DATA I/O CORP 10-Q

Item 1. Financial Statements DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (UNAUDITED) March 31, 2021 December 31, 2020 ASSETS CURRENT ASSETS: Cash and cash equivalents $13,621 $14,167 Trade accounts receivable, net of allowance for doubtful accounts of $69 and $66, respectively 3,342 2,494 Inventories 5,132 5,270 Other current assets 1,282 1,319 TOTAL CURRENT ASSETS 23,377 23,250 Property, plant and equipment – net 977 1,216 Other assets 990 1,126 TOTAL ASSETS $25,344 $25,592 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $1,412 $1,245 Accrued compensation 1,250 1,509 Deferred revenue 1,269 1,068 Other accrued liabilities 1,311 1,307 Income taxes payable 54 62 TOTAL CURRENT LIABILITIES 5,296 5,191 Operating lease liabilities 482 588 Long-term other payables 150 174 COMMITMENTS - - STOCKHOLDERS’ EQUITY Preferred stock - Authorized, 5,000,000 shares, including 200,000 shares of Series A Junior Participating Issued and outstanding, none - - Common stock, at stated value - Authorized, 30,000,000 shares Issued and outstanding, 8,421,599 shares as of March 31, 2021 and 8,416,335 shares as of December 31, 2020 20,361 20,071 Accumulated earnings (deficit) (1,789) (1,456) Accumulated other comprehensive income (loss) 844 1,024 TOTAL STOCKHOLDERS’ EQUITY 19,416 19,639 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $25,344 $25,592 See notes to consolidated financial statements 3 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (UNAUDITED) Three Months Ended March 31, 2021 2020 Net sales $6,015 $4,785 Cost of goods sold 2,677 2,001 Gross margin 3,338 2,784 Operating expenses: Research and development 1,606 1,582 Selling, general and administrative 2,062 1,811 Total operating expenses 3,668 3,393 Operating income (loss) (330) (609) Non-operating income: Interest income 3 8 Foreign currency transaction gain (loss) 26 52 Total non-operating income (loss) 29 60 Income (loss) before income taxes (301) (549) Income tax (expense) benefit (32) (5) Net income (loss) ($333) ($554) Basic earnings (loss) per share ($0.04) ($0.07) Diluted earnings (loss) per share ($0.04) ($0.07) Weighted-average basic shares 8,420 8,219 Weighted-average diluted shares 8,420 8,219 See notes to consolidated financial statements 4 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (UNAUDITED) Three Months Ended March 31, 2021 2020 Net income (loss) ($333) ($554) Other comprehensive income (loss): Foreign currency translation gain (loss) (180) (265) Comprehensive income (loss) ($513) ($819) See notes to consolidated financial statements 5 DATA I/O CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) (UNAUDITED) Accumulated Common Stock Retained and Other Total Earnings Comprehensive Stockholders' Shares Amount (Deficit) Income (Loss) Equity Balance at December 31, 2019 8,212,748 $18,748 $2,508 $274 $21,530 Repurchased shares - - - Stock awards issued, net of tax withheld 5,190 (10) - - (10) Issuance of stock through: ESPP 3,509 14 - - 14 Share-based compensation - 249 - - 249 Net income (loss) - - (554) - (554) Other comprehensive income (loss) - - - (265) (265) Balance at March 31, 2020 8,221,447 $19,001 $1,954 $9 $20,964 Balance at December 31, 2020 8,416,335 $20,071 ($1,456) $1,024 $19,639 Repurchased shares - - - Stock awards issued, net of tax withheld 2,089 (4) - - (4) Issuance of stock through: ESPP 3,175 16 - - 16 Share-based compensation - 278 - - 278 Net income (loss) - - (333) - (333) Other comprehensive income (loss) - - - (180) (180) Balance at March 31, 2021 8,421,599 $20,361 ($1,789) $844 $19,416 See notes to consolidated financial statements 6 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (UNAUDITED) For the Three Months Ended March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($333) ($554) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 200 197 Equipment transferred to cost of goods sold 132 (2) Share-based compensation 278 249 Net change in: Trade accounts receivable (843) 973 Inventories 442 189 Other current assets 36 (792) Accounts payable and accrued liabilities (94) (468) Deferred revenue 175 24 Other long-term liabilities (105) (135) Deposits and other long-term assets 136 771 Net cash provided by (used in) operating activities 24 452 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (92) (340) Cash provided by (used in) investing activities (92) (340) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, less payments for shares withheld to cover tax 12 4 Cash provided by (used in) financing activities 12 4 Increase (decrease) in cash and cash equivalents (56) 116 Effects of exchange rate changes on cash (490) (238) Cash and cash equivalents at beginning of period 14,167 13,936 Cash and cash equivalents at end of period $13,621 $13,814 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $40 $63 See notes to consolidated financial statements 7 DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - FINANCIAL STATEMENT PREPARATION Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) prepared the financial statements as of March 31, 2021 and March 31, 2020 according to the rules and regulations of the Securities and Exchange Commission ("SEC"). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 31, 2020 has been derived from the audited financial statements at that date. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America according to such SEC rules and regulations. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in our Form 10-K for the year ended December 31, 2020. 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 2021 and 2020, 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. 8 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. The following table represents our revenues by major categories: Three Months Ended Net sales by type March 31, 2021 Change March 31, 2020 (in thousands) Equipment $3,347 29.4% $2,587 Adapter 1,908 41.9% 1,345 Software and Maintenance 760 (10.9%) 853 Total $6,015 25.7% $4,785 Share-Based Compensation All stock-based compensation awards are measured based on estimated fair values on the date of grant and recognized as compensation expense on the straight-line single-option method. Our share-based compensation is reduced for estimated forfeitures at the time of grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates. 9 Income Tax Income taxes are computed at current enacted tax rates, less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, and any changes in the valuation allowance caused by a change in judgment about the realization of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. The CARES Act, enacted in Q1 2020, accelerated the AMT credit refund of $640,000, resulting in a reclass from non-current asset to a current asset. Recently Adopted Accounting Pronouncements In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Measurement of Credit Losses on Financial Instruments," which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments. We are planning to adopt the standard effective for years after December 15, 2022 and do not expect this to have a material impact on our financial statements. NOTE 2 – INVENTORIES Inventories consisted of the following components: March 31, 2021 December 31, 2020 (in thousands) Raw material $2,915 $3,143 Work-in-process 1,393 1,204 Finished goods 824 923 Inventories $5,132 $5,270 NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET Property and equipment consisted of the following components: March 31, 2021 December 31, 2020 (in thousands) Leasehold improvements $420 $421 Equipment 5,609 5,625 Sales demonstration equipment 824 963 6,853 7,009 Less accumulated depreciation 5,876 5,793 Property and equipment, net $977 $1,216 10 NOTE 4 – OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: March 31, 2021 December 31, 2020 (in thousands) Lease liability - short term $612 $673 Product warranty 367 371 Sales return reserve 61 61 Other taxes 110 109 Other 161 93 Other accrued liabilities $1,311 $1,307 The changes in our product warranty liability for the three months ending March 31, 2021 are as follows: March 31, 2021 (in thousands) Liability, beginning balance $371 Net expenses 184 Warranty claims (184) Accrual revisions (4) Liability, ending balance $367 NOTE 5 – LEASES Our leasing arrangements are primarily for facility leases we use to conduct our operations. The following table presents our future lease payments for long-term operating leases as of March 31, 2021: Operating Lease Commitments (in thousands) 2021 (remaining) $576 2022 341 2023 111 2024 87 2025 66 Thereafter 82 Total $1,263 Less Imputed interest (169) Total operating lease liabilities $1,094 Cash paid for operating lease liabilities for the three months ended March 31, 2021 and 2020 were $201,000 and $185,000, respectively. There were three new operating leases during the three months ended March 31, 2021. 11 The following table presents supplemental balance sheet information related to leases as of March 31, 2021: Balance at March 31, 2021 Balance at December 31, 2020 (in thousands) Right-of-use assets (Long-term other assets) $945 $1,081 Lease liability-short term (Other accrued liabilities) 612 673 Lease liability-long term (Operating lease liabilities) 482 588 At March 31, 2021, the weighted average remaining lease term is 2.83 and the weighted average discount rate used is 5%. The components of our lease expense for the three months ended March 31, 2021 and 2020 include operating lease costs of $171,000 and $163,000, respectively, and short-term lease costs of $7,000 and $7,000, respectively. Our real estate facility leases are described below: During the third quarter of 2017, we amended our lease agreement, extending the lease for the Redmond, Washington headquarters facility through July 31, 2022. This lease is for approximately 20,460 square feet. We signed a lease agreement effective November 1, 2015 that extends the lease for a facility located in Shanghai, China through October 31, 2021. This lease is for approximately 19,400 square feet. During the fourth quarter of 2016, we signed a lease agreement for a new facility located near Munich, Germany which was effective March 1, 2017 through February 28, 2022 with a five year extension available. This lease is for approximately 4,895 square feet. NOTE 6 – OTHER COMMITMENTS We have purchase obligations for inventory and production costs as well as other obligations such as capital expenditures, service contracts, marketing, and development agreements. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days. At March 31, 2021, the purchase commitments and other obligations totaled $1.5 million of which all but $75,000 are expected to be paid over the next twelve months. NOTE 7 – CONTINGENCIES As of March 31, 2021, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. NOTE 8 – EARNINGS PER SHARE Basic earnings per share is calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated based on these same weighted average shares outstanding plus the effect of potential shares issuable upon assumed exercise of stock options based on the treasury stock method. Potential shares issuable upon the exercise of stock options are excluded from the calculation of diluted earnings per share to the extent their effect would be anti-dilutive. 12 The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended March 31, 2021 March 31, 2020 (in thousands except per share data) Numerator for basic and diluted earnings (loss) per share: Net income (loss) ($333) ($554) Denominator for basic earnings (loss) per share: Weighted-average shares 8,420 8,219 Employee stock options and awards 251 56 Denominator for diluted earnings (loss) per share: Adjusted weighted-average shares & assumed conversions of stock options 8,671 8,275 Basic and diluted earnings (loss) per share: Total basic earnings (loss) per share ($0.04) ($0.07) Total diluted earnings (loss) per share ($0.04) ($0.07) Options to purchase 25,000 and 25,000 shares respectively were outstanding as of March 31, 2021 and 2020, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive. NOTE 9 – SHARE-BASED COMPENSATION For share-based awards granted, we have recognized compensation expense based on the estimated grant date fair value method. For these awards we have recognized compensation expense using a straight-line amortization method reduced for estimated forfeitures. The impact on our results of operations of recording share-based compensation, net of forfeitures, for the three months ended March 31, 2021 and 2020, respectively, were as follows: Three Months Ended March 31, 2021 March 31, 2020 (in thousands) Cost of goods sold $10 $6 Research and development 71 64 Selling, general and administrative 197 179 Total share-based compensation $278 $249 13 Equity awards granted during the three months ended March 31, 2021 and 2020 were as follows: Three Months Ended March 31, 2021 March 31, 2020 Restricted Stock Units 2,000 - Stock Options - - Non-employee directors Restricted Stock Units (“RSUs”) vest over one year and options vest over three years and have a six-year exercise period. Employee RSUs typically vest over four years and employee Non-Qualified stock options typically vest quarterly over 4 years and have a six-year exercise period. The remaining unamortized expected future equity compensation expense and remaining amortization period associated with unvested option grants, restricted stock awards and restricted stock unit awards at March 31, 2021 are: March 31, 2021 Unamortized future equity compensation expense (in thousands) $1,725 Remaining weighted average amortization period (in years) 2.26 14