daio_10k

10-K 1 daio_10k.htm ANNUAL REPORT daio_10k

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2020

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

For the transition period from _____________ to _____________

Commission file number: 0-10394

DATA I/O CORPORATION

(Exact name of registrant as specified in its charter)

Washington	91-0864123
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

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

(425) 881-6444

(Address, including zip code, of registrant’s principle executive offices and telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	DAIO	NASDAQ

Securities registered pursuant to Section 12(g) of the Act

None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, ”accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Accelerated filer ☐	Smaller reporting company ☒
Large accelerated filer ☐	Emerging growth company ☐
Non-accelerated filer ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Aggregate market value of voting and non-voting common equity held

by non-affiliates on the registrant as of June 30, 2020:

$27,952,330

Shares of Common Stock, no par value, outstanding as of March 22, 2021:

8,421,599

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to its May 20, 2021 Annual Meeting of Shareholders are incorporated into Part III of this Annual Report on Form 10-K.

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DATA I/O CORPORATION

FORM 10-K

For the Fiscal Year Ended December 31, 2020

INDEX

Part I			Page

	Item 1.	Business	3

	Item 1A.	Risk Factors	11

	Item 1B.	Unresolved Staff Comments	21

	Item 2.	Properties	21

	Item 3.	Legal Proceedings	21

	Item 4.	Mine Safety Disclosures	21

Part II

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22

	Item 6.	Selected Financial Data	22

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	30

	Item 8.	Financial Statements and Supplementary Data	30

	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55

	Item 9A.	Controls and Procedures	56

	Item 9B.	Other Information	56

Part III

	Item 10.	Directors, Executive Officers and Corporate Governance	57

	Item 11.	Executive Compensation	57

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	57

	Item 13.	Certain Relationships and Related Transactions and Director Independence	58

	Item 14.	Principal Accounting Fees and Services	58

Part IV
	Item 15.	Exhibits, Financial Statement Schedules	59

	Item 16.	Form 10-K Summary	63

Signatures			64

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PART I

Item 1. Business

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on current expectations, estimates and projections about Data I/O Corporation’s industry, management’s beliefs and certain assumptions made by management. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements.”

General

Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) is a global market leader for advanced programming, security deployment, security provisioning and associated Intellectual Property (“IP”) protection and management solutions used in electronics manufacturing with flash memory, microcontrollers, and flash memory-based intelligent devices as well as secure element devices, authentication devices and secure microcontrollers. We collectively refer to IP protection, security provisioning of devices, provisioning of security into devices, and related services such as cloud onboarding and device and provisioning documentation management as “security deployment”. Data I/O® designs, manufactures and sells programming and security deployment systems and services for electronic device manufacturers, specifically targeting high-growth areas such as high-volume users of flash memory and flash memory-based microcontrollers. Most electronic products today incorporate a number of programmable semiconductor devices that contain data, operating instructions and security credentials essential for the proper operation of the product and more and more products require security deployment.

Our mission is to bring the world’s electronic devices to life. Programmable devices are used in products such as automobile electronics, smartphones, HDTV, tablets, gaming systems and a broad category called Internet of Things (“IoT”). IoT is a broad term that addresses the interconnectivity of devices and other electronic or smart products. Our solutions, some of which include security deployment and process control capabilities, enable us to address the demanding requirements of the electronic device market, where applications security and IP protection are essential to our customer’s success. Our largest customers are heavy users of programmable semiconductor devices and include original equipment manufacturers (“OEMs”) in automotive electronics, consumer electronics and IoT markets as well as their programming center partners and electronic manufacturing service (“EMS”) contract manufacturers.

Data I/O was incorporated in the State of Washington in 1969 and its business was founded in 1972. Our website address is www.dataio.com.

COVID-19

In 2020, we had to react to the global COVID-19 pandemic. COVID-19 has impacted all aspects of our business, from customer demand, to supply chain integrity, employee safety, business processes, and financial management. As a global company, we had to manage each of these while working within the guidelines of local and national policy in the U.S., China and Germany. Our philosophy at the start of the outbreak was simple:

Keep our people and their families safe;

Keep our facilities safe and operational while we serve our customers as an essential business; and

Preserve cash.

We have managed this issue successfully to date, with no known employee transmissions in the workplace and significant preservation of our cash and working capital throughout the year. Our resilient supply chain model kept our facilities in Shanghai, China and Redmond, Washington open, and serving customers globally. We supported customers rapidly transitioning to medical device support. We did this while facing unique international travel restrictions, shipping delays, and inability to meet with customers in person. All the while we preserved and slightly grew our cash balances, while moving more cash to the U.S.

COVID-19 has continued to impact our demand, particularly capacity related, evidenced by many automotive and other plant shut downs in the second quarter, their re-openings and now, in a believed ripple effect, the impact of chip shortages on their production plans. This appears to be a short-term issue and the outlook for automotive electronics remains strong for a decade. Waves of COVID-19 infection rates have kept or re-imposed revised travel restrictions. Customers largely have not permitted in-person sales and other visits. Converting these interactions to remote and virtual means has meant new processes and technology usage.

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In production, in addition to adding protective health measures for our employees, we have focused on supply chain resilience and duplicating production capability for some products in both our Shanghai, China and Redmond, USA facilities. We implemented additional supplier financial and other monitoring, as well as adding additional local suppliers and increasing inventory stock levels of key parts. Other than production employees who necessarily are onsite, most Redmond employees are working remotely with some flexibility to be onsite and this is expected to continue until COVID-19 risks are reduced by vaccination coverage.

Industry Background

We enable companies to improve productivity, increase supply-chain security and reduce costs by providing device data programming and security deployment solutions that allow our customers to take IP (large design and data files) and protect and program it into memory, microcontroller and logic devices quickly and cost-effectively. We also provide services related to hardware support, system installation and repair, and device programming. Companies that design and manufacture products utilizing programmable electronic devices, ranging from automobiles to cell phones, purchase programming solutions from us. Trends of increasing device densities, shrinking device packages, increased demands for security, and customers increasing their software content file sizes, combined with the increasing numbers of intelligent devices such as automotive electronics and IoT applications, are driving demand for our solutions.

Traditionally, our programming market opportunity focused on the number of semiconductor devices to be programmed, but because of the rapid increase in the density of devices, and increasing demands for supply-chain security, the focus has shifted in many cases from the number and type of devices to the number and type of bits per device to be programmed or securely provisioned. With expected growth in IoT applications, the business opportunity for this market differentiates on quality, security and automation.

Some of our automated programming systems integrate data programming, automated handling functions and/or security deployment into a single product solution. During 2020, we continued to simplify and integrate security deployment into some of our solutions. Quality and security-conscious customers, particularly those in high-volume manufacturing and programming, drive this portion of our business.

Products

To accommodate the expanding variety and quantities of programmable devices being manufactured today, we offer multiple solutions for the numerous types of device mix and volume usage by our customers in the various market segments and applications. We work closely with leading manufacturers of programmable devices to develop our products to meet the requirements of a particular device. Our newer products are positioned and recognized as some of the most advanced programming and security deployment solutions.

Our programming solutions include a broad range of products, systems, modules and accessories, grouped into two general categories: automated programming systems and manual programming systems. We provide two categories of automated programming systems: off-line and in-line. Our PSV family of automated programming systems delivers a broad range of programming capacity and capability to the marketplace. Our recently announced PSV2800 Automated Programming System focuses on dedicated high-volume manufacturing in a lower cost platform. Our PSV7000 Automated Programming System continues to be well adopted in the marketplace, in particular for automotive electronics customers and as a base for security deployment upgrades. Our PSV5000 automated programming system combines mid-range capacity and flexibility with competitive pricing. Our PSV3000 Automated Programming System, developed for the Asian automation market, is a lower cost platform for basic programming needs. Our PSV family of handlers has won multiple industry awards for technical excellence and innovation. In 2018 our Lumen®X programmer won five industry awards for Universal Flash Storage (“UFS”) support. Our ConneX® software won the 2017 Circuits Assembly NPI Award, the EM Asia Innovation Award and the SMT China Vision Award. Our SentriX® security provisioning system won the Global Technology Award at Productronica and the Embedded Award for Innovation at the Embedded World show. Our Job Composer software for LumenX won the Circuits Assembly NPI Award in January 2019 and January 2020. In October 2019 our Job Composer software won the Mexico Technology Award for Device Programming and in November 2019, our PSV2800 won the Global Technology Award at Productronica and in February 2020, the Circuits Assembly NPI Award. In January 2019 and February 2020, Data I/O won the Circuits Assembly Service Excellence Award.

Our automated systems have list selling prices ranging from $75,000 to $615,000 and our manual systems have list selling prices ranging from $10,000 to $35,000. Our security deployment system, SentriX®, is currently offered for security provisioning on a pay per part use basis along with related fees.

Data I/O programming technology is integrated with the PSV family to create highly-flexible systems that deliver outstanding performance with low total cost of ownership. The LumenX programming engine is the fastest solution available for eMMC and UFS programming of large NAND FLASH. Increasing memory densities and the need for faster data interfaces are resulting in an expected transition to the use of UFS devices. LumenX is available on our PSV7000 and PSV5000 and as a standalone manual programmer. FlashCORE™, and our universal job setup tool, Tasklink™ for Windows®, are available in each family of our automated programming systems and in FlashPAK™, our manual programming system. The SentriX security system adds security deployment capability to our data programming system. SentriX allows customers of any size and demand-profile to securely add keys, certificates, and other security information to specialized regions of authentication integrated circuits ("ICs”), secure elements and secure microcontrollers. We provide device support and service on all of our products. Device support is a critical aspect of our business and consists of writing software algorithms for devices and developing socket adapters to hold and connect to the device for programming.

Our products have both an upfront solution sale and recurring revenue elements. Adapters are a consumable item and software and maintenance are typically recurring under subscription contracts. Our SentriX system revenue typically comes from per part use fees, set-up or minimum quarterly fees, consumables, non-recurring engineering fees, service fees and the sale of equipment related to SentriX.

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Sales Percentage of Total Sales Breakdown by Type
Sales Type	2020	2019	Drivers
Equipment Sales	56%	58%	Capacity, Process improvement, Technology
Adapter Sales	28%	26%	Capacity utilization, New customer products
Software and Maintenance Sales	16%	16%	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 3000 devices per hour throughput ● UFS Support ● Supports LumenX and FlashCORE III programmers ● Supports multiple media types ● Supports quality options – fiber laser marking, 3D coplanarity ● ConneX Factory Integration, Job Composer & other Software	● Managed and secure programming ● High throughput for high density Flash programming ● High flexibility with respect to I/O options (tray, tape, tube), marking/labeling and vision for coplanarity inspection
SentriX Security Deployment 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/K&S ● Factory Integration Software ● Supports FlashCORE III programmers	● Dramatic reduction in inventory carrying and rework costs ● “Zero” footprint ● Rapid return on investment (“ROI”) typically realized in a matter of months ● Integration with factory systems
LumenX Programmer	● Extensible architecture for fast program, verify and download speeds ● Supports UFS, microcontrollers, Serial FLASH and other device types ● Large file size support ● Secure Job creation ● 8 sockets with tool-less changeover with single socket adapters	● 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 ● Support for legacy devices

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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	Borg Warner, Bosch, Alpine, Visteon, Kostal, Harman Becker, Denso, Continental, Panasonic, Magna, Marelli	LG, TCL, Siemens, Danfoss, Philips, Schneider, Endress+Hauser, Insta, Microsoft, Sony, Amazon, UTEC	Pegatron, Flextronics, Jabil, Wistron, Sanmina SCI, Foxconn, Leesys, Calcomp	Arrow, Avnet, BTV, CPS, EPS, Elsil, Elmitech, Noa Leading
Business drivers	Infotainment, Advanced Driver Assist (ADAS), Electrification, Connectivity and Security	Higher functionality driven by increasing electronic content. Shift from analog to connected intelligent devices, security	Production contract wins	Value-added services, logistics, security
Programming equipment drivers	Growing Electronic Content, Global Support, Resilient Supply Chains, new product rollouts, growing file sizes, quality control and traceability, security	Growing Electronic Content, need for IP protection. Process improvement and simplification as well as new product rollouts, memory and new technology, security	New contracts from OEMs, programming solutions specified by OEMs	Capacity utilization of their installed base of equipment, small parts handling, security
Buying criteria	Quality, reliability, configuration control, traceability, global support, IP protection, security	Quality, reliability, configuration control, traceability, global support, IP protection, Security.	Lowest equipment procurement cost, global support	Flexibility, lowest life-cycle cost-per programmed-part, low changeover time; use of multiple vendors provides negotiating leverage, device support availability
Security Deployment	End customer focus	End customer focus	End customer and partner Focus	Current partner focus of our SentriX deployments

Our solutions address the data programming of devices and security deployment needs of programmable semiconductor devices. Semiconductor devices are a large, growing market, in terms of devices, bits programmed and need for security. We believe that our sales are driven by many of the same forces that propel the semiconductor industry. We sell to the same firms that buy the semiconductors. When their business grows, they buy more semiconductors which, in turn, require additional programming equipment to maintain production speeds or program new device technologies.

Our device programming solutions currently target two high volume, growing markets: automotive electronics and IoT systems including Industrial and Consumer devices.

Growth drivers for automotive electronics

●

Consumers desire advanced car features requiring higher levels of sophistication, including autonomous cars, infotainment options (audio, radio, dashboard displays, navigation), ADAS, wireless connectivity and electrification

●

Proliferation of programmable microcontrollers to support the next-generation electronic car systems

●

Increasing use of high-density flash to provide memory for advanced applications that require programming

●

Increasing complexity to support autonomous vehicles

●

Increasing need for security solutions for a secure supply chain and lifecycle firmware integrity

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Growth drivers for IoT: including industrial, consumer electronics and wireless

●

Securely controlling groups of connected devices through a secure supply chain and lifecycle firmware integrity management

●

Adding intelligence and processing into devices

●

Connecting previously unconnected devices to networks and the internet (such as smart home, including intelligent thermostats and lighting)

●

Emergence of new devices and applications (such as health and wellness wearable devices and applications)

All of the above growth drivers are long term and are likely to be adversely impacted, at least temporarily, due to the global pandemic of COVID-19 in our markets. Annual projections on spending, growth, mix, and profitability are likely to be revised substantially as new information is obtained.

Diversification of accounts receivable and net sales

During 2020, we sold products to approximately 200 customers throughout the world.

The following represented greater than 10% of net sales for the applicable year

Percentage of Net Sales	2020	2019	2018

Number of customers	1	1	2

Approximate percentage of net sales	12%	11%	29%

Percentage of each	12%	11%	16%
Percentage of each	n/a	n/a	13%

The following represented greater than 10% of our consolidated accounts receivable for the applicable year:

Percentage of Consolidated Accounts Receivable	2020	2019	2018

Number of customers	3	2	3

Approximate percentage of consolidated accounts receivable balance	41%	32%	35%

Percentage of each	17%	17%	12%
Percentage of each	12%	15%	12%
Percentage of each	12%	n/a	11%

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Geographic Markets and Distribution

We market and sell our products through a combination of direct sales, internal telesales, indirect sales representatives and distributors, as well as services through programming centers. We continually evaluate our sales channels against our evolving markets and customers and realign them as necessary to ensure that we reach our existing and potential customers in the most effective and efficient manner possible.

U.S. Sales

We market our products throughout the U.S. using a variety of sales channels, including our own field sales management personnel, independent sales representatives and direct telesales. Our U.S. independent sales representatives obtain orders on an agency basis, with shipments made directly to the customer by us. Net sales in the U.S. for 2020, 2019 and 2018 were (in millions) $1.5, $1.7 and $3.4, respectively. Some of our customers’ orders delivered internationally are heavily influenced by U.S. sales-based efforts.

International Sales

International sales represented approximately 93%, 92% and 88% of net sales in 2020, 2019 and 2018, respectively. We make foreign sales through our wholly-owned subsidiaries in Germany and China, as well as through independent distributors and sales representatives operating in 45 countries. Our independent foreign distributors purchase our products for resale and we generally recognize the sale at the time of shipment to the distributor. As with U.S. sales representatives, sales made by international sales representatives are on an agency basis, with sales made directly to the customer by us.

Net international sales for 2020, 2019 and 2018 were (in millions) $18.8, $19.8 and $25.8, respectively. We determine international sales by the international geographic destination into which the products are sold and delivered, and include not only sales by foreign subsidiaries but also export sales from the U.S. to our foreign distributors and to our representatives’ customers. International sales do not include transfers between Data I/O and our foreign subsidiaries. Export sales are subject to U.S. Department of Commerce regulations. We have not, however, experienced difficulties to date as a result of these requirements. Our products typically do not require export licenses. We have not made sales to Iran or any Iranian governmental entities or any other blacklisted companies or countries.

Fluctuating exchange rates and other factors beyond our control, such as the coronavirus, international monetary stability, tariff and trade policies and U.S. and foreign tax and economic policies, may affect the level and profitability of international sales. We cannot predict the effect of such factors on our business, but we try to consider and respond to changes in these factors, particularly as the majority of our costs are U.S. based while the vast majority of our sales are international.

Competition

The competition in the programming systems market is highly fragmented with a small number of organizations selling directly competitive solutions and a large number of smaller organizations offering less expensive solutions. In particular, low cost automated solutions have gained market share in recent years, where the competition is primarily based on price. Typically, their equipment meets a “good enough” standard, but with reduced quality, traceability, upgradability, security and other software features such as factory integration software. Many of these competitors compete on a regional basis, with local language and support. Although competition in the security deployment market is developing, we expect competition in the market to increase as security deployment becomes more important. There are alternative security deployment solutions such as software-based security, rather than the hardware-based security of our SentriX equipment.

In addition, we compete with multiple substitute forms of device programming including “home grown” solutions. Programming after device placement may be done with In Circuit Test (“ICT”), In System Programming (“ISP”), and End of Line Downloading (“EOL”). Some automotive products may also be programmed over the air (“OTA”). IoT devices may also be programmed with ICT, ISP, EOL or OTA. In addition, new security devices may be required to be programmed using device-specific programmers developed by the semiconductor manufacturer.

While we are not aware of any published industry market information covering the programming systems or security deployment market, according to our internal analysis of competitors’ revenues, we believe we continue to be the largest competitor in the programming systems equipment market and have been gaining market share in recent years, especially with our new products.

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Manufacturing, Raw Materials and Backlog

We strive to manufacture and provide the best solutions for advanced programming. We primarily assemble and test our products at our principal facilities in Redmond, Washington and Shanghai, China. Both of these locations are ISO 9001:2015 certified. We outsource our circuit board manufacturing and fabrication. As a resilient supply chain strategy, we manufacture various products in both of our production facilities. This strategy allows opportunity to mitigate some of the risks of having only one location, as well as enabling tariff and tax optimization strategies. We use a combination of standard components and fabricated parts manufactured to our specifications. Most components used are available from a number of different suppliers and subcontractors but certain items, such as some handler and programmer and security deployment subassemblies, custom integrated circuits, hybrid circuits and connectors, are purchased from single sources. We believe that additional sources can be developed for present single-source components without significant difficulties. We cannot be sure that single-source components will always continue to be readily available. If we cannot develop alternative sources for these components, or if we experience deterioration in relationships with these suppliers, there may be price increases, minimum order quantities, end of life purchase requirements, costs associated with integrating alternatively sourced parts, and delays or reductions in product introductions or shipments, which may materially adversely affect our operating results.

In accordance with industry practices, generally all orders are subject to cancellation prior to shipment without penalty, except for contracts calling for custom configuration. To date, such cancellations have not had a material effect on our sales volume. To meet customers’ delivery requirements, we manufacture certain products based upon a combination of backlog and anticipated orders. Most orders are scheduled for delivery within 1 to 90 days after receipt of the order. Our backlog of pending orders was approximately (in millions) $3.9, $2.9 and $1.9 as of December 31, 2020, 2019 and 2018, respectively. The size of backlog at any particular date is not necessarily a meaningful indicator of the trend of our business.

Research and Development

We believe that continued investment in research and development is critical to our future success. We continue to develop new technologies and products and enhance existing products. Future growth is, to a large extent, dependent upon the timely development and introduction of new products, as well as the development of technology and algorithms to support the latest programmable devices. Where possible, we may pursue partnerships and other strategic relationships to add new products, capabilities and services, particularly in security deployment. We are currently focusing our research and development efforts on strategic growth markets, including automotive electronics, IoT and security deployment. We are continuing to develop technology for security deployment to program new categories of semiconductors, including Secure Elements, TPMs, Authentication Chips, and Secure Microcontrollers. We plan to deliver new programming technology, automated handling systems and enhancements for security deployment in the manufacturing environment. We also continue to focus on increasing our capacity and responsiveness for new device support requests from customers and programmable integrated circuit manufacturers by revising and enhancing our internal processes and tools. Our research and development efforts have resulted in the release of significant new products and product enhancements over the past several years.

During 2020, 2019 and 2018, we made expenditures for research and development of (in millions) $6.4, $6.5 and $7.4, respectively, representing 31%, 29.9% and 25.2% of net sales, respectively. Research and development costs are generally expensed as incurred.

Patents, Copyrights, Trademarks and Licenses

We rely on a combination of patents, copyrights, trade secrets and trademarks to protect our IP, as well as product development and marketing skill to establish and protect our market position. We continue to apply for and add new patents to our patent portfolio as we develop strategic new technologies.

We attempt to protect our rights in proprietary systems (architecture, implementations, software), including the SentriX Security Deployment System. We attempt to protect our software, including Lumen®X software, Flashcore software, TaskLink software, ConneX smart programming software and other software products, by retaining the title to and copyright of the software and documentation, by including appropriate contractual restrictions on use and disclosure in our licenses, and by requiring our employees to execute non-disclosure agreements. Our software products are not typically sold separately from sales of programming systems. However, when we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon shipment, provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions, if any, have been met.

Because of the rapidly changing technology in the semiconductor, electronic equipment and software industries, portions of our products might infringe upon existing patents or copyrights, and we may be required to obtain licenses or discontinue the use of the infringing technology. We believe that any exposure we may have regarding possible infringement claims is a reasonable business risk similar to that assumed by other companies in the electronic equipment and software industries. However, any claim of infringement, with or without merit, could be costly and a diversion of management’s attention, and an adverse determination could adversely affect our reputation, preclude us from offering certain products, and subject us to substantial liability. As of December 31, 2020, there were no pending actions regarding infringement claims.

SEC Form 10-K filed by Data I/O Corporation