DATA I/O CORP
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM
10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended
December 31,
2019
or
For the transition
period from
_____________ to
_____________
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Commission file
number:
0-10394
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DATA I/O CORPORATION
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(Exact name of
registrant as specified in its charter)
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Washington
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91-0864123
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(State or other jurisdiction of
incorporation)
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(I.R.S. Employer Identification
No.)
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6645
185
th
Ave
NE, Suite 100, Redmond, Washington, 98052
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(425)
881-6444
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(Address, including zip code, of
registrant’s principle executive offices and telephone
number, including area code)
Securities registered pursuant to
Section 12(b) of the Act
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Title of each
class
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Trading
Symbol(s)
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Name of each exchange on which
registered
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Common Stock
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DAIO
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NASDAQ
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Securities
registered pursuant to Section 12(g) of the Act
None
Indicate by check mark whether the
registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes ☐
No ☒
Indicate by check mark whether the
registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. Yes ☐ No
☒
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit
such files). Yes ☒ No
☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated
filer”, ”accelerated filer”, “smaller
reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
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Accelerated filer
☐
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Smaller reporting company
☒
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Large accelerated filer
☐
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Emerging growth company
☐
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Non-accelerated filer
☐
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If an emerging growth company,
indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ☐ No ☒
Aggregate market value of voting
and non-voting common equity held
by non-affiliates on the registrant
as of June 30, 2019:
$31,697,946
Shares of Common Stock, no par
value, outstanding as of March 19, 2020:
8,221,447
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the
registrant’s Proxy Statement relating to its May 18, 2020
Annual Meeting of Shareholders are incorporated into Part III of
this Annual Report on Form 10-K.
DATA I/O CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 2019
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INDEX
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Part
I
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Page
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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18
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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19
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Item
4.
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Mine
Safety Disclosures
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19
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Part
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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19
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Item
6.
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Selected
Financial Data
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20
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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21
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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28
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Item
8.
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Financial
Statements and Supplementary Data
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28
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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49
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Item
9A.
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Controls
and Procedures
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49
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Item
9B.
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Other
Information
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49
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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50
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Item
11.
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Executive
Compensation
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50
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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50
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence
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51
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Item
14.
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Principal
Accounting Fees and Services
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51
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Part
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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51
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Item
16.
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Form
10-K Summary
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52
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Signatures
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53
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2
PART I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated
herein by reference contain forward-looking statements based on
current expectations, estimates and projections about Data I/O
Corporation’s industry, management’s beliefs and
certain assumptions made by management. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Forward Looking
Statements.”
General
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. We collectively refer to IP
protection, security provisioning of devices, provisioning of
security into devices, and related services such as cloud
onboarding and device and provisioning documentation management as
“security deployment”. Data I/O
®
designs, manufactures and sells programming and security deployment
systems and services for electronic device manufacturers,
specifically targeting high-growth areas such as high-volume users
of flash memory and flash memory based microcontrollers. Most
electronic products today incorporate a number of programmable
semiconductor devices that contain data, operating instructions and
security credentials essential for the proper operation of the
product and more and more products require security
deployment.
Our
mission is to bring the world’s electronic devices to life.
Programmable devices are used in products such as automobile
electronics, smartphones, HDTV, tablets, gaming systems and a broad
category called Internet of Things (“IoT”). IoT is a
broad term that addresses the interconnectivity of devices and
other electronic or smart products. Our solutions, some of which
include security deployment and process control capabilities,
enable us to address the demanding requirements of the electronic
device market, where applications security and IP protection are
essential to our customer’s success. Our largest customers
are heavy users of programmable semiconductor devices and include
original equipment manufacturers (“OEMs”) in automotive
electronics, consumer electronics and IoT markets as well as their
programming center partners and electronic manufacturing service
(“EMS”) contract manufacturers.
Data
I/O was incorporated in the State of Washington in 1969 and its
business was founded in 1972. Our website address is
www.dataio.com
.
Industry Background
We
enable companies to improve productivity, increase supply-chain
security and reduce costs by providing device data programming and
security deployment solutions that allow our customers to take IP
(large design and data files) and protect and program it into
memory, microcontroller and logic devices quickly and
cost-effectively. We also provide services related to hardware
support, system installation and repair, and device programming.
Companies that design and manufacture products utilizing
programmable electronic devices, ranging from automobiles to cell
phones, purchase programming solutions from us. Trends of
increasing device densities, shrinking device packages, increased
demands for security, and customers increasing their software
content file sizes, combined with the increasing numbers of
intelligent devices such as automotive electronics and IoT
applications, are driving demand for our solutions.
Traditionally,
our programming market opportunity focused on the number of
semiconductor devices to be programmed, but because of the rapid
increase in the density of devices, and increasing demands for
supply-chain security, the focus has shifted in many cases from the
number and type of devices to the number and type of bits per
device to be programmed or securely provisioned. With expected
growth in IoT applications, the business opportunity for this
market differentiates on quality, security and
automation.
Some of
our automated programming systems integrate data programming,
automated handling functions and/or security deployment into a
single product solution. During 2019, we continued to integrate
security deployment into some of our solutions. Quality and
security-conscious customers, particularly those in high-volume
manufacturing and programming, drive this portion of our
business.
3
Products
To
accommodate the expanding variety and quantities of programmable
devices being manufactured today, we offer multiple solutions for
the numerous types of device mix and volume usage by our customers
in the various market segments and applications. We work closely
with leading manufacturers of programmable devices to develop our
products to meet the requirements of a particular device. Our newer
products are positioned and recognized as some of the most advanced
programming and security deployment solutions.
Our
programming solutions include a broad range of products, systems,
modules and accessories, grouped into two general categories:
automated programming systems and manual programming systems. We
provide two categories of automated programming systems: off-line
and in-line. Our PSV family of automated programming systems
delivers a broad range of programming capacity and capability to
the marketplace. Our recently announced PSV2800 Automated
Programming System focuses on dedicated high volume manufacturing
in a lower cost platform. Our PSV7000 Automated Programming System
continues to be adopted in the marketplace, in particular for
automotive electronics customers. Our PSV5000 automated programming
system combines mid-range capacity and flexibility with competitive
pricing. Our PSV3000 Automated Programming System, developed for
the Asian automation market, is a lower cost platform for basic
programming needs. Our PSV family of handlers has won multiple
industry awards for technical excellence and innovation. In 2018
our Lumen®X programmer won five industry awards for Universal
Flash Storage (“UFS”) support. Our ConneX®
software won the 2017 Circuits Assembly NPI Award, the EM Asia
Innovation Award and the SMT China Vision Award. Our
SentriX® security provisioning system won the Global
Technology Award at Productronica in November 2017 and the Embedded
Award for Innovation at the Embedded World show in February
2018. Our Job Composer software for LumenX won the Circuits
Assembly NPI Award in January 2019 and January 2020. In October
2019 our Job Composer software won the Mexico Technology Award for
Device Programming and in November 2019, our PSV2800 won the Global
Technology Award at Productronica and in February 2020, the
Circuits Assembly NPI Award. In January 2019 and February 2020,
Data I/O won the Circuits Assembly Service Excellence
Award.
Our
automated systems have list selling prices ranging from $75,000 to
$550,000 and our manual systems have list selling prices ranging
from $9,000 to $20,000. Our security deployment system,
SentriX®, is currently offered for security provisioning on a
pay per part use basis along with related fees.
Data
I/O programming technology may be integrated with the PSV family to
create highly-flexible systems that deliver outstanding performance
with low total cost of ownership. The LumenX programming engine is
the fastest solution available for eMMC and UFS programming of
large NAND FLASH. Increasing memory densities and the need for
faster data interfaces are resulting in an expected transition to
the use of UFS devices. LumenX is available on our PSV7000 and
PSV5000 and as a standalone manual programmer. FlashCORE™,
and our universal job setup tool, Tasklink™ for
Windows®, are available in each family of our automated
programming systems and in FlashPAK™, our manual programming
system. The SentriX security system adds security deployment
capability to our data programming system. SentriX allows customers
of any size and demand-profile to securely add keys, certificates,
and other security information to specialized regions of
authentication integrated circuits ("ICs”), secure elements
and secure microcontrollers. We provide device support and service
on all of our products. Device support is a critical aspect of our
business and consists of writing software algorithms for devices
and developing socket adapters to hold and connect to the device
for programming.
Our
products have both an upfront solution sale and recurring revenue
elements. Adapters are a consumable item and software and
maintenance are typically recurring under annual subscription
contracts. Our SentriX system revenue typically comes from per part
use fees or minimum quarterly fees, consumables, non-recurring
engineering fees, service fees and the sale of equipment related to
SentriX.
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Sales Percentage of Total Sales Breakdown by Type
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Sales Type
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2019
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2018
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Drivers
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Equipment
Sales
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58%
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65%
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Capacity,
Process improvement, Technology
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Adapter
Sales
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26%
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24%
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Capacity
utilization, New customer products
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Software
and Maintenance Sales
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16%
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11%
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Installed
base, Added capabilities
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Total
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100%
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100%
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4
The
table below presents our main products and the key features that
benefit our customers:
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Products
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Key
Features
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Customer
Benefits
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PSV
Handlers: Off-line (Automated)
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Fast program and
verify speeds
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Up to 112
programming sites
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Up to 3000 devices
per hour throughput
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UFS
Support
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Supports LumenX and
FlashCORE III programmers
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Supports multiple
media types
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Supports quality
options – fiber laser marking, 3D coplanarity
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ConneX
Factory Integration, Job Composer & other Software
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Managed and secure
programming
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High throughput for
high density Flash programming
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High
flexibility with respect to I/O options (tray, tape, tube),
marking/labeling and vision for coplanarity inspection
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SentriX
Security Deployment System
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Unique ability to
securely provision keys and certificates one device at a
time
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Pay
per use model reduces capital spending requirements as the market
develops.
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Create Secure IoT
devices across a global network
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Maintain
IP control over the lifecycle of their products
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RoadRunner
& RoadRunner3 Series Handlers:
In-line,
(Automated)
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Just-in-time
in-line programming
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Direct integration
with placement machine supporting SIPLACE, Fuji NXT, Panasonic,
Universal/Genesis and Assembleon/K&S
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Factory Integration
Software
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Supports
FlashCORE III programmers
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Dramatic reduction
in inventory carrying and rework costs
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“Zero”
footprint
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Rapid return on
investment (“ROI”) typically realized in a matter of
months
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Integration
with factory systems
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LumenX
Programmer
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Extensible
architecture for fast program, verify and download
speeds
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Supports
UFS
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Large file size
support
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Secure Job
creation
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8
sockets with tool-less changeover with single socket
adapters
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Managed and secure
programming
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Fast setup and job
changeover
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Highest yield and
low total cost of programming
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High
performance
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FlashPAK
III programmer:
(Non-Automated)
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Scalability
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Network control via
Ethernet
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Stand-alone
operation or PC compatible
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Parallel
programming
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Validate designs
before moving down the firmware supply chain
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Unmatched
ease of use in manual production systems
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Unifamily
programmers: Off-line, Low Volume and Engineering
(Non-Automated)
(Legacy
Equipment)
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Breadth
of device coverage
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Universal
programmer
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Support for legacy
devices
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5
Customers/Markets
We sell
our solutions to customers worldwide, many of whom are world-class
manufacturers of electronic devices used in a broad range of
industries, as described in the following table:
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OEMs
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EMS
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Programming Centers
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Automotive Electronics
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IoT, Industrial, Consumer Electronics, including
Wireless
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Contract Manufacturers
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Notable end customers
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Delphi,
Bosch, Alpine, Visteon, Kostal, Harman Becker, Denso, Continental,
Panasonic, Magna, Magnetti Marelli
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LG, TCL
Siemens, Danfoss, Philips, Schneider, Endress+Hauser, Pilz, Insta,
Carrier, Microsoft, Sony, Amazon, UTC
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Pegatron,
Flextronics, Jabil, Wistron, Sanmina SCI, Foxconn, Leesys,
Calcomp
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Arrow,
Avnet, BTV, CPS, EPS, Elmitech, Noa Leading
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Business drivers
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Safety,
navigation and infotainment devices, increased electronic content
to support autonomous driving, security
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Higher
functionality driven by increasing electronic content. Shift from
analog to connected intelligent devices, security
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Acquisition
of OEM factories, production contract wins
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Value-added
services, logistics, security
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Programming equipment drivers
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Process
improvement and simplification, new product rollouts, growing file
sizes, quality control and traceability, security
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Process
improvement and simplification as well as new product rollouts,
memory and new technology, security
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New
contracts from OEMs, programming solutions specified by
OEMs
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Capacity
utilization of their installed base of equipment, small parts
handling, security
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Buying criteria
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Quality,
reliability, configuration control, traceability, global support,
IP protection
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Quality,
reliability, configuration control, traceability, security, and
security provisioning. Throughput, technical capability to support
evolving technology, global support, IP protection, robust
algorithms, low cost
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Lowest
equipment procurement cost, global support
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Flexibility,
lowest life-cycle cost-per programmed-part, low changeover time;
use of multiple vendors provides negotiating leverage, device
support availability
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Security Deployment
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End
customer focus
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End
customer focus
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End
customer and partner Focus
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Current
partner focus of our SentriX
deployments
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Our
solutions address the data programming of devices and security
deployment needs of programmable semiconductor devices.
Semiconductor devices are a large, growing market, in terms of
devices, bits programmed and need for security. We believe that our
sales are driven by many of the same forces that propel the
semiconductor industry. We sell to the same firms that buy the
semiconductors. When their business grows, they buy more
semiconductors which, in turn, require additional programming
equipment to maintain production speeds or program new device
technologies.
Our
device programming solutions currently target two high volume,
growing markets: automotive electronics and IoT systems including
Industrial and Consumer devices.
6
Growth drivers for automotive electronics
●
Consumers
desire advanced car features requiring higher levels of
sophistication, including autonomous cars, infotainment options
(audio, radio, dashboard displays, navigation, ADAS and wireless
connectivity) and electrification, as well as increased safety
features and optimized engine functionality
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Increasing
numbers and size of microcontrollers per vehicle
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Proliferation
of programmable microcontrollers to support the next-generation
electronic car systems
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Increasing
use of high-density flash to provide memory for advanced
applications that require programming
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Increasing
complexity to support autonomous vehicles
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Increasing
need for security solutions for a secure supply chain and lifecycle
firmware integrity
Growth drivers for IoT: including industrial, consumer electronics
and wireless
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Securely
controlling groups of connected devices through a secure supply
chain and lifecycle firmware integrity management
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Adding
intelligence and processing into devices
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Connecting
previously unconnected devices to networks and the internet (such
as intelligent thermostats and lighting)
●
Emergence
of new devices and applications (such as wearables)
All of
the above growth drivers are long term and are likely to be
adversely impacted, at least temporarily, due to the global
pandemic of COVID-19 in our markets. Annual projections on
spending, growth, mix, and profitability are likely to be revised
substantially as new information is obtained.
During
2019, we sold products to over 200 customers throughout the world.
The following customers represented greater than 10% of sales in
the applicable year:
2019
One customer, Data
Copy Limited, a distributor in China, accounted for approximately
11% of net sales.
2018
Two customers,
Bosch, an Automotive Electronics OEM, and Data Copy Limited, a
distributor in China, accounted for approximately 16% and 13% of
net sales, respectively.
2017
One customer, Data
Copy Limited, a distributor in China, accounted for approximately
15% of net sales.
The
following customers represented greater than 10% of our
consolidated accounts receivable balance as of December 31 of the
applicable year:
2019
Two customers
accounted for greater than 10% of our consolidated accounts
receivable balance at December 31, 2019: Flextronics and Panasonic
represented 17% and 15% of that balance, respectively.
2018
Three customers
accounted for greater than 10% of our consolidated accounts
receivable balance at December 31, 2018: Systemation, Continental
and Semitron represented 12%, 12% and 11% of that balance,
respectively.
2017
One customer, Data
Copy Limited, accounted for 25% of our consolidated accounts
receivable balance at December 31, 2017.
Geographic Markets and Distribution
We
market and sell our products through a combination of direct sales,
internal telesales, indirect sales representatives and
distributors, as well as services through programming centers. We
continually evaluate our sales channels against our evolving
markets and customers and realign them as necessary to ensure that
we reach our existing and potential customers in the most effective
and efficient manner possible.
U.S. Sales
We
market our products throughout the U.S. using a variety of sales
channels, including our own field sales management personnel,
independent sales representatives and direct telesales. Our U.S.
independent sales representatives obtain orders on an agency basis,
with shipments made directly to the customer by us. Net sales in
the United States for 2019, 2018 and 2017 were (in millions) $1.7,
$3.4 and $2.9, respectively. Some of our customers’ orders
delivered internationally are heavily influenced by U.S.
sales-based efforts.
7
International Sales
International
sales represented approximately 92%, 88% and 92% of net sales in
2019, 2018, and 2017, respectively. We make foreign sales through
our wholly-owned subsidiaries in Germany and China, as well as
through independent distributors and sales representatives
operating in 44 other countries. Our independent foreign
distributors purchase our products for resale and we generally
recognize the sale at the time of shipment to the distributor. As
with U.S. sales representatives, sales made by international sales
representatives are on an agency basis, with sales made directly to
the customer by us.
Net
international sales for 2019, 2018, and 2017 were (in millions)
$19.8, $25.8 and $31.2, respectively. 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. Export sales are subject to U.S.
Department of Commerce regulations. We have not, however,
experienced difficulties to date as a result of these requirements.
Certain products (such as SentriX) may require export licenses due
to the technology contained and the country to which they would be
shipped. We have not made sales to Iran or any Iranian governmental
entities or any other blacklisted companies or
countries.
Fluctuating
exchange rates and other factors beyond our control, such as the
coronavirus, international monetary stability, tariff and trade
policies and U.S. and foreign tax and economic policies, may affect
the level and profitability of international sales. We cannot
predict the effect of such factors on our business, but we try to
consider and respond to changes in these factors, particularly as
the majority of our costs are U.S. based while the vast majority of
our sales are international.
Competition
The
competition in the programming systems market is highly fragmented
with a small number of organizations selling directly competitive
solutions and a large number of smaller organizations offering less
expensive solutions. In particular, low cost automated solutions
have gained market share in recent years, where the competition is
primarily based on price. Typically, their equipment meets a
“good enough” standard, but with reduced quality,
traceability, upgradability, security and other software features
such as factory integration software. Many of these competitors
compete on a regional basis, with local language and support.
Although competition in the security deployment market is
developing, we expect competition in the market to increase as
security deployment becomes more important. There are alternative
security deployment solutions such as software-based security,
rather than the hardware-based security of our SentriX
equipment.
In
addition, we compete with multiple substitute forms of device
programming including “home grown” solutions.
Programming after device placement may be done with In Circuit Test
(“ICT”), In System Programming (“ISP”), and
End of Line Downloading (“EOL”). Some automotive
products may also be programmed over the air (“OTA”).
IoT devices may also be programmed with ICT, ISP, EOL or OTA. In
addition, new security devices may be required to be programmed
using device-specific programmers developed by the semiconductor
manufacturer.
While
we are not aware of any published industry market information
covering the programming systems or security deployment market,
according to our internal analysis of competitors’ revenues,
we believe we continue to be the largest competitor in the
programming systems equipment market and have been gaining market
share in recent years, especially with our new
products.
Manufacturing, Raw Materials and Backlog
We
strive to manufacture and provide the best solutions for advanced
programming. We primarily assemble and test our products at our
principal facilities in Redmond, Washington and Shanghai, China.
Both of these locations are ISO 9001:2015 certified. We outsource
our circuit board manufacturing and fabrication. We use a
combination of standard components and fabricated parts
manufactured to our specifications. Most components used are
available from a number of different suppliers and subcontractors
but certain items, such as some handler and programmer and security
deployment subassemblies, custom integrated circuits, hybrid
circuits and connectors, are purchased from single sources. We
believe that additional sources can be developed for present
single-source components without significant difficulties. We
cannot be sure that single-source components will always continue
to be readily available. If we cannot develop alternative sources
for these components, or if we experience deterioration in
relationships with these suppliers, there may be price increases,
minimum order quantities, end of life purchase requirements, costs
associated with integrating alternatively sourced parts, and delays
or reductions in product introductions or shipments, which may
materially adversely affect our operating results.
8
In
accordance with industry practices, generally all orders are
subject to cancellation prior to shipment without penalty, except
for contracts calling for custom configuration. To date, such
cancellations have not had a material effect on our sales volume.
To meet customers’ delivery requirements, we manufacture
certain products based upon a combination of backlog and
anticipated orders. Most orders are scheduled for delivery within 1
to 90 days after receipt of the order. Our backlog of pending
orders was approximately (in millions) $2.9, $1.9 and $4.0 as of
December 31, 2019, 2018, and 2017, respectively. The size of
backlog at any particular date is not necessarily a meaningful
indicator of the trend of our business.
Research and Development
We
believe that continued investment in research and development is
critical to our future success. We continue to develop new
technologies and products and enhance existing products. Future
growth is, to a large extent, dependent upon the timely development
and introduction of new products, as well as the development of
technology and algorithms to support the latest programmable
devices. Where possible, we may pursue partnerships and other
strategic relationships to add new products, capabilities and
services, particularly in security deployment. We are currently
focusing our research and development efforts on strategic growth
markets, including automotive electronics, IoT and security
deployment. We are continuing to develop technology for security
deployment to program new categories of semiconductors, including
Secure Elements, Authentication Chips, and Secure Microcontrollers.
We plan to deliver new programming technology, automated handling
systems and enhancements for security deployment in the
manufacturing environment. In 2020, we are planning to expand our
hiring and research and development related to our SentriX platform
and the security deployment market. We also continue to focus on
increasing our capacity and responsiveness for new device support
requests from customers and programmable integrated circuit
manufacturers by revising and enhancing our internal processes and
tools. Our research and development efforts have resulted in the
release of significant new products and product enhancements over
the past several years.
During
2019, 2018, and 2017, we made expenditures for research and
development of (in millions) $6.5, $7.4, and $6.9, respectively,
representing 29.9%, 25.2%, and 20.3% of net sales, respectively.
Research and development costs are generally expensed as
incurred.
Patents, Copyrights, Trademarks and Licenses
We rely
on a combination of patents, copyrights, trade secrets and
trademarks to protect our IP, as well as product development and
marketing skill to establish and protect our market position. We
continue to apply for and add new patents to our patent portfolio
as we develop strategic new technologies.
We
attempt to protect our rights in proprietary systems (architecture,
implementations, software), including the SentriX Security
Deployment System. We attempt to protect our software, including
Lumen®X software, Flashcore software, TaskLink software,
ConneX smart programming software and other software products, by
retaining the title to and copyright of the software and
documentation, by including appropriate contractual restrictions on
use and disclosure in our licenses, and by requiring our employees
to execute non-disclosure agreements. Our software products are not
typically sold separately from sales of programming systems.
However, on those occasions where software is sold separately,
revenue is recognized when a sales agreement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is
reasonably assured.
Because
of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might
infringe upon existing patents or copyrights, and we may be
required to obtain licenses or discontinue the use of the
infringing technology. We believe that any exposure we may have
regarding possible infringement claims is a reasonable business
risk similar to that assumed by other companies in the electronic
equipment and software industries. However, any claim of
infringement, with or without merit, could be costly and a
diversion of management’s attention, and an adverse
determination could adversely affect our reputation, preclude us
from offering certain products, and subject us to substantial
liability. As of December 31, 2018, there were no pending actions
regarding infringement claims.
Employees
As of
December 31, 2019, we had a total of 96 employees, of which 46 were
located outside the U.S. and 7 of which were part time. We also
utilize independent contractors for specialty work, primarily in
research and development, and utilize temporary workers to adjust
capacity to fluctuating demand and for special projects. Many of
our employees are highly skilled, trained and experienced in
specialized areas and our continued success will depend in part
upon our ability to attract and retain employees who can be in
great demand within the industry. None of our employees are
represented by a collective bargaining unit and we believe
relations with our employees are favorable. In foreign countries we
have employment agreements or, in China, the Shanghai Foreign
Services Co., Ltd. (“FSCO”) labor
agreement.
9
Environmental Compliance
Our
facilities are subject to numerous laws and regulations concerning
the discharge of materials or otherwise relating to the
environment. Compliance with environmental laws has not had, nor is
it expected to have, a material effect on our capital expenditures,
financial position, results of operations or competitive
position.
Executive Officers of the Registrant
Set
forth below is certain information concerning the executive
officers of Data I/O as of March 23, 2019:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
|
|
Anthony
Ambrose
|
|
58
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
Joel S.
Hatlen
|
|
61
|
|
Vice
President, Chief Operating and Financial Officer,
Secretary
and Treasurer
|
|
|
Rajeev
Gulati
|
|
56
|
|
Chief
Technology Officer, Vice President of Engineering
|
|
|
Michael
Tidwell
|
|
50
|
|
Vice
President Marketing and Business Development
|
|
Anthony
Ambrose, age 58, was appointed a director of Data I/O effective
October 25, 2012. He joined Data I/O October 25, 2012 and is
our President and Chief Executive Officer
(“CEO”). Prior to Data I/O, Mr. Ambrose was Owner
and Principal of Cedar Mill Partners, LLC, a strategy consulting
firm since 2011. From 2007 to 2011, he was Vice President and
General Manager at RadiSys Corporation, a leading provider of
embedded wireless infrastructure solutions, where he led all
product divisions and worldwide engineering. Until 2007, he
was general manager and held several other progressively
responsible positions at Intel Corporation, where he led
development and marketing of standards-based telecommunications
platforms, and grew the industry standard server business to over
$1B in revenues. He is Chair of the EvergreenHealth
Foundation Board of Trustees. In 2019 he also became a board
member of CipherLoc Corporation (OTCQB: CLOK). Mr. Ambrose has a
Bachelor’s of Science in Engineering from Princeton
University, and completed the Stanford Graduate School of Business
Director Symposium.
Joel S.
Hatlen joined Data I/O in September 1991 and in July 2017 became
our Chief Operating Officer in addition to serving as our Vice
President, Chief Financial Officer, Secretary and Treasurer since
January 1998. He was Chief Accounting Officer since February 1997
and served as Corporate Controller from December 1993 to December
1997. Previously, he was Tax Manager and Senior Tax Accountant.
From September 1981 until joining Data I/O, Joel was employed by
Ernst & Young LLP as a Certified Public Accountant, where his
most recent position was Senior Manager. Joel is a Certified Public
Accountant and holds a Masters in Taxation from Golden Gate
University and a Bachelor’s in Business Administration in
Accounting from Pacific Lutheran University.
Rajeev
Gulati joined Data I/O in July 2013 and is our Chief Technology
Officer and Vice President of Engineering. Prior to Data I/O,
Rajeev served as Director of Software Engineering for AMD
responsible for tools, compiler strategy and execution from 2006 to
2013. He has an extensive background in software,
systems and applying technology to develop new markets.
Previously, he served as Director of Strategy and Planning at
Freescale from 2004 to 2006; as Director of Embedded Products at
Metrowerks (acquired by Motorola) from 2000 to 2004 and Director of
Compilers, Libraries & Performance Tools from 1997 to 2000; and
engineering and programmer positions at Apple Computer, IBM and
Pacific-Sierra Research. Rajeev holds a Master of Science in
Electrical & Computer Engineering from the University of Texas,
Austin and a BE in Electrical Engineering from Delhi College of
Engineering, New Delhi.
Michael
Tidwell joined Data I/O in May 2019 and is our Vice President of
Marketing and Business Development. Prior to Data I/O, he was Vice
President of Marketing & Business Development at Tignis, an AI
and machine learning startup. From 2012 to 2018 Michael was head of
Marketing and Business Development at Sansa Security, a leading
software security IP provider that was sold to ARM Holdings. Prior
to Sansa, Michael was Vice President of Business and Market
Development at BSQUARE Corporation. Michael has a Master of Science
in Electrical Engineering from the University of Washington and a
Bachelor of Electrical Engineering (Summa Cum Laude) from Georgia
Institute of Technology.
10
Item 1A. Risk Factors
Cautionary Factors That May Affect Future Results
Our disclosure and analysis in this Annual Report contains some
forward-looking statements. Forward-looking statements include our
current expectations or forecasts of future events. The reader can
identify these statements by the fact that they do not relate
strictly to historical or current facts. In particular, these
include statements relating to future action, the impact of the
coronavirus, prospective products, expected market growth, new
technologies and trends, industry partnerships, foreign operations,
economic expectations, future performance or results of current and
anticipated products, sales efforts, expenses, outcome of
contingencies, impact of regulatory requirements, tariffs and
financial results.
Any or all of the forward-looking statements in this Annual Report
or in any other public statement made
may turn out to be wrong
. They
can be affected by inaccurate assumptions we might make, or known
or unknown risks and uncertainties can affect these forward-looking
statements. Many factors -- for example, product competition and
product development -- will be important in determining future
results. Moreover, neither Data I/O nor anyone else assumes
responsibility for the accuracy and completeness of these
forward-looking statements. Actual future results may materially
vary.
We undertake no obligation to publicly update any forward-looking
statements after the date of this Annual Report, whether as a
result of new information, future events or otherwise. The reader
should not unduly rely on our forward-looking statements. The
reader is advised, however, to consult any future disclosures we
make on related subjects in our 10-Q, 8-K and 10-K reports to the
SEC and press releases. Also, note that we provide the following
cautionary discussion of risks, uncertainties and possible
inaccurate assumptions relevant to our business. These are factors
that we think could cause our actual results to differ materially
from expected and historical results. Other factors besides those
listed here could also adversely affect us. This discussion is
permitted by the Private Securities Litigation Reform Act of
1995.
RISK FACTORS:
CORONAVIRUS
The coronavirus that causes the serious disease COVID-19
(“coronavirus”), has and may continue to adversely
affect our business, including revenues, suppliers, employees and
facilities.
As a
global company with 92% of its 2019 sales in international markets,
we have been and may continue to be significantly impacted by the
coronavirus outbreak, which has since spread to Asia, USA, Europe
and all other markets we serve. We have already seen orders delayed
due to the coronavirus. 31% of our employees are based in Shanghai,
China and we have a manufacturing facility there which manufactures
some of our equipment and develops most of the adapters and
algorithms for our equipment. Although our facilities in Shanghai,
Redmond and Germany are currently operating, they could be closed
for an extended period of time if the coronavirus spreads
significantly. Additionally, we source other components from China
and other countries that are used to manufacture our equipment in
China and in our Redmond, Washington facility and these components
may not be readily available. In addition, our corporate
headquarters is located in Redmond, Washington which is only a few
miles from the US epicenter of the coronavirus in Kirkland,
Washington. As a result, many of our Redmond based employees and
executives are working from home and we are limiting visitors to
our Redmond facility as the coronavirus continues to spread. All of
our facilities are subject to restrictions and closure by
governmental entities. As the coronavirus continues to spread, it
has and may continue to impact our revenues, our ability to obtain
key components and to manufacture our products, as well as sell,
install and support our products around the world.
The
coronavirus has and continues to impact key tradeshows and travel
plans for our employees. Because of the coronavirus we are not able
to visit many of our customers and prospects. We were recently
scheduled to attend the Embedded World 2020 tradeshow related to
our security deployment products and had to cancel our
participation.
TARIFFS AND TRADE ISSUES
Changes in tariffs and trade issues may adversely affect our
business, including revenues and/or gross margins.
We
produce products in the United States and China. Currently, certain
of our products are subject to tariffs imposed by one country on
goods manufactured in the other country. There is uncertainty
regarding the tariffs expected to be imposed, and any increase in
tariff rates and subjecting additional items to tariffs, could
impact our costs, revenues and the competitiveness of our products
due to our manufacturing locations. Trade and tariff issues are
creating business uncertainty and may spread to and impact other
jurisdictions.
11
NEW PRODUCTS OR SERVICES
We are pursuing new product or service initiatives, and business
models that may develop more slowly and/or to a lesser extent than
expected
In
order to lead in new and potentially lucrative market
opportunities, for example in security deployment of programmable
devices, circuit boards and electronic systems, we are making
significant investments in people, technology and business
development while the market is developing and uncertain. Because
of the lengthy time to market from design to production in security
provisioning, if these markets develop more slowly than planned, or
if our security deployment solutions are not widely accepted, then
we may not achieve our expected return on investment in new
technologies and this may significantly affect the results of our
existing business.
In the
security deployment area, we have introduced a new pay per use
business model that may not be accepted by our customers who are
accustomed to paying for capital equipment upfront, rather than
paying per use charges.
Failure to adapt to technology trends in our industry may impact
our competitiveness and financial results.
Product
and service technology in our industry evolves rapidly, making
timely product innovation essential to success in the marketplace.
Introducing products and services with improved technologies or
features may render our existing products obsolete and
unmarketable. Technological advances and trends that may negatively
impact our business include:
●
new device package
types, densities, chip interfaces and technologies requiring
hardware and software changes in order to be programmed by our
products, particularly certain segments of the high-density flash
memory markets where after placement programming is recommended by
certain semiconductor manufacturers
●
reduction in
semiconductor process geometries for certain 3 Dimensional (3D),
Multi Level Cell (MLC) and Triple Level Cell (TLC) NAND and eMMC
FLASH memories impact the product data retention through Surface
Mount Technology (SMT) reflow or X-ray inspection. Improper SMT
process control can negatively impact the end customer’s
ability to successfully program devices. This can cause them
to change their programing methods away from pre-programming to
post placement programming techniques, including ISP, ICT. Data I/O
is working with several semiconductor manufacturers to develop best
practices to minimize the impact of reflow and potential concerns
about X-ray induced data loss.
●
changes in Flash
technology speeds will eventually require us to change the
architecture of our programming engines
●
electronics
equipment manufacturing practices, such as widespread use of
in-circuit programming or downloading
●
adoption of
proprietary security and programming protocols and additional
security capabilities and requirements
●
customer software
platform preferences different from those on which our products
operate
●
customer adoption
of newer unsupported semiconductor device technologies such as UFS
memory or device interface methods, particularly if these
technologies are adopted by automotive electronics, IoT or wireless
customers
●
more rigid industry
standards, which would decrease the value-added element of our
products and support services
If we
cannot develop products or services in a timely manner in response
to industry changes, or if our products or services do not perform
well, our business and financial condition may be adversely
affected. Also, our new products or services may contain defects or
errors that give rise to product liability claims against us or
cause our products to fail to gain market acceptance. Our future
success depends on our ability to successfully compete with other
technology firms in attracting and retaining key technical
personnel.
Failure to adapt to increasing automotive electronics customer
requirements
Concentration
in Automotive Electronics and our orders related to automotive
electronics customers has increased in recent years to 60% in 2019,
60% in 2018, and 54% in 2017. As we become more concentrated on
automotive electronics customers, any decrease in demand from these
customers may materially impact our results, as it will take some
time to transition our product line to other markets. Quality
standards and business requirements by our automotive electronics
customers, driven in turn by their automotive manufacturer
customers, may demand processes, and certifications at a higher
level than we currently are structured to provide. For example,
although we currently meet the ISO 9001:2015 standard, new quality
standards may be demanded by our customers with even more rigorous
requirements. In addition, contractual provisions may expose us to
greater potential liability and costs and we may be required to
provide higher service levels than we currently provide. If we
cannot adapt to these industry requirements or manage these
contractual provisions, our business may be adversely
affected.
12
Delays in development, introduction and shipment of new products or
services may result in a decline in sales or increased
costs.
We
develop new engineering and automated programming systems and
services. Significant technological, supplier, manufacturing or
other problems may delay the development, introduction or
production of these products or services.
For
example, we may encounter these problems:
●
technical problems
in the development of a new programming and/or security deployment
systems or the robotics for new automated handing
systems
●
inability to hire
qualified personnel or turnover in existing personnel or inability
to engage or retain key technology partners
●
delays or failures
to perform by us or third parties, including some smaller early
stage or recently acquired companies, involved in our development
projects
●
dependence on large
semiconductor companies for cooperation and support to securely
provision their devices. These companies must enable us with
specific technical information, and support Data I/O as a qualified
solution to their customers and channel partners.
●
development of new
products or services that are not accepted by the
market
These
problems may result in a delay or decline in sales or increased
costs.
We may pursue business acquisitions that could impair our financial
position and profitability.
We may
pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions may include risks, such
as:
●
burdening
management and our operating teams during the integration of the
acquisition
●
diverting
management’s attention from other business
concerns
●
failing to
successfully integrate or monetize the acquired products or
technologies
●
lack of acceptance
of the acquired products by our sales channels or
customers
●
entering markets
where we have no or limited prior experience
●
potential loss of
key employees of the acquired company
●
additional burden
of support for an acquired programmer architecture
Future
acquisitions may also impact our financial position. For example,
we may use significant cash or incur debt, which would weaken our
balance sheet, or issue additional shares, potentially diluting
existing shareholders. We may also capitalize goodwill and
intangible assets acquired, the amortization or impairment of which
would reduce our profitability. We cannot guarantee that future
acquisitions will improve our business or operating
results.
If we are unable to protect our IP, we may not be able to compete
effectively or operate profitably.
We rely
on patents, copyrights, trade secrets and trademarks to protect our
IP, as well as product development and marketing skill to establish
and protect our market position. In particular, patents are a key
part of our security deployment strategy, and if we are not able to
successfully enforce these patents, we might lose our competitive
advantage in the security deployment market. We attempt to protect
our rights in proprietary software products, including our user
interface, product firmware, software module options and other
software products by retaining the title to and copyright of the
software and documentation, by including appropriate contractual
restrictions on use and disclosure in our licenses, and by
requiring our employees to execute non-disclosure
agreements.
13
Because
of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might
possibly infringe upon existing patents or copyrights, and we might
be required to obtain licenses or discontinue the use of the
infringing technology. We believe that any exposure we may have
regarding possible infringement claims is a reasonable business
risk similar to that assumed by other companies in the electronic
equipment and software industries. However, any claim of
infringement, with or without merit, could be costly and a
diversion of management’s attention, and an adverse
determination could adversely affect our reputation, preclude us
from offering certain products, and subject us to substantial
liability.
We might face increased competition and might not be able to
compete successfully with current and future
competitors.
Technological
advances have reduced the barriers of entry into the programming
systems market. We expect competition to increase from both
established and emerging companies. If we fail to compete
successfully against current and future sources of competition, our
profitability and financial performance will be adversely
impacted.
THIRD PARTY RELATIONSHIPS
If we do not develop, enhance and retain our relationships with
security partners, our business may be adversely affected and we
may not be able to timely develop new and cost effective managed
and secure programming solutions.
As we
enter new areas in security deployment we need to complement our
skills and expertise with partners’ expertise in security.
Some of these partners are operating with more limited capital
and/or management expertise than established firms or recently
acquired firms that may have different priorities. Other partners
are very large companies where prioritizing work with us may be
difficult in light of competing priorities. For some of our then
earlier stage partners, we have obtained unique product features
and capabilities in exchange for NRE payments, pre-paid royalties,
marketing incentives and sales cooperation. When these unique
features and capabilities are no longer available, we will face
more competition. If our partners are unable to develop and deliver
solutions that we need to integrate into our security deployment
programming solutions, our products might be delayed, we might have
to locate alternate partners and suppliers or develop the
technology ourselves, and we would still be responsible for paying
any related pre-paid royalties or NRE payments and might face
write-offs of any excess equipment.
If we do not develop and enhance our relationships with
semiconductor manufacturers, our business may be adversely
affected.
We work
closely with most semiconductor manufacturers to ensure that our
data programming and security deployment systems comply with their
requirements. In addition, many semiconductor manufacturers
recommend our managed and secure programming systems for use by
users of their programmable devices. These working relationships
enable us to keep our programming systems product lines up to date
and provide end-users with broad and current programmable device
support. As technology changes occur that could limit the
effectiveness of pre-placement programming, particularly for very
small high-density NAND, e-MMC and UFS devices, certain
semiconductor manufacturers may not recommend or may not continue
recommending our programming systems for these devices. Our
business may be adversely affected if our relationships with
semiconductor manufacturers deteriorate or if semiconductor
manufacturers are not willing to closely work with us on security
deployment. Consolidation within the semiconductor industry may
also impact us. As we develop more security deployment solutions,
we will need to partner more closely with semiconductor
manufacturers.
Our reliance on a small number of suppliers may result in a
shortage of key components, which may adversely affect our
business, and our suppliers may experience financial difficulties
which could impact their ability to service our needs.
Certain
parts or software used in our products are currently available from
either a single supplier or from a limited number of suppliers. Our
small relative level of business means we frequently lack influence
and significant purchasing power. If we cannot develop alternative
sources of these components, if sales of parts or software are
discontinued by the supplier, if we experience deterioration in our
relationship with these suppliers, or if these suppliers require
financing which is not available, there may be delays or reductions
in product introductions or shipments, which may materially
adversely affect our operating results.
Because
we rely on a small number of suppliers for certain parts, we are
subject to possible price increases by these suppliers. Also, we
may be unable to accurately forecast our production schedule. If we
underestimate our production schedule, suppliers may be unable to
meet our demand for components. This delay in the supply of key
components may have a materially adverse effect on our business.
For suppliers who discontinue parts, we may be required to make
lifetime purchases covering future requirements. Over estimation of
demand or excessive minimum order quantities will lead to excess
inventories that may become obsolete.
14
Certain
of our sockets, parts, subassemblies and boards are currently
manufactured to our specifications by third-party foreign contract
manufacturers and we are sourcing certain parts or options from
foreign manufacturers, particularly in China. For example, due to
the coronavirus or other viruses impacting workers, suppliers or
travel, we may not be able to obtain a sufficient quantity of these
products if and when needed or the quality of these parts or
options may not meet our standards, which may result in lost
sales.
If we are unable to attract and retain qualified third-party
distributors and representatives, our business may be adversely
affected.
We have
an internal sales force and also utilize third-party distributors
and representatives. Therefore, the financial stability of these
distributors and representatives is important. Their ability to
operate, timely pay us, and to acquire any necessary financing may
be affected by the current economic climate. Highly skilled
professional engineers use most of our products. To be effective,
third-party distributors and representatives must possess
significant technical, marketing, customer relationships and sales
resources and must devote their resources to sales efforts,
customer education, training and support. These required qualities
limit the number of potential third-party distributors and
representatives. Our business will suffer if we cannot attract and
retain a sufficient number of qualified third-party distributors
and representatives to market our products.
MARKET CONDITIONS
A decline in economic and market conditions may result in delayed
or decreased capital spending and delayed or defaulted payments
from our customers.
The
coronavirus appears likely to affect economic and market conditions
as it continues to spread. Our business is highly impacted by
capital spending plans and other economic cycles that affect the
users and manufacturers of integrated circuits. The industries are
highly cyclical and are characterized by rapid technological
change, short product life cycles and fluctuations in manufacturing
capacity and pricing and gross margin pressures. As we experienced
in recent prior years, our operations may in the future reflect
substantial fluctuations from period-to-period as a consequence of
these industry patterns, general economic conditions affecting the
timing of orders from major customers, and other factors affecting
capital spending. In a difficult economic climate, it may take us
longer to receive payments from our customers and some of our
customers’ business may fail, resulting in non-payment. Our
market growth forecasts and related business decisions may be
wrong. These factors could have a material adverse effect on our
business and financial condition.
Our international operations may expose us to additional risks that
may adversely affect our business.
International
sales represented approximately 92%, 88% and 92% of net sales in
2019, 2018, and 2017, respectively. We expect that international
sales will continue to be a significant portion of our net revenue.
International sales may fluctuate due to various factors,
including:
●
the impact of the
coronavirus or other viruses
●
fluctuations in
foreign currency exchange rates because 92% of our sales are to
international markets, volatile exchange rates may also impact our
competitiveness and margins
●
economic
uncertainty related to the European sovereign debt
situation
●
migration of
manufacturing to low cost geographies
●
unexpected changes
in regulatory requirements, including Brexit
●
tariffs and
taxes
●
Bi-lateral and
Multi-lateral trade agreements
●
difficulties in
staffing and managing foreign operations
●
longer average
payment cycles and difficulty in collecting accounts
receivable
●
compliance with
applicable export licensing requirements and the Foreign Corrupt
Practices Act
●
product safety and
other certification requirements
●
difficulties in
integrating foreign and outsourced operations
●
civil unrest,
political and economic instability
15
Because
we have customers located throughout the world, we have significant
foreign receivables. We may experience difficulties in collecting
these amounts as a result of payment practices of certain foreign
customers, economic uncertainty and regulations in foreign
countries, the availability and reliability of foreign credit
information, and potential difficulties in enforcing collection
terms.
The
European Union and European Free Trade Association
(“EU”) has established certain electronic emission and
product safety requirements (“CE”). As applicable, our
products currently meet these requirements; however, failure to
obtain either a CE
certification or a waiver for any
product may prevent us from marketing that product in Europe. The
EU also has directives concerning the Reduction of Hazardous
Substances (“RoHS”) and we believe we are classified
within the EU RoHS Directive category list as Industrial Monitoring
and Control Equipment (category 9). We believe all current products
meet the RoHS directives. Failure to meet applicable directives or
qualifying exemptions may prevent us from marketing certain
products in Europe or other territories with similar
requirements.
We have
subsidiaries in Germany, China and Canada and large balances of
cash are in our foreign subsidiaries. Our business and financial
condition is sensitive to currency exchange rates and any
restrictions imposed on their currencies including restrictions on
repatriations of cash. Any repatriation of cash could result in tax
costs and corresponding deferred tax assets with related tax
valuation allowances. Currency exchange fluctuations in these
countries may adversely affect our investment in our
subsidiaries.
OPERATIONS
Quarterly fluctuations in our operating results may adversely
affect our stock price.
Our
operating results tend to vary from quarter to quarter. Our revenue
in each quarter substantially depends upon orders received within
that quarter. Conversely, our expenditures are based on investment
plans and estimates of future revenues. We may, therefore, be
unable to quickly reduce our spending if our revenues decline in a
given quarter. As a result, operating results for that quarter will
suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future
periods.
Other
factors, which may cause our quarterly operating results to
fluctuate, include:
●
increased
competition
●
timing of new
product announcements and timing of development
expenditures
●
product or service
releases and pricing changes by us or our competitors
●
market acceptance
or delays in the introduction of new products or
services
●
production
constraints
●
quality
issues
●
labor or material
constraints
●
timing of
significant orders
●
timing of
installation or customer acceptance requirements
●
sales channel mix
of direct vs. indirect distribution
●
civil unrest, war
or terrorism
●
health issues such
as the outbreak of the coronavirus or other viruses impacting
workers, suppliers, customers, travel, or our
facilities
●
customers’
budgets
●
changes in
accounting rules, tax or other legislation
●
adverse movements
in exchange rates, interest rates or tax rates
●
cyclical and
seasonal nature of demand for our customers’
products
●
general economic
conditions in the countries where we sell products
●
expenses and delays
obtaining authorizations in setting up new operations or
locations
●
facilities
relocations
16
Due to
any of the foregoing factors, it is possible that in some future
quarters, our operating results will be below expectations of
analysts and investors.
We have a history of operating losses and may be unable to generate
enough revenue to achieve and maintain profitability.
We have
incurred operating losses in four of the last ten years. We operate
in a cyclical industry. We will continue to examine our level of
operating expense based upon our projected revenues. Any planned
increases in operating expenses, such as the increased hiring and
research and development expenses related to our security
deployment platform, may result in losses in future periods if
projected revenues are not achieved or due the investment level. As
a result, we may need to generate greater revenues than we have
recently in order to maintain profitability. However, we cannot
provide assurance that our revenues will continue to increase and
our business strategies may not be successful, resulting in future
losses.
The loss of key employees may adversely affect our
operations.
We have
employees located in the U.S., Germany and China. We also utilize
independent contractors for specialty work, primarily in research
and development, and utilize temporary workers to adjust capacity
to fluctuating demand. Many of our employees are highly skilled and
our continued success will depend in part upon our ability to
attract and retain employees who can be in great demand within the
industry. None of our employees are represented by a collective
bargaining unit and we believe relations with our employees are
favorable, though no assurance can be made that this will be the
case in the future. In China, our workers are “leased”
with the arrangements made under the “FSCO” labor
agreement and we could be adversely affected if we were unable to
continue that arrangement.
We may need to raise additional capital and our future access to
capital is uncertain.
Our
past revenues have sometimes been, and our future revenues may
again be, insufficient to support the expense of our operations and
any expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable
to generate sufficient cash flows from operations or to obtain
funds through additional debt, lease or equity financing, we may
have to reduce some or all of our development and sales and
marketing efforts and limit the expansion of our
business.
We
believe that we have sufficient cash or working capital available
under our operating plan to fund our operations and capital
requirements through at least the next one-year period. In the
event we require additional cash for U.S. operations or other
needs, we may choose to repatriate some, or all, of the $8.7
million held in our foreign subsidiaries. Although we have no
current repatriation plans, there may be tax, legal and other
impediments to any repatriation actions. Our working capital may be
used to fund possible losses, business growth, project initiatives,
share repurchases and business development initiatives including
acquisitions, which could reduce our liquidity and result in a
requirement for additional cash before that time. Any substantial
inability to achieve our current business plan could have a
material adverse impact on our financial position, liquidity, or
results of operations and may require us to reduce expenditures
and/or seek additional financing.
Therefore,
we may seek additional funding through public or private debt or
equity financing or from other sources. We have no commitments for
additional financing, and given a potential future unfavorable
economic climate and our financial results, we may experience
difficulty in obtaining funding on favorable terms, if at all. Any
financing we obtain may contain covenants that restrict our freedom
to operate our business or may require us to issue securities that
have rights, preferences or privileges senior to our Common Stock
and may dilute your ownership interest.
Our stock price may be volatile and, as a result, our shareholders
may lose some or all of their investment.
The
stock prices of technology companies tend to fluctuate
significantly. We believe factors such as announcements of new
products or services by us or our competitors and quarterly
variations in financial results and outlook may cause the market
price of our Common Stock to fluctuate substantially. In addition,
overall volatility in the stock market, particularly in the
technology company sector, is often unrelated to the operating
performance of companies. If these market fluctuations continue in
the future, they may adversely affect the price of our Common
Stock.
Cyber security breaches or terrorism could result in liabilities or
costs as well as damage to or loss of our data or customer access
to our website and information systems. The collection, storage,
transmission, use and disclosure of user data and personal
information, if accessed improperly, could give rise to liabilities
or additional costs as a result of laws, governmental regulations
and evolving views of personal privacy rights.
17
Cyber
security breaches or terrorism could result in the exposure or
theft of private or confidential information as well as interrupt
our business, including denying customer access to our website and
information systems. We transmit, and in some cases store, end-user
data, including personal information. In jurisdictions around the
world, personal information is becoming increasingly subject to
legislation and regulations intended to protect consumers’
privacy and security. The interpretation of privacy and data
protection laws and regulations regarding the collection, storage,
transmission, use and disclosure of such information in some
jurisdictions is unclear and evolving. These laws may be
interpreted and applied in conflicting ways from country to country
and in a manner that is not consistent with our current data
protection practices. Complying with these varying international
requirements could cause us to incur additional costs and change
our business practices. Because our services are accessible in many
foreign jurisdictions, some of these jurisdictions may claim that
we are required to comply with their laws, even where we have no
local entity, employees or infrastructure. We could be forced to
incur significant expenses if we were required to modify our
products, our services or our existing security and privacy
procedures in order to comply with new or expanded
regulations.
REGULATORY REQUIREMENTS
Failure to comply with increasing regulatory requirements may
adversely affect our stock price and business.
As a
public company, we are subject to numerous governmental and stock
exchange requirements, with which we believe we are in compliance.
Our failure to meet regulatory requirements and exchange listing
standards may result in actions such as: the delisting of our
stock, impacting our stock’s liquidity; SEC enforcement
actions; and securities claims and litigation.
The
Sarbanes-Oxley Act of 2002 and the Securities and Exchange
Commission (SEC) have requirements that we may fail to meet or we
may fall out of compliance with, such as the internal controls
auditor attestation required under Section 404 of the
Sarbanes-Oxley Act of 2002, with which we are not currently
required to comply as we are a smaller reporting company. We assume
that we will continue to have the status of a smaller reporting
company based on the aggregate market value of the voting and
non-voting shares held as of June 30, 2019. If we fail to achieve
and maintain the adequacy of our internal controls, as such
standards are modified, supplemented or amended from time to time,
we may not be able to ensure that we can conclude on an ongoing
basis that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act
of 2002. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce
reliable financial reports and are important to help prevent
financial fraud. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed,
investors could lose confidence in our reported financial
information, and the trading price of our stock could drop
significantly.
While
we have policies and procedures in place designed to prevent
corruption and bribery, because our business is significantly
international, violations of the Foreign Corrupt Practices Act
(FCPA) could have a significant adverse effect on our business due
to the disruption and distraction of an investigation, financial
penalties and criminal penalties.
Government regulations regarding the use of "conflict"
minerals could adversely affect our prospects and results of
operations.
Regulatory
requirements regarding disclosure of our use of
“conflict” minerals mined from the Democratic Republic
of Congo and adjoining countries could affect the sourcing and
availability of minerals used in the manufacture of certain
products. Although we do not buy raw materials, manufacture, or
produce any electronic equipment using conflict minerals
directly, some components provided by our suppliers and contained
in our products contain conflict minerals. Our goal is for our
products to be conflict free. As a result, there may only be a
limited pool of suppliers who provide conflict free metals, and we
cannot assure you that we will be able to obtain products in
sufficient quantities or at competitive prices. Single source
suppliers may not respond or respond negatively regarding conflict
mineral sourcing and we may be unable to find alternative sources
to replace them. Also, because our supply chain is complex, we may
face reputational challenges with our customers and other
stakeholders if we are unable to sufficiently verify the origins
for all metals used in the products that we sell. Further, if we
are unable to comply with the new laws or regulations or if our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to practice, regulatory authorities may
initiate legal proceedings against us. We may need to incur
additional costs and invest additional resources, including
management’s time, in order to comply with the new
regulations and anticipated additional reporting and disclosure
obligations.
Item 1B. Unresolved Staff Comments
None.
18
Item 2. Properties
During
the third quarter of 2017, we amended our lease agreement for the
Redmond, Washington headquarters facility, extending the lease to
July 31, 2022, waiving a potential space give back provision and
receiving lease inducement incentives. Previously on June 8, 2015
the lease had been amended to relocate our headquarters to a nearby
building and lower the square footage to approximately 20,460. The
lease base annual rental payments during 2019 and 2018 were
approximately $351,000 and $341,000, 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.
We
signed a lease agreement effective November 1, 2015 that extends
through October 31, 2021 for a facility located in Shanghai, China.
This lease is for approximately 19,400 square feet. The lease base
annual rental payments during 2019 and 2018 were approximately
$305,000 and $288,000, respectively.
During
the fourth quarter of 2016, we signed a lease agreement for a new
facility located near Munich, Germany which was effective March 1,
2017 and extends through February 28, 2022. This lease is for
approximately 4,895 square feet. The lease base annual rental
payments during 2019 and 2018 were approximately $57,000 and
$67,000, respectively.
Item 3. Legal Proceedings
From
time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As
of December 31, 2019, 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.
Item 4. Mine Safety Disclosures
Not
Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Our
Common Stock is listed on the NASDAQ Capital Market (NASDAQ symbol
is DAIO). The closing price was $4.25 on December 31,
2019.
The
approximate number of shareholders of record as of March 19,
2020 was 438.
Except
for special cash dividend of $4.15 per share paid on March 8, 1989,
we have not paid cash dividends on our Common Stock and do not
anticipate paying regular cash dividends in the foreseeable
future.
No
sales of unregistered securities were made by us during the periods
ended December 31, 2019, 2018 or 2017.
See
Item 12 for the Equity Compensation Plan Information.
19
ISSUER PURCHASES OF EQUITY SECURITIES
On
October 31, 2018, our Board of Directors approved a share
repurchase program with provisions to buy back up to $2.0 million
of our stock during the period from November 1, 2018 through
October 31, 2019. The program was established with a
10b5-1 plan under the Exchange Act to provide flexibility to make
purchases throughout the period. For the quarter ended September
30, 2019, 55,904 shares of stock were repurchased at an average
price of $4.37 for a total of $244,197 including $1,176 in
commissions and charges. The $2.0 million buyback program was
completed during the third quarter of 2019. The following is a
summary of the stock repurchase program from November 1, 2018
through September 30, 2019:
|
Repurchases by
Month
|
Total Number of
Shares Purchased
|
Average Price Paid
per Share
|
Total Number of
Shares Purchased as Part of Publicly Announced Repurchase
Program
|
Approximate Dollar
Value of Shares that May Yet Be Purchased under the
Program
|
|
|
|
|
|
|
|
Dec.
2018
|
101,975
|
$
5.25
|
101,975
|
$
1,464,470
|
|
Jan.
2019
|
43,701
|
$
5.39
|
43,701
|
$
1,229,115
|
|
Mar.
2019
|
13,911
|
$
5.49
|
13,911
|
$
1,152,793
|
|
Apr.
2019
|
69,141
|
$
5.34
|
69,141
|
$
783,687
|
|
May
2019
|
69,798
|
$
4.63
|
69,798
|
$
461,417
|
|
Jun.
2019
|
49,255
|
$
4.44
|
49,255
|
$
244,197
|
|
Jul.
2019
|
55,280
|
$
4.37
|
55,280
|
$
2,798
|
|
Aug.
2019
|
624
|
$
4.32
|
624
|
$
3
|
|
Total
|
403,685
|
$
4.95
|
403,685
|
|
Item 6. Selected Financial Data
Not
applicable.
20
Item 7
.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a “safe harbor” for
forward-looking statements to encourage companies to provide
prospective information about themselves as long as they identify
these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could
cause actual results to differ from the projected results. All
statements other than statements of historical fact made in this
Annual Report on Form 10-K are forward-looking. In particular,
statements herein regarding economic outlook, industry prospects
and trends; industry partnerships; future results of operations or
financial position; future spending; breakeven revenue point;
expected market growth; market acceptance of our newly introduced
or upgraded products or services; the sufficiency of our cash to
fund future operations and capital requirements; development,
introduction and shipment of new products or services; changing
foreign operations; and any other guidance on future periods are
forward-looking statements. Forward-looking statements reflect
management’s current expectations and are inherently
uncertain. Although we believe that the expectations reflected in
these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance,
achievements, or other future events. Moreover, neither Data I/O
nor anyone else assumes responsibility for the accuracy and
completeness of these forward-looking statements. We are under no
duty to update any of these forward-looking statements after the
date of this Annual Report. The Reader should not place undue
reliance on these forward-looking statements. The following
discussions and the section entitled “Risk Factors –
Cautionary Factors That May Affect Future Results” describes
some, but not all, of the factors that could cause these
differences.
OVERVIEW
We
sustained our first loss in 6 years due to a downturn in orders,
combined with increased investments in our security deployment
business. Our strong cash position and balance sheet combined with
our long-term view of the market gives us the financial flexibility
to make these security business decisions. At Data I/O, we are
investing for the long term to retain and extend our leadership
position. On the product side, we continue to invest with a
long-term focus towards expanding our markets and creating unique
value for our customers. This is true for both our traditional core
business as well as the emerging security deployment
business.
The
automotive electronics market is cyclical and we experienced the
downturn in capital spending related to it and the electronics
industry. We continued our focus on automotive electronics and
managing the core programming business for growth and
profitability, while developing and enhancing products,
particularly in security deployment, to drive future revenue and
earnings growth as we invest resources in the security deployment
market. Our challenge continues to be operating in a cyclical and
rapidly evolving industry environment. Our efforts are to balance
industry changes, industry partnerships, new technologies, business
geography shifts, exchange rate volatility, trade issues and
tariffs, coronavirus impacts, increasing costs and strategic
investments in our business with the level of demand and mix of
business we expect. We continue to manage our costs carefully and
execute strategies for cost reduction.
We are
focusing our research and development efforts in our strategic
growth markets, namely automotive electronics and IoT new
programming technologies, secure supply chain solutions, automated
programming systems and their enhancements for the manufacturing
environment and software. We are developing technology and products
to securely provision new categories of semiconductors, including
Secure Elements, Authentication Chips, and Secure Microcontrollers.
We plan to deliver new programming technology and automated
handling systems for managed and secure programming in the
manufacturing environment. We continue to focus on extending the
capabilities and support for our product lines and supporting the
latest semiconductor devices, including various configurations of
NAND Flash, e-MMC, UFS and microcontrollers on our newer
products.
Our
customer focus has been on global and strategic high-volume
manufacturers in key market segments like automotive electronics,
IoT, industrial controls and consumer electronics as well as
programming centers.
Although
the long-term prospects for our strategic growth markets should be
good, these markets and our business have been, and are likely to
continue to be, adversely impacted, at least temporarily, by the
the global pandemic of coronavirus. See also the detailed
discussion of the impacts of the coronavirus on our business and
markets in Item 1A, Risk Factors. Annual projections on spending,
growth, mix, and profitability are likely to be revised
substantially as new information is obtained.
21
CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America
requires that we make estimates and judgments, which affect the
reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related
to revenue recognition, sales returns, bad debts, inventories,
intangible assets, income taxes, warranty obligations,
restructuring charges, contingencies such as litigation and
contract terms that have multiple elements and other complexities
typical in the capital equipment industry. We base our estimates on
historical experience and other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or
conditions.
We
believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our
financial statements:
Revenue Recognition:
Effective January 1, 2018, the Company
adopted ASU 2014-09, Revenue (“Topic 606”): Revenue
from Contracts with Customers, using the modified retrospective
method. Topic 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.
The
adoption of Topic 606 did not have a material impact on our 2018
financial statement line items, either individually or in the
aggregate. We have elected the practical expedient to 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
2019, the impact of capitalization of incremental costs for
obtaining contracts was immaterial. We have made a sales tax policy
election to 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 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. The transaction price is allocated to the
separate performance obligations on relative standalone sales
price. We allocate the transaction price of each element based on
relative selling prices. Relative selling price is based on the
selling price of the standalone system. For the installation and
service and support performance obligations, we use the value of
the discount given to distributors who perform these components.
For software maintenance performance obligations, we use what we
charge for annual software maintenance renewals after the initial
year the system is sold. Revenue is recognized on the system sale
based on shipping terms, installation revenue is recognized after
the installation is performed, and hardware service and support and
software maintenance revenue is recognized ratably over the term of
the agreement, typically one year. Deferred revenue includes
service, support and maintenance contracts and represents the
undelivered performance obligation of agreements that are typically
for one year.
When we
sell software separately, we recognize revenue upon the transfer of
control of the software, which is generally upon shipment, provided
that only inconsequential performance obligations remain on our
part and substantive acceptance conditions, if any, have been
met.
22
We
recognize revenue when there is an approved contract that both
parties are committed to perform, both parties rights have been
identified, the contract has substance, collection of substantially
all the consideration is probable, the transaction price has been
determined and allocated over the performance obligations, the
performance obligations including substantive acceptance
conditions, if any, in the contract have been met, the obligation
is not contingent on resale of the product, the buyer’s
obligation would not be changed in the event of theft, physical
destruction or damage to the product, the buyer acquiring the
product for resale has economic substance apart from us and we do
not have significant obligations for future performance to directly
bring about the resale of the product by the buyer. We establish a
reserve for sales returns based on historical trends in product
returns and estimates for new items. Payment terms are generally 30
days from shipment.
We
transfer certain products out of service from their internal use
and make them available for sale. The products transferred are
typically our standard products in one of the following areas:
service loaners, rental or test units; engineering test units; or
sales demonstration equipment. Once transferred, the equipment is
sold by our regular sales channels as used equipment inventory.
These product units often involve refurbishing and an equipment
warranty, and are conducted as sales in our normal and ordinary
course of business. The transfer amount is the product unit’s
net book value and the sale transaction is accounted for as revenue
and cost of goods sold.
Allowance for Doubtful Accounts:
We base the allowance for
doubtful accounts receivable on our assessment of the
collectability of specific customer accounts and the aging of
accounts receivable. If there is deterioration of a major
customer’s credit worthiness or actual defaults are higher
than historical experience, our estimates of the recoverability of
amounts due to us could be adversely affected.
Inventory
: Inventories are stated at the lower of cost or
net realizable value. Adjustments are made to standard cost, which
approximates actual cost on a first-in, first-out basis. We
estimate reductions to inventory for obsolete, slow-moving, excess
and non-salable inventory by reviewing current transactions and
forecasted product demand. We evaluate our inventories on an item
by item basis and record inventory adjustments accordingly. If
there is a significant decrease in demand for our products,
uncertainty during product line transitions, or a higher risk of
inventory obsolescence because of rapidly changing technology and
customer requirements, we may be required to increase our inventory
adjustments and our gross margin could be adversely
affected.
Warranty Accruals:
We accrue for warranty costs based on the
expected material and labor costs to fulfill our warranty
obligations. If we experience an increase in warranty claims, which
are higher than our historical experience, our gross margin could
be adversely affected.
Tax Valuation Allowances:
Given the uncertainty created by
our loss history, as well as the ongoing cyclical uncertain
economic outlook for our industry and capital and geographic
spending as well as income and net deferred tax assets by entity
and country, we expect to continue to limit the recognition of net
deferred tax assets and accounting for uncertain tax positions and
maintain the tax valuation allowances. At the current time, we
expect, therefore, that reversals of the tax valuation allowance
will take place as we are able to take advantage of the underlying
tax loss or other attributes in carry forward or their use by
future income or circumstances allow us to realize these
attributes. The transfer pricing and expense or cost sharing
arrangements are complex areas where judgments, such as the
determination of arms-length arrangements, can be subject to
challenges by different tax jurisdictions.
Share-based Compensation:
We account for share-based awards
made to our employees and directors, including employee stock
option awards and restricted stock unit awards, using the estimated
grant date fair value method of accounting. For options, we
estimate the fair value using the Black-Scholes valuation model and
an estimated forfeiture rate, which requires the input of highly
subjective assumptions, including the option’s expected life
and the price volatility of the underlying stock. The expected
stock price volatility assumption was determined using the
historical volatility of our common stock. Changes in the
subjective assumptions required in the valuation model may
significantly affect the estimated value of the awards, the related
stock-based compensation expense and, consequently, our results of
operations. Restricted stock unit awards are valued based on the
average of the high and low price on the date of the grant and an
estimated forfeiture rate. For both options and restricted awards,
expense is recognized as compensation expense on the straight-line
basis. Employee Stock Purchase Plan (“ESPP”) shares
were issued under provisions that do not require us to record any
equity compensation expense.
23
RESULTS OF OPERATIONS:
NET SALES
|
Net
sales by product line
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Automated
programming systems
|
$
16,642
|
(28.4
%)
|
$
23,252
|
|
Non-automated
programming systems
|
4,926
|
(17.5
%)
|
5,972
|
|
Total programming
systems
|
$
21,568
|
(26.2
%)
|
$
29,224
|
|
Net
sales by location
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
United
States
|
$
1,735
|
(49.5
%)
|
$
3,436
|
|
% of
total
|
8.0
%
|
|
11.8
%
|
|
International
|
$
19,833
|
(23.1
%)
|
$
25,788
|
|
% of
total
|
92.0
%
|
|
88.2
%
|
|
Net
sales by type
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Equipment
Sales
|
$
12,553
|
(33.9
%)
|
$
19,002
|
|
Adapter
Sales
|
5,535
|
(20.4
%)
|
6,954
|
|
Software and
Maintenance Sales
|
3,480
|
6.5
%
|
3,268
|
|
Total
|
$
21,568
|
(26.2
%)
|
$
29,224
|
Net
sales for the year ended December 31, 2019 declined approximately
26% to $21.6 million compared to 2018 primarily as a result of a
cyclical downturn in capital spending resulting in lower demand in
Automotive Electronics and Programming Centers during 2019. On a
regional basis, net sales decreased approximately 6% in the
Americas, 33% in Europe and 32% in Asia.
Order
bookings were $22.5 million for 2019, down approximately 17%
compared to $27.0 million in 2018. Backlog at December 31, 2019 and
2018 was $2.9 million and $1.9 million, respectively. Tariffs
impacted customer orders by creating uncertainty and delays and
increased costs that could not be passed on to our customers. We
believe that during the year the decline in bookings in the third
quarter to $4.3 million, in addition to cyclicality, was largely
the result of the tariff concerns with the demand being delayed.
Bookings recovered in the fourth quarter to $6.9 million. Deferred
revenue was $1.5 million on December 31, 2019 compared to $1.6
million at December 31, 2018.
GROSS MARGIN
|
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Gross
margin
|
$
12,550
|
(27.7
%)
|
$
17,356
|
|
Percentage of net
sales
|
58.2
%
|
|
59.4
%
|
Gross
margin as a percentage of sales for the year ended December 31,
2019 was 58.2%, compared to 59.4% in 2018. The decline was due to
the impact of lower sales volumes relative to fixed production
costs and increased US/China tariffs offset in part by a favorable
sales channel mix.
RESEARCH AND DEVELOPMENT
|
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Research and
development
|
$
6,451
|
(12.4
%)
|
$
7,361
|
|
Percentage of net
sales
|
29.9
%
|
|
25.2
%
|
24
Research
and development (“R&D”) expense decreased $910,000
for the year ended December 31, 2019 compared to 2018. The decrease
was primarily related to lower employee related costs, reduced
contract labor and lower incentive compensation. R&D as a
percentage of sales increased primarily due to the decline in 2019
sales.
We
believe it is essential to invest in R&D to significantly
enhance our existing products and to create new products as markets
develop and technologies change. In 2020, we are planning to expand
our hiring and research and development related to our SentriX and
the Security Deployment market. In addition to product development,
a significant part of R&D spending is on creating software and
support for new devices introduced by the semiconductor companies.
We are currently focusing our research development efforts on
strategic growth markets, including automotive electronics and IoT.
We are developing technology and the SentriX product line to
securely program new categories of semiconductors, including Secure
Elements, Authentication Chips, and Secure Microcontrollers. We
delivered new enhanced programming technology and automated
handling systems for managed and secure programming in the
manufacturing environment and extending the capabilities and
support for our programmer architecture. Our R&D spending
fluctuates based on the number, type, and the development stage of
our product initiatives and projects.
SELLING, GENERAL AND ADMINISTRATIVE
|
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Selling, general
& administrative
|
$
7,377
|
(10.7
%)
|
$
8,257
|
|
Percentage of net
sales
|
34.2
%
|
|
28.3
%
|
Selling,
General and Administrative (“SG&A”) expenses
decreased $880,000 for the year ended December 31, 2019 compared to
2018. The decrease was primarily related to reduced sales
commissions on lower sales volume and lower incentive compensation.
Lower stock-based compensation and cost control measures
contributed to the reduction.
INTEREST
|
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Interest
income
|
$
53
|
43.2
%
|
$
37
|
Interest
income was higher for the year ended December 31, 2019 compared to
2018, primarily due to higher invested cash balances.
INCOME TAXES
|
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Income tax
(expense) benefit
|
$
(31
)
|
(89.3
%)
|
$
(291
)
|
Income
tax (expense) decreased by $260,000 for the year ended December 31,
2019 compared to 2018. The decrease was primarily a result of the
2019 operating loss and the valuation allowance required as we were
not able to recognize the benefit of the loss. In 2019, we did
recognize a tax benefit of $42,000 related to previously
sequestered refundable “Alternative Minimum Tax
Credits” in carryforward. Income tax (expense) in 2019 and
2018 is primarily the result of foreign subsidiary income tax and
minimal US state income tax.
The
effective tax rate for 2019 of (2.7%) and 2018 of 15.3% differed
from the statutory tax rates in our tax reporting jurisdictions
primarily due to the effect of valuation allowances as well as
foreign tax incentives and credits. We have a valuation allowance
of $7.5 million and $7.0 million as of December 31, 2019 and 2018,
respectively. Our deferred tax assets and valuation allowance have
been reduced by approximately $348,000 and $308,000 associated with
the requirements of accounting for uncertain tax positions as of
December 31, 2019 and 2018, respectively. Given the uncertainty
created by our loss history particularly in the U.S. which is where
most of our net deferred tax assets are located, and the ongoing
uncertain economic outlook for our industry as well as capital and
geographic spending, we currently expect to continue to limit the
recognition of net deferred tax assets and maintain the tax
valuation allowances.
25
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES
Sales
and expenses incurred by foreign subsidiaries are denominated in
the subsidiary’s local currency and translated into U.S.
Dollar amounts at average rates of exchange during the year. We
recognized foreign currency transaction gains of $5,000 and
$103,000 in 2019 and 2018, respectively. The transaction gains or
losses resulted primarily from translation adjustments to foreign
inter-company accounts and U.S. Dollar accounts held by foreign
subsidiaries and sales by our German subsidiary to certain
customers, which were invoiced in U.S. Dollars. Because
approximately 92% of our sales are to international markets,
volatile exchange rates may also impact our competitiveness and
margins.
FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES
|
|
2019
|
Change
|
2018
|
|
(in
thousands)
|
|
|
|
|
Working
capital
|
$
18,497
|
$
(2,568
)
|
$
21,065
|
At
December 31, 2019, our principal sources of liquidity consisted of
existing cash and cash equivalents which decreased $4.4 million
primarily due to share repurchase program and the net loss for the
year as well as the impact of lower stock-based compensation and
depreciation (non-cash expenses). These drove our working capital
to decrease by $2.6 million for the year ended December 31, 2019 to
$18.5 million. Our current ratio was 4.4 and 4.1 for December 31,
2019 and 2018, respectively.
Although
we have no significant external capital expenditure plans
currently, we expect that we will continue to make capital
expenditures to support our business. We plan to increase our
investment in internally developed equipment used for services,
rentals, sales demonstration and test equipment as we develop and
release new products. Capital expenditures are expected to be
funded by existing and internally generated funds or lease
financing.
As a
result of our significant product development, customer support,
selling and marketing efforts, we have required substantial working
capital to fund our operations. In recent years, we have managed
operations with planned increases in investment in our new business
markets, products and technologies, while addressing rising costs,
tariffs and foreign exchange rate challenges. This included
geographic shifts in our operations and differentiated product
development and cost strategies.
We
believe that we have sufficient cash or working capital available
under our operating plan to fund our operations and capital
requirements through at least the next one-year period. Our working
capital may be used to fund possible losses, business growth,
project initiatives, share repurchases and business development
initiatives including acquisitions, which could reduce our
liquidity and result in a requirement for additional cash at that
time. Any substantial inability to achieve our current business
plan could have a material adverse impact on our financial
position, liquidity, or results of operations and may require us to
reduce expenditures and/or seek additional financing.
OFF-BALANCE SHEET ARRANGEMENTS
Except
as noted in the accompanying consolidated financial statements in
Note 7, “Operating Lease Commitments” and Note 8,
“Other Commitments”, we had no off-balance sheet
arrangements.
SHARE REPURCHASE PROGRAMS
On
October 31, 2018, our Board of Directors approved a share
repurchase program with provisions to buy back up to $2.0 million
of our stock during the period from November 1, 2018 through
October 31, 2019. The program was established with a
10b5-1 plan under the Exchange Act to provide flexibility to make
purchases throughout the period. The $2.0 million buyback program
was completed during the third quarter of 2019. The following is a
summary of the stock repurchase program from November 1, 2018
through September 30, 2019:
26
|
Repurchases by
Month
|
Total Number of
Shares Purchased
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased as Part of Publicly Announced Repurchase
Program
|
Approximate
Dollar Value of Shares that May Yet Be Purchased under the
Program
|
|
|
|
|
|
|
|
Dec.
2018
|
101,975
|
$
5.25
|
101,975
|
$
1,464,470
|
|
Jan.
2019
|
43,701
|
$
5.39
|
43,701
|
$
1,229,115
|
|
Mar.
2019
|
13,911
|
$
5.49
|
13,911
|
$
1,152,793
|
|
Apr.
2019
|
69,141
|
$
5.34
|
69,141
|
$
783,687
|
|
May
2019
|
69,798
|
$
4.63
|
69,798
|
$
461,417
|
|
Jun.
2019
|
49,255
|
$
4.44
|
49,255
|
$
244,197
|
|
Jul.
2019
|
55,280
|
$
4.37
|
55,280
|
$
2,798
|
|
Aug.
2019
|
624
|
$
4.32
|
624
|
$
3
|
|
Total
|
403,685
|
$
4.95
|
403,685
|
|
NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL
MEASURES
Earnings
Before Interest, Taxes, Depreciation, and Amortization
(“EBITDA”) and Adjusted EBITDA excluding equity
compensation (a non-cash item) are set forth below. Non-GAAP
financial measures should not be considered a substitute for, or
superior to, measures of financial performance prepared in
accordance with GAAP. We believe that these non-GAAP financial
measures provide meaningful supplemental information regarding our
results and facilitate the comparison of results. A reconciliation
of net income to EBITDA and adjusted EBITDA follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
(in
thousands)
|
|
|
|
Net Income
(loss)
|
$
(1,187
)
|
$
1,606
|
|
Interest
(income)
|
(53
)
|
(37
)
|
|
Taxes
|
31
|
291
|
|
Depreciation
& amortization
|
868
|
955
|
|
EBITDA earnings
(loss)
|
$
(341
)
|
$
2,815
|
|
|
|
|
|
Equity
compensation
|
1,171
|
1,230
|
|
Adjusted EBITDA
earnings (loss)
|
|
|
|
excluding
equity compensation
|
$
830
|
$
4,045
|
NEW ACCOUNTING PRONOUNCEMENTS
We adopted the new lease accounting standard, ASC 842, on January
1, 2019 using the modified retrospective transition method, and
recorded a balance sheet adjustment on the date of adoption. In
2018, we accounted for leases under ASC 840. In adopting ASC 842,
we utilized certain practical expedients available under the
standard. These practical expedients include waiving reassessment
of conclusions reached under the previous lease standard as to
whether contracts contain leases, not recording right-of-use assets
or lease liabilities for leases with terms of 12 months or less,
how to classify leases identified and how to account for initial
direct costs incurred. We also utilized the practical expedient to
use hindsight as of the date of adoption to determine the terms of
our leases and to evaluate our right-of-use assets for
impairment.
27
In June 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-13, Financial Instruments - Credit Losses
(Topic 326), which updates the guidance related to the measurement
of credit losses on financial instruments, including trade
receivables. This ASU requires the recognition of credit losses on
financial instruments based on an estimate of expected losses,
replacing the incurred loss model in the prior guidance. The new
guidance is effective for annual periods beginning after December
15, 2019, including interim periods within those fiscal years. The
Company does not expect the adoption of ASU 2016-13 will have a
material impact on the consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable.
Item 8. Financial Statements and Supplementary Data
See
pages 29 through 48.
28
|
|
|
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, 2019 and 2018, 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, 2019, and the related
notes and financial statement schedules included under Item 15(a)
(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, 2019 and 2018, and the results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2019, in conformity with accounting
principles generally accepted in the United States of
America.
Change in accounting principle
As
discussed in Note 1 to the consolidated financial statements, the
Company has changed its method of accounting for leases in 2019 due
to the adoption of the new leasing standard.
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 supporting 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.
/s/
GRANT THORNTON LLP
We have
served as the Company’s auditor since 2001.
Seattle,
Washington
March
27, 2020
29
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
December 31,
2019
|
December 31,
2018
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
and cash equivalents
|
$
13,936
|
$
18,343
|
|
Trade
accounts receivable, net of allowance for
|
|
|
|
doubtful
accounts of $80 and $75, respectively
|
4,099
|
3,771
|
|
Inventories
|
5,020
|
5,185
|
|
Other
current assets
|
924
|
621
|
|
TOTAL
CURRENT ASSETS
|
23,979
|
27,920
|
|
|
|
|
|
Property,
plant and equipment – net
|
1,668
|
1,985
|
|
Income
tax receivable
|
640
|
598
|
|
Other
assets
|
1,994
|
220
|
|
TOTAL
ASSETS
|
$
28,281
|
$
30,723
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts
payable
|
$
1,151
|
$
1,755
|
|
Accrued
compensation
|
1,541
|
2,872
|
|
Deferred
revenue
|
1,387
|
1,392
|
|
Other
accrued liabilities
|
1,372
|
789
|
|
Income
taxes payable
|
31
|
47
|
|
TOTAL
CURRENT LIABILITIES
|
5,482
|
6,855
|
|
|
|
|
|
Operating
lease liabilities
|
1,178
|
-
|
|
Long-term
other payables
|
91
|
511
|
|
|
|
|
|
COMMITMENTS
|
-
|
-
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
Preferred
stock -
|
|
|
|
Authorized,
5,000,000 shares, including
|
|
|
|
200,000
shares of Series A Junior Participating
|
|
|
|
Issued
and outstanding, none
|
-
|
-
|
|
Common
stock, at stated value -
|
|
|
|
Authorized,
30,000,000 shares
|
|
|
|
Issued
and outstanding, 8,212,748 shares as of December 31,
|
|
|
|
2019
and 8,338,628 shares as of December 31, 2018
|
18,748
|
19,254
|
|
Accumulated
earnings
|
2,508
|
3,695
|
|
Accumulated
other comprehensive income (loss)
|
274
|
408
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
21,530
|
23,357
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
28,281
|
$
30,723
|
30
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
For the Years
Ended
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Net
sales
|
$
21,568
|
$
29,224
|
|
Cost
of goods sold
|
9,018
|
11,868
|
|
Gross
margin
|
12,550
|
17,356
|
|
Operating
expenses:
|
|
|
|
Research
and development
|
6,451
|
7,361
|
|
Selling,
general and administrative
|
7,377
|
8,257
|
|
Total
operating expenses
|
13,828
|
15,618
|
|
Operating
income (loss)
|
(1,278
)
|
1,738
|
|
Non-operating
income:
|
|
|
|
Interest
income
|
53
|
37
|
|
Gain
on sale of assets
|
64
|
19
|
|
Foreign
currency transaction gain (loss)
|
5
|
103
|
|
Total
non-operating income
|
122
|
159
|
|
Income
(loss) before income taxes
|
(1,156
)
|
1,897
|
|
Income
tax (expense) benefit
|
(31
)
|
(291
)
|
|
Net
income (loss)
|
$
(1,187
)
|
$
1,606
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
$
(0.14
)
|
$
0.19
|
|
Diluted
earnings (loss) per share
|
$
(0.14
)
|
$
0.19
|
|
Weighted-average
basic shares
|
8,247
|
8,378
|
|
Weighted-average
diluted shares
|
8,247
|
8,514
|
31
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
For the Years
Ended
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Net
Income (loss)
|
$
(1,187
)
|
$
1,606
|
|
Other
comprehensive income:
|
|
|
|
Foreign
currency translation gain (loss)
|
(134
)
|
(574
)
|
|
Comprehensive
income (loss)
|
$
(1,321
)
|
$
1,032
|
32
DATA I/O CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
|
|
|
|
|
Accumulated
|
|
|
|
Common
Stock
|
Retained
|
and
Other
|
Total
|
|
|
|
|
|
Earnings
|
Comprehensive
|
Stockholders'
|
|
|
Shares
|
Amount
|
(Deficit)
|
Income
(Loss)
|
Equity
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2017
|
8,276,813
|
$
18,989
|
$
2,089
|
$
982
|
$
22,060
|
|
Stock options
exercised
|
10,052
|
-
|
-
|
-
|
-
|
|
Repurchased
shares
|
(101,975
)
|
(536
)
|
-
|
-
|
(536
)
|
|
Stock awards issued, net of tax
withholding
|
150,726
|
(448
)
|
-
|
-
|
(448
)
|
|
Issuance of stock through: Employee
Stock Purchase Plan
|
3,012
|
19
|
-
|
-
|
19
|
|
Share-based
compensation
|
-
|
1,230
|
-
|
-
|
1,230
|
|
Net income
(loss)
|
-
|
-
|
1,606
|
-
|
1,606
|
|
Other comprehensive income gain
(loss)
|
-
|
-
|
-
|
(574
)
|
(574
)
|
|
Balance at
December 31, 2018
|
8,338,628
|
$
19,254
|
$
3,695
|
$
408
|
$
23,357
|
|
|
|
|
|
|
|
|
Stock options
exercised
|
-
|
-
|
|
|
-
|
|
Repurchased
shares
|
(301,710
)
|
(1,464
)
|
-
|
-
|
(1,464
)
|
|
Stock awards issued, net of tax
withholding
|
169,653
|
(243
)
|
-
|
-
|
(243
)
|
|
Issuance of stock through: Employee
Stock Purchase Plan
|
6,177
|
30
|
-
|
-
|
30
|
|
Share-based
compensation
|
-
|
1,171
|
-
|
-
|
1,171
|
|
Net income
(loss)
|
-
|
-
|
(1,187
)
|
-
|
(1,187
)
|
|
Other comprehensive income gain
(loss)
|
-
|
-
|
-
|
(134
)
|
(134
)
|
|
Balance at
December 31, 2019
|
8,212,748
|
$
18,748
|
$
2,508
|
$
274
|
$
21,530
|
33
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
For the Years
Ended
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
income(loss)
|
$
(1,187
)
|
$
1,606
|
|
Adjustments
to reconcile net income(loss)
|
|
|
|
to
net cash provided by (used in) operating activities:
|
|
|
|
Depreciation
and amortization
|
867
|
955
|
|
Gain
on sale of assets
|
(64
)
|
(19
)
|
|
Equipment
transferred to cost of goods sold
|
63
|
423
|
|
Share-based
compensation
|
1,171
|
1,230
|
|
Net
change in:
|
|
|
|
Trade
accounts receivable
|
(375
)
|
(78
)
|
|
Inventories
|
139
|
(1,135
)
|
|
Other
current assets
|
(307
)
|
72
|
|
Accounts
payable and accrued liabilities
|
(2,031
)
|
(397
)
|
|
Deferred
revenue
|
(98
)
|
(288
)
|
|
Other
long-term liabilities
|
(29
)
|
(82
)
|
|
Deposits
and other long-term assets
|
(245
)
|
(175
)
|
|
Net
cash provided by (used in) operating activities
|
(2,096
)
|
2,112
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases
of property, plant and equipment
|
(612
)
|
(907
)
|
|
Net
proceeds from sale of assets
|
64
|
19
|
|
Cash
provided by (used in) investing activities
|
(548
)
|
(888
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Net
proceeds from issuance of common stock, less payments
|
|
|
|
for
shares withheld to cover tax
|
(213
)
|
(966
)
|
|
Repurchase
of common stock
|
(1,464
)
|
-
|
|
Cash
provided by (used in) financing activities
|
(1,677
)
|
(966
)
|
|
Increase
(decrease) in cash and cash equivalents
|
(4,321
)
|
258
|
|
|
|
|
|
Effects
of exchange rate changes on cash
|
(86
)
|
(456
)
|
|
Cash
and cash equivalents at beginning of period
|
18,343
|
18,541
|
|
Cash
and cash equivalents at end of period
|
$
13,936
|
$
18,343
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash
paid during the period for:
|
|
|
|
Income
taxes
|
$
307
|
$
463
|
34
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
Doubtful Accounts
●
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, primarily China, Germany and Canada, totaled (in
millions) $8.7 at December 31, 2019 and $6.4 at December 31,
2018.
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
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 doubtful accounts. 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. Interest may be charged, at
the discretion of management and according to our standard sales
terms, beginning on the day after the due date of the receivable.
However, interest income is subsequently recognized on these
accounts either to the extent cash is received, or when the future
collection of interest and the receivable balance is considered
probable by management.
Inventories
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
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 manufacturing and office
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 this evaluation, no impairment was noted for property,
plant and equipment for the years ended December 31, 2019 and
2018.
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 single-option method. Our share-based
compensation is reduced for estimated forfeitures at the time of
grant and revised as necessary in subsequent periods if actual
forfeitures differ from those estimates.
36
Revenue Recognition
Effective
January 1, 2018, the Company adopted ASU 2014-09, Revenue
(“Topic 606”): Revenue from Contracts with Customers,
using the modified retrospective method. Topic 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.
Our
basic revenue recognition remains essentially the same as it was in
2017. The adoption of Topic 606 did not have a material impact on
our 2018 financial statement line items, either individually or in
the aggregate, and would not have been material to 2017 financial
results. We have elected the practical expedient to 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
2019, the impact of capitalization of incremental costs for
obtaining contracts was immaterial. We have made a sales tax policy
election to 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 takes into account 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. The transaction price is allocated to the
separate performance obligations on relative standalone sales
price. We allocate the transaction price of each element based on
relative selling prices. Relative selling price is based on the
selling price of the standalone system. For the installation and
service and support performance obligations, we use the value of
the discount given to distributors who perform these components.
For software maintenance performance obligations, we use what we
charge for annual software maintenance renewals after the initial
year the system is sold. Revenue is recognized on the system sale
based on shipping terms, installation revenue is recognized after
the installation is performed, and hardware service and support and
software maintenance revenue is recognized ratably over the term of
the agreement, typically one year. Deferred revenue includes
service, support and maintenance contracts and represents the
undelivered performance obligation of agreements that are typically
for one year.
When we
sell software separately, we recognize revenue upon the transfer of
control of the software, which is generally upon shipment, provided
that only inconsequential performance obligations remain on our
part and substantive acceptance conditions, if any, have been
met.
We
recognize revenue when there is an approved contract that both
parties are committed to perform, both parties rights have been
identified, the contract has substance, collection of substantially
all the consideration is probable, the transaction price has been
determined and allocated over the performance obligations, the
performance obligations including substantive acceptance
conditions, if any, in the contract have been met, the obligation
is not contingent on resale of the product, the buyer’s
obligation would not be changed in the event of theft, physical
destruction or damage to the product, the buyer acquiring the
product for resale has economic substance apart from us and we do
not have significant obligations for future performance to directly
bring about the resale of the product by the buyer. We establish a
reserve for sales returns based on historical trends in product
returns and estimates for new items. Payment terms are generally 30
days from shipment.
37
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:
|
Net
sales by type
|
2019
|
2018
|
|
(in
thousands)
|
|
|
|
Equipment
Sales
|
$
12,553
|
$
19,002
|
|
Adapter
Sales
|
5,535
|
6,954
|
|
Software and
Maintenance Sales
|
3,480
|
3,268
|
|
Total
|
$
21,568
|
$
29,224
|
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. 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, 2019, 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 noncancelable 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 $173,000 and $174,000 in 2019 and 2018,
respectively.
38
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 65,000 and 136,000 for the years ended
December 31, 2019 and 2018, respectively. Options to purchase
29,752 and 25,000 shares of common stock were outstanding as of
December 31, 2019 and 2018, respectively, but were excluded from
the computation of diluted EPS for the period 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. Two customers accounted for greater than
10% of our consolidated accounts receivable balance at December 31,
2019: Flextronics and Panasonic represented 17% and 15% of that
balance, respectively. As of December 31, 2018, three customers
each accounted for greater than 10% of our consolidated accounts
receivable balance at December 31, 2018: Systemation, Continental
and Semitron. Our consolidated accounts receivable balance as of
December 31, 2019 and 2018 includes foreign accounts receivable in
the functional currency of our foreign subsidiaries amounting to
$1,255,000 and $1,931,000, 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.
New Accounting Pronouncements
We adopted the new lease accounting standard, ASC 842, on January
1, 2019 using the modified retrospective transition method, and
recorded a balance sheet adjustment on the date of adoption. In
2018, we accounted for leases under ASC 840. In adopting ASC 842,
we utilized certain practical expedients available under the
standard. These practical expedients include waiving reassessment
of conclusions reached under the previous lease standard as to
whether contracts contain leases, not recording right-of-use assets
or lease liabilities for leases with terms of 12 months or less,
how to classify leases identified and how to account for initial
direct costs incurred. We also utilized the practical expedient to
use hindsight as of the date of adoption to determine the terms of
our leases and to evaluate our right-of-use assets for
impairment.
In June 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-13, Financial Instruments - Credit Losses
(Topic 326), which updates the guidance related to the measurement
of credit losses on financial instruments, including trade
receivables. This ASU requires the recognition of credit losses on
financial instruments based on an estimate of expected losses,
replacing the incurred loss model in the prior guidance. The new
guidance is effective for annual periods beginning after December
15, 2019, including interim periods within those fiscal years. The
Company does not expect the adoption of ASU 2016-13 will have a
material impact on the consolidated financial
statements.
39
NOTE 2 – ACCOUNTS RECEIVABLE, NET
|
|
December 31,
2019
|
December
31,
2018
|
|
(in
thousands)
|
|
|
|
Trade accounts
receivable
|
$
4,179
|
$
3,846
|
|
Less allowance for
doubtful receivables
|
80
|
75
|
|
Trade accounts
receivable, net
|
$
4,099
|
$
3,771
|
Changes
in Data I/O’s allowance for doubtful accounts are as
follow:
|
|
December 31,
2019
|
December
31,
2018
|
|
(in
thousands)
|
|
|
|
Beginning
balance
|
$
75
|
$
73
|
|
Bad debt expense
(reversal)
|
5
|
2
|
|
Accounts
written-off
|
-
|
-
|
|
Recoveries
|
-
|
-
|
|
Ending
balance
|
$
80
|
$
75
|
NOTE 3– INVENTORIES
|
|
December
31,
2019
|
December
31,
2018
|
|
(in
thousands)
|
|
|
|
Raw
material
|
$
2,416
|
$
2,925
|
|
Work-in-process
|
1,832
|
1,584
|
|
Finished
goods
|
772
|
676
|
|
Inventories
|
$
5,020
|
$
5,185
|
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
|
|
December
31,
2019
|
December
31,
2018
|
|
(in
thousands)
|
|
|
|
Leasehold
improvements
|
$
395
|
$
399
|
|
Equipment
|
5,606
|
5,378
|
|
Sales
demonstration equipment
|
778
|
942
|
|
|
6,779
|
6,719
|
|
Less
accumulated depreciation
|
5,111
|
4,734
|
|
Property and
equipment, net
|
$
1,668
|
$
1,985
|
Total
depreciation expense recorded for 2019 and 2018 was $867,000 and
$955,000, respectively.
NOTE 5 – INCOME TAX RECEIVABLE
On December 22,
2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was
signed into law, making significant changes to the Internal Revenue
Code. Changes include the repeal of corporate Alternative Minimum
Tax (AMT) for tax years after December 31, 2017. As a result, in
2017, we have recorded a long-term income tax receivable which as
of December 31, 2019 has a balance of $640,000 for the refundable
AMT credits.
40
NOTE 6 – OTHER ACCRUED LIABILITIES
Other
accrued liabilities consisted of the following
components:
|
|
December
31,
2019
|
December
31,
2018
|
|
(in
thousands)
|
|
|
|
Lease
liability - short term
|
$
678
|
$
0
|
|
Product
warranty
|
367
|
471
|
|
Sales
return reserve
|
77
|
87
|
|
Other
taxes
|
126
|
102
|
|
Other
|
124
|
129
|
|
Other
accrued liabilities
|
$
1,372
|
$
789
|
The
changes in our product warranty liability for the year ending
December 31, 2019 are follows:
|
|
December
31,
2019
|
|
(in
thousands)
|
|
|
Liability,
beginning balance
|
$
471
|
|
Net
expenses
|
736
|
|
Warranty
claims
|
(736
)
|
|
Accrual
revisions
|
(104
)
|
|
Liability,
ending balance
|
$
367
|
NOTE 7 – 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 follows:
For the
years ending December 31:
|
|
Operating Lease Commitments
|
|
(in
thousands)
|
|
|
2020
|
$
755
|
|
2021
|
681
|
|
2022
|
308
|
|
2023
|
89
|
|
2024
|
82
|
|
Thereafter
|
141
|
|
Total
|
$
2,056
|
|
Less
Imputed interest
|
(200
)
|
|
Total operating
lease liabilities
|
$
1,856
|
Cash
paid for operating lease liabilities for the twelve months ended
December 31, 2019 was $757,000. There were no new or modified
leases during the twelve months ended December 31,
2019.
The
following table presents supplemental balance sheet information
related to leases as of December 31, 2019:
|
|
Balance at
December 31,
2019
|
|
(in
thousands)
|
|
|
Right-of-use assets
(Long-term other assets)
|
$
1,574
|
|
Lease
liability-short term (Other accrued liabilities)
|
678
|
|
Lease
liability-long term (Long-term other payables)
|
1,178
|
41
At
December 31, 2019, the weighted average remaining lease term is
3.39 years and the weighted average discount rate used is
5%.
The
components of our lease expense for the twelve months ended
December 31, 2019 include operating lease costs of $685,000, which
includes short-term lease costs of $32,000.
Our
real estate facility leases are described below:
During
the third quarter of 2017, we amended our lease agreement for the
Redmond, Washington headquarters facility, extending the lease to
July 31, 2022, waiving a potential space give back provision and
receiving lease inducement incentives. Previously on June 8, 2015
the lease had been amended to relocate our headquarters to a nearby
building and lower the square footage to approximately 20,460. The
lease base annual rental payments during 2019 and 2018 were
approximately $351,000 and $341,000, 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.
We
signed a lease agreement effective November 1, 2015 that extends
through October 31, 2021 for a facility located in Shanghai, China.
This lease is for approximately 19,400 square feet. The lease base
annual rental payments during 2019 and 2018 were approximately
$305,000 and $288,000, respectively.
During
the fourth quarter of 2016, we signed a lease agreement for a new
facility located near Munich, Germany which was effective March 1,
2017 and extends through February 28, 2022. This lease is for
approximately 4,895 square feet. The lease base annual rental
payments during 2019 and 2018 were approximately $57,000 and
$67,000, respectively.
NOTE 8 –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, 2019,
the purchase commitments and other obligations totaled $1,334,000
of which all but $323,000 are expected to be paid over the next
twelve months.
NOTE 9 – CONTINGENCIES
As of
December 31, 2019, 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 10 – STOCK AND RETIREMENT PLANS
Stock Option Plans
At
December 31, 2019, there were 687,119 shares available for future
grant under Data I/O Corporation 2000 Stock Compensation Incentive
Plan (“2000 Plan”). At December 31, 2019 there were
shares of Common Stock reserved for issuance consisting of 561,403
under the 2000 plan. Pursuant to this 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. 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.
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 2019 and 2018, a total of 6,177 and 3,012
shares, respectively, were purchased under the plan at average
prices of $4.88 and 7.81 per share, respectively. At December 31,
2019, a total 39,249 shares were reserved for future
issuance.
42
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, 2019 there were 25,000 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 for 2019 or 2018 board service and
151,322 shares remain available in
the plan as of December 31, 2019.
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 years 2019 and 2018, we contributed one
dollar for each dollar contributed by a participant, with a maximum
contribution of four percent of a participant’s eligible
earnings. Our matching contribution expense for the savings plan,
net of forfeitures, was approximately $239,000 and $237,000 in 2019
and 2018, respectively. Employer matching contributions owed to the
plan were $211,000 and $271,000 at December 31, 2019 and 2018,
respectively.
NOTE 11– 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, 2019 and
2018 was as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
(in
thousands)
|
|
|
|
Cost of goods
sold
|
$
28
|
$
25
|
|
Research and
development
|
288
|
266
|
|
Selling, general
and administrative
|
855
|
939
|
|
Total share-based
compensation
|
$
1,171
|
$
1,230
|
An
immaterial amount of share-based compensation was capitalized into
inventory as overhead for the years ended December 31, 2019 and
2018, respectively.
The
fair values of share-based awards for employee stock option awards
were estimated at the date of grant using the Black-Scholes
valuation model. The volatility and expected life of the options
used in calculating the fair value of share-based awards may
exclude certain periods of historical data that we considered
atypical and not likely to occur in future periods. The following
weighted average assumptions were used to calculate the fair value
of options granted during the years ended December 31:
43
|
|
Employee
Stock
|
|
|
|
Options
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Risk-free interest
rates
|
2.31
%
|
N/A
|
|
Volatility
factors
|
62.05
%
|
N/A
|
|
Expected life of
the option in years
|
4.0
|
N/A
|
|
Expected dividend
yield
|
None
|
N/A
|
The
risk-free interest rate used in the Black-Scholes valuation method
is based on the implied yield currently available in U.S. Treasury
securities at maturity with an equivalent term. We have not
recently declared or paid any dividends and do not currently have
plans to do so in the future. The expected term of options
represents the period that our stock-based awards are expected to
be outstanding and has been determined based on historical weighted
average holding periods and projected holding periods for the
remaining unexercised shares. Consideration was given to the
contractual terms of our stock-based awards, vesting schedules and
expectations of future employee behavior. Expected volatility is
based on the annualized daily historical volatility of our stock
over a representative period.
The
following table summarizes stock option activity under our stock
option plans for the twelve months ended December 31:
|
|
2019
|
2018
|
||||
|
|
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
|
25,000
|
$
8.03
|
|
40,000
|
$
6.10
|
|
|
Granted
|
25,000
|
4.98
|
|
-
|
-
|
|
|
Exercised
|
-
|
0.00
|
|
(15,000
)
|
2.83
|
|
|
Cancelled, Expired
or
|
|
|
|
|
|
|
|
Forfeited
|
(25,000
)
|
8.03
|
|
-
|
-
|
|
|
Outstanding at end
of year
|
25,000
|
$
4.98
|
5.34
|
25,000
|
$
8.03
|
4.50
|
|
|
|
|
|
|
|
|
|
Vested or expected
to vest at the end of the period
|
24,723
|
$
4.98
|
5.34
|
22,924
|
$
8.03
|
4.50
|
|
Exercisable at end
of year
|
12,500
|
$
4.98
|
5.34
|
7,813
|
$
8.03
|
4.50
|
The
aggregate intrinsic value of outstanding options is $0. There were
no stock option awards exercised in 2019.
44
Restricted
stock award including performance-based stock award activity under
our share-based compensation plan was as follows:
|
|
2019
|
2018
|
||
|
|
Awards
|
Weighted -
Average Grant Date Fair Value
|
Awards
|
Weighted -
Average Grant Date Fair Value
|
|
Outstanding at
beginning of year
|
558,856
|
$
6.06
|
565,850
|
$
5.09
|
|
Granted
|
276,700
|
4.57
|
206,856
|
7.11
|
|
Vested
|
(224,089
)
|
5.30
|
(213,100
)
|
4.51
|
|
Cancelled
|
(75,064
)
|
7.30
|
(750
)
|
4.24
|
|
Outstanding at end
of year
|
536,403
|
$
5.44
|
558,856
|
$
6.06
|
During
the years ended December 31, 2019 and 2018, 54,436 and 67,322
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.
The
remaining unamortized expected future compensation expense and
remaining amortization period associated with unvested option
grants and restricted stock awards are:
|
|
December 31,
2019
|
December 31,
2018
|
|
|
|
|
|
Unamortized future
compensation expense
|
$
2,351,324
|
$
2,835,978
|
|
Remaining weighted
average amortization period in years
|
2.40
|
2.63
|
NOTE 12 – SHARE REPURCHASE PROGRAMS
On
October 31, 2018, our Board of Directors approved a share
repurchase program with provisions to buy back up to $2.0 million
of our stock during the period from November 1, 2018 through
October 31, 2019. The program was established with a
10b5-1 plan under the Exchange Act to provide flexibility to make
purchases throughout the period. For the quarter ended September
30, 2019, 55,904 shares of stock were repurchased at an average
price of $4.37 for a total of $244,197 including $1,176 in
commissions and charges. The $2.0 million buyback program was
completed during the third quarter of 2019. The following is a
summary of the stock repurchase program from November 1, 2018
through September 30, 2019:
|
Repurchases by
Month
|
Total Number of
Shares Purchased
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased as Part of Publicly Announced Repurchase
Program
|
Approximate
Dollar Value of Shares that May Yet Be Purchased under the
Program
|
|
|
|
|
|
|
|
Dec.
2018
|
101,975
|
$
5.25
|
101,975
|
$
1,464,470
|
|
Jan.
2019
|
43,701
|
$
5.39
|
43,701
|
$
1,229,115
|
|
Mar.
2019
|
13,911
|
$
5.49
|
13,911
|
$
1,152,793
|
|
Apr.
2019
|
69,141
|
$
5.34
|
69,141
|
$
783,687
|
|
May
2019
|
69,798
|
$
4.63
|
69,798
|
$
461,417
|
|
Jun.
2019
|
49,255
|
$
4.44
|
49,255
|
$
244,197
|
|
Jul.
2019
|
55,280
|
$
4.37
|
55,280
|
$
2,798
|
|
Aug.
2019
|
624
|
$
4.32
|
624
|
$
3
|
|
Total
|
403,685
|
$
4.95
|
403,685
|
|
45
NOTE 13– INCOME TAXES
Components of income (loss) before taxes:
|
|
Year Ended
December 31,
|
|
|
(in
thousands)
|
2019
|
2018
|
|
U.S.
operations
|
$
(2,518
)
|
$
(137
)
|
|
Foreign
operations
|
1,362
|
2,034
|
|
Total
income (loss) before taxes
|
$
(1,156
)
|
$
1,897
|
Income
tax expense (benefit) consists of:
|
(in
thousands)
|
Year Ended
December 31,
|
|
|
Current
tax expense (benefit)
|
2019
|
2018
|
|
U.S.
federal
|
$
(42
)
|
$
5
|
|
State
|
8
|
20
|
|
Foreign
|
65
|
266
|
|
|
31
|
291
|
|
Deferred
tax expense (benefit) – U.S. federal
|
-
|
-
|
|
Total
income tax expense (benefit)
|
$
31
|
$
291
|
A
reconciliation of our effective income tax and the U.S. federal tax
rate is as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
(in
thousands)
|
|
|
|
Statutory
tax
|
$
(243
)
|
$
398
|
|
State
and foreign income tax, net of federal income tax
benefit
|
(230
)
|
(159
)
|
|
Valuation
allowance for deferred tax assets
|
568
|
245
|
|
Federal
rate change
|
-
|
-
|
|
Foreign
sourced deemed dividend income
|
-
|
-
|
|
Stock
based compensation
|
(177
)
|
(282
)
|
|
AMT
credit refund
|
-
|
-
|
|
Other
|
113
|
89
|
|
Total
income tax expense (benefit)
|
$
31
|
$
291
|
The tax
effects of temporary differences that gave rise to significant
portions of the deferred tax assets are presented
below:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
(in
thousands)
|
|
|
|
Deferred
income tax assets:
|
|
|
|
Allowance
for doubtful accounts
|
$
13
|
$
8
|
|
Inventory
and product return reserves
|
464
|
467
|
|
Compensation
accruals
|
1,723
|
1,515
|
|
Accrued
liabilities
|
129
|
321
|
|
Book-over-tax
depreciation and amortization
|
25
|
21
|
|
Foreign
net operating loss carryforwards
|
3
|
132
|
|
U.S.
net operating loss carryforwards
|
2,904
|
2,345
|
|
U.S.
credit carryforwards
|
2,280
|
2,161
|
|
|
7,541
|
6,970
|
|
|
|
|
|
Valuation
Allowance
|
(7,541
)
|
(6,970
)
|
|
Total
Deferred Income Tax Assets
|
$
-
|
$
-
|
46
The
valuation allowance for deferred tax assets increased $571,000 and
$140,000 during the years ended December 31, 2019 and 2018,
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.
U.S.
net operating loss carryforwards are $13,830,000 at December 31,
2019 with expiration years from 2022 to 2039. 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.
The
gross changes in uncertain tax positions resulting in unrecognized
tax benefits are presented below:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
(in
thousands)
|
|
|
|
Unrecognized
tax benefits, opening balance
|
$
308
|
$
272
|
|
Prior
period tax position increases
|
10
|
-
|
|
Additions
based on tax positions related to current year
|
30
|
36
|
|
Unrecognized tax
benefits, ending balance
|
$
348
|
$
308
|
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 2016, 2017, 2018 and
2019 in the United States of America. In addition, various tax
years from 2002 to 2015 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 14 – 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 subsidiaries in Germany as well as in China, which also
manufactures some of our products.
47
The
following tables provide summary operating information by
geographic area:
|
|
Year Ended
December 31,
|
|
|
(in
thousands)
|
2019
|
2018
|
|
Net
sales:
|
|
|
|
U.S.
|
$
1,735
|
$
3,436
|
|
Europe
|
8,828
|
13,251
|
|
Rest
of World
|
11,005
|
12,537
|
|
|
$
21,568
|
$
29,224
|
|
|
|
|
|
Included
in Europe and Rest of World net sales are
|
|
|
|
the
following significant balances:
|
|
|
|
|
|
|
|
Germany
|
$
2,507
|
$
4,428
|
|
China
|
$
2,934
|
$
4,489
|
|
|
|
|
|
Operating
income:
|
|
|
|
U.S.
|
$
317
|
$
802
|
|
Europe
|
(1,108
)
|
258
|
|
Rest
of World
|
(487
)
|
678
|
|
|
$
(1,278
)
|
$
1,738
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
U.S.
|
$
12,818
|
$
18,976
|
|
Europe
|
5,917
|
5,279
|
|
Rest
of World
|
9,546
|
6,468
|
|
|
$
28,281
|
$
30,723
|
NOTE 15 – SUBSEQUENT EVENTS
Beginning
in early 2020, there has been an outbreak of coronavirus
(COVID-19), initially in China and which has spread to other
jurisdictions, including all locations where the Company does
business. The full extent of the outbreak, related business and
travel restrictions, government required closure restrictions and
changes to behavior intended to reduce its spread are uncertain as
of the date of the Report as this continues to evolve globally.
Therefore, the full extent to which coronavirus may impact the
Company’s results of operations or financial position is
uncertain. This outbreak has already had a significant disruption
on the operations of the Company and its suppliers and customers.
To the extent that the Company’s customers and suppliers
continue to be impacted by the coronavirus outbreak, this could
reduce the availability, or result in delays, of materials or
supplies to or from the Company, which in turn could significantly
interrupt the Company’s business operations. Management
continues to monitor the impact that the COVID-19 pandemic is
having on the Company, our industry and the economies in which the
Company operates. While we expect this matter to negatively impact
our results, the related financial impact and duration of such
impact cannot be reasonably estimated at this time.
There
were no other subsequent events which would require additional
disclosures to the financial statements, except for those already
disclosed throughout the Notes to Consolidated Financial
Statements.
48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 9A._ Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report (the “Evaluation Date”).
Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective at the reasonable
assurance level. Disclosure controls are controls and procedures
designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls
are also designed to ensure that such information is accumulated
and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure.
(b)
Management’s Report on Internal Control Over Financial
Reporting.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control
systems are designed to provide reasonable assurance to the
Company’s management and board of directors regarding
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial
reporting is defined in Rule 13a-15(f) promulgated under the
Exchange Act and includes those policies and procedures
that:
(i)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company;
(ii)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company; and
(iii)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
All
internal controls, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statements preparation and presentation.
Our
management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2019.
In making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated
Framework (2013). Based on this assessment our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2019, our internal control over financial reporting
was effective.
This
annual report does not include an attestation report of the
company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the company’s
registered public accounting firm pursuant to the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which permanently
exempts smaller reporting companies from complying with Section
404(b) of the Sarbanes-Oxley Act of 2002.
(c)
Changes in internal controls.
There
were no changes made in our internal controls during the period
covered by this report that has materially affected or is
reasonably likely to materially affect our internal control over
financial reporting.
Item 9B._Other Information
None.
49
PART
III
Item 10. Directors, Executive Officers and Corporate
Governance
Information
regarding the Registrant’s directors is set forth under
“Election of Directors” in our Proxy Statement relating
to our annual meeting of shareholders to be held on May 18, 2020
and is incorporated herein by reference. Such Proxy Statement will
be filed within 120 days of our year-end. Information regarding the
Registrant’s executive officers is set forth in Item 1 of
Part I herein under the caption “Executive Officers of the
Registrant.”
Code of
Ethics
We have
adopted a Code of Ethics that applies to all directors, officers
and employees of Data I/O, including the Chief Executive Officer
and Chief Financial Officer. The key principles of the Code of
Ethics are to act legally and with integrity in all work for Data
I/O. The Code of Ethics is posted on the corporate governance page
of our website
http://www.dataio.com/Company/InvestorRelations/CorporateGovernance.aspx.
We will post any amendments to our Code of Ethics on our website.
In the unlikely event that the Board of Directors approves any sort
of waiver to the Code of Ethics for our executive officers or
directors, information concerning such waiver will also be posted
on our website. In addition to posting information regarding
amendments and waivers on our website, the same information will be
included in a Current Report on Form 8-K within four business days
following the date of the amendment or waiver, unless website
posting of such amendments or waivers is permitted by
Nasdaq’s rules.
Item 11. Executive Compensation
Information
called for by Part III, Item 11, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held on May
18, 2020 and is incorporated herein by reference. The information
appears in the Proxy Statement under the caption “Executive
Compensation.” Such Proxy Statement will be filed within 120
days of our year-end.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Information
called for by Part III, Item 12, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held
on
May 18, 2020 and is
incorporated herein by reference. The information appears in the
Proxy Statement under the caption “Voting Securities and
Principal Holders.” Such Proxy Statement will be filed within
120 days of our year end.
Equity Compensation Plan Information
The
following table gives information about our Common Stock that may
be issued upon the exercise of options and rights under all of our
existing equity compensation plans as of December 31, 2019. See
Notes 10 and 11 of “Notes to Consolidated Financial
Statements.”
|
|
(a) Number of
securities to be issued upon the exercise of outstanding options,
warrants and rights
|
(b)
Weighted–average exercise price of outstanding options,
warrants and rights
|
(c) Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
Equity
compensation plans approved by the security holders (1)
(2)
|
28,509
|
$
4.84
|
1,351,368
|
|
Equity
compensation plans not approved by the security
holders
|
-
|
$
0.00
|
-
|
|
Total
|
28,509
|
$
4.84
|
1,351,368
|
(1)
Represents shares
of our Common Stock issuable pursuant to the Data I/O Corporation
2000 Stock Incentive Compensation Plan, 1982 Employee Stock
Purchase Plan and 1996 Director Fee Plan. Table excludes unvested
restricted stock awards of 536,403 from the 2000 Plan.
(2)
Stock Appreciation
Rights Plan (“SAR”) provides that directors, executive
officers or holders of 10% or more of our Common Stock have an
accompanying SAR with respect to each exercisable option. While the
plan has been approved by the security holders, no amounts are
included in columns (a), (b), or (c) relating to the
SAR.
50
Item 13. Certain Relationships and Related Transactions, and
Director Independence
The
information required by this item is contained in, and incorporated
by reference from, the Proxy Statement for our 2020 Annual Meeting
of Shareholders under the caption “Certain Relationships and
Related Transactions.”
Item 14._ Principal Accounting Fees and Services
The
information required by this Item with respect to principal
accountant fees and services is incorporated by reference to the
section captioned “Principal Accountant’s Fees and
Services” in the Proxy Statement relating to our annual
meeting of shareholders to be held on May 18, 2020. Such Proxy
Statement will be filed within 120 days of our
year-end.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Executive Compensation Plans and Arrangements
The
following list is a subset of the list of exhibits described below
and contains all compensatory plans, contracts or arrangements in
which any director or executive officer of Data I/O is a
participant, unless the method of allocation of benefits thereunder
is the same for management and non-management
participants:
(1)
Amended and
Restated 1982 Employee Stock Purchase Plan. See Exhibit
10.5.
(2)
Data I/O
Corporation Tax Deferral Retirement Plan and Trust with Great West
Financial (formerly Orchard Trust Company). See Exhibits 10.15,
10.16, 10.17, 10.30 and 10.31.
(3)
Summary of Amended
and Restated Management Incentive Compensation Plan. See Exhibit
10.2.
(4)
Amended and
Restated 1983 Stock Appreciation Rights Plan. See Exhibit
10.1.
(5)
Amended and
Restated Executive Agreements. See Exhibit 10.8, 10.20, 10.23 and
10.27.
(6)
1996 Director Fee
Plan. See Exhibit 10.4.
(7)
Data I/O
Corporation 2000 Stock Compensation Incentive Plan. See Exhibit
10.6, 10.11, 10.22 and 10.26.
(8)
Form of Option
Agreement. See Exhibit 10.7.
(9)
Form of
Indemnification Agreement. See Exhibit 10.18.
(10)
Letter Agreement
with Anthony Ambrose. See Exhibit 10.21.
(11)
Letter Agreement
with Rajeev Gulati. See Exhibit 10.24.
(12)
Form of Restricted
Stock Agreement. See Exhibit 10.12.
(13)
Letter Agreement
with Joel S. Hatlen. See Exhibit 10.28.
(14)
Form of Executive
Agreement. See Exhibit 10.27.
(15)
Form of Restricted
Stock Unit Award Agreement. See Exhibit 10.25.
(16)
Letter Agreement
with Michael Tidwell. See Exhibit 10.36.
51
|
(a)
|
List of Documents Filed as a Part of This
Report:
|
Page
|
||
(1)
Index to Financial Statements
:
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
29
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2019 and
2018
|
30
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations for each of the two years
ended December 31, 2019 and
31-Dec-18
|
31
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income (Loss) for each of
the two years ended
December
31, 2019 and December 31, 2018
|
32
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity for each of
the two years ended December 31, 2019 and December 31,
2018
|
33
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for each of the two years
ended December 31, 2019 and
31-Dec-18
|
34
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
35
|
(2)
Index to Financial Statement Schedules
:
|
|
|
|
Schedule II – Consolidated Valuation and Qualifying
Accounts
|
58
|
All
other schedules not listed above have been omitted because the
required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or
required.
(3)
Index
to Exhibits:
3
Articles
of Incorporation:
3.1
Data I/O’s
restated Articles of Incorporation filed November 2, 1987
(Incorporated by reference to Exhibit 3.1 of Data I/O’s 1987
Annual Report on Form 10-K (File No. 0-10394) and attached as a PDF
to Exhibit 3.1 in our 2017 Annual Report on Form
10-K).
4
Instruments
Defining the Rights of Security Holders, Including
Indentures:
10
Material
Contracts:
10.1
Amended and
Restated 1983 Stock Appreciation Rights Plan dated
February 3, 1993 (Incorporated by reference to Exhibit
10.23 of Data I/O’s 1992 Annual Report on Form 10-K (File No.
0-10394) and attached as a PDF to Exhibit 10.1 in our 2017 Annual
Report on Form 10-K).
31
Certification
– Section 302:
32
Certification
– Section 906:
101
Interactive
Date Files Pursuant to Rule 405 of Regulation S-T
Item 16. Form 10-K Summary
None.
52
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
DATA I/O
CORPORATION
(REGISTRANT)
|
|
|
|
|
|
|
|
|
DATED: March 27,
2020
|
By:
|
/s/
Anthony
Ambrose
|
|
|
|
|
Anthony
Ambrose
|
|
|
|
|
President and Chief
Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates
indicated.
|
NAME
|
|
DATE
|
|
TITLE
|
|
|
|
|
|
|
|
/s/
Anthony
Ambrose
|
|
March 27, 2020 |
|
President and Chief
Executive Officer
|
|
Anthony
Ambrose
|
|
|
|
(Principal Executive Officer), Director |
|
|
|
|
|
|
|
/s/
Joel S.
Hatlen
|
|
March 27, 2020 |
|
Chief Operating and
Financial Officer
|
|
Joel S.
Hatlen
|
|
|
|
Vice President |
|
|
|
|
|
Secretary, Treasurer |
|
|
|
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
|
|
/s/
Douglas W.
Brown
|
|
March 27, 2020 |
|
Director
|
|
Douglas W.
Brown
|
|
|
|
|
|
|
|
|
|
|
|
/s/
John D.
Delafield
|
|
March 27, 2020 |
|
Director |
| John D. Delafield |
|
|
|
|
|
|
|
|
|
|
|
/s/
Alan B.
Howe
|
|
March 27, 2020 |
|
Director |
| Alan B. Howe |
|
|
|
|
|
|
|
|
|
|
|
/s/
Mark J.
Gallenberger
|
|
March 27, 2020 |
|
Director |
| Mark J. Gallenberger |
|
|
|
|
53
DATA I/O CORPORATION
SCHEDULE II – CONSOLIDATED VALUATION AND QUALIFYING
ACCOUNTS
|
|
Balance at Beginning of Period
|
Charged/ (Credited) to Costs and Expenses
|
Deductions-Describe
|
Balance at End of Period
|
|
(in
thousands)
|
|
|
|
|
|
Year Ended December
31, 2018:
|
|
|
|
|
|
Allowance
for bad debts
|
$
73
|
$
2
|
$
-
(1)
|
$
75
|
|
|
|
|
|
|
|
Year
Ended December 31, 2019:
|
|
|
|
|
|
Allowance
for bad debts
|
$
75
|
$
5
|
$
-
(1)
|
$
80
|
(1)
Uncollectable accounts written off, net of recoveries
54
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Summary Of Significant Accounting PoliciesNote 2 Accounts Receivable, NetNote 3 InventoriesNote 4 Property, Plant and Equipment, NetNote 5 Income Tax ReceivableNote 6 Other Accrued LiabilitiesNote 7 Operating Lease CommitmentsNote 8 Other CommitmentsNote 9 ContingenciesNote 10 Stock and Retirement PlansNote 11 Share-based CompensationNote 12 Share Repurchase ProgramsNote 13 Income TaxesNote 14 Segment and Geographic InformationNote 15 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. _ Controls and ProceduresItem 9B. _other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. _ Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary