DATA I/O CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General FORWARD-LOOKING STATEMENTS 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 industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; 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; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new products or services; changing foreign operations; strategic transformation progress and timeline; ERP implementation timeline; potential acquisitions; and the 2026 organic growth framework; 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 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. OVERVIEW 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 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 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. 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. 20 Table of Contents 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. 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. 21 Table of Contents RESULTS OF OPERATIONS: NET SALES Three Months Ended Six Months Ended Net sales by location June 30, 2026 Change June 30, 2025 June 30, 2026 Change June 30, 2025 (in thousands) United States $ 1,325 367 % $ 284 $ 3,080 196 % $ 1,040 % of total 25.7 % 4.8 % 36.7 % 8.6 % International $ 3,824 (32 %) $ 5,664 $ 5,319 (52 %) $ 11,084 % of total 74.3 % 95.2 % 63.3 % 91.4 % 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 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. 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 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. 22 Table of Contents GROSS MARGIN Three Months Ended Six Months Ended June 30, 2026 Change June 30, 2025 June 30, 2026 Change June 30, 2025 (in thousands) Gross margin $ 2,935 (0.8 %) $ 2,960 $ 4,545 (26.1 %) $ 6,148 Percentage of net sales 57.0 % 49.8 % 54.1 % 50.7 % 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. RESEARCH AND DEVELOPMENT Three Months Ended Six Months Ended June 30, 2026 Change June 30, 2025 June 30, 2026 Change June 30, 2025 (in thousands) Research and development $ 1,380 (17.0 %) $ 1,662 $ 2,671 (15.9 %) $ 3,177 Percentage of net sales 26.8 % 27.9 % 31.8 % 26.2 % 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 June 30, 2026 Change June 30, 2025 June 30, 2026 Change June 30, 2025 (in thousands) Selling, general & administrative $ 2,279 6.4 % $ 2,142 $ 5,743 37.0 % $ 4,192 Percentage of net sales 44.3 % 36.0 % 68.4 % 34.6 % 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. INTEREST INCOME Three Months Ended Six Months Ended June 30, 2026 Change June 30, 2025 June 30, 2026 Change June 30, 2025 (in thousands) Interest income $ 11 (68.6) % $ 35 $ 26 (64.4) % $ 73 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 June 30, 2026 Change June 30, 2025 June 30, 2026 Change June 30, 2025 (in thousands) Interest expense $ 873 100.0 % $ - $ 873 100.0 % $ - Interest expense was higher in the second quarter of 2026 due to the recognition of interest expense of the convertible debenture. 23 Table of Contents INCOME TAXES Three Months Ended Six Months Ended June 30, 2026 Change June 30, 2025 June 30, 2026 Change June 30, 2025 (in thousands) Income tax benefit (expense) $ - (100.0 %) $ 20 $ - (100.0 %) $ (2 ) Income tax benefit (expense) for the second quarter of 2026 and 2025 primarily related to foreign and state taxes. 24 Table of Contents Financial Condition LIQUIDITY AND CAPITAL RESOURCES June 30, 2026 Change December 31, 2025 (in thousands) Working capital $ 10,706 $ (1,564 ) $ 12,270 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. Engineering and production tooling, test equipment and sales demonstration products will continue to be purchased as we develop and release new products. Capital expenditures are expected to be funded by existing and internally generated funds. As a result of our cyclical and seasonal industry, significant product development, customer support and selling and marketing efforts, we have required working capital to fund our operations. We have tried to balance our spending with our anticipated revenue levels and the goal of profitable operations. We have implemented or have on-going initiatives to reduce material and logistic costs, enhance product quality, increase operational and R&D efficiencies and minimize tax expenses. 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. 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, 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, “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 ($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. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding the Company’s results and facilitate the comparison of results. A reconciliation of net income to EBITDA and adjusted EBITDA follows: 25 Table of Contents NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURE RECONCILIATION Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 (in thousands) Net Income (loss) $ (1,629 ) $ (742 ) $ (4,799 ) $ (1,124 ) Interest (income) (11 ) (35 ) (26 ) (73 ) Interest expense 873 - 873 - Taxes - (20 ) - 2 Depreciation and amortization 102 110 217 237 EBITDA $ (665 ) $ (687 ) $ (3,735 ) $ (958 ) Equity compensation 156 250 233 424 Adjusted EBITDA, excluding equity compensation $ (509 ) $ (437 ) $ (3,502 ) $ (534 ) Item 3 . Quantitative and Qualitative Disclosures About Market Risk Not applicable.