Data I/O (DAIO) - 2020 Q4 - Annual Report

PART I Item 1. Business Data I/O Corporation is a global leader in advanced programming and security deployment solutions for electronics manufacturing, navigating 2020's COVID-19 impacts while continuing product development - Data I/O is a global market leader in advanced programming, security deployment, and IP protection solutions for electronics manufacturing, focusing on flash memory, microcontrollers, and secure element devices[11] - The company's mission is to 'bring the world's electronic devices to life,' serving OEMs in automotive electronics, consumer electronics, and IoT markets, as well as programming center partners and EMS contract manufacturers[12] - In 2020, Data I/O successfully managed the COVID-19 pandemic by prioritizing employee safety, maintaining operational facilities in Shanghai and Redmond, and preserving cash and working capital, despite impacts on demand, travel restrictions, and chip shortages[14][15][16] - The company's product offerings include automated programming systems (PSV family, LumenX programmer) and manual programming systems (FlashPAK), with prices ranging from $10,000 to $615,000, and the SentriX security provisioning system is offered on a pay-per-part use basis[23][24][25] Sales Type | Sales Type | 2020 Sales Percentage of Total Sales | 2019 Sales Percentage of Total Sales | | :------------------------------- | :----------------------------------- | :----------------------------------- | | Equipment Sales | 56% | 58% | | Adapter Sales | 28% | 26% | | Software and Maintenance Sales | 16% | 16% | Item 1A. Risk Factors Data I/O faces various risks, including ongoing COVID-19 effects, trade tensions, slow market adoption for new products, rapid technological changes, and reliance on single-source suppliers - The COVID-19 pandemic has significantly impacted Data I/O's business globally, affecting revenues, supply chains, employee safety, and customer engagement, with 93% of 2020 sales in international markets[71][72] - Changes in tariffs and trade issues, particularly between the U.S. and China, have negatively impacted gross margins and created business uncertainty, leading to some customers shifting production away from China[74][75][76] - New product and service initiatives, especially in security deployment, face risks of slow market development and potential non-acceptance of new business models (e.g., pay-per-use), which could affect return on investment[78][79] - Failure to adapt to rapid technological changes in the industry, such as new device package types, flash technology speeds, and proprietary security protocols, could negatively impact competitiveness and financial results[81][82] - The company's concentration in automotive electronics (53% of orders in 2020) makes it vulnerable to demand fluctuations in this sector and increasing customer requirements for quality standards and liability[84] - Reliance on a small number of single-source suppliers for key components poses risks of shortages, price increases, and delays in product introductions or shipments[102][103][104] - International operations, which account for a significant majority of sales (93% in 2020), expose the company to risks from foreign currency fluctuations, economic uncertainty, regulatory changes, and difficulties in collecting foreign receivables[111][113][115] - The company has a history of operating losses in four of the last ten years and may need to raise additional capital, with future access to funding being uncertain[120][123][126] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report for the period - The company has no unresolved staff comments as of the reporting date[135] Item 2. Properties Data I/O operates its principal facilities in Redmond, Washington, and has leased offices in Shanghai, China, and near Munich, Germany - Data I/O's principal facilities are located in Redmond, Washington (approx. 20,460 sq ft, lease until July 31, 2022), Shanghai, China (approx. 19,400 sq ft, lease until October 31, 2021), and near Munich, Germany (approx. 4,895 sq ft, lease until February 28, 2022, with a 5-year extension option)[136][137][138][139] Annual Lease Payments (in thousands) | Location | 2020 Annual Rental Payments | 2019 Annual Rental Payments | | :---------------- | :-------------------------- | :-------------------------- | | Redmond, WA | $361 | $351 | | Shanghai, China | $301 | $305 | | Munich, Germany | $62 | $57 | Item 3. Legal Proceedings As of December 31, 2020, Data I/O was not involved in any legal proceedings or indemnification claims that would materially adversely affect its operations or financial position - As of December 31, 2020, Data I/O was not a party to any legal proceedings or aware of any indemnification agreement claims that would have a material adverse effect on its results of operations or financial position[140] Item 4. Mine Safety Disclosures This item is not applicable to Data I/O Corporation - Mine Safety Disclosures are not applicable to Data I/O Corporation[141] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Data I/O's Common Stock is listed on the NASDAQ Capital Market under the symbol DAIO, with 431 shareholders of record as of March 22, 2021, and no regular cash dividends anticipated - Data I/O's Common Stock is listed on the NASDAQ Capital Market with the symbol DAIO[144] - As of March 22, 2021, there were approximately 431 shareholders of record[145] - The company has not paid cash dividends on its Common Stock since a special dividend in March 1989 and does not anticipate paying regular cash dividends in the foreseeable future[145] Item 6. Selected Financial Data This section is not applicable for Data I/O Corporation - Selected Financial Data is not applicable for this report[148] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Data I/O reported a second consecutive loss in 2020 due to a pandemic-related downturn and significant investments in security deployment, despite maintaining a strong cash position and balance sheet - Data I/O sustained its second loss in six years in 2020, driven by a pandemic-related downturn in orders and significant investments in its security deployment business[150] - The company is strategically investing in the long term, particularly in automotive electronics and IoT markets, and launched a second generation of SentriX tools and capabilities in 2020[152][153] Net Sales by Product Line (in thousands) | Product Line | 2020 Net Sales | Change (YoY) | 2019 Net Sales | | :------------------------------- | :------------- | :----------- | :------------- | | Automated programming systems | $16,509 | (0.8%) | $16,642 | | Non-automated programming systems | $3,819 | (22.5%) | $4,926 | | Total programming systems | $20,328 | (5.7%) | $21,568 | Net Sales by Location (in thousands) | Location | 2020 Net Sales | % of Total | Change (YoY) | 2019 Net Sales | % of Total | | :-------------- | :------------- | :--------- | :----------- | :------------- | :--------- | | United States | $1,516 | 7.5% | (12.6%) | $1,735 | 8.0% | | International | $18,812 | 92.5% | (5.1%) | $19,833 | 92.0% | Gross Margin (in thousands) | Metric | 2020 | Change (YoY) | 2019 | | :---------------------- | :---------- | :----------- | :---------- | | Gross margin | $10,822 | (13.8%) | $12,550 | | Percentage of net sales | 53.2% | | 58.2% | Research and Development Expense (in thousands) | Metric | 2020 | Change (YoY) | 2019 | | :------------------------ | :-------- | :----------- | :-------- | | Research and development | $6,357 | (1.5%) | $6,451 | | Percentage of net sales | 31.3% | | 29.9% | Impairment & Related Charges (in thousands) | Category | 2020 | | :---------------------------------------- | :---- | | Impairment charges (equipment, software, prepaid royalties) | $652 | | Obsolete inventory charges | $291 | | Total impairment & related charges | $943 | Key Financial Metrics (in thousands) | Metric | 2020 | 2019 | | :---------------------------------------- | :---------- | :---------- | | Net Income (loss) | $(3,964) | $(1,187) | | EBITDA | $(2,776) | $(341) | | Adjusted EBITDA (excl. equity comp. & impairment) | $(366) | $830 | | Working Capital | $18,059 | $18,497 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for Data I/O Corporation - Quantitative and Qualitative Disclosures About Market Risk are not applicable for this report[200] Item 8. Financial Statements and Supplementary Data This section presents Data I/O's audited consolidated financial statements for 2020 and 2019, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, with an unqualified opinion from Grant Thornton LLP - Grant Thornton LLP audited the consolidated financial statements for Data I/O Corporation for the periods ended December 31, 2020 and 2019, issuing an unqualified opinion[204] - A critical audit matter identified was the net realizable value of inventory, due to the complexity and subjectivity of demand forecasting, which requires significant auditor judgment[210][211] Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2020 | December 31, 2019 | | :------------------------------------ | :---------------- | :---------------- | | Cash and cash equivalents | $14,167 | $13,936 | | Total Current Assets | $23,250 | $23,979 | | Total Assets | $25,592 | $28,281 | | Total Current Liabilities | $5,191 | $5,482 | | Total Stockholders' Equity | $19,639 | $21,530 | Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 2020 | 2019 | | :------------------------------------ | :---------- | :---------- | | Net sales | $20,328 | $21,568 | | Gross margin | $10,822 | $12,550 | | Operating income (loss) | $(3,078) | $(1,278) | | Net income (loss) | $(3,964) | $(1,187) | | Basic earnings (loss) per share | $(0.48) | $(0.14) | | Diluted earnings (loss) per share | $(0.48) | $(0.14) | Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 2020 | 2019 | | :---------------------------------------- | :-------- | :-------- | | Net cash provided by (used in) operating activities | $631 | $(2,096) | | Cash provided by (used in) investing activities | $(860) | $(548) | | Cash provided by (used in) financing activities | $(144) | $(1,677) | | Cash and cash equivalents at end of period | $14,167 | $13,936 | - The valuation allowance for deferred tax assets increased by $1,422,000 in 2020, reflecting uncertainty in utilizing these assets due to the company's volatile loss history and cyclical industry[312] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure for the reported period - There were no changes in or disagreements with accountants on accounting and financial disclosure[324] Item 9A. Controls and Procedures Data I/O's management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with the company exempt from auditor attestation under Sarbanes-Oxley Section 404(b) - As of December 31, 2020, Data I/O's disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level by management, including the CEO and CFO[327] - Management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2020, using the COSO framework and concluded it was effective[331] - Data I/O, as a smaller reporting company, is exempt from the auditor attestation report on internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act[332] Item 9B. Other Information There is no other information to report under this item - There is no other information to report under this item[334] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding Data I/O's directors and executive officers is incorporated by reference from the Proxy Statement for its May 20, 2021 Annual Meeting, and the company has adopted a Code of Ethics for all personnel - Information on directors is incorporated by reference from the Proxy Statement for the May 20, 2021 Annual Meeting of Shareholders[337] - Information on executive officers is provided in Item 1 of Part I under 'Executive Officers of the Registrant'[337] - Data I/O has adopted a Code of Ethics for all directors, officers, and employees, emphasizing legal and ethical conduct, available on its corporate governance website[338] Item 11. Executive Compensation Details on executive compensation are incorporated by reference from the 'Executive Compensation' section of Data I/O's Proxy Statement for its May 20, 2021 Annual Meeting of Shareholders - Executive compensation information is incorporated by reference from the Proxy Statement for the May 20, 2021 Annual Meeting of Shareholders[339] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters is incorporated by reference from the Proxy Statement for the May 20, 2021 Annual Meeting, with 28,175 securities to be issued upon exercise of outstanding options at a weighted-average exercise price of $4.97 as of December 31, 2020 - Security ownership information is incorporated by reference from the Proxy Statement for the May 20, 2021 Annual Meeting of Shareholders[340] Equity Compensation Plan Information as of December 31, 2020 | Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted–average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance | | :-------------------------------------------------------------------- | :------------------------------------------------------------------------ | :---------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by security holders | 3,175 | $4.90 | 286,925 | | Equity compensation plans not approved by security holders (Inducement grant) | 25,000 | $4.98 | - | | Total | 28,175 | $4.97 | 286,925 | Item 13. Certain Relationships and Related Transactions and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement for Data I/O's 2020 Annual Meeting of Shareholders - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Shareholders[343] Item 14. Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the Proxy Statement for Data I/O's May 20, 2021 Annual Meeting of Shareholders - Information on principal accounting fees and services is incorporated by reference from the Proxy Statement for the May 20, 2021 Annual Meeting of Shareholders[343] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the 10-K report, including executive compensation plans, articles of incorporation, and material contracts, along with the Index to Financial Statements and Schedule II - This item lists all exhibits, including executive compensation plans, articles of incorporation, instruments defining security holder rights, and material contracts[346][348][367][368][372] - The financial statements and supplementary data are indexed, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income (Loss), Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[364] Schedule II – Consolidated Valuation and Qualifying Accounts (in thousands) | Year Ended December 31, | Balance at Beginning of Period | Charged/ (Credited) to Costs and Expenses | Deductions | Balance at End of Period | | :---------------------- | :----------------------------- | :---------------------------------------- | :--------- | :----------------------- | | 2019 (Allowance for bad debts) | $75 | $5 | $- (1) | $80 | | 2020 (Allowance for bad debts) | $80 | $(14) | $- (1) | $66 | Item 16. Form 10-K Summary This section indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided[386] Signatures The report is duly signed on behalf of Data I/O Corporation by its President and Chief Executive Officer, Anthony Ambrose, and other principal executive officers and directors, as of March 26, 2021 - The report is signed by Anthony Ambrose, President and Chief Executive Officer, and Joel S. Hatlen, Chief Operating and Financial Officer, along with other directors, on March 26, 2021[389][390]