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 the Far East, 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, net of taxes recognized. 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 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) $5.6 at December 31, 2016 and $6.2 at December 31, 2015.
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.
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 accrued, 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 market 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 market) 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, 2016 and 2015.
Patent Costs
We expense external costs, such as filing
fees and associated attorney fees, incurred to obtain initial patents, but capitalize acquired patents 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
reliability 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.
Revenue Recognition
We recognize revenue at the time the product
is shipped. 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 considered
a separate element. 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 at the time of shipment. Installation that is considered perfunctory includes
any installation that can be performed by other parties, such as distributors, other vendors, or in most cases the customers themselves.
This takes into account the complexity, skill and training needed as well as customer expectations regarding installation.
We enter into multiple deliverables arrangements
that arise during the sale of a system that includes an installation component, a service and support component and a software
maintenance component. We allocate the value 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 components, we use what
we charge to distributors who perform these components. For software maintenance components, 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.
When we sell software separately, we recognize
software revenue upon shipment provided that only inconsequential obligations remain on our part and substantive acceptance conditions,
if any, have been met.
We recognize revenue when persuasive evidence
of an arrangement exists, shipment has occurred, the price is fixed or determinable, the buyer has paid or is obligated to pay,
collectability is reasonably assured, substantive acceptance conditions, if any, 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.
Sales were recorded net of actual sales returns
and changes to the associated sales return reserve. Sales return reserves were $50,000 and $61,000 at December 31, 2016 and
2015, respectively.
We transfer certain products out of service
from their internal use and make them available for sale. The products transferred are 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.
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 $108,000 and $137,000 in 2016 and 2015, respectively.
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 164,000 and 147,000 for the years ended December 31, 2016 and 2015,
respectively. Options to purchase 117,352 and 166,720 shares of common stock were outstanding as of December 31, 2016 and
2015, 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. As of December 31, 2016, three customers accounted for greater than 10%
of our consolidated accounts receivable balance: Bosch and Arrow our direct customers, and Data Copy Limited, our distributor in
China, represented 30%, 16% and 14% of that balance, respectively. Our consolidated accounts receivable balance as of December
31, 2016 and 2015 includes foreign accounts receivable in the functional currency of our foreign subsidiaries amounting to $2,554,000
and $569,000, 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
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock
Compensation (ASU 2016-09), “Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 requires excess
tax benefits to be recognized in the statement of operations as an income tax expense and is applied prospectively by means of
a cumulative-effect adjustment of excess tax benefits from equity in the period of adoption. The standard establishes an alternative
practical expedient for estimating the expected term of an award by recognizing the effects of forfeitures in compensation cost
when the forfeitures occur. Adoption of the alternative practical expedient is applied prospectively on an entity-wide basis. The
standard requires that amounts paid to a taxing authority on the employee’s behalf as a result of directly withholding shares
for tax-withholding purposes are to be presented on a retrospective basis as a financing activity on the statement of cash flows.
The standard becomes effective beginning January 1, 2017. We are in the process of evaluating the impact of adoption on our consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases”
(ASU 2016-02). ASU 2016-02 requires lessees to recognize almost all leases on the balance sheet as a right-of-use asset and
a lease liability and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases
of intangible assets or inventory. Early adoption of the standard is allowed. The standard becomes effective beginning January
1, 2019. We are in the process of evaluating the impact of adoption on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides companies with a single model for accounting
for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific
revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the
customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance.
In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” (ASU 2015-14), deferring
the effective date of the new revenue recognition standard by one year and now takes effect for public entities in fiscal years
beginning after December 15, 2017. We currently expect to adopt the revenue standards as of January 1, 2018, utilizing
the modified retrospective transition method. The new standard may, in certain circumstances, impact the timing of when revenue
is recognized for product shipped, and the timing and classification of certain sales incentives. We have begun to evaluate
the potential impact of the adoption on our consolidated financial statements, but at this time the impact is unknown. We
will expand our evaluation to identify all our revenue streams and determine when each source of revenue meets the five requirements
for revenue recognition. We will monitor updated guidance on adopting this new standard.
|
