DATA I/O CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves as long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking. In particular, statements herein regarding economic outlook; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; expected expenses, breakeven revenue point; expected market decline, bottom or growth; market acceptance of our newly introduced or upgraded products or services; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new products or services; changing foreign operations; taxes, trade issues and tariffs; expected inventory levels; expectations for unsupported platform or product versions and related inventory and other charges; supply chain expectations; semiconductor chip shortages and recovery; 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. Moreover, neither Data I/O nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Annual Report. The Reader should not place undue reliance on these forward-looking statements. The following discussions and the 2024 Annual Report on Form 10-K section entitled “Risk Factors – Cautionary Factors That May Affect Future Results” describe some, but not all, of the factors that could cause these differences. OVERVIEW Data I/O continued to make progress in key operational areas during the first quarter, despite a challenging global economic environment. The period represents a first step in proving the growth and market expansion strategies being implementing over the past several months. The Company achieved strong first quarter results, reporting increases in revenue, net income and EBITDA on a sequential and year-over-year comparison basis. At the same time, efficiency improvements and streamlining operations resulted in a lower cost basis for manufacturing and overhead. Furthermore, we are encouraged to see customers increase the utilization of their existing systems which results in a greater need for engineering and maintenance services and heightened demand for consumable adapters, which represent a high margin source of revenue. We continue to grow our pipeline of opportunities beyond the automotive sector including a revitalization of our activities with semiconductor companies and forging strategic product development relationships with leading firms serving the memory and microcontroller sectors. Combined with continued efforts to expand our market reach, we expect to deliver revenue growth through end market diversification and an enhanced consultative sales process. As the tariff and trade scenarios evolve, Data I/O is well prepared having implemented a resilient supply chain with dual manufacturing capabilities in both the United States and China during COVID which provides an advantage to manage emerging tariff policies. With the flexibility to manufacture at either location, we are well positioned to cost-effectively support customers globally. Efforts are underway to enhance our redundancies between our two manufacturing locations. Additional manufacturing locations are being considered for placement within our European headquarters in Germany and with select distribution partners. Significant progress has been made in a short period of time against a backdrop of significant economic and cross-border trade uncertainty. We remain cautious given the near-term headwinds, as this has created additional strain on the economy and stalled capital investments. We remain focused on setting the business up for sustainable growth by driving innovation, enhancing our products and improving our value proposition. 16 Table of Contents CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES 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, credit losses, 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: Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 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 the current and prior period quarters, the impact of capitalization of incremental costs for obtaining contracts were 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 analysis considers the complexity, skill and training needed, as well as customer installation expectations. We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, installation, services and support and extended maintenance components. We allocate the transaction price of each element based on the relative selling price. Relative selling price is based on the selling price of the standalone system. Installation, services and support costs are based on the discount given to distributors who perform these services. For software maintenance performance obligations, we use the charge for annual software maintenance renewals after the expiration of the initial warranty coverage. Revenue is recognized on the system based on shipping terms, software based on delivery, installation and services based on completion of work and software maintenance and extended warranty support ratably over the term of the agreement, typically one year. When we license software separately, we recognize revenue upon the transfer of control of the software, which is generally upon delivery, provided that only immaterial items in the context of the contract with the customer remain on our part and substantive acceptance conditions, if any, have been met. 17 Table of Contents 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 to 60 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 are sold in our normal and ordinary course of business with standard warranty coverage. 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 Credit Losses: Allowance for credit losses is based on our assessment of the losses collectively expected for the future, as well as 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, or events forecast that collectively indicate some impairment is expected, our estimates of the recoverability of amounts due to us could be adversely affected. Inventory : 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 cyclical 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 in which 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, performance stock unit 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 and performance 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 options, performance and restricted stock unit 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. 18 Table of Contents RESULTS OF OPERATIONS: NET SALES Three Months Ended Net sales by product line March 31, 2025 Change March 31, 2024 (in thousands) Automated programming systems $ 4,346 (9.9 %) $ 4,823 Non-automated programming systems 1,830 43.4 % 1,276 Total programming systems $ 6,176 1.3 % $ 6,099 Three Months Ended Net sales by location March 31, 2025 Change March 31, 2024 (in thousands) United States $ 756 234.5 % $ 226 % of total 12.2 % 3.7 % International $ 5,420 (7.7 %) $ 5,873 % of total 87.8 % 96.3 % Three Months Ended Net sales by type March 31, 2025 Change March 31, 2024 (in thousands) Equipment sales $ 3,317 (1.5 %) $ 3,366 Adapter sales 1,963 6.3 % 1,846 Software and maintenance 896 1.0 % 887 Total $ 6,176 1.3 % $ 6,099 Net sales in the first quarter of 2025 were $6.2 million, as compared with $6.1 million in the prior year period and $5.2 million in the fourth quarter of 2024. The improvements were driven by business recovery and backlog deliveries in the Americas and Europe with growth from the prior year period of 32% and 44%, respectively. Asia revenue declined 40% due to strong prior year performance and bookings delay due to trade, tariffs and economic uncertainties. New bookings activities were strong at the start and slowed at the end of the first quarter as customers delayed purchase decisions due to global trade and tariff concerns and related automotive electronics uncertainty. First quarter 2025 bookings were $4.6 million, up from $4.1 million in fourth quarter 2024 and down from $8.1 million in first quarter 2024 due to a large $2.8 million contract from a single customer for multiple system deliveries that has spanned nearly 15 months. Backlog on March 31, 2025 was $2.9 million, down $0.6 million from December 31, 2024. Additionally, deferred revenue was approximately $1.5 million on March 31, 2025. On a geographic basis, international sales represented approximately 88% of total net sales for the first quarter of 2025 compared with 96% in the prior year period. Total equipment sales were 54% of revenues, adapters were 32% and software and services revenues were 14% of revenues in the first quarter of 2025 compared with 55% and 30% and 15% respectively for the first quarter of 2024. Automotive electronics represented 66% of orders followed by 26% for IoT and 8% for programming centers for the first quarter of 2025. 19 Table of Contents GROSS MARGIN Three Months Ended March 31, 2025 Change March 31, 2024 (in thousands) Gross margin $ 3,188 (1.0 %) $ 3,220 Percentage of net sales 51.6 % 52.8 % Gross margin as a percentage of sales in the first quarter of 2025 was 51.6% as compared to 52.8% in the same period last year and 52.2% in the fourth quarter of 2024. The change in gross margin percentage primarily reflects a higher mix of system sales revenue and lower spending absorption from related inventory reductions in the first quarter of 2024. RESEARCH AND DEVELOPMENT Three Months Ended March 31, 2025 Change March 31, 2024 (in thousands) Research and development $ 1,515 (4.2 %) $ 1,582 Percentage of net sales 24.5 % 25.9 % Research and development (“R&D”) expenses decreased in the first quarter of 2025 as compared to the same period in 2024. The slight decrease is due to transition from prior to new R&D programs and the associated changes in project and outside services spending. SELLING, GENERAL AND ADMINISTRATIVE Three Months Ended March 31, 2025 Change March 31, 2024 (in thousands) Selling, general & administrative $ 2,050 (17.9 %) $ 2,498 Percentage of net sales 33.2 % 41.0 % Selling, General and Administrative (“SG&A”) expenses were lower in the first quarter of 2025 as compared to the same period in 2024. First quarter spending reduction reflects primarily lower sales commissions related to lower first quarter bookings and lower compensation expenses from headcount reductions which occurred in fourth quarter 2024. Continued efficiency improvements and cost reduction efforts remain a focus, offset in part by inflationary increases and seasonal first quarter public company costs. INTEREST Three Months Ended March 31, 2025 Change March 31, 2024 (in thousands) Interest income $ 38 (52.5 %) $ 80 Interest income was lower in the first quarter of 2025 compared to the same period in 2024 due to lower interest rates and invested balances. 20 Table of Contents INCOME TAXES Three Months Ended March 31, 2025 Change March 31, 2024 (in thousands) Income tax benefit (expense) $ (21 ) (48.8 %) $ (41 ) Income tax benefit (expense) for the first quarter of 2025 and 2024 primarily related to foreign and state taxes. 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 $8.9 million as of March 31, 2025. As of March 31, for both 2025 and 2024, our deferred tax assets and valuation allowance have been reduced by approximately $444,000 and $434,000, respectively. 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. Financial Condition LIQUIDITY AND CAPITAL RESOURCES March 31, 2025 Change December 31, 2024 (in thousands) Working capital $ 16,014 $ (71 ) $ 16,085 At March 31, 2025, our principal sources of liquidity consisted of existing cash and cash equivalents. Cash at $10.5 million increased $159,000 from December 31, 2024 primarily due to higher sales, an improved costs structure and lower inventory levels, partially offset by higher cash expenses paid annually in the first quarter. Correspondingly, working capital of approximately $16.0 million on March 31, 2025, remained relatively flat as compared to December 31, 2024. The Company continues to have no debt. Although we have no significant capital expenditure plans currently, we expect to continue to carefully make and manage expenditures to support the business. Engineering and production tooling, test equipment and sales demonstration products will continue to be purchased as we develop and release new products. Capital expenditures are 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 working capital to fund our operations. We have tried to balance our spending with our anticipated revenue levels and the goal of profitable operations. We have implemented or have on-going initiatives to reduce material and logistic costs, enhance product quality, increase operational and R&D efficiencies and minimize tax expenses. 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. 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. Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to further reduce expenditure and/or seek possible additional financing. 21 Table of Contents 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. NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($272,000) in the first quarter of 2025 compared to ($645,000) in the first quarter of 2024. Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($98,000) in the first quarter of 2025, compared to ($364,000) in the first quarter of 2024. 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. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding the Company’s results and facilitate the comparison of results. A reconciliation of net income to EBITDA and adjusted EBITDA follows: NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURE RECONCILIATION Three Months Ended March 31, 2025 2024 (in thousands) Net Income (loss) $ (382 ) $ (807 ) Interest (income) (38 ) (80 ) Taxes 21 41 Depreciation and amortization 127 201 EBITDA $ (272 ) $ (645 ) Equity compensation 174 281 Adjusted EBITDA, excluding equity compensation $ (98 ) $ (364 ) Item 3 . Quantitative and Qualitative Disclosures About Market Risk Not applicable. 22 Table of Contents