DAIO 10-K & 10-Q changes, risk factors and insider trading

Any or all of the forward-looking statements in this Annual Report or in any other public statement made may turn out to be wrong. They can be affected by inaccurate assumptions we might make or known or unknown risks and uncertainties can affect these forward-looking statements. Many factors --– for example, product competition and product development --– will be important in determining future results. Moreover, neither Data I/O nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. Actual future results may materially vary.

We undertake no obligation to publicly update any forward-looking statements after the date of this Annual Report, whether as a result of new information, future events or otherwise. The reader should not unduly rely on our forward-looking statements. The reader is advised, however, to consult any future disclosures we make on related subjects in our 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission (“SEC”) and press releases. Also, note that we provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

Changes in tariffs and issues of trade issuesand global conflict may adversely affect our business, including revenues and/or gross margins.

War based restrictions, embargos, and supply chain disruptions have and are occurring because of the Russian invasion of Ukraine, which could have economic and other indirect impacts to our business. We do not have any operations in Russia or Ukraine, nor do we rely on any software or hardware components sourced from these two countries. The Israelescalation -of Hamasmilitary warconflict involving Iran and other actors in the Middle East, including risks of broader regional war, cyberattacks, and disruption to critical shipping routes and energy infrastructure, could havematerially similarimpact issues,global althougheconomic weconditions haveand notadversely experiencedaffect anyour materialbusiness, impacts.including through increased costs, supply chain disruptions, and demand volatility.

In order to lead in new and potentially lucrative market opportunities, for example in security deployment of programmable devices, circuit boards and electronic systems, we are making significant investments in people, technology and business development while the market is developing and uncertain. Due to the length of time to market from design to production in security provisioning, if these markets develop more slowly than planned, or if our security deployment solutions are not widely accepted, then we may not achieve our expected return on investment in new technologies, which may significantly affect the results of our existing business.

Concentration in automotive electronics and our orders related to automotive electronics customers has been dominant in recent years at 59% in 2024, 63% in 2023 and 61% in 2022. As we have been concentrated on automotive electronics customers, any decrease in demand from these customers may materially impact our results, as it will take some time to transition our product line to other markets. Quality standards and business requirements by our automotive electronics customers, driven in turn by their automotive manufacturer customers, may demand processes and certifications at a higher level than we currently are structured to provide. For example, although we currently meet the ISO 9001:2015 standard, new quality standards, and environmental standards may be demanded by our customers with even more rigorous requirements. In addition, contractual provisions may expose us to greater potential liability and costs and we may be required to provide higher service levels than we currently provide. If we cannot adapt to these industry requirements or manage these contractual provisions, our business may be adversely affected.

Technological advances have reduced the barriers of entry into the capital equipment segment of the data provisioning market in which we compete. We expect competition to increase from both established and emerging companies. If we fail to compete successfully against current and future sources of competition, our profitability and financial performance will be adversely impacted.

Certain parts or software used in our products are currently available from either a single supplier or from a limited number of suppliers. Our small relative level of business means we frequently lack influence and significant purchasing power. If we cannot develop alternative sources of these components, if sales of parts or software are discontinued by the supplier, if we experience deterioration in our relationship with these suppliers, or if these suppliers require financing which is not available, there may be delays or reductions in product introductions or shipments, which may materially and adversely affect our operating results.

Current and future public health crise,crises, geo-political conflicts, and economic barriers, tariffs and constraints can adversely impact the Company’s financial performance. Our business is highly impacted by capital spending plans and other economic cycles that affect the users and manufacturers of integrated circuits. The industries are highly cyclical and are characterized by rapid technological change, short product life cycles and fluctuations in manufacturing capacity and pricing and gross margin pressures. In a difficult economic climate, it may take us longer to receive payments from our customers and some of our customers’ business may fail, resulting in non-payment. Our market growth outlook and related business decisions may be wrong. These factors could have a material adverse effect on our business and financial condition.

Our operating results tend to vary from quarter to quarter. Our revenue in each quarter substantially depends upon orders received within that quarter. Conversely, our expenditures are based on investment plans and estimates of future revenues. We may, therefore, be unable to quickly reduce our spending if our revenues decline in a given quarter. As a result, operating results for that quarter will suffer. Our operating results for any one quarter are not necessarily indicative of results for any future periods. Other factors, which may cause our quarterly operating results to fluctuate, include:

We have incurred operating losses in five8 of the last ten years. We operate in a cyclical industry. We will continue to examine our level of operating expense based upon our projected revenues. Any planned increases in operating expenses may result in losses in future periods if projected revenues are not achieved or the investment level required is too large. As a result, we may need to generate greater revenues than we have recently in order to maintain profitability. However, we cannot provide assurance that our revenues will increase and our business strategies will be successful, resulting in future losses.

As a public company, we are subject to numerous governmental and stock exchange requirements with which we believe,believe we are in compliance with.compliance. Our failure to meet regulatory requirements and exchange listing standards may result in actions such as: the delisting of our stock, impacting our stock’s liquidity; SEC enforcement actions; and securities claims and litigation. Unfortunately, increasedIncreased regulations pushed onto public companies may have a disproportionate impact to smaller public companies.

The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission (SEC)SEC have requirements that we may fail to meet or we may fall out of compliance with, such as the internal controls auditor attestation required under Section 404 of the Sarbanes-Oxley Act of 2002, with which we are not currently required to comply as we are a smaller reporting company. We assume that we will continue to have the status of a smaller reporting company based on the aggregate market value of the voting and non-voting shares held as of June 30, 2024.2025. If we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

This Annual Report on Form 10-K includes 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 Annual Report on Form 10-K 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 Annual Report. The Reader should not place undue reliance on these forward-looking statements. The following discussions and the section entitled “Risk Factors - Cautionary Factors That May Affect Future Results” describes some, but not all, of the factors that could cause these differences.

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.

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 and that the installation meets the criteria to be a separate performance obligation.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.

We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, installation, service and support, and extended maintenance components. We allocate the transaction price of each element based on the relative selling prices.price Relativeof each performance obligation. For hardware, we determine our best estimate of selling price is based on thean sellingexpected pricecost-plus-a-margin of the standalone system.approach. For the installation and service and support performance obligations, we use the valueprice ofcharged the discount given toby distributors who perform these components. For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold. Revenue is recognized on the system based on shipping terms, software based on delivery, installation and services based on completion of work and software maintenance and extended warranty support ratably over the term of the agreement, typically one year.

Tax Valuation Allowances: Given the uncertainty created by our loss historyhistory, capital and geographic spending, as well as income and current net deferred tax assets by entity and country, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances. At the current time, we expect, therefore, that reversals of the tax valuation allowance will take place as we are able to take advantage of the underlying tax loss or other attributes in carry forward or their use by future income or circumstances allow us to realize these attributes. The transfer pricing and expense or cost sharing arrangements are complex areas where judgments, such as the determination of arms-length arrangements, can be subject to challenges by different tax jurisdictions.

Net sales for the year ended December 31, 20242025 decreased approximately 22%,1.2%, to $21.8$21.5 million, compared to 2023.$21.8 million in 2024. In 2024,2025, automotive electronics uncertainty persisted and customer capacity expansion slowed, resulting in lower system shipmentsshipments, notably in the Americas and EuropeEurope, which were partially offset by growth in Asia. Automotive electronics represented 59%64% of 20242025 bookings compared to 63%59% for 2023. While automotive system sales were below expectations, the Company continues to expand its sales to service providers (franchise distribution, contract manufacturers and independent providers) and reoccurring revenue offerings.2024. For the full year, consumable adapters and services revenue remained steady,increased, representing 50%58% of total revenue and helping mitigate the decline in system sales.

Order bookings in 2025 were $18.6 million, down approximately 17% compared to $22.5 million in 2024, down approximately 12.6% compared to $25.8 million in 2023 due to similar market challenges noted for revenue. The order backlog on December 31, 2024,2025 was $3.5$1.6 million, up $0.7 million from the fourth quarter of 2023, which will benefit revenue recognition in the first half of 2025 as systems are shipped.million. Additionally, deferred revenue was approximately $1.6$1.5 million on December 31, 2024.2025.

Gross margin as a percentage of sales for the year ended December 31, 2024,2025, was 53.3%,49.3%, compared to 57.7%53.3% in 2023.2024. The decrease in gross margin as a percentage of sales primarily reflects lower sales volume and lower related absorption of fixed manufacturinglabor and service operatingoverhead costs. Actual 2024 production and service spending decreased by $250,000 or 4% from the prior year.

Research and development (“R&D”) expense decreasedincreased $284,000$291,000 for the year ended December 31, 20242025, compared to 2023.2024. The decreaseincrease was primarily related to contractedincreased servicesstaff, andnotably incentivein compensation.China.

We believe it is essential to invest in R&D to significantly enhance our existing solutions and create new products as markets develop and technologies change. During 2024,2025, we continued to invest in the creation of new and enhancement of existing capabilities for our PSV family of automated systems, LumenX and FlashPAK family of non-automated programmers and related software. In addition to product development, a significant part of R&D spending is on creating algorithm software and support for new devices introduced by the semiconductor companies. Our R&D spending fluctuates based on the number, type, and the development stage of our product initiatives and projects.

Selling, General and Administrative (“SG&A”) expenses decreasedincreased approximately $810,000 thousand$777,000 for the year ended December 31, 20242025, compared to 2023.2024. The decreaseincrease was primarily related to lowerincreased saleslegal commissionsand accounting fees tied to SEC filings, one-time charges associated with the ransomware incident report on lowerAugust revenue16, 2025, and lowerincreased outsidespending serviceson from efficiency improvementsinfrastructure and costsecurity, controls.partially offset by reduced IT spending in other areas. Cost control measures remain in effect. Salary and wages remained flat with lower headcount savings offset by staff separation charges of approximately $430,000 in the fourth quarter of 2024.

Interest income was higherlower for the year ended December 31, 20242025 compared to 20232024 primarily due to higher average interest rates and higherlower invested balances.

The effective tax raterates forin 20242025 ofand 2024, respectively were (4.8%) and (14.3%), and 2023 of 28.6% differed from the statutory tax rates in our tax reporting jurisdictions primarily due to subsidiarysubsidiaries income withand losses and consolidated losses and the effect of valuation allowances. We have a valuation allowance of $8.2$10.5 million and $8.7$9.2 million as of December 31, 20242025 and 2023, respectively. Our deferred tax assets and valuation allowance have increased by approximately $442,000 and $430,000 associated with the requirements of accounting for uncertain tax positions as of December 31, 2024 and 2023,2024, respectively. Given the uncertainty created by our loss history, particularly in the U.S., which is where most of our net deferred tax assets are located, and the ongoing uncertain economic outlook for our industry, as well as capital and geographic spending, we currently expect to continue to limit the recognition of net deferred tax assets and maintain the tax valuation allowances.

Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary’s local currency and translated into U.S. Dollar amounts at average rates of exchange during the year. We recognized foreign currency transaction gains of $58,000 in 2024 and $42,000 in 2023. The transaction gains resulted primarily from translation adjustments to foreign inter-company accounts and U.S. Dollar accounts held by foreign subsidiaries and sales by our German subsidiary to certain customers, which were invoiced in U.S. Dollars. Because approximately 94% of sales are to international markets, volatile exchange rates may also impact our competitiveness and margins. Product and service price increases have been increased in response to cost increases caused by inflation, tariffs and part shortages.

At December 31, 2024, our principal sources of liquidity consisted of existing cash and cash equivalents. Cash at December 31, 2024 and 2023 was $10.3 million and $12.3 million, respectively. Working capital decreased by $2.3$4.1 million during 20242025, primarily due primarily to the revenue decline and resulting operating loss. Our current ratio improvedwas 3.3 and was 4.2 and 4.0 for December 31, 20242025 and 2023,2024, respectively. The company continues to have no debt.

Although we have no significant external capital expenditure plans currently, weWe expect to continue to carefully make and manage capital expenditures to support our business. We plan to increase our internally developed rental, sales demonstration and test equipment as we develop and release new products. Capital expenditures are currently expected to be funded by existing and internally generated funds.

As a result of ourthe cyclical and seasonal industry,nature significantof productcapital development,expenditure factory resilience strategies, customer support and selling and marketing efforts,businesses, we require substantialsignificant working capital to fund our operations. We have implemented or have initiativescontinued to implementmanage the geographic shiftsposture inof our operations, optimize real estate usage, adjust pricing for cost inflation, lower unit costs, lower tariff expenses, reduce exposureoperations to thealign impactto our customers’ needs and to minimize impacts of currencyexogenous volatility,factors increasesuch productas developmenttariffs. differentiation,All andthat reducesaid, other costs. Wewe 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.

We may require additional cash at the U.S. headquarters,headquarters to support future strategic and operational initiatives., which could cause potential repatriation of cash that is held in our foreign subsidiaries. For any repatriation, there may be tax and other impediments to any repatriation actions. As many repatriations typically have associated withholding taxes, those withheld will be a current tax without generating a current or deferred tax benefit recognition. InWe are actively tuning our operations and intercompany structures to minimize the secondneed quarterfor and impact of 2024,any we completed a $3.4 million dividend distribution from our China subsidiary operation, incurring a $337,000 foreign tax withholding expense. This was undertaken to optimize the cash position and operating needsrepatriation of each subsidiary, increase the interest earning potential of our cash holdings and ensure available liquidity at the U.S. headquarters to support future strategic and operational initiatives.monies.

Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA excluding equity compensation and impairment & related charges (non-cash, one-time items) are set forth below. Non-GAAP financial measures 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 our results and facilitate the comparison of results. A reconciliation of net income to EBITDA and Adjusted EBITDA follows:

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 except as set forth below.Report.

Data I/O continued to evolve its business through the firstsecond quarter of 2026, despiteas a challenging global economic environment. Slower uptake of new initiatives through the early partsome of the quartereconomic negativelychallenges impactedof revenuethe growth,prior but momentumquarters began to buildease. Sales momentum observed towards quarter-end.the Meanwhile,end managementof tookthe stepsprior toquarter realigncontinued 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, leveragingthrough operating efficiencies andefficiencies, internal AI deploymentsdeployments, and select, targeted spending cuts led to reducea costs.significant improvement in gross margins.

Our customers’ end markets have seen some weakening of demand which has affected sell-through of microcontrollers, security ICs and memory devices, which we believe has been partially offset by customers’ increased utilization of their existing systems. The net effect has been some greater need for engineering and maintenance services but also some lumpiness in demand for consumable adapters. Overall demand for capital equipment continuedcontinues to be negatively impacted by global trade and tariff negotiations throughout most of the first quarter.uncertainty. However, the Company’s ongoing supply chain planning and other actions have helped mitigate the impact of new tariffs, trade and inflationary pressures, including shifting material sourcing and product manufacturing.

We continue to 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 ana importantletter of intent on a strategic relationshipacquisition withwhich IARwill indiversify the securityCompany’s spacecustomer that we believe will expand the reach, applicabilitybase and addressablesectoral marketexposure, forenhance bothmanufacturing companies.capabilities and efficiencies, and accelerate our move into programming and Programming-as-a-Service (“Paas”).

Significant operational and product progress has been made in a short period of time against a backdrop of significant economic and cross-border trade uncertainty. We remain cautious given the near-term headwinds, but are increasingly encouraged by later-quartersecond quarter activity levels.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 productsproducts, and improving our value proposition.propositions.

At the same time, we are focused on increasing our efficiency in delivering our products and services, and to that end we have sought to streamline and better align our operations. Notably,Following the first quarter realignment in Germany, in the firstsecond quarter of 2026, we made somesimilar strategic realignments aroundin our GermanyRedmond officeoperations which we expect to yield material cost savings and efficiencies. Employee-related costs related to the GermanyRedmond realignment and expensed in the firstsecond quarter amounted to approximately over $1 million,$345,000, primarily for legal work and employee severance. We expect to continuecontinuously to review our operations in Germany as well as the U.S. and Chinaglobal operations with an eye to improving operational efficiency and effectiveness worldwide.

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.

* 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 quarterthree and six months ended MarchJune 31,30, 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 quarterthree and six months ended MarchJune 31,30, 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 were $3.3 million, compared with $6.2 million in the prior year period.2026. Overall demand for capital equipment continued to be negatively impacted by ongoing global trade and tariff negotiations throughoutthrough most of the firstsecond quarter of 2026. Net sales of consumable adapters and services revenue represented 81%55% of total revenue and provide a stable base of recurring revenue.

Total platform sales in the first quarter of 2026 were 19%44% of revenues, adapter salesadapters were 47%34% and software and services sales revenues were 34%22% of revenues compared with 49%41%, 41% and 32% and 19%18% respectively in the firstsecond 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 46%74% of total net sales for the firstsecond quarter of 2026 compared with 88%95% in the prior year period.

Bookings increased in the latter half of the firstsecond 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. FirstSecond quarter 2026 bookings were $4.2$4.9 million, up from $3.1 million in the fourth quarter 2025 and down from $4.6$4.2 million in the first quarter 2026 and down from $5.8 million in the second quarter 2025.

Backlog at MarchJune 31,30, 2026, was $2.6$2.1 million, updown from $1.6$2.6 million at the end of the prior quarter. Deferred revenue was $1.5 million on March 31, 2026, and $1.5 million on December 31, 2025.

Gross margin as a percentage of sales in the firstsecond quarter of 2026 was 49.5%57% as compared to 51.6%49.8% in the same period last year.year Overalland 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 recovered sequentially as direct material costs remained steady and consistent with prior periods. Margins declined year-over-year as overheads and other fixed costs were spread over a smaller revenue base.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 (“R&D”) expenses decreased in the firstsecond 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 (“SG&A”) expenses were higher in the firstsecond 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 MunichRedmond operations. Continued efficiency improvements and cost reduction efforts remain a focus.

INTEREST INCOME

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

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

Working capital decreased by $3.0$1.6 million during 2026, primarily due to net proceeds of approximately $9 million received from the revenueJune decline2026 andprivate resultingplacement operatingpartially loss.offset by net cash burn through the first half of the year partly driven by reorganization costs. Our current ratio was 2.61.9 and 3.53.46 for MarchJune 31,30, 2026 and December 31, 2025, respectively.

At MarchJune 31,30, 2026, our principal sources of liquidity consisted of existing cash and cash equivalents. Cash at $5.7$10.8 million decreasedincreased $2.2$2.9 million from December 31, 2025, primarily due to one-timethe expensesissuance andof investmentsconvertible debentures in the firstsecond quarter, partially offset by ana otherwisesignificant improvedcompany costrestructure. structure,Subsequent lowerto inventorythe levels, and currency effects on overseas cash balances. Correspondingly, working capitalend of approximatelythe $9.3second millionquarter, onthe Marchconvertible 31, 2026,debt was downconverted $3.0into millionpreferred asequity, comparedeliminating tothe December 31, 2025. The Company continues to have noCompany’s debt.

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.capital, If additional capital is required, the Company will review the amounts and options to raise capital at that time, but future financingwhich 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.

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

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($3,070,000$665,000) in the firstsecond quarter of 2026 compared to ($272,000$687,000) in the firstsecond quarter of 2025. Adjusted EBITDA, excluding share-basedequity compensation (a non-cash item), was ($2,993,000$509,000) in the firstsecond quarter of 2026, compared to ($98,000$437,000) in the firstsecond quarter of 2025.