What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2026-04-16 compared with 2025-04-01 · 88 added, 87 removed, 145 unchanged (55% of the section changed)

10 unchanged sentences

expected expenses, breakeven revenue point;

cybersecurity risk management and costs;

expected market decline, bottom or growth;

the development of the Edge AI market;

market acceptance of our newly introduced or upgraded products or services;

2 unchanged sentences

changing foreign operations;

strategic transformation progress and timeline;

ERP implementation timeline;

potential acquisitions;

and the 2026 organic growth framework;

taxes, trade issues and tariffs;

12 unchanged sentences

The following discussions and the section entitled “Risk Factors - Cautionary Factors That May Affect Future Results” describes some, but not all, of the factors that could cause these differences.

The automotive and industrial electronics industry is cyclical.

With increased market uncertainty and customer capacity expansion slowing in 2024, automated systems shipments declined in the Americas and Europe which was partially offset by revenue growth in Asia.

Automotive electronics represented 59% of 2024 bookings compared to 63% for 2023.

While automotive system sales were below expectations, the Company continues to expand its sales to service providers (franchise distribution, contract manufacturers and independent providers) and reoccurring revenue offerings.

For the full year, consumable adapters and services revenue remained steady, representing 50% of total revenue and helping mitigate the decline in system sales.

COVID-19 impacts in past years were no longer an operational challenge with personnel staffing, inventory levels and 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.

However, the operational and manufacturing resiliencies gained from the COVID-19 impact and the experience of leadership and operational teams can be leveraged to navigate and mitigate these potential future challenges.

As our customers shift their supply chain and manufacturing locations to address changing economic and trade constraints, we will have the capacity and ability to adjust accordingly.

After a period of stability which lasted over a decade, key organizational leadership transition occurred in the fourth quarter of 2024 with 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 and corresponding changes in the strategic and operational direction of these groups.

We believe these changes will drive improved revenue growth, higher product innovation, greater operational efficiency and improved financial performance.

We continue to make investments in technologies, products and services to maintain market leadership in our Unified Programming Strategy.

This strategy supports our customers’ preprogramming supply chain needs, from design to manufacturing and beyond.

Our manual programmer offerings, such as LumenX and FlashCore, provide preprogramming solutions for our customers’ design, engineering, new product introduction, low-to-medium production, and test needs while our PSV system of products support medium-to-high volume production needs.

Our strong cash position and balance sheet, combined with our long-term view of the market, gives us financial flexibility to make these investments.

Data I/O Corporation is a global leader in data programming and provisioning solutions for flash memory, microcontrollers and security integrated circuits.

The Company designs, manufactures and sells programming and security deployment systems used by electronics manufacturers in automotive, Internet-of-Things, industrial, medical, wireless and consumer electronics applications.

Since 1972, the Company has enabled the design and manufacture of electronic products through innovative programming solutions, and today its customers use Data I/O’s security deployment and programming systems to reliably, securely and cost-effectively bring innovative new products to life.

The Company’s global operations include manufacturing and engineering facilities in Redmond, Washington and Shanghai, China, with additional sales and support operations in Munich, Germany.

The year ended December 31, 2025 was a pivotal period for the Company, defined by a comprehensive strategic transformation executed under the leadership of President and CEO William Wentworth, who assumed the role in the fourth quarter of 2024.

The transformation was designed around six strategic priorities:

modernizing the Company’s go-to-market strategy, investing in the core technology platform, strengthening customer relationships, optimizing business operations and IT infrastructure, improving operational processes, and deploying artificial intelligence across the organization.

As the Company enters 2026, management believes the transformation is approximately one year ahead of schedule relative to its original multi-year plan.

A central element of the transformation has been expanding the Company’s addressable market.

Historically, Data I/O served the relatively narrow market for offline semiconductor programming equipment, where demand is predominantly tied to customers’ capital expenditure budgets and capacity expansion decisions.

The Company is now repositioning itself to serve the significantly larger data provisioning market, which encompasses the programming, configuration, and testing of connected devices across the full manufacturing lifecycle.

This expanded market opportunity includes services and solutions for programming at test and support for the growing Edge AI ecosystem.

Management believes the broader data provisioning market represents a meaningfully larger opportunity than the traditional programming equipment market segment the Company has historically served.

Subsequent to year end, in February 2026, the Company announced a collaboration with IAR, a global leader in embedded development tools and security solutions, to combine IAR’s security expertise with Data I/O’s provisioning expertise.

The collaboration is intended to create a frictionless solution that reduces the complexity inherent in current device provisioning approaches, simplifying the process of securely programming and provisioning devices across global manufacturing supply chains.

This collaboration is an early example of the Company’s strategy to build partnerships that extend its platform into adjacent areas of the data provisioning value chain.

The buildout of Edge AI represents a significant emerging growth driver for the Company.

Autonomous systems, connected vehicles, industrial IoT devices and smart infrastructure all require increasing volumes of data to be economically and securely provisioned into semiconductor devices at the various points in the manufacturing process.

As the proliferation of AI-enabled devices at the network edge accelerates, the demand for high-throughput, secure programming and provisioning solutions is expected to grow substantially.

The Company observed encouraging early indicators of this trend during the fourth quarter of 2025 and into early 2026, with new customer logos engaging on definitive production timelines for Edge AI applications.

Management believes the convergence of Edge AI buildout and increasing device complexity positions the Company favorably for sustainable long-term growth.

During 2025, the Company deployed artificial intelligence across all functional departments to accelerate operations and reduce costs.

AI-enabled efficiencies were a key contributor to a 7% reduction in recurring operating expenses, from an annualized run rate of approximately $26.7 million at the time of the CEO transition in November 2024 to approximately $24.8 million by year end 2025.

The Company has identified plans for an additional $1.0 million of annual run rate savings to be realized within the first half of 2026.

AI tools were applied to software engineering to accelerate programming algorithm development and device support, ERP implementation planning and data migration, customer support and service processes, and internal business operations including financial reporting and analysis.

Management believes these AI capabilities enabled the Company to accomplish its transformation objectives significantly faster than would have been achievable through traditional approaches, and that ongoing AI deployment will continue to yield productivity gains and competitive advantages.

The Company has turned its strategic attention to broadening and stabilizing its business model.

Historically, Data I/O’s revenues have been overwhelmingly tied to capital expenditure cycles in programming equipment, making the business highly cyclical and dependent on customers’ capacity expansion decisions.

The Company is making concerted efforts to reduce its dependence on the automotive electronics sector, historically the Company’s largest end market.

Automotive electronics represented approximately 64% of 2025 bookings, compared to 59% in 2024.

More broadly, the Company is focused on developing a more balanced revenue model that incorporates recurring services and consumables revenues, including adapter sales, software services, and programming-at-test service offerings.

For the full year 2025, consumable adapters and services represented 58% of total revenue, providing a more stable and recurring base, while platform sales represented 42% of total revenue.

Deferred revenue decreased to approximately $1.5 million at December 31, 2025 from $1.6 million at December 31, 2024.

For the full year ended December 31, 2025, the Company reported net sales of $21.5 million, compared to $21.8 million in 2024.

Bookings for the full year 2025 were $18.6 million, a decrease of 17% from $22.5 million in 2024, with backlog at December 31, 2025 of $1.6 million.

Regionally, 2025 bookings were strongest from customers throughout Asia, while North America demand for bookings was consistent with the prior year though tailing off in the fourth quarter and Europe declined more generally, reflecting both the ongoing automotive downturn and the Company’s deliberate efforts to diversify its customer base into adjacent markets.

Despite the near-term booking softness, the Company observed very encouraging customer activity in the fourth quarter 2025 and into early 2026, with new customer engagements and definitive production timelines providing increased confidence in the demand environment heading into the new year.

Looking ahead, the Company has established a 2026 business framework that encompasses organic revenue growth only, from which management sees a path to positive operating cash flows.

Inorganic growth opportunities, while actively being evaluated, are not incorporated into this framework and would be incremental to the organic plan.

The framework is supported by the convergence of the Company’s platform investments, expanding market opportunities in data provisioning and Edge AI, the strategic transformation progress realized in 2025, improved operational capabilities and a strengthened leadership team.

The Company’s balance sheet provides a solid foundation, with $7.9 million in cash and no debt as of December 31, 2025.

Management made deliberate changes to the Board of Directors and executive suite over the past 18 months to ensure the right team is in place to execute this growth plan, and the Company engaged a leading boutique middle-market investment bank to evaluate inorganic growth opportunities aligned with its strategic direction.

Based on the progress achieved in 2025 and the early indicators observed in the demand environment, management is confident that 2026 will be a year of growth for Data I/O.

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, sales returns, credit losses, inventories, income taxes, warranty obligations, restructuring charges, contingencies such as litigation and contract terms that have multiple elements and other complexities typical in the capital equipment industry.

We 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:

6 unchanged sentences

We recognize revenue upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be a separate performance obligation.

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.

These systems are standard products with published product specifications and are configurable with standard options.

The evidence that these systems could be deemed 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 upon transfer of control of the product to customers, which generally is at the time of shipment.

Installation that is considered perfunctory includes any installation that is expected to be performed by other parties, such as distributors, other vendors, or the customers themselves.

This analysis considers the complexity, skill and training needed, as well as customer expectations regarding installation.

We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, installation, service and support, and extended maintenance components.

We allocate the transaction price of each element based on the relative selling prices.

Relative selling price is based on the selling price of the standalone system.

For the installation and service and support performance obligations, we use the value of the discount given to distributors who perform these components.

We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, service and support, and extended maintenance components.

We allocate the transaction price of each element based on the relative selling price of each performance obligation.

For hardware, we determine our best estimate of selling price based on an expected cost-plus-a-margin approach.

For the service and support performance obligations, we use the price charged by distributors who perform these components.

For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold.

Revenue is recognized on the system based on shipping terms, software based on delivery, installation and services based on completion of work and software maintenance and extended warranty support ratably over the term of the agreement, typically one year.

Revenue is recognized on the system based on shipping terms, software based on delivery, and services based on completion of work and software maintenance and extended warranty support ratably over the term of the agreement, typically one year.

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.

32 unchanged sentences

RESULTS OF OPERATIONS:

Net sales by product line

(in thousands)

Automated programming systems

Non-automated programming systems

Total programming systems

Net sales by location

4 unchanged sentences

(in thousands)

Equipment Sales

Platform Sales

Adapter Sales

Software and Maintenance Sales *

* includes an insignificant amount of service and parts sales

Net sales for the year ended December 31, 2024 decreased approximately 22%, to $21.8 million, compared to 2023.

In 2024, automotive electronics uncertainty persisted and customer capacity expansion slowed, resulting in lower system shipments in the Americas and Europe which were partially offset by growth in Asia.

Software and Services Sales*

* includes service and parts sales associated with equipment service contracts

The Company identified an error in the prior‑year disaggregated revenue amounts of net sales by type.

As a result, the 2024 revenue by major category amounts have been revised.

The correction did not impact the Company’s previously reported consolidated balance sheets, statements of operations, comprehensive income (loss), or statements of cash flows.

See Note 15 for additional information regarding the revision of prior‑period disaggregated revenue amounts.

Net sales for the year ended December 31, 2025 decreased approximately 1.2%, to $21.5 million, compared to $21.8 million in 2024.

In 2025, automotive electronics uncertainty persisted and customer capacity expansion slowed, resulting in lower system shipments, notably in Europe, which were partially offset by growth in Asia.

Automotive electronics represented 64% of 2025 bookings compared to 59% for 2024.

For the full year, consumable adapters and services revenue remained steady, representing 50% of total revenue and helping mitigate the decline in system sales.

Order bookings were $22.5 million in 2024, down approximately 12.6% compared to $25.8 million in 2023 due to similar market challenges noted for revenue.

The order backlog on December 31, 2024, was $3.5 million, up $0.7 million from the fourth quarter of 2023, which will benefit revenue recognition in the first half of 2025 as systems are shipped.

For the full year, consumable adapters and services revenue increased, representing 58% of total revenue and helping mitigate the decline in system sales.

Order bookings in 2025 were $18.6 million, down approximately 17% compared to $22.5 million in 2024, due to similar market challenges noted for revenue.

The order backlog on December 31, 2025 was $1.6 million.

Additionally, deferred revenue was approximately $1.5 million on December 31, 2025.

2 unchanged sentences

Gross margin as a percentage of sales for the year ended December 31, 2025, was 49.3%, compared to 53.3% in 2024.

The decrease in gross margin as a percentage of sales primarily reflects lower sales volume and lower related absorption of fixed manufacturing and service operating costs.

Actual 2024 production and service spending decreased by $250,000 or 4% from the prior year.

The decrease in gross margin as a percentage of sales primarily reflects lower sales volume and lower related absorption of labor and overhead costs.

RESEARCH AND DEVELOPMENT

2 unchanged sentences

Percentage of net sales

Research and development (“R&D”) expense decreased $284,000 for the year ended December 31, 2024 compared to 2023.

The decrease was primarily related to contracted services and incentive compensation.

We believe it is essential to invest in R&D to significantly enhance our existing solutions and create new products as markets develop and technologies change.

Research and development (“R&D”) expense increased $291,000 for the year ended December 31, 2025, compared to 2024.

The increase was primarily related to increased staff, notably in China.

We invest in R&D to significantly enhance our existing solutions and create new products as markets develop and technologies change.

During 2025, we continued to invest in the creation of new and enhancement of existing capabilities for our PSV family of automated systems, LumenX and FlashPAK family of non-automated programmers and related software.

5 unchanged sentences

Percentage of net sales

Selling, General and Administrative (“SG&A”) expenses decreased approximately $810,000 thousand for the year ended December 31, 2024 compared to 2023.

The decrease was primarily related to lower sales commissions on lower revenue and lower outside services from efficiency improvements and cost controls.

Selling, General and Administrative (“SG&A”) expenses increased approximately $777,000 for the year ended December 31, 2025, compared to 2024.

The increase was primarily related to increased legal and accounting fees tied to SEC filings, one-time charges associated with the ransomware incident report on August 16, 2025, and increased spending on infrastructure and security, partially offset by reduced IT spending in other areas.

Cost control measures remain in effect.

Salary and wages remained flat with lower headcount savings offset by staff separation charges of approximately $430,000 in the fourth quarter of 2024.

(in thousands)

Interest income

Interest income was higher for the year ended December 31, 2024 compared to 2023 primarily due to higher average interest rates and higher invested balances.

Interest income was lower for the year ended December 31, 2025 compared to 2024 primarily due to lower invested balances.

(in thousands)

Income tax (expense) benefit

Income tax (expense) increased by $192,000 for the year ended December 31, 2024 compared to 2023.

The increase was primarily a result of the withholding tax of $337,000 on the repatriation of cash from China subsidiary in 2024.

Income tax (expense) in 2024 and 2023 is primarily the result of foreign subsidiary income tax and minimal U.S.

state income tax.

The effective tax rate for 2024 of (14.3%) and 2023 of 28.6% differed from the statutory tax rates in our tax reporting jurisdictions primarily due to subsidiary income with consolidated losses and the effect of valuation allowances.

Income tax (expense) decreased by $146,000 for the year ended December 31, 2025 compared to 2024.

In 2025, income tax expense includes $250,000 of deferred income taxes from recording deferred tax liabilities primarily related to outside basis differences in foreign subsidiaries.

In 2024, the Company repatriated cash from our China subsidiary resulting in a withholding tax of $337,000.

The effective tax rates in 2025 and 2024, respectively were (4.8%) and (14.3%), and differed from the statutory tax rates in our tax reporting jurisdictions primarily due to subsidiaries income and losses and consolidated losses and the effect of valuation allowances.

We have a valuation allowance of $10.5 million and $9.2 million as of December 31, 2025 and 2024, respectively.

Our deferred tax assets and valuation allowance have increased by approximately $442,000 and $430,000 associated with the requirements of accounting for uncertain tax positions as of December 31, 2024 and 2023, respectively.

Given the uncertainty created by our loss history, particularly in the U.S., which is where most of our net deferred tax assets are located, and the ongoing uncertain economic outlook for our industry, as well as capital and geographic spending, we currently expect to continue to limit the recognition of net deferred tax assets and maintain the tax valuation allowances.

Given the uncertainty created by our loss history, particularly the U.S., which is where most of our net deferred tax assets are located, and the ongoing uncertain economic outlook for our industry, as well as capital and geographic spending, we currently expect to continue to limit the recognition of net deferred tax assets and maintain the tax valuation allowances.

INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES

We recognized foreign currency transaction losses of ($10,000) in 2025 and $58,000 transactions gains in 2024.

Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary’s local currency and translated into U.S.

Dollar amounts at average rates of exchange during the year.

We recognized foreign currency transaction gains of $58,000 in 2024 and $42,000 in 2023.

The transaction gains resulted primarily from translation adjustments to foreign inter-company accounts and U.S.

6 unchanged sentences

Working capital

Working capital decreased by $4.1 million during 2025, primarily due to the revenue decline and resulting operating loss.

Our current ratio was 3.3 and 4.2 for December 31, 2025 and 2024, respectively.

At December 31, 2025, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at December 31, 2025 and 2024 was $7.9 million and $10.3 million, respectively.

Working capital decreased by $2.3 million during 2024 due primarily to the revenue decline and resulting operating loss.

Our current ratio improved and was 4.2 and 4.0 for December 31, 2024 and 2023, respectively.

The company continues to have no debt.

Although we have no significant external capital expenditure plans currently, we expect to continue to carefully make and manage capital expenditures to support our business.

We expect to continue to carefully make and manage capital expenditures to support our business.

We plan to increase our internally developed rental, sales demonstration and test equipment as we develop and release new products.

Capital expenditures are currently expected to be funded by existing and internally generated funds.

As a result of our cyclical and seasonal industry, significant product development, factory resilience strategies, customer support and selling and marketing efforts, we require substantial working capital to fund our operations.

We have implemented or have initiatives to implement geographic shifts in our operations, optimize real estate usage, adjust pricing for cost inflation, lower unit costs, lower tariff expenses, reduce exposure to the impact of currency volatility, increase product development differentiation, and reduce other costs.

We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond.

As a result of the cyclical and seasonal nature of capital expenditure businesses, we require significant working capital to fund our operations.

We have continued to manage the geographic posture of our operations to align to our customers’ needs and to minimize impacts of exogenous factors such as tariffs.

All that said, we believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond.

We may require additional cash at the U.S.

headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries.

headquarters to support future strategic and operational initiatives., which could cause potential repatriation of cash that is held in our foreign subsidiaries.

For any repatriation, there may be tax and other impediments to any repatriation actions.

As many repatriations typically have associated withholding taxes, those withheld will be a current tax without generating a current or deferred tax benefit recognition.

In the second quarter of 2024, we completed a $3.4 million dividend distribution from our China subsidiary operation, incurring a $337,000 foreign tax withholding expense.

This was undertaken to optimize the cash position and operating needs of each subsidiary, increase the interest earning potential of our cash holdings and ensure available liquidity at the U.S.

headquarters to support future strategic and operational initiatives.

We are actively tuning our operations and intercompany structures to minimize the need for and impact of any repatriation of monies.

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.

16 unchanged sentences

Adjusted EBITDA, excluding equity compensation

NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND IMPLEMENTED

Effective January 1, 2024, the Company adopted ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.

This update requires entities, including those with a single reportable segment, to disclose significant segment expenses regularly provided to the Chief Operating Decision Maker (CODM) and included in the reported measure of segment profit or loss.

The Company operates as a single reportable segment.

The CODM evaluates the Company's performance based on operating income, as presented in the consolidated statements of operations.

Significant segment expenses are those that are already disclosed in operating income and regularly reviewed by the CODM for purposes of assessing performance and allocating resources.

Additional significant single segment expense categories are provided in Note 13 – Segment Information.

NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND NOT YET IMPLEMENTED

In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740):

Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid.

ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted.

We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

In November 2024, FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation (Subtopic 220-40), which requires disclosure of specific information about costs and expenses within relevant expense captions on the face of the income statement, qualitative descriptions for expense captions not specifically disaggregated quantitatively, and the total amount and definition of selling expenses for interim and annual reporting periods.

This standard is effective for the annual reporting period beginning January 1, 2027 and interim reporting periods beginning January 1, 2028 and should be applied retrospectively to all comparative periods.

Early adoption is permitted.

The Company is currently evaluating the effects of adopting this new accounting guidance.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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 7. Management’s Discussion and Analysis