UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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,” “acceleratedfiler”, ”accelerated filer”, “smaller reporting company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.       (Check one):

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 26, 2017:

PART I - FINANCIAL INFORMATION

Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) prepared the financial statements as of September 30, 2017March 31, 2022 and September 30, 2016March 31, 2021 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, 20162021 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 three and nine months ended September 30, 2017March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022.  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, 2016.

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

We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year.  During 2022 and 2021, 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 atupon transfer of control of the timepromised products or services to customers in an amount that reflects the product is shipped.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 considered a separate element.performance obligation.  These systems are standard products with published product specifications and are configurable with standard options.  The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

The revenue related to products requiring installation that is perfunctory is recognized upon transfer of control of the product to customers, which generally is at the time of shipment.  Installation that is considered perfunctory includes any installation that canis expected to be performed by other parties, such as distributors, other vendors, or the customers themselves.  This takes into accountconsiders the complexity, skill and training needed as well as customer expectations regarding installation.

We enter into arrangements with multiple deliverable arrangementsperformance 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 valuetransaction 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 components,performance obligations, we use the value of the discount given to distributors who perform these components.  For software maintenance components,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.

When we sell software separately, we recognize revenue upon the transfer of control of the software, revenuewhich 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 persuasive evidencethere is an approved contract that both parties are committed to perform, both parties rights have been identified, the contract has substance,  collection of an arrangement exists, shipmentsubstantially all the consideration is probable, the transaction price has occurred,been determined and allocated over the price is fixed or determinable,performance obligations, the buyer has paid or is obligated to pay, collectability is reasonably assured,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.

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.

All stock-based compensation expense as required for all share-based payment awards including employee stock options and restricted stock unit awards,are measured based on estimated fair values and estimated forfeiture rate on the date of grant dates.

Other accrued liabilities consisted of the following components:

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 March 31, 2022:

Cash paid for operating lease liabilities for the three months ended March 31, 2022 and other agreements, primarily2021 were $212,000 and $201,000, respectively. 

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

At March 31, 2022, the weighted average remaining lease term is 3.67 and the weighted average discount rate used is 5%.

The components of our lease expense for factorythe three months ended March 31, 2022 and office space, with initial or remaining terms2021 include operating lease costs of one year or more as follows:

Our real estate facility leases are described below:

During the thirdfourth quarter of 2017,2021, we amended our lease agreement for the Redmond, Washington headquarters facility, effective September 12, 2017, extending the lease to JulyJanuary 31, 2022, waiving a potential space give back provision and receiving2026.  The lease inducement incentives. Previously on June 8, 2015 the lease had been amended to relocate our headquarters to a nearby building and lower theis for approximately 20,460 square footage to approximately 20,460.

In addition to the Redmond facility, approximately 24,000 square feet is leased at two foreign locations, including our sales, service, operations and engineering office located in Shanghai, China, and our German sales, service and engineering office located near Munich, Germany.

Our lease rental rate.

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, 2017,March 31, 2022, the purchase commitments and other obligations totaled $2,058,000$2.0 million of which all but $18,000$590,000 are expected to be paid over the next twelve months.

As of September 30, 2017,March 31, 2022, 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.

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:

Options to purchase 8,42512,500 and 198,39525,000 shares respectively were outstanding as of September 30, 2017March 31, 2022 and 2016, respectively,2021, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive.

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, 2017March 31, 2022 and 2016, respectively, was2021 were as follows:

Equity awards granted during the three and nine months ended September 30, 2017March 31, 2022 and 20162021 were as follows: