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 provisioning and associated Intellectual Property (“IP”) management
solutions used in electronics manufacturing with flash memory,
microcontrollers, and flash memory-based intelligent devices as well as secure
element devices and secure microcontrollers. Data I/O
®
designs, manufactures and sells programming 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.
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 IP management, secure
content management and process control capabilities, enable us to address the
demanding requirements of the electronic device market, where applications and IP
protection are essential to our customer’s success. Our largest customers are
heavy users of programmable semiconductor devices and include original
equipment manufacturers (“OEMs”) in automotive electronics, consumer
electronics and IoT markets as well as their programming center partners and
electronic manufacturing service (“EMS”) contract manufacturers.
Data I/O was
incorporated in the State of Washington in 1969 and its business was founded in
1972. Our website address is www.dataio.com.
Industry
Background
We enable companies to improve
productivity, increase supply-chain security and reduce costs by providing
device data programming and security provisioning 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 secure provisioning into a single product solution. During
2018, we continued to integrate security provisioning 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 provisioning equipment and associated IP management 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 PSV7000 Automated Programming System continues to be adopted
in the marketplace, in particular for automotive electronics customers. Our PSV5000 automated programming system combines
mid-range capacity and flexibility with competitive pricing. Our PSV3000 Automated Programming System, developed
for the Asian automation market, is a lower cost platform for basic programming
needs. Our PSV family of handlers has
won multiple industry awards for technical excellence and innovation. In 2018 our Lumen®X programmer won five industry
awards for Universal Flash Storage (“UFS”) support. Our ConneX® software
won the 2017 Circuits Assembly NPI Award, the EM Asia Innovation Award and the
SMT China Vision Award. Our SentriX® security provisioning system won the
Global Technology Award at Productronica in November 2017 and the Embedded
Award for Innovation at the Embedded World show in February 2018. Our Job
Composer software for LumenX won the Circuits Assembly NPI Award in January
2019.
Our automated
systems have list selling prices ranging from $50,000 to $550,000 and our
manual systems have list selling prices ranging from $4,500 to $30,000. Our
security provisioning system, Sentrix, is currently offered for security
provisioning on a pay per use basis.
Data I/O programming
technology may be integrated with the PSV family to create highly-flexible
systems that deliver outstanding performance with low total cost of ownership. The
LumenX programming engine is the fastest solution available for eMMC and UFS
programming of large NAND FLASH. Increasing memory densities and the need for
faster data interfaces are resulting in an expected transition to the use of
UFS devices. LumenX is available on our PSV7000 and PSV5000 and as a
standalone manual programmer. FlashCORE™, and our universal job setup tool,
Tasklink™ for Windows®, are available in each family of our automated
programming systems and in FlashPAK™, our manual programming system. The
SentriX security system adds security provisioning capability to our data
programming system. SentriX allows customers of any size and demand-profile to
securely add keys, certificates, and other security information to specialized
regions of authentication integrated circuits ("ICs”), secure elements and
secure microcontrollers. We provide device support and service on all of our
products. Device support is a critical aspect of our business and consists of
writing software algorithms for devices and developing socket adapters to hold
and connect to the device for programming.
Our products have
both an upfront solution sale and recurring revenue elements. Adapters are a
consumable item and software and maintenance are typically recurring under
annual subscription contracts.
Sales
Percentage of Total Sales Breakdown by Type
|
Sales Type
|
2018
|
2017
|
Drivers
|
Equipment Sales
|
65%
|
71%
|
Capacity, Process
improvement, Technology
|
Adapter Sales
|
24%
|
22%
|
Capacity
utilization, New customer products
|
Software and
Maintenance Sales
|
11%
|
7%
|
Installed base,
Added capabilities
|
Total
|
100%
|
100%
|
|
The table below presents our
main products and the key features that benefit our customers:
Products
|
Key
Features
|
Customer
Benefits
|
PSV Handlers:
Off-line (Automated)
|
·
Fast program and verify speeds
·
Up to 112 programming sites
·
Up to 2000 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 &
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
|
SentriX
Security Provisioning System
|
·
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
|
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
·
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
|
LumenX
Programmer
|
·
Extensible architecture for fast
program, verify and download speeds
·
Supports UFS
·
Large file size support
·
Secure Job creation
·
8 sockets with tool-less
changeover with single socket adapters
|
·
Managed and secure programming
·
Fast setup and job changeover
·
Highest yield and low total cost
of programming
·
High performance
|
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
|
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:
|
OEMs
|
EMS
|
Programming
Centers
|
Automotive Electronics
|
IoT, Industrial, Consumer
Electronics, including Wireless
|
Contract Manufacturers
|
|
Notable end customers
|
Delphi, Bosch, Alpine, Visteon,
Kostal, Harman Becker, Denso, Continental, Panasonic, Magna, Magnetti Marelli
|
LG,TCL Siemens, Danfoss,
Philips, Schneider, Endress+Hauser, Pilz, Insta, Carrier, Microsoft, Sony,
Amazon, UTC
|
Pegatron, Flextronics, Jabil, Wistron,
Sanmina SCI, Foxconn, Leesys, Calcomp
|
Arrow, Avnet, BTV, CPS, EPS, Elmitech,
Noa (Toshiba)
|
Business drivers
|
Safety, navigation and infotainment
devices, increased electronic content to support autonomous driving, security
|
Higher functionality driven by
increasing electronic content. Shift from analog to connected intelligent
devices, security
|
Acquisition of OEM factories,
production contract wins
|
Value-added services, logistics,
security
|
Programming equipment drivers
|
Process improvement and
simplification, new product rollouts, growing file sizes, quality control and
traceability, security
|
Process improvement and simplification
as well as new product rollouts, memory and new technology, security
|
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
|
Quality, reliability, configuration
control, traceability, security, and security provisioning. Throughput,
technical capability to support evolving technology, global support, IP
protection, robust algorithms, low cost
|
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
|
Our solutions address the data programming of devices
and security provisioning needs of programmable semiconductor devices.
Semiconductor devices are a large, growing market, both in terms of devices and
bits programmed. 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
infotainment options (audio, radio, dashboard displays, navigation, ADAS and
wireless connectivity) as well as increased safety features and optimized
engine functionality
·
Increasing numbers and
size of microcontrollers per vehicle
·
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 intelligent
thermostats and lighting)
·
Emergence of new
devices and applications (such as wearables)
During 2018, we sold
products to over 200 customers throughout the world. The following customers
represented greater than 10% of sales in the applicable year:
2018 Two customers,
Bosch, an Automotive Electronics OEM, and Data Copy Limited, a distributor in
China, accounted for approximately 16% and 13% of net sales, respectively.
2017 One customer,
Data Copy Limited, a distributor in China, accounted for approximately 15% of
net sales.
2016 Four customers,
Data Copy Limited, Arrow, Bosch and BTV, accounted for approximately 16%, 13%,
11% and 10% of net sales, respectively. Arrow and BTV are Programming Centers.
The following
customers represented greater than 10% of our consolidated accounts receivable
balance as of December 31 of the applicable year:
2018 Three customers
accounted for greater than 10% of our consolidated accounts receivable balance
at December 31, 2018: Systemation, Continental and Semitron represented 12%,
12% and 11% of that balance, respectively.
2017 One customer,
Data Copy Limited, accounted for 25% of our consolidated accounts receivable
balance at December 31, 2017.
2016 Three customers
accounted for greater than 10% of our consolidated accounts receivable balance
at December 31, 2016: Bosch and Arrow our direct customers, and Data Copy
Limited, represented 30%, 16% and 14% of that balance, respectively.
Geographic Markets and Distribution
We
market and sell our products through a combination of direct sales, internal
telesales, indirect sales representatives and distributors, as well as services
through programming centers. We continually evaluate our sales channels
against our evolving markets and customers and realign them as necessary to
ensure that we reach our existing and potential customers in the most effective
and efficient manner possible.
U.S. Sales
We market our
products throughout the U.S. using a variety of sales channels, including our
own field sales management personnel, independent sales representatives and
direct telesales. Our U.S. independent sales representatives obtain orders on
an agency basis, with shipments made directly to the customer by us. Net sales
in the United States for 2018, 2017 and 2016 were (in millions) $3.4, $2.9 and $2.9,
respectively. Some of our customers’ orders delivered internationally are
heavily influenced by U.S. sales based efforts.
International
Sales
International sales
represented approximately 88%, 92% and 88% of net sales in 2018, 2017, and 2016,
respectively. We make foreign sales through our wholly-owned subsidiaries in
Germany and China, as well as through independent distributors and sales
representatives operating in 44 other countries. Our independent foreign
distributors purchase our products for resale and we generally recognize the
sale at the time of shipment to the distributor. As with U.S. sales
representatives, sales made by international sales representatives are on an
agency basis, with sales made directly to the customer by us.
Net international
sales for 2018, 2017, and 2016 were (in millions) $25.8, $31.2 and $20.5, respectively.
We determine international sales by the international geographic destination
into which the products are sold and delivered, and include not only sales by
foreign subsidiaries but also export sales from the U.S. to our foreign
distributors and to our representatives’ customers. International sales do not
include transfers between Data I/O and our foreign subsidiaries. Export sales
are subject to U.S. Department of Commerce regulations. We have not, however,
experienced difficulties to date as a result of these requirements. Certain
products (such as Sentrix) may require export licenses due to the technology
contained and the country to which they would be shipped. We have not made
sales to Iran or any Iranian governmental entities or any other blacklisted
companies or countries.
Fluctuating exchange
rates and other factors beyond our control, such as 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, 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 provisioning market
is developing, we expect competition in the market to increase as security
provision becomes more important.
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”) and In System Programming
(“ISP”). Some automotive products may also be programmed over the air
(“OTA”). IoT devices may also be programmed with ICT, ISP 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 provisioning market, according to
our internal analysis of competitors’ revenues, we believe we continue to be
the largest competitor in the programming systems equipment market and have
been gaining market share in recent years, especially with our new products.
Manufacturing, Raw Materials and Backlog
We
strive to manufacture and provide the best solutions for advanced programming.
We primarily assemble and test our products at our principal facilities in
Redmond, Washington and Shanghai, China. Both of these locations are ISO
9001:2015 certified. We outsource our circuit board manufacturing and
fabrication. We use a combination of standard components and fabricated parts
manufactured to our specifications. Most components used are available from a
number of different suppliers and subcontractors but certain items, such as
some handler and programmer and security provisioning 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, 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) $1.9, $4.0
and $3.2 as of December 31, 2018, 2017, and 2016, 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 provisioning.
We are currently focusing our research and development efforts on strategic
growth markets, including automotive electronics and the IoT. We are continuing
to develop technology to securely program new categories of semiconductors,
including Secure Elements, Authentication Chips, and Secure Microcontrollers.
We plan to deliver new programming technology, automated handling systems and
enhancements for managed and secure programming 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 2018, 2017, and
2016, we made expenditures for research and development of (in millions) $7.4, $6.9,
and $5.1, respectively, representing 25.2%, 20.3%, and 21.6% 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 software, including Lumen®X software,
Flashcore software, TaskLink software, ConneX smart programming software and
other software products, by retaining the title to and copyright of the
software and documentation, by including appropriate contractual restrictions
on use and disclosure in our licenses, and by requiring our employees to
execute non-disclosure agreements. Our software products are not typically
sold separately from sales of programming systems. However, on those occasions
where software is sold separately, revenue is recognized when a sales agreement
exists, delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured.
Because of the
rapidly changing technology in the semiconductor, electronic equipment and
software industries, portions of our products might infringe upon existing
patents or copyrights, and we may be required to obtain licenses or discontinue
the use of the infringing technology. We believe that any exposure we may have
regarding possible infringement claims is a reasonable business risk similar to
that assumed by other companies in the electronic equipment and software
industries. However, any claim of infringement, with or without merit, could
be costly and a diversion of management’s attention, and an adverse
determination could adversely affect our reputation, preclude us from offering
certain products, and subject us to substantial liability. As of December 31,
2018, there were no pending actions regarding infringement claims.
Employees
As of December 31,
2018, we had a total of 102 employees, of which 48 were located outside the
U.S. and 7 of which were part time. We also utilize independent contractors
for specialty work, primarily in research and development, and utilize
temporary workers to adjust capacity to fluctuating demand and for special
projects. Many of our employees are highly skilled and trained 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.
Environmental
Compliance
Our facilities are
subject to numerous laws and regulations concerning the discharge of materials
or otherwise relating to the environment. Compliance with environmental laws
has not had, nor is it expected to have, a material effect on our capital
expenditures, financial position, results of operations or competitive position.
Executive Officers of the Registrant
Set forth below
is certain information concerning the executive officers of Data I/O as of March
23, 2018:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Anthony Ambrose
|
|
57
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
Joel S. Hatlen
|
|
60
|
|
Vice President, Chief Operating and Financial
Officer,
Secretary and Treasurer
|
|
|
|
|
|
|
|
Rajeev Gulati
|
|
55
|
|
Chief Technology Officer, Vice
President of Engineering
|
|
|
|
|
|
|
|
Anthony Ambrose joined Data I/O in October 2012 and is our President and
Chief Executive Officer. He was appointed to the Board of Directors of Data
I/O in October 2012. Prior to Data I/O, Anthony was Owner and Principal of
Cedar Mill Partners, LLC, a strategy consulting firm. Until 2011, he was
Vice President and General Manager at RadiSys Corporation, a leading provider
of embedded wireless infrastructure solutions, where he led three 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 a member of the EvergreenHealth Foundation Board of Trustees.
Mr. Ambrose has a Bachelor’s of Science in Engineering from Princeton
University.
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 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.
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, 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:
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.
We are aware of proposals to increase tariff rates and to subject
additional items to tariffs, which 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.
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
provisioning of programmable devices, circuit boards and electronic systems, we
must invest ahead of others while the market is developing and uncertain. Because
of the lengthy time to market from design to production insecurity
provisioning, if these markets develop more slowly than planned, then we may
not achieve our expected return on investment in new technologies and this may affect
the results of our existing business.
In the security
provisioning area, we have introduced a new pay per use business model that may
not be accepted by our customers who are accustomed to paying for capital
equipment upfront, rather than paying per use charges.
Failure to adapt to technology trends
in our industry may impact our competitiveness and financial results.
Product and service technology in our
industry evolves rapidly, making timely product innovation essential to success
in the marketplace. Introducing products and services with improved
technologies or features may render our existing products obsolete and unmarketable.
Technological advances and trends that may negatively impact our business
include:
·
new device package types,
densities, chip interfaces and technologies requiring hardware and software
changes in order to be programmed by our products, particularly certain
segments of the high density flash memory markets where after placement
programming is recommended by the 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 prior to placement in manufacturing. This
can cause them to change their programing methods away from pre-programming to
post placement programming techniques, including ISP. Data I/O is working with
semiconductor manufacturers to develop best practices to minimize the impact of
reflow and potential concerns about X-ray induced data loss.
·
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
semiconductor device technologies such as UFS memory or device interface methods
such as PCI, particularly if these technologies are adopted by automotive
electronics, IoT or wireless customers
·
more rigid industry standards,
which would decrease the value-added element of our products and support
services
If we cannot develop products or
services in a timely manner in response to industry changes, or if our products
or services do not perform well, our business and financial condition may be
adversely affected. Also, our new products or services may contain defects or
errors that give rise to product liability claims against us or cause our
products to fail to gain market acceptance. Our future success depends on our
ability to successfully compete with other technology firms in attracting and
retaining key technical personnel.
Failure to adapt to increasing
automotive electronics customer requirements
Concentration in Automotive Electronics
and our orders related to automotive electronics customers increased to 60% in
2018, from 54% in 2017, and 47% in 2016. As we become more concentrated on
automotive electronics customers, any decrease in demand from these customers
may materially impact our results, as it will take some time to transition our
product line to other markets. Quality standards and business requirements by
our automotive electronics customers, driven in turn by their automotive
manufacturer customers, may demand processes, and certifications at a higher
level than we currently are structured to provide. For example, although we
currently meet the ISO 9001:2015 standard, new quality standards may be
demanded by our customers with even more rigorous
requirements. In addition, contractual provisions may expose us to greater
potential liability and costs and we may be required to provide higher service
levels than we currently provide. If we cannot adapt to these industry
requirements or manage these contractual provisions, our business may be
adversely affected.
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 provisioning systems platform 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 provisioning strategy. 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 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.
We may face increased competition and
may not be able to compete successfully with current and future competitors.
Technological advances have reduced the
barriers of entry into the programming systems market. We expect competition
to increase from both established and emerging companies. If we fail to
compete successfully against current and future sources of competition, our
profitability and financial performance will be adversely impacted.
THIRD PARTY RELATIONSHIPS
If we do not develop, enhance and
retain our relationships with security partners, our business may be adversely
affected and we may not be able to timely develop new and cost effective
managed and secure programming solutions.
As we enter new areas in managed and
secure programming, we need to complement our skills and expertise with partners’
expertise in security. Some of these partners are early stage companies that
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. If these unique features and capabilities are no longer available,
we will face more competition. If our partners are unable to develop and
deliver solutions that we need to integrate into our managed and secure
programming solutions, our products might be delayed, we might have to locate
alternate partners and suppliers or develop the technology ourselves, and we
would still be responsible for paying any related pre-paid royalties or NRE
payments.
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 provisioning 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
provisioning. Consolidation within the semiconductor industry may also impact
us. As we develop more security 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.
Certain of our sockets, parts,
subassemblies and boards are currently manufactured to our specifications by
third-party foreign contract manufacturers and we are sourcing certain parts or
options from foreign manufacturers. 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.
Our business is highly impacted by
capital spending plans and other economic cycles that affect the users and
manufacturers of integrated circuits. These industries are highly cyclical and
are characterized by rapid technological change, short product life cycles and
fluctuations in manufacturing capacity and pricing and gross margin pressures.
As we experienced in recent prior years, our operations may in the future
reflect substantial fluctuations from period-to-period as a consequence of
these industry patterns, general economic conditions affecting the timing of
orders from major customers, and other factors affecting capital spending. In
a difficult economic climate it may take us longer to receive payments from our
customers and some of our customers’ business may fail, resulting in
non-payment. Our market growth forecasts and related business decisions may be
wrong. These factors could have a material adverse effect on our business and
financial condition.
Our
international operations may expose us to additional risks that may adversely
affect our business.
International
sales represented approximately 88%, 92% and 88% of net sales in 2018, 2017,
and 2016, 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:
·
fluctuations in foreign currency
exchange rates because 88% of our sales are to international markets, volatile
exchange rates may also impact our competiveness 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, China,
Brazil and Canada and large balances of cash are in our foreign subsidiaries.
Our business and financial condition is sensitive to currency exchange rates
and any restrictions imposed on their currencies including restrictions on
repatriations of cash. Any repatriation
of cash could result in tax costs and corresponding deferred tax assets with
related tax valuation allowances. Currency exchange fluctuations in these
countries may adversely affect our investment in our subsidiaries.
OPERATIONS
Quarterly fluctuations in our
operating results may adversely affect our stock price.
Our operating results tend to vary from
quarter to quarter. Our revenue in each quarter substantially depends upon
orders received within that quarter. Conversely, our expenditures are based on
investment plans and estimates of future revenues. We may, therefore, be
unable to quickly reduce our spending if our revenues decline in a given
quarter. As a result, operating results for that quarter will suffer. Our
results of operations for any one quarter are not necessarily indicative of
results for any future periods.
Other factors, which may cause our
quarterly operating results to fluctuate, include:
·
increased competition
·
timing of new product
announcements and timing of development expenditures
·
product or service releases and
pricing changes by us or our competitors
·
market acceptance or delays in the
introduction of new products or services
·
production constraints
·
quality issues
·
labor or material constraints
·
timing of significant orders
·
timing of installation or customer
acceptance requirements
·
sales channel mix of direct vs.
indirect distribution
·
civil unrest, war or terrorism
·
health issues (such as the
outbreak of a virus impacting workers or travel)
·
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 three
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. As a result, we may need to generate
greater revenues than we have recently in order to maintain profitability.
However, we cannot provide assurance that our revenues will continue to
increase and our business strategies may not be successful, resulting in future
losses.
The loss of key
employees may adversely affect our operations.
We have employees located in the U.S.,
Germany and China. We also utilize independent contractors for specialty work,
primarily in research and development, and utilize temporary workers to adjust
capacity to fluctuating demand. Many of our employees are highly skilled and
our continued success will depend in part upon our ability to attract and
retain employees who can be in great demand within the industry. None of our
employees are represented by a collective bargaining unit and we believe
relations with our employees are favorable, though no assurance can be made
that this will be the case in the future. In China, our workers are “leased”
with the arrangements made under the “FSCO” labor agreement and we could be
adversely affected if we were unable to continue that arrangement.
We may need to
raise additional capital and our future access to capital is uncertain.
Our past revenues have sometimes been,
and our future revenues may again be, insufficient to support the expense of
our operations and any expansion of our business. We may therefore need
additional equity or debt capital to finance our operations. If we are unable
to generate sufficient cash flows from operations or to obtain funds through
additional debt, lease or equity financing, we may have to reduce some or all
of our development and sales and marketing efforts and limit the expansion of
our business.
We believe that we have sufficient cash
or working capital available under our operating plan to fund our operations
and capital requirements through at least the next one-year period. In the event we require additional cash for U.S.
operations or other needs, we may choose to repatriate some, or all, of the $6.4
million held in our foreign subsidiaries.
Although we have no current repatriation plans, there may be tax, legal and
other impediments to any repatriation actions. Our working capital may be used
to fund possible losses, business growth, project initiatives, share
repurchases and business development initiatives including acquisitions, which
could reduce our liquidity and result in
a requirement for additional cash before that time. Any substantial inability to achieve our current
business plan could have a material adverse impact on our financial position,
liquidity, or results of operations and may require us to reduce expenditures
and/or seek additional financing.
Therefore, we may seek additional
funding through public or private debt or equity financing or from other
sources. We have no commitments for additional financing, and given a
potential future unfavorable economic climate and our financial results, we may
experience difficulty in obtaining funding on favorable terms, if at all. Any
financing we obtain may contain covenants that restrict our freedom to operate
our business or may require us to issue securities that have rights,
preferences or privileges senior to our Common Stock and may dilute your
ownership interest.
Our stock price may be volatile and,
as a result, our shareholders may lose some or all of their investment.
The stock prices of technology companies
tend to fluctuate significantly. We believe factors such as announcements of
new products or services by us or our competitors and quarterly variations in
financial results and outlook may cause the market price of our Common Stock to
fluctuate substantially. In addition, overall volatility in the stock market,
particularly in the technology company sector, is often unrelated to the
operating performance of companies. If these market fluctuations continue in
the future, they may adversely affect the price of our Common Stock.
Cyber security breaches or terrorism
could result in liabilities or costs as well as damage to or loss of our data
or customer access to our website and information systems. The collection,
storage, transmission, use and disclosure of user data and personal
information, if accessed improperly, could give rise to liabilities or
additional costs as a result of laws, governmental regulations and evolving
views of personal privacy rights.
Cyber security breaches or terrorism
could result in the exposure or theft of private or confidential information as
well as interrupt our business, including denying customer access to our
website and information systems. We transmit, and in some cases store,
end-user data, including personal information. In jurisdictions around the
world, personal information is becoming increasingly subject to legislation and
regulations intended to protect consumers’ privacy and security. The
interpretation of privacy and data protection laws and regulations regarding
the collection, storage, transmission, use and disclosure of such
information in some jurisdictions is unclear and
evolving. These laws may be interpreted and applied in conflicting ways from
country to country and in a manner that is not consistent with our current data
protection practices. Complying with these varying international requirements
could cause us to incur additional costs and change our business practices.
Because our services are accessible in many foreign jurisdictions, some of
these jurisdictions may claim that we are required to comply with their laws,
even where we have no local entity, employees or infrastructure. We could be
forced to incur significant expenses if we were required to modify our
products, our services or our existing security and privacy procedures in order
to comply with new or expanded regulations.
REGULATORY REQUIREMENTS
Failure to
comply with increasing regulatory requirements may adversely affect our stock price
and business.
As a public
company, we are subject to numerous governmental and stock exchange
requirements, with which we believe we are in compliance. Our failure to meet
regulatory requirements and exchange listing standards may result in actions such
as: the delisting of our stock, impacting our stock’s liquidity; SEC
enforcement actions; and securities claims and litigation.
The Sarbanes-Oxley Act of 2002 and the
Securities and Exchange Commission (SEC) have requirements that we may fail to
meet or we may fall out of compliance with, such as the internal controls
auditor attestation required under Section 404 of the Sarbanes-Oxley Act of
2002, with which we are not currently required to comply as we are a smaller
reporting company. We assume that we will continue to have the status of a
smaller reporting company based on the aggregate market value of the voting and
non-voting shares held as of June 30, 2018. 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, waiving a potential space give back provision and receiving lease inducement incentives. Previously on June 8, 2015 the lease had been amended to relocate our headquarters to a nearby building and lower the square footage to approximately 20,460. The lease base annual rental payments during 2018 and 2017 were approximately $341,000 and $303,000, 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 2018 and 2017 were approximately $288,000 and $276,000, respectively.
During the fourth quarter of 2016, we signed a lease agreement for a new facility located near Munich, Germany which was effective March 1, 2017 and extends through February 28, 2022. This lease is for approximately 4,895 square feet. The lease base annual rental payments during 2018 and 2017 were approximately $67,000 and $64,000, 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, 2018, 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 $5.00 on December 31, 2018.
The approximate number of shareholders of record as of March 21, 2019 was 435.
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, 2018, 2017 or 2016.
See Item 12 for the Equity Compensation Plan Information.
iSSUER pURCHASES OF eQUITY sECURITIES
On October 31, 2018, our Board of Directors approved a share repurchase program with provisions to buy back up to $2 million of our stock during the period from November 1, 2018 through October 31, 2019. The program was established with a 10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. For the quarter and year ended December 31, 2018, 101,975 shares of stock were repurchased at an average price of $5.23 for a total of $533,463 plus $2,067 in commissions and charges.
The following is a summary of the stock repurchase program from November
1, 2018 through December 31, 2018:
|
Repurchases
by Month
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Repurchase Program
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased under the Program
|
|
|
|
|
|
|
|
|
|
|
December 2018
|
101,975
|
|
$5.23
|
|
101,975
|
|
$1,466,537
|
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, industry prospects and trends;
industry partnerships; future results of operations or financial position; future
spending; breakeven revenue point; expected market growth; market acceptance of
our newly introduced or upgraded products or services; the sufficiency of our
cash to fund future operations and capital requirements; development,
introduction and shipment of new products or services; changing foreign
operations; and any other guidance on future periods are forward-looking
statements. Forward-looking statements reflect management’s current
expectations and are inherently uncertain. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance, achievements,
or other future events. Moreover, neither Data I/O nor anyone else assumes responsibility
for the accuracy and completeness of these forward-looking statements. We are
under no duty to update any of these forward-looking statements after the date
of this Annual Report. The Reader should not place undue reliance on these
forward-looking statements. The following discussions and the section entitled
“Risk Factors – Cautionary Factors That May Affect Future Results” describes
some, but not all, of the factors that could cause these differences.
OVERVIEW
We continued our
focus on automotive electronics and managing the core programming business for
growth and profitability, while developing and enhancing products, particularly
in security provisioning, to drive future revenue and earnings growth as we
invest resources in the security provisioning market. Our challenge continues
to be operating in a cyclical and rapidly evolving industry environment. We
are continuing our efforts to balance industry changes, industry partnerships, new
technologies, business geography shifts, exchange rate volatility, trade issues
and tariffs, 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 currently focusing our research
and development efforts on strategic growth markets, including automotive
electronics and IoT. We are developing technology to securely provision new
categories of semiconductors, including Secure Elements, Authentication Chips,
and Secure Microcontrollers. We plan to deliver new programming technology and
automated handling systems for managed and secure programming in the
manufacturing environment. We continue to focus on extending the capabilities
and support for our product lines and supporting the latest semiconductor
devices, including various configurations of NAND Flash, e-MMC, UFS and
microcontrollers on our newer products.
Our customer focus
has been on global and strategic high volume manufacturers in key market
segments like automotive electronics, IoT, industrial controls and consumer
electronics as well as programming centers.
cRITICAL aCCOUNTING pOLICY jUDGMENTS AND
eSTIMATES
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we make
estimates and judgments, which affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, sales returns, bad debts, inventories,
intangible assets, income taxes, warranty obligations, restructuring charges,
contingencies such as litigation and contract terms that have multiple elements
and other complexities typical in the capital equipment industry. We base our
estimates on historical experience and other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the
following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our financial statements:
Revenue Recognition:
Effective
January 1, 2018, the Company adopted ASU 2014-09, Revenue (“Topic 606”):
Revenue from Contracts with Customers, using the modified retrospective
method. Topic 606 provides a single, principles-based five-step model to
be applied to all contracts with customers. It generally provides for the
recognition of revenue in an amount that reflects the consideration to which the
Company expects to be entitled, net of allowances for estimated returns,
discounts or sales incentives, as well as taxes collected from customers when
control over the promised goods or services are transferred to the customer.
Our basic revenue
recognition remains essentially the same as it was in 2017. The adoption of
Topic 606 did not have a material impact on our 2018 financial statement line
items, either individually or in the aggregate, and would not have been
material to 2017 financial results. We have elected the practical expedient to expense
contract acquisition costs, primarily sales commissions, for contracts with
terms of one year or less and will capitalize and amortize incremental costs with
terms that exceed one year. During 2018, the impact of capitalization of
incremental costs for obtaining contracts was $8,193. We have made a sales tax
policy election to exclude sales, use, value added, some excise taxes and other
similar taxes from the measurement of the transaction price.
We recognize revenue
upon transfer of control of the promised products or services to customers in
an amount that reflects the consideration we expect to receive in exchange for
those products or services. We have determined that our programming equipment
has reached a point of maturity and stability such that product acceptance can
be assured by testing at the factory prior to shipment and that the
installation meets the criteria to be a separate performance obligation. These
systems are standard products with published product specifications and are
configurable with standard options. The evidence that these systems could be
deemed as accepted was based upon having standardized factory production of the
units, results from batteries of tests of product performance to our published
specifications, quality inspections and installation standardization, as well
as past product operation validation with the customer and the history provided
by our installed base of products upon which the current versions were based.
The revenue related
to products requiring installation that is perfunctory is recognized upon
transfer of control of the product to customers, which generally is at the time
of shipment. Installation that is considered perfunctory includes any
installation that is expected to be performed by other parties, such as
distributors, other vendors, or the customers themselves. This takes into
account the complexity, skill and training needed as well as customer
expectations regarding installation.
We enter into
arrangements with multiple performance obligations that arise during the sale
of a system that includes an installation component, a service and support
component and a software maintenance component. The transaction price is
allocated to the separate performance obligations on relative standalone sales
price. We allocate the transaction price of each element based on relative
selling prices. Relative selling price is based on the selling price of the
standalone system. For the installation and service and support performance
obligations, we use the value of the discount given to distributors who perform
these components. For software maintenance performance obligations, we use
what we charge for annual software maintenance renewals after the initial year
the system is sold. Revenue is recognized on the system sale based on shipping
terms, installation revenue is recognized after the installation is performed,
and hardware service and support and software maintenance revenue is recognized
ratably over the term of the agreement, typically one year. Deferred revenue
includes service, support and maintenance contracts and represents the
undelivered performance obligation of agreements that are typically for one
year.
When
we sell software separately, we recognize revenue upon the transfer of control
of the software, which is generally upon shipment, provided that only
inconsequential performance obligations remain on our part and substantive
acceptance conditions, if any, have been met.
We recognize revenue
when there is an approved contract that both parties are committed to perform, both
parties rights have been identified, the contract has substance, collection of
substantially all the consideration is probable, the transaction price has been
determined and allocated over the performance obligations, the performance
obligations including substantive
acceptance conditions, if any, in the contract have been met, the obligation is
not contingent on resale of the product, the buyer’s obligation would not be
changed in the event of theft, physical destruction or damage to the product,
the buyer acquiring the product for resale has economic substance apart from us
and we do not have significant obligations for future performance to directly
bring about the resale of the product by the buyer. We establish a reserve for
sales returns based on historical trends in product returns and estimates for
new items. Payment terms are generally 30 days from shipment.
We transfer certain
products out of service from their internal use and make them available for
sale. The products transferred are typically our standard products in one of
the following areas: service loaners, rental or test units; engineering test
units; or sales demonstration equipment. Once transferred, the equipment is
sold by our regular sales channels as used equipment inventory. These product
units often involve refurbishing and an equipment warranty, and are conducted
as sales in our normal
and ordinary course of
business. The transfer amount is the product unit’s net book value and the
sale transaction is accounted for as revenue and cost of goods sold.
Allowance for
Doubtful Accounts:
We base the
allowance for doubtful accounts receivable on our assessment of the
collectability of specific customer accounts and the aging of accounts
receivable. If there is deterioration of a major customer’s credit worthiness
or actual defaults are higher than historical experience, our estimates of the
recoverability of amounts due to us could be adversely affected.
Inventory
: Inventories are stated at the lower of cost or net
realizable value. Adjustments are made to standard cost, which approximates
actual cost on a first-in, first-out basis. We estimate reductions to
inventory for obsolete, slow-moving, excess and non-salable inventory by
reviewing current transactions and forecasted product demand. We evaluate our
inventories on an item by item basis and record inventory adjustments
accordingly. If there is a significant decrease in demand for our products,
uncertainty during product line transitions, or a higher risk of inventory
obsolescence because of rapidly changing technology and customer requirements,
we may be required to increase our inventory adjustments and our gross margin
could be adversely affected.
Warranty
Accruals:
We accrue for warranty
costs based on the expected material and labor costs to fulfill our warranty
obligations. If we experience an increase in warranty claims, which are higher
than our historical experience, our gross margin could be adversely affected.
Tax Valuation
Allowances:
Given the uncertainty
created by our loss history, as well as the ongoing cyclical uncertain economic
outlook for our industry and capital and geographic spending as well as income
and net deferred tax assets by entity and country, we expect to continue to
limit the recognition of net deferred tax assets and accounting for uncertain
tax positions and maintain the tax valuation allowances. At the current time,
we expect, therefore, that reversals of the tax valuation allowance will take
place as we are able to take advantage of the underlying tax loss or other
attributes in carry forward or their use by future income or circumstances allow
us to realize these attributes. The transfer pricing and expense or cost
sharing arrangements are complex areas where judgments, such as the
determination of arms-length arrangements, can be subject to challenges by
different tax jurisdictions.
Share-based
Compensation:
We account for
share-based awards made to our employees and directors, including employee
stock option awards and restricted stock unit awards, using the estimated grant
date fair value method of accounting. For options, we estimate the fair value
using the Black-Scholes valuation model and an estimated forfeiture rate, which
requires the input of highly subjective assumptions, including the option’s
expected life and the price volatility of the underlying stock. The expected
stock price volatility assumption was determined using the historical
volatility of our common stock. Changes in the subjective assumptions required
in the valuation model may significantly affect the estimated value of the
awards, the related stock-based compensation expense and, consequently, our
results of operations. Restricted stock unit awards are valued based on the
average of the high and low price on the date of the grant and an estimated
forfeiture rate. For both options and restricted awards, expense is recognized
as compensation expense on the straight-line basis. Employee Stock Purchase
Plan (“ESPP”) shares were issued under provisions that do not require us to
record any equity compensation expense.
Results of Operations:
Net Sales
Net sales by product line
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Automated programming systems
|
|
$23,252
|
|
(16.5%)
|
|
$27,854
|
Non-automated programming systems
|
|
5,972
|
|
(3.6%)
|
|
6,197
|
Total programming systems
|
|
$29,224
|
|
(14.2%)
|
|
$34,051
|
|
|
|
|
|
|
|
Net sales by location
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
United States
|
|
$3,436
|
|
19.6%
|
|
$2,874
|
% of total
|
|
11.8%
|
|
|
|
8.4%
|
International
|
|
$25,788
|
|
(17.3%)
|
|
$31,177
|
% of total
|
|
88.2%
|
|
|
|
91.6%
|
Net
sales by type
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Equipment Sales
|
|
$19,002
|
|
(21.7%)
|
|
$24,267
|
Adapter Sales
|
|
6,954
|
|
(6.3%)
|
|
7,418
|
Software and Maintenance Sales
|
|
3,268
|
|
38.1%
|
|
2,366
|
Total
|
|
$29,224
|
|
(14.2%)
|
|
$34,051
|
|
|
|
|
|
|
|
Net sales for the
year ended December 31, 2018 declined approximately 14% to $29.2 million
compared to 2017 primarily as a result of strong Automotive Electronics and
Programming Center cyclical demand during 2017, with the decline related particularly
to programming center customers. On a regional basis, net sales decreased approximately
18% in the Americas, 11% in Europe and 16% in Asia.
Order bookings were
$27.0 million for 2018, down approximately 21% compared to $34.3 million in 2017.
Backlog at December 31, 2018 and 2017 was $1.9 million and $4.0 million,
respectively. Deferred revenue was $1.6 million on December 31, 2018 compared
to $1.9 million at December 31, 2017.
Gross Margin
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Gross margin
|
|
$17,356
|
|
(13.5%)
|
|
$20,059
|
Percentage of net sales
|
|
59.4%
|
|
|
|
58.9%
|
Gross margin as a
percentage of sales for the year ended December 31, 2018 was 59.4%, compared to
58.9% in 2017. The improvement was primarily due to ongoing cost reduction
efforts offset in part by unfavorable currency translation.
Research and Development
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Research and development
|
|
$7,361
|
|
6.7%
|
|
$6,896
|
Percentage of net sales
|
|
25.2%
|
|
|
|
20.3%
|
Research and
development (“R&D”) expense increased
$465,000 for the year ended December 31, 2018 compared to 2017. The increase
was primarily related to higher employee related costs and contract labor, offset in part by lower incentive compensation. R&D as a percentage of
sales increased primarily due to the decline in 2018 sales.
We believe it is
essential to invest in R&D to significantly enhance our existing products
and to create new products as markets develop and technologies change. In
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 and development efforts on
strategic growth markets, including automotive electronics and IoT. We are
developing technology 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
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Selling, general & administrative
|
|
$8,257
|
|
1.7%
|
|
$8,116
|
Percentage of net sales
|
|
28.3%
|
|
|
|
23.8%
|
Selling, General and
Administrative (“SG&A”) expenses increased $141,000 for the year ended December 31, 2018 compared to 2017.
The increase was primarily related to higher employee related costs, facilities and depreciation, offset in part by lower
incentive compensation and sales commissions.
Interest
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Interest income
|
|
$37
|
|
27.6%
|
|
$29
|
Interest income was higher
for the year ended December 31, 2018 compared to 2017, primarily due to higher invested cash balances.
INCOME TAXES
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
($291)
|
|
*
|
|
$288
|
* not meaningful
|
|
|
|
|
|
|
Income tax (expense) increased by $579,000 for the year ended
December 31, 2018 compared to 2017. The increase was primarily a result of
the Tax Cuts and Jobs Act of 2017, when we recorded the impact of a $531,000
net benefit in the fourth quarter of 2017. This was made up of $67,000 of
additional tax relating to the “deemed repatriation” of previously deferred
foreign subsidiary “post 1986 Earnings & Profits”, and recognizing a tax
benefit of $598,000 related to refundable “Alternative Minimum Tax Credits” in
carryforward. Income tax (expense) in 2018 is primarily the result of foreign
subsidiary income tax and minimal US state income tax.
The effective tax
rate for 2018 of 15.3% differed from the statutory tax rates in our tax
reporting jurisdictions primarily due to the effect of valuation allowances as
well as foreign tax incentives and credits. We have a valuation allowance of $7.0
million and $6.8 million as of December 31, 2018 and 2017, respectively. Our
deferred tax assets and valuation allowance have been reduced by approximately
$308,000 and $272,000 associated with the requirements of accounting for
uncertain tax positions as of December 31, 2018 and 2017, respectively. Given the uncertainty created by our loss history and
the limited current taxable income 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.
GAIN ON SALE OF ASSETS
During the years 2018
and 2017, we sold non-core excess internet domain addresses and recorded a non-operating
gain of $19,000 and $366,000 net of commissions, respectively. Substantially
all of our non-core excess internet domain addresses have been sold.
Inflation and changes in Foreign currency
exchange rates
Sales and expenses
incurred by foreign subsidiaries are denominated in the subsidiary’s local
currency and translated into U.S. Dollar amounts at average rates of exchange
during the year. We recognized foreign currency transaction gains and (losses)
of $103,000 and ($281,000) in 2018 and 2017, respectively. The transaction
gains or losses resulted primarily from translation adjustments to foreign
inter-company accounts and U.S. Dollar accounts held by foreign subsidiaries and
sales by our German subsidiary to certain customers, which were invoiced in U.S.
Dollars. Because approximately 88% of our sales are to international markets,
volatile exchange rates may also impact our competiveness and margins.
Financial Condition:
Liquidity and Capital Resources
|
|
2018
|
|
Change
|
|
2017
|
(in thousands)
|
|
|
|
|
|
|
Working capital
|
|
$21,065
|
|
$1,579
|
|
$19,486
|
At December 31, 2018,
our principal sources of liquidity consisted of existing cash and cash
equivalents which increased primarily due to the net income for the year and
stock based compensation and depreciation (non-cash expenses) offset in part by
share repurchases under the share repurchase program. These drove our working
capital to increase by $1.6 million for the
year ended December 31, 2018 to $21.1
million. Our working capital composition shifted as a result of inventory
growth and lower accrued liabilities. Our current ratio was 4.1 and 3.5 for
December 31, 2018 and 2017, respectively.
For the year ended
December 31, 2018, our cash position decreased
$198,000 generally resulting from the same factors above.
Although we have no significant
external capital expenditure plans currently, we expect that we will continue
to make capital expenditures to support our business. We plan to increase our investment
in internally developed equipment used for services, rentals, sales demonstration
and test equipment as we develop and release new products. Capital
expenditures are expected to be funded by existing and internally generated
funds or lease financing.
As a result of our
significant product development, customer support, selling and marketing
efforts, we have required substantial working capital to fund our operations.
In 2018 and recent years, we have managed balancing profitable operations,
while addressing rising costs, tariffs and foreign exchange rate challenges.
This included geographic shifts in our operations, optimized real estate usage
strategies and differentiated product development and cost strategies.
We
believe that we have sufficient cash or working capital available under our
operating plan to fund our operations and capital requirements through at least
the next one year period. Our working capital may be used to fund possible
losses, business growth, project initiatives, share repurchases and business
development initiatives including acquisitions, which could reduce our
liquidity and result in a requirement for
additional cash at that time. Any
substantial inability to achieve our current business plan could have a
material adverse impact on our financial position, liquidity, or results of
operations and may require us to reduce expenditures and/or seek additional
financing.
OFF-balance sheet arrangements
Except as noted in
the accompanying consolidated financial
statements in Note 7, “Operating Lease Commitments” and Note 8, “Other
Commitments”, we had no off-balance sheet arrangements.
Share repurchase programs
On October 31, 2018,
our Board of Directors approved a share repurchase program with provisions to
buy back up to $2 million of our stock during the period from November 1, 2018
through October 31, 2019. The program was established with a 10b5-1
plan under the Exchange Act to provide flexibility to make purchases throughout
the period. For the year ended December
31, 2017, 101,975 shares of stock were repurchased at an average price of $5.23
for a total of $533,463 plus $2,067 in commissions and charges.
The following is a
summary of the stock repurchase program from November 1, 2018 through December
31, 2018:
|
Repurchases
by Month
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Repurchase Program
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased under the Program
|
|
|
|
|
|
|
|
|
|
|
December 2018
|
101,975
|
|
$5.23
|
|
101,975
|
|
$1,466,537
|
Non-Generally accepted accounting principles (GAAP)
FINANCIAL MeasureS
Earnings
Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted
EBITDA excluding equity compensation (a non-cash item) are set forth below. Non-GAAP
financial measures should not be considered a substitute for, or superior to,
measures of financial performance prepared in accordance with GAAP. We believe
that these non-GAAP financial measures provide meaningful supplemental
information regarding our results and facilitate the comparison of results. A
reconciliation of net income to EBITDA and adjusted EBITDA follows:
|
|
Year
Ended December 31,
|
|
|
2018
|
|
2017
|
(in thousands)
|
|
|
|
|
Net Income
|
|
$1,606
|
|
$5,449
|
Interest (income)
|
|
(37)
|
|
(29)
|
Taxes
|
|
291
|
|
(288)
|
Depreciation & amortization
|
|
955
|
|
822
|
EBITDA earnings
|
|
$2,815
|
|
$5,954
|
|
|
|
|
|
Equity compensation
|
|
1,230
|
|
714
|
Adjusted EBITDA earnings excluding
|
|
|
|
|
equity compensation
|
|
$4,045
|
|
$6,668
|
|
|
|
|
|
N
EW
A
CCOUNTING
PRONOUNCEMENTS
In 2018,
the FASB issued ASU 2018-15, “Intangibles” (ASU 2018-15). ASU 2018-15 applies
in accounting for implementation costs incurred in a cloud computing
arrangement that is a service contract where the guidance in ASC 350-40 for
internal-use software shall apply to determine capitalization or expensing of
implementation, training or data conversion costs. The standard becomes
effective beginning January 1, 2020.
We
are in the process of evaluating the impact of adoption on our consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02, “
Leases
”
(ASU 2016-02). ASU 2016-02 requires lessees to recognize almost all
leases on the balance sheet as a right-of-use asset and a lease liability and
requires leases to be classified as either an operating or a financing lease.
The standard excludes leases of intangible assets or inventory. ASU 2018-11
provides lessors with a limited practical expedient. This standard became effective
and we adopted
the leasing standard as of
January 1, 2019.
We are
continuing to evaluate the expected impact of ASC 842 on our consolidated financial
statements, but anticipate that, among other things, the required recognition
by a lessee of a lease liability and related right-of-use asset for operating
leases will
increase both the assets and liabilities
recognized and reported on our balance sheet as of the adoption date. We are
also continuing to evaluate the available practical expedients and our adoption
method for this new standard. We anticipate that our internal control framework
will not materially change upon adoption of ASC 842, but certain existing
internal controls will be modified and augmented, as necessary, effective as of
December 31, 2018. When adopted, we expect to recognize a lease asset and
liability related to the lessee provisions under ASC 842 of approximately $2.6
million with approximately $700,000 and $1.9 million of short term and long
term liabilities respectively as of January 1, 2019.
Our leases include facilities in Redmond, Washington,
and in the Shanghai and Munich areas, as well as a small amount of office
equipment and automobiles.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Financial Statements and Supplementary Data
See pages 28 through
45.
|
report of Independent REGISTERED PUBLIC ACCOUNTING
FIRM
|
|
Board of Directors and Stockholders
Data I/O Corporation
Opinion
on the financial statements
We
have audited the accompanying consolidated balance sheets of Data I/O
Corporation (a Washington corporation) and subsidiaries (the “Company”) as of
December 31, 2018 and 2017, 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, 2018, and the related notes and
financial statement schedules included under Item 15(a) (collectively referred
to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the results of
its
operations and its
cash flows for each of the two years in the period ended December 31,
2018, 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 supporting the amounts
and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor
since 2001.
Seattle, Washington
March 28, 2019
DATA I/O
CORPORATION
|
CONSOLIDATED
BALANCE SHEETS
|
(in
thousands, except share data)
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash
and cash equivalents
|
$18,343
|
|
$18,541
|
Trade
accounts receivable, net of allowance for
|
|
|
|
doubtful accounts of $75 and $73, respectively
|
3,771
|
|
3,769
|
Inventories
|
5,185
|
|
4,168
|
Other
current assets
|
621
|
|
708
|
TOTAL
CURRENT ASSETS
|
27,920
|
|
27,186
|
|
|
|
|
Property, plant and
equipment – net
|
1,985
|
|
2,458
|
Income tax receivable
|
598
|
|
598
|
Other assets
|
220
|
|
45
|
TOTAL
ASSETS
|
$30,723
|
|
$30,287
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Accounts
payable
|
$1,755
|
|
$1,301
|
Accrued
compensation
|
2,872
|
|
3,536
|
Deferred
revenue
|
1,392
|
|
1,787
|
Other
accrued liabilities
|
789
|
|
858
|
Income
taxes payable
|
47
|
|
218
|
TOTAL
CURRENT LIABILITIES
|
6,855
|
|
7,700
|
|
|
|
|
Long-term other payables
|
511
|
|
527
|
|
|
|
|
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, 8,338,628 shares as of December 31,
|
|
|
|
2018
and 8,276,813 shares as of December 31, 2017
|
19,254
|
|
18,989
|
Accumulated earnings
|
3,695
|
|
2,089
|
Accumulated other
comprehensive income
|
408
|
|
982
|
TOTAL
STOCKHOLDERS’ EQUITY
|
23,357
|
|
22,060
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$30,723
|
|
$30,287
|
|
|
|
|
DATA I/O
CORPORATION
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
For
the Years Ended
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Net Sales
|
|
$29,224
|
|
$34,051
|
Cost of goods sold
|
|
11,868
|
|
13,992
|
Gross
margin
|
|
17,356
|
|
20,059
|
Operating expenses:
|
|
|
|
|
Research
and development
|
|
7,361
|
|
6,896
|
Selling,
general and administrative
|
|
8,257
|
|
8,116
|
Total
operating expenses
|
|
15,618
|
|
15,012
|
Operating
income
|
|
1,738
|
|
5,047
|
Non-operating income
(expense):
|
|
|
|
|
Interest
income
|
|
37
|
|
29
|
Gain on
sale of assets
|
|
19
|
|
366
|
Foreign
currency transaction gain (loss)
|
|
103
|
|
(281)
|
Total
non-operating income
|
|
159
|
|
114
|
Income before income taxes
|
|
1,897
|
|
5,161
|
Income tax (expense)
benefit
|
|
(291)
|
|
288
|
Net income
|
|
$1,606
|
|
$5,449
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$0.19
|
|
$0.67
|
Diluted
earnings per share
|
|
$0.19
|
|
$0.65
|
Weighted-average
basic shares
|
|
8,378
|
|
8,149
|
Weighted-average
diluted shares
|
|
8,514
|
|
8,436
|
DATA
I/O CORPORATION
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
(in
thousands)
|
|
|
|
|
|
|
|
|
For
the Years Ended
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Net Income
|
|
$1,606
|
|
$5,449
|
Other comprehensive
income:
|
|
|
|
|
Foreign currency
translation gain (loss)
|
|
(574)
|
|
794
|
Comprehensive income
|
|
$1,032
|
|
$6,243
|
|
|
|
|
|
DATA
I/O CORPORATION
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
|
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Common
Stock
|
|
Retained
|
|
and Other
|
|
Total
|
|
|
|
|
|
|
Earnings
|
|
Comprehensive
|
|
Stockholders'
|
|
|
Shares
|
|
Amount
|
|
(Deficit)
|
|
Income
(Loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
8,015,746
|
|
$19,204
|
|
($3,360)
|
|
$188
|
|
$16,032
|
Stock options exercised
|
|
131,065
|
|
(549)
|
|
-
|
|
-
|
|
(549)
|
Repurchased shares
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Stock awards issued, net of tax
withholding
|
|
128,262
|
|
(401)
|
|
-
|
|
-
|
|
(401)
|
Issuance of stock through:
Employee Stock Purchase Plan
|
|
1,740
|
|
12
|
|
-
|
|
-
|
|
12
|
Share-based compensation
|
|
-
|
|
723
|
|
-
|
|
-
|
|
723
|
Net income
|
|
-
|
|
-
|
|
5,449
|
|
-
|
|
5,449
|
Other comprehensive income gain (loss)
|
-
|
|
-
|
|
-
|
|
794
|
|
794
|
Balance at December 31, 2017
|
|
8,276,813
|
|
$18,989
|
|
$2,089
|
|
$982
|
|
$22,060
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
10,052
|
|
-
|
|
|
|
|
|
-
|
Repurchased shares
|
|
(101,975)
|
|
(536)
|
|
|
|
|
|
(536)
|
Stock awards issued, net of tax
withholding
|
|
150,726
|
|
(448)
|
|
-
|
|
-
|
|
(448)
|
Issuance of stock through:
Employee Stock Purchase Plan
|
|
3,012
|
|
19
|
|
-
|
|
-
|
|
19
|
Share-based compensation
|
|
-
|
|
1,230
|
|
-
|
|
-
|
|
1,230
|
Net income
|
|
-
|
|
-
|
|
1,606
|
|
-
|
|
1,606
|
Other comprehensive income gain (loss)
|
-
|
|
-
|
|
-
|
|
(574)
|
|
(574)
|
Balance at December 31, 2018
|
|
8,338,628
|
|
$19,254
|
|
$3,695
|
|
$408
|
|
$23,357
|
|
|
|
|
|
|
|
|
|
|
|
DATA
I/O CORPORATION
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(in
thousands)
|
|
|
|
|
|
|
|
|
For
the Years Ended
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
|
Net
income
|
|
$1,606
|
|
$5,449
|
Adjustments
to reconcile net income
|
|
|
|
|
to net
cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation
and amortization
|
|
955
|
|
822
|
Gain on
sale of assets
|
|
(19)
|
|
(366)
|
Equipment
transferred to cost of goods sold
|
|
423
|
|
749
|
Share-based
compensation
|
|
1,230
|
|
714
|
Net
change in:
|
|
|
|
|
Trade
accounts receivable
|
|
(78)
|
|
1,215
|
Inventories
|
|
(1,135)
|
|
59
|
Other
current assets
|
|
72
|
|
(198)
|
Accounts
payable and accrued liabilities
|
|
(397)
|
|
1,520
|
Deferred
revenue
|
|
(288)
|
|
(247)
|
Other
long-term liabilities
|
|
(82)
|
|
(11)
|
Deposits
and other long-term assets
|
|
(175)
|
|
(580)
|
Net cash provided by
(used in) operating activities
|
|
2,112
|
|
9,126
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
(907)
|
|
(2,154)
|
Net
proceeds from sale of assets
|
|
19
|
|
366
|
Cash
provided by (used in) investing activities
|
|
(888)
|
|
(1,788)
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
|
Net proceeds
from issuance of common stock, less payments
|
|
|
|
|
for shares withheld to cover tax
|
|
(966)
|
|
(939)
|
Cash
provided by (used in) financing activities
|
|
(966)
|
|
(939)
|
Increase (decrease) in
cash and cash equivalents
|
|
258
|
|
6,399
|
|
|
|
|
|
Effects of exchange rate
changes on cash
|
|
(456)
|
|
571
|
Cash and cash equivalents
at beginning of period
|
|
18,541
|
|
11,571
|
Cash and cash equivalents
at end of period
|
|
$18,343
|
|
$18,541
|
|
|
|
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
Cash paid during the
period for:
|
|
|
|
|
Income taxes
|
|
$463
|
|
$127
|
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 the Far East, Europe and the Americas. Our manufacturing
operations are currently located in Redmond, Washington, United States and
Shanghai, China.
Principles of
Consolidation
The consolidated
financial statements include the accounts of Data I/O Corporation and our
wholly-owned subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant
estimates include:
-
Revenue
Recognition
-
Allowance
for Doubtful Accounts
-
Inventory
-
Warranty
Accruals
-
Tax
Valuation Allowances
-
Share-based
Compensation
Foreign Currency
Translation
Assets and
liabilities of foreign subsidiaries are translated at the exchange rate on the
balance sheet date. Revenues, costs and expenses of foreign subsidiaries are
translated at average rates of exchange prevailing during the year.
Translation adjustments resulting from this process are charged or credited to
stockholders’ equity. Realized and unrealized gains and losses resulting from
the effects of changes in exchange rates on assets and liabilities denominated
in foreign currencies are included in non-operating expense as foreign currency
transaction gains and losses.
Cash and Cash
Equivalents
All highly liquid
investments purchased with an original maturity of 90 days or less are
considered cash equivalents. We maintain our cash and cash equivalents
with major financial institutions in the United States of America, which are
insured by the Federal Deposit Insurance Corporation (FDIC), and in foreign
jurisdictions. Deposits in U.S. banks exceed the FDIC insurance
limit. We have not experienced any losses on our cash and cash
equivalents. Cash and cash equivalents held in foreign bank accounts,
primarily China, Germany and Canada, totaled (in millions) $6.4 at December 31,
2018 and $6.2 at December 31, 2017.
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 market) accordingly.
Property, Plant
and Equipment
Property, plant and
equipment, including leasehold improvements, are stated at cost and
depreciation is calculated over the estimated useful lives of the related
assets or lease terms on the straight-line basis. We depreciate substantially
all manufacturing and office equipment over periods of three to seven years.
We depreciate leasehold improvements over the remaining portion of the lease or
over the expected life of the asset if less than the remaining term of the
lease.
We regularly review
all of our property, plant and equipment for impairment whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. If the total of future undiscounted cash flows is less than the
carrying amount of these assets, an impairment loss, if any, based on the
excess of the carrying amount over the fair value of the assets, is recorded.
Based on this evaluation, no impairment was noted for property, plant and
equipment for the years ended December 31, 2018 and 2017.
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. Tax reform changes including
the impact on enactment have been included in our 2017 financial statements and
changes effective in 2018, including Global Intangible Low Tax Income (GILTI),
have been included in our 2018 financial statements.
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
Effective January 1,
2018, the Company adopted ASU 2014-09, Revenue (“Topic 606”): Revenue from
Contracts with Customers, using the modified retrospective method. Topic
606 provides a single, principles-based five-step model to be applied to all
contracts with customers. It generally provides for the recognition of revenue
in an amount that reflects the consideration to which the Company expects to be
entitled, net of allowances for estimated returns, discounts or sales
incentives, as well as taxes collected from customers when control over the
promised goods or services are transferred to the customer.
Our basic revenue
recognition remains essentially the same as it was in 2017. The adoption of
Topic 606 did not have a material impact on our 2018 financial statement line
items, either individually or in the aggregate, and would not have been
material to 2017 financial results. We have elected the practical expedient to expense
contract acquisition costs, primarily sales commissions, for contracts with
terms of one year or less and will capitalize and amortize incremental costs with
terms that exceed one year. During 2018, the impact of capitalization of
incremental costs for obtaining contracts was $8,193. We have made a sales tax
policy election to exclude sales, use, value added, some excise taxes and other
similar taxes from the measurement of the transaction price.
We recognize revenue
upon transfer of control of the promised products or services to customers in
an amount that reflects the consideration we expect to receive in exchange for
those products or services. We have determined that our programming equipment
has reached a point of maturity and stability such that product acceptance can
be assured by testing at the factory prior to shipment and that the
installation meets the criteria to be a separate performance obligation. These
systems are standard products with published product specifications and are
configurable with standard options. The evidence that these systems could be
deemed as accepted was based upon having standardized factory production of the
units, results from batteries of tests of product performance to our published
specifications, quality inspections and installation standardization, as well
as past product operation validation with the customer and the history provided
by our installed base of products upon which the current versions were based.
The revenue related
to products requiring installation that is perfunctory is recognized upon
transfer of control of the product to customers, which generally is at the time
of shipment. Installation that is considered perfunctory includes any
installation that is expected to be performed by other parties, such as
distributors, other vendors, or the customers themselves. This takes into
account the complexity, skill and training needed as well as customer
expectations regarding installation.
We enter into
arrangements with multiple performance obligations that arise during the sale
of a system that includes an installation component, a service and support
component and a software maintenance component. The transaction price is
allocated to the separate performance obligations on relative standalone sales
price. We allocate the transaction price of each element based on relative
selling prices. Relative selling price is based on the selling price of the
standalone system. For the installation and service and support performance
obligations, we use the value of the discount given to distributors who perform
these components. For software maintenance performance obligations, we use
what we charge for annual software maintenance renewals after the initial year
the system is sold. Revenue is recognized on the system sale based on shipping
terms, installation revenue is recognized after the installation is performed,
and hardware service and support and software maintenance revenue is recognized
ratably over the term of the agreement, typically one year. Deferred revenue
includes service, support and maintenance contracts and represents the
undelivered performance obligation of agreements that are typically for one
year.
When
we sell software separately, we recognize revenue upon the transfer of control
of the software, which is generally upon shipment, provided that only
inconsequential performance obligations remain on our part and substantive
acceptance conditions, if any, have been met.
We recognize revenue
when there is an approved contract that both parties are committed to perform, both
parties rights have been identified, the contract has substance, collection of
substantially all the consideration is probable, the transaction price has been
determined and allocated over the performance obligations, the performance
obligations including substantive
acceptance conditions, if any, in the contract have been met, the obligation is
not contingent on resale of the product, the buyer’s obligation would not be
changed in the event of theft, physical destruction or damage to the product,
the buyer acquiring the product for resale has economic substance apart from us
and we do not have significant obligations for future performance to directly
bring about the resale of the product by the buyer. We establish a reserve for
sales returns based on historical trends in product returns and estimates for
new items. Payment terms are generally 30 days from shipment.
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
|
|
2018
|
|
2017
|
(in thousands)
|
|
|
|
|
Equipment Sales
|
|
$19,002
|
|
$24,267
|
Adapter Sales
|
|
6,954
|
|
7,418
|
Software and Maintenance Sales
|
|
3,268
|
|
2,366
|
Total
|
|
$29,224
|
|
$34,051
|
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 $174,000 and $154,000 in 2018 and 2017, 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 136,000 and 287,000 for the years ended December 31, 2018 and 2017, respectively. Options to purchase 25,000 and 12,603 shares of common stock were outstanding as of December 31, 2018 and 2017, respectively, but were excluded from the computation of diluted EPS for the period then ended because the options were anti-dilutive.
Diversification of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of trade receivables. Our trade receivables are geographically dispersed and include customers in many different industries. As of December 31, 2018, three customers accounted for greater than 10% of our consolidated accounts receivable balance at December 31, 2018: Systemation, Continental and Semitron, accounted for greater than 10% of our consolidated accounts receivable balance at December 31, 2018. Our consolidated accounts receivable balance as of December 31, 2018 and 2017 includes foreign accounts receivable in the functional currency of our foreign subsidiaries amounting to $1,931,000 and $1,228,000, respectively. We generally do business with our foreign distributors in U.S. Dollars. We believe that risk of loss is significantly reduced due to the diversity of our end-customers and geographic sales areas. We perform on-going credit evaluations of our customers’ financial condition and require collateral, such as letters of credit and bank guarantees, or prepayment whenever deemed necessary.
New Accounting Pronouncements
In 2018, the FASB issued ASU 2018-15, “Intangibles” (ASU 2018-15). ASU 2018-15 applies in accounting for implementation costs incurred in a cloud computing arrangement that is a service contract where the guidance in ASC 350-40 for internal-use software shall apply to determine capitalization or expensing of implementation, training or data conversion costs. The standard becomes effective beginning January 1, 2020.
We are in the process of evaluating the impact of adoption on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “
Leases
” (ASU 2016-02). ASU 2016-02 requires lessees to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability and requires leases to be classified as either an operating or a financing lease. The standard excludes leases of intangible assets or inventory. ASU 2018-11 provides lessors with a limited practical expedient. This standard became effective and we adopted
the leasing standard as of January 1, 2019.
We are continuing to evaluate the expected impact of ASC 842 on our consolidated financial statements, but anticipate that, among other things, the required recognition by a lessee of a lease liability and related right-of-use asset for operating leases will increase both the assets and liabilities recognized and reported on our balance sheet as of the adoption date. We are also
continuing to evaluate the available practical
expedients and our adoption method for this new standard. We anticipate that our
internal control framework will not materially change upon adoption of ASC 842,
but certain existing internal controls will be modified and augmented, as
necessary, effective as of December 31, 2018. When adopted, we expect to
recognize a lease asset and liability related to the lessee provisions under
ASC 842 of approximately $2.6 million with approximately $700,000 and $1.9
million of short term and long term liabilities respectively as of January 1,
2019.
Our leases include facilities in
Redmond, Washington, and in the Shanghai and Munich areas, as well as a small
amount of office equipment and automobiles.
NOTE 2 – ACCOUNTS
RECEIVABLE, NET
|
|
December 31,
2018
|
|
December
31,
2017
|
(in thousands)
|
|
|
|
|
Trade accounts receivable
|
|
$3,846
|
|
$3,842
|
Less allowance for doubtful
receivables
|
|
75
|
|
73
|
Trade accounts receivable, net
|
|
$3,771
|
|
$3,769
|
|
|
|
|
|
Changes in Data I/O’s allowance for
doubtful accounts are as follow:
|
|
|
|
|
December 31,
2018
|
|
December
31,
2017
|
(in thousands)
|
|
|
|
|
Beginning balance
|
|
$73
|
|
$96
|
Bad debt expense (reversal)
|
|
2
|
|
(24)
|
Accounts written-off
|
|
-
|
|
-
|
Recoveries
|
|
-
|
|
1
|
Ending balance
|
|
$75
|
|
$73
|
|
|
|
|
|
NOTE 3–
INVENTORIES
|
|
December
31,
2018
|
|
December
31,
2017
|
(in thousands)
|
|
|
|
|
Raw material
|
|
$2,925
|
|
$2,392
|
Work-in-process
|
|
1,584
|
|
1,091
|
Finished goods
|
|
676
|
|
685
|
Inventories
|
|
$5,185
|
|
$4,168
|
|
|
|
|
|
NOTE 4 – PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
December
31,
2018
|
|
December
31,
2017
|
(in thousands)
|
|
|
|
|
Leasehold
improvements
|
|
$399
|
|
$416
|
Equipment
|
|
5,378
|
|
5,279
|
Sales
demonstration equipment
|
|
942
|
|
1,315
|
|
|
6,719
|
|
7,010
|
Less accumulated
depreciation
|
|
4,734
|
|
4,552
|
Property and
equipment, net
|
|
$1,985
|
|
$2,458
|
|
|
|
|
|
Total
depreciation expense recorded for 2018 and 2017 was $955,000 and $822,000,
respectively.
NOTE 5 – INCOME
TAX RECEIVABLE
On December 22,
2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law, making
significant changes to the Internal Revenue Code. Changes include the repeal
of corporate Alternative Minimum Tax (AMT) for tax years after December
31, 2017. As a result, in 2017, we have recorded a long-term
income tax receivable of $598,000 for the refundable AMT credits net of
sequestration.
NOTE 6 – OTHER
ACCRUED LIABILITIES
Other accrued
liabilities consisted of the following components:
|
|
December
31,
2018
|
|
December
31,
2017
|
(in thousands)
|
|
|
|
|
Product warranty
|
|
$471
|
|
$530
|
Sales return reserve
|
|
87
|
|
80
|
Other taxes
|
|
102
|
|
109
|
Other
|
|
129
|
|
139
|
Other accrued liabilities
|
|
$789
|
|
$858
|
|
|
|
|
|
The changes in our
product warranty liability for the year ending December 31, 2018 are follows:
|
|
December 31,
2018
|
(in thousands)
|
|
|
Liability, beginning
balance
|
|
$530
|
Net expenses
|
|
936
|
Warranty claims
|
|
(936)
|
Accrual revisions
|
|
(59)
|
Liability, ending balance
|
|
$471
|
|
|
|
NOTE 7 – OPERATING
LEASE COMMITMENTS
We have commitments
under non-cancelable operating leases and other agreements, primarily for
factory and office space, with initial or remaining terms of one year or more
as follows:
For
the years ending December 31:
|
|
Operating
Leases
|
(in thousands)
|
|
|
2019
|
|
$940
|
2020
|
|
938
|
2021
|
|
885
|
2022
|
|
344
|
2023
|
|
10
|
Thereafter
|
|
-
|
Total
|
|
$3,117
|
|
|
|
During
the third quarter of 2017, we amended our lease agreement for the Redmond,
Washington headquarters facility, extending the lease to July 31, 2022, waiving
a potential space give back provision and receiving lease inducement
incentives. Previously on June 8, 2015 the lease had been amended to relocate
our headquarters to a nearby building and lower the square footage to
approximately 20,460. The lease base
annual rental payments during 2018 and 2017 were approximately $341,000 and
$303,000, 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 2018 and 2017 were approximately $288,000 and $276,000,
respectively.
During the fourth
quarter of 2016, we signed a lease
agreement for a new facility located near Munich, Germany which was effective
March 1, 2017 and extends through February 28, 2022. This lease is for
approximately 4,895 square feet. The
lease base annual rental payments during 2018 and 2017 were approximately $67,000
and $64,000, respectively.
NOTE 8 –OTHER
COMMITMENTS
We have purchase
obligations for inventory and production costs as well as other obligations
such as capital expenditures, service contracts, marketing, and development
agreements. Arrangements are considered purchase obligations if a contract
specifies all significant terms, including fixed or minimum quantities to be
purchased, a pricing structure and approximate timing of the transaction. Most
arrangements are cancelable without a significant penalty, and with short
notice, typically less than 90 days. At December
31, 2018, the purchase commitments and other obligations totaled $1,364,000 of
which all but $5,000 are expected to be paid over the next twelve months.
NOTE 9 –
CONTINGENCIES
As of December 31, 2018, we were not a party to any legal
proceedings or aware of any indemnification agreement claims, the adverse
outcome of which in management’s opinion, individually or in the aggregate,
would have a material adverse effect on our results of operations or financial
position.
NOTE 10 – STOCK
AND RETIREMENT PLANS
Stock Option
Plans
At December 31, 2018,
there were 38,755 shares available for future grant under Data I/O Corporation
2000 Stock Compensation Incentive Plan (“2000 Plan”). At December 31, 2018
there were shares of Common Stock reserved for issuance consisting of 583,856
under the 2000 plan. Pursuant to this 2000 Plan, options are granted to our
officers and key employees with exercise prices equal to the fair market value
of the Common Stock at the date of grant and generally vest over four years.
Options granted under the plans have a maximum term of six years from the date
of grant. Stock awards are also granted under the 2000 Plan which generally
vest over four years.
Employee Stock Purchase Plan
Under the Employee
Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of our
Common Stock at six-month intervals at 95% of the fair market value on the last
day of each six-month period. Employees may purchase shares having a value not
exceeding ten percent of their gross compensation during an offering period.
During 2018 and 2017, a total of 3,012 and 1,740 shares, respectively, were
purchased under the plan at average prices of $7.81 and $5.78 per share,
respectively. At December 31, 2018, a total of 48,935 shares were reserved for
future issuance.
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, 2018 there were 25,000 SARs outstanding.
Director Fee Plan
We have a Director
Fee Plan available to compensate directors who are not employees of
Data I/O Corporation with equity. No shares were issued from the plan for
2018 or 2017 board service and
151,322 shares
remain available in the plan as of December 31, 2018.
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 2018 and 2017, 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 $237,000 and $232,000 in 2018 and 2017, respectively. Employer
matching contributions owed to the plan were $271,000 and $251,000 at December
31, 2018 and 2017, respectively.
NOTE 11–
SHARE-BASED COMPENSATION
For share-based
awards granted, we have recognized compensation expense based on the estimated
grant date fair value method. For these awards we have recognized compensation
expense using a straight-line amortization method and reduced for estimated forfeitures.
The impact on our results of operations of recording share-based compensation
for the year ended December 31, 2018 and 2017 was as follows:
|
|
Year
Ended December 31,
|
|
|
2018
|
|
2017
|
(in thousands)
|
|
|
|
|
Cost of goods sold
|
|
$25
|
|
$18
|
Research and
development
|
|
266
|
|
164
|
Selling, general
and administrative
|
|
939
|
|
532
|
Total share-based
compensation
|
|
$1,230
|
|
$714
|
|
|
|
|
|
An immaterial amount
of share-based compensation was capitalized into inventory as overhead for the
years ended December 31, 2018 and 2017, respectively.
The
fair values of share-based awards for employee stock option awards were estimated
at the date of grant using the Black-Scholes valuation model. The volatility
and expected life of the options used in calculating the fair value of
share-based awards may exclude certain periods of historical data that we
considered atypical and not likely to occur in future periods. The following
weighted average assumptions were used to calculate the fair value of options
granted during the years ended December 31:
|
|
Employee
Stock
|
|
|
Options
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Risk-free interest
rates
|
|
N/A
|
|
1.72%
|
Volatility factors
|
|
N/A
|
|
62.00%
|
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:
|
|
2018
|
|
2017
|
|
|
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
|
|
40,000
|
|
$6.10
|
|
|
|
376,000
|
|
$2.95
|
|
|
Granted
|
|
-
|
|
-
|
|
|
|
25,000
|
|
8.03
|
|
|
Exercised
|
|
(15,000)
|
|
2.83
|
|
|
|
(346,000)
|
|
2.83
|
|
|
Cancelled, Expired or
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
-
|
|
-
|
|
|
|
(15,000)
|
|
6.01
|
|
|
Outstanding at end
of year
|
|
25,000
|
|
$8.03
|
|
4.50
|
|
40,000
|
|
$6.10
|
|
3.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected
to vest at the end of the period
|
|
22,924
|
|
$8.03
|
|
4.50
|
|
34,460
|
|
$5.79
|
|
3.29
|
Exercisable at end
of year
|
|
7,813
|
|
$8.03
|
|
4.50
|
|
16,563
|
|
$3.37
|
|
0.91
|
The
aggregate intrinsic value of outstanding options is $0. The aggregate
intrinsic value of awards exercised during the twelve month period ended
December 31, 2018 was $87,900.
Restricted
stock award including performance-based stock award activity under our
share-based compensation plan was as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Awards
|
|
Weighted
- Average Grant Date Fair Value
|
|
Awards
|
|
Weighted
- Average Grant Date Fair Value
|
Outstanding at beginning of year
|
|
565,850
|
|
$5.09
|
|
464,850
|
|
$2.78
|
Granted
|
|
206,856
|
|
7.11
|
|
287,600
|
|
7.29
|
Vested
|
|
(213,100)
|
|
4.51
|
|
(181,725)
|
|
2.72
|
Cancelled
|
|
(750)
|
|
4.24
|
|
(4,875)
|
|
3.06
|
Outstanding at end of year
|
|
558,856
|
|
$6.06
|
|
565,850
|
|
$5.09
|
|
|
|
|
|
|
|
|
|
During
the year ended December 31, 2018, 67,322 shares 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,
2018
|
|
December 31,
2017
|
|
|
|
|
|
Unamortized future compensation
expense
|
|
$2,835,978
|
|
$2,560,844
|
Remaining weighted average
amortization period in years
|
|
2.63
|
|
2.98
|
NOTE 12 – SHARE REPURCHASE PROGRAMS
On October 31, 2018,
our Board of Directors approved a share repurchase program with provisions to
buy back up to $2 million of our stock during the period from November 1, 2018
through October 31, 2019. The program was established with a 10b5-1
plan under the Exchange Act to provide flexibility to make purchases throughout
the period. For the year ended December
31, 2017, 101,975 shares of stock were repurchased at an average price of $5.23
for a total of $533,463 plus $2,067 in commissions and charges.
The following is a
summary of the stock repurchase program from November 1, 2018 through December
31, 2018:
|
Repurchases
by Month
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Repurchase Program
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased under the Program
|
|
|
|
|
|
|
|
|
|
|
December 2018
|
101,975
|
|
$5.23
|
|
101,975
|
|
$1,466,537
|
NOTE 13– INCOME TAXES
Components
of income (loss) before taxes:
|
|
Year
Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
U.S. operations
|
|
($137)
|
|
$3,817
|
Foreign operations
|
|
2,034
|
|
1,344
|
Total income (loss)
before taxes
|
|
$1,897
|
|
$5,161
|
|
|
|
|
|
Income tax
expense (benefit) consists of:
|
|
|
|
|
(in thousands)
|
|
Year
Ended December 31,
|
Current tax expense
(benefit)
|
|
2018
|
|
2017
|
U.S. federal
|
|
$5
|
|
($494)
|
State
|
|
20
|
|
8
|
Foreign
|
|
266
|
|
198
|
|
|
291
|
|
(288)
|
Deferred tax expense
(benefit) – U.S. federal
|
|
-
|
|
-
|
Total income tax
expense (benefit)
|
|
$291
|
|
($288)
|
|
|
|
|
|
A
reconciliation of our effective income tax and the U.S. federal tax rate is as
follows:
|
|
Year
Ended December 31,
|
|
|
2018
|
|
2017
|
(in thousands)
|
|
|
|
|
Statutory tax
|
|
$398
|
|
$1,755
|
State and foreign income
tax, net of federal income tax benefit
|
|
(159)
|
|
83
|
Valuation allowance for
deferred tax assets
|
|
245
|
|
(4,800)
|
Federal rate change
|
|
-
|
|
2,979
|
Foreign sourced deemed
dividend income
|
|
-
|
|
1,145
|
Stock based compensation
|
|
(282)
|
|
(970)
|
AMT credit refund
|
|
-
|
|
(494)
|
Other
|
|
89
|
|
14
|
Total income tax expense
(benefit)
|
|
$291
|
|
($288)
|
|
|
|
|
|
The tax effects
of temporary differences that gave rise to significant portions of the deferred
tax assets are presented below:
|
|
Year
Ended December 31,
|
|
|
2018
|
|
2017
|
(in thousands)
|
|
|
|
|
Deferred income tax
assets:
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$8
|
|
$11
|
Inventory and product
return reserves
|
|
467
|
|
406
|
Compensation accruals
|
|
1,515
|
|
1,233
|
Accrued liabilities
|
|
321
|
|
236
|
Book-over-tax
depreciation and amortization
|
|
21
|
|
33
|
Foreign net operating
loss carryforwards
|
|
132
|
|
133
|
U.S. net operating
loss carryforwards
|
|
2,345
|
|
2,761
|
U.S. credit
carryforwards
|
|
2,161
|
|
2,017
|
|
|
6,970
|
|
6,830
|
|
|
|
|
|
Valuation Allowance
|
|
(6,970)
|
|
(6,830)
|
Total Deferred Income Tax Assets
|
|
$ -
|
|
$ -
|
|
|
|
|
|
The valuation
allowance for deferred tax assets increased $140,000 and decreased $4,418,000 during
the years ended December 31, 2018 and 2017, 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.
On December 22,
2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making
significant changes to the Internal Revenue Code. For the year ending December
31, 2017, we had completed our accounting for the effects of the Act. The
changes that impacted our 2017 financial statements include: a federal
corporate tax rate decrease from 34% to 21% for tax years
beginning after December 31, 2017, the repeal of corporate
Alternative Minimum Tax (AMT) for tax years after December 31, 2017, and a
one-time tax on the mandatory deemed repatriation of cumulative foreign
earnings of “post 1986 Earnings &
Profits”. We computed our 2017 provision
for income taxes and as a result we recorded a net tax benefit of $531,000
on our income statement in the fourth quarter of 2017, the period in which
the legislation was enacted, made up of
$67,000 of additional tax relating to the “deemed repatriation” and recognizing
a tax benefit of $598,000 related to refundable “Alternative Minimum Tax
Credits” in carryforward. The deemed
repatriation tax resulted in the utilization of $3.4 million of net operating
loss carryforwards and generated $1.0 million of foreign tax credits, as well
as corresponding valuation allowance adjustments.
As a result of the corporate
income tax rate reduction from 34% to 21%, we revalued our net deferred tax
assets at December 31, 2017, which resulted in a decrease of the net deferred
tax assets and corresponding valuation allowance balance of $3.0 million.
U.S. net operating
loss carryforwards are $10,568,000 at December 31, 2018 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,
|
|
|
2018
|
|
2017
|
(in thousands)
|
|
|
|
|
Unrecognized tax benefits,
opening balance
|
|
$272
|
|
$226
|
Prior period tax
position increases
|
|
-
|
|
10
|
Additions based on
tax positions related to current year
|
|
36
|
|
36
|
Unrecognized tax benefits, ending
balance
|
|
$308
|
|
$272
|
|
|
|
|
|
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 2015, 2016, 2017 and 2018 in the United
States of America. In addition, various tax years from 2001 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 14 – SEGMENT
AND GEOGRAPHIC INFORMATION
We consider our
operations to be a single operating segment, focused on the design,
manufacturing and sale of programming systems used by designers and
manufacturers of electronic products.
Major operations
outside the U.S. include sales, engineering and service support subsidiaries in
Germany as well as in China, which also manufactures some of our products.
The following tables
provide summary operating information by geographic area:
|
|
Year
Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
U.S.
|
|
$3,436
|
|
$2,874
|
Europe
|
|
13,251
|
|
14,899
|
Rest of World
|
|
12,537
|
|
16,278
|
|
|
$29,224
|
|
$34,051
|
|
|
|
|
|
Included in Europe and
Rest of World net sales are
|
|
|
|
the following significant
balances:
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$4,428
|
|
$7,982
|
China
|
|
$4,489
|
|
$5,865
|
|
|
|
|
|
Operating income:
|
|
|
|
|
U.S.
|
|
$802
|
|
$499
|
Europe
|
|
258
|
|
2,171
|
Rest of World
|
|
678
|
|
2,377
|
|
|
$1,738
|
|
$5,047
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
U.S.
|
|
$18,976
|
|
$18,340
|
Europe
|
|
5,279
|
|
5,001
|
Rest of World
|
|
6,468
|
|
6,946
|
|
|
$30,723
|
|
$30,287
|
|
|
|
|
|
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, 2018. 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, 2018, 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, 2019 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, 2019 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, 2019 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, 2018.
See Notes 10 and 11 of “Notes to Consolidated Financial Statements.”
|
|
(a)
Number of securities to be issued upon the exercise of outstanding options,
warrants and rights
|
|
(b)
Weighted–average exercise price of outstanding options, warrants and rights
|
|
(c)
Number of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a))
|
Equity compensation plans
approved by the security holders (1) (2)
|
|
27,763
|
|
$7.79
|
|
934,927
|
Equity compensation plans
not approved by the security holders
|
|
-
|
|
$0.00
|
|
-
|
Total
|
|
27,763
|
|
$7.79
|
|
934,927
|
|
|
|
|
|
|
|
(1)
Represents shares of our Common Stock issuable pursuant to the Data I/O Corporation 2000 Stock Incentive Compensation Plan, 1982 Employee Stock Purchase Plan and 1996 Director Fee Plan. Table excludes unvested restricted stock awards of 558,856 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.
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 2019 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, 2019. 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, and 10.23.
|
|
(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.
|
|
(a)
|
|
List of Documents Filed as Part of This Report:
|
Page
|
|
(1)
|
Index to Financial Statements:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
28
|
|
|
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
29
|
|
|
|
Consolidated Statements of Operations for each of the two years ended December 31, 2017 and December 31, 2016
|
30
|
|
|
|
Consolidated Statements of Comprehensive Income (Loss) for each of the two years ended
December 31, 2017 and December 31, 2016
|
31
|
|
|
|
Consolidated Statements of Stockholders’ Equity for each of the two years ended December 31, 2017 and December 31, 2016
|
32
|
|
|
|
Consolidated Statements of Cash Flows for each of the two years ended December 31, 2017 and
December 31, 2016
|
33
|
|
|
|
Notes to Consolidated Financial Statements
|
34
|
|
(2)
|
Index to Financial Statement Schedules:
|
|
|
|
|
Schedule II – Consolidated Valuation and Qualifying Accounts
|
55
|
|
|
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)).
|
|
|
|
|
3.2
|
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)
.
|
|
|
|
|
3.3
|
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:
|
|
|
|
|
4.1
|
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 t
|
|
|
|
|
4.2
|
Rights Agreement, dated as of March 31, 1988, between Data I/O Corporation and First Jersey National Bank, as Rights Agent, as amended by Amendment No. 1 thereto, dated as of May 28, 1992 and Amendment No. 2 thereto, dated as of July 16, 1997 (Incorpor
a
|
|
|
|
|
4.3
|
Amendment No. 1, dated as of February 10, 1999, to Rights Agreement, dated as of April 4, 1998, between Data I/O Corporation and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (Incorporated by reference to Exhibit 4.1 of Data I/O’s Form 8-A/A
|
|
|
|
|
4.4
|
Amendment No. 2 to Rights Agreement, dated as of April 3, 2008, between Data I/O Corporation and Computershare (formerly BNY Mellon Investor Services LLC, and ChaseMellon Shareholder Services, L.L.C.). (Incorporated by reference to Exhibit 4.3 of Data I/
|
|
|
|
|
4.5
|
Amendment No. 3 to Rights Agreement, dated as of July 13, 2016, between Data I/O Corporation and Computershare. (Incorporated by reference to Exhibit 4.4 of Data I/O’s Form 8-A/A dated July 14, 2016).
|
|
|
|
|
|
|
|
|
|
|
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)).
|
|
|
|
|
10.2
|
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)).
|
|
|
|
|
10.3
|
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)).
|
|
|
|
|
10.4
|
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)).
|
|
|
|
|
10.5
|
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
)
|
|
|
|
|
10.6
|
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)
.
|
|
|
|
|
10.7
|
Form of Option Agreement (Incorporated by reference to Data I/O’s 2004 Annual Report on Form 10-K (File No. 0-10394))
.
|
|
|
|
|
10.8
|
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)).
|
|
|
|
|
10.9
|
Lease, Redmond East Business Campus between Data I/O Corporation and Carr Redmond PLCC dated February 28, 2006 (Incorporated by reference to Data I/O’s 2005 Annual Report on Form 10K (File No. 0-10394))
.
|
|
|
|
|
10.10
|
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))
.
|
|
|
|
|
10.11
|
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)
.
|
|
|
|
|
10.12
|
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))
.
|
|
|
|
|
10.13
|
Patent Purchase Agreement (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on March 25, 2008))
.
|
|
|
|
|
10.14
|
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)
.
|
|
|
|
|
10.15
|
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))
.
|
|
|
|
|
10.16
|
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))
.
|
|
|
|
|
10.17
|
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))
.
|
|
|
|
|
10.18
|
Form of Indemnification Agreement. (Incorporated by reference to Data I/O’s 2010 Annual Report on Form 10-K (File No. 0-10394))
.
|
|
|
|
|
10.19
|
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)
.
|
|
|
|
|
10.20
|
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))
.
|
|
|
|
|
10.21
|
Letter Agreement with Anthony Ambrose (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on October 29, 2012)
.
|
|
|
|
|
10.22
|
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)
.
|
|
|
|
|
10.23
|
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))
.
|
|
|
|
|
10.24
|
Letter Agreement with Rajeev Gulati (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on July 31, 2013)
.
|
|
|
|
|
10.25
|
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))
.
|
|
|
|
|
10.26
|
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))
.
|
|
|
|
|
10.27
|
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))
.
|
|
|
|
|
10.28
|
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))
.
|
|
|
|
|
10.29
|
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))
.
|
|
|
|
|
10.30
|
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))
.
|
|
|
|
|
10.31
|
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))
.
|
|
|
|
|
10.32
|
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))
.
|
|
|
|
|
10.33
|
Standstill and Voting Agreement, dated as of July 13, 2016, by and among Data I/O Corporation, David Kanen and Kanen Wealth Management LLC (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on July 14, 2016)
.
|
|
|
|
|
10.34
|
34 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))
.
|
|
|
|
|
10.35
|
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.)
.
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|
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21.1
|
Subsidiaries of the Registrant
|
56
|
|
|
|
23.1
|
Consent of Independent Registered Public Accounting Firm
|
57
|
|
|
31
|
Certification – Section 302:
|
|
|
|
|
31.1
|
Chief Executive Officer Certification
|
58
|
|
|
|
31.2
|
Chief Financial Officer Certification
|
59
|
|
|
32
|
Certification – Section 906:
|
|
|
|
|
32.1
|
Chief Executive Officer Certification
|
60
|
|
|
|
32.2
|
Chief Financial Officer Certification
|
61
|
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|
|
|
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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 28, 2019 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
By:
/s/Anthony
Ambrose________ March 28, 2019
President and Chief Executive
Officer
Anthony Ambrose (Principal
Executive Officer), Director
By:
/s/Joel
S. Hatlen____________ March 28, 2019
Chief Operating and Financial
Officer
Joel S. Hatlen Vice
President
Secretary,
Treasurer
(Principal Financial and Accounting Officer)
By:
/s/Douglas W. Brown_______ _ March 28, 2019
Director
Douglas W. Brown
By:
/s/Brian T. Crowley_______ ___ March 28, 2019
Director
Brian T. Crowley
By:
/s/Alan
B. Howe____________ _ March 28, 2019
Director
Alan B. Howe
By:
/s/Mark
J. Gallenberger_______ March 28, 2019
Director
Mark
J. Gallenberger
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, 2017:
|
|
|
|
|
|
|
|
|
Allowance for bad debts
|
|
$96
|
|
($24)
|
|
$1
|
(1)
|
$73
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018:
|
|
|
|
|
|
|
|
|
Allowance for bad debts
|
|
$73
|
|
$2
|
|
$ -
|
(1)
|
$75
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Uncollectable accounts
|
|
|
|
|
|
|
|
|
|
written off, net of recoveries
|
|
|
|
|
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|
|
EXHIBIT 21.1
DATA I/O
CORPORATION
SUBSIDIARIES
OF THE REGISTRANT
The following table indicates the name,
jurisdiction of incorporation and basis of ownership of each of Data I/O’s
subsidiaries:
Name of Subsidiary
|
State
or Jurisdiction
of
Organization
|
Percentage
of Voting Securities Owned
|
Data I/O International, Inc.
|
Washington
|
100%
|
RTD, Inc.
|
Washington
|
100%
|
|
|
|
Data I/O FSC International, Inc.
|
Territory of Guam
|
100%
|
Data I/O Canada Corporation
|
Canada
|
100%
|
Data I/O GmbH
|
Germany
|
100%
|
Data I/O Electronics (Shanghai) Co.,
Ltd.
|
China
|
100%
|
Data I/O Programação de Sistemas
Ltda.
|
Brazil
|
100%
|
|
|
|
|
|
|
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 28, 2019, with respect to the consolidated financial statements and schedule included in the Annual Report of Data I/O Corporation on Form 10‑K for the year ended December 31, 2018. We consent to the incorporation by reference of said report in the Registration Statements of Data I/O Corporation on Form S‑8 (File Nos. 002-76164, 002-86785, 002-98115, 002-78394, 33-95608, 33-66824, 33-42010, 33-26472, 33-54422, 333-20657, 333-55911, 33-02254, 33-03958, 333-107543, 333-81986, 333-48595, 333-121861, 333-151006, 333-166730, 333-175840 and 333-224971) and on Form S-3 (File No. 333-121566).
/s/Grant Thornton LLP
Seattle, Washington
March 28, 2019
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