0001654954-22-006563.txt : 20220512 0001654954-22-006563.hdr.sgml : 20220512 20220512132743 ACCESSION NUMBER: 0001654954-22-006563 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 57 CONFORMED PERIOD OF REPORT: 20220331 FILED AS OF DATE: 20220512 DATE AS OF CHANGE: 20220512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA I/O CORP CENTRAL INDEX KEY: 0000351998 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 910864123 STATE OF INCORPORATION: WA FISCAL YEAR END: 1211 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10394 FILM NUMBER: 22916979 BUSINESS ADDRESS: STREET 1: 6645 185TH AVE NE, SUITE 100 CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 4258676922 MAIL ADDRESS: STREET 1: 6645 185TH AVE NE, SUITE 100 CITY: REDMOND STATE: WA ZIP: 98052 10-Q 1 daio_10q.htm FORM 10-Q daio_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission file number:  0-10394

 

DATA I/O CORPORATION

(Exact name of registrant as specified in its charter)

 

Washington

 

91-0864123

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

6645 185th Ave NE, Suite 100, Redmond, Washington, 98052

425-881-6444

(Address of principal executive offices, including zip code)

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class      

Trading Symbol(s)     

Name of each exchange on which registered

Common Stock

DAIO  

NASDAQ

 

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.       

 

Accelerated filer

Smaller reporting company

Large accelerated filer

Emerging growth company 

Non-accelerated filer

 

 

 

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 ☒

 

Shares of Common Stock, no par value, outstanding as of April 30, 2022:  8,624,171

 

 

  

DATA I/O CORPORATION

 

FORM 10-Q

For the Quarter Ended March 31, 2022

 

INDEX

Part I.

 

Financial Information

Page

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

23

 

 

 

 

 

Item 1A.

Risk Factors

23

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

23

 

 

 

 

 

Item 4.

Mine Safety Disclosures

23

 

 

 

 

 

Item 5.

Other Information

23

 

 

 

 

 

Item 6.

Exhibits

24

 

 

 

 

Signatures

 

25

 

 
2

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

DATA I/O CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

March 31,

2022

 

 

December 31, 

2021

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

$12,296

 

 

$14,190

 

Trade accounts receivable, net of allowance for

 

 

 

 

 

 

 

 

         doubtful accounts of $73 and $89, respectively

 

 

3,055

 

 

 

3,995

 

Inventories

 

 

6,625

 

 

 

6,351

 

Other current assets

 

 

817

 

 

 

737

 

TOTAL CURRENT ASSETS

 

 

22,793

 

 

 

25,273

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment – net

 

 

953

 

 

 

946

 

Other assets

 

 

2,742

 

 

 

2,838

 

TOTAL ASSETS

 

$26,488

 

 

$29,057

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$1,463

 

 

$1,373

 

Accrued compensation

 

 

1,526

 

 

 

2,496

 

Deferred revenue

 

 

1,466

 

 

 

1,507

 

Other accrued liabilities

 

 

1,439

 

 

 

1,413

 

Income taxes payable

 

 

3

 

 

 

-

 

TOTAL CURRENT LIABILITIES

 

 

5,897

 

 

 

6,789

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

2,138

 

 

 

2,277

 

Long-term other payables

 

 

193

 

 

 

138

 

 

 

 

 

 

 

 

 

 

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, 8,622,369 shares as of March 31,

 

 

 

 

 

 

 

 

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

 

 

21,183

 

 

 

20,886

 

Accumulated earnings (deficit)

 

 

(3,831)

 

 

(2,011)

Accumulated other comprehensive income

 

 

908

 

 

 

978

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

18,260

 

 

 

19,853

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$26,488

 

 

$29,057

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

 

 
3

Table of Contents

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(UNAUDITED)

 

 

 

 

 

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net sales

 

$4,965

 

 

$6,015

 

Cost of goods sold

 

 

2,662

 

 

 

2,677

 

Gross margin

 

 

2,303

 

 

 

3,338

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,616

 

 

 

1,606

 

Selling, general and administrative

 

 

2,048

 

 

 

2,062

 

Total operating expenses

 

 

3,664

 

 

 

3,668

 

Operating income (loss)

 

 

(1,361)

 

 

(330)

Non-operating income:

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

3

 

Gain on sale of assets

 

 

58

 

 

 

-

 

Foreign currency transaction gain (loss)

 

 

(60)

 

 

26

 

Total non-operating income (loss)

 

 

(1)

 

 

29

 

Income (loss) before income taxes

 

 

(1,362)

 

 

(301)

Income tax (expense) benefit

 

 

(458)

 

 

(32)

Net income (loss)

 

($1,820)

 

 

($333)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

($0.21)

 

 

($0.04)

 

Diluted earnings (loss) per share

 

($0.21)

 

 

($0.04)

 

Weighted-average basic shares

 

 

8,622

 

 

 

8,420

 

Weighted-average diluted shares

 

 

8,622

 

 

 

8,420

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

 

 
4

Table of Contents

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(UNAUDITED)

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

Net income (loss)

 

($1,820)

 

 

($333)

 

Other comprehensive income (loss):

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(70)

 

 

(180)

Comprehensive income (loss)

 

($1,890)

 

 

($513)

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

 

 
5

Table of Contents

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

 

Retained

 

 

and Other

 

 

Total

 

 

 

 

 

 

 

 

 

Earnings

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

(Deficit)

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2020

 

 

8,416,335

 

 

$20,071

 

 

($1,456)

 

 

$1,024

 

 

$19,639

 

Stock awards issued, net of tax withholding

 

 

2,089

 

 

 

(4)

 

 

-

 

 

 

-

 

 

 

(4)

Issuance of stock through: ESPP

 

 

3,175

 

 

 

16

 

 

 

-

 

 

 

-

 

 

 

16

 

Share-based compensation

 

 

-

 

 

 

278

 

 

 

-

 

 

 

-

 

 

 

278

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

(333)

 

 

-

 

 

 

(333)

Other comprehensive income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(180)

 

 

(180)

Balance at March 31, 2021

 

 

8,421,599

 

 

$20,361

 

 

($1,789)

 

 

$844

 

 

$19,416

 

Balance at December 31, 2021

 

 

8,621,007

 

 

$20,886

 

 

($2,011)

 

 

$978

 

 

$19,853

 

Stock awards issued, net of tax withholding

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of stock through: ESPP

 

 

1,362

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

6

 

Share-based compensation

 

 

-

 

 

 

291

 

 

 

-

 

 

 

-

 

 

 

291

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

(1,820)

 

 

-

 

 

 

(1,820)

Other comprehensive income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(70)

 

 

(70)

Balance at March 31, 2022

 

 

8,622,369

 

 

$21,183

 

 

($3,831)

 

 

$908

 

 

$18,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

 

 
6

Table of Contents

 

DATA I/O CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

For the Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

($1,820)

 

 

($333)

 

Adjustments to reconcile net income (loss)

 

 

 

 

 

 

to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

140

 

 

 

200

 

Equipment transferred to cost of goods sold

 

 

125

 

 

 

132

 

Share-based compensation

 

 

291

 

 

 

278

 

Net change in:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

913

 

 

 

(843)

Inventories

 

 

(277)

 

 

442

 

Other current assets

 

 

(98)

 

 

36

 

Accounts payable and accrued liabilities

 

 

(835)

 

 

(94)

Deferred revenue

 

 

28

 

 

 

175

 

Other long-term liabilities

 

 

(253)

 

 

(105)

Deposits and other long-term assets

 

 

204

 

 

 

136

 

     Net cash provided by (used in) operating activities

 

 

(1,582)

 

 

24

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(272)

 

 

(92)

Cash provided by (used in) investing activities

 

 

(272)

 

 

(92)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net proceeds from issuance of common stock, less payments

 

 

 

 

 

 

 

 

     for shares withheld to cover tax

 

 

6

 

 

 

12

 

Cash provided by (used in) financing activities

 

 

6

 

 

 

12

 

Increase (decrease) in cash and cash equivalents

 

 

(1,848)

 

 

(56)

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash

 

 

(46)

 

 

(490)

Cash and cash equivalents at beginning of period

 

 

14,190

 

 

 

14,167

 

Cash and cash equivalents at end of period

 

$12,296

 

 

$13,621

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

    Income taxes

 

$441

 

 

$40

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

 

 
7

Table of Contents

 

DATA I/O CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - FINANCIAL STATEMENT PREPARATION

 

Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) prepared the financial statements as of March 31, 2022 and March 31, 2021 according to the rules and regulations of the Securities and Exchange Commission ("SEC").  These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented.  The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date.  We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America according to such SEC rules and regulations.  Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.  These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in our Form 10-K for the year ended December 31, 2021.

 

Revenue Recognition

 

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.   

 

We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year.  During 2022 and 2021, the impact of capitalization of incremental costs for obtaining contracts was immaterial.  We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price.

 

We recognize revenue upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.  We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be a separate performance obligation.  These systems are standard products with published product specifications and are configurable with standard options.  The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

 

The revenue related to products requiring installation that is perfunctory is recognized upon transfer of control of the product to customers, which generally is at the time of shipment.  Installation that is considered perfunctory includes any installation that is expected to be performed by other parties, such as distributors, other vendors, or the customers themselves.  This considers the complexity, skill and training needed as well as customer expectations regarding installation.

 

We enter into arrangements with multiple performance obligations that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component.  We allocate the transaction price of each element based on relative selling prices.  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.

 

 
8

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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. 

 

We transfer certain products out of service from their internal use and make them available for sale.  The products transferred are typically our standard products in one of the following areas: service loaners, rental or test units; engineering test units; or sales demonstration equipment.  Once transferred, the equipment is sold by our regular sales channels as used equipment inventory.  These product units often involve refurbishing and an equipment warranty, and are conducted as sales in our normal and ordinary course of business.  The transfer amount is the product unit’s net book value and the sale transaction is accounted for as revenue and cost of goods sold.

 

The following table represents our revenues by major categories:

 

 

 

 Three Months Ended

 

Net sales by type

 

March 31,

2022

 

 

Change

 

March 31,

2021

 

(in thousands)

 

 

 

 

 

 

 

 

Equipment

 

$2,607

 

 

(22.1%)

 

$3,347

 

Adapter

 

 

1,622

 

 

(15.0%)

 

 

1,908

 

Software and Maintenance

 

 

736

 

 

(3.2%)

 

 

760

 

Total

 

$4,965

 

 

(17.5%)

 

$6,015

 

 

Share-Based Compensation

 

All stock-based compensation awards are measured based on estimated fair values on the date of grant and recognized as compensation expense on the straight-line method.  Our share-based compensation is reduced for estimated forfeitures at the time of grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates.

 

 
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Table of Contents

 

Income Tax

 

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. During the quarter ended March 31, 2022, as a result of a dividend paid from our China subsidiary to the USA parent company, $442,000 of income tax was withheld and paid.

 

Recently Adopted Accounting Pronouncements

 

On January 1, 2021 the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles and the methodology for calculating income tax rates in an interim period, among other updates. The adoption of this ASU did not have a material impact on our financial statements.

 

NOTE 2 – INVENTORIES

 

Inventories consisted of the following components:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

(in thousands)

 

 

 

 

 

 

Raw material

 

$3,992

 

 

$3,771

 

Work-in-process

 

 

1,727

 

 

 

1,602

 

Finished goods

 

 

906

 

 

 

978

 

Inventories

 

$6,625

 

 

$6,351

 

 

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET

 

Property and equipment consisted of the following components:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

(in thousands)

 

 

 

 

 

 

Leasehold improvements

 

$431

 

 

$430

 

Equipment

 

 

5,191

 

 

 

5,218

 

Sales demonstration equipment

 

 

807

 

 

 

754

 

 

 

 

6,429

 

 

 

6,402

 

Less accumulated depreciation

 

 

5,476

 

 

 

5,456

 

Property and equipment, net

 

$953

 

 

$946

 

 

 
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NOTE 4 – OTHER ACCRUED LIABILITIES

 

Other accrued liabilities consisted of the following components:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

(in thousands)

 

 

 

 

 

 

Lease liability - short term

 

$623

 

 

$601

 

Product warranty

 

 

430

 

 

 

432

 

Sales return reserve

 

 

71

 

 

 

71

 

Other taxes

 

 

132

 

 

 

180

 

Other

 

 

183

 

 

 

129

 

Other accrued liabilities

 

$1,439

 

 

$1,413

 

 

The changes in our product warranty liability for the three months ending March 31, 2022 are as follows:

 

 

 

March 31,

2022

 

 

December 31,

2021

 

(in thousands)

 

 

 

 

 

 

Liability, beginning balance

 

$432

 

 

$371

 

Net expenses

 

 

217

 

 

 

864

 

Warranty claims

 

 

(217)

 

 

(864)

Accrual revisions

 

 

(2)

 

 

61

 

Liability, ending balance

 

$430

 

 

$432

 

 

NOTE 5 – LEASES

 

Our leasing arrangements are primarily for facility leases we use to conduct our operations. The following table presents our future lease payments for long-term operating leases as of March 31, 2022:

 

 

 

Operating

Lease Commitments

 

 (in thousands)

 

 

 

2022 (remaining)

 

$594

 

2023

 

 

920

 

2024

 

 

836

 

2025

 

 

585

 

2026

 

 

133

 

Thereafter

 

 

48

 

Total

 

$3,116

 

   Less Imputed interest

 

 

(356)

Total operating lease liabilities

 

$2,760

 

 

Cash paid for operating lease liabilities for the three months ended March 31, 2022 and 2021 were $212,000 and $201,000, respectively. 

 

 
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The following table presents supplemental balance sheet information related to leases:

 

 

 

Balance at

March 31,

2022

 

 

Balance at

December 31,

2021

 

(in thousands)

 

 

 

 

 

 

Right-of-use assets (Long-term other assets)

 

$2,697

 

 

$2,793

 

Lease liability-short term (Other accrued liabilities)

 

 

623

 

 

 

601

 

Lease liability-long term (Operating lease liabilities)

 

 

2,138

 

 

 

2,277

 

 

At March 31, 2022, the weighted average remaining lease term is 3.67 and the weighted average discount rate used is 5%.

 

The components of our lease expense for the three months ended March 31, 2022 and 2021 include operating lease costs of $220,000 and $171,000, respectively, and short-term lease costs of $20,000 and $7,000, respectively.

 

Our real estate facility leases are described below:

 

During the fourth quarter of 2021, we amended our lease agreement for the Redmond, Washington headquarters facility, extending the lease to January 31, 2026.  The lease is for approximately 20,460 square feet. 

 

In April 2021, we signed a lease extension effective November 1, 2021  that extends the lease for a facility located in Shanghai, China through October 31, 2024.  This lease is for approximately 19,400 square feet.

 

Our lease for our facility located near Munich, Germany ran through February 28, 2022 and in March 2022 we entered into a lease extension to August 2027.  This lease is for approximately 4,895 square feet.

 

NOTE 6 – OTHER COMMITMENTS

 

We have purchase obligations for inventory and production costs as well as other obligations such as capital expenditures, service contracts, marketing, and development agreements.  Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.  Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days.  At March 31, 2022, the purchase commitments and other obligations totaled $2.0 million of which all but $590,000 are expected to be paid over the next twelve months.

 

NOTE 7 – CONTINGENCIES

 

As of March 31, 2022, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. 

 

NOTE 8 – EARNINGS PER SHARE

 

Basic earnings per share is calculated based on the weighted average number of common shares outstanding during each period.  Diluted earnings per share is calculated based on these same weighted average shares outstanding plus the effect of potential shares issuable upon assumed exercise of stock options based on the treasury stock method. 

 

Potential shares issuable upon the exercise of stock options are excluded from the calculation of diluted earnings per share to the extent their effect would be anti-dilutive.

 

 
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The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 Three Months Ended

 

 

 

March 31,

2022

 

 

March 31,

2021

 

(in thousands except per share data)

 

 

 

 

 

 

Numerator for basic and diluted

 

 

 

 

 

 

earnings (loss) per share:

 

 

 

 

 

 

       Net income (loss)

 

(1,820)

 

 

($333)

 

 

 

 

 

 

 

 

Denominator for basic

 

 

 

 

 

 

earnings (loss) per share:

 

 

 

 

 

 

       Weighted-average shares

 

 

8,622

 

 

 

8,420

 

 

 

 

 

 

 

 

 

 

Employee stock options and awards

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Denominator for diluted

 

 

 

 

 

 

 

 

earnings (loss) per share:

 

 

 

 

 

 

 

 

       Adjusted weighted-average shares &

 

 

 

 

 

 

 

 

       assumed conversions of stock options

 

 

8,622

 

 

 

8,420

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

 

 

 

 

 

earnings (loss) per share:

 

 

 

 

 

 

 

 

       Basic earnings (loss) per share

 

($0.21)

 

 

($0.04)

 

       Diluted earnings (loss) per share 

 

($0.21)

 

 

($0.04)

 

 

Options to purchase 12,500 and 25,000 shares respectively were outstanding as of March 31, 2022 and 2021, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive.

 

NOTE 9 – 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 reduced for estimated forfeitures.  

 

The impact on our results of operations of recording share-based compensation, net of forfeitures, for the three months ended March 31, 2022 and 2021 were as follows:

 

 

 

 Three Months Ended

 

 

 

March 31,

2022

 

 

March 31,

2021

 

(in thousands)

 

 

 

 

 

 

Cost of goods sold

 

$15

 

 

$10

 

Research and development

 

 

64

 

 

 

71

 

Selling, general and administrative

 

 

212

 

 

 

197

 

Total share-based compensation

 

$291

 

 

$278

 

 

 
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Equity awards granted during the three months ended March 31, 2022 and 2021 were as follows:

 

 

 

 Three Months Ended

 

 

 

March 31,

2022

 

 

March 31,

2021

 

 

 

 

 

 

 

 

Restricted Stock Units

 

 

2,515

 

 

 

2,000

 

 

Non-employee directors Restricted Stock Units (“RSUs”) typically vest over the earlier of one year or the next annual meeting of shareholders and Non-Qualified stock options vest over three years and have a six-year exercise period.  Employee RSUs typically vest over four years and employee Non-Qualified stock options typically vest quarterly over 4 years and have a six-year exercise period.

 

The remaining unamortized expected future equity compensation expense and remaining amortization period associated with unvested option grants, restricted stock awards and restricted stock unit awards at March 31, 2022 are:

 

 

 

March 31,

2022

 

 

 

 

 

Unamortized future equity compensation expense (in thousands)

 

$2,021

 

Remaining weighted average amortization period (in years)

 

 

2.44

 

 

 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q are forward-looking.  In particular, statements herein regarding economic outlook, impact of COVID-19; Shanghai COVID-19 resurgence lockdown impact and timing; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; breakeven revenue point; expected market decline, bottom or 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; trade issues and tariffs; expected inventory levels; expectations for unsupported platform or product versions and related inventory and other charges; Russian invasion of Ukraine impacts; supply chain expectations; semiconductor chip shortages; 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 Quarterly Report.  The Reader should not place undue reliance on these forward-looking statements.  The discussions above and in the section in Item 1A., Risk Factors “Cautionary Factors That May Affect Future Results” in our Annual report on Form 10-K for the year ended December 31, 2021, describe some, but not all, of the factors that could cause these differences.

 

OVERVIEW

 

The first quarter of 2022 was very unusual.  It started strongly with orders and new sales funnel prospect additions, which appeared to relate to improved supply chain and semiconductor part shortage problems that had been significant issues in the second half of 2021.  The improvement of business conditions was before the geopolitical issues stemming from the late-February Russian invasion of Ukraine and the mid-March COVID-19 resurgence in China resulting in restrictions and the lockdown of Shanghai.  We discontinued our relationship with our Russian distributor, which represented an immaterial level of business.  We had no distribution or operations in Ukraine.  The lockdown impacted end of quarter shipments that were completed and ready for delivery to customers from Shanghai.  Approximately $1 million of potential revenue, including 5 PSV systems remained in inventory and backlog at the end of the quarter.  No orders were cancelled and we expect to be able to resume shipments later in the second quarter. The timing of ending the lockdown is uncertain and depending when we are allowed to resume deliveries may result in not having enough time to expect collections to occur in the second quarter. We expect that we have adequate cash resources and that the collections and cash should be normalized before the end of the third quarter.

 

In the first quarter of 2022, due to a continued cyclical downturn, Russian invasion of Ukraine impacts particularly on Europe, the COVID-19 related Shanghai lockdown resulting in about $1M of potential revenue not being shipped and realized, combined with continued significant investments in our security deployment business, we incurred operating losses. Our strong cash position and balance sheet combined with our long-term view of the market gave us the financial flexibility to make these security business investments.  At Data I/O, we are investing for the long-term to retain and extend our leadership position in automotive electronics and security deployment.  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. 

 

 
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Our short-term challenge continues to be operating in a cyclical, COVID-19 impacted, geopolitical uncertainties and rapidly evolving industry environment with continued supply chain and silicon part shortages issues.   We continue to balance industry changes, industry partnerships, new technologies, business geography shifts, travel and customer restrictions, customer shut downs, exchange rate volatility, trade issues and tariffs, COVID-19 impacts, semiconductor chip shortages, 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 cash preservation, protecting our employee base, addressing inflation impacts,  and cost control. Many of our employees continue to work remotely from home or on a hybrid basis, with the essential production and process workers onsite as part of our essential operations.

 

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 continuing to develop technology to securely provision new categories of semiconductors, including Secure Elements, Authentication Chips, and Secure Microcontrollers.  We continue to focus on extending the capabilities of our programming systems 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 by the global pandemic of COVID-19. Chip shortages are causing issues and some automotive plant interruptions.  This appears to be a lingering issue for 2022 and in some cases drives consumable adapter demand in order to support alternative chips.

 

As a global company with over 90% of our sales in international markets, we have been and expect to continue to be impacted by the COVID-19 pandemic in all markets we serve, with follow-on waves of impact. On March 29, 2022 we announced that our Shanghai facility was being closed due to the local government lockdown.  We were unable to ship products valued at $1M, and the facility remains closed. We are supporting customers from our Redmond, Washington USA facility and dealing with shipping bottlenecks and shutdowns.  We believe that our classification as essential by certain U.S. customer groups will continue to keep operations open in the USA.  We source other components from China and other countries that are used to manufacture our equipment in China and in our Redmond, Washington facility. These components may not be readily available or subject to delays. Our manufacturing facilities in Shanghai and Redmond have helped us to be part of a resilient supply chain to our customers with dual production of some products and local sourcing of many suppliers.  Many of our employees and executives are working from home or on a hybrid basis and we are limiting visitors to our facilities as the pandemic continues.  All of our facilities are subject to restrictions and closure by governmental entities. The pandemic has and may continue to impact our revenues in some geographies, our ability to obtain key components and to manufacture our products, as well as sell, install and support our products around the world. We expect wide-spread vaccinations to help restore business interactions with customers, however we expect to continue to be impacted and respond to customer site restrictions on sales and service visits, travel restrictions, closed borders, cancelled trade shows and industry gatherings, and modifications in our operations to allow social distancing.  The geopolitical uncertainty from the Russian invasion of Ukraine remains a continuing issue.  See also the detailed discussion of the impacts of COVID-19 on our business and markets in Item 1A, Risk Factors in our annual report on Form 10-K. The pandemic could have the effect of heightening many of the other risks described in Item 1A of our Form 10-K . Annual projections on spending, growth, mix, and profitability have been and are likely to be further revised substantially as new information is obtained.

 

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, 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:

 

 
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Revenue Recognition:  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.   

 

We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year.  During 2022 and 2021, the impact of capitalization of incremental costs for obtaining contracts was immaterial.  We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price.

 

We recognize revenue upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.  We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be a separate performance obligation.  These systems are standard products with published product specifications and are configurable with standard options.  The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

 

The revenue related to products requiring installation that is perfunctory is recognized upon transfer of control of the product to customers, which generally is at the time of shipment.  Installation that is considered perfunctory includes any installation that is expected to be performed by other parties, such as distributors, other vendors, or the customers themselves.  This considers the complexity, skill and training needed as well as customer expectations regarding installation.

 

We enter into arrangements with multiple performance obligations that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component.  We allocate the transaction price of each element based on relative selling prices.  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. 

 

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.

 

 
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Table of Contents

 

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 current and ongoing cyclical and COVID-19 pandemic related uncertain economic outlook for our industry, capital and geographic spending, as well as income and current 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.  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.

 

 
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Table of Contents

 

RESULTS OF OPERATIONS:
 
NET SALES

 

 

 Three Months Ended

 

Net sales by product line

 

March 31,

2022

 

 

Change

 

 

March 31,

2021

 

 (in thousands)

 

 

 

 

 

 

 

 

 

Automated programming systems

 

$3,876

 

 

(21.1%)

 

 

$4,910

 

Non-automated programming systems

 

 

1,089

 

 

(1.4%)

 

 

 

1,105

 

Total programming systems

 

$4,965

 

 

(17.5%)

 

 

$6,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

Net sales by location

 

March 31,

2022

 

 

Change

 

 

March 31,

2021

 

 (in thousands)

 

 

 

 

 

 

 

 

 

 

 

United States

 

$288

 

 

 

1.4%

 

$284

 

% of total

 

 

5.8%

 

 

 

 

 

 

4.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

International

 

$4,677

 

 

(18.4%)

 

 

$5,731

 

% of total

 

 

94.2%

 

 

 

 

 

 

95.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

Net sales by type

 

March 31,

2022

 

 

Change

 

 

March 31,

2021

 

 (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales

 

$2,607

 

 

(22.1%)

 

 

$3,347

 

Adapter sales

 

 

1,622

 

 

(15.0%)

 

 

 

1,908

 

Software and maintenance

 

 

736

 

 

(3.2%)

 

 

 

760

 

Total programming systems

 

$4,965

 

 

(17.5%)

 

 

$6,015

 

 

Net sales in the first quarter of 2022 were $5.0 million, as compared with $6.0 million in the prior year period and $6.4 million in the fourth quarter of 2021.  Sales in the first quarter of 2022 were impacted by a resumption of COVID-19 related shut downs in Shanghai.  This resulted in approximately $1 million in potential product revenue that could not ship.  No orders have been cancelled and their shipment is expected later in the second quarter. 

 

First quarter 2022 bookings were $6.2 million, as compared with $5.4 million in the prior year period and $6.2 million in fourth quarter of 2021.  We began the quarter strongly with improved orders and sales funnel additions.  The improvement in the business conditions was before the late February Russian invasion of Ukraine and the mid-March COVID-19 resurgence in China resulting in restrictions and a lockdown in Shanghai.  We believe these events caused uncertainty and a late quarter slowdown in Europe, and shut down related interruptions in our Shanghai business.  The first quarter of 2021 was early in the original COVID-19 recovery with business just resuming.

 

On a geographic basis, international sales represented approximately 94.2% of total net sales for the first quarter of 2022 compared with 95.3% in the prior year period. Total equipment sales were 52% of revenues, adapters were 33% and software and services revenues were 15% of revenues respectively in the first quarter of 2022 compared with 56% and 31% and 13% respectively for the first quarter of 2021. Automotive electronics represented 63% of orders for the quarter.

 

Backlog at March 31, 2022 was $4.1 million, as compared with $2.9 million at year end and up from $3.0 million at March 31, 2021. The backlog increase was primarily due to the Shanghai lockdown related $1 million of potential revenue shipments that were caught up in the shutdown and included 5 PSV systems that were complete and ready to ship. Data I/O had $1.7 million in deferred revenue at the end of the first quarter of 2022 as compared with $1.3 million at the end of the first quarter of 2021.

 

 
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Table of Contents

 

GROSS MARGIN

 

 

 

Three Months Ended

 

 

 

March 31,

2022

 

 

Change

 

March 31,

2021

 

(in thousands)

 

 

 

 

 

 

 

 

Gross margin

 

$2,303

 

 

(31.0%)

 

$3,338

 

Percentage of net sales

 

 

46.4%

 

 

 

 

55.5%

 

Gross margin as a percentage of sales in the first quarter of 2022 was 46.4% as compared to 55.5% in the same period last year. For the first quarter of 2022, gross margin was primarily impacted by the lower sales volume and mix. The Shanghai lockdown prevented shipments of approximately $1 million in potential revenue that would have added approximately 5 gross margin percentage points. 

 

RESEARCH AND DEVELOPMENT

 

 

 

 Three Months Ended

 

 

 

March 31,

2022

 

 

Change

 

 

March 31,

2021

 

(in thousands)

 

 

 

 

 

 

 

 

 

Research and development

 

$1,616

 

 

 

0.6%

 

$1,606

 

Percentage of net sales

 

 

32.5%

 

 

 

 

 

 

26.7%

 

Research and development (“R&D”) expenses in the first quarter of 2022 were approximately the same as compared to the same period in 2021. We have maintained our investment in our product development and supporting our growth initiatives.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

 

 

 Three Months Ended

 

 

 

March 31,

2022

 

 

Change

 

March 31,

2021

 

(in thousands)

 

 

 

 

 

 

 

 

Selling, general &

 

 

 

 

 

 

 

 

administrative

 

$2,048

 

 

(0.7%)

 

$2,062

 

Percentage of net sales

 

 

41.2%

 

 

 

 

34.3%

 

Selling, General and Administrative (“SG&A”) expenses were approximately the same as compared to the same period in 2021.  The lower sales volume resulted in lower sales commissions, however these were  offset by higher marketing and rent costs.  Cost control measures have remained in place during the first quarter of 2022 and are expected to continue in the second quarter of 2022.

 

INTEREST

 

 

 

 Three Months Ended

 

 

 

March 31,

2022

 

 

Change

 

March 31,

2021

 

(in thousands)

 

 

 

 

 

 

 

 

Interest income

 

$1

 

 

(66.7%)

 

$3

 

 

Interest income was approximately the same in the first quarter of 2022 as compared to the same period in 2021 and reflects lower invested balances in foreign subsidiary accounts.

 

 
20

Table of Contents

 

INCOME TAXES

 

 

 

 Three Months Ended

 

 

 

March 31,

2022

 

Change

 

 

March 31,

2021

 

(in thousands)

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

($458)

 

 

1331.3%

 

($32)

 

 

Income tax benefit (expense) for the first quarter of both 2022 and 2021, primarily related to foreign and state taxes.  During the first quarter of 2022 a China dividend withholding tax of $442,000 was paid in connection with a dividend repatriation to the US parent company.

 

The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes.  We have a valuation allowance of $8.2 million as of March 31, 2022.  As of March 31, for both 2022 and 2021, our deferred tax assets and valuation allowance have been reduced by approximately $399,000 and $371,000, respectively, associated with the requirements of accounting for uncertain tax positions.  Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance. 

 

Financial Condition

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

March 31,

2022

 

 

Change

 

December 31,

2021

 

(in thousands)

 

 

 

 

 

 

 

 

Working capital

 

$16,896

 

 

($1,588)

 

$18,484

 

 

At March 31, 2022, our principal sources of liquidity consisted of existing cash and cash equivalents.  Cash decreased $1,894,000 from December 31, 2021 primarily from paying off year end accruals for annual incentive compensation of $791,000 and annual 401(k) matching contributions of $224,000, as well as one-time China dividend income withholding tax of $442,000 on the dividend from Shanghai and funding the operating loss. 

 

Our working capital decreased $1,588,000 during 2022, primarily due to the reasons for the cash decline in the period.  The Shanghai lockdown delayed the delivery of approximately $1 million of potential product revenue. Depending on the timing of the expected reopening later in the second quarter and resumption of shipping, there may not be enough time to expect collections to take place before the end of the second quarter. We believe we have the funds necessary to accommodate this. The company continues to have no debt.

 

Although we have no significant external capital expenditure plans currently, we expect to continue to carefully make and manage capital expenditures to support our business.  We plan to increase our internally developed rental, security provisioning, sales demonstration and test equipment as we develop and release new products. Capital expenditures are currently expected to be funded by existing and internally generated funds.

 

As a result of our cyclical industry, significant product development, customer support and selling and marketing efforts, we have required substantial working capital to fund our operations.  We have tried to balance our level of development spending with the goal of profitable operations or managing down business levels related to COVID-19.  We have implemented or have initiatives to implement geographic shifts in our operations, optimize real estate usage, reduce exposure to the impact of currency volatility and tariffs, increase product development differentiation, and controlling costs.

 

 
21

Table of Contents

 

We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond.  We may require additional cash at the U.S. headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries.  We currently do not have plans and/or intentions to make further repatriations.  For any repatriation, there may be tax and other impediments to any repatriation actions.  As many repatriations typically have associated withholding taxes, those withheld will be a current tax without generating a current or deferred tax benefit.  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 possible additional financing.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Except as noted in the accompanying consolidated financial statements in Note 6, “Other Commitments”, we have no off-balance sheet arrangements.

 

NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

 

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($1,223,000) in the first quarter of 2022 compared to ($105,000) in the first quarter of 2021.  Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($932,000) in the first quarter of 2022, compared to $173,000 in the first quarter of 2021.

 

Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, 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 the Company’s results and facilitate the comparison of results.  A reconciliation of net income to EBITDA and adjusted EBITDA follows:

 

NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURE RECONCILIATION

 

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

(in thousands)

 

 

 

 

 

 

Net Income (loss)

 

($1,820)

 

 

($333)

 

   Interest (income)

 

 

(1)

 

 

(3)

   Taxes

 

 

458

 

 

 

32

 

   Depreciation & amortization

 

 

140

 

 

 

199

 

EBITDA earnings (loss)

 

($1,223)

 

 

($105)

 

   Equity compensation

 

 

291

 

 

 

278

 

Adjusted EBITDA, excluding equity compensation

 

($932)

 

 

$173

 

 

NEW ACCOUNTING PRONOUNCEMENTS

 

On January 1, 2021 the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles and the methodology for calculating income tax rates in an interim period, among other updates. The adoption of this ASU did not have a material impact on our financial statements.

 

Item 3Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.  Controls and Procedures

 

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 level of assurance. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed 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 reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

CHANGES IN INTERNAL CONTROLS

 

There were no changes made in our internal controls during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting which is still under the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013).

 

 
22

Table of Contents

 

PART II - OTHER INFORMATION

 

Item 1. 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 March 31, 2022, we were not a party to any material pending legal proceedings.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  There are no material changes to the Risk Factors described in our Annual Report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

 

None   

 

Item 3. Defaults Upon Senior Securities 

 

None 

 

Item 4. Mine Safety Disclosures 

 

Not Applicable 

 

Item 5. Other Information 

 

None   

 

 
23

Table of Contents

 

Item 6. Exhibits 

 

(a) Exhibits   

 

10

Material Contracts:

 

 

 

 

None

 

 

 

31

Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002:

 

31.1

Chief Executive Officer Certification

 

31.2

Chief Financial Officer Certification

 

 

 

 

32

Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002:

 

32.1

Chief Executive Officer Certification

 

32.2

Chief Financial Officer Certification

 

 

 

 

101

Interactive Data Files Pursuant to Rule 405 of Regulation S-T

 

 
24

Table of Contents

 

SIGNATURES

 

Pursuant to the requirements 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.

 

DATED:   May 12, 2022

 

DATA I/O CORPORATION

(REGISTRANT)

 

By:

/s/Anthony Ambrose  

 

Anthony Ambrose

President and Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

 

 

 

 

 

By:

/s/Joel S. Hatlen

 

Joel S. Hatlen

Vice President and Chief Operating and Financial Officer

Secretary and Treasurer

(Principal Financial Officer and Duly Authorized Officer)

 

 

 
25

 

EX-31.1 2 daio_ex311.htm CERTIFICATION daio_ex311.htm

EXHIBIT 31.1 

 

CERTIFICATION

 

I, Anthony Ambrose, certify that:

 

1)

I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;

 

 

 

2)

Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

 

 

3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

 

 

4)

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

 

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

 

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

 

 

 

d)

Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

5)

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

DATED:   May 12, 2022

 

/s/ Anthony Ambrose

 

Anthony Ambrose

Chief Executive Officer

(Principal Executive Officer)

 

 

EX-31.2 3 daio_ex312.htm CERTIFICATION daio_ex312.htm

 

EXHIBIT 31.2

 

CERTIFICATION

 

I, Joel S. Hatlen, certify that:

 

1)

I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;

 

 

 

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

 

 

3)

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

 

 

4)

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

 

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

 

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

 

 

 

d)

Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

5)

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

DATED:   May 12, 2022

 

/s/ Joel S. Hatlen  

 

Joel S. Hatlen

Chief Financial Officer

(Principal Financial Officer)

 

EX-32.1 4 daio_ex321.htm CERTIFICATION daio_ex321.htm

 

EXHIBIT 32.1

 

Certification by Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the quarterly report of Data I/O Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Ambrose, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Anthony Ambrose

 

Anthony Ambrose

Chief Executive Officer

(Principal Executive Officer)

May 12, 2022

 

 

 

 

EX-32.2 5 daio_ex322.htm CERTIFICATION daio_ex322.htm

EXHIBIT 32.2

 

Certification by Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the quarterly report of Data I/O Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel S. Hatlen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Joel S. Hatlen  

 

Joel S. Hatlen

Chief Financial Officer

(Principal Financial Officer)

May 12, 2022

 

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