Attached files
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM
10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended
December 31,
2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition
period from _____________ to
_____________
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Commission file
number: 0-10394
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DATA I/O CORPORATION
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(Exact name of
registrant as specified in its charter)
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Washington
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91-0864123
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(State or other jurisdiction of
incorporation)
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(I.R.S. Employer Identification
No.)
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6645
185th Ave
NE, Suite 100, Redmond, Washington, 98052
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(425)
881-6444
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(Address, including zip code, of
registrant’s principle executive offices and telephone
number, including area code)
Securities registered pursuant to
Section 12(b) of the Act
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Title of each
class
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Trading
Symbol(s)
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Name of each exchange on which
registered
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Common Stock
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DAIO
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NASDAQ
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Securities
registered pursuant to Section 12(g) of the Act
None
Indicate by check mark whether the
registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes ☐
No ☒
Indicate by check mark whether the
registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. Yes ☐ No
☒
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit
such files). Yes ☒ No
☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated
filer”, ”accelerated filer”, “smaller
reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
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Accelerated filer
☐
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Smaller reporting company
☒
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Large accelerated filer
☐
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Emerging growth company
☐
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Non-accelerated filer
☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued
its audit report. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ☐ No ☒
Aggregate
market value of voting and non-voting common equity
held
by
non-affiliates on the registrant as of June 30, 2020:
$27,952,330
Shares
of Common Stock, no par value, outstanding as of March 22,
2021:
8,421,599
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s Proxy Statement relating to its May 20,
2021 Annual Meeting of Shareholders are incorporated into Part III
of this Annual Report on Form 10-K.
DATA
I/O CORPORATION
FORM
10-K
For
the Fiscal Year Ended December 31, 2020
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63
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64
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PART I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated
herein by reference contain forward-looking statements based on
current expectations, estimates and projections about Data I/O
Corporation’s industry, management’s beliefs and
certain assumptions made by management. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Forward Looking
Statements.”
General
Data
I/O Corporation (“Data I/O”, “We”,
“Our”, “Us”) is a global market leader for
advanced programming, security deployment, security provisioning
and associated Intellectual Property (“IP”) protection
and management solutions used in electronics manufacturing with
flash memory, microcontrollers, and flash memory-based intelligent
devices as well as secure element devices, authentication devices
and secure microcontrollers. We collectively refer to IP
protection, security provisioning of devices, provisioning of
security into devices, and related services such as cloud
onboarding and device and provisioning documentation management as
“security deployment”. Data I/O®
designs, manufactures and sells programming and security deployment
systems and services for electronic device manufacturers,
specifically targeting high-growth areas such as high-volume users
of flash memory and flash memory-based microcontrollers. Most
electronic products today incorporate a number of programmable
semiconductor devices that contain data, operating instructions and
security credentials essential for the proper operation of the
product and more and more products require security
deployment.
Our
mission is to bring the world’s electronic devices to life.
Programmable devices are used in products such as automobile
electronics, smartphones, HDTV, tablets, gaming systems and a broad
category called Internet of Things (“IoT”). IoT is a
broad term that addresses the interconnectivity of devices and
other electronic or smart products. Our solutions, some of which
include security deployment and process control capabilities,
enable us to address the demanding requirements of the electronic
device market, where applications security and IP protection are
essential to our customer’s success. Our largest customers
are heavy users of programmable semiconductor devices and include
original equipment manufacturers (“OEMs”) in automotive
electronics, consumer electronics and IoT markets as well as their
programming center partners and electronic manufacturing service
(“EMS”) contract manufacturers.
Data
I/O was incorporated in the State of Washington in 1969 and its
business was founded in 1972. Our website address is www.dataio.com.
COVID-19
In
2020, we had to react to the global COVID-19 pandemic. COVID-19 has
impacted all aspects of our business, from customer demand, to
supply chain integrity, employee safety, business processes, and
financial management. As a global company, we had to manage each of
these while working within the guidelines of local and national
policy in the U.S., China and Germany. Our philosophy at the start
of the outbreak was simple:
1.
Keep our people and
their families safe;
2.
Keep our facilities
safe and operational while we serve our customers as an essential
business; and
3.
Preserve
cash.
We have
managed this issue successfully to date, with no known employee
transmissions in the workplace and significant preservation of our
cash and working capital throughout the year. Our resilient supply
chain model kept our facilities in Shanghai, China and Redmond,
Washington open, and serving customers globally. We supported
customers rapidly transitioning to medical device support. We did
this while facing unique international travel restrictions,
shipping delays, and inability to meet with customers in person.
All the while we preserved and slightly grew our cash balances,
while moving more cash to the U.S.
COVID-19
has continued to impact our demand, particularly capacity related,
evidenced by many automotive and other plant shut downs in the
second quarter, their re-openings and now, in a believed ripple
effect, the impact of chip shortages on their production plans.
This appears to be a short-term issue and the outlook for
automotive electronics remains strong for a decade. Waves of
COVID-19 infection rates have kept or re-imposed revised travel
restrictions. Customers largely have not permitted in-person sales
and other visits. Converting these interactions to remote and
virtual means has meant new processes and technology
usage.
In
production, in addition to adding protective health measures for
our employees, we have focused on supply chain resilience and
duplicating production capability for some products in both our
Shanghai, China and Redmond, USA facilities. We implemented
additional supplier financial and other monitoring, as well as
adding additional local suppliers and increasing inventory stock
levels of key parts. Other than production employees who
necessarily are onsite, most Redmond employees are working remotely
with some flexibility to be onsite and this is expected to continue
until COVID-19 risks are reduced by vaccination
coverage.
Industry Background
We
enable companies to improve productivity, increase supply-chain
security and reduce costs by providing device data programming and
security deployment solutions that allow our customers to take IP
(large design and data files) and protect and program it into
memory, microcontroller and logic devices quickly and
cost-effectively. We also provide services related to hardware
support, system installation and repair, and device programming.
Companies that design and manufacture products utilizing
programmable electronic devices, ranging from automobiles to cell
phones, purchase programming solutions from us. Trends of
increasing device densities, shrinking device packages, increased
demands for security, and customers increasing their software
content file sizes, combined with the increasing numbers of
intelligent devices such as automotive electronics and IoT
applications, are driving demand for our solutions.
Traditionally,
our programming market opportunity focused on the number of
semiconductor devices to be programmed, but because of the rapid
increase in the density of devices, and increasing demands for
supply-chain security, the focus has shifted in many cases from the
number and type of devices to the number and type of bits per
device to be programmed or securely provisioned. With expected
growth in IoT applications, the business opportunity for this
market differentiates on quality, security and
automation.
Some of
our automated programming systems integrate data programming,
automated handling functions and/or security deployment into a
single product solution. During 2020, we continued to simplify and
integrate security deployment into some of our solutions. Quality
and security-conscious customers, particularly those in high-volume
manufacturing and programming, drive this portion of our
business.
Products
To
accommodate the expanding variety and quantities of programmable
devices being manufactured today, we offer multiple solutions for
the numerous types of device mix and volume usage by our customers
in the various market segments and applications. We work closely
with leading manufacturers of programmable devices to develop our
products to meet the requirements of a particular device. Our newer
products are positioned and recognized as some of the most advanced
programming and security deployment solutions.
Our
programming solutions include a broad range of products, systems,
modules and accessories, grouped into two general categories:
automated programming systems and manual programming systems. We
provide two categories of automated programming systems: off-line
and in-line. Our PSV family of automated programming systems
delivers a broad range of programming capacity and capability to
the marketplace. Our recently announced PSV2800 Automated
Programming System focuses on dedicated high-volume manufacturing
in a lower cost platform. Our PSV7000 Automated Programming System
continues to be well adopted in the marketplace, in particular for
automotive electronics customers and as a base for security
deployment upgrades. Our PSV5000 automated programming system
combines mid-range capacity and flexibility with competitive
pricing. Our PSV3000 Automated Programming System, developed for
the Asian automation market, is a lower cost platform for basic
programming needs. Our PSV family of handlers has won multiple
industry awards for technical excellence and innovation. In 2018
our Lumen®X programmer won five industry awards for Universal
Flash Storage (“UFS”) support. Our ConneX®
software won the 2017 Circuits Assembly NPI Award, the EM Asia
Innovation Award and the SMT China Vision Award. Our
SentriX® security provisioning system won the Global
Technology Award at Productronica and the Embedded Award for
Innovation at the Embedded World show. Our Job Composer software
for LumenX won the Circuits Assembly NPI Award in January 2019 and
January 2020. In October 2019 our Job Composer software won the
Mexico Technology Award for Device Programming and in November
2019, our PSV2800 won the Global Technology Award at Productronica
and in February 2020, the Circuits Assembly NPI Award. In January
2019 and February 2020, Data I/O won the Circuits Assembly Service
Excellence Award.
Our
automated systems have list selling prices ranging from $75,000 to
$615,000 and our manual systems have list selling prices ranging
from $10,000 to $35,000. Our security deployment system,
SentriX®, is currently offered for security provisioning on a
pay per part use basis along with related fees.
Data
I/O programming technology is integrated with the PSV family to
create highly-flexible systems that deliver outstanding performance
with low total cost of ownership. The LumenX programming engine is
the fastest solution available for eMMC and UFS programming of
large NAND FLASH. Increasing memory densities and the need for
faster data interfaces are resulting in an expected transition to
the use of UFS devices. LumenX is available on our PSV7000 and
PSV5000 and as a standalone manual programmer. FlashCORE™,
and our universal job setup tool, Tasklink™ for
Windows®, are available in each family of our automated
programming systems and in FlashPAK™, our manual programming
system. The SentriX security system adds security deployment
capability to our data programming system. SentriX allows customers
of any size and demand-profile to securely add keys, certificates,
and other security information to specialized regions of
authentication integrated circuits ("ICs”), secure elements
and secure microcontrollers. We provide device support and service
on all of our products. Device support is a critical aspect of our
business and consists of writing software algorithms for devices
and developing socket adapters to hold and connect to the device
for programming.
Our
products have both an upfront solution sale and recurring revenue
elements. Adapters are a consumable item and software and
maintenance are typically recurring under subscription contracts.
Our SentriX system revenue typically comes from per part use fees,
set-up or minimum quarterly fees, consumables, non-recurring
engineering fees, service fees and the sale of equipment related to
SentriX.
|
Sales Percentage of Total Sales Breakdown by Type
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Sales Type
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2020
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2019
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Drivers
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Equipment
Sales
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56%
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58%
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Capacity,
Process improvement, Technology
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Adapter
Sales
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28%
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26%
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Capacity
utilization, New customer products
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Software
and Maintenance Sales
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16%
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16%
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Installed
base, Added capabilities
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Total
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100%
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100%
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The
table below presents our main products and the key features that
benefit our customers:
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Products
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Key
Features
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Customer
Benefits
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PSV
Handlers: Off-line (Automated)
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●
Fast
program and verify speeds
●
Up to
112 programming sites
●
Up to
3000 devices per hour throughput
●
UFS
Support
●
Supports LumenX and
FlashCORE III programmers
●
Supports multiple
media types
●
Supports quality
options – fiber laser marking, 3D coplanarity
●
ConneX Factory
Integration, Job Composer & other Software
|
●
Managed
and secure programming
●
High
throughput for high density Flash programming
●
High
flexibility with respect to I/O options (tray, tape, tube),
marking/labeling and vision for coplanarity
inspection
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SentriX
Security Deployment System
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●
Unique
ability to securely provision keys and certificates one device at a
time
●
Pay per
use model reduces capital spending requirements as the market
develops.
|
●
Create
Secure IoT devices across a global network
●
Maintain IP
control over the lifecycle of their products
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|
RoadRunner
& RoadRunner3 Series Handlers:
In-line,
(Automated)
|
●
Just-in-time
in-line programming
●
Direct
integration with placement machine supporting SIPLACE, Fuji NXT,
Panasonic, Universal/Genesis and Assembleon/K&S
●
Factory
Integration Software
●
Supports FlashCORE
III programmers
|
●
Dramatic reduction
in inventory carrying and rework costs
●
“Zero”
footprint
●
Rapid
return on investment (“ROI”) typically realized in a
matter of months
●
Integration
with factory systems
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LumenX
Programmer
|
●
Extensible
architecture for fast program, verify and download
speeds
●
Supports UFS,
microcontrollers, Serial FLASH and other device types
●
Large
file size support
●
Secure
Job creation
●
8 sockets
with tool-less changeover with single socket
adapters
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●
Managed and
secure programming
●
Fast
setup and job changeover
●
Highest
yield and low total cost of programming
●
High
performance
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|
FlashPAK
III programmer:
(Non-Automated)
|
● Scalability
● Network control via
Ethernet
● Stand-alone
operation or PC compatible
● Parallel
programming
|
●
Validate designs
before moving down the firmware supply chain
●
Unmatched
ease of use in manual production systems
|
|
Unifamily
programmers: Off-line, Low Volume and Engineering
(Non-Automated)
(Legacy
Equipment)
|
● Breadth
of device coverage
|
● Universal
programmer
● Support for legacy
devices
|
Customers/Markets
We sell
our solutions to customers worldwide, many of whom are world-class
manufacturers of electronic devices used in a broad range of
industries, as described in the following table:
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OEMs
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EMS
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Programming Centers
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Automotive Electronics
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IoT, Industrial, Consumer Electronics, including
Wireless
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Contract Manufacturers
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Notable end customers
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Borg
Warner, Bosch, Alpine, Visteon, Kostal, Harman Becker, Denso,
Continental, Panasonic, Magna, Marelli
|
LG,
TCL, Siemens, Danfoss, Philips, Schneider, Endress+Hauser, Insta,
Microsoft, Sony, Amazon, UTEC
|
Pegatron,
Flextronics, Jabil, Wistron, Sanmina SCI, Foxconn, Leesys,
Calcomp
|
Arrow,
Avnet, BTV, CPS, EPS, Elsil, Elmitech, Noa Leading
|
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Business drivers
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Infotainment,
Advanced Driver Assist (ADAS), Electrification, Connectivity and
Security
|
Higher
functionality driven by increasing electronic content. Shift from
analog to connected intelligent devices, security
|
Production
contract wins
|
Value-added
services, logistics, security
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|
Programming equipment drivers
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Growing
Electronic Content, Global Support, Resilient Supply Chains, new
product rollouts, growing file sizes, quality control and
traceability, security
|
Growing
Electronic Content, need for IP protection. Process improvement and
simplification as well as new product rollouts, memory and new
technology, security
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New
contracts from OEMs, programming solutions specified by
OEMs
|
Capacity
utilization of their installed base of equipment, small parts
handling, security
|
|
Buying criteria
|
Quality,
reliability, configuration control, traceability, global support,
IP protection, security
|
Quality,
reliability, configuration control, traceability, global support,
IP protection, Security.
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Lowest
equipment procurement cost, global support
|
Flexibility,
lowest life-cycle cost-per programmed-part, low changeover time;
use of multiple vendors provides negotiating leverage, device
support availability
|
|
Security Deployment
|
End
customer focus
|
End
customer focus
|
End
customer and partner Focus
|
Current
partner focus of our SentriX
deployments
|
Our
solutions address the data programming of devices and security
deployment needs of programmable semiconductor devices.
Semiconductor devices are a large, growing market, in terms of
devices, bits programmed and need for security. We believe that our
sales are driven by many of the same forces that propel the
semiconductor industry. We sell to the same firms that buy the
semiconductors. When their business grows, they buy more
semiconductors which, in turn, require additional programming
equipment to maintain production speeds or program new device
technologies.
Our
device programming solutions currently target two high volume,
growing markets: automotive electronics and IoT systems including
Industrial and Consumer devices.
Growth drivers for automotive electronics
●
Consumers
desire advanced car features requiring higher levels of
sophistication, including autonomous cars, infotainment options
(audio, radio, dashboard displays, navigation), ADAS, wireless
connectivity and electrification
●
Proliferation
of programmable microcontrollers to support the next-generation
electronic car systems
●
Increasing
use of high-density flash to provide memory for advanced
applications that require programming
●
Increasing
complexity to support autonomous vehicles
●
Increasing
need for security solutions for a secure supply chain and lifecycle
firmware integrity
Growth drivers for IoT: including industrial, consumer electronics
and wireless
●
Securely
controlling groups of connected devices through a secure supply
chain and lifecycle firmware integrity management
●
Adding
intelligence and processing into devices
●
Connecting
previously unconnected devices to networks and the internet (such
as smart home, including intelligent thermostats and
lighting)
●
Emergence
of new devices and applications (such as health and wellness
wearable devices and applications)
All of
the above growth drivers are long term and are likely to be
adversely impacted, at least temporarily, due to the global
pandemic of COVID-19 in our markets. Annual projections on
spending, growth, mix, and profitability are likely to be revised
substantially as new information is obtained.
Diversification of accounts receivable and net sales
During
2020, we sold products to approximately 200 customers throughout
the world.
The
following represented greater than 10%
of net sales for the applicable year
|
Percentage of Net Sales
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Number of
customers
|
1
|
1
|
2
|
|
|
|
|
|
|
Approximate
percentage of net sales
|
12%
|
11%
|
29%
|
|
|
|
|
|
|
Percentage
of each
|
12%
|
11%
|
16%
|
|
Percentage
of each
|
n/a
|
n/a
|
13%
|
The
following represented greater than 10%
of our consolidated accounts receivable for the applicable
year:
|
Percentage of Consolidated Accounts Receivable
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Number of
customers
|
3
|
2
|
3
|
|
|
|
|
|
|
Approximate
percentage of consolidated accounts receivable balance
|
41%
|
32%
|
35%
|
|
|
|
|
|
|
Percentage
of each
|
17%
|
17%
|
12%
|
|
Percentage
of each
|
12%
|
15%
|
12%
|
|
Percentage
of each
|
12%
|
n/a
|
11%
|
Geographic Markets and Distribution
We
market and sell our products through a combination of direct sales,
internal telesales, indirect sales representatives and
distributors, as well as services through programming centers. We
continually evaluate our sales channels against our evolving
markets and customers and realign them as necessary to ensure that
we reach our existing and potential customers in the most effective
and efficient manner possible.
U.S. Sales
We
market our products throughout the U.S. using a variety of sales
channels, including our own field sales management personnel,
independent sales representatives and direct telesales. Our U.S.
independent sales representatives obtain orders on an agency basis,
with shipments made directly to the customer by us. Net sales in
the U.S. for 2020, 2019 and 2018 were (in millions) $1.5, $1.7 and
$3.4, respectively. Some of our customers’ orders delivered
internationally are heavily influenced by U.S. sales-based
efforts.
International Sales
International
sales represented approximately 93%, 92% and 88% of net sales in
2020, 2019 and 2018, respectively. We make foreign sales through
our wholly-owned subsidiaries in Germany and China, as well as
through independent distributors and sales representatives
operating in 45 countries. Our independent foreign distributors
purchase our products for resale and we generally recognize the
sale at the time of shipment to the distributor. As with U.S. sales
representatives, sales made by international sales representatives
are on an agency basis, with sales made directly to the customer by
us.
Net
international sales for 2020, 2019 and 2018 were (in millions)
$18.8, $19.8 and $25.8, respectively. We determine international
sales by the international geographic destination into which the
products are sold and delivered, and include not only sales by
foreign subsidiaries but also export sales from the U.S. to our
foreign distributors and to our representatives’ customers.
International sales do not include transfers between Data I/O and
our foreign subsidiaries. Export sales are subject to U.S.
Department of Commerce regulations. We have not, however,
experienced difficulties to date as a result of these requirements.
Our products typically do not require export licenses. We have not
made sales to Iran or any Iranian governmental entities or any
other blacklisted companies or countries.
Fluctuating
exchange rates and other factors beyond our control, such as the
coronavirus, international monetary stability, tariff and trade
policies and U.S. and foreign tax and economic policies, may affect
the level and profitability of international sales. We cannot
predict the effect of such factors on our business, but we try to
consider and respond to changes in these factors, particularly as
the majority of our costs are U.S. based while the vast majority of
our sales are international.
Competition
The
competition in the programming systems market is highly fragmented
with a small number of organizations selling directly competitive
solutions and a large number of smaller organizations offering less
expensive solutions. In particular, low cost automated solutions
have gained market share in recent years, where the competition is
primarily based on price. Typically, their equipment meets a
“good enough” standard, but with reduced quality,
traceability, upgradability, security and other software features
such as factory integration software. Many of these competitors
compete on a regional basis, with local language and support.
Although competition in the security deployment market is
developing, we expect competition in the market to increase as
security deployment becomes more important. There are alternative
security deployment solutions such as software-based security,
rather than the hardware-based security of our SentriX
equipment.
In
addition, we compete with multiple substitute forms of device
programming including “home grown” solutions.
Programming after device placement may be done with In Circuit Test
(“ICT”), In System Programming (“ISP”), and
End of Line Downloading (“EOL”). Some automotive
products may also be programmed over the air (“OTA”).
IoT devices may also be programmed with ICT, ISP, EOL or OTA. In
addition, new security devices may be required to be programmed
using device-specific programmers developed by the semiconductor
manufacturer.
While
we are not aware of any published industry market information
covering the programming systems or security deployment market,
according to our internal analysis of competitors’ revenues,
we believe we continue to be the largest competitor in the
programming systems equipment market and have been gaining market
share in recent years, especially with our new
products.
Manufacturing, Raw Materials and Backlog
We
strive to manufacture and provide the best solutions for advanced
programming. We primarily assemble and test our products at our
principal facilities in Redmond, Washington and Shanghai, China.
Both of these locations are ISO 9001:2015 certified. We outsource
our circuit board manufacturing and fabrication. As a resilient
supply chain strategy, we manufacture various products in both of
our production facilities. This strategy allows opportunity to
mitigate some of the risks of having only one location, as well as
enabling tariff and tax optimization strategies. We use a
combination of standard components and fabricated parts
manufactured to our specifications. Most components used are
available from a number of different suppliers and subcontractors
but certain items, such as some handler and programmer and security
deployment subassemblies, custom integrated circuits, hybrid
circuits and connectors, are purchased from single sources. We
believe that additional sources can be developed for present
single-source components without significant difficulties. We
cannot be sure that single-source components will always continue
to be readily available. If we cannot develop alternative sources
for these components, or if we experience deterioration in
relationships with these suppliers, there may be price increases,
minimum order quantities, end of life purchase requirements, costs
associated with integrating alternatively sourced parts, and delays
or reductions in product introductions or shipments, which may
materially adversely affect our operating results.
In
accordance with industry practices, generally all orders are
subject to cancellation prior to shipment without penalty, except
for contracts calling for custom configuration. To date, such
cancellations have not had a material effect on our sales volume.
To meet customers’ delivery requirements, we manufacture
certain products based upon a combination of backlog and
anticipated orders. Most orders are scheduled for delivery within 1
to 90 days after receipt of the order. Our backlog of pending
orders was approximately (in millions) $3.9, $2.9 and $1.9 as of
December 31, 2020, 2019 and 2018, respectively. The size of backlog
at any particular date is not necessarily a meaningful indicator of
the trend of our business.
Research and Development
We
believe that continued investment in research and development is
critical to our future success. We continue to develop new
technologies and products and enhance existing products. Future
growth is, to a large extent, dependent upon the timely development
and introduction of new products, as well as the development of
technology and algorithms to support the latest programmable
devices. Where possible, we may pursue partnerships and other
strategic relationships to add new products, capabilities and
services, particularly in security deployment. We are currently
focusing our research and development efforts on strategic growth
markets, including automotive electronics, IoT and security
deployment. We are continuing to develop technology for security
deployment to program new categories of semiconductors, including
Secure Elements, TPMs, Authentication Chips, and Secure
Microcontrollers. We plan to deliver new programming technology,
automated handling systems and enhancements for security deployment
in the manufacturing environment. We also continue to focus on
increasing our capacity and responsiveness for new device support
requests from customers and programmable integrated circuit
manufacturers by revising and enhancing our internal processes and
tools. Our research and development efforts have resulted in the
release of significant new products and product enhancements over
the past several years.
During
2020, 2019 and 2018, we made expenditures for research and
development of (in millions) $6.4, $6.5 and $7.4, respectively,
representing 31%, 29.9% and 25.2% of net sales, respectively.
Research and development costs are generally expensed as
incurred.
Patents, Copyrights, Trademarks and Licenses
We rely
on a combination of patents, copyrights, trade secrets and
trademarks to protect our IP, as well as product development and
marketing skill to establish and protect our market position. We
continue to apply for and add new patents to our patent portfolio
as we develop strategic new technologies.
We
attempt to protect our rights in proprietary systems (architecture,
implementations, software), including the SentriX Security
Deployment System. We attempt to protect our software, including
Lumen®X software, Flashcore software, TaskLink software,
ConneX smart programming software and other software products, by
retaining the title to and copyright of the software and
documentation, by including appropriate contractual restrictions on
use and disclosure in our licenses, and by requiring our employees
to execute non-disclosure agreements. Our software products are not
typically sold separately from sales of programming systems.
However, 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.
Because
of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might
infringe upon existing patents or copyrights, and we may be
required to obtain licenses or discontinue the use of the
infringing technology. We believe that any exposure we may have
regarding possible infringement claims is a reasonable business
risk similar to that assumed by other companies in the electronic
equipment and software industries. However, any claim of
infringement, with or without merit, could be costly and a
diversion of management’s attention, and an adverse
determination could adversely affect our reputation, preclude us
from offering certain products, and subject us to substantial
liability. As of December 31, 2020, there were no pending actions
regarding infringement claims.
Employees
As of
December 31, 2020, we had a total of 96 employees, of which 46 were
located outside the U.S. and 8 of which were part time. We also
utilize independent contractors for specialty work, primarily in
research and development, and utilize temporary workers to adjust
capacity to fluctuating demand and for special projects. Many of
our employees are highly skilled, trained and experienced in
specialized areas and our continued success will depend in part
upon our ability to attract and retain employees who can be in
great demand within the industry. None of our employees are
represented by a collective bargaining unit and we believe
relations with our employees are favorable. In foreign countries we
have employment agreements or, in China, the Shanghai Foreign
Services Co., Ltd. (“FSCO”) labor
agreement.
When
hiring and retaining talent, we create specialized knowledge that
is difficult to replace short term. During COVID-19, we
specifically avoided layoffs and other short-term measures to
retain specialized skills and advance our research and development
efforts while some other competitors were forced to reduce their
research and development efforts.
Environmental Compliance
Data
I/O is a leader in ESG in the programming industry. We are the only
supplier with a published conflict mineral policy, and public
company governance. To our knowledge, we are the only programming
industry supplier with a diverse Board of Directors. Our facilities
are subject to numerous laws and regulations concerning the
discharge of materials or otherwise relating to the
environment.
Data
I/O is committed to all of the responsibilities associated with
modern age ESG. The Company’s key pillars for ESG support a
framework for sustainable growth and include Leadership &
Governance, Environment, Innovation, Human Capital, Social Capital,
and Financial Excellence. Initiatives within these areas apply to
the company’s daily global operations as well as within its
supply chains.
In
addition to this commitment, the company has a track record of
meeting its regulatory obligations, being a solid corporate
citizen, delivering superior value to its customers and partners,
and demonstrating enduring corporate stewardship while consistently
returning capital to shareholders.
As the
largest and only publicly traded company in its sector, Data I/O
has led its industry in disclosing significant operational and
financial information. The Company's Board currently includes Data
I/O's CEO and four Independent Directors. It is diverse
in gender, education, professional experience and differences in
viewpoints and skills. Data I/O believes it was the first [and
remains the only] in its industry to adopt a conflict minerals
policy. Through its continuous improvement practices and our
operations focus on assembly and test with no fabrication, the
company consumes relatively little energy, has minimal or no
emissions or pollutants to air and wastewater, and complies with
workplace labor, safety and business practices on 3
continents.
Data
I/O is also committed to giving back to our local communities
through volunteer and internship programs. The Company provides
employees time-off to volunteer and also coordinates group
projects. In addition, the Company provides internships to local
high school and college students through STEM and technical
colleges.
Compliance
with environmental laws has not had, nor is it expected to have, a
material effect on our capital expenditures, financial position,
results of operations or competitive position.
Executive Officers of the Registrant
Set
forth below is certain information concerning the executive
officers of Data I/O as of March 22, 2021:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Anthony
Ambrose
|
|
59
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
Joel S.
Hatlen
|
|
62
|
|
Vice
President, Chief Operating and Financial Officer,
Secretary
and Treasurer
|
|
Rajeev
Gulati
|
|
57
|
|
Chief
Technology Officer, Vice President of Engineering
|
|
Michael
Tidwell
|
|
52
|
|
Vice
President Marketing and Business Development
|
Anthony
Ambrose, age 59, joined Data I/O October 25, 2012 and is our
President and Chief Executive Officer (“CEO”), and a
member of the Board of Directors. Prior to Data I/O, Mr.
Ambrose was Owner and Principal of Cedar Mill Partners, LLC, a
strategy consulting firm since 2011. From 2007 to 2011, he
was Vice President and General Manager at RadiSys Corporation, a
leading provider of embedded wireless infrastructure solutions,
where he led all product divisions and worldwide engineering.
Until 2007, he was general manager and held several other
progressively responsible positions at Intel Corporation, where he
led development and marketing of standards-based telecommunications
platforms, and grew the industry standard server business to over
$1B in revenues. He is Chair of the EvergreenHealth
Foundation Board of Trustees. In 2019 he also became a board
member of CipherLoc Corporation (OTCQB: CLOK). Mr. Ambrose has a
Bachelor’s of Science in Engineering from Princeton
University, and completed the Stanford Graduate School of Business
Director Symposium.
Joel S.
Hatlen joined Data I/O in September 1991 and in July 2017 became
our Chief Operating Officer in addition to serving as our Vice
President, Chief Financial Officer, Secretary and Treasurer since
January 1998. He was Chief Accounting Officer since February 1997
and served as Corporate Controller from December 1993 to December
1997. Previously, he was Tax Manager and Senior Tax Accountant.
From September 1981 until joining Data I/O, Joel was employed by
Ernst & Young LLP as a Certified Public Accountant, where his
most recent position was Senior Manager. Joel is a Certified Public
Accountant and holds a Masters in Taxation from Golden Gate
University and a Bachelor’s in Business Administration in
Accounting from Pacific Lutheran University.
Rajeev
Gulati joined Data I/O in July 2013 and is our Chief Technology
Officer and Vice President of Engineering. Prior to Data I/O,
Rajeev served as Director of Software Engineering for AMD
responsible for tools, compiler strategy and execution from 2006 to
2013. He has an extensive background in software,
systems and applying technology to develop new markets.
Previously, he served as Director of Strategy and Planning at
Freescale from 2004 to 2006; as Director of Embedded Products at
Metrowerks (acquired by Motorola) from 2000 to 2004 and Director of
Compilers, Libraries & Performance Tools from 1997 to 2000; and
engineering and programmer positions at Apple Computer, IBM and
Pacific-Sierra Research. Rajeev holds a Master of Science in
Electrical & Computer Engineering from the University of Texas,
Austin and a BE in Electrical Engineering from Delhi College of
Engineering, New Delhi.
Michael
Tidwell joined Data I/O in May 2019 and is our Vice President of
Marketing and Business Development. Prior to Data I/O, he was Vice
President of Marketing & Business Development at Tignis, an AI
and machine learning startup. From 2012 to 2018 Michael was head of
Marketing and Business Development at Sansa Security, a leading
software security IP provider that was sold to ARM Holdings. Prior
to Sansa, Michael was Vice President of Business and Market
Development at BSQUARE Corporation. Michael has a Master of Science
in Electrical Engineering from the University of Washington and a
Bachelor of Electrical Engineering (Summa Cum Laude) from Georgia
Institute of Technology.
Item 1A. Risk Factors
Cautionary Factors That May Affect Future Results
Our disclosure and analysis in this Annual Report contains some
forward-looking statements. Forward-looking statements include our
current expectations or forecasts of future events. The reader can
identify these statements by the fact that they do not relate
strictly to historical or current facts. In particular, these
include statements relating to future action, the impact of the
coronavirus, prospective products, expected market growth, new
technologies and trends, industry partnerships, foreign operations,
economic expectations, future performance or results of current and
anticipated products, sales efforts, expenses, outcome of
contingencies, impact of regulatory requirements, tariffs and
financial results.
Any or all of the forward-looking statements in this Annual Report
or in any other public statement made may turn out to be wrong. They
can be affected by inaccurate assumptions we might make, or known
or unknown risks and uncertainties can affect these forward-looking
statements. Many factors -- for example, product competition and
product development -- will be important in determining future
results. Moreover, neither Data I/O nor anyone else assumes
responsibility for the accuracy and completeness of these
forward-looking statements. Actual future results may materially
vary.
We undertake no obligation to publicly update any forward-looking
statements after the date of this Annual Report, whether as a
result of new information, future events or otherwise. The reader
should not unduly rely on our forward-looking statements. The
reader is advised, however, to consult any future disclosures we
make on related subjects in our 10-Q, 8-K and 10-K reports to the
SEC and press releases. Also, note that we provide the following
cautionary discussion of risks, uncertainties and possible
inaccurate assumptions relevant to our business. These are factors
that we think could cause our actual results to differ materially
from expected and historical results. Other factors besides those
listed here could also adversely affect us. This discussion is
permitted by the Private Securities Litigation Reform Act of
1995.
RISK FACTORS:
CORONAVIRUS
The coronavirus that causes the serious disease COVID-19
(“coronavirus”), has and may continue to adversely
affect our business, including revenues, suppliers, employees and
facilities.
As a
global company with 93% of its 2020 sales in international markets,
we have been and may continue to be, significantly impacted by the
word wide coronavirus outbreak, which has affected all markets we
serve. Thirty of our employees are based in Shanghai, China and we
have a manufacturing facility there which manufactures some of our
equipment and develops most of the adapters and algorithms for our
equipment. Although our facilities in Shanghai, Redmond and Germany
are currently operating, they could be closed for an extended
period of time if the coronavirus spreads significantly.
Additionally, we source other components from China and other
countries that are used to manufacture our equipment in China and
in our Redmond, Washington facility and these components may not be
readily available. Many of our Redmond based employees and
executives are working from home and we are limiting visitors to
our Redmond facility. All of our facilities are subject to
restrictions and closure by governmental entities. Travel
restrictions have in some cases prevented and may continue to
impact equipment installations, repairs and selling at customer
sites. As the coronavirus continues as a pandemic, it has and may
continue to impact our revenues, our ability to obtain key
components and to manufacture our products, as well as sell,
install and support our products around the world.
The
coronavirus has and continues to impact key tradeshows and travel
plans for our employees. Because of the coronavirus we are not able
to visit many of our customers and prospects. Many tradeshows,
marketing activities and conferences have been canceled, postponed
or made virtual.
TARIFFS AND TRADE ISSUES
Changes in tariffs and trade issues may adversely affect our
business, including revenues and/or gross margins.
We
produce products in the United States and China. Currently, certain
of our products are subject to tariffs imposed by one country on
goods manufactured in the other country. This has materially
impacted our gross margins negatively. There is uncertainty
regarding the tariffs expected to be imposed, and any increase in
tariff rates and subjecting additional items to tariffs, could
impact our costs, revenues and the competitiveness of our products
due to our manufacturing locations. Trade and tariff issues are
creating business uncertainty and may spread to and impact other
jurisdictions.
Additionally,
trade tensions between the United States and China are impacting
our ability to seamlessly design, build, market and sell our
products. Some customers have moved production away from China,
further from our facilities and engineers. We endeavor to have
multi-sourced manufacturing, but this is not currently practical
for all products in all locations.
Brexit
has not had any significant impact on our business, however as
further effects become apparent its impact on us could
change.
NEW PRODUCTS OR SERVICES
We are pursuing new product or service initiatives, and business
models that may develop more slowly and/or to a lesser extent than
expected
In
order to lead in new and potentially lucrative market
opportunities, for example in security deployment of programmable
devices, circuit boards and electronic systems, we are making
significant investments in people, technology and business
development while the market is developing and uncertain. Due to
the length of time to market from design to production in security
provisioning, if these markets develop more slowly than planned, or
if our security deployment solutions are not widely accepted, then
we may not achieve our expected return on investment in new
technologies and this may significantly affect the results of our
existing business.
In the
security deployment area, we have introduced a new pay per use
business model and service fees that may not be accepted by our
customers who are accustomed to paying for capital equipment
upfront, rather than paying per use charges.
Failure to adapt to technology trends in our industry may impact
our competitiveness and financial results.
Product
and service technology in our industry evolves rapidly, making
timely product innovation essential to success in the marketplace.
Introducing products and services with improved technologies or
features may render our existing products obsolete and
unmarketable. Technological advances and trends that may negatively
impact our business include:
●
new device package
types, densities, chip interfaces and technologies requiring
hardware and software changes in order to be programmed by our
products, particularly certain segments of the high-density flash
memory markets where after placement programming is recommended by
certain semiconductor manufacturers
●
reduction in
semiconductor process geometries for certain 3 Dimensional (3D),
Multi Level Cell (MLC) and Triple Level Cell (TLC) NAND and eMMC
FLASH memories impact the product data retention through Surface
Mount Technology (SMT) reflow or X-ray inspection. Improper SMT
process control can negatively impact the end customer’s
ability to successfully program devices. This can cause them
to change their programing methods away from pre-programming to
post placement programming techniques, including ISP, ICT. Data I/O
is working with several semiconductor manufacturers to develop best
practices to minimize the impact of reflow and potential concerns
about X-ray induced data loss.
●
changes in Flash
technology speeds will eventually require us to change the
architecture of our programming engines
●
electronics
equipment manufacturing practices, such as widespread use of
in-circuit programming or downloading
●
adoption of
proprietary security and programming protocols and additional
security capabilities and requirements
●
customer software
platform preferences different from those on which our products
operate
●
customer adoption
of newer unsupported semiconductor device technologies such as UFS
memory or device interface methods, particularly if these
technologies are adopted by automotive electronics, IoT or wireless
customers
●
more rigid industry
standards, which would decrease the value-added element of our
products and support services
If we
cannot develop products or services in a timely manner in response
to industry changes, or if our products or services do not perform
well, our business and financial condition may be adversely
affected. Also, our new products or services may contain defects or
errors that give rise to product liability claims against us or
cause our products to fail to gain market acceptance. Our future
success depends on our ability to successfully compete with other
technology firms in attracting and retaining key technical
personnel.
Failure to adapt to increasing automotive electronics customer
requirements may impact our competitiveness and result in a decline
in sales or increased costs.
Concentration
in Automotive Electronics and our orders related to automotive
electronics customers has been dominant in recent years at 53% in
2020, 60% in 2019 and 60% in 2018. As we have been concentrated on
automotive electronics customers, any decrease in demand from these
customers (for example, many had plant shut downs during the second
quarter of 2020) may materially impact our results, as it will take
some time to transition our product line to other markets. Quality
standards and business requirements by our automotive electronics
customers, driven in turn by their automotive manufacturer
customers, may demand processes, and certifications at a higher
level than we currently are structured to provide. For example,
although we currently meet the ISO 9001:2015 standard, new quality
standards may be demanded by our customers with even more rigorous
requirements. In addition, contractual provisions may expose us to
greater potential liability and costs and we may be required to
provide higher service levels than we currently provide. If we
cannot adapt to these industry requirements or manage these
contractual provisions, our business may be adversely
affected.
Delays in development, introduction and shipment of new products or
services may result in a decline in sales or increased
costs.
We
develop new engineering and automated programming systems and
services. Significant technological, supplier, manufacturing or
other problems may delay the development, introduction or
production of these products or services.
For
example, we may encounter these problems:
●
technical problems
in the development of a new programming and/or security deployment
systems or the robotics for new automated handing
systems
●
inability to hire
qualified personnel or turnover in existing personnel or inability
to engage or retain key technology partners
●
delays or failures
to perform by us or third parties, including some smaller early
stage or recently acquired companies, involved in our development
projects
●
dependence on large
semiconductor companies for cooperation and support to securely
provision their devices. These companies must enable us with
specific technical information, and support Data I/O as a qualified
solution to their customers and channel partners.
●
development of new
products or services that are not accepted by the
market
These
problems may result in a delay or decline in sales or increased
costs.
We may pursue business acquisitions that could impair our financial
position and profitability.
We may
pursue acquisitions of complementary technologies, product lines or
businesses. Future acquisitions may include risks, such
as:
●
burdening
management and our operating teams during the integration of the
acquisition
●
diverting
management’s attention from other business
concerns
●
failing to
successfully integrate or monetize the acquired products or
technologies
●
lack of acceptance
of the acquired products by our sales channels or
customers
●
entering markets
where we have no or limited prior experience
●
potential loss of
key employees of the acquired company
●
additional burden
of support for an acquired programmer architecture
Future
acquisitions may also impact our financial position. For example,
we may use significant cash or incur debt, which would weaken our
balance sheet, or issue additional shares, potentially diluting
existing shareholders. We may also capitalize goodwill and
intangible assets acquired, the amortization or impairment of which
would reduce our profitability. We cannot guarantee that future
acquisitions will improve our business or operating
results.
If we are unable to protect our IP, we may not be able to compete
effectively or operate profitably.
We rely
on patents, copyrights, trade secrets and trademarks to protect our
IP, as well as product development and marketing skill to establish
and protect our market position. In particular, patents are a key
part of our security deployment strategy, and if we are not able to
successfully enforce these patents, we might lose our competitive
advantage in the security deployment market. We attempt to protect
our rights in proprietary software products, including our user
interface, product firmware, software module options and other
software products by retaining the title to and copyright of the
software and documentation, by including appropriate contractual
restrictions on use and disclosure in our licenses, and by
requiring our employees to execute non-disclosure
agreements.
Because
of the rapidly changing technology in the semiconductor, electronic
equipment and software industries, portions of our products might
possibly infringe upon existing patents or copyrights, and we might
be required to obtain licenses or discontinue the use of the
infringing technology. We believe that any exposure we may have
regarding possible infringement claims is a reasonable business
risk similar to that assumed by other companies in the electronic
equipment and software industries. However, any claim of
infringement, with or without merit, could be costly and a
diversion of management’s attention, and an adverse
determination could adversely affect our reputation, preclude us
from offering certain products, and subject us to substantial
liability.
We might face increased competition and might not be able to
compete successfully with current and future
competitors.
Technological
advances have reduced the barriers of entry into the programming
systems market. We expect competition to increase from both
established and emerging companies. If we fail to compete
successfully against current and future sources of competition, our
profitability and financial performance will be adversely
impacted.
THIRD PARTY RELATIONSHIPS
If we do not develop, enhance and retain our relationships with
security partners, our business may be adversely affected and we
may not be able to timely develop new and cost effective managed
and secure programming solutions.
We may
be required to complement our skills and expertise with
partners’ expertise. Some of these partners are operating
with more limited capital and/or management expertise than
established firms or recently acquired firms that may have
different priorities. Other partners are very large companies where
prioritizing work with us may be difficult in light of competing
priorities. For some of our then earlier stage partners, we have
obtained unique product features and capabilities in exchange for
NRE payments, pre-paid royalties, marketing incentives and sales
cooperation. As these unique features and capabilities are no
longer available, we face more competition. If our partners are
unable to develop and deliver solutions that we need to integrate
into our solutions, our products might be delayed, we might have to
locate alternate partners and suppliers or develop the technology
ourselves, and we have been, and could be, in future arrangements
still responsible for paying the costs of any related pre-paid
royalties or NRE payments, and have, and might result in,
write-offs of any excess equipment or inventory. In 2020, we
significantly reduced our dependence on third parties for our
SentriX platform.
If we do not develop and enhance our relationships with
semiconductor manufacturers, our business may be adversely
affected.
We work
closely with most semiconductor manufacturers to ensure that our
data programming and security deployment systems comply with their
requirements. In addition, many semiconductor manufacturers
recommend our managed and secure programming systems for use by
users of their programmable devices. These working relationships
enable us to keep our programming systems product lines up to date
and provide end-users with broad and current programmable device
support. As technology changes occur that could limit the
effectiveness of pre-placement programming, particularly for very
small high-density NAND, e-MMC and UFS devices, certain
semiconductor manufacturers may not recommend or may not continue
recommending our programming systems for these devices. Our
business may be adversely affected if our relationships with
semiconductor manufacturers deteriorate or if semiconductor
manufacturers are not willing to closely work with us on security
deployment. Consolidation within the semiconductor industry may
also impact us. As we develop more security deployment solutions,
we will need to partner more closely with semiconductor
manufacturers.
Our reliance on a small number of suppliers may result in a
shortage of key components, which may adversely affect our
business, and our suppliers may experience financial difficulties
which could impact their ability to service our needs.
Certain
parts or software used in our products are currently available from
either a single supplier or from a limited number of suppliers. Our
small relative level of business means we frequently lack influence
and significant purchasing power. If we cannot develop alternative
sources of these components, if sales of parts or software are
discontinued by the supplier, if we experience deterioration in our
relationship with these suppliers, or if these suppliers require
financing which is not available, there may be delays or reductions
in product introductions or shipments, which may materially
adversely affect our operating results.
Because
we rely on a small number of suppliers for certain parts, we are
subject to possible price increases by these suppliers. Also, we
may be unable to accurately forecast our production schedule. If we
underestimate our production schedule, suppliers may be unable to
meet our demand for components. This delay in the supply of key
components may have a materially adverse effect on our business.
For suppliers who discontinue parts, we may be required to make
lifetime purchases covering future requirements. Over estimation of
demand or excessive minimum order quantities will lead to excess
inventories that may become obsolete.
Some of
our sockets, parts, subassemblies and boards are currently
manufactured to our specifications by third-party foreign contract
manufacturers and we are sourcing certain parts or options from
foreign manufacturers, particularly in China. For example, due to
the coronavirus or other viruses impacting workers, suppliers or
travel, we may not be able to obtain a sufficient quantity of these
products if and when needed or the quality of these parts or
options may not meet our standards, which may result in lost
sales.
If we are unable to attract and retain qualified third-party
distributors and representatives, our business may be adversely
affected.
We have
an internal sales force and also utilize third-party distributors
and representatives. Therefore, the financial stability of these
distributors and representatives is important. Their ability to
operate, timely pay us, and to acquire any necessary financing may
be affected by the current economic climate. Highly skilled
professional engineers use most of our products. To be effective,
third-party distributors and representatives must possess
significant technical, marketing, customer relationships and sales
resources and must devote their resources to sales efforts,
customer education, training and support. These required qualities
limit the number of potential third-party distributors and
representatives. Our business will suffer if we cannot attract and
retain a sufficient number of qualified third-party distributors
and representatives to market our products.
MARKET CONDITIONS
A decline in economic and market conditions may result in delayed
or decreased capital spending and delayed or defaulted payments
from our customers.
The
coronavirus appears likely to affect economic and market conditions
as it continues to spread. Our business is highly impacted by
capital spending plans and other economic cycles that affect the
users and manufacturers of integrated circuits. The industries are
highly cyclical and are characterized by rapid technological
change, short product life cycles and fluctuations in manufacturing
capacity and pricing and gross margin pressures. As we experienced
in this and recent prior years, our operations may in the future
reflect substantial fluctuations from period-to-period as a
consequence of these industry patterns, general economic conditions
affecting the timing of orders from major customers, and other
factors affecting capital spending. In a difficult economic
climate, it may take us longer to receive payments from our
customers and some of our customers’ business may fail,
resulting in non-payment. Our market growth forecasts and related
business decisions may be wrong. These factors could have a
material adverse effect on our business and financial
condition.
Our international operations may expose us to additional risks that
may adversely affect our business.
International
sales represented approximately 93%, 92% and 88% of net sales in
2020, 2019 and 2018, respectively. We expect that international
sales will continue to be a significant portion of our net revenue.
International sales may fluctuate due to various factors,
including:
●
the impact of the
coronavirus or other viruses
●
fluctuations in
foreign currency exchange rates because 93% of our sales are to
international markets, volatile exchange rates may also impact our
competitiveness and margins
●
economic
uncertainty related to the European sovereign debt
situation
●
migration of
manufacturing to low cost geographies
●
unexpected changes
in regulatory requirements, including Brexit
●
tariffs and
taxes
●
Bi-lateral and
Multi-lateral trade agreements
●
difficulties in
staffing and managing foreign operations
●
longer average
payment cycles and difficulty in collecting accounts
receivable
●
compliance with
applicable export licensing requirements and the Foreign Corrupt
Practices Act
●
product safety and
other certification requirements
●
difficulties in
integrating foreign and outsourced operations
●
civil unrest,
political and economic instability
Because
we have customers located throughout the world, we have significant
foreign receivables. We may experience difficulties in collecting
these amounts as a result of payment practices of certain foreign
customers, economic uncertainty and regulations in foreign
countries, the availability and reliability of foreign credit
information, and potential difficulties in enforcing collection
terms.
The
European Union and European Free Trade Association
(“EU”) has established certain electronic emission and
product safety requirements (“CE”). As applicable, our
products currently meet these requirements; however, failure to
obtain either a CE certification or a waiver for any
product may prevent us from marketing that product in Europe. The
EU also has directives concerning the Reduction of Hazardous
Substances (“RoHS”) and we believe we are classified
within the EU RoHS Directive category list as Industrial Monitoring
and Control Equipment (category 9). We believe all current products
meet the RoHS directives. Failure to meet applicable directives or
qualifying exemptions may prevent us from marketing certain
products in Europe or other territories with similar
requirements.
We have
subsidiaries in Germany and China and large balances of cash are in
our foreign subsidiaries. Our business and financial condition is
sensitive to currency exchange rates and any restrictions imposed
on their currencies including restrictions on repatriations of
cash. A repatriation of cash has, and could in the future, result
in tax costs and corresponding deferred tax assets with related tax
valuation allowances. Currency exchange fluctuations in these
countries may adversely affect our investment in our
subsidiaries.
OPERATIONS
Quarterly fluctuations in our operating results may adversely
affect our stock price.
Our
operating results tend to vary from quarter to quarter. Our revenue
in each quarter substantially depends upon orders received within
that quarter. Conversely, our expenditures are based on investment
plans and estimates of future revenues. We may, therefore, be
unable to quickly reduce our spending if our revenues decline in a
given quarter. As a result, operating results for that quarter will
suffer. Our results of operations for any one quarter are not
necessarily indicative of results for any future
periods.
Other
factors, which may cause our quarterly operating results to
fluctuate, include:
●
increased
competition
●
timing of new
product announcements and timing of development
expenditures
●
product or service
releases and pricing changes by us or our competitors
●
market acceptance
or delays in the introduction of new products or
services
●
production
constraints
●
quality
issues
●
labor or material
constraints
●
timing of
significant orders
●
timing of
installation or customer acceptance requirements
●
sales channel mix
of direct vs. indirect distribution
●
civil unrest, war
or terrorism
●
health issues such
as the outbreak of the coronavirus or other viruses impacting
workers, suppliers, customers, travel, or our
facilities
●
customers’
budgets
●
changes in
accounting rules, tax or other legislation
●
adverse movements
in exchange rates, interest rates or tax rates
●
cyclical and
seasonal nature of demand for our customers’
products
●
general economic
conditions in the countries where we sell products
●
expenses and delays
obtaining authorizations in setting up new operations or
locations
●
facilities
relocations
Due to
any of the foregoing factors, it is possible that in some future
quarters, our operating results will be below expectations of
analysts and investors.
We have a history of operating losses and may be unable to generate
enough revenue to achieve and maintain profitability.
We have
incurred operating losses in four of the last ten years. We operate
in a cyclical industry. We will continue to examine our level of
operating expense based upon our projected revenues. Any planned
increases in operating expenses may result in losses in future
periods if projected revenues are not achieved or the investment
level required is too large. As a result, we may need to generate
greater revenues than we have recently in order to maintain
profitability. However, we cannot provide assurance that our
revenues will continue to increase and our business strategies may
not be successful, resulting in future losses.
The loss of key employees may adversely affect our
operations.
We have
employees located in the U.S., Germany and China. We also utilize
independent contractors for specialty work, primarily in research
and development, and utilize temporary workers to adjust capacity
to fluctuating demand. Many of our employees are highly skilled and
our continued success will depend in part upon our ability to
attract and retain employees who can be in great demand within the
industry. None of our employees are represented by a collective
bargaining unit and we believe relations with our employees are
favorable, though no assurance can be made that this will be the
case in the future. In China, our workers have benefits and similar
arrangements provided under a “FSCO” labor agreement
and we could be adversely affected if we were unable to continue
that arrangement.
We may need to raise additional capital and our future access to
capital is uncertain.
Our
past revenues have sometimes been, and our future revenues may
again be, insufficient to support the expense of our operations and
any expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable
to generate sufficient cash flows from operations or to obtain
funds through additional debt, lease or equity financing, we may
have to reduce some or all of our development and sales and
marketing efforts and limit the expansion of our
business.
We
believe that we have sufficient cash or working capital available
under our operating plan to fund our operations and capital
requirements through at least the next one-year period. In the
event we require additional cash for U.S. operations or other
needs, we may choose to repatriate some, or all, of the $6.8
million held in our foreign subsidiaries. Although we have no
current repatriation plans, there may be tax, legal and other
impediments to any repatriation actions. Our working capital may be
used to fund possible losses, business growth, project initiatives,
share repurchases and business development initiatives including
acquisitions, which could reduce our liquidity and result in a
requirement for additional cash before that time. Any substantial
inability to achieve our current business plan could have a
material adverse impact on our financial position, liquidity, or
results of operations and may require us to reduce expenditures
and/or seek additional financing.
Therefore,
we may seek additional funding through public or private debt or
equity financing or from other sources. We have no commitments for
additional financing, and given a potential future unfavorable
economic climate and our financial results, we may experience
difficulty in obtaining funding on favorable terms, if at all. Any
financing we obtain may contain covenants that restrict our freedom
to operate our business or may require us to issue securities that
have rights, preferences or privileges senior to our Common Stock
and may dilute your ownership interest.
Cyber security breaches or terrorism could result in liabilities or
costs as well as damage to or loss of our data or customer access
to our website and information systems. The collection, storage,
transmission, use and disclosure of user data and personal
information, if accessed improperly, could give rise to liabilities
or additional costs as a result of laws, governmental regulations
and evolving views of personal privacy rights.
Cyber
security breaches or terrorism could result in the exposure or
theft of private or confidential information as well as interrupt
our business, including denying customer access to our website and
information systems. We transmit, and in some cases store, end-user
data, including personal information. In jurisdictions around the
world, personal information is becoming increasingly subject to
legislation and regulations intended to protect consumers’
privacy and security. The interpretation of privacy and data
protection laws and regulations regarding the collection, storage,
transmission, use and disclosure of such information in some
jurisdictions is unclear and evolving. These laws may be
interpreted and applied in conflicting ways from country to country
and in a manner that is not consistent with our current data
protection practices. Complying with these varying international
requirements could cause us to incur additional costs and change
our business practices. Because our services are accessible in many
foreign jurisdictions, some of these jurisdictions may claim that
we are required to comply with their laws, even where we have no
local entity, employees or infrastructure. We could be forced to
incur significant expenses if we were required to modify our
products, our services or our existing security and privacy
procedures in order to comply with new or expanded
regulations.
Our stock price may be volatile and, as a result, our shareholders
may lose some or all of their investment.
The
stock prices of technology companies tend to fluctuate
significantly. We believe factors such as announcements of new
products or services by us or our competitors and quarterly
variations in financial results and outlook may cause the market
price of our Common Stock to fluctuate substantially. In addition,
overall volatility in the stock market, particularly in the
technology company sector, is often unrelated to the operating
performance of companies. If these market fluctuations continue in
the future, they may adversely affect the price of our Common
Stock. Additionally, securities of certain companies have recently
experienced significant and extreme volatility in stock price due
short sellers of shares of common stock, known as a “short
squeeze.” These short squeezes have caused extreme volatility
in both the stock prices of those companies and in the market, and
have led to the price per share of those companies to trade at a
significantly inflated rate that is disconnected from the
underlying value of the company. Many investors who have purchased
shares in those companies at an inflated rate face the risk of
losing a significant portion of their original investment, as in
many cases the price per share has declined steadily as interest in
those stocks have abated. While we have no reason to believe our
shares would be the target of a short squeeze, there can be no
assurance that we won’t be in the future, and you may lose a
significant portion or all of your investment if you purchase our
shares at a rate that is significantly disconnected from our
underlying value.
REGULATORY REQUIREMENTS
Failure to comply with increasing regulatory requirements may
adversely affect our stock price and business.
As a
public company, we are subject to numerous governmental and stock
exchange requirements, with which we believe we are in compliance.
Our failure to meet regulatory requirements and exchange listing
standards may result in actions such as: the delisting of our
stock, impacting our stock’s liquidity; SEC enforcement
actions; and securities claims and litigation.
The
Sarbanes-Oxley Act of 2002 and the Securities and Exchange
Commission (SEC) have requirements that we may fail to meet or we
may fall out of compliance with, such as the internal controls
auditor attestation required under Section 404 of the
Sarbanes-Oxley Act of 2002, with which we are not currently
required to comply as we are a smaller reporting company. We assume
that we will continue to have the status of a smaller reporting
company based on the aggregate market value of the voting and
non-voting shares held as of June 30, 2020. If we fail to achieve
and maintain the adequacy of our internal controls, as such
standards are modified, supplemented or amended from time to time,
we may not be able to ensure that we can conclude on an ongoing
basis that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act
of 2002. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce
reliable financial reports and are important to help prevent
financial fraud. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed,
investors could lose confidence in our reported financial
information, and the trading price of our stock could drop
significantly.
While
we have policies and procedures in place designed to prevent
corruption and bribery, because our business is significantly
international, violations of the Foreign Corrupt Practices Act
(FCPA) could have a significant adverse effect on our business due
to the disruption and distraction of an investigation, financial
penalties and criminal penalties.
Government regulations regarding the use of "conflict"
minerals could adversely affect our prospects and results of
operations.
Regulatory
requirements regarding disclosure of our use of
“conflict” minerals mined from the Democratic Republic
of Congo and adjoining countries could affect the sourcing and
availability of minerals used in the manufacture of certain
products. Although we do not buy raw materials, manufacture, or
produce any electronic equipment using conflict minerals
directly, some components provided by our suppliers and contained
in our products contain conflict minerals. Our goal is for our
products to be conflict free. As a result, there may only be a
limited pool of suppliers who provide conflict free metals, and we
cannot assure you that we will be able to obtain products in
sufficient quantities or at competitive prices. Single source
suppliers may not respond or respond negatively regarding conflict
mineral sourcing and we may be unable to find alternative sources
to replace them. Also, because our supply chain is complex, we may
face reputational challenges with our customers and other
stakeholders if we are unable to sufficiently verify the origins
for all metals used in the products that we sell. Further, if we
are unable to comply with the new laws or regulations or if our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to practice, regulatory authorities may
initiate legal proceedings against us. We may need to incur
additional costs and invest additional resources, including
management’s time, in order to comply with the new
regulations and anticipated additional reporting and disclosure
obligations.
Item 1B. Unresolved Staff
Comments
None.
Item 2. Properties
During
the third quarter of 2017, we amended our lease agreement for the
Redmond, Washington headquarters facility, extending the lease to
July 31, 2022. Previously on June 8, 2015 the lease had been
amended to relocate our headquarters to a nearby building and lower
the square footage to approximately 20,460. The lease base annual
rental payments during 2020 and 2019 were approximately $361,000
and $351,000, respectively.
In
addition to the Redmond facility, approximately 24,000 square feet
is leased at two foreign locations, including our sales, service,
operations and engineering office located in Shanghai, China, and
our German sales, service and engineering office located near
Munich, Germany.
We
signed a lease agreement effective November 1, 2015 that extends
through October 31, 2021 for a facility located in Shanghai, China.
This lease is for approximately 19,400 square feet. The lease base
annual rental payments during 2020 and 2019 were approximately
$301,000 and $305,000, respectively.
During
the fourth quarter of 2016, we signed a lease agreement for a new
facility located near Munich, Germany which was effective March 1,
2017 and extends through February 28, 2022 with a five year further
extension to 2027. This lease is for approximately 4,895 square
feet. The lease base annual rental payments during 2020 and 2019
were approximately $62,000 and $57,000, respectively.
Item 3. Legal Proceedings
From
time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As
of December 31, 2020, we were not a party to any legal proceedings
or aware of any indemnification agreement claims, the adverse
outcome of which in management’s opinion, individually or in
the aggregate, would have a material adverse effect on our results
of operations or financial position.
Item 4. Mine Safety
Disclosures
Not
Applicable.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our
Common Stock is listed on the NASDAQ Capital Market (NASDAQ symbol
is DAIO). The closing price was $4.12 on December 31,
2020.
The
approximate number of shareholders of record as of March 22, 2021
was 431.
Except
for special cash dividend of $4.15 per share paid on March 8, 1989,
we have not paid cash dividends on our Common Stock and do not
anticipate paying regular cash dividends in the foreseeable
future.
No
sales of unregistered securities were made by us during the periods
ended December 31, 2020, 2019 or 2018.
See
Item 12 for the Equity Compensation Plan Information.
Item 6. Selected Financial
Data
Not
applicable.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a “safe harbor” for
forward-looking statements to encourage companies to provide
prospective information about themselves as long as they identify
these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could
cause actual results to differ from the projected results.
All statements other than statements of historical fact made in
this Annual Report on Form 10-K are forward-looking. In
particular, statements herein regarding economic outlook, impact of
novel coronavirus or COVID-19; 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; and any other guidance on future periods are
forward-looking statements. Forward-looking statements
reflect management’s current expectations and are inherently
uncertain. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance,
achievements, or other future events. Moreover, neither Data
I/O nor anyone else assumes responsibility for the accuracy and
completeness of these forward-looking statements. We are
under no duty to update any of these forward-looking statements
after the date of this Annual Report. The Reader should not
place undue reliance on these forward-looking statements. The
following discussions and the section entitled “Risk Factors
– Cautionary Factors That May Affect Future Results”
describes some, but not all, of the factors that could cause these
differences.
OVERVIEW
We
sustained our second loss in 6 years due to a pandemic related
downturn in orders, combined with continued significant investments
in our security deployment business. Our strong cash position and
balance sheet combined with our long-term view of the market gives
us the financial flexibility to make these security business
decisions. At Data I/O, we are investing for the long term to
retain and extend our leadership position. On the product side, we
continue to invest with a long-term focus towards expanding our
markets and creating unique value for our customers. This is true
for both our traditional core business as well as the emerging
security deployment business.
The
automotive electronics market is cyclical and has been impacted by
the pandemic, and, we experienced the downturn in capital and
consumable spending related to it and the electronics industry. We
continued our focus on automotive electronics and managing the core
programming business to conserve cash and working capital during
2020 while positioning us for growth and profitability. Customer
and industry sources have communicated expectations for automotive
electronics to have a decade of growth at a 10 to 15% compound
annual growth rate, confirming our focus on this market. In
addition, the IoT market expected growth is the driver of future
revenue and earnings growth as we invest resources in the security
deployment market. During 2020, we launched a new generation of
SentriX tools and capability. We made the strategic decision to
control key pieces of the technology and enhance the ability to
both simplify the security deployment process, own the end-to-end
intellectual property and scale our business. As a result of this
decision, we impaired the earlier generation of security deployment
tools, inventory, and assets. This enables us to move forward and
support customers with enhanced new technology unburdened by the
restrictions, costs, and complexity of the previous tools. Our
challenge continues to be operating in a cyclical and rapidly
evolving industry environment. Our efforts are to balance industry
changes, industry partnerships, new technologies, business
geography shifts, exchange rate volatility, trade issues and
tariffs, coronavirus impacts, increasing costs and strategic
investments in our business with the level of demand and mix of
business we expect. We continue to manage our costs carefully and
execute strategies for cost reduction.
We are
focusing our research and development efforts in our strategic
growth markets, namely automotive electronics and IoT new
programming technologies, secure supply chain solutions, automated
programming systems and their enhancements for the manufacturing
environment and software. We are developing technology and products
to securely provision new categories of semiconductors, including
Secure Elements, Authentication Chips, and Secure Microcontrollers.
We plan to deliver new programming technology and automated
handling systems for managed and secure programming in the
manufacturing environment. We continue to focus on extending the
capabilities and support for our product lines and supporting the
latest semiconductor devices, including various configurations of
NAND Flash, e-MMC, UFS, TPM and microcontrollers on our newer
products.
Our
customer focus has been on global and strategic high-volume
manufacturers in key market segments like automotive electronics,
IoT, industrial controls and consumer electronics as well as
programming centers.
Although
the long-term prospects for our strategic growth markets should be
good, these markets and our business have been, and are likely to
continue to be, adversely impacted, at least temporarily, by the
global pandemic of coronavirus. See also the detailed discussion of
the impacts of the coronavirus on our business and markets in Item
1A, Risk Factors. Annual and quarterly projections on spending,
growth, mix, and profitability are likely to be revised
substantially with changing pandemic impacts and 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,
intangible assets, income taxes, warranty obligations,
restructuring charges, contingencies such as litigation and
contract terms that have multiple elements and other complexities
typical in the capital equipment industry. We base our estimates on
historical experience and other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or
conditions.
We
believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our
financial statements:
Revenue Recognition: 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 2020 and 2019, 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.
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 related uncertain economic outlook for our industry and
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, which requires the input of highly
subjective assumptions, including the option’s expected life
and the price volatility of the underlying stock. The expected
stock price volatility assumption was determined using the
historical volatility of our common stock. Changes in the
subjective assumptions required in the valuation model may
significantly affect the estimated value of the awards, the related
stock-based compensation expense and, consequently, our results of
operations. Restricted stock unit awards are valued based on the
average of the high and low price on the date of the grant and an
estimated forfeiture rate. For both options and restricted awards,
expense is recognized as compensation expense on the straight-line
basis. Employee Stock Purchase Plan (“ESPP”) shares
were issued under provisions that do not require us to record any
equity compensation expense.
RESULTS OF OPERATIONS:
NET SALES
|
Net
sales by product line
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
Automated
programming systems
|
$16,509
|
(0.8%)
|
$16,642
|
|
Non-automated
programming systems
|
3,819
|
(22.5%)
|
4,926
|
|
Total programming
systems
|
$20,328
|
(5.7%)
|
$21,568
|
|
Net
sales by location
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
United
States
|
$1,516
|
(12.6%)
|
$1,735
|
|
% of
total
|
7.5%
|
|
8.0%
|
|
International
|
$18,812
|
(5.1%)
|
$19,833
|
|
% of
total
|
92.5%
|
|
92.0%
|
|
Net
sales by type
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
Equipment
Sales
|
$11,480
|
(8.5%)
|
$12,553
|
|
Adapter
Sales
|
5,527
|
(0.1%)
|
5,535
|
|
Software and
Maintenance Sales
|
3,321
|
(4.6%)
|
3,480
|
|
Total
|
$20,328
|
(5.7%)
|
$21,568
|
Net
sales for the year ended December 31, 2020 declined approximately 5.7% to $20.3 million
compared to 2019 primarily as a result of COVID-19 related downturn
in capital spending resulting in lower demand in Automotive
Electronics and Programming Centers during 2020. On a regional
basis, net sales increased approximately 13% in Asia and decreased
approximately 23% in the Americas and 5% in Europe.
Order
bookings were $20.8 million for 2020, down approximately 8%
compared to $22.5 million in 2019. Backlog at December 31, 2020 and
2019 was $3.9 million and $2.9 million, respectively. Deferred
revenue was $1.1 million at December 31, 2020 compared to $1.5
million at December 31, 2019.
GROSS MARGIN
|
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
Gross
margin
|
$10,822
|
(13.8%)
|
$12,550
|
|
Percentage of net
sales
|
53.2%
|
|
58.2%
|
Gross
margin as a percentage of sales for the year ended December 31,
2020 was 53.2%, compared to 58.2% in 2019. The decline in gross
margin percentage was due to the impact of channel and price mix,
factory charges, including impairment obsolescence of $291,000 for
certain end of service support and first generation SentriX parts,
as well as lower sales volumes relative to fixed production
costs.
RESEARCH AND DEVELOPMENT
|
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
Research and
development
|
$6,357
|
(1.5%)
|
$6,451
|
|
Percentage of net
sales
|
31.3%
|
|
29.9%
|
Research
and development (“R&D”) expense decreased $94,000
for the year ended December 31, 2020 compared to 2019. The decrease
was primarily related to lower employee related costs and lower
incentive compensation. R&D as a percentage of sales increased
primarily due to the decline in 2020 sales.
We
believe it is essential to invest in R&D to significantly
enhance our existing products and to create new products as markets
develop and technologies change. During 2020, we strategically
invested in creating a second generation of SentriX, which was
introduced in the fourth quarter. In addition to product
development, a significant part of R&D spending is on creating
software and support for new devices introduced by the
semiconductor companies. We are currently focusing our research
development efforts on strategic growth markets, including
automotive electronics and IoT. We are developing technology and
the SentriX product line to securely program new categories of
semiconductors, including Secure Elements, Authentication Chips,
and Secure Microcontrollers. We delivered new enhanced programming
technology and automated handling systems for managed and secure
programming in the manufacturing environment and extending the
capabilities and support for our programmer architecture. Our
R&D spending fluctuates based on the number, type, and the
development stage of our product initiatives and
projects.
SELLING, GENERAL AND ADMINISTRATIVE
|
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
Selling, general
& administrative
|
$6,891
|
(6.6%)
|
$7,377
|
|
Percentage of net
sales
|
33.9%
|
|
34.2%
|
Selling,
General and Administrative (“SG&A”) expenses
decreased $486,000 for the year ended December 31, 2020 compared to
2019. The decrease was primarily related to reduced sales
commissions on lower sales volume, lower incentive compensation and
travel related expenses and partly offset by higher consulting
costs and other third party costs and stock-based compensation.
Cost control measures contributed to the reduction.
INTEREST
Interest
income was lower for the year ended December 31, 2020 compared to
2019, primarily due to lower invested cash balances and lower
interest rates.
INCOME TAXES
|
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
Income tax
(expense) benefit
|
$(387)
|
1148.4%
|
$(31)
|
Income
tax (expense) increased by $356,000 for the year ended December 31,
2020 compared to 2019. The increase was primarily a result of the
withholding tax of $257,000 on the repatriation of cash from
subsidiaries in 2020. Income tax (expense) in 2020 and 2019 is
primarily the result of foreign subsidiary income tax and minimal
US state income tax.
The
effective tax rate for 2020 of (10.8%) and 2019 of (2.7%) differed
from the statutory tax rates in our tax reporting jurisdictions
primarily due to the effect of valuation allowances. We have a
valuation allowance of $8.9 million and $7.5 million as of December
31, 2020 and 2019, respectively. Our deferred tax assets and
valuation allowance have been increased by approximately $365,000
and $348,000 associated with the requirements of accounting for
uncertain tax positions as of December 31, 2020 and 2019,
respectively. Given the uncertainty created by our loss history
particularly in the U.S. which is where most of our net deferred
tax assets are located, and the ongoing uncertain economic outlook
for our industry as well as capital and geographic spending, we
currently expect to continue to limit the recognition of net
deferred tax assets and maintain the tax valuation
allowances.
Due to
repatriations of cash from China and Canada, we were required to
pay $257,000 in withholding tax during 2020, as compared with no
withholding tax during 2019. Movements of cash that generated local
country withholding taxes are a current tax expense that created
additional deferred tax assets that resulted in additional tax
valuation allowances.
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES
Sales
and expenses incurred by foreign subsidiaries are denominated in
the subsidiary’s local currency and translated into U.S.
Dollar amounts at average rates of exchange during the year. We
recognized foreign currency transaction loss of $(513,000) in 2020
and foreign transaction gain of $5,000 in 2019. The transaction
gains or losses resulted primarily from translation adjustments to
foreign inter-company accounts and U.S. Dollar accounts held by
foreign subsidiaries and sales by our German subsidiary to certain
customers, which were invoiced in U.S. Dollars. Because
approximately 93% of our sales are to international markets,
volatile exchange rates may also impact our competitiveness and
margins.
IMPAIRMENT & RELATED CHARGES
During
the fourth quarter of 2020, we launched a new generation of SentriX
tools and capability. We made the strategic decision to control key
pieces of the technology and enhance the ability to simplify the
security deployment process, own the end-to-end intellectual
property and scale our business. We accelerated the transition to
second generation of SentriX by immediately upgrading all
customers’ deployed first generation SentriX systems to the
new hardware and software. This obsoleted components of the first
generation hardware, software and inventory.
We also
ended support for some legacy automated handlers, impairing the
remaining service inventory.
As a
result, certain capital equipment assets, advance payments and
inventory were analyzed and determined to be impaired, totaling
$943,000. This included impairment of $652,000, consisting of
$252,000 of equipment and software, $400,000 of prepaid royalties,
as well as impairment related charges of $291,000, due to inventory
obsolescence (cost of goods sold) for end of certain product
support.
FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES
|
|
2020
|
Change
|
2019
|
|
(in
thousands)
|
|
|
|
|
Working
capital
|
$18,059
|
$(438)
|
$18,497
|
At
December 31, 2020, our principal sources of liquidity consisted of
existing cash and cash equivalents which increased $231,000
primarily due to shifts in working capital. Our working capital
decreased in 2020 due to our operating loss offset in part by the
CARES Act acceleration of the AMT credit refund to current assets.
Our current ratio was 4.5 and 4.4 for December 31, 2020 and 2019,
respectively. 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 and seasonal 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 reduce
costs.
We
believe that we have sufficient cash or working capital available
under our operating plan to fund our operations and capital
requirements through at least the next one-year period. 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 have liquidated our subsidiary in Canada and
repatriated its cash. 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, “Operating Lease Commitments” and Note 7,
“Other Commitments”, we had no material off-balance
sheet arrangements.
SHARE REPURCHASE PROGRAMS
Data
I/O did not offer a share repurchase program in 2020. In August of
2019, Data I/O completed the share repurchase program authorized in
2018.
NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL
MEASURES
Earnings
Before Interest, Taxes, Depreciation, and Amortization
(“EBITDA”) and Adjusted EBITDA excluding equity
compensation and impairment & related charges (non-cash,
one-time items) are set forth below. Non-GAAP financial measures
should not be considered a substitute for, or superior to, measures
of financial performance prepared in accordance with GAAP. We
believe that these non-GAAP financial measures provide meaningful
supplemental information regarding our results and facilitate the
comparison of results.
During
the fourth quarter of 2020, certain capital equipment assets,
advance payments and inventory were analyzed and determined to be
impaired totaling $943,000. This included impairment of assets
consisting of $252,000 of equipment and software, $400,000 of
prepaid royalties, of $652,000 as well as impairment related
charges of $291,000 due primarily to end of certain product
support.
A
reconciliation of net income to EBITDA and Adjusted EBITDA
follows:
|
|
For Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
(in
thousands)
|
|
|
|
Net Income
(loss)
|
$(3,964)
|
$(1,187)
|
|
Interest
(income)
|
(14)
|
(53)
|
|
Taxes
|
387
|
31
|
|
Depreciation
and amortization
|
815
|
868
|
|
EBITDA
|
$(2,776)
|
$(341)
|
|
|
|
|
|
Equity
compensation
|
1,467
|
1,171
|
|
Impairment
& related charges
|
943
|
-
|
|
Adjusted EBITDA,
excluding equity compensation
|
|
|
|
and impairment
& related charges
|
$(366)
|
$830
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
Gross
Margin
|
$10,822
|
$12,550
|
|
Impairment related
obsolete inventory charges
|
291
|
-
|
|
Adjusted
gross margin excluding
|
|
|
|
impairment
related obsolete inventory charges
|
$11,113
|
$12,550
|
|
|
|
|
|
|
|
|
|
Gross Margin as a %
of sales
|
53.2%
|
58.2%
|
|
Impairment related
obsolete
|
|
|
|
inventory charges
as a % of sales
|
1.4%
|
0.0%
|
|
Adjusted
gross margin excluding impairment
|
|
|
|
related
obsolete inventory charges as a % of sales
|
54.7%
|
58.2%
|
|
|
|
|
|
Impairment &
related charges include the following:
|
|
|
|
(in
thousands)
|
|
|
|
Impairment
charges
|
$652
|
-
|
|
Obsolete inventory
charges
|
291
|
-
|
|
Total
impairment & related charges
|
$943
|
-
|
NEW ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") No. 2016-13,
"Measurement of Credit Losses on Financial Instruments," which
amends the impairment model by requiring entities to use a
forward-looking approach based on expected losses rather than
incurred losses to estimate credit losses on certain types of
financial instruments. We are planning to adopt the standard
effective for years after December 15, 2022 and do not expect this
to have a material impact on our financial statements.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
Not
applicable.
Item 8. Financial Statements and
Supplementary Data
See
pages 31 through 55.
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
|
|
Board
of Directors and Stockholders
Data
I/O Corporation
Opinion on the financial statements
Board
of Directors and Stockholders
Data
I/O Corporation
Opinion on the financial statements
We have audited the accompanying consolidated
balance sheets of Data I/O Corporation (a Washington corporation)
and subsidiaries (the “Company”) as of December 31,
2020 and 2019, the related consolidated statements of operations,
comprehensive income (loss), stockholders’ equity, and cash
flows for each of the two years in the period ended December 31,
2020, and the related notes and financial statement schedule
included under Item 15(a)(2) (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2020, in conformity with
accounting principles generally accepted in the United States of
America.
Basis for opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical audit matter
The
critical audit matter communicated below is a matter arising from
the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved especially
challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing separate
opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Net realizable value of inventory
As
described further in Note 1 to the financial statements, management
measures the net realizable value of inventory based on estimated
reductions to inventory for obsolete, slow-moving, excess and
non-salable inventory by reviewing current transactions and
forecasted demand. We identified the net realizable value of
inventory specifically as a critical audit matter.
The
principal considerations for our determination that the net
realizable value of inventory represents a critical audit matter
are that the assessment of the valuation of inventory is complex
and includes an estimate of forecasted demand. The demand estimate
is subjective and requires the Company to consider significant
assumptions such as economic conditions, technological advances,
historical usage, and consumer trends, which are subject to
significant uncertainty and therefore require significant auditor
judgement.
Our
audit procedures related to the net realizable value of inventory
included the following, among others:
●
obtained
management’s analysis of parts in inventory and expected
customer demand, recalculated inputs into the analysis. This
included, among other inputs, historical usage compared to
quantities on hand, age, and general ledger balances.
●
tested selected
inventory items by making inquiries of management and evaluating
the appropriateness of judgments, assumptions and documentation
supporting adjustments to the reserve estimate.
●
inquired with
management and various staff members outside of the finance team to
obtain support for selected forecast demand inputs as well as
product specific trends.
/s/
GRANT THORNTON LLP
We have
served as the Company’s auditor since 2001.
Seattle,
Washington
March
26, 2021
DATA
I/O CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
|
|
December 31,
2020
|
December 31,
2019
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
and cash equivalents
|
$14,167
|
$13,936
|
|
Trade
accounts receivable, net of allowance for
|
|
|
|
doubtful
accounts of $66 and $80, respectively
|
2,494
|
4,099
|
|
Inventories
|
5,270
|
5,020
|
|
Other
current assets
|
1,319
|
924
|
|
TOTAL
CURRENT ASSETS
|
23,250
|
23,979
|
|
|
|
|
|
Property,
plant and equipment – net
|
1,216
|
1,668
|
|
Income
tax receivable
|
-
|
640
|
|
Other
assets
|
1,126
|
1,994
|
|
TOTAL
ASSETS
|
$25,592
|
$28,281
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts
payable
|
$1,245
|
$1,151
|
|
Accrued
compensation
|
1,509
|
1,541
|
|
Deferred
revenue
|
1,068
|
1,387
|
|
Other
accrued liabilities
|
1,307
|
1,372
|
|
Income
taxes payable
|
62
|
31
|
|
TOTAL
CURRENT LIABILITIES
|
5,191
|
5,482
|
|
|
|
|
|
Operating
lease liabilities
|
588
|
1,178
|
|
Long-term
other payables
|
174
|
91
|
|
|
|
|
|
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, 8,416,335 shares as of December 31,
|
|
|
|
2020
and 8,212,748 shares as of December 31, 2019
|
20,071
|
18,748
|
|
Accumulated
earnings (deficit)
|
(1,456)
|
2,508
|
|
Accumulated
other comprehensive income (loss)
|
1,024
|
274
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
19,639
|
21,530
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$25,592
|
$28,281
|
See notes to consolidated financial statements
DATA
I/O CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
For the Years
EndedDecember 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Net
sales
|
$20,328
|
$21,568
|
|
Cost
of goods sold
|
9,506
|
9,018
|
|
Gross
margin
|
10,822
|
12,550
|
|
Operating
expenses:
|
|
|
|
Research
and development
|
6,357
|
6,451
|
|
Selling,
general and administrative
|
6,891
|
7,377
|
|
Impairment
|
652
|
-
|
|
Total
operating expenses
|
13,900
|
13,828
|
|
Operating
income (loss)
|
(3,078)
|
(1,278)
|
|
Non-operating
income (loss):
|
|
|
|
Interest
income
|
14
|
53
|
|
Gain
on sale of assets
|
-
|
64
|
|
Foreign
currency transaction gain (loss)
|
(513)
|
5
|
|
Total
non-operating income (loss)
|
(499)
|
122
|
|
Income
(loss) before income taxes
|
(3,577)
|
(1,156)
|
|
Income
tax (expense) benefit
|
(387)
|
(31)
|
|
Net
income (loss)
|
$(3,964)
|
$(1,187)
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
$(0.48)
|
$(0.14)
|
|
Diluted
earnings (loss) per share
|
$(0.48)
|
$(0.14)
|
|
Weighted-average
basic shares
|
8,333
|
8,247
|
|
Weighted-average
diluted shares
|
8,333
|
8,247
|
See notes to consolidated financial statements
DATA
I/O CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in
thousands)
|
|
For the Years
EndedDecember 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Net
Income (loss)
|
$(3,964)
|
$(1,187)
|
|
Other
comprehensive income:
|
|
|
|
Foreign
currency translation gain (loss)
|
750
|
(134)
|
|
Comprehensive
income (loss)
|
$(3,214)
|
$(1,321)
|
See notes to consolidated financial statements
DATA
I/O CORPORATION
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
(in
thousands, except share amounts)
|
|
|
|
|
Accumulated
|
|
|
|
Common
Stock
|
Accumulated
|
and
Other
|
Total
|
|
|
|
|
|
Earnings
|
Comprehensive
|
Stockholders'
|
|
|
Shares
|
Amount
|
(Deficit)
|
Income
(Loss)
|
Equity
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
8,338,628
|
$19,254
|
$3,695
|
$408
|
$23,357
|
|
Stock options
exercised
|
-
|
-
|
-
|
-
|
-
|
|
Repurchased
shares
|
(301,710)
|
(1,464)
|
-
|
-
|
(1,464)
|
|
Stock awards
issued, net of tax withholding
|
169,653
|
(243)
|
-
|
-
|
(243)
|
|
Issuance of stock
through: Employee Stock Purchase Plan
|
6,177
|
30
|
-
|
-
|
30
|
|
Share-based
compensation
|
-
|
1,171
|
-
|
-
|
1,171
|
|
Net income
(loss)
|
-
|
-
|
(1,187)
|
-
|
(1,187)
|
|
Other comprehensive
income gain (loss)
|
-
|
-
|
-
|
(134)
|
(134)
|
|
Balance
at December 31, 2019
|
8,212,748
|
$18,748
|
$2,508
|
$274
|
$21,530
|
|
|
|
|
|
|
|
|
Stock options
exercised
|
-
|
-
|
|
|
-
|
|
Repurchased
shares
|
-
|
-
|
-
|
-
|
-
|
|
Stock awards
issued, net of tax withholding
|
195,773
|
(173)
|
-
|
-
|
(173)
|
|
Issuance of stock
through: Employee Stock Purchase Plan
|
7,814
|
29
|
-
|
-
|
29
|
|
Share-based
compensation
|
-
|
1,467
|
-
|
-
|
1,467
|
|
Net income
(loss)
|
-
|
-
|
(3,964)
|
-
|
(3,964)
|
|
Other comprehensive
income gain (loss)
|
-
|
-
|
-
|
750
|
750
|
|
Balance
at December 31, 2020
|
8,416,335
|
$20,071
|
$(1,456)
|
$1,024
|
$19,639
|
See notes to consolidated financial statements
DATA I/O CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
For the Twelve
Months Ended December 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
income (loss)
|
$(3,964)
|
$(1,187)
|
|
Adjustments
to reconcile net income (loss)
|
|
|
|
to
net cash provided by (used in) operating activities:
|
|
|
|
Depreciation
and amortization
|
815
|
867
|
|
Gain
on sale of assets
|
-
|
(64)
|
|
Equipment
transferred to cost of goods sold
|
245
|
63
|
|
Share-based
compensation
|
1,467
|
1,171
|
|
Impairment
and related charges
|
943
|
-
|
|
Net
change in:
|
|
|
|
Trade
accounts receivable
|
1,664
|
(375)
|
|
Inventories
|
(414)
|
139
|
|
Other
current assets
|
(398)
|
(307)
|
|
Accounts
payable and accrued liabilities
|
(38)
|
(2,031)
|
|
Deferred
revenue
|
(380)
|
(98)
|
|
Other
long-term liabilities
|
(491)
|
(29)
|
|
Deposits
and other long-term assets
|
1,182
|
(245)
|
|
Net
cash provided by (used in) operating activities
|
631
|
(2,096)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases
of property, plant and equipment
|
(860)
|
(612)
|
|
Net
proceeds from sale of assets
|
-
|
64
|
|
Cash
provided by (used in) investing activities
|
(860)
|
(548)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Net
proceeds from issuance of common stock, less payments
|
|
|
|
for
shares withheld to cover tax
|
(144)
|
(213)
|
|
Repurchase
of common stock
|
-
|
(1,464)
|
|
Cash
provided by (used in) financing activities
|
(144)
|
(1,677)
|
|
Increase
(decrease) in cash and cash equivalents
|
(373)
|
(4,321)
|
|
|
|
|
|
Effects
of exchange rate changes on cash
|
604
|
(86)
|
|
Cash
and cash equivalents at beginning of period
|
13,936
|
18,343
|
|
Cash
and cash equivalents at end of period
|
$14,167
|
$13,936
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash
paid during the period for:
|
|
|
|
Income
taxes
|
$137
|
$307
|
See notes to consolidated financial statements
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
Data I/O
Corporation (“Data I/O”, “We”,
“Our”, “Us”) designs, manufactures and
sells programming systems used by designers and manufacturers of
electronic products. Our programming system products are used to
program integrated circuits (“ICs” or
“devices” or “semiconductors”) with the
specific unique data necessary for the ICs contained in various
products, and are an important tool for the electronics industry
experiencing growing use of programmable ICs. Customers for our
programming system products are located around the world, primarily
in Asia, Europe and the Americas. Our manufacturing operations are
currently located in Redmond, Washington, United States and
Shanghai, China.
Principles of Consolidation
The
consolidated financial statements include the accounts of
Data I/O Corporation and our wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Significant
estimates include:
●
Revenue
Recognition
●
Allowance for
Doubtful Accounts
●
Inventory
●
Warranty
Accruals
●
Tax Valuation
Allowances
●
Share-based
Compensation
Foreign Currency Translation
Assets
and liabilities of foreign subsidiaries are translated at the
exchange rate on the balance sheet date. Revenues, costs and
expenses of foreign subsidiaries are translated at average rates of
exchange prevailing during the year. Translation adjustments
resulting from this process are charged or credited to
stockholders’ equity. Realized and unrealized gains and
losses resulting from the effects of changes in exchange rates on
assets and liabilities denominated in foreign currencies are
included in non-operating expense as foreign currency transaction
gains and losses.
Cash and Cash Equivalents
All
highly liquid investments purchased with an original maturity of 90
days or less are considered cash equivalents. We maintain our
cash and cash equivalents with major financial institutions in the
United States of America, which are insured by the Federal Deposit
Insurance Corporation (FDIC), and in foreign jurisdictions.
Deposits in U.S. banks exceed the FDIC insurance limit. We
have not experienced any losses on our cash and cash
equivalents. Cash and cash equivalents held in foreign bank
accounts in China and Germany, totaled (in millions) $6.8 at
December 31, 2020 and $8.7 at December 31, 2019.
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 charged, at
the discretion of management and according to our standard sales
terms, beginning on the day after the due date of the receivable.
However, interest income is subsequently recognized on these
accounts either to the extent cash is received, or when the future
collection of interest and the receivable balance is considered
probable by management.
Inventories
Inventories
are stated at the lower of cost or net realizable value with cost
being the currently adjusted standard cost, which approximates cost
on a first-in, first-out basis. We estimate changes to inventory
for obsolete, slow-moving, excess and non-salable inventory by
reviewing current transactions and forecasted product demand. We
evaluate our inventories on an item by item basis and record an
adjustment (lower of cost or net realizable value)
accordingly.
Property, Plant and Equipment
Property,
plant and equipment, including leasehold improvements, are stated
at cost and depreciation is calculated over the estimated useful
lives of the related assets or lease terms on the straight-line
basis. We depreciate substantially all manufacturing and office
equipment over periods of three to seven years. We depreciate
leasehold improvements over the remaining portion of the lease or
over the expected life of the asset if less than the remaining term
of the lease.
We
regularly review all of our property, plant and equipment for
impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. If the total of
future undiscounted cash flows is less than the carrying amount of
these assets, an impairment loss, if any, based on the excess of
the carrying amount over the fair value of the assets, is recorded.
Based on this evaluation, approximately $252,000 of impairment was
noted and recorded for property, plant and equipment for the year
ended December 31, 2020. For the year ended December 31, 2019, no
impairment was noted or recorded for property, plant and
equipment.
Patent Costs
We
expense external costs, such as filing fees and associated attorney
fees, incurred to obtain initial patents, but capitalize patents
obtained through acquisition as intangible assets. We also expense
costs associated with maintaining and defending patents subsequent
to their issuance.
Income Taxes
Income
taxes are computed at current enacted tax rates, less tax credits
using the asset and liability method. Deferred taxes are adjusted
both for items that do not have tax consequences and for the
cumulative effect of any changes in tax rates from those previously
used to determine deferred tax assets or liabilities. Tax
provisions include amounts that are currently payable, changes in
deferred tax assets and liabilities that arise because of temporary
differences between the timing of when items of income and expense
are recognized for financial reporting and income tax purposes, and
any changes in the valuation allowance caused by a change in
judgment about the realization of the related deferred tax assets.
A valuation allowance is established when necessary to reduce
deferred tax assets to amounts expected to be realized. The CARES
Act, enacted in Q1 2020, accelerated the AMT credit refund of
$640,000 to be a current asset instead of non-current.
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
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 2020 and 2019, 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.
The
following table represents our revenues by major
categories:
|
Net sales by type
|
2020
|
2019
|
|
(in
thousands)
|
|
|
|
Equipment
Sales
|
$11,480
|
$12,553
|
|
Adapter
Sales
|
5,527
|
5,535
|
|
Software and
Maintenance Sales *
|
3,321
|
3,480
|
|
Total
|
$20,328
|
$21,568
|
*
includes an insignificant amount of service and part
sales
Leases - Accounting Standards Codification 842
Leases
arise from contracts which convey the right to control the use of
identified property or equipment for a period of time in exchange
for consideration. Our leasing arrangements are primarily for
office space we use to conduct our operations. In addition, there
are automobiles and a small amount of office equipment leased. We
determine whether contracts include a lease at the inception date,
which is generally upon contract signing, considering factors such
as whether the contract includes an asset which is physically
distinct, which party obtains substantially all of the capacity and
economic benefit of the asset, and which party directs how, and for
what purpose, the asset is used during the contractual period of
use. Our leases commence when the lessor makes the asset available
for our use. At commencement, we record a lease liability at the
present value of future lease payments, net of any future lease
incentives to be received. Some of our lease agreements include
cancellable future periods subject to termination or extension
options. We include cancellable lease periods in our future lease
payments when we are reasonably certain to continue to utilize the
asset for those periods. We calculate the present value of future
lease payments at commencement using a discount rate which we
estimate as the collateralized borrowing rate we believe that would
be incurred on our future lease payments over a similar term. At
commencement, we also record a corresponding right-of-use asset,
which is calculated based on the amount of the lease liability,
adjusted for any advance lease payments paid, initial direct costs
incurred or lease incentives received prior to commencement.
Right-of-use assets are subject to evaluation for impairment or
disposal on a basis consistent with other long-lived
assets.
Leases
are classified at commencement, as either operating or finance
leases. As of December 31, 2020, all of our leases are classified
as operating leases. Rent expense for operating leases is
recognized on the straight-line method over the term of the
agreement beginning on the lease commencement date.
In
accounting for leases, we utilize certain practical expedients and
policy elections available under the lease accounting standard. For
example, we do not record right-of-use assets or lease liabilities
for leases with terms of 12 months or less. For contracts
containing real estate leases, we do not combine lease and
non-lease components. The primary impact of this policy election is
that we do not include in our calculation of lease liabilities any
fixed and non-cancelable future payments due under the contract for
items such as common area maintenance, utilities and other costs.
Lease-related costs which are variable rather than fixed are
expensed in the period incurred.
Assumptions,
judgments and estimates impacting the carrying value of our
right-of-use assets and liabilities include evaluating whether an
arrangement contains a lease, determining whether the lease term
should include any cancellable future periods, estimating the
discount rate used to calculate our lease liabilities, estimating
the fair value and useful life of the leased asset for the purpose
of classifying the lease as an operating or finance lease,
evaluating whether a lease contract amendment represents a new
lease agreement or a modification to the existing lease and
evaluating our right-of-use assets for impairment.
Research and Development
Research
and development costs are generally expensed as
incurred.
Advertising Expense
Advertising
costs are expensed as incurred. Total advertising expenses were
approximately $127,000 and $173,000 in 2020 and 2019,
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 74,000 and 65,000 for the years ended
December 31, 2020 and 2019, respectively. Options to purchase
25,000 and 29,752 shares of common stock were outstanding as of
December 31, 2020 and 2019, 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. Our consolidated accounts receivable
balance as of December 31, 2020 and 2019 includes foreign accounts
receivable in the functional currency of our foreign subsidiaries
amounting to $587,000 and $1,255,000, 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.
The
following represented greater than 10%
of our consolidated accounts receivable for the applicable
year:
|
Percentage of Consolidated Accounts Receivable
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Number of
customers
|
3
|
2
|
3
|
|
|
|
|
|
|
Approximate
percentage of consolidated accounts receivable balance
|
41%
|
32%
|
35%
|
|
|
|
|
|
|
Percentage
of each
|
17%
|
17%
|
12%
|
|
Percentage
of each
|
12%
|
15%
|
12%
|
|
Percentage
of each
|
12%
|
n/a
|
11%
|
Diversification of net sales
The
following represented greater than 10%
of net sales for the applicable year:
|
Percentage of Net Sales
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Number of
customers
|
1
|
1
|
2
|
|
|
|
|
|
|
Approximate
percentage of net sales
|
12%
|
11%
|
29%
|
|
|
|
|
|
|
Percentage
of each
|
12%
|
11%
|
16%
|
|
Percentage
of each
|
n/a
|
n/a
|
13%
|
COVID-19
In
2020, we had to react to the global COVID-19 pandemic. COVID-19 has
impacted all aspects of our business, from customer demand, to
supply chain integrity, employee safety, business processes, and
financial management. As a global company, we had to manage each of
these while working within the guidelines of local and national
policy in the U.S., China and Germany. Our philosophy at the start
of the outbreak was simple:
1.
Keep our people and
their families safe;
2.
Keep our facilities
safe and operational while we serve our customers as an essential
business; and
3.
Preserve
cash.
We have
managed this issue successfully to date, with no known employee
transmissions in the workplace and significant preservation of our
cash and working capital throughout the year. Our resilient supply
chain model kept our facilities in Shanghai, China and Redmond,
Washington open, and serving customers globally. We supported
customers rapidly transitioning to medical device support. We did
this while facing unique international travel restrictions,
shipping delays, and inability to meet with customers in person.
All the while we preserved and slightly grew our cash balances,
while moving more cash to the U.S.
COVID-19
has continued to impact our demand, particularly capacity related,
evidenced by many automotive and other plant shut downs in the
second quarter, their re-openings and now, in a believed ripple
effect, the impact of chip shortages on their production plans.
This appears to be a short-term issue and the outlook for
automotive electronics remains strong for a decade. Waves of
COVID-19 infection rates have kept or re-imposed revised travel
restrictions. Customers largely have not permitted in-person sales
and other visits. Converting these interactions to remote and
virtual means has meant new processes and technology
usage.
In
production, in addition to adding protective health measures for
our employees, we have focused on supply chain resilience and
duplicating production capability for some products in both our
Shanghai, China and Redmond, USA facilities. We implemented
additional supplier financial and other monitoring, as well as
adding additional local suppliers and increasing inventory stock
levels of key parts. Other than production employees who
necessarily are onsite, most Redmond employees are working remotely
with some flexibility to be onsite and this is expected to continue
until COVID-19 risks are reduced by vaccination
coverage.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") No. 2016-13,
"Measurement of Credit Losses on Financial Instruments," which
amends the impairment model by requiring entities to use a
forward-looking approach based on expected losses rather than
incurred losses to estimate credit losses on certain types of
financial instruments. We are planning to adopt the standard
effective for years after December 15, 2022 and do not expect this
to have a material impact on our financial statements.
NOTE 2 – ACCOUNTS RECEIVABLE, NET
|
|
December 31,
2020
|
December
31,
2019
|
|
(in
thousands)
|
|
|
|
Trade accounts
receivable
|
$2,560
|
$4,179
|
|
Less allowance for
doubtful receivables
|
66
|
80
|
|
Trade accounts
receivable, net
|
$2,494
|
$4,099
|
Changes
in Data I/O’s allowance for doubtful accounts are as
follows:
|
|
December 31,
2020
|
December
31,
2019
|
|
(in
thousands)
|
|
|
|
Beginning
balance
|
$80
|
$75
|
|
Bad debt expense
(reversal)
|
(14)
|
5
|
|
Accounts
written-off
|
-
|
-
|
|
Recoveries
|
-
|
-
|
|
Ending
balance
|
$66
|
$80
|
|
|
|
|
NOTE 3 – INVENTORIES
|
|
December
31,
2020
|
December
31
,2019
|
|
(in
thousands)
|
|
|
|
Raw
material
|
$3,143
|
$2,416
|
|
Work-in-process
|
1,204
|
1,832
|
|
Finished
goods
|
923
|
772
|
|
Inventories
|
$5,270
|
$5,020
|
|
|
|
|
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
|
|
December
31,
2020
|
December
31,
2019
|
|
(in
thousands)
|
|
|
|
Leasehold
improvements
|
$421
|
$395
|
|
Equipment
|
5,625
|
5,606
|
|
Sales
demonstration equipment
|
963
|
778
|
|
|
7,009
|
6,779
|
|
Less
accumulated depreciation
|
5,793
|
5,111
|
|
Property and
equipment, net
|
$1,216
|
$1,668
|
Total
depreciation expense recorded for 2020 and 2019 was $815,000 and
$867,000, respectively.
NOTE 5 – OTHER ACCRUED LIABILITIES
Other
accrued liabilities consisted of the following
components:
|
|
December
31,
2020
|
December
31,
2019
|
|
(in
thousands)
|
|
|
|
Lease
liability - short term
|
$673
|
$678
|
|
Product
warranty
|
371
|
367
|
|
Sales
return reserve
|
61
|
77
|
|
Other
taxes
|
109
|
126
|
|
Other
|
93
|
124
|
|
Other
accrued liabilities
|
$1,307
|
$1,372
|
|
|
|
|
The
changes in our product warranty liability for the year ending
December 31, 2020 are follows:
|
|
December
31,
2020
|
|
(in
thousands)
|
|
|
Liability,
beginning balance
|
$367
|
|
Net
expenses
|
728
|
|
Warranty
claims
|
(728)
|
|
Accrual
revisions
|
4
|
|
Liability,
ending balance
|
$371
|
|
|
|
NOTE 6 – OPERATING LEASE COMMITMENTS
We have
commitments under non-cancelable operating leases and other
agreements, primarily for factory and office space, with initial or
remaining terms of one year or more as follows:
For the
years ending December 31:
|
|
Operating
Lease
Commitments
|
|
(in
thousands)
|
|
|
2021
|
$747
|
|
2022
|
331
|
|
2023
|
101
|
|
2024
|
89
|
|
2025
|
69
|
|
Thereafter
|
85
|
|
Total
|
$1,422
|
|
Less
Imputed interest
|
(162)
|
|
Total operating
lease liabilities
|
$1,260
|
Cash
paid for operating lease liabilities for the twelve months ended
December 31, 2020 and 2019, respectively, was $770,000 and
$757,000. There were three new or modified leases during the twelve
months ended December 31, 2020 that are considered minor, and are
accounted for in the amounts disclosed above.
The
following table presents supplemental balance sheet information
related to leases as of December 31, 2020:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
(in
thousands)
|
|
|
|
Right-of-use
assets (Long-term other assets)
|
$1,081
|
$1,574
|
|
Lease
liability-short term (Other accrued liabilities)
|
$673
|
$678
|
|
Lease
liability-long term (Operating lease liabilities)
|
$588
|
$1,178
|
At
December 31, 2020, the weighted average remaining lease term is 2.9
years and the weighted average discount rate used is
5%.
The
components of our lease expense for the twelve months ended
December 31, 2020 and 2019, respectively, include operating lease
costs of $692,000 and $685,000, which includes short-term lease
costs of $34,000 and $32,000. Variable payments were not material,
and were treated as non-lease components and were recognized in the
period for which the costs occur.
Our
real estate facility leases are described below:
During
the third quarter of 2017, we amended our lease agreement for the
Redmond, Washington headquarters facility, extending the lease to
July 31, 2022. Previously on June 8, 2015 the lease had been
amended to relocate our headquarters to a nearby building and lower
the square footage to approximately 20,460. The lease base annual
rental payments during 2020 and 2019 were approximately $361,000
and $351,000, respectively.
In
addition to the Redmond facility, approximately 24,000 square feet
is leased at two foreign locations, including our sales, service,
operations and engineering office located in Shanghai, China, and
our German sales, service and engineering office located near
Munich, Germany.
We
signed a lease agreement effective November 1, 2015 that extends
through October 31, 2021 for a facility located in Shanghai, China.
This lease is for approximately 19,400 square feet. The lease base
annual rental payments during 2020 and 2019 were approximately
$301,000 and $305,000, respectively.
During
the fourth quarter of 2016, we signed a lease agreement for a new
facility located near Munich, Germany which was effective March 1,
2017 and extends through February 28, 2022 with a five year further
extension to 2027. This lease is for approximately 4,895 square
feet. The lease base annual rental payments during 2020 and 2019
were approximately $62,000 and $57,000, respectively.
NOTE 7 – OTHER COMMITMENTS
We have
purchase obligations for inventory and production costs as well as
other obligations such as capital expenditures, service contracts,
marketing, and development agreements. Arrangements are considered
purchase obligations if a contract specifies all significant terms,
including fixed or minimum quantities to be purchased, a pricing
structure and approximate timing of the transaction. Most
arrangements are cancelable without a significant penalty, and with
short notice, typically less than 90 days. At December 31, 2020,
the purchase commitments and other obligations totaled $1.3 million
of which all but $124,000 are expected to be paid over the next
twelve months.
NOTE 8 – CONTINGENCIES
As of
December 31, 2020, we were not a party to any legal proceedings or
aware of any indemnification agreement claims, the adverse outcome
of which in management’s opinion, individually or in the
aggregate, would have a material adverse effect on our results of
operations or financial position.
NOTE 9 – STOCK AND RETIREMENT PLANS
Stock Option Plans
At
December 31, 2020, there were 124,393 shares available for future
grant under Data I/O Corporation 2000 Stock Compensation Incentive
Plan (“2000 Plan”). At December 31, 2020, there were
shares of Common Stock reserved for issuance consisting of 62,500
inducement reserve shares and 605,728 shares under the 2000 Plan.
The inducement reserve shares were granted in 2019 consisting of
25,000 options and 50,000 RSU (37,500 unvested and unissued), which
were not from the 2000 Plan, but were made under the terms of the
2000 Plan. During 2020, 12,500 shares were issued from the
inducement reserve. Pursuant to the 2000 Plan, options are granted
to our officers and key employees with exercise prices equal to the
fair market value of the Common Stock at the date of grant and
generally vest over four years. Options granted under the plans
have a maximum term of six years from the date of grant. Stock
awards are also granted under the 2000 Plan which generally vest
over four years and one year for nonemployee
Directors.
Employee Stock Purchase Plan
Under
the Employee Stock Purchase Plan (“ESPP”), eligible
employees may purchase shares of our Common Stock at six-month
intervals at 95% of the fair market value on the last day of each
six-month period. Employees may purchase shares having a value not
exceeding ten percent of their gross compensation during an
offering period. During 2020 and 2019, a total of 7,814 and 6,177
shares, respectively, were purchased under the plan at average
prices of $3.71 and $4.88 per share, respectively. At December 31,
2020 and 2019, 31,769 and 39,249 shares were reserved for future
issuance respectively.
Stock Appreciation Rights Plan
We have
a Stock Appreciation Rights (“SAR”) Plan under which
each director, executive officer or holder of 10% or more of our
Common Stock has a SAR with respect to each exercisable stock
option. The SAR entitles the SAR holder to receive cash from us for
the difference between the market value of the stock and the
exercise price of the option in lieu of exercising the related
option. SARs are only exercisable following a tender offer or
exchange offer for our stock, or following approval by shareholders
of Data I/O of any merger, consolidation, reorganization or other
transaction providing for the conversion or exchange of more than
50% of the common shares outstanding. As no event has occurred,
which would make the SARs exercisable, and no such event is deemed
probable, no compensation expense has been recorded under this
plan. At December 31, 2020 and 2019, there were 25,000 SARs
outstanding.
Director Fee Plan
We have
a Director Fee Plan available to compensate directors who are not
employees of Data I/O Corporation with equity. During 2020,
20,559 shares were issued from the plan and no shares were issued
from the plan in 2019. At December 31, 2020 and 2019 130,763 and
151,322 shares remain available in the plan
respectively.
Retirement Savings Plan
We have
a savings plan that qualifies as a cash or deferred salary
arrangement under Section 401(k) of the Internal Revenue Code.
Under the plan, participating U.S. employees may defer their
pre-tax salary or post-tax salary if Roth is elected, subject to
IRS limitations. In fiscal years 2020 and 2019, we contributed one
dollar for each dollar contributed by a participant, with a maximum
contribution of four percent of a participant’s eligible
earnings. Our matching contribution expense for the savings plan,
net of forfeitures, was approximately $184,000 and $239,000 in 2020
and 2019, respectively. Employer matching contributions owed to the
plan were $200,000 and $211,000 at December 31, 2020 and 2019,
respectively.
NOTE 10 – SHARE-BASED COMPENSATION
For
share-based awards granted, we have recognized compensation expense
based on the estimated grant date fair value method. For these
awards we have recognized compensation expense using a
straight-line amortization method and reduced for estimated
forfeitures. The impact on our results of operations of recording
share-based compensation for the year ended December 31, 2020 and
2019 was as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
(in
thousands)
|
|
|
|
Cost of goods
sold
|
$44
|
$28
|
|
Research and
development
|
371
|
288
|
|
Selling, general
and administrative
|
1,052
|
855
|
|
Total share-based
compensation
|
$1,467
|
$1,171
|
An
immaterial amount of share-based compensation was capitalized into
inventory as overhead for the years ended December 31, 2020 and
2019, respectively.
The
fair values of share-based awards for employee stock option awards
were estimated at the date of grant using the Black-Scholes
valuation model. The volatility and expected life of the options
used in calculating the fair value of share-based awards may
exclude certain periods of historical data that we considered
atypical and not likely to occur in future periods. There were no
options granted during the year ended December 31, 2020. The
following weighted average assumptions were used to calculate the
fair value of options granted during the year ended December 31,
2019:
|
|
Employee
Stock
|
|
|
|
Options
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Risk-free interest
rates
|
n/a
|
2.31%
|
|
Volatility
factors
|
n/a
|
62.05%
|
|
Expected life of
the option in years
|
n/a
|
4.0
|
|
Expected dividend
yield
|
n/a
|
None
|
The
risk-free interest rate used in the Black-Scholes valuation method
is based on the implied yield currently available in U.S. Treasury
securities at maturity with an equivalent term. We have not
recently declared or paid any dividends and do not currently have
plans to do so in the future. The expected term of options
represents the period that our stock-based awards are expected to
be outstanding and has been determined based on historical weighted
average holding periods and projected holding periods for the
remaining unexercised shares. Consideration was given to the
contractual terms of our stock-based awards, vesting schedules and
expectations of future employee behavior. Expected volatility is
based on the annualized daily historical volatility of our stock
over a representative period.
The
following table summarizes stock option activity under our stock
option plans for the twelve months ended December 31:
|
|
2020
|
2019
|
||||
|
|
Options
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining Contractual Life in Years
|
Options
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining Contractual Life in Years
|
|
|
|
|
|
|
|
|
|
Outstanding at
beginning of year
|
25,000
|
$4.98
|
|
25,000
|
$8.03
|
|
|
Granted
|
-
|
-
|
|
25,000
|
4.98
|
|
|
Exercised
|
-
|
-
|
|
-
|
0.00
|
|
|
Cancelled, Expired
or
|
|
|
|
|
|
|
|
Forfeited
|
-
|
-
|
|
(25,000)
|
8.03
|
|
|
Outstanding at end
of year
|
25,000
|
$4.98
|
4.33
|
25,000
|
$4.98
|
5.34
|
|
|
|
|
|
|
|
|
|
Vested or expected
to vest at the end of the period
|
24,068
|
$4.98
|
4.33
|
24,723
|
$4.98
|
5.34
|
|
Exercisable at end
of year
|
9,375
|
$4.98
|
4.33
|
12,500
|
$4.98
|
5.34
|
The
aggregate intrinsic value of outstanding options is $0. There were
no stock option awards exercised in 2020.
Restricted
stock award activity including performance-based stock award
activity under our share-based compensation plan was as
follows:
|
|
2020
|
2019
|
||
|
|
Awards
|
Weighted -
Average
Grant Date Fair
Value
|
Awards
|
Weighted -
Average
Grant Date Fair
Value
|
|
Outstanding at
beginning of year
|
536,403
|
$5.44
|
558,856
|
$6.06
|
|
Granted
|
383,951
|
3.02
|
276,700
|
4.57
|
|
Vested
|
(230,901)
|
5.16
|
(224,089)
|
5.30
|
|
Cancelled
|
(46,225)
|
4.58
|
(75,064)
|
7.30
|
|
Outstanding at end
of year
|
643,228
|
$4.16
|
536,403
|
$5.44
|
During
the years ended December 31, 2020 and 2019, 55,687 and 54,436
shares respectively were withheld from issuance related to
restricted stock units vesting and stock option exercises to cover
employee taxes and stock options exercise price.
The
remaining unamortized expected future compensation expense and
remaining amortization period associated with unvested option
grants and restricted stock awards are:
|
|
December 31,
2020
|
December 31,
2019
|
|
|
|
|
|
Unamortized future
compensation expense
|
$2,017,501
|
$2,351,324
|
|
Remaining weighted
average amortization period in years
|
2.35
|
2.40
|
NOTE 11 – SHARE REPURCHASE PROGRAMS
Data
I/O did not offer a share repurchase program in 2020. In August of
2019, Data I/O completed the share repurchase program authorized in
2018.
NOTE 12 – INCOME TAXES
Components of income (loss) before taxes:
|
|
Year Ended
December 31,
|
|
|
(in
thousands)
|
2020
|
2019
|
|
U.S.
operations
|
$(4,451)
|
$(2,518)
|
|
Foreign
operations
|
874
|
1,362
|
|
Total
income (loss) before taxes
|
$(3,577)
|
$(1,156)
|
Income
tax expense (benefit) consists of:
|
|
Year Ended
December 31,
|
|
|
(in
thousands)
|
2020
|
2019
|
|
Current
tax expense (benefit)
|
|
|
|
U.S.
federal
|
$0
|
$(42)
|
|
State
|
(2)
|
8
|
|
Foreign
|
389
|
65
|
|
|
387
|
31
|
|
Deferred
tax expense (benefit) – U.S. federal
|
-
|
-
|
|
Total
income tax expense (benefit)
|
$387
|
$31
|
A
reconciliation of our effective income tax and the U.S. federal tax
rate is as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
(in
thousands)
|
|
|
|
Statutory
tax
|
$(751)
|
$(243)
|
|
State
and foreign income tax, net of federal income tax
benefit
|
151
|
(230)
|
|
Valuation
allowance for deferred tax assets
|
1,513
|
568
|
|
Foreign
sourced deemed dividend income
|
(394)
|
-
|
|
Stock
based compensation
|
(136)
|
(177)
|
|
Other
|
4
|
113
|
|
Total
income tax expense (benefit)
|
$387
|
$31
|
The tax
effects of temporary differences that gave rise to significant
portions of the deferred tax assets are presented
below:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
(in
thousands)
|
|
|
|
Deferred
income tax assets:
|
|
|
|
Allowance
for doubtful accounts
|
$10
|
$13
|
|
Inventory
and product return reserves
|
573
|
464
|
|
Compensation
accruals
|
1,973
|
1,723
|
|
Accrued
liabilities
|
179
|
129
|
|
Book-over-tax
depreciation and amortization
|
91
|
25
|
|
Foreign
net operating loss carryforwards
|
53
|
3
|
|
U.S.
net operating loss carryforwards
|
3,739
|
2,904
|
|
U.S.
credit carryforwards
|
2,345
|
2,280
|
|
|
8,963
|
7,541
|
|
|
|
|
|
Valuation
Allowance
|
(8,963)
|
(7,541)
|
|
Total
Deferred Income Tax Assets
|
$-
|
$-
|
The
valuation allowance for deferred tax assets increased $1,422,000
and $571,000 during the years ended December 31, 2020 and 2019,
respectively. The net deferred tax assets have a full valuation
allowance provided due to uncertainty regarding our ability to
utilize such assets in future years. This full valuation allowance
evaluation is based upon our volatile history of losses and the
cyclical nature of our industry and capital spending. Credit
carryforwards consist primarily of research and experimental and
foreign tax credits. We intend to continue to reinvest foreign
earnings of our operating subsidiaries.
U.S.
net operating loss carryforwards are $17.8 million at December 31,
2020 with expiration years from 2022 to 2034. Utilization of net
operating loss and credit carryforwards is subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986,
as amended.
The
gross changes in uncertain tax positions resulting in unrecognized
tax benefits are presented below:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
(in
thousands)
|
|
|
|
Unrecognized
tax benefits, opening balance
|
$348
|
$308
|
|
Prior
period tax position increases
|
-
|
10
|
|
Additions
based on tax positions related to current year
|
17
|
30
|
|
Unrecognized tax
benefits, ending balance
|
$365
|
$348
|
Historically,
we have incurred minimal interest expense and no penalties
associated with tax matters. We have
adopted a policy whereby amounts related to penalties associated
with tax matters are classified as general and administrative
expense when incurred and amounts related to interest associated
with tax matters are classified as interest income or interest
expense.
Tax
years that remain open for examination include 2017, 2018, 2019 and
2020 in the United States of America. In addition, various tax
years from 2002 to 2014 may be subject to examination in the event
that we utilize the net operating losses and credit carryforwards
from those years in our current or future year tax
returns.
NOTE 13 – SEGMENT AND GEOGRAPHIC INFORMATION
We
consider our operations to be a single operating segment, focused
on the design, manufacturing and sale of programming systems used
by designers and manufacturers of electronic products.
Major
operations outside the U.S. include sales, engineering and service
support subsidiaries in Germany as well as in China, which also
manufactures some of our products.
The
following tables provide summary operating information by
geographic area:
|
|
Year Ended
December 31,
|
|
|
(in
thousands)
|
2020
|
2019
|
|
Net
sales:
|
|
|
|
U.S.
|
$1,516
|
$1,735
|
|
Europe
|
8,415
|
8,828
|
|
Rest
of World
|
10,397
|
11,005
|
|
|
$20,328
|
$21,568
|
|
|
|
|
|
Included
in Europe and Rest of World are
|
|
|
|
the
following significant balances:
|
|
|
|
|
|
|
|
Germany
|
$3,851
|
$2,507
|
|
China
|
$3,490
|
$2,934
|
|
|
|
|
|
Operating
income:
|
|
|
|
U.S.
|
$(713)
|
$317
|
|
Europe
|
(1,698)
|
(1,108)
|
|
Rest
of World
|
(667)
|
(487)
|
|
|
$(3,078)
|
$(1,278)
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
U.S.
|
$13,858
|
$12,818
|
|
Europe
|
5,878
|
5,917
|
|
Rest
of World
|
5,856
|
9,546
|
|
|
$25,592
|
$28,281
|
NOTE 14 – IMPAIRMENT AND RELATED CHARGES
During
the fourth quarter of 2020, we launched a new generation of SentriX
tools and capability. We made the strategic decision to control key
pieces of the technology and enhance the ability to simplify the
security deployment process, own the end-to-end intellectual
property and scale our business. We accelerated the transition to
second generation of SentriX by immediately upgrading all
customers’ deployed first generation SentriX systems to the
new hardware and software. This obsoleted components of the first
generation hardware, software and inventory.
We also
ended support for some legacy automated handlers, impairing the
remaining service inventory.
As a
result, certain capital equipment assets, advance payments and
inventory were analyzed and determined to be impaired, totaling
$943,000. This included impairment of $652,000, consisting of
$252,000 of equipment and software, $400,000 of prepaid royalties,
as well as impairment related charges of $291,000, due to inventory
obsolescence (cost of goods sold) for end of certain product
support.
NOTE 15 – SUBSEQUENT EVENTS
In
preparing the financial statements, the Company has reviewed all
known events which have occurred after December 31, 2020 through
March 26, 2021, the date on which the financial statements are
available for issuance, for potential recognition or disclosure in
the consolidated financial statements and footnotes.
There
were no subsequent events which would require additional
disclosures to the financial statements other than those already
disclosed throughout the Notes to Consolidated Financial
Statements.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and
Procedures
(a)
Evaluation of disclosure controls and procedures.
Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report (the “Evaluation Date”).
Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective at the reasonable
assurance level. Disclosure controls are controls and procedures
designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls
are also designed to ensure that such information is accumulated
and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure.
(b)
Management’s Report on Internal Control Over Financial
Reporting.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control
systems are designed to provide reasonable assurance to the
Company’s management and board of directors regarding
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial
reporting is defined in Rule 13a-15(f) promulgated under the
Exchange Act and includes those policies and procedures
that:
(i)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company;
(ii)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company; and
(iii)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
All
internal controls, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statements preparation and presentation.
Our
management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2020.
In making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated
Framework (2013). Based on this assessment our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2020, our internal control over financial reporting
was effective.
This
annual report does not include an attestation report of the
company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the company’s
registered public accounting firm pursuant to the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which permanently
exempts smaller reporting companies from complying with Section
404(b) of the Sarbanes-Oxley Act of 2002.
(c)
Changes in internal controls.
There
were no changes made in our internal controls during the period
covered by this report that has materially affected or is
reasonably likely to materially affect our internal control over
financial reporting.
Item 9B Other Information
None.
PART III
Item 10. Directors, Executive Officers
and Corporate Governance
Information
regarding the Registrant’s directors is set forth under
“Election of Directors” in our Proxy Statement relating
to our annual meeting of shareholders to be held on May 20, 2021
and is incorporated herein by reference. Such Proxy Statement will
be filed within 120 days of our year-end. Information regarding the
Registrant’s executive officers is set forth in Item 1 of
Part I herein under the caption “Executive Officers of the
Registrant.”
Code of Ethics
We have
adopted a Code of Ethics that applies to all directors, officers
and employees of Data I/O, including the Chief Executive Officer
and Chief Financial Officer. The key principles of the Code of
Ethics are to act legally and with integrity in all work for Data
I/O. The Code of Ethics is posted on the corporate governance page
of our website:
http://www.dataio.com/Company/InvestorRelations/CorporateGovernance.aspx
We will
post any amendments to our Code of Ethics on our website. In the
unlikely event that the Board of Directors approves any sort of
waiver to the Code of Ethics for our executive officers or
directors, information concerning such waiver will also be posted
on our website. In addition to posting information regarding
amendments and waivers on our website, the same information will be
included in a Current Report on Form 8-K within four business days
following the date of the amendment or waiver, unless website
posting of such amendments or waivers is permitted by
NASDAQ’s rules.
Item 11. Executive
Compensation
Information
called for by Part III, Item 11, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held on May
20, 2021 and is incorporated herein by reference. The information
appears in the Proxy Statement under the caption “Executive
Compensation.” Such Proxy Statement will be filed within 120
days of our year-end.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
Information
called for by Part III, Item 12, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held
on May 20, 2021 and is
incorporated herein by reference. The information appears in the
Proxy Statement under the caption “Voting Securities and
Principal Holders.” Such Proxy Statement will be filed within
120 days of our year end.
Equity Compensation Plan Information
The
following table gives information about our Common Stock that may
be issued upon the exercise of options and rights under all of our
existing equity compensation plans as of December 31, 2020. See
Notes 9 and 10 of “Notes to Consolidated Financial
Statements.”
|
|
(a) Number of
securities to be issued upon the exercise of outstanding options,
warrants and rights
|
(b)
Weighted–average exercise price of outstanding options,
warrants and rights
|
(c) Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
Equity
compensation plans approved by the security holders (1)
(2)
|
3,175
|
$4.90
|
286,925
|
|
Equity
compensation plans not approved by the security holders
(3)
|
25,000
|
$4.98
|
-
|
|
Total
|
28,175
|
$4.97
|
286,925
|
(1)
Represents shares
of our Common Stock issuable pursuant to the Data I/O Corporation
2000 Stock Compensation Incentive Plan, 1982 Employee Stock
Purchase Plan and 1996 Director Fee Plan. Table excludes unvested
restricted stock awards of 605,728 from the 2000 Plan.
(2)
Stock Appreciation
Rights Plan (“SAR”) provides that directors, executive
officers or holders of 10% or more of our Common Stock have an
accompanying SAR with respect to each exercisable option. While the
plan has been approved by the security holders, no amounts are
included in columns (a), (b), or (c) relating to the
SAR.
(3)
Inducement grant to
Michael Tidwell of 25,000 non-qualified stock options. Table
excludes unvested 2019 restricted stock inducement grant of 37,500
to Michael Tidwell.
Item 13. Certain Relationships and
Related Transactions, and Director Independence
The
information required by this item is contained in, and incorporated
by reference from, the Proxy Statement for our 2020 Annual Meeting
of Shareholders under the caption “Certain Relationships and
Related Transactions.”
Item 14. Principal Accounting Fees and
Services
The
information required by this Item with respect to principal
accountant fees and services is incorporated by reference to the
section captioned “Principal Accountant’s Fees and
Services” in the Proxy Statement relating to our annual
meeting of shareholders to be held on May 20, 2021. Such Proxy
Statement will be filed within 120 days of our
year-end.
PART IV
Item 15. Exhibits, Financial Statement
Schedules
Executive Compensation Plans and Arrangements
The
following list is a subset of the list of exhibits described below
and contains all compensatory plans, contracts or arrangements in
which any director or executive officer of Data I/O is a
participant, unless the method of allocation of benefits thereunder
is the same for management and non-management
participants:
(1)
Amended and
Restated 1982 Employee Stock Purchase Plan. See Exhibit
10.5.
(2)
Data I/O
Corporation Tax Deferral Retirement Plan and Trust with Great West
Financial (formerly Orchard Trust Company). See Exhibits 10.15,
10.16, 10.17, 10.30 and 10.31.
(3)
Summary of Amended
and Restated Management Incentive Compensation Plan. See Exhibit
10.2.
(4)
Amended and
Restated 1983 Stock Appreciation Rights Plan. See Exhibit
10.1.
(5)
Amended and
Restated Executive Agreements. See Exhibit 10.8, 10.20, 10.23 and
10.27.
(6)
1996 Director Fee
Plan. See Exhibit 10.4.
(7)
Data I/O
Corporation 2000 Stock Compensation Incentive Plan. See Exhibit
10.6, 10.11, 10.22 and 10.26.
(8)
Form of Option
Agreement. See Exhibit 10.7.
(9)
Form of
Indemnification Agreement. See Exhibit 10.18.
(10)
Letter Agreement
with Anthony Ambrose. See Exhibit 10.21.
(11)
Letter Agreement
with Rajeev Gulati. See Exhibit 10.24.
(12)
Form of Restricted
Stock Agreement. See Exhibit 10.12.
(13)
Letter Agreement
with Joel S. Hatlen. See Exhibit 10.28.
(14)
Form of Executive
Agreement. See Exhibit 10.27.
(15)
Form of Restricted
Stock Unit Award Agreement. See Exhibit 10.25.
(16)
Letter Agreement
with Michael Tidwell. See Exhibit 10.36.
|
(a)
|
List of Documents Filed as a Part of This
Report:
|
Page
|
||
(1)
Index to Financial Statements :
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
29
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2020 and
2019
|
30
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations for each of the two years
ended December 31, 2020 and December
31, 2019
|
31
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income (Loss) for each of
the two years ended December
31, 2020 and December 31, 2019
|
32
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity for each of
the two years ended December 31, 2020 and December 31,
2019
|
33
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for each of the two years
ended December 31, 2020 and December 31,2019
|
34
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
35
|
(2)
Index to Financial Statement Schedules :
|
|
|
|
Schedule II – Consolidated Valuation and Qualifying
Accounts
|
58
|
All
other schedules not listed above have been omitted because the
required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or
required.
(3)
Index to Exhibits:
3
Articles
of Incorporation:
3.1
Data I/O’s
restated Articles of Incorporation filed November 2, 1987
(Incorporated by reference to Exhibit 3.1 of Data I/O’s 1987
Annual Report on Form 10-K (File No. 0-10394) and attached as a PDF
to Exhibit 3.1 in our 2017 Annual Report on Form
10-K).
Data I/O’s
Bylaws as amended and restated as of July 20, 2011 (Incorporated by
reference to Data I/O’s Current Report on Form 8-K filed July
26, 2011).
Certification of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock (Incorporated by reference to Exhibit
1 of Data I/O’s Registration Statement on Form 8-A filed
March 13, 1998 (File No. 0-10394)).
4
Instruments
Defining the Rights of Security Holders, Including
Indentures:
Rights Agreement
dated as of April 4, 1998, between Data I/O Corporation and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent, which
includes: as Exhibit A thereto, the Form of Right Certificate; and,
as Exhibit B thereto, the Summary of Rights to Purchase Series A
Junior Participating Preferred Stock (Incorporated by reference to
Data I/O’s Current Report on Form 8-K filed on March 13,
1998).
10
Material
Contracts:
10.1
Amended and
Restated 1983 Stock Appreciation Rights Plan dated
February 3, 1993 (Incorporated by reference to Exhibit
10.23 of Data I/O’s 1992 Annual Report on Form 10-K (File No.
0-10394) and attached as a PDF to Exhibit 10.1 in our 2017 Annual
Report on Form 10-K).
Amended and
Restated Management Incentive Compensation Plan dated January 1,
1997 (Incorporated by reference to Exhibit 10.25 of Data
I/O’s 1997 Annual Report on Form 10-K (File No.
0-10394)).
Amended and
Restated Performance Bonus Plan dated January 1, 1997 (Incorporated
by reference to Exhibit 10.26 of Data I/O’s 1997 Annual
Report on Form 10-K (File No. 0-10394)).
Amended and
Restated Data I/O Corporation 1996 Director Fee Plan
(Incorporated by reference to Exhibit 10.32 of Data I/O’s
1997 Annual Report on Form 10-K (File No. 0-10394)).
Amended and
Restated 1982 Employee Stock Purchase Plan dated May 16, 2003
(Incorporated by reference to Data I/O’s 2003 Proxy Statement
dated March 31, 2003).
Amended and
Restated Data I/O Corporation 2000 Stock Compensation Incentive
Plan dated May 24, 2006 (Incorporated by reference to Data
I/O’s 2006 Proxy Statement dated April 6, 2006).
Form of Option
Agreement (Incorporated by reference to Data I/O’s 2004
Annual Report on Form 10-K (File No. 0-10394)).
Amended and
Restated Executive Agreement with Joel S. Hatlen dated December 31,
2011 (Incorporated by reference to Data I/O’s 2011 Annual
Report on Form 10K (File No. 0-10394)).
Lease, Redmond East
Business Campus between Data I/O Corporation and Carr Redmond PLLC
dated February 28, 2006 (Incorporated by reference to Data
I/O’s 2005 Annual Report on Form 10K (File No.
0-10394)).
Second Amendment to
Lease, (Redmond East) between Data I/O Corporation and Arden Realty
Limited Partnership, made as of January 31, 2011. (Incorporated by
reference to Data I/O’s 2010 Annual Report on Form 10-K (File
No. 0-10394)).
Amended and
Restated Data I/O Corporation 2000 Stock Compensation Incentive
Plan approved May 17, 2011 (Incorporated by reference to Data
I/O’s 2011 Proxy Statement filed April 5, 2011).
Form of Restricted
Stock Award Agreement (Incorporated by reference to Exhibit 10.29
of Data I/O’s June 30, 2006 Quarterly Report on Form 10-Q
(File No. 0-10394)).
Patent Purchase
Agreement (Incorporated by reference to Data I/O’s Current
Report on Form 8-K filed on March 25,
2008)).
First Amendment to
the Patent Purchase Agreement (Incorporated by reference to Data
I/O’s Current Report on Form 8-K filed on March 25,
2008).
Great West
Financial (formerly Orchard Trust Company) Defined Contribution
Prototype Plan and Trust (Incorporated by reference to Data
I/O’s 2007 Annual Report on Form 10-K (File No.
0-10394)).
Great West
Financial (formerly Orchard Trust Company) Non-standardized 401(k)
Plan (Incorporated by reference to Data I/O’s 2007 Annual
Report on Form 10-K (File No. 0-10394)).
Great West
Financial (formerly Orchard Trust Company) Defined Contribution
Prototype Plan and Trust Amendment for Pension Protection Act and
Heart Act. (Incorporated by reference to Data I/O’s 2009
Annual Report on Form 10-K (File No. 0-10394)).
Form of
Indemnification Agreement. (Incorporated by reference to Data
I/O’s 2010 Annual Report on Form 10-K (File No.
0-10394)).
Asset Purchase
Agreement dated April 29, 2011, with the Miller Trust, for
acquisition of Software Technology (Incorporated
by reference to Data I/O’s Current Report on Form 8-K filed
May 3, 2011 with portions omitted pursuant to a confidential
treatment request, and by reference to Data I/O’s Form 10-Q
filed April 3, 2012, which included the redacted portions that had
been made in the original Form 8-K filing).
Executive Agreement
with Anthony Ambrose dated October 25, 2012. (Incorporated by
reference to Data I/O’s 2012 Annual Report on Form 10-K (File
No. 0-10394)).
Letter Agreement
with Anthony Ambrose (Incorporated by reference to Data I/O’s
Current Report on Form 8-K filed on October 29, 2012).
Amended and
Restated Data I/O Corporation 2000 Stock Compensation Incentive
Plan approved May 10, 2012 (Incorporated by reference to Data
I/O’s 2012 Proxy Statement filed April 3, 2012).
Executive Agreement
with Rajeev Gulati dated July 25, 2013. (Incorporated by reference
to Data I/O’s 2013 Annual Report on Form 10-K (File No.
0-10394)).
Letter Agreement
with Rajeev Gulati (Incorporated by reference to Data I/O’s
Current Report on Form 8-K filed on July 31, 2013).
Form of Restricted
Stock Unit Award Agreement (Incorporated by reference to Exhibit
10.29 of Data I/O’s March 31, 2014 Quarterly Report on Form
10-Q (File No. 0-10394)).
Amended and
Restated Data I/O Corporation 2000 Stock Compensation Incentive
Plan approved April 30, 2014 (Incorporated by reference to Exhibit
10.30 of Data I/O’s March 31, 2014 Quarterly Report on Form
10-Q (File No. 0-10394)).
Form of Executive
Agreement (Incorporated by reference to Exhibit 10.31 of Data
I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File No.
0-10394)).
Letter Agreement
with Joel S. Hatlen (Incorporated by reference to Exhibit 10.32 of
Data I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File
No. 0-10394)).
Third Amendment to
Lease, (Redmond East) between Data I/O Corporation and Arden Realty
Limited Partnership, made as of June 1, 2015 (Incorporated by
reference to Exhibit 10.29 of Data I/O’s June 30, 2015
Quarterly Report on Form 10-Q (File No. 0-10394)).
Great West
Financial Adoption Agreement #005 Non-standardized 401(k) Plan
(Incorporated by reference to Data I/O’s 2015 Annual Report
on Form 10-K (File No. 0-10394)).
Great West
Financial Adoption Agreement #005 Non-standardized 401(k) Plan
(Incorporated by reference to Data I/O’s 2016 Annual Report
on Form 10-K (File No. 0-10394)).
Negotiation
Protocol for the Purchase of Data I/O’s PSV7000, a supply
agreement executed July 20, 2016, between Data I/O Corporation and
Bosch Car Multimedia Group (Incorporated by reference to Exhibit
10.31 of Data I/O’s September 30, 2016 Quarterly Report on
Form 10-Q (File No. 0-10394)). (Portions of this exhibit have been
omitted based on confidential treatment granted by the SEC. The
omitted portions of these exhibits have been filed separately with
the SEC. The registrant undertakes to furnish on a supplemental
basis a copy of any omitted schedules to the Securities and
Exchange Commission upon request.).
Fifth Amendment to
Lease, between Data I/O Corporation and BRE WA OFFICE OWNER LLC,
made as of September 12, 2017 (Incorporated by reference to Data
I/O’s September 30, 2017 Quarterly Report on Form 10-Q (File
No. 0-10394)).
1st Amendment to
Negotiation Protocol executed on September 24,2018 between Data I/O
Corporation and Robert Bosch GmbH (Incorporated by reference to
Exhibit 10.35 of Data I/O’s September 30, 2018 Quarterly
Report on Form 10-Q (File No. 0-10394)). (Portions of this exhibit
have been omitted based on a request for confidential treatment
made to the SEC. The omitted portions of these exhibits have been
filed separately with the SEC. The registrant undertakes to furnish
on a supplemental basis a copy of any omitted schedules to the
Securities Exchange Commission upon request.).
Letter Agreement
with Michael Tidwell (Incorporated by reference to Form 8-K filed
on May 1, 2019).
Subsidiaries of the
Registrant
Consent of
Independent Registered Public Accounting Firm
31
Certification
– Section 302:
Chief Executive
Officer Certification
Chief Financial
Officer Certification
32
Certification
– Section 906:
Chief Executive
Officer Certification
Chief Financial
Officer Certification
101
Interactive
Date Files Pursuant to Rule 405 of Regulation S-T
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
DATA I/O
CORPORATION
(REGISTRANT)
|
|
|
|
|
|
|
|
|
DATED: March 26,
2021
|
By:
|
/s/ Anthony
Ambrose
|
|
|
|
|
Anthony
Ambrose
|
|
|
|
|
President and Chief
Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates
indicated.
|
NAME
|
|
DATE
|
|
TITLE
|
|
|
|
|
|
|
|
/s/ Anthony
Ambrose
|
|
March 26, 2021 |
|
President and Chief
Executive Officer
|
|
Anthony
Ambrose
|
|
|
(Principal Executive Officer), Director | |
|
|
|
|
|
|
|
/s/ Joel S.
Hatlen
|
|
March 26, 2021 |
|
Chief Operating and
Financial Officer
|
|
Joel S.
Hatlen
|
|
|
Vice President | |
|
|
|
|
Secretary, Treasurer | |
|
|
|
|
(Principal Financial and Accounting Officer) | |
|
|
|
|
|
|
|
/s/ Douglas W.
Brown
|
|
March 26, 2021 |
|
Director
|
|
Douglas W.
Brown
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Alan B.
Howe
|
|
March 26, 2021 |
|
Director |
| Alan B. Howe |
|
|
|
|
|
|
|
|
|
|
|
/s/ Mark J.
Gallenberger
|
|
March 26, 2021 |
|
Director |
| Mark J. Gallenberger |
|
|
|
|
|
|
|
|
|
|
| /s/ Sally A. Washlow |
|
March 26,
2021
|
|
Director
|
| Sally A.
Washlow |
|
|
|
|
DATA I/O CORPORATION
SCHEDULE II – CONSOLIDATED VALUATION AND QUALIFYING
ACCOUNTS
|
|
Balance at
Beginning
of Period
|
Charged/ (Credited)
to Costs and Expenses
|
Deductions-Describe
|
Balance at End
of Period
|
|
(in
thousands)
|
|
|
|
|
|
Year Ended December
31, 2019:
|
|
|
|
|
|
Allowance
for bad debts
|
$75
|
$5
|
$-(1)
|
$80
|
|
|
|
|
|
|
|
Year
Ended December 31, 2020:
|
|
|
|
|
|
Allowance
for bad debts
|
$80
|
$(14)
|
$-(1)
|
$66
|
|
|
|
|
|
|
|
(1) Uncollectable
accounts
|
|
|
|
|
|
written off, net of
recoveries
|
|
|
|
|
65