daio_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

Commission file number: 0-10394

DATA I/O CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-0864123

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

425-881-6444

(Address of principal executive offices, including zip code)

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

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

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

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

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

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

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

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

Shares of Common Stock, no par value, outstanding as of October 30, 2023: 9,020,798

DATA I/O CORPORATION

FORM 10-Q
For the Quarter Ended September 30, 2023

INDEX
Part I.		Financial Information	Page

	Item 1.	Financial Statements	3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

Part II		Other Information

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25

	Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	25

	Item 3.	Defaults Upon Senior Securities	25

	Item 4.	Mine Safety Disclosures	25

	Item 5.	Other Information	25

	Item 6.	Exhibits	26

Signatures			27

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(UNAUDITED)

	September 30, 2023			December 31, 2022

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,867		$	11,510
Trade accounts receivable, net of allowance for doubtful accounts of $104 and $147, respectively		4,900			4,992
Inventories		6,392			6,751
Other current assets		600			645
TOTAL CURRENT ASSETS		23,759			23,898

Property, plant and equipment – net		955			1,072
Other assets		1,602			2,195
TOTAL ASSETS	$	26,316		$	27,165

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,101		$	1,366
Accrued compensation		1,661			1,670
Deferred revenue		1,304			1,575
Other accrued liabilities		1,511			1,596
Income taxes payable		84			112
TOTAL CURRENT LIABILITIES		5,661			6,319

Operating lease liabilities		871			1,500
Long-term other payables		174			237

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, 9,020,798 shares as of September 30, 2023 and 8,816,381 shares as of December 31, 2022		22,471			21,897
Accumulated earnings (deficit)		(2,789	)		(3,131	)
Accumulated other comprehensive income		(72	)		343
TOTAL STOCKHOLDERS’ EQUITY		19,610			19,109
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	26,316		$	27,165

See notes to consolidated financial statements

Table of Contents

DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022

Net sales	$	6,561		$	7,212		$	21,190		$	16,946
Cost of goods sold		3,041			3,101			8,995			7,774
Gross margin		3,520			4,111			12,195			9,172
Operating expenses:
Research and development		1,577			1,432			4,922			4,605
Selling, general and administrative		2,006			1,967			7,003			5,943
Total operating expenses		3,583			3,399			11,925			10,548
Operating income (loss)		(63	)		712			270			(1,376	)
Non-operating income (loss):
Interest income		41			9			125			11
Gain on sale of assets		-			-			-			57
Foreign currency transaction gain (loss)		(15	)		307			107			378
Total non-operating income (loss)		26			316			232			446
Income (loss) before income taxes		(37	)		1,028			502			(930	)
Income tax (expense) benefit		(16	)		(181	)		(160	)		(700	)
Net income (loss)	($53)			$	847		$	342		($1,630)

Basic earnings (loss) per share	$	(0.01	)	$	0.10		$	0.04		$	(0.19	)
Diluted earnings (loss) per share	$	(0.01	)	$	0.10		$	0.04		$	(0.19	)
Weighted-average basic shares		9,020			8,816			8,914			8,715
Weighted-average diluted shares		9,020			8,859			9,065			8,715

See notes to consolidated financial statements

Table of Contents

DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022

Net income (loss)	$	(53	)	$	847		$	342		$	(1,630	)
Other comprehensive income (loss):
Foreign currency translation gain (loss)		(130	)		(544	)		(415	)		(1,068	)
Comprehensive income (loss)	$	(183	)	$	303		$	(73	)	$	(2,698	)

See notes to consolidated financial statements

Table of Contents

DATA I/O CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(UNAUDITED)

									Accumulated
						Retained			and Other			Total
	Common Stock					Earnings			Comprehensive			Stockholders'
	Shares		Amount			(Deficit)			Income (Loss)			Equity
Balance at December 31, 2021		8,621,007	$	20,886		($2,011)			$	978		$	19,853
Stock awards issued, net of tax withholding		-		-			-			-			-
Issuance of stock through: ESPP		1,362		6			-			-			6
Share-based compensation		-		291			-			-			291
Net income (loss)		-		-			(1,820	)		-			(1,820	)
Other comprehensive income (loss)		-		-			-			(70	)		(70	)
Balance at March 31, 2022		8,622,369	$	21,183		($3,831)			$	908		$	18,260
Stock awards issued, net of tax withholding		191,910		(177	)		-			-			(177	)
Issuance of stock through: ESPP		-		-			-			-			-
Share-based compensation		-		380			-			-			380
Net income (loss)		-		-			(657	)		-			(657	)
Other comprehensive income (loss)		-		-			-			(454	)		(454	)
Balance at June 30, 2022		8,814,279		21,386			(4,488	)		454			17,352
Stock awards issued, net of tax withholding		176		-			-			-			-
Issuance of stock through: ESPP		1,926		6			-			-			6
Share-based compensation		-		264			-			-			264
Net income (loss)		-		-			847			-			847
Other comprehensive income (loss)		-		-			-			(544	)		(544	)
Balance at September 30, 2022		8,816,381		21,656			(3,641	)		(90	)		17,925
Balance at December 31, 2022		8,816,381	$	21,897		($3,131)			$	343		$	19,109
Stock awards issued, net of tax withholding		-		-			-			-			-
Issuance of stock through: ESPP		1,695		7			-			-			7
Share-based compensation		-		249			-			-			249
Net income (loss)		-		-			95			-			95
Other comprehensive income (loss)				-			-			65			65
Balance at March 31, 2023		8,818,076	$	22,153		($3,036)			$	408		$	19,525
Stock awards issued, net of tax withholding		200,799		(368	)		-			-			(368	)
Issuance of stock through: ESPP		-		-			-			-			-
Share-based compensation		-		380			-			-			380
Net income (loss)		-		-			300			-			300
Other comprehensive income (loss)				-			-			(350	)		(350	)
Balance at June 30, 2023		9,018,875		22,165			(2,736	)		58			19,487
Stock awards issued, net of tax withholding		352		(1	)		-			-			(1	)
Issuance of stock through: ESPP		1,571		7			-			-			7
Share-based compensation		-		300			-			-			300
Net income (loss)		-		-			(53	)		-			(53	)
Other comprehensive income (loss)				-			-			(130	)		(130	)
Balance at September 30, 2023		9,020,798		22,471			(2,789	)		(72	)		19,610

See notes to consolidated financial statements

Table of Contents

DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)

	For the Nine Months Ended September 30,
	2023			2022

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	342		$	(1,630	)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization		468			441
Equipment transferred to cost of goods sold		139			317
Share-based compensation		929			934
Net change in:
Trade accounts receivable		25			(619	)
Inventories		241			(1,031	)
Other current assets		35			78
Accounts payable and accrued liabilities		(329	)		(248	)
Deferred revenue		(318	)		438
Other long-term liabilities		(515	)		(731	)
Deposits and other long-term assets		444			511
Net cash provided by (used in) operating activities		1,461			(1,540	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(490	)		(794	)
Cash provided by (used in) investing activities		(490	)		(794	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, less payments for shares withheld to cover tax		(354	)		(165	)
Cash provided by (used in) financing activities		(354	)		(165	)
Increase (decrease) in cash and cash equivalents		617			(2,499	)

Effects of exchange rate changes on cash		(260	)		(650	)
Cash and cash equivalents at beginning of period		11,510			14,190
Cash and cash equivalents at end of period	$	11,867		$	11,041

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	189		$	516

See notes to consolidated financial statements

Table of Contents

DATA I/O CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. Customers for our programming system products are located around the world, primarily in Asia, Europe and the Americas. Our manufacturing operations are currently located in Redmond, Washington, United States and Shanghai, China.

We prepared the financial statements as of September 30, 2023 and September 30, 2022 according to the rules and regulations of the Securities and Exchange Commission ("SEC"). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America according to such SEC rules and regulations. Operating results for the nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Significant Accounting Policies

These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in our Form 10-K for the year ended December 31, 2022 (filed with the SEC on March 30, 2023). There have been no changes to our significant accounting policies described in the Annual Report that have had a material impact on our unaudited condensed consolidated financial statements and related notes.

Revenue Recognition

Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) provides a single, principles-based, five-step model to be applied to all contracts with customers. It generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers when control over the promised goods or services are transferred to the customer.

We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year. During the third quarter of 2023 and 2022, the impact of capitalization of incremental costs for obtaining contracts was immaterial. We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price.

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

Table of Contents

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 analysis considers the complexity, skill and training needed as well as customer expectations regarding installation.

We enter into arrangements with multiple performance obligations that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component. We allocate the transaction price of each element based on relative selling prices. Relative selling price is based on the selling price of the standalone system. For the installation and service and support performance obligations, we use the value of the discount given to distributors who perform these components. For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold. Revenue is recognized on the system sale based on shipping terms, installation revenue is recognized after the installation is performed, and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement, typically one year. Deferred revenue includes service, support and maintenance contracts and represents the undelivered performance obligation of agreements that are typically for one year.

When we license 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 to 60 days from shipment.

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

The following table represents our revenues by major categories:

	Three Months Ended							Nine Months Ended
Net sales by type	September 30, 2023		Change			September 30, 2022		September 30, 2023		Change			September 30, 2022
(in thousands)
Equipment	$	3,820	(5.4		%)	$	4,040	$	12,428		34.0	%	$	9,274
Adapter		1,813	(22.2		%)		2,330		6,059		12.7	%		5,378
Software and Maintenance		928		10.2	%		842		2,703		17.8	%		2,294
Total	$	6,561	(9.0		%)	$	7,212	$	21,190		25.0	%	$	16,946

Share-Based Compensation

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

Table of Contents

Income Tax

Income taxes are computed at current enacted tax rates, less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, and any changes in the valuation allowance caused by a change in judgment about the realization of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.

Recently Adopted Accounting Pronouncements

For the nine months ended September 30, 2023, there were no recently issued accounting pronouncements that had, or are expected to have, a material impact to Data I/O Corporation’s consolidated financial statements. In the first quarter of 2023, ASU 326 became effective for the Company. The adoption of the ASU 326 CECL (Current Estimate of Credit Losses) did not have a material impact to Data I/O Corporation’s consolidated financial statements.

NOTE 2 – INVENTORIES

Inventories consisted of the following components:

	September 30, 2023		December 31, 2022
(in thousands)
Raw materials	$	3,438	$	3,850
Work-in-process		1,865		1,911
Finished goods		1,089		990
Inventories	$	6,392	$	6,751

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET

Property and equipment consisted of the following components:

	September 30, 2023		December 31, 2022
(in thousands)
Leasehold improvements	$	387	$	404
Equipment		4,860		4,683
Sales demonstration equipment		1,006		1,066
		6,253		6,153
Less accumulated depreciation		5,298		5,081
Property and equipment, net	$	955	$	1,072

Table of Contents

NOTE 4 – OTHER ACCRUED LIABILITIES

Other accrued liabilities consisted of the following components:

	September 30, 2023		December 31, 2022
(in thousands)
Lease liability - short term	$	815	$	799
Product warranty		452		425
Sales return reserve		34		71
Other taxes		114		163
Other		96		138
Other accrued liabilities	$	1,511	$	1,596

The changes in our product warranty liability for the nine months ending September 30, 2023, and year ending December 31, 2022, are as follows:

	September 30, 2023			December 31, 2022
(in thousands)
Liability, beginning balance	$	425		$	432
Net expenses		676			774
Warranty claims		(676	)		(774	)
Accrual revisions		27			(7	)
Liability, ending balance	$	452		$	425

NOTE 5 – LEASES

Our leasing arrangements are primarily for facility leases we use to conduct our operations. The following table presents our future lease payments for long-term operating leases as of September 30, 2023:

	Operating Lease Commitments
(in thousands)
2023 (remaining)	$	218
2024		806
2025		588
2026		130
2027		46
Thereafter		-
Total	$	1,788
Less imputed interest		(103	)
Net operating lease liabilities	$	1,685

Cash paid for operating lease liabilities for the three and nine months ended September 30, 2023 was $221,000 and $664,000, respectively. Cash paid for operating lease liabilities for the three and nine months ended September 30, 2022 was $138,000 and $555,000, respectively.

Table of Contents

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

	Balance at September 30, 2023		Balance at December 31, 2022
(in thousands)
Right-of-use assets (Long-term other assets)	$	1,537	$	2,129
Lease liability-short term (Other accrued liabilities)		815		799
Lease liability-long term (Operating lease liabilities)		871		1,500

At September 30, 2023, the weighted average remaining lease term is 2.27 years and the weighted average discount rate used is 5%.

The components of our lease expense for the three and nine months ended September 30, 2023 include operating lease costs of $206,000 and $636,000, respectively, and short-term lease costs of $8,000 and $21,000, respectively. This compares to the three and nine months ended September 30, 2022 with operating lease costs of $209,000 and $642,000 respectively, and short-term lease costs of $8,000 and $35,000, respectively.

The Redmond, Washington headquarters facility lease runs to January 31, 2026. The lease is for approximately 20,460 square feet. The lease for a facility located in Shanghai, China runs to October 31, 2024. This lease is for approximately 19,400 square feet. The lease for our facility located near Munich, Germany runs to August 2027. This lease is for approximately 4,895 square feet.

NOTE 6 – OTHER COMMITMENTS

We have purchase obligations for inventory and production costs as well as other obligations such as capital expenditures, service contracts, marketing, and development agreements. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days. At September 30, 2023, the purchase commitments and other obligations totaled $1.8 million of which all but $256,000 are expected to be paid over the next twelve months.

NOTE 7 – CONTINGENCIES

As of September 30, 2023, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.

NOTE 8 – INCOME TAXES

Income tax benefit (expense) primarily relates to foreign and state taxes. For the comparison period of 2022, the first quarter of 2022 included dividend withholding taxes of $442,000 on a dividend repatriation.

The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes. We have a valuation allowance of $8.8 million as of September 30, 2023. As of September 30, for both 2023 and 2022, our deferred tax assets and valuation allowance have been reduced by approximately $435,000 and $405,000, respectively, associated with the requirements of accounting for uncertain tax positions. Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance.

Table of Contents

NOTE 9 – EARNINGS PER SHARE

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

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

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

	Three Months Ended					Nine Months Ended
	September 30, 2023			September 30, 2022		September 30, 2023		September 30, 2022
(in thousands except per share data)
Numerator for basic and diluted earnings (loss) per share:
Net income (loss)	$	(53	)	$	847	$	342	$	(1,630	)

Denominator for basic earnings (loss) per share:
Weighted-average shares		9,020			8,816		8,914		8,715

Employee stock options and awards		-			43		151		-

Denominator for diluted earnings (loss) per share:
Adjusted weighted-average shares & assumed conversions of stock options		9,020			8,859		9,065		8,715

Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share	$	(0.01	)	$	0.10	$	0.04	$	(0.19	)
Diluted earnings (loss) per share	$	(0.01	)	$	0.10	$	0.04	$	(0.19	)

Options to purchase 12,500 and 12,500 shares, respectively, were outstanding as of September 30, 2023 and 2022, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive.

Table of Contents

NOTE 10 – SHARE-BASED COMPENSATION

For share-based awards granted, we have recognized compensation expense based on the estimated grant date fair value method. For these awards we have recognized compensation expense using a straight-line amortization method reduced for estimated forfeitures.

The impact on our results of operations of recording share-based compensation, net of forfeitures, for the three and nine months ended September 30, 2023 and 2022, respectively, were as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
(in thousands)
Cost of goods sold	$	24	$	18	$	72	$	58
Research and development		64		58		193		191
Selling, general and administrative		212		188		664		686
Total share-based compensation	$	300	$	264	$	929	$	935

Equity awards granted during the three and nine months ended September 30, 2023 and 2022 were as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

Restricted Stock Units		75,000		1,000		357,100		327,715
Performance Stock Units		5,000		-		30,000		-

Non-employee directors Restricted Stock Units (“RSUs”) typically vest over the earlier of one year or the next annual meeting of shareholders and Non-Qualified stock options vest over three years and have a six-year exercise period. Employee RSUs typically vest annually over three or four years and employee Non-Qualified stock options typically vest quarterly over four years and have a six-year exercise period. Performance Stock Units (“PSUs”) typically cliff vest at the end of the performance period and the performance metric is cumulative revenue growth over the three-year period ending December 31, 2025 with a cumulative revenue threshold, target, and maximum.

Table of Contents

The remaining unamortized expected future equity compensation expense and remaining amortization period associated with award grants of unvested options, PSUs and RSUs at September 30, 2023 and 2022 are:

	September 30, 2023		September 30, 2022

Unamortized future equity compensation expense (in thousands)	$	2,731	$	2,371
Remaining weighted average amortization period (in years)		2.60		2.64

The weighted average number of shares outstanding used to compute earnings (loss) per share included the following:

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

Restricted Stock Units		71,903		43,030		148,529		113,193
Performance Stock Units		679		-		599		-
Stock Options		220		170		231		204

Table of Contents

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

General

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves as long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking. In particular, statements herein regarding economic outlook, impact of COVID-19 including recovery from the shutdown in Shanghai, China; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; expected expenses, breakeven revenue point; expected market decline, bottom or growth; market acceptance of our newly introduced or upgraded products or services; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new products or services; changing foreign operations; taxes, trade issues and tariffs; expected inventory levels; expectations for unsupported platform or product versions and related inventory and other charges; Russian invasion of Ukraine impacts; supply chain expectations; semiconductor chip shortages and recovery; and any other guidance on future periods are forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or other future events. Moreover, neither Data I/O nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report. The Reader should not place undue reliance on these forward-looking statements. The discussions above and in the section in Item 1A., Risk Factors “Cautionary Factors That May Affect Future Results” in our Annual report on Form 10-K for the year ended December 31, 2022, describe some, but not all, of the factors that could cause these differences.

OVERVIEW

The third quarter of 2023 reflects softer demand in China, Germany and the United States. This resulted in a small loss for the quarter. The prior year comparisons reflect impacts from last year’s Shanghai reopening after the COVID-19 shutdown.

COVID-19 Background and Update

We have continued to react to, and manage our business relative to, the COVID-19 pandemic. During parts of the first and second quarters of 2022, our Shanghai facility and operations were shut down for two and a half months as required by China pursuant to their zero-COVID policy. Our resilient supply chain model and remote work were able to support our customers. We resumed normal Shanghai operations early in 2023. We believe that our China demand was soft during the first three quarters of 2023 due to both COVID-19 recovery in China and customers responding to the implications of new emission standards effective mid-year.

Other Major Impacts

The war in Ukraine starting in early 2022, while having little direct impact on us from Russia or Ukraine, affected supply chains, shipping, European economic uncertainty and energy concerns. Inflation impacted everyone. We believe we were able to adequately address inflation with pricing adjustments such that our margins were mostly maintained. The strengthening of the dollar in 2022 created headwinds for revenues, as typically over 90% of our business is international. Interest rate hikes by central banks were a concern, especially for cyclical industries with resulting worries about capital spending and planning for recessionary impacts. Certain labor markets were tight during the year causing recruiting challenges. The impact of semiconductor chip shortages, that began mid-2021 and continued well into 2022, are not completely resolved yet in 2023. Many of the issues described in the overview have caused supply chain disruptions and lead-time unreliability, which we have managed carefully by maintaining and increasing key inventory levels. We believe there is less risk exposure on these issues, and we are now reducing inventory levels and expect to continue reducing inventory through 2023. The economic challenges resulting from the war in Ukraine and inflation have likely caused Germany to enter into a recession in 2023. We believe that this and challenges related to the expected shift from Internal Combustion Engines (ICE) to Electric Vehicles (EV) have impacted short-term demand in Germany. In the United States, we believe uncertainty related to automotive labor strikes softened demand and pushed out expected end of the quarter orders. We have been experiencing stronger orders during October from our automotive electronics customers and the labor strikes having been resolved.

Table of Contents

2023

The strong dollar impact that started to reverse during the fourth quarter of 2022, has provided tail winds for revenue in the first and second quarter of 2023, especially versus the Euro. During the third quarter of 2023 the US dollar strengthened again causing revenue head winds. Macroeconomic news, while improving, continued to be fairly negative. On a more positive note, inflation, while still elevated, appears to be diminishing. Interest rates continue to be higher, but an anticipated recession has not occurred outside of Germany. COVID-19, semiconductor shortages, shipping & supply chain issues, and domestic labor tightness slowing recruiting, are improving situations and no longer top of mind. Travel, trade shows, and face-to-face customer meetings are happening. We think our new capabilities of supplier resilience, inventory and production in multiple locations, leveraging remote and virtual services, are capabilities to retain and build upon. We continue to focus on managing our costs carefully and growth-oriented strategies.

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. At Data I/O, we are investing for the long-term to retain and extend our leadership position in automotive electronics and security deployment. We are continuing to develop technology to securely provision newer categories of semiconductors, including Secure Microcontrollers, Authentication Chips, and Secure Elements. 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, eMMC, UFS and microcontrollers on our newer products.

Our customer focus has been on global and strategic high-volume manufacturers in key market segments like automotive electronics, IoT, industrial controls and consumer electronics, as well as programming centers. Although the long-term prospects for our strategic growth markets should remain good, these markets and our business have been, and are likely to continue to be, adversely impacted by COVID-19 and other global political and economic factors. In particular, the continued outlook by industry analysts for automotive electronics, which remains our primary market focus, remains strong based on the long-term forecast for a decade. The move to EV in particular is expected to be a strong demand driver as electronic content in each EV is estimated to be 2-3 times that of a standard ICE vehicle.

On the product side, we continue to invest with a long-term focus towards expanding our markets and creating unique value for our customers. This is true for both our traditional core business as well as the emerging security deployment business. Our strong cash position and balance sheet, combined with our long-term view of the market, gives us the financial flexibility to make these investments.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, sales returns, bad debts, inventories, income taxes, warranty obligations, restructuring charges, contingencies such as litigation and contract terms that have multiple elements and other complexities typical in the capital equipment industry. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Table of Contents

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements:

Revenue Recognition: Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) provides a single, principles-based, five-step model to be applied to all contracts with customers. It generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers when control over the promised goods or services are transferred to the customer.

We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year. During 2023 and 2022 , the impact of capitalization of incremental costs for obtaining contracts was immaterial. We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price.

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 analysis considers the complexity, skill and training needed, as well as customer expectations regarding installation.

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.

Table of Contents

Allowance for Doubtful Accounts: We base the allowance for doubtful accounts receivable (Current Estimate of Credit Losses) on our assessment of the credit losses collectively expected for the future, as well as 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, or events forecast that collectively indicate some impairment is expected, our estimates of the recoverability of amounts due to us could be adversely affected.

Inventory: Inventories are stated at the lower of cost or net realizable value. Adjustments are made to standard cost, which approximates actual cost on a first-in, first-out basis. We estimate reductions to inventory for obsolete, slow-moving, excess and non-salable inventory by reviewing current transactions and forecasted product demand. We evaluate our inventories on an item-by-item basis and record inventory adjustments accordingly. If there is a significant decrease in demand for our products, uncertainty during product line transitions, or a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory adjustments, and our gross margin could be adversely affected.

Warranty Accruals: We accrue for warranty costs based on the expected material and labor costs to fulfill our warranty obligations. If we experience an increase in warranty claims, which are higher than our historical experience, our gross margin could be adversely affected.

Tax Valuation Allowances: Given the uncertainty created by our loss history, as well as the current and ongoing cyclical and COVID-19 pandemic related uncertain economic outlook for our industry, capital and geographic spending, as well as income and current net deferred tax assets by entity and country, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances. At the current time, we expect, therefore, that reversals of the tax valuation allowance will take place as we are able to take advantage of the underlying tax loss or other attributes in carry forward or their use by future income or circumstances allow us to realize these attributes. The transfer pricing and expense or cost sharing arrangements are complex areas where judgments, such as the determination of arms-length arrangements, can be subject to challenges by different tax jurisdictions.

Share-based Compensation: We account for share-based awards made to our employees and directors, including employee stock option awards, performance stock unit awards and restricted stock unit awards, using the estimated grant date fair value method of accounting. For options, we estimate the fair value using the Black-Scholes valuation model and an estimated forfeiture rate. Restricted stock unit awards and performance 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 options, performance and restricted stock unit 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.

Table of Contents

RESULTS OF OPERATIONS:

NET SALES

	Three Months Ended						Nine Months Ended
Net sales by product line	September 30, 2023		Change		September 30, 2022		September 30, 2023		Change			September 30, 2022
(in thousands)
Automated programming systems	$	5,267	(2.7	%)	$	5,414	$	17,129		32.4	%	$	12,934
Non-automated programming systems		1,294	(28.0	%)		1,798		4,061		1.2	%		4,012
Total programming systems	$	6,561	(9.0	%)	$	7,212	$	21,190		25.0	%	$	16,946

	Three Months Ended						Nine Months Ended
Net sales by location	September 30, 2023		Change		September 30, 2022		September 30, 2023		Change			September 30, 2022
(in thousands)
United States	$	278	(59.4	%)	$	684	$	2,225		49.5	%	$

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