Impinj had a stellar start to life as a public company, posting several strong quarters in a row, but a new lawsuit alleges that the RFID technology company overplayed its earlier success and claims that the company deceived investors in the process.
The suit, filed in U.S. District Court in Seattle this week, alleges that Impinj overestimated demand for its tags for connecting items to the internet in 2016 and 2017, when customers were actually buying more tags than they needed because Impinj was dealing with production delays. Once the supply issues cleared up, the suit argues, demand slowed significantly because customers were no longer stockpiling inventory. The suit claims the situation caused subpar revenue growth and sent Impinj stock spiraling downward.
Contacted on Friday, the Seattle-based company said it doesn’t comment on litigation as a matter of policy, but is aware of the suit and plans to defend itself vigorously.
Here is the crux of the argument, from the filing, which refers to Impinj products as endpoint ICs (integrated circuits).
Defendants repeatedly touted increased sales and purportedly strong demand for endpoint ICs, which Defendants claimed had been driven by customers’ increasing adoption of Impinj’s technology. In truth, Impinj’s “record breaking” revenues from 2016 to late-2017 were the result of customers stockpiling inventory to account for Impinj’s production delays and concerns over extended production lead times. In fact, while Impinj was attributing increased sales to “accelerating” demand—and reassuring investors that the Company had “confidence in the strong demand” and great “visibility” into its customers’ supposedly “low” inventory levels — Impinj customers amassed between one half to one billion excess endpoint ICs.
When the Company’s supply constraints eventually improved, and IC endpoint lead times shortened, Impinj customers reduced their purchases, significantly reducing Impinj’s sales during 2018. The revelations of the fraud as described below caused the price of Impinj stock to decline dramatically.
The suit was filed by the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge, a retirement fund that bought Impinj stock and manages $1.2 billion in assets for 6,800 people. The lawsuit alleges multiple violations of federal securities laws.
The retirement fund is seeking class action status for the suit, which would potentially open up the claim to include other stockholders. In addition to Impinj, the company’s CEO Chris Diorio, COO Eric Brodersen and Evan Fein — who left his CFO position earlier this year — are named in the lawsuit.
Impinj focuses on RAIN RFID — radio frequency identification — technology that connects everyday items to the internet. Impinj sells tags for connecting items as well as readers for tracking those items, even when they are on the go.
The lawsuit relies heavily on commentary from executives during quarterly earnings calls with investors. Impinj beat Wall Street expectations for several consecutive quarters after going public in 2016.
The lawsuit cites optimistic remarks from Diorio in that period, attributing significant revenue growth to market adoption of the technology. The suit argues that Impinj’s results were not an accurate indicator of a growing market. “In reality, the Company’s reported sales of endpoint ICs reflected purchases by Impinj customers that greatly exceeded actual end-user demand, i.e., customers stockpiling product, in response to the Company’s long lead times and supply constraints,” the lawsuit says.
Impinj stock rose nearly 160 percent from the time of its IPO to the end of July 2017.
The first major issue for Impinj, according to the suit, came in early August 2017, when the company lowered its guidance for sales from between 7.8 billion and 8 billion units down to 7 billion to 7.2 billion. Then in November 2017, Impinj posted its first earnings miss and downgraded guidance for the following quarter.
From the suit:
According to Impinj, the Company’s fourth quarter outlook was “impacted by a decline in endpoint IC demand,” with Defendant Diorio explaining that the reduced demand was attributable to customers “adjusting from a transition where we had constrained supply and long lead times to us having a buffer stock in short lead times now.” In fact, Diorio revealed that, in the prior year, “we didn’t have enough product [and] so we have long lead times, and we see a normalization happening now as we accommodate basically a new dynamic where we have sufficient product to meet the demand.’
It didn’t get any better in early 2018, as the company laid off 9 percent of its workforce and closed some remote offices in February. Fein also left in February, and Impinj stock hit its lowest point around that time.
Since then, however, Impinj stock has rebounded, rising 124 percent from mid-February until the end of September. In May, Diorio called “the first half of 2018 the turning point for our business.”
Impinj got a boost thanks to a recent decree from the International Air Transport Association Board of Governors mandates the use of connected bag tags by 2020. Impinj rolled out new connected bag tags specifically for the airline industry last month, with Diorio saying the “rollout is one of the largest and fastest industry adoptions in the history of RFID.”
Here is the full lawsuit: