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 third quarter, despite a challenging global economic environment. The third quarter represents a continuation in proving the growth and market expansion strategies being implemented over the past several months. At the same time, efficiency improvements and streamlining operations resulted in a lower cost basis for manufacturing and overhead. We are focused on improvements to our core programming platform and received several industry awards for our innovative new products. Our customers’ end markets have seen some weakening of demand which has affected sell-through of microcontrollers, security ICs and memory devices, which we believe has been partially offset by customers’ increased utilization of their existing systems. The net effect has been some greater need for engineering and maintenance services but also some lumpiness in demand for consumable adapters. Overall demand for capital equipment continued to be negatively impacted by global trade and tariff negotiations throughout most of the third quarter. However, the Company’s ongoing supply chain planning and other actions have helped mitigate the impact of new tariffs, trade and inflationary pressures, including shifting material sourcing and product manufacturing. 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. Significant operational and product 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 global economy, affected customers’ end markets, 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. 17 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. There have been no changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on April 1, 2025, as described in Note 1. Description of Business and Summary of Significant Accounting Policies to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. RESULTS OF OPERATIONS: NET SALES Three Months Ended Nine Months Ended Net sales by product line September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Automated programming systems $ 3,431 (14.5 )% $ 4,012 $ 11,092 (13.6 )% $ 12,844 Non-automated programming systems 1,962 39.1 % 1,411 6,424 71.8 % 3,740 Total programming systems $ 5,393 (0.6 )% $ 5,423 $ 17,516 5.6 % $ 16,584 Three Months Ended Nine Months Ended Net sales by location September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) United States $ 7 (98.2 )% $ 388 $ 1,047 (12.8 )% $ 1,201 % of total 0.1 % 7.2 % 6.0 % 7.2 % International $ 5,386 7.0 % $ 5,035 $ 16,469 7.1 % $ 15,383 % of total 99.9 % 92.8 % 94.0 % 92.8 % Three Months Ended Nine Months Ended Net sales by type September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Equipment sales $ 2,774 10.6 % $ 2,509 $ 9,087 10.4 % $ 8,228 Adapter sales 1,750 (12.7 )% 2,005 6,044 6.7 % 5,667 Software and maintenance 869 (4.4 )% 909 2,385 (11.3 )% 2,689 Total $ 5,393 (0.6 )% $ 5,423 $ 17,516 5.6 % $ 16,584 Net sales in the third quarter of 2025 were $5.4 million, compared with $5.4 million in the prior year period and $5.9 million in the second quarter of 2025. Overall demand for capital equipment continued to be negatively impacted by ongoing global trade and tariff negotiations throughout most of the third quarter of 2025. Sales rhythms were also disrupted somewhat by the ransomware incident experienced by the Company in August; however, management believes this impacted timing rather than volume of sales. Net sales of consumable adapters and services revenue represented 49% of total revenue and provide a stable base of re-occurring revenue. 18 Table of Contents Total equipment sales in the third quarter of 2025 were 51% of revenues, adapter sales were 32% and software and maintenance revenues were 17% of revenues compared with 46% and 37% and 17% respectively in the third quarter of 2024. For 2025 year to date, equipment sales were 52% of revenues, adapter sales were 35% and software and maintenance revenues were 13% of revenues compared with 2024 year to date sales of 50% and 34% and 16% respectively. On a geographic basis, international sales represented approximately 99% of total net sales for the third quarter of 2025 compared with 93% in the prior year period. Bookings increased in the latter half of the third quarter as customers had been delaying purchase decisions amid ongoing global trade and tariff concerns and as sales processes disrupted by the ransomware incident resumed. Third quarter 2025 bookings were $5.1 million, down from $5.8 million in the second quarter 2025 and up from $4.7 million in the third quarter 2024. Automotive electronics, a core market vertical in the third quarter of 2025, was 65% of third quarter 2025 bookings. Backlog at September 30, 2025, was $2.7 million, down from $2.8 million at the end of the prior quarter. Deferred revenue was $1.4 million on September 30, 2025, up from $1.3 million on June 30, 2025. GROSS MARGIN Three Months Ended Nine Months Ended September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Gross margin $ 2,734 (6.5 )% $ 2,924 $ 8,882 (0.2 )% $ 8,900 Percentage of net sales 50.7 % 53.9 % 50.7 % 53.7 % Gross margin as a percentage of sales in the third quarter of 2025 was 50.7% as compared to 53.9% in the same period last year and 49.8% in the second quarter of 2025. Margins recovered sequentially as the second quarter’s lower margin product mix and configuration of automated systems driven by a large customer order passed through the system. Direct material costs remained steady and consistent with prior periods. Ongoing supply chain planning and other actions have been mitigating the impact of new tariffs, trade and inflationary pressures, including shifting material sourcing and product manufacturing. RESEARCH AND DEVELOPMENT Three Months Ended Nine Months Ended September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Research and development $ 1,709 10.7 % $ 1,544 $ 4,886 7.6 % $ 4,539 Percentage of net sales 31.7 % 28.5 % 27.9 % 27.4 % Research and development (“R&D”) expenses increased in the third quarter of 2025 as compared to the same period in 2024. The increase is due to transition to new R&D programs, increased investment in the Company’s core platform, and the associated changes in project and outside services spending. 19 Table of Contents SELLING, GENERAL AND ADMINISTRATIVE Three Months Ended Nine Months Ended September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Selling, general & administrative $ 2,418 41.8 % $ 1,705 $ 6,609 8.1 % $ 6,112 Percentage of net sales 44.8 % 31.4 % 37.7 % 36.9 % Selling, General and Administrative (“SG&A”) expenses were higher in the third quarter of 2025 as compared to the same period in 2024. The third quarter spending increase includes higher compensation expenses and leadership and other human resource transition requirements that continued through September 30, 2025. In addition, there were significant expenses associated with the remediation of and recovery from the August ransomware incident. Continued efficiency improvements and cost reduction efforts remain a focus. SHARE BASED COMPENSATION Three Months Ended Nine Months Ended September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Share-based compensation $ 115 (62.2 )% $ 304 $ 539 (44.3 )% $ 967 Third quarter 2025 shared-based compensation of $115,000 was $189,000 lower compared to the prior year period due to staff reductions and retirements since the fourth quarter of 2024. INTEREST Three Months Ended Nine Months Ended September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Interest income $ 34 (52.1 )% $ 71 $ 107 (52.2 )% $ 224 Interest income was lower in the third quarter of 2025 compared to the same period in 2024 due to lower interest rates and invested balances. INCOME TAXES Three Months Ended Nine Months Ended September 30, 2025 Change September 30, 2024 September 30, 2025 Change September 30, 2024 (in thousands) Income tax benefit (expense) - - - $ (2 ) (99.5 )% ($393) 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 $9.3 million as of September 30, 2025. As of September 30, 2025 and 2024, our deferred tax assets and valuation allowance have been reduced by approximately $449,000 and $441,000, 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. 20 Table of Contents Financial Condition LIQUIDITY AND CAPITAL RESOURCES September 30, 2025 Change December 31, 2024 (in thousands) Working capital $ 14,422 ($1,663) $ 16,085 At September 30, 2025, our principal sources of liquidity consisted of existing cash and cash equivalents. Cash at $9.7 million decreased $662,000 from December 31, 2024, primarily due to one-time expenses and investments in the third quarter, partially offset by an otherwise improved cost structure, lower inventory levels, and currency effects on overseas cash balances. Correspondingly, working capital of approximately $14.4 million on September 30, 2025, was down $1.6 million as compared to December 31, 2024, and roughly $1.2 million from quarter ending June 30, 2025. 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. If the Company determines to pursue significant acquisitions or business development initiatives, the Company may need to raise additional capital. If additional capital is required, the Company will review the amounts and options to raise capital at that time, but future financing would most likely be through debt and equity offerings. 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. OFF-BALANCE SHEET ARRANGEMENTS Except as noted in the accompanying consolidated financial statements in Note 5, “Operating Lease Commitments” and Note 6, “Other Commitments”, we have no off-balance sheet arrangements. 21 Table of Contents NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($1,263,000) in the third quarter of 2025 compared to ($267,000) in the third quarter of 2024. Adjusted EBITDA, excluding share-based compensation (a non-cash item), was ($1,148,000) in the third quarter of 2025, compared to $37,000 in the second quarter of 2025 and $37,000 in the third 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 September 30, Nine Months Ended September 30, 2025 2024 2025 2024 (in thousands) Net Income (loss) $ (1,362 ) $ (307 ) $ (2,486 ) $ (1,911 ) Interest (income) (34 ) (71 ) (107 ) (224 ) Income tax expense - - 2 394 Depreciation and amortization 133 111 369 450 EBITDA (1,263 ) (267 ) (2,222 ) (1,291 ) Share-based compensation 115 304 539 967 Adjusted EBITDA, excluding share-based compensation $ (1,148 ) $ 37 $ (1,683 ) $ (324 ) Item 3 . Quantitative and Qualitative Disclosures About Market Risk Not applicable.