bsqr20230331_10q.htm
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`


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

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

 

For the quarterly period ended March 31, 2023 

 

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: 000-27687

 


https://cdn.kscope.io/0a526c69bc63a9970d8baff21e83e5c6-fulllogo.jpg

BSQUARE CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Washington

 

91-1650880

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

   

1415 Western Ave, Suite 700,

Seattle, WA

 

98101

(Address of principal executive offices)

 

(Zip Code)

 

(425519-5900

(Registrant’s telephone number, including area code)

 


 

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

 

Title of each class

 

 

Trading symbol(s)

 

Name of each exchange on which registered

Common stock, no par value  BSQR The NASDAQ Stock Market LLC

 

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  ☒

 

The number of shares of common stock outstanding as of April 30, 2023: 19,986,485

 


 

 

 

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2023

TABLE OF CONTENTS

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

1

     

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk

19

     

Item 4

Controls and Procedures

19

     

 

PART II. OTHER INFORMATION

 

     

Item 1A

Risk Factors

19

     

Item 6

Exhibits

19

     

 

Signatures

20

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

  

March 31, 2023

  

December 31, 2022

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $7,520  $35,414 

Restricted cash

  221   221 

Short-term investments

  26,211   7 

Accounts receivable, net of allowance for doubtful accounts of $50 at March 31, 2023 and December 31, 2022

  4,764   3,985 

Contract assets

  138   51 

Prepaid expenses and other current assets

  701   410 

Total current assets

  39,555   40,088 

Property and equipment, net of accumulated depreciation

  737   813 

Right-of-use lease assets, net

  1,234   1,297 

Other non-current assets

  24   24 

Total assets

 $41,550  $42,222 

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current liabilities:

        

Third-party software fees payable

 $4,273  $4,073 

Accounts payable

  165   414 

Accrued compensation

  322   430 

Other accrued expenses

  258   232 

Deferred revenue

  179   252 

Operating lease

  367   362 

Total current liabilities

  5,564   5,763 

Deferred revenue, long-term

  7   9 

Operating lease, long-term

  981   1,051 
         

Shareholders' equity:

        

Preferred stock, no par value: 10,000,000 shares authorized; no shares issued and outstanding

      

Common stock, no par value: 37,500,000 shares authorized: 20,075,395 and 20,337,906 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

  172,232   172,558 

Accumulated other comprehensive loss

  (1,057)  (1,053)

Accumulated deficit

  (136,177)  (136,106)

Total shareholders' equity

  34,998   35,399 

Total liabilities and shareholders' equity

 $41,550  $42,222 

 

See notes to condensed consolidated financial statements.

 

 

 

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Revenue:

        

Partner Solutions

 $7,267  $9,132 

Edge to Cloud

  874   600 

Total revenue

  8,141   9,732 

Cost of revenue:

        

Partner Solutions

  6,187   7,552 

Edge to Cloud

  669   697 

Total cost of revenue

  6,856   8,249 

Gross profit

  1,285   1,483 

Operating expenses:

        

Selling, general and administrative

  1,449   2,143 

Research and development

  284   261 

Total operating expenses

  1,733   2,404 

Loss from operations

  (448)  (921)

Other income (expense), net

  377   33 

Loss before income taxes

  (71)  (888)

Income taxes

      

Net loss

 $(71) $(888)

Basic and diluted loss per share

 $(0.00) $(0.05)

Shares used in per share calculations:

        

Basic and diluted

  20,197   16,665 
         

Net loss

 $(71) $(888)

Other comprehensive loss

        

Foreign currency translation, net of tax

  (4)  3 

Total other comprehensive (loss) income

  (4)  3 

Comprehensive loss

 $(75) $(885)

 

See notes to condensed consolidated financial statements.

 

 

 

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Cash flows from operating activities:

        

Net loss

 $(71) $(888)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Depreciation and amortization

  133   88 

Accretion of discount on investments

  (182)   

Stock-based compensation

  15   75 

Changes in operating assets and liabilities:

        

Accounts receivable

  (779)  124 

Contract assets

  (87)  29 

Prepaid expenses and other assets

  (293)  (454)

Third-party software fees payable

  200   348 

Accounts payable and accrued expenses

  (331)  214 

Deferred revenue

  (75)  26 

Net cash used in operating activities

  (1,470)  (438)

Cash flows from investing activities:

        

Additions to property and equipment

  (57)  (138)

Purchases of short-term investments

  (26,022)   

Net cash from investing activities

  (26,079)  (138)

Cash flows from financing activities:

        

Proceeds from exercise of stock options

  25   65 

Cash settlement of performance stock units

     (137)

Repurchases of common stock

  (366)   

Net cash used in financing activities

  (341)  (72)

Effect of exchange rate changes on cash and cash equivalents

  (4)  3 

Net decrease in cash and cash equivalents

  (27,894)  (645)

Cash, restricted cash, and cash equivalents, beginning of period

  35,635   40,087 

Cash, restricted cash, and cash equivalents, end of period

 $7,741  $39,442 

 

See notes to condensed consolidated financial statements.

 

 

 

BSQUARE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

                  

Accumulated

         
                  

Other

      

Total

 
  

Preferred Stock

  

Common Stock

  

Comprehensive

  

Accumulated

  

Shareholders'

 

For the Three Months Ended March 31, 2023

 

Shares

  

Amount

  

Shares

  

Amount

  

Income (Loss)

  

Deficit

  

Equity

 

Balance as of December 31, 2022

    $   20,337,906  $172,558  $(1,053) $(136,106) $35,399 

Exercise of stock options

        24,167   25         25 

Issuance of common stock upon settlement of restricted stock units (RSUs)

        16,960             

Repurchase of common stock

        (303,638)  (366)        (366)

Stock-based compensation

           15         15 

Net loss

                 (71)  (71)

Foreign currency translation adjustment, net of tax

              (4)     (4)

Balance as of March 31, 2023

    $   20,075,395  $172,232  $(1,057) $(136,177) $34,998 

 

                  

Accumulated

         
                  

Other

      

Total

 
  

Preferred Stock

  

Common Stock

  

Comprehensive

  

Accumulated

  

Shareholders'

 

For the Three Months Ended March 31, 2022

 

Shares

  

Amount

  

Shares

  

Amount

  

Income (Loss)

  

Deficit

  

Equity

 

Balance as of December 31, 2021

    $   20,374,406  $172,397  $(1,024) $(132,248) $39,125 

Exercise of stock options

        54,167   65         65 

Issuance of common stock upon settlement of restricted stock units (RSUs)

        17,307             

Stock-based compensation

           75         75 

Cash settlement of performance stock units

           (137)        (137)

Net loss

                 (888)  (888)

Foreign currency translation adjustment, net of tax

              3      3 

Balance as of March 31, 2022

    $   20,445,880  $172,400  $(1,021) $(133,136) $38,243 

  

See notes to condensed consolidated financial statements

 

 

BSQUARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

Bsquare Corporation ("Bsquare," "we," "us" and "our") develops and deploys technologies for the makers and operators of connected devices. These fleets of business-oriented devices, often called the Internet of Things (IoT), offer a powerful means to connect organizations, people, information, and ideas. Hundreds of millions of connected devices have already been deployed and it is estimated that billions more will be. Despite their growing prevalence, these devices and the systems in which they operate remain a significant source of complexity, unplanned and often uncontrolled expense, and operational risk. Our customers are undergoing a massive change in their business practices and Bsquare provides technology that helps them capture the value of connected devices and reduces the cost and risk of doing so.

 

Since our founding in 1994, Bsquare has helped embedded device manufacturers (“Original Equipment Manufacturers” or “OEMs”) design and build cost-effective products. For most of our history, we operated at the intersection of hardware and software, helping our customers select, develop, and configure system software for a variety of purpose-built devices, from mobile computing to point-of-sale systems to healthcare equipment to hospitality, gaming, and more. Our expertise in hardware, device configuration, and operating systems became essential to our customers’ design cycles and purchasing decisions. As our customers deployed ever-larger fleets of devices, our understanding of the requirements for large-scale device operations increased.

 

More recently, our expertise and business prospects have shifted to cloud-connected devices that have been connected to create intelligent systems. This shift coincides with the overall growth of IoT technologies and with our customers’ recognition that connected intelligent devices create significant business opportunities. Device makers have increasingly specified their products not only to be connection-ready, but also to be enhanced by the breadth and depth of functionality that connection creates. We have taken to market a valuable and expanding portfolio of products and services that meet the needs of connected device makers. This portfolio captures our experience and our expertise can enable our customers to be more productive, flexible, and financially successful. And, in turn, our customers can then help make people and organizations more productive, improve quality of life, and reduce demands on the limited resources of our planet.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Bsquare have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of Bsquare and our wholly owned subsidiary. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of March 31, 2023 and our operating results and cash flows for the three months ended March 31, 2023 and 2022. The accompanying financial information as of December 31, 2022 is derived from our audited financial statements as of that date.

 

These unaudited financial statements and related notes should be read in conjunction with our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 7, 2023.

 

Basis of consolidation

 

The consolidated financial statements include the accounts of Bsquare and our wholly owned subsidiary. All intercompany balances and transactions have been eliminated.

 

Use of estimates

 

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include provisions for bad debts and income taxes, estimates related to contracts with customers, such as determining standalone selling price, useful lives of property and equipment, fair value of stock-based awards, and assumptions used to determine the net present value of operating lease liabilities, among other estimates. Actual results  may differ from these estimates.

 

Income (loss) per share

 

We compute basic income (loss) per share using the weighted average number of shares of common stock outstanding during the period. We consider restricted stock units as outstanding shares of common stock and include them in the computation of basic loss per share only when vested. We compute diluted loss per share using the weighted average number of shares of common stock outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. We exclude common stock equivalent shares from the computation if their effect is anti-dilutive.

 

The following potentially dilutive weighted shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Stock options

  1,216,055   991,588 

Restricted stock units

  25,555   22,898 

  

5

 

2. Revenue Recognition 

 

Disaggregation of revenue

 

The following table provides information about disaggregated revenue by primary geographical area and operating segment (in thousands):

 

  

Three Months Ended March 31, 2023

  

Three Months Ended March 31, 2022

 
  Partner  Edge to     Partner  Edge to    
  

Solutions

  

Cloud

  

Total

  

Solutions

  

Cloud

  

Total

 

Primary geographic area:

                        

North America

 $6,883  $809  $7,692  $8,205  $563  $8,768 

Europe

  75   65   140   91   37   128 

Asia

  309      309   836      836 

Total

 $7,267  $874  $8,141  $9,132  $600  $9,732 

  

For the quarters ended March 31, 2023 and 2022, $7.4 million and $9.3 million of revenue was recorded at a point-in-time, and $0.7 million and $0.4 million of revenue was recorded over-time, respectively.

 

Contract balances

 

We receive payments from customers based upon contractual billing schedules. Our average customer payment terms range from 30 - 60 days. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to our contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities, presented as deferred revenue on our condensed consolidated balance sheets, include payments received in advance of performance under the contract and are realized when the associated revenue is recognized. We had no asset impairment charges related to contract assets for each of the three months ended March 31, 2023 and 2022

 

Significant changes in the contract assets and the deferred revenue balances were as follows (in thousands):

 

  

Three Months Ended March 31, 2023

  

Three Months Ended March 31, 2022

 
  

Contract

  

Contract

 
  

Assets

  

Assets

 

Balance at beginning of period

 $  $46 

Revenue recognized

  132   16 

Amounts invoiced

  (45)  (45)

Reclassifications and other

  51    

Balance at end of period

 $138  $17 

 

  

Three Months Ended March 31, 2023

  

Three Months Ended March 31, 2022

 
  

Deferred

  

Deferred

 
  

Revenue

  

Revenue

 

Balance at beginning of period

 $210  $1,138 

Revenue recognized

  (154)  (269)

Amounts collected or invoiced

  80   295 

Reclassifications and other

  50    

Balance at end of period

 $186  $1,164 

 

Contract acquisition costs

 

We capitalize contract acquisition costs for contracts with a life exceeding one year. Amortization of contract acquisition costs was $11,250 and $4,000 for the three months ended March 31, 2023 and 2022, respectively. There were no asset impairment charges for contract acquisition costs for any of the periods noted above.

 

6

 

Transaction price allocated to the remaining performance obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The satisfaction of performance obligations varies based on the nature of the underlying promise and the customer. The estimated revenue does not include contracts with original durations of one year or less, amounts of variable consideration attributable to royalties, or contract renewals that were unexercised as of March 31, 2023:

 

  

Remainder of

                 
  

2023

  

2024

  

2025

  

2026

  

2027

 

Edge to Cloud

 $1,447,321  $1,338,649  $  $  $ 

 

Practical expedients and exemptions

 

We generally expense sales commissions when incurred because the amortization period would have been less than one year. We record these costs within selling, general and administrative expenses.

 

When applicable and appropriate, the Company utilizes the ‘as-invoiced’ practical expedient which permits revenue recognition upon invoicing.

 

3. Cash and Investments

 

Cash, cash equivalents, restricted cash and short-term investments consisted of the following (in thousands):

 

  

March 31, 2023

  

December 31, 2022

 

Cash

 $2,092  $2,243 

Cash equivalents (see detail in Note 4)

  5,428   33,171 

Restricted cash (see detail in Note 4)

  221   221 

Total cash, cash equivalents and restricted cash

  7,741   35,635 

Short-term investments

  26,211   7 

Total cash, cash equivalents, restricted cash and short-term investments

 $33,952  $35,642 

 

The following table sets forth information regarding the amortized cost basis and fair value of our short-term investments that are classified as held-to-maturity ("HTM") (in thousands):

 

              

Gross

  

Gross

     
  

Amortized

  

Allowance for

  

Net carrying

  

unrealized

  

unrealized

  

Fair

 
  

cost

  

credit losses

  

amount

  

gains

  

losses

  

value

 

U.S. treasury securities

 $26,211  $  $26,211  $13  $  $26,224 

Total

 $26,211  $  $26,211  $13  $  $26,224 

 

The contractual maturity of our HTM investments is within 200 days of March 31, 2023.

 

4. Fair Value Measurements

 

We measure our cash equivalents and restricted cash at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

 

 

Level 1:

Quoted prices in active markets for identical assets or liabilities.

 

Level 2:

Directly or indirectly observable market-based inputs or unobservable inputs used in models or other valuation methodologies.

 

Level 3:

Unobservable inputs that are not corroborated by market data. The inputs require significant management judgment or estimation.

 

We classify our cash equivalents and restricted cash within Level 1 because we determine their fair values using quoted market prices.

 

7

 

Assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 are summarized below (in thousands):

 

  

March 31, 2023

  

December 31, 2022

 
  

Quoted Prices in

      

Quoted Prices in

     
  

Active Markets

      

Active Markets

     
  

for Identical

      

for Identical

     
  

Assets (Level 1)

  

Total

  

Assets (Level 1)

  

Total

 

Assets

                

Cash equivalents:

                

Money market funds

 $5,428  $5,428  $13,461  $13,461 

U.S. treasury securities

        19,710   19,710 

Total cash equivalents

  5,428   5,428   33,171   33,171 

Restricted cash:

                

Money market funds

  221   221   221   221 

Total assets measured at fair value

 $5,649  $5,649  $33,392  $33,392 
 

5. Leases

 

In  December 2019, we entered into an operating lease agreement for a new corporate office facility in Seattle, Washington. The term of the lease is 87 months, with a rent date starting on  May 1, 2020 and the lease term ending on  July 31, 2027. 

 

In  November 2020, we renewed the lease for our office facility in the UK. The term of the lease is 120 months, with rent payments starting on  November 30, 2020 and the lease term ending on  November 8, 2030. The Company has an opportunity to break the lease at the five-year mark in  November 2025. As it is reasonably certain that we will utilize this option, the accounting for this lease utilized  November 2025 as the end date. The lease commencement date was  November 9, 2020. There was no material impact to our statement of operations or statement of cash flows as a result of entering into this lease. 

 

Our leases have remaining terms of four to five years. Both of our leases contain renewal options. Because of changes in our business, we are not able to determine with reasonable certainty whether we will renew our Seattle or Trowbridge, UK leases. As a result, we have not considered renewal options when recording ROU assets, lease liabilities or lease expense.

 

The following tables present the components of our lease expense and supplemental cash flow information related to our leases for the three months ended March 31, 2023 and 2022 (in thousands):

 

  

Three Months Ended

  

Three Months Ended

 

Total component lease expense was as follows:

 March 31, 2023  March 31, 2022 

Operating leases

 $101  $75 

Supplemental cash flow information related to leases was as follows:

        

Cash paid for amounts included in the measurement of lease liabilities

 $110  $77 

 

The following table presents supplemental balance sheet information related to our operating leases as of March 31, 2023 and 2022 (dollars in thousands):

 

  March 31, 2023  March 31, 2022 

Right-of-use lease assets

 $1,234  $1,522 
         

Current portion of operating lease liability

 $367  $358 

Operating lease liability, net of current portion

  981   1,286 

Total operating lease liabilities

 $1,348  $1,644 
         

Weighted-average remaining lease term (years)

  4.0   4.9 

Weighted-average discount rate

  8.5%  8.5%

 

The following table presents the amounts we are obligated to pay, by maturity, under our operating leases liabilities as of March 31, 2023 (in thousands):

 

Years Ending December 31,

    

2023, remainder of year

 $276 

2024

  373 

2025

  362 

2026

  276 

2027

  164 

Total minimum lease payments

  1,451 

Less: amount representing interest

  (103)

Present value of lease liabilities

 $1,348 

 

8

 
 

6. Shareholders’ Equity

 

Equity Compensation Plans

 

We have a stock plan (the “Stock Plan”) for equity awards to eligible service providers and an inducement stock plan for newly hired employees (the “Inducement Plan”) (collectively the “Plans”). We stopped using the Inducement Plan in 2019, although it continues to govern outstanding awards granted under it. Under the Stock Plan, stock options  may be granted with a fixed exercise price that is equivalent to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan  may only be granted to our employees. The Stock Plan also allows for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, RSUs and performance-based restricted stock units ("PSUs").

 

Stock-Based Compensation

 

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, and we account for forfeitures as they occur. The fair value of RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of PSUs is estimated at the grant date based on the fair value of each vesting tranche as calculated by a Monte Carlo simulation. The fair value of stock options is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense  may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Dividend yield

  0%  0%

Expected life (years)

  5.9   4.9 

Expected volatility

  96%  111%

Risk-free interest rate

  2.9%  1.8%

 

The impact on our results of operations from stock-based compensation expense was as follows (in thousands):

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Cost of revenue — Edge to Cloud

 $2  $6 

Selling, general and administrative

  12   66 

Research and development

  1   3 

Total stock-based compensation expense

 $15  $75 

 

Stock Option Activity

 

The following table summarizes stock option activity under the Plans:

 

          

Weighted

     
          

Average

     
      

Weighted

  

Remaining

     
      Average  Contractual  Aggregate 
  

Number of

  

Exercise

  

Life

  

Intrinsic

 
  

Shares

  

Price

  

(in years)

  

Value

 

Balance at December 31, 2022

  1,539,278  $2.05   5.17  $43,783 

Granted

              

Exercised

  (24,167)  1.02         

Forfeited

  (40,026)  1.39         

Expired

  (92,839)  2.75         

Balance at March 31, 2023

  1,382,246   2.05   5.39   25,642 

Vested and expected to vest at March 31, 2023

  1,382,246   2.05   5.39   25,642 

Exercisable at March 31, 2023

  1,133,477   2.16   4.87   18,908 

 

9

 

At March 31, 2023, total compensation cost related to stock options granted but not yet recognized was $91,300. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.9 years. The following table summarizes certain information about stock options:

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Weighted average grant-date fair value of options granted during the period

 $  $1.84 

Options in-the-money (in shares)

  203,316   312,661 

Aggregate intrinsic value of options exercised during the period

 $3,616  $1.20 

 

The aggregate intrinsic value represents the difference between the exercise price of the underlying options and the quoted price of our common stock for the number of options exercised during the periods indicated. We issue new shares of common stock upon exercise of stock options.

 

Restricted Stock Unit Activity

 

The following table summarizes RSU activity under the Plans:

 

  

Number of

  

Weighted Average

 
  

Shares

  

Award Price

 

Unvested at December 31, 2022

  45,109  $3.25 

Granted

      

Vested

  (16,960)  3.25 

Forfeited

  (7,692)  3.25 

Unvested at March 31, 2023

  20,457   3.25 

Expected to vest after March 31, 2023

  20,457   3.25 

 

At March 31, 2023, total compensation cost not yet recognized related to granted RSUs was approximately $17,100. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.25 years.

 

Performance Stock Units

 

In January 2021, we awarded Performance Stock Units ("PSUs") to Mr. Derrickson, President and CEO, and Mr. Wheaton, CFO at the time. The PSUs vest based on a combination of Bsquare's stock price performance and continued service. The first vesting measurement date was  January 5, 2022 and the final measurement date is  July 5, 2025.

 

In January 2022, the Compensation Committee of the board of directors (the "Committee") amended the PSU agreements, updating the definition of stock price performance, and reducing the total number of PSUs available to Messrs. Derrickson and Wheaton by 50,000 and 33,333 shares of common stock, respectively (the "2021 Shares"). In lieu of any claim to the 2021 Shares, each of Messrs. Derrickson and Wheaton received in February 2022 a cash settlement in an amount equal to the number of 2021 Shares multiplied by the closing price per share on January 5, 2022. Because the cash settlement was equal to the fair value of the 2021 Shares, we recognized the cash settlement as a charge to equity in the amount paid to repurchase the 2021 Shares.

 

Mr. Wheaton resigned as CFO in February 2023 and, accordingly, during the quarter, we reversed $18,000 of expense related to his PSU award. At March 31, 2023, there is no compensation cost not yet recognized related to Mr. Wheaton’s PSU award, and the shares that were subject to release have been forfeited.

 

We estimated the fair value of the awards utilizing Monte Carlo simulations, and we record the expense in the selling, general and administrative line of our consolidated statement of operations. For the three months ended March 31, 2023, we recorded expense of approximately $3,300 related to Mr. Derrickson’s PSU award. For the three months ended March 31, 2022, we recorded total PSU expense of approximately $12,000. At March 31, 2023, total compensation cost not yet recognized related to Mr. Derrickson’s granted PSUs was approximately $10,600 and will be amortized over a weighted-average period of approximately 2.30 years.

 

Common Stock Reserved for Future Issuance

 

The following table summarizes our shares of common stock reserved for future issuance under the Plans as of March 31, 2023:

 

  

March 31, 2023

 

Stock options outstanding

  1,382,246 

Restricted stock units and performance stock units outstanding

  270,457 

Stock options and restricted stock units available for future grant

  920,743 

Common stock reserved for future issuance

  2,573,446 

 

Share Repurchase Program

 

In November 2022, our Board of Directors authorized a share repurchase program (the “Program”) pursuant to which we can repurchase up to $5.0 million of our common stock. The Program has an expiration date of June 30, 2023, but provides for termination at any time.

 

During the first quarter of 2023, we repurchased 303,638 shares for approximately $0.4 million.

 

10

 
 

7. Commitments and Contingencies

 

Lease and rent obligations

 

Our commitments include obligations outstanding under operating leases, which expire through 2027. We have lease commitments for office space in Seattle, Washington and Trowbridge, UK. See Note 5 - Leases.

 

Loss Contingencies

 

From time to time, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including tax assessments. We defend ourselves vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals made on the best information available at the time, which can be highly subjective. As of March 31, 2023, we have not recorded any loss contingency accruals. 

 

8. Information about Operating Segments and Geographical Areas

 

The Company’s operations are conducted in two reportable segments: Partner Solutions and Edge to Cloud. The Company defines its segments as those operations whose results the chief operating decision maker ("CODM") regularly reviews to analyze performance and allocate resources. We operate within a single industry segment of computer software and services.

 

The Company measures the results of its segments using, among other measures, each segment's revenue and gross profit. Information for the Company's segments is provided in the following table (in thousands):

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Partner Solutions:

        

Revenue

 $7,267  $9,132 

Cost of revenue

  6,187   7,552 

Segment gross profit

  1,080   1,580 
         

Edge to Cloud:

        

Revenue

  874   600 

Cost of revenue

  669   697 

Segment gross profit

  205   (97)
         

Total gross profit

  1,285   1,483 

 

Revenue by geography is based on the sales region of the customer. See Footnote 2 - Revenue Recognition for a disaggregation of revenue by segment and geographic area.

 

We do not track assets at the segment level. The following table sets forth total long-lived assets by geographic area (in thousands):

 

  

March 31, 2023

  

December 31, 2022

 

Property and equipment, net:

        

North America

 $737  $813 

Europe

      

Total property and equipment, net

 $737  $813 

 

 

 

9. Significant Risk Concentrations

 

Significant Customers

 

No customers accounted for 10% or more of total revenue for each of the three months ended March 31, 2023 and 2022.

 

No customers accounted for more than 10% of total accounts receivable at March 31, 2023. Continental Resources, Inc. had accounts receivable balances of $757,000, or approximately 16% of total accounts receivable at March 31, 2022. 

 

11

 

Significant Supplier

 

We are authorized to sell Windows IoT operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Puerto Rico, Columbia, and several Caribbean countries. 

 

We were previously party to certain Original Equipment Manufacturer Distribution Agreements ("ODAs") with Microsoft pursuant to which we were licensed to sell Microsoft Windows Mobile operating systems to customers in North America, South America, Central America (excluding Cuba), Japan, Taiwan, Europe, the Middle East, and Africa. The ODAs to sell Windows Mobile operating systems expired on  April 30, 2022 and were not renewed thereafter.

 

Our current distribution agreements with Microsoft have no automatic renewal provisions and may be terminated unilaterally by Microsoft at any time.

 

The majority of our revenue continues to be derived from reselling Microsoft Windows Embedded and IoT operating system software to device makers. The sale of Microsoft operating systems has historically accounted for substantially all of our Partner Solutions revenue.

 

Microsoft currently offers a distributor incentives program through which we earn rebates pursuant to predefined objectives related to sales of Microsoft Windows IoT operating systems. Based on the nature of the incentives, we record a portion of the incentive earnings as a reduction of Partner Solutions cost of revenue with the remaining portion recorded as an offset to qualified marketing expenses in the period the expenditures are approved. 

 

Under this rebate program, we recorded rebate credits as follows (in thousands):

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Reductions to cost of revenue

 $131  $136 

Reductions to marketing expense

  289   105 

  

12

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes. Some statements and information contained in this discussion are not historical facts but are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, readers can identify forward- looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology, which when used are meant to signify the statement as forward-looking. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements that are not historical facts. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s actual results, to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in the sections entitled “Risk Factors” in this Quarterly Report on Form 10-Q and in in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 as well as similar discussions contained in our periodic reports, and other documents or filings and documents that we may from time to time file or furnish with the SEC. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Overview

 

Bsquare develops and deploys technologies for the makers and operators of connected devices. These fleets of business-oriented devices, often called the Internet of Things ("IoT"), offer a powerful means to connect organizations, people, information, and ideas. Hundreds of millions of connected devices have already been deployed and it is estimated that billions more will be. Despite their growing prevalence, these devices and the systems in which they operate remain a significant source of complexity, unplanned and often uncontrolled expense, and operational risk. Our customers are undergoing a massive change in their business practices and Bsquare provides technology that helps them capture the value of connected devices and reduces the cost and risk of doing so.

 

Since our founding in 1994, Bsquare has helped embedded device manufacturers (“Original Equipment Manufacturers” or “OEMs”) design and build cost-effective products. For most of our history, we operated at the intersection of hardware and software, helping our customers select, develop, and configure system software for a variety of purpose-built devices, from mobile computing to point-of-sale systems to healthcare equipment to hospitality, gaming, and more. Our expertise in hardware, device configuration, and operating systems became essential to our customers’ design cycles and purchasing decisions. As our customers deployed ever-larger fleets of devices, our understanding of the requirements for large-scale device operations increased.

 

More recently, our expertise and business prospects have shifted to cloud-connected devices that have been connected to create intelligent systems. This shift coincides with the overall growth of IoT technologies and with our customers’ recognition that connected intelligent devices create significant business opportunities. Device makers have increasingly specified their products not only to be connection-ready, but also to be enhanced by the breadth and depth of functionality that connection creates. We have taken to market a portfolio of products and services that we believe meets the needs of connected device makers. This portfolio captures our experience and our expertise can enable our customers to be more productive, flexible, and financially successful. And, in turn, our customers can then help make people and organizations more productive, improve quality of life, and reduce demands on the limited resources of our planet.

 

Key Highlights

 

Partner Solutions revenue increased slightly over the fourth quarter of 2022 largely due to one additional shipping day in the current quarter. Daily average revenue was flat quarter-over-quarter.

 

We believe our Partner Solutions revenue is affected by other Microsoft distributors offering deep discounts on Windows IoT OS software as part of hardware/software bundles. We expect this market trend may continue in future quarters. We are working to retain and attract customers with superior service and technical support, pricing that rewards loyalty, and a path to IoT operations.

 

 

In our Edge to Cloud segment, we continue to focus our efforts on a small number of key customers that help us gain credibility as a reliable technology partner. For example, we support Itron, Inc. with its intelligent utility grid. We believe our experience serving Itron and our other large IoT customers positions us to improve our IoT software and services in 2023 and beyond.

 

Our focus on expense discipline has continued. Our operating expenses in the first quarter decreased by $1 million compared to the fourth quarter of 2022, and decreased by $0.7 million compared to the first quarter of 2022.

 

We continue to invest in our SquareOne® platform, which provides a robust, remote device management solution built on state-of-the art cloud infrastructure. SquareOne consists of optional modules that have been pre-built on an architecture designed to be efficient, cost effective and scalable. It can be used on its own, or as an accelerant for a customized solution. It offers secure device registration for multiple OS types, two-way communication via open standards, software updates, operational support, and more.

 

In the first three months of 2023, our product development investment totaled over $340,000, of which $60,000 was capitalized on the balance sheet as internally developed software with the remainder reflected on the consolidated statement of operations as research and development expense.

 

During the first quarter we continued to invest our cash reserves, taking advantage of favorable interest rates. We recognized $0.4 million of interest income during the quarter.

 

In the fourth quarter of 2022, we announced a plan to repurchase up to $5 million of our common stock (the "Share Repurchase Plan"). The Share Repurchase Plan is intended to return value to shareholders without compromising our ability to pursue organic growth or strategic alternatives. During the first quarter of 2023, we repurchased 303,638 shares for approximately $0.4 million.

 

Cash, cash equivalents, restricted cash and short-term investments totaled $34.0 million on March 31, 2023, a decrease of $1.7 million since December 31, 2022. The decrease was driven primarily by changes in working capital and, to a lesser degree, the share repurchase program.

 

Cash will be invested strategically to grow our business and enhance our value proposition to customers.

 

 

Critical Accounting Estimates

 

Revenue recognition

 

Our revenue recognition accounting methodology contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment. For example, for arrangements that have multiple performance obligations, we must exercise judgment and use estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2) determine the standalone selling price of each performance obligation; (3) allocate the transaction price among the various performance obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time. For revenue recognized over-time, we use either the input or output method, whichever most faithfully depicts the transfer of goods or services.

 

Our contracts with customers sometimes include promises to transfer multiple products and services, such as professional services, a perpetual or term software license, and support and maintenance. A performance obligation is a promise in a contract with a customer to transfer products or services that are concluded to be distinct. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment. We allocate the transaction price to each distinct performance obligation based on the estimated standalone selling price (“SSP”) for each performance obligation.

 

Judgment is required to determine the SSP for each distinct performance obligation. Where possible, we determine SSP based on list prices or other observable inputs. In instances where SSP is not directly observable, we determine the SSP using information that may include internal costs, market conditions, and other observable inputs. In some cases, when the selling price is highly uncertain or variable, we may utilize the residual method to determine SSP. When using the residual method the SSP of a performance obligations is calculated by subtracting the sum of the SSPs of all other goods and services promised under the contract from the total transaction price.

 

We have not made any changes to the significant estimates utilized to determine the total transaction price and stand-alone selling prices at contract inception. Our customer contracts that involve perpetual licenses are less sensitive to changes in estimates than contracts involving SaaS as those arrangements require us to estimate customer usage. Changes to our customer usage estimates could have a material impact on the total transaction price.     

 

In addition, we exercise judgment in certain transactions when determining whether we should recognize revenue based on the gross amount billed to a customer (as a principal) or the net amount retained (as an agent). These judgments are based on our determination of whether or not we control the service before it is transferred to the customer.

 

 

Taxes

 

As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the countries and other jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from the differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Net operating losses and tax credits, to the extent not already utilized to offset taxable income or income taxes, also give rise to deferred tax assets. We must then assess the likelihood that any deferred tax assets will be realized from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. We are required to use judgment as to the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, we examine all available evidence on a jurisdiction-by-jurisdiction basis and weigh the positive and negative information when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items, (i) the historical levels of income or loss over a range of time periods that extends beyond the two years presented, (ii) the historical sources of income and losses, (iii) the expectations and risk associated with underlying estimates of future taxable income, (iv) the expectations and risk associated with new product offerings and uncertainties with the timing of future taxable income, and (v) prudent and feasible tax planning strategies. Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. We estimate the valuation allowance related to our deferred tax assets on a quarterly basis.

 

Our sales may be subject to other taxes, particularly withholding taxes, due to our sales to customers in countries other than the United States. The tax regulations governing withholding taxes are complex, causing us to have to make assumptions about the appropriate tax treatment. Further, we make sales in many jurisdictions across the United States, where tax regulations are varied and complex. We must therefore continue to analyze our state tax exposure and determine what the appropriate tax treatments are, and make estimates for sales, franchise, income and other state taxes.

 

Results of Operations

 

The following table presents our summarized results of operations for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.

 

   

Three Months Ended March 31,

 

(In thousands, except percentages)

 

2023

   

2022

   

$ Change

   

% Change

 

Total revenue

  $ 8,141     $ 9,732     $ (1,591 )     (16 )

Total cost of revenue

    6,856       8,249       (1,393 )     (17 )

Gross profit

    1,285       1,483       (198 )     (13 )

Operating expenses

    1,733       2,404       (671 )     (28 )

Loss from operations

    (448 )     (921 )     473       (51 )

Other income, net

    377       33       344       1,042  

(Loss) income before income taxes

    (71 )     (888 )     817       (92 )

Income taxes

                       

Net (loss) income

  $ (71 )   $ (888 )   $ 817       (92 )

 

Revenue

 

We generate revenue from the sale of software, both embedded operating system software that we resell and our own proprietary software, and related professional services.

 

 

Total revenue for the three months ended March 31, 2023 decreased compared to the same period in 2022, primarily due to decreased sales in our Partner Solutions segment in North America and Asia, slightly offset by increased revenue in the Edge to Cloud segment.

 

Additional revenue details are as follows:

 

   

Three Months Ended March 31,

 

(In thousands, except percentages)

 

2023

   

2022

   

$ Change

   

% Change

 

Revenue

                               

Partner Solutions

  $ 7,267     $ 9,132     $ (1,865 )     (20 )

Edge to Cloud

    874       600       274       46  

Total revenue

  $ 8,141     $ 9,732     $ (1,591 )     (16 )

As a percentage of total revenue:

                               

Partner Solutions

    89 %     94 %                

Edge to Cloud

    11 %     6 %                

 

Partner Solutions revenue

 

Partner Solutions revenue decreased $1.9 million or 20% for the three months ended March 31, 2023 compared to the same period in 2022. The decrease was driven in part by a large one-time order in the first quarter of 2022 that did not repeat in the first quarter of 2023. 

 

Edge to Cloud revenue

 

Edge to Cloud revenue increased $0.3 million or 46% for the three months ended March 31, 2023 compared to the same period in 2022. The increase is due to professional services revenue.

 

Gross profit and gross margin

 

Cost of revenue for the Partner Solutions segment consists primarily of embedded operating system software product costs payable to third-party vendors, net of rebate credits earned through Microsoft’s distributor incentive program.

 

Cost of revenue for the Edge to Cloud segment consists primarily of salaries, benefits and re-billable expenses. Gross profit and gross margin for each segment were as follows:

 

   

Three Months Ended March 31,

 

(In thousands, except percentages)

 

2023

   

2022

   

$ Change

   

% Change

 

Partner Solutions

  $ 1,080     $ 1,580     $ (500 )     (32 )%

Partner Solutions gross margin

    15 %     17 %             (2.0 )

Edge to Cloud

  $ 205     $ (97 )   $ 302       (312 )%

Edge to Cloud gross margin

    24 %     (16 )%             40  

Total gross profit

  $ 1,285     $ 1,483     $ (198 )     (13 )%

Total gross margin

    16 %     15 %             1.0  

 

Partner Solutions gross profit and gross margin

 

Partner Solutions gross profit decreased for the three months ended March 31, 2023 compared to the same period in 2022. The decrease was primarily due to decline in revenue, but was also impacted by gross margin rate deterioration. The first quarter of 2022 included a high-margin order that favorably impacted that quarter’s rate.

 

Partner Solutions gross profit is impacted by rebate credits earned through Microsoft’s distributor incentives program. Based on the nature of the incentives, we record a portion of them as a reduction of Partner Solutions cost of revenue with the remaining portion recognized as an offset to qualified marketing expenses during the period in which the expenditure claims are approved. See Footnote 9 – Significant Concentrations for further information about these rebates.

 

Edge to Cloud gross profit and gross margin

 

Edge to Cloud gross profit increased for the three months ended March 31, 2023 compared to the same period in 2022 commensurate with quarter-over-quarter increase in segment revenue.

 

 

Operating expenses

 

The following table presents our operating expenses for the periods indicated:

 

   

Three Months Ended March 31,

 

(In thousands, except percentages)

 

2023

   

2022

   

$ Change

   

% Change

 

Operating expenses:

                               

Selling, general and administrative

  $ 1,449     $ 2,143     $ (694 )     (32 )

Research and development

    284       261       23       9  

Total operating expenses

  $ 1,733     $ 2,404     $ (671 )     (28 )

As a percentage of total revenue:

                               

Selling, general and administrative

    18 %     22 %                

Research and development

    3 %     3 %                

 

Selling, general and administrative

 

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related benefits, commissions and bonuses for our sales, marketing and administrative personnel, facilities and depreciation costs, as well as professional services fees (e.g., consulting, legal, audit and tax). SG&A expenses for the three months ended March 31, 2023 decreased compared to the same period in 2022 driven by decreased digital advertising, increased rebates from Microsoft (which reduce marketing expense), and decreased labor, including stock-based compensation expense.

 

Research and development

 

Research and development (“R&D”) expenses consist primarily of salaries and related benefits for software development and quality assurance personnel, contractor and consultant costs. R&D expenses increased for the three months ended March 31, 2023 compared to the same periods in 2022 primarily due to a decrease in the capitalization of personnel costs and an increase in new product amortization expense.

 

Other income (expense), net

 

Other income (expense), net consists primarily of interest income on our cash and investments, gains and losses we may recognize on our investments, and gains and losses on foreign exchange transactions and other items. Other income (expense), net for three months ended March 31, 2023 compared to the same period in 2022 due to an increase in interest income.

 

Income taxes

 

Income taxes were not recorded for the quarterly periods ended March 31, 2023 and March 31, 2022, respectively.

 

Liquidity and Capital Resources

 

As of March 31, 2023, we had $34.0 million of cash, cash equivalents, restricted cash, and short-term investments, reflecting a decrease of $1.7 million from December 31, 2022. We generally invest our excess cash in high quality marketable investments. These investments typically include corporate notes and bonds, commercial paper, and money market funds, although specific holdings can vary from period to period depending upon our cash requirements. Cash equivalent investments held at March 31, 2023 totaled $5.4 million. Cash equivalent investments held at December 31, 2022 totaled $33.2 million.

 

We believe that our existing cash and cash equivalents will be sufficient to meet our needs for working capital and capital expenditures for at least the next 12 months.

 

Cash Flows from Operating Activities

 

Operating activities used cash of approximately $1.5 million during the quarter ended March 31, 2023. The cash use was driven by an increase in accounts receivable and prepaid expenses, and a decrease in accounts payable.

 

Cash Flows from Investing Activities

 

Investing activities used cash of approximately $26.1 million for the three months ended March 31, 2023. During the quarter, we invested $26.0 million in treasuries with a maturity date beyond 90 days. These are reflected as short-term investments on the balance sheet. The remaining cash used in investing activities relates to additions to our property, plant and equipment in the form of internally-developed software.

 

Cash Flows from Financing Activities

 

Financing activities used cash of $0.3 million during the quarter ended March 31, 2023. This cash use was driven by the repurchase of the Company’s common stock, slightly offset by the proceeds of stock option exercises. During the first quarter of 2023, we repurchased 303,638 shares for approximately $0.4 million.

 

 

Material cash requirements and sources of liquidity

 

Cash requirements arising from contractual obligations relate to our office leases. See Footnote 5 – Leases for further information. Other significant cash requirements include software royalties, which become a liability at the point we sell third-party software to our customers, and salary and benefit expenditures related to our personnel. Our sources of liquidity include cash and cash equivalents currently on-hand, short-term investments, and cash generated from operations. We believe that our existing cash, cash equivalents and short-term investments are sufficient to meet our cash requirements for the foreseeable future. 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4.

Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

There were no changes in our internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1A.

Risk Factors

 

There have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022

 

Item 6.

Exhibits

 

(b) Exhibits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Filed or

 

Incorporated by Reference

Exhibit

 

 

 

Furnished

 

 

 

 

 

 

 

 

 

Number

 

Description

 

Herewith

 

Form

 

Filing Date

 

Exhibit

 

 

File No.

3.1

 

Amended and Restated Articles of Incorporation

 

 

 

S-1

 

August 17, 1999

 

3.1

(a)

 

333-85351

3.1(a)

 

Articles of Amendment to Amended and Restated Articles of Incorporation

 

 

 

10-Q

 

August 7, 2000

 

3.1

 

 

000-27687

3.1(b)

 

Articles of Amendment to Amended and Restated Articles of Incorporation

 

 

 

8-K

 

October 11, 2005

 

3.1

 

 

000-27687

3.2

 

Amended and Restated Bylaws, effective August 6, 2020

 

 

 

8-K

 

August 10, 2020

 

3.1

 

 

000-27687

31.1

 

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) under the Securities and Exchange Act of 1934

 

X

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) under the Securities and Exchange Act of 1934

 

X

 

 

 

 

 

 

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

X

 

 

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

X

 

 

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Document

 

X

 

 

 

 

 

 

 

 

 

104   Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)   X                  

 

 

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.

 

 

 

BSQUARE CORPORATION

(Registrant)

 

 

 

Date: May 11, 2023

 

By:

 

/s/ Cheryl A. Wynne

 

 

 

 

Cheryl A. Wynne

 

 

 

 

Chief Financial Officer

(Principal Financial and Accounting Officer and Duly

Authorized Signatory)

 

20
ex_469983.htm

https://cdn.kscope.io/0a526c69bc63a9970d8baff21e83e5c6-logo.jpg

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

RULE 13(a)-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

I, Ralph C. Derrickson, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of BSQUARE Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 11, 2023

 

/s/ Ralph C. Derrickson

 

 

Ralph C. Derrickson

President and Chief Executive Officer

(Principal Executive Officer)

 

 
ex_469984.htm

https://cdn.kscope.io/0a526c69bc63a9970d8baff21e83e5c6-logo.jpg

 

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

RULE 13(a)-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

I, Cheryl Wynne, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of BSQUARE Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 11, 2023

 

/s/ Cheryl A. Wynne

 

 

Cheryl A. Wynne

Chief Financial Officer, Secretary and Treasurer

(Principal Financial and Accounting Officer)

 

 
ex_469985.htm

https://cdn.kscope.io/0a526c69bc63a9970d8baff21e83e5c6-logo.jpg

 

Exhibit 32.1

 

CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

 

I, Ralph C. Derrickson, President and Chief Executive Officer, certify that:

 

1. To my knowledge, this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. To my knowledge, the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of BSQUARE Corporation.

 

Dated: May 11, 2023

 

/s/ Ralph C. Derrickson

 

 

Ralph C. Derrickson

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 
ex_469986.htm

https://cdn.kscope.io/0a526c69bc63a9970d8baff21e83e5c6-logo.jpg

 

Exhibit 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

 

I, Cheryl Wynne, Chief Financial Officer, Secretary and Treasurer, certify that:

 

1. To my knowledge, this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. To my knowledge, the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of BSQUARE Corporation.

 

Dated: May 11, 2023

 

/s/ Cheryl A. Wynne

 

 

Cheryl A. Wynne

 

 

Chief Financial Officer, Secretary and Treasurer

(Principal Financial and Accounting Officer)