DATA I/O CORP 10-Q

Item 1. Financial Statements DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (UNAUDITED) June 30, 2026 December 31, 2025 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 10,843 $ 7,901 Trade accounts receivable, net of allowance for credit losses of $ 31 and $ 29 , respectively 4,302 2,841 Inventories 6,189 5,710 Other current assets 856 799 TOTAL CURRENT ASSETS 22,190 17,251 Property and equipment – net 678 807 Other assets 1,774 2,118 TOTAL ASSETS $ 24,642 $ 20,176 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,350 $ 1,227 Accrued compensation 725 958 Deferred revenue 1,093 1,464 Other accrued liabilities 2,104 1,328 Convertible debenture net of debt issuance costs 6,208 - Income taxes payable 4 4 TOTAL CURRENT LIABILITIES 11,484 4,981 Deferred foreign income tax 250 250 Operating lease liabilities 1,056 1,411 Long-term other payables - 20 STOCKHOLDERS’ EQUITY Preferred stock - Authorized, 5,000,000 shares, including 200,000 shares of Series A Junior Participating Issued and outstanding, none - - Preferred stock - Authorized, 8,000 shares of Series B Preferred Stock Issued and outstanding, none - - Common stock, at stated value - Authorized, 30,000,000 shares Issued and outstanding, 10,395,627 shares as of June 30, 2026 and 9,391,922 shares as of December 31, 2025 25,916 24,062 Additional paid in capital 1,165 - Accumulated deficit ( 15,773 ) ( 10,974 ) Accumulated other comprehensive income (loss) 544 426 TOTAL STOCKHOLDERS’ EQUITY 11,852 13,514 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 24,642 $ 20,176 See notes to consolidated financial statements 3 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 Net sales $ 5,149 $ 5,948 $ 8,399 $ 12,124 Cost of goods sold 2,214 2,988 3,854 5,976 Gross margin 2,935 2,960 4,545 6,148 Operating expenses: Research and development 1,380 1,662 2,671 3,177 Selling, general and administrative 2,279 2,142 5,743 4,192 Total operating expenses 3,659 3,804 8,414 7,369 Operating income (loss) ( 724 ) ( 844 ) ( 3,869 ) ( 1,221 ) Non-operating income (loss): Interest income 11 35 26 73 Interest expense ( 873 ) - ( 873 ) - Foreign currency transaction gain (loss) ( 43 ) 47 ( 83 ) 26 Total non-operating income (loss) ( 905 ) 82 ( 930 ) 99 Income (loss) before income taxes ( 1,629 ) ( 762 ) ( 4,799 ) ( 1,122 ) Income tax (expense) benefit - 20 - ( 2 ) Net income (loss) $ ( 1,629 ) $ ( 742 ) $ ( 4,799 ) $ ( 1,124 ) Basic earnings (loss) per share $ ( 0.17 ) $ ( 0.08 ) $ ( 0.51 ) $ ( 0.12 ) Diluted earnings (loss) per share $ ( 0.17 ) $ ( 0.08 ) $ ( 0.51 ) $ ( 0.12 ) Weighted-average basic shares 9,572 9,296 9,483 9,267 Weighted-average diluted shares 9,572 9,296 9,483 9,267 See notes to consolidated financial statements 4 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 Net income (loss) $ ( 1,629 ) $ ( 742 ) $ ( 4,799 ) $ ( 1,124 ) Other comprehensive income (loss): Foreign currency translation gain (loss) 64 289 118 304 Comprehensive income (loss) $ ( 1,565 ) $ ( 453 ) $ ( 4,681 ) $ ( 820 ) See notes to consolidated financial statements 5 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) (UNAUDITED) Accumulated Additional and Other Total Common Stock Accumulated Paid in Comprehensive Stockholders' Shares Amount Deficit Capital Income (Loss) Equity Balance at December 31, 2024 9,236,040 $ 23,475 $ ( 5,738 ) - $ ( 111 ) $ 17,626 Stock awards issued, net of tax withholding 1,759 ( 3 ) - - - ( 3 ) Issuance of stock through: ESPP 1,932 6 - - - 6 Share-based compensation - 174 - - - 174 Net income (loss) - - ( 382 ) - - ( 382 ) Other comprehensive income (loss) - - - - 126 126 Balance at March 31, 2025 9,239,731 $ 23,652 $ ( 6,120 ) - $ 15 $ 17,547 Stock awards issued, net of tax withholding 134,967 ( 98 ) - - - ( 98 ) Issuance of stock through: ESPP - - - - - - Share-based compensation - 250 - - - 250 Net income (loss) - - ( 742 ) - - ( 742 ) Other comprehensive income (loss) - - - - 289 289 Balance at June 30, 2025 9,374,698 $ 23,804 $ ( 6,862 ) - $ 304 $ 17,246 Balance at December 31, 2025 9,391,922 $ 24,062 $ ( 10,974 ) - $ 426 $ 13,514 Stock awards issued, net of tax withholding 2,500 ( 13 ) - - - ( 13 ) Issuance of stock through: ESPP - - - - - Share-based compensation - 77 - - - 77 Net income (loss) - - ( 3,170 ) - - ( 3,170 ) Other comprehensive income (loss) - - - - 54 54 Balance at March 31, 2026 9,394,422 $ 24,126 $ ( 14,144 ) - $ 480 $ 10,462 Stock awards issued, net of tax withholding 131,365 ( 55 ) - - - ( 55 ) Issuance of stock through: ESPP - - - - - - Share-based compensation - 156 - - - 156 Common stock issued in private placement 869,840 1,689 - - 1,689 Warrants - - - 1,165 - 1,165 Net income (loss) - - ( 1,629 ) - - ( 1,629 ) Other comprehensive income (loss) - - - - 64 64 Balance at June 30, 2026 10,395,627 $ 25,916 $ ( 15,773 ) $ 1,165 $ 544 $ 11,852 See notes to consolidated financial statements 6 Table of Contents DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (UNAUDITED) For the Six Months Ended June 30, 2026 2025 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 4,799 ) $ ( 1,124 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 217 237 Equipment transferred to inventory 130 61 Interest expense 873 - Share-based compensation 233 424 Net change in: Trade accounts receivable ( 1,461 ) 191 Inventories ( 479 ) 290 Other current assets ( 57 ) ( 113 ) Accounts payable and accrued liabilities 579 232 Deferred revenue ( 371 ) ( 432 ) Other long-term liabilities ( 375 ) ( 409 ) Deposits and other long-term assets 344 410 Net cash provided by (used in) operating activities ( 5,166 ) ( 233 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 229 ) ( 347 ) Net proceeds from sale of assets 8 - Cash provided by (used in) investing activities ( 221 ) ( 347 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible debt 6,825 - Proceeds from issuance of common stock 2,111 - Direct costs from issuance of convertible debt ( 725 ) - Net proceeds from issuance of common stock, less payments for shares withheld to cover tax - ( 95 ) Cash provided by (used in) financing activities 8,211 ( 95 ) Increase (decrease) in cash and cash equivalents 2,824 ( 675 ) Effects of exchange rate changes on cash 118 318 Cash and cash equivalents at beginning of period 7,901 10,326 Cash and cash equivalents at end of period $ 10,843 $ 9,969 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes - $ 14 See notes to consolidated financial statements 7 Table of Contents DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”, the “Company”) 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. 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. We prepared the financial statements as of June 30, 2026 and June 30, 2025 according to the rules and regulations of the Securities and Exchange Commission ("SEC"). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 31, 2025 has been derived from the audited financial statements at that date. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America according to such SEC rules and regulations. Operating results for the six months ended June 30, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026. Significant Accounting Policies These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in our Form 10-K and Form 10-K/A for the year ended December 31, 2025 (filed with the SEC on April 16, 2026 and April 30, 2026, respectively). There have been no changes to our significant accounting policies described in the Annual Report that have had a material impact on our unaudited condensed consolidated financial statements and related notes. 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 the current and prior period quarters, the impact of capitalization of incremental costs for obtaining contracts were 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. These systems are standard products with published product specifications and are configurable with standard options. The evidence that these systems could be deemed accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based. 8 Table of Contents We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, services and support and extended maintenance components. We allocate the transaction price of each element based on the relative selling price of each performance obligation. For hardware, we determine our best estimate of selling price based on an expected cost-plus-a-margin approach. For the service and support performance obligations, we estimate the standalone selling price using the adjusted market assessment approach, which considers observable market pricing, discounting practices, and prices charged for comparable standalone arrangements. For software maintenance performance obligations, we determine our best estimate of selling price based on observable standalone sales of annual software maintenance renewals. Revenue is recognized on the system based on shipping terms, software based on delivery, services based on completion of work, and software maintenance and extended warranty support ratably over the term of the agreement, typically one year. We record deferred revenue as any non-refundable amounts that are primarily related to prepayments from customers, which is recognized as revenue as or when the performance obligations are satisfied. We have elected the practical expedient to omit disclosure of the amount of the transaction price allocated to remaining performance obligations for contracts with an expected contract length of one year or less. 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 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. 9 Table of Contents The following table represents our revenues by major categories: Three Months Ended Six Months Ended Net sales by type June 30, 2026 Change June 30, 2025 (as revised) June 30, 2026 Change June 30, 2025 (as revised) (in thousands) Platform sales $ 2,282 ( 5.4 %) $ 2,413 $ 2,907 ( 47 %) $ 5,486 Adapter sales 1,759 ( 28.6 %) 2,462 3,278 ( 25.6 %) 4,404 Software and services sales* 1,108 3.2 % 1,073 2,214 ( 0.9 %) 2,234 Total $ 5,149 ( 13.4 %) $ 5,948 $ 8,399 ( 30.7 %) $ 12,124 * includes service and parts sales associated with equipment service contracts The Company identified an error in the prior‑year disaggregated revenue amounts. As a result, the 2025 revenue by major category amounts have been revised. The correction did not impact the Company’s previously reported consolidated balance sheets, statements of operations, comprehensive income (loss), or statements of cash flows. See: Note 12 for additional information regarding the revision of prior‑period disaggregated revenue amounts. 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. Income Tax Income taxes for U.S. and foreign subsidiary operations 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. On July 4, 2025, the One Big Beautiful Bill Act (Act) was signed into law. The Act makes permanent key elements of the Tax Cuts and Jobs Act, including 100 percent bonus depreciation, domestic research cost expensing, increases the AMIC to 35 percent from 25 percent and modifications to the international tax framework. The Act includes multiple effective dates, with certain provisions effective in 2025 and others phased in through 2027. We continue to evaluate the impact of the Act's provisions that will take effect in future years. As a result of this legislation, the Company is deducting its domestic Section 174A expenditures beginning in the 2025 taxable year. New Accounting Pronouncements – Standards Issued and Not Yet Implemented In November 2024, the FASB issued ASU 2024-03, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation (Subtopic 220-40),” which requires disclosure of specific information about costs and expenses within relevant expense captions on the face of the income statement. This standard is effective for the Company’s annual reporting period beginning January 1, 2027, and interim reporting periods beginning January 1, 2028. Early adoption is permitted. The Company is currently evaluating the effects of adopting this new accounting guidance. 10 Table of Contents NOTE 2 – INVENTORIES 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-saleable inventory by reviewing current transactions and forecasted product demand. We evaluate our inventories on an item-by-item basis and record inventory adjustments accordingly. Inventories consisted of the following components: June 30, 2026 December 31, 2025 (in thousands) Raw material $ 3,185 $ 2,912 Work-in-process 1,576 1,661 Finished goods 1,428 1,137 Inventories $ 6,189 $ 5,710 NOTE 3– PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following components: June 30, 2026 December 31, 2025 (in thousands) Leasehold improvements $ 365 $ 356 Equipment 3,988 4,242 Sales demonstration equipment 352 1,029 4,705 5,627 Less accumulated depreciation 4,027 4,820 Property and equipment, net $ 678 $ 807 11 Table of Contents NOTE 4 – ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: June 30, 2026 December 31, 2025 (in thousands) Lease liability - short term $ 698 $ 690 Product warranty 515 517 Sales return reserve 32 32 Other taxes 78 60 Severance accrual 649 - Interest payable, net 10 - Other 122 29 Other accrued liabilities $ 2,104 $ 1,328 During the three months ended June 30, 2026, the Company recorded approximately $ 0.3 million of employee-related costs associated with a workforce reduction in operations. During the six months ended June 30, 2026, the Company recorded approximately $ 1.3 million of such costs. As of June 30, 2026, accrued liabilities related to these termination benefits were approximately $ 649,000 , which are expected to be paid within the next twelve months. The changes in our product warranty liability at June 30, 2026 and year ended December 31, 2025 are as follows: June 30, 2026 December 31, 2025 (in thousands) Product warranty liability, beginning balance $ 517 $ 350 Net expenses 785 576 Warranty claims ( 785 ) ( 576 ) Accrual revisions ( 2 ) 167 Product warranty liability, ending balance $ 515 $ 517 12 Table of Contents NOTE 5– OPERATING LEASE COMMITMENTS 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 as of June 30, 2026, are as follows: June 30, 2026 Operating Lease Commitments (in thousands) 2026 (remaining) $ 386 2027 694 2028 433 2029 369 2030 - 2031 And Thereafter - Total 1,882 Less imputed interest ( 124 ) Total operating lease liabilities $ 1,758 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 components of our lease expense for the three months and six months ended June 30, 2026, include facility related operating lease costs of $ 187,000 and $ 375,000 , respectively, and short-term lease costs of $ 6,500 and $ 14,000 , respectively. In the prior year, components of our lease expense for the three months and six months ended June 30, 2025, include facility related operating lease costs of $ 184,000 and $ 366,000 , respectively, and short-term lease costs of $ 10,000 and $ 19,000 , respectively. There were no new operating leases during the six months ended June 30, 2026. The Redmond, Washington headquarters facility lease runs to October 31, 2029, at approximately 20,460 square feet. The lease for the facility located in Shanghai, China runs to October 31, 2027, 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 June 30, 2026, and December 31, 2025: Balance at June 30, 2026 Balance at December 31, 2025 (in thousands) Right-of-use assets (Long-term other assets) $ 1,660 $ 2,005 Lease liability-short term (Other accrued liabilities) $ 698 $ 690 Lease liability-long term (Operating lease liabilities) $ 1,056 $ 1,411 NOTE 6– 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. As of June 30, 2026, we had confirmed contracts with a commitment of approximately $ 660,000 to be paid within one year and $ 480,000 to be paid beyond one year. 13 Table of Contents NOTE 7 – CONTINGENCIES As of June 30, 2026, 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 aggregate, would have a material adverse effect on our results of operations or financial position. NOTE 8 – INCOME TAXES Income tax expense for the second quarter of 2026 and 2025 primarily related to foreign and minor state taxes. The provision for (benefit from) income taxes for the three months ended June 30, 2026 and 2025 was $ 0 and $ 20,000 , respectively, and the provision for (benefit from) income taxes for the six months ended June 30, 2026 and 2025 was $ 0 and ($ 2,000 ), respectively. The effective tax rates for the three months ended June 30, 2026 and 2025 were 0 % and ( 2.62 %), respectively, and the effective tax rates for the six months ended June 30, 2026 and 2025 were 0 % for each period. The differences between our effective tax rates for the three and six months ended June 30, 2026 and 2025 and the U.S. federal statutory income tax rate of 21 % were primarily attributable to the effect of a full valuation allowance against our net deferred tax assets and, to a lesser extent, foreign taxes. The change in our effective tax rate for the six months ended June 30, 2026 compared with the same period in 2025 was primarily attributable to changes in the mix and amount of pre-tax income and loss across jurisdictions. NOTE 9 – EARNINGS PER SHARE Basic earnings per share is calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated based on these same weighted average shares outstanding plus the effect of potential shares issuable upon assumed exercise of stock options based on the treasury stock method. Potential shares issuable upon the exercise of stock options are excluded from the calculation of diluted earnings per share to the extent their effect would be anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Six Months Ended June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 (in thousands except per share data) Numerator for basic and diluted earnings (loss) per share: Net income (loss) $ ( 1,629 ) $ ( 742 ) $ ( 4,799 ) $ ( 1,124 ) Denominator for basic earnings (loss) per share: Weighted-average shares 9,572 9,296 9,483 9,267 Employee stock options and awards - - - - Denominator for diluted earnings (loss) per share: Adjusted weighted-average shares & assumed conversions of stock options 9,572 9,296 9,483 9,267 Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ ( 0.17 ) $ ( 0.08 ) $ ( 0.51 ) $ ( 0.12 ) Diluted earnings (loss) per share $ ( 0.17 ) $ ( 0.08 ) $ ( 0.51 ) $ ( 0.12 ) 14 Table of Contents The weighted average number of shares outstanding used to compute earnings (loss) per share included the following: Three Months Ended Six Months Ended June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 Restricted Stock Units 88,209 66,424 98,443 77,906 Performance Stock Units 17,717 19,638 17,901 17,811 Stock Options 13,682 - 7,426 - Options to purchase 200,625 and 200,000 shares were outstanding as of June 30, 2026 and 2025, respectively, but were excluded from the computation of diluted earnings per share for the periods then ended because the options were anti-dilutive. In connection with the private placement financing transaction completed on June 17, 2026, the following potential common shares were outstanding as of June 30, 2026 but were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2026 because their effect would have been anti-dilutive: 2,730,160 shares issuable upon conversion of the convertible notes (representing the shares issuable upon conversion of the notes into Series B convertible preferred stock and the subsequent conversion of such preferred stock into common stock) and 1,080,000 shares issuable upon exercise of the related warrants. No comparable securities were outstanding as of June 30, 2025. 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, net of forfeitures, for the three and six months ended June 30, 2026 and 2025, were as follows: Three Months Ended Six Months Ended June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 (in thousands) Cost of goods sold - $ 36 $ 12 $ 61 Research and development - 65 2 113 Selling, general and administrative 156 149 219 250 Total share-based compensation $ 156 $ 250 $ 233 $ 424 Equity awards granted during the three and six months ended June 30, 2026 and 2025 were as follows: Three Months Ended Six Months Ended June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 Restricted Stock Units - 81,200 - 96,472 Performance Stock Units - - - - Employee Restricted Stock Units (“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. Non-employee director 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. There have been no Restricted Stock awards granted in 2026. 15 Table of Contents Performance Stock Units (“PSUs”) typically cliff vest at the end of the performance period and the performance metric for 2023 awards is cumulative revenue growth over the three-year period ending December 31, 2026, with a cumulative revenue threshold, target, and maximum performance measure. For 2024 awards, the performance metrics included revenue growth, EBITDA and project objective targets over the three-year period ending December 31, 2026. There have been no Performance Stock awards granted in 2025 or 2026. The remaining unamortized expected future equity compensation expense and remaining amortization period associated with award grants of RSUs, PSUs and unvested options at June 30, 2026 and 2025 are: June 30, 2026 June 30, 2025 Unamortized future equity compensation expense (in thousands) $ 511 $ 1,197 Remaining weighted average amortization period (in years) 1.81 1.92 NOTE 11 –SEGMENT INFORMATION Data I/O operates as a single segment entity, with the sole objective to design, manufacture, and sell programming systems. We operate in three separate locations — Redmond, Washington; Shanghai, China; and Munich, Germany — these locations function as part of a single, integrated business and all operations are strategically aligned to support this objective. The accounting policies of the programming system segment are the same as those described in the summary of significant accounting policies. The measure of segment assets is reported on the balance sheet as total consolidated assets. Our Chief Operating Decision Maker (CODM) is the President/CEO who reviews the company’s financial performance on a consolidated basis without distinguishing between different business lines or geographic areas for the purpose of making operating decisions, allocating resources and evaluating financial performance. Financial performance is assessed using operating results, actual net income vs. plan, balance sheet fluctuations, and other key performance indicators. Significant single segment expense categories that are provided to the chief operating decision maker and included in the reported segment operating profits are outlined in the following table: Three Months Ended Six Months Ended June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 (in thousands) Net sales $ 5,149 $ 5,948 $ 8,399 $ 12,124 Cost of goods sold 2,214 2,988 3,854 5,976 Gross margin 2,935 2,960 4,545 6,148 Operating Expenses: Employee expenses 2,015 2,392 4,061 4,647 Customer acquisition costs 166 240 374 533 Professional and outside services 691 570 1,669 1,111 Occupancy costs (OPEX portion) 205 243 575 462 Depreciation & amortization 97 139 203 265 Other 485 220 1,532 351 Total operating expense 3,659 3,804 8,414 7,369 Operating income (loss) $ ( 724 ) $ ( 844 ) $ ( 3,869 ) $ ( 1,221 ) 16 Table of Contents NOTE 12 – PRIOR PERIOD REVISION 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 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 three and six months ended June 30, 2025 to enhance comparability. Three Months Ended Six Months Ended Net sales by type June 30, 2025 As Previously Reported Effect of Revision June 30, 2025 As Revised June 30, 2025 As Previously Reported Effect of Revision June 30, 2025 As Revised (in thousands) Platform sales $ 2,997 $ ( 584 ) $ 2,413 $ 6,315 $ ( 829 ) $ 5,486 Adapter sales 2,331 131 2,462 4,293 111 4,404 Software and services sales* 620 453 1,073 1,516 718 2,234 Total $ 5,948 $ - $ 5,948 $ 12,124 $ - $ 12,124 *includes service and parts sales associated with equipment service contracts NOTE 13 – PRIVATE PLACEMENT Issuance of common stock On June 17, 2026, the Company issued 869,840 shares of its common stock in a private placement financing transaction entered into pursuant to a Securities Purchase Agreement dated May 14, 2026 with the Lytton‑Kambara Foundation and Alice W. Lytton Family LLC (the "Investors"). The common stock was issued together with convertible debentures and warrants for aggregate gross proceeds to the Company of approximately $9.0 million. Following the issuance, the Company had 10,264,262 shares of common stock issued and outstanding. As the common stock, warrants, and convertible debentures were issued together in a single transaction, the Company allocated the $9.0 million of gross proceeds to each freestanding instrument based on its relative fair value. Of the total proceeds, $1,854,150 was allocated to the common stock. The shares of common stock issued in the transaction rank equally with the Company's other outstanding shares of common stock and carry no preferential dividend, liquidation, redemption, or conversion rights. The Company incurred total issuance costs of approximately $800,000 in connection with the private placement financing transaction, of which $164,879 was allocated to the common stock on the same relative fair value basis used to allocate the proceeds. Issuance costs allocated to the common stock were recorded as a reduction of the proceeds recognized in equity. Accordingly, the net amount recognized in common stock for the shares issued was $1,689,271. 17 Convertible Notes (Series B Preferred Stock) The Convertible Notes were issued under the private placement financing transaction on June 17, 2026, pursuant to the Securities Purchase Agreement dated May 14, 2026. The Notes were issued in a transaction to the Lytton-Kambara Foundation and to Alice W. Lytton Family LLC, with principal balances of $4.55 million and $2.28 million, respectively. The Notes are direct, unsecured debt obligations of the Company and rank equally in right of payment with all other Debentures now or hereafter issued under the series. These are five-year Notes maturing on June 16, 2031, unless earlier converted, and bear interest at a rate of 4.0% per annum, payable semiannually on November 1 and May 1, beginning on the first such date after the original issue date of the Notes, on each conversion date (as to that principal amount then being converted), and on the maturity date. The interest is paid in cash, or at the Company’s option and under certain circumstances, in Series B Convertible Preferred Stock of the Company. The Investors may convert the Notes into shares of Preferred Stock at a conversion price of $1,000 per share, representing 6,825 shares of Series B Preferred Stock into which the Notes are potentially convertible. Investors may convert all or a portion of the Notes at any time. Beginning 36 months after the effective date, the Company may redeem outstanding Notes for 130% of principal , accrued interest and other amounts due. However, following the stockholder approval required under Nasdaq rules to permit issuance of all underlying shares contemplated by the transaction, particularly where issuances would exceed 19.99% of the Company's outstanding Common Stock as of the Closing Date (“Shareholder Approval”), all remaining principal and accrued interest automatically convert into Series B Preferred Stock without further Investor action. The potentially dilutive shares associated with the Company's convertible notes were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. As of June 30, 2026, the unamortized discount on the Notes was $ 617,718 , the net carrying amount was $ 6.2 million, and the fair value of the Notes was approximately $ 10,881,000 . The fair value of the Notes was determined using a binomial lattice model in a risk-neutral framework using significant unobservable inputs, resulting in a Level 3 fair value classification. Significant estimates include the Company’s stock price, volatility, risk-free rate, and credit spread. 18 Conversion of the Notes into Series B Preferred Stock was contingent upon receipt of shareholder approval required under Nasdaq rules. Prior to such approval, the number of common shares issuable pursuant to conversion was subject to contractual issuance limitations. Absent Shareholder Approval, the Company could not issue more than 1,877,945 common shares pursuant to the financing transaction. The Company incurred total issuance costs of approximately $ 800,000 in connection with the private placement financing transaction, of which $ 521,770 was allocated to the Notes on the same relative fair value basis used to allocate the proceeds. Together with the issuance discount, the issuance costs attributable to the Note are amortized as interest expense using the effective interest method over the expected life of the Notes. The effective interest rate on the Notes for the period from June 17, 2026 through June 30, 2026 was 452%, due to the shortened discount accretion term relative to the contract term. For the period ended June 30, 2026, the coupon interest on the Convertible Notes was $ 9,859 and amortization of the debt discount was $ 862,890 . Warrants The Warrants were issued under the private placement financing transaction on June 17, 2026 pursuant to the Securities Purchase Agreement dated May 14, 2026. These Warrants are exercisable for an aggregate of 1,080,000 shares of Common Stock at an exercise price of $3.00 per share for a period of five years, expiring June 16, 2031 (see table below). The exercise price and warrant shares are subject to customary antidilution adjustments. The Holder controls the manner of exercise and may exercise the Warrants in whole or in part at any time during the exercise period, paying the exercise price in cash or, at any time after the six-month anniversary of the Closing Date when no effective registration statement is available for the issuance of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”), elect a cashless (net share) exercise; the Company is not required to make any cash payment or net cash settlement in lieu of delivering Warrant Shares. Any Warrant remaining outstanding on the Termination Date is automatically exercised on a cashless basis. As of June 30, 2026, the Company had the following warrants issued and outstanding: Holder Issuance date Warrant Shares Exercise price Expiration date Lytton-Kambara Foundation 6/17/2026 720,000 $ 3.00 6/16/2031 Alice W. Lytton Family LLC 6/17/2026 360,000 $ 3.00 6/16/2031 Total 1,080,000 Under the cashless (net share) alternative, the Holder receives a net number of shares equal to (A − B) × X ÷ A, where "A" is the five-trading-day volume-weighted average price (VWAP) preceding exercise, "B" is the $3.00 exercise price, and "X" is the number of shares issuable on a cash exercise; accordingly, the number of shares issuable varies with the Company's share price. As the five-day VWAP of the Common Stock increases above the exercise price, both the number of shares issued on a cashless exercise and the aggregate fair value of those shares increase; conversely, as the five-day VWAP approaches the exercise price, the number of shares issued and their aggregate fair value decrease, and no shares would be issued if the five-day VWAP were equal to or below the exercise price. As of June 30, 2026, if the Holders elect to exercise the Warrants for cash, the Company would deliver one share of Common Stock for each Warrant exercised and would receive cash equal to the fixed $3.00 exercise price per share; the aggregate fair value of the shares issued upon such cash exercise would vary directly with the then-current five-day VWAP of the Common Stock, whereas the per-warrant exercise price and resulting cash proceeds to the Company remain fixed in accordance with the Warrant Agreement. The Company incurred total issuance costs of approximately $ 800,000 in connection with the private placement financing transaction, of which $ 113,735 was allocated to the Warrants on the same relative fair value basis used to allocate the proceeds. The Warrants may not be exercised to the extent (i) such conversion or issuance would result in the investor having beneficial ownership of more than 9.99% of the outstanding shares of Common Stock or (ii) absent stockholder approval, the aggregate number of shares issued would exceed 19.9%of the outstanding shares of Common Stock. All 1,080,000 Warrant Shares were exercisable in full from the issue date, the Warrants contain no vesting conditions, and no Warrants had been exercised as of June 30, 2026. NOTE 14 –SUBSEQUENT EVENTS On July 8, 2026, at the Company’s Annual Meeting of Shareholders, the Company obtained Shareholder Approval required under the terms of its Notes. As a result of such approval, the automatic conversion feature was triggered and all outstanding Notes were converted into shares of the Company's Preferred Stock. The conversion resulted in the issuance of 6,825 .4 shares of Preferred Stock in exchange for aggregate outstanding principal and accrued interest of approximately $ 6,841,325 of the Notes at the conversion price of $1,000 per share. Following the conversion, the Notes were no longer outstanding. 19 Table of Contents