What changed in this filing

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Item 2. Management’s Discussion and Analysis

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In particular, statements herein regarding economic outlook, impact of COVID-19;

Shanghai COVID-19 resurgence lockdown impact and timing;

industry prospects and trends;

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expectations for unsupported platform or product versions and related inventory and other charges;

Russian invasion of Ukraine impacts;

supply chain expectations;

semiconductor chip shortages;

and any other guidance on future periods are forward-looking statements Forward-looking statements reflect management’s current expectations and are inherently uncertain.

and any other guidance on future periods are forward-looking statements.

Forward-looking statements reflect management’s current expectations and are inherently uncertain.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or other future events.

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The discussions above and in the section in Item 1A., Risk Factors “Cautionary Factors That May Affect Future Results” in our Annual report on Form 10-K for the year ended December 31, 2021, describe some, but not all, of the factors that could cause these differences.

In 2021, we have continued to react to and manage our business relative to the COVID-19 pandemic.

During 2020, COVID-19 had impacted all aspects of our business, from customer demand, to supply chain integrity, employee safety, business processes, and financial management.

As a global company, we had to manage each of these while working within the guidelines of local and national policy in the U.S., China and Germany.

Our philosophy at the start of the outbreak was simple:

Keep our people and their families safe;

Keep our facilities safe and operational while we serve our customers as an essential business;

Preserve cash.

We have managed the COVID-19 impact successfully to date, with no known employee transmissions in the workplace and significant preservation of our cash and working capital.

Our resilient supply chain model kept our facilities in Shanghai, China and Redmond, Washington open, and serving customers globally.

We face continued international travel restrictions, shipping delays, and inability to meet with customers in person.

As business has recovered we have been able to respond by having the working capital needed and the workforce in place.

In the third quarter, we experienced a slowdown of demand as customers, we believe, were unable to secure an adequate silicon supply for planned capacity expansion.

In supply chains around the world with the re-openings and now, in a believed ripple effect, factories are experiencing the impact of chip shortages on their production plans.

This appears to be a shorter-term issue, but expected to have some continuing impact into 2022.

However, the outlook by industry analysts for automotive electronics remains strong for a decade.

Waves of COVID-19 infection rates and variants have kept or re-imposed revised travel restrictions.

Customers largely have not permitted in-person sales and other visits.

Converting these interactions to remote and virtual means has meant implementing new processes and technology.

In production, in addition to adding protective health measures for our employees, we have focused on supply chain resilience and duplicating production capability for some products in both our Shanghai, China and Redmond, USA facilities.

We implemented additional supplier financial and other monitoring, as well as adding additional local suppliers and increasing inventory stock levels of key parts.

Other than production employees who necessarily are onsite, most other Redmond employees are working remotely with hybrid flexibility to be onsite as desired or needed and this is expected to continue through year-end.

China employees are generally onsite.

We believe our exposure to COVID-19 risks are reduced by vaccination coverage, which is 98% in Redmond with our China and Germany facilities not far behind.

Our short-term challenge continues to be operating in a cyclical, COVID-19 impacted, and rapidly evolving industry environment, which saw significant improvement of revenue, up 27%, in the first three quarters of 2021 as compared to the same period of 2020.

Bookings were up 30% for the same comparative periods, but declined in the third quarter, we believe, due to silicon chip shortages discussed above.

Our focus has been dealing with COVID-19 related issues, especially supply chain shortages and lead-times, which have been managed though carefully maintaining inventory levels.

We also continue to balance a host of current issues including industry changes, industry partnerships, new technologies, business geography shifts, travel and customer restrictions, customer shut downs, exchange rate volatility, trade issues and tariffs, semiconductor chip shortages, shipping challenges, increasing costs (inflation) and strategic investments in our business with the level of demand and mix of business we expect.

We continue to manage our costs carefully and execute strategies for cash preservation, protecting our employee base and managing supply chain price increases.

We are focusing our research and development efforts in our strategic growth markets, namely automotive electronics and IoT new programming technologies, secure supply chain solutions, automated programming systems and their enhancements for the manufacturing environment and software.

The first quarter of 2022 was very unusual.

It started strongly with orders and new sales funnel prospect additions, which appeared to relate to improved supply chain and semiconductor part shortage problems that had been significant issues in the second half of 2021.

The improvement of business conditions was before the geopolitical issues stemming from the late-February Russian invasion of Ukraine and the mid-March COVID-19 resurgence in China resulting in restrictions and the lockdown of Shanghai.

We discontinued our relationship with our Russian distributor, which represented an immaterial level of business.

We had no distribution or operations in Ukraine.

The lockdown impacted end of quarter shipments that were completed and ready for delivery to customers from Shanghai.

Approximately $1 million of potential revenue, including 5 PSV systems remained in inventory and backlog at the end of the quarter.

No orders were cancelled and we expect to be able to resume shipments later in the second quarter.

The timing of ending the lockdown is uncertain and depending when we are allowed to resume deliveries may result in not having enough time to expect collections to occur in the second quarter.

We expect that we have adequate cash resources and that the collections and cash should be normalized before the end of the third quarter.

In the first quarter of 2022, due to a continued cyclical downturn, Russian invasion of Ukraine impacts particularly on Europe, the COVID-19 related Shanghai lockdown resulting in about $1M of potential revenue not being shipped and realized, combined with continued significant investments in our security deployment business, we incurred operating losses.

Our strong cash position and balance sheet combined with our long-term view of the market gave us the financial flexibility to make these security business investments.

At Data I/O, we are investing for the long-term to retain and extend our leadership position in automotive electronics and security deployment.

We are continuing to develop technology to securely provision newer categories of semiconductors, including Secure Elements, Authentication Chips, and Secure Microcontrollers.

In late 2020, we released updated SentriX hardware and tools which simplify the customer acquisition process, and reduce dependency on third party suppliers.

We also upgraded SentriX® security deployment systems in the field to this new architecture.

We plan to deliver new programming technology and automated handling systems for managed and secure programming in the manufacturing environment.

We continue to focus on extending the capabilities and support for our product lines and supporting the latest semiconductor devices, including various configurations of NAND Flash, e-MMC, UFS and microcontrollers on our newer products.

On the product side, we continue to invest with a long-term focus towards expanding our markets and creating unique value for our customers.

This is true for both our traditional core business as well as the emerging security deployment business.

Our short-term challenge continues to be operating in a cyclical, COVID-19 impacted, geopolitical uncertainties and rapidly evolving industry environment with continued supply chain and silicon part shortages issues.

We continue to balance industry changes, industry partnerships, new technologies, business geography shifts, travel and customer restrictions, customer shut downs, exchange rate volatility, trade issues and tariffs, COVID-19 impacts, semiconductor chip shortages, increasing costs and strategic investments in our business with the level of demand and mix of business we expect.

We continue to manage our costs carefully and execute strategies for cash preservation, protecting our employee base, addressing inflation impacts, and cost control.

Many of our employees continue to work remotely from home or on a hybrid basis, with the essential production and process workers onsite as part of our essential operations.

We are continuing to develop technology to securely provision new categories of semiconductors, including Secure Elements, Authentication Chips, and Secure Microcontrollers.

We continue to focus on extending the capabilities of our programming systems and support for our product lines and supporting the latest semiconductor devices, including various configurations of NAND Flash, e-MMC, UFS and microcontrollers on our newer products.

Our customer focus has been on global and strategic high-volume manufacturers in key market segments like automotive electronics, IoT, industrial controls and consumer electronics as well as programming centers.

Although the long-term prospects for our strategic growth markets should be good, these markets and our business have been, and are likely to continue to be, adversely impacted by the global COVID-19 pandemic.

Chip shortages are causing issues and some automotive plant or production shutdowns.

This appears to be temporary and in some cases, for us, drives consumable adapter demand in order to support alternative chips.

As a global company with 93% of our 2020 sales in international markets, we have been and expect to continue to be significantly impacted by the COVID-19 pandemic.

Although our facilities in Shanghai, Redmond and Germany are currently operating in some pandemic-related restricted ways, we believe that our classification as essential by certain U.S.

customer groups will continue to keep operations open.

We source some components from China and other countries that are used to manufacture our equipment in China and in our Redmond, Washington facility and these components may not be readily available or subject to delays.

Chip shortages are causing issues and some automotive plant interruptions.

This appears to be a lingering issue for 2022 and in some cases drives consumable adapter demand in order to support alternative chips.

As a global company with over 90% of our sales in international markets, we have been and expect to continue to be impacted by the COVID-19 pandemic in all markets we serve, with follow-on waves of impact.

On March 29, 2022 we announced that our Shanghai facility was being closed due to the local government lockdown.

We were unable to ship products valued at $1M, and the facility remains closed.

We are supporting customers from our Redmond, Washington USA facility and dealing with shipping bottlenecks and shutdowns.

We believe that our classification as essential by certain U.S.

customer groups will continue to keep operations open in the USA.

We source other components from China and other countries that are used to manufacture our equipment in China and in our Redmond, Washington facility.

These components may not be readily available or subject to delays.

Our manufacturing facilities in Shanghai and Redmond have helped us to be part of a resilient supply chain to our customers with dual production of some products and local sourcing of many suppliers.

Many of our employees and executives are still working from home, and we are limiting visitors to our facilities as the pandemic continues.

All of our facilities are subject to restrictions, rapid regulation changes, and closure by governmental entities.

Many of our employees and executives are working from home or on a hybrid basis and we are limiting visitors to our facilities as the pandemic continues.

All of our facilities are subject to restrictions and closure by governmental entities.

The pandemic has and may continue to impact our revenues in some geographies, our ability to obtain key components and to manufacture our products, as well as sell, install and support our products around the world.

We expect wide-spread vaccinations to help restore business interactions with customers, however we expect continued customer site restrictions on sales and service visits, travel restrictions, closed borders, cancelled trade shows and industry gatherings, and modifications in our operations.

See also the detailed discussion of the impacts of COVID-19 on our business and markets in Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 31, 2020.

The pandemic could have the effect of heightening many of the other risks described in our Form 10-K.

We expect wide-spread vaccinations to help restore business interactions with customers, however we expect to continue to be impacted and respond to customer site restrictions on sales and service visits, travel restrictions, closed borders, cancelled trade shows and industry gatherings, and modifications in our operations to allow social distancing.

The geopolitical uncertainty from the Russian invasion of Ukraine remains a continuing issue.

See also the detailed discussion of the impacts of COVID-19 on our business and markets in Item 1A, Risk Factors in our annual report on Form 10-K.

The pandemic could have the effect of heightening many of the other risks described in Item 1A of our Form 10-K .

Annual projections on spending, growth, mix, and profitability have been and are likely to be further revised substantially as new information is obtained.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

Our critical accounting policies have not changed from those discussed in our 2020 Form 10-K.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates, including those related to revenue recognition, sales returns, bad debts, inventories, income taxes, warranty obligations, restructuring charges, contingencies such as litigation and contract terms that have multiple elements and other complexities typical in the capital equipment industry.

We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances.

Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements:

Revenue Recognition:

Topic 606 provides a single, principles-based five-step model to be applied to all contracts with customers.

It generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers when control over the promised goods or services are transferred to the customer.

We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year.

During 2022 and 2021, the impact of capitalization of incremental costs for obtaining contracts was immaterial.

We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price.

We recognize revenue upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be a separate performance obligation.

These systems are standard products with published product specifications and are configurable with standard options.

The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

The revenue related to products requiring installation that is perfunctory is recognized upon transfer of control of the product to customers, which generally is at the time of shipment.

Installation that is considered perfunctory includes any installation that is expected to be performed by other parties, such as distributors, other vendors, or the customers themselves.

This considers the complexity, skill and training needed as well as customer expectations regarding installation.

We enter into arrangements with multiple performance obligations that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component.

We allocate the transaction price of each element based on relative selling prices.

Relative selling price is based on the selling price of the standalone system.

For the installation and service and support performance obligations, we use the value of the discount given to distributors who perform these components.

For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold.

Revenue is recognized on the system sale based on shipping terms, installation revenue is recognized after the installation is performed, and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement, typically one year.

Deferred revenue includes service, support and maintenance contracts and represents the undelivered performance obligation of agreements that are typically for one year.

When we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon shipment, provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions, if any, have been met.

We recognize revenue when there is an approved contract that both parties are committed to perform, both parties rights have been identified, the contract has substance, collection of substantially all the consideration is probable, the transaction price has been determined and allocated over the performance obligations, the performance obligations including substantive acceptance conditions, if any, in the contract have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer.

We establish a reserve for sales returns based on historical trends in product returns and estimates for new items.

Payment terms are generally 30 days from shipment.

We transfer certain products out of service from their internal use and make them available for sale.

The products transferred are typically our standard products in one of the following areas:

service loaners, rental or test units;

engineering test units;

or sales demonstration equipment.

Once transferred, the equipment is sold by our regular sales channels as used equipment inventory.

These product units often involve refurbishing and an equipment warranty, and are conducted as sales in our normal and ordinary course of business.

The transfer amount is the product unit’s net book value and the sale transaction is accounted for as revenue and cost of goods sold.

Allowance for Doubtful Accounts:

We base the allowance for doubtful accounts receivable on our assessment of the collectability of specific customer accounts and the aging of accounts receivable.

If there is deterioration of a major customer’s credit worthiness or actual defaults are higher than historical experience, our estimates of the recoverability of amounts due to us could be adversely affected.

Inventories are stated at the lower of cost or net realizable value.

Adjustments are made to standard cost, which approximates actual cost on a first-in, first-out basis.

We estimate reductions to inventory for obsolete, slow-moving, excess and non-salable inventory by reviewing current transactions and forecasted product demand.

We evaluate our inventories on an item-by-item basis and record inventory adjustments accordingly.

If there is a significant decrease in demand for our products, uncertainty during product line transitions, or a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory adjustments and our gross margin could be adversely affected.

Warranty Accruals:

We accrue for warranty costs based on the expected material and labor costs to fulfill our warranty obligations.

If we experience an increase in warranty claims, which are higher than our historical experience, our gross margin could be adversely affected.

Tax Valuation Allowances:

Given the uncertainty created by our loss history, as well as the current and ongoing cyclical and COVID-19 pandemic related uncertain economic outlook for our industry, capital and geographic spending, as well as income and current net deferred tax assets by entity and country, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances.

At the current time, we expect, therefore, that reversals of the tax valuation allowance will take place as we are able to take advantage of the underlying tax loss or other attributes in carry forward or their use by future income or circumstances allow us to realize these attributes.

The transfer pricing and expense or cost sharing arrangements are complex areas where judgments, such as the determination of arms-length arrangements, can be subject to challenges by different tax jurisdictions.

Share-based Compensation:

We account for share-based awards made to our employees and directors, including employee stock option awards and restricted stock unit awards, using the estimated grant date fair value method of accounting.

For options, we estimate the fair value using the Black-Scholes valuation model and an estimated forfeiture rate.

Restricted stock unit awards are valued based on the average of the high and low price on the date of the grant and an estimated forfeiture rate.

For both options and restricted awards, expense is recognized as compensation expense on the straight-line basis.

Employee Stock Purchase Plan (“ESPP”) shares were issued under provisions that do not require us to record any equity compensation expense.

RESULTS OF OPERATIONS:

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Net sales by location

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Net sales by type

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Total programming systems

Net sales in the third quarter of 2021 were $6.7 million, up 13% as compared with $5.9 million in the third quarter of 2020.

The increase from the prior year period primarily reflects higher overall demand for equipment and higher adapter sales associated with the increased usage and growing installed base of machines throughout the world.

Recurring and consumable revenues, which include adapter sales, represented $2.7 million or 39% of total revenues in the third quarter 2021, as compared with $2.1 million or 35% of the lower third quarter 2020 total.

Total capital equipment sales were 61% of revenues, adapters were 28% and software and services revenues were 11% of revenues respectively in the third quarter of 2021 compared with 65% and 21% and 14% respectively for the third quarter of 2020.

On a geographic basis, international sales represented approximately 86% of total net sales for the third quarter of 2021 compared with 93% in the prior year period.

Third quarter 2021 bookings were $5 million, down from $5.6 million in the third quarter of the prior year.

The current quarter’s bookings we believe were impacted by chip shortages and supply chain issues, which resulted in demand delays.

Backlog at September 30, 2021 was approximately $3.3 million, down from $5.0 million at June 30, 2021 and up from $2.8 million at September 30, 2020.

Data I/O had $1.4 million in deferred revenue at the end of the third quarter of 2021 as compared with $1.1 million at the end of fourth quarter of 2020.

Net sales in the first quarter of 2022 were $5.0 million, as compared with $6.0 million in the prior year period and $6.4 million in the fourth quarter of 2021.

Sales in the first quarter of 2022 were impacted by a resumption of COVID-19 related shut downs in Shanghai.

This resulted in approximately $1 million in potential product revenue that could not ship.

No orders have been cancelled and their shipment is expected later in the second quarter.

First quarter 2022 bookings were $6.2 million, as compared with $5.4 million in the prior year period and $6.2 million in fourth quarter of 2021.

We began the quarter strongly with improved orders and sales funnel additions.

The improvement in the business conditions was before the late February Russian invasion of Ukraine and the mid-March COVID-19 resurgence in China resulting in restrictions and a lockdown in Shanghai.

We believe these events caused uncertainty and a late quarter slowdown in Europe, and shut down related interruptions in our Shanghai business.

The first quarter of 2021 was early in the original COVID-19 recovery with business just resuming.

On a geographic basis, international sales represented approximately 94.2% of total net sales for the first quarter of 2022 compared with 95.3% in the prior year period.

Total equipment sales were 52% of revenues, adapters were 33% and software and services revenues were 15% of revenues respectively in the first quarter of 2022 compared with 56% and 31% and 13% respectively for the first quarter of 2021.

Automotive electronics represented 63% of orders for the quarter.

Backlog at March 31, 2022 was $4.1 million, as compared with $2.9 million at year end and up from $3.0 million at March 31, 2021.

The backlog increase was primarily due to the Shanghai lockdown related $1 million of potential revenue shipments that were caught up in the shutdown and included 5 PSV systems that were complete and ready to ship.

Data I/O had $1.7 million in deferred revenue at the end of the first quarter of 2022 as compared with $1.3 million at the end of the first quarter of 2021.

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Percentage of net sales

Gross margin as a percentage of sales was 60.7% in the third quarter of 2021, as compared to 55.1% in the same period of the prior year.

The difference in gross margin as a percentage of sales primarily reflects the leverage on fixed production costs from higher revenues, and improved factory variances as well as channel mix.

Gross margin as a percentage of sales in the first quarter of 2022 was 46.4% as compared to 55.5% in the same period last year.

For the first quarter of 2022, gross margin was primarily impacted by the lower sales volume and mix.

The Shanghai lockdown prevented shipments of approximately $1 million in potential revenue that would have added approximately 5 gross margin percentage points.

RESEARCH AND DEVELOPMENT

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Percentage of net sales

Research and development (“R&D”) expenses were $1.7 million in the third quarter of 2021 and $1.6 million in the third quarter of 2020, and as a percentage of sales were relatively consistent compared to the same period in 2020.

Research and development (“R&D”) expenses in the first quarter of 2022 were approximately the same as compared to the same period in 2021.

We have maintained our investment in our product development and supporting our growth initiatives.

SELLING, GENERAL AND ADMINISTRATIVE

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Percentage of net sales

Selling, General and Administrative (“SG&A”) expenses in the third quarter of 2021 increased by approximately $406,000 from the prior year period primarily due to higher sales commissions associated with the mix and higher sales volume for programming equipment as well as higher incentive compensation.

Selling, General and Administrative (“SG&A”) expenses were approximately the same as compared to the same period in 2021.

The lower sales volume resulted in lower sales commissions, however these were offset by higher marketing and rent costs.

Cost control measures have remained in place during the first quarter of 2022 and are expected to continue in the second quarter of 2022.

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Interest income

Interest income was higher in the third quarter 2021 compared to the same period in 2020 primarily due to interest received on the AMT refund.

Interest income was approximately the same in the first quarter of 2022 as compared to the same period in 2021 and reflects lower invested balances in foreign subsidiary accounts.

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Income tax benefit (expense)

Income tax benefit (expense) for the third quarter of both 2021 and 2020, primarily related to foreign and minor state taxes.

Income tax benefit (expense) for the first quarter of both 2022 and 2021, primarily related to foreign and state taxes.

During the first quarter of 2022 a China dividend withholding tax of $442,000 was paid in connection with a dividend repatriation to the US parent company.

The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes.

We have a valuation allowance of $8.0 million as of September 30, 2021.

As of September 30, for both 2021 and 2020, our deferred tax assets and valuation allowance have been reduced by approximately $381,000 and $370,000, respectively, associated with the requirements of accounting for uncertain tax positions.

We have a valuation allowance of $8.2 million as of March 31, 2022.

As of March 31, for both 2022 and 2021, our deferred tax assets and valuation allowance have been reduced by approximately $399,000 and $371,000, respectively, associated with the requirements of accounting for uncertain tax positions.

Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance.

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LIQUIDITY AND CAPITAL RESOURCES

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At September 30, 2021, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash increased $74,000 from December 31, 2020 primarily to changes in working capital offset in part by funding the operating loss for 2021.

A prior year AMT credit related tax refund of over $600,000 was received during the quarter.

Net working capital at the end of the third quarter of 2021, compared to December 31, 2020, increased approximately $400,000 to $18.5 million, with redeployment of cash and offsetting changes in accounts receivable and current liabilities.

Although we have no significant external capital expenditure plans currently, we expect that we will continue to make and manage carefully capital expenditures to support our business.

At March 31, 2022, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash decreased $1,894,000 from December 31, 2021 primarily from paying off year end accruals for annual incentive compensation of $791,000 and annual 401(k) matching contributions of $224,000, as well as one-time China dividend income withholding tax of $442,000 on the dividend from Shanghai and funding the operating loss.

Our working capital decreased $1,588,000 during 2022, primarily due to the reasons for the cash decline in the period.

The Shanghai lockdown delayed the delivery of approximately $1 million of potential product revenue.

Depending on the timing of the expected reopening later in the second quarter and resumption of shipping, there may not be enough time to expect collections to take place before the end of the second quarter.

We believe we have the funds necessary to accommodate this.

The company continues to have no debt.

Although we have no significant external capital expenditure plans currently, we expect to continue to carefully make and manage capital expenditures to support our business.

We plan to increase our internally developed rental, security provisioning, sales demonstration and test equipment as we develop and release new products.

Capital expenditures are currently expected to be funded by existing and internally generated funds.

As a result of our cyclical and seasonal industry, significant product development, customer support and selling and marketing efforts, we have required substantial working capital to fund our operations.

We have tried to balance our level of development spending with the goal of profitable operations or managing the impact on business levels related to COVID-19.

We have implemented or have initiatives to implement geographic shifts in our operations, optimize real estate usage, reduce exposure to the impact of currency volatility and tariffs, increase product development differentiation, and reduce costs.

We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through at least the next one-year period.

We expect that cash will be needed to fund the business growth as operations recover to previous levels.

As a result of our cyclical industry, significant product development, customer support and selling and marketing efforts, we have required substantial working capital to fund our operations.

We have tried to balance our level of development spending with the goal of profitable operations or managing down business levels related to COVID-19.

We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond.

We may require additional cash at the U.S.

headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries.

We currently do not have plans and/or intentions to make further repatriations.

For any repatriation, there may be tax and other impediments to any repatriation actions.

As many repatriations typically have associated withholding taxes, those withheld will be a current tax without generating a current or deferred tax benefit.

Our working capital may be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time.

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OFF-BALANCE SHEET ARRANGEMENTS

Except as noted in the accompanying consolidated financial statements in Note 5, “Leases” and Note 6, “Other Commitments”, we have no off-balance sheet arrangements.

Except as noted in the accompanying consolidated financial statements in Note 6, “Other Commitments”, we have no off-balance sheet arrangements.

NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $284,000 in the third quarter of 2021 compared to ($197,000) in the third quarter of 2020.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was $564,000 in the third quarter of 2021, compared to $169,000 in the third quarter of 2020.

EBITDA was $374,000 in the nine months ended September 30, 2021 compared to ($1,269,000) in the same period of 2020.

Adjusted EBITDA, excluding equity compensation (a non-cash item) was $1,334,000 in the nine months ended September 30, 2021 compared to ($173,000) in the same period of 2020.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($1,223,000) in the first quarter of 2022 compared to ($105,000) in the first quarter of 2021.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($932,000) in the first quarter of 2022, compared to $173,000 in the first quarter of 2021.

Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

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Equity compensation

Adjusted EBITDA earnings (loss),

excluding equity compensation

Adjusted EBITDA, excluding equity compensation

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 for a discussion of new accounting pronouncements.

On January 1, 2021 the Company adopted ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles and the methodology for calculating income tax rates in an interim period, among other updates.

The adoption of this ASU did not have a material impact on our financial statements.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis