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DATA I/O CORP

DATA I/O CORPDAIOEarnings & Financial Report

Nasdaq · Information Technology · Instruments For Meas & Testing of Electricity & Elec Signals

Data I/O Corporation is a provider of manual and automated data programming and security provisioning systems for flash memory, microcontrollers, and logic devices. Founded in 1969 and incorporated in 1972, the company developed equipment that allowed electronic designers to program non-volatile semiconductor devices with data stored on punched cards or ASCII-encoded (eight-level) punched paper tape. These products were used for the design and manufacturing of systems used in industries such ...

What changed in DATA I/O CORP's 10-K — 2022 vs 2023

Top changes in DATA I/O CORP's 2023 10-K

157 paragraphs added · 184 removed · 130 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

50 edited+10 added−20 removed34 unchanged
Shift from analog to connected intelligent devices, security Production contract wins Value-added services, logistics, security Programming equipment drivers Growing Electronic Content, Global Support, Resilient Supply Chains, new product rollouts, growing file sizes, quality control and traceability, security Growing Electronic Content, need for IP protection.
Shift from analog to connected intelligent devices, security Production contract wins Value-added services, logistics, security Programming equipment drivers Growing electronic content, global support, resilient supply chains, new product rollouts, growing file sizes, quality control, traceability, and security Growing electronic content and need for IP protection.
LumenX is available on our PSV7000 and PSV5000 and as a standalone manual programmer. FlashCORE™, and our universal job setup tool, Tasklink™ for Windows®, are available in each family of our automated programming systems and in FlashPAK™, our manual programming system. The SentriX security system adds security deployment capability to our data programming system.
LumenX is available on our PSV7000 and PSV5000 and as a standalone manual programmer. FlashCORE™, and our universal job setup tool, Tasklink™ for Windows®, are available in each family of our automated programming systems and in FlashPAK™, our manual programming system. The SentriX security system adds security capability to our data programming system.
Rajeev holds a Master of Science in Electrical & Computer Engineering from the University of Texas, Austin and a BE in Electrical Engineering from Delhi College of Engineering, New Delhi. Michael Tidwell joined Data I/O in May 2019 and is our Vice President of Marketing and Business Development.
Rajeev holds a Master of Science in Electrical & Computer Engineering from the University of Texas, Austin and a BE in Electrical Engineering from Delhi College of Engineering, New Delhi. Michael Tidwell joined Data I/O in May 2019 and is our Vice President of Marketing and Corporate Business Development.
Our PSV7000 Automated Programming System continues to be well adopted in the marketplace, in particular for automotive electronics customers and as a base for security deployment upgrades. Our PSV5000 Automated Programming System combines mid-range capacity and flexibility with competitive pricing and also supports security deployment. Our PSV3000 Automated Programming System is a lower cost platform for basic programming needs.
Our PSV7000 Automated Programming System continues to be well adopted in the marketplace, in particular for automotive electronics customers and as a base for security deployment upgrades. Our PSV5000 Automated Programming System combines mid-range capacity and flexibility with competitive pricing and also supports security deployment. Our PSV3500 Automated Programming System is a lower cost platform for basic programming needs.
We believe patent protection enforcement may be increasingly important in our security provisioning business and we have approximately 20 U.S. and international awarded patents related to the SentriX platform and security provisioning architecture, processes, and methods. We attempt to protect our rights in proprietary systems (architecture, implementations, software), including the SentriX Security Deployment System.
We believe patent protection enforcement may be increasingly important in our security provisioning business and we have approximately 25 U.S. and international awarded patents related to the SentriX platform and security provisioning architecture, processes, and methods. We attempt to protect our rights in proprietary systems (architecture, implementations, software), including the SentriX Security Deployment System.
We make foreign sales through our wholly-owned subsidiaries in Germany and China, as well as through independent distributors and sales representatives operating in 45 countries. Our independent foreign distributors purchase our products for resale and we generally recognize the sale at the time of shipment to the distributor.
We make foreign sales through our wholly-owned subsidiaries in Germany and China, as well as through independent distributors and sales representatives operating in 46 countries. Our independent foreign distributors purchase our products for resale and we generally recognize the sale at the time of shipment to the distributor.
Net sales in the U.S. for 2022, 2021 and 2020 were (in millions) $1.8, $2.6 and $1.5, respectively. Some of our customers’ orders delivered internationally are heavily influenced by U.S. sales-based efforts. 7 Table of Contents International Sales International sales represented approximately 93%, 90% and 93% of net sales in 2022, 2021 and 2020, respectively.
Net sales in the U.S. for 2023, 2022 and 2021 were (in millions) $2.8, $1.8 and $2.6, respectively. Some of our customers’ orders delivered internationally are heavily influenced by U.S. sales-based efforts. 7 Table of Contents International Sales International sales represented approximately 90%, 93% and 90% of net sales in 2023, 2022 and 2021, respectively.
When their business grows, they buy more semiconductors which, in turn, require additional programming equipment to maintain production speeds or program new device technologies.
When their business grows, they buy more semiconductors which, in turn, requires additional programming equipment to maintain production speeds or program new device technologies.
Until 2007, he was general manager and held several other progressively responsible positions at Intel Corporation, where he led development and marketing of standards-based telecommunications platforms, and grew the industry standard server business to over $1B in revenues. He is Chair of the EvergreenHealth Foundation Board of Trustees. He is also a board member of SideChannel, Inc.
Until 2007, he was general manager and held several other progressively responsible positions at Intel Corporation, where he led development and marketing of standards-based telecommunications platforms, and grew the industry standard server business to over $1B in revenues. He is Chair of the EvergreenHealth Foundation Board of Trustees. He previously served as a board member of SideChannel, Inc.
Our software products are not typically sold separately from sales of programming systems. However, when we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon shipment, provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions, if any, have been met.
Our software products are not typically sold or licensed separately from sales of programming systems. However, when we license software separately, we recognize revenue upon the transfer of control of the software, which is generally upon shipment, provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions, if any, have been met.
As with U.S. sales representatives, sales made by international sales representatives are on an agency basis, with sales made directly to the customer by us. Net international sales for 2022, 2021 and 2020 were (in millions) $22.4, $23.2 and $18.8, respectively.
As with U.S. sales representatives, sales made by international sales representatives are on an agency basis, with sales made directly to the customer by us. Net international sales for 2023, 2022 and 2021 were (in millions) $25.3, $22.4 and $23.2, respectively.
Our security deployment system, SentriX®, is offered for security provisioning on a pay per part use basis along with related fees. Data I/O programming technology is integrated with the PSV family to create highly-flexible systems that deliver outstanding performance with low total cost of ownership.
Our security deployment system, SentriX®, is offered as a software license added to existing programming systems or on a pay per part use basis along with related fees. Data I/O programming technology is integrated with the PSV family to create highly-flexible systems that deliver outstanding performance with low total cost of ownership.
((OTCQB: SDCH) retained after their 2022 merger with Cipherloc Corporation (OTCQB: CLOK) where he joined the board in 2019 and has also been lead independent director since 2019). Mr. Ambrose has a Bachelor’s of Science in Engineering from Princeton University.
(OTCQB: SDCH) until February 2024 having been retained after their 2022 merger with Cipherloc Corporation (OTCQB: CLOK) where he joined the board in 2019 and had also been lead independent director since 2019. Mr. Ambrose has a Bachelor of Science in Engineering from Princeton University.
The following represented greater than 10% of net sales for the applicable year: Percentage of Net Sales 2022 2021 2020 Number of customers (a distributor) 1 1 1 Approximate percentage of net sales 23 % 14 % 12 % The following represented greater than 10% of our consolidated accounts receivable for the applicable year: Percentage of Consolidated Accounts Receivable 2022 2021 2020 Number of customers 3 3 3 Approximate percentage of consolidated accounts receivable balance 39 % 36 % 41 % Percentage of each 15 % 13 % 17 % Percentage of each 13 % 12 % 12 % Percentage of each 11 % 11 % 12 % Geographic Markets and Distribution We market and sell our products through a combination of direct sales, indirect sales representatives and distributors, as well as services through programming centers.
The following represented greater than 10% of net sales for the applicable year: Percentage of Net Sales 2023 2022 2021 Number of customers 2 1 1 Approximate percentage of net sales 24 % 23 % 14 % Percentage of each 13 % 23 % 14 % Percentage of each 11 % n/a n/a The following represented greater than 10% of our consolidated accounts receivable for the applicable year: Percentage of Consolidated Accounts Receivable 2023 2022 2021 Number of customers 3 3 3 Approximate percentage of consolidated accounts receivable balance 47 % 39 % 36 % Percentage of each 18 % 15 % 13 % Percentage of each 16 % 13 % 12 % Percentage of each 13 % 11 % 11 % Geographic Markets and Distribution We market and sell our products through a combination of direct sales, indirect sales representatives and distributors, as well as services through programming centers.
Rajeev Gulati joined Data I/O in July 2013 and is our Chief Technology Officer and Vice President of Engineering. Prior to Data I/O, Rajeev served as Director of Software Engineering for AMD responsible for tools, compiler strategy and execution from 2006 to 2013. He has an extensive background in software, systems and applying technology to develop new markets.
Prior to Data I/O, Rajeev served as Director of Software Engineering for AMD responsible for tools, compiler strategy and execution from 2006 to 2013. He has an extensive background in software, systems and applying technology to develop new markets.
Our PSV family of handlers has won multiple industry awards for technical excellence and innovation and has a large global installed base. Our automated systems have list selling prices ranging from $95,000 to $635,000 and our manual systems have list selling prices ranging from $10,000 to $36,000.
Our PSV family of handlers has won multiple industry awards for technical excellence and innovation and has a large global installed base. Our automated systems have list selling prices ranging from $62,000 to $690,000 and our manual systems have list selling prices ranging from $12,000 to $48,000.
Hatlen 64 Vice President, Chief Operating and Financial Officer, Secretary and Treasurer Rajeev Gulati 59 Chief Technology Officer, Vice President of Engineering Michael Tidwell 54 Vice President of Marketing and Business Development Anthony Ambrose joined Data I/O on October 25, 2012, and is our President and Chief Executive Officer (“CEO”), and a member of the Board of Directors.
Ng 62 Vice President, Chief Financial Officer, Secretary and Treasurer Rajeev Gulati 60 Chief Technology Officer, Vice President of Engineering Michael Tidwell 55 Vice President of Marketing and Corporate Business Development Anthony Ambrose joined Data I/O on October 25, 2012, and is our President and Chief Executive Officer (“CEO”), and a member of the Board of Directors.
Sales Percentage of Total Sales Breakdown by Type Sales Type 2022 2021 Drivers Equipment Sales 57% 58% Capacity, Process improvement, Technology Adapter Sales 30% 30% Capacity utilization, New customer products Software and Maintenance Sales 13% 12% Installed base, Added capabilities Total 100% 100% The table below presents our main products and the key features that benefit our customers: Products Key Features Customer Benefits PSV Handlers: Off-line (Automated) · Fast program and verify speeds · Up to 112 programming sites · Up to 3000 devices per hour throughput · UFS Support · Supports LumenX and FlashCORE III programmers · Supports multiple media types · Supports quality options – fiber laser marking, 3D coplanarity · ConneX Factory Integration, Job Composer & other Software · Managed and secure programming · High throughput for high density Flash programming · High flexibility with respect to I/O options (tray, tape, tube), marking/labeling and vision for coplanarity inspection SentriX Security Deployment System · Unique ability to securely provision keys and certificates one device at a time · Pay per use model reduces capital spending requirements as the market develops. · Create Secure IoT devices across a global network · Maintain IP control over the lifecycle of their products LumenX Programmer · Extensible architecture for fast program, verify and download speeds · Supports UFS, microcontrollers, Serial FLASH, secure elements and other device types · Large file size support · Secure Job creation · 8 sockets with tool-less changeover with single socket adapters · Managed and secure programming · Fast setup and job changeover · Highest yield and low total cost of programming · High performance FlashPAK III programmer: (Non-Automated) · Scalability · Network control via Ethernet · Stand-alone operation or PC compatible · Parallel programming · Validate designs before moving down the firmware supply chain · Unmatched ease of use in manual production systems 5 Table of Contents Customers/Markets We sell our solutions to customers worldwide, many of whom are world-class manufacturers of electronic devices used in a broad range of industries, as described in the following table: OEMs EMS Programming Centers Automotive Electronics IoT, Industrial, Consumer Electronics, including Wireless Contract Manufacturers Notable end customers Borg Warner, Bosch, Alps Alpine, Visteon, Kostal, JVCKenwood, Harman, Denso Ten, Continental, Aptiv Panasonic, Magna, Marelli, Tesla LG, TCL, Siemens, Danfoss, Philips, Schneider, Endress+Hauser, Insta, Microsoft, Sony, Amazon, UTEC Pegatron, Flex, Jabil, Wistron, Sanmina SCI, Foxconn, Leesys, Calcomp Arrow, Avnet, BTV, CPS, Elsil, Elmitech, NOA Leading Business drivers Infotainment, Advanced Driver Assist (ADAS), Electrification, Connectivity and Security Higher functionality driven by increasing electronic content.
Our SentriX system revenue typically comes from per part use fees, set-up or minimum quarterly fees, consumables, non-recurring engineering fees, service fees and the sale of equipment related to SentriX. 4 Table of Contents Sales Percentage of Total Sales Breakdown by Type Sales Type 2023 2022 Drivers Equipment Sales 58% 57% Capacity, Process improvement, Technology Adapter Sales 29% 30% Capacity utilization, New customer products Software and Maintenance Sales 13% 13% Installed base, Added capabilities Total 100 % 100 % The table below presents our main products and the key features that benefit our customers: Products Key Features Customer Benefits PSV Systems: Off-line (Automated) · Fast program and verify speeds · Up to 112 programming sites · Up to 3000 devices per hour throughput · UFS Support · Supports LumenX and FlashCORE III programmers · Supports multiple media types · Supports quality options – fiber laser marking, 2D inspection, 3D coplanarity · ConneX Service Software enables connected factory integration and automation · Managed and secure programming · High throughput for high-density flash memory programming · Flexible I/O options (tray, tape, tube), marking/labeling and vision for coplanarity inspection · Scalable solutions for low to high-volume manufacturing · Access to system data for connected factory machine learning and AI applications SentriX Security Deployment System · Unique ability to securely provision keys and certificates one device at a time · Broad set of secure devices supported with wide range of silicon partners · Software license model allows easy upgrades from deployed data programming systems · Pay per use model · Create secure IoT devices across a global network · Maintain IP control over their product’s lifecycle · Secure supply chain and flexible key management architecture LumenX Programmer (Non-automated) · Extensible architecture for fast program, verify and download speeds · Supports UFS memory, microcontrollers, serial flash, secure elements and other device types · Large file size support · Secure job creation · Eight sockets with tool-less changeover with single-socket adapters · Managed and secure programming · Fast setup and job changeover · Highest yield and low total cost of programming · High performance FlashPAK III programmer: (Non-automated) · Scalability · Network control via Ethernet · Stand-alone operation or PC compatible · Parallel programming · Four sockets · Universal device support · Validate designs before moving down the firmware supply chain · Unmatched ease of use in manual production systems 5 Table of Contents Customers/Markets We sell our solutions to customers worldwide, many of whom are world-class manufacturers of electronic devices used in a broad range of industries, as described in the following table: OEMs EMS Programming Centers Automotive Electronics IoT, Industrial, Consumer Electronics, including Wireless Contract Manufacturers Notable end customers Borg Warner, Bosch, Alps Alpine, Visteon, Kostal, JVCKenwood, Harman, Hitachi, Denso Ten, Continental, Aptiv Panasonic, Magna, Marelli, Tesla, Desay, BYD LG, TCL, Siemens, Danfoss, Philips, Schneider, Endress+Hauser, Insta, Sony, UTEC, Nokia Pegatron, Flex, Jabil, Wistron, Sanmina SCI, Foxconn, Salcomp, Calcomp, Plexus Arrow, Avnet, BTV, CPS, Semitron, NOA Leading Business drivers Infotainment, Advanced Driver Assist (ADAS), electrification, connectivity, and security Higher functionality driven by increasing electronic content.
As a resilient supply chain strategy, we manufacture various products in both of our production facilities. This strategy allows opportunity to mitigate some of the risks of having only one location, as well as enabling tariff and tax optimization strategies. We use a combination of standard components and fabricated parts manufactured to our specifications.
This strategy allows opportunity to mitigate some of the risks of having only one location, as well as enabling tariff and tax optimization strategies. We use a combination of standard components and fabricated parts manufactured to our specifications.
However, any claim of infringement, with or without merit, could be costly and a diversion of management’s attention, and an adverse determination could adversely affect our reputation, potentially preclude us from offering certain products, and subject us to substantial liability.
However, any claim of infringement, with or without merit, could be costly and a diversion of management’s attention, and an adverse determination could adversely affect our reputation, potentially preclude us from offering certain products, and subject us to substantial liability. As of December 31, 2023, we were not subject to any pending actions regarding infringement claims.
Device support is a critical aspect of our business and consists of writing software algorithms for devices and developing socket adapters to hold and connect to the device for programming. 4 Table of Contents Our products have both an upfront solution sale and recurring revenue element.
Device support is a critical aspect of our business and consists of writing software algorithms for devices and developing socket adapters to hold and connect to the device for programming. Our products have both an upfront solution sale and recurring revenue element. Adapters are a consumable item and software and maintenance are typically recurring under subscription contracts.
Environmental, Social and Governance (“ESG”) Data I/O is committed to the responsibilities associated with modern age ESG. The Company’s key pillars for ESG support a framework for sustainable growth and include Leadership & Governance, Environment, Innovation, Human Capital, Social Capital, and Financial Excellence.
The tight labor markets that we experienced in 2022 returned to more normal in 2023. Environmental, Social and Governance (“ESG”) Data I/O is committed to the responsibilities associated with modern age ESG. The Company’s key pillars for ESG support a framework for sustainable growth and include Leadership & Governance, Environment, Innovation, Human Capital, Social Capital, and Financial Excellence.
Semiconductor devices are a large, growing market, in terms of devices, bits programmed and need for security. We believe that our sales are driven by many of the same forces that propel the semiconductor industry. We sell to the same firms that buy the semiconductors.
Semiconductor devices are a large, growing market, in terms of units, bits programmed and need for security. We believe that our sales are driven by many of the same forces that propel the semiconductor industry as well as the automotive electronics industry. We sell to the manufacturers who are consumers of certain semiconductors.
With expected growth in IoT applications, the business opportunity for this market differentiates on quality, security and automation. Some of our automated programming systems integrate data programming, automated handling functions and/or security deployment into a single product solution.
With expected growth in IoT applications, the business opportunity for this market differs depending on quality, security and automation. Some of our automated programming systems integrate data programming, automated handling functions and/or security deployment into a single product solution. Quality and security-conscious customers, particularly those in high-volume manufacturing and programming, drive this portion of our business.
Our device programming solutions currently target two high volume, growing markets: automotive electronics and IoT systems including industrial and consumer devices. 6 Table of Contents Growth drivers for automotive electronics · Consumers desire advanced car features requiring higher levels of sophistication, including autonomous cars, infotainment options (audio, radio, dashboard displays, navigation), ADAS, wireless connectivity and electrification · Proliferation of programmable microcontrollers to support the next-generation electronic car systems · Increasing use of high-density flash to provide memory for advanced applications that require programming · Increasing complexity to support autonomous vehicles · Increasing need for security solutions for a secure supply chain and lifecycle firmware integrity · Growing software size is a programming capacity driver Growth drivers for IoT, including industrial, consumer electronics and wireless · Securely controlling groups of connected devices through a secure supply chain and lifecycle firmware integrity management · Adding intelligence and processing into devices · Connecting previously unconnected devices to networks and the internet (such as smart home, including intelligent thermostats and lighting) · Emergence of new devices and applications (such as health and wellness wearable devices and applications) All of the above growth drivers are long term and are likely to be adversely impacted, at least temporarily, due to the global pandemic of COVID-19 and other global political and economic factors in our markets.
Our device programming solutions currently target two high volume, growing markets: automotive electronics and IoT systems, including industrial and consumer devices. 6 Table of Contents Growth drivers for automotive electronics · Consumers desire advanced car features requiring higher levels of sophistication, including autonomous cars, infotainment options (audio, radio, dashboard displays, navigation), ADAS, wireless connectivity and electrification · Proliferation of programmable microcontrollers to support the next-generation electronic car systems · Increasing use of high-density flash to provide memory for advanced applications · Increasing complexity to support autonomous vehicles · Increasing need for security solutions for a secure supply chain and lifecycle firmware integrity · Growing software size Growth drivers for IoT, including industrial, consumer electronics and wireless · Securely controlling groups of connected devices through a secure supply chain and lifecycle firmware integrity management · Adding intelligence and processing into devices · Connecting previously unconnected devices to networks and the internet (such as smart home, including intelligent thermostats and lighting) · Emergence of new devices and applications (such as health and wellness wearable devices and applications) Diversification of accounts receivable and net sales During 2023, we sold products to approximately 200 customers throughout the world.
We cannot predict the effect of such factors on our business, but we try to consider and respond to changes in these factors, particularly as the majority of our costs are U.S. based while the vast majority of our sales are international.
We cannot predict the effect of such factors on our business, but we try to consider and respond to changes in these factors, particularly as the majority of our costs are U.S. based while the vast majority of our sales are international. Competition The competition in the programming systems market is fragmented with several companies selling directly competitive solutions.
Industry Background We enable companies to improve productivity, increase supply-chain security and reduce costs by providing device data programming and security deployment solutions that allow our customers to take IP (large design and data files) and protect and program it into memory, microcontroller, security and logic devices quickly and cost-effectively.
We experienced stronger orders the second half of 2023 from our automotive electronics customers and the labor strikes have been resolved. 3 Table of Contents Industry Background We enable companies to improve productivity, increase supply-chain security and reduce costs by providing device data programming and security deployment solutions that allow our customers to take IP (large design and data files) and protect and program it into memory, microcontroller, security and logic devices quickly and cost-effectively.
Initiatives within these areas apply to the company’s daily global operations as well as within its supply chains. We believe we are the only supplier in our industry with a published conflict mineral policy and public company governance. We believe we are the only programming industry supplier with a diverse Board of Directors.
Initiatives within these areas apply to the company’s daily global operations as well as within its supply chains. We believe we are the only supplier in our industry with a published conflict mineral policy and public company governance. Our facilities are subject to numerous laws and regulations concerning the discharge of materials or otherwise relating to the environment.
If we cannot develop alternative sources for these components, or if we experience deterioration in relationships with these suppliers, there may be price increases, minimum order quantities, end of life purchase requirements, costs associated with integrating alternatively sourced parts, and delays or reductions in product introductions or shipments, which may materially adversely affect our operating results. 8 Table of Contents In accordance with industry practices, generally all orders are subject to cancellation prior to shipment without penalty, except for contracts calling for custom configuration.
If we cannot develop alternative sources for these components, or if we experience deterioration in relationships with these suppliers, there may be price increases, minimum order quantities, end of life purchase requirements, costs associated with integrating alternatively sourced parts, and delays or reductions in product introductions or shipments, which may materially adversely affect our operating results.
Our largest customers are heavy users of programmable semiconductor devices and include original equipment manufacturers (“OEMs”) in automotive electronics, industrial electronics, consumer electronics and IoT markets as well as their programming center partners and electronic manufacturing service (“EMS”) contract manufacturers. Data I/O was incorporated in the State of Washington in 1969 and its business was founded in 1972.
Our largest customers are heavy users of programmable semiconductor devices and include original equipment manufacturers (“OEMs”) and tier 1 suppliers in automotive electronics, industrial electronics, consumer electronics and IoT markets as well as their programming center partners and electronic manufacturing service (“EMS”) contract manufacturers.
Manufacturing, Raw Materials and Backlog We strive to manufacture and provide the best solutions for advanced programming. We primarily assemble and test our products at our principal facilities in Redmond, Washington and Shanghai, China. Both of these locations are ISO 9001:2015 certified. We outsource our circuit board manufacturing and fabrication.
We primarily assemble and test our products at our principal facilities in Redmond, Washington and Shanghai, China. Both of these locations are ISO 9001:2015 certified. We outsource our circuit board manufacturing and fabrication. As a resilient supply chain strategy, we manufacture various products in both of our production facilities.
He has completed the Stanford Graduate School of Business Director Symposium and earned the Carnegie Mellon University Certificate in Cybersecurity Oversight. 10 Table of Contents Joel S. Hatlen joined Data I/O in September 1991 and in July 2017 became our Chief Operating Officer in addition to serving as our Vice President, Chief Financial Officer, Secretary and Treasurer since January 1998.
He has completed the Stanford Graduate School of Business Director Symposium and earned the Carnegie Mellon University Certificate in Cybersecurity Oversight. 10 Table of Contents Gerald Y. Ng joined Data I/O in July 2023 as Data I/O's Vice President of Finance and, effective August 16, 2023, became Data I/O's Vice President and Chief Financial Officer.
In addition, new security devices may be required to be programmed using device-specific programmers developed by the semiconductor manufacturer.
Some automotive products may also be programmed over the air (“OTA”). IoT devices may also be programmed with ICT, ISP, EOL or OTA. In addition, new security devices may be required to be programmed using device-specific programmers developed by the semiconductor manufacturer.
We continue to develop new technologies and products and enhance existing products. Future growth is, to a large extent, dependent upon the timely development and introduction of new products, as well as the development of technology and algorithms to support the latest programmable devices.
Future growth is, to a large extent, dependent upon the timely development and introduction of new products, as well as the development of technology and algorithms to support the latest programmable devices. Where possible, we may pursue partnerships and other strategic relationships to add new products, capabilities and services, particularly in security deployment.
While we are not aware of any published industry market information covering the programming systems or security deployment market, according to our internal analysis of competitors’ revenues, we believe we continue to be the largest competitor in the programming systems equipment market and have been gaining market share in recent years, especially with our new products.
While we are not aware of any published industry market information covering the programming systems or security deployment market, according to our internal analysis of competitors’ revenues, we believe we continue to be the largest supplier in the programming systems market. Manufacturing, Raw Materials and Backlog We strive to manufacture and provide the best solutions for advanced programming.
During 2022, 2021 and 2020, we made expenditures for research and development of (in millions) $6.1, $6.6 and $6.4, respectively, representing 25%, 26% and 31% of net sales, respectively. Research and development costs are generally expensed as incurred.
Our research and development efforts have resulted in the release of significant new products and product enhancements over the past several years. During 2023, 2022 and 2021, we made expenditures for research and development of (in millions) $6.5, $6.1 and $6.6, respectively, representing 23%, 25% and 26% of net sales, respectively. Research and development costs are generally expensed as incurred.
Our backlog of pending orders was approximately (in millions) $4.8, $2.9 and $3.9 as of December 31, 2022, 2021 and 2020, respectively. The size of backlog at any particular date is not necessarily a meaningful indicator of the trend of our business. Research and Development We believe that continued investment in research and development is critical to our future success.
The size of backlog at any particular date is not necessarily a meaningful indicator of the trend of our business. 8 Table of Contents Research and Development We believe that continued investment in research and development is critical to our future success. We continue to develop new technologies and products and enhance existing products.
Although competition in the security deployment market is developing, we expect competition in the market to increase as security deployment becomes more important. There are alternative security deployment solutions such as software-based security, rather than the hardware-based security of our SentriX equipment. In addition, we compete with multiple substitute forms of device programming including “home grown” solutions.
There are alternative security deployment solutions such as software-based security, rather than the hardware-based security of our SentriX equipment. In addition, we compete with multiple substitute forms of device programming including “home grown” solutions. Programming after device placement may be done with In Circuit Test (“ICT”), In System Programming (“ISP”), and End of Line Downloading (“EOL”).
Process improvement and simplification as well as new product rollouts, memory and new technology, security New contracts from OEMs, programming solutions specified by OEMs Capacity utilization of their installed base of equipment, small parts handling, security Buying criteria Quality, reliability, configuration control, traceability, global support, IP protection, security Quality, reliability, configuration control, traceability, global support, IP protection, Security.
Process improvement and simplification as well as new product rollouts, memory and new technology, security New contracts from OEMs, programming solutions specified by OEMs Capacity utilization of their installed base of equipment, small parts handling, security Buying criteria Quality, throughput, reliability, configuration control, traceability, global support, IP protection, security Quality, reliability, configuration control, traceability, global support, IP protection, security Lowest equipment procurement cost, throughput, global support Flexibility, lowest lifecycle cost per programmed part, low changeover time; use of multiple vendors provides negotiating leverage, device support availability Security Deployment End-customer focus End-customer focus End-customer and partner focus Partner focus of our SentriX deployments Our solutions address the data programming and security deployment needs of programmable semiconductor devices.
To date, such cancellations have not had a material effect on our sales volume. To meet customers’ delivery requirements, we manufacture certain products based upon a combination of backlog and anticipated orders. Most orders are scheduled for delivery within 1 to 90 days after receipt of the order.
In accordance with industry practices, generally all orders are subject to cancellation prior to shipment without penalty, except for contracts calling for custom configuration. To date, such cancellations have not had a material effect on our sales volume. To meet customers’ delivery requirements, we manufacture certain products based upon a combination of backlog and anticipated orders.
We also continue to focus on increasing our capacity and responsiveness for new device support requests from customers and programmable integrated circuit manufacturers by revising and enhancing our internal processes and tools. Our research and development efforts have resulted in the release of significant new products and product enhancements over the past several years.
We plan to deliver new programming technology, automated handling systems, factory automation communications software, and enhancements for security deployment in the manufacturing environment. We also continue to focus on increasing our capacity and responsiveness for new device support requests from customers and programmable integrated circuit manufacturers by revising and enhancing our internal processes and tools.
Executive Officers of the Registrant Set forth below is certain information concerning the executive officers of Data I/O as of March 20, 2023: Name Age Position Anthony Ambrose 61 President and Chief Executive Officer Joel S.
Potential regulations regarding climate change measurements and disclosures could require significant effort and costs. 9 Table of Contents Executive Officers of the Registrant Set forth below is certain information concerning the executive officers of Data I/O as of March 18, 2024: Name Age Position Anthony Ambrose 62 President and Chief Executive Officer Gerald Y.
Typically, their equipment meets a “good enough” standard, but with reduced quality, traceability, upgradability, security and other software features such as factory integration software. Many of these competitors compete on a regional basis, with local language and support.
Our direct competition competes primarily based on price. Typically, their equipment meets a “good enough” standard, but with reduced quality, traceability, upgradability, security and other software features. Many of these competitors compete on a regional basis. Although competition in the security deployment market is developing, we expect competition in the market to increase as security deployment becomes more important.
We also utilize independent contractors for specialty work, primarily in research and development, and utilize temporary workers to adjust capacity to fluctuating demand and for special projects.
Employees - Human Capital As of December 31, 2023, we had a total of 100 employees, of which 46 were located outside the U.S. and 9 of which were part time. We also utilize independent contractors for specialty work, primarily in research and development, and utilize temporary workers to adjust capacity to fluctuating demand and for special projects.
We are continuing to develop technology for security deployment to program new categories of semiconductors, including Secure Elements, TPMs, Authentication Chips, and Secure Microcontrollers. We plan to deliver new programming technology, automated handling systems and enhancements for security deployment in the manufacturing environment.
We are currently focusing our research and development efforts on strategic growth markets, including automotive electronics, IoT and security deployment. We are continuing to develop technology for security deployment to program new categories of semiconductors, including Secure Elements, TPMs, Authentication Chips, and Secure Microcontrollers.
Compliance with environmental laws has not had, nor is it currently expected to have, a material effect on our capital expenditures, financial position, results of operations or competitive position. Potential regulations regarding climate change measurements and disclosures could require significant effort and costs.
The Company provides employees time-off to volunteer and also coordinates group projects. In addition, the Company provides internships to local high school and college students through STEM and technical colleges. Compliance with environmental laws has not had, nor is it currently expected to have, a material effect on our capital expenditures, financial position, results of operations or competitive position.
The impact of semiconductor chip shortages that began mid 2021 continued well into 2022 and are not completely resolved going into 2023. Many of the issues described here in the overview have caused supply chain disruptions and lead time unreliability, which we have managed though carefully maintaining and increasing key inventory levels.
For 2023, many of the issues described 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.
In foreign countries we have employment agreements or, in China, the Shanghai Foreign Services Co., Ltd. (“FSCO”) labor agreement. When hiring and retaining talent, we create specialized knowledge that is difficult to replace short term. We experienced tight labor markets during 2022 which resulted in challenges in recruiting assembly technicians and software development engineers.
In foreign countries we have employment agreements or, in China, the Shanghai Foreign Services Co., Ltd. (“FSCO”) labor agreement. Because of the creation of specialized knowledge and skills in our business, there are extra short-term challenges to hiring and training replacements.
Certain labor markets were tight during the year, with assembly technicians and software development engineers being challenging to recruit. Interest rate hikes by central banks is a concern especially for cyclical industries with resulting worries about capital spending and planning for recessionary impacts. Currency changes caused significant headwinds to our translated consolidated revenues.
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 not completely resolved yet in 2023.
While we had little direct impact from Russia or Ukraine, the war’s effect on supply chains, shipping, European economic uncertainty and energy concerns disrupted our business. Later in the year, the impacts seemed to diminish. Inflation impacted everyone. We believe we were able to adequately address inflation with pricing adjustments such that our margins were mostly maintained.
We continued to manage inflation, supply chain impacts and shortages, and the post lock down economic transitions in China and elsewhere. Other Major Impacts on 2023 In 2022, the war in Ukraine started, while having little direct impact on us from Russia or Ukraine, did affect our supply chains, European economic uncertainty and energy concerns. Inflation impacted everyone.
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Our website address is www.dataio.com. COVID-19 During 2022, we continued to react to and manage our business relative to the COVID-19 pandemic. During 2020 and throughout 2021, COVID-19 impacted all aspects of our business, from customer demand, to supply chain integrity, employee safety, business processes, and financial management.
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Data I/O was incorporated in the State of Washington in 1969 and its business was founded in 1972. Our website address is www.dataio.com . COVID-19 In 2023, most of the direct implications of COVID-19 had passed, and we were dealing with the follow-on impacts or indirect impacts from COVID-19 and the policies put in place to mitigate the disease.
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During 2022, as a result of vaccinations and the reduced impact of COVID-19, our business started to return to more normal in parts of the world. As a global company, we had to manage these aspects of our business while working within the guidelines of local and national policy in the U.S., China and Germany.
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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.
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During parts of the first and second quarters, our Shanghai facility and operations were shut down for two and a half months as required by China’s requirements pursuant to their COVID Zero policy. This shutdown impacted our supply chains, shipping times, travel, trade shows, and forced remote work.
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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.
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We were largely able to resume operations and begin recovery late in the second quarter and throughout the third quarter. For most of 2022, waves of COVID-19 infection and variants have kept or re-imposed revised travel restrictions. Customers continued to restrict in-person sales and other visits.
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In the United States, we believe uncertainty related to automotive labor strikes softened demand and pushed out expected end-of-the-quarter orders.
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We have continued to do business by converting these interactions to remote and virtual means as we have implemented new processes and technology. Our resilient supply chain model was able to support our customers by having alternate facilities that were open and responded to the critical impacts of the shutdown.
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Most orders are scheduled for delivery within 1 to 90 days after receipt of the order. Our backlog of pending orders was approximately (in millions) $2.8, $4.8 and $2.9 as of December 31, 2023, 2022 and 2021, respectively.
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Later in the year China’s COVID Zero policy was effectively cancelled. In December most of our employees in Shanghai China were out briefly with COVID and then we resumed normal operations. 3 Table of Contents Other Major Impacts on 2022 The war in Ukraine had many impacts on our business.
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Our hiring and retention strategies and efforts include emphasis on the advantages of working in a technology oriented, smaller, international, public company, and the culture of our organization. We utilize competitive pay practices, incentive compensation, equity awards, and benefits such as health care, life and disability insurance; paid time off; education and volunteer time.
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This resulted from the strengthening of the US Dollar versus most foreign currencies, especially the Euro and Yuan in which our subsidiaries do business. Later in the fourth quarter and continuing into early 2023, the US Dollar weakened somewhat, providing some tailwinds to revenue growth.
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Additionally, the Company started to purchase only sustainable (green) electric power (in our China & U.S. facilities in 2023; German facility in prior years) and started to purchase offsets for its carbon emissions from natural gas use in the U.S. facility. For our vehicles, we have been replacing turned in cars with hybrid or electric vehicles.
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Finally, the continued outlook by industry analysts for automotive electronics remains strong based on the long-term forecast for a decade, which remains our primary market focus.
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None of these actions have had a material financial impact. Recent developments to climate regulations and guidelines have increased customer demands for climate disclosures on their timelines as opposed to regulations applicability to the Company. Data I/O is also committed to giving back to our local communities through volunteer and internship programs.
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During 2022, we continued to simplify and integrate security deployment into some of our solutions adding the capability to our PSV5000 and as a field upgrade to installed systems. Quality and security-conscious customers, particularly those in high-volume manufacturing and programming, drive this portion of our business.
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Gerry brings a wealth of experience in finance and treasury functions, business development, financial planning & forecasting, monthly reporting and business compliance. He was previously CFO for Kymeta Corporation, a broadband satellite and cellular networks communication company, and prior to that, held CFO titles at FUJIFILM SonoSite, Inc. and Fluke Networks.
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Adapters are a consumable item and software and maintenance are typically recurring under subscription contracts. Our SentriX system revenue typically comes from per part use fees, set-up or minimum quarterly fees, consumables, non-recurring engineering fees, service fees and the sale of equipment related to SentriX.
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Gerry holds a Masters of Business Administration from Northwestern University – Kellogg School of Management and a Bachelor of Arts Finance and Accounting from the University of Washington. Rajeev Gulati joined Data I/O in July 2013 and is our Chief Technology Officer and Vice President of Engineering.
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Lowest equipment procurement cost, global support Flexibility, lowest life-cycle cost-per programmed-part, low changeover time; use of multiple vendors provides negotiating leverage, device support availability Security Deployment End customer focus End customer focus End customer and partner Focus Partner focus of our SentriX deployments Our solutions address the data programming of devices and security deployment needs of programmable semiconductor devices.
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Annual projections on spending, growth, mix, and profitability are likely to be revised substantially as new information is obtained. Diversification of accounts receivable and net sales During 2022, we sold products to approximately 200 customers throughout the world.
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Competition The competition in the programming systems market is highly fragmented with a small number of organizations selling directly competitive solutions and a large number of smaller organizations offering less expensive solutions. In particular, low cost automated solutions have gained market share in recent years, where the competition is primarily based on price.
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Programming after device placement may be done with In Circuit Test (“ICT”), In System Programming (“ISP”), and End of Line Downloading (“EOL”). Some automotive products may also be programmed over the air (“OTA”). IoT devices may also be programmed with ICT, ISP, EOL or OTA.
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Where possible, we may pursue partnerships and other strategic relationships to add new products, capabilities and services, particularly in security deployment. We are currently focusing our research and development efforts on strategic growth markets, including automotive electronics, IoT and security deployment.
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As of December 31, 2022, we were not subject to any pending actions regarding infringement claims. 9 Table of Contents Employees As of December 31, 2022, we had a total of 95 employees, of which 45 were located outside the U.S. and 10 of which were part time.
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Our facilities are subject to numerous laws and regulations concerning the discharge of materials or otherwise relating to the environment.
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Data I/O is also committed to giving back to our local communities through volunteer and internship programs. The Company provides employees time-off to volunteer and also coordinates group projects. In addition, the Company provides internships to local high school and college students through STEM and technical colleges.
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He was Chief Accounting Officer since February 1997 and served as Corporate Controller from December 1993 to December 1997. Previously, he was Tax Manager and Senior Tax Accountant. From September 1981 until joining Data I/O, Joel was employed by Ernst & Young LLP as a Certified Public Accountant, where his most recent position was Senior Manager.
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Joel is a Certified Public Accountant and holds a Masters in Taxation from Golden Gate University and a Bachelor’s in Business Administration in Accounting from Pacific Lutheran University. Joel plans to retire during the second half of 2023 and a search for his replacement is underway.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Future acquisitions may include risks, such as: · burdening management and our operating teams during the integration of the acquisition; · diverting management’s attention from other business concerns; · failing to successfully integrate, scale or monetize the acquired products or technologies; · lack of acceptance of the acquired products by our sales channels or customers; · entering markets where we have no or limited prior experience; · potential loss of key employees of the acquired company; and/or · additional burden of support for an acquired programmer architecture.
Acquisitions may include risks, such as: · burdening management and our operating teams during the integration of the acquisition; · diverting management’s attention from other business concerns; · failing to successfully integrate, scale or monetize the acquired products or technologies; · lack of acceptance of the acquired products by our sales channels or customers; · entering markets where we have no or limited prior experience; · potential loss of key employees of the acquired company; and/or · additional burden of support for an acquired programmer architecture.
Government regulations regarding the use of "conflict" minerals and potential climate and ESG requirements could adversely affect our prospects and results of operations. Regulatory requirements regarding disclosure of our use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries could affect the sourcing and availability of minerals used in the manufacture of certain products.
Government regulations regarding the use of “conflict” minerals and potential climate and ESG requirements could adversely affect our prospects and results of operations. Regulatory requirements regarding disclosure of our use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries could affect the sourcing and availability of minerals used in the manufacture of certain products.
Cybersecurity breaches or terrorism could result in liabilities or costs as well as damage to or loss of our data or customer access to our website and information systems.
CYBERSECURITY RISKS Cybersecurity breaches or terrorism could result in liabilities or costs as well as damage to or loss of our data or customer access to our website and information systems.
Due to any of the foregoing factors, it is possible that in some future quarters, our operating results will be below expectations of analysts and investors. We have a history of operating losses and may be unable to generate enough revenue to achieve and maintain profitability. We have incurred operating losses in five of the last ten years.
Due to any of the foregoing factors, it is possible that in some future quarters, our operating results will be below the expectations of analysts and investors. We have a history of operating losses and may be unable to generate enough revenue to achieve and maintain profitability. We have incurred operating losses in four of the last ten years.
We assume that we will continue to have the status of a smaller reporting company based on the aggregate market value of the voting and non-voting shares held as of June 30, 2022.
We assume that we will continue to have the status of a smaller reporting company based on the aggregate market value of the voting and non-voting shares held as of June 30, 2023.
The collection, storage, transmission, use and disclosure of user data and personal information, if accessed improperly, could give rise to liabilities or additional costs as a result of laws, governmental regulations and evolving views of personal privacy rights. Cybersecurity attacks may increase as a result of the Russian invasion of Ukraine.
The collection, storage, transmission, use and disclosure of user data and personal information, if accessed improperly, could give rise to liabilities or additional costs as a result of laws, governmental regulations and evolving views of personal privacy rights. Cybersecurity attacks may increase as a result of the Russian invasion of Ukraine, and/or deterioration of the geopolitical environment.
Our results of operations for any one quarter are not necessarily indicative of results for any future periods. 16 Table of Contents Other factors, which may cause our quarterly operating results to fluctuate, include: · increased competition; · timing of new product announcements and timing of development expenditures; · product or service releases and pricing changes by us or our competitors; · market acceptance or delays in the introduction of new products or services; · production constraints, including part shortages impact on us and our supply chains; · quality issues; · labor or material constraints; · timing of significant orders; · timing of installation or customer acceptance requirements; · sales channel mix of direct vs. indirect distribution; · civil unrest, war or terrorism; · health issues such as the outbreak of the coronavirus or other viruses impacting workers, suppliers, customers, travel, or our facilities; · customers’ budgets; · changes in accounting rules, tax or other legislation; · adverse movements in exchange rates, interest rates, inflation or tax rates; · cyclical and seasonal nature of demand for our customers’ products; · general economic conditions in the countries where we sell products; · expenses and delays obtaining authorizations in setting up new operations or locations; and/or · facilities relocations.
Other factors, which may cause our quarterly operating results to fluctuate, include: · increased competition; · timing of new product announcements and timing of development expenditures; 16 Table of Contents · product or service releases and pricing changes by us or our competitors; · market acceptance or delays in the introduction of new products or services; · production constraints, including part shortages impact on us and our supply chains; · quality issues; · labor or material constraints; · timing of significant orders; · timing of installation or customer acceptance requirements; · sales channel mix of direct vs. indirect distribution; · civil unrest, war or terrorism; · health issues such as the outbreak of the coronavirus or other viruses impacting workers, suppliers, customers, travel, or our facilities; · customers’ budgets; · changes in accounting rules, tax or other legislation; · adverse movements in exchange rates, interest rates, inflation or tax rates; · cyclical and seasonal nature of demand for our customers’ products; · general economic conditions in the countries where we sell products; · expenses and delays obtaining authorizations in setting up new operations or locations; and/or · facilities relocations.
In particular, these include statements relating to future action, the impact of the coronavirus, supply chain expectations, semiconductor chip shortages, Russia-Ukraine war impacts, prospective products, expected market growth, new technologies and trends, industry partnerships, foreign operations, economic expectations, future performance or results of current and anticipated products, sales efforts, expenses, outcome of contingencies, impact of regulatory requirements, tariffs and financial results.
In particular, these include statements relating to future action, supply chain expectations, semiconductor chip availability, Russia-Ukraine war impacts, prospective products, expected market growth, new technologies and trends, industry partnerships, foreign operations, economic expectations, future performance or results of current and anticipated products, sales efforts, expenses, outcome of contingencies, impact of regulatory requirements, tariffs and financial results.
Data I/O has, and continues to work with several semiconductor manufacturers to develop best practices to minimize the impact of reflow and potential concerns about X-ray induced data loss; · changes in Flash technology speeds will eventually require us to change the architecture of our programming engines; · electronics equipment manufacturing practices, such as widespread use of in-circuit programming or downloading; · adoption of proprietary security and programming protocols and additional security capabilities and requirements; · customer software platform preferences different from those on which our products operate; · customer adoption of newer unsupported semiconductor device technologies such as NVMe memory or device interface methods, particularly if these technologies are adopted by automotive electronics, IoT or wireless customers; and/or · more rigid industry standards, which would decrease the value-added element of our products and support services.
Data I/O has, and continues to work with several semiconductor manufacturers to develop best practices to minimize the impact of reflow and potential concerns about X-ray induced data loss so that preprogramming remains a supported alternative; · changes in Flash technology speeds will eventually require us to change the architecture of our programming engines; · electronics equipment manufacturing practices, such as widespread use of in-circuit programming or downloading; · adoption of proprietary security and programming protocols and additional security capabilities and requirements; 12 Table of Contents · customer software platform preferences different from those on which our products operate; · customer adoption of newer unsupported semiconductor device technologies such as NVMe memory or device interface methods, particularly if these technologies are adopted by automotive electronics, IoT or wireless customers; and/or · more rigid industry standards, which would decrease the value-added element of our products and support services.
In the security deployment area, we have introduced a new pay per use business model and service fees that may not be accepted by our customers who are accustomed to paying for capital equipment upfront, rather than paying per use charges. 12 Table of Contents Failure to adapt to technology trends in our industry may impact our competitiveness and financial results.
In the security deployment area, we have introduced a pay per use business model and service fees that may not be accepted by our customers who are accustomed to paying for capital equipment upfront, rather than paying per use charges. Failure to adapt to technology trends in our industry may impact our competitiveness and financial results.
In China, our workers have benefits and similar arrangements provided under a “FSCO” labor agreement, and we could be adversely affected if we were unable to continue that arrangement. 17 Table of Contents We may need to raise additional capital and our future access to capital is uncertain.
In China, our workers have benefits and similar arrangements provided under a “FSCO” labor agreement, and we could be adversely affected if we were unable to continue that arrangement. We may need to raise additional capital and our future access to capital is uncertain.
International sales may fluctuate due to various factors, including: · the impact of COVID-19, the coronavirus and variants of it, or other viruses; · fluctuations in foreign currency exchange rates because 93% of our sales are to international markets, volatile exchange rates may also impact our competitiveness and margins, especially where we have subsidiary operations; · economic uncertainty related to the European energy cost increases; · migration of manufacturing to low cost geographies; · unexpected changes in regulatory requirements; · tariffs and taxes; · bi-lateral and multi-lateral trade agreements; · difficulties in staffing and managing foreign operations; · longer average payment cycles and difficulty in collecting accounts receivable; · compliance with applicable export licensing requirements and the Foreign Corrupt Practices Act; · product safety and other certification requirements; · difficulties in integrating foreign and outsourced operations; · war, civil unrest, political and economic instability, including the Russian invasion of Ukraine; · ability to protect our intellectual property in multiple patent jurisdictions; and/or · ability to move cash freely from subsidiaries.
International sales may fluctuate due to various factors, including: · the impact of COVID-19, the coronavirus and variants of it, or other viruses; 15 Table of Contents · fluctuations in foreign currency exchange rates because 90% of our sales are to international markets, volatile exchange rates may also impact our competitiveness and margins, especially where we have subsidiary operations; · economic uncertainty related to the European energy cost increases; · China economic challenges, as this is a major market for our products and a significant production location; · migration of manufacturing to low cost geographies; · unexpected changes in regulatory requirements; · tariffs and taxes; · bi-lateral and multi-lateral trade agreements; · difficulties in staffing and managing foreign operations; · longer average payment cycles and difficulty in collecting accounts receivable; · compliance with applicable export licensing requirements and the Foreign Corrupt Practices Act; · product safety and other certification requirements; · difficulties in integrating foreign and outsourced operations; · war, civil unrest, political and economic instability, including the Russian invasion of Ukraine and the Israel – Hamas war; · ability to protect our intellectual property in multiple patent jurisdictions; and/or · ability to move cash freely from subsidiaries.
Conversely, our expenditures are based on investment plans and estimates of future revenues. We may, therefore, be unable to quickly reduce our spending if our revenues decline in a given quarter. As a result, operating results for that quarter will suffer.
Conversely, our expenditures are based on investment plans and estimates of future revenues. We may, therefore, be unable to quickly reduce our spending if our revenues decline in a given quarter. As a result, operating results for that quarter will suffer. Our results of operations for any one quarter are not necessarily indicative of results for any future periods.
Failure to adapt to increasing automotive electronics customer requirements may impact our competitiveness and result in a decline in sales or increased costs. Concentration in automotive electronics and our orders related to automotive electronics customers has been dominant in recent years at 61% in 2022, 58% in 2021 and 53% in 2020.
Failure to adapt to increasing automotive electronics customer requirements and a rapidly changing global automotive electronics ecosystem may impact our competitiveness and result in a decline in sales or increased costs. Concentration in automotive electronics and our orders related to automotive electronics customers has been dominant in recent years at 63% in 2023, 61% in 2022 and 58% in 2021.
There may be tax, legal and other impediments to any repatriation actions. 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.
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.
For example, due to the coronavirus or other viruses impacting workers, suppliers or travel, we may not be able to obtain a sufficient quantity of these products if and when needed or the quality of these parts or options may not meet our standards, which may result in lost sales.
For example, due to geopolitical considerations, we may not be able to obtain a sufficient quantity of these products if and when needed or the quality of these parts or options may not meet our standards, which may result in lost sales.
The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission (SEC) have requirements that we may fail to meet or we may fall out of compliance with, such as the internal controls auditor attestation required under Section 404 of the Sarbanes-Oxley Act of 2002, with which we are not currently required to comply as we are a smaller reporting company.
Unfortunately, increased regulations pushed onto public companies may have a disproportionate impact to smaller public companies. 18 Table of Contents The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission (SEC) have requirements that we may fail to meet or we may fall out of compliance with, such as the internal controls auditor attestation required under Section 404 of the Sarbanes-Oxley Act of 2002, with which we are not currently required to comply as we are a smaller reporting company.
In a difficult economic climate, it may take us longer to receive payments from our customers and some of our customers’ business may fail, resulting in non-payment. Our market growth forecasts and related business decisions may be wrong.
In a difficult economic climate, it may take us longer to receive payments from our customers and some of our customers’ business may fail, resulting in non-payment. Our market growth forecasts and related business decisions may be wrong. These factors could have a material adverse effect on our business and financial condition.
While we have no reason to believe our shares would be the target of a short squeeze, there can be no assurance that we won’t be in the future, and you may lose a significant portion or all of your investment if you purchase our shares at a rate that is significantly disconnected from our underlying value. 18 Table of Contents REGULATORY REQUIREMENTS Failure to comply with increasing regulatory requirements may adversely affect our stock price and business.
While we have no reason to believe our shares would be the target of a short squeeze, there can be no assurance that we won’t be in the future, and you may lose a significant portion or all of your investment if you purchase our shares at a rate that is significantly disconnected from our underlying value.
Because we rely on a small number of suppliers for certain parts, we are subject to possible price increases by these suppliers. In 2022, we have seen more part shortages and larger price increases than in recent years. Also, we may be unable to accurately forecast our production schedule.
Because we rely on a small number of suppliers for certain parts, we are subject to possible price increases by these suppliers. As experienced in 2022, we have seen more part shortages and larger price increases than in recent years.
Climate focused regulations and related disclosures are a similar evolving regulatory area and we may be required to invest in systems, processes and personnel to address new requirements in the ESG area. These could require significant costs, work and reputational risk for failing to meet requirements,
Climate focused regulations and related disclosures are a similar evolving regulatory area and we may be required to invest in systems, processes and personnel to address new requirements in the ESG area. These will require significant costs, work and reputational risk for failing to meet requirements, with miniscule impact to the global environment. Item 1B. Unresolved Staff Comments None.
Any financing we obtain may contain covenants that restrict our freedom to operate our business or may require us to issue securities that have rights, preferences or privileges senior to our Common Stock and may dilute your ownership interest.
Any financing we obtain may contain covenants that restrict our freedom to operate our business or may require us to issue securities that have rights, preferences or privileges senior to our Common Stock and may dilute your ownership interest. Our stock price may be volatile and, as a result, our shareholders may lose some or all of their investment.
If we are unable to generate sufficient cash flows from operations or to obtain funds through additional debt, lease or equity financing, we may have to reduce some or all of our development and sales and marketing efforts and limit the expansion of our business.
If we are unable to generate sufficient cash flows from operations or to obtain funds through additional debt, lease or equity financing, we may have to reduce some or all of our development and sales and marketing efforts and limit the expansion of our business. 17 Table of Contents 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.
Quality standards and business requirements by our automotive electronics customers, driven in turn by their automotive manufacturer customers, may demand processes and certifications at a higher level than we currently are structured to provide. For example, although we currently meet the ISO 9001:2015 standard, new quality standards may be demanded by our customers with even more rigorous requirements.
Quality standards and business requirements by our automotive electronics customers, driven in turn by their automotive manufacturer customers, may demand processes and certifications at a higher level than we currently are structured to provide.
If we underestimate our production schedule, suppliers may be unable to meet our demand for components. This delay in the supply of key components may have a materially adverse effect on our business. For suppliers who discontinue parts, we may be required to make lifetime purchases covering future requirements.
This delay in the supply of key components may have a materially adverse effect on our business. For suppliers who discontinue parts, we may be required to make lifetime purchases covering future requirements. Over estimation of demand or excessive minimum order quantities may lead to excess inventories that may become obsolete.
We could be forced to incur significant expenses if we were required to modify our products, our services or our existing security and privacy procedures in order to comply with new or expanded regulations. Our stock price may be volatile and, as a result, our shareholders may lose some or all of their investment.
We could be forced to incur significant expenses if we were required to modify our products, our services or our existing security and privacy procedures in order to comply with new or expanded regulations. REGULATORY REQUIREMENTS Failure to comply with increasing regulatory requirements may adversely affect our stock price and business.
TARIFFS AND TRADE ISSUES Changes in tariffs and trade issues may adversely affect our business, including revenues and/or gross margins. We produce products in the United States and China. Currently, certain of our products are subject to tariffs imposed by one country on goods manufactured in the other country. This has materially impacted our gross margins negatively.
Currently, certain of our products are subject to tariffs imposed by one country on goods manufactured in the other country. This has materially impacted our gross margins negatively.
Over estimation of demand or excessive minimum order quantities will lead to excess inventories that may become obsolete. Part shortages, especially semiconductor parts in 2021 and 2022, impact availability, lead times, and pricing that may be disruptive to our production plans, lead times, margins and may result in lost sales.
Part shortages, especially semiconductor parts as experienced in 2021 and 2022, impact availability, lead times, and pricing that may be disruptive to our production plans, lead times, margins and may result in lost sales.
These companies must enable us with specific technical information and support Data I/O as a qualified solution to their customers and channel partners; · development of new products or services that are not accepted by the market; and/or · experience delays in supply chain for parts needed for new products. 13 Table of Contents These problems may result in a delay or decline in sales or increased costs.
These companies must enable us with specific technical information and support Data I/O as a qualified solution to their customers and channel partners; · delays or failure to develop and utilize Artificial Intelligence (“AI”) for our offerings or services, potentially falling behind competitors exploiting the use of AI; · development of new products or services that are not accepted by the market; and/or · delays in supply chain for parts needed for new products.
We may pursue business acquisitions that could impair our financial position and profitability. We may pursue acquisitions of complementary technologies, product lines or businesses.
These problems may result in a delay or decline in sales or increased costs. 13 Table of Contents We may pursue business acquisitions that could impair our financial position and profitability. We may pursue acquisitions of complementary technologies, product lines or businesses.
The coronavirus will continue to affect economic and market conditions as it continues to spread. Global impacts of the Russian invasion of Ukraine are uncertain at the present time. Our business is highly impacted by capital spending plans and other economic cycles that affect the users and manufacturers of integrated circuits.
The coronavirus derivatives or similar items may affect economic and market conditions as surges and spreads. Global impacts of the Russian invasion of Ukraine continue to evolve with sanctions and trade issues. Our business is highly impacted by capital spending plans and other economic cycles that affect the users and manufacturers of integrated circuits.
War based restrictions, embargos, and supply chain disruptions are occurring as a result of the Russian invasion of Ukraine, which could have economic and other indirect impacts to our business. We do not have any operations in Russia or Ukraine, nor do we rely on any software or hardware components sourced from these two countries.
We endeavor to have multi-sourced manufacturing, but this is not currently practical for all products in all locations. War based restrictions, embargos, and supply chain disruptions have and are occurring as a result of the Russian invasion of Ukraine, which could have economic and other indirect impacts to our business.
These factors could have a material adverse effect on our business and financial condition. 15 Table of Contents Our international operations may expose us to additional risks that may adversely affect our business. International sales represented approximately 93%, 90% and 93% of net sales in 2022, 2021 and 2020, respectively.
Our international operations may expose us to additional risks that may adversely affect our business. International sales represented approximately 90%, 93% and 90% of net sales in 2023, 2022 and 2021, respectively. We expect that international sales will continue to be a significant portion of our net revenue.
Additionally, trade tensions between the United States and China are impacting our ability to seamlessly design, build, market and sell our products. Some customers have moved production away from China, further from our facilities and engineers. We endeavor to have multi-sourced manufacturing, but this is not currently practical for all products in all locations.
Additionally, ongoing trade tensions between the United States and China are impacting our ability to seamlessly design, build, market and sell our products. These tensions may increase suddenly at any time due to government policies or actions. Some customers have moved production away from China, further from our facilities and engineers.
Delays in development, introduction and shipment of new products or services may result in a decline in sales or increased costs. We develop new engineering and automated programming systems and services. Significant technological, supplier, manufacturing or other problems may delay the development, introduction or production of these products or services.
Significant technological, supplier, manufacturing or other problems may delay the development, introduction or production of these products or services.
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. In the event we require additional cash for U.S. operations or other needs, we may choose to repatriate some, or all, of the cash held in our foreign subsidiaries.
In the event we require additional cash for U.S. operations or other needs, we may choose to repatriate some, or all, of the cash held in our foreign subsidiaries. There may be tax, legal and other impediments to any repatriation actions.
This discussion is permitted by the Private Securities Litigation Reform Act of 1995. 11 Table of Contents RISK FACTORS: CORONAVIRUS The coronavirus that causes the serious disease COVID-19 (“coronavirus”), has and may continue to adversely affect our business, including revenues, suppliers, employees and facilities.
This discussion is permitted by the Private Securities Litigation Reform Act of 1995. 11 Table of Contents RISK FACTORS: TARIFFS AND TRADE ISSUES Changes in tariffs and trade issues may adversely affect our business, including revenues and/or gross margins. We produce products in the United States and China.
In addition, contractual provisions may expose us to greater potential liability and costs and we may be required to provide higher service levels than we currently provide. If we cannot adapt to these industry requirements or manage these contractual provisions, our business may be adversely affected.
For example, although we currently meet the ISO 9001:2015 standard, new quality standards, and environmental standards may be demanded by our customers with even more rigorous requirements. In addition, contractual provisions may expose us to greater potential liability and costs and we may be required to provide higher service levels than we currently provide.
Removed
As a global company with approximately 93% of our 2022 sales in international markets, we have been and may continue to be, significantly impacted by the word wide coronavirus outbreak, which has affected all markets we serve.
Added
We do not have any operations in Russia or Ukraine, nor do we rely on any software or hardware components sourced from these two countries. The Israel - Hamas war could have similar issues, although we have not experienced any material impacts.
Removed
Twenty seven of our employees are based in Shanghai, China and we have a manufacturing facility there which manufactures some of our equipment and develops most of the adapters and algorithms for our equipment.
Added
If we cannot adapt to these industry requirements or manage these contractual provisions, our business may be adversely affected. We are also seeing a shift in the global automotive industry towards new entrants touting new methods, especially for all electric vehicles. These new entrants may not develop solutions through the traditional value chain.
Removed
Although our facilities in Shanghai, Redmond and Germany are currently operating, they could be closed for an extended period of time due to outbreaks of new variants of coronavirus.
Added
If Data I/O is not able to market and sell effectively to these new entrants, we risk losing market share in our largest market. Delays in development, introduction and shipment of new products or services may result in a decline in sales or increased costs. We develop new engineering and automated programming systems and services.
Removed
Additionally, we source other components from China and other countries that are used to manufacture our equipment in China and in our Redmond, Washington facility and these components may not be readily available. Many of our Redmond based employees and executives are working from home or under hybrid schedules and we limit visitors to our facilities.
Added
While this has returned to a stable situation in 2023, our volumes typically are not high enough to maintain multiple suppliers. Also, we may be unable to accurately forecast our production schedule. If we underestimate our production schedule, suppliers may be unable to meet our demand for components.
Removed
All of our facilities are subject to restrictions and closure by governmental entities. Travel restrictions have in some cases prevented and may continue to impact equipment installations, repairs and selling at customer sites.
Removed
As the coronavirus continues as a pandemic, it has and may continue to impact our revenues, our ability to obtain key components and to manufacture our products, as well as sell, install and support our products around the world. The coronavirus has and continues to impact key tradeshows and travel plans for our employees.
Removed
Because of the coronavirus, we have experienced limitations on visiting many of our customers and prospects. Many tradeshows, marketing activities and conferences have been canceled, postponed or made virtual. However, we are experiencing reduced limitations on visiting customers and resumption of in person events.
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We expect that international sales will continue to be a significant portion of our net revenue.

Item 2. Properties

Properties — owned and leased real estate

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Item 2. Properties During the fourth quarter of 2021, we amended our lease agreement for the Redmond, Washington headquarters facility, extending the lease to January 31, 2026. The lease is for approximately 20,460 square feet. The lease base annual rental payments during 2022 and 2021 were approximately $331,000 and $372,000, respectively.
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Item 2. Properties The company has three facilities with our headquarters and primary engineering and operational functions located in Redmond, Washington. Our two subsidiary facilities in Munich, Germany and Shanghai, China provide extended worldwide sales, service, engineering and operations services. The total annual gross or base lease payments during 2023 and 2022 were approximately $823,000 and $713,000, respectively.
Removed
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.
Added
The lease payment increase in 2023 was due primarily to lease abatement incentives for lease renewals in 2022 and standard rate increase in 2023. The Redmond, Washington headquarters facility lease runs to January 31, 2026 at approximately 20,460 square feet. The lease for the facility located in Shanghai, China runs to October 31, 2024 at approximately 19,400 square feet.
Removed
In April 2021, we signed a lease extension for our facility located in Shanghai, China, effective November 1, 2021, that extends the lease through October 31, 2024. This lease is for approximately 19,400 square feet. The lease base annual rental payments during 2022 and 2021 were approximately $314,000 and $317,000, respectively.
Added
The lease for the facility located near Munich, Germany runs to August 2027 at approximately 4,895 square feet.
Removed
In March of 2022, we entered into a lease extension through 2027 for our facility located near Munich, Germany. This lease is for approximately 4,895 square feet. The lease base annual rental payments during 2022 and 2021 were approximately $62,000 and $58,000, respectively.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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As of December 31, 2022, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. Item 4 .
As of December 31, 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. Item 4 .

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Except for special cash dividend of $4.15 per share paid on March 8, 1989, we have not paid cash dividends on our Common Stock and do not anticipate paying regular cash dividends in the foreseeable future. No sales of unregistered securities were made by us during the periods ended December 31, 2022, 2021 or 2020.
Except for special cash dividend of $4.15 per share paid on March 8, 1989, we have not paid cash dividends on our Common Stock and do not anticipate paying regular cash dividends in the foreseeable future. No sales of unregistered securities were made by us during the periods ended December 31, 2023, 2022 or 2021.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Common Stock is listed on the NASDAQ Capital Market (NASDAQ symbol is DAIO). The closing price was $3.97 on December 30, 2022. The approximate number of shareholders of record as of March 20, 2023 was 377.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Common Stock is listed on the NASDAQ Capital Market (NASDAQ symbol is DAIO). The closing price was $2.94 on December 29, 2023. The approximate number of shareholders of record as of March 18, 2024 was 369.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Share-based Compensation: We account for share-based awards made to our employees and directors, including employee stock option 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.
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.
For any repatriation, there may be tax and other impediments to any repatriation actions. As many repatriations typically have associated withholding taxes, those withheld will be a current tax without generating a current or deferred tax benefit.
For any repatriation, there may be tax and other impediments to any repatriation actions. As many repatriations typically have associated withholding taxes, those withheld will be a current tax without generating a current or deferred tax benefit recognition.
SHARE REPURCHASE PROGRAMS Data I/O did not have a share repurchase program in 2022. NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA excluding equity compensation and impairment & related charges (non-cash, one-time items) are set forth below.
SHARE REPURCHASE PROGRAMS Data I/O did not have a share repurchase program in 2023 or 2022. NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA excluding equity compensation and impairment & related charges (non-cash, one-time items) are set forth below.
We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year. During 2022 and 2021, the impact of capitalization of incremental costs for obtaining contracts was immaterial.
We 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.
Restricted stock unit awards are valued based on the average of the high and low price on the date of the grant and an estimated forfeiture rate. For both options and restricted awards, expense is recognized as compensation expense on the straight-line basis.
Restricted stock unit awards and performance stock unit awards are valued based on the average of the high and low price on the date of the grant and an estimated forfeiture rate. For options, performance and restricted stock unit awards, expense is recognized as compensation expense on the straight-line basis.
The transaction gains or losses resulted primarily from translation adjustments to foreign inter-company accounts and U.S. Dollar accounts held by foreign subsidiaries and sales by our German subsidiary to certain customers, which were invoiced in U.S. Dollars. Because approximately 93% of our sales are to international markets, volatile exchange rates may also impact our competitiveness and margins.
The transaction gains resulted primarily from translation adjustments to foreign inter-company accounts and U.S. Dollar accounts held by foreign subsidiaries and sales by our German subsidiary to certain customers, which were invoiced in U.S. Dollars. Because approximately 90% of our sales are to international markets, volatile exchange rates may also impact our competitiveness and margins.
We establish a reserve for sales returns based on historical trends in product returns and estimates for new items. Payment terms are generally 30-60 days from shipment. We transfer certain products out of service from their internal use and make them available for sale.
We establish a reserve for sales returns based on historical trends in product returns and estimates for new items. Payment terms are generally 30 to 60 days from shipment. 22 Table of Contents We transfer certain products out of service from their internal use and make them available for sale.
Although the long-term prospects for our strategic growth markets should remain good, these markets and our business have been, and are likely to continue to be, adversely impacted by the global COVID-19 pandemic and other global political and economic factors.
Although the long-term prospects for our strategic growth markets should remain good, these markets and our business have been, and are likely to continue to be, adversely impacted by global political and economic factors.
On an on-going basis, we evaluate our estimates, including those related to revenue recognition, sales returns, bad debts, inventories, 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.
On an on-going basis, we evaluate our estimates, including those related to revenue recognition, sales returns, credit losses, inventories, 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 have a valuation allowance of $9.3 million and $7.9 million as of December 31, 2022 and 2021, respectively. Our deferred tax assets and valuation allowance have increased by approximately $422,000 and $392,000 associated with the requirements of accounting for uncertain tax positions as of December 31, 2022 and 2021, respectively.
We have a valuation allowance of $8.7 million and $9.3 million as of December 31, 2023 and 2022, respectively. Our deferred tax assets and valuation allowance have increased by approximately $430,000 and $422,000 associated with the requirements of accounting for uncertain tax positions as of December 31, 2023 and 2022, respectively.
Income tax (expense) in 2022 and 2021 is primarily the result of foreign subsidiary income tax and minimal U.S. state income tax. The effective tax rate for 2022 of (156.3%) and 2021 of (25.4%) differed from the statutory tax rates in our tax reporting jurisdictions primarily due to subsidiary income with consolidated losses and the effect of valuation allowances.
Income tax (expense) in 2023 and 2022 is primarily the result of foreign subsidiary income tax and minimal U.S. state income tax. The effective tax rate for 2023 of 28.6% and 2022 of (156.3%) differed from the statutory tax rates in our tax reporting jurisdictions primarily due to subsidiary income with consolidated losses and the effect of valuation allowances.
Capital expenditures are currently expected to be funded by existing and internally generated funds. As a result of our cyclical and seasonal industry, significant product development, customer support and selling and marketing efforts, we have required substantial working capital to fund our operations.
Capital expenditures are currently expected to be funded by existing and internally generated funds. As a result of our cyclical and seasonal industry, significant product development, factory resilience strategies, customer support and selling and marketing efforts, we require substantial working capital to fund our operations.
We have implemented or have initiatives to implement geographic shifts in our operations, optimize real estate usage, adjusting pricing for cost inflation, reduce exposure to the impact of currency volatility and tariffs, increase product development differentiation, and reduce costs.
We have implemented or have initiatives to implement geographic shifts in our operations, optimize real estate usage, adjusting pricing for cost inflation, lower unit costs, lower tariff expenses, reduce exposure to the impact of currency volatility, increase product development differentiation, and reduce other costs.
In particular, statements herein regarding economic outlook, impact of COVID-19; Shanghai COVID-19 resurgence lockdown impact and timing; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; breakeven revenue point; expected market decline, bottom or growth; market acceptance of our newly introduced or upgraded products or services; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new products or services; changing foreign operations; 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; inflation; currency rates and movements; and any other guidance on future periods are forward-looking statements.
In particular, statements herein regarding economic outlook, impact of COVID-19 including recovery from the shutdown in Shanghai, China; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; expected expenses, breakeven revenue point; expected market decline, bottom or growth; market acceptance of our newly introduced or upgraded products or services; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new 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; Israel – Hamas war impacts; supply chain expectations; semiconductor chip shortages and recovery; and any other guidance on future periods are forward-looking statements.
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary’s local currency and translated into U.S. Dollar amounts at average rates of exchange during the year. We recognized foreign currency transaction gain of $221,000 in 2022 and foreign currency transaction loss of $(202,000) in 2021.
Inflation and changes in Foreign currency exchange rates Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary’s local currency and translated into U.S. Dollar amounts at average rates of exchange during the year. We recognized foreign currency transaction gains of $42,000 in 2023 and $221,000 in 2022.
We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our results and facilitate the comparison of results. 27 Table of Contents A reconciliation of net income to EBITDA and Adjusted EBITDA follows: For Year Ended December 31, 2022 2021 (in thousands) Net Income (loss) ($1,120 ) ($555 ) Interest (income) (34 ) (11 ) Taxes 683 112 Depreciation and amortization 560 667 EBITDA $ 89 $ 213 Equity compensation 1,176 1,238 Adjusted EBITDA, excluding equity compensation $ 1,265 $ 1,451 NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND NOT YET IMPLEMENTED In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326).
We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our results and facilitate the comparison of results. 26 Table of Contents A reconciliation of net income to EBITDA and Adjusted EBITDA follows: For Year Ended December 31, 2023 2022 (in thousands) Net Income (loss) $ 486 $ (1,120 ) Interest (income) (190 ) (34 ) Taxes 194 683 Depreciation and amortization 608 560 EBITDA $ 1,098 $ 89 Equity compensation 1,190 1,176 Adjusted EBITDA, excluding equity compensation $ 2,288 $ 1,265 NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND IMPLEMENTED In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326).
Employee Stock Purchase Plan (“ESPP”) shares were issued under provisions that do not require us to record any equity compensation expense. 24 Table of Contents RESULTS OF OPERATIONS: NET SALES Net sales by product line 2022 Change 2021 (in thousands) Automated programming systems $ 18,926 (9.3%) $ 20,864 Non-automated programming systems 5,291 6.4% 4,971 Total programming systems $ 24,217 (6.3%) $ 25,835 Net sales by location 2022 Change 2021 (in thousands) United States $ 1,774 (32.0%) $ 2,607 % of total 7.3 % 10.1 % International $ 22,443 (3.4%) $ 23,228 % of total 92.7 % 89.9 % Net sales by type 2022 Change 2021 (in thousands) Equipment Sales $ 13,803 (7.9%) $ 14,989 Adapter Sales 7,336 (6.2%) 7,818 Software and Maintenance Sales 3,078 1.7% 3,028 Total $ 24,217 (6.3%) $ 25,835 Net sales for the year ended December 31, 2022 decreased approximately 6.3% to $24.2 million compared to 2021 primarily as a result of COVID-19 shutdown in the first half of 2022, economic uncertainty resulting from the war in Ukraine, semiconductor shortages and a stronger dollar, offset in part during the second half of the 2022 by improved semiconductor supply with higher demand in automotive electronics and industrial/IOT.
Employee Stock Purchase Plan (“ESPP”) shares were issued under provisions that do not require us to record any equity compensation expense. 23 Table of Contents Results of Operations: Net Sales Net sales by product line 2023 Change 2022 (in thousands) Automated programming systems $ 22,806 20.5 % $ 18,926 Non-automated programming systems 5,258 (0.6 %) 5,291 Total programming systems $ 28,064 15.9 % $ 24,217 Net sales by location 2023 Change 2022 (in thousands) United States $ 2,799 57.8 % $ 1,774 % of total 10.0 % 7.3 % International $ 25,265 12.6 % $ 22,443 % of total 90.0 % 92.7 % Net sales by type 2023 Change 2022 (in thousands) Equipment Sales $ 16,343 18.4 % $ 13,803 Adapter Sales 8,154 11.2 % 7,336 Software and Maintenance Sales 3,567 15.9 % 3,078 Total $ 28,064 15.9 % $ 24,217 Net sales for the year ended December 31, 2023 increased approximately 16%, to $28.1 million, compared to 2022, primarily as a result of COVID-19 China shutdown in the first half of 2022, economic uncertainty resulting from the war in Ukraine, semiconductor shortages and a stronger dollar, offset in part during the second half of the 2022 and continuing in 2023 by fulfilling the backlog built up during the shutdown, improved semiconductor supply, and higher demand in automotive electronics and industrial/IoT.
We believe it is essential to invest in R&D to significantly enhance our existing products and to create new products as markets develop and technologies change. During 2022, we continued strategically investing in supporting SentriX, ConneX and our LumenX programmer capabilities.
The increase was primarily related contracted services and incentive compensation. We believe it is essential to invest in R&D to significantly enhance our existing products and to create new products as markets develop and technologies change. During 2023, we continued strategically investing in supporting SentriX, ConneX and our LumenX programmer capabilities.
We increased prices in response to cost increases caused by inflation and part shortages and believe we will continue to utilize this strategy. 26 Table of Contents FINANCIAL CONDITION: LIQUIDITY AND CAPITAL RESOURCES 2022 Change 2021 (in thousands) Working capital $ 17,579 ($905 ) $ 18,484 At December 31, 2022, our principal sources of liquidity consisted of existing cash and cash equivalents.
We increased prices in response to cost increases caused by inflation and part shortages. 25 Table of Contents FINANCIAL CONDITION: LIQUIDITY AND CAPITAL RESOURCES 2023 Change 2022 (in thousands) Working capital $ 18,425 $ 846 $ 17,579 At December 31, 2023, our principal sources of liquidity consisted of existing cash and cash equivalents.
GROSS MARGIN 2022 Change 2021 (in thousands) Gross margin $ 13,210 (10.3%) $ 14,720 Percentage of net sales 54.5 % 57.0 % Gross margin as a percentage of sales for the year ended December 31, 2022 was 54.5%, compared to 57.0% in 2021.
Gross Margin 2023 Change 2022 (in thousands) Gross margin $ 16,186 22.5 % $ 13,210 Percentage of net sales 57.7 % 54.5 % Gross margin as a percentage of sales for the year ended December 31, 2023 was 57.7%, compared to 54.5% in 2022.
Inventory : Inventories are stated at the lower of cost or 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.
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 basis and record inventory adjustments accordingly.
INCOME TAXES 2022 Change 2021 (in thousands) Income tax (expense) benefit ($683 ) 509.8 % ($112 ) Income tax (expense) increased by $571,000 for the year ended December 31, 2022 compared to 2021. The increase was primarily a result of the withholding tax of $442,000 on the repatriation of cash from subsidiaries in 2022.
INCOME TAXES 2023 Change 2022 (in thousands) Income tax (expense) benefit $ (194 ) (71.6 %) $ (683 ) Income tax (expense) decreased by $489,000 for the year ended December 31, 2023 compared to 2022. The decrease was primarily a result of the withholding tax of $442,000 on the repatriation of cash from subsidiaries in 2022.
When we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon delivery, provided that only immaterial items in the context of the contract with the customer remain on our part and substantive acceptance conditions, if any, have been met.
When we license software separately, we recognize revenue upon the transfer of control of the software, which is generally upon shipment, provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions, if any, have been met.
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.
Revenue is recognized on the system based on shipping terms, software based on delivery, installation and services based on completion of work and software maintenance and extended warranty support ratably over the term of the agreement, typically one year.
We allocate the transaction price of each element based on relative selling prices. Relative selling price is based on the selling price of the standalone system. For the installation and service and support performance obligations, we use the value of the discount given to distributors who perform these components.
Relative selling price is based on the selling price of the standalone system. For the installation and service and support performance obligations, we use the value of the discount given to distributors who perform these components. For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold.
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.
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. 21 Table of Contents 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.
We are developing technology and the SentriX product line to securely program new categories of semiconductors, including Secure Microcontrollers, Secure Elements, and Authentication Chips. Our R&D spending fluctuates based on the number, type, and the development stage of our product initiatives and projects.
We are developing technology and the SentriX product line to securely program new categories of semiconductors, including Secure Microcontrollers, Secure Elements, and Authentication Chips.
This analysis considers the complexity, skill and training needed as well as customer expectations regarding installation. 23 Table of Contents We enter into arrangements with multiple performance obligations that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component.
This analysis considers the complexity, skill and training needed, as well as customer expectations regarding installation. We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, installation, service and support, and extended maintenance components. We allocate the transaction price of each element based on the relative selling prices.
Cash at December 31, 2022 and 2021 was $11.5 million and $14.2 million, respectively. Our working capital decreased by $905,000 during 2022 due primarily to our operating loss and taxes related to a cash repatriation from China. Our current ratio was 3.8 and 3.7 for December 31, 2022 and 2021, respectively. The company continues to have no debt.
Cash at December 31, 2023 and 2022 was $12.3 million and $11.5 million, respectively. Our working capital increased by $846,000 during 2023 due primarily to revenue growth and operating profit improvement. Our current ratio was 4.0 and 3.8 for December 31, 2023 and 2022, respectively. The company continues to have no debt.
We are under no duty to update any of these forward-looking statements after the date of this Annual Report. The Reader should not place undue reliance on these forward-looking statements.
We are under no duty to update any of these forward-looking statements after the date of this Annual Report. The Reader should not place undue reliance on these forward-looking statements. The following discussions and the section entitled “Risk Factors - Cautionary Factors That May Affect Future Results” describes some, but not all, of the factors that could cause these differences.
Cost control measures remain in effect. INTEREST 2022 Change 2021 (in thousands) Interest income $ 34 209.1 % $ 11 Interest income was slightly higher for the year ended December 31, 2022 compared to 2021 primarily due to higher invested balances.
The increase was primarily related to higher sales commissions, contracted services and incentive compensation. Cost control measures remain in effect. Interest 2023 Change 2022 (in thousands) Interest income $ 190 458.8 % $ 34 Interest income was higher for the year ended December 31, 2023 compared to 2022 primarily due to higher average interest rates and higher invested balances.
We do not expect the new credit loss standard to have a material impact on our financial condition, results of operations and cash flows, or financial statement disclosures. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable.
We adopted the new credit loss standard on January 1, 2023. The new credit loss standard has not had a material impact on our financial condition, results of operations and cash flows, or financial statement disclosures.
Allowance for Doubtful Accounts: We base the allowance for doubtful accounts receivable on our assessment of the 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, our estimates of the recoverability of amounts due to us could be adversely affected.
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 : Inventories are stated at the lower of cost or net realizable value.
We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond. We have not had exposure to recent bank takeovers and have cash holdings in a number of banks.
We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond. If this belief is incorrect, we may require additional cash at the U.S. headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries.
Despite negative macroeconomic news, we enter into 2023 with strong sales funnels, more favorable currency rate tailwinds with a weakening US Dollar, and the strong long-term growth outlook for automotive electronics. 22 Table of Contents We are focusing our research and development efforts in our strategic growth markets, namely automotive electronics and IoT new programming technologies, secure supply chain solutions, automated programming systems and their enhancements for the manufacturing environment and software.
We continue to focus on managing our costs carefully and growth-oriented strategies. We are focusing our research and development efforts in our strategic growth markets, namely automotive electronics and IoT new programming technologies, secure supply chain solutions, automated programming systems and their enhancements for the manufacturing environment and software.
RESEARCH AND DEVELOPMENT 2022 Change 2021 (in thousands) Research and development $ 6,083 (8.3%) $ 6,635 Percentage of net sales 25.1 % 25.7 % 25 Table of Contents Research and development (“R&D”) expense decreased $552,000 for the year ended December 31, 2022 compared to 2021. The decrease was primarily related to lower incentive compensation.
The increase in gross margin percentage was due to the impact of sale volume relative to fixed costs; product mix, channel mix, and lower inventory levels (which contributed to lower freight, tariffs, and obsolescence costs.) Research and Development 2023 Change 2022 (in thousands) Research and development $ 6,524 7.2 % $ 6,083 Percentage of net sales 23.2 % 25.1 % Research and development (“R&D”) expense increased $441,000 for the year ended December 31, 2023 compared to 2022.
SELLING, GENERAL AND ADMINISTRATIVE 2022 Change 2021 (in thousands) Selling, general & administrative $ 7,876 (5.8%) $ 8,358 Percentage of net sales 32.5 % 32.4 % Selling, General and Administrative (“SG&A”) expenses decreased approximately $482,000 for the year ended December 31, 2022 compared to 2021. The decrease was primarily related to lower sales commissions and incentive compensation.
Our R&D spending fluctuates based on the number, type, and the development stage of our product initiatives and projects. 24 Table of Contents Selling, General and Administrative 2023 Change 2022 (in thousands) Selling, general & administrative $ 9,214 17.0 % $ 7,876 Percentage of net sales 32.8 % 32.5 % Selling, General and Administrative (“SG&A”) expenses increased approximately $1.3 million for the year ended December 31, 2023 compared to 2022.
On a regional basis, net sales increased approximately 15% in Asia and declined approximately 10% in the Americas and 21% in Europe. Order bookings were $26.4 million for 2022, up approximately 4% compared to $25.5 million in 2021. Backlog at December 31, 2022 and 2021 was $4.8 million and $2.9 million, respectively.
Order bookings were $25.8 million in 2023, down approximately 2% compared to $26.4 million in 2022. Automotive Electronics were 63% of total bookings, up 2% from 61% in 2022. Backlog at December 31, 2023 and 2022 was $2.8 million and $4.8 million, respectively. Deferred revenue was $1.6 million at December 31, 2023 compared to $1.8 million at December 31, 2022.
Finally, the continued outlook by industry analysts for automotive electronics remains strong based on the long-term forecast for a decade, which remains our primary market focus. Moving forward, our short-term challenge continues to be operating in a cyclical, COVID-19 impacted, and rapidly evolving industry environment with volatile currencies, inflation, supply chain issues, and improved but remaining semiconductor part shortages.
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. On the product side, we continue to invest with a long-term focus towards expanding our markets and creating unique value for our customers.
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The following discussions and the section entitled “Risk Factors – Cautionary Factors That May Affect Future Results” describes some, but not all, of the factors that could cause these differences. 21 Table of Contents OVERVIEW During 2022, we continued to react to and manage our business relative to the COVID-19 pandemic.
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OVERVIEW In 2023, most of the direct implications of COVID-19 had passed, and we were dealing with the follow-on impacts or indirect impacts from COVID-19 and the policies put in place to mitigate the disease. We continued to manage inflation, supply chain impacts and shortages, and the post lock down economic transitions in China and elsewhere.
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During 2020 and throughout 2021, COVID-19 impacted all aspects of our business, from customer demand, to supply chain integrity, employee safety, business processes, and financial management. During 2022, as a result of vaccinations and the reduced impact of COVID-19, our business started to return to more normal in parts of the world.
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The strong dollar impact that started to reverse during the fourth quarter of 2022, provided tail winds for revenue in the first and second quarter of 2023, especially versus the Euro. During the second half of 2023, the U.S. dollar strengthened again causing revenue head winds. However, we managed to achieve profitability for the year.
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As a global company, we had to manage these aspects of our business while working within the guidelines of local and national policy in the U.S., China and Germany.
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Macroeconomic news, while improving, continued to be fairly negative. On a more positive note, inflation, while still elevated, is diminishing. Interest rates continue to be higher, but an anticipated recession has not occurred outside of Germany with a current soft landing outlook causing expectations for avoiding a U.S. recession.
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During parts of the first and second quarters, our Shanghai facility and operations were shut down for two and a half months as required by China’s requirements pursuant to their COVID Zero policy. This shutdown impacted our supply chains, shipping times, travel, trade shows, and forced remote work.
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COVID-19, semiconductor shortages, shipping & supply chain issues, and domestic labor tightness are improving situations. Travel, trade shows, and face-to-face customer meetings are happening. We believe our new supplier resilience, inventory holdings and production in multiple locations, and ability to leverage remote and virtual services, are capabilities to retain and build upon.
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We were largely able to resume operations and begin recovery late in the second quarter and throughout the third quarter. For most of 2022, waves of COVID-19 infection and variants have kept or re-imposed revised travel restrictions. Customers continued to restrict in-person sales and other visits.
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This is true for both our traditional core business as well as the emerging security deployment business.
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We have continued to do business by converting these interactions to remote and virtual means as we have implemented new processes and technology. Our resilient supply chain model was able to support our customers by having alternate facilities that were open and responded to the critical impacts of the shutdown.
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Allowance for Credit Losses: We base the allowance for credit losses on our assessment of the losses collectively expected for the future, as well as collectability of specific customer accounts and the aging of accounts receivable.
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Later in the year China’s COVID Zero policy was effectively cancelled. In December most of our employees in Shanghai China were out briefly with COVID and then we resumed normal operations. Other Major Impacts on 2022 The war in Ukraine had many impacts on our business.
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NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND NOT YET IMPLEMENTED In November 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses.
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While we had little direct impact from Russia or Ukraine, the war’s affect on supply chains, shipping, European economic uncertainty and energy concerns disrupted our business. Later in the year, the impacts seemed to diminish. Inflation impacted everyone. We believe we were able to adequately address inflation with pricing adjustments such that our margins were mostly maintained.
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ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.
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Certain labor markets were tight during the year, with assembly technicians and software development engineers being challenging to recruit. Interest rate hikes by central banks is a concern especially for cyclical industries with resulting worries about capital spending and planning for recessionary impacts. Currency changes caused significant headwinds to our translated consolidated revenues.
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In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740): Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted.
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This resulted from the strengthening of the US Dollar versus most foreign currencies, especially the Euro and Yuan in which our subsidiaries do business. Later in the fourth quarter and continuing into early 2023, the US Dollar weakened somewhat, providing some tailwinds to revenue growth.
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We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable.
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The impact of semiconductor chip shortages that began mid 2021 continued well into 2022 and are not completely resolved going into 2023. Many of the issues described here in the overview have caused supply chain disruptions and lead time unreliability, which we have managed though carefully maintaining and increasing key inventory levels.
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We also continue to balance a host of current issues including industry changes, industry partnerships, new technologies, business geography shifts, travel and customer restrictions, trade issues and tariffs, shipping challenges, and strategic investments in our business with the level of demand and mix of business we expect.
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We have taken steps to be a resilient supplier to our customers by enhancing our remote service and support capabilities, increased stocking of inventory, and having product production in multiple locations. We continue to manage our costs carefully and execute strategies for cash preservation, protecting our employee base, and managing supply chain price increases and uncertainties.
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Revenues were down 6% for 2022, compared to 2021. However, bookings were up 4% for 2022, compared to 2021, resulting in an increase in backlog going into 2023. The second half of the year saw a recovery in demand and quarterly profitability.
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For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold.
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Deferred revenue of $1.8 million on December 31, 2022, includes service, support and maintenance contracts and represents the undelivered performance obligation of agreements that are typically for one year.
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We evaluate our inventories on an item-by-item basis and record inventory adjustments accordingly.
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Deferred revenue was $1.8 million at December 31, 2022 compared to $1.5 million at December 31, 2021. Net sales in 2021 reflected the initial recovery from COVID-19 conditions in 2020.
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The decline in gross margin percentage was due to the impact of sale volume relative to fixed cost; currency rate impacts of the strengthening US Dollar, channel mix, and inventory charges.
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We have tried to balance our level of development spending with the goal of profitable operations or managing down business levels related to COVID-19, inflation, war in Ukraine impacts, interest rates hikes, currency rate moves, and part shortages.
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We may require additional cash at the U.S. headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries. We have repatriated cash from our China subsidiary during 2022 and incurred dividend withholding tax, which was unable to receive a current tax benefit for.
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The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the new credit loss standard effective January 1, 2023.

Other DAIO 10-K year-over-year comparisons