Data I/O
Annual Report 2023

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2023 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 (State or other jurisdiction of incorporation) 91-0864123 (I.R.S. Employer Identification No.) 6645 185th Ave NE, Suite 100, Redmond, Washington, 98052 (425) 881-6444 (Address, including zip code, of registrant’s principle executive offices and telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act Title of each class Common Stock Trading Symbol(s) DAIO Name of each exchange on which registered NASDAQ Securities registered pursuant to Section 12(g) of the Act None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 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. Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Yes Yes No No No No Yes Accelerated filer Smaller reporting company Emerging growth company Large accelerated filer Non-accelerated filer If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Aggregate market value of voting and non-voting common equity held by non-affiliates on the registrant as of June 30, 2023: Shares of Common Stock, no par value, outstanding as of March 18, 2024: $35,598,991 9,023,200 DOCUMENTS INCORPORATED BY REFERENCE Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐ 1 DATA I/O CORPORATION FORM 10-K For the Fiscal Year Ended December 31, 2023 INDEX Part I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 1C. Cybersecurity Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Part III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions and Director Independence Item 14. Principal Accounting Fees and Services Part IV Item 15. Exhibits, Financial Statement Schedules Item 16. Form 10-K Summary Signatures 2 3 11 19 19 20 20 20 20 21 21 27 27 49 49 49 50 50 50 50 51 51 51 56 57 Item 1. Business PART I 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. COVID-19 In 2023, most of the direct implications of COVID-19 had passed, and we were dealing with the follow-on impacts or indirect impacts from COVID-19 and the policies put in place to mitigate the disease. We continued to manage inflation, supply chain impacts and shortages, and the post lock down economic transitions in China and elsewhere. Other Major Impacts on 2023 In 2022, the war in Ukraine started, while having little direct impact on us from Russia or Ukraine, did affect our supply chains, European economic uncertainty and energy concerns. Inflation impacted everyone. We believe we were able to adequately address inflation with pricing adjustments such that our margins were mostly maintained. The strengthening of the dollar in 2022 created headwinds for revenues, as typically over 90% of our business is international. Interest rate hikes by central banks were a concern, especially for cyclical industries with resulting worries about capital spending and planning for recessionary impacts. Certain labor markets were tight during the year causing recruiting challenges. The impact of semiconductor chip shortages, that began mid-2021 and continued well into 2022, are not completely resolved yet in 2023. For 2023, many of the issues described have caused supply chain disruptions and lead-time unreliability, which we have managed carefully by maintaining and increasing key inventory levels. We believe there is less risk exposure on these issues and we are now reducing inventory levels. The economic challenges resulting from the war in Ukraine and inflation have likely caused Germany to enter into a recession in 2023. We believe that this, and challenges related to the expected shift from Internal Combustion Engines (ICE) to Electric Vehicles (EV), have impacted short-term demand in Germany. In the United States, we believe uncertainty related to automotive labor strikes softened demand and pushed out expected end-of-the-quarter orders. We experienced stronger orders the second half of 2023 from our automotive electronics customers and the labor strikes have been resolved. 3 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. 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 $62,000 to $690,000 and our manual systems have list selling prices ranging from $12,000 to $48,000. 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. Our products have both an upfront solution sale and recurring revenue element. Adapters are a consumable item and software and maintenance are typically recurring under subscription contracts. Our SentriX system revenue typically comes from per part use fees, set-up or minimum quarterly fees, consumables, non-recurring engineering fees, service fees and the sale of equipment related to SentriX. 4 Sales Percentage of Total Sales Breakdown by Type Sales Type Equipment Sales Adapter Sales Software and Maintenance Sales Total 2022 Drivers 57% 30% 13% 2023 58% 29% 13% 100% 100% Capacity, Process improvement, Technology Capacity utilization, New customer products Installed base, Added capabilities The table below presents our main products and the key features that benefit our customers: Products PSV Systems: Off-line (Automated) Key Features Fast program and verify speeds • • Up to 112 programming sites • Up to 3000 devices per hour throughput • UFS Support • Supports LumenX and FlashCORE III programmers Supports multiple media types Supports quality options – fiber laser marking, 2D inspection, 3D coplanarity ConneX Service Software enables connected factory integration and automation SentriX Security Deployment System • Unique ability to securely provision keys and certificates one device at a time • Broad set of secure devices supported with LumenX Programmer (Non-automated) FlashPAK III programmer: (Non-automated) wide range of silicon partners Software license model allows easy upgrades from deployed data programming systems Pay per use model Extensible architecture for fast program, verify and download speeds Supports UFS memory, microcontrollers, serial flash, secure elements and other device types Large file size support Secure job creation Eight sockets with tool-less changeover with single-socket adapters Scalability • • Network control via Ethernet • • • • Universal device support Stand-alone operation or PC compatible Parallel programming Four sockets • • • • • • • • • • Customer Benefits • Managed and secure programming • • High throughput for high- density flash memory programming Flexible I/O options (tray, tape, tube), marking/labeling and vision for coplanarity inspection Scalable solutions for low to high-volume manufacturing • • Access to system data for • connected factory machine learning and AI applications Create secure IoT devices across a global network • Maintain IP control over their • product’s lifecycle Secure supply chain and flexible key management architecture • Managed and secure programming • Fast setup and job changeover • Highest yield and low total cost of programming • High performance • Validate designs before moving down the firmware supply chain • Unmatched ease of use in manual production systems 5 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 Notable end customers Business drivers Programming equipment drivers Buying criteria Automotive Electronics Borg Warner, Bosch, Alps Alpine, Visteon, Kostal, JVCKenwood, Harman, Hitachi, Denso Ten, Continental, Aptiv Panasonic, Magna, Marelli, Tesla, Desay, BYD Infotainment, Advanced Driver Assist (ADAS), electrification, connectivity, and security Growing electronic content, global support, resilient supply chains, new product rollouts, growing file sizes, quality control, traceability, and security Quality, throughput, reliability, configuration control, traceability, global support, IP protection, security IoT, Industrial, Consumer Electronics, including Wireless LG, TCL, Siemens, Danfoss, Philips, Schneider, Endress+Hauser, Insta, Sony, UTEC, Nokia Contract Manufacturers Pegatron, Flex, Jabil, Wistron, Sanmina SCI, Foxconn, Salcomp, Calcomp, Plexus Arrow, Avnet, BTV, CPS, Semitron, NOA Leading Higher functionality driven by increasing electronic content. Shift from analog to connected intelligent devices, security Growing electronic content and need for IP protection. Process improvement and simplification as well as new product rollouts, memory and new technology, security Quality, reliability, configuration control, traceability, global support, IP protection, security Production contract wins Value-added services, logistics, security New contracts from OEMs, programming solutions specified by OEMs Capacity utilization of their installed base of equipment, small parts handling, 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 Partner focus of our SentriX deployments Security Deployment End-customer focus End-customer focus End-customer and partner focus 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, requires 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 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 Securely controlling groups of connected devices through a secure supply chain and lifecycle firmware integrity management Growth drivers for IoT, including industrial, consumer electronics and wireless • • Adding intelligence and processing into devices • Connecting previously unconnected devices to networks and the internet (such as smart home, including intelligent thermostats and lighting) Emergence of new devices and applications (such as health and wellness wearable devices and applications) • Diversification of accounts receivable and net sales During 2023, we sold products to approximately 200 customers throughout the world. The following represented greater than 10% of net sales for the applicable year: Percentage of Net Sales Number of customers Approximate percentage of net sales Percentage of each Percentage of each 2023 2 24% 13% 11% 2022 1 23% 23% n/a The following represented greater than 10% of our consolidated accounts receivable for the applicable year: Percentage of Consolidated Accounts Receivable Number of customers Approximate percentage of consolidated accounts receivable balance Percentage of each Percentage of each Percentage of each Geographic Markets and Distribution 2023 3 47% 18% 16% 13% 2022 3 39% 15% 13% 11% 2021 1 14% 14% n/a 2021 3 36% 13% 12% 11% 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 2023, 2022 and 2021 were (in millions) $2.8, $1.8 and $2.6, respectively. Some of our customers’ orders delivered internationally are heavily influenced by U.S. sales- based efforts. 7 International Sales International sales represented approximately 90%, 93% and 90% of net sales in 2023, 2022 and 2021, 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 46 countries. Our independent foreign distributors purchase our products for resale and we generally recognize the sale at the time of shipment to the distributor. As with U.S. sales representatives, sales made by international sales representatives are on an agency basis, with sales made directly to the customer by us. Net international sales for 2023, 2022 and 2021 were (in millions) $25.3, $22.4 and $23.2, respectively. 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. Typically, their equipment meets a “good enough” standard, but with reduced quality, traceability, upgradability, security and other software features. Many of these competitors compete on a regional basis. Although competition in the security deployment market is developing, we expect competition in the market to increase as security deployment becomes more important. 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 8 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) $2.8, $4.8 and $2.9 as of December 31, 2023, 2022 and 2021, respectively. The size of backlog at any particular date is not necessarily a meaningful indicator of the trend of our business. Research and Development We believe that continued investment in research and development is critical to our future success. We continue to develop new technologies and products and enhance existing products. Future growth is, to a large extent, dependent upon the timely development and introduction of new products, as well as the development of technology and algorithms to support the latest programmable devices. 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 security deployment to program new categories of semiconductors, including Secure Elements, TPMs, Authentication Chips, and Secure Microcontrollers. We plan to deliver new programming technology, automated handling systems, 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 2023, 2022 and 2021, we made expenditures for research and development of (in millions) $6.5, $6.1 and $6.6, respectively, representing 23%, 25% and 26% of net sales, respectively. Research and development costs are generally expensed as incurred. 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 skill to establish and protect our market position. We continue to apply for and add new patents to our patent portfolio as we develop strategic new technologies. We believe patent protection enforcement may be increasingly important in our security provisioning business and we have approximately 25 U.S. and international awarded patents related to the SentriX platform and security provisioning architecture, processes, and methods. We attempt to protect our rights in proprietary systems (architecture, implementations, software), including the SentriX Security Deployment System. We attempt to protect our software, including Lumen®X software, FlashCORE software, TaskLink software, ConneX smart programming software 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 the 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 an adverse determination could adversely affect our reputation, potentially preclude us from offering certain products, and subject us to substantial liability. As of December 31, 2023, we were not subject to any pending actions regarding infringement claims. Employees - Human Capital As of December 31, 2023, we had a total of 100 employees, of which 46 were located outside the U.S. and 9 of which were part time. We also utilize independent contractors for specialty work, primarily in research and development, and utilize temporary workers to adjust capacity to fluctuating demand and for special projects. 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, 9 life and disability insurance; paid time off; education and volunteer time. The tight labor markets that we experienced in 2022 returned to more normal in 2023. Environmental, Social and Governance (“ESG”) Data I/O is committed to the responsibilities associated with modern age ESG. The Company’s key pillars for ESG support a framework for sustainable growth and include Leadership & Governance, Environment, Innovation, Human Capital, Social Capital, and Financial Excellence. Initiatives within these areas apply to the company’s daily global operations as well as within its supply chains. We believe we are the only supplier in our industry with a published conflict mineral policy and public company governance. Our facilities are subject to numerous laws and regulations concerning the discharge of materials or otherwise relating to the environment. 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. 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 turned in cars with hybrid or electric vehicles. 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 provides employees time-off to volunteer and also coordinates group projects. In addition, the Company provides internships to local high school and college students through STEM and technical colleges. Compliance with environmental laws has not had, nor is it currently expected to have, a material effect on our capital expenditures, financial position, results of operations or competitive position. 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, 2024: Name Age Position Anthony Ambrose Gerald Y. Ng Rajeev Gulati Michael Tidwell 62 62 60 55 President and Chief Executive Officer Vice President, Chief Financial Officer, Secretary and Treasurer Chief Technology Officer, Vice President of Engineering Vice President of Marketing and Corporate Business Development Anthony Ambrose joined Data I/O on October 25, 2012, and is our President and Chief Executive Officer (“CEO”), and a member of the Board of Directors. Prior to Data I/O, Mr. Ambrose was Owner and Principal of Cedar Mill Partners, LLC, a strategy consulting firm since 2011. From 2007 to 2011, he was Vice President and General Manager at RadiSys Corporation, a leading provider of embedded wireless infrastructure solutions, where he led all product divisions and worldwide engineering. Until 2007, he was general manager and held several other progressively responsible positions at Intel Corporation, where he led development and marketing of standards-based telecommunications platforms, and grew the industry standard server business to over $1B in revenues. He is Chair of the EvergreenHealth Foundation Board of Trustees. He previously served as a board member of SideChannel, Inc. (OTCQB: SDCH) until February 2024 having been retained after their 2022 merger with Cipherloc Corporation (OTCQB: CLOK) where he joined the board in 2019 and had also been lead independent director since 2019. Mr. Ambrose has a 10 Bachelor of Science in Engineering from Princeton University. He has completed the Stanford Graduate School of Business Director Symposium and earned the Carnegie Mellon University Certificate in Cybersecurity Oversight. 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. Rajeev Gulati joined Data I/O in July 2013 and is our Chief Technology Officer and Vice President of Engineering. Prior to Data I/O, Rajeev served as Director of Software Engineering for AMD responsible for tools, compiler strategy and execution from 2006 to 2013. He has an extensive background in software, systems and applying technology to develop new markets. Previously, he served as Director of Strategy and Planning at Freescale from 2004 to 2006; as Director of Embedded Products at Metrowerks (acquired by Motorola) from 2000 to 2004 and Director of Compilers, Libraries & Performance Tools from 1997 to 2000; and engineering and programmer positions at Apple Computer, IBM and Pacific-Sierra Research. Rajeev holds a Master of Science in Electrical & Computer Engineering from the University of Texas, Austin and a BE in Electrical Engineering from Delhi College of Engineering, New Delhi. Michael Tidwell joined Data I/O in May 2019 and is our Vice President of Marketing and Corporate Business Development. Prior to Data I/O, he was Vice President of Marketing & Business Development at Tignis, an AI and machine learning startup. From 2012 to 2018 Michael was head of Marketing and Business Development at Sansa Security, a leading software security IP provider that was sold to ARM Holdings. Prior to Sansa, Michael was Vice President of Business and Market Development at BSQUARE Corporation. Michael has a Master of Science in Electrical Engineering from the University of Washington and a Bachelor of Electrical Engineering (Summa Cum Laude) from Georgia Institute of Technology. Item 1A. Risk Factors Cautionary Factors That May Affect Future Results Our disclosure and analysis in this Annual Report contains some forward-looking statements. Forward-looking statements include our current expectations or forecasts of future events. 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, 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. They can be affected by inaccurate assumptions we might make, or known or unknown risks and uncertainties can affect these forward-looking statements. Many factors -- for example, product competition and product development -- will be important in determining future results. Moreover, neither Data I/O nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. Actual future results may materially vary. We undertake no obligation to publicly update any forward-looking statements after the date of this Annual Report, whether as a result of new information, future events or otherwise. The reader should not unduly rely on our forward-looking statements. The reader is advised, however, to consult any future disclosures we make on related subjects in our 10-Q, 8-K and 10-K reports to the SEC and press releases. Also, note that we provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is permitted by the Private Securities Litigation Reform Act of 1995. 11 RISK FACTORS: TARIFFS AND TRADE ISSUES Changes in tariffs and trade issues may adversely affect our business, including revenues and/or gross margins. We produce products in the United States and China. Currently, certain of our products are subject to tariffs imposed by one country on goods manufactured in the other country. This has materially impacted our gross margins negatively. There is uncertainty regarding the tariffs expected to be imposed, and any increase in tariff rates and subjecting additional items to tariffs, could impact our costs, revenues and the competitiveness of our products due to our manufacturing locations. Trade and tariff issues are creating business uncertainty and may spread to and impact other jurisdictions. 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 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 We are pursuing new product or service initiatives, and business models that may develop more slowly and/or to a lesser extent than expected. In order to lead in new and potentially lucrative market opportunities, for example in security deployment of programmable devices, circuit boards and electronic systems, we are making significant investments in people, technology and business development while the market is developing and uncertain. 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 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. Product and service technology in our industry evolves rapidly, making timely product innovation essential to success in the marketplace. Introducing products and services with improved technologies or features may render our existing products obsolete and unmarketable. Technological advances and trends that may negatively impact our business include: • • • • • new device package types, densities, chip interfaces and technologies requiring hardware and software changes in order to be programmed by our products, particularly certain segments of the high-density flash memory markets where after placement programming is recommended by certain semiconductor manufacturers; reduction in semiconductor process geometries for certain 3 Dimensional (3D), Multi Level Cell (MLC) and Triple Level Cell (TLC) NAND and eMMC FLASH memories impact the product data retention through Surface Mount Technology (SMT) reflow or X-ray inspection. Improper SMT process control can negatively impact the end customer’s ability to successfully program devices. 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 so that preprogramming remains a supported alternative; changes in Flash technology speeds will eventually require us to change the architecture of our programming engines; electronics equipment manufacturing practices, such as widespread use of in-circuit programming or downloading; adoption of proprietary security and programming protocols and additional security capabilities and requirements; 12 • • customer software platform preferences different from those on which our products operate; customer adoption of newer unsupported semiconductor device technologies such as NVMe memory or device interface methods, particularly if these technologies are adopted by automotive electronics, IoT or wireless customers; and/or • more rigid industry standards, which would decrease the value-added element of our products and support services. If we cannot develop products or services in a timely manner in response to industry changes, or if our products or services do not perform well, our business and financial condition may be adversely affected. Also, our new products or services may contain defects or errors that give rise to product liability claims against us or cause our products to fail to gain market acceptance. 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 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. As we have been concentrated on automotive electronics customers, any decrease in demand from these customers may materially impact our results, as it will take some time to transition our product line to other markets. 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, 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. We develop new engineering and automated programming systems and services. Significant technological, supplier, manufacturing or other problems may delay the development, introduction or production of these products or services. For example, we may encounter these problems: • • • • • • • technical problems in the development of a new programming and/or security deployment systems or the robotics for new automated handing systems; inability to hire qualified personnel or turnover in existing personnel or inability to engage or retain key technology partners; delays or failures to perform by us or third parties, including some smaller early stage or recently acquired companies, involved in our development projects; dependence on large semiconductor companies for cooperation and support to securely provision their devices. These companies must enable us with specific technical information and support Data I/O as a qualified solution to their customers and channel partners; delays or failure to develop and utilize Artificial Intelligence (“AI”) for our offerings or services, potentially falling behind competitors exploiting the use of AI; development of new products or services that are not accepted by the market; and/or delays in supply chain for parts needed for new products. These problems may result in a delay or decline in sales or increased costs. 13 We may pursue business acquisitions that could impair our financial position and profitability. We may pursue acquisitions of complementary technologies, product lines or businesses. Acquisitions may include risks, such as: • • • • • • • burdening management and our operating teams during the integration of the acquisition; diverting management’s attention from other business concerns; failing to successfully integrate, scale or monetize the acquired products or technologies; lack of acceptance of the acquired products by our sales channels or customers; entering markets where we have no or limited prior experience; potential loss of key employees of the acquired company; and/or additional burden of support for an acquired programmer architecture. Future acquisitions may also impact our financial position. For example, we may use significant cash or incur debt, which would weaken our balance sheet, or issue additional shares, potentially diluting existing shareholders. We may also capitalize goodwill and intangible assets acquired, the amortization or impairment of which would reduce our profitability. We cannot guarantee that future acquisitions will improve our business or operating results. If we are unable to protect our IP, we may not be able to compete effectively or operate profitably. We rely on patents, copyrights, trade secrets and trademarks to protect our IP, as well as product development and marketing skill to establish and protect our market position. In particular, patents are a key part of our security deployment strategy, and if we are not able to successfully enforce these patents, we might lose our competitive advantage in the security deployment market. We attempt to protect our rights in proprietary software products, including our user interface, product firmware, software module options 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. Because of the rapidly changing technology in the semiconductor, electronic equipment and software industries, portions of our products might possibly infringe upon existing patents or copyrights, and we might be required to obtain licenses or discontinue the use of the 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 an adverse determination could adversely affect our reputation, preclude us from offering certain products, and subject us to substantial liability. We might face increased competition and might not be able to compete successfully with current and future competitors. Technological advances have reduced the barriers of entry into the market in which we compete. We expect competition to increase from both established and emerging companies. If we fail to compete successfully against current and future sources of competition, our profitability and financial performance will be adversely impacted. THIRD PARTY RELATIONSHIPS If we do not develop and enhance our relationships with semiconductor manufacturers, our business may be adversely affected. We work closely with most semiconductor manufacturers to ensure that our data programming and security deployment systems comply with their requirements. In addition, many semiconductor manufacturers recommend our managed and secure programming systems for use by users of their programmable devices. These working relationships enable us to keep our programming systems product lines up to date and provide end-users with broad and current programmable device support. As technology changes occur that could limit the effectiveness of pre-placement programming, particularly for very small high-density NAND, eMMC and UFS devices, certain semiconductor manufacturers may not recommend or may not continue recommending our programming systems for these devices. Our business may be adversely affected if our relationships with semiconductor manufacturers deteriorate or if semiconductor manufacturers are not willing to closely work with us on security deployment. Consolidation within the semiconductor industry may also impact us. As we develop more security deployment solutions, we will need to partner more closely with semiconductor manufacturers. 14 Our reliance on a small number of suppliers may result in a shortage of key components, which may adversely affect our business, and our suppliers may experience financial difficulties which could impact their ability to service our needs. Certain parts or software used in our products are currently available from either a single supplier or from a limited number of suppliers. Our small relative level of business means we frequently lack influence and significant purchasing power. If we cannot develop alternative sources of these components, if sales of parts or software are discontinued by the supplier, if we experience deterioration in our relationship with these suppliers, or if these suppliers require financing which is not available, there may be delays or reductions in product introductions or shipments, which may materially adversely affect our operating results. Because we rely on a small number of suppliers for certain parts, we are subject to possible price increases by these suppliers. As experienced in 2022, we have seen more part shortages and larger price increases than in recent years. While this has returned to a stable situation in 2023, our volumes typically are not high enough to maintain multiple suppliers. Also, we may be unable to accurately forecast our production schedule. If we underestimate our production schedule, suppliers may be unable to meet our demand for components. This delay in the supply of key components may have a materially adverse effect on our business. For suppliers who discontinue parts, we may be required to make lifetime purchases covering future requirements. Over estimation of demand or excessive minimum order quantities may lead to excess inventories that may become obsolete. 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 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. We have an internal sales force and also utilize third-party distributors and representatives. Therefore, the financial stability of these distributors and representatives is important. Their ability to operate, timely pay us, and to acquire any necessary financing may be affected by the current economic climate. Highly skilled professional engineers use most of our products. To be effective, third-party distributors and representatives must possess significant technical, security, marketing, customer relationships and sales resources and must devote their resources to sales efforts, customer education, training and support. These required qualities limit the number of potential third-party distributors and representatives. Our business will suffer if we cannot attract and retain a sufficient number of qualified third-party distributors and representatives to market our products. MARKET CONDITIONS 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 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. The industries are highly cyclical and are characterized by rapid technological change, short product life cycles and fluctuations in manufacturing capacity and pricing and gross margin pressures. As we experienced in this and recent prior years, our operations may in the future reflect substantial fluctuations from period-to-period as a consequence of these industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting capital spending. In a difficult economic climate, it may take us longer to receive payments from our customers and some of our customers’ business may fail, resulting in non-payment. Our market growth forecasts and related business decisions may be wrong. These factors could have a material adverse effect on our business and financial condition. Our international operations may expose us to additional risks that may adversely affect our business. International sales represented approximately 90%, 93% and 90% of net sales in 2023, 2022 and 2021, respectively. We expect that international sales will continue to be a significant portion of our net revenue. International sales may fluctuate due to various factors, including: • the impact of COVID-19, the coronavirus and variants of it, or other viruses; 15 • • • fluctuations in foreign currency exchange rates because 90% of our sales are to international markets, volatile exchange rates may also impact our competitiveness and margins, especially where we have subsidiary operations; economic uncertainty related to the European energy cost increases; China economic challenges, as this is a major market for our products and a significant production location; • migration of manufacturing to low cost geographies; • • • • • • • • unexpected changes in regulatory requirements; tariffs and taxes; bi-lateral and multi-lateral trade agreements; difficulties in staffing and managing foreign operations; longer average payment cycles and difficulty in collecting accounts receivable; compliance with applicable export licensing requirements and the Foreign Corrupt Practices Act; product safety and other certification requirements; difficulties in integrating foreign and outsourced operations; • war, civil unrest, political and economic instability, including the Russian invasion of Ukraine and the Israel – Hamas war; • • ability to protect our intellectual property in multiple patent jurisdictions; and/or ability to move cash freely from subsidiaries. Because we have customers located throughout the world, we have significant foreign receivables, although none are based in Russia or Ukraine. We may experience difficulties in collecting these amounts as a result of payment practices of certain foreign customers, economic uncertainty and regulations in foreign countries, the availability and reliability of foreign credit information, and potential difficulties in enforcing collection terms. The European Union and European Free Trade Association (“EU”) has established certain electronic emission and product safety requirements (“CE”). As applicable, our products currently meet these requirements; however, failure to obtain either a CE certification or a waiver for any product may prevent us from marketing that product in Europe. The EU also has directives concerning the Reduction of Hazardous Substances (“RoHS”) and we believe we are classified within the EU RoHS Directive category list as Industrial Monitoring and Control Equipment (category 9). We believe all current products meet the RoHS directives. Failure to meet applicable directives or qualifying exemptions may prevent us from marketing certain products in Europe or other territories with similar requirements. We have subsidiaries in Germany and China and large balances of cash are in our foreign subsidiaries. Our business and financial condition is sensitive to currency exchange rates and any restrictions imposed on their currencies including restrictions on repatriations of cash. A repatriation of cash has, and could in the future, result in tax costs and corresponding deferred tax assets with related tax valuation allowances. Currency exchange fluctuations in these countries may adversely affect our investment in our subsidiaries. OPERATIONS Quarterly fluctuations in our operating results may adversely affect our stock price. Our operating results tend to vary from quarter to quarter. Our revenue in each quarter substantially depends upon orders received within that quarter. Conversely, our expenditures are based on investment plans and estimates of future revenues. We may, therefore, be unable to quickly reduce our spending if our revenues decline in a given quarter. As a result, operating results for that quarter will suffer. Our results of operations for any one quarter are not necessarily indicative of results for any future periods. Other factors, which may cause our quarterly operating results to fluctuate, include: • • increased competition; timing of new product announcements and timing of development expenditures; 16 • product or service releases and pricing changes by us or our competitors; • market acceptance or delays in the introduction of new products or services; • • • • • • • • • • • • • • • production constraints, including part shortages impact on us and our supply chains; quality issues; labor or material constraints; timing of significant orders; timing of installation or customer acceptance requirements; sales channel mix of direct vs. indirect distribution; civil unrest, war or terrorism; health issues such as the outbreak of the coronavirus or other viruses impacting workers, suppliers, customers, travel, or our facilities; customers’ budgets; changes in accounting rules, tax or other legislation; adverse movements in exchange rates, interest rates, inflation or tax rates; cyclical and seasonal nature of demand for our customers’ products; general economic conditions in the countries where we sell products; expenses and delays obtaining authorizations in setting up new operations or locations; and/or facilities relocations. Due to any of the foregoing factors, it is possible that in some future quarters, our operating results will be below the expectations of analysts and investors. We have a history of operating losses and may be unable to generate enough revenue to achieve and maintain profitability. We have incurred operating losses in four of the last ten years. We operate in a cyclical industry. We will continue to examine our level of operating expense based upon our projected revenues. Any planned increases in operating expenses may result in losses in future periods if projected revenues are not achieved or the investment level required is too large. As a result, we may need to generate greater revenues than we have recently in order to maintain profitability. However, we cannot provide assurance that our revenues will continue to increase and our business strategies may not be successful, resulting in future losses. The loss of key employees may adversely affect our operations. We have employees located in the U.S., Germany and China. We also utilize independent contractors for specialty work, primarily in research and development, and utilize temporary workers to adjust capacity to fluctuating demand. Many of our employees are highly skilled, 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, though no assurance can be made that this will be the case in the future. In China, our workers have benefits and similar arrangements provided under a “FSCO” labor agreement, and we could be adversely affected if we were unable to continue that arrangement. We may need to raise additional capital and our future access to capital is uncertain. Our past revenues have sometimes been, and our future revenues may again be, insufficient to support the expense of our operations and any expansion of our business. We may therefore need additional equity or debt capital to finance our operations. If we are unable to generate sufficient cash flows from operations or to obtain funds through additional debt, lease or equity financing, we may have to reduce some or all of our development and sales and marketing efforts and limit the expansion of our business. We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through at least the next one-year period. In the event we require additional cash for U.S. operations or other needs, 17 we may choose to repatriate some, or all, of the cash held in our foreign subsidiaries. There may be tax, legal and other impediments to any repatriation actions. 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 additional financing. Therefore, we may seek additional funding through public or private debt or equity financing or from other sources. We have no commitments for additional financing, and given a potential future unfavorable economic climate and our financial results, we may experience difficulty in obtaining funding on favorable terms, if at all. 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, 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. We transmit, and in some cases store, end-user data, including personal information. In jurisdictions around the world, personal information is becoming increasingly subject to legislation and regulations intended to protect consumers’ privacy and security. The interpretation of privacy and data protection laws and regulations regarding the collection, storage, transmission, use and disclosure of such information in some jurisdictions is unclear and evolving. These laws may be interpreted and applied in conflicting ways from country to country and in a manner that is not consistent with our current data protection practices. Complying with these varying international requirements could cause us to incur additional costs and change our business practices. Because our services are accessible in many foreign jurisdictions, some of these jurisdictions may claim that we are required to comply with their laws, even where we have no local entity, employees or infrastructure. We could be forced to incur significant expenses if we were required to modify our products, our services or our existing security and privacy procedures in order to comply with new or expanded regulations. REGULATORY REQUIREMENTS Failure to comply with increasing regulatory requirements may adversely affect our stock price and business. As a public company, we are subject to numerous governmental and stock exchange requirements, with which we believe we are in compliance. Our failure to meet regulatory requirements and exchange listing standards may result in actions such as: the 18 delisting of our stock, impacting our stock’s liquidity; SEC enforcement actions; 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. We assume that we will continue to have the status of a smaller reporting company based on the aggregate market value of the voting and non- voting shares held as of June 30, 2023. If we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly. While we have policies and procedures in place designed to prevent corruption and bribery, because our business is significantly international, violations of the Foreign Corrupt Practices Act (FCPA) could have a significant adverse effect on our business due to the disruption and distraction of an investigation, financial penalties and criminal penalties. Government regulations regarding the use of “conflict” minerals and potential climate and ESG requirements could adversely affect our prospects and results of operations. Regulatory requirements regarding disclosure of our use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries could affect the sourcing and availability of minerals used in the manufacture of certain products. Although we do not buy raw materials, manufacture, or produce any electronic equipment using conflict minerals directly, some components provided by our suppliers and contained in our products contain conflict minerals. Our goal is for our products to be conflict free. As a result, there may only be a limited pool of suppliers who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices. Single source suppliers may not respond, or respond negatively regarding conflict mineral sourcing, and we may be unable to find alternative sources to replace them. Also, because our supply chain is complex, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins for all metals used in the products that we sell. Further, if we are unable to comply with the new laws or regulations or if our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us. We may need to incur additional costs and invest additional resources, including management’s time, in order to comply with the new regulations and anticipated additional reporting and disclosure obligations. Climate focused regulations and related disclosures are a similar evolving regulatory area and we may be required to invest in systems, processes and personnel to address new requirements in the ESG area. These will require significant costs, work and reputational risk for failing to meet requirements, with miniscule impact to the global environment. Item 1B. Unresolved Staff Comments None. Item 1C. Cybersecurity CYBERSECURITY GOVERNANCE The Company’s Board of Directors, as a whole, has oversight responsibility for our strategic and operational risks. The Audit Committee of the Board of Directors is responsible for board-level oversight of cybersecurity risk, however the full Board is typically present for Information Technology (IT) and Cybersecurity briefings. As part of it’s oversight role, the Audit Committee receives reporting about the Company’s cybersecurity program, activities, threats and incidents (if any) through periodic updates. The cybersecurity program is managed by our outsourced IT infrastructure team with oversight and coordination by our CFO, who reports directly to our CEO. Utilization of an outsourced IT infrastructure team allows Data I/O to access the necessary breadth and depth of leading cybersecurity programs, staff, expertise, and tools. The IT infrastructure team monitors the prevention, mitigation, detection, and remediation of cybersecurity incidents through their management of the cybersecurity function, including the operation of the Company’s incident response plans, which include appropriate escalation to the CFO, CEO and the Audit Committee. 19 CYBERSECURITY RISK MANAGEMENT AND STRATEGY The Company has processes in place to identify, assess, and monitor material risks from cybersecurity threats, which are part of the Company’s overall cybersecurity risk management and have been embedded in the information systems operating procedures and internal controls. Our IT function manages IT operations and continually evolves and enhances our systems to meet the constantly changing digital environment. Periodic cybersecurity risk assessments are performed to identify, assess, and prioritize potential risks to information, data assets, infrastructure and third party vendors. Additionally, a third-party review and testing of the financial controls over IT as part of our Sarbanes-Oxley internal controls testing is performed annually. The Company addresses significant risks through corrective or mitigating actions as necessary. The Company has also established cybersecurity and information security awareness training programs. Employees with access to the Company’s network receive annual training on topics such as phishing, malware, and other cybersecurity risks. Training is administered and tracked through online learning modules with ongoing follow-up testing. All employees and contractors enter into non-disclosure confidentiality agreements. We work to continually evolve our systems to meet the constantly changing digital environment and continue to invest in the cybersecurity and resiliency of our networks and to enhance our internal controls and processes, which are designed to help protect our systems and infrastructure, and the information they contain. There have been no risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of operations or financial condition. The nature of potential cybersecurity risks and threats are uncertain, and any future incidents, outages or breaches could have a material adverse effect on the Company’s business, financial conditions or results of operations. For more information about the cybersecurity risks we face, refer to the Risk Factors in section “Cybersecurity Risks” in Part I, Item 1A, "Risk Factors". Item 2. Properties The company has three facilities with our headquarters and primary engineering and operational functions located in Redmond, Washington. Our two subsidiary facilities in Munich, Germany and Shanghai, China provide extended worldwide sales, service, engineering and operations services. The total annual gross or base lease payments during 2023 and 2022 were approximately $823,000 and $713,000, respectively. The lease payment increase in 2023 was due primarily to lease abatement incentives for lease renewals in 2022 and standard rate increase in 2023. The Redmond, Washington headquarters facility lease runs to January 31, 2026 at approximately 20,460 square feet. The lease for the facility located in Shanghai, China runs to October 31, 2024 at approximately 19,400 square feet. The lease for the facility located near Munich, Germany runs to August 2027 at approximately 4,895 square feet. Item 3. 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 December 31, 2023, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. Item 4. Mine Safety Disclosures Not Applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Common Stock is listed on the NASDAQ Capital Market (NASDAQ symbol is DAIO). The closing price was $2.94 on December 29, 2023. The approximate number of shareholders of record as of March 18, 2024 was 369. Except for special cash dividend of $4.15 per share paid on March 8, 1989, we have not paid cash dividends on our Common Stock and do not anticipate paying regular cash dividends in the foreseeable future. No sales of unregistered securities were made by us during the periods ended December 31, 2023, 2022 or 2021. See Item 12 for the Equity Compensation Plan Information. 20 Item 6. Selected Financial Data Not applicable. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K 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 Annual Report on Form 10-K are forward-looking. In particular, statements herein regarding economic outlook, impact of COVID-19 including recovery from the shutdown in Shanghai, China; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; expected expenses, breakeven revenue point; expected market decline, bottom or growth; market acceptance of our newly introduced or upgraded products or services; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new products or services; changing foreign operations; taxes, trade issues and tariffs; expected inventory levels; expectations for unsupported platform or product versions and related inventory and other charges; Russian invasion of Ukraine impacts; Israel – Hamas war impacts; supply chain expectations; semiconductor chip shortages and recovery; and any other guidance on future periods are forward-looking statements. 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 Data I/O 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 Annual Report. The Reader should not place undue reliance on these forward-looking statements. The following discussions and the section entitled “Risk Factors - Cautionary Factors That May Affect Future Results” describes some, but not all, of the factors that could cause these differences. OVERVIEW In 2023, most of the direct implications of COVID-19 had passed, and we were dealing with the follow-on impacts or indirect impacts from COVID-19 and the policies put in place to mitigate the disease. We continued to manage inflation, supply chain impacts and shortages, and the post lock down economic transitions in China and elsewhere. The strong dollar impact that started to reverse during the fourth quarter of 2022, provided tail winds for revenue in the first and second quarter of 2023, especially versus the Euro. During the second half of 2023, the U.S. dollar strengthened again causing revenue head winds. However, we managed to achieve profitability for the year. Macroeconomic news, while improving, continued to be fairly negative. On a more positive note, inflation, while still elevated, is diminishing. Interest rates continue to be higher, but an anticipated recession has not occurred outside of Germany with a current soft landing outlook causing expectations for avoiding a U.S. recession. COVID-19, semiconductor shortages, shipping & supply chain issues, and domestic labor tightness are improving situations. Travel, trade shows, and face-to-face customer meetings are happening. We believe our new supplier resilience, inventory holdings and production in multiple locations, and ability to leverage remote and virtual services, are capabilities to retain and build upon. We continue to focus on managing our costs carefully and growth-oriented strategies. We are focusing our research and development efforts in our strategic growth markets, namely automotive electronics and IoT new programming technologies, secure supply chain solutions, automated programming systems and their enhancements for the manufacturing environment and software. At Data I/O, we are investing for the long-term to retain and extend our leadership position in automotive electronics and security deployment. We are continuing to develop technology to securely provision newer categories of semiconductors, including Secure Microcontrollers, Authentication Chips, and Secure Elements. We continue to focus on extending the capabilities and support for our product lines and supporting the latest semiconductor devices, including various configurations of NAND Flash, eMMC, UFS and microcontrollers on our newer products. Our customer focus has been on global and strategic high-volume manufacturers in key market segments like automotive electronics, IoT, industrial controls and consumer electronics, as well as programming centers. Although the long-term prospects for our strategic growth markets should remain good, these markets and our business have been, and are likely to continue to be, adversely impacted by global political and economic factors. In particular, the continued outlook by industry analysts for automotive electronics, which remains our primary market focus, remains strong based on the long-term forecast for a decade. 21 On the product side, we continue to invest with a long-term focus towards expanding our markets and creating unique value for our customers. This is true for both our traditional core business as well as the emerging security deployment business. Our strong cash position and balance sheet, combined with our long-term view of the market, gives us the financial flexibility to make these investments. 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: Revenue Recognition: Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) provides a single, principles-based five-step model to be applied to all contracts with customers. It generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers when control over the promised goods or services are transferred to the customer. We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year. During 2023 and 2022, the impact of capitalization of incremental costs for obtaining contracts was immaterial. We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price. 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. 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 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. 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. 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. We recognize revenue when there is an approved contract that both parties are committed to perform, both parties rights have been identified, the contract has substance, collection of substantially all the consideration is probable, the transaction price has 22 been determined and allocated over the performance obligations, the performance obligations, including substantive acceptance conditions, if any, in the contract 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. Payment terms are generally 30 to 60 days from shipment. We transfer certain products out of service from their internal use and make them available for sale. The products transferred are typically 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 Credit Losses: We base the allowance for credit losses on our assessment of the losses collectively expected for the future, as well as collectability of specific customer accounts and the aging of accounts receivable. If there is deterioration of a major customer’s credit worthiness or actual defaults are higher than historical experience, or events forecast that collectively indicate some impairment is expected, our estimates of the recoverability of amounts due to us could be adversely affected. Inventory: Inventories are stated at the lower of cost or net realizable value. 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 and ongoing cyclical and COVID- 19 related uncertain economic outlook for our industry and capital and geographic spending, as well as income and current net deferred tax assets by entity and country, 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 as we are able to take advantage of the underlying tax loss or other attributes in carry forward or their use by future income or circumstances allow us to realize these attributes. 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, performance stock unit awards and restricted stock unit awards, using the estimated grant date fair value method of accounting. For options, we estimate the fair value using the Black-Scholes valuation model and an estimated forfeiture rate. Restricted stock unit awards and performance stock unit awards are valued based on the average of the high and low price on the date of the grant and an estimated forfeiture rate. For options, performance and restricted stock unit awards, expense is recognized as compensation expense on the straight-line basis. Employee Stock Purchase Plan (“ESPP”) shares were issued under provisions that do not require us to record any equity compensation expense. 23 RESULTS OF OPERATIONS: NET SALES Net sales by product line (in thousands) Automated programming systems Non-automated programming systems Total programming systems Net sales by location (in thousands) United States % of total International % of total Net sales by type (in thousands) Equipment Sales Adapter Sales Software and Maintenance Sales Total 2023 Change 2022 $22,806 5,258 $28,064 20.5% (0.6%) 15.9% $18,926 5,291 $24,217 2023 Change 2022 $2,799 10.0% $25,265 90.0% 57.8% 12.6% $1,774 7.3% $22,443 92.7% 2023 Change 2022 $16,343 8,154 3,567 $28,064 18.4% 11.2% 15.9% 15.9% $13,803 7,336 3,078 $24,217 Net sales for the year ended December 31, 2023 increased approximately 16%, to $28.1 million, compared to 2022, primarily as a result of COVID-19 China shutdown in the first half of 2022, economic uncertainty resulting from the war in Ukraine, semiconductor shortages and a stronger dollar, offset in part during the second half of the 2022 and continuing in 2023 by fulfilling the backlog built up during the shutdown, improved semiconductor supply, and higher demand in automotive electronics and industrial/IoT. Order bookings were $25.8 million in 2023, down approximately 2% compared to $26.4 million in 2022. Automotive Electronics were 63% of total bookings, up 2% from 61% in 2022. Backlog at December 31, 2023 and 2022 was $2.8 million and $4.8 million, respectively. Deferred revenue was $1.6 million at December 31, 2023 compared to $1.8 million at December 31, 2022. GROSS MARGIN (in thousands) Gross margin Percentage of net sales 2023 Change 2022 $16,186 57.7% 22.5% $13,210 54.5% Gross margin as a percentage of sales for the year ended December 31, 2023 was 57.7%, compared to 54.5% in 2022. The increase in gross margin percentage was due to the impact of sale volume relative to fixed costs; product mix, channel mix, and lower inventory levels (which contributed to lower freight, tariffs, and obsolescence costs.) RESEARCH AND DEVELOPMENT (in thousands) Research and development Percentage of net sales 2023 Change 2022 $6,524 23.2% 7.2% $6,083 25.1% Research and development (“R&D”) expense increased $441,000 for the year ended December 31, 2023 compared to 2022. The increase was primarily related contracted services and incentive compensation. We believe it is essential to invest in R&D to significantly enhance our existing products and to create new products as markets develop and technologies change. During 2023, we continued strategically investing in supporting SentriX, ConneX and our LumenX programmer capabilities. In addition to product development, a significant part of R&D spending is on creating software and support for new devices introduced by the semiconductor companies. We are currently focusing our research development efforts on strategic growth markets, including automotive electronics and IoT. We are developing technology and the SentriX 24 product line to securely program new categories of semiconductors, including Secure Microcontrollers, Secure Elements, and Authentication Chips. Our R&D spending fluctuates based on the number, type, and the development stage of our product initiatives and projects. SELLING, GENERAL AND ADMINISTRATIVE (in thousands) Selling, general & administrative Percentage of net sales 2023 Change 2022 $9,214 32.8% 17.0% $7,876 32.5% Selling, General and Administrative (“SG&A”) expenses increased approximately $1.3 million for the year ended December 31, 2023 compared to 2022. The increase was primarily related to higher sales commissions, contracted services and incentive compensation. Cost control measures remain in effect. INTEREST (in thousands) Interest income 2023 Change 2022 $190 458.8% $34 Interest income was higher for the year ended December 31, 2023 compared to 2022 primarily due to higher average interest rates and higher invested balances. INCOME TAXES (in thousands) Income tax (expense) benefit 2023 Change 2022 ($194) (71.6%) ($683) Income tax (expense) decreased by $489,000 for the year ended December 31, 2023 compared to 2022. The decrease was primarily a result of the withholding tax of $442,000 on the repatriation of cash from subsidiaries in 2022. Income tax (expense) in 2023 and 2022 is primarily the result of foreign subsidiary income tax and minimal U.S. state income tax. The effective tax rate for 2023 of 28.6% and 2022 of (156.3%) differed from the statutory tax rates in our tax reporting jurisdictions primarily due to subsidiary income with consolidated losses and the effect of valuation allowances. We have a valuation allowance of $8.7 million and $9.3 million as of December 31, 2023 and 2022, respectively. Our deferred tax assets and valuation allowance have increased by approximately $430,000 and $422,000 associated with the requirements of accounting for uncertain tax positions as of December 31, 2023 and 2022, respectively. 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. INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary’s local currency and translated into U.S. Dollar amounts at average rates of exchange during the year. We recognized foreign currency transaction gains of $42,000 in 2023 and $221,000 in 2022. The transaction gains resulted primarily from translation adjustments to foreign inter-company accounts and U.S. Dollar accounts held by foreign subsidiaries and sales by our German subsidiary to certain customers, which were invoiced in U.S. Dollars. Because approximately 90% of our sales are to international markets, volatile exchange rates may also impact our competitiveness and margins. We increased prices in response to cost increases caused by inflation and part shortages. 25 FINANCIAL CONDITION: LIQUIDITY AND CAPITAL RESOURCES (in thousands) Working capital 2023 Change 2022 $18,425 $846 $17,579 At December 31, 2023, our principal sources of liquidity consisted of existing cash and cash equivalents. Cash at December 31, 2023 and 2022 was $12.3 million and $11.5 million, respectively. Our working capital increased by $846,000 during 2023 due primarily to revenue growth and operating profit improvement. Our current ratio was 4.0 and 3.8 for December 31, 2023 and 2022, respectively. The company continues to have no debt. 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 plan to increase our internally developed rental, security provisioning, 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, adjusting pricing for cost inflation, lower unit costs, lower tariff expenses, reduce exposure to the impact of currency volatility, increase product development differentiation, and reduce other costs. We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond. If this belief is incorrect, we may require additional cash at the U.S. headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries. 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. 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 7, “Other Commitments”, we had no material off- balance sheet arrangements. SHARE REPURCHASE PROGRAMS Data I/O did not have a share repurchase program in 2023 or 2022. NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA excluding equity compensation and impairment & related charges (non-cash, one-time items) are set forth below. Non-GAAP financial measures 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 our results and facilitate the comparison of results. 26 A reconciliation of net income to EBITDA and Adjusted EBITDA follows: (in thousands) Net Income (loss) Interest (income) Taxes Depreciation and amortization EBITDA Equity compensation For Year Ended December 31, 2023 2022 $486 (190) 194 608 $1,098 1,190 ($1,120) (34) 683 560 $89 1,176 Adjusted EBITDA, excluding equity compensation $2,288 $1,265 NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND IMPLEMENTED In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326). Topic 326 is effective (Smaller Reporting Company) for reporting periods beginning after December 15, 2022. Topic 326 replaces the incurred loss impairment methodology under current Generally Accepted Accounting Principles ("GAAP") with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. We adopted the new credit loss standard on January 1, 2023. The new credit loss standard has not had a material impact on our financial condition, results of operations and cash flows, or financial statement disclosures. NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND NOT YET IMPLEMENTED In November 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures. 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data See pages 30 through 48. 27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Data I/O Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Data I/O Corporation (a Washington corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes and financial statement schedules included under Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Net realizable value of inventory As described further in Note 1 to the financial statements, management measures the net realizable value of inventory based on estimated reductions to inventory for obsolete, slow-moving, excess and non-salable inventory by reviewing current transactions and forecasted demand. We identified net realizable value of inventory specifically as a critical audit matter. The principal considerations for our determination that the net realizable value of inventory represents a critical audit matter are that the assessment of the valuation of inventory is complex and includes an estimate of forecasted demand. The demand estimate is subjective and requires the Company to consider significant assumptions such as economic conditions, technological advances, historical usage, and consumer trends, which are subject to significant uncertainty and therefore require significant auditor judgement. 28 Our audit procedures related to the net realizable value of inventory included the following, among others: • To test the adequacy of the Company’s allowance for excess and obsolete inventories, we performed substantive audit procedures that included, among others, testing the completeness and accuracy of the underlying data used in the estimation calculations, specifically those related to inventory movements and aging. We also evaluated the reasonableness of significant assumptions including the estimated reserve percentage and other significant assumptions through inquiry of management and personnel outside of finance team and analytical procedures. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2001. Bellevue, Washington March 27, 2024 29 DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) ASSETS CURRENT ASSETS: Cash and cash equivalents Trade accounts receivable, net of allowance for credit losses of $72 and $147, respectively Inventories Other current assets TOTAL CURRENT ASSETS Property, plant and equipment – net Other assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable Accrued compensation Deferred revenue Other accrued liabilities Income taxes payable TOTAL CURRENT LIABILITIES Operating lease liabilities Long-term other payables 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, 9,020,819 shares as of December 31, 2023 and 8,816,381 shares as of December 31, 2022 Accumulated earnings (deficit) Accumulated other comprehensive income TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY See notes to consolidated financial statements 30 December 31, 2023 December 31, 2022 $12,341 $11,510 5,707 5,875 690 24,613 1,359 1,429 $27,401 $1,272 $2,003 1,362 1,438 113 6,188 702 192 - - 22,731 (2,645) 233 20,319 $27,401 4,992 6,751 645 23,898 1,072 2,195 $27,165 $1,366 1,670 1,575 1,596 112 6,319 1,500 237 - - 21,897 (3,131) 343 19,109 $27,165 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Net sales Cost of goods sold Gross margin Operating expenses: Research and development Selling, general and administrative Total operating expenses Operating income (loss) Non-operating income (loss): Interest income Gain on sale of assets Foreign currency transaction gain (loss) Total non-operating income (loss) Income (loss) before income taxes Income tax (expense) benefit Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share Weighted-average basic shares Weighted-average diluted shares See notes to consolidated financial statements For the Years Ended December 31, 2023 2022 $28,064 11,878 16,186 6,524 9,214 15,738 448 190 - 42 232 680 (194) $486 $0.05 $0.05 8,941 9,073 $24,217 11,007 13,210 6,083 7,876 13,959 (749) 34 57 221 312 (437) (683) ($1,120) ($0.13) ($0.13) 8,741 8,741 31 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Net Income (loss) Other comprehensive income: Foreign currency translation gain (loss) Comprehensive income (loss) See notes to consolidated financial statements For the Years Ended December 31, 2023 2022 $486 (110) $376 ($1,120) (635) ($1,755) 32 DATA I/O CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Common Stock Shares Amount Accumulated Earnings (Deficit) Accumulated and Other Comprehensive Income (Loss) Total Stockholders' Equity Balance at December 31, 2021 8,621,007 $20,886 ($2,011) $978 $19,853 Stock awards issued, net of tax withholding Issuance of stock through: Employee Stock Purchase Plan Share-based compensation Net income (loss) Other comprehensive income gain (loss) Balance at December 31, 2022 Stock awards issued, net of tax withholding Issuance of stock through: Employee Stock Purchase Plan Share-based compensation Net income (loss) Other comprehensive income gain (loss) Balance at December 31, 2023 192,086 (178) - - (178) 3,288 - - - 8,816,381 13 1,176 - - $21,897 - - (1,120) - ($3,131) - - - (635) $343 13 1,176 (1,120) (635) $19,109 201,172 (370) - - (370) 3,266 - - - 9,020,819 14 1,190 - - 22,731 - - 486 - (2,645) - - - (110) $233 14 1,190 486 (110) $20,319 See notes to consolidated financial statements 33 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization Equipment transferred to cost of goods sold Share-based compensation Net change in: Trade accounts receivable Inventories Other current assets Accounts payable and accrued liabilities Deferred revenue Other long-term liabilities Deposits and other long-term assets Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment Cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, less payments for shares withheld to cover tax Cash provided by (used in) financing activities For the Twelve Months Ended December 31, 2023 2022 $486 ($1,120) 608 301 1,190 (719) 815 (48) 109 (267) (684) 637 2,428 560 394 1,176 (1,100) (588) 61 (428) 199 (890) 684 (1,052) (1,195) (1,195) (1,080) (1,080) (356) (356) (165) (165) Increase (decrease) in cash and cash equivalents 877 (2,297) Effects of exchange rate changes on cash Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes See notes to consolidated financial statements (46) 11,510 $12,341 (383) 14,190 $11,510 $171 $556 34 DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) designs, manufactures and sells programming systems used by designers and manufacturers of electronic products. Our programming system products are used to program integrated circuits (“ICs” or “devices” or “semiconductors”) with the specific unique data necessary for the ICs contained in various products, and are an important tool for the electronics industry experiencing growing use of programmable ICs. Customers for our programming system products are located around the world, primarily in Asia, Europe and the Americas. Our manufacturing operations are currently located in Redmond, Washington, United States and Shanghai, China. Principles of Consolidation The consolidated financial statements include the accounts of Data I/O Corporation and our wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include: • Revenue Recognition • Allowance for Credit Losses • • Warranty Accruals • • Tax Valuation Allowances Share-based Compensation Inventory Foreign Currency Translation Assets and liabilities of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses of foreign subsidiaries are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to stockholders’ equity. Realized and unrealized gains and losses resulting from the effects of changes in exchange rates on assets and liabilities denominated in foreign currencies are included in non-operating expense as foreign currency transaction gains and losses. Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of 90 days or less are considered cash equivalents. We maintain our cash and cash equivalents with major financial institutions in the United States of America, which are insured by the Federal Deposit Insurance Corporation (FDIC), and in foreign jurisdictions. Deposits in U.S. banks exceed the FDIC insurance limit. We have not experienced any losses on our cash and cash equivalents. Cash and cash equivalents held in foreign bank accounts, typically in local currency, in China and Germany, totaled (in millions) $6.6 and $4.0 at December 31, 2023 and 2022, respectively. This cash held in subsidiaries have restrictions and costs associated with repatriations, currency conversions, and complying with government policies, regulations and controls, especially in China. Fair Value of Financial Instruments Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other short-term liabilities. 35 Accounts Receivable The majority of our accounts receivable are due from companies in the electronics manufacturing industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are typically due within 30 to 60 days and are stated at amounts due from customers net of an allowance for credit losses. Accounts receivable outstanding longer than the contractual payment terms are considered past due. We determine the allowance by considering a number of factors, including a forward-looking expectation based upon the condition of the general economy and the industry as a whole and our previous bad debt experience, as well as the length of time trade accounts receivable are past due, the industry and geographic payment practices involved, and the customer’s current ability to pay their obligation to us. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for credit losses. Inventories Inventories are stated at the lower of cost or net realizable value with cost being the currently adjusted standard cost, which approximates cost on a first-in, first-out basis. We estimate changes to inventory for obsolete, slow-moving, excess and potential non-salable inventory by reviewing current transactions and forecasted product demand. We evaluate our inventories on an item by item basis and record an adjustment (lower of cost or net realizable value) accordingly. Property, Plant and Equipment Property, plant and equipment, including leasehold improvements, are stated at cost, and depreciation is calculated over the estimated useful lives of the related assets or lease terms on the straight-line basis. We depreciate substantially all property, plant and equipment over periods of three to seven years. We depreciate leasehold improvements over the remaining portion of the lease or over the expected life of the asset if less than the remaining term of the lease. We regularly review all of our property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the total of future undiscounted cash flows is less than the carrying amount of these assets, an impairment loss, if any, based on the excess of the carrying amount over the fair value of the assets, is recorded. Based on these evaluations, for the years ended December 31, 2023 and 2022, no impairment was noted or recorded for property, plant and equipment. Patent Costs We expense external costs, such as filing fees and associated attorney fees, incurred to obtain initial patents, but capitalize patents obtained through acquisition as intangible assets. We also expense costs associated with maintaining and defending patents subsequent to their issuance. Income Taxes Income taxes are computed at current enacted tax rates, less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, and any changes in the valuation allowance caused by a change in judgment about the realization of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. Share-Based Compensation All stock-based compensation awards are measured based on estimated fair values on the date of grant and recognized as compensation expense on the straight-line method. Our share-based compensation is reduced for estimated forfeitures at the time of grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates. 36 Revenue Recognition Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606) provides a single, principles- based five-step model to be applied to all contracts with customers. It generally provides for the recognition of revenue in an amount that reflects the consideration to which the Company expects to be entitled, net of allowances for estimated returns, discounts or sales incentives, as well as taxes collected from customers when control over the promised goods or services are transferred to the customer. We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year. During 2023 and 2022, the impact of capitalization of incremental costs for obtaining contracts was immaterial. We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price. 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. 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 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, services 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. 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. Total deferred revenue which represents undelivered performance obligations for installation, service, support and extended maintenance contracts was $1.6 million and $1.8 million and the portion expected to be recognized within one year was $1.4 million and $1.6 million for December 31, 2023 and 2022, respectively. When we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon delivery, provided that only immaterial items in the context of the contract with the customer remain on our part and substantive acceptance conditions, if any, have been met. We recognize revenue when there is an approved contract that both parties are committed to perform, both parties rights have been identified, the contract has substance, collection of substantially all the consideration is probable, the transaction price has been determined and allocated over the performance obligations, the performance obligations including substantive acceptance conditions, if any, in the contract 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. Payment terms are generally 30 to 60 days from shipment. We transfer certain products out of service from their internal use and make them available for sale. The products transferred are typically 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. 37 The following table represents our revenues by major categories: Net sales by type (in thousands) Equipment Sales Adapter Sales Software and Maintenance Sales * Total * includes an insignificant amount of service and parts sales Leases - Accounting Standards Codification 842 2023 Change 2022 $16,343 8,154 3,567 $28,064 18.4% 11.2% 15.9% 15.9% $13,803 7,336 3,078 $24,217 Leases arise from contracts which convey the right to control the use of identified property or equipment for a period of time in exchange for consideration. Our leasing arrangements are primarily for office facility space we use to conduct our operations. In addition, there are automobiles and a small amount of office equipment leased. We determine whether contracts include a lease at the inception date, which is generally upon contract signing, considering factors such as whether the contract includes an asset which is physically distinct, which party obtains substantially all of the capacity and economic benefit of the asset, and which party directs how, and for what purpose, the asset is used during the contractual period of use. Our leases commence when the lessor makes the asset available for our use. At commencement, we record a lease liability at the present value of future lease payments, net of any future lease incentives to be received. Some of our lease agreements include cancellable future periods subject to termination or extension options. We include cancellable lease periods in our future lease payments when we are reasonably certain to continue to utilize the asset for those periods. We calculate the present value of future lease payments at commencement using a discount rate which we estimate as the collateralized borrowing rate we believe that would be incurred on our future lease payments over a similar term. At commencement, we also record a corresponding right-of-use asset, which is calculated based on the amount of the lease liability, adjusted for any advance lease payments paid, initial direct costs incurred or lease incentives received prior to commencement. Right-of-use assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets. Leases are classified at commencement as either operating or finance leases. As of December 31, 2023, all of our leases are classified as operating leases. Rent expense for operating leases is recognized on the straight-line method over the term of the agreement beginning on the lease commencement date. In accounting for leases, we utilize certain practical expedients and policy elections available under the lease accounting standard. For example, we do not record right-of-use assets or lease liabilities for leases with terms of 12 months or less. For contracts containing real estate leases, we do not combine lease and non-lease components. The primary impact of this policy election is that we do not include in our calculation of lease liabilities any fixed and non-cancelable future payments due under the contract for items such as common area maintenance, utilities and other costs. Lease-related costs which are variable rather than fixed are expensed in the period incurred. Assumptions, judgments and estimates impacting the carrying value of our right-of-use assets and liabilities include evaluating whether an arrangement contains a lease, determining whether the lease term should include any cancellable future periods, estimating the discount rate used to calculate our lease liabilities, estimating the fair value and useful life of the leased asset for the purpose of classifying the lease as an operating or finance lease, evaluating whether a lease contract amendment represents a new lease agreement or a modification to the existing lease and evaluating our right-of-use assets for impairment. Research and Development Research and development costs are generally expensed as incurred. Advertising Expense Advertising costs are expensed as incurred. Total advertising expenses were approximately $196,000 and $116,000 in 2023 and 2022, respectively. 38 Warranty Expense We record a liability for an estimate of costs that we expect to incur under our basic limited warranty when product revenue is recognized. Factors affecting our warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. We normally provide a warranty for our products against defects for periods ranging from ninety days to one year. We provide for the estimated cost that may be incurred under our product warranties and periodically assess the adequacy of our warranty liability based on changes in the above factors. We record revenues on extended warranties on a straight-line basis over the term of the related warranty contracts. Service costs are expensed as incurred. Earnings (Loss) Per Share Basic earnings (loss) per share exclude any dilutive effects of stock options. Basic earnings (loss) per share are computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted-average number of common shares and common stock equivalent shares outstanding during the period. The common stock equivalent shares from equity awards used in calculating diluted earnings per share were 133,000 and 109,000 for the years ended December 31, 2023 and 2022, respectively. Options to purchase 12,500 shares of common stock were outstanding as of both periods December 31, 2023 and 2022, but were excluded from the computation of diluted earnings per share for the periods then ended, because the options were anti-dilutive. Diversification of Credit Risk Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of trade receivables. Our trade receivables are geographically dispersed and include customers in many different industries. Our consolidated accounts receivable balance as of December 31, 2023 and 2022 includes foreign accounts receivable in the functional currency of our foreign subsidiaries amounting to $1.0 and $2.4 million, respectively. We generally do business with our foreign distributors in U.S. Dollars. We believe that risk of loss is significantly reduced due to the diversity of our end-customers and geographic sales areas. We perform on-going credit evaluations of our customers’ financial condition and require collateral, such as letters of credit and bank guarantees, or prepayment whenever deemed necessary. The following represented greater than 10% of our consolidated accounts receivable for the applicable year: Percentage of Consolidated Accounts Receivable Number of customers Approximate percentage of consolidated accounts receivable balance Percentage of each Percentage of each Percentage of each Diversification of net sales 2023 3 47% 18% 16% 13% The following represented greater than 10% of net sales for the applicable year: Percentage of Net Sales Number of customers Approximate percentage of net sales Percentage of each Percentage of each 2023 2 24% 13% 11% 39 2022 3 39% 15% 13% 11% 2022 1 23% 23% n/a COVID-19 In 2023, most of the direct implications of COVID-19 had passed, and we were dealing with the follow-on impacts or indirect impacts from COVID-19 and the policies put in place to mitigate the disease. We continued to manage inflation, supply chain impacts and shortages, and the post lock down economic transitions in China and elsewhere. New Accounting Pronouncements - Standards Issued and Implemented In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326). Topic 326 is effective (Smaller Reporting Company) for reporting periods beginning after December 15, 2022. Topic 326 replaces the incurred loss impairment methodology under current Generally Accepted Accounting Principles ("GAAP") with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. We adopted the new credit loss standard on January 1, 2023. The new credit loss standard has not had a material impact on our financial condition, results of operations and cash flows, or financial statement disclosures. New Accounting Pronouncements - Standards Issued and Not Yet Implemented In November 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures. 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. 40 NOTE 2 – ACCOUNTS RECEIVABLE, NET (in thousands) Trade accounts receivable Less allowance for credit losses Trade accounts receivable, net Changes in Data I/O’s allowance for credit losses are as follows: (in thousands) Beginning balance Credit loss (reversal) Accounts written-off Recoveries Ending balance NOTE 3 – INVENTORIES (in thousands) Raw material Work-in-process Finished goods Inventories NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET (in thousands) Leasehold improvements Equipment Sales demonstration equipment Less accumulated depreciation Property and equipment, net December 31, 2023 December 31, 2022 $5,779 72 $5,707 $5,139 147 $4,992 December 31, 2023 December 31, 2022 $147 (75) - - $72 $89 58 - - $147 December 31, 2023 December 31, 2022 $3,328 1,596 951 $5,875 $3,850 1,911 990 $6,751 December 31, 2023 December 31, 2022 $394 4,977 1,396 6,767 5,408 $1,359 $404 4,683 1,066 6,153 5,081 $1,072 Total depreciation expense recorded for 2023 and 2022 was $608,000 and $560,000, respectively. 41 NOTE 5 – OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: (in thousands) Lease liability - short term Product warranty Sales return reserve Other taxes Other Other accrued liabilities December 31, 2023 December 31, 2022 $798 449 32 69 90 $1,438 $799 425 71 163 138 $1,596 The changes in our product warranty liability for the year ending December 31, 2023 are follows: (in thousands) Liability, beginning balance Net expenses Warranty claims Accrual revisions Liability, ending balance NOTE 6 – OPERATING LEASE COMMITMENTS December 31, 2023 December 31, 2022 $425 902 (902) 24 $449 $432 774 (774) (7) $425 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 for the year ending December 31 are as follows: (in thousands) 2024 2025 2026 2027 2028 & Thereafter Total Less imputed interest Total operating lease liabilities December 31, 2023 Operating Lease Commitments $841 591 133 48 - $1,613 (113) $1,500 Payments for operating lease liabilities for the twelve months ended December 31, 2023 and 2022, respectively, was $894,000 and $779,000 which included short-term lease costs of $25,000 and 45,000. There were no new or modified leases during the twelve months ended December 31, 2023 that are accounted for in the amounts disclosed above. The total annual lease expense in 2023 and 2022, including operating lease expenses and short-term lease expenses, was approximately $745,000 and $899,000, respectively. Variable payments were not material and were treated as non-lease components and were recognized in the period for which the costs occur. For the largest lease component, the company has three facilities with our headquarters and primary engineering and operational functions located in Redmond, Washington. Our two subsidiary facilities in Munich, Germany and Shanghai, China provide extended worldwide sales, service, engineering and operation services. The total annual gross or base lease payments during 2023 and 2022 were approximately $823,000 and $713,000, respectively. The lease payment increase in 2023 was due primarily to lease abatement incentives for lease renewals in 2022 and standard rate increase in 2023. 42 The Redmond, Washington headquarters facility lease runs to January 31, 2026 at approximately 20,460 square feet. The lease for the facility located in Shanghai, China runs to October 31, 2024 at approximately 19,400 square feet. The lease for the facility located near Munich, Germany runs to August 2027 at approximately 4,895 square feet. The following table presents supplemental balance sheet information related to leases as of December 31, 2023 and 2022: (in thousands) Right-of-use assets (Long-term other assets) Lease liability-short term (Other accrued liabilities) Lease liability-long term (Operating lease liabilities) Year Ended December 31, 2023 2022 $1,363 $798 $703 $2,129 $799 $1,500 At December 31, 2023, the weighted average remaining lease term is 2.17 years and the weighted average discount rate used is 5%. 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 December 31, 2023, we had one contract with a commitment of approximately $232,000 to be paid in 2024 and $251,000 to be paid beyond one year. NOTE 8 – CONTINGENCIES As of December 31, 2023, we were not a party to any legal proceedings or aware of any indemnification agreement claims, the adverse outcome of which in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. NOTE 9 – STOCK AND RETIREMENT PLANS Stock Option Plans At December 31, 2023, there were 732,327 shares available for future grant under Data I/O Corporation 2023 Omnibus Incentive Compensation Incentive Plan (“2023 Plan”). At December 31, 2023, there were shares of Common Stock reserved for issuance for outstanding awards, consisting of 92,500 inducement reserve shares, 353,525 shares under the 2000 Plan, and 295,100 shares under the 2023 Plan. The inducement reserve shares remaining that were granted in 2019 consist of 12,500 options vested but unissued (using the terms of the 2000 Plan) and the grant in 2023 consisting of 75,000 RSU and 5000 PSU, (which were not from the 2023 Plan, but were made under the terms of the 2023 Plan). Pursuant to the 2000 and 2023 Plans, options are granted to our officers and key employees with exercise prices equal to the fair market value of the Common Stock at the date of grant and generally vest over four years. Options granted under the plans have a maximum term of six years from the date of grant. Stock awards are now granted under the 2023 Plan (previously the 2000 Plan) which for RSU awards generally vest over four years (some three years) and one year for nonemployee Directors. Performance Share Unit (PSU) awards vest based upon the three-year performance achievement on December 31, 2025. The performance measures for the PSUs awarded are revenue growth targets for the three-year period ending December 31, 2025. Achieving a threshold growth measure earns 50% of the PSU target award; achieving the target growth measure earns 100% of the PSU target award; and achieving the maximum target growth measure earns 150% of the PSU target award. 43 Employee Stock Purchase Plan Under the Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of our Common Stock at six-month intervals at 95% of the fair market value on the last day of each six-month period. Employees may purchase shares having a value not exceeding ten percent of their gross compensation during an offering period. During 2023 and 2022, a total of 3,341 and 3,288 shares, respectively, were purchased under the plan at average prices of $4.16 and $4.06 per share, respectively. At December 31, 2023 and 2022, 21,525 and 25,477 shares were reserved for future grant respectively. Stock Appreciation Rights Plan We have a Stock Appreciation Rights (“SAR”) Plan under which each director, executive officer or holder of 10% or more of our Common Stock has a SAR with respect to each exercisable stock option. The SAR entitles the SAR holder to receive cash from us for the difference between the market value of the stock and the exercise price of the option in lieu of exercising the related option. SARs are only exercisable following a tender offer or exchange offer for our stock, or following approval by shareholders of Data I/O of any merger, consolidation, reorganization or other transaction providing for the conversion or exchange of more than 50% of the common shares outstanding. As no event has occurred, which would make the SARs exercisable, and no such event is deemed probable, no compensation expense has been recorded under this plan. At December 31, 2023 and 2022, there were 12,500 SARs outstanding. Retirement Savings Plan We have a savings plan that qualifies as a cash or deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer their pre-tax salary or post-tax salary if Roth is elected, subject to IRS limitations. In fiscal year 2023, we contributed one dollar for each dollar contributed by a participant on the first two percent and $.50 for each dollar contributed by participant on the next four percent of a participant’s eligible earnings, and as a result this requires a minimum six percent contribution to receive a four percent matching contribution. Our matching contribution expense for the savings plan, net of forfeitures, was approximately $253,000 and $210,000 in 2023 and 2022, respectively. Employer matching contributions owed to the plan were $248,000 and $229,000 at December 31, 2023 and 2022, respectively. 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 and reduced for estimated forfeitures. The impact on our results of operations of recording share-based compensation for the year ended December 31, 2023 and 2022 was as follows: (in thousands) Cost of goods sold Research and development Selling, general and administrative Total share-based compensation Year Ended December 31, 2023 2022 $95 257 838 $1,190 $76 228 872 $1,176 44 An immaterial amount of share-based compensation was capitalized into inventory as overhead for the years ended December 31, 2023 and 2022, respectively. The following table summarizes stock option activity under our stock option plans for the twelve months ended December 31, 2023 and 2022: 2023 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life in Years 2022 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life in Years Options Options Outstanding at beginning of year Granted Exercised Cancelled, Expired or Forfeited 12,500 - - $4.98 - - 12,500 - - $4.98 - - - - - - Outstanding at end of year 12,500 $4.98 1.33 12,500 $4.98 2.33 Vested or expected to vest at the end of the period Exercisable at end of year 12,500 12,500 $4.98 $4.98 1.33 1.33 12,466 9,375 $4.98 $4.98 2.33 2.33 The aggregate intrinsic value of outstanding options is $0. There were no stock option awards exercised in 2023. Restricted stock award activity including performance-based stock award activity under our share-based compensation plan was as follows: 2023 2022 Awards 665,200 387,100 (284,925) (38,750) 728,625 Weighted - Average Grant Date Fair Value $3.94 4.36 3.93 3.96 $4.17 Awards 623,777 330,215 (249,292) (39,500) 665,200 Weighted - Average Grant Date Fair Value $4.73 3.26 4.95 4.33 $3.94 Outstanding at beginning of year Granted Vested Cancelled Outstanding at end of year During the years ended December 31, 2023 and 2022, 83,753 and 57,206 shares, respectively, were withheld from issuance related to restricted stock units vesting and stock option exercises to cover employee taxes and stock options exercise price. Non-employee directors Restricted Stock Units (“RSUs”) typically vest over the earlier of one year or the next annual meeting of shareholders and Non-Qualified stock options vest over three years and have a six-year exercise period. Employee RSUs typically vest annually over three or four years and employee Non-Qualified stock options typically vest quarterly over four years and have a six-year exercise period. Performance Stock Units (“PSUs”) typically cliff vest at the end of the performance period and the performance metric is cumulative revenue growth over the three-year period ending December 31, 2025 with a cumulative revenue threshold, target, and maximum performance measure. The table above includes performance shares granted in 2023 of 30,000 shares at the target performance level (the threshold level would be 50% and the maximum level would be 150% of the target level). 45 The remaining unamortized expected future compensation expense and remaining amortization period associated with unvested option grants and restricted stock awards are: December 31, 2023 December 31, 2022 Unamortized future compensation expense $2,317,524 $2,029,457 Remaining weighted average amortization period in years 2.44 2.47 The weighted average number of shares outstanding used to compute earnings (loss) per share included the following: Weighted average shares outstanding Restricted and Performance Stock Units Stock Options Year Ended December 31, 2023 2022 8,940,612 8,740,701 132,360 216 Weighted average diluted shares 9,073,188 8,740,701 NOTE 11 – SHARE REPURCHASE PROGRAMS Data I/O did not have a share repurchase program in 2023. NOTE 12 – INCOME TAXES Components of income (loss) before taxes: (in thousands) U.S. operations Foreign operations Total income (loss) before taxes Income tax expense (benefit) consists of: (in thousands) Current tax expense (benefit) U.S. federal State Foreign Deferred tax expense (benefit) – U.S. federal Total income tax expense (benefit) Year Ended December 31, 2023 2022 ($536) 1,216 $680 ($1,622) 1,185 ($437) Year Ended December 31, 2023 2022 $0 20 174 194 - $194 $0 19 664 683 - $683 46 A reconciliation of our effective income tax and the U.S. federal tax rate is as follows: (in thousands) Statutory tax State and foreign income tax, net of federal tax benefit Valuation allowance for deferred tax asset Foreign sourced deemed dividend income Stock based compensation Other Total income tax expense (benefit) Year Ended December 31, 2023 2022 $143 (178) 139 322 (250) 18 $194 ($92) (189) 370 738 (154) 10 $683 The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented below: (in thousands) Deferred income tax assets: Allowance for credit losses Inventory and product return reserves Compensation accruals Accrued liabilities Book-over-tax depreciation and amortization Foreign net operating loss carryforwards U.S. net operating loss carryforwards U.S. credit carryforwards Valuation Allowance Total Deferred Income Tax Assets Year Ended December 31, 2023 2022 $14 1,168 2,750 65 18 184 2,899 1,557 8,655 (8,655) $ - $22 477 2,511 151 25 149 4,399 1,560 9,294 (9,294) $ - The valuation allowance for deferred tax assets decreased $639,000 and increased $1,388,000 during the years ended December 31, 2023 and 2022, respectively. The net deferred tax assets have a full valuation allowance provided due to uncertainty regarding our ability to utilize such assets in future years. This full valuation allowance evaluation is based upon our volatile history of losses and the cyclical nature of our industry and capital spending. Credit carryforwards consist primarily of research and experimental and foreign tax credits. We intend to continue to reinvest foreign earnings of our operating subsidiaries. U.S. net operating loss carryforwards are $13.8 million at December 31, 2023 with expiration years from 2023 to 2034. Utilization of net operating loss and credit carryforwards is subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. We have not had a Section 382 ownership change, but if we did the usage of these tax assets would have an income usage limitation based on the value of the Company at the time of the change times the federal long-term tax-exempt rate. The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below: Year Ended December 31, (in thousands) Unrecognized tax benefits, opening balance Prior period tax position increases Additions based on tax positions related to current year Unrecognized tax benefits, ending balance 2023 2022 $422 (6) 14 $430 $392 - 30 $422 47 Historically, we have incurred minimal interest expense and no penalties associated with tax matters. 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. Tax years that remain open for examination include 2020, 2021, 2022 and 2023 in the United States of America. In addition, various tax years from 2002 to 2014 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. NOTE 13 – SEGMENT AND GEOGRAPHIC INFORMATION We consider our operations to be a single operating segment, focused on the design, manufacturing and sale of programming systems used by designers and manufacturers of electronic products. Major operations outside the U.S. include sales, engineering and service support by subsidiaries in Germany as well as in China, which also manufactures some of our products. 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. The following tables provide summary operating information by geographic area: (in thousands) Net sales: U.S. Europe Rest of World Included in Europe and Rest of World are the following Net Sales significant balances: Germany China Operating income: U.S. Europe Rest of World Identifiable assets: U.S. Europe (primarily Germany) Rest of World (primarily China) NOTE 14 – SUBSEQUENT EVENTS Year Ended December 31, 2023 2022 $2,799 9,469 15,796 $28,064 $4,697 $3,800 $216 (671) 903 $448 $12,385 4,966 10,050 $27,401 $1,774 7,402 15,041 $24,217 $2,881 $5,476 $5 (1,331) 577 ($749) $15,234 4,886 7,045 $27,165 In preparing the financial statements, the Company has reviewed all known events which have occurred after December 31, 2023 through the date on which the financial statements are available for issuance, for potential recognition or disclosure in the consolidated financial statements and footnotes. There were no other subsequent events which would require additional disclosures to the financial statements other than those already disclosed throughout the Notes to Consolidated Financial Statements. 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (a) 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 assurance level. Disclosure controls are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted 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 ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. (b) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control systems are designed to provide reasonable assurance to the Company’s management and board of directors regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. All internal controls, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statements preparation and presentation. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013). Based on this assessment our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2023, our internal control over financial reporting was effective. This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently exempts smaller reporting companies from complying with Section 404(b) of the Sarbanes-Oxley Act of 2002. (c) Changes in internal controls. There were no changes made in our internal controls during the period covered by this report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Item 9B. Other Information During the quarter ended December 31, 2023, no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K. 49 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. Item 10. Directors, Executive Officers and Corporate Governance PART III Information regarding the Registrant’s directors is set forth under “Election of Directors” in our Proxy Statement relating to our annual meeting of shareholders to be held on May 16, 2024 and is incorporated herein by reference. Such Proxy Statement will be filed within 120 days of our year-end. Information regarding the Registrant’s executive officers is set forth in Item 1 of Part I herein under the caption “Executive Officers of the Registrant.” Code of Ethics We have adopted a Code of Ethics that applies to all directors, officers and employees of Data I/O, including the Chief Executive Officer and Chief Financial Officer. The key principles of the Code of Ethics are to act legally and with integrity in all work for Data I/O. The Code of Ethics is posted on the corporate governance page of our website: http://www.dataio.com/Company/InvestorRelations/CorporateGovernance.aspx We will post any amendments to our Code of Ethics on our website. In the unlikely event that the Board of Directors approves any sort of waiver to the Code of Ethics for our executive officers or directors, information concerning such waiver will also be posted on our website. In addition to posting information regarding amendments and waivers on our website, the same information will be included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver, unless website posting of such amendments or waivers is permitted by NASDAQ’s rules. Item 11. Executive Compensation Information called for by Part III, Item 11, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 16, 2024 and is incorporated herein by reference. The information appears in the Proxy Statement under the caption “Executive Compensation.” Such Proxy Statement will be filed within 120 days of our year-end. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information called for by Part III, Item 12, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 16, 2024 and is incorporated herein by reference. The information appears in the Proxy Statement under the caption “Voting Securities and Principal Holders.” Such Proxy Statement will be filed within 120 days of our year end. 50 Equity Compensation Plan Information The following table gives information about our Common Stock that may be issued upon the exercise of options and rights under all of our existing equity compensation plans as of December 31, 2023. See Notes 9 and 10 of “Notes to Consolidated Financial Statements.” (a) Number of securities to be issued upon the exercise of outstanding options, warrants and rights (b) Weighted– average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 2,381 $3.26 753,852 12,500 14,881 $4.98 $4.86 - 753,852 Equity compensation plans approved by the security holders (1) (2) Equity compensation plans not approved by the security holders (3) Total (1) Represents shares of our Common Stock issuable pursuant to the Data I/O Corporation 2023 Omnibus Incentive Compensation Incentive Plan, 2000 Stock Compensation Incentive Plan, and 1982 Employee Stock Purchase Plan. Table excludes unvested: RSU awards of 353,525 from the 2000 Plan, RSU awards of 270,100 from the 2023 Plan, and PSU awards of 25,000 from the 2023 Plan. (2) Stock Appreciation Rights Plan (“SAR”) provides that directors, executive officers or holders of 10% or more of our Common Stock have an accompanying SAR with respect to each exercisable option. While the plan has been approved by the security holders, no amounts are included in columns (a), (b), or (c) relating to the SAR. Inducement grant remaining to Michael Tidwell of non-qualified stock options, fully vested, with 12,500 remaining unexercised. Table excludes unvested inducement grants to Gerald Ng of 75,000 RSU and 5000 PSU awards. (3) Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated by reference to the section captioned “Certain Relationships and Related Transactions” in the Proxy Statement relating to our annual meeting of shareholders to be held on May 16, 2024. Such Proxy Statement will be filed within 120 days of our year-end. Item 14. Principal Accounting Fees and Services The information required by this Item with respect to principal accountant fees and services is incorporated by reference to the section captioned “Principal Accountant’s Fees and Services” in the Proxy Statement relating to our annual meeting of shareholders to be held on May 16, 2024. Such Proxy Statement will be filed within 120 days of our year-end. Item 15. Exhibits, Financial Statement Schedules Executive Compensation Plans and Arrangements PART IV The following list is a subset of the list of exhibits described below and contains all compensatory plans, contracts or arrangements in which any director or executive officer of Data I/O is a participant, unless the method of allocation of benefits thereunder is the same for management and non-management participants: 51 (1) Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit 10.5. (2) Data I/O Corporation Tax Deferral Retirement Plan and Trust with Empower Retirement (formerly known as Great West Financial (formerly known as Orchard Trust Company). See Exhibits 10.11, 10.12, 10.13, 10.23, 10.34 and 10.31. (3) Summary of Amended and Restated Management Incentive Compensation Plan. See Exhibit 10.2. (4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1. (5) Amended and Restated Executive Agreements. See Exhibit 10.20, and 10.32 (6) 1996 Director Fee Plan (terminated in 2023). See Exhibit 10.4. (7) Data I/O Corporation 2000 Stock Compensation Incentive Plan. See Exhibit 10.6, 10.10, 10.16, 10.19, 10.29 and 10.33. (8) Form of Option Agreement. See Exhibit 10.7. (9) Form of Indemnification Agreement. See Exhibit 10.14. (10) Letter Agreement with Anthony Ambrose. See Exhibit 10.15. (11) Letter Agreement with Rajeev Gulati. See Exhibit 10.17. (12) Letter Agreement with Joel S. Hatlen. See Exhibit 10.21. (13) Form of Executive Agreement. See Exhibit 10.20 and 10.32. (14) Form of Restricted Stock Unit Award Agreement. See Exhibit 10.18 and 10.36. (15) Letter Agreement with Michael Tidwell. See Exhibit 10.28. (16) Data I/O Corporation 2023 Omnibus Incentive Compensation Incentive Plan. See Exhibit 10.34. (17) Form of Performance Stock Unit Award Agreement. See Exhibit 10.35. (18) Letter Agreement with Gerald Y. Ng. See Exhibit 10.37. (a) List of Documents Filed as a Part of This Report: (1) Index to Financial Statements: Report of Independent Registered Public Accounting Firm (PCAOB ID 248) Consolidated Balance Sheets as of December 31, 2023 and December 31, 2022 Consolidated Statements of Operations for each of the two years ended December 31, 2023 and December 31, 2022 Consolidated Statements of Comprehensive Income (Loss) for each of the two years ended December 31, 2023 and December 31, 2022 Consolidated Statements of Stockholders’ Equity for each of the two years ended December 31, 2023 and December 31, 2022 Page 28 30 31 32 33 52 Consolidated Statements of Cash Flows for each of the two years ended December 31, 2023 and December 31, 2022 Notes to Consolidated Financial Statements (2) Index to Financial Statement Schedules: Schedule II – Consolidated Valuation and Qualifying Accounts All other schedules not listed above have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required. 34 35 58 (3) Index to Exhibits: 3 Articles of Incorporation: 3.1 3.2 3.3 Data I/O’s restated Articles of Incorporation filed November 2, 1987 (Incorporated by reference to Exhibit 3.1 of Data I/O’s 1987 Annual Report on Form 10-K (File No. 0-10394) and attached as a PDF to Exhibit 3.1 in our 2017 Annual Report on Form 10-K). Data I/O’s Bylaws as amended and restated as of July 20, 2011 (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed July 26, 2011). Certification of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 1 of Data I/O’s Registration Statement on Form 8-A filed March 13, 1998 (File No. 0-10394)). 4 Instruments Defining the Rights of Security Holders, Including Indentures: 4.1 Rights Agreement dated as of April 4, 1998, between Data I/O Corporation and ChaseMellon Shareholder Services, L.L.C. as Rights Agent, which includes: as Exhibit A thereto, the Form of Right Certificate; and, as Exhibit B thereto, the Summary of Rights to Purchase Series A Junior Participating Preferred Stock (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on March 13, 1998). 4.2 Description of Data I/O Corporation’s Common Stock (Incorporated by reference to Data I/O’s 2022 Annual Report on Form 10-K (File No. 0-10394)). 59 10 Material Contracts: 10.1 10.2 10.3 10.4 Amended and Restated 1983 Stock Appreciation Rights Plan dated February 3, 1993 (Incorporated by reference to Exhibit 10.23 of Data I/O’s 1992 Annual Report on Form 10-K (File No. 0-10394) and attached as a PDF to Exhibit 10.1 in our 2017 Annual Report on Form 10-K). Amended and Restated Management Incentive Compensation Plan dated January 1, 1997 (Incorporated by reference to Exhibit 10.25 of Data I/O’s 1997 Annual Report on Form 10-K (File No. 0-10394)). Amended and Restated Performance Bonus Plan dated January 1, 1997 (Incorporated by reference to Exhibit 10.26 of Data I/O’s 1997 Annual Report on Form 10-K (File No. 0- 10394)). Amended and Restated Data I/O Corporation 1996 Director Fee Plan (Incorporated by reference to Exhibit 10.32 of Data I/O’s 1997 Annual Report on Form 10-K (File No. 0- 10394)). (Plan cancelled February 22, 2023.) 53 10.5 10.6 10.7 10.8 10.9 Amended and Restated 1982 Employee Stock Purchase Plan dated May 16, 2003 (Incorporated by reference to Data I/O’s 2003 Proxy Statement dated March 31, 2003). Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan dated May 24, 2006 (Incorporated by reference to Data I/O’s 2006 Proxy Statement dated April 6, 2006). Form of Option Agreement (Incorporated by reference to Data I/O’s 2004 Annual Report on Form 10-K (File No. 0-10394)). Lease, Redmond East Business Campus between Data I/O Corporation and Carr Redmond PLLC dated February 28, 2006 (Incorporated by reference to Data I/O’s 2005 Annual Report on Form 10K (File No. 0-10394)). Second Amendment to Lease, (Redmond East) between Data I/O Corporation and Arden Realty Limited Partnership, made as of January 31, 2011. (Incorporated by reference to Data I/O’s 2010 Annual Report on Form 10-K (File No. 0-10394)). 10.10 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved May 17, 2011 (Incorporated by reference to Data I/O’s 2011 Proxy Statement filed April 5, 2011). 10.11 Empower Retirement (formerly known as Great West Financial (formerly known as Orchard Trust Company) Defined Contribution Prototype Plan and Trust (Incorporated by reference to Data I/O’s 2007 Annual Report on Form 10-K (File No. 0-10394)). 10.12 Empower Retirement (formerly known as Great West Financial (formerly known as Orchard Trust Company) Non-standardized 401(k) Plan (Incorporated by reference to Data I/O’s 2007 Annual Report on Form 10-K (File No. 0-10394)). 10.13 Empower Retirement (formerly known as Great West Financial (formerly known as Orchard Trust Company) Defined Contribution Prototype Plan and Trust Amendment for Pension Protection Act and Heart Act. (Incorporated by reference to Data I/O’s 2009 Annual Report on Form 10-K (File No. 0-10394)). 10.14 Form of Indemnification Agreement. (Incorporated by reference to Data I/O’s 2010 Annual Report on Form 10-K (File No. 0-10394)). 10.15 Letter Agreement with Anthony Ambrose (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on October 29, 2012). 10.16 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved May 10, 2012 (Incorporated by reference to Data I/O’s 2012 Proxy Statement filed April 3, 2012). 10.17 Letter Agreement with Rajeev Gulati (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on July 31, 2013). 10.18 Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.29 of Data I/O’s March 31, 2014 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.19 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved April 30, 2014 (Incorporated by reference to Exhibit 10.30 of Data I/O’s March 31, 2014 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.20 Form of Executive Agreement (Incorporated by reference to Exhibit 10.31 of Data I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File No. 0-10394)). 54 10.21 Letter Agreement with Joel S. Hatlen (Incorporated by reference to Exhibit 10.32 of Data I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.22 Third Amendment to Lease, (Redmond East) between Data I/O Corporation and Arden Realty Limited Partnership, made as of June 1, 2015 (Incorporated by reference to Exhibit 10.29 of Data I/O’s June 30, 2015 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.23 Empower Retirement (formerly known as Great West Financial) Financial Adoption Agreement #005 Non-standardized 401(k) Plan (Incorporated by reference to Data I/O’s 2015 Annual Report on Form 10-K (File No. 0-10394)). 10.24 Empower Retirement (formerly known as Great West Financial) Financial Adoption Agreement #005 Non-standardized 401(k) Plan (Incorporated by reference to Data I/O’s 2016 Annual Report on Form 10-K (File No. 0-10394)). 10.25 Negotiation Protocol for the Purchase of Data I/O’s PSV7000, a supply agreement executed July 20, 2016, between Data I/O Corporation and Bosch Car Multimedia Group (Incorporated by reference to Exhibit 10.31 of Data I/O’s September 30, 2016 Quarterly Report on Form 10-Q (File No. 0-10394)). (Portions of this exhibit have been omitted based on confidential treatment granted by the SEC. The omitted portions of these exhibits have been filed separately with the SEC. The registrant undertakes to furnish on a supplemental basis a copy of any omitted schedules to the Securities and Exchange Commission upon request.). 10.26 Fifth Amendment to Lease, between Data I/O Corporation and BRE WA OFFICE OWNER LLC, made as of September 12, 2017 (Incorporated by reference to Data I/O’s September 30, 2017 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.27 1st Amendment to Negotiation Protocol executed on September 24, 2018 between Data I/O Corporation and Robert Bosch GmbH (Incorporated by reference to Exhibit 10.35 of Data I/O’s September 30, 2018 Quarterly Report on Form 10-Q (File No. 0-10394)). (Portions of this exhibit have been omitted based on a request for confidential treatment made to the SEC. The omitted portions of these exhibits have been filed separately with the SEC. The registrant undertakes to furnish on a supplemental basis a copy of any omitted schedules to the Securities Exchange Commission upon request.). 10.28 Letter Agreement with Michael Tidwell (Incorporated by reference to Form 8-K filed on May 1, 2019). 10.29 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved May 20, 2021 (Incorporated by reference to Data I/O’s 2021 Proxy Statement dated April 5, 2021). 10.30 Sixth Amendment to Lease, between Data I/O Corporation and Alco Redmond East, LLC, made as of October 4, 2021 (Incorporated by reference to Data I/O’s 2021 Annual Report on Form 10-K (File No. 0-10394)). 10.31 Empower Retirement (formerly known as Great West Financial) Financial Adoption Agreement #001 Non-standardized 401(k) Plan (Incorporated by reference to Data I/O’s 2021 Annual Report on Form 10-K (File No. 0-10394)). 10.32 Form of Executive Agreement (Incorporated by reference to Form 8-K filed on February 6, 2023). 55 10.33 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved May 18, 2023 (Incorporated by reference to Data I/O’s 2023 Proxy Statement dated April 3, 2023). 10.34 Data I/O Corporation 2023 Omnibus Incentive Compensation Incentive Plan approved May 18, 2023 (Incorporated by reference to Data I/O’s 2023 Proxy Statement dated April 3, 2023). 10.35 Form of Performance Stock Unit Award Agreement. 10.36 Form of Restricted Stock Unit Award Agreement. 10.37 Letter Agreement with Gerald Y. Ng (Incorporated by reference to Form 8-K filed on June 30, 2023). 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 31 Certification – Section 302: 31.1 31.2 Chief Executive Officer Certification Chief Financial Officer Certification 32 Certification – Section 906: 32.1 32.1 Chief Executive Officer Certification Chief Financial Officer Certification 97 Data I/O Corporation INCENTIVE COMPENSATION RECOVERY POLICY. 101 Interactive Data Files Pursuant to Rule 405 of Regulation S-T 66 72 60 61 62 63 64 65 77 Item 16. Form 10-K Summary None. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 2024 DATA I/O CORPORATION (REGISTRANT) By: /s/Anthony Ambrose Anthony Ambrose President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME & DATE TITLE By: /s/Anthony Ambrose Anthony Ambrose March 27, 2024 President and Chief Executive Officer (Principal Executive Officer), Director By: /s/Gerald Y. Ng Gerald Y. Ng March 27, 2024 Chief Financial Officer Vice President Secretary, Treasurer (Principal Financial and Accounting Officer) By: /s/Douglas W. Brown Douglas W. Brown March 27, 2024 Director By: /s/Sally A. Washlow Sally A. Washlow By: /s/Edward J. Smith Edward J. Smith March 27, 2024 Director March 27, 2024 Director By: /s/William Wentworth William Wentworth March 27, 2024 Director 57 DATA I/O CORPORATION SCHEDULE II – CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Balance at Beginning of Period Charged/ (Credited) to Costs and Expenses Deductions- Describe Balance at End of Period $89 $58 $ - (1) $147 $147 ($75) $ - (1) $72 (in thousands) Year Ended December 31, 2022: Allowance for credit losses Year Ended December 31, 2023: Allowance for credit losses (1) Uncollectable accounts written off, net of recoveries 58 EXHIBIT 4.2 DATA I/O CORPORATION DESCRIPTION OF DATA I/O CORPORATION’S COMMON STOCK The common stock of Data I/O Corporation is its only class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The following description of our Common Stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Restated Articles of Incorporation and Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (the “Articles”) and our Amended and Restated Bylaws (the “Bylaws”), each of which attached as exhibit to the Annual Report on Form 10-K. We are incorporated in the State of Washington and are subject to the Washington Business Corporation Act, Title 23B of the Revised Code of Washington. Authorized Capital Shares Our authorized capital shares are thirty-five million (35,000,000), consisting of thirty million (30,000,000) shares of Common Stock (“Common Stock”), and five million (5,000,000) shares of Preferred Stock. Two hundred thousand (200,000) shares of Series A Junior Participating Preferred Stock have been designated. The outstanding shares of our Common Stock are fully paid and nonassessable. There are no shares of Preferred Stock outstanding. Voting Rights Holders of Common Stock are entitled to one vote per share on all matters voted on by the shareholders, including the election of directors. Our Common Stock does not have cumulative voting rights. Dividend Rights The holders of Common Stock are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available for the payment of dividends. Liquidation Rights Holders of Common Stock will share ratably in all assets legally available for distribution to our shareholders in the event of dissolution. Other Rights and Preferences Our Common Stock has no sinking fund or redemption provisions or preemptive, conversion or exchange rights. Holders of Common Stock may act by unanimous written consent. Potential Limitations on Rights of Holders of Common Stock Our Articles authorize our board of directors to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. Two hundred thousand (200,000) shares of Series A Junior Participating Preferred Stock have been designated, but none are outstanding. The rights of the holders of Common Stock may be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. Listing The Common Stock is traded on The Nasdaq Stock Market LLC under the trading symbol “DAIO.” 59 EXHIBIT 21.1 DATA I/O CORPORATION SUBSIDIARIES OF THE REGISTRANT The following table indicates the name, jurisdiction of incorporation and basis of ownership of each of Data I/O’s subsidiaries: Name of Subsidiary Data I/O International, Inc. RTD, Inc. State or Jurisdiction of Organization Washington Washington Data I/O FSC International, Inc. Territory of Guam Data I/O GmbH Germany Data I/O Electronics (Shanghai) Co., Ltd. China Percentage of Voting Securities Owned 100% 100% 100% 100% 100% 60 EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated March 27, 2024, with respect to the consolidated financial statements included in the Annual Report of Data I/O Corporation on Form 10-K for the year ended December 31, 2023. We consent to the incorporation by reference of said report in the Registration Statements of Data I/O Corporation on Forms S-3 (File No. 333-121566) and on Forms S-8 (File Nos. 002-76164, 002-86785, 002-98115, 002-78394, 33-95608, 33-66824, 33-42010, 33-26472, 33-54422, 333-20657, 333-55911, 33-02254, 33-03958, 333-107543, 333-81986, 333-48595, 333-121861, 333-151006, 333-166730, 333-175840, and 333-224971). /s/ GRANT THORNTON LLP Bellevue, Washington March 27, 2024 61 EXHIBIT 31.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I have reviewed this annual report on Form 10-K of Data I/O Corporation; I, Anthony Ambrose, certify that: 1) 2) Based upon my knowledge, this annual 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 annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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)0 for the registrant and we 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 annual 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 annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this annual 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. 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 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 controls over financial reporting. Date: March 27, 2024 /s/ Anthony Ambrose Anthony Ambrose Chief Executive Officer (Principal Executive Officer) 62 EXHIBIT 31.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I have reviewed this annual report on Form 10-K of Data I/O Corporation; I, Gerald Y. Ng, certify that: 1) 2) Based upon my knowledge, this annual 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 annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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)0 for the registrant and we 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 annual 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 purpose in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this annual 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. 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 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 controls over financial reporting. Date: March 27, 2024 /s/ Gerald Y. Ng Gerald Y. Ng Chief Financial Officer (Principal Financial Officer) 63 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 annual report of Data I/O Corporation (the “Company”) on Form 10-K for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Ambrose, Chief Executive Officer of the Company, certify, that pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934; and 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) Date: March 27, 2024 64 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 annual report of Data I/O Corporation (the “Company”) on Form 10-K for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gerald Y. Ng, Chief Financial Officer of the Company, certify, that pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gerald Y. Ng Gerald Y. Ng Chief Financial Officer (Principal Financial Officer) Date: March 27, 2024 65 EXHIBIT 10.35 Form of Performance Stock Unit Award Agreement PERFORMANCE STOCK UNIT AWARD AGREEMENT DATA I/O CORPORATION 91-0864123 6645 185th Ave NE, Suite 100 Redmond, WA 98052 This PERFORMANCE STOCK UNIT AWARD AGREEMENT (the "Agreement") is made as of the grant date specified in the accompanying statement dated ______________, 20__ (the "Grant Date") & Grant # , by and between Data I/O Corporation, a Washington corporation (the "Company"), and the Participant listed in the signature page of this Agreement ("Participant"). The PSU Award (as defined below) is subject to the terms and conditions set forth in this PSU Award Agreement and in the Data I/O Corporation 2023 Omnibus Incentive Compensation Plan, (the "Plan"). Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms in the Plan. The Performance Stock Units (“PSUs”) granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of book-keeping entries only and shall be utilized solely as a device for the measurement and determination of the number of Shares to be issued to or in respect of the Participant pursuant to this Agreement. The Company’s obligation with respect to settlement of PSUs is an unsecured and unfunded obligation. Neither the Plan nor this PSU Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and Participant or any other person or entity. Any rights under the Plan and this PSU Agreement shall have no greater priority than those of an unsecured creditor of the Company. 1. Award and Vesting. The Company hereby grants to Participant a performance stock unit award (the "PSU Award”) for that number of performance stock units (the "Units") as detailed in the accompanying statement (the “Target Number of PSUs”). Each Unit represents the right to receive one share of common stock, no par value per share, of the Company (a “Share”), or cash equal to the Fair Market Value of a Share, upon satisfaction of the vesting conditions set forth in this Agreement and subject to the terms of the Plan and this Agreement. The PSU Award represents the right to receive Shares (or cash equal in value to the Shares) only if and when both the performance vesting conditions and continued service vesting conditions have been satisfied or waived. Performance Vesting Conditions. Exhibit A to this PSU Agreement sets forth the performance (a) conditions, the performance period over which performance is measured, and the multiplier (if any) that may be used to adjust the Target Number of PSUs upward or downward based on the level of achievement of the performance conditions, determined as of the last day of the performance period. (b) Continued Service Vesting Conditions. Unless otherwise provided in this Agreement, the Participant must remain in continuous employment or service with the Company or an Affiliate from the Grant Date through the last day of the performance period. Vesting Ceases if Participant’s Service is Terminated for Cause. Notwithstanding the preceding sections (c) of this PSU Agreement, if the Participant is terminated for Cause, the vesting of Units will cease as of the date the Company learns of the behavior constituting Cause and all Units determined to be unvested as of such date will be forfeited. For purposes of this PSU Agreement, “Cause” means dishonesty, fraud, misconduct, disclosure of confidential information, conviction of, or a plea of guilty or no contest to, a felony under the laws of the United States or any state thereof, habitual absence from work for reasons other than illness, intentional conduct which causes significant injury to the Company or an Affiliate, habitual abuse of alcohol or a controlled substance, in each case as determined by the Committee, and the Committee’s determination shall be conclusive and binding. 66 2. Restrictions on Transfer. The Units may not be sold, assigned, transferred or pledged, other than by will or the laws of descent and distribution, and any such attempted transfer shall be void. 3. Forfeiture. Except as otherwise provided in Sections 3(a) through 3(d) hereof, if the Participant ceases to be employed by or provide services to the Company or any Affiliate (whether or not terminated for Cause) prior to the last day of the performance period, the Participant's rights to all of the unvested Units (and the unvested Shares subject to such Units) shall be immediately and irrevocably forfeited. Upon forfeiture, Participant will no longer have any rights relating to the unvested Units (and the unvested Shares subject to such Units). Participant’s Termination of Employment or Services Due to Death or Disability. If the Participant (a) remains in continuous service with the Company or an Affiliate until the Participant’s employment or service is terminated due to death or Disability prior to the last day of the performance period, any unvested Units will not be forfeited, but instead will remain outstanding and eligible to become vested at the end of the performance period if and to the extent that performance conditions have been satisfied. Participant’s Termination of Employment or Services Due to Involuntary Termination in the Absence of (b) a Change in Control. If the Participant remains in continuous service with the Company or an Affiliate from the Grant Date until the Participant experiences an Involuntary Termination of employment or service by the Company without Cause prior to the last day of the performance period, then a pro rata portion of the Target Number of PSUs that are unvested shall not be forfeited, but instead will remain outstanding and eligible to become vested at the end of the performance period if and to the extent that performance conditions have been satisfied. The pro rata number of the Units that are not forfeited and will remain eligible to become vested at the end of the performance period (subject to any adjustments based on level of achievement of the performance measures) shall be determined by multiplying the Target Number of PSUs by a fraction, the numerator of which is the number of days of the Participant’s service with the Company or an Affiliate from the Grant Date to the date of the Involuntary Termination, and the denominator of which is the number of days from the Grant Date to last day of the performance period. “Involuntary Termination” means the involuntary termination of the Participant’s service by the Company or by the Affiliate that employs the Participant, or by the other party to a transaction constituting a Change in Control, in each case for reasons other than Cause; or (ii) the voluntary resignation of the Participant following (A) a change in the Participant’s position with the Company (or with its successor or the Affiliate employing the Participant), or with the other party to the transaction constituting a Change of Control, that materially reduces the Participant’s level of authority or responsibility, or (B) a reduction in the Participant’s compensation (including base salary, fringe benefits and participation in bonus or incentive programs based on individual or corporate performance) by more than 20%. Change of Control. If the Participant remains in continuous service with the Company or an Affiliate (c) until a Change of Control (as defined in the Plan) that occurs before the last day of the performance period, and the Participant’s Units are neither assumed nor substituted nor replaced with similar rights (or cash equivalents thereof), then, upon consummation of the Change in Control, 100% of the unvested Units shall become fully vested and settled/paid at that time. If the Participant’s Units are assumed or substituted or replaced with similar rights, then notwithstanding such assumption, substitution of replacement (i) 25% of the unvested Units shall become vested (and settled/paid) upon the Change of Control, and (ii) if the Participant experiences an Involuntary Termination without Cause within 12 months following the Change of Control and before the last day of the performance period, then the Target Number of PSUs will become vested and settled/paid at the time of such Involuntary Termination. Retirement. If the Participant retires after having attained the age of 62 with five years of service with (d) the Company or an Affiliate, or after having attained age 55 with ten years of service with the Company or an Affiliate, in either case after having given the Company six months prior written notice of such retirement, then provided the Participant continues service to the Company or an Affiliate through the designated retirement date (or such modified retirement date as determined by the Committee), the Committee shall have the discretion, but not the obligation, to waive the continued service vesting conditions or deem them satisfied with respect to some or all of the unvested Units. In such case, the Units will not be forfeited, but instead will 67 remain outstanding and eligible to become vested at the end of the performance period if and to the extent that performance conditions have been satisfied. 4. Issuance of Shares. Except as otherwise provided herein, as soon as administratively practicable following the end of the performance period, the Company will determine the extent to which performance conditions have been satisfied, and as soon as possible thereafter, but in all cases by March 15th of the year immediately following the year in which the last day of the performance period occurs, the Company shall cause to be issued to the Participant, or to the Participant ’s legal representatives, beneficiaries or heirs, as the case may be, one Share (or cash equal to the Fair Market Value of a Share) in settlement of each vested Unit (as determined based on level of achievement of performance conditions). If, pursuant to this Agreement, PSUs become fully vested prior to the end of the Performance Period (for example upon Involuntary Termination following a Change in Control, or upon the Committee’s discretion under the Plan to waive all vesting conditions or deem them satisfied), then the Company immediately will determine the number of Units that have become vested, and as soon as possible thereafter, but in all cases by March 15th of the year immediately following the year in which the Units became fully vested, the Company shall cause to be issued to the Participant, or to the Participant’s legal representatives, beneficiaries or heirs, as the case may be, one Share (or cash equal to the Fair Market Value of a Share) in settlement of each vested Unit. For greater certainty, in all cases PSUs awarded under this Agreement will be settled and paid out as soon as practical following the time at which they are no longer subject to a substantial risk of forfeiture, and in any event by March 15th of the year immediately following the year in which the Units are no longer subject to a substantial risk of forfeiture. The number of Shares issued shall equal the number of Units vested, reduced as necessary to cover the Withholding Obligations. 5. Tax Withholding. In order to comply with all applicable federal, state, local or foreign income tax laws or regulations (the “Withholding Obligations”), the Company may take such action as it deems appropriate to ensure that all applicable federal, state, local or foreign payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. Unless the Committee determines otherwise, the Company will withhold a portion of the Shares otherwise to be delivered upon settlement of the Units with a Fair Market Value equal to the amount of such taxes (subject to any applicable limitations to avoid adverse accounting treatment) (a “net settlement”). For greater certainty, in the event of a net settlement, the Company will not deliver to the Participant any fractional Shares (or equivalent cash value) remaining after reduction for the Withholding Obligations; rather, any remaining fractional Shares will be cancelled without payment. The Company may establish procedures to ensure satisfaction of all applicable Withholding Obligations arising in connection with this Agreement. If the Committee determines that net settlement will not apply, the Participant hereby authorizes the Company, at its sole discretion and subject to any limitations under applicable law, to satisfy any such Withholding Obligations by (1) withholding from the wages and other cash compensation payable to the Participant or by causing the Participant to tender a cash payment or other Shares to the Company; or (2) selling on the Participant’s behalf (using any brokerage firm determined acceptable to the Company for such purpose) a portion of the Shares issued in settlement of the Units as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the Withholding Obligations. The Participant shall be responsible for all brokerage fees and other costs of sale, and the Participant further agrees to indemnify and hold the Company harmless from any losses, costs, damages or expenses relating to any such sale. The Company may refuse to deliver Shares if the Participant fails to comply with the Participant’s obligations in connection with the Withholding Obligations described in this paragraph. 6. Rights as Shareholder. Units are not actual Shares, and only represent a right to receive Shares according to the terms and conditions set forth herein and the terms of the Plan. Accordingly, the issuance of a Unit shall not entitle the Participant to any of the rights or benefits generally accorded to shareholders unless and until a Share is actually issued. 7. U.S. Securities Restrictions. The Company may require from the Participant such investment representation, undertaking or agreement, if any, as the Company may consider necessary in order to comply with applicable laws and policies of any applicable Exchange. The Participant understands and acknowledges that Shares to be issued settlement of the PSUs may be issued subject to any restrictive legend or other transfer restrictions as may be required by applicable securities laws and stock exchange requirements. 68 8. Miscellaneous. (a) Subject to Plan. This PSU Award is subject to the terms and conditions of the Plan, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. In addition, this Award is subject to the rules and regulations promulgated pursuant to the Plan, now or hereafter in effect. A copy of the Plan will be furnished upon request of the Participant and it may be found via the exhibit index in our current Annual Report on Form 10-K on dataio.com or sec.gov websites. (b) No Right to Continued Service. This Agreement shall not confer on the Participant any right with respect to continuance of service to the Company, nor will it interfere in any way with the right of the Company to terminate such service at any time. (c) Governing Law; Venue. The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan and the Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Washington. Any party bringing a legal action or proceeding against any other party arising out of or relating to this PSU Award Agreement may bring the legal action or proceeding in the United States District Court for the Western District of Washington or in any court of the State of Washington sitting in King County. Each party waives, to the fullest extent permitted by law (i) any objection it may now or later have to the laying of venue of any legal action or proceeding arising out of or relating to this PSU Award Agreement brought in a court described in the preceding sentence and (ii) any claim that any legal action or proceeding brought in any such court has been brought in an inconvenient forum. (d) Section 409A Provisions. The Units and the issuance of Shares (or payment of cash) under this PSU Agreement are intended to be exempt from the application of section 409A of the Internal Revenue Code, as amended ("Section 409A") by reason of the short-term deferral exemption set forth in Treasury Regulation §1.409A-l(b)(4). Notwithstanding anything in the Plan or this PSU Agreement to the contrary, to the extent that any amount or benefit hereunder that constitutes "deferred compensation" to the Participant under Section 409A and applicable guidance thereunder is otherwise payable or distributable to the Participant under the Plan or this Agreement solely by reason of the occurrence of a Change in Control or due to the Participant's Disability or termination of employment, such amount or benefit will not be payable or distributable to the Participant by reason of such circumstance unless the Committee determines in good faith that (i) the circumstances giving rise to such Change in Control, Disability or separation from service meet the definition of a change in ownership or control, disability, or separation from service, as the case may be, in Section 409A(a)(2)(A) of the Code and applicable regulations, or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A by reason of the short-term deferral exemption or otherwise. Any payment or distribution of deferred compensation that otherwise would be made to a Participant who is a specified employee as defined in Section 409A(a)(2)(B) of the Code on account of separation from service may not be made before the date which is six months after the date of the specified employee's separation from service (or if earlier, upon the Participant’s death), unless the payment or distribution is exempt from the application of Section 409A by reason of the short term deferral exemption or otherwise. (e) Clawback, Recoupment, Company Policies. Units and Shares and/or cash delivered in settlement of Units awarded hereunder shall be subject to recovery or other penalties pursuant to (i) any Company clawback policy, as may be adopted or amended from time to time, or (ii) any applicable law, rule or regulation or applicable stock exchange rule, including, without limitation, Section 304 of the Sarbanes-Oxley Act of 2002, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any applicable stock exchange listing rule adopted pursuant thereto. In addition, this PSU Award Agreement and all compensation awarded under this PSU Award Agreement shall be subject to the terms of any noncompetition, confidentiality or nondisclosure policies or agreements as may be in place between the Participant and the Company or any Affiliate from time to time. (f) Entire Agreement. This PSU Award Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, 69 representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof. (g) Dividend Equivalents. Dividend equivalents on unvested PSUs will be credited to the notional PSU account of the Participant and will be subject to the same terms and conditions, including vesting and time of settlement, as the underlying PSUs to which they relate. (h) Acknowledgment. The grant of PSUs hereunder shall not be effective until the Participant dates and signs the form of acknowledgment below and returns a signed copy or otherwise signs pursuant to any method of electronic acceptance approved by the Company or made available to the Participant through the platform of any third-party administrator or record-keeper retained by the Company to administer Awards granted under the Plan. By Participant’s signature and the signature of the Company’s representative, the Participant and the Company agree that this PSU Award is granted under and governed by the terms and conditions of the Data I/O Corporation 2023 Omnibus Incentive Compensation Plan and this PSU Award Agreement. IN WITNESS WHEREOF, the Company and Participant have executed this Agreement on the date set forth in the accompanying statement. DATA I/O CORPORATION PARTICIPANT By___________________________ Signature_________________________________ Its___________________________ Printed/Typed Name ________________________ 70 EXHIBIT A TO PERFORMANCE STOCK UNIT AWARD AGREEMENT Performance Period Begins: January 1, 202_ Performance Period Ends: December 31, 202_ Target Number of PSUs: _________________ Subject to the provisions of the Plan, PSUs allocated to the Participant pursuant to this PSU Award Agreement, including dividend equivalent Units allocable to PSUs granted under this PSU Award Agreement, if any, shall become vested on the last day of the Performance Period, provided the performance measures set forth below have been satisfied and the Participant has remained in continuous service with the Company or an Affiliate through the last day of the Performance Period (or as otherwise provided under the Plan). The final award number of PSUs will be determined by multiplying the Target Number of PSUs by the applicable multiplier factor set forth below. Achievement Levels Vested PSUs Payout nil .5 x Target Number of PSUs 1.0 x Target number of PSUs 1.5 x Target Number of PSUs 71 EXHIBIT 10.36 Form of Restricted Stock Unit Award Agreement RESTRICTED STOCK UNIT AWARD AGREEMENT DATA I/O CORPORATION 91-0864123 6645 185th Ave NE, Suite 100 Redmond, WA 98052 This RESTRICTED STOCK UNIT AWARD AGREEMENT (the "Agreement") is made as of the grant date specified in the accompanying statement dated ______________, 20__ (the "Grant Date") & Grant # , by and between Data I/O Corporation, a Washington corporation (the "Company"), and the Participant listed in the signature page of this Agreement ("Participant"). The RSU Award (as defined below) is subject to the terms and conditions set forth in this RSU Award Agreement and in the Data I/O Corporation 2023 Omnibus Incentive Compensation Plan, (the "Plan"). Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms in the Plan. The RSUs granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of book-keeping entries only and shall be utilized solely as a device for the measurement and determination of the number of Shares to be issued to or in respect of the Participant pursuant to this Agreement. The Company’s obligation with respect to settlement of RSUs is an unsecured and unfunded obligation. Neither the Plan nor this RSU Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and Participant or any other person or entity. Any rights under the Plan and this RSU Agreement shall have no greater priority than those of an unsecured creditor of the Company. 2. Award and Vesting. The Company hereby grants to Participant a restricted stock unit award (the "RSU Award”) for that number of restricted stock units (the "Units") as detailed in the accompanying statement. Each Unit represents the right to receive one share of common stock, no par value per share, of the Company (a “Share”), or cash equal to the Fair Market Value of a Share, subject to the vesting requirements of this Agreement and the terms of the Plan. The RSU Award represents the right to receive Shares only when, and with respect to the number of Shares to which, the Units have become vested. Scheduled Vesting Date. Unless otherwise indicated in the accompanying statement or otherwise (a) provided in this Agreement, the Units shall vest annually over three years, with one-third vesting on each of the first, second and third anniversaries of the Grant Date (each a “Scheduled Vesting Date”), provided the Participant remains in continuous service with the Company or an Affiliate through such Scheduled Vesting Date. Vesting Ceases if Participant’s Service is Terminated for Cause. Notwithstanding Section 1(a) above, if (b) the Participant is terminated for Cause, the vesting of Units will cease as of the date the Company learns of the behavior constituting Cause and all Units determined to be unvested as of such date will be forfeited. For purposes of this RSU Agreement, “Cause” means dishonesty, fraud, misconduct, disclosure of confidential information, conviction of, or a plea of guilty or no contest to, a felony under the laws of the United States or any state thereof, habitual absence from work for reasons other than illness, intentional conduct which causes significant injury to the Company or an Affiliate, habitual abuse of alcohol or a controlled substance, in each case as determined by the Committee, and the Committee’s determination shall be conclusive and binding. Accelerated Vesting Date. If Units become vested upon termination of employment or services due to (c) death, Disability or Retirement, or upon involuntary termination by the Company without Cause, or upon Retirement, or upon Change of Control, in each case pursuant to Sections 3(a) through 3(d) hereof, or if the Committee exercises its discretion as permitted under the Plan to waive all vesting conditions or deem all vesting conditions to be satisfied with respect to some or all of the RSUs, the date of such termination of 72 employment or services, Retirement, Change of Control, or Committee action will be the “Accelerated Vesting Date” for such Units. 2. Restrictions on Transfer. The Units may not be sold, assigned, transferred or pledged, other than by will or the laws of descent and distribution, and any such attempted transfer shall be void. 3. Forfeiture. Except as otherwise provided in Sections 3(a) through 3(d) hereof, if the Participant ceases to be employed by or provide services to the Company or any Affiliate (whether or not terminated for Cause) prior to the vesting of the Units on the Scheduled Vesting Date, or the Accelerated Vesting Date, as applicable, the Participant's rights to all of the unvested Units (and the unvested Shares subject to such Units) shall be immediately and irrevocably forfeited. Upon forfeiture, Participant will no longer have any rights relating to the unvested Units (and the unvested Shares subject to such Units. (a) Participant’s Termination of Employment or Services Due to Death or Disability. If the Participant remains in continuous service with the Company or an Affiliate until the Participant’s employment or service is terminated due to death or Disability prior to the vesting of Units, any Units granted hereunder that previously have not become vested Units shall become fully (100%) vested as of the date of such termination. The date of such termination is the Accelerated Vesting Date for purposes of timing of settlement of the Units. (b) Participant’s Termination of Employment or Services Due to Involuntary Termination. If the Participant remains in continuous service with the Company or an Affiliate until the Participant’s experiences an Involuntary Termination of employment or service by the Company without Cause prior to a Scheduled Vesting Date, then a pro rata number of any unvested Units shall become vested. The pro rata number of the Units that become vested shall be determined by multiplying the number of unvested Units corresponding to a particular Scheduled Vesting Date by a fraction, the numerator of which is the number of days of the Participant’s service with the Company or an Affiliate from the Grant Date to the date of termination, and the denominator of which is the number of days from the Grant Date to the Scheduled Vesting Date. The date of such termination is the Accelerated Vesting Date for purposes of timing of settlement of such Units. “Involuntary Termination” means the involuntary termination of the Participant’s service by the Company or by the Affiliate that employs the Participant, or by the other party to a transaction constituting a Change in Control, in each case for reasons other than Cause; or (ii) the voluntary resignation of the Participant following (A) a change in the Participant’s position with the Company (or with its successor or the Affiliate employing the Participant) or with the other party to the transaction constituting a Change of Control, that materially reduces the Participant’s level of authority or responsibility, or (B) a reduction in the Participant’s compensation (including base salary, fringe benefits and participation in bonus or incentive programs based on individual or corporate performance) by more than 20%. (c) Change of Control. If the Participant remains in continuous service with the Company or an Affiliate until a Change of Control (as defined in the Plan) that occurs before the Scheduled Vesting Date, and the Participant’s Units are neither assumed nor substituted nor replaced with similar rights (or cash equivalents thereof), then upon consummation of the Change in Control 100% of the unvested Units shall become fully vested, and the date of the Change of Control is the Accelerated Vesting Date for purposes of timing of settlement of such Units. If the Participant’s Units are assumed or substituted or replaced with similar rights, then notwithstanding such assumption, substitution of replacement (i) 25% of the unvested Units shall become vested (and settled/paid) upon the Change of Control, and (ii) if the Participant experiences an Involuntary Termination without Cause within 12 months following the Change of Control, any Units (or replacement award) that remain unvested will vest in full as of the date of such termination and the date of such termination is the Accelerated Vesting Date for purposes of timing of settlement of the Units. (d) Retirement. If the Participant retires after having attained the age of 62 with five years of service with the Company or an Affiliate, or after having attained age 55 with ten years of service with the Company or an Affiliate, in either case after having given the Company six months prior written notice of such 73 retirement, then provided the Participant continues service to the Company or an Affiliate through the designated retirement date (or such modified retirement date as determined by the Committee), the Committee shall have the discretion, but not the obligation, to waive the vesting conditions or deem them satisfied with respect to some or all of the unvested Units. The effective date of such Committee action waiving the continued service vesting conditions is the Accelerated Vesting Date for purposes of timing of settlement of such Units. 4. Issuance of Shares. As soon as administratively practicable following the vesting of RSUs on the Scheduled Vesting Date, or the Accelerated Vesting Date, as applicable (each a Vesting Date), and the Participant's satisfaction of any required tax withholding obligations, (but in no event later than 60 days following the Vesting Date), the Company shall cause to be issued to the Participant, or to the Participant’s legal representatives, beneficiaries or heirs, as the case may be, one Share in settlement of each vested Unit (or cash equal to the value of a Share). The number of Shares issued shall equal the number of Units vested, reduced as necessary to cover the Withholding Obligations. 5. Tax Withholding. In order to comply with all applicable federal, state, local or foreign income tax laws or regulations (the “Withholding Obligations”), the Company may take such action as it deems appropriate to ensure that all applicable federal, state, local or foreign payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. Unless the Committee determines otherwise, the Company will withhold a portion of the Shares otherwise to be delivered upon settlement of the Units with a Fair Market Value equal to the amount of such taxes (subject to any applicable limitations to avoid adverse accounting treatment) (a “net settlement”). For greater certainty, in the event of a net settlement, the Company will not deliver to the Participant any fractional Shares (or equivalent cash value) remaining after reduction for the Withholding Obligations; rather, any remaining fractional Shares will be cancelled without payment. The Company may establish procedures to ensure satisfaction of all applicable Withholding Obligations arising in connection with this Agreement. If the Committee determines that net settlement will not apply, the Participant hereby authorizes the Company, at its sole discretion and subject to any limitations under applicable law, to satisfy any such Withholding Obligations by (1) withholding from the wages and other cash compensation payable to the Participant or by causing the Participant to tender a cash payment or other Shares to the Company; or (2) selling on the Participant’s behalf (using any brokerage firm determined acceptable to the Company for such purpose) a portion of the Shares issued in settlement of the Units as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the Withholding Obligations. The Participant shall be responsible for all brokerage fees and other costs of sale, and the Participant further agrees to indemnify and hold the Company harmless from any losses, costs, damages or expenses relating to any such sale. The Company may refuse to deliver Shares if the Participant fails to comply with the Participant’s obligations in connection with the Withholding Obligations described in this paragraph. 6. Rights as Shareholder. Units are not actual Shares, and only represent a right to receive Shares according to the terms and conditions set forth herein and the terms of the Plan. Accordingly, the issuance of a Unit shall not entitle the Participant to any of the rights or benefits generally accorded to shareholders unless and until a Share is actually issued. 7. U.S. Securities Restrictions. The Company may require from the Participant such investment representation, undertaking or agreement, if any, as the Company may consider necessary in order to comply with applicable laws and policies of any applicable Exchange. The Participant understands and acknowledges that Shares to be issued settlement of the RSUs may be issued subject to any restrictive legend or other transfer restrictions as may be required by applicable securities laws and stock exchange requirements. 8. Miscellaneous. (a) Subject to Plan. This RSU Award is subject to the terms and conditions of the Plan, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. In addition, this Award is subject to the rules and regulations promulgated pursuant to the Plan, now or hereafter in effect. 74 A copy of the Plan will be furnished upon request of the Participant and it may be found via the exhibit index in our current Annual Report on Form 10-K on dataio.com or sec.gov websites. (b) No Right to Continued Service. This Agreement shall not confer on the Participant any right with respect to continuance of service to the Company, nor will it interfere in any way with the right of the Company to terminate such service at any time. (c) Governing Law; Venue. The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan and the Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Washington. Any party bringing a legal action or proceeding against any other party arising out of or relating to this RSU Award Agreement may bring the legal action or proceeding in the United States District Court for the Western District of Washington or in any court of the State of Washington sitting in King County. Each party waives, to the fullest extent permitted by law (i) any objection it may now or later have to the laying of venue of any legal action or proceeding arising out of or relating to this RSU Award Agreement brought in a court described in the preceding sentence and (ii) any claim that any legal action or proceeding brought in any such court has been brought in an inconvenient forum. (d) Section 409A Provisions. The Units and the issuance of Shares (or payment of cash) under this RSU Agreement are intended to be exempt from the application of section 409A of the Internal Revenue Code, as amended ("Section 409A") by reason of the short-term deferral exemption set forth in Treasury Regulation §1.409A-l(b)(4). Notwithstanding anything in the Plan or this RSU Agreement to the contrary, to the extent that any amount or benefit hereunder that constitutes "deferred compensation" to the Participant under Section 409A and applicable guidance thereunder is otherwise payable or distributable to the Participant under the Plan or this Agreement solely by reason of the occurrence of a Change in Control or due to the Participant's disability or termination of employment, such amount or benefit will not be payable or distributable to the Participant by reason of such circumstance unless the Committee determines in good faith that (i) the circumstances giving rise to such Change in Control, disability or separation from service meet the definition of a change in ownership or control, disability, or separation from service, as the case may be, in Section 409A(a)(2)(A) of the Code and applicable regulations, or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A by reason of the short-term deferral exemption or otherwise. Any payment or distribution of deferred compensation that otherwise would be made to a Participant who is a specified employee as defined in Section 409A(a)(2)(B) of the Code on account of separation from service may not be made before the date which is six months after the date of the specified employee's separation from service (or if earlier, upon the Participant’s death), unless the payment or distribution is exempt from the application of Section 409A by reason of the short term deferral exemption or otherwise. (e) Clawback, Recoupment, Company Policies. Units and Shares and/or cash delivered in settlement of Units awarded hereunder shall be subject to recovery or other penalties pursuant to (i) any Company clawback policy, as may be adopted or amended from time to time, or (ii) any applicable law, rule or regulation or applicable stock exchange rule, including, without limitation, Section 304 of the Sarbanes-Oxley Act of 2002, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any applicable stock exchange listing rule adopted pursuant thereto. In addition, this RSU Award Agreement and all compensation awarded under this RSU Award Agreement shall be subject to the terms of any noncompetition, confidentiality or nondisclosure policies or agreements as may be in place between the Participant and the Company or any Affiliate from time to time. (f) Entire Agreement. This RSU Award Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof. 75 (g) Dividend Equivalents. Dividend equivalents on unvested RSUs will be credited to the notional RSU account of the Participant and will be subject to the same terms and conditions, including vesting and time of settlement, as the underlying RSUs to which they relate. (h) Acknowledgment. The grant of RSUs hereunder shall not be effective until the Participant dates and signs the form of acknowledgment below and returns a signed copy or otherwise signs pursuant to any method of electronic acceptance approved by the Company or made available to the Participant through the platform of any third-party administrator or record-keeper retained by the Company to administer Awards granted under the Plan. By Participant’s signature and the signature of the Company’s representative, the Participant and the Company agree that this RSU Award is granted under and governed by the terms and conditions of the Data I/O Corporation 2023 Omnibus Incentive Compensation Plan and this RSU Award Agreement. IN WITNESS WHEREOF, the Company and Participant have executed this Agreement on the date set forth in the accompanying statement. DATA I/O CORPORATION PARTICIPANT By___________________________ Signature_________________________________ Its___________________________ Printed/Typed Name ________________________ 76 EXHIBIT 97 1. Introduction. DATA I/O CORPORATION INCENTIVE COMPENSATION RECOVERY POLICY The Board of Directors of Data I/O Corporation (the “Company”) believes that it is in the best interests of the Company and its shareholders to create and maintain a culture that emphasizes integrity and accountability and that reinforces the Company's compensation philosophy. The Board has therefore adopted this policy, which provides for the recovery of erroneously awarded incentive compensation in the event that the Company is required to prepare an accounting restatement due to material noncompliance of the Company with any financial reporting requirements under the federal securities laws (the “Policy”). This Policy is designed to comply with Section 10D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), related rules and the listing standards of the Nasdaq Stock Market or any other securities exchange on which the Company’s shares are listed in the future. 2. Administration. This Policy shall be administered by the Board or, if so designated by the Board, the Compensation Committee (the “Committee”), in which case, all references herein to the Board shall be deemed references to the Committee. Any determinations made by the Board shall be final and binding on all affected individuals. 3. Covered Executives. Unless and until the Board determines otherwise, for purposes of this Policy, the term “Covered Executive” means a current or former employee who is or was identified by the Company as the Company’s president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of the Company in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person (including any executive officer of the Company’s subsidiaries or affiliates) who performs similar policy-making functions for the Company. “Policy-making function” excludes policy-making functions that are not significant. “Covered Executives” will include, at minimum, the executive officers identified by the Company pursuant to Item 401(b) of Regulation S-K of the Exchange Act. For the avoidance of doubt, “Covered Executives” will include at least the following Company officers: Chief Executive Officer and Chief Financial Officer. This Policy covers Incentive Compensation received by a person after beginning service as a Covered Executive and who served as a Covered Executive at any time during the performance period for that Incentive Compensation. 4. Recovery: Accounting Restatement. In the event of an “Accounting Restatement,” the Company will recover reasonably promptly any excess Incentive Compensation received by any Covered Executive during the three completed fiscal years immediately preceding the date on which the Company is required to prepare an Accounting Restatement, including transition periods resulting from a change in the Company’s fiscal year as provided in Rule 10D-1 of the Exchange Act. Incentive Compensation is deemed “received” in the Company’s fiscal period during which the Financial Reporting Measure specified in the Incentive Compensation award is attained, even if the payment or grant of the Incentive Compensation occurs after the end of that period. (a) Definition of Accounting Restatement. For the purposes of this Policy, an “Accounting Restatement” means the Company is required to prepare an accounting restatement of its financial statements filed with the Securities and Exchange 77 Commission (the “SEC”) due to the Company’s material noncompliance with any financial reporting requirements under the federal securities laws (including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period). The determination of the time when the Company is “required” to prepare an Accounting Restatement shall be made in accordance with applicable SEC and national securities exchange rules and regulations. An Accounting Restatement does not include situations in which financial statement changes did not result from material non-compliance with financial reporting requirements, such as, but not limited to retrospective: (i) application of a change in accounting principles; (ii) revision to reportable segment information due to a change in the structure of the Company’s internal organization; (iii) reclassification due to a discontinued operation; (iv) application of a change in reporting entity, such as from a reorganization of entities under common control; (v) adjustment to provision amounts in connection with a prior business combination; and (vi) revision for stock splits, stock dividends, reverse stock splits or other changes in capital structure. (b) Definition of Incentive Compensation. For purposes of this Policy, “Incentive Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure, including, for example, bonuses or awards under the Company’s short and long-term incentive plans, grants and awards under the Company’s equity incentive plans, and contributions of such bonuses or awards to the Company’s deferred compensation plans or other employee benefit plans. Incentive Compensation does not include awards which are granted, earned and vested without regard to attainment of Financial Reporting Measures, such as time-vesting awards, discretionary awards and awards based wholly on subjective standards, strategic measures or operational measures. (c) Financial Reporting Measures. “Financial Reporting Measures” are those that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements (including non-GAAP financial measures) and any measures derived wholly or in part from such financial measures. For the avoidance of doubt, Financial Reporting Measures include stock price and total shareholder return. A measure need not be presented within the financial statements or included in a filing with the SEC to constitute a Financial Reporting Measure for purposes of this Policy. (d) Excess Incentive Compensation: Amount Subject to Recovery. The amount(s) to be recovered from the Covered Executive will be the amount(s) by which the Covered Executive’s Incentive Compensation for the relevant period(s) exceeded the amount(s) that the Covered Executive otherwise would have received had such Incentive Compensation been determined based on the restated amounts contained in the Accounting Restatement. All amounts shall be computed without regard to taxes paid. For Incentive Compensation based on Financial Reporting Measures such as stock price or total shareholder return, where the amount of excess compensation is not subject to mathematical recalculation directly from the information in an Accounting Restatement, the Board will calculate the amount to be reimbursed based on a reasonable estimate of the effect of the Accounting Restatement on such Financial Reporting Measure upon which the Incentive Compensation was received. The Company will maintain documentation of that reasonable estimate and will provide such documentation to the applicable national securities exchange. 78 (e) Method of Recovery. The Board will determine, in its sole discretion, the method(s) for recovering reasonably promptly excess Incentive Compensation hereunder. Such methods may include, without limitation: (i) (ii) (iii) requiring reimbursement of compensation previously paid; forfeiting any compensation contribution made under the Company’s deferred compensation plans, as well as any matching amounts and earnings thereon; offsetting the recovered amount from any compensation that the Covered Executive may earn or be awarded in the future (including, for the avoidance of doubt, recovering amounts earned or awarded in the future to such individual equal to compensation paid or deferred into tax– qualified plans or plans subject to the Employee Retirement Income Security Act of 1974 (collectively, “Exempt Plans”); provided that, no such recovery will be made from amounts held in any Exempt Plan of the Company); (iv) taking any other remedial and recovery action permitted by law, as determined by the Board; or (v) some combination of the foregoing. 5. No Indemnification or Advance. Subject to applicable law, the Company shall not indemnify, including by paying or reimbursing for premiums for any insurance policy covering any potential losses, any Covered Executives against the loss of any erroneously awarded Incentive Compensation, nor shall the Company advance any costs or expenses to any Covered Executives in connection with any action to recover excess Incentive Compensation. 6. Interpretation. The Board is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate or advisable for the administration of this Policy. It is intended that this Policy be interpreted in a manner that is consistent with the requirements of Section 10D of the Exchange Act and any applicable rules or standards adopted by the SEC or any national securities exchange on which the Company's securities are listed. 7. Effective Date. The Board adopted this Policy on October 25, 2023. This Policy applies to Incentive Compensation received by Covered Executives on or after October 2, 2023 (the “Effective Date”) that results from attainment of a Financial Reporting Measure based on or derived from financial information for any fiscal period ending on or after the Effective Date. In addition, this Policy is intended to be and will be incorporated as an essential term and condition of any Incentive Compensation agreement, plan or program that the Company establishes or maintains on or after the Effective Date. 8. Amendment and Termination. The Board may amend this Policy from time to time in its discretion, and shall amend this Policy as it deems necessary to reflect changes in regulations adopted by the SEC under Section 10D of the Exchange Act and to comply with any rules or standards adopted by the Nasdaq Stock Market or any other securities exchange on which the Company’s shares are listed in the future. 9. Other Recovery Rights. The Board intends that this Policy will be applied to the fullest extent of the law. Upon receipt of this Policy, each Covered Executive is required to complete the Receipt and Acknowledgement attached as Schedule A to this Policy. 79 The Board may require that any employment agreement or similar agreement relating to Incentive Compensation received on or after the Effective Date shall, as a condition to the grant of any benefit thereunder, require a Covered Executive to agree to abide by the terms of this Policy. Any right of recovery under this Policy is in addition to, and not in lieu of, any (i) other remedies or rights of compensation recovery that may be available to the Company pursuant to the terms of any similar policy in any employment agreement, or similar agreement relating to Incentive Compensation, unless any such agreement expressly prohibits such right of recovery, and (ii) any other legal remedies available to the Company. The provisions of this Policy are in addition to (and not in lieu of) any rights to repayment the Company may have under Section 304 of the Sarbanes-Oxley Act of 2002 and other applicable laws. 10. Impracticability. The Company shall recover any excess Incentive Compensation in accordance with this Policy, except to the extent that certain conditions are met and the Board has determined that such recovery would be impracticable, all in accordance with Rule 10D-1 of the Exchange Act and the Nasdaq Stock Market or any other securities exchange on which the Company’s shares are listed in the future. 11. Successors. This Policy shall be binding upon and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or other legal representatives. 80 Schedule A INCENTIVE-BASED COMPENSATION CLAWBACK POLICY RECEIPT AND ACKNOWLEDGEMENT I, __________________________________________, hereby acknowledge that I have received and read a copy of the Incentive Compensation Recovery Policy. As a condition of my receipt of any Incentive Compensation as defined in the Policy, I hereby agree to the terms of the Policy. I further agree that if recovery of excess Incentive Compensation is required pursuant to the Policy, the Company shall, to the fullest extent permitted by governing laws, require such recovery from me up to the amount by which the Incentive Compensation received by me, and amounts paid or payable pursuant or with respect thereto, constituted excess Incentive Compensation. If any such reimbursement, reduction, cancelation, forfeiture, repurchase, recoupment, offset against future grants or awards and/or other method of recovery does not fully satisfy the amount due, I agree to immediately pay the remaining unpaid balance to the Company. Signature Date 81 

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