Impinj (PI) 10-Q2020 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended March 31, 2020

Commission File Number: 001-37824

IMPINJ, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

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

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

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

As of April 17, 2020, 22,677,059 shares of common stock were outstanding.

IMPINJ, INC.

QUARTERLY REPORT ON FORM 10-Q

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PART I — FINANCIAL INFORMATION

IMPINJ, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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IMPINJ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include Impinj, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain immaterial amounts on our condensed consolidated balance sheets in prior period have been reclassified to conform with current period presentation. These condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2019 included in Impinj, Inc.’s Annual Report on Form 10-K, which was filed with the SEC on March 2, 2020. The condensed consolidated balance sheet as of December 31, 2019, included herein, was derived from the audited consolidated financial statements of Impinj, Inc.

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

Use of Estimates

Preparing financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, sales incentives, estimated costs to complete development contracts, deferred revenue, inventory excess and obsolescence, income taxes, determination of the fair value of stock awards and compensation and employee-related benefits. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.

Risks and Uncertainties

We are subject to risks and uncertainties as a result of Covid-19. We anticipate overall 2020 retail demand to be adversely affected by Covid-19 but are unable to reliably forecast the extent of its impact on our endpoint IC revenue. In addition, Covid-19 has caused delays in some of our pending global system deployments as system integrators, value-added resellers and their related end-customers’ business locations are closed as a result of government travel and business restrictions, impacting our ability to replace project-based revenue from completed projects.

As of the date of this report, several of our suppliers have been impacted by Covid-19 and have either experienced temporary closures or are operating at reduced capacity. We also experienced some challenges shipping products from Thailand due to transport challenges related to Covid-19. We were able to fulfill all shipments for the first quarter of 2020 and believe we have sufficient inventory to satisfy our expected needs for endpoint IC and systems products for the second quarter of 2020.

While we expect the effects of the pandemic and the related responses to negatively impact our results of operations, cash flows and financial position, the uncertainty over the duration and severity of the epidemiological, economic and operational impacts of Covid-19 means we cannot reasonably estimate the extent of the financial impact of Covid-19 as of the date of this report. The extent to which the Covid-19 outbreak impacts our results depends on developments that are unpredictable, including actions needed to contain the spread of Covid-19 and reduce its impact on public health.

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board, or FASB, issued guidance on the measurement of credit losses on financial instruments. This guidance requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We adopted this standard on January 1, 2020 and the adoption of this guidance did not materially impact our financial positions, results of operations or cash flows.

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Recently Issued Accounting Standards Not Yet Adopted

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

Accounts Receivable

The allowance for doubtful accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. We record changes in our estimate to the allowance for doubtful accounts through bad debt expense and write off the receivable and corresponding allowance when accounts are ultimately determined to be uncollectible. Bad debt expense is included in general and administrative expenses. For the periods presented in this report, bad debt expense and the allowance for doubtful account were not material.

We derive the majority of our trade receivables from sales to original equipment manufacturers, or OEMs, original design manufacturers, or ODM, as well as to distributors who are large, well-established companies. We do not have customers that represent a significant credit risk based on current economic conditions and past collection experience. Also, we have not had material past-due balances on our accounts receivable as of March 31, 2020 and December 31, 2019.

Inventory

We recorded $2.7 million in inventory excess and obsolescence charges for the three months ended March 31, 2020, causing an unfavorable 5.6% net impact to gross margin. The charges, which reduced the inventory value of impacted products to zero, relate primarily to decreased demand for endpoint ICs and gateways specifically designed for European applications. This demand decrease is due to Covid-19’s impact on EU businesses, especially the EU retail industry. We expect future demand to be met by newer endpoint IC and gateway products. Inventory excess and obsolescence charges to gross margin were not material for the three months ended March 31, 2019.

Note 2. Fair Value Measurements

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

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

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

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

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

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

We did not have any Level 3 assets as of March 31, 2020 or December 31, 2019. There were no liabilities measured at fair value as of March 31, 2020 or December 31, 2019. The gross unrealized gains or losses on cash equivalents and short-term investments as of March 31, 2020 or December 31, 2019 were not material.

Note 3. Inventory

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

Note 4. Stock-Based Awards

Stock Options

The following table summarizes stock options activity for the three months ended March 31, 2020 (in thousands):

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Restricted Stock Units

The following table summarizes activity for restricted stock units, or RSUs, and RSUs with performance conditions, or PSUs, for the three months ended March 31, 2020 (in thousands):

We granted PSUs in 2019 under our annual bonus program to our senior executives and other bonus-eligible employees. The number of PSUs that ultimately vested depended on us attaining a financial metric for the fiscal year as well as on the employee’s continued employment through the vesting date. The compensation committee and board of directors approved achievement of the financial metric, vesting 243,000 shares in the first quarter of 2020.  

Stock-Based Compensation Expense

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

Note 5. Commitments and Contingencies

For information on our commitments and contingencies, see Part II, Item 8 (Financial Statements and Supplementary Data, Note 11. Commitments and Contingencies) of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to our commitments and contingencies, outside of the ordinary course of our business, as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, except for “Obligations with Third-Parties” and “Litigation” as discussed below.

Obligations with Third Parties

We have certain non-cancelable obligations, which include obligations with third-party manufacturers who manufacture our products. We are committed to purchase $10.5 million of inventory as of March 31, 2020.

Litigation

From time to time, we are subject to various legal proceedings or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of March 31, 2020 and December 31, 2019, we have not recorded any such liabilities. The following is a description of our significant legal proceedings. Although we believe that resolving these claims, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties.

Federal Securities Class Actions

On August 7, 2018, a class-action complaint for violation of the federal securities laws was filed in the U.S. District Court for the Central District of California against us, our chief executive officer and former chief operating officer. Captioned Schultz v. Impinj, Inc., et al, the complaint, purportedly brought on behalf of all purchasers of our common stock from May 7, 2018 through and including August 2, 2018, asserted claims that our quarterly statement filed on Form 10-Q for the first quarter of 2018 and a concurrent press release made false or misleading statements about our business prospects and financial condition. The complaint sought monetary damages, costs and expenses. On October 3, 2018, the plaintiff voluntarily dismissed this complaint.

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On August 27, 2018, a second class-action complaint for violation of the federal securities laws was filed in the U.S. District Court for the Western District of Washington against us, our chief executive officer, former chief operating officer and former chief financial officer. Captioned Montemarano v. Impinj, Inc., et al., the complaint, purportedly brought on behalf of all purchasers of our common stock from May 4, 2017 through and including August 2, 2018, asserts claims that we made false or misleading statements in our financial statements, press releases and conference calls during the purported class period in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act. The complaint seeks monetary damages, costs and expenses.

On October 2, 2018, a third class-action complaint for violation of the federal securities laws was filed in the U.S. District Court for the Western District of Washington against us, our chief executive officer, former chief operating officer and former chief financial officer. Captioned Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge v. Impinj, Inc., et al., the complaint, purportedly brought on behalf of all purchasers of our common stock from November 3, 2016 through and including February 15, 2018, asserts claims that we made false or misleading statements about customer demand for our products and inventory in SEC filings, press releases and conference calls in violation of Section 10(b) of the Securities Exchange Act. The complaint seeks monetary damages, costs and expenses.

On January 14, 2019, the U.S. District Court for the Western District of Washington consolidated the Montemarano and Baton Rouge actions and appointed the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge as lead plaintiff. On February 13, 2019, lead plaintiff filed a consolidated amended complaint. The consolidated amended complaint alleges that from July 21, 2016 through February 15, 2018, we made false or misleading statements about customer demand and the capability of our products and platform in violation of Section 10(b) of the Securities Exchange Act.

On March 19, 2019, we filed a motion to dismiss the consolidated amended complaint, and on October 4, 2019, the court entered an order granting in part and denying in part the motion. The court dismissed the Section 10(b) claim against our former chief operating officer, dismissed product-capability-related allegations against our former chief financial officer, and dismissed allegations that defendants made false or misleading statements concerning increasing demand prior to the first quarter of 2017. The court denied the motion as to all other claims and defendants. A trial date has been set for February 1, 2021.

New York State Securities Class Action

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

Shareholder Derivative Actions

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

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Patent Infringement Claims and Counterclaims

On June 6, 2019, we filed a patent infringement lawsuit against NXP USA, Inc., a Delaware corporation and subsidiary of NXP Semiconductors N.V., or NXP, in the U.S. District Court for the Northern District of California. Our complaint alleges that certain NXP integrated circuit products infringed and continue to infringe numerous U.S. patents owned by us. We are seeking, among other things, past damages, including lost profits, and no less than a reasonable royalty; enhanced damages for willful infringement; and reasonable attorneys’ fees and costs for infringement of each of the asserted patents. We are also seeking an injunction against NXP making, selling, using, offering for sale or importing the RAIN RFID integrated circuit product NXP introduced in 2017. Defendants responded to our complaint on September 30, 2019 citing numerous defenses including denying infringement, claiming our asserted patents are invalid, and that the infringed patents were licensed on a royalty-free basis under Impinj’s commitments to GS1 EPCglobal.

On October 4, 2019, NXP USA, Inc. and NXP, filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges that certain of our products infringed and continue to infringe numerous U.S. patents owned by NXP or NXP USA, Inc. The plaintiffs are seeking, among other things, past damages adequate to compensate them for our alleged infringement of each of the patents-in-suit, and reasonable attorneys’ fees and costs. They are also seeking an injunction against us, enjoining continuing acts of infringement of the patents-in-suit. As of the date of this report, there is no court date set.

Note 6. Debt Facilities

Convertible Senior Notes

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

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

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

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

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

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

Certain convertible-debt instruments that may be settled in cash on conversion are required to be separated into a liability and an equity component. The total proceeds are first allocated to the liability component based on the fair value of a similar debt instrument without the conversion option. The total proceeds that remain are allocated to the equity component and recognized in additional paid-in capital.

Accordingly, we separated the 2019 Notes into a liability and an equity component. We determined the fair value of the liability component to be $52.5 million calculated as the present value of future cash flows discounted at the borrowing rate for a similar nonconvertible debt instrument based on the expected term. We determined the borrowing rate to be 9.90% based on the market rates for nonconvertible debt instruments issued by other companies with publicly available credit ratings considered to be comparable to us. We recognized the excess of the principal amount of the 2019 Notes over the initial carrying amount of the liability component as a debt discount of $33.8 million and are amortizing it to interest expense over the expected term of the 2019 Notes using the effective interest rate method. We recorded the equity component of $33.8 million, calculated as the difference between the total proceeds of $86.3 million and the initial carrying amount of the liability component, as additional paid-in capital. We will not remeasure the equity component as long as it continues to meet the conditions for equity classification.

As of March 31, 2020, the 2019 Notes were not yet convertible and the “if-converted value” did not exceed the remaining principal amount of the 2019 Notes.

We allocated the 2019 Notes total issuance costs of $2.8 million between liability and equity in the same proportion as the allocation of our total proceeds to liability and equity components. We are amortizing the issuance costs attributable to the liability component of $1.7 million to interest expense over the respective term of the 2019 Notes using the effective interest rate method. We netted the issuance costs attributable to the equity component of $1.1 million against the respective equity component in additional paid-in capital.

The effective interest rate on the liability component of the 2019 Notes is 10.21%. As of March 31, 2020, we recorded accrued interest related to the 2019 Notes of $503,000 in accrued liabilities on our condensed consolidated balance sheet.

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

Our estimated fair value of the 2019 Notes was $73.6 million and $87.0 million as of March 31, 2020 and December 31, 2019, respectively, which we determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 2.

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

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

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

Note 7. Leases

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

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

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

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The following table presents future lease payments under operating leases as of March 31, 2020 (in thousands):

Note 8. Net Loss Per Share

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

The following table presents the outstanding options and restricted stock units and unvested shares excluded from the computation of diluted net loss per share as of the dates presented because their effect would have been antidilutive (in thousands):

Note 9. Segment Information

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

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The chief executive officer reviews information about our revenue categories, which are endpoint ICs and systems. Systems revenue includes sales of reader ICs, reader modules, readers, gateways and software. The following table presents our revenue by category for the periods presented (in thousands):

Note 10. Deferred Revenue

Deferred revenue, comprising individually immaterial amounts for extended warranty, enhanced maintenance and advanced payments on non-recurring engineering services contracts, represents revenue that has not yet been recognized.

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

Note 11. Subsequent Events

On April 20, 2020, we entered into an unsecured promissory note, or the PPP Note, through Silicon Valley Bank under the Paycheck Protection Program, or PPP, a program administered by the Small Business Administration, or SBA, and established as part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. The PPP Note had an aggregate principal amount of approximately $5.8 million, and we received the loan proceeds on April 22, 2020.

On April 23, 2020, the SBA issued guidance that substantially narrowed the ability of public companies to participate in the PPP program. We applied for the PPP program in good faith. However, considering the SBA’s new guidance, on April 24, 2020, we informed Silicon Valley Bank that we will repay the PPP Note in full as soon as possible.

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

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

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

Our Business

Our vision is digital life for everyday items. 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 engage with those everyday physical items via their digital twins. Our mission is to deliver a platform that powers that item-to-cloud connectivity and to enable developers to innovate Internet-of-Things, or IoT, applications on our platform. Today, we deliver the identity, location and authenticity of billions of physical items; we believe our future is delivering the identity, location and authenticity of trillions of everyday items and enabling those cloud-based digital twins, each storing an individual item’s ownership, history and links, and enabling ubiquitous access to them. We believe the item-to-cloud connectivity that we will deliver will enhance businesses efficiencies and commerce, and ultimately, improve peoples’ lives.

Our platform connects individual items, capturing and delivering data about each item from manufacturing through distribution to sale. We and our channel partners connect those items via a miniature radio chip embedded in the item or in its packaging, reading and delivering the item’s unique identity, location and authenticity to business and consumer applications. To date, we have enabled connectivity to more than 40 billion items, enabling retailers, hospitals, airlines, automotive manufacturers, logistics providers, shippers and business in many other industries to derive timely business value from those connected items. We believe our opportunity is to ultimately connect trillions of everyday items, and to deliver valuable information about those items not just to businesses, but also to everyday people, extending and delivering an item’s digital life to the person that buys and owns the item.

Our platform comprises three layers: (1) endpoint integrated circuits, or ICs, (2) connectivity and (3) software that together deliver item data to business and consumer applications. We link the layers of our platform to deliver advanced capabilities and performance that surpasses mix-and-match solutions built from competitor products. Within each layer we sell one or more product families.

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Factors Affecting Our Performance

Covid-19 Pandemic

We are monitoring the current and future impact of the Covid-19 pandemic on all aspects of our business, including how the pandemic will affect our customers, end-users, suppliers and other business partners.

We anticipate overall 2020 retail demand to be adversely affected by Covid-19 but are unable to reliably forecast the extent of its impact on our endpoint IC revenue. Even under normal circumstances, forecasting endpoint IC revenue is difficult because we sell endpoint ICs primarily through our inlay partners, which limits our ability to forecast demand from the end users. This forecasting challenge is exacerbated by the uncertain extent and duration of Covid-19’s impact to the global economy generally and the retail industry in particular; the degree to which Covid-19 may cause long-term shifts, both positive and negative, in various industries important to us including retail, shipping and logistics; and other uncertainties relating to the Covid-19 pandemic.

We continue to see evidence of continued adoption of RAIN by some large businesses, but the extent to which such adoption will proceed, or the degree to which such adoption will mitigate the negative impacts of Covid-19 generally, is unclear. Covid-19 has already caused delays in some pending and planned global system deployments with some system integrators, value-added resellers and their related end-customers’ business locations closed as a result of government travel and business restrictions, impacting our ability to replace project-based revenue from completed projects. Some companies have announced plans to reduce or defer capital expenditures in response to Covid-19, which may impact our operating results in 2020 and beyond.

Several of our suppliers have been impacted by Covid-19 and have either experienced temporary closures or are operating at reduced capacity. For example, factories in Malaysia that produce our readers and gateways and post-process certain of our endpoint ICs were shut down for approximately three weeks due to Covid-19-related public health measures. As of the date of this report they have returned to production, albeit at reduced levels. We also experienced challenges shipping products due to reduced transport capacity and increased costs as a result of Covid-19-related disruptions. Moreover, Covid-19 related restrictions on our suppliers and inlay partners will delay the availability of inlays incorporating our M700 endpoint ICs by over two months

While we were able to fulfill all endpoint IC orders for first-quarter 2020 and believe we have sufficient inventory to satisfy our expected needs for endpoint ICs for second-quarter 2020, given the uncertainty associated with the Covid-19 pandemic, there can be no assurance that we will be able to satisfy demand for our products in a cost-effective manner. If our Asian or other suppliers are unable to meet, or are delayed in meeting, our expectations as a result of Covid-19-related restrictions on their operations or logistics providers, deterioration of their financial condition or otherwise, we might be unable to meet customer demand and that inability may persist for a significant period of time.

Most of our facilities and employees are based in Seattle, where the government has imposed restrictions designed to slow the spread of Covid-19. All our employees, other than those preforming certain limited functions, are working from home. We have attempted to minimize the impact of the Covid-19 restrictions on our operations. However, Covid-19 related restrictions on work and travel could adversely affect our performance by, for example, slowing our ability to develop and launch new products and to engage in usual sales activities requiring travel.

In light of the Covid-19 pandemic we may slow or suspend our investments in significant long-term activities such as research and development, potentially impairing our ability to meet our long-term strategic objectives. We have also entered into an unsecured promissory note for approximately $5.8 million under the Paycheck Protection Program to avoid or delay layoffs, furloughs and other personnel cost-cutting actions. For further information on the terms of this debt, please refer to Note 11 to our condensed consolidated financial statements included elsewhere in this report.

While we expect the effects of the pandemic and the related responses to negatively impact our results of operations, cash flows and financial position, the uncertainty over the duration and severity of the epidemiological, economic and operational impacts of Covid-19 means we cannot reasonably estimate the extent of the financial impact of Covid-19. The extent to which the Covid-19 outbreak impacts our results will depend on future developments that are unpredictable, including actions needed to contain its spread and reduce its impact on public health.

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

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Investing in Growth

We have invested and plan to continue investing in research and development to enhance and extend our platform, including enhancing existing products, introducing new products and tightening the platform linkages between our product offerings. We plan to enhance and expand our readers and gateways and how we leverage them, in conjunction with our software, for platform deployments in retail, supply chain and logistics and other industries. We also plan to continue developing next-generation reader and endpoint ICs.

We have invested and plan to continue investing in sales and marketing to grow our sales reach, expand our market opportunities, deepen our integrations with our supply-chain partners and accelerate the development and adoption of solutions based on our platform.

Most of our investments precede any sales benefit from the investment, and in some instances, we may never see a sales benefit. The potential causes of the latter are many, including the market not being receptive to our product or sales approach, late or failed product development, personnel departures or other causes. We sometimes enter into arrangements with end users, vendors or channel partners for them to fund a portion of our investment, but even in those instances the results of our investments remain uncertain, and in some instances we may be required to refund the investment if the development is unsuccessful or the market opportunity fails to materialize. In some instances, we delay or cancel investments without or until we obtain such funding. The outcome of any investment is almost always uncertain, and if our results do not meet our or your expectations then our operating results, profitability and stock price may be adversely affected.

While our long-term vision of investing for growth remains unchanged, Covid-19 introduces new uncertainty in our business. We will monitor the impacts of Covid-19 on our supply chain, market and opportunities and may adjust our investment strategy as appropriate.

Market Adoption

Our financial performance depends on the pace, scope and depth of end-user adoption of our products in multiple industries, but especially in the retail industry which is our largest market. Covid-19 has had, and is expected to continue to have, a materially adverse impact on the retail industry. In addition, the Covid-19 pandemic may accelerate a long-term shift in consumer behavior away from physical stores and that may adversely impact demand for endpoint ICs over the longer term. The extent and duration to which Covid-19 will materially impact the retail industry is unclear, as is the extent to which it will impact our product sales. Other industries that are potential future drivers of market adoption, have also been impacted by the Covid-19 pandemic, although the ultimate impact on RAIN adoption and on our business is unclear. For example, the aviation industry, with the potential for widespread bag-tagging, has been negatively impacted by Covid-19. However, shipping and logistics providers have experienced an increase in demand which could positively impact RAIN adoption. See the section captioned “—Covid-19 Pandemic” for additional information.

The pace, scope and depth of end-user adoption, even without the impact of Covid-19, remains uncertain, potentially causing large fluctuations in our operating results. For example, in 2015 and 2016 several major retailers and brand owners initiated deployments that significantly increased our endpoint IC sales, exceeding our expectations and those of our industry’s analysts and lengthening our lead times. In 2017 we invested in internal endpoint IC inventory to reduce those lead times, meet forecasted demand and improve our ability to deliver in the event of continued demand growth. However, in the second half of 2017 the endpoint IC growth rate slowed, which we believe was due to several factors including, but not limited to, delays in new deployments and in planned expansions at several large retailers. That decelerating growth rate engendered an endpoint IC channel inventory correction that negatively impacted our operating results for several subsequent quarters. In response, we reduced our internal endpoint IC inventory in the second half of 2018 and throughout 2019.

Given the uncertainties in our market, we cannot assure you that adoption will continue, we will have appropriate product inventory, we will not experience future product inventory shortfalls or overages, or that Covid-19 will not significantly impact our business. We also cannot assure you that we will be able to maintain or grow the market share of any of our products, as a result of insufficient inventory, Covid-19, competitors copying our products, competition generally or for a host of other reasons, many of which our outside of our control.

Regardless of the uneven pace of retail and other industry adoption, we believe the underlying, long-term trend is continued RAIN adoption. We recently introduced our new Impinj M700 endpoint IC, which offers significant performance advantages and we believe will foster adoption. However, Covid-19 has already impacted our M700 rollout and adoption, and further delays in production or qualification may impact market share at these and other deployments in the near term.

We also believe that expanding retail deployments foster RAIN adoption in other markets. For example, our reader and gateway sales in the second half of 2017 and our gateway sales in 2019 exceeded our expectations due to supply-chain end users deploying shipment-verification and asset-tracking use cases that demand real-time fixed reading. However, as noted below, at the current stage of RAIN adoption our revenue could decline on a quarterly or annual basis due to fluctuations caused by large-scale deployments by a limited number of large end-users.

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We sell our products through channel partners and distributors and have limited ability to determine end-user demand. As a consequence, we may incorrectly predict that demand or be unable to identify market shifts in a timely fashion, potentially affecting our business adversely. If RAIN market adoption, and adoption of our platform products specifically, does not meet our expectations or if we are unable to meet partner or end-user volume or performance expectations as a result of the impact of Covid-19 or otherwise then our operating results and growth prospects will be adversely affected. If we reduce prices to win opportunities, then our gross margins may be negatively affected. In contrast, if our endpoint IC, reader IC, reader module, reader, gateway or software sales exceed expectations, then our revenue and profitability may be positively affected.

Timing and Complexity of Customer Deployments

From 2010 to 2019, our endpoint IC unit sales volumes increased at a compounded annual growth rate of 28%, indicating growing adoption of RAIN-based solutions. However, the pace at which end users adopt RAIN has been uneven and unpredictable in scope and timing. For example, our endpoint IC unit sales volumes increased significantly in 2016, declined in the second half of 2017 and in the first half of 2018 and then returned to growth in the second half of 2018 and in 2019 (the latter albeit not at the same pace as in 2016). Short-term demand will remain unpredictable in scope and timing. For example, end users may eliminate or significantly reduce or delay spending on RAIN-based solutions to conserve cash in response to the COVID-19 pandemic. Longer term, we believe our opportunity and our market will continue to grow, but we cannot predict whether historical annual growth rates are indicative of the pace of that future growth.

Further, although we promote our platform as an integrated offering, we sell our products individually, and end users often use only certain of our products. For any given end-user solution, whether an end user chooses to deploy our entire platform or only a portion will also affect our operating results.

Our systems business relies disproportionally on large-scale deployments at discrete end users. The timing of those large deployments causes large variability in our systems revenue. For example, we generated 14% of 2019 total revenue from a North American Systems customer in connection with a project-based gateway deployment. As of the date of this report, we do not have orders from this customer beyond first quarter of 2020. If we are unable to replace project-based revenue from these discrete projects with new revenue streams, or if end users with sizable projects change or delay them without giving us adequate notice, we may experience significant fluctuation in revenue on a quarterly or annual basis. We anticipate that uncertainty to continue to characterize our business for the foreseeable future. Notably, Covid-19 has caused delays in some of our pending global system deployments as system integrators, value-added resellers and their related end-customers’ business locations are temporarily closed, impacting our ability to replace project-based revenue from completed projects in a timely fashion.

Average Selling Price

Our product ASPs fluctuate based on competitive pressures and the discounting we offer to win opportunities, but generally decline over time. We expect that trend to continue. Historically, we have been able to implement manufacturing and quality improvements that effectively reduce the per-unit cost of most of our hardware products, as well as introduce newer and lower-cost products, but the timing of these cost reductions and product introductions fluctuates and may not materialize in any given quarter or year.

Seasonality

We typically renegotiate pricing with most of our endpoint IC customers with an effective date of the first quarter of the calendar year, reducing both revenue and gross margins in the first quarter when compared with prior periods. The impact tends to decline in subsequent quarters as we reduce costs and, to the extent we can migrate our customers to newer, lower-cost products, adjust product mix. Endpoint IC volumes also tend to be lower in the fourth quarter than the third quarter.

System sales tend to be stronger in the fourth quarter of the calendar year, and less strong in the first quarter. We believe this seasonality is due to the availability of residual funding for capital expenditures prior to the end of many customers’ fiscal years.

While, over the longer term, we expect these seasonal trends to continue, quarter-to-quarter variability in our revenue can be caused by a number of factors including uncertainty in demand and supply as a result of Covid-19, timing of large deployments, supply constraints, that can mask seasonality in any given year. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in the sections of this report captioned “—Covid-19 Pandemic” Part II, Item 1A (Risk Factors)

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Inventory Supply

From time to time we experience inventory overages or shortages, either due to us mis-estimating customer or end-user demand, constrained supplier manufacturing capacity or product availability, fluctuations in our market or the global economy, changes in regulations or tariffs or for a host of other reasons. These inventory dynamics can impact some or all of our hardware products. High inventory levels can result in product obsolescence, increases in reserves or unexpected expenses that adversely affect our business. Low inventory levels can affect our ability to meet customer demand, lengthen lead times and potentially causing us to miss opportunities, lose market share or damage customer relationships, also adversely affecting our business. For example, in 2010 we experienced wafer shortages from TSMC relative to our submitted endpoint IC wafer purchase orders because of high worldwide demand for semiconductor foundry capacity. These shortages adversely affected our ability to meet our customers’ demand and, in some cases, caused customers to cancel orders, qualify alternative suppliers or purchase from our competitors. Our existing ICs use 200mm wafers, and semiconductor industry analysts predict high 200mm wafer demand again in 2020.

As of the date of this report, several of our suppliers have been impacted by Covid-19 and have either experienced temporary closures or are operating at reduced capacity as discussed above.

Results of Operations

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

Revenue and gross profit increased primarily due to higher endpoint IC revenue and, to a lesser extent, due to systems revenue, partially offset by higher excess and obsolescence charges. Our higher endpoint IC revenue was due to growth in our customers’ underlying business, including new opportunities, as well as revenue we believe are a result of customer concerns regarding global supply constraints due to Covid-19 coupled with our ability to respond to this demand by maintaining acceptable lead times throughout first-quarter 2020.

Gross margin decreased primarily due to higher excess and obsolescence charges, partially offset by leverage derived from comparable overhead costs. We recorded $2.7 million in inventory excess and obsolescence charges for the three months ended March 31, 2020, causing an unfavorable 5.6% net impact to gross margins as described further below. 

Loss from operations decreased primarily due to increased gross profit, partially offset by increased operating expenses; a net increase in operating expenses was due to increased stock-based compensation expense.

Revenue

We currently derive substantially all our revenue from sales of endpoint ICs, reader ICs, reader modules, readers and gateways. We sell our endpoint ICs primarily to inlay manufacturers; our reader ICs and reader modules primarily to OEMs and ODMs through distributors; and our readers and gateways to value-added resellers, or VARs, and system integrators, or SIs, primarily through distributors. We expect endpoint IC sales to represent a majority of our revenue for the foreseeable future.

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Endpoint IC revenue increased $11.8 million primarily due to a $13.4 million increase in shipment volumes, partially offset by lower ASPs primarily due to product mix, and to a lesser extent, our annual price negotiations. Growth in our customers’ underlying business, including new opportunities, accounted for $7.2 million of the increased shipment volumes. We believe the remaining $6.2 million increase was a result of customer concerns regarding global supply constraints due to Covid-19, coupled with our ability to respond to this demand by maintaining acceptable lead times throughout first-quarter 2020. We do not expect endpoint IC revenue growth to continue at 54% in second-quarter 2020. The Covid-19 impact to worldwide economies and the retail industry in particular; our future supply-chain uncertainties; the fact that we sell primarily through distribution so are at least one step removed from the end users; and a host of other related uncertainties which change near-daily, make it difficult to forecast our endpoint IC revenue at this time.

Systems revenue increased $2.9 million due primarily to $1.1 million in reader IC revenue and $1.0 million in gateway revenue, both from higher unit volumes. Due to Covid-19 we are experiencing delays to some of our global system deployments. Such delays will impact our ability to replace the North American project-based revenue noted in our fiscal year 2019 results.  

For more information, see the section captioned “Risk Factors—Covid-19 has adversely affected our business, and the magnitude and duration of future Covid-19 effects on our financial position, results of operations, cash flows and business prospects are uncertain.”

Gross Profit and Gross Margin

Cost of revenue includes costs associated with manufacturing our endpoint ICs, reader ICs, reader modules, readers and gateways, including direct materials and outsourced manufacturing costs as well as associated overhead costs such as logistics, quality control, planning and procurement. Cost of revenue also includes charges for excess and obsolescence and warranty costs. Our gross margin varies from period to period based on mix of endpoint IC and systems revenue, underlying product margins driven by changes in ASPs or costs, as well as from charges for excess and obsolescence.

Gross profit increased due to increased endpoint IC and systems revenue as mentioned above, partially offset by higher excess and obsolescence charges. We recorded $2.7 million in inventory excess and obsolescence charges for the three months ended March 31, 2020, causing an unfavorable 5.6% net impact to gross margins. The charges, which reduced the inventory value of impacted products to zero, relate primarily to decreased demand for endpoint ICs and gateways specifically designed for European applications. This demand decreased due to Covid-19’s impact on EU businesses, especially the EU retail industry. We expect future demand to be met by newer endpoint IC and gateway products. Inventory excess and obsolescence charges, including the impact to gross margin were not material for the three months ended March 31, 2019.

Operating Expenses

Research and Development 

Research and development expense primarily comprises personnel expenses (salaries, benefits and other employee related costs) and stock-based compensation expense for our product-development personnel; external consulting and service costs; prototype materials; other new-product development costs; and an allocated portion of infrastructure costs, which include occupancy, depreciation and software costs. We expect research and development expense to increase in absolute dollars in future periods as we focus on new product development and introductions; however we will continue to monitor the impacts of Covid-19 on our business and may adjust our research and development investment strategy as appropriate.

Research and development expense increased $2.5 million primarily due to increases of $950,000 in stock-based compensation from 2019 PSUs and an increased number of stock options and RSUs and $923,000 in personnel expenses from increased headcount.

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Sales and Marketing 

Sales and marketing expense primarily comprises personnel expenses (salaries, incentive sales compensation, or commission, benefits and other employee related costs) and stock-based compensation expense for our sales and marketing personnel; travel, advertising and promotional expenses; and an allocated portion of infrastructure costs, which include occupancy, depreciation and software costs. We expect sales and marketing expense to remain approximately constant on an absolute dollar basis, except for incentive sales compensation which fluctuates as a function of revenue. In addition, we will continue to monitor the impacts of Covid-19 on our business and may adjust our sales and marketing expense as appropriate.

Sales and marketing expense decreased $1.1 million due to a $1.2 million decrease in personnel expenses from decreased headcount.

General and Administrative 

General and administrative expense primarily comprises personnel expenses (salaries, benefits, and other employee related costs) and stock-based compensation expense for our executive, finance, human resources and information technology personnel; legal, accounting and other professional service fees; travel and insurance expense; and an allocated portion of infrastructure costs which include, occupancy, depreciation and software costs. We expect general and administrative expense to increase due to higher accounting and compliance costs as a result of being a public company and professional service fees related to our ongoing litigation.  In addition, we will continue to monitor the impacts of Covid-19 on our business and may adjust our general and administrative expense as appropriate.

General and administrative expense increased $547,000 primarily due to a $653,000 increase in stock-based compensation expense from 2019 PSUs and an increased number of stock options and RSUs.

Other Income, net

Other income, net for the three months ended March 31, 2020 remained comparable to the prior period.

Interest Expense

Interest expense consists primarily of cash interest, amortization of debt issuance costs and debt discount on our long-term debt.

Interest expense increased $883,000, comprised primarily of an $854,000 increase in amortization of debt discount related to our subordinated convertible notes due 2026, or the 2019 Notes. For further information on the 2019 Notes, please refer to Note 6 to our condensed consolidated financial statements included elsewhere in this report.

Income Tax Expense

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We are subject to federal and state income taxes in the United States and foreign jurisdictions. Income tax expense remained comparable for the periods stated above.

Non-GAAP Financial Measures

Our key non-GAAP performance measures include adjusted EBITDA and non-GAAP net income (loss), as defined below. We use adjusted EBITDA and non-GAAP net income (loss) as key measures to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operating plans. We believe excluding those items provides useful information for period-to-period comparisons of our business to allow investors and others to understand and evaluate our operating results in the same manner as it does for our management and board of directors. Our presentation of these non-GAAP financial measures is not meant to be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP, and our non-GAAP measures may be different from similarly termed non-GAAP measures used by other companies.

Adjusted EBITDA

We define adjusted EBITDA differently in this report than we have in the prior period, due to loss on debt extinguishment incurred in connection with the December 2019 repayment of our senior credit facility. We define adjusted EBITDA as net income (loss) determined in accordance with GAAP, excluding, if applicable for the periods presented, the effects of stock-based compensation; depreciation; investigation costs; restructuring costs; other income, net; interest expense; loss on debt extinguishment and income tax benefit (expense). We have excluded loss on debt extinguishment because we do not believe it reflects our core operations. The exclusion of loss on debt extinguishment does not impact adjusted EBITDA previously reported for prior periods.

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

Non-GAAP Net Income (Loss)

We define non-GAAP net income (loss) differently in this report than we have in the prior period due to the prepayment penalty on debt extinguishment incurred in connection with the December 2019 repayment of our senior credit facility and amortization of debt discount related to the equity component of the 2019 Notes. Amortization of debt issuance costs and non-cash income tax benefit (expense) are no longer excluded from non-GAAP net income (loss). We define non-GAAP net income (loss) as net income (loss) determined in accordance with GAAP, excluding, if applicable for the periods presented, the effects of stock-based compensation; depreciation; investigation costs; restructuring costs; amortization of debt discount related to the equity component of our convertible notes; and prepayment penalty on debt extinguishment. We have revised the prior period non-GAAP net income (loss) to conform to our current period presentation.

GAAP requires that certain convertible debt instruments that may be settled in cash on conversion be accounted for as separate liability and equity components in a manner that reflects our non-convertible debt borrowing rate. This accounting results in the debt component being treated as though it was issued at a discount, with the debt discount being amortized as additional non-cash interest expense over the debt instrument term using the effective interest method. As a result, we believe that excluding this non-cash interest expense attributable to the debt discount in calculating our non-GAAP net income (loss) is useful because this interest expense is not indicative of our ongoing operational performance.

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The following table presents a reconciliation of net loss to non-GAAP net income (loss):

Liquidity and Capital Resources

As of March 31, 2020, we had cash, cash equivalents and short-term investments of $119.2 million, comprising cash deposits held at major financial institutions and short-term investments in a variety of securities, including U.S. government agencies, treasury bills, corporate notes and bonds, commercial paper and money market funds. We had working capital of $161.3 million as of March 31, 2020.

Historically, we have funded our operations primarily through cash generated from operations, issuing equity securities, convertible-debt offerings and/or borrowing under our prior senior credit facility. In 2020, our principal use of cash is funding operations to capture our market opportunity and capital expenditures.

We believe, based on our current operating plan, that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Sources of Funds

From time to time, we may explore additional financing sources and means to lower our cost of capital, which could include equity, equity-linked and debt financing. In addition, in connection with any future acquisitions, we may pursue additional funding which may be in the form of additional debt, equity or equity-linked financing or a combination thereof. We can provide no assurance that any additional financing will be available to us on acceptable terms.

2019 Notes

In December 2019, we issued the 2019 Notes in an aggregate principal amount of $86.3 million. The 2019 Notes are our senior unsecured obligations. The 2019 Notes bear interest at a fixed rate of 2.00% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2020. The 2019 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election. The 2019 Notes will mature on December 15, 2026, unless earlier repurchased, redeemed, or converted in accordance with the terms of the indenture for the 2019 Notes.

The net proceeds from issuing the 2019 Notes were approximately $83.5 million after deducting fees and expenses. We used the net proceeds from issuing the 2019 Notes to pay the cost of the capped call transactions and repay our senior credit facility. We intend to use the remainder of the net proceeds for general corporate purposes.

For further information on the terms of this debt, please refer to Notes 6 to our condensed consolidated financial statements included elsewhere in this report.

Cash Flows

The following table presents selected cash flow data for the periods presented:

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Operating Cash Flows

For the three months ended March 31, 2020, we generated $1.8 million of net cash from operating activities. These net cash proceeds were primarily driven by $2.9 million proceeds from net loss adjusted for non-cash items, partially offset by $1.1 million working capital usage primarily due to lower cash collection from accounts receivable due to timing and inventory related to the excess and obsolescence charges described above.

For the three months ended March 31, 2019, we used $731,000 of net cash from operating activities. This cash usage was primarily driven by $2.6 million proceeds from net loss adjusted for non-cash items, partially offset by $1.9 million of working capital contribution primarily due to lower cash usage in inventory purchases, partially offset by higher cash usage in accrued compensation and employee-related benefits for our 2018 cash bonus payments.

Investing Cash Flows

For the three months ended March 31, 2020, we generated $13.1 million of net cash from investing activities. These net cash proceeds were primarily driven by investment maturities of $14.2 million, partially offset by purchases of property and equipment of $1.1 million.

For the three months ended March 31, 2019, we generated $417,000 of net cash from investing activities. These net cash proceeds were driven by investment maturities of $22.9 million, partially offset by investment purchases of $22.2 million.

Financing Cash Flows

For the three months ended March 31, 2020, we generated $1.9 million of net cash from financing activities. These net cash proceeds primarily comprised $2.0 million from exercised stock options and our employee stock purchase plan.

For the three months ended March 31, 2019, we generated $1.4 million of net cash from financing activities. These net cash proceeds primarily comprised $1.8 million from exercised stock options and our employee stock purchase plan.

Contractual Obligations

The following table reflects a summary of our contractual obligations as of March 31, 2020: