DATA I/O CORP 10-K

Item 1. Business This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on current expectations, estimates and projections about Data I/O Corporation’s industry, management’s beliefs and certain assumptions made by management. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements.” General Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) is a global market leader for advanced programming, security deployment, security provisioning and associated Intellectual Property (“IP”) protection and management solutions used in electronics manufacturing with flash memory, microcontrollers, and flash memory-based intelligent devices as well as secure element devices, authentication devices and secure microcontrollers. We collectively refer to IP protection, security provisioning of devices, provisioning of security into devices, and related services such as cloud onboarding and device and provisioning documentation management as “security deployment”. Data I/O ® designs, manufactures and sells programming and security deployment systems and services for electronic device manufacturers, specifically targeting high-growth areas such as high-volume users of flash memory and flash memory-based microcontrollers. Most electronic products today incorporate a number of programmable semiconductor devices that contain data, operating instructions and security credentials essential for the proper operation of the product and more and more products require security deployment. Our mission is to bring the world’s electronic devices to life. Programmable devices are used in products such as automobile electronics, smartphones, HDTV, smart meters, gaming systems and a broad category called Internet of Things (“IoT”). IoT is a broad term that addresses the interconnectivity of devices and other electronic or smart products. Our solutions, some of which include security deployment and process control capabilities, enable us to address the demanding requirements of the electronic device market, where applications security and IP protection are essential to our customer’s success. 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. 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 . Major Impacts on 2024 Due to economic and automotive electronics uncertainties and slower customer capacity expansion, shipments of the Company’s automated systems in the Americas and Europe were lower which was partially offset by revenue growth in Asia. COVID-19 impacts in past years were no longer an operational challenge with personnel staffing, inventory levels, supply chain and operational activities returning to normal levels. However, late in 2024 with the new incoming United States Administration, geo-political, economic and trade uncertainties have increased. The resulting future impact on the Company’s markets, customers, supply chain and operations are uncertain. We will leverage the experience gained from the impacts of COVID-19, along with the expertise of our leadership and operational teams, to effectively navigate and mitigate these potential challenges. After a period of stability which lasted over a decade, a key organizational leadership transition occurred in the fourth quarter of 2024 with the planned retirement of Anthony Ambrose and the appointment of a new CEO and President, William Wentworth. Subsequent changes have also occurred in the leadership of the Sales, Marketing and Engineering functions. 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 also provide services related to hardware support, system installation and repair, and device programming. Companies that design and manufacture products utilizing programmable electronic devices, ranging from automobiles to cell phones, purchase programming solutions from us. Trends of increasing device densities, shrinking device packages, increased demands for security, and customers increasing their software content file sizes, combined with the increasing numbers of intelligent devices such as automotive electronics and IoT applications, are driving demand for our solutions. 3 Table of Contents Traditionally, our programming market opportunity focused on the number of semiconductor devices to be programmed, but because of the rapid increase in the density of devices, and increasing demands for supply-chain security, the focus has shifted in many cases, from the number and type of devices to the number and type of bits per device to be programmed or securely provisioned. 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. Products To accommodate the expanding variety and quantities of programmable devices being manufactured today, we offer multiple solutions for the numerous types of device mix and volume usage by our customers in the various market segments and applications. We work closely with leading manufacturers of programmable devices to develop our products to meet the requirements of a particular device. Our newer products are positioned and recognized as some of the most advanced programming and security deployment solutions. Our programming solutions include a broad range of products, systems, modules and accessories, grouped into two general categories: automated programming systems and manual programming systems. Our PSV family of automated programming systems delivers a broad range of programming capacity and capability to the marketplace. Our PSV2800 Automated Programming System focuses on dedicated high-volume manufacturing in a lower cost platform. 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. 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 approximately $62,000 to $690,000 and our manual systems have list selling prices ranging from approximately $10,000 to $20,000. 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. The Lumen®X programming engine is our highest performance programming engine, designed to support eMMC and UFS programming of large NAND FLASH, as well as microcontrollers, serial FLASH and other devices. Increasing memory densities and the need for faster data interfaces are resulting in an expected transition to the use of UFS devices. 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. SentriX allows customers of any size and demand-profile to securely add keys, certificates, and other security information to specialized regions of authentication integrated circuits ("ICs”), secure elements and secure microcontrollers. We provide device support and service on all of our products. 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 Sales Percentage of Total Sales Breakdown by Type Sales Type 2024 2023 Drivers Equipment Sales 51% 58% Capacity, Process improvement, Technology Adapter Sales 33% 29% Capacity utilization, New customer products Software and Maintenance Sales 16% 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 · Fast program and verify speeds · Managed and secure programming (Automated) · · Up to 112 programming sites Up to 3000 devices per hour throughput · High throughput for high-density flash memory programming · · UFS Support Supports LumenX and FlashCORE III programmers · Flexible I/O options (tray, tape, tube), marking/labeling and vision for coplanarity inspection · · Supports multiple media types Supports quality options – fiber laser marking, ink dot marking, 2D inspection, 3D coplanarity · · Scalable solutions for low to high-volume manufacturing Access to system data for connected factory and traceability · ConneX Service Software enables connected factory integration and automation LumenX Programmer (Non-automated) · Extensible architecture for fast programming, verify and download speeds · · Managed and secure programming Fast setup and job changeover · Supports UFS memory, microcontrollers, serial flash, secure elements and other device types · · Highest yield and low total cost of programming High performance · · Large file size support Secure job creation · Create and validate designs before moving down the firmware supply chain · Eight sockets with tool-less changeover with single-socket adapters FlashPAK III programmer: (Non-automated) · · Scalability Network control via Ethernet · Create and validate designs before moving down the firmware supply chain · Stand-alone operation or PC compatible · Unmatched ease of use in manual production systems · Parallel programming · Four sockets · Universal device support SentriX Security Deployment System · Unique ability to securely provision keys and certificates one device at a time · · Create secure IoT devices across a global network Maintain IP control over their product’s lifecycle · Broad set of secure devices supported with wide range of silicon partners · Secure supply chain and flexible key management architecture · Software license model allows easy upgrades from deployed PSV data programming systems · Pay per use model 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. 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. Process improvement and simplification as well as new product rollouts, memory and new technology, security New contracts from OEMs, programming solutions specified by OEMs Large algorithm device support library, contract wins, 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. 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. When their business grows, they buy more semiconductors which, in turn, require additional programming equipment to maintain production speeds or program new device technologies. 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 2024, we sold products to approximately 197 customers throughout the world. The following represented greater than 10% of net sales for the applicable year: Percentage of Net Sales 2024 2023 2022 Number of customers 2 2 1 Approximate percentage of net sales 34 % 24 % 23 % Percentage of each 19 % 13 % 23 % Percentage of each 15 % 11 % n/a The following represented greater than 10% of our consolidated accounts receivable for the applicable years: Percentage of Consolidated Accounts Receivable 2024 2023 2022 Number of customers 2 3 3 Approximate percentage of consolidated accounts receivable balance 43 % 47 % 39 % Percentage of each 30 % 18 % 15 % Percentage of each 13 % 16 % 13 % Percentage of each - 13 % 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. We continually evaluate our sales channels against our evolving markets and customers and realign them as necessary to ensure that we reach our existing and potential customers in the most effective and efficient manner possible. U.S. Sales We market our products throughout the U.S. using a variety of sales channels, including our own field sales management personnel, independent sales representatives and direct sales. Our U.S. independent sales representatives obtain orders on an agency basis, with shipments made directly to the customer by us. Net sales in the U.S. for 2024, 2023 and 2022 were (in millions) $1.4, $2.8 and $1.8, 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 94%, 90% and 93% of net sales in 2024, 2023 and 2022, respectively. We make foreign sales through our wholly-owned subsidiaries in Germany and China, as well as through independent distributors and sales representatives operating in 32 countries. Our independent foreign distributors purchase our products for resale and we generally recognize the sale at the time of shipment to the distributor. 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 2024, 2023 and 2022 were (in millions) $20.4, $25.3 and $22.4, respectively. We determine international sales by the international geographic destination into which the products are sold and delivered and include not only sales by foreign subsidiaries but also export sales from the U.S. to our foreign distributors and to our representatives’ customers. International sales do not include transfers between Data I/O and our foreign subsidiaries. Export sales are subject to U.S. Department of Commerce regulations. We have not, however, experienced difficulties to date as a result of these requirements. Our products typically do not require export licenses. We have not made sales to Iran or any Iranian governmental entities or any other blacklisted companies or countries. Fluctuating exchange rates and other factors beyond our control, such as the coronavirus, international monetary stability, tariff and trade policies and U.S. and foreign tax and economic policies, may affect the level and profitability of international sales. 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. Our direct competition competes primarily based on price. 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. 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”). 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. 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. 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. 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. Most components used are available from a number of different suppliers and subcontractors but certain items, such as some handler and programmer and security deployment subassemblies, custom integrated circuits, hybrid circuits and connectors, are purchased from single sources. We believe that additional sources can be developed for most present single-source components without significant difficulties. Single-source components may not always continue to be readily available or may be subject to part shortage delays. 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. 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. 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) $3.5, $2.8 and $4.8 as of December 31, 2024, 2023 and 2022, respectively. The size of backlog at any 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. Future growth is largely 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. 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 manual and automated systems 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, 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. Our research and development efforts have resulted in the release of significant new products and product enhancements over the past several years. During 2024, 2023 and 2022, we made expenditures for research and development of (in millions) $6.2, $6.5 and $6.1, respectively, representing 29%, 23% and 25% of net sales, respectively. Research and development costs are generally expensed as incurred. Patents, Copyrights, Trademarks and Licenses We rely on a combination of patents, copyrights, trade secrets and trademarks to protect our IP, as well as product development and marketing skills to establish and protect our market position and will continue to apply for and add new patents to our patent portfolio as we develop strategic new technologies. We attempt to protect our rights in proprietary systems (architecture, implementations, software) including Lumen®X, FlashCORE, TaskLink, ConneX, SentriX and other software products, by retaining the title to and copyright of the software and documentation, by including appropriate contractual restrictions on use and disclosure in our licenses, and by requiring our employees to execute non-disclosure agreements. 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. Because of the rapidly changing technology in the semiconductor, electronic equipment and software industries, portions of our products might infringe upon existing patents or copyrights, and we may be required to obtain licenses or discontinue the use of infringing technology. We believe that any exposure we may have regarding possible infringement claims is a reasonable business risk similar to that assumed by other companies in the electronic equipment and software industries. However, any claim of infringement, with or without merit, could be costly and a diversion of management’s attention, and be 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, 2024, we were not subject to any pending actions regarding infringement claims. Employees - Human Capital As of December 31, 2024, we had a total of 95 employees, of which 45 were located outside the U.S. and 7 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. Many of our employees are highly skilled, trained and experienced in specialized areas and our continued success will depend in part upon our ability to attract and retain employees who can be in great demand within the industry. None of our employees are represented by a collective bargaining unit and we believe relations with our employees are favorable. 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. 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. 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. Initiatives within these areas apply to the Company’s daily global operations as well as within its supply chains. Our facilities are subject to numerous laws and regulations concerning the discharge of materials or otherwise relating to the environment. In addition to this commitment, the Company has a track record of meeting its ESG regulatory obligations, being a solid corporate citizen, delivering superior value to its customers and partners, and demonstrating corporate stewardship including returning capital to shareholders through past share buybacks. 9 Table of Contents As the largest and only publicly traded company in its sector, according to our internal analysis, Data I/O has led its industry in disclosing significant operational and financial information. The Company's Board currently includes Data I/O's CEO and four Independent Directors. It is diverse in gender, education, professional experience and differences in viewpoints and skills. Through its continuous improvement practices and our operations’ focus on assembly and test with no fabrication, the Company consumes relatively little energy, has minimal or no emissions or pollutants to air and wastewater, and complies with workplace labor, safety and business practices on three continents. 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 company-owned cars with hybrid or electric vehicles where feasible. 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. The Company provide employees time-off to volunteer. 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. Potential regulations regarding climate change measurements and disclosures could require significant effort and costs. Executive Officers of the Registrant Set forth below is certain information concerning the executive officers of Data I/O as of March 18, 2025: Name Age Position William Wentworth 59 President and Chief Executive Officer Gerald Y. Ng 63 Vice President, Chief Financial Officer, Secretary and Treasurer William Wentworth joined Data I/O as a member of the Board of Directors on May 2023 and assumed the President position on September 1,2024 and Chief Executive Officer (“CEO”) position on October 1, 2024. Bill Wentworth brings a wealth of industry experience spanning over 35 years, including private equity and M&A exposure. As the CEO of Source Electronics, the global market share leader in programming and test services, he was a Data I/O customer and led the sale of controlling interest of Source Electronics to HIG Capital in 2001 and the company’s subsequent sale to Avnet in 2008 with significant investor return. Under Bill's leadership, Source developed compelling programming solutions for the automotive and consumer industries, expanding the business and limiting its industry and customer concentration. For the years prior to joining Data I/O, as President and owner of Wentworth Advisors, he has consulted in the programming, IT, and private equity markets, focusing on expanding deal flow, performing due diligence and Board service. 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. 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. 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. 10 Table of Contents