What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-05-15 compared with 2025-11-12 · 70 added, 104 removed, 103 unchanged (63% of the section changed)

1 unchanged sentence

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves as long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results.

All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking.

In particular, statements herein regarding economic outlook;

industry prospects and trends;

In particular, statements herein regarding industry prospects and trends;

expected business recovery;

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expected expenses, breakeven revenue point;

cybersecurity risk management and costs;

expected market decline, bottom or growth;

the development of the Edge AI market;

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

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changing foreign operations;

strategic transformation progress and timeline;

ERP implementation timeline;

potential acquisitions;

and the 2026 organic growth framework;

taxes, trade issues and tariffs;

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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;

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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.

We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report.

The reader should not place undue reliance on these forward-looking statements.

The following discussions and the 2025 Annual Report on Form 10-K section entitled “Risk Factors – Cautionary Factors That May Affect Future Results” describe some, but not all, of the factors that could cause these differences.

Data I/O continued to make progress in key operational areas during the third quarter, despite a challenging global economic environment.

The third quarter represents a continuation in proving the growth and market expansion strategies being implemented over the past several months.

At the same time, efficiency improvements and streamlining operations resulted in a lower cost basis for manufacturing and overhead.

We are focused on improvements to our core programming platform and received several industry awards for our innovative new products.

Data I/O continued to evolve its business through the first quarter of 2026, despite a challenging global economic environment.

Slower uptake of new initiatives through the early part of the quarter negatively impacted revenue growth, but momentum began to build towards quarter-end.

Meanwhile, management took steps to realign costs, leveraging operating efficiencies and internal AI deployments and select, targeted spending cuts to reduce costs.

Our customers’ end markets have seen some weakening of demand which has affected sell-through of microcontrollers, security ICs and memory devices, which we believe has been partially offset by customers’ increased utilization of their existing systems.

The net effect has been some greater need for engineering and maintenance services but also some lumpiness in demand for consumable adapters.

Overall demand for capital equipment continued to be negatively impacted by global trade and tariff negotiations throughout most of the third quarter.

Overall demand for capital equipment continued to be negatively impacted by global trade and tariff negotiations throughout most of the first quarter.

However, the Company’s ongoing supply chain planning and other actions have helped mitigate the impact of new tariffs, trade and inflationary pressures, including shifting material sourcing and product manufacturing.

We continue to grow our pipeline of opportunities beyond the automotive sector including a revitalization of our activities with semiconductor companies and forging strategic product development relationships with leading firms serving the memory and microcontroller sectors.

We continue to focus on expanding our pipeline of opportunities beyond the automotive sector including a revitalization of our activities with semiconductor companies.

Combined with continued efforts to expand our market reach, we expect to deliver revenue growth through end market diversification and an enhanced consultative sales process.

In the quarter, we announced an important strategic relationship with IAR in the security space that we believe will expand the reach, applicability and addressable market for both companies.

Significant operational and product progress has been made in a short period of time against a backdrop of significant economic and cross-border trade uncertainty.

We remain cautious given the near-term headwinds, as this has created additional strain on the global economy, affected customers’ end markets, and stalled capital investments.

We remain cautious given the near-term headwinds, but are increasingly encouraged by later-quarter activity levels.

We remain focused on setting the business up for sustainable growth by driving innovation, enhancing our products and improving our value proposition.

At the same time, we are focused on increasing our efficiency in delivering our products and services, and to that end we have sought to streamline and better align our operations.

Notably, in the first quarter of 2026, we made some strategic realignments around our Germany office which we expect to yield material cost savings and efficiencies.

Employee-related costs related to the Germany realignment and expensed in the first quarter amounted to approximately over $1 million, primarily for legal work and employee severance.

We expect to continue to review our operations in Germany as well as the U.S.

and China operations with an eye to improving operational efficiency worldwide.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

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Three Months Ended

Nine Months Ended

Net sales by product line

September 30,

(in thousands)

Automated programming systems

Non-automated programming systems

Total programming systems

Three Months Ended

Nine Months Ended

Net sales by location

September 30,

March 31, 2026

March 31, 2025

(in thousands)

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Three Months Ended

Nine Months Ended

Net sales by type

September 30,

March 31, 2026

March 31, 2025

(in thousands)

Equipment sales

Platform sales

Adapter sales

Software and maintenance

Net sales in the third quarter of 2025 were $5.4 million, compared with $5.4 million in the prior year period and $5.9 million in the second quarter of 2025.

Overall demand for capital equipment continued to be negatively impacted by ongoing global trade and tariff negotiations throughout most of the third quarter of 2025.

Sales rhythms were also disrupted somewhat by the ransomware incident experienced by the Company in August;

however, management believes this impacted timing rather than volume of sales.

Net sales of consumable adapters and services revenue represented 49% of total revenue and provide a stable base of re-occurring revenue.

Total equipment sales in the third quarter of 2025 were 51% of revenues, adapter sales were 32% and software and maintenance revenues were 17% of revenues compared with 46% and 37% and 17% respectively in the third quarter of 2024.

For 2025 year to date, equipment sales were 52% of revenues, adapter sales were 35% and software and maintenance revenues were 13% of revenues compared with 2024 year to date sales of 50% and 34% and 16% respectively.

On a geographic basis, international sales represented approximately 99% of total net sales for the third quarter of 2025 compared with 93% in the prior year period.

Bookings increased in the latter half of the third quarter as customers had been delaying purchase decisions amid ongoing global trade and tariff concerns and as sales processes disrupted by the ransomware incident resumed.

Third quarter 2025 bookings were $5.1 million, down from $5.8 million in the second quarter 2025 and up from $4.7 million in the third quarter 2024.

Automotive electronics, a core market vertical in the third quarter of 2025, was 65% of third quarter 2025 bookings.

Backlog at September 30, 2025, was $2.7 million, down from $2.8 million at the end of the prior quarter.

Deferred revenue was $1.4 million on September 30, 2025, up from $1.3 million on June 30, 2025.

Software and Services Sales*

* includes service and parts sales associated with equipment service contracts

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

As such, the Company has revised the net sales by type for the quarter ended March 31, 2025.

This correction affected only the disaggregation of net sales among Platform, Adapter, and Software and Services sales and did not impact the Company’s previously reported consolidated balance sheets, statements of operations, comprehensive income (loss), or statements of cash flows.

While the total revenue was not affected, the Company has revised the presentation of net sales by type for the quarter ended March 31, 2025 to enhance comparability.

Net sales in the first quarter of 2026 were $3.3 million, compared with $6.2 million in the prior year period.

Overall demand for capital equipment continued to be negatively impacted by ongoing global trade and tariff negotiations throughout most of the first quarter of 2026.

Net sales of consumable adapters and services revenue represented 81% of total revenue and provide a stable base of recurring revenue.

Total platform sales in the first quarter of 2026 were 19% of revenues, adapter sales were 47% and software and services sales revenues were 34% of revenues compared with 49% and 32% and 19% respectively in the first quarter of 2025.

On a geographic basis, international sales represented approximately 46% of total net sales for the first quarter of 2026 compared with 88% in the prior year period.

Bookings increased in the latter half of the first quarter as customers had been delaying purchase decisions amid ongoing global trade and tariff concerns and as sales processes disrupted by the ransomware incident resumed.

First quarter 2026 bookings were $4.2 million, up from $3.1 million in the fourth quarter 2025 and down from $4.6 million in the first quarter 2025.

Backlog at March 31, 2026, was $2.6 million, up from $1.6 million at the end of the prior quarter.

Deferred revenue was $1.5 million on March 31, 2026, and $1.5 million on December 31, 2025.

Three Months Ended

Nine Months Ended

September 30,

March 31, 2026

March 31, 2025

(in thousands)

Percentage of net sales

Gross margin as a percentage of sales in the third quarter of 2025 was 50.7% as compared to 53.9% in the same period last year and 49.8% in the second quarter of 2025.

Margins recovered sequentially as the second quarter’s lower margin product mix and configuration of automated systems driven by a large customer order passed through the system.

Direct material costs remained steady and consistent with prior periods.

Gross margin as a percentage of sales in the first quarter of 2026 was 49.5% as compared to 51.6% in the same period last year.

Overall gross margins recovered sequentially as direct material costs remained steady and consistent with prior periods.

Margins declined year-over-year as overheads and other fixed costs were spread over a smaller revenue base.

Ongoing supply chain planning and other actions have been mitigating the impact of new tariffs, trade and inflationary pressures, including shifting material sourcing and product manufacturing.

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

1 unchanged sentence

Percentage of net sales

Research and development (“R&D”) expenses increased in the third quarter of 2025 as compared to the same period in 2024.

The increase is due to transition to new R&D programs, increased investment in the Company’s core platform, and the associated changes in project and outside services spending.

Research and development (“R&D”) expenses decreased in the first quarter of 2026 as compared to the same period in 2025.

The decrease is due primarily to a reduction in expenses related to headcount and outside services for projects completed in 2025.

SELLING, GENERAL AND ADMINISTRATIVE

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

2 unchanged sentences

Percentage of net sales

Selling, General and Administrative (“SG&A”) expenses were higher in the third quarter of 2025 as compared to the same period in 2024.

The third quarter spending increase includes higher compensation expenses and leadership and other human resource transition requirements that continued through September 30, 2025.

In addition, there were significant expenses associated with the remediation of and recovery from the August ransomware incident.

Selling, General and Administrative (“SG&A”) expenses were higher in the first quarter of 2026 as compared to the same period in 2025.

The year-over-year increase in SG&A expense was largely driven by a number of one-time expenses, most notably reorganization expenses related to the strategic reconfiguration of the Company’s Munich operations.

Continued efficiency improvements and cost reduction efforts remain a focus.

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Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Share-based compensation

Third quarter 2025 shared-based compensation of $115,000 was $189,000 lower compared to the prior year period due to staff reductions and retirements since the fourth quarter of 2024.

First quarter 2026 share-based compensation of $77,000 was $97,000 lower compared to the prior year period due to staff reductions and retirements since the fourth quarter of 2024.

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Interest income

Interest income was lower in the third quarter of 2025 compared to the same period in 2024 due to lower interest rates and invested balances.

Interest income was lower in the first quarter of 2026 compared to the same period in 2025 due to lower invested balances.

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Income tax benefit (expense)

The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes.

We have a valuation allowance of $9.3 million as of September 30, 2025.

As of September 30, 2025 and 2024, our deferred tax assets and valuation allowance have been reduced by approximately $449,000 and $441,000, respectively.

Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance.

Income tax expense for the first quarter of both 2026 and 2025, primarily related to foreign and minor state taxes.

Income tax provision of $0 and $21,000 were recognized for the three months ended March 31, 2026 and 2025, respectively, and the effective tax rates for these periods were 0% and 5.82%, respectively.

The difference between our effective tax rates for the three months ended March 31, 2026 and 2025, and the U.S.

statutory rate of 21% was primarily attributable to the impact of a full valuation allowance on our net deferred tax assets, as well as foreign taxes.

Our consolidated effective tax rate decreased for the three months ended March 31, 2026, compared to the same period in the prior year primarily due to operational results in the first quarter of 2026.

Financial Condition

LIQUIDITY AND CAPITAL RESOURCES

September 30,

(in thousands)

Working capital

At September 30, 2025, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $9.7 million decreased $662,000 from December 31, 2024, primarily due to one-time expenses and investments in the third quarter, partially offset by an otherwise improved cost structure, lower inventory levels, and currency effects on overseas cash balances.

Correspondingly, working capital of approximately $14.4 million on September 30, 2025, was down $1.6 million as compared to December 31, 2024, and roughly $1.2 million from quarter ending June 30, 2025.

Working capital decreased by $3.0 million during 2026, primarily due to the revenue decline and resulting operating loss.

Our current ratio was 2.6 and 3.5 for March 31, 2026 and December 31, 2025, respectively.

At March 31, 2026, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $5.7 million decreased $2.2 million from December 31, 2025, primarily due to one-time expenses and investments in the first quarter, partially offset by an otherwise improved cost structure, lower inventory levels, and currency effects on overseas cash balances.

Correspondingly, working capital of approximately $9.3 million on March 31, 2026, was down $3.0 million as compared to December 31, 2025.

The Company continues to have no debt.

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NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($1,263,000) in the third quarter of 2025 compared to ($267,000) in the third quarter of 2024.

Adjusted EBITDA, excluding share-based compensation (a non-cash item), was ($1,148,000) in the third quarter of 2025, compared to $37,000 in the second quarter of 2025 and $37,000 in the third quarter of 2024.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($3,070,000) in the first quarter of 2026 compared to ($272,000) in the first quarter of 2025.

Adjusted EBITDA, excluding share-based compensation (a non-cash item), was ($2,993,000) in the first quarter of 2026, compared to ($98,000) in the first quarter of 2025.

Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

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Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands)

1 unchanged sentence

Interest (income)

Income tax expense

Depreciation and amortization

Share-based compensation

Adjusted EBITDA, excluding share-based compensation

Depreciation & amortization

EBITDA earnings (loss)

Equity compensation

Adjusted EBITDA, excluding equity compensation

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis