\‘I
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, 2016
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 |
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91-1650880 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
110 110th Avenue NE, Suite 300, Bellevue WA |
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98004 |
(Address of principal executive offices) |
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(Zip Code) |
(425) 519-5900
(Registrant’s telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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☐ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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☒ |
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 31, 2016: 12,452,144
FORM 10-Q
For the Quarterly Period Ended September 30, 2016
TABLE OF CONTENTS
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Page |
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PART I. FINANCIAL INFORMATION |
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Item 1 |
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3 |
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Item 2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
Item 3 |
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22 |
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Item 4 |
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22 |
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PART II. OTHER INFORMATION |
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Item 1A |
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23 |
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Item 5 |
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23 |
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Item 6 |
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23 |
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23 |
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24 |
2
BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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September 30, 2016 |
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December 31, 2015 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
12,346 |
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$ |
16,443 |
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Short-term investments |
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19,231 |
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13,280 |
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Accounts receivable, net of allowance for doubtful accounts of $50 at September 30, 2016 and $62 December 31, 2015 |
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19,808 |
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19,009 |
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Prepaid expenses and other current assets |
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459 |
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580 |
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Total current assets |
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51,844 |
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49,312 |
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Equipment, furniture and leasehold improvements, net |
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1,194 |
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1,167 |
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Restricted cash equivalents |
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— |
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250 |
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Deferred tax assets |
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32 |
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145 |
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Intangible assets, net |
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493 |
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594 |
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Goodwill |
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3,738 |
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3,738 |
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Other non-current assets |
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54 |
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52 |
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Total assets |
$ |
57,355 |
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$ |
55,258 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Third-party software fees payable |
$ |
11,068 |
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$ |
11,789 |
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Accounts payable |
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284 |
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188 |
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Accrued compensation |
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1,924 |
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2,390 |
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Other accrued expenses |
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741 |
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1,277 |
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Deferred rent, current portion |
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315 |
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298 |
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Deferred revenue |
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1,170 |
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1,135 |
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Total current liabilities |
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15,502 |
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17,077 |
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Deferred tax liability |
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85 |
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97 |
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Deferred rent |
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937 |
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1,177 |
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Deferred revenue |
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2,041 |
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— |
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Shareholders’ equity: |
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Preferred stock, no par value: 10,000,000 shares authorized; no shares issued and outstanding |
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— |
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— |
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Common stock, no par value: 37,500,000 shares authorized; 12,415,775 shares issued and outstanding at September 30, 2016 and 12,092,598 shares issued and outstanding at December 31, 2015 |
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135,043 |
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133,331 |
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Accumulated other comprehensive loss |
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(907 |
) |
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(869 |
) |
Accumulated deficit |
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(95,346 |
) |
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(95,555 |
) |
Total shareholders’ equity |
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38,790 |
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36,907 |
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Total liabilities and shareholders’ equity |
$ |
57,355 |
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$ |
55,258 |
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See notes to condensed consolidated financial statements.
3
BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts) (Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2016 |
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2015 |
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2016 |
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2015 |
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Revenue: |
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Software |
$ |
19,216 |
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$ |
21,215 |
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$ |
58,118 |
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$ |
66,679 |
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Service |
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3,251 |
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5,220 |
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12,526 |
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14,894 |
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Total revenue |
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22,467 |
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26,435 |
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70,644 |
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81,573 |
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Cost of revenue: |
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Software |
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15,281 |
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17,698 |
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47,901 |
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54,732 |
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Service |
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3,509 |
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3,864 |
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10,877 |
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11,287 |
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Total cost of revenue |
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18,790 |
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21,562 |
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58,778 |
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66,019 |
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Gross profit |
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3,677 |
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4,873 |
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11,866 |
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15,554 |
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Operating expenses: |
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Selling, general and administrative |
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3,283 |
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3,174 |
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9,693 |
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9,120 |
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Research and development |
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809 |
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312 |
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2,024 |
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1,300 |
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Total operating expenses |
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4,092 |
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3,486 |
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11,717 |
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10,420 |
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Income (loss) from operations |
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(415 |
) |
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1,387 |
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149 |
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5,134 |
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Other income, net |
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128 |
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32 |
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204 |
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124 |
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Income (loss) before income taxes |
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(287 |
) |
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1,419 |
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353 |
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5,258 |
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Income tax benefit (expense) |
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181 |
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(174 |
) |
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(144 |
) |
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(305 |
) |
Net income (loss) |
$ |
(106 |
) |
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$ |
1,245 |
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$ |
209 |
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$ |
4,953 |
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Basic income (loss) per share |
$ |
(0.01 |
) |
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$ |
0.10 |
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$ |
0.02 |
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$ |
0.42 |
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Diluted income (loss) per share |
$ |
(0.01 |
) |
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$ |
0.10 |
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$ |
0.02 |
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$ |
0.40 |
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Shares used in calculation of income (loss) per share: |
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Basic |
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12,310 |
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11,959 |
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12,189 |
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11,867 |
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Diluted |
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12,310 |
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12,466 |
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12,576 |
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12,294 |
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Comprehensive income (loss): |
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Net income (loss) |
$ |
(106 |
) |
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$ |
1,245 |
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$ |
209 |
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$ |
4,953 |
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Other comprehensive income (loss): |
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Foreign currency translation, net of tax |
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(78 |
) |
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3 |
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(44 |
) |
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20 |
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Change in unrealized gains (losses) on investments, net of tax |
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29 |
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1 |
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6 |
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(3 |
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Total other comprehensive income (loss) |
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(49 |
) |
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4 |
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(38 |
) |
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17 |
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Comprehensive income (loss) |
$ |
(155 |
) |
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$ |
1,249 |
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$ |
171 |
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$ |
4,970 |
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See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
|
Nine Months Ended September 30, |
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2016 |
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2015 |
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Cash flows from operating activities: |
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Net income |
$ |
209 |
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$ |
4,953 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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442 |
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425 |
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Stock-based compensation |
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908 |
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1,022 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(799 |
) |
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(1,934 |
) |
Prepaid expenses and other assets |
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220 |
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|
203 |
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Third-party software fees payable |
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(721 |
) |
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(2,063 |
) |
Accounts payable and accrued expenses |
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(906 |
) |
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|
224 |
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Deferred revenue |
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2,076 |
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(7 |
) |
Deferred rent |
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(223 |
) |
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(203 |
) |
Net cash provided by operating activities |
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1,206 |
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2,620 |
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Cash flows from investing activities: |
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Purchases of equipment and furniture |
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(368 |
) |
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(225 |
) |
Proceeds from maturities of short-term investments |
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18,200 |
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14,253 |
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Purchases of short-term investments |
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(24,159 |
) |
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(16,906 |
) |
Reduction of restricted cash equivalents |
|
250 |
|
|
|
— |
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Net cash used in investing activities |
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(6,077 |
) |
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(2,878 |
) |
Cash flows provided by financing activities—proceeds from exercise of stock options |
|
832 |
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|
508 |
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Effect of exchange rate changes on cash |
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(58 |
) |
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|
8 |
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Net increase (decrease) in cash and cash equivalents |
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(4,097 |
) |
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|
258 |
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Cash and cash equivalents, beginning of period |
|
16,443 |
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|
|
13,127 |
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Cash and cash equivalents, end of period |
$ |
12,346 |
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|
$ |
13,385 |
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See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“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 our 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, 2016, our operating results for the three and nine months ended September 30, 2016 and 2015 and our cash flows for the nine months ended September 30, 2016 and 2015. The accompanying financial information as of December 31, 2015 is derived from audited financial statements. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015. All intercompany balances have been eliminated.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance, as amended, is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for public companies effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact this ASU will have on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred income taxes. The amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. We adopted the new guidance retrospectively beginning with the year ended December 31, 2014, and applied such guidance consistently beginning with the year ended December 31, 2015.
In February 2016, the FASB issued ASU No. 2016-2, “Leases,” to make leasing activities more transparent and comparable, requiring most leases be recognized by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-2 is effective for public business entities for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.
In March 2016, the FASB amended the existing accounting standards for stock-based compensation, ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendments impact several aspects of accounting for share-based payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We are required to adopt the amendments in the first quarter of 2017, with early adoption permitted. If early adoption is elected, all amendments must be adopted in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.
6
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” adding or clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.
Income (Loss) Per Share
Basic income (loss) per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares, such as options, restricted stock awards and restricted stock units. Restricted stock awards (“RSAs”) are considered outstanding and included in the computation of basic income or loss per share when underlying restrictions expire and the awards are no longer forfeitable. Restricted stock units (“RSUs”) are considered outstanding and included in the computation of basic income or loss per share only when vested. Diluted income (loss) per share is computed using the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.
We excluded an aggregate of 1,545,512 and 627,778 options for the three and nine months ended September 30, 2016, respectively, from diluted income (loss) per share because their effect was anti-dilutive. For the three months ended September 30, 2016, this included common stock equivalent shares of 952,858 calculated using the treasury stock method that would have been included in diluted income (loss) per share had we been in a net income position. In a period where we are in a loss position, diluted loss per share is computed using the basic share count. We excluded an aggregate of 282,276 and 201,091 options for the three and nine months ended September 30, 2015, respectively, from diluted income per share because their effect was anti-dilutive.
2. Cash, Cash Equivalents and Investments
Cash, cash equivalents and short-term investments consisted of the following (in thousands):
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September 30, 2016 |
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December 31, 2015 |
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Cash |
$ |
11,470 |
|
|
$ |
7,270 |
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Cash equivalents: |
|
|
|
|
|
|
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Money market funds |
|
876 |
|
|
|
1,500 |
|
Corporate commercial paper |
|
— |
|
|
|
5,404 |
|
Corporate debt securities |
|
— |
|
|
|
2,269 |
|
Total cash equivalents |
|
876 |
|
|
|
9,173 |
|
Total cash and cash equivalents |
|
12,346 |
|
|
|
16,443 |
|
Short-term investments: |
|
|
|
|
|
|
|
Corporate commercial paper |
|
13,701 |
|
|
|
6,245 |
|
Treasury bonds |
|
— |
|
|
|
1,007 |
|
Corporate debt securities |
|
5,530 |
|
|
|
6,028 |
|
Total short-term investments |
|
19,231 |
|
|
|
13,280 |
|
Restricted cash equivalents—money market fund |
|
— |
|
|
|
250 |
|
Total cash, cash equivalents and short-term investments |
$ |
31,577 |
|
|
$ |
29,973 |
|
Gross unrealized gains and losses on our short-term investments were not material as of September 30, 2016 and December 31, 2015. The balance in restricted cash equivalents at December 31, 2015 related to a letter of credit securing the lease of our corporate headquarters. The restricted cash was released in September 2016.
7
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 and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 are summarized below (in thousands):
|
September 30, 2016 |
|
|||||||||
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Direct or Indirect Observable Inputs (Level 2) |
|
|
Total |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
$ |
876 |
|
|
$ |
— |
|
|
$ |
876 |
|
Total cash equivalents |
|
876 |
|
|
|
— |
|
|
|
876 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial paper |
|
— |
|
|
|
13,701 |
|
|
|
13,701 |
|
Corporate debt securities |
|
— |
|
|
|
5,530 |
|
|
|
5,530 |
|
Total short-term investments |
|
— |
|
|
|
19,231 |
|
|
|
19,231 |
|
Total assets measured at fair value |
$ |
876 |
|
|
$ |
19,231 |
|
|
$ |
20,107 |
|
|
December 31, 2015 |
|
|||||||||
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Direct or Indirect Observable Inputs (Level 2) |
|
|
Total |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
$ |
5,404 |
|
|
$ |
— |
|
|
$ |
5,404 |
|
Corporate commercial paper |
|
— |
|
|
|
1,500 |
|
|
|
1,500 |
|
Corporate debt securities |
|
— |
|
|
|
2,269 |
|
|
|
2,269 |
|
Total cash equivalents |
|
5,404 |
|
|
|
3,769 |
|
|
|
9,173 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial paper |
|
— |
|
|
|
6,245 |
|
|
|
6,245 |
|
Treasury bonds |
|
— |
|
|
|
1,007 |
|
|
|
1,007 |
|
Corporate debt securities |
|
— |
|
|
|
6,028 |
|
|
|
6,028 |
|
Total short-term investments |
|
— |
|
|
|
13,280 |
|
|
|
13,280 |
|
Restricted cash equivalents—money market fund |
|
250 |
|
|
|
— |
|
|
|
250 |
|
Total assets measured at fair value |
$ |
5,654 |
|
|
$ |
17,049 |
|
|
$ |
22,703 |
|
8
4. Goodwill and Intangible Assets
Goodwill relates to the 2011 acquisition of MPC Data, Ltd. (renamed BSQUARE EMEA in 2015), a United Kingdom based provider of embedded software engineering services. The excess of the acquisition consideration over the fair value of net assets acquired was recorded as goodwill. We operate as a single reporting unit, and BSQUARE EMEA falls within that reporting unit. There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2016.
Intangible assets relate to customer relationships acquired from TestQuest Inc. in 2008 and from the acquisition of MPC in 2011, the vast majority of which relates to the MPC acquisition.
Information regarding our intangible assets is as follows (in thousands):
|
September 30, 2016 |
|
|||||||||
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|||
Customer relationships |
$ |
1,275 |
|
|
$ |
(782 |
) |
|
$ |
493 |
|
|
December 31, 2015 |
|
|||||||||
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|||
Customer relationships |
$ |
1,275 |
|
|
$ |
(681 |
) |
|
$ |
594 |
|
Amortization expense was $33,000 and $101,000 for the three and nine months ended September 30, 2016, respectively, and $33,000 and $101,000 for the three and nine months ended September 30, 2015, respectively. Amortization in future periods is expected to be as follows (in thousands):
Remainder of 2016 |
$ |
30 |
|
2017 |
|
98 |
|
2018 |
|
98 |
|
2019 |
|
98 |
|
2020 |
|
98 |
|
2021 |
|
71 |
|
Total |
$ |
493 |
|
5. Credit Agreement
Line of Credit
On September 22, 2015, we entered into a two-year unsecured line of credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Bank”) in the principal amount of up to $12 million. At our election, advances under the Credit Agreement shall bear interest at either (1) a rate per annum equal to 1.5% below the bank’s applicable prime rate or (2) 1.5% above the Bank’s applicable LIBOR rate, in each case as defined in the Credit Agreement. The Credit Agreement contains customary affirmative and negative covenants, including compliance with financial ratios and metrics, as well as limitations on our ability to pay distributions or dividends while there is an ongoing event of default or to the extent such distribution causes an event of default. We are required to maintain certain minimum interest coverage ratios, liquidity levels and asset coverage ratios as defined in the Credit Agreement. We were in compliance with all such covenants as of September 30, 2016. On September 29, 2016, the Credit Agreement was modified to extend the final due date an additional year to September 22, 2018.
There were no amounts outstanding under the Credit Agreement as of September 30, 2016 or December 31, 2015. In September 2016 we entered into a new letter of credit agreement for $250,000 secured by the Credit Agreement in connection with the lease of our corporate headquarters. Accordingly, the principal amount available under the Credit Agreement has been reduced from $12 million to $11.75 million.
9
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 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, RSAs and unrestricted stock awards, and RSUs. Expense is recorded for performance options over the requisite service periods when achievement of related performance targets are considered to be probable.
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 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, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Dividend yield |
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected life |
3.3 years |
|
|
3.3 years |
|
|
3.4 years |
|
|
3.3 years |
|
||||
Expected volatility |
|
55 |
% |
|
|
53 |
% |
|
|
55 |
% |
|
|
52 |
% |
Risk-free interest rate |
|
1.0 |
% |
|
|
1.3 |
% |
|
|
1.1 |
% |
|
|
1.2 |
% |
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, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Cost of revenue — service |
$ |
(4 |
) |
|
$ |
133 |
|
|
$ |
169 |
|
|
$ |
351 |
|
Selling, general and administrative |
|
262 |
|
|
|
298 |
|
|
|
618 |
|
|
|
616 |
|
Research and development |
|
22 |
|
|
|
23 |
|
|
|
121 |
|
|
|
55 |
|
Total stock-based compensation expense |
$ |
280 |
|
|
$ |
454 |
|
|
$ |
908 |
|
|
$ |
1,022 |
|
Per diluted share |
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
10
The following table summarizes stock option activity under the Plans for the nine-month period ended September 30, 2016:
Stock Options |
|
Number of Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Life (in years) |
|
|
Aggregate Intrinsic Value |
|
||||
Balance at January 1, 2016 |
|
|
1,778,697 |
|
|
$ |
4.43 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
307,700 |
|
|
|
5.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(273,320 |
) |
|
|
3.19 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(380,472 |
) |
|
|
5.31 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(51,367 |
) |
|
|
6.13 |
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016 |
|
|
1,381,238 |
|
|
$ |
4.61 |
|
|
|
7.31 |
|
|
$ |
1,176,876 |
|
Vested and expected to vest at September 30, 2016 |
|
|
1,305,619 |
|
|
$ |
4.55 |
|
|
|
7.21 |
|
|
$ |
1,165,259 |
|
Exercisable at September 30, 2016 |
|
|
773,084 |
|
|
$ |
4.02 |
|
|
|
6.24 |
|
|
$ |
948,542 |
|
At September 30, 2016, total compensation cost related to stock options granted but not yet recognized was $731,527, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.32 years. The following table summarizes certain information about stock options:
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Weighted-average grant-date fair value of option grants for the period |
$ |
2.53 |
|
|
$ |
3.16 |
|
|
$ |
2.83 |
|
|
$ |
3.10 |
|
Options in-the-money at period end |
|
766,101 |
|
|
|
1,762,893 |
|
|
|
766,101 |
|
|
|
1,762,893 |
|
Aggregate intrinsic value of options exercised |
$ |
226,430 |
|
|
$ |
265,641 |
|
|
$ |
568,516 |
|
|
$ |
616,417 |
|
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 that were in-the-money at period end or that were 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 for the nine-month period ended September 30, 2016:
|
Number of Shares |
|
|
Weighted Average Grant Date Fair Value |
|
||
Unvested at January 1, 2016 |
|
104,463 |
|
|
$ |
5.97 |
|
Granted |
|
54,870 |
|
|
|
5.65 |
|
Vested |
|
(56,081 |
) |
|
|
5.94 |
|
Forfeited |
|
(15,969 |
) |
|
|
5.77 |
|
Unvested at September 30, 2016 |
|
87,283 |
|
|
$ |
5.83 |
|
Expected to vest after September 30, 2016 |
|
78,781 |
|
|
$ |
5.81 |
|
At September 30, 2016, total compensation cost related to RSUs granted but not yet recognized was $268,388, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 1.02 years.
11
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, 2016:
Stock options outstanding |
|
1,381,238 |
|
RSUs outstanding |
|
87,283 |
|
Stock awards available for future grant |
|
1,105,715 |
|
Common stock reserved for future issuance |
|
2,574,236 |
|
7. Commitments and Contingencies
Lease and rent obligations
Our commitments include obligations outstanding under operating leases, which expire through 2020. We have lease commitments for office space in Bellevue, Washington; San Diego, California; Boston, Massachusetts; Taipei, Taiwan; Tokyo, Japan; and Trowbridge, UK. We also lease office space on a month-to-month basis in Akron, Ohio.
In August 2013, we amended the lease agreement for our Bellevue, Washington headquarters, which was initially scheduled to expire in August 2014, and extended the lease term to May 2020. The amendment to the headquarters lease provided that no cash lease payments were to be made for a seven-month period from June 1, 2013 to December 31, 2013. In conjunction with the amended lease agreement, the landlord provided lease incentives totaling $1,128,000 for leasehold improvements and furniture related to new space in the same building, which were capitalized and are reflected in the deferred rent liability. We are amortizing these assets over the shorter of their economic life or the lease term.
Rent expense was $262,000 and $781,000 for the three and nine months ended September 30, 2016, respectively, and $268,000 and $789,000 for the three and nine months ended September 30, 2015, respectively.
As of December 31, 2015, we had $250,000 pledged as collateral for a bank letter of credit under the terms of our headquarters facility lease. The pledged cash supporting the outstanding letter of credit was classified as restricted cash at December 31, 2015. In September 2016 the restriction on this cash was removed as we entered into a new letter of credit secured by our Credit Agreement with the Bank.
Future operating lease commitments are as follows by calendar year (in thousands):
Remainder of 2016 |
$ |
330 |
|
2017 |
|
1,185 |
|
2018 |
|
1,094 |
|
2019 |
|
1,038 |
|
2020 |
|
436 |
|
Total commitments |
$ |
4,083 |
|
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 of these 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. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.
12
A third-party software vendor invoiced us a total of $934,000 for certain licensed software that was lost in transit by a common carrier during the second quarter of 2014. We accrued a liability of $100,000 in the second quarter of 2014 as an estimate of our potential liability for legal and insurance deductible expenses. During the first quarter of 2015, the vendor credited our account for the full $934,000 as the licenses had been deactivated and there was no indication of counterfeit use. Accordingly, we reversed approximately $85,000 of the accrual after payment of legal expenses in the first quarter of 2015.
Volume Pricing Agreements
In conjunction with our activities under our OEM Distribution Agreements (“ODAs”) with Microsoft Corporation (“Microsoft”), as further described in Note 9, we have entered into OEM Volume Royalty Pricing (“OVRP”) commitments with Microsoft. Under these OVRPs, we are provided with volume pricing on a customer-by-customer basis assuming certain minimum unit volumes are met. The OVRP terms are 12 months. In the event we do not meet the committed minimum unit volumes, we are obligated to pay the difference between the committed per-unit volume rate and the actual per-unit rate we achieved based upon actual units purchased. The OVRP arrangements do not equate to a minimum purchase commitment, but rather, the arrangements are a volume pricing arrangement based upon actual volume purchased. In substantially all significant instances, we have reciprocal agreements with our customers such that we will receive per-unit price adjustments, similar to the amounts we would subsequently owe to Microsoft if such OVRP volumes are not met. However, in the event a customer is unwilling or unable to pay us, we would be negatively impacted. Based upon the credit-worthiness of our customers, our historical OVRP experience with our customers and OVRP arrangements in general, we do not believe we will incur any material liability relating to active agreements, and, therefore, no provision or reserve has been recorded as of September 30, 2016 or December 31, 2015.
In late 2015, Microsoft implemented significant pricing changes for its embedded products, including ending its design registration pricing discounts and its OVRP and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016. In December 2015, we renewed the majority of our Microsoft licensing customer agreements for 2016 retaining 2015 pricing. As a result, the price changes implemented by Microsoft may not have a significant impact until 2017.
8. 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, software and professional engineering services, each of which we consider to be an operating and reportable segment. Software includes third-party software and proprietary software sales, and professional engineering services includes consulting, programming and software implementation revenue. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements. We do not produce asset information by reportable segment and it is not presented here.
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
19,216 |
|
|
$ |
21,215 |
|
|
$ |
58,118 |
|
|
$ |
66,679 |
|
Cost of revenue |
|
15,281 |
|
|
|
17,698 |
|
|
|
47,901 |
|
|
|
54,732 |
|
Gross profit |
|
3,935 |
|
|
|
3,517 |
|
|
|
10,217 |
|
|
|
11,947 |
|
Professional Engineering Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
3,251 |
|
|
|
5,220 |
|
|
|
12,526 |
|
|
|
14,894 |
|
Cost of revenue |
|
3,509 |
|
|
|
3,864 |
|
|
|
10,877 |
|
|
|
11,287 |
|
Gross profit (loss) |
|
(258 |
) |
|
|
1,356 |
|
|
|
1,649 |
|
|
|
3,607 |
|
Total gross profit |
|
3,677 |
|
|
|
4,873 |
|
|
|
11,866 |
|
|
|
15,554 |
|
Operating expenses |
|
4,092 |
|
|
|
3,486 |
|
|
|
11,717 |
|
|
|
10,420 |
|
Other income, net |
|
128 |
|
|
|
32 |
|
|
|
204 |
|
|
|
124 |
|
Income tax benefit (expense) |
|
181 |
|
|
|
(174 |
) |
|
|
(144 |
) |
|
|
(305 |
) |
Net income (loss) |
$ |
(106 |
) |
|
$ |
1,245 |
|
|
$ |
209 |
|
|
$ |
4,953 |
|
13
Revenue by geography is based on the sales region of the customer. The following table sets forth revenue and long-lived assets by geographic area (in thousands):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
$ |
20,917 |
|
|
$ |
23,654 |
|
|
$ |
66,275 |
|
|
$ |
74,415 |
|
Asia |
|
1,018 |
|
|
|
1,055 |
|
|
|
1,847 |
|
|
|
3,043 |
|
Europe |
|
532 |
|
|
|
1,726 |
|
|
|
2,522 |
|
|
|
4,115 |
|
Total revenue |
$ |
22,467 |
|
|
$ |
26,435 |
|
|
$ |
70,644 |
|
|
$ |
81,573 |
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Long-lived assets: |
|
|
|
|
|
|
|
North America |
$ |
981 |
|
|
$ |
1,353 |
|
Asia |
|
264 |
|
|
|
247 |
|
Europe |
|
4,266 |
|
|
|
4,345 |
|
Total long-lived assets |
$ |
5,511 |
|
|
$ |
5,945 |
|
9. Significant Risk Concentrations
Significant Customer
One customer, Honeywell International, Inc. and affiliated entities (“Honeywell”), accounted for $1.5 million, or 7%, and $9.2 million, or 13%, of total revenue for the three and nine months ended September 30, 2016, respectively. Honeywell accounted for $2.8 million, or 11%, and $13.5 million, or 17%, of total revenue for the three and nine months ended September 30, 2015, respectively. No other customers accounted for more than 10% of our revenue for any of the periods noted above.
Honeywell had total accounts receivable balances of $6.8 million, or approximately 34% of total accounts receivable, at September 30, 2016 and $6.1 million, or 32% of total accounts receivable, at December 31, 2015. No other customers had accounts receivable balances that were 10% or more of the total accounts receivable at September 30, 2016 or December 31, 2015.
Significant Supplier
We have two ODAs with Microsoft which enable us to sell Microsoft Windows Embedded operating systems to our customers in the United States, Canada, Argentina, Brazil, Chile, Columbia, Mexico, Peru, Puerto Rico, the Caribbean, the European Union, the European Free Trade Association, Turkey and Africa, which expire on June 30, 2017. We also have four ODAs with Microsoft which allow us to sell Microsoft Windows Mobile operating systems in the Americas (excluding Cuba), Japan, Taiwan, Europe, the Middle East, and Africa, which also expire on June 30, 2017.
Software sales under these agreements constitute a significant portion of our software revenue and total revenue. These agreements are typically renewed bi-annually, annually or semi-annually; however, there is no automatic renewal provision in any of these agreements. Further, 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. Under this rebate program, we recognized $78,000 and $287,000 during the three and nine months ended September 30, 2016, respectively, compared to $91,000 and $257,000 during the three and nine months ended September 30, 2015, respectively. These rebates were treated as reductions in cost of sales. Additionally, during the three and nine months ended September 30, 2016, we qualified for $181,000 and $670,000, respectively, in rebate credits, compared to $212,000 and $599,000 for the three and nine months ended September 30, 2015, respectively. These are accounted for as reductions in marketing expense if and when qualified program expenditures are made.
Microsoft has implemented significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OVRP and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016. In December 2015 we renewed the majority of our Microsoft licensing customer agreements for 2016 retaining 2015 pricing. As a result, the price changes implemented by Microsoft may not have a significant impact until 2017.
14
10. Restructuring
On July 28, 2016, our board of directors approved a restructuring plan that included a workforce reduction in our professional engineering services group. The workforce reduction impacted 33 personnel, comprised of both employees and consultants, representing approximately 17% of our pre-reduction headcount, and is intended to reduce expenses and to better align our organizational structure with our increasing strategic focus on our DataV software and services.
We incurred pre-tax restructuring charges of approximately $807,000 in the third quarter of 2016, representing one-time cash employee termination benefits including severance, accrued paid-time off and other employment obligations. The restructuring costs have been included in the results of operations for the three months ended September 30, 2016 with $17,000 included in selling, general and administrative expenses and $790,000 in cost of service revenue. We paid $619,000 of the $807,000 during the third quarter of 2016, and the remaining $188,000 is included in accrued compensation at September 30, 2016. We anticipate incurring an additional $192,000 of restructuring charges in the fourth quarter of 2016. The staff reductions from this restructuring were completed in October 2016.
15
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” and “the Company” refer to BSQUARE Corporation, a Washington corporation, and its subsidiaries.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes. Some statements and information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015 entitled “Risk Factors,” similar discussions in subsequently filed Quarterly Reports on Form 10-Q, including this Form 10-Q, as applicable, and those contained from time to time in our other filings with the Securities and Exchange Commission. 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
We provide software solutions and related engineering services to companies that develop smart, connected systems. A smart, connected system is a dedicated purpose computing device that typically has a display, runs an operating system (e.g., Microsoft® Windows® Embedded Compact) and is usually connected to a network or data cloud via a wired or wireless connection. Examples of smart, connected systems include set-top boxes, home gateways, point-of-sale terminals, kiosks, voting machines, gaming platforms, tablets, handheld data collection devices, personal media players, smart phones, smart vending machines, in-vehicle telematics and entertainment devices. We primarily focus on smart, connected systems that utilize Microsoft Windows Embedded and Windows Mobile operating systems as well as devices running other popular operating systems such as Android, Linux and QNX.