Company Quick10K Filing
Bsquare
Price1.22 EPS-1
Shares13 P/E-1
MCap16 P/FCF-3
Net Debt-7 EBIT-13
TEV8 TEV/EBIT-1
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-13
10-Q 2020-06-30 Filed 2020-08-14
10-Q 2020-03-31 Filed 2020-05-12
10-K 2019-12-31 Filed 2020-02-25
10-Q 2019-09-30 Filed 2019-11-08
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10-Q 2019-03-31 Filed 2019-05-14
10-K 2018-12-31 Filed 2019-03-04
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10-K 2015-12-31 Filed 2016-02-11
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10-K 2014-12-31 Filed 2015-02-19
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10-K 2013-12-31 Filed 2014-02-25
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-09
10-K 2012-12-31 Filed 2013-02-22
10-Q 2012-09-30 Filed 2012-11-14
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10-K 2011-12-31 Filed 2012-02-23
10-Q 2011-09-30 Filed 2011-11-10
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10-Q 2011-03-31 Filed 2011-05-05
10-K 2010-12-31 Filed 2011-03-17
10-Q 2010-09-30 Filed 2010-11-12
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10-K 2009-12-31 Filed 2010-03-25
8-K 2020-11-12
8-K 2020-08-13
8-K 2020-08-06
8-K 2020-06-11
8-K 2020-05-11
8-K 2020-04-10
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8-K 2019-05-13
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8-K 2019-03-01
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8-K 2019-02-21
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8-K 2018-11-16
8-K 2018-11-12
8-K 2018-11-02
8-K 2018-08-09
8-K 2018-06-25
8-K 2018-06-12
8-K 2018-05-31
8-K 2018-05-15
8-K 2018-05-09
8-K 2018-02-20

BSQR 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 ex_204192.htm
EX-31.2 ex_204193.htm
EX-32.1 ex_204194.htm
EX-32.2 ex_204195.htm

Bsquare Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
655239261302012201420172020
Assets, Equity
3022146-2-102012201420172020
Rev, G Profit, Net Income
4.31.4-1.4-4.3-7.1-10.02012201420172020
Ops, Inv, Fin

10-Q 1 bsqr20200930_10q.htm FORM 10-Q bsqr20200630_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 September 30, 2020 

 

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

 


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)

 

(425) 519-5900

(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 October 30, 2020: 13,235,038



 

 

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BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2020

TABLE OF CONTENTS

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

     

Item 2

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

16

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk

20

     

Item 4

Controls and Procedures

20

     

 

PART II. OTHER INFORMATION

 

     

Item 1A

Risk Factors

21

     

Item 6

Exhibits

22

     

 

Signatures

23

 

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

   

September 30, 2020

   

December 31, 2019

 
   

(Unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 12,209     $ 7,712  

Restricted cash

    363       600  

Short-term investments

          2,249  

Accounts receivable, net of allowance for doubtful accounts of $50 and $31 at September 30, 2020 and December 31, 2019, respectively

    5,514       9,216  

Contract assets

    553       494  

Prepaid expenses and other current assets

    423       244  

Total current assets

    19,062       20,515  

Equipment, furniture and leasehold improvements, less accumulated depreciation

    403       252  

Deferred tax assets

    7       7  

Intangible assets, less accumulated amortization

    95       169  

Right-of-use lease asset, net

    1,471       1,828  

Other non-current assets

    25       284  

Total assets

  $ 21,063     $ 23,055  

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Third-party software fees payable

  $ 5,722     $ 7,224  

Accounts payable

    287       408  
Paycheck Protection Program loan     962        

Accrued compensation

    456       1,001  

Other accrued expenses

    658       306  

Deferred revenue

    2,142       1,559  

Operating lease

    317       702  

Total current liabilities

    10,544       11,200  

Deferred revenue, long-term

    10       903  

Operating lease, long-term

    1,269       1,256  
Paycheck Protection Program loan, long-term     618        
                 

Shareholders' equity:

               

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

           

Common stock, no par: 37,500,000 shares authorized; 13,180,139 and 13,042,293 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

    139,516       138,877  

Accumulated other comprehensive loss

    (1,017 )     (987 )

Accumulated deficit

    (129,877 )     (128,194 )

Total shareholders' equity

    8,622       9,696  

Total liabilities and shareholders' equity

  $ 21,063     $ 23,055  

 

See notes to condensed consolidated financial statements.

 

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BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

 

   

 Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue:

                               

Partner Solutions

  $ 9,145     $ 12,556     $ 33,160     $ 37,341  

Edge to Cloud

    1,275       2,085       2,913       6,576  

Total revenue

    10,420       14,641       36,073       43,917  

Cost of revenue:

                               

Partner Solutions

    7,402       10,762       27,502       31,834  

Edge to Cloud

    1,128       1,247       3,050       4,637  

Total cost of revenue

    8,530       12,009       30,552       36,471  

Gross profit

    1,890       2,632       5,521       7,446  

Operating expenses:

                               

Selling, general and administrative

    1,987       2,462       6,951       8,478  

Research and development

    41       1,046       222       5,276  
Restructuring costs           253             1,629  

Total operating expenses

    2,028       3,761       7,173       15,383  

Loss from operations

    (138 )     (1,129 )     (1,652 )     (7,937 )

Other income (loss), net

    2       22       (31 )     116  

Loss before income taxes

    (136 )     (1,107 )     (1,683 )     (7,821 )

Income taxes

                       

Net loss

  $ (136 )   $ (1,107 )   $ (1,683 )   $ (7,821 )
Basic loss per share   $ (0.01 )   $ (0.09 )   $ (0.13 )   $ (0.60 )
Diluted loss per share   $ (0.01 )   $ (0.09 )   $ (0.13 )   $ (0.60 )

Shares used in per share calculations:

                               

Basic

    13,165       12,934       13,205       12,982  

Diluted

    13,165       12,934       13,205       12,982  
                                 

Net loss

  $ (136 )   $ (1,107 )   $ (1,683 )   $ (7,821 )

Other comprehensive income (loss)

                               

Foreign currency translation, net of tax

    11       (2 )     (27 )     (82 )

Unrealized gain (loss) on investments, net of tax

    (3 )     (2 )     (3 )     4  

Total other comprehensive income (loss)

    8       (4 )     (30 )     (78 )

Comprehensive loss

  $ (128 )   $ (1,111 )   $ (1,713 )   $ (7,899 )

 

See notes to condensed consolidated financial statements.

 

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BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net loss

  $ (1,683 )   $ (7,821 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    494       696  

Stock-based compensation

    601       371  
Impairment of capitalized software development costs           375  
Changes in operating assets and liabilities:                

Accounts receivable, net

    3,702       2,804  

Contract assets

    123       424  

Prepaid expenses and other assets

    (342 )     344  

Third-party software fees payable

    (1,502 )     (612 )

Accounts payable and accrued expenses

    (314 )     (1,270 )

Operating lease

    (15 )     240  

Deferred revenue

    (310 )     (48 )

Deferred rent

          (497 )

Net cash provided by (used in) operating activities

    754       (4,994 )

Cash flows from investing activities:

               

Purchases of equipment and furniture

    (374 )     (300 )

Proceeds from maturities of short-term investments

    2,250       9,640  

Purchases of short-term investments

          (7,370 )

Net cash provided by investing activities

    1,876       1,970  
Cash flows from financing activities:                
Cash flows from financing activities: Proceeds from Paycheck Protection Program loan     1,580        

Effect of exchange rate changes on cash and cash equivalents

    50       (144 )

Net increase (decrease) in cash and cash equivalents

    4,260       (3,168 )

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

    8,312       10,531  

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

  $ 12,572     $ 7,363  

 

See notes to condensed consolidated financial statements.

 

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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 September 30, 2020

 

Shares

   

Amount

   

Shares

   

Amount

   

Income (Loss)

   

Deficit

   

Equity

 

Balance as of June 30, 2020

        $       13,155,139     $ 139,199     $ (1,025 )   $ (129,741 )   $ 8,433  
Exercise of stock options                 25,000       34                   34  

Share-based compensation, including issuance of restricted stock

                      281                   281  

Net loss

                                  (136 )     (136 )

Foreign currency translation adjustment, net of tax

                      2       11             13  

Unrealized gain on investments, net of tax

                            (3 )           (3 )

Balance as of September 30, 2020

        $       13,180,139     $ 139,516     $ (1,017 )   $ (129,877 )   $ 8,622  

 

                                   

Accumulated

                 
                                   

Other

           

Total

 
   

Preferred Stock

   

Common Stock

   

Comprehensive

   

Accumulated

   

Shareholders'

 

For the Nine Months Ended September 30, 2020

 

Shares

   

Amount

   

Shares

   

Amount

   

Income (Loss)

   

Deficit

   

Equity

 

Balance as of December 31, 2019

        $       13,042,293     $ 138,877     $ (987 )   $ (128,194 )   $ 9,696  
Exercise of stock options                       34                   34  

Share-based compensation, including issuance of restricted stock

                137,846       601                   601  

Net loss

                                  (1,683 )     (1,683 )

Foreign currency translation adjustment, net of tax

                      4       (27 )           (23 )

Unrealized gain on investments, net of tax

                            (3 )           (3 )

Balance as of September 30, 2020

        $       13,180,139     $ 139,516     $ (1,017 )   $ (129,877 )   $ 8,622  

 

See notes to condensed consolidated financial statements

 

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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”) builds technology that is powering the next generation of connected devices and intelligent systems. We help companies realize the promise of the Internet of Things (“IoT”) through the development of devices and systems that are cloud-enabled, share data seamlessly, facilitate distributed learning and control, and operate securely at scale. We believe that IoT-enabled systems can not only deliver value to our customers but also help people make better use of the resources of our planet. Bsquare's suite of services and software components create new revenue streams and operating models for our customers while providing opportunities for lowering costs and improving operations.

 

Since our founding in 1994, Bsquare has been at the intersection of hardware and software. Today that intersection is the “edge” where cloud-enabled devices connect to create intelligent systems that share data, facilitate distributed control and machine learning, and operate securely at scale. From device hardware, to the operating system, to IoT software solutions, and cloud services that make intelligent systems possible, Bsquare’s expertise, products, and services are at the center of digital transformation.

 

Our business has largely been focused on providing software solutions (including reselling software from Microsoft Corporation (“Microsoft”)) and related engineering services to businesses that develop, market, and sell dedicated-purpose standalone intelligent systems. Examples of dedicated-purpose standalone intelligent systems include smart, connected computing devices such as point-of-sale terminals, kiosks, tablets and handheld devices, as well as vending machines, ATM machines, digital signs, smart phones, set-top boxes and in-vehicle telematics and entertainment devices.

 

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 subsidiaries. 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 September 30, 2020 and our operating results and cash flows for nine months ended September 30, 2020 and 2019. The accompanying financial information as of December 31, 2019 is derived from our audited financial statements as of that date.

 

These unaudited condensed 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, 2019, as filed with the SEC on February 24, 2020.

 

Basis of consolidation

 

The consolidated financial statements include the accounts of Bsquare and our wholly owned subsidiaries. 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 of progress on professional engineering service arrangements, bonus accruals, fair value of intangible assets and property and equipment, fair values of stock-based awards, and assumptions used to determine the net present value of operating lease liabilities, among other estimates and assumptions. Actual results may differ from these estimates and assumptions.

 

Income (Loss) Per Share

 

We compute basic 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 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 September 30,

   

 Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Stock options

    1,796,478       1,534,817       1,769,556       1,560,546  

Restricted stock units

    35,123       59,130       46,851       78,430  

 

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Small Business Administration Paycheck Protection Program loan

 

On April 10, 2020, we received loan proceeds of $1.6 million (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the Small Business Administration (“SBA”), provides for loans to qualifying companies in amounts up to 2.5 times their average payroll expenses. We treat our PPP Loan as financial liability and accrue interest under the interest method, per the terms of the underlying promissory note. On our balance sheet, amounts due within 12 months are classified as a current liability and amounts due more than 12 months after the balance sheet date are classified as a long-term liability.

 

COVID-19 impact

 

In March 2020, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (“COVID-19”) outbreak. As the pandemic continues to affect economic and social interactions around the world, multiple governmental authorities have imposed “stay at home,” “shelter-in-place” and similar orders that have and may continue to disrupt business operations and present economic uncertainties. We continue to monitor closely the impact of COVID-19 on all aspects of our business, including how it has impacted and may continue to impact our customers, employees, suppliers, and vendors. For the quarterly period ended September 30, 2020, we continued to experience adverse conditions for our business as a result of COVID-19, including a reduction in customer demand for certain products. Due to the uncertainties surrounding COVID-19, we are unable to predict the extent the pandemic will continue to impact our operational and financial performance in future periods. We will continue to make any necessary adjustments to our financial statements and presentation of operating results in future periods. As a result, our estimates and judgments may change materially as new events occur or additional information becomes available to us.

 

 

2. Revenue Recognition 

 

Disaggregation of revenue

 

The following table provides information about disaggregated revenue by primary geographical area and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):

 

   

Three Months Ended September 30, 2020

   

Three Months Ended September 30, 2019

 
           

Edge to

                   

Edge to

         
   

Partner Solutions

   

Cloud

   

Total

   

Partner Solutions

   

Cloud

   

Total

 

Primary geographic area:

                                               

North America

  $ 7,819     $ 1,100     $ 8,919     $ 10,851     $ 1,863     $ 12,714  

Europe

    613       172       785       164       177       341  

Asia

    713       3       716       1,541       45       1,586  

Total

  $ 9,145     $ 1,275     $ 10,420     $ 12,556     $ 2,085     $ 14,641  

 

   

Nine Months Ended September 30, 2020

   

Nine Months Ended September 30, 2019

 
           

Edge to

                   

Edge to

         
   

Partner Solutions

   

Cloud

   

Total

   

Partner Solutions

   

Cloud

   

Total

 

Primary geographic area:

                                               

North America

  $ 28,104     $ 2,345     $ 30,449     $ 31,687     $ 5,932     $ 37,619  

Europe

    1,344       475       1,819       1,086       477       1,563  

Asia

    3,712       93       3,805       4,568       167       4,735  

Total

  $ 33,160     $ 2,913     $ 36,073     $ 37,341     $ 6,576     $ 43,917  

 

Contract balances

 

We receive payments from customers based upon contractual billing schedules; accounts receivable is 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 and deferred contract acquisition costs, which are amortized over time as the associated revenue is recognized. 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 and nine months ended September 30, 2020 and 2019

 

Significant changes in the contract assets and the deferred revenue balances during the three and nine months ended September 30, 2020 were as follows (in thousands):

 

   

Three Months Ended September 30, 2020

   

 Nine Months Ended September 30, 2020

 
   

Contract

   

Deferred

   

Contract

   

Deferred

 
   

Assets

   

Revenue

   

Assets

   

Revenue

 

Revenue recognized that was included in deferred revenue at December 31, 2019

  $     $ 412     $     $ 1,118  

Transferred to receivables from contract assets recognized at December 31, 2019

                15        

 

Contract acquisition costs

 

We capitalize contract acquisition costs for contracts with a life exceeding one year. Amortization of contract acquisition costs was $23,000 and $35,000 for the three months ended September 30, 2020 and 2019, respectively and was $68,000 and $42,000 for the nine months ended September 30, 2020 and 2019, respectively. There were no asset impairment charges for contract acquisition costs for any of the periods noted above. 

 

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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 (in thousands). 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 September 30, 2020:

 

   

Remainder of

                 
   

2020

   

2021

   

After 2021

 

Partner Solutions

  $ 66     $ 3     $ 9  

Edge to Cloud

    591       1,483        

 

Practical expedients and exemptions

 

We apply a practical expedient and fully expense contract acquisition costs, such as sales commissions, as incurred because the amortization period is less than one year. We record these costs within selling, general and administrative expenses.

 

 

3. Cash, Cash Equivalents and Short-Term Investments

 

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

 

   

September 30, 2020

   

December 31, 2019

 

Cash

  $ 6,356     $ 4,092  

Cash equivalents (see detail in Note 4)

    5,853       3,620  

Restricted cash

    363       600  

Total cash and cash equivalents

    12,572       8,312  

Short-term investments (see detail in Note 4)

          2,249  

Total cash, cash equivalents and short-term investments

  $ 12,572     $ 10,561  

 

 

4. Fair Value Measurements

 

We measure our cash equivalents and short-term investments 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 short-term investments within Level 1 or Level 2 because our cash equivalents and short-term investments are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

 

Assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 are summarized below (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 
   

Quoted Prices in

   

Direct or

           

Quoted Prices in

   

Direct or

         
   

Active Markets

   

Indirect

           

Active Markets

   

Indirect

         
   

for Identical

   

Observable

           

for Identical

   

Observable

         
   

Assets (Level 1)

   

Inputs (Level 2)

   

Total

   

Assets (Level 1)

   

Inputs (Level 2)

   

Total

 

Assets

                                               

Cash equivalents:

                                               

Money market funds

  $ 5,853     $     $ 5,853     $ 1,871     $     $ 1,871  

Corporate commercial paper

                            999       999  

Corporate debt

                            750       750  

Total cash equivalents

    5,853             5,853       1,871       1,749       3,620  

Restricted cash:

                                               

Money market funds

    363             363       600             600  

Short-term investments:

                                               

Corporate commercial paper

                            748       748  

Corporate debt

                            1,501       1,501  

Total short-term investments

                            2,249       2,249  

Total assets measured at fair value

  $ 6,216     $     $ 6,216     $ 2,471     $ 3,998     $ 6,469  

 

As of September 30, 2020, and December 31, 2019, contractual maturities of our short-term investments were less than one year, and gross unrealized gains and losses on those investments were not material.

 

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5. Intangible Assets

 

Intangible assets are related to customer relationships that we acquired from TestQuest, Inc. in November 2008 and from the acquisition of Bsquare EMEA, Ltd. in September 2011.

 

Information regarding our intangible assets is as follows (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 
   

Gross

                   

Gross

                 
   

Carrying

   

Accumulated

   

Net Book

   

Carrying

   

Accumulated

   

Net Book

 
   

Amount

   

Amortization

   

Value

   

Amount

   

Amortization

   

Value

 

Customer relationships

  $ 982     $ (887 )   $ 95     $ 1,275     $ (1,106 )   $ 169  

 

Amortization expense was $25,000 for each of the three months ended September 30, 2020 and 2019, and was $74,000 for each of the nine months ended September 30, 2020 and 2019. Amortization in future periods is expected to be as follows (in thousands):

 

Remainder of 2020

  $ 24  

2021

    71  

Total

  $ 95  

 

 

6. Leases

 

We determine if an arrangement is a lease at inception. On our balance sheet, our office leases are included in right-of-use (“ROU”) lease asset, net and related lease liabilities are included in operating lease and operating lease, long-term. We determined that we do not currently have any leases that we are required to classify as finance leases.

 

ROU assets represent our right to use the underlying assets for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease agreements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the term of the lease. For leases that do not provide an implicit rate, we use an incremental borrowing rate based on information available at the commencement date to determine the present value of lease payments. We use the implicit rate in the lease when readily determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

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 which started on May 1, 2020 and the lease term ending on July 31, 2027. As a result of entering this lease agreement, in December 2019, we recorded additional ROU assets and net lease liabilities of $1.2 million on our consolidated balance sheets. 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 one to eight years. The only leases that contain renewal options are for office space leases at our Seattle and Trowbridge locations. In the fourth quarter of 2019, we made the decision not to renew our Bellevue lease, which expired at the end of May 2020, and we made the decision not to renew our Taiwan lease, exiting that facility in February 2020 (see Note 11, “Restructuring Costs”). Because of changes in our business, we are not able to determine with reasonable certainty whether we will renew our Seattle lease. 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 nine months ended September 30, 2020 (in thousands):

 

   

Nine Months Ended

 

Total component lease expense was as follows:

 

September 30, 2020

 

Operating leases

  $ 582  

Supplemental cash flow information related to leases was as follows:

       

Cash paid for amounts included in the measurement of lease liabilities

  $ 596  

 

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The following table presents supplemental balance sheet information related to our operating leases as of September 30, 2020 (dollars in thousands):

 

   

September 30, 2020

 

Right-of-use lease assets

  $ 1,471  
         

Current portion of operating lease liability

  $ 317  

Operating lease liability, net of current portion

    1,269  

Total operating lease liabilities

  $ 1,586  
         

Weighted average remaining lease term (years)

    6.6  

Weighted average discount rate

    8.4 %

 

The following table presents the amounts we are obligated to pay, by maturity, under our operating leases liabilities as of September 30, 2020 (in thousands):

 

Years Ended December 31,

       

2020, remainder of year

  $ 157  

2021

    274  

2022

    249  

2023

    255  

2024

    262  

After 2024

    709  

Total minimum lease payments

    1,905  

Less: amount representing interest

    (319 )

Present value of lease liabilities

  $ 1,586  

 

 

7. Shareholders’ Equity

 

Equity Compensation Plans

 

We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (together with the Stock Plan, the “Plans”). Under the Plans, stock options to purchase shares of our common stock may be granted with a fixed exercise price that is equal 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 Plans also allow for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and restricted stock units (“RSUs”).

 

Stock-Based Compensation

 

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures based on historical experience and expected future activities. 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 stock option awards 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 September 30,

   

 Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Dividend yield

    0 %     0 %     0 %     0 %

Expected life (years)

    4.9       5.6       4.9       5.8  

Expected volatility

    63 %     64 %     63 %     64 %

Risk-free interest rate

    0.2 %     1.6 %     0.5 %     2.1 %

 

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

 

   

Three Months Ended September 30,

   

 Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Cost of revenue — Edge to Cloud

  $ 26     $ 1     $ 50     $ 10  

Selling, general and administrative

    250       175       536       373  

Research and development

    5       12       15       (12 )

Total stock-based compensation expense

  $ 281     $ 188     $ 601     $ 371  

 

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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, 2019

    1,544,826     $ 2.74       7.47     $ 46,582  

Granted

    574,900       1.03                  

Exercised

    (25,000 )     1.35                  

Forfeited

    (109,656 )     1.72                  

Expired

    (200,367 )     4.82                  

Balance at September 30, 2020

    1,784,703       2.07       8.03       214,529  

Vested and expected to vest at September 30, 2020

    1,548,348       2.14       7.90       172,230  

Exercisable at September 30, 2020

    568,073     $ 3.35       6.28     $ 6,601  

 

At September 30, 2020, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was $490,778. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.6 years. The following table summarizes certain information about stock options:

 

   

Three Months Ended September 30,

   

 Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

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

  $ 1.37     $ 1.23     $ 1.03     $ 1.70  

Options in-the-money (in shares)

    59,201             59,201        

Aggregate intrinsic value of options exercised during the period

  $ 1.35     $     $ 1.35     $  

 

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 period. 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, 2019

    112,846     $ 1.44  

Granted

    219,596       1  

Vested

    (112,846 )     1.44  

Forfeited

           

Unvested at September 30, 2020

    219,596     $ 1.48  

Expected to vest after September 30, 2020

    206,673     $ 1.48  

 

At September 30, 2020, total compensation cost related to RSUs granted but not yet recognized, net of estimated forfeitures, was $173,000. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.4 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 September 30, 2020:

 

   

September 30, 2020

 

Stock options outstanding

    1,784,703  

Restricted stock units outstanding

    219,596  

Stock options and restricted stock units available for future grant

    1,245,563  

Common stock reserved for future issuance

    3,249,862

 

 

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8. 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 6, “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 on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.

 

 

9. Information about Geographic Areas and Operating Segments

 

Our chief operating decision-makers (i.e. our Chief Executive Officer and certain direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by our chief operating decision-makers, or anyone else, for operations, operating results, or planning for levels or components below the consolidated unit level. We operate within a single industry segment of computer software and services.

 

We have two major product lines, Partner Solutions and Edge to Cloud, each of which we consider to be operating and reportable segments. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements, and we do not produce asset information by reportable segment. The following table sets forth profit and loss information about our segments (in thousands):

 

   

Three Months Ended September 30,

   

 Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Partner Solutions:

                               

Revenue

  $ 9,145     $ 12,556     $ 33,160     $ 37,341  

Cost of revenue

    7,402       10,762       27,502       31,834  

Gross profit

    1,743       1,794       5,658       5,507  

Edge to Cloud:

                               

Revenue

    1,275       2,085       2,913       6,576  

Cost of revenue

    1,128       1,247       3,050       4,637  

Gross profit

    147       838       (137 )     1,939  

Total gross profit

    1,890       2,632       5,521       7,446  

Operating expenses

    2,028       3,761       7,173       15,383  

Other income, net

    2       22       (31 )     116  

Income tax (expense) benefit

                       

Net loss

  $ (136 )   $ (1,107 )   $ (1,683 )   $ (7,821 )

 

Revenue by geographic area is based on the sales region of the customer. The following tables set forth total revenue and long-lived assets by geographic area (in thousands):

   

Three Months Ended September 30,

   

 Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Total revenue:

                               

North America

  $ 8,919     $ 12,714     $ 30,449     $ 37,619  

Asia

    716       1,586       3,805       4,735  

Europe

    785       341       1,819       1,563  

Total revenue

  $ 10,420     $ 14,641     $ 36,073     $ 43,917  

 

   

September 30, 2020

   

December 31, 2019

 

Long-lived assets:

               

North America

  $ 1,823     $ 2,016  

Asia

          177  

Europe

    171       340  

Total long-lived assets

  $ 1,994     $ 2,533  

 

Long-lived assets decreased due to utilization of ROU leased assets in North America and from retirement of ROU leased assets in Asia due to closure of our Taiwan office.

 

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10. Significant Risk Concentrations

 

Significant Customers

 

No customers accounted for 10% or more of total revenue for each of the three and nine months ended September 30, 2020 and 2019.

 

Kodak Alaris had accounts receivable balances of $645 thousand or approximately 12% of total accounts receivable at September 30, 2020.  Honeywell International, Inc. and affiliated entities (“Honeywell”) had accounts receivable balances of $552 thousand or approximately 10% of total accounts receivable at September 30, 2020 and $1.2 million or approximately 13% of total accounts receivable at December 31, 2019. No other customer accounted for 10% or more of total accounts receivable at September 30, 2020 or December 31, 2019.

 

 

Significant Supplier

 

Effective March 1, 2019, pursuant to a Global Partnership Agreement with Microsoft, we are authorized to sell Windows Embedded operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Puerto Rico, Columbia, and several Caribbean countries. Of our total revenue, 79% in 2019 resulted from the sale of Windows IoT operating systems. We have also entered into OEM distributor agreements (“ODAs”) with Microsoft pursuant to which we are 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 are effective through April 30, 2022.

 

Software sales under these agreements constitute a significant portion of our Partner Solutions revenue and total revenue. There is no automatic renewal provision in any of these agreements, and these agreements can be terminated unilaterally by Microsoft at any time.

 

Microsoft currently offers a rebate program to sell Microsoft Windows Embedded operating systems pursuant to which we earn money for achieving certain predefined objectives. In accordance with Microsoft rebate program rules:

 

•    For the three months ended September 30, 2020, we allocated 50% of rebates to reduce cost of sales, with the remaining 50% potentially available to offset qualified marketing expenses related to Microsoft Azure products in the period that expenditures are claimed and approved.

 

•    For the six months ended June 30, 2020, we allocated 20% of rebates to reduce cost of sales, with the remaining 80% potentially available to offset qualified marketing expenses related to Microsoft Azure products in the period that expenditures are claimed and approved.

 

•    For the three and nine months ended September 30, 2019, respectively, we allocated 20% of rebates to reduce cost of sales, with the remaining 80% potentially available to offset qualified marketing expenses related to Microsoft Azure products in the period that expenditures are claimed and approved.

 

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

 

   

Three Months Ended September 30,

   

 Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Reductions to cost of revenue

  $ 500     $ 87     $ 654     $ 240  

Reductions to marketing expense

  $ 123     $ 597     $ 1,026     $ 1,027  

 

There was a balance of approximately $122,000 in qualified outstanding rebate credits at September 30, 2020, which will be accounted for as a reduction in marketing expense in the period in which qualified program expenditures are claimed and approved.

 

 

11. Restructuring costs

 

In May 2019, we approved a severance plan that included a workforce elimination of approximately 38 positions in the United States and internationally. In October 2019, we decided to close our Taiwan branch office, which resulted in elimination of approximately 17 additional positions by the end of 2019. An involuntary termination benefit plan was provided to employees of the Taiwan branch in order to reduce go-forward operating costs and to re-align our go-forward business model. The costs associated with these actions consisted primarily of charges for restructuring costs related to severance and benefits, and a non-cash impairment charge related to certain software development cost assets. We incurred aggregate restructuring charges of approximately $2.3 million associated with these actions during 2019, beginning in the second quarter of 2019. For the three and nine months ended September 30, 2020, we did not incur any charges for restructuring costs under this plan. For the three months ended September 30, 2020, no restructuring costs were paid.  For the nine months ended September 30, 2020, $0.5 million in restructuring costs were paid and there is no remaining balance of accrued restructuring charges on our consolidated balance sheet at September 30, 2020.

 

The following tables show the activity and estimated timing of future payouts for accrued restructuring costs (in thousands):

   

For the nine months ended

 
   

September 30, 2020

 

Balance at beginning of period

  $ 472  

Restructuring costs

     

Cash payments

    (472 )

Balance at end of period

  $  

 

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12. Paycheck Protection Program loan

 

Our PPP Loan is evidenced by a promissory note, dated as of April 7, 2020 (the “Note”), between us and JPMorgan Chase Bank, N.A. (the “Lender”). The Note has a two-year term, bears interest at the rate of 0.98% per annum, and may be prepaid at any time without payment of any premium or penalty. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”).  The principal and accrued interest under the Note is forgivable after eight weeks if we used the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise comply with PPP requirements. In order to obtain forgiveness of the PPP Loan, we must submit a request and provide satisfactory documentation regarding our compliance with applicable requirements.  We must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period.  We have used the proceeds of the PPP Loan for eligible purposes and intend to pursue forgiveness, although we may have taken or may in the future take action that could inadvertently cause some or all of the PPP Loan to become ineligible for forgiveness.

 

The Note contains customary events of default relating to, among other things, payment defaults and breaches of representations or warranties.  The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from us, or filing suit and obtaining judgment against us.

 

At September 30, 2020 and December 31, 2019, the PPP Loan balance was as follows (in thousands):

   

September 30, 2020

   

December 31, 2019

 

PPP Loan, .98%, due April 2022:

               

Principal

  $ 1,572     $ -  

Accrued interest

    8       -  
    $ 1,580     $ -  
                 

PPP Loan payable:

               

Current portion

  $ 962          

Long-term portion

    618          
    $ 1,580     $ -  

 

 

 

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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 of 1933, as amended (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, 2019 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 builds technology that is powering the next generation of connected devices and intelligent systems. We help companies realize the promise of IoT through the development of devices and systems that are cloud-enabled, share data seamlessly, facilitate distributed learning and control, and operate securely at scale. We believe that IoT-enabled systems can not only deliver value to our customers, but also can help people make better use of the resources of our planet and work more effectively to improve quality of life. Bsquare's suite of services and software components create for our customers new revenue streams and operating models while providing opportunities for lowering costs and improving operations.

 

Since our founding in 1994, Bsquare has been at the intersection of hardware and software. Today that intersection is the “edge” where cloud-enabled devices connect to create intelligent systems that share data, facilitate distributed control and machine learning, and operate securely at scale. From device hardware, to the operating system, to IoT software solutions, and cloud services that make intelligent systems possible, Bsquare’s expertise, products, and services are at the center of digital transformation.

 

Our objective throughout 2020 has been to accelerate the business rebuilding we initiated last year. The first quarter started with increasing revenue and margins in our Partner Solutions segment.  Late in the first quarter of 2020, we began to experience the challenging economic conditions created by COVID-19. Conditions worsened in the second quarter and have persisted since then. However, expense reductions from prior periods allowed us to absorb the gross margin decrease and limit our losses. Compared to the first nine months of 2019, despite lower revenue, our 2020 year to date net income improved by $6.1 million and our cash consumption from operating activities improved by $4.9 million.

 

Our Partner Solutions business segment is a source of both cash and important partner and customer relationships. We are uniquely positioned as a software-only Microsoft distributor. Because we sell operating system (“OS”) software decoupled from hardware, we can partner with a wide range of customers, especially those who are concerned about procuring their software from a potential hardware competitor. Nearly every customer that has been buying OS software is now contemplating their IoT strategy and our longstanding relationship allows us to cross sell our Edge to Cloud products and services.

 

In our Edge to Cloud business segment, we plan to expand on the valuable experience we gained serving our large customers in 2019 building and operating their IoT solutions at scale. Our B2IQ software and consulting suite and our improved engineering methodologies create a foundation upon which we can build and grow this business segment. We plan to continue to invest in creating an agile and quality-oriented customer service function that will become an integral part of our customers’ IoT operations, allowing our customers to rely on Bsquare to ensure that their products are well designed and can operate in a fully connected IoT-enabled world.

 

In addition to system design and software engineering services, we have expanded our services to include 24/7 support, dev/ops, and cloud management – the services that are critical when a customer puts an edge-to-cloud solution into production. Experience with our early IoT customers showed that Bsquare’s role could last well beyond the design and development phase and continue into on-going operation of connected devices. This role as an operating partner for our customers represents an opportunity for future collaboration and on-going business in the form of monthly support and services fees to Bsquare.

 

We are pursuing increasingly apparent business opportunities in the intersection of our business segments. In the Partner Solutions segment, customers are recognizing that their products, essentially interconnected devices and associated software, cannot be sold, installed, and then forgotten. For these customers, we offer software-based solutions that address the operational headaches caused by this new business requirement.  In many ways, these are the same services we are already providing to our large Edge to Cloud segment customers. Experience with those customers has shown that Bsquare’s role can last well beyond the development phase and continue into their on-going operations. This role as an operating partner represents an opportunity for future collaboration and on-going business in the form of monthly support and services fees to Bsquare. Our software and edge expertise combined with our position as a supply chain partner makes us uniquely suited to address these complex requirements.

 

We see a natural progression between the increasing level of control provided by network-aware devices, the connected ubiquity of these devices, the distributed computing that the cloud offers, the rules and rules engines that make up machine learning, and, ultimately, the distributed decision making and control created by these intelligent devices and systems. In pursuing revenue growth in both segments, we seek to exploit what we believe to be the obvious synergy between our two core businesses.

 

 

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Bsquare Response to COVID-19 Pandemic

 

Early in the evolution of our collective understanding of the COVID-19 pandemic, we encouraged our Bsquare team members in the UK and US to work remotely and to make a personal decision about traveling to and working in the office. In mid-March 2020, in response to local government “stay at home,” “shelter-in-place” and similar orders intended to reduce the spread of the virus, Bsquare closed our offices in Trowbridge in the United Kingdom and stopped all non-essential activities in our Bellevue, Washington office. Bsquare’s operations are now fully virtual.

 

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on many factors, including the eventual duration of the pandemic; its impact on our customers’ and our sales cycles, employee or industry events, and our vendors; and the reactions of governments and businesses to manage its adverse impacts. All of these factors remain highly uncertain and cannot be predicted. In the second and  third quarters of 2020, we experienced adverse conditions for our business and may continue to experience adverse conditions in future periods. See “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.

 

Critical Accounting Judgments

 

Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, cost of sales and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances, which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes to our critical accounting judgments, policies and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

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 September 30,

   

Nine Months Ended September 30,

 

(In thousands, except percentages)

 

2020

   

2019

   

$ Change

   

% Change

   

2020

   

2019

   

$ Change

   

% Change

 

Total revenue

  $ 10,420     $ 14,641     $ (4,221 )     (29 )%   $ 36,073     $ 43,917     $ (7,844 )     (18 )%

Total cost of revenue

    8,530       12,009       (3,479 )     (29 )%     30,552       36,471       (5,919 )     (16 )%

Gross profit

    1,890       2,632       (742 )     (28 )%     5,521       7,446       (1,925 )     (26 )%

Operating expenses

    2,028       3,761       (1,733 )     (46 )%     7,173       15,383       (8,210 )     (53 )%

Loss from operations

    (138 )     (1,129 )     991       88 %     (1,652 )     (7,937 )     6,285       79 %

Other income (loss), net

    2       22       (20 )     (91 )%     (31 )     116       (147 )     (127 )%

Loss before income taxes

    (136 )     (1,107 )     971       88 %     (1,683 )     (7,821 )     6,138       78 %

Income tax benefit

                      %                       %

Net loss

  $ (136 )   $ (1,107 )   $ 971       88 %   $ (1,683 )   $ (7,821 )   $ 6,138       78 %

 

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 decreased for the three and nine months ended September 30, 2020 compared to the prior year periods, primarily due to decreased sales in our Partner Solutions segment, primarily in North America and Asia, and lower revenue in our Edge to Cloud segment.

 

Additional revenue details are as follows:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(In thousands, except percentages)

 

2020

   

2019

   

$ Change

   

% Change

   

2020

   

2019

   

$ Change

   

% Change

 

Revenue

                                                               

Partner Solutions

  $ 9,145     $ 12,556     $ (3,411 )     (27 )%   $ 33,160     $ 37,341     $ (4,181 )     (11 )%

Edge to Cloud

    1,275       2,085       (810 )     (39 )%     2,913       6,576       (3,663 )     (56 )%

Total revenue

  $ 10,420     $ 14,641     $ (4,221 )     (29 )%   $ 36,073     $ 43,917     $ (7,844 )     (18 )%

As a percentage of total revenue:

                                                               

Partner Solutions

    88 %     86 %                     92 %     85 %                

Edge to Cloud

    12 %     14 %                     8 %     15 %                

 

Partner Solutions revenue

 

Partner Solutions revenue decreased for the quarterly period ended September 30, 2020, primarily due to a $2.9 million decrease in sales of Microsoft Windows operating systems and a $0.5 million decrease in sales of Microsoft Mobile operating systems. For the nine months ended September 30, 2020, Microsoft Windows operating systems decreased $3.8 million and Microsoft Mobile operating systems decreased $1.3 million. We believe customer demand for embedded operating systems was adversely impacted by the economic downturn and related uncertainty due to the global COVID-19 pandemic as our orders were down 22% and 17% this quarter versus the three and nine months ended September 30, 2019, respectively. 

 

Sales of Microsoft operating systems represented approximately 86% and 88% of our total revenue and 81% and 88% of our total gross margin for the three and nine months ended September 30, 2020, respectively.

 

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Edge to Cloud revenue

 

Edge to Cloud revenue decreased for the three and nine months ended September 30, 2020 compared to the same periods in 2019, primarily due to significant DataV related professional service revenue recognized in the prior year period that was not repeated in the current quarter. We expect Edge to Cloud revenue will continue to vary in timing and amount.

 

Gross profit and gross margin

 

Cost of Partner Solutions revenue consists primarily of the cost of embedded operating system software product costs payable to third-party vendors and support costs associated with our proprietary software products. Cost of Edge to Cloud revenue consists primarily of salaries and benefits, contractor costs and re-billable expenses, related facilities and depreciation costs, and amortization of certain intangible assets related to acquisitions. Gross profit and gross margin were as follows:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(In thousands, except percentages)

 

2020

   

2019

   

$ Change

   

% Change

   

2020

   

2019

   

$ Change

   

% Change

 

Partner Solutions

  $ 1,743     $ 1,794     $ (51 )     (3 )%   $ 5,658     $ 5,507     $ 151       3 %

Partner Solutions gross margin

    19 %     14 %             33 %     17 %     15 %             16 %

Edge to Cloud

    147     $ 838     $ (691 )     (82 )%     (137 )     1,939       (2,076 )     (107 )%

Edge to Cloud gross margin

    12 %     40 %             (71 )%     (5 )%     29 %             (116 )%

Total gross profit

  $ 1,890     $ 2,632     $ (742 )     (28 )%   $ 5,521     $ 7,446     $ (1,925 )     (26 )%

Total gross margin

    18 %     18 %             1 %     15 %     17 %             (10 )%

Save File

Partner Solutions gross profit and gross margin

 

Partner Solutions gross profit decreased for the three months ended September 30, 2020 primarily due to decreased Partner Solutions revenue, partially offset by an increase in the amount of rebate credits allocated to cost of sales. Partner Solutions gross profit increased for the nine months ended September 30, 2020 primarily due to an increase of $0.5 million in non-Microsoft third-party software gross profit offset by a decline of $0.3 million in gross profit from Microsoft product sales.

 

Gross profit on Partner Solutions is positively impacted by rebate credits that we receive from Microsoft for the sale of Windows operating systems earned through the achievement of defined objectives. Under the Microsoft rebate program, we recognized $500,000 and $654,000 in rebate credits during the three and nine months ended September 30, 2020, compared to $87,000 and $240,000 in rebate credits during the three and nine months ended September 30, 2019, all of which were accounted for as reductions in cost of revenue.  For the quarterly period ended September 30, 2020, we allocated 50% of rebates to reduce cost of sales and 50% to marketing expenses, and for the quarterly period ended September 30, 2019, we allocated 20% of rebates to reduce cost of sales and 80% to marketing expenses. See “Note 10, Significant Risk Concentrations.”

 

Edge to Cloud gross profit and gross margin

 

Edge to Cloud gross profit and gross margin decreased for the three and nine months ended September 30, 2020 primarily due to decreased sales of DataV professional services, primarily in North America, and from ongoing but temporary investment in improvements to previously deployed DataV customer installations.

 

Operating expenses

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(In thousands, except percentages)

 

2020

   

2019

   

$ Change

   

% Change

   

2020

   

2019

   

$ Change

   

% Change

 

Operating expenses:

                                                               

Selling, general and administrative

  $ 1,987     $ 2,462     $ (475 )     (19 )%   $ 6,951     $ 8,478     $ (1,527 )     (18 )%

Research and development

    41       1,046       (1,005 )     (96 )%     222       5,276       (5,054 )     (96 )%
Restructuring costs           253       (253 )     (100 )%           1,629       (1,629 )     (100 )%

Total operating expenses

  $ 2,028     $ 3,761     $ (1,733 )     (46 )%   $ 7,173     $ 15,383     $ (8,210 )     (53 )%

As a percentage of total revenue:

                                                               

Selling, general and administrative

    19 %     17 %                     19 %     19 %                

Research and development

    0 %     7 %                     1 %     12 %                
Restructuring costs     0 %     2 %                     0 %     4 %                

 

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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 and related facilities and depreciation costs, as well as professional services fees (e.g., consulting, legal, audit and tax). SG&A expenses decreased for the three and nine months ended September 30, 2020 primarily due to lower salaries and related benefits resulting from our restructuring efforts in prior periods, partially offset by increased costs for stock-based compensation expense and corporate insurance 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, and related facilities and depreciation costs. R&D expenses decreased for the three and nine months ended September 30, 2020 primarily due to lower salaries and related benefits resulting from restructuring efforts in prior periods, including elimination of R&D positions as a result of our decision to discontinue marketing of DataV as an IoT platform in the second quarter of 2019.

 

Restructuring costs

 

Restructuring costs were not recorded for the three and nine months ended September 30, 2020.  For the three and nine months ended September 30, 2019, restructuring costs consist primarily of severance, related benefit and other employment costs as a result of the restructuring plan we put in place during the second quarter of 2019.  See Note 12, “Restructuring Costs.”

 

Other income (loss), net

 

Other income (loss), 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. We had an immaterial change in other income (loss), net for the quarterly period ended September 30, 2020 as compared to the prior year period.

 

Income taxes

 

Income taxes were not recorded for the quarterly periods ended September 30, 2020 and September 30, 2019, respectively.

 

Liquidity and Capital Resources

 

As of September 30, 2020, we had $12.6 million of cash, restricted cash, and cash equivalents. 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. Our investments held at September 30, 2020 had minimal default risk and consist of cash equivalents.  We held no short-term investments at September 30, 2020, primarily due to the timing of maturities on previously held short-term investments.

 

In mid-March 2020, a number of customers notified Bsquare that it is an essential supplier to their businesses which had been designated essential to the country’s infrastructure. Throughout the rapid change created by the COVID-19 crisis, Bsquare has continued to meet customer demands. In April 2020, as part of our contingency planning to meet our obligations, we applied for and received $1.6 million in funding through the PPP Loan. The principal and accrued interest under the Note is forgivable after eight weeks if we used the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise comply with PPP requirements. The CARES Act reduces the amount of the PPP loan that may be forgiven if the borrower reduces full-time equivalent employees during the covered period as compared to a base period.  In order to obtain forgiveness of the PPP Loan, we must submit a request and provide satisfactory documentation regarding our compliance with applicable requirements.  Although we believe a portion of the loan may be forgivable, the amount will not be known until the end of the covered period and after we are notified by the SBA of the amount to be forgiven.  We must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period.  We have used the proceeds of the PPP Loan for eligible purposes and intend to pursue forgiveness, although we may have taken or may in the future take action that could inadvertently cause some or all of the PPP Loan to become ineligible for forgiveness. See Note 12, Paycheck Protection Program loan.

 

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 provided cash of approximately $0.8 million for the nine months ended September 30, 2020, which included our net loss, more than offset by non-cash adjustments of $1.1 million and a working capital increase of approximately $1.4 million. The working capital increase included cash inflows of $3.7 million related to accounts receivable partially offset by cash outflows of $1.5 million related to third-party software fees payable, a $0.3 million change in prepaid expenses and other assets, a $0.3 million change in accounts payable and accrued expense, and $0.3 million related to deferred revenue.

 

Operating activities used cash of approximately $5.0 million for the nine months ended September 30, 2019, which included our net loss, offset by non-cash adjustments of $6.4 million, and a working capital increase of approximately $1.4 million. The working capital increase included cash inflows of $2.8 million related to accounts receivable, primarily from Honeywell in Europe, partially offset by decreases in accounts payable and third-party software fees payable.

 

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Cash Flows from Investing Activities

 

Investing activities provided cash of approximately $1.9 million for the nine months ended September 30, 2020, due to net cash inflows of $2.3 million on short-term investments, partially offset by a $0.4 million increase in equipment and furniture, primarily from purchases of leasehold improvements for our Seattle office facility. Our short-term investments matured near the end of the first quarter of 2020 and were held as cash equivalents as of September 30, 2020.

 

Investing activities provided cash of approximately $2.0 million for the nine months ended September 30, 2019, primarily due to net cash inflows of $2.3 million on short-term investments, partially offset by a $0.3 million increase in capitalized software development costs, which was reflected in the equipment, furniture and leasehold improvements, less accumulated depreciation statement line on the consolidated balance sheets.

 

Cash Flows from Financing Activities

 

Financing activities provided net cash inflows of approximately $1.6 million for the nine months ended September 30, 2020, primarily due to net cash proceeds received in the second quarter of 2020 on the PPP Loan. 

 

Financing activities provided negligible cash for the three months ended September 30, 2020, and for the three and nine months ended September 30, 2020 and 2019.

 

Cash Commitments

 

Our future or potential cash commitments relate to minimum rents payable under operating leases, which total $0.2 million for the remainder of 2020, $0.3 million in 2021, $0.2 million in 2022, $0.3 million in 2023, $0.3 million in 2024, and $0.7 million thereafter.

 

 

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 controls over financial reporting during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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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, 2019, other than as listed below.

 

The unprecedented nature of the COVID-19 pandemic creates uncertainty for Bsquare and its customers, and for the overall global business environment.

 

As the scope and impact of the COVID-19 pandemic continue to evolve, a number of potential risks to our business may emerge and many have already started to affect our business and our financial results. Beyond our 2020 operating results, we may face ongoing challenges selling or delivering our software and services, as our employees and many of those of our customers work from home, are unable to attend company and industry events, and face restrictions on travel and in-person meetings.  Closures of manufacturing facilities and warehouses, or staffing shortages, have disrupted supply and distribution chains. Our customers could continue to experience a slow-down in demand for their products, decreased budgets, or delayed business initiatives, further reducing the need for our software and services. If our customers’ global supply chains are disrupted because of COVID-19, they may not be able to meet demands for their end-product and they may reduce or eliminate their purchases from Bsquare for an uncertain period of time, if not permanently. Our customers may be slow to collect from their customers or otherwise face liquidity problems, which may cause delays in satisfaction of their financial obligations to us. Some of our customers may be forced to reduce their workforce through layoffs or furloughs, to cease operations temporarily, or, in extreme cases, declare bankruptcy. In those situations, disruptions to our business could range from a loss of key customer relationships to an inability to timely collect potentially significant receivables.

 

Our financial results for the three- and nine-month periods ended September 30, 2020 reflect the negative impact of the pandemic.  More specifically, we have experienced a reduction in sales in our Partner Solutions segment since the second quarter of 2020 which we believe is primarily the result of the pandemic. The adverse effects of the COVID-19 pandemic on our financial results may continue for an unknown period of time. The extent, depth, and duration of the impact of the COVID-19 pandemic on our operational and financial performance will depend on many factors, including the rate of spread of the pandemic; its impact on our customers’ and our sales cycles, employee or industry events, and our vendors; and the reactions of governments and businesses to manage its adverse impacts.  Since the second quarter of 2020, the adverse effects of the COVID-19 pandemic have become more apparent and the prevalence of the virus in the locations where we and our customers, suppliers and partners conduct business did not abate. The persistence of COVID-19 may cause additional adverse conditions for our business in future periods and the extent to which COVID-19 may impact our financial condition or results remains uncertain.

 

We received a PPP loan, which may not be forgivable and may subject us to litigation or public scrutiny that harms our business.

 

In April 2020, we received loan proceeds of $1.6 million under the PPP, which provides for loans to qualifying companies in amounts up to 2.5 times their average monthly payroll expenses. No payments of principal or interest are due during an initial six-month deferral period, and up to 100% of principal and accrued interest is forgivable if we used the PPP loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise comply with PPP requirements. We have used the proceeds of the PPP loan for eligible purposes and expect to pursue forgiveness; however, we may have taken or may in the future take action that could inadvertently cause some or all of the PPP loan to become ineligible for forgiveness, which may reduce our liquidity and harm our business, financial condition and results of operations.

 

The rules surrounding the forgiveness of PPP funding are subject to the political and economic climate and could change, altering our obligations for repayment. Furthermore, if the media, watch groups, government officials or others portray us as a business that should not have availed itself of PPP funding, we may face negative publicity that harms our business and operations.

 

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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

 

Bylaws and all amendments thereto

 

 

 

10-K

 

March 19, 2003

 

3.2

 

 

000-27687

3.3   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

 

 

 

X

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

X

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Document

 

X

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definitions

 

X

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Document

 

X

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SIGNATURES

 

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

 

 

 

BSQUARE CORPORATION

(Registrant)

 

 

 

Date: November 12, 2020

 

By:

 

/s/ Christopher Wheaton

 

 

 

 

Christopher Wheaton

 

 

 

 

Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Duly Authorized Signatory)

 

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