What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-12 · 79 added, 46 removed, 183 unchanged (41% of the section changed)

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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.

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.

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

We continue to focus on extending the capabilities of our programming systems 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 pandemic of COVID-19.

Semiconductor chip shortages have, had and continue to cause 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.

Semiconductor chip shortages have caused, and continue to cause issues and some automotive plant interruptions.

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

The Shanghai COVID-19 related lockdown, which impacted our Shanghai facility starting in March, ended in early June, and our facility is currently operational.

The facility was operational at all times in the third quarter.

Because we have manufacturing facilities in Shanghai and Redmond, it has 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.

The lockdown resulted in building up a record backlog.

All unshipped systems in Shanghai at the end of March were shipped in June.

The backlog of adapters is being worked down and is expected to return to normal levels in August.

The backlog level for systems is expected to return to normal levels during the second half of 2022.

The balance sheet impact from the lockdown should return to normal at the end of the third quarter of 2022.

We are limiting visitors to our facilities as the pandemic continues.

We continue to keep certain COVID-19 safety proceedures and limitations in our facilities as the pandemic continues.

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

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Net sales by product line

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Total programming systems

Net sales in the second quarter of 2022 were $4.8 million, down 29% as compared with $6.7 million in the second quarter of 2021.

The decrease from the prior year period primarily reflects the impact of lower foreign currencies, in particular, unfavorable exchange rates, as reported on a consolidated basis, the previously announced Shanghai COVID-19 restrictions and lockdowns, and the war in Ukraine which impacted European business as well as supply chain, and revenue recognition for shipments that had been held up or delayed.

Recurring and consumable revenues, which includes adapter sales, represented $2.1 million or 45% of total revenues in the second quarter 2022, as compared with $2.6 million or 39% of the higher second quarter 2021 total.

Total capital equipment sales were 55% of revenues, adapters were 30%, and software and services revenues were 15% of revenues, respectively, in the second quarter of 2022 compared with 61%, 29% and 10%, respectively, for the second quarter of 2021.

On a geographic basis, international sales represented approximately 89.2% of total net sales for the second quarter of 2022 compared with 93.0% in the prior year period.

Second quarter 2022 bookings were $6.4 million, down 28% from $8.9 million in the second quarter of the prior year.

Backlog at June 30, 2022 was approximately $5.8 million, up from $4.1 million at March 31, 2022 and $5.0 million at June 30, 2021.

Data I/O had $1.5 million in deferred revenue at June 30, 2022, $1.4 million at June 30, 2021 and $1.5 million at the end of the fourth quarter of 2021.

Net sales in the third quarter of 2022 were $7.2 million, up 7% as compared with $6.7 million in the third quarter of 2021.

The increase from the prior year period primarily reflects higher overall demand for equipment, and higher adapter sales from shipping backlog related to the Covid-19 related Shanghai shutdown from mid-March to mid-June recovery, offset in part by lower revenue as a result of the stronger US dollar.

The prior year period included the impact of semiconductor part shortages especially on automotive electronics business.

Recurring and consumable revenues, which include adapter sales, represented $3.2 million or 44% of total revenues in the third quarter 2022, as compared with $2.7 million or 39% of the lower third quarter 2021 total.

Total capital equipment sales were 56% of revenues, adapters were 32% and software and services revenues were 12% of revenues respectively in the third quarter of 2022 compared with 55% and 30% and 15% respectively for the third quarter of 2021.

On a geographic basis, international sales represented approximately 91% of total net sales for the third quarter of 2022 compared with 86% in the prior year period.

Third quarter 2022 bookings were $7.1 million, up from $5.0 million in the third quarter of the prior year.

The current quarter’s bookings we believe were impacted by the recovery from the Covid-19 related Shanghai shutdown, as well as a resurgence of business demand in each of our geographies (Americas, Europe and Asia), offset in part by the currency translation impact of the strong dollar.

Backlog at September 30, 2022 was approximately $4.9 million, down from $5.8 million at June 30, 2022 and up from $3.3 million at September 30, 2021.

The backlog draw down from June 30 th relates primarily to build and shipment of production related to the prior quarter Shanghai Covid shutdown.

Data I/O had $2.0 million in deferred revenue at the end of the third quarter of 2022, including one delivered system waiting for final acceptance, as compared with $1.5 million at the end of fourth quarter of 2021.

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Percentage of net sales

Gross margin as a percentage of sales was 57.8% in the second quarter of 2022, as compared to 57.0% in the same period of the prior year.

The change in gross margin as a percentage of sales relates primarily to favorable variances during the quarter, offset in part by the effect of changes in volume relative to fixed costs.

Gross margins at 57.0% in the third quarter were down from 60.7% in the third quarter of 2021.

The decrease was primarily due to currency strength of the US Dollar, which is up approximately 15% versus the Euro and Yuan, offset in part by net favorable factory variances.

RESEARCH AND DEVELOPMENT

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Research and development (“R&D”) expenses in the second quarter of 2022 were relatively consistent compared to the same period in 2021.

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

Research and development (“R&D”) expenses in the third quarter of 2022 were $1.4 million and decreased by approximately $298,000 from the prior year period primarily due to lower incentive compensation and consulting expenses as well as the impact of the strong US Dollar translation of foreign subsidiary costs and spending discipline.

SELLING, GENERAL AND ADMINISTRATIVE

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Percentage of net sales

Selling, General and Administrative (“SG&A”) expenses in the second quarter of 2022 decreased by approximately $126,000 from the prior year period primarily due to lower sales commissions associated with lower revenue, the channel mix, as well as lower incentive compensation.

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

Selling, General and Administrative (“SG&A”) expenses in the third quarter of 2022 were $2.0 million and decreased by approximately $249,000 from the prior year period primarily due to lower incentive compensation as well as the impact of the strong US Dollar translation of foreign subsidiary costs and spending discipline.

The cost control measures have remained in place during the first three quarters of 2022 and are expected to continue in the fourth quarter of 2022.

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Interest income

Interest income was higher in the second quarter 2022 compared to the same period in 2021.

Interest income was higher in the third quarter 2022 compared to the same period in 2021 primarily due to interest received on the AMT refund.

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Income tax benefit (expense)

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

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

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

For the nine months ended September 30, 2022 tax expense also included dividend withholding tax.

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 $8.5 million as of June 30, 2022.

As of June 30, for both 2022 and 2021, our deferred tax assets and valuation allowance have been reduced by approximately $405,000 and $376,000, respectively, associated with the requirements of accounting for uncertain tax positions.

We have a valuation allowance of $8.3 million as of September 30, 2022.

As of September 30, for both 2022 and 2021, our deferred tax assets and valuation allowance have been reduced by approximately $412,000 and $381,000, 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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Working capital

At June 30, 2022, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash decreased $3.9 million from December 31, 2021 primarily from funding the operating loss and 2021 year end accruals.

Net working capital at the end of the second quarter of 2022 compared to December 31, 2021 decreased approximately $2.6 million to $15.9 million, with redeployment of cash and offsetting changes in accounts receivable, inventory and current liabilities.

At September 30, 2022, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash decreased $3.1 million from December 31, 2021 primarily due to funding the operating loss and 2021 year end accruals.

Net working capital at the end of the third quarter of 2022, compared to December 31, 2021, decreased approximately $2.0 million to $16.5 million, primarily due to funding the operating loss.

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.

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We have tried to balance our level of development spending with the goal of profitable operations or managing lower 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 control costs.

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.

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NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($445,000) in the second quarter of 2022 compared to $196,000 in the second quarter of 2021.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($65,000) in the second quarter of 2022, compared to $597,000 in the second quarter of 2021.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $1.2 million in the third quarter of 2022 compared to $284,000 in the third quarter of 2021.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was $1.4 million in the third quarter of 2022, compared to $564,000 in the third 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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Adjusted EBITDA, excluding equity compensation

Recently Adopted Accounting Pronouncements

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

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.

Quantitative and Qualitative Disclosures About Market Risk

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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