| NOTE 1 - FINANCIAL STATEMENT PREPARATION | Data
I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) prepared the financial statements
as of March 31, 2020 and March 31, 2019 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, 2019 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 months ended March 31, 2020 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019. Revenue
Recognition 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
have elected the practical expedient to 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 2020 and 2019,
the impact of capitalization of incremental costs for obtaining contracts was immaterial. We have made a sales tax policy election
to 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. 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 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. The transaction price is allocated to the separate
performance obligations on relative standalone sales price. 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 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. 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 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
Net
sales by type March
31, 2020 Change March
31, 2019
(in
thousands)
Equipment
Sales $ 2,587 (30.3 $ 3,711
Adapter
Sales 1,345 (7.9 1,461
Software
and Maintenance Sales 853 (3.7 886
Total $ 4,785 (21.0 $ 6,058 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 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 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. The CARES Act, enacted in Q1 2020, accelerated the AMT credit refund of
$640,000 to be a current asset instead of non-current. Recently
Adopted Accounting Pronouncements We
adopted the new lease accounting standard, ASC 842, on January 1, 2019 using the modified retrospective transition method, and
recorded a balance sheet adjustment on the date of adoption. In 2018, we accounted for leases under ASC 840. The new lease standard
requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases, and also requires
additional quantitative and qualitative disclosures to enable users of the financial statements to assess the amount, timing and
uncertainty of cash flows arising from leases. In adopting ASC 842, we utilized certain practical expedients available under the
standard. These practical expedients include waiving reassessment of conclusions reached under the previous lease standard as
to whether contracts contain leases, not recording right-of-use assets or lease liabilities for leases with terms of 12 months
or less, how to classify leases identified and how to account for initial direct costs incurred. We also utilized the practical
expedient to use hindsight as of the date of adoption to determine the terms of our leases and to evaluate our right-of-use assets
for impairment. See
Note 5 of the accompanying notes to the condensed consolidated financial statements for additional information regarding our operating
leases. |
