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, ~~2017~~ 2023
or 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

~~Commission file number:~~ ~~0-10394~~
DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)

Washington		91-0864123

~~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
~~6645 185~~th ~~Ave NE, Suite 100, Redmond, Washington, 98052~~ ~~(Address of principal executive offices, including zip code)~~
~~(425) 881-6444~~ ~~(Registrant’s telephone number, including area code)~~

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 ~~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,” “accelerated~~filer”, ”accelerated filer”, “smaller reporting company” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~	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 ~~26, 2017:~~

~~8,241,049~~

~~Table of Contents~~

30, 2023: 9,020,798

D~~ATA I/O CORPORATION~~

~~FORM 10-Q~~ DATA I/O CORPORATION

FORM 10-Q
For the Quarter Ended September 30, ~~2017~~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	14	16

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22	24

	Item 4.	Controls and Procedures	22	24

Part II		Other Information

	Item 1.	Legal Proceedings	22	25

	Item 1A.	Risk Factors	22	25

	Item 2.	Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities	22	25

	Item 3.	Defaults Upon Senior Securities	23	25

	Item 4.	Mine Safety Disclosures	23	25

	Item 5.	Other Information		25

	Item 6.	Exhibits		26

Signatures				27


	~~Item 5.~~	~~Other Information~~	232

	~~Item 6.~~Table of Contents	~~Exhibits~~	23

~~Signatures~~			24

~~Table of Contents~~

P~~ART~~

PART I - FINANCIAL INFORMATION

I~~tem~~

Item 1.

Financial ~~Statements~~

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

~~DATA I/O CORPORATION~~

~~CONSOLIDATED BALANCE SHEETS~~3

~~(in thousands, except share data)~~

~~(UNAUDITED)~~Table of Contents

September 30,
2017

December 31,
2016

ASSETS

CURRENT ASSETS:

Cash and cash equivalents
$15,164
$11,571
Trade accounts receivable, net of allowance for


         doubtful accounts of $104 and $96, respectively
  5,233
  4,725
Inventories
  4,950
  4,059
Other current assets
  537
  483
TOTAL CURRENT ASSETS
  25,884
  20,838



Property, plant and equipment – net
  2,158
  1,875
Other assets
  45
  63
TOTAL ASSETS
$28,087
$22,776



LIABILITIES AND STOCKHOLDERS’ EQUITY


CURRENT LIABILITIES:


Accounts payable
$1,598
$1,428
Accrued compensation
  3,273
  2,208
Deferred revenue
  1,570
  1,926
Other accrued liabilities
  1,029
  703
TOTAL CURRENT LIABILITIES
  7,470
  6,265



Long-term other payables
  438
  479



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, 8,240,711 shares as of September 30,


2017 and 8,015,746 shares as of December 31, 2016
  18,836
  19,204
Accumulated earnings (deficit)
  553
  (3,360)
Accumulated other comprehensive income
  790
  188
TOTAL STOCKHOLDERS’ EQUITY
  20,179
  16,032
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$28,087
$22,776



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

~~DATA I/O CORPORATION~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~4

~~(in thousands, except per share amounts)~~

~~(UNAUDITED)~~Table of Contents

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Net sales
$9,596
$6,588
$25,955
$17,002
Cost of goods sold
  3,639
  2,945
  10,629
  7,743
Gross margin
  5,957
  3,643
  15,326
  9,259
Operating expenses:




Research and development
  1,814
  1,358
  5,130
  3,655
Selling, general and administrative
  2,319
  1,664
  6,300
  4,766
Total operating expenses
  4,133
  3,022
  11,430
  8,421
Operating income
  1,824
  621
  3,896
  838
Non-operating income (expense):




Interest income
  6
  11
  19
  34
Gain on sale of assets
  72
  -
  363
  -
Foreign currency transaction gain (loss)
  (66)
  (3)
  (158)
  41
Total non-operating income
  12
  8
  224
  75
Income before income taxes
  1,836
  629
  4,120
  913
Income tax (expense)
  (108)
  (4)
  (207)
  (12)
Net income
$1,728
$625
$3,913
$901










Basic earnings per share
$0.21
$0.08
$0.48
$0.11
Diluted earnings per share
$0.20
$0.08
$0.47
$0.11
Weighted-average basic shares
  8,201
  7,977
  8,112
  7,955
Weighted-average diluted shares
  8,467
  8,183
  8,400
  8,083





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

~~DATA I/O CORPORATION~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~5

~~(in thousands)~~

~~(UNAUDITED)~~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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Net income
$1,728
$625
$3,913
$901
Other comprehensive income:




Foreign currency translation gain (loss)
  248
  (17)
  602
  (77)
Comprehensive income
$1,976
$608
$4,515
$824





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,

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income
$3,913
$901
Adjustments to reconcile net income


to net cash provided by (used in) operating activities:


Depreciation and amortization
  634
  409
Gain on sale of assets
  (363)
  -
Equipment transferred to cost of goods sold
  725
  720
Share-based compensation
  540
  409
Net change in:


Trade accounts receivable
  (192)
  (2,385)
Inventories
  (766)
  (211)
Other current assets
  (33)
  213
Accounts payable and accrued liabilities
  1,497
  160
Deferred revenue
  (485)
  163
Other long-term liabilities
  (52)
  86
Deposits and other long-term assets
  18
  1
     Net cash provided by (used in) operating activities
  5,436
  466



CASH FLOWS FROM INVESTING ACTIVITIES:


Purchases of property, plant and equipment
  (1,642)
  (1,688)
Net proceeds from sale of assets
  363
  -
Cash provided by (used in) investing activities
  (1,279)
  (1,688)



CASH FLOWS FROM FINANCING ACTIVITIES:


Net Proceeds from issuance of common stock, less payments


     for shares withheld to cover tax
  (895)
  (76)
Repurchase of common stock
  -
  (191)
Cash provided by (used in) financing activities
  (895)
  (267)
Increase/(decrease) in cash and cash equivalents
  3,262
  (1,489)



Effects of exchange rate changes on cash
  331
  (54)
Cash and cash equivalents at beginning of period
  11,571
  11,268
Cash and cash equivalents at end of period
$15,164
$9,725



Supplemental disclosure of cash flow information:


Cash paid during the period for:


    Income Taxes
$82
$6



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 - ~~FINANCIAL STATEMENT PREPARATION~~

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, ~~2017~~2023 and September 30, ~~2016~~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, ~~2016~~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 ~~three and~~ nine months ended September 30, ~~2017~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~ 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, ~~2016.~~

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 atupon transfer of control of the ~~time~~promised 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.

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 ~~can~~is expected to be performed by other parties, such as distributors, other vendors, or the customers themselves. This ~~takes into account~~analysis considers the complexity, skill and training needed as well as customer expectations regarding installation.

We enter into arrangements with multiple ~~deliverable arrangements~~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 ~~value~~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 ~~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.

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~~license software separately, we recognize revenue upon the transfer of control of the software, ~~revenue~~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 ~~persuasive evidence~~there 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, shipment~~substantially 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.

~~Table of Contents~~

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.

~~Stock-Based~~

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 ~~Expense~~

~~We measure and recognize~~

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.~~

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.

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Income Tax

~~Penalties associated with~~

Income taxes are computed at current enacted tax ~~matters~~rates, less tax credits using the asset and liability method. Deferred taxes are ~~classified as general~~adjusted both for items that do not have tax consequences and ~~administrative~~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 ~~incurred and~~necessary to reduce deferred tax assets to amounts ~~related~~expected 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~~be realized.

Recently Adopted Accounting Pronouncements

For the ~~three and~~ nine months ended September 30, ~~2017.~~

We2023, there were no recently issued accounting pronouncements that had, or are expected to have, ~~incurred net operating losses in certain past years.~~ ~~Given~~a material impact to Data I/O Corporation’s consolidated financial statements. In 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~~first quarter of ~~net deferred tax assets associated with our net operating losses and credit carryforwards and continue to maintain a valuation allowance~~2023, ASU 326 became effective for the ~~full amount of the net deferred tax asset balance. We expect to further analyze the level of valuation allowance during the remainder of 2017.~~ ~~There were~~ ~~$249,000 and $226,000~~ ~~of unrecognized tax benefits related to uncertain tax positions and related valuation allowance as of~~ ~~September 30, 2017~~ ~~and December 31, 2016, respectively.~~

~~Tax years that remain open for~~ ~~examination include 2014, 2015, 2016 and 2017~~ ~~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 March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU 2016-09), “Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 requires excess tax benefits to be recognized in the statement of operations as an income tax expense and is applied prospectively by means of a cumulative-effect adjustment of excess tax benefits from equity in the period of adoption. The standard establishes an alternative practical expedient for estimating the expected term of an award by recognizing the effects of forfeitures in compensation cost when the forfeitures occur. Adoption of the alternative practical expedient is applied prospectively on an entity-wide basis. The standard requires that amounts paid to a taxing authority on the employee’s behalf as a result of directly withholding shares for tax-withholding purposes are to be presented on a retrospective basis as a financing activity on the statement of cash flows. The standard became effective beginning January 1, 2017.Company. The adoption of the ASU ~~2016-09 was~~326 CECL (Current Estimate of Credit Losses) did not have a material impact to ~~our~~Data I/O Corporation’s consolidated financial statements.

~~In February 2016, the FASB issued ASU 2016-02, “Leases~~” (ASU 2016-02). ASU 2016-02 requires lessees to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases of intangible assets or inventory. Early adoption of the standard is allowed. The standard becomes effective beginning January 1, 2019. ~~We are in the process of evaluating the impact of adoption on our consolidated financial statements.~~

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In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing 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 it now takes effect for public entities in fiscal years beginning after December 15, 2017. We plan to adopt the revenue standards as of January 1, 2018, utilizing the modified retrospective transition method. The Company is currently evaluating the potential impact of the adoption on our consolidated financial statements. As part of this process, the Company has identified its revenue streams and an analysis of how we currently account for revenue transactions compared to the revenue accounting required under the new standard. We intend to complete our adoption plan in fiscal year 2017. Because of the nature of the work that remains, at this time, we remain unable to reasonably estimate the impact of adoption on our consolidated financial statements. We will continue our evaluation of revenue from our contracts with customers, and will update our expectations of the impact of adoption of the new revenue standards on our consolidated financial statements in our next filing.

NOTE 2 – INVENTORIES

Inventories consisted of the following components:

September 30,
2017

December 31,
2016

(in thousands)

Raw material
$2,806
$2,402
Work-in-process
  1,465
  1,226
Finished goods
  679
  431
Inventories
$4,950
$4,059

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,
2017

December 31,
2016

(in thousands)

Leasehold improvements
$409
$376
Equipment
  5,293
  4,449
Sales demonstration equipment
  1,102
  1,158

  6,804
  5,983
Less accumulated depreciation
  4,646
  4,108
Property and equipment, net
$2,158
$1,875

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	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

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NOTE 4 – OTHER ACCRUED LIABILITIES

Other accrued liabilities consisted of the following components:

September 30,
2017

December 31,
2016

(in thousands)

Product warranty
$501
$371
Sales return reserve
  80
  50
Other taxes
  262
  149
Other
  186
  133
Other accrued liabilities
$1,029
$703

	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, ~~2017~~2023, and year ending December 31, 2022, are as follows:

	~~September 30,~~ ~~2017~~
~~(in thousands)~~
~~Liability, beginning balance~~	$~~371~~
~~Net expenses~~	~~609~~
~~Warranty claims~~	~~(609~~)
~~Accrual revisions~~	~~130~~
~~Liability, ending balance~~	$~~501~~

	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 – ~~OPERATING LEASE COMMITMENTS~~

~~We have commitments under non-cancelable~~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 ~~other agreements, primarily~~nine months ended September 30, 2023 was $221,000 and $664,000, respectively. Cash paid for ~~factory~~operating lease liabilities for the three and ~~office space, with initial or~~nine months ended September 30, 2022 was $138,000 and $555,000, respectively.

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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 ~~terms~~lease term is 2.27 years and the weighted average discount rate used is 5%.

The components of ~~one year or more as follows:~~

~~For the years ending December 31:~~

Operating Leases

(in thousands)

2017 (remaining)
$197
2018
  909
2019
  937
2020
  919
2021
  753
Thereafter
  231
Total
$3,946

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~~During the third quarter of 2017, we amended~~ our lease ~~agreement~~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 ~~effective September 12, 2017, extending the~~ lease runs to ~~July~~January 31, ~~2022, waiving a potential space give back provision and receiving~~2026. The lease ~~inducement incentives. Previously on June 8, 2015 the~~is for approximately 20,460 square feet. The lease ~~had been amended to relocate our headquarters to a nearby building and lower the 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.

~~We signed a lease agreement effective November 1, 2015 that extends through October 31, 2021~~ for a ~~new~~ facility located in Shanghai, China ~~which we moved into during the first quarter of 2016. The new~~runs to October 31, 2024. This lease is for approximately ~~doubled our space to~~ 19,400 square ~~feet at approximately 54% of the prior~~feet. The lease ~~rental rate.~~

~~During the fourth quarter of 2016, we signed a lease agreement~~ for ~~a new~~our facility located near Munich, Germany ~~which was effective March 1, 2017 and extends through February 28, 2022. The new~~runs to August 2027. This lease ~~slightly increased our space to~~is for approximately 4,895 square ~~feet at approximately the same cost per square foot as the prior lease.~~

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, ~~2017,~~2023, the purchase commitments and other obligations totaled ~~$2,058,000~~$1.8 million of which all but ~~$18,000~~$256,000 are expected to be paid over the next twelve months.

NOTE 7 – CONTINGENCIES

As of September 30, ~~2017,~~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.

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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.

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

Three Months Ended

Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

(in thousands except per share data)

Numerator for basic and diluted

earnings per share:

       Net income
$1,728
$625
$3,913
$901





Denominator for basic




earnings per share:




       weighted-average shares
  8,201
  7,977
  8,112
  7,955





Employee stock options and awards
  266
  206
  288
  128





Denominator for diluted




earnings per share:




       adjusted weighted-average shares &




       assumed conversions of stock options
  8,467
  8,183
  8,400
  8,083





Basic and diluted




earnings per share:




       Total basic earnings per share
$0.21
$0.08
$0.48
$0.11
       Total diluted earnings per share
$0.20
$0.08
$0.47
$0.11

	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 ~~8,425~~12,500 and ~~198,395~~12,500 shares, respectively, were outstanding as of September 30, ~~2017~~2023 and ~~2016, respectively,~~2022, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive.

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NOTE 910 – 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, ~~2017~~2023 and ~~2016,~~2022, respectively, ~~was~~were as follows:

Three Months Ended

Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

(in thousands)

Cost of goods sold
$4
$3
$14
$11
Research and development
  39
  23
  127
  82
Selling, general and administrative
  130
  84
  399
  316
Total share-based compensation
$173
$110
$540
$409





Impact on net earnings (loss) per share:




Basic and diluted
$(0.02)
$(0.01)
$(0.07)
$(0.05)

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The fair value of share-based awards for employee stock options was estimated using the Black-Scholes valuation model. The following weighted average assumptions were used to calculate the fair value of stock options granted during the three months and nine months ended September 30, 2017 and 2016:

Three Months Ended

Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

Risk-free interest rates 1.72%   N/A
1.72%
  N/A
Volatility factors 0.62   N/A 0.62   N/A
Expected life of the option in years 4.00   N/A 4.00   N/A
Expected dividend yield None   N/A None   N/A

	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, ~~2017~~2023 and ~~2016~~2022 were as follows:

Three Months Ended

Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

Restricted Stock
  51,000
  3,000
  286,600
  225,100
Stock Options
  25,000
  -
  25,000
  -

	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 (“~~RSU’s”~~RSUs”) typically vest over the earlier of one year ~~employee RSU’s~~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 4four years and have a ~~six year~~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.

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The remaining unamortized expected future equity compensation expense and remaining amortization period associated with award grants of unvested ~~option grants, restricted stock awards~~options, PSUs and ~~restricted stock unit awards~~RSUs at September 30, ~~2017~~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


~~September 30,~~ ~~2017~~ 15

~~Unamortized future equity compensation expense (in thousands)~~	$~~2,722~~ Table of Contents
~~Remaining weighted average amortization period (in years)~~	~~3.19~~

~~Table of Contents~~

I~~tem~~

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 orand trends; expected ~~revenues; expected level of expense; expected savings;~~business recovery; industry partnerships; future results of ~~operations; reversals of tax valuation allowances; breakeven point,~~operations or financial position; ~~changes in gross margin; economic conditions and capital spending outlook;~~future spending; expected expenses, breakeven revenue point; expected market decline, bottom or growth; market acceptance of our newly introduced or upgraded ~~products;~~products or services; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new ~~products; building lease arrangements; sales channels~~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 weData 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 ~~report.~~Quarterly Report. The ~~reader~~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, ~~2016~~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 ~~managing~~not completely resolved yet in 2023. Many of the ~~core programming business~~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.

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2023

The strong dollar impact that started to reverse during the fourth quarter of 2022, has provided tail winds for ~~growth~~revenue in the first and ~~profitability,~~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 ~~developing~~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 ~~enhancing both~~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 ~~core products~~new capabilities of supplier resilience, inventory and ~~our managed~~production in multiple locations, leveraging remote and ~~secure programming platform~~virtual services, are capabilities to ~~drive future revenue~~retain and ~~earnings growth.~~build upon. We continue to ~~be in a cyclical, seasonal~~focus on managing our costs carefully and rapidly evolving industry environment. We attempt to balance industry changes, business geography shifts, exchange rate volatility, increasing costs and strategic investments in our business with the level of demand and mix of current business opportunities

growth-oriented strategies.

We are ~~concentrating~~focusing our research and development efforts in our strategic growth markets, namely automotive electronics and ~~Internet of Things (IoT), focusing on~~IoT new programming technologies, ~~security provisioning,~~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 ~~developing~~continuing to develop technology to securely ~~program new~~provision newer categories of semiconductors, including ~~authentication ICs (especially secure elements)~~Secure Microcontrollers, Authentication Chips, and secure microcontrollers. We are delivering new programming technology and automated handling systems for managed and secure programming in the manufacturing environment. In these new security initiatives, we face a new evolving market; are in a period of rapid learning; and are establishing new industry relationships, business processes, supply chains, and investing heavily in advance of revenue.

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, ~~e-MMC,~~eMMC, UFS ~~microcontrollers, authentication ICs, secure element ICs~~ and ~~secure~~ microcontrollers on our newer products.

Our customer focus ~~remains~~has been on global and strategic ~~high volume~~high-volume manufacturers in key market segments like automotive electronics, IoT, industrial controls and consumer electronics, as well as programming ~~centers~~centers. Although the long-term prospects for our strategic growth markets should remain good, these markets and ~~contract manufacturing.~~

~~Table~~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 ~~Contents~~

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, ~~estimating the percentage-of-completion on fixed-price professional engineering service contracts,~~ sales returns, bad debts, inventories, ~~investments, intangible assets,~~ 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.

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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 ~~can~~is expected to be performed by other parties, such as distributors, other vendors, or ~~in most cases~~ the customers themselves. This ~~takes into account~~analysis considers the complexity, skill and training needed, as well as customer expectations regarding installation.

support and maintenance contracts and represents the undelivered performance obligation of agreements that are typically for one year.

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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.

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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:~~

Inventory: Inventories are stated at the lower of cost or ~~market.~~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~~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 ~~volatile~~current and ongoing cyclical and COVID-19 pandemic related uncertain economic outlook for our industry, capital and ~~capital~~geographic spending, as well as income and current net deferred tax assets by entity and country, we ~~have limited~~expect to continue to limit the recognition of net deferred tax assets ~~associated with our net operating losses~~ and ~~credit carryforwards~~accounting for uncertain tax positions and ~~continue to~~ maintain athe tax valuation ~~allowance for the full amount of the net deferred tax asset balance.~~allowances. At the current time, we expect, ~~to continue to analyze and evaluate potential~~therefore, that reversals of the tax valuation allowance ~~during the remainder of 2017. Any reversals~~ will take place ~~only~~ as we are able ~~to determine that it will be possible~~ to take advantage of the underlying tax loss or other attributes in carry ~~forward. Transfer~~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, which requires the input of highly subjective assumptions, including the option’s expected life~~rate. Restricted stock unit awards and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using the historical volatility of our common stock. Changes in the subjective assumptions required in the valuation model may significantly affect the estimated value of the awards, the related stock-based compensation expense and, consequently, our results of operations. Restrictedperformance stock unit awards are valued based on the average of the high and low price on the date of the ~~grant.~~grant and an estimated forfeiture rate. For ~~both~~ 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.

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~~Results of Operations~~

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RESULTS OF OPERATIONS:

NET SALES

Three Months Ended

Nine Months Ended

Net sales by product line

September 30,
2017

Change

September 30,
2016

September 30,
2017

Change

September 30,
2016

(in thousands)

Automated programming systems
$7,766
  49.5%
$5,196
$21,193
  58.0%
$13,417
Non-automated programming systems
  1,830
  31.5%
  1,392
  4,762
  32.8%
  3,585
Total programming systems
$9,596
  45.7%
$6,588
$25,955
  52.7%
$17,002

Three Months Ended

Nine Months Ended

Net sales by location

September 30,
2017

Change

September 30,
2016

September 30,
2017

Change

September 30,
2016

(in thousands)

United States
$610
  31.5%
$464
$2,256
  8.1%
$2,086
% of total
  6.4%

  7.0%
  8.7%

  12.3%







International
$8,986
  46.7%
$6,124
$23,699
  58.9%
$14,916
% of total
  93.6%

  93.0%
  91.3%

  87.7%

	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	%	$	1,488
% of total		4.2	%					9.5	%		10.5	%					8.8	%

International	$	6,283		(3.8		%)	$	6,528		$	18,965			22.7	%	$	15,458
% of total		95.8	%					90.5	%		89.5	%					91.2	%

	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 sales	$	3,820		(5.4		%)	$	4,040		$	12,428			34.0	%	$	9,274
Adapter sales		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

Net sales in the third quarter of ~~2017~~2023 were ~~$9.6~~$6.6 million, down 9% as compared with ~~$6.6~~$7.2 million in the third quarter of ~~2016. Automotive Electronics demand~~2022. The decrease primarily represents that in 2022 the resumption of shipping and backlog following the Shanghai COVID shutdown. Net sales year-to-date for third quarter of 2023 were $21.2 million, up 25% as compared with $16.9 million for the same period of 2022. The increase primarily resulting from ~~both OEMs~~2022 impacts of the Shanghai COVID shutdown, currency volatility of the US Dollar, semiconductor shortages and ~~Programming Centers drove increased~~war in Ukraine. Recurring and consumable revenues, ~~primarily related to our PSV family of automated programming systems. Revenues from adapters, a consumable, increased approximately $100,000 from the year earlier period. International~~which include adapter sales, represented ~~94%~~a more normal proportion at 42% of revenues in the third quarter of 2023, as compared with 44% in the third quarter of 2022. Year-to-date, total capital equipment sales were 59% of revenues, adapters were 29% and software and services revenues were 12% of revenues, respectively, in the third quarter of 2023 compared with 56% and 32% and 12%, respectively, for the third quarter of 2022.

On a geographic basis, international sales represented approximately 95.8% of total net sales for the third quarter of 2023 compared ~~to 93% during the same period in 2016.~~

~~Revenue for the quarter was approximately 74% equipment, 20% consumables and 6% software and services.~~

~~Order bookings increased 4% to $8.2 million~~with 91% in the third quarter of ~~2017,~~2022.

Third quarter 2023 bookings were $5.3 million, as compared with $7.1 million in the prior year period. Year-to-date bookings were $18.6 million, as compared with $19.6 million in the prior year-to-date period. We experienced softness in China demand in the first, second and third quarters of 2023, we believe, as they recovered from COVID-19 and related to new automotive emission standards. Long-term, we see potential for more demand in China driven by new production changes and especially the transition to EV. Germany has entered a ~~10-year~~recession and is also seeing weak demand. We expect a return to longer-term growth in 2024. Our outlook assumes no further escalation or disruption of trade due to the Israel-Hamas war and associated disruptions.

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Backlog at September 30, 2023 was approximately $2.5 million, down from $3.8 million at June 30, 2023 and $4.9 million at September 30, 2022, which reflected the post lockdown Shanghai shipments in 2022 and the soft demand during the third quarter ~~high, compared to $7.9~~of 2023 in China and Germany. Data I/O had $1.5 million in deferred revenue at September 30, 2023, down from $1.6 million at June 30, and $2.0 million at September 30, 2022.

GROSS MARGIN

	Three Months Ended									Nine Months Ended
	September 30, 2023			Change			September 30, 2022			September 30, 2023			Change			September 30, 2022
(in thousands)
Gross margin	$	3,520			(14.4	%)	$	4,111		$	12,195			33.0	%	$	9,172
Percentage of net sales		53.7	%					57.0	%		57.6	%					54.1	%

Gross margins as a percentage of sales were 53.7% in the third quarter of ~~2016. The variation~~2023 as compared to 57.0% in ~~revenue percentages versus order bookings percentages relates~~the same period of 2022 with margins impacted by lower sales volume on relatively fixed costs; product mix and our channel mix, offset in part by less favorable variances.

Year-to-date gross margins for 2023 compared to 2022 were primarily impacted in the ~~change~~first two quarters of 2022 by the Shanghai COVID-19 shutdown, sales volume relative to fixed costs, currency effects and variances.

RESEARCH AND DEVELOPMENT

	Three Months Ended									Nine Months Ended
	September 30, 2023			Change			September 30, 2022			September 30, 2023			Change			September 30, 2022
(in thousands)
Research and development	$	1,577			10.1	%	$	1,432		$	4,922			6.9	%	$	4,605
Percentage of net sales		24.0	%					19.9	%		23.2	%					27.2	%

Research and development (“R&D”) expenses in ~~backlog, deferred revenues and currency translation. Deferred revenue at the end of~~ the third quarter ~~was $1.6 million with all major systems shipments able to be recognized in the quarter. At the end~~ of the second quarter, we had deferred revenue of $2.8 million, including 3 systems that were recognized in the third quarter. Backlog at the end of the third quarter was $4.6 million compared to $4.7 million at the end of the second quarter and $3.2 million at December 31, 2016.

~~For the nine months ending September 30, 2017,~~2023 increased compared to the same period in ~~2016, net sales growth was generally~~2022, primarily with additional outside services in support of our product lines.

Year-to-date R&D expense increases were primarily due to the same factors discussed above for the third quarter, with a continued trend of higher automated and lower non-automated system sales. On a regional basis, all regions had sales growth compared to the same period in 2016.

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~~GROSS MARGIN~~

Three Months Ended

Nine Months Ended

September 30,
2017

Change

September 30,
2016

September 30,
2017

Change

September 30,
2016

(in thousands)

Gross margin
$5,957
  63.5%
$3,643
$15,326
  65.5%
$9,259
Percentage of net sales
  62.1%

  55.3%
  59.0%

  54.5%

~~For the third quarter of 2017, gross margin~~ as ~~a percentage of sales was 62.1%, compared to 55.3%~~ in the third quarter, of 2016 and 56.9% in the second quarter of 2017. The increase was primarily due to sales volume, which resulted in better fixed factory cost utilization, along with a favorable product mix, a favorable sales channel mix (with more direct sales versus distributer sales), and reduced unfavorable factory variances. Distributer sales are net of a distribution discount where direct sales usually result in channel commissions which are included in selling expense. We increased our capacity during the third quarter with virtually no additional investment.

For the first nine months of 2017 compared to the same period in 2016, gross margin as a percentage of sales increased generally due to the same factors discussed above for the third quarter. Based on past experience, we expect variations in our gross margin as a percentage of sales due to changes in key factors for future periods including: sales volume, product mix, channel mix, pricing, inventory fluctuations, warranty, factory variances and currency exchange rates.

~~RESEARCH AND DEVELOPMENT~~

Three Months Ended

Nine Months Ended

September 30,
2017

Change

September 30,
2016

September 30,
2017

Change

September 30,
2016

(in thousands)

Research and development
$1,814
  33.6%
$1,358
$5,130
  40.4%
$3,655
Percentage of net sales
  18.9%

  20.6%
  19.8%

  21.5%

Research and development (“R&D”) increased $456,000 in the third quarter of 2017 compared to the same period in 2016, primarily due to additional and higher personnel costs, incentive and stock based compensation as well as ~~SentriX NRE charges, which mostly supported our Managed and Secure Programming initiative.~~

~~For the first nine months of 2017 compared to the same period~~incentive compensation where there was none in ~~2016, the increase in R&D expense was generally~~2022 due to ~~the same factors discussed above for the third quarter.~~

losses. We have maintained our investment in our product development and supporting our growth initiatives.

SELLING, GENERAL AND ADMINISTRATIVE

Three Months Ended

Nine Months Ended

September 30,
2017

Change

September 30,
2016

September 30,
2017

Change

September 30,
2016

(in thousands)

Selling, general &

administrative
$2,319
  39.4%
$1,664
$6,300
  32.2%
$4,766
Percentage of net sales
  24.2%

  25.3%
  24.3%

  28.0%

	Three Months Ended									Nine Months Ended
	September 30, 2023			Change			September 30, 2022			September 30, 2023			Change			September 30, 2022
(in thousands)
Selling, general & administrative	$	2,006			2.0	%	$	1,967		$	7,003			17.8	%	$	5,943
Percentage of net sales		30.6	%					27.3	%		33.0	%					35.1	%

Selling, General and Administrative (“SG&A”) expenses ~~increased $655,000~~ in the third quarter of ~~2017~~2023 increased by approximately $39,000 from the prior year period primarily due to higher channel and sales commissions associated with channel mix, recruiting fees; outside services; and additional information technology projects and support, as well as incentive compensation where there was none in 2022 due to losses.

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Year-to-date SG&A expenses increased by approximately $1.1 million from the prior year period primarily due to mix with more sales through commissionable channels, increased outside services, as well as incentive compensation where there was none in 2022 due to losses. Cost control measures have remained in place during the first three quarters of 2023 and are expected to continue in the fourth quarter of 2023.

INTEREST

	Three Months Ended							Nine Months Ended
	September 30, 2023		Change			September 30, 2022		September 30, 2023		Change			September 30, 2022
(in thousands)
Interest income	$	41		355.6	%	$	9	$	125		1036.4	%	$	11

Interest income was higher in the third quarter 2023 and year-to-date compared to the same ~~period~~periods in ~~2016,~~2022 due to ~~the increased level of business activity~~higher average interest rates and ~~include~~ higher ~~incentive, commission and stock based compensation and depreciation, offset in part by lower rent costs.~~

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~~For the first nine months of 2017 compared to the same period in 2016, the increase in SG&A expense was generally due to the same factors discussed above for the third quarter.~~

~~INTEREST~~

Three Months Ended

Nine Months Ended

September 30,
2017

Change

September 30,
2016

September 30,
2017

Change

September 30,
2016

(in thousands)

Interest income
$6
(45.5%)
$11
$19
(44.1%)
$34

~~Interest income decreased in the third quarter of 2017 compared to the same period in 2016, due to both lower~~ invested ~~cash balances and lower interest rates.~~

~~For the first nine months of 2017 compared to the same period in 2016, the decrease in interest income was generally due to the same factors discussed above for the third quarter.~~

balances.

INCOME TAXES

Three Months Ended

Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

(in thousands)

Income tax (expense)
$(108)
$(4)
$(207)
$(12)

	Three Months Ended									Nine Months Ended
	September 30, 2023			Change			September 30, 2022			September 30, 2023			Change			September 30, 2022
(in thousands)
Income tax benefit (expense)	$	(16	)		(91.2	%)	$	(181	)	$	(160	)		(77.1	%)	$	(700	)

Income tax benefit (expense) for the third quarter of ~~2017 compared~~both 2023 and 2022, primarily related to ~~same period in 2016, primarily resulted from~~ foreign ~~subsidiary income tax.~~

~~For the first nine months of 2017 compared to the same period in 2016, the change in~~and some state taxes.

Year-to-date income tax ~~expense~~benefit (expense) was ~~generally~~primarily due to the same factors ~~discussed above for~~as in the third ~~quarter.~~

quarter of 2023, as well as during the first quarter of 2022, a China dividend withholding tax of $442,000 was paid in connection with a dividend repatriation to the US parent company.

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 ~~$10.6~~$8.8 million as of September 30, ~~2017. Our~~2023. As of September 30, for both 2023 and 2022, our deferred tax assets and valuation allowance have been reduced by approximately ~~$249,000~~$435,000 and ~~$226,000~~$412,000, respectively, associated with the requirements of accounting for uncertain tax ~~positions as of September 30, 2017 and December 31, 2016, respectively.~~positions. Given the uncertainty created by our loss history, as well as the volatile and uncertain current economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets ~~associated with~~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. ~~We expect to further analyze the level of valuation allowance during the remainder of 2017.~~

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Financial Condition

LIQUIDITY AND CAPITAL ~~RESOURCES~~

September 30,
2017

Change

December 31,
2016

(in thousands)

Working capital
$18,414
$3,841
$14,573

RESOURCEs

September 30,

2023

Change

December 31,

2022

(in thousands)

Working capital

18,098

519

17,579

At September 30, ~~2017~~2023, our principal sources of liquidity consisted of existing cash ~~position~~and cash equivalents. Cash at $11.9 million has increased $357,000 year-to-date and was ~~$15.2~~approximately the same as on June 30, 2023.

Net working capital at September 30, 2023 was $18.1 million, ~~with $10.8 million~~up $519,000 compared to December 31, 2022, and approximately the same as on June 30, 2023. Receivables were reduced $92,000 compared to December 31, 2022. DSO (Days Sales Outstanding, a collections metric) was up but still below our target. Inventory decreased by $359,000 compared to December 31, 2022. While inventory was elevated in 2022 to address potential shortage risks, we no longer see the ~~USA and the balance in foreign subsidiaries. The change in cash~~same exposure, so we are continuing to manage operations to reduce inventory levels going forward during the fourth quarter ~~resulted primarily from earnings for the period and collections~~ of ~~our accounts receivable.~~

2023.

Although we have no significant external capital expenditure plans currently, we expect ~~that we will~~to continue to carefully make and manage capital expenditures to support our business. We plan to increase our internally developed rental, security provisioning, sales demonstration and test equipment as we develop and release new products. Capital expenditures are currently expected to be funded by existing and internally generated funds.

As a result of our cyclical industry, significant product development, customer support and selling and marketing efforts, we have required substantial working capital to fund our operations. We have tried to balance our level of development spending with the goal of profitable ~~operations.~~operations or managing lower business levels related to COVID-19. We have implemented or have initiatives to implement geographic shifts in our operations, ~~optimized real estate usage, reduced~~reduce exposure to the impact of currency volatility and ~~additional~~tariffs, increase product development differentiation, and ~~cost reductions.~~

control costs.

We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through ~~at least~~ the next one-year ~~period. We~~period, and beyond. If this belief is incorrect, we may require additional cash ~~for~~at the U.S. ~~operations,~~headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries. ~~Although we~~We currently do not have ~~no current~~plans and/or intentions to make further repatriations. For any repatriation, ~~plans,~~ there may be tax and other impediments to any repatriation actions. As many repatriations typically have associated withholding taxes, those amounts withheld will be a current tax without generating a current or deferred tax benefit recognition. Our working capital may be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives, including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time. Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to reduce expenditures and/or seek possible additional financing.

OFF-BALANCE SHEET ARRANGEMENTS

Except as noted in the accompanying consolidated financial statements in Note 5, ~~“Operating Lease Commitments”~~“Leases” and Note 6, “Other Commitments”, we have no off-balance sheet arrangements.

NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ~~$2.1~~approximately $0.1 million in the third quarter of ~~2017~~2023 compared to ~~$755,000~~$1.2 million in the third quarter of ~~2016.~~2022. Adjusted EBITDA, excluding equity compensation (a non-cash item), was ~~$2.3~~approximately $0.4 million in the third quarter of ~~2017,~~2023, compared to ~~$865,000~~$1.4 million in the third quarter of ~~2016.~~

EBITDA was $4.7 million for the first nine months of 2017 compared to $1.3 in the first nine months of 2016. Adjusted EBITDA, excluding equity compensation was $5.3 million for the first nine months of 2017, compared to $1.7 million for the first nine months of 2016.

2022.

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Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding the Company’s results and facilitate the comparison of results. A reconciliation of net income to EBITDA and adjusted EBITDA follows:

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NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURE RECONCILIATION

Three Months Ended

Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

(in thousands)

Net Income
$1,728
$625
$3,913
$901
   Interest (income) expense
  (6)
  (11)
  (19)
  (34)
   Taxes
  108
  4
  207
  12
   Depreciation & amortization
  306
  137
  634
  409
EBITDA earnings
$2,136
$755
$4,735
$1,288





   Equity compensation
  173
  110
  540
  409
Adjusted EBITDA earnings,




   excluding equity compensation
$2,309
$865
$5,275
$1,697

~~RECENT ACCOUNTING ANNOUNCEMENTS~~

~~In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU 2016-09), “Improvements~~

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
(in thousands)
Net Income (loss)	$	(53	)	$	847		$	342		$	(1,630	)
Interest (income)		(41	)		(9	)		(125	)		(11	)
Taxes		16			181			160			700
Depreciation & amortization		180			148			468			441
EBITDA earnings (loss)	$	102		$	1,167		$	845		$	(500	)
Equity compensation		300			264			929			935
Adjusted EBITDA, excluding equity compensation	$	402		$	1,431		$	1,774		$	435

Recently Adopted Accounting Pronouncements

See Note 1 of Notes to ~~Employee Share-Based Payment Accounting”. ASU 2016-09 requires excess tax benefits to be recognized~~Condensed Consolidated Financial Statements included in ~~the statement~~Part 1, Item 1 for a discussion of operations as an income tax expense and is applied prospectively by means of a cumulative-effect adjustment of excess tax benefits from equity in the period of adoption. The standard establishes an alternative practical expedient for estimating the expected term of an award by recognizing the effects of forfeitures in compensation cost when the forfeitures occur. Adoption of the alternative practical expedient is applied prospectively on an entity-wide basis. The standard requires that amounts paid to a taxing authority on the employee’s behalf as a result of directly withholding shares for tax-withholding purposes are to be presented on a retrospective basis as a financing activity on the statement of cash flows. The standard became effective beginning January 1, 2017. The adoption of ASU 2016-09 was not material to our consolidated financial statements.

~~In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides companies with a single model for~~recently adopted accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing 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 it now takes effect for public entities in fiscal years beginning after December 15, 2017. We plan to adopt the revenue standards as of January 1, 2018, utilizing the modified retrospective transition method. The Company is currently evaluating the potential impact of the adoption on our consolidated financial statements. As part of this process, the Company has identified its revenue streams and a preliminary analysis of how we currently account for revenue transactions compared to the revenue accounting required under the new standard. We intend to complete our adoption plan in fiscal year 2017. Because of the nature of the work that remains, at this time, we are unable to reasonably estimate the impact of adoption on our consolidated financial statements. We will continue our evaluation of revenue from our contracts with customers, and we will update our expectations of the impact of adoption of the new revenue standards on our consolidated financial statements in future filings.

~~Table of Contents~~

I~~tem~~pronouncements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

I~~tem~~

Item 4.

Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective at the reasonable level of assurance. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROLS

There were no changes made in our internal controls during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting which is still under the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013).

P~~ART~~

Table of Contents

PART II - OTHER INFORMATION

I~~tem~~

Item 1.

Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of September 30, ~~2017,~~2023, we were not a party to any material pending legal proceedings.

I~~tem~~

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2022, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There are no material changes to the Risk Factors described in our Annual Report.

I~~tem~~

Item 2.

Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds,

~~None~~

~~Table~~ and Issuer Purchases of ~~Contents~~

I~~tem~~Equity Securities

None

Item 3.

Defaults Upon Senior Securities

None

I~~tem~~

Item 4.

Mine Safety Disclosures

Not Applicable

I~~tem~~

Item 5.

Other Information

~~None~~

I~~tem 6.~~

~~Exhibits~~

~~(a)~~

~~Exhibits~~

~~Material Contracts:~~

~~10.34~~

~~Fifth Amendment to Lease, between Data I/O Corporation and BRE WA OFFICE OWNER LLC, made~~

No officers or directors, as ~~of September 12, 2017~~

~~Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002:~~

~~31.1~~

~~Chief Executive Officer Certification~~

~~31.2~~

~~Chief Financial Officer Certification~~

~~Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002:~~

~~32.1~~

~~Chief Executive Officer Certification~~

~~32.2~~

~~Chief Financial Officer Certification~~

~~101~~

~~Interactive Data~~ ~~Files Pursuant to~~defined in Rule ~~405~~16a-1(f), adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation ~~S-T~~

~~Table of Contents~~

S~~IGNATURES~~

S-K, during the three months ended September 30, 2023.

Table of Contents

Item 6.Exhibits

10	Material Contracts:

	None

31	Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002:

	31.1	Chief Executive Officer Certification

	31.2	Chief Financial Officer Certification

32	Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002:

	32.1	Chief Executive Officer Certification

	32.2	Chief Financial Officer Certification

101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED: November ~~9, 2017~~

~~DATA I/O CORPORATION~~

~~(REGISTRANT)~~

By~~: //S//Anthony Ambrose~~

~~Anthony Ambrose~~

~~President and Chief Executive Officer~~

~~(Principal Executive Officer and Duly Authorized Officer)~~

By~~: //S//Joel S. Hatlen~~

~~Joel S. Hatlen~~

~~Vice President and Chief Operating and Financial Officer~~

~~Secretary and Treasurer~~

~~(Principal Financial Officer and Duly Authorized Officer)~~

13, 2023

DATA I/O CORPORATION (REGISTRANT)

By:	/s/Anthony Ambrose
	Anthony Ambrose
	President and Chief Executive Officer
	(Principal Executive Officer and Duly Authorized Officer)


By:	/s/Gerald Y. Ng
	Gerald Y. Ng
	Vice President and Chief Financial Officer
	Secretary and Treasurer
	(Principal Financial Officer and Duly Authorized Officer)

	September 30, 2017	December 31, 2016

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$15,164	$11,571
Trade accounts receivable, net of allowance for
doubtful accounts of $104 and $96, respectively	5,233	4,725
Inventories	4,950	4,059
Other current assets	537	483
TOTAL CURRENT ASSETS	25,884	20,838

Property, plant and equipment – net	2,158	1,875
Other assets	45	63
TOTAL ASSETS	$28,087	$22,776

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$1,598	$1,428
Accrued compensation	3,273	2,208
Deferred revenue	1,570	1,926
Other accrued liabilities	1,029	703
TOTAL CURRENT LIABILITIES	7,470	6,265

Long-term other payables	438	479

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, 8,240,711 shares as of September 30,
2017 and 8,015,746 shares as of December 31, 2016	18,836	19,204
Accumulated earnings (deficit)	553	(3,360)
Accumulated other comprehensive income	790	188
TOTAL STOCKHOLDERS’ EQUITY	20,179	16,032
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$28,087	$22,776

See notes to consolidated financial statements

	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016

Net sales	$9,596	$6,588	$25,955	$17,002
Cost of goods sold	3,639	2,945	10,629	7,743
Gross margin	5,957	3,643	15,326	9,259
Operating expenses:
Research and development	1,814	1,358	5,130	3,655
Selling, general and administrative	2,319	1,664	6,300	4,766
Total operating expenses	4,133	3,022	11,430	8,421
Operating income	1,824	621	3,896	838
Non-operating income (expense):
Interest income	6	11	19	34
Gain on sale of assets	72	-	363	-
Foreign currency transaction gain (loss)	(66)	(3)	(158)	41
Total non-operating income	12	8	224	75
Income before income taxes	1,836	629	4,120	913
Income tax (expense)	(108)	(4)	(207)	(12)
Net income	$1,728	$625	$3,913	$901


Basic earnings per share	$0.21	$0.08	$0.48	$0.11
Diluted earnings per share	$0.20	$0.08	$0.47	$0.11
Weighted-average basic shares	8,201	7,977	8,112	7,955
Weighted-average diluted shares	8,467	8,183	8,400	8,083

See notes to consolidated financial statements

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

	For the Nine Months Ended September 30,
	2017	2016

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$3,913	$901
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization	634	409
Gain on sale of assets	(363)	-
Equipment transferred to cost of goods sold	725	720
Share-based compensation	540	409
Net change in:
Trade accounts receivable	(192)	(2,385)
Inventories	(766)	(211)
Other current assets	(33)	213
Accounts payable and accrued liabilities	1,497	160
Deferred revenue	(485)	163
Other long-term liabilities	(52)	86
Deposits and other long-term assets	18	1
Net cash provided by (used in) operating activities	5,436	466

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(1,642)	(1,688)
Net proceeds from sale of assets	363	-
Cash provided by (used in) investing activities	(1,279)	(1,688)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from issuance of common stock, less payments
for shares withheld to cover tax	(895)	(76)
Repurchase of common stock	-	(191)
Cash provided by (used in) financing activities	(895)	(267)
Increase/(decrease) in cash and cash equivalents	3,262	(1,489)

Effects of exchange rate changes on cash	331	(54)
Cash and cash equivalents at beginning of period	11,571	11,268
Cash and cash equivalents at end of period	$15,164	$9,725

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income Taxes	$82	$6

See notes to consolidated financial statements

	Operating Leases
(in thousands)
2017 (remaining)	$197
2018	909
2019	937
2020	919
2021	753
Thereafter	231
Total	$3,946