What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-30 compared with 2022-03-29 · 55 added, 83 removed, 493 unchanged (22% of the section changed)

5 unchanged sentences

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”).

We have audited the accompanying consolidated balance sheets of Data I/O Corporation (a Washington corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

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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.

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates 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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Net realizable value of inventory

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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

· To test the adequacy of the Company's allowance for excess and obsolete inventories, we performed substantive audit procedures that included, among others, testing the completeness and accuracy of the underlying data used in the estimation calculations, specifically those related to inventory movements and aging.

We evaluated the reasonableness of significant assumptions including the estimated reserve percentage and other significant assumptions through inquiry of management and personnel outside of finance team, analytic procedures and lookback analysis.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2001.

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Cash and cash equivalents

Trade accounts receivable, net of allowance for

doubtful accounts of $89 and $66, respectively

Trade accounts receivable, net of allowance for doubtful accounts of $ 147 and $ 89 , respectively

Other current assets

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Preferred stock -

Authorized, 5,000,000 shares, including

200,000 shares of Series A Junior Participating

Issued and outstanding, none

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

Authorized, 30,000,000 shares Issued and outstanding, 8,816,381 shares as of December 31, 2022 and 8,621,007 shares as of December 31, 2021

Accumulated earnings (deficit)

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

TOTAL STOCKHOLDERS’ EQUITY

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Balance at December 31, 2020

Stock options exercised, net

Stock options exercised

Repurchased shares

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Balance at December 31, 2021

Stock options exercised, net

Stock options exercised

Repurchased shares

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Share-based compensation

Impairment and related charges

Net change in:

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CASH FLOWS FROM FINANCING ACTIVITIES:

Net proceeds from issuance of common stock, less payments

for shares withheld to cover tax

Net proceeds from issuance of common stock, less payments for shares withheld to cover tax

Cash provided by (used in) financing activities

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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.

Cash and cash equivalents held in foreign bank accounts, typically in local currency, in China and Germany, totaled (in millions) $ 4 .0 and $ 6.8 at December 31, 2022 and 2021, respectively.

This cash held in subsidiaries have restrictions and costs associated with repatriations, currency conversions, and complying with government policies, regulations and controls, especially in China.

Fair Value of Financial Instruments

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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 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.

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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.

Based on these evaluations, for the years ended December 31, 2022 and 2021, no impairment was noted or recorded for property, plant and equipment.

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.

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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

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Revenue Recognition

Topic 606 provides a single, principles-based five-step model to be applied to all contracts with customers.

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.

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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.

This analysis 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.

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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.

Deferred revenue of $1.8 million at December 31, 2022 includes service, support and maintenance contracts and represents the undelivered performance obligation of agreements that are typically for one year or less.

When we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon delivery, provided that only immaterial items in the context of the contract with the customer 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.

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The common stock equivalent shares from equity awards used in calculating diluted earnings per share were 109,000 and 186,000 for the years ended December 31, 2022 and 2021, 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.

Options to purchase 12,500 shares of common stock were outstanding as of both periods December 31, 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.

Diversification of Credit Risk

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Approximate percentage of net sales

In 2021, we continued to react to and manage our business relative to the COVID-19 pandemic.

During 2022, 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:

Keep our employees and their families safe;

Keep our facilities safe and operational while we serve our customers as an essential business;

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.

During 2022, as a result of vaccinations and the reduced impact of COVID-19, our business started to return to more normal in parts of the world.

As a global company, we had to manage these aspects of our business while working within the guidelines of local and national policy in the U.S., China and Germany.

During parts of the first and second quarters, our Shanghai facility and operations were shut down for two and a half months as required by China’s requirements pursuant to their COVID Zero policy.

This shutdown impacted our supply chains, shipping times, travel, trade shows, and forced remote work.

We were largely able to resume operations and begin recovery late in the second quarter and throughout the third quarter.

For most of 2022, waves of COVID-19 infection and variants have kept or re-imposed revised travel restrictions.

Customers continued to restrict in-person sales and other visits.

We have continued to do business by converting these interactions to remote and virtual means as we have implemented new processes and technology.

Our resilient supply chain model was able to support our customers by having alternate facilities that were open and responded to the critical impacts of the shutdown.

Later in the year China’s COVID Zero policy was effectively cancelled.

In December most of our employees in Shanghai China were out briefly with COVID and then we resumed normal operations.

New Accounting Pronouncements - Standards issued and not yet implemented

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326).

Topic 326 is effective (Smaller Reporting Company) for reporting periods beginning after December 15, 2022.

Topic 326 replaces the incurred loss impairment methodology under current Generally Accepted Accounting Principles ("GAAP") with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments.

The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

We plan to adopt the new credit loss standard effective January 1, 2023.

We do not expect the new credit loss standard to have a material impact on our financial condition, results of operations and cash flows, or financial statement disclosures.

NOTE 2 – ACCOUNTS RECEIVABLE, NET

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Trade accounts receivable, net

Changes in Data I/O’s allowance for doubtful accounts are as follows:

Changes in Data I/O’s allowance

for doubtful accounts are as follows:

(in thousands)

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Cash paid for operating lease liabilities for the twelve months ended December 31, 2022 and 2021, respectively, was $ 779,560 and $ 815,000 .

There were eight new or modified leases during the twelve months ended December 31, 2021 that are accounted for in the amounts disclosed above.

There were two new or modified leases during the twelve months ended December 31, 2022 that are accounted for in the amounts disclosed above.

The following table presents supplemental balance sheet information related to leases as of December 31, 2022:

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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 .

In April 2021, we signed a lease extension for our facility located in Shanghai, China, 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 2022 and 2021 were approximately $ 314,000 and $ 317,000 , 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.

In March of 2022, we entered into a lease extension through 2027 for our facility located near Munich, Germany.

This lease is for approximately 4,895 square feet.

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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.

No shares were issued from the plan in 2022 and 2021.

At December 31, 2022 and 2021, 130,763 shares remain available in the plan.

Subsequent to December 31, 2022, the Director Fee Plan was cancelled by the Board of Directors and the plan reserved shares were unreserved.

Retirement Savings Plan

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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.

In fiscal years 2021, we contributed one dollar for each dollar contributed by a participant, with a maximum contribution of four percent of a participant’s eligible earnings.

In fiscal year 2022, we contributed one dollar for each dollar contributed by a participant on the first two percent and $.50 for each dollar contributed by participant on the next four percent of a participant’s eligible earnings, and as a result this requires a minimum six percent contribution to receive a four percent matching contribution.

Our matching contribution expense for the savings plan, net of forfeitures, was approximately $ 210,000 and $ 186,000 in 2022 and 2021, respectively.

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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 valuation allowance for deferred tax assets increased $ 1,388,000 and decreased $( 1,057,000 ) during the years ended December 31, 2022 and 2021, 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.

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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.

We have not had a Section 382 ownership change, but if we did the usage of these tax assets would have an income usage limitation based on the value of the Company at the time of the change times the federal long-term tax-exempt rate.

The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below:

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Rest of World

Included in Europe and Rest of World are the following significant balances:

Included in Europe and Rest of World are

the following Net Sales significant balances:

Operating income:

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Rest of World

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 14 – 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.

In preparing the financial statements, the Company has reviewed all known events which have occurred after December 31, 2022 through the date on which the financial statements are available for issuance, for potential recognition or disclosure in the consolidated financial statements and footnotes.

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.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data