DATA I/O CORP 10-Q

Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (UNAUDITED) June 30, 2024 December 31, 2023 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,440 $ 12,341 Trade accounts receivable, net of allowance for credit losses of $ 21 and $ 72 , respectively 3,341 5,707 Inventories 6,741 5,875 Other current assets 601 690 TOTAL CURRENT ASSETS 22,123 24,613 Property, plant and equipment – net 932 1,359 Other assets 1,032 1,429 TOTAL ASSETS $ 24,087 $ 27,401 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,041 $ 1,272 Accrued compensation 949 2,003 Deferred revenue 1,279 1,362 Other accrued liabilities 1,176 1,438 Income taxes payable 49 113 TOTAL CURRENT LIABILITIES 4,494 6,188 Operating lease liabilities 421 702 Long-term other payables 254 192 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, 9,219,838 shares as of June 30, 2024 and 9,020,819 shares as of December 31, 2023 23,172 22,731 Accumulated earnings (deficit) ( 4,249 ) ( 2,645 ) Accumulated other comprehensive income ( 5 ) 233 TOTAL STOCKHOLDERS’ EQUITY 18,918 20,319 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 24,087 $ 27,401 See notes to consolidated financial statements 3 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net sales $ 5,062 $ 7,398 $ 11,161 $ 14,629 Cost of goods sold 2,305 3,025 5,184 5,954 Gross margin 2,757 4,373 5,977 8,675 Operating expenses: Research and development 1,413 1,720 2,995 3,345 Selling, general and administrative 1,910 2,489 4,408 4,997 Total operating expenses 3,323 4,209 7,403 8,342 Operating income (loss) ( 566 ) 164 ( 1,426 ) 333 Non-operating income (loss): Interest income 73 49 153 84 Foreign currency transaction gain (loss) 49 196 62 122 Total non-operating income (loss) 122 245 215 206 Income (loss) before income taxes ( 444 ) 409 ( 1,211 ) 539 Income tax (expense) benefit ( 353 ) ( 109 ) ( 393 ) ( 144 ) Net income (loss) $ ( 797 ) $ 300 $ ( 1,604 ) $ 395 Basic earnings (loss) per share $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.04 Diluted earnings (loss) per share $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.04 Weighted-average basic shares 9,104 8,904 9,063 8,861 Weighted-average diluted shares 9,104 9,075 9,063 9,052 See notes to consolidated financial statements 4 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net income (loss) $ ( 797 ) $ 300 $ ( 1,604 ) $ 395 Other comprehensive income (loss): Foreign currency translation gain (loss) ( 70 ) ( 350 ) ( 238 ) ( 285 ) Comprehensive income (loss) $ ( 867 ) $ ( 50 ) $ ( 1,842 ) $ 110 See notes to consolidated financial statements 5 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) (UNAUDITED) Accumulated Retained and Other Total Common Stock Earnings Comprehensive Stockholders’ Shares Amount (Deficit) Income (Loss) Equity Balance at December 31, 2022 8,816,381 $ 21,897 $ ( 3,131 ) $ 343 $ 19,109 Stock awards issued, net of tax withholding - - - - - Issuance of stock through: ESPP 1,695 7 - - 7 Share-based compensation - 249 - - 249 Net income (loss) - - 95 - 95 Other comprehensive income (loss) - - - 65 65 Balance at March 31, 2023 8,818,076 $ 22,153 $ ( 3,036 ) $ 408 $ 19,525 Stock awards issued, net of tax withholding 200,799 ( 368 ) - - ( 368 ) Issuance of stock through: ESPP - - - - - Share-based compensation - 380 - - 380 Net income (loss) - - 300 - 300 Other comprehensive income (loss) - - - ( 350 ) ( 350 ) Balance at June 30, 2023 9,018,875 $ 22,165 $ ( 2,736 ) $ 58 $ 19,487 Balance at December 31, 2023 9,020,819 $ 22,731 $ ( 2,645 ) $ 233 $ 20,319 Stock awards issued, net of tax withholding 1,759 - - - - Issuance of stock through: ESPP 2,381 7 - - 7 Share-based compensation - 281 - - 281 Net income (loss) - - ( 807 ) - ( 807 ) Other comprehensive income (loss) - - - ( 168 ) ( 168 ) Balance at March 31, 2024 9,024,959 $ 23,019 $ ( 3,452 ) $ 65 $ 19,632 Stock awards issued, net of tax withholding 194,879 ( 229 ) - - ( 229 ) Issuance of stock through: ESPP - - - - - Share-based compensation - 382 - - 382 Net income (loss) - - ( 797 ) - ( 797 ) Other comprehensive income (loss) - - - ( 70 ) ( 70 ) Balance at June 30, 2024 9,219,838 $ 23,172 $ ( 4,249 ) $ ( 5 ) $ 18,918 See notes to consolidated financial statements 6 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (UNAUDITED) For the Six Months Ended June 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 1,604 ) $ 395 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 340 289 Equipment transferred to cost of goods sold 250 109 Share-based compensation 663 629 Net change in: Trade accounts receivable 2,362 262 Inventories ( 877 ) ( 216 ) Other current assets 86 ( 211 ) Accounts payable and accrued liabilities ( 1,601 ) 239 Deferred revenue ( 17 ) ( 233 ) Other long-term liabilities ( 281 ) ( 299 ) Deposits and other long-term assets 395 256 Net cash provided by (used in) operating activities ( 284 ) 1,220 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 164 ) ( 315 ) Cash provided by (used in) investing activities ( 164 ) ( 315 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, less payments for shares withheld to cover tax ( 223 ) ( 360 ) Cash provided by (used in) financing activities ( 223 ) ( 360 ) Increase (decrease) in cash and cash equivalents ( 671 ) 545 Effects of exchange rate changes on cash ( 230 ) ( 185 ) Cash and cash equivalents at beginning of period 12,341 11,510 Cash and cash equivalents at end of period $ 11,440 $ 11,870 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 464 $ 144 See notes to consolidated financial statements 7 Table of Contents DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) is a global market leader for advanced programming, security deployment, security provisioning and associated Intellectual Property (“IP”) protection and management solutions used in electronics manufacturing with flash memory, microcontrollers, and flash memory-based intelligent devices as well as secure element devices, authentication devices and secure microcontrollers. Customers for our programming system products are located around the world, primarily in Asia, Europe and the Americas. Our manufacturing operations are currently located in Redmond, Washington, United States and Shanghai, China. We prepared the financial statements as of June 30, 2024 and June 30, 2023 according to the rules and regulations of the Securities and Exchange Commission (“SEC”). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 31, 2023 has been derived from the audited financial statements at that date. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America according to such SEC rules and regulations. Operating results for the six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. Significant Accounting Policies These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in our Form 10-K for the year ended December 31, 2023 (filed with the SEC on March 27, 2024). There have been no changes to our significant accounting policies described in the Annual Report that have had a material impact on our unaudited condensed consolidated financial statements and related notes. Revenue Recognition Accounting Standards Codification (ASC) Topic 606, R evenue 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 the second quarter of 2024 and 2023, 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 and customer installation expectations. 8 Table of Contents 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 relative selling price. 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 contracts were $ 1.5 million and $ 1.6 million for June 30, 2024 and 2023, respectively, and the portion expected to be recognized within one year was $ 1.3 million and $ 1.4 million for June 30, 2024 and 2023, respectively. When we license software separately, we recognize revenue upon the transfer of control of the software, which is generally upon shipment, provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions, if any, have been met. We recognize revenue when there is an approved contract that both parties are committed to perform, both parties’ rights have been identified, the contract has substance, collection of substantially all the consideration is probable, the transaction price has been determined and allocated over the performance obligations, the performance obligations including substantive acceptance conditions, if any, in the contract have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer. We establish a reserve for sales returns based on historical trends in product returns and estimates for new items. Payment terms are generally 30 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. The following table represents our revenues by major categories: Three Months Ended Six Months Ended Net sales by type June 30, 2024 Change June 30, 2023 June 30, 2024 Change June 30, 2023 (in thousands) Equipment $ 2,353 ( 48.4 ) % $ 4,557 $ 5,719 ( 33.6 ) % $ 8,608 Adapter 1,816 ( 8.2 ) % 1,979 3,662 ( 13.8 ) % 4,246 Software and Maintenance 893 3.6 % 862 1,780 0.3 % 1,775 Total $ 5,062 ( 31.6 ) % $ 7,398 $ 11,161 ( 23.7 ) % $ 14,629 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. 9 Table of Contents Income Tax Income taxes for U.S. and foreign subsidiary operations 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. New Accounting Pronouncements – Standards Issued and Not Yet Implemented For the six months ended June 30, 2024, there were no recently issued accounting pronouncements that had a material impact to Data I/O Corporation’s consolidated financial statements. 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 – INVENTORIES Inventories consisted of the following components: June 30, 2024 December 31, 2023 (in thousands) Raw material $ 3,627 $ 3,328 Work-in-process 2,030 1,596 Finished goods 1,084 951 Inventories $ 6,741 $ 5,875 NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET Property and equipment consisted of the following components: June 30, 2024 December 31, 2023 (in thousands) Leasehold improvements $ 388 $ 394 Equipment 4,680 4,977 Sales demonstration equipment 892 1,396 5,960 6,767 Less accumulated depreciation ( 5,028 ) ( 5,408 ) Property and equipment, net $ 932 $ 1,359 10 Table of Contents NOTE 4 – OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: June 30, 2024 December 31, 2023 (in thousands) Lease liability - short term $ 661 $ 798 Product warranty 392 449 Sales return reserve 32 32 Other taxes 55 69 Other 36 90 Other accrued liabilities $ 1,176 $ 1,438 The changes in our product warranty liability for the six months ending June 30, 2024, and year ending December 31, 2023, are as follows: June 30, 2024 December 31, 2023 (in thousands) Liability, beginning balance $ 449 $ 425 Net expenses 425 902 Warranty claims ( 425 ) ( 902 ) Accrual revisions ( 57 ) 24 Liability, ending balance $ 392 $ 449 NOTE 5 – 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 as of June 30, 2024 are as follows: June 30, 2024 Operating Lease Commitments (in thousands) 2024 (remaining) $ 396 2025 583 2026 127 2027 47 2028 & Thereafter 0 Total $ 1,153 Less imputed interest ( 70 ) Total operating lease liabilities $ 1,083 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 components of our lease expense for the three and six months ended June 30, 2024, include facility related operating lease costs of $ 207,000 and $ 415,000 , respectively, and short-term lease costs of $ 8,000 and $ 17,000 , respectively. There were no new operating leases during the three and six months ended June 30, 2024. 11 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 June 30, 2024 and December 31, 2023: June 30, 2024 December 31, 2023 (in thousands) Right-of-use assets (Long-term other assets) $ 967 $ 1,363 Lease liability-short term (Other accrued liabilities) 661 798 Lease liability-long term (Operating lease liabilities) 421 703 At June 30, 2024, the weighted average remaining lease term is 1.73 years and the weighted average discount rate used is 5 %. NOTE 6 – OTHER COMMITMENTS We have purchase obligations for inventory and production costs as well as other obligations such as capital expenditures, service contracts, marketing, and development agreements. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days. As of June 30, 2024, we had one contract with a commitment of approximately $ 232,000 to be paid within one year and $ 135,000 beyond one year. NOTE 7 – CONTINGENCIES As of June 30, 2024, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. NOTE 8 – INCOME TAXES Income tax benefit (expense) primarily relates to foreign and state taxes. For the comparison period of 2024, the second quarter of 2024 included dividend withholding taxes of approximately $ 337,000 due to a $ 3.4 million dividend repatriation from our China subsidiary operation. The effective tax rate differed from the statutory tax rate primarily due to valuation allowances effect, as well as foreign taxes. We have a valuation allowance of $ 9.3 million as of June 30, 2024. As of June 30, for both 2024 and 2023, our deferred tax assets and valuation allowance have been reduced by approximately $ 437,000 and $ 437,000 , respectively. Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance. 12 Table of Contents NOTE 9 – EARNINGS PER SHARE Basic earnings per share is calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated based on these same weighted average shares outstanding plus the effect of potential shares issuable upon assumed exercise of stock options based on the treasury stock method. Potential shares issuable upon the exercise of stock options are excluded from the calculation of diluted earnings per share to the extent their effect would be anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 (in thousands except per share data) Numerator for basic and diluted earnings (loss) per share: Net income (loss) $ ( 797 ) $ 300 $ ( 1,604 ) $ 395 Denominator for basic earnings (loss) per share: Weighted-average shares 9,104 8,904 9,063 8,861 Employee stock options and awards - 171 - 191 Denominator for diluted earnings (loss) per share: Adjusted weighted-average shares & assumed conversions of stock options 9,104 9,075 9,063 9,052 Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.04 Diluted earnings (loss) per share $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.04 The weighted average number of shares outstanding used to compute earnings (loss) per share included the following: Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Restricted Stock Units 91,729 169,990 110,706 195,204 Performance Stock Units 8,098 232 5,784 96 Stock Options 161 237 168 236 Options to purchase 12,500 and 12,500 shares, respectively, were outstanding as of June 30, 2024 and 2023, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive. 13 Table of Contents 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, net of forfeitures, for the three and six months ended June 30, 2024 and 2023, respectively, were as follows: Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 (in thousands) Cost of goods sold $ 36 $ 30 $ 60 $ 48 Research and development 82 81 146 129 Selling, general and administrative 264 269 457 452 Total share-based compensation $ 382 $ 380 $ 663 $ 629 Equity awards granted during the three and six months ended June 30, 2024 and 2023 were as follows: Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Restricted Stock Units 231,650 272,100 231,650 282,100 Performance Stock Units 119,000 25,000 119,000 25,000 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”) granted in 2024, cliff vest at the end of the performance period based on performance metrics which includes cumulative revenue growth, EBITDA attainment and other project-based milestone targets over the three-year period ending December 31, 2026 with a performance threshold, target, and maximum. The remaining unamortized expected future equity compensation expense and remaining amortization period associated with award grants of unvested options, PSUs and RSUs at June 30, 2024 and 2023 are: June 30, 2024 June 30, 2023 Unamortized future equity compensation expense (in thousands) $ 2,464 $ 2,683 Remaining weighted average amortization period (in years) 2.27 2.64 14 Table of Contents