DATA I/O CORP 10-Q

Item 1. Financial Statements DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (UNAUDITED) September 30, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,041 $ 14,190 Trade accounts receivable, net of allowance for doubtful accounts of $ 98 and $ 89 , respectively 4,412 3,995 Inventories 7,104 6,351 Other current assets 615 737 TOTAL CURRENT ASSETS 23,172 25,273 Property, plant and equipment – net 983 946 Other assets 2,314 2,838 TOTAL ASSETS $ 26,469 $ 29,057 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,533 $ 1,373 Accrued compensation 1,631 2,496 Deferred revenue 1,805 1,507 Other accrued liabilities 1,543 1,413 Income taxes payable 170 - TOTAL CURRENT LIABILITIES 6,682 6,789 Operating lease liabilities 1,659 2,277 Long-term other payables 203 138 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, 8,816,381 shares as of September 30, 2022 and 8,621,007 shares as of December 31, 2021 21,656 20,886 Accumulated earnings (deficit) ( 3,641 ) ( 2,011 ) Accumulated other comprehensive income ( 90 ) 978 TOTAL STOCKHOLDERS’ EQUITY 17,925 19,853 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 26,469 $ 29,057 See notes to consolidated financial statements 3 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net sales $ 7,212 $ 6,730 $ 16,946 $ 19,478 Cost of goods sold 3,101 2,642 7,774 8,215 Gross margin 4,111 4,088 9,172 11,263 Operating expenses: Research and development 1,432 1,730 4,605 5,009 Selling, general and administrative 1,967 2,216 5,943 6,332 Total operating expenses 3,399 3,946 10,548 11,341 Operating income (loss) 712 142 ( 1,376 ) ( 78 ) Non-operating income (loss): Interest income 9 8 11 11 Gain on sale of assets - - 57 - Foreign currency transaction gain (loss) 307 ( 26 ) 378 ( 64 ) Total non-operating income (loss) 316 ( 18 ) 446 ( 53 ) Income (loss) before income taxes 1,028 124 ( 930 ) ( 131 ) Income tax (expense) benefit ( 181 ) ( 112 ) ( 700 ) ( 219 ) Net income (loss) $ 847 $ 12 ($ 1,630 ) ($ 350 ) Basic earnings (loss) per share $ 0.10 $ 0.00 ($ 0.19 ) ($ 0.04 ) Diluted earnings (loss) per share $ 0.10 $ 0.00 ($ 0.19 ) ($ 0.04 ) Weighted-average basic shares 8,816 8,621 8,715 8,519 Weighted-average diluted shares 8,859 8,760 8,715 8,519 See notes to consolidated financial statements 4 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income (loss) $ 847 $ 12 ($ 1,630 ) ($ 350 ) Other comprehensive income (loss): Foreign currency translation gain (loss) ( 544 ) ( 85 ) ( 1,068 ) ( 113 ) Comprehensive income (loss) $ 303 ($ 73 ) ($ 2,698 ) ($ 463 ) See notes to consolidated financial statements 5 Table of Contents 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, 2020 8,416,335 $ 20,071 ( 1,456 ) $ 1,024 $ 19,639 Stock awards issued, net of tax withholding 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 Repurchased shares - - - Stock awards issued, net of tax withholding 197,923 ( 442 ) - - ( 442 ) Issuance of stock through: ESPP - - - - - Share-based compensation - 401 - - 401 Net income (loss) - - ( 29 ) - ( 29 ) Other comprehensive income (loss) - - - 152 152 Balance at June 30, 2021 8,619,522 $ 20,320 ( 1,818 ) $ 996 $ 19,498 Repurchased shares - - - Stock awards issued, net of tax withholding 176 - - - - Issuance of stock through: ESPP 1,309 8 - - 8 Share-based compensation - 280 - - 280 Net income (loss) - - 12 - 12 Other comprehensive income (loss) - - - ( 85 ) ( 85 ) Balance at September 30, 2021 8,621,007 $ 20,608 1,806 $ 911 $ 19,713 Balance at December 31, 2021 8,621,007 $ 20,886 ( 2,011 ) $ 978 $ 19,853 Stock awards issued, net of tax withholding - - - - - Issuance of stock through: ESPP 1,362 6 - - 6 Share-based compensation - 291 - - 291 Net income (loss) - - ( 1,820 ) - ( 1,820 ) Other comprehensive income (loss) - - - ( 70 ) ( 70 ) Balance at March 31, 2022 8,622,369 $ 21,183 ( 3,831 ) $ 908 $ 18,260 Stock awards issued, net of tax withholding 191,910 ( 177 ) - - ( 177 ) Issuance of stock through: ESPP - - - - - Share-based compensation - 380 - - 380 Net income (loss) - - ( 657 ) - ( 657 ) Other comprehensive income (loss) - - ( 454 ) ( 454 ) Balance at June 30, 2022 8,814,279 $ 21,386 ( 4,488 ) $ 454 $ 17,352 Stock awards issued, net of tax withholding 176 - - - - Issuance of stock through: ESPP 1,926 6 - - 6 Share-based compensation - 264 - - 264 Net income (loss) - - 847 - 847 Other comprehensive income (loss) - - ( 544 ) ( 544 ) Balance at September 30, 2022 8,816,381 $ 21,656 ( 3,641 ) ( 90 ) $ 17,925 See notes to consolidated financial statements 6 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (UNAUDITED) For the Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($ 1,630 ) ($ 350 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 441 516 Equipment transferred to cost of goods sold 317 121 Share-based compensation 934 961 Net change in: Trade accounts receivable ( 619 ) ( 1,601 ) Inventories ( 1,031 ) ( 465 ) Other current assets 78 800 Accounts payable and accrued liabilities ( 248 ) 897 Deferred revenue 438 228 Other long-term liabilities ( 731 ) ( 287 ) Deposits and other long-term assets 511 443 Net cash provided by (used in) operating activities ( 1,540 ) 1,263 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 794 ) ( 361 ) Cash provided by (used in) investing activities ( 794 ) ( 361 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, less payments for shares withheld to cover tax ( 165 ) ( 424 ) Cash provided by (used in) financing activities ( 165 ) ( 424 ) Increase (decrease) in cash and cash equivalents ( 2,499 ) 478 Effects of exchange rate changes on cash ( 650 ) ( 404 ) Cash and cash equivalents at beginning of period 14,190 14,167 Cash and cash equivalents at end of period $ 11,041 $ 14,241 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 516 ($ 463 ) See notes to consolidated financial statements 7 Table of Contents DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) is a global market leader for advanced programming, security deployment, security provisioning and associated Intellectual Property (“IP”) protection and management solutions used in electronics manufacturing with flash memory, microcontrollers, and flash memory-based intelligent devices as well as secure element devices, authentication devices and secure microcontrollers. 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. We prepared the financial statements as of September 30, 2022 and September 30, 2021 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, 2021 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 nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Significant Accounting Policies 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, 2021. There have been no changes to our significant accounting policies described in the Annual Report that have had a material impact on our unaudited condensed consolidated financial statements and related notes. Revenue Recognition Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) provides a single, principles-based, five-step model to be applied to all contracts with customers. It generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers when control over the promised goods or services are transferred to the customer. We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year. During 2022 and 2021, 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 analysis considers the complexity, skill and training needed as well as customer expectations regarding installation. 8 Table of Contents 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. The following table represents our revenues by major categories: Three Months Ended Nine Months Ended Net sales by type September 30, 2022 Change September 30, 2021 September 30, 2022 Change September 30, 2021 (in thousands) Equipment $ 4,040 ( 0.9 %) $ 4,077 $ 9,274 ( 19.7 %) $ 11,554 Adapter 2,330 22.6 % 1,901 5,378 ( 6.5 %) 5,751 Software and Maintenance 842 12.0 % 752 2,294 5.6 % 2,173 Total $ 7,212 7.2 % $ 6,730 $ 16,946 ( 13.0 %) $ 19,478 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 Table of Contents 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. Recently Adopted Accounting Pronouncements For the nine months ended September 30, 2022, there were no recently issued accounting pronouncements that had, or are expected to have, a material impact to Data I/O Corporation’s consolidated financial statements. NOTE 2 – INVENTORIES Inventories consisted of the following components: September 30, 2022 December 31, 2021 (in thousands) Raw material $ 4,167 $ 3,771 Work-in-process 1,956 1,602 Finished goods 981 978 Inventories $ 7,104 $ 6,351 NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET Property and equipment consisted of the following components: September 30, 2022 December 31, 2021 (in thousands) Leasehold improvements $ 394 $ 430 Equipment 4,888 5,218 Sales demonstration equipment 999 754 6,281 6,402 Less accumulated depreciation 5,298 5,456 Property and equipment, net $ 983 $ 946 NOTE 4 – OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: September 30, 2022 December 31, 2021 (in thousands) Lease liability - short term $ 767 $ 601 Product warranty 395 432 Sales return reserve 71 71 Other taxes 204 180 Other 106 129 Other accrued liabilities $ 1,543 $ 1,413 10 Table of Contents The changes in our product warranty liability for the nine months ending September 30, 2022 are as follows: September 30, 2022 December 31, 2021 (in thousands) Liability, beginning balance $ 432 $ 371 Net expenses 594 864 Warranty claims ( 594 ) ( 864 ) Accrual revisions ( 37 ) 61 Liability, ending balance $ 395 $ 432 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 September 30, 2022: Operating Lease Commitments (in thousands) 2022 (remaining) $ 218 2023 870 2024 798 2025 577 2026 125 Thereafter 43 Total $ 2,631 Less imputed interest ( 205 ) Total operating lease liabilities $ 2,426 Cash paid for operating lease liabilities for the three and nine months ended September 30, 2022 was $ 138,000 and $ 555,000 , respectively. There were three new operating leases during the nine months ended September 30, 2022. The following table presents supplemental balance sheet information related to leases: Balance at September 30, 2022 Balance at December 31, 2021 (in thousands) Right-of-use assets (Long-term other assets) $ 2,250 $ 2,793 Lease liability-short term (Other accrued liabilities) 767 601 Lease liability-long term (Operating lease liabilities) 1,659 2,277 11 Table of Contents At September 30, 2022, the weighted average remaining lease term is 3.21 years and the weighted average discount rate used is 5 %. The components of our lease expense for the three and nine months ended September 30, 2022 include operating lease costs of $ 209,000 and $ 642,000 , respectively, and short-term lease costs of $ 8,000 and $ 35,000 , respectively. 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. In April 2021, we signed a lease extension effective November 1, 2021 that extends the lease for a facility located in Shanghai, China through October 31, 2024 . This lease is for approximately 19,400 square feet. 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 August 2027. 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 September 30, 2022, the purchase commitments and other obligations totaled $ 2.6 million of which all but $ 540,000 are expected to be paid over the next twelve months. NOTE 7 – CONTINGENCIES As of September 30, 2022, 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 – INCOME TAXES Income tax benefit (expense) for the third quarter of both 2022 and 2021, primarily related to foreign and state taxes. NOTE 9 – 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 Table of Contents The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (in thousands except per share data) Numerator for basic and diluted earnings (loss) per share: Net income (loss) $ 847 $ 12 ($ 1,630 ) ($ 350 ) Denominator for basic earnings (loss) per share: Weighted-average shares 8,816 8,621 8,715 8,519 Employee stock options and awards 43 139 - - Denominator for diluted earnings (loss) per share: Adjusted weighted-average shares & assumed conversions of stock options 8,859 8,760 8,715 8,519 Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ 0.10 $ 0.00 ($ 0.19 ) ($ 0.04 ) Diluted earnings (loss) per share $ 0.10 $ 0.00 ($ 0.19 ) ($ 0.04 ) Options to purchase 12,500 shares were outstanding as of both September 30, 2022 and 2021, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive. 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 reduced for estimated forfeitures. The impact on our results of operations of recording share-based compensation, net of forfeitures, for the three and nine months ended September 30, 2022 and 2021, respectively, were as follows: Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (in thousands) Cost of goods sold $ 18 $ 16 $ 58 $ 42 Research and development 58 66 191 238 Selling, general and administrative 188 198 686 680 Total share-based compensation $ 264 $ 280 $ 935 $ 960 13 Table of Contents Equity awards granted during the three and nine months ended September 30, 2022 and 2021 were as follows: Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Restricted Stock Units 1,000 1,000 327,715 257,400 Non-employee directors Restricted Stock Units (“RSUs”) typically vest over the earlier of one year or the next annual meeting of shareholders and Non-Qualified stock 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 September 30, 2022 are: September 30, 2022 Unamortized future equity compensation expense (in thousands) $ 2,371 Remaining weighted average amortization period (in years) 2.64 14 Table of Contents