daio_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2026

Or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 0-10394

DATA I/O CORPORATION
(Exact name of registrant as specified in its charter)

Washington

91-0864123

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6645 185th Ave NE, Suite 100, Redmond, Washington, 98052

425-881-6444

(Address of principal executive offices, including zip code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	DAIO	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, ”accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Shares of Common Stock, no par value, outstanding as of July 31, 2026: 10,395,627

DATA I/O CORPORATION

FORM 10-Q

For the Quarter Ended June 30, 2026

INDEX

Part I.		Financial Information	Page

	Item 1.	Financial Statements (Unaudited)	3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

	Item 4.	Controls and Procedures	26

Part II		Other Information

	Item 1.	Legal Proceedings	27

	Item 1A.	Risk Factors	27

	Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	27

	Item 3.	Defaults Upon Senior Securities	27

	Item 4.	Mine Safety Disclosures	27

	Item 5.	Other Information	27

	Item 6.	Exhibits	28

Signatures			29

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PART I - FINANCIAL INFORMATION

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

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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

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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

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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

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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

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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.

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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.

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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.

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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

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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

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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.

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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	)

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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.

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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	)

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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.

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.

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.

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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.

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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.

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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

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.

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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.

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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.

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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:

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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.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation and due to the existence of a material weakness in our internal controls over financial reporting as of December 31, 2025 which is described below, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective.

As previously reported, we identified material weakness in our internal controls over financial reporting as of December 31, 2025. The material weakness related to user access and segregation of duties for the information technology system that support the Company’s financial reporting process. Notwithstanding this material weakness, we have performed additional procedures to enable management to conclude that our consolidated financial statements included in this Form 10-Q fairly present in all material respects our financial condition and results of operations for the period ended June 30, 2026.

In response to the material weakness, we have made and will continue to expand the remediations needed to address this weakness. Management and the Audit Committee will monitor these remedial measures and the effectiveness of our overall control environment. A material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and Management concludes, through testing, that these controls are operating effectively.

CHANGES IN INTERNAL CONTROLS

Subsequent to the identification of the material weakness discussed in the annual report on Form 10-K for the year ended December 31, 2025, management has continued to implement remediation actions designed to address the underlying control deficiencies, including enhancing review procedures and increasing management oversight over financial reporting activities. These actions are intended to improve the design and operation of the Company’s internal control environment. Management believes these remediation efforts appropriately address the root causes of the material weakness; however, the material weakness will not be considered remediated until the relevant controls have operated for a sufficient period of time and management has concluded, based on testing, that the controls are operating effectively.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of June 30, 2026, we were not a party to any material pending legal proceedings.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There are no material changes to the Risk Factors described in our Annual Report.

At Data I/O, our customers and suppliers continue to increase reliance on systems, and as additional features are added, the risks also increase. Any significant disruptions to our global systems or the internet for any reason, which could include equipment or network failures; co-location facility failures; power outages; sabotage; employee error or other actions; cyber incidents or other security breaches; reliance on third party technology; geopolitical activity or natural disasters; all of which could have a material negative effect on our results. In August 2025, we were the subject of a targeted cyber incident. Upon discovering the incident, we shut down most of our operating systems globally to manage the safety of our overall global systems environment. This shutdown and any such future events may result in loss of revenue; business disruptions (such as the inability to timely process shipments); and significant remediation costs. This cyber incident, or any future cyber incident could also result in increased vulnerability to attempts of fraud, legal claims and proceedings including potential breach of contract claims, reporting delays or errors; interference with regulatory reporting; an increase in costs to protect our systems and technology; or damage to our reputation.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

	(a)	None
	(b)	None
	(c)	During the quarterly period ended June 30, 2026, no director or officer adopted or terminated any Rule 10b5-1 trading arrangement, and/or any non-Rule 10b5-1 trading arrangement (as such terms are defined pursuant to Item 408(a) of Regulation S-K).

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Item 6. Exhibits

(a) Exhibits

	3.4	Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K, filed with the SEC on June 23, 2026).

10	Material Contracts:
	10.31	Data I/O Corporation 2023 Omnibus Incentive Compensation Incentive Plan approved May 18, 2023, as amended July 8, 2026 (Incorporated by reference to Data I/O’s 2026 Proxy Statement dated May 29, 2026).
	10.41	Form of Convertible Note (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K, filed with the SEC on June 23, 2026).
	10.42	Form of Warrant (incorporated by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K, filed with the SEC on June 23, 2026).
	10.43	Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K, filed with the SEC on June 23, 2026).

31	Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002:
	31.1	Chief Executive Officer Certification
	31.2	Chief Financial Officer Certification

32	Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002:
	32.1	Chief Executive Officer Certification
	32.2	Chief Financial Officer Certification

101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED: August 14, 2026

DATA I/O CORPORATION
(REGISTRANT)

By:	/s/William Wentworth
	William Wentworth
	President and Chief Executive Officer
	(Principal Executive Officer and Duly Authorized Officer)

By:	/s/Charles J. DiBona
	Charles J. DiBona
	Chief Financial Officer,
	Secretary and Treasurer
	(Principal Financial Officer and Duly Authorized Officer)