See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
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 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 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 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, 2022 and our operating results and cash flows for the three months ended March 31, 2022 and 2021. The accompanying financial information as of December 31, 2021 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, 2021, as filed with the SEC on March 10, 2022.
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, 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, | |
| | 2022 | | | 2021 | |
Stock options | | | 991,588 | | | | 163,393 | |
Restricted stock units | | | 22,898 | | | | 108,828 | |
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, 2022 | | | Three Months Ended March 31, 2021 | |
| | Partner | | | Edge to | | | | | | Partner | | | Edge to | | | | |
| | Solutions | | | Cloud | | | Total | | | Solutions | | | Cloud | | | Total | |
Primary geographic area: | | | | | | | | | | | | | | | | | | | | | | | | |
North America | | $ | 8,205 | | | $ | 563 | | | $ | 8,768 | | | $ | 7,523 | | | $ | 1,065 | | | $ | 8,588 | |
Europe | | | 91 | | | | 37 | | | | 128 | | | | 110 | | | | 112 | | | | 222 | |
Asia | | | 836 | | | | — | | | | 836 | | | | 1,162 | | | | — | | | | 1,162 | |
Total | | $ | 9,132 | | | $ | 600 | | | $ | 9,732 | | | $ | 8,795 | | | $ | 1,177 | | | $ | 9,972 | |
For the quarter ended March 31, 2022 and 2021, $9.3 million and $8.8 million of revenue was recorded at a point-in-time, and $0.4 million and $1.2 million of revenue recorded over-time, respectively.
Contract balances
We receive payments from customers based upon contractual billing schedules. 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, 2022 and 2021.
Significant changes in the contract assets and the deferred revenue balances during the three months ended March 31, 2022 and 2021 were as follows (in thousands):
| | Three Months Ended March 31, 2022 | | | Three Months Ended March 31, 2021 | |
| | Contract | | | Contract | |
| | Assets | | | Assets | |
Transferred to receivables from contract assets outstanding at the beginning of the period | | $ | 45 | | | $ | — | |
| | Three Months Ended March 31, 2022 | | | Three Months Ended March 31, 2021 | |
| | Deferred | | | Deferred | |
| | Revenue | | | Revenue | |
Revenue recognized that was included in deferred revenue at the beginning of the period | | $ | 205 | | | $ | 756 | |
Contract acquisition costs
We capitalize contract acquisition costs for contracts with a life exceeding one year. Amortization of contract acquisition costs was $4,000 and $22,000 for the three months ended March 31, 2022 and 2021, respectively. There were no asset impairment charges for contract acquisition costs for any of the periods noted above.
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 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, 2022:
| | Remainder of | | | | | | | | | |
| | 2022 | | | 2023 | | | After 2023 | |
Edge to Cloud | | $ | 1,044 | | | $ | 454 | | | $ | — | |
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, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Cash | | $ | 5,411 | | | $ | 2,506 | |
Cash equivalents (see detail in Note 4) | | | 33,810 | | | | 37,023 | |
Restricted cash | | | 220 | | | | 557 | |
Total cash and cash equivalents | | $ | 39,441 | | | $ | 40,086 | |
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 our cash equivalents and restricted cash are valued using quoted market prices.
Assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 are summarized below (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
| | 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 | | $ | 33,810 | | | $ | — | | | $ | 33,810 | | | $ | 37,023 | | | $ | — | | | $ | 37,023 | |
Total cash equivalents | | | 33,810 | | | | — | | | | 33,810 | | | | 37,023 | | | | — | | | | 37,023 | |
Restricted cash: | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | | 220 | | | | — | | | | 220 | | | | 557 | | | | — | | | | 557 | |
Total assets measured at fair value | | $ | 34,030 | | | $ | — | | | $ | 34,030 | | | $ | 37,580 | | | $ | — | | | $ | 37,580 | |
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. As a result of entering into this lease agreement, we recorded additional ROU assets and net lease liabilities of $0.4 million on our consolidated balance sheet as of December 31, 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 six 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, 2022 and 2021 (in thousands):
| | Three Months Ended | | | Three Months Ended | |
Total component lease expense was as follows: | | March 31, 2022 | | | March 31, 2021 | |
Operating leases | | $ | 75 | | | $ | 105 | |
Supplemental cash flow information related to leases was as follows: | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 77 | | | $ | 104 | |
The following table presents supplemental balance sheet information related to our operating leases as of March 31, 2022 and 2021 (dollars in thousands):
| | March 31, 2022 | | | March 31, 2021 | |
Right-of-use lease assets | | $ | 1,522 | | | $ | 1,773 | |
| | | | | | | | |
Current portion of operating lease liability | | $ | 358 | | | $ | 344 | |
Operating lease liability, net of current portion | | | 1,286 | | | | 1,552 | |
Total operating lease liabilities | | $ | 1,644 | | | $ | 1,896 | |
| | | | | | | | |
Weighted average remaining lease term (years) | | | 4.9 | | | | 5.9 | |
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, 2022 (in thousands):
Years Ending December 31, | | | | |
2022, remainder of year | | $ | 276 | |
2023 | | | 374 | |
2024 | | | 380 | |
2025 | | | 367 | |
2026 | | | 276 | |
After 2026 | | | 164 | |
Total minimum lease payments | | | 1,837 | |
Less: amount representing interest | | | (193 | ) |
Present value of lease liabilities | | $ | 1,644 | |
6. Shareholders’ Equity
Equity Compensation Plans
We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (the “Inducement Plan”) (collectively the “Plans”). Under the Plans, 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 Plans also allow for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, RSUs and PSUs.
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 activity. 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, | |
| | 2022 | | | 2021 | |
Dividend yield | | | 0 | % | | | 0 | % |
Expected life (years) | | | 4.9 | | | | 4.9 | |
Expected volatility | | | 111 | % | | | 83 | % |
Risk-free interest rate | | | 1.8 | % | | | 0.4 | % |
The impact on our results of operations from stock-based compensation expense was as follows (in thousands):
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Cost of revenue — Edge to Cloud | | $ | 6 | | | $ | 15 | |
Selling, general and administrative | | | 66 | | | | 146 | |
Research and development | | | 3 | | | | 7 | |
Total stock-based compensation expense | | $ | 75 | | | $ | 168 | |
Stock Option Activity
The following table summarizes stock option activity under the Plans:
| | | | | | | | | | Weighted | | | | | |
| | | | | | | | | | Average | | | | | |
| | | | | | | | | | Remaining | | | | | |
| | | | | | Weighted | | | Contractual | | | | | |
| | Number of | | | Average | | | Life | | | Aggregate | |
| | Shares | | | Exercise Price | | | (in years) | | | Intrinsic Value | |
Balance at December 31, 2021 | | | 1,664,014 | | | $ | 2.07 | | | | 6.64 | | | $ | 405,223 | |
Granted | | | 50,000 | | | | 1.84 | | | | | | | | | |
Exercised | | | (54,167 | ) | | | 1.20 | | | | | | | | | |
Forfeited | | | (8,125 | ) | | | 1.02 | | | | | | | | | |
Expired | | | (26,625 | ) | | | 3.45 | | | | | | | | | |
Balance at March 31, 2022 | | | 1,625,097 | | | | 2.07 | | | | 6.70 | | | | 385,088 | |
Vested and expected to vest at March 31, 2022 | | | 1,625,097 | | | | 2.07 | | | | 6.70 | | | | 385,088 | |
Exercisable at March 31, 2022 | | | 988,838 | | | $ | 2.38 | | | | 6.13 | | | $ | 189,808 | |
At March 31, 2022, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was $263,411. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.10 years. The following table summarizes certain information about stock options:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Weighted average grant-date fair value of options granted during the period | | $ | 1.84 | | | $ | 3.17 | |
Options in-the-money (in shares) | | | 312,661 | | | | 550,733 | |
Aggregate intrinsic value of options exercised during the period | | $ | 1.20 | | | $ | 5.15 | |
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, 2021 | | | 34,614 | | | $ | 2.72 | |
Granted | | | — | | | | — | |
Vested | | | (17,307 | ) | | | 2.72 | |
Forfeited | | | — | | | | — | |
Unvested at March 31, 2022 | | | 17,307 | | | | 2.72 | |
Expected to vest after March 31, 2022 | | | 17,307 | | | $ | 2.72 | |
At March 31, 2022, total compensation cost not yet recognized related to granted RSUs was approximately $9,157, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.2 years.
Performance Stock Units
In January 2021, we awarded PSUs to Messrs. Derrickson and Wheaton. The PSUs vest based on a combination of Bsquare's stock price performance and Messrs. Derrickson's and Wheaton's continued service. The first vesting measurement date was January 5, 2022 and the final measurement date is July 5, 2025. We estimated the fair value of the awards utilizing Monte Carlo simulations. Based on the Monte Carlo model, expense of approximately $12,000 was recorded in the selling, general and administrative line of our consolidated statement of operations for the period ended March 31, 2022. At March 31, 2022, total compensation cost not yet recognized related to granted PSUs was approximately $48,000 and will be amortized over a weighted-average period of approximately 3.3 years.
In January 2022, the Compensation Committee of the board of directors (the "Committee") amended the PSUs, updating the definition of stock price performance, and reduced 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.
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, 2022:
| | March 31, 2022 | |
Stock options outstanding | | | 1,625,097 | |
Restricted stock units and performance stock units outstanding | | | 433,974 | |
Stock options and restricted stock units available for future grant | | | 1,045,772 | |
Common stock reserved for future issuance | | | 3,104,843 | |
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, 2022, 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, | |
| | 2022 | | | 2021 | |
Partner Solutions: | | | | | | | | |
Revenue | | $ | 9,132 | | | $ | 8,795 | |
Cost of revenue | | | 7,552 | | | | 7,459 | |
Segment gross profit | | | 1,580 | | | | 1,336 | |
| | | | | | | | |
Edge to Cloud: | | | | | | | | |
Revenue | | | 600 | | | | 1,177 | |
Cost of revenue | | | 696 | | | | 920 | |
Segment gross profit | | | (96 | ) | | | 257 | |
| | | | | | | | |
Total gross profit | | | 1,484 | | | | 1,593 | |
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, 2022 | | | December 31, 2021 | |
Long-lived assets: | | | | | | | | |
North America | | $ | 750 | | | $ | 1,430 | |
Europe | | | 172 | | | | 177 | |
Total long-lived assets | | $ | 922 | | | $ | 1,607 | |
Total long-lived assets decreased due to the removal of fully-depreciated assets in North America.
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, 2022 and 2021.
Continental Resources, Inc. had accounts receivable balances of $757,000, or approximately 16% of total accounts receivable at March 31, 2022. Honeywell International, Inc. and affiliated entities (“Honeywell”) had accounts receivable balances of $563,000 or approximately 10% of total accounts receivable at March 31, 2021.
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. Our distribution agreement for sales of Windows IoT operating systems in the European Union (“E.U.”), the European Free Trade Association, Turkey and Africa, expired on June 30, 2019 and was not renewed thereafter.
We have also entered into Original Equipment Manufacturer Distribution 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.
There is no automatic renewal provision in any of these agreements, and these agreements can 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. In accordance with program rules, we allocate a portion of the incentive earnings to reduce cost of revenue with the remaining portion utilized to offset qualified marketing expenses in the period the expenditures are claimed and approved. During the second quarter of 2020 the program allocation was changed by Microsoft to a 50/50 split between the two components.
Under this rebate program, we recorded rebate credits as follows (in thousands):
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Reductions to cost of revenue | | $ | 136 | | | $ | 106 | |
Reductions to marketing expense | | | 105 | | | | 57 | |