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, impact of COVID-19; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; 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; trade issues and tariffs; expected inventory levels; expectations for unsupported platform or product versions and related inventory and other charges; 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, neitherData 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 Quarterly Report. The Reader should not place undue reliance on these forward-looking statements. 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 endedDecember 31, 2020 , describe some, but not all, of the factors that could cause these differences. OVERVIEW
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 theU.S. ,China andGermany . Our philosophy at the start of the outbreak was simple:
1. Keep our people and their families safe;
2. Keep our facilities safe and operational while we serve our customers as an essential business; and
3. Preserve cash 16 Table of Contents 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 inShanghai, China andRedmond, 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 second quarter, we experienced a surge of demand as customers resumed operations and adding capacity. 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 and the outlook 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 usage. 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 ourShanghai, China andRedmond ,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 otherRedmond employees are working remotely with hybrid flexibility to be onsite as desired or needed and this is expected to continue through the summer.China employees are generally onsite. We believe our exposure to COVID-19 risks are reduced by vaccination coverage, which is mid 90% inRedmond with ourChina andGermany 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 in the first quarter of 2021, which continued to improve in the second quarter of 2021. In particular the surge in demand with bookings of$8.9 million that provided a$5 million backlog at the end of the second quarter. 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 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 cost reductions. These actions have ensured that with the recovery we are able to finance and resume growth 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. AtData 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 new 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. 17 Table of Contents 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. 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 inShanghai ,Redmond andGermany are currently operating in some pandemic related restricted ways, we believe that our classification as essential by certainU.S. customer groups will continue to keep operations open. We source some components fromChina and other countries that are used to manufacture our equipment inChina and in ourRedmond, Washington facility and these components may not be readily available or subject to delays. Our manufacturing facilities inShanghai andRedmond 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. 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. The pandemic could have the effect of heightening many of the other risks described in it. 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. 18 Table of Contents Results of Operations:Net Sales Three Months Ended Six Months Ended
Net sales by product June 30, June 30, June 30, June 30, line 2021 Change 2020 2021 Change 2020 (in thousands) Automated programming systems$ 5,379 52.3 %$ 3,531 $ 10,289 48.1 %$ 6,949 Non-automated (1.3 programming systems 1,354 20.5 % 1,124 2,459 %) 2,491 Total programming systems$ 6,733 44.6 %$ 4,655 $ 12,748 35.0 %$ 9,440 Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Net sales by location 2021 Change 2020 2021
Change 2020 (in thousands) United States$ 469 61.7 %$ 290 $ 753 34.0 %$ 562 % of total 7.0 % 6.2 % 5.9 % 6.0 % International$ 6,264 43.5 %$ 4,365 $ 11,995 35.1 %$ 8,878 % of total 93.0 % 93.8 % 94.1 % 94.0 % Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Net sales by type 2021 Change 2020 2021 Change 2020 (in thousands) Equipment sales$ 4,130 66.8 %$ 2,476 $ 7,477 47.7 %$ 5,063 Adapter sales 1,942 46.7 % 1,324 3,850 44.2 % 2,669 Software and (22.7 (16.8 maintenance 661 %) 855 1,421 %) 1,708 Total programming systems$ 6,733 44.6 %$ 4,655 $ 12,748 35.0 %$ 9,440 Net sales in the second quarter of 2021 were$6.7 million , up 45% as compared with$4.7 million in the second 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 includes adapter sales represented$2.6 million or 39% of total revenues in the second quarter 2021, as compared with$2.2 million or 47% of the lower second quarter 2020 total. Total capital equipment sales were 61.4% of revenues, adapters were 28.8% and software and services revenues were 9.8% of revenues respectively in the second quarter of 2021 compared with 53.2% and 28.4% and 18.4% respectively for the second quarter of 2020. On a geographic basis, international sales represented approximately 93.0% of total net sales for the second quarter of 2021 compared with 93.8% in the prior year period.
Second quarter 2021 bookings were
19 Table of Contents Backlog atJune 30, 2021 was approximately$5.0 million , up from$3.0 million atMarch 31, 2021 and$2.8 million atJune 30, 2020 .Data I/O had$1.4 million in deferred revenue at the end of the second quarter of 2021 as compared with$1.1 million at the end of fourth quarter of 2020. Gross Margin Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2021 Change 2020 2021 Change 2020 (in thousands) Gross margin$ 3,837 57.3 %$ 2,439 $ 7,175 37.4 %$ 5,223 Percentage of net sales 57.0 % 52.4 % 56.3 % 55.3 % Gross margin as a percentage of sales was 57.0% in the second quarter of 2021, as compared to 52.4% 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, improved factory variances and channel and product mix. Research and Development Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2021 Change 2020 2021 Change 2020 (in thousands) Research and development$ 1,673 3.7 %$ 1,614 $ 3,279 2.6 %$ 3,196 Percentage of net sales 24.8 % 34.7 % 25.7 % 33.9 %
Research and development ("R&D") expenses in the second quarter of 2021 were relatively consistent compared to the same period in 2020.
Selling, General and Administrative
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2021 Change 2020 2021 Change 2020 (in thousands) Selling, general & administrative$ 2,054 20.6 %$ 1,703 $ 4,116 17.1 %$ 3,514 Percentage of net sales 30.5 % 36.6 % 32.3 % 37.2 %
Selling, General and Administrative ("SG&A") expenses in the second quarter of 2021 increased by approximately$351,000 from the prior year period primarily due to higher sales commissions associated with the channel mix and sharply increased demand for programming equipment as well as higher incentive compensation as the Company returned to profitability on an operating income basis. 20 Table of Contents Interest Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2021 Change 2020 2021 Change 2020 (in thousands) Interest income$ 0 (100.0 %)$ 1 $ 3 (66.7 %)$ 9
Interest income was lower in the second quarter 2021 compared to the same period in 2020 primarily due to lower invested funds and lower interest yields.
Income Taxes Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2021 Change 2020 2021 Change 2020 (in thousands) Income tax benefit (22.7 (expense)$ (75 ) %)$ (97 ) $ (107 ) 4.9 %$ (102 )
Income tax benefit (expense) for the second quarter of both 2021 and 2020, 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$9.5 million as ofJune 30, 2021 . As ofJune 30 , for both 2021 and 2020, our deferred tax assets and valuation allowance have been reduced by approximately$376,000 and$363,000 , respectively, associated with the requirements of accounting for uncertain tax positions. Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance. Financial Condition
Liquidity and Capital Resources
June 30, December 31, 2021 Change 2020 (in thousands) Working capital$ 18,159 $ 100 $ 18,059
At
Net working capital at the end of the second quarter of 2021 compared to
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. 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. 21 Table of Contents
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. We may require additional cash at theU.S. headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries. For any repatriation, there may be tax and other impediments to any repatriation actions. 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 reduce expenditures and/or seek possible additional financing.
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$196,000 in the second quarter of 2021 compared to ($712,000 ) in the second quarter of 2020. Adjusted EBITDA, excluding equity compensation (a non-cash item), was$597,000 in the second quarter of 2021, compared to ($231,000 ) in the second quarter of 2020. Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was$90,000 in the six months endedJune 30, 2021 compared to ($1,071,000 ) in the same period of 2020. Adjusted EBITDA, excluding equity compensation (a non-cash item) was$770,000 in the six months endedJune 30, 2021 compared to ($341,000 ) in the same period of 2020. Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding the Company's results and facilitate the comparison of results. A reconciliation of net income to EBITDA and adjusted EBITDA follows: NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURE RECONCILIATION Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Net Income (loss)$ (29 ) $ (1,057 ) $ (362 ) $ (1,611 ) Interest (income) - (1 ) (3 ) (9 ) Taxes 75 97 107 102 Depreciation & amortization 150 249 348 447 EBITDA earnings (loss)$ 196 $ (712 ) $ 90 $ (1,071 ) Equity compensation 401 481 680 730 Adjusted EBITDA earnings (loss), excluding equity compensation$ 597 $ (231 ) $ 770 $ (341 ) 22 Table of Contents 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.
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