DATA I/O CORP 10-K

Item 8. Financial Statements and Supplementary Data See pages 28 through 48. 27 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Data I/O Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Data I/O Corporation (a Washington corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes and financial statement schedules included under Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Net realizable value of inventory As described further in Note 1 to the financial statements, management measures the net realizable value of inventory based on estimated reductions to inventory for obsolete, slow-moving, excess and non-salable inventory by reviewing current transactions and forecasted demand. We identified the net realizable value of inventory specifically as a critical audit matter. The principal considerations for our determination that the net realizable value of inventory represents a critical audit matter are that the assessment of the valuation of inventory is complex and includes an estimate of forecasted demand. The demand estimate is subjective and requires the Company to consider significant assumptions such as economic conditions, technological advances, historical usage, and consumer trends, which are subject to significant uncertainty and therefore require significant auditor judgement. 28 Table of Contents Our audit procedures related to the net realizable value of inventory included the following, among others: · obtained management’s analysis of parts in inventory and expected customer demand, recalculated inputs into the analysis. This included, among other inputs, historical usage compared to quantities on hand, age, and general ledger balances. · tested selected inventory items by making inquiries of management and evaluating the appropriateness of judgments, assumptions and documentation supporting adjustments to the reserve estimate. · inquired with management and various staff members outside of the finance team to obtain support for selected forecast demand inputs as well as product specific trends GRANT THORNTON LLP We have served as the Company’s auditor since 2001. Bellevue, Washington Date: March 29, 2022 29 Table of Contents DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2021 December 31, 2020 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,190 $ 14,167 Trade accounts receivable, net of allowance for doubtful accounts of $89 and $66, respectively 3,995 2,494 Inventories 6,351 5,270 Other current assets 737 1,319 TOTAL CURRENT ASSETS 25,273 23,250 Property, plant and equipment – net 946 1,216 Other assets 2,838 1,126 TOTAL ASSETS $ 29,057 $ 25,592 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,373 $ 1,245 Accrued compensation 2,496 1,509 Deferred revenue 1,507 1,068 Other accrued liabilities 1,413 1,307 Income taxes payable - 62 TOTAL CURRENT LIABILITIES 6,789 5,191 Operating lease liabilities 2,277 588 Long-term other payables 138 174 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, 8,621,007 shares as of December 31, 2021 and 8,416,335 shares as of December 31, 2020 20,886 20,071 Accumulated earnings (deficit) ( 2,011 ) ( 1,456 ) Accumulated other comprehensive income (loss) 978 1,024 TOTAL STOCKHOLDERS’ EQUITY 19,853 19,639 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 29,057 $ 25,592 See notes to consolidated financial statements 30 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) For the Years Ended December 31, 2021 2020 Net sales $ 25,835 $ 20,328 Cost of goods sold 11,115 9,506 Gross margin 14,720 10,822 Operating expenses: Research and development 6,635 6,357 Selling, general and administrative 8,358 6,891 Impairment - 652 Total operating expenses 14,993 13,900 Operating income (loss) ( 273 ) ( 3,078 ) Non-operating income (loss): Interest income 11 14 Gain on sale of assets 21 - Foreign currency transaction gain (loss) ( 202 ) ( 513 ) Total non-operating income (loss) ( 170 ) ( 499 ) Income (loss) before income taxes ( 443 ) ( 3,577 ) Income tax (expense) benefit ( 112 ) ( 387 ) Net income (loss) $ ( 555 ) $ ( 3,964 ) Basic earnings (loss) per share $ ( 0.06 ) $ ( 0.48 ) Diluted earnings (loss) per share $ ( 0.06 ) $ ( 0.48 ) Weighted-average basic shares 8,545 8,333 Weighted-average diluted shares 8,545 8,333 See notes to consolidated financial statements 31 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) For the Years Ended December 31, 2021 2020 Net Income (loss) $ ( 555 ) $ ( 3,964 ) Other comprehensive income: Foreign currency translation gain (loss) ( 46 ) 750 Comprehensive income (loss) $ ( 601 ) $ ( 3,214 ) See notes to consolidated financial statements 32 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Accumulated Accumulated and Other Total Common Stock Earnings Comprehensive Stockholders' Shares Amount (Deficit) Income (Loss) Equity Balance at December 31, 2019 8,212,748 $ 18,748 $ 2,508 $ 274 $ 21,530 Stock options exercised, net - - - - - Repurchased shares - - - - - Stock awards issued, net of tax withholding 195,773 ( 173 ) - - ( 173 ) Issuance of stock through: Employee Stock Purchase Plan 7,814 29 - - 29 Share-based compensation - 1,467 - - 1,467 Net income (loss) - - ( 3,964 ) - ( 3,964 ) Other comprehensive income gain (loss) - - - 750 750 Balance at December 31, 2020 8,416,335 $ 20,071 $ ( 1,456 ) $ 1,024 $ 19,639 Stock options exercised, net 2,444 ( 6 ) - - ( 6 ) Repurchased shares - - - - - Stock awards issued, net of tax withholding 197,744 ( 441 ) - - ( 441 ) Issuance of stock through: Employee Stock Purchase Plan 4,484 24 - - 24 Share-based compensation - 1,238 - - 1,238 Net income (loss) - - ( 555 ) - ( 555 ) Other comprehensive income gain (loss) - - - ( 46 ) ( 46 ) Balance at December 31, 2021 8,621,007 $ 20,886 $ ( 2,011 ) $ 978 $ 19,853 See notes to consolidated financial statements 33 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Twelve Months Ended December 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 555 ) $ ( 3,964 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 667 815 Equipment transferred to cost of goods sold 220 245 Share-based compensation 1,238 1,467 Impairment and related charges - 943 Net change in: Trade accounts receivable ( 1,565 ) 1,664 Inventories ( 750 ) ( 414 ) Other current assets 598 ( 398 ) Accounts payable and accrued liabilities 94 ( 38 ) Deferred revenue 539 ( 380 ) Other long-term liabilities 251 ( 491 ) Deposits and other long-term assets 673 1,182 Net cash provided by (used in) operating activities 1,410 631 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 623 ) ( 860 ) Cash provided by (used in) investing activities ( 623 ) ( 860 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, less payments for shares withheld to cover tax ( 423 ) ( 144 ) Cash provided by (used in) financing activities ( 423 ) ( 144 ) Increase (decrease) in cash and cash equivalents 364 ( 373 ) Effects of exchange rate changes on cash ( 341 ) 604 Cash and cash equivalents at beginning of period 14,167 13,936 Cash and cash equivalents at end of period $ 14,190 $ 14,167 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 415 $ 137 See notes to consolidated financial statements 34 Table of Contents DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) designs, manufactures and sells programming systems used by designers and manufacturers of electronic products. Our programming system products are used to program integrated circuits (“ICs” or “devices” or “semiconductors”) with the specific unique data necessary for the ICs contained in various products, and are an important tool for the electronics industry experiencing growing use of programmable ICs. Customers for our programming system products are located around the world, primarily in Asia, Europe and the Americas. Our manufacturing operations are currently located in Redmond, Washington, United States and Shanghai, China. Principles of Consolidation The consolidated financial statements include the accounts of Data I/O Corporation and our wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include: • Revenue Recognition • Allowance for Doubtful Accounts • Inventory • Warranty Accruals • Tax Valuation Allowances • Share-based Compensation Foreign Currency Translation Assets and liabilities of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses of foreign subsidiaries are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to stockholders’ equity. Realized and unrealized gains and losses resulting from the effects of changes in exchange rates on assets and liabilities denominated in foreign currencies are included in non-operating expense as foreign currency transaction gains and losses. Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of 90 days or less are considered cash equivalents. We maintain our cash and cash equivalents with major financial institutions in the United States of America, which are insured by the Federal Deposit Insurance Corporation (FDIC), and in foreign jurisdictions. Deposits in U.S. banks exceed the FDIC insurance limit. We have not experienced any losses on our cash and cash equivalents. Cash and cash equivalents held in foreign bank accounts in China and Germany, totaled (in millions) $ 6.8 at both December 31, 2021 and 2020. Fair Value of Financial Instruments Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other short-term liabilities. 35 Table of Contents Accounts Receivable The majority of our accounts receivable are due from companies in the electronics manufacturing industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are typically due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. We determine the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the industry and geographic payment practices involved, our previous bad debt experience, the customer’s current ability to pay their obligation to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Interest may be charged, at the discretion of management and according to our standard sales terms, beginning on the day after the due date of the receivable. However, interest income is subsequently recognized on these accounts either to the extent cash is received, or when the future collection of interest and the receivable balance is considered probable by management. Inventories Inventories are stated at the lower of cost or net realizable value with cost being the currently adjusted standard cost, which approximates cost on a first-in, first-out basis. We estimate changes 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 an adjustment (lower of cost or net realizable value) accordingly. Property, Plant and Equipment Property, plant and equipment, including leasehold improvements, are stated at cost, and depreciation is calculated over the estimated useful lives of the related assets or lease terms on the straight-line basis. We depreciate substantially all property, plant and equipment over periods of three to seven years. We depreciate leasehold improvements over the remaining portion of the lease or over the expected life of the asset if less than the remaining term of the lease. We regularly review all of our property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the total of future undiscounted cash flows is less than the carrying amount of these assets, an impairment loss, if any, based on the excess of the carrying amount over the fair value of the assets, is recorded. Based on this evaluation, for the year ended December 31, 2021, no impairment was noted or recorded for property, plant and equipment. For the year ended December 31, 2020, approximately $ 252,000 of property, plant and equipment impairment was recorded. Patent Costs We expense external costs, such as filing fees and associated attorney fees, incurred to obtain initial patents, but capitalize patents obtained through acquisition as intangible assets. We also expense costs associated with maintaining and defending patents subsequent to their issuance. Income Taxes 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 , which was previously carried as a current asset, which the majority was received in September 2021. 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 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. 36 Table of Contents 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. 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. 37 Table of Contents The following table represents our revenues by major categories: Net sales by type 2021 2020 (in thousands) Equipment Sales $ 14,989 $ 11,480 Adapter Sales 7,818 5,527 Software and Maintenance Sales * 3,028 3,321 Total $ 25,835 $ 20,328 * includes an insignificant amount of service and part sales Leases - Accounting Standards Codification 842 Leases arise from contracts which convey the right to control the use of identified property or equipment for a period of time in exchange for consideration. Our leasing arrangements are primarily for office space we use to conduct our operations. In addition, there are automobiles and a small amount of office equipment leased. We determine whether contracts include a lease at the inception date, which is generally upon contract signing, considering factors such as whether the contract includes an asset which is physically distinct, which party obtains substantially all of the capacity and economic benefit of the asset, and which party directs how, and for what purpose, the asset is used during the contractual period of use. Our leases commence when the lessor makes the asset available for our use. At commencement, we record a lease liability at the present value of future lease payments, net of any future lease incentives to be received. Some of our lease agreements include cancellable future periods subject to termination or extension options. We include cancellable lease periods in our future lease payments when we are reasonably certain to continue to utilize the asset for those periods. We calculate the present value of future lease payments at commencement using a discount rate which we estimate as the collateralized borrowing rate we believe that would be incurred on our future lease payments over a similar term. At commencement, we also record a corresponding right-of-use asset, which is calculated based on the amount of the lease liability, adjusted for any advance lease payments paid, initial direct costs incurred or lease incentives received prior to commencement. Right-of-use assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets. Leases are classified at commencement, as either operating or finance leases. As of December 31, 2021, all of our leases are classified as operating leases. Rent expense for operating leases is recognized on the straight-line method over the term of the agreement beginning on the lease commencement date. In accounting for leases, we utilize certain practical expedients and policy elections available under the lease accounting standard. For example, we do not record right-of-use assets or lease liabilities for leases with terms of 12 months or less. For contracts containing real estate leases, we do not combine lease and non-lease components. The primary impact of this policy election is that we do not include in our calculation of lease liabilities any fixed and non-cancelable future payments due under the contract for items such as common area maintenance, utilities and other costs. Lease-related costs which are variable rather than fixed are expensed in the period incurred. Assumptions, judgments and estimates impacting the carrying value of our right-of-use assets and liabilities include evaluating whether an arrangement contains a lease, determining whether the lease term should include any cancellable future periods, estimating the discount rate used to calculate our lease liabilities, estimating the fair value and useful life of the leased asset for the purpose of classifying the lease as an operating or finance lease, evaluating whether a lease contract amendment represents a new lease agreement or a modification to the existing lease and evaluating our right-of-use assets for impairment. Research and Development Research and development costs are generally expensed as incurred. Advertising Expense Advertising costs are expensed as incurred. Total advertising expenses were approximately $ 121,000 and $ 127,000 in 2021 and 2020, respectively. 38 Table of Contents Warranty Expense We record a liability for an estimate of costs that we expect to incur under our basic limited warranty when product revenue is recognized. Factors affecting our warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. We normally provide a warranty for our products against defects for periods ranging from ninety days to one year. We provide for the estimated cost that may be incurred under our product warranties and periodically assess the adequacy of our warranty liability based on changes in the above factors. We record revenues on extended warranties on a straight-line basis over the term of the related warranty contracts. Service costs are expensed as incurred. Earnings (Loss) Per Share Basic earnings (loss) per share exclude any dilutive effects of stock options. Basic earnings (loss) per share are computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted-average number of common shares and common stock equivalent shares outstanding during the period. The common stock equivalent shares from equity awards used in calculating diluted earnings per share were 186,000 and 74,000 for the years ended December 31, 2021 and 2020, respectively. Options to purchase 12,500 and 25,000 shares of common stock were outstanding as of December 31, 2021 and 2020, respectively, but were excluded from the computation of diluted earnings per share for the periods then ended, because the options were anti-dilutive. Diversification of Credit Risk Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of trade receivables. Our trade receivables are geographically dispersed and include customers in many different industries. Our consolidated accounts receivable balance as of December 31, 2021 and 2020 includes foreign accounts receivable in the functional currency of our foreign subsidiaries amounting to $1,813,000 and $587,000, respectively. We generally do business with our foreign distributors in U.S. Dollars. We believe that risk of loss is significantly reduced due to the diversity of our end-customers and geographic sales areas. We perform on-going credit evaluations of our customers’ financial condition and require collateral, such as letters of credit and bank guarantees, or prepayment whenever deemed necessary. The following represented greater than 10% of our consolidated accounts receivable for the applicable year: Percentage of Consolidated Accounts Receivable 2021 2020 Number of customers 3 3 Approximate percentage of consolidated accounts receivable balance 36 % 41 % Percentage of each 13 % 17 % Percentage of each 12 % 12 % Percentage of each 11 % 12 % Diversification of net sales The following represented greater than 10% of net sales for the applicable year: Percentage of Net Sales 2021 2020 Number of customers 1 1 Approximate percentage of net sales 14 % 12 % 39 Table of Contents COVID-19 In 2021, we continued to react to and manage our business relative to the COVID-19 pandemic. During 2020 and throughout 2021, COVID-19 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 the U.S., China and Germany. Our philosophy at the start of the outbreak was simple: 1. Keep our employees and their families safe; 2. Keep our facilities safe and operational while we serve our customers as an essential business; and 3. Preserve cash. 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 in Shanghai, China and Redmond, Washington open, and serving customers globally, despite sporadic government restrictions on our facilities and vendors. 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. We saw a resurgence of orders in the second quarter of 2021 as vaccinations were occurring and customers resumed business. Following this, in the third quarter of 2021, we experienced a slowdown of demand as customers, we believe, were unable to secure an adequate semiconductor parts supply for planned capacity expansion. 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, but is expected to have some continuing impact into 2022. However, the outlook by industry analysts 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. 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 our Shanghai, China and Redmond, 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 are required to be onsite, most other employees are working with hybrid flexibility to be onsite as desired or needed and this is expected to continue. New Accounting Pronouncements On January 1, 2021 the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles and the methodology for calculating income tax rates in an interim period, among other updates. The adoption of this ASU did not have a material impact on our financial statements. 40 Table of Contents NOTE 2 – ACCOUNTS RECEIVABLE, NET December 31, 2021 December 31, 2020 (in thousands) Trade accounts receivable $ 4,084 $ 2,560 Less allowance for doubtful receivables 89 66 Trade accounts receivable, net $ 3,995 $ 2,494 Changes in Data I/O’s allowance for doubtful accounts are as follows: December 31, 2021 December 31, 2020 (in thousands) Beginning balance $ 66 $ 80 Bad debt expense (reversal) 23 ( 14 ) Accounts written-off - - Recoveries - - Ending balance $ 89 $ 66 NOTE 3 – INVENTORIES December 31, 2021 December 31, 2020 (in thousands) Raw material $ 3,771 $ 3,143 Work-in-process 1,602 1,204 Finished goods 978 923 Inventories $ 6,351 $ 5,270 NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET December 31, 2021 December 31, 2020 (in thousands) Leasehold improvements $ 430 $ 421 Equipment 5,218 5,625 Sales demonstration equipment 754 963 6,402 7,009 Less accumulated depreciation 5,456 5,793 Property and equipment, net $ 946 $ 1,216 Total depreciation expense recorded for 2021 and 2020 was $ 667,000 and $ 815,000 , respectively. 41 Table of Contents NOTE 5 – OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: December 31, 2021 December 31, 2020 (in thousands) Lease liability - short term $ 601 $ 673 Product warranty 432 371 Sales return reserve 71 61 Other taxes 180 109 Other 129 93 Other accrued liabilities $ 1,413 $ 1,307 The changes in our product warranty liability for the year ending December 31, 2021 are follows: December 31, 2021 (in thousands) Liability, beginning balance $ 371 Net expenses 864 Warranty claims ( 864 ) Accrual revisions 61 Liability, ending balance $ 432 NOTE 6 – OPERATING LEASE COMMITMENTS We have commitments under non-cancelable operating leases and other agreements, primarily for factory and office space, with initial or remaining terms of one year or more for the years ending December 31 are as follows: Operating Lease Commitments (in thousands) 2022 $ 802 2023 911 2024 826 2025 576 2026 124 Thereafter 16 Total $ 3,447 Less Imputed interest ( 377 ) Total operating lease liabilities $ 2,878 Cash paid for operating lease liabilities for the twelve months ended December 31, 2021 and 2020, respectively, was $ 815,000 and $ 770,000 . There were eight new or modified leases during the twelve months ended December 31, 2021 that are accounted for in the amounts disclosed above. The following table presents supplemental balance sheet information related to leases as of December 31, 2021: Year Ended December 31, 2021 2020 (in thousands) Right-of-use assets (Long-term other assets) $ 2,793 $ 1,081 Lease liability-short term (Other accrued liabilities) $ 601 $ 673 Lease liability-long term (Operating lease liabilities) $ 2,277 $ 588 42 Table of Contents At December 31, 2021, the weighted average remaining lease term is 3.4 years and the weighted average discount rate used is 5 %. The components of our lease expense for the twelve months ended December 31, 2021 and 2020, respectively, include operating lease costs of $ 751,000 and $ 692,000 , which includes short-term lease costs of $ 31,000 and $ 34,000 . Variable payments were not material, and were treated as non-lease components and were recognized in the period for which the costs occur. Our real estate facility leases are described below: During the fourth quarter of 2021, we amended our lease agreement for the Redmond, Washington headquarters facility, extending the lease to January 31, 2026 . The lease is for approximately 20,460 square feet. The lease base annual rental payments during 2021 and 2020 were approximately $ 372,000 and $ 361,000 , respectively. In addition to the Redmond facility, approximately 24,000 square feet is leased at two foreign locations, including our sales, service, operations and engineering office located in Shanghai, China, and our German sales, service and engineering office located near Munich, Germany. Our lease for a facility located in Shanghai, China ran through October 31, 2021. In April 2021, we signed a lease extension effective November 1, 2021 that extends the lease through October 31, 2024 . This lease is for approximately 19,400 square feet. The lease base annual rental payments during 2021 and 2020 were approximately $ 317,000 and $ 301,000 , respectively. Our lease for our facility located near Munich, Germany ran through February 28, 2022 and in March 2022 we entered into a lease extension to 2027. This lease is for approximately 4,895 square feet. The lease base annual rental payments during 2021 and 2020 were approximately $ 58,000 and $ 62,000 , respectively. NOTE 7 – 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 December 31, 2021, the purchase commitments and other obligations totaled $ 1.8 million, of which all but $ 3,500 are expected to be paid over the next twelve months. NOTE 8 – CONTINGENCIES As of December 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 9 – STOCK AND RETIREMENT PLANS Stock Option Plans At December 31, 2021, there were 570,892 shares available for future grant under Data I/O Corporation 2000 Stock Compensation Incentive Plan (“2000 Plan”). At December 31, 2021, there were shares of Common Stock reserved for issuance consisting of 37,500 inducement reserve shares and 598,777 shares under the 2000 Plan. The inducement reserve shares were granted in 2019 consisting of 25,000 options (12,500 unvested and unissued) and 50,000 RSU, which were not from the 2000 Plan, but were made under the terms of the 2000 Plan. During 2021, 12,500 shares were issued from the inducement reserve. Pursuant to the 2000 Plan, options are granted to our officers and key employees with exercise prices equal to the fair market value of the Common Stock at the date of grant and generally vest over four years. Options granted under the plans have a maximum term of six years from the date of grant. Stock awards are also granted under the 2000 Plan which generally vest over four years and one year for nonemployee Directors. Employee Stock Purchase Plan Under the Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of our Common Stock at six-month intervals at 95 % of the fair market value on the last day of each six-month period. Employees may purchase shares having a value not exceeding ten percent of their gross compensation during an offering period. During 2021 and 2020, a total of 4,484 and 7,814 shares, respectively, were purchased under the plan at average prices of $ 5.38 and $ 3.71 per share, respectively. At December 31, 2021 and 2020, 29,098 and 31,769 shares were reserved for future issuance respectively. 43 Table of Contents Stock Appreciation Rights Plan We have a Stock Appreciation Rights (“SAR”) Plan under which each director, executive officer or holder of 10% or more of our Common Stock has a SAR with respect to each exercisable stock option. The SAR entitles the SAR holder to receive cash from us for the difference between the market value of the stock and the exercise price of the option in lieu of exercising the related option. SARs are only exercisable following a tender offer or exchange offer for our stock, or following approval by shareholders of Data I/O of any merger, consolidation, reorganization or other transaction providing for the conversion or exchange of more than 50% of the common shares outstanding. As no event has occurred, which would make the SARs exercisable, and no such event is deemed probable, no compensation expense has been recorded under this plan. At December 31, 2021 and 2020, there were 25,000 SARs outstanding. Director Fee Plan We have a Director Fee Plan available to compensate directors who are not employees of Data I/O Corporation with equity. During 2021, no shares were issued from the plan and 20,559 shares were issued from the plan in 2020. At December 31, 2021 and 2020 130,763 shares remain available in the plan. Retirement Savings Plan We have a savings plan that qualifies as a cash or deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer their pre-tax salary or post-tax salary if Roth is elected, subject to IRS limitations. In fiscal years 2021 and 2020, we contributed one dollar for each dollar contributed by a participant, with a maximum contribution of four percent of a participant’s eligible earnings. Our matching contribution expense for the savings plan, net of forfeitures, was approximately $ 186,000 and $ 184,000 in 2021 and 2020, respectively. Employer matching contributions owed to the plan were $ 224,000 and $ 200,000 at December 31, 2021 and 2020, respectively. NOTE 10 – 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 and reduced for estimated forfeitures. The impact on our results of operations of recording share-based compensation for the year ended December 31, 2021 and 2020 was as follows: Year Ended December 31, 2021 2020 (in thousands) Cost of goods sold $ 57 $ 44 Research and development 303 371 Selling, general and administrative 878 1,052 Total share-based compensation $ 1,238 $ 1,467 An immaterial amount of share-based compensation was capitalized into inventory as overhead for the years ended December 31, 2021 and 2020, respectively. 44 Table of Contents The following table summarizes stock option activity under our stock option plans for the twelve months ended December 31: 2021 2020 Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life in Years Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life in Years Outstanding at beginning of year 25,000 $ 4.98 25,000 $ 4.98 Granted - - - - Exercised ( 12,500 ) 4.98 - - Cancelled, Expired or Forfeited - - - - Outstanding at end of year 12,500 $ 4.98 3.33 25,000 $ 4.98 4.33 Vested or expected to vest at the end of the period 12,166 $ 4.98 3.33 24,068 $ 4.98 4.33 Exercisable at end of year 3,125 $ 4.98 3.33 9,375 $ 4.98 4.33 The aggregate intrinsic value of outstanding options is $ 0 . There were no stock option awards exercised in 2020. Restricted stock award activity including performance-based stock award activity under our share-based compensation plan was as follows: 2021 2020 Awards Weighted - Average Grant Date Fair Value Awards Weighted - Average Grant Date Fair Value Outstanding at beginning of year 643,228 $ 4.16 536,403 $ 5.44 Granted 262,001 5.95 383,951 3.02 Vested ( 272,952 ) 4.56 ( 230,901 ) 5.16 Cancelled ( 8,500 ) 4.15 ( 46,225 ) 4.58 Outstanding at end of year 623,777 $ 4.73 643,228 $ 4.16 During the years ended December 31, 2021 and 2020, 85,264 and 55,687 shares respectively were withheld from issuance related to restricted stock units vesting and stock option exercises to cover employee taxes and stock options exercise price. The remaining unamortized expected future compensation expense and remaining amortization period associated with unvested option grants and restricted stock awards are: December 31, 2021 December 31, 2020 Unamortized future compensation expense $ 2,300,286 $ 2,017,501 Remaining weighted average amortization period in years 2.57 2.35 45 Table of Contents NOTE 11 – SHARE REPURCHASE PROGRAMS Data I/O did not have a share repurchase program in 2021. NOTE 12 – INCOME TAXES Components of income (loss) before taxes: Year Ended December 31, (in thousands) 2021 2020 U.S. operations $ ( 2,086 ) $ ( 4,451 ) Foreign operations 1,643 874 Total income (loss) before taxes $ ( 443 ) $ ( 3,577 ) Income tax expense (benefit) consists of: Year Ended December 31, (in thousands) 2021 2020 Current tax expense (benefit) U.S. federal $ 0 $ 0 State ( 2 ) ( 2 ) Foreign 114 389 112 387 Deferred tax expense (benefit) – U.S. federal - - Total income tax expense (benefit) $ 112 $ 387 A reconciliation of our effective income tax and the U.S. federal tax rate is as follows: Year Ended December 31, (in thousands) 2021 2020 Statutory tax $ ( 93 ) $ ( 751 ) State and foreign income tax, net of federal income tax benefit ( 254 ) 151 Valuation allowance for deferred tax assets 454 1,513 Foreign sourced deemed dividend income 341 ( 394 ) Stock based compensation ( 325 ) ( 136 ) Other ( 11 ) 4 Total income tax expense (benefit) $ 112 $ 387 46 Table of Contents The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented below: Year Ended December 31, 2021 2020 (in thousands) Deferred income tax assets: Allowance for doubtful accounts $ 13 $ 10 Inventory and product return reserves 484 573 Compensation accruals 2,421 1,973 Accrued liabilities 202 179 Book-over-tax depreciation and amortization 23 91 Foreign net operating loss carryforwards 22 53 U.S. net operating loss carryforwards 3,301 3,739 U.S. credit carryforwards 1,440 2,345 7,906 8,963 Valuation Allowance ( 7,906 ) ( 8,963 ) Total Deferred Income Tax Assets $ - $ - The valuation allowance for deferred tax assets decreased $ 1,057,000 and increased $ 1,422,000 during the years ended December 31, 2021 and 2020, respectively. The net deferred tax assets have a full valuation allowance provided due to uncertainty regarding our ability to utilize such assets in future years. This full valuation allowance evaluation is based upon our volatile history of losses and the cyclical nature of our industry and capital spending. Credit carryforwards consist primarily of research and experimental and foreign tax credits. We intend to continue to reinvest foreign earnings of our operating subsidiaries. U.S. net operating loss carryforwards are $ 15.7 million at December 31, 2021 with expiration years from 2023 to 2034 . Utilization of net operating loss and credit carryforwards is subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below: Year Ended December 31, 2021 2020 (in thousands) Unrecognized tax benefits, opening balance $ 365 $ 348 Prior period tax position increases - - Additions based on tax positions related to current year 27 17 Unrecognized tax benefits, ending balance $ 392 $ 365 Historically, we have incurred minimal interest expense and no penalties associated with tax matters. We have adopted a policy whereby amounts related to penalties associated with tax matters are classified as general and administrative expense when incurred and amounts related to interest associated with tax matters are classified as interest income or interest expense. Tax years that remain open for examination include 2018, 2019, 2020 and 2021 in the United States of America. In addition, various tax years from 2002 to 2014 may be subject to examination in the event that we utilize the net operating losses and credit carryforwards from those years in our current or future year tax returns. NOTE 13 – SEGMENT AND GEOGRAPHIC INFORMATION We consider our operations to be a single operating segment, focused on the design, manufacturing and sale of programming systems used by designers and manufacturers of electronic products. Major operations outside the U.S. include sales, engineering and service support by subsidiaries in Germany as well as in China, which also manufactures some of our products. 47 Table of Contents The following tables provide summary operating information by geographic area: Year Ended December 31, (in thousands) 2021 2020 Net sales: U.S. $ 2,607 $ 1,516 Europe 9,387 8,415 Rest of World 13,841 10,397 $ 25,835 $ 20,328 Included in Europe and Rest of World are the following significant balances: Germany $ 3,783 $ 3,851 China $ 4,203 $ 3,490 Operating income: U.S. $ 257 ($ 713 ) Europe ( 1,037 ) ( 1,698 ) Rest of World 507 ( 667 ) $ ( 273 ) $ ( 3,078 ) Identifiable assets: U.S. $ 15,840 $ 13,858 Europe 5,638 5,878 Rest of World 7,579 5,856 $ 29,057 $ 25,592 NOTE 14 – IMPAIRMENT AND RELATED CHARGES During 2021, no impairment or impairment related charges were taken. During the fourth quarter of 2020, we launched a new generation of SentriX tools and capability. This obsoleted components of the first-generation hardware, software and inventory. We also ended support for some legacy automated handlers, impairing the remaining service inventory. As a result, certain capital equipment assets, advance payments and inventory were analyzed and determined to be impaired, totaling $ 943,000 in the fourth quarter of 2020. This included impairment of $ 652 ,000, consisting of $ 252,000 of equipment and software, $ 400,000 of prepaid royalties, as well as impairment related charges of $ 291,000 , due to inventory obsolescence (cost of goods sold) for end of certain product support. NOTE 15 – SUBSEQUENT EVENTS In preparing the financial statements, the Company has reviewed all known events which have occurred after December 31, 2021 through March 29, 2022, the date on which the financial statements are available for issuance, for potential recognition or disclosure in the consolidated financial statements and footnotes. On February 23, 2022, Edward J. Smith was appointed a director of Data I/O. During the first quarter of 2022, new COVID-19 outbreaks resulted in sporadic government restrictions on our facilities, customers and vendors in China, which caused supply chain, production, shipment and economic uncertainty impacting our business. On March 28, 2022, the Shanghai China government announced additional restrictive measures which will close the Company’s Shanghai operations through April 5, 2022. The Russia-Ukraine war is resulting in increased geo-political and economic uncertainty. Even though we do not have operations in Russia or Ukraine, our business may be impacted. There were no other subsequent events which would require additional disclosures to the financial statements other than those already disclosed throughout the Notes to Consolidated Financial Statements. 48 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.