| NOTE 1 - FINANCIAL STATEMENT PREPARATION | Data I/O Corporation (“Data I/O”,
“We”, “Our”, “Us”) prepared the financial statements as of June 30, 2018 and June 30, 2017
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, 2017 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 six months ended June 30, 2018 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017. Revenue Recognition Effective January 1, 2018, the Company adopted
ASU 2014-09, Revenue (“Topic 606”): Revenue from Contracts with Customers, using the modified retrospective method.
Topic 606 provides a single, principles-based five-step model to be applied to all contracts with customers. It generally
provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled,
net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers when control
over the promised goods or services are transferred to the customer. For incremental contract acquisition costs, the Company
has elected the practical expedient to capitalize and amortize incremental costs for obtaining contracts, primarily sales commissions,
with terms that exceed one year. Our basic revenue recognition remains essentially
the same as it was in 2017, but we have modified our policies and processes to be able to identify and properly defer contract
acquisition costs. The adoption of Topic 606 did not have a material impact on our financial results. We generally recognize revenue at the time the
product is shipped or when the service is delivered. The revenue related to products requiring installation that is perfunctory
is generally recognized at the time of shipment. Installation that is considered perfunctory includes any installation that
can be performed by other parties, such as distributors, other vendors, or the customers themselves. This takes into account
the complexity, skill and training needed as well as customer expectations regarding installation. Contracts requiring acceptance
are recognized when acceptance is received. 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. 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. We enter into multiple deliverable arrangements
that arise during the sale of a system that may include consumables (adapters), an installation component, a service and support
component and a software maintenance component. We allocate the value 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, we use the standard compensation provided as a discount to distributors or as additional commission to our representative
channel which performs these components. For software maintenance components, we use what we charge for annual software maintenance
renewals after the initial year the system is sold. Revenue is generally 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 license software separately, we recognize
software revenue upon shipment, provided that only inconsequential obligations remain on our part and substantive acceptance conditions,
if any, have been met. 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 our standard products and typically
are service loaners, rental or test systems, engineering test systems or sales demonstration systems. Once transferred, the
systems are sold by our regular sales channels as used inventory. These systems 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 system’s
net book value and the sale transaction is accounted for as revenue and cost of goods sold. Deferred revenue relates to contracted amounts
that have been invoiced to customers for which remaining performance obligations must be completed before we can recognize revenue.
These amounts primarily relate to unamortized software and service contracts and other items invoiced but not recognized due to
incomplete performance obligations, such as installation and acceptance requirements for systems. As of June 30, 2018, deferred revenue was $2.5
million which consisted of $2.4 million which will be recognized over the next twelve months, and the remaining balance to be recognized
beyond that. Stock-Based Compensation Expense All stock-based compensation awards are measured
based on estimated fair values on the date of grant and recognized as compensation expense on the straight-line single-option method.
Our share-based compensation is reduced for estimated forfeitures at the time of grant and revised as necessary in subsequent periods
if actual forfeitures differ from those estimates. Income Tax Penalties associated with tax matters are classified
as general and administrative expense when incurred and amounts related to interest associated with tax matters are classified
as interest income or interest expense. We did not incur any interest or penalties associated with tax matters during the
three months ended June 30, 2018. Tax Reform impact was included in our 2017 financial
statements, which primarily reflected the deemed repatriation (IRC 965 transition tax), the AMT credit receivable as a result of
AMT repeal, and the revaluation of net deferred tax assets and valuation allowance as a result of the income tax rate reduction. We have incurred net operating losses in certain
past years. Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for
our industry and cyclical capital spending, we have limited the recognition of net deferred tax assets associated with 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. We will continue to analyze the level of valuation allowance in future periods. There were $290,000
and $272,000 of unrecognized tax benefits related to uncertain tax positions and a corresponding valuation allowance as of June
30, 2018 and December 31, 2017, respectively. Tax years that remain open for examination include
2014 through 2018 in the United States of America. In addition, tax years from 2000 to 2013 may be subject to examination
in the event that we utilize the net operating losses and credit carryforwards from those years in our current or future year tax
returns. Recent Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, “ Leases In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers” (ASU 2014-09) (“Topic 606”). ASU 2014-09 provides companies with a
single model for accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance,
including industry-specific revenue guidance. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts
with Customers” (ASU 2015-14), deferring the effective date of the new revenue recognition standard by one year and now takes
effect for public entities in fiscal years beginning after December 15, 2017. We have adopted the revenue standard as
of January 1, 2018, which did not have a material impact on our consolidated financial statements. We have implemented changes
to our accounting policies, internal controls, and disclosures to support the new standard, however, these changes were not material. |
