What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-14 compared with 2026-05-15 · 61 added, 62 removed, 111 unchanged (53% of the section changed)

35 unchanged sentences

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 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 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.

Data I/O continued to evolve its business through the second quarter of 2026, as some of the economic challenges of the prior quarters began to ease.

Sales momentum observed towards the end of the prior quarter continued and revenues recovered.

A positive mix shift, an emphasis on pricing discipline, and better overhead absorption combined with management’s continued focus on realigning operating costs, through efficiencies, internal AI deployments, and targeted spending cuts led to a significant improvement in gross margins.

Overall demand for capital equipment continues to be impacted by global trade and tariff uncertainty.

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

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.

In the second quarter, we announced a letter of intent on a strategic acquisition which will diversify the Company’s customer base and sectoral exposure, enhance manufacturing capabilities and efficiencies, and accelerate our move into programming and Programming-as-a-Service (“Paas”).

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, 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.

We are increasingly encouraged by second quarter activity levels and the transformative impact of the announced acquisition.

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

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.

Following the first quarter realignment in Germany, in the second quarter of 2026, we made similar strategic realignments in our Redmond operations which we expect to yield material cost savings and efficiencies.

Employee-related costs related to the Redmond realignment and expensed in the second quarter amounted to approximately $345,000, primarily for employee severance.

We expect continuously to review our global operations with an eye to improving operational efficiency and effectiveness worldwide.

Ongoing Clawback Policy Analysis

We are still conducting a clawback analysis in connection with the previously disclosed accounting restatement as required by the Company’s policies but have not yet determined if any erroneously awarded compensation was paid based on the restated financial results.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

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Actual results may differ from these estimates under different assumptions or conditions.

There have been no changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on April 16, 2026, as described in Note 1.

There have been no changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Annual Report on Form 10-K and 10-K/A for the year ended December 31, 2025, which was filed with the SEC on April 16, 2026 and April 30, 2026, respectively, as described in Note 1.

Description of Business and Summary of Significant Accounting Policies to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Three Months Ended

Six Months Ended

Net sales by location

March 31, 2026

March 31, 2025

(in thousands)

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Three Months Ended

Six Months Ended

Net sales by type

March 31, 2026

March 31, 2025

2025 (as Revised)

(in thousands)

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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.

As such, the Company has revised the net sales by type for the three and six months ended June 30, 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.

While the total revenue was not affected, the Company has revised the presentation of net sales by type for the three and six months ended June 30, 2025 to enhance comparability.

Net sales in the second quarter of 2026 were $5.2 million, compared with $5.9 million in the prior year period and $3.3 million in the first quarter of 2026.

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

Net sales of consumable adapters and services revenue represented 55% 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.

Total platform sales were 44% of revenues, adapters were 34% and software and services revenues were 22% of revenues compared with 41%, 41% and 18% respectively in the second quarter of 2025.

For 2026 year to date, platform sales were 35% of revenues, adapters were 39% and software and services revenues were 26% of revenues compared with 2025 year to date sales of 46%, 36% and 18% respectively.

On a geographic basis, international sales represented approximately 74% of total net sales for the second quarter of 2026 compared with 95% in the prior year period.

Bookings increased in the latter half of the second 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.

Second quarter 2026 bookings were $4.9 million, up from $4.2 million in the first quarter 2026 and down from $5.8 million in the second quarter 2025.

Backlog at June 30, 2026, was $2.1 million, down from $2.6 million at the end of the prior quarter.

Deferred revenue was $1.1 million on June 30, 2026, down from $1.5 million on December 31, 2025.

Three Months Ended

March 31, 2026

March 31, 2025

Six Months Ended

(in thousands)

Percentage of net sales

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.

Gross margin as a percentage of sales in the second quarter of 2026 was 57% as compared to 49.8% in the same period last year and 49.5% in the first quarter of 2026.

A positive mix shift combined with the enactment of strict discounting controls, better overhead absorption, and a focus on improving production efficiencies led to a significant improvement in gross margins.

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.

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Three Months Ended

Six Months Ended

(in thousands)

1 unchanged sentence

Percentage of net sales

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.

Research and development (“R&D”) expenses decreased in the second 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 to outside services for projects completed in 2025.

In particular, the realignment and restructuring of operations in Germany in the first quarter of 2026 and in Redmond in the second quarter of 2026 resulted in improved productivity and efficiencies which accounted for some 95% of the reduction in spending.

SELLING, GENERAL AND ADMINISTRATIVE

Three Months Ended

Six Months Ended

(in thousands)

2 unchanged sentences

Percentage of net sales

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.

Selling, General and Administrative (“SG&A”) expenses were higher in the second 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 training and reorganization expenses related to the strategic reconfiguration of the Company’s Redmond operations.

Continued efficiency improvements and cost reduction efforts remain a focus.

SHARE-BASED COMPENSATION

INTEREST INCOME

Three Months Ended

Six Months Ended

(in thousands)

Share-based compensation

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.

Interest income

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

INTEREST EXPENSE

Three Months Ended

Six Months Ended

(in thousands)

Interest income

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

Interest expense

Interest expense was higher in the second quarter of 2026 due to the recognition of interest expense of the convertible debenture.

Three Months Ended

Six Months Ended

(in thousands)

Income tax benefit (expense)

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.

Income tax benefit (expense) for the second quarter of 2026 and 2025 primarily related to foreign and state taxes.

Financial Condition

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Working capital

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.

Working capital decreased by $1.6 million during 2026, primarily due to net proceeds of approximately $9 million received from the June 2026 private placement partially offset by net cash burn through the first half of the year partly driven by reorganization costs.

Our current ratio was 1.9 and 3.46 for June 30, 2026 and December 31, 2025, respectively.

At June 30, 2026, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $10.8 million increased $2.9 million from December 31, 2025, primarily due to the issuance of convertible debentures in the second quarter, partially offset by a significant company restructure.

Subsequent to the end of the second quarter, the convertible debt was converted into preferred equity, eliminating the Company’s debt.

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

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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.

If the Company determines to pursue significant acquisitions or business development initiatives, the Company may need to raise additional capital.

If additional capital is required, the Company will review the amounts and options to raise capital at that time, but future financing would most likely be through debt and equity offerings.

If the Company determines to pursue significant acquisitions or business development initiatives, the Company may need to raise additional capital, which would most likely be through debt and equity offerings.

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 further reduce expenditure and/or seek possible additional financing.

OFF-BALANCE SHEET ARRANGEMENTS

Except as noted in the accompanying consolidated financial statements in Note 5, “Operating Lease Commitments” and Note 6, “Other Commitments”, we have no off-balance sheet arrangements.

Except as noted in the accompanying consolidated financial statements in Note 5, “Leases” and Note 6, “Other Commitments”, we have no off-balance sheet arrangements.

NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

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.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($665,000) in the second quarter of 2026 compared to ($687,000) in the second quarter of 2025.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($509,000) in the second quarter of 2026, compared to ($437,000) in the second 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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NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURE RECONCILIATION

Three Months Ended

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Interest (income)

Depreciation & amortization

EBITDA earnings (loss)

Interest expense

Depreciation and amortization

Equity compensation

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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