What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-27 compared with 2023-03-30 · 87 added, 106 removed, 442 unchanged (30% of the section changed)

24 unchanged sentences

(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.

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 matter 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

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.

We identified 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.

2 unchanged sentences

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.

We also 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 and analytical procedures.

/s/ GRANT THORNTON LLP

7 unchanged sentences

Cash and cash equivalents

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

Trade accounts receivable, net of allowance for credit losses of $ 72 and $ 147 , respectively

Other current assets

12 unchanged sentences

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 December 31, 2022 and 8,621,007 shares as of December 31, 2021

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, 9,020,819 shares as of December 31, 2023 and 8,816,381 shares as of December 31, 2022

Accumulated earnings (deficit)

6 unchanged sentences

(in thousands, except per share amounts)

For the Years Ended December 31,

For the Years Ended

Cost of goods sold

20 unchanged sentences

(in thousands)

For the Years Ended December 31,

For the Years Ended

Net Income (loss)

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Balance at December 31, 2021

Stock options exercised

Repurchased shares

Stock awards issued, net of tax withholding

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Balance at December 31, 2022

Stock options exercised

Repurchased shares

Stock awards issued, net of tax withholding

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(in thousands)

For the Twelve Months Ended December 31,

For the Twelve Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

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Revenue Recognition

Allowance for Doubtful Accounts

Allowance for Credit Losses

Warranty Accruals

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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 are typically due within 30 to 60 days and are stated at amounts due from customers net of an allowance for credit losses.

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.

We determine the allowance by considering a number of factors, including a forward-looking expectation based upon the condition of the general economy and the industry as a whole and our previous bad debt experience, as well as the length of time trade accounts receivable are past due, the industry and geographic payment practices involved, and the customer’s current ability to pay their obligation to us.

We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for credit losses.

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 estimate changes to inventory for obsolete, slow-moving, excess and potential 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.

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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.

We allocate the transaction price of each element based on relative selling prices.

We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, installation, services and support and extended maintenance components.

We allocate the transaction price of each element based on the relative selling prices.

Relative selling price is based on the selling price of the standalone system.

1 unchanged sentence

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 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.

Revenue is recognized on the system based on shipping terms, software based on delivery, installation and services based on completion of work and software maintenance and extended warranty support ratably over the term of the agreement, typically one year.

Total deferred revenue which represents undelivered performance obligations for installation, service, support and extended maintenance contracts was $1.6 million and $1.8 million and the portion expected to be recognized within one year was $1.4 million and $1.6 million for December 31, 2023 and 2022, respectively.

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.

1 unchanged sentence

We establish a reserve for sales returns based on historical trends in product returns and estimates for new items.

Payment terms are generally 30-60 days from shipment.

Payment terms are generally 30 to 60 days from shipment.

We transfer certain products out of service from their internal use and make them available for sale.

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Software and Maintenance Sales *

* includes an insignificant amount of service and part sales

* includes an insignificant amount of service and parts 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.

Our leasing arrangements are primarily for office facility space we use to conduct our operations.

In addition, there are automobiles and a small amount of office equipment leased.

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Our trade receivables are geographically dispersed and include customers in many different industries.

Our consolidated accounts receivable balance as of December 31, 2022 and 2021 includes foreign accounts receivable in the functional currency of our foreign subsidiaries amounting to $ 2,400,000 and $ 1,813,000 , respectively.

Our consolidated accounts receivable balance as of December 31, 2023 and 2022 includes foreign accounts receivable in the functional currency of our foreign subsidiaries amounting to $ 1.0 and $ 2.4 million, respectively.

We generally do business with our foreign distributors in U.S.

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Approximate percentage of net sales

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.

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).

Percentage of each

In 2023, most of the direct implications of COVID-19 had passed, and we were dealing with the follow-on impacts or indirect impacts from COVID-19 and the policies put in place to mitigate the disease.

We continued to manage inflation, supply chain impacts and shortages, and the post lock down economic transitions in China and elsewhere.

New Accounting Pronouncements - Standards Issued and Implemented

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.

We adopted the new credit loss standard on January 1, 2023.

The new credit loss standard has not had a material impact on our financial condition, results of operations and cash flows, or financial statement disclosures.

New Accounting Pronouncements - Standards Issued and Not Yet Implemented

In November 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses.

ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted.

We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740):

Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid.

ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted.

We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

NOTE 2 – ACCOUNTS RECEIVABLE, NET

1 unchanged sentence

Trade accounts receivable

Less allowance for doubtful receivables

Less allowance for credit losses

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 credit losses are as follows:

(in thousands)

Beginning balance

Bad debt expense (reversal)

Credit loss (reversal)

Accounts written-off

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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:

Lease Commitments

(in thousands)

2028 & Thereafter

Less imputed interest

Total operating lease liabilities

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 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:

Payments for operating lease liabilities for the twelve months ended December 31, 2023 and 2022, respectively, was $ 894,000 and $ 779,000 which included short-term lease costs of $ 25,000 and 45,000 .

There were no new or modified leases during the twelve months ended December 31, 2023 that are accounted for in the amounts disclosed above.

The total annual lease expense in 2023 and 2022, including operating lease expenses and short-term lease expenses, was approximately $ 745,000 and $ 899,000 , respectively.

Variable payments were not material and were treated as non-lease components and were recognized in the period for which the costs occur.

For the largest lease component, the company has three facilities with our headquarters and primary engineering and operational functions located in Redmond, Washington.

Our two subsidiary facilities in Munich, Germany and Shanghai, China provide extended worldwide sales, service, engineering and operation services.

The total annual gross or base lease payments during 2023 and 2022 were approximately $ 823,000 and $ 713,000 , respectively.

The lease payment increase in 2023 was due primarily to lease abatement incentives for lease renewals in 2022 and standard rate increase in 2023.

The Redmond, Washington headquarters facility lease runs to January 31, 2026 at approximately 20,460 square feet.

The lease for the facility located in Shanghai, China runs to October 31, 2024 at approximately 19,400 square feet.

The lease for the facility located near Munich, Germany runs to August 2027 at approximately 4,895 square feet.

The following table presents supplemental balance sheet information related to leases as of December 31, 2023 and 2022:

Year Ended December 31,

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At December 31, 2023, the weighted average remaining lease term is 2.17 years and the weighted average discount rate used is 5 %.

The components of our lease expense for the twelve months ended December 31, 2022 and 2021, respectively, include operating lease costs of $ 899,000 and $ 751,000 , which includes short-term lease costs of $ 45,000 and $ 31,000 .

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 2022 and 2021 were approximately $331,000 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.

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.

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.

The lease base annual rental payments during 2022 and 2021 were approximately $ 62,000 and $ 58,000 , respectively.

NOTE 7 – OTHER COMMITMENTS

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Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days.

At December 31, 2022, the purchase commitments and other obligations totaled $ 2.5 million, of which all but $ 401,000 are expected to be paid over the next twelve months.

At December 31, 2023, we had one contract with a commitment of approximately $ 232,000 to be paid in 2024 and $ 251,000 to be paid beyond one year.

NOTE 8 – CONTINGENCIES

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Stock Option Plans

At December 31, 2022, there were 280,177 shares available for future grant under Data I/O Corporation 2000 Stock Compensation Incentive Plan (“2000 Plan”).

At December 31, 2022, there were shares of Common Stock reserved for issuance consisting of 12,500 inducement reserve shares and 665,200 shares under the 2000 Plan.

The inducement reserve shares were granted in 2019 consisting of 12,500 options ( 12,500 unvested and 12,500 unissued) and 50,000 RSU, which were not from the 2000 Plan, but were made under the terms of the 2000 Plan.

During 2022, 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.

At December 31, 2023, there were 732,327 shares available for future grant under Data I/O Corporation 2023 Omnibus Incentive Compensation Incentive Plan (“2023 Plan”).

At December 31, 2023, there were shares of Common Stock reserved for issuance for outstanding awards, consisting of 92,500 inducement reserve shares, 353,525 shares under the 2000 Plan, and 295,100 shares under the 2023 Plan.

The inducement reserve shares remaining that were granted in 2019 consist of 12,500 options vested but unissued (using the terms of the 2000 Plan) and the grant in 2023 consisting of 75,000 RSU and 5000 PSU, (which were not from the 2023 Plan, but were made under the terms of the 2023 Plan).

Pursuant to the 2000 and 2023 Plans, 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.

Stock awards are now granted under the 2023 Plan (previously the 2000 Plan) which for RSU awards generally vest over four years (some three years) and one year for nonemployee Directors.

Performance Share Unit (PSU) awards vest based upon the three-year performance achievement on December 31, 2025.

The performance measures for the PSUs awarded are revenue growth targets for the three-year period ending December 31, 2025.

Achieving a threshold growth measure earns 50% of the PSU target award;

achieving the target growth measure earns 100% of the PSU target award;

and achieving the maximum target growth measure earns 150% of the PSU target award.

Employee Stock Purchase Plan

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During 2023 and 2022, a total of 3,341 and 3,288 shares, respectively, were purchased under the plan at average prices of $ 4.16 and $ 4.06 per share, respectively.

At December 31, 2022 and 2021, 25,477 and 29,098 shares were reserved for future issuance respectively.

At December 31, 2023 and 2022, 21,525 and 25,477 shares were reserved for future grant respectively.

Stock Appreciation Rights Plan

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At December 31, 2023 and 2022, there were 12,500 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.

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

2 unchanged sentences

employees may defer their pre-tax salary or post-tax salary if Roth is elected, subject to IRS limitations.

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 2023, 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.

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An immaterial amount of share-based compensation was capitalized into inventory as overhead for the years ended December 31, 2023 and 2022, respectively.

The following table summarizes stock option activity under our stock option plans for the twelve months ended December 31, 2022:

The following table summarizes stock option activity under our stock option plans for the twelve months ended December 31, 2023 and 2022:

Weighted-Average Exercise Price

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During the years ended December 31, 2023 and 2022, 83,753 and 57,206 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.

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 annually over three or four years and employee Non-Qualified stock options typically vest quarterly over four years and have a six-year exercise period.

Performance Stock Units (“PSUs”) typically cliff vest at the end of the performance period and the performance metric is cumulative revenue growth over the three-year period ending December 31, 2025 with a cumulative revenue threshold, target, and maximum performance measure.

The table above includes performance shares granted in 2023 of 30,000 shares at the target performance level (the threshold level would be 50% and the maximum level would be 150% of the target level).

The remaining unamortized expected future compensation expense and remaining amortization period associated with unvested option grants and restricted stock awards are:

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Remaining weighted average amortization period in years

The weighted average number of shares outstanding used to compute earnings (loss) per share included the following:

Year Ended December 31,

Weighted average shares outstanding

Restricted and Performance Stock Units

Stock Options

Weighted average diluted shares

NOTE 11 – SHARE REPURCHASE PROGRAMS

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Statutory tax

State and foreign income tax, net of federal income tax benefit

Valuation allowance for deferred tax assets

State and foreign income tax, net of federal tax benefit

Valuation allowance for deferred tax asset

Foreign sourced deemed dividend income

1 unchanged sentence

Total income tax expense (benefit)

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented below:

Year Ended December 31,

(in thousands)

Deferred income tax assets:

Allowance for doubtful accounts

Inventory and product return reserves

Compensation accruals

Accrued liabilities

Book-over-tax depreciation and amortization

Foreign net operating loss carryforwards

net operating loss carryforwards

credit carryforwards

Valuation Allowance

Total Deferred Income Tax Assets

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.

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.

net operating loss carryforwards are $ 13.8 million at December 31, 2023 with expiration years from 2023 to 2034 .

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include sales, engineering and service support by subsidiaries in Germany as well as in China, which also manufactures some of our products.

We determine international sales by the international geographic destination into which the products are sold and delivered and include not only sales by foreign subsidiaries but also export sales from the U.S.

to our foreign distributors and to our representatives’ customers.

International sales do not include transfers between Data I/O and our foreign subsidiaries.

The following tables provide summary operating information by geographic area:

2 unchanged sentences

Rest of World

Included in Europe and Rest of World are

the following Net Sales significant balances:

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

Operating income:

1 unchanged sentence

Identifiable assets:

Rest of World

Europe (primarily Germany)

Rest of World (primarily China)

NOTE 14 – SUBSEQUENT EVENTS

3 unchanged sentences

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