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DATA I/O CORP - Quarter Report: 2016 June (Form 10-Q)

f10q_06302016.htm - Generated by SEC Publisher for SEC Filing

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

(X)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

or

 

(  )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

 

Commission file number:                                                    0-10394

DATA I/O CORPORATION

(Exact name of registrant as specified in its charter)

 

Washington

91-0864123

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

6645 185th Ave NE, Suite 100, Redmond, Washington, 98052

(Address of principal executive offices, including zip code)

 

(425) 881-6444

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes X  No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes X  No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer __  Accelerated filer __  Non-accelerated filer __  Smaller reporting company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  _ NoX

 

Shares of Common Stock, no par value, outstanding as of July 29, 2016:

 

7,971,287

1

 


 
 

DATA I/O CORPORATION

 

FORM 10-Q

For the Quarter Ended June 30, 2016

 

INDEX

Part I.

 

Financial Information

Page

 

 

 

 

 

Item 1.

Financial Statements

  3

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

23

 

 

 

 

 

Item 1A.

Risk Factors

23

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

24

 

 

 

 

 

Item 4.

Mine Safety Disclosures

24

 

 

 

 

 

Item 5.

Other Information

24

 

 

 

 

 

Item 6.

Exhibits

24

 

 

 

 

Signatures

 

25

           

 

2

 


 

PART I - FINANCIAL INFORMATION

 

Item 1.                  Financial Statements

 

DATA I/O CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(UNAUDITED)

       
 

June 30,
2016

 

December 31,
2015

     

 

ASSETS

   

 

CURRENT ASSETS:

   

 

Cash and cash equivalents

$8,824

 

$11,268

Trade accounts receivable, net of allowance for

   

 

         doubtful accounts of $90 and $43, respectively

4,388

 

2,790

Inventories

4,088

 

3,705

Other current assets

374

 

577

TOTAL CURRENT ASSETS

17,674

 

18,340

     

 

Property, plant and equipment – net

1,651

 

1,237

Other assets

63

 

63

TOTAL ASSETS

$19,388

 

$19,640

     

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

 

CURRENT LIABILITIES:

   

 

Accounts payable

$920

 

$1,250

Accrued compensation

1,223

 

1,689

Deferred revenue

1,071

 

1,038

Other accrued liabilities

717

 

540

TOTAL CURRENT LIABILITIES

3,931

 

4,517

     

 

Long-term other payables

473

 

429

     

 

COMMITMENTS

-

 

-

     

 

STOCKHOLDERS’ EQUITY

   

 

Preferred stock -

   

 

Authorized, 5,000,000 shares, including

   

 

200,000 shares of Series A Junior Participating

   

 

Issued and outstanding, none

-

 

-

Common stock, at stated value -

   

 

Authorized, 30,000,000 shares

   

 

Issued and outstanding, 7,977,787 shares as of June 30,

   

 

2016 and 7,943,720 shares as of December 31, 2015

19,125

 

19,051

Accumulated earnings (deficit)

(4,740)

 

(5,016)

Accumulated other comprehensive  income

599

 

659

TOTAL STOCKHOLDERS’ EQUITY

14,984

 

14,694

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$19,388

 

$19,640

       

See notes to consolidated financial statements

 

 

 

3

 


 

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(UNAUDITED)

                 
   

Three Months Ended
June 30,

 

Six Months Ended
June 30,

   

2016

 

2015

 

2016

 

2015

                 

Net Sales

 

$5,801

 

$4,958

 

$10,414

 

$10,860

Cost of goods sold

 

2,713

 

2,236

 

4,798

 

5,280

Gross margin

 

3,088

 

2,722

 

5,616

 

5,580

Operating expenses:

               

Research and development

 

1,172

 

1,243

 

2,297

 

2,341

Selling, general and administrative

 

1,525

 

1,415

 

3,103

 

2,953

Total operating expenses

 

2,697

 

2,658

 

5,400

 

5,294

Operating income

 

391

 

64

 

216

 

286

Non-operating income (expense):

               

Interest income

 

11

 

27

 

23

 

58

Foreign currency transaction gain (loss)

 

49

 

7

 

45

 

(188)

Total non-operating income (expense)

 

60

 

34

 

68

 

(130)

Income before income taxes

 

451

 

98

 

284

 

156

Income tax (expense) benefit

 

(7)

 

2

 

(8)

 

(7)

Net income

 

$444

 

$100

 

$276

 

$149

                 
                 

Basic earnings per share

 

$0.06

 

$0.01

 

$0.03

 

$0.02

Diluted earnings per share

 

$0.06

 

$0.01

 

$0.03

 

$0.02

Weighted-average basic shares

 

7,942

 

7,894

 

7,944

 

7,879

Weighted-average diluted shares

 

8,039

 

8,078

 

8,033

 

8,062

                 

See notes to consolidated financial statements

           

 

4

 


 

 

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(UNAUDITED)

         
   

Three Months Ended
June 30,

 

Six Months Ended
June 30,

   

2016

 

2015

 

2016

 

2015

                 

Net income

 

$444

 

$100

 

$276

 

$149

Other comprehensive income:

               

Foreign currency translation gain (loss)

 

(221)

 

59

 

(60)

 

(112)

Comprehensive income (loss)

 

$223

 

$159

 

$216

 

$37

                 

See notes to consolidated financial statements

           

 

 

5

 


 

 

DATA I/O CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

         
   

For the Six Months Ended
June 30,

   

2016

 

2015

   

 

   

CASH FLOWS FROM OPERATING ACTIVITIES:

       

Net income

 

$276

 

$149

Adjustments to reconcile net income

       

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

       

Depreciation and amortization

 

272

 

274

Equipment transferred to cost of goods sold

 

691

 

42

Share-based compensation

 

300

 

238

Net change in:

       

Trade accounts receivable

 

(1,592)

 

549

Inventories

 

(404)

 

286

Other current assets

 

198

 

22

Accrued cost of business restructuring

 

-

 

(66)

Accounts payable and accrued liabilities

 

(612)

 

(467)

Deferred revenue

 

(17)

 

(681)

Other long-term liabilities

 

83

 

(45)

     Net cash provided by (used in) operating activities

 

(805)

 

301

         

CASH FLOWS FROM INVESTING ACTIVITIES:

       

Purchases of property, plant and equipment

 

(1,377)

 

(394)

Cash provided by (used in) investing activities

 

(1,377)

 

(394)

         

CASH FLOWS FROM FINANCING ACTIVITIES:

       

Proceeds from issuance of common stock, net of tax withholding

(63)

 

(60)

Repurchase of common stock

 

(174)

 

-

Cash provided by (used in) financing activities

 

(237)

 

(60)

Increase/(decrease) in cash and cash equivalents

 

(2,419)

 

(153)

         

Effects of exchange rate changes on cash

 

(25)

 

(63)

Cash and cash equivalents at beginning of period

 

11,268

 

9,361

Cash and cash equivalents at end of period

 

$8,824

 

$9,145

         

Supplemental disclosure of cash flow information:

       

Cash paid (received) during the period for:

 

     

    Income Taxes

 

$6

 

($10)

See notes to consolidated financial statements

       

 

 

6

 


 

DATA I/O CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - FINANCIAL STATEMENT PREPARATION

Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) prepared the financial statements as of June 30, 2016 and June 30, 2015 according to the rules and regulations of the Securities and Exchange Commission ("SEC"). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented.  The balance sheet at December 31, 2015 has been derived from the audited financial statements at that date. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America according to such SEC rules and regulations.  Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in our Form 10-K for the year ended December 31, 2015.

 

Revenue Recognition

 

We recognize revenue at the time the product is shipped.  We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be considered a separate element.  These systems are standard products with published product specifications and are configurable with standard options.  The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

 

The revenue related to products requiring installation that is perfunctory is recognized at the time of shipment.  Installation that is considered perfunctory includes any installation that can be performed by other parties, such as distributors, other vendors, or in most cases the customers themselves.  This takes into account the complexity, skill and training needed as well as customer expectations regarding installation.

 

We enter into multiple deliverable arrangements that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component.  We allocate the value of each element based on relative selling prices.  Relative selling price is based on the selling price of the standalone system.  For the installation and service and support components, we use the value of the discount given to distributors who perform these components.  For software maintenance components, we use what we charge for annual software maintenance renewals after the initial year the system is sold.  Revenue is recognized on the system sale based on shipping terms, installation revenue is recognized after the installation is performed, and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement, typically one year.

 

When we sell software separately, we recognize software revenue upon shipment provided that only inconsequential obligations remain on our part and substantive acceptance conditions, if any, have been met.

 

We recognize revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is fixed or determinable, the buyer has paid or is obligated to pay, collectability is reasonably assured, substantive acceptance conditions, if any, have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer.  We establish a reserve for sales returns based on historical trends in product returns and estimates for new items.

7

 


 

 

We transfer certain products out of service from their internal use and make them available for sale.  The products transferred are our standard products in one of the following areas: service loaners, rental or test units; engineering test units; or sales demonstration equipment.  Once transferred, the equipment is sold by our regular sales channels as used equipment inventory.  These product units often involve refurbishing and an equipment warranty, and are conducted as sales in our normal and ordinary course of business.  The transfer amount is the product unit’s net book value and the sale transaction is accounted for as revenue and cost of goods sold.

 

Stock-Based Compensation Expense

 

We measure and recognize compensation expense as required for all share-based payment awards, including employee stock options and restricted stock unit awards, based on estimated fair values and estimated forfeiture rate on the grant dates.

 

Income Tax

 

Historically, when accounting for uncertainty in income taxes, we have not incurred any interest or penalties associated with tax matters and no interest or penalties were recognized during the three and six months ended June 30, 2016.  However, we have adopted a policy whereby amounts related to penalties associated with tax matters are classified as general and administrative expense when incurred and amounts related to interest associated with tax matters are classified as interest income or interest expense.

 

We have incurred net operating losses in certain past years.  We continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance associated with our net operating losses and credit carryforwards, as sufficient uncertainty exists regarding our ability to realize such tax assets in the future.  There were $218,000 and $206,000 of unrecognized tax benefits related to uncertain tax positions and related valuation allowance as of June 30, 2016 and 2015, respectively.

 

Tax years that remain open for examination include 2012, 2013, 2014 and 2015 in the United States of America.  In addition, tax years from 2001 to 2011 may be subject to examination in the event that we utilize the net operating losses and credit carryforwards from those years in our current or future year tax returns.

 

Recent Accounting Pronouncements

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU 2016-09), “Improvements to Employee Share-Based Payment Accounting”.  ASU 2016-09 requires excess tax benefits to be recognized in the statement of operations as an income tax expense and is applied prospectively by means of a cumulative-effect adjustment of excess tax benefits from equity in the period of adoption. The standard establishes an alternative practical expedient for estimating the expected term of an award by recognizing the effects of forfeitures in compensation cost when the forfeitures occur. Adoption of the alternative practical expedient is applied prospectively on an entity-wide basis. The standard requires that amounts paid to a taxing authority on the employee’s behalf as a result of directly withholding shares for tax-withholding purposes are to be presented on a retrospective basis as a financing activity on the statement of cash flows. The standard becomes effective beginning January 1, 2017. We are in the process of evaluating the impact of adoption on our consolidated financial statements.

 

8

 


 

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

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09).  ASU 2014-09 provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance.  In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” (ASU 2015-14).  ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017.  We are in the process of evaluating the impact of adoption on our consolidated financial statements.

 

NOTE 2 – INVENTORIES

Inventories consisted of the following components:

       
   

June 30,
2016

 

December 31,
2015

 (in thousands)

       

Raw material

 

$2,577

 

$2,262

Work-in-process

 

1,004

 

1,099

Finished goods

 

507

 

344

Inventories

 

$4,088

 

$3,705

         

 

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET

Property and equipment consisted of the following components:

 

   

June 30,
2016

 

December 31,
2015

 (in thousands)

       

 Leasehold improvements

 

$388

 

$77

 Equipment

 

6,023

 

5,739

   

6,411

 

5,816

 Less accumulated depreciation

 

4,760

 

4,579

 Property and equipment, net

 

$1,651

 

$1,237

         

 

NOTE 4 – BUSINESS RESTRUCTURING

Our previous years’ restructure actions have been fully implemented.  As a result of the lease amendment discussed in Note 6, “Operating Lease Commitments”, which started in July 2015, the balance of the restructure liability of approximately $120,000 was incorporated into our deferred rent liability as part of the new lease incentive.

9

 


 

NOTE 5 – OTHER ACCRUED LIABILITIES

Other accrued liabilities consisted of the following components:

   

June 30,
2016

 

December 31,
2015

 (in thousands)

     

 

 Product warranty

 

$330

 

$368

 Sales return reserve

 

61

 

61

 Other taxes

 

157

 

92

 Other

 

169

 

19

 Other accrued liabilities

 

$717

 

$540

       

 

 

The changes in our product warranty liability for the six months ending June 30, 2016 are as follows:

   

June 30,
2016

 (in thousands)

   

 Liability, beginning balance

 

$368

 Net expenses

 

416

 Warranty claims

 

(458)

 Accrual revisions

 

4

 Liability, ending balance

 

$330

     

 

 

NOTE 6 – OPERATING LEASE COMMITMENTS

We have commitments under non-cancelable operating leases and other agreements, primarily for factory and office space, with initial or remaining terms of one year or more as follows:

For the years ending December 31:

 

   

Operating
Leases

 (in thousands)

   

2016 (remaining)

 

$431

2017

 

821

2018

 

806

2019

 

838

2020

 

835

Thereafter

 

432

Total

 

$4,163

     

10

 


 

 

During the second quarter of 2015, we amended our lease agreement for the Redmond, Washington headquarters facility effective July 8, 2015. The amended lease resulted in our headquarters relocating to a nearby building, extending the term through April 2021, lowering the square footage to approximately 20,460, providing lease inducement incentives and lowering the rental rate. The new lease commitment of approximately $1.7 million will be paid over the term of the lease. As a result of this lease amendment, the remaining balance of the restructure liability of approximately $120,000 was incorporated into our deferred rent liability in July, 2015.

 

We renewed our lease agreement for what is now our former Shanghai, China facility, effective June 15, 2015, extending the term through December 31, 2015.  Operations continued in this facility through January 31, 2016.  In October 2015, we signed a lease agreement for a new facility located in Shanghai, China which was effective November 1, 2015 and extends through October 31, 2021.  The new lease approximately doubled our space to 19,400 square feet at approximately 54% of the prior lease rental rate.

 

During the first quarter of 2014, we renewed our lease agreement for our Munich, Germany facility effective February 1, 2015 and extending the term through January 2018 and lowering the square footage to approximately 4,306 square feet.  Effective June 1, 2014, the landlord was able to lease the excess space abandoned as part of Q2 2013 restructure actions to another tenant and the lease was revised to end May 31, 2017.

 

NOTE 7 – OTHER COMMITMENTS

We have purchase obligations for inventory and production costs as well as other obligations such as capital expenditures, service contracts, marketing, and development agreements.  Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.  Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days.  At June 30, 2016, the purchase commitments and other obligations totaled $1,394,000 of which all but $44,000 are expected to be paid over the next twelve months.

 

NOTE 8 – CONTINGENCIES

As of June 30, 2016, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. 

 

NOTE 9 – EARNINGS PER SHARE

Basic earnings per share is calculated based on the weighted average number of common shares outstanding during each period.  Diluted earnings per share is calculated based on these same weighted average shares outstanding plus the effect of potential shares issuable upon assumed exercise of stock options based on the treasury stock method.  Potential shares issuable upon the exercise of stock options are excluded from the calculation of diluted earnings per share to the extent their effect would be anti-dilutive.

 

 

11

 


 

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

 

   

 Three Months Ended

 

 Six Months Ended

   

Jun. 30,
2016

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Jun. 30,
2015

(in thousands except per share data)

               

Numerator for basic and diluted

               

earnings per share:

               

       Net income

 

$444

 

$100

 

$276

 

$149

                 

Denominator for basic

               

earnings per share:

               

       weighted-average shares

 

7,942

 

7,894

 

7,944

 

7,879

                 

Employee stock options and awards

 

97

 

184

 

89

 

183

                 

Denominator for diluted

               

earnings per share:

               

       adjusted weighted-average shares &

               

       assumed conversions of stock options

 

8,039

 

8,078

 

8,033

 

8,062

                 

Basic and diluted

               

earnings per share:

               

       Total basic earnings per share

 

$0.06

 

$0.01

 

$0.03

 

$0.02

       Total diluted earnings per share 

 

$0.06

 

$0.01

 

$0.03

 

$0.02

 

Options to purchase 229,213 and 165,843 shares were outstanding as of June 30, 2016 and 2015, respectively, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive.

 

NOTE 10 – SHARE-BASED COMPENSATION

 

For share-based awards granted, we have recognized compensation expense based on the estimated grant date fair value method.  For these awards we have recognized compensation expense using a straight-line amortization method reduced for estimated forfeitures.  

 

The impact on our results of operations of recording share-based compensation, net of forfeitures, for the three and six months ended June 30, 2016 and 2015, respectively, was as follows:

   

 Three Months Ended

 

 Six Months Ended

   

Jun. 30,
2016

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Jun. 30,
2015

 (in thousands)

               

Cost of goods sold

 

$6

 

$6

 

$8

 

$8

Research and development

 

41

 

22

 

60

 

41

Selling, general and administrative

 

158

 

120

 

232

 

189

Total share-based compensation

 

$205

 

$148

 

$300

 

$238

                 

Impact on net earnings per share:

               

Basic and diluted

 

($0.03)

 

($0.02)

 

($0.04)

 

($0.03)

12

 


 

 

Equity awards granted during the three and six months ended June 30, 2016 and 2015 were as follows:

 

   

 Three Months Ended

 

 Six Months Ended

   

Jun. 30,
2016

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Jun. 30,
2015

     

 

 

 

 

   

Restricted Stock

 

212,100

 

193,800

 

222,100

 

193,800

 

There were no stock option awards issued during the three and six months ended June 30, 2016 and 2015.

 

Non-employee directors Restricted Stock Units (“RSU’s”) vest over one year, employee RSU’s vest over four years with the expense being recognized over the vesting period.

 

The remaining unamortized expected future equity compensation expense and remaining amortization period associated with unvested option grants, restricted stock awards and restricted stock unit awards at June 30, 2016 are:

   

Jun. 30,
2016

 (in thousands unless specified)

   

Unamortized future equity compensation expense

 

$1,303

Remaining weighted average amortization period in years

 

2.85

 

NOTE 11 – SHARE REPURCHASE PROGRAMS

 

On February 24, 2016, our Board of Directors approved a share repurchase program with provisions to buy back up to $1 million of our stock during the period from March 2, 2016 through March 31, 2017.  The program was established with a 10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period.  For the three months ended June 30, 2016, 31,330 shares of stock have been repurchased at an average price of $2.44 for a total of $76,425 plus $658 in commissions.  For the six months ended June 30, 2016, 73,845 shares of stock have been repurchased at an average price of $2.33 for a total of $172,409 plus $1,513 in commissions.

 

13

 


 

The following is a summary of share repurchase activity under the plan through June 30, 2016:

 

Repurchases by Month

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Repurchase Program

 

Approximate Dollar Value of Shares that May Yet Be Purchased under the Program

               
 

March 2016

 

$2.26

 

42,515

 

$903,161

 

April 2016

 

$2.35

 

8,480

 

$883,064

 

May 2016

 

$2.52

 

7,650

 

$863,602

 

June 2016

 

$2.45

 

15,200

 

$826,078

 

Total

 

$2.33

 

73,845

   

 

 

14

 


 

Item 2.                  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves as long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results.  All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking.  In particular, statements herein regarding industry prospects or trends; expected revenues; expected level of expense; expected savings; future results of operations; reversals of tax valuation allowances; breakeven point, or financial position; changes in gross margin; economic conditions and capital spending outlook; market acceptance of our newly introduced or upgraded products; development, introduction and shipment of new products; building lease arrangements; sales channels and any other guidance on future periods are forward-looking statements.  Forward-looking statements reflect management’s current expectations and are inherently uncertain.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or other future events.  Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements.  We are under no duty to update any of these forward-looking statements after the date of this report.  The reader should not place undue reliance on these forward-looking statements.  The discussions above and in the section in Item 1A., Risk Factors “Cautionary Factors That May Affect Future Results” in our Annual report on Form 10-K for the year ended December 31, 2015 describe some, but not all, of the factors that could cause these differences.

 

OVERVIEW

 

We continued our focus on managing the core programming business with the goal of operating profitably, while developing and enhancing products to drive future revenue and earnings growth.  Our challenge continues to be operating in a cyclical and rapidly evolving industry environment.  We are continuing our efforts to balance business geography shifts, exchange rate volatility, increasing costs and strategic investments in our business with the level of demand and mix of business we expect.  We continue to manage our costs carefully and create strategies for cost reduction.

 

We are focusing our research and development efforts in our strategic growth markets, namely managed and secure programming technology, automated programming systems and their enhancements for the manufacturing environment and software.  We continue to focus on extending the capabilities and support for our product lines and supporting the latest semiconductor devices, including NAND Flash, e-MMC, and microcontrollers on our newer products.  In 2015, we announced our new PSV5000 and our new Lumen™X programmer.  In 2016, we released LumenX integrated into the PSV5000 automated programming system.

 

Our customer focus is on strategic high volume and high growth market segments: automotive electronics and IoT (Internet of Things) systems including industrial and consumer devices.

 

Subsequent to the end of the quarter, we announced the signing of a five year supply agreement with Bosch Car Multimedia division, recognized to be a leading automotive electronics manufacturer with high quality standards.  This resulted from a complex benchmark evaluation versus our key competitors.  We expect to see some business in 2016, with a larger impact expected for 2017 and 2018.

 

15

 


 

BUSINESS RESTRUCTURING PROGRESS

 

Our previous years’ restructure actions have been fully implemented. As a result of the lease amendment discussed in Note 6, “Operating Lease Commitments”, which started in July 2015, the balance of the restructure liability of approximately $120,000 was incorporated into our deferred rent liability as part of the new lease incentive.

 

cRITICAL aCCOUNTING pOLICY jUDGMENTS AND eSTIMATES

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to revenue recognition, estimating the percentage-of-completion on fixed-price professional engineering service contracts, sales returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring charges, contingencies such as litigation, and contract terms that have multiple elements and other complexities typical in the capital equipment industry.  We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions. 

 

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements:

 

Revenue Recognition:  We recognize revenue at the time the product is shipped.  We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be considered a separate element.  These systems are standard products with published product specifications and are configurable with standard options.  The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

 

The revenue related to products requiring installation that is perfunctory is recognized at the time of shipment.  Installation that is considered perfunctory includes any installation that can be performed by other parties, such as distributors, other vendors, or in most cases the customers themselves.  This takes into account the complexity, skill and training needed as well as customer expectations regarding installation.

 

We enter into multiple deliverable arrangements that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component.  We allocate the value of each element based on relative selling prices.  Relative selling price is based on the selling price of the standalone system.  For the installation and service and support components, we use the value of the discount given to distributors who perform these components.  For software maintenance components, we use what we charge for annual software maintenance renewals after the initial year the system is sold.  Revenue is recognized on the system sale based on shipping terms, installation revenue is recognized after the installation is performed, and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement, typically one year.

 

When we sell software separately, we recognize software revenue upon shipment provided that only inconsequential obligations remain on our part and substantive acceptance conditions, if any, have been met.

 

We recognize revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is fixed or determinable, the buyer has paid or is obligated to pay, collectability is reasonably assured, substantive acceptance conditions, if any, have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer.  We establish a reserve for sales returns based on historical trends in product returns and estimates for new items.

16

 


 

 

We transfer certain products out of service from their internal use and make them available for sale.  The products transferred are our standard products in one of the following areas: service loaners, rental or test units; engineering test units; or sales demonstration equipment.  Once transferred, the equipment is sold by our regular sales channels as used equipment inventory.  These product units often involve refurbishing and an equipment warranty, and are conducted as sales in our normal and ordinary course of business.  The transfer amount is the product unit’s net book value and the sale transaction is accounted for as revenue and cost of goods sold.

 

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. 

 

Inventory: Inventories are stated at the lower of cost or market.  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.  If there is a significant decrease in demand for our products, uncertainty during product line transitions, or a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory adjustments and our gross margin could be adversely affected. 

 

Warranty Accruals:  We accrue for warranty costs based on the expected material and labor costs to fulfill our warranty obligations.  If we experience an increase in warranty claims, which are higher than our historical experience, our gross margin could be adversely affected. 

 

Tax Valuation Allowances:  Given the uncertainty created by our loss history, as well as the current uncertain economic outlook for our industry and capital spending, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances.  At the current time, we expect, therefore, that reversals of the tax valuation allowance will take place only as we are able to take advantage of the underlying tax loss or other attributes in carry forward.  The transfer pricing and expense or cost sharing arrangements are complex areas where judgments, such as the determination of arms-length arrangements, can be subject to challenges by different tax jurisdictions. 

 

Share-based Compensation:  We account for share-based awards made to our employees and directors, including employee stock option awards and restricted stock unit awards, using the estimated grant date fair value method of accounting and estimated forfeiture rate.  For options, we estimate the fair value using the Black-Scholes valuation model, which requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.  The expected stock price volatility assumption was determined using the historical volatility of our common stock.  Changes in the subjective assumptions required in the valuation model may significantly affect the estimated value of the awards, the related stock-based compensation expense and, consequently, our results of operations.  

 

 

17

 


 
 

Results of Operations

 

Net Sales

 

   

 Three Months Ended

 

 Six Months Ended

Net sales by product line

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 (in thousands)

                       

Automated programming systems

 

$4,657

 

34.1%

 

$3,474

 

$7,949

 

(2.5%)

 

$8,152

Non-automated programming systems

 

1,144

 

(22.9%)

 

1,484

 

2,465

 

(9.0%)

 

2,708

Total programming systems

 

$5,801

 

17.0%

 

$4,958

 

$10,414

 

(4.1%)

 

$10,860

                         
                         
   

 Three Months Ended

 

 Six Months Ended

Net sales by location

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 (in thousands)

                       

United States

 

$599

 

(39.9%)

 

$997

 

$1,622

 

16.1%

 

$1,397

% of total

 

10.3%

     

20.1%

 

15.6%

     

12.9%

                         

International

 

$5,202

 

31.3%

 

$3,961

 

$8,792

 

(7.1%)

 

$9,463

% of total

 

89.7%

     

79.9%

 

84.4%

     

87.1%

 

 

 

Net sales in the second quarter of 2016 were $5.8 million, compared with $5.0 million in the second quarter of 2015.  The year-over-year increase in sales was primarily a result of strong bookings in the first quarter of 2016, particularly for automotive electronics equipment and Internet of Things markets.  Net sales for the first half of 2016 were $10.4 million as compared to $10.9 million for the same period last year.  On an international regional basis, revenue in the second quarter of 2016 increased in Asia 48% and in Europe 27% and declined 30% in the Americas compared to the second quarter of 2015.  

 

On a product basis, the net sales growth is primarily from higher PSV family sales, offset in part by declining older product family sales and adapter sales.  A sales breakdown by type for the second quarter of 2016 was 70% equipment, 21% adapters, and 9% software and maintenance and was approximately the same year to date through the second quarter of 2016.  Adapters are a consumable item and software and maintenance are typically recurring under annual subscription contracts.

 

Order bookings were $5.7 in the second quarter of 2016 compared to $5.1 million in the same period in 2015.  The variation in revenue amounts versus order amounts related to the change in deferred revenues, backlog and currency translation.  Backlog at June 30, 2016 was $2.0 million compared to $1.9 million on June 30, 2015 and $2.0 million on March 31, 2016.  Deferred revenue at June 30, 2016 was $1.1 million compared to $1.0 million on June 30, 2015 and $1.2 million on March 31, 2016.

 

For the six months ending June 30, 2016, compared to the same period in 2015, the net sales decrease was primarily due to lower sales of our automated programming systems.  On a regional basis, net sales increased 13% in Asia and 5% in the Americas, while declining 22% in the Americas compared to the same period in 2015.

 

 

18

 


 
 

Gross Margin

 

 

 Three Months Ended

 

 Six Months Ended

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 (in thousands)

                     

Gross margin

$3,088

 

13.4%

 

$2,722

 

$5,616

 

0.6%

 

$5,580

Percentage of net sales

53.2%

     

54.9%

 

53.9%

     

51.4%

 

Gross margin increased in dollars due to the sales volume increase.  Gross margin as a percentage of sales in the second quarter of 2016 was 53.2%, compared with 54.9% in the second quarter of 2015.  The gross margin decrease as a percentage of sales for the second quarter was primarily due to a product mix shift and less favorable factory variances. 

 

For the first six months of 2016 compared to the same period in 2015, gross margin as a percentage of sales increased primarily due to favorable factory variances, particularly in the first quarter.  Based on past experience, we expect variations in our gross margin as a percentage of sales due to changes in key factors for future periods including: sales volume, product mix, channel mix, pricing, inventory fluctuations, warranty, factory variances and currency exchange rates.

 

Research and Development

 

 

 Three Months Ended

 

 Six Months Ended

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 (in thousands)

                     

Research and development

$1,172

 

(5.7%)

 

$1,243

 

$2,297

 

(1.9%)

 

$2,341

Percentage of net sales

20.2%

     

25.1%

 

22.1%

     

21.6%

               

Research and development (“R&D”) decreased $71 thousand in the second quarter of 2016 compared to the same period in 2015, primarily due to lower R&D materials and contract labor related to the Lumen™X product.

 

For the first six months of 2016 compared to the same period in 2015, the decrease in R&D expense was generally due to the same factors discussed above for the second quarter.

 

Selling, General and Administrative

 

 

 Three Months Ended

 

 Six Months Ended

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 (in thousands)

                     

Selling, general &

                     

administrative

$1,525

 

7.8%

 

$1,415

 

$3,103

 

5.1%

 

$2,953

Percentage of net sales

26.3%

     

28.5%

 

29.8%

     

27.2%

 

Selling, General and Administrative (“SG&A”) expenses increased $110 thousand in the second quarter of 2016  compared to the same period in 2015, primarily due to higher employee related costs, a higher bad debt reserve and higher commissions.

19

 


 

 

For the first six months of 2016 compared to the same period in 2015, the increase in SG&A expense was generally due to the same factors discussed above for the second quarter and includes approximately $20 thousand non-recurring 2016 Shanghai office move costs.

 

Interest

 

 

 Three Months Ended

 

 Six Months Ended

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 (in thousands)

                     

Interest income

$11

 

(59.3%)

 

$27

 

$23

 

(60.3%)

 

$58

 

 

 

Interest income decreased in the second quarter of 2016 compared to the same period in 2015, due to both lower invested cash balances and lower interest rates.

 

For the first six months of 2016 compared to the same period in 2015, the decrease in interest income was generally due to the same factors discussed above for the second quarter.

 

Income Taxes

 

 

 Three Months Ended

 

 Six Months Ended

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Change

 

Jun. 30,
2015

 (in thousands)

                     

Income tax (expense) benefit

($7)

 

*

 

$2

 

($8)

 

14.3%

 

($7)

   * not meaningful

                     

 

Income tax (expense)/benefit for the second quarter of 2016 compared to same period in 2015, primarily resulted from foreign subsidiary income tax and refunds received in 2015 by foreign subsidiaries.

 

For the first six months of 2016 compared to the same period in 2015, the change in income tax expense was generally due to the same factors discussed above for the second quarter.

 

The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes.  We have a valuation allowance of $11.4 million as of June 30, 2016.  Our deferred tax assets and valuation allowance have been reduced by approximately $218 thousand and $206 thousand associated with the requirements of accounting for uncertain tax positions as of June 30, 2016 and 2015, respectively.  Given the uncertainty created by our past loss history and the cyclical nature of the industry in which we operate, we expect to continue to limit the recognition of net deferred tax assets and maintain the tax valuation allowances.

 

 

 

20

 


 

Financial Condition

               

Liquidity and Capital Resources

 

   
 

Jun. 30,
2016

 

Change

 

Dec. 31,
2015

 (in thousands)

         

Working capital

$13,743

 

($80)

 

$13,823

 

 

At June 30, 2016 our cash position was $8.8 million, with $3.7 million in the USA and the balance in foreign subsidiaries. The change in cash during the quarter resulted primarily from a working capital shift mostly to receivables. 

 

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

 

As a result of our significant product development, customer support, selling and marketing efforts, we have required substantial working capital to fund our operations.  We have tried to balance our level of development spending with the goal of profitable operations.  We have implemented or have initiatives to implement geographic shifts in our operations, optimized real estate usage, reduced exposure to the impact of currency volatility, and additional product development differentiation and cost reductions.

 

We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through at least the next one-year period.  We may require additional cash for U.S. operations, which could cause potential repatriation of cash that is held in our foreign subsidiaries.  Although we have no current repatriation plans, there may be tax 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.  Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to reduce expenditures and/or seek possible additional financing.

 

OFF-Balance sheet arrangements

 

Except as noted in the accompanying consolidated financial statements in Note 6, “Operating Lease Commitments” and Note 7, “Other Commitments”, we have no off-balance sheet arrangements.

 

Non-Generally accepted accounting principles (GAAP) FINANCIAL MeasureS

 

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $584 thousand in the second quarter of 2016 compared to $197 thousand in the second quarter of 2015.  Adjusted EBITDA, excluding equity compensation (a non-cash item) was $789 thousand in the second quarter of 2016, compared to $345 thousand in the second quarter of 2015.

 

EBITDA was $533 thousand for the first six months of 2016 compared to $372 thousand in the first six months of 2015.  Adjusted EBITDA, excluding equity compensation was $833 thousand for the first six months of 2016, compared to $610 thousand for the first six months of 2015.

 

21

 


 

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

 

Non-Generally accepted accounting principles (GAAP) FINANCIAL Measure RECONCILIATION

 

   

 Three Months Ended

 

 Six Months Ended

   

Jun. 30,
2016

 

Jun. 30,
2015

 

Jun. 30,
2016

 

Jun. 30,
2015

 (in thousands)

               

Net Income

 

$444

 

$100

 

$276

 

$149

   Interest (income) expense

 

(11)

 

(27)

 

(23)

 

(58)

   Taxes

 

7

 

(2)

 

8

 

7

   Depreciation & amortization

 

144

 

126

 

272

 

274

EBITDA earnings

 

$584

 

$197

 

$533

 

$372

                 

   Equity compensation

 

205

 

148

 

300

 

238

Adjusted EBITDA,

 

 

 

 

       

   excluding equity compensation

 

$789

 

$345

 

$833

 

$610

                 

 

 

 

RECENT ACCOUNTING ANNOUNCEMENTS

 

Recent Accounting Pronouncements

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (ASU 2016-09), “Improvements to Employee Share-Based Payment Accounting”.  ASU 2016-09 requires excess tax benefits to be recognized in the statement of operations as an income tax expense and is applied prospectively by means of a cumulative-effect adjustment of excess tax benefits from equity in the period of adoption. The standard establishes an alternative practical expedient for estimating the expected term of an award by recognizing the effects of forfeitures in compensation cost when the forfeitures occur. Adoption of the alternative practical expedient is applied prospectively on an entity-wide basis. The standard requires that amounts paid to a taxing authority on the employee’s behalf as a result of directly withholding shares for tax-withholding purposes are to be presented on a retrospective basis as a financing activity on the statement of cash flows. The standard becomes effective beginning January 1, 2017. We are in the process of evaluating the impact of adoption on our consolidated financial statements.

 

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

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09).  ASU 2014-09 provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance.  In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” (ASU 2015-14).  ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017.  We are in the process of evaluating the impact of adoption on our consolidated financial statements.

22

 


 
 

 

Item 3.                                  Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.                 Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

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

 

Changes in internal controls

 

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

 

PART II - OTHER INFORMATION

 

Item 1.                  Legal Proceedings

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.  As of June 30, 2016, we were not a party to any material pending legal proceedings.

 

Item 1A.                Risk Factors


In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  There are no material changes to the Risk Factors described in our Annual Report.

Item 2.                  Unregistered Sales of Equity Securities and Use of Proceeds

 

                                None

 

 

23

 


 
 

Item 3.                  Defaults Upon Senior Securities

 

                                None

 

Item 4.                  Mine Safety Disclosures

 

                                Not Applicable

               

Item 5.                  Other Information

 

                                None

 

Item 6.                  Exhibits 

 

(a)    Exhibits

 

                  4   Instruments Defining the Rights of Security Holders, Including Indentures:

         4.5                     Amendment No. 3 to Rights Agreement, dated as of July 13, 2016, between Data I/O Corporation and Computershare.  (Incorporated by reference to Exhibit 4.4 of Data I/O’s Form 8-A/A filed on July 14, 2016).

 

                10   Material Contracts:

         None

               

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

31.1                           Chief Executive Officer Certification                                                                                    

31.2                           Chief Financial Officer Certification                                                                                      

 

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

32.1                           Chief Executive Officer Certification                                                                                    

32.2                           Chief Financial Officer Certification

 

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

 

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SIGNATURES

 

 

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

 

DATED:   August 15, 2016

 

 

DATA I/O CORPORATION

(REGISTRANT)

 

 

By: //S//Anthony Ambrose                                                                                                                           

Anthony Ambrose

President and Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

 

 

By: //S//Joel S. Hatlen

Joel S. Hatlen

Vice President and Chief Financial Officer

Secretary and Treasurer

(Principal Financial Officer and Duly Authorized Officer)

 

 

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Exhibit 31.1

CERTIFICATION        

 

I, Anthony Ambrose, certify that:

1)            I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;

2)            Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3)            Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4)            The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a)             Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)             Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

d)            Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)            The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)             All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

DATED:   August 15, 2016

 

/s/ Anthony Ambrose

Anthony Ambrose

Chief Executive Officer

(Principal Executive Officer)

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Exhibit 31.2

 

CERTIFICATION

 

I, Joel S. Hatlen, certify that:

1)            I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;

2)            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3)            Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4)            The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a)             Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)             Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

d)            Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)            The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)             All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

DATED:   August 15, 2016

 

 /s/ Joel S. Hatlen  

Joel S. Hatlen

Chief Financial Officer

(Principal Financial Officer)

 

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Exhibit 32.1

 

Certification by Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the quarterly report of Data I/O Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Ambrose, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Anthony Ambrose

Anthony Ambrose

Chief Executive Officer

(Principal Executive Officer)

August 15, 2016

 

 

 

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Exhibit 32.2

 

Certification by Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the quarterly report of Data I/O Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel S. Hatlen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 /s/ Joel S. Hatlen  

Joel S. Hatlen

Chief Financial Officer

(Principal Financial Officer)

August 15, 2016

29