What changed in this filing

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Item 1A. Risk Factors

2024-03-27 compared with 2023-03-30 · 38 added, 42 removed, 239 unchanged (25% of the section changed)

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The reader can identify these statements by the fact that they do not relate strictly to historical or current facts.

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.

Any or all of the forward-looking statements in this Annual Report or in any other public statement made may turn out to be wrong .

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RISK FACTORS:

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.

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.

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.

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.

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.

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.

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.

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.

TARIFFS AND TRADE ISSUES

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Trade and tariff issues are creating business uncertainty and may spread to and impact other jurisdictions.

Additionally, trade tensions between the United States and China are impacting our ability to seamlessly design, build, market and sell our products.

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.

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 are occurring as a result of the Russian invasion of Ukraine, which could have economic and other indirect impacts to our business.

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.

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.

NEW PRODUCTS OR SERVICES

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Due to the length of time to market from design to production in security provisioning, if these markets develop more slowly than planned, or if our security deployment solutions are not widely accepted, then we may not achieve our expected return on investment in new technologies, which may significantly affect the results of our existing business.

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.

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.

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This can cause them to change their programing methods away from pre-programming to post placement programming techniques, including ISP, ICT.

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;

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;

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Our future success depends on our ability to successfully compete with other technology firms in attracting and retaining key technical personnel.

Failure to adapt to increasing automotive electronics customer requirements may impact our competitiveness and result in a decline in sales or increased costs.

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.

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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.

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.

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.

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.

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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;

experience delays in supply chain for parts needed for new products.

delays in supply chain for parts needed for new products.

These problems may result in a delay or decline in sales or increased costs.

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We may pursue acquisitions of complementary technologies, product lines or businesses.

Future acquisitions may include risks, such as:

Acquisitions may include risks, such as:

burdening management and our operating teams during the integration of the acquisition;

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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.

As experienced in 2022, we have seen more part shortages and larger price increases than in recent years.

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.

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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 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.

Over estimation of demand or excessive minimum order quantities may lead to excess inventories that may become obsolete.

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.

Some of our sockets, parts, subassemblies and boards are currently manufactured to our specifications by third-party foreign contract manufacturers and we are sourcing certain parts or options from foreign manufacturers, particularly in China.

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.

If we are unable to attract and retain qualified third-party distributors and representatives, our business may be adversely affected.

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A decline in economic and market conditions may result in delayed or decreased capital spending and delayed or defaulted payments from our customers.

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.

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.

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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;

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difficulties in integrating foreign and outsourced operations;

war, civil unrest, political and economic instability, including the Russian invasion of Ukraine;

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;

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facilities relocations.

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.

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 five of the last ten years.

We have incurred operating losses in four of the last ten years.

We operate in a cyclical industry.

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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.

The stock prices of technology companies tend to fluctuate significantly.

We believe factors such as announcements of new products or services by us or our competitors and quarterly variations in financial results and outlook may cause the market price of our Common Stock to fluctuate substantially.

In addition, overall volatility in the stock market, particularly in the technology company sector, is often unrelated to the operating performance of companies.

If these market fluctuations continue in the future, they may adversely affect the price of our Common Stock.

Additionally, securities of certain companies have recently experienced significant and extreme volatility in stock price due to short sellers of shares of common stock, known as a “short squeeze.” These short squeezes have caused extreme volatility in both the stock prices of those companies and in the market, and have led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company.

Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant portion of their original investment, as in many cases the price per share has declined steadily as interest in those stocks have abated.

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.

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.

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.

Cybersecurity attacks may increase as a result of the Russian invasion of Ukraine, and/or deterioration of the geopolitical environment.

Cybersecurity breaches or terrorism could result in the exposure or theft of private or confidential information as well as interrupt our business, including denying customer access to our website and information systems.

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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.

The stock prices of technology companies tend to fluctuate significantly.

In addition, overall volatility in the stock market, particularly in the technology company sector, is often unrelated to the operating performance of companies.

If these market fluctuations continue in the future, they may adversely affect the price of our Common Stock.

REGULATORY REQUIREMENTS

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and securities claims and litigation.

Unfortunately, increased regulations pushed onto public companies may have a disproportionate impact to smaller public companies.

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.

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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,

Unresolved Staff Comments

These will require significant costs, work and reputational risk for failing to meet requirements, with miniscule impact to the global environment.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors