DATA I/O CORP 10-K

Item 8. Financial Statements and Supplementary Data See pages 30 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, 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 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 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 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: · 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 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 We have served as the Company’s auditor since 2001. Bellevue, Washington March 27, 2024 29 Table of Contents DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2023 December 31, 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 12,341 $ 11,510 Trade accounts receivable, net of allowance for credit losses of $ 72 and $ 147 , respectively 5,707 4,992 Inventories 5,875 6,751 Other current assets 690 645 TOTAL CURRENT ASSETS 24,613 23,898 Property, plant and equipment – net 1,359 1,072 Other assets 1,429 2,195 TOTAL ASSETS $ 27,401 $ 27,165 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,272 $ 1,366 Accrued compensation $ 2,003 1,670 Deferred revenue 1,362 1,575 Other accrued liabilities 1,438 1,596 Income taxes payable 113 112 TOTAL CURRENT LIABILITIES 6,188 6,319 Operating lease liabilities 702 1,500 Long-term other payables 192 237 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, 9,020,819 shares as of December 31, 2023 and 8,816,381 shares as of December 31, 2022 22,731 21,897 Accumulated earnings (deficit) ( 2,645 ) ( 3,131 ) Accumulated other comprehensive income 233 343 TOTAL STOCKHOLDERS’ EQUITY 20,319 19,109 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 27,401 $ 27,165 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, 2023 2022 Net sales $ 28,064 $ 24,217 Cost of goods sold 11,878 11,007 Gross margin 16,186 13,210 Operating expenses: Research and development 6,524 6,083 Selling, general and administrative 9,214 7,876 Total operating expenses 15,738 13,959 Operating income (loss) 448 ( 749 ) Non-operating income (loss): Interest income 190 34 Gain on sale of assets - 57 Foreign currency transaction gain (loss) 42 221 Total non-operating income (loss) 232 312 Income (loss) before income taxes 680 ( 437 ) Income tax (expense) benefit ( 194 ) ( 683 ) Net income (loss) $ 486 ($ 1,120 ) Basic earnings (loss) per share $ 0.05 ($ 0.13 ) Diluted earnings (loss) per share $ 0.05 ($ 0.13 ) Weighted-average basic shares 8,941 8,741 Weighted-average diluted shares 9,073 8,741 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, 2023 2022 Net Income (loss) $ 486 ($ 1,120 ) Other comprehensive income: Foreign currency translation gain (loss) ( 110 ) ( 635 ) Comprehensive income (loss) $ 376 ($ 1,755 ) 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 Common Stock Accumulated and Other Total Earnings Comprehensive Stockholders' Shares Amount (Deficit) Income (Loss) Equity Balance at December 31, 2021 8,621,007 $ 20,886 $ ( 2,011 ) $ 978 $ 19,853 Stock awards issued, net of tax withholding 192,086 ( 178 ) - - ( 178 ) Issuance of stock through: Employee Stock Purchase Plan 3,288 13 - - 13 Share-based compensation - 1,176 - - 1,176 Net income (loss) - - ( 1,120 ) - ( 1,120 ) Other comprehensive income gain (loss) - - - ( 635 ) ( 635 ) Balance at December 31, 2022 8,816,381 $ 21,897 $ ( 3,131 ) $ 343 $ 19,109 Stock awards issued, net of tax withholding 201,172 ( 370 ) - - ( 370 ) Issuance of stock through: Employee Stock Purchase Plan 3,266 14 - - 14 Share-based compensation - 1,190 - - 1,190 Net income (loss) - - 486 - 486 Other comprehensive income gain (loss) - - - ( 110 ) ( 110 ) Balance at December 31, 2023 9,020,819 22,731 ( 2,645 ) $ 233 $ 20,319 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, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 486 $ ( 1,120 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 608 560 Equipment transferred to cost of goods sold 301 394 Share-based compensation 1,190 1,176 Net change in: Trade accounts receivable ( 719 ) ( 1,100 ) Inventories 815 ( 588 ) Other current assets ( 48 ) 61 Accounts payable and accrued liabilities 109 ( 428 ) Deferred revenue ( 267 ) 199 Other long-term liabilities ( 684 ) ( 890 ) Deposits and other long-term assets 637 684 Net cash provided by (used in) operating activities 2,428 ( 1,052 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 1,195 ) ( 1,080 ) Cash provided by (used in) investing activities ( 1,195 ) ( 1,080 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, less payments for shares withheld to cover tax ( 356 ) ( 165 ) Cash provided by (used in) financing activities ( 356 ) ( 165 ) Increase (decrease) in cash and cash equivalents 877 ( 2,297 ) Effects of exchange rate changes on cash ( 46 ) ( 383 ) Cash and cash equivalents at beginning of period 11,510 14,190 Cash and cash equivalents at end of period $ 12,341 $ 11,510 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 171 $ 556 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 Credit Losses · 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, typically in local currency, in China and Germany, totaled (in millions) $ 6.6 and $ 4.0 at December 31, 2023 and 2022, 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 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 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 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 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 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. 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 these evaluations, for the years ended December 31, 2023 and 2022, no impairment was noted or recorded for property, plant and equipment. 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. 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 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 2023 and 2022, 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. 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. 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 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. 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 to 60 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 2023 Change 2022 (in thousands) Equipment Sales $ 16,343 18.4 % $ 13,803 Adapter Sales 8,154 11.2 % 7,336 Software and Maintenance Sales * 3,567 15.9 % 3,078 Total $ 28,064 15.9 % $ 24,217 * 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 facility 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, 2023, 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 $ 196,000 and $ 116,000 in 2023 and 2022, 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 133,000 and 109,000 for the years ended December 31, 2023 and 2022, respectively. Options to purchase 12,500 shares of common stock were outstanding as of both periods December 31, 2023 and 2022, 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, 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. 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 2023 2022 Number of customers 3 3 Approximate percentage of consolidated accounts receivable balance 47 % 39 % Percentage of each 18 % 15 % Percentage of each 16 % 13 % Percentage of each 13 % 11 % Diversification of net sales The following represented greater than 10% of net sales for the applicable year: Percentage of Net Sales 2023 2022 Number of customers 2 1 Approximate percentage of net sales 24 % 23 % Percentage of each 13 % 23 % Percentage of each 11 % n/a 39 Table of Contents COVID-19 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. 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. 40 Table of Contents NOTE 2 – ACCOUNTS RECEIVABLE, NET December 31, 2023 December 31, 2022 (in thousands) Trade accounts receivable $ 5,779 $ 5,139 Less allowance for credit losses 72 147 Trade accounts receivable, net $ 5,707 $ 4,992 Changes in Data I/O’s allowance for credit losses are as follows: December 31, 2023 December 31, 2022 (in thousands) Beginning balance $ 147 $ 89 Credit loss (reversal) ( 75 ) 58 Accounts written-off - - Recoveries - - Ending balance $ 72 $ 147 NOTE 3 – INVENTORIES December 31, 2023 December 31, 2022 (in thousands) Raw material $ 3,328 $ 3,850 Work-in-process 1,596 1,911 Finished goods 951 990 Inventories $ 5,875 $ 6,751 NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET December 31, 2023 December 31, 2022 (in thousands) Leasehold improvements $ 394 $ 404 Equipment 4,977 4,683 Sales demonstration equipment 1,396 1,066 6,767 6,153 Less accumulated depreciation 5,408 5,081 Property and equipment, net $ 1,359 $ 1,072 Total depreciation expense recorded for 2023 and 2022 was $ 608,000 and $ 560,000 , respectively. 41 Table of Contents NOTE 5 – OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: December 31, 2023 December 31, 2022 (in thousands) Lease liability - short term $ 798 $ 799 Product warranty 449 425 Sales return reserve 32 71 Other taxes 69 163 Other 90 138 Other accrued liabilities $ 1,438 $ 1,596 The changes in our product warranty liability for the year ending December 31, 2023 are follows: December 31, 2023 December 31, 2022 (in thousands) Liability, beginning balance $ 425 $ 432 Net expenses 902 774 Warranty claims ( 902 ) ( 774 ) Accrual revisions 24 ( 7 ) Liability, ending balance $ 449 $ 425 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 year ending December 31 are as follows: December 31, 2023 Operating Lease Commitments (in thousands) 2024 $ 841 2025 591 2026 133 2027 48 2028 & Thereafter - Total $ 1,613 Less imputed interest ( 113 ) Total operating lease liabilities $ 1,500 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. 42 Table of Contents 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, 2023 2022 (in thousands) Right-of-use assets (Long-term other assets) $ 1,363 $ 2,129 Lease liability-short term (Other accrued liabilities) $ 798 $ 799 Lease liability-long term (Operating lease liabilities) $ 703 $ 1,500 At December 31, 2023, the weighted average remaining lease term is 2.17 years and the weighted average discount rate used is 5 %. 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, 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 As of December 31, 2023, 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, 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 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. 43 Table of Contents 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 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, 2023 and 2022, 21,525 and 25,477 shares were reserved for future grant respectively. 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, 2023 and 2022, there were 12,500 SARs outstanding. 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 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. Our matching contribution expense for the savings plan, net of forfeitures, was approximately $ 253,000 and $ 210,000 in 2023 and 2022, respectively. Employer matching contributions owed to the plan were $ 248,000 and $ 229,000 at December 31, 2023 and 2022, 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, 2023 and 2022 was as follows: Year Ended December 31, 2023 2022 (in thousands) Cost of goods sold $ 95 $ 76 Research and development 257 228 Selling, general and administrative 838 872 Total share-based compensation $ 1,190 $ 1,176 44 Table of Contents 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, 2023 and 2022: 2023 2022 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 12,500 $ 4.98 12,500 $ 4.98 Granted - - - - Exercised - - - - Cancelled, Expired or Forfeited - - - - Outstanding at end of year 12,500 $ 4.98 1.33 12,500 $ 4.98 2.33 Vested or expected to vest at the end of the period 12,500 $ 4.98 1.33 12,466 $ 4.98 2.33 Exercisable at end of year 12,500 $ 4.98 1.33 9,375 $ 4.98 2.33 The aggregate intrinsic value of outstanding options is $ 0 . There were no stock option awards exercised in 2023. Restricted stock award activity including performance-based stock award activity under our share-based compensation plan was as follows: 2023 2022 Awards Weighted - Average Grant Date Fair Value Awards Weighted - Average Grant Date Fair Value Outstanding at beginning of year 665,200 $ 3.94 623,777 $ 4.73 Granted 387,100 4.36 330,215 3.26 Vested ( 284,925 ) 3.93 ( 249,292 ) 4.95 Cancelled ( 38,750 ) 3.96 ( 39,500 ) 4.33 Outstanding at end of year 728,625 $ 4.17 665,200 $ 3.94 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). 45 Table of Contents The remaining unamortized expected future compensation expense and remaining amortization period associated with unvested option grants and restricted stock awards are: December 31, 2023 December 31, 2022 Unamortized future compensation expense $ 2,317,524 $ 2,029,457 Remaining weighted average amortization period in years 2.44 2.47 The weighted average number of shares outstanding used to compute earnings (loss) per share included the following: Year Ended December 31, 2023 2022 Weighted average shares outstanding 8,940,612 8,740,701 Restricted and Performance Stock Units 132,360 Stock Options 216 Weighted average diluted shares 9,073,188 8,740,701 NOTE 11 – SHARE REPURCHASE PROGRAMS Data I/O did not have a share repurchase program in 2023. NOTE 12 – INCOME TAXES Components of income (loss) before taxes: Year Ended December 31, (in thousands) 2023 2022 U.S. operations $ ( 536 ) $ ( 1,622 ) Foreign operations 1,216 1,185 Total income (loss) before taxes $ 680 $ ( 437 ) Income tax expense (benefit) consists of: Year Ended December 31, (in thousands) 2023 2022 Current tax expense (benefit) U.S. federal $ 0 $ 0 State 20 19 Foreign 174 664 194 683 Deferred tax expense (benefit) – U.S. federal - - Total income tax expense (benefit) $ 194 $ 683 46 Table of Contents A reconciliation of our effective income tax and the U.S. federal tax rate is as follows: Year Ended December 31, (in thousands) 2023 2022 Statutory tax $ 143 $ ( 92 ) State and foreign income tax, net of federal tax benefit ( 178 ) ( 189 ) Valuation allowance for deferred tax asset 139 370 Foreign sourced deemed dividend income 322 738 Stock based compensation ( 250 ) ( 154 ) Other 18 10 Total income tax expense (benefit) $ 194 $ 683 U.S. net operating loss carryforwards are $ 13.8 million at December 31, 2023 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. 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: Year Ended December 31, 2023 2022 (in thousands) Unrecognized tax benefits, opening balance $ 422 $ 392 Prior period tax position increases ( 6 ) - Additions based on tax positions related to current year 14 30 Unrecognized tax benefits, ending balance $ 430 $ 422 47 Table of Contents 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 2020, 2021, 2022 and 2023 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. 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: Year Ended December 31, (in thousands) 2023 2022 Net sales: U.S. $ 2,799 $ 1,774 Europe 9,469 7,402 Rest of World 15,796 15,041 $ 28,064 $ 24,217 Included in Europe and Rest of World are the following Net Sales significant balances: Germany $ 4,697 $ 2,881 China $ 3,800 $ 5,476 Operating income: U.S. $ 216 $ 5 Europe ( 671 ) ( 1,331 ) Rest of World 903 577 $ 448 ($ 749 ) Identifiable assets: U.S. $ 12,385 $ 15,234 Europe (primarily Germany) 4,966 4,886 Rest of World (primarily China) 10,050 7,045 $ 27,401 $ 27,165 NOTE 14 – SUBSEQUENT EVENTS In preparing the financial statements, the Company has reviewed all known events which have occurred after December 31, 2023 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. 48 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.