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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
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
(State or other jurisdiction of
incorporation or organization)
91-1650880
(I.R.S. Employer
Identification Number)
1415 Western Ave, Suite 700, Seattle, Washington 98101
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (425) 519-5900
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common stock, no par value
Trading Symbol(s)
BSQR
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑
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 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 aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2021 was approximately $48.0 million and
was determined using the closing price of our common stock on that same date per the NASDAQ Stock Market ($4.77). The number of
shares of common stock outstanding as of February 28, 2022: 20,428,573.
Portions of the definitive proxy statement to be delivered to shareholders in connection with the 2022 annual meeting of shareholders are
incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
BSQUARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
Item 9C
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
PART III
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13
Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accounting Fees and Services
PART IV
Item 15
Exhibits, Financial Statement Schedules
Item 16
Form 10-K Summary
Signatures
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on this Form 10-K (“Form 10-K”) are not purely historical statements, discuss
future expectations, contain projections of results of operations or financial condition, or state other forward-looking information. Those
statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially
from those contemplated by the statements. The “forward-looking” information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these so-called forward-looking statements by words like “may,” “will,” “should,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “seeks” or “continue” or the negative of those words and other
comparable words. You should be aware that those statements only reflect our predictions and are subject to risks and uncertainties. Actual
events or results may differ substantially. Important factors that could cause our actual results to be materially different from the forward-
looking statements include (but are not limited to) the following:
1)
risks associated with the operation of our business generally, including:
a)
customer demand for our services and solutions;
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
maintaining a balance of our supply of skills and resources with customer demand;
effectively competing in a highly competitive market;
the impact of the COVID-19 pandemic and future variants of the virus on us, our customers, and the global business
environment;
protecting our customers’ and our data and information;
risks from international operations including fluctuations in exchange rates;
obtaining favorable pricing to reflect services provided;
adapting to changes in technologies and offerings;
risk of loss of one or more significant software vendors;
making appropriate estimates and assumptions in connection with preparing our consolidated financial statements;
maintaining effective internal controls; and
changes to tax levels, audits, investigations, tax laws or their interpretation;
2)
3)
4)
5)
6)
7)
the impact of the general economy and economic and political uncertainty on our business;
risks associated with potential changes to federal, state, local and foreign laws, regulations, and policies;
risks associated with managing growth organically and through acquisitions;
risks associated with servicing our debt, the potential impact on the value of our common stock from the conditional conversion
features of our debt and the associated convertible note hedge transactions;
legal liabilities, including intellectual property protection and infringement or the disclosure of personally identifiable
information; and
the risks detailed from time to time within our filings with the Securities and Exchange Commission (the “SEC”).
This discussion is not exhaustive but is designed to highlight important factors that may impact our forward-looking statements.
Because the factors referred to above, as well as the statements included under the heading “Risk Factors” in this Form 10-K, including
documents incorporated by reference therein and herein, could cause actual results or outcomes to differ materially from those expressed in
any forward-looking statement made by us or on our behalf, you should not place undue reliance on any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date
of this Form 10-K to conform such statements to actual results.
All forward-looking statements, express or implied, included in this report and the documents we incorporate by reference and that
are attributable to Bsquare Corporation and its subsidiaries (collectively, “we,” “us,” “Bsquare,” or the “Company”) are expressly qualified in
their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or
oral forward-looking statements that the Company or any persons acting on our behalf may issue.
Table of Contents
Item 1.
Business.
Overview
PART I
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.
Embedded Operating System Software and Services
Customers frequently engage us because of our technical expertise in device operating system (“OS”) image development and
configuration, device software development and testing, and our experience in embedded and mobile systems design. Our long and
successful history as a Microsoft Corporation (“Microsoft”) embedded OS distribution and technology partner is a source of many customer
opportunities and a pillar of our reputation in the IoT ecosystem. We believe working with Bsquare engineers can result in shorter
development cycles, faster time-to-market, lower overall development costs, and a more robust product. Our software and configuration
services are designed to help ensure that our customers’ devices are secure, updateable, and operable as part of a connected IoT system. A
decade ago, our customers typically built devices on a single OS. Today, they increasingly have a multi-OS product strategy. Accordingly, we
believe that the need for our embedded OS expertise and services is expanding and accelerating. We recognize revenue and cost of sales
for this segment of our business under the name “Partner Solutions”.
Our target market for OS software and services includes makers of connected, intelligent devices such as point-of-sale terminals,
kiosks, tablets and handheld data collection devices, smart vending machines, ATMs, essential equipment in buildings and facilities
environments, digital signs, and in-vehicle telematics and entertainment devices. These devices work on a variety of operating systems,
including the most common: Windows IoT, Android, and Linux. They are deployed in various cloud environments, such as Microsoft Azure,
Amazon Web Services (“AWS”), or Google Cloud, and are typically connected to a network via a wired or wireless connection. Our
customers for these smart devices include world-class OEMs, original design manufacturers (“ODMs”), silicon vendors, and peripheral
vendors.
IoT Operations Services and Software
Our customers’ devices are frequently components of complicated operating networks, creating new requirements for updating,
maintaining, and evolving the capabilities of devices in the fleet. Once configured and deployed, this device fleet then becomes part of an
operational environment that requires long-term attention to the challenges of IoT operations. These demands have created operational
burdens that are difficult to meet through traditional technologies and support models. For that reason, our customers are increasingly relying
on Bsquare’s extensive experience developing, deploying, and operating large IoT systems at scale. Our experience using Microsoft Azure
and AWS cloud services is an asset we believe to be seldom found inside a customer’s technology team. Outsourcing fleet management and
24/7 operations services to Bsquare can result in lower system development costs, greater security, better maintainability, lower operating
costs, and improved return on investment (“ROI”) for a customer’s IoT system. We have built and now operate 24/7 mission critical IoT
systems for customers of varying size and complexity, and we believe the software and processes we have used to do so may be a
sustainable competitive advantage and a potential opportunity for new revenue. We recognize revenue and cost of sales for this segment of
our business under the name “Edge to Cloud”.
Our target market for our IoT operations service and software includes our OS and software OEM customers as well as companies
that purchase from those OEMs and operate their devices as a fleet. This market represents business and industrial segments in a wide
range of vertical markets such as retail, point of sale, medical equipment, gaming, buildings and facilities management, manufacturing,
robotics, autonomous vehicles, utility management, and transportation. The IoT market continues to evolve as companies understand the
possibilities and economics of IoT technology and operations. Increasingly, customers are realizing that IoT operations are not core
competencies of their business and that outsourcing operations can lower costs, reduce downtime, and mitigate the reputational risk of
security and operational failures.
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Bsquare Solutions Portfolio
We provide a suite of software, tools, and services to our customers that are packaged based on technical and business
requirements that includes:
Embedded OS and System Software Sales and Support
We resell Windows IoT, Windows Embedded, and Windows Server IoT software as well as system utility software for Adobe and
McAfee. We provide license compliance services, technical support, and manufacturing support. See Software Distribution and Relationship
with Microsoft, below, for additional details about our Embedded OS and System Software products.
OS Configuration and Device Hardening Services
We create for customers a manufacturable image for a specific version of OS software (Windows IoT, Linux, and Android) based on
the unique requirements of the hardware and the intended operating environment. In the fourth quarter of 2021, we announced a suite of
services for making connected devices, secure, recoverable, upgradable, and updatable. This packaged offering analyzes and addresses the
differences in security architectures across Windows, Linux, and Android operating systems, and implements our recommended practices for
device hardening. We also tailor Device Hardening specifications based on a customer's operating system, hardware configuration,
application software, security policies, and operating environment.
Device Management Solutions
In the fourth quarter of 2021, we announced early availability of SquareOne, a software as a service (“SaaS”) product. SquareOne
captures workflows to be stored and managed centrally and deployed as needed for the purposes of secure remote device management.
The product supports devices running Windows, Linux, and Android operating systems. The technology is a step-change in the way devices
are connected and managed. The solution unlocks the data and telemetry on devices to provide secure, accurate, and reliable intelligence.
SquareOne registers and maps embedded devices to provide heartbeat monitoring, telemetry analysis, content updates, and preventative
maintenance routines, which helps connected device fleets to become simultaneously secure, intelligent, and efficiently managed.
IoT and Fleet Transition Services
Our professional services help transition a collection of devices to a specific OS and software configuration in preparation for
management and operations as part of an intelligent system. We work with customers to understand and bring together multiple versions of
OS software and hardware, connectivity, security, personnel, operating hours, and other factors that could affect previously deployed
equipment. Bsquare also offers software utilities and professional services to migrate a fleet of devices to 24/7 IoT operations, allowing
individual device and system performance to be managed centrally and integrated into existing business systems.
24/7 IoT Operations
Our outsourced IoT operations services include 24/7 infrastructure monitoring, automated issue escalation, incident response and
troubleshooting, management protocols, uptime and service level reporting, and cloud instance management. We also offer related data
engineering services to assist customers with the development and implementation of IoT systems and data-driven operations, including
machine learning and predictive analytics that allow IoT systems to operate as an intelligent system.
Software Distribution
We maintain distribution agreements with multiple third-party software vendors. Our ability to resell these third-party software
products, whether as stand-alone products or in conjunction with our own proprietary software and engineering service offerings, provides
our customers with a comprehensive solution for their device project needs:
●
●
●
For over 20 years, we have been a Microsoft Authorized Distributor of Windows Embedded and IoT operating system software and
licenses, including major product families such as Windows 10 IoT Enterprise, Windows Server IoT, and SQL Server IoT. We are
also authorized to sell Windows IoT operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru,
Venezuela, Puerto Rico, Columbia, and several Caribbean countries.
We are an authorized distributor for Adobe Flash technologies and Adobe Reader. We have the right to distribute Adobe Flash Lite
licenses on a worldwide basis.
We are an authorized distributor of McAfee security software in North America.
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.
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Relationship with Microsoft
We have a long-standing relationship with Microsoft, which is important to the continuing success of our business:
●
●
●
●
●
●
●
We have been one of Microsoft’s distributors of Windows Embedded and IoT operating systems for over 20 years.
We have been a distributor of Microsoft Windows Mobile operating systems since November 2009.
We are a Gold level Data Analytics partner.
We are a Gold level Application Integration partner.
We are Silver level Application Development partner.
Microsoft has engaged us on various engineering service projects.
We work closely with Microsoft executives, developers, product managers and sales personnel. We leverage these relationships in a
variety of ways, including:
a.
b.
We gain early access to new Microsoft embedded software and other technologies.
We leverage co-marketing resources, content and strategies from Microsoft, including market development funds, to support
our own marketing and sales efforts.
We participate in Microsoft-sponsored trade shows, seminars, and other events.
We receive sales leads from Microsoft.
We receive rebates from Microsoft based upon the achievement of predefined sales objectives.
c.
d.
e.
See Item 1A, “Risk Factors,” for more information regarding our relationship with Microsoft.
Competition
Microsoft controls who can distribute its OS software. Microsoft Authorized Distributors that we compete with include Advantech, Inc.,
Arrow Electronics, Inc., Avnet, Inc., and Dell Computer, Inc. Our competition is not limited to these Microsoft Authorized Distributors. We
compete with other consulting firms for services related to device design and development, system software development, and engineering
firms that offer similar services.
Despite competition from these larger organizations, we have retained a loyal customer base, largely due to our technical support
and business services. We are known as the company that can manage difficult problems at the intersection of hardware and software. Our
competitors have directed customers to us to resolve issues and Microsoft’s OS team regularly seeks our guidance on customer technical
challenges. Further, as a software-only company with multi-OS experience, we have always offered customers independence from OS or
hardware biases.
Our history provides us with a unique position in the market. Our legacy OS distribution, our reputation as a technology provider, and
our recent experience building and operating significant IoT systems sets us apart. These factors enable and enhance the market credibility
of our claims of expertise, experience, and insight. As our customers evaluate products and services for purchasing decisions, we believe
that they are and will remain more likely to buy from a company that has the history and experience to meet their requirements and provide a
long-term operational perspective.
Our product portfolio is composed of solutions that are highly complementary across our customers’ product lifecycles. Supplying
a customer with Device Hardening and OS licensing put us in a unique position to sell SquareOne. Similarly, if a customer selects our
SquareOne product, the first implementation consideration is the configuration of the software on the devices, creating an opportunity for our
Device Hardening solution and operating system license sales.
The market for device software and engineering services is competitive and we face competition from the following:
Our current and potential customers’ internal engineering and research and development departments, which may seek to provide
their own IoT-related services or develop their own software solutions which could compete with our own service offerings and
products.
Engineering service firms, including offshore development companies, such as Adeneo, Symphony Teleca, and Wipro.
ODMs, particularly those in Taiwan and China, with their own software development capabilities.
Contract manufacturers with their own software development capabilities.
Competition for our IoT software and operating services include:
Large, established enterprise software and solution providers such as International Business Machines, Oracle Corporation, SAP
SE, and SAS Software, Inc.
Cloud IoT providers such as AWS and Microsoft Azure. Although we are closely partnered with AWS and Microsoft, there are
elements of their solutions with which we compete directly.
Mid-sized companies engaged in business transitions similar to our own, including PTC Inc. and TTTech Industrial North America,
Inc.
Startups funded to enter the IoT market, including C3.AI, Inc., Losant IOT Inc., and TeamViewer US, Inc.
●
●
●
●
●
●
●
●
Sales and Marketing
We market our products and services utilizing a direct sales model. We have sales personnel in the United States and in the United
Kingdom. Historically, we have not made significant use of resellers, channel partners, representative agents, or other indirect channels. Key
elements of our sales and marketing strategy include direct marketing, digital marketing, content marketing, trade shows, event marketing,
public relations, analyst relations, social media properties, customer and strategic alliance partner co-marketing programs, and a
comprehensive website.
Our sales and marketing efforts with embedded OS customers will also be beneficial in our efforts to attract customers for our IoT
software and services, and vice versa. The two markets we have traditionally served are converging, and our sales and marketing will
increasingly reflect that convergence. The cross-selling opportunities between our two primarily markets could be a source of strength as we
continue to expand our presence and reputation among the makers of IoT devices and those responsible for IoT device operations.
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International Operations
Our international operations outside of North America are conducted through our offices in Trowbridge, UK. We maintain a European
sales and marketing presence through the UK office exclusively in support of our IoT software and services, reported in our Edge to Cloud
business segment. The majority of our global technical personnel also work from the UK office.
Our OEM Distribution Agreement with Microsoft for the sale of Microsoft Windows IoT operating systems is currently restricted to
North America. As a result, the majority of our revenue continues to be generated from North America. Revenue generated from customers
located outside of North America was approximately 14% of total revenue in both 2021 and 2020.
Human Capital
We had a total employee headcount of 53 on December 31, 2021, with 33 people located in North America and 20 in the United
Kingdom. As compared to December 31, 2020, our total employee headcount was smaller by seven.
In response to ongoing orders by local governments to “stay at home,” “shelter-in-place” and similar actions intended to reduce the
spread of COVID-19, we closed our offices in Trowbridge in the United Kingdom and stopped all non-essential activities in our Seattle,
Washington office. Bsquare’s operations are, at the time of this filing, largely virtual. We will continue to monitor local regulations and may
adjust our policies and work-from-home mandates and conditions as requirements change.
In the second quarter of 2020, we moved our corporate headquarters from Bellevue, Washington, to Seattle, Washington. From the
outset, we conceived of our new location as a collaboration space and its design was based on a review of how and where we collaborate,
our teams’ commuting patterns, facilities costs, and our long-term space requirements. With our engineering team in the UK and customers
all over the globe, collaborating over long distances and time zones was an operating imperative. We purchased and deployed technologies
that enabled and enhanced remote work and as early as the fourth quarter of 2019 asked our team members to begin to consider how they
could begin to work more often from remote locations. This planning work allowed us to move seamlessly to virtual operations when the
COVID-19 pandemic arrived. While the new Seattle facility remained largely unoccupied throughout 2021, we believe it will serve us well and
we look forward to hosting visitors when it is safe again.
Diversity and Inclusion
We operate a standing Anti-racism and Inclusion Task Force to help us reckon with the ways in which our company and the
technology industry at large have contributed to systemic racism and the marginalization of underrepresented and underserved groups in
both the US and the UK. In this area, we favor action over performative speech. We are expanding our recruiting outreach to find candidates
from communities currently underrepresented in technology companies and are renewing our commitment to inclusive hiring practices. We
are particularly interested in building a team composed of people who have made diversity, equity, and inclusion in the workplace a central
part of their professional journey. We are also holding our partners accountable to their own actions in pursuit of racial equity, and we are
offering every employee a day of Community Engagement Leave to vote, volunteer in their community, or participate in other civic activities.
Compensation and Benefits
We strive to provide market-competitive compensation and benefits that attract and retain employees whose values align with our
mission and goals. Our compensation packages include combinations of competitive base pay, sales commissions, performance based
short-term incentives, health care, retirement benefits, paid time off and family leave. In addition, we offer employees the benefit of equity
ownership in the Company through stock option grants. We also provide access to a variety of health and wellness resources.
Intellectual Property and Other Proprietary Rights
We strive to protect our intellectual property rights primarily through copyright, trademark, and trade secret laws, through contractual
arrangements, and occasionally through patent filings. While we cannot be certain that our efforts will be effective to prevent the
misappropriation of our intellectual property, or to prevent the development and design by others of products or technologies similar to, or
competitive with, those developed by us, we plan to continue to pursue appropriate protections for our intellectual property.
Additionally, because a significant portion of our revenue relates to the sale of third-party software products, we also rely on our
partners, particularly Microsoft, to appropriately protect their own intellectual property.
See Item 1A, “Risk Factors,” for more information regarding our intellectual property and other proprietary rights.
Available Information
We were incorporated in the State of Washington in July 1994. Our principal office is located at 1415 Western Ave, Suite 700,
Seattle, Washington 98101, and our telephone number is (425) 519-5900. Our website address is www.bsquare.com. Information contained
on or that can be accessed through our website is not a part of this Form 10-K.
Our stock is traded on the NASDAQ Capital Market under the symbol BSQR. Our website may be visited at www.bsquare.com. We
electronically file with or furnish to the Securities and Exchange Commission (SEC) our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934. We make available on our website, free of charge, copies of these reports, as soon as reasonably practicable after electronically
filing such reports with, or furnishing them to the SEC.
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Item 1A.
Risk Factors.
As discussed under Item 1 of Part I, “Business—Cautionary Note Regarding Forward-Looking Statements,” our actual results could
differ materially from those expressed in our forward-looking statements. Factors that might cause or contribute to such differences include,
but are not limited to, those discussed below. Additional risks and uncertainties not presently known to us, or that we currently deem
immaterial but later emerge as material, may also impair our business operations. If any of the following risks occur, our business, financial
condition, operating results, cash flows and the trading price of our common stock could be materially adversely affected.
Risks Related to General Business Conditions
If we are not successful in developing and delivering competitive product and services offerings that keep pace with technological
changes and needs, or if our products and services fail to gain or maintain traction with potential customers, our business would
be negatively impacted.
Throughout 2021, we continued to update our product strategy to bring to market technologies and related services that build on our
history of helping our customers deploy and operate intelligent devices. While we will continue to meet customer commitments previously
made, we are developing new products and services that may expand our opportunities in the IoT market. The attractiveness of these new
offerings remains uncertain, as does the size of the investment required to bring them to fruition. Our strategy to focus on the IoT market is
subject to a number of additional risks and the occurrence of any of them could harm our business:
•
•
•
•
•
•
The significant investment of time and financial and other corporate resources required;
Customer acceptance of our IoT-related product and service offerings;
Our ability to cross sell customers;
The ROI model for IoT, which has proven to be elusive for many customers, could further delay adoption of IoT solutions by the
market;
Because IoT services are a relatively new offering, the sales cycle may be longer than we anticipate, and;
We may be unable to grow our IoT-related services business rapidly enough to reach profitability in 2021.
Our marketplace is highly competitive, which may result in price reductions, lower gross profit margins and loss of market share.
The competition in the growing market for IoT-related software and engineering services is significant. Further, we anticipate that we
will encounter and attract competitive attention from a number of new software and service providers as we continue to focus on this market
in 2021 and beyond, and as we expand our IoT-related service offerings. We currently face, or expect to face, competition from the following:
•
•
•
•
•
Our current and potential customers’ internal engineering and research and development departments, which may seek to
provide their own IoT services and/or develop their own software solutions which could compete with our IoT-related service
offerings and products;
Microsoft Windows IoT and Windows Mobile operating system distributors such as Advantech Co, Arrow Electronics, Inc.,
Avnet, Inc. and Dell Computer, Inc.;
Cloud IoT providers such as AWS and Microsoft Azure. Although we are closely partnered with AWS and Microsoft, there are
elements of their solutions with which we compete directly;
Mid-sized companies engaged in business transitions similar to our own, including TTTech Industrial North America, Inc. and
PTC Inc.; and
Startups funded to enter the IoT market, including Esper, Particle Industries, Inc., Ayla Networks, and SecuriThings.
Some of our competitors have greater financial and other resources than we do. They may also focus on only one aspect of our
business or offer complementary products that can be integrated with our products. As we develop and bring to market new software
products and service offerings, we may begin competing with companies with which we have not previously competed. Further, as we
expand the geographic markets into which we sell our services and related software solutions, or increase our penetration therein, we may
expect to increasingly compete with companies with which we have not previously competed. It is also likely that new competitors will enter
the market or that our competitors will form alliances, including alliances with AWS or Microsoft, that may enable them to rapidly increase
their market share. New competitors may have lower overhead than we do and may be able to undercut our pricing. We expect that
competition will increase as other established and emerging companies enter the connected device market, and as new products and
technologies are introduced.
Neither AWS nor Microsoft has agreed to any exclusive arrangement with us, nor has either agreed not to compete with us. AWS
may decide to focus on providing products or services that compete directly with our products and services or partnering with other solution
providers that compete with us. Microsoft may decide to bring more of the core embedded development services and expertise that we
provide in-house, possibly resulting in reduced software and service revenue opportunities for us. The barrier to entering the market as a
provider of Microsoft-based smart connected system software and services is relatively low. In addition, Microsoft has created marketing
programs to encourage systems integrators to work on Windows IoT and Windows Mobile operating system software and services, including
in the evolving IoT market. These systems integrators may be given substantially the same access by Microsoft to Microsoft technology as
we are.
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The unprecedented nature of the COVID-19 pandemic creates ongoing uncertainty for Bsquare and our 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 affected our business and our financial results in 2021. We may face ongoing challenges selling or delivering our software and
services, as our employees and many of those of our customers are still working from home, may be unable to attend company and industry
events, and often face restrictions on travel and in-person meetings. Closures of manufacturing facilities and warehouses, or staffing
shortages, continue to disrupt 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 us 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.
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 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 new variants of the coronavirus that causes COVID-19 and the speed with which vaccines are
manufactured, distributed, delivered, and accepted by the populace. Specifically, our customers’ demand for our products is uncertain and is
likely affected by disruptions in their component supply chains, their own sales cycles, their industry verticals, their ability to sell through
traditional distribution channels, their ability to convene or attend employee or industry events, or other factors created and made persistent
by the uncertain COVID-19 environment. The decline in Partner Solutions revenue experienced in 2021 suggests the effect of these
disruptions can be significant. The lingering economic effects of COVID-19, even after resolution of the immediate public health crisis, may
result in adverse conditions for our business that may impact our financial condition or results.
Our operating results may be adversely affected by changing economic and market conditions and the uncertain geopolitical
environment.
Uncertain economic and political conditions in the U.S. and worldwide have from time to time contributed, and may in the future
contribute, to volatility in the technology industries at large, particularly in an emerging market such as IoT. These factors could potentially
result in reduced demand for our products and services as a result of constraints on IT-related capital spending by our customers; purchasing
delays; payment delays adversely affecting our cash flow and revenue; and difficulty in accurate budgeting and planning. If global economic
and market conditions, or economic conditions in key markets, remain uncertain or deteriorate, we may experience material impacts on our
business, operating results and financial condition.
Large customers with significant resources may resort to litigation to recoup economic loss and other damages caused by what
those customers perceive to be a deficiency in our products or a breach in our contractual arrangements.
We have a number of larger customers that have entered into longer-term contracts for our products and services. Further, we have
actively engaged with those customers in recent months to retool our previously delivered products and to improve our previous agreements.
Despite these efforts and investments, new issues may arise, or previous problems may re-occur, causing these customers to choose to
initiate litigation against us. While we have no indication that these customers intend to pursue litigation, a decision to do so could cause us
to incur significant defense costs, which would be significantly distracting, and may damage our reputation in our markets.
We may be subject to product liability, infringement or other legal claims that could result in significant cost and ongoing liabilities.
Our software license and service agreements with our customers typically contain provisions designed to limit our exposure to
potential product liability, infringement, and other legal claims. However, it is possible that these provisions may be ineffective under the laws
of certain jurisdictions or that our customers may not agree to these limitations. Although we have not experienced any product liability or
infringement claims to date, as our business focus continues to transition to the sale of our own proprietary products, the sale and support of
our products and services may be subject to such claims in the future. There is a risk that any such claims or liabilities may exceed, or fall
outside, the scope of our insurance coverage, and we may be unable to obtain adequate liability insurance in the future. A product liability,
infringement or other legal claim brought against us, whether successful or not, could negatively impact our business and operating results.
Our common stock has experienced and may continue to experience price and volume fluctuations, which could lead to costly
litigation for us and make an investment in us less appealing.
Stock markets are subject to significant price and volume fluctuations that may be unrelated to the operating performance of
particular companies and the market price of our common stock may therefore frequently change as a result. For example, during the year
ended December 31, 2020, the high and low closing prices of our common stock were $1.83 and $0.93 per share, respectively, but in
February 2021 our stock price reached an intraday high of $11.83 per share. Our stock price has at times appeared to be disassociated
with our financial condition or results of operations. In addition, the market price of our common stock has fluctuated and may continue to
fluctuate substantially due to a variety of other factors, including quarterly fluctuations in our results of operations (including as a result of
fluctuations in our revenue recognition), our ability to execute on our current growth strategy in a timely fashion, announcements about
technological innovations or new products or services by us or our competitors, market acceptance of new products and services offered by
us, developments in the IoT market, changes in our relationships with our suppliers or customers, our ability to meet analysts’ expectations,
changes in the information technology environment, changes in earnings estimates by analysts, sales of our common stock by existing
holders and the loss of key personnel. Possible exogenous incidents and trends may also impact capital markets and our own common stock
prices, including but not limited to foreign and cross border altercations, political unrest, cyberterrorism on a global scale, and increasingly
disruptive weather systems.
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In the past, following periods of volatility in the market price of a company’s stock, class action securities litigation has often been
instituted against such companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s
attention and resources, which would materially adversely affect our business, financial condition and operating results.
Our common stock may become the target of a “short squeeze.”
In 2021, the securities of several companies experienced significant and extreme volatility in stock price due to short sellers of
shares of common stock and buy-and-hold decisions of longer investors, resulting in what is sometimes described as a “short squeeze.”
Short squeezes have caused extreme volatility in those companies and in the market and have led to the price per share of those companies
to trade at a significantly inflated rate that is disconnected from the underlying value of the company. Sharp rises in a company’s stock price
may force traders in a short position to buy the stock to avoid even greater losses. Many investors who have purchased shares in those
companies at an inflated rate face the risk of losing a significant portion of their original investment as the price per share has declined
steadily as interest in those stocks have abated. We may be a target of a short squeeze, and investors may lose a significant portion or all of
their investment if they purchase our shares at a rate that is significantly disconnected from our underlying value.
Future sales of substantial amounts of our common stock, or the possibility that such sales could occur, could adversely affect the
market price of our common stock.
We may issue up to $25.0 million of common stock from time to time pursuant to a prospectus supplement dated July 2, 2021
relating to the offering of up to $25.0 million in shares under the At-Market Issuance Sales Agreement between us and B. Riley Securities,
Inc. (the “Sales Agent”) (the “Current Offering”). The issuance from time to time of shares in the Current Offering, as well as the possibility
that we may issue shares in future offerings, could have the effect of depressing the market price, or increasing the market price volatility, of
our common stock. The number of shares we may sell, and any resulting impact on market price or volatility, is highly uncertain because we
have the broad discretion regarding the number of shares we instruct the Sales Agent to sell, the market price of the common stock during
the sales period, the limits we set with the Sales Agent in any applicable placement notice, and the demand for our common stock during the
sales period. It is not currently possible to predict the number of shares that will be sold or the gross proceeds to be raised in connection with
those sales.
You may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible
into or exchangeable for our common stock. We may not be able to sell shares or other securities in any offering at a price per share that is
equal to or greater than prevailing market prices, and investors purchasing shares or other securities in the future could have rights superior
to existing shareholders. The price per share at which we sell additional shares of our common stock or other securities convertible into or
exchangeable for our common stock in future transactions may be higher or lower than currently prevailing prices per share.
Our common stock has experienced and may continue to experience price and volume fluctuations, which could cause you to lose
a significant portion of your investment, lead to costly litigation for us and interfere with our efforts to grow our business.
Stock markets are subject to significant price and volume fluctuations that may be unrelated to the operating performance of
particular companies, and accordingly the market price of our common stock may frequently and meaningfully change. For example, during
the year ended December 31, 2020, the high and low closing prices per share of our common stock were $1.83 and $0.93, respectively, with
an intraday high of $2.00 and an intraday low $0.83 per share, and with daily trading volume at a low of 500 shares and a high of 837,100
shares. In 2021, through June 30, 2021, the high and low closing prices per share of our common stock were $8.40 and $1.44, respectively,
with an intraday high of $11.83 and an intraday low of $1.40 per share, and with a daily trading volume at a low of 32,100 shares and a high
of 240,691,000 shares. We have not had any recent change in our financial condition or results of operations that is consistent with the
recent change in our stock price. In addition, the market price of our common stock has fluctuated and may continue to fluctuate substantially
due to a variety of other factors, including quarterly fluctuations in our results of operations (including as a result of fluctuations in our
revenue), our ability to execute on our current growth strategy in a timely fashion, announcements about technological innovations or new
products or services by us or our competitors, market acceptance of new products and services offered by us, developments in the IoT
market, changes in our relationships with our suppliers or customers, our ability to meet analysts’ expectations, changes in the information
technology environment, changes in earnings estimates by analysts, sales of our common stock by existing holders and the loss of key
personnel. Possible exogenous incidents and trends may also impact the capital markets generally and our common stock prices specifically,
such as foreign and cross border altercations, political unrest, cyberterrorism on a global scale, and disruptive weather systems. The timing
of your purchase of our common stock relative to fluctuations in its trading price may result in you losing all or a significant portion of your
investment.
In the past, following periods of volatility in the market price of a company’s stock, class action securities litigation has often been
instituted against such companies. Litigation may arise out of facts and circumstances, or disclosure relating thereto, that we do not currently
regard as material. For example, in 2021, we pre-released our expected financial results for the first quarter of 2021, we announced that our
shareholders approved amended and restated articles of incorporation then retracted the filing, we pre-released our expected financial
results for the second quarter of 2021, and we revised certain prior period financial statements due to a $77,000 error related to the
recognition of certain revenues in our Edge to Cloud segment. We have also recently sold shares in the public markets during periods of
volatile market activity. Such volatility may entice shareholders to challenge our disclosure, whether or not they are correct. Any litigation, if
instituted against us, could result in substantial costs and diversion of management’s attention and resources, which would interfere with our
ability to execute our business plan, sell our software and services, and otherwise materially adversely affect our business, financial condition
and operating results.
If securities or industry analysts fail to continue publishing research about our business, if they change their recommendations
adversely or if our results of operations do not meet their expectations, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could
lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, it is likely that in
some future period our operating results will be below the expectations of securities analysts or investors. If one or more of the analysts who
cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.
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Because we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, shareholders must
rely on appreciation of the value of our common stock for any return on their investment.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not
anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of any existing or future debt agreements
may preclude us from paying dividends. As a result, we expect that only appreciation of the price of our common stock, if any, will provide a
return to investors in this offering for the foreseeable future.
Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic or
foreign regulations may limit the use and adoption of our products and services and adversely affect our business.
Regulation related to the provision of services on the internet is evolving and increasing, as federal, state and foreign governments
continue to adopt new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information,
such as the E.U.’s Data Protection Directive and General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act
(“CCPA”). Further, laws and regulations are increasingly aimed at the use of personal information for marketing purposes, such as the E.U.’s
ePrivacy Directive and ePrivacy Regulation. Country-specific laws and regulations are subject to new and differing interpretations and may
be inconsistent among jurisdictions. Existing laws and regulations, as well as future requirements, could reduce demand for our products and
services or restrict our ability to store and process data or, in some cases, impact our ability to offer our products and services in certain
locations or our customers' ability to deploy our solutions globally. The costs of compliance with and other burdens imposed by laws,
regulations and standards such as GDPR and CCPA may also limit the use and adoption of our products and services, reduce overall
demand for our products and services, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close
sales transactions, any of which could harm our business. Furthermore, concerns regarding data privacy may cause our customers’
customers to resist providing the data necessary to allow our customers to use our products and services effectively. Even the perception
that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our
products and services and could limit adoption of our cloud-based solutions.
It might be difficult for a third party to acquire us even if doing so would be beneficial to our shareholders.
Certain provisions of our articles of incorporation, bylaws and Washington law may discourage, delay or prevent a change in the
control of us or a change in our management, even if doing so would be beneficial to our shareholders. Our Board of Directors has the
authority under our articles of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a
result, preferred stock could be issued quickly and easily with terms calculated to delay or prevent a change in control of our company or
make removal of our management more difficult. In addition, our Board of Directors is divided into three classes. The directors in each class
serve for three-year terms, one class being elected each year by our shareholders. This system of electing and removing directors may
discourage a third party from making a tender offer or otherwise attempting to obtain control of our company because it generally makes it
more difficult for shareholders to replace a majority of our directors. In addition, Chapter 19 of the Washington Business Corporation Act
generally prohibits a “target corporation” from engaging in certain significant business transactions with a defined “acquiring person” for a
period of five years after the acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the
target corporation’s Board of Directors prior to the time of acquisition. This provision may have the effect of delaying, deterring or preventing
a change in control of our company. The existence of these anti-takeover provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock.
Risks Related to Our Business Operations
Investments in new products and services may not deliver the returns that were anticipated when the development process was
initiated, which will have a detrimental effect on our financial results.
As we bring new products and services to market, the acquisition rate, amount, and profitability of the revenue produced by these
new offerings will be highly uncertain. Customers may not choose to adopt our technologies or may choose to adopt them more slowly than
expected. The investment models that caused us to initiate product development efforts may have contained faulty assumptions about
customer adoption rates and/or pricing. As a result, we may be required to sustain losses from product development for a longer period than
expected, which could harm our financial results and diminish our ability to make additional investments in new products or in improving our
existing set of products and services.
Expected operating efficiencies from our restructuring plans may not be realized as anticipated.
Throughout 2021, we continued our efforts to reduce unnecessary or excessive costs, with particular emphasis on personnel costs,
in order to better align our organizational structure with our strategic focus. Factors which may affect the potential operating efficiencies we
realize from our restructuring plans include the adverse impact of job eliminations, uncertainties associated with loss of customer and vendor
confidence, potential negative impact on sales and customer service as well as factors outside of our control such as changes in the
economic environment. We may not realize the anticipated benefits under our restructuring plans, which could result in additional
restructuring efforts. If our restructuring plans are not successful, our business and results of operations may be negatively impacted.
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The efforts to improve our cost structure and business outlook could result in the departure of key personnel or in costly
employment-related litigation. Such outcomes would adversely affect our business and financial results.
In many areas, we now operate with single and primary points of function and expertise for some positions. Ongoing organizational
adjustments, combined with the tight labor market, could cause the sudden departure of key individuals, which could in turn have a
detrimental effect on our ability to innovate rapidly and serve our customers. Further, because the market for technology employment
remains highly competitive, filling key vacancies may extend these negative effects. Further, employees who have had or who may have in
the future their employment relationship terminated, or who are simply disgruntled with the direction of the company’s strategy may decide to
pursue litigation against us or may choose to disparage us in social media. These activities could damage our reputation, divert our attention
from operating our business, and otherwise cause our business to suffer.
Our international operations expose us to greater intellectual property, management, collections, regulatory and other risks.
Customers outside of North America generated approximately 14% of our total revenue in both 2021 and 2020. We currently have
operations outside of North America and in the United Kingdom (“U.K.”). Our international activities and operations expose us to a number of
risks, including the following:
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Greater difficulty in protecting intellectual property due to less stringent foreign intellectual property laws and enforcement
policies;
Longer collection cycles than we typically experience in North America;
Unfavorable changes in regulatory practices and tariffs;
Compliance with complex regulatory regimes or restrictions on import and export of our goods and services;
Complex and/or adverse tax laws and/or changes thereto. Additionally, we may be subject to income, withholding and other
taxes for which we may realize no current benefit despite the existence of significant net operating loss and tax credit
carryforwards in the U.S.;
Loss or reduction of withholding tax exemptions;
The impact of fluctuating exchange rates between the U.S. dollar and foreign currencies;
General economic and political conditions in international markets which may differ from those in the U.S.;
Increased exposure to potential liability under the Foreign Corrupt Practices Act;
Added cost and administrative burden associated with creating and operating business structures in other jurisdictions;
Potential labor costs and risks associated with employees and labor laws in other geographies;
The inherent risks of working in a certain highly regulated and/or controlled economies where relationships between company
management and government officials is critical to timely processing of approvals required to conduct business; and
On January 31, 2020, the U.K. exited the E.U., commonly referred to as “Brexit”. As the long-term implications of Brexit
become clear, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries
and increased regulatory complexities, which could adversely impact our operations and business in both the U.K. and the
E.U.
These risks could have a material adverse effect on the financial and managerial resources required to operate our foreign offices,
as well as on our future international revenue, which could negatively impact our business and operating results.
As our customers seek more cost-effective locations to develop and manufacture their products, particularly overseas locations,
our ability to continue to sell our software products and services to these customers could be adversely affected, which could
negatively impact our revenue and operating results.
Due to competitive and other pressures, some of our customers have moved, and others may seek to move, the development and
manufacturing of their smart, connected systems to overseas locations, which may limit our ability to sell our software and services to these
customers. As an example, under our current arrangements with Microsoft, we are currently only able to sell Microsoft Windows IoT
operating systems to our customers in the United States, Canada, the Caribbean (excluding Cuba), Mexico, and the European Free Trade
Association. If our customers, or potential customers, move their manufacturing overseas to locations in which our business may be limited,
we may be less able to remain competitive, which could negatively impact our revenue and operating results.
Past acquisitions have proven difficult to integrate, and future acquisitions, if any, could disrupt our business, dilute shareholder
value and negatively affect our operating results and may not accrete to our revenue or other operating results or to our business
generally.
We have acquired the technologies, assets and/or operations of other companies in the past and may acquire or make investments
in companies, products, services and technologies in the future. If we fail to properly evaluate, integrate and execute on our acquisitions and
investments, our business and prospects may be seriously harmed. In addition, acquisitions may not be as accretive to our revenue or other
operating results as expected. To successfully complete an acquisition, we must properly evaluate the business, technology, market and
management team of the acquisition target, accurately forecast the financial impact of the transaction, including accounting charges and
transaction expenses, integrate and retain personnel, combine potentially different corporate cultures and effectively integrate products,
research and development, sales, marketing and support operations. If we fail to do any of these, we may suffer losses and impair
relationships with our employees, customers and strategic partners. Additionally, acquisition activities may distract management from day-to-
day operations. We also may be unable to maintain consistently uniform standards, controls, procedures and policies across our entire
business as a result, and significant additional demands may be placed on our management and our operations, information services and
financial, legal and marketing resources. Finally, acquired businesses may result in unexpected liabilities and contingencies, which may
involve compliance with foreign laws, payment of taxes, labor negotiations or other unknown costs and expenses, which could be significant.
We could become subject to taxation in jurisdictions in which we do not believe we currently have tax nexus, which could expose
us to additional tax liability that we have not been subject to in the past.
We sell in many jurisdictions across the United States. We believe we do not have nexus in most of these jurisdictions and,
therefore, we believe we are not subject to sales, franchise, income and other state and local taxes in such jurisdictions. However, if we are
determined to have tax nexus in other jurisdictions (as a result of more aggressive interpretations of nexus by taxing jurisdictions or
otherwise) and we are unable to pass through this cost to our customers, our tax expense will increase which will negatively affect our results
of operations. Further, because state and local tax laws are becoming increasingly complex, we anticipate that our cost to monitor our state
and local tax compliance will increase which will negatively affect our results of operations. Additionally, we may have unknown tax exposure
in a state or local tax jurisdiction because of recent tax law changes of which we are unaware, and the resulting liability could be significant
and would negatively affect our results of operations.
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Changes in our effective tax rate may impact our results of operations.
We are subject to taxes in the U.S. and other jurisdictions. Tax rates in these jurisdictions may be subject to significant change due to
economic and/or political conditions. A number of other factors may also impact our future effective tax rate including:
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the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes, including write-offs of acquired intangibles and impairment of goodwill
in connection with acquisitions;
changes in availability of tax credits, tax holidays, and tax deductions;
changes in share-based compensation; and
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles.
There may be restrictions on the use of our net operating loss and tax credit carryforwards due to a tax law “ownership change.”
We did not generate taxable income in 2021 or 2020 and, as a result, we were unable to use our net operating loss and tax credit
carryforwards with respect to such tax years. In addition, Sections 382 and 383 of the Internal Revenue Code restrict the ability of a
corporation that undergoes an ownership change to use net operating loss and tax credit carryforwards. We have performed analyses of
possible ownership changes which included consideration of a third-party study, and do not believe that an ownership change, as defined by
Section 382, has occurred. However, if a tax law ownership change has occurred of which we are not aware, or if a tax law ownership
change occurs in the future, we may have to adjust the valuation of our deferred tax assets and could be at risk of having to pay income
taxes notwithstanding the existence of our sizable carryforwards. Further, to the extent that we have utilized our carryforwards from prior
years, the existence of a previous tax law ownership change that we did not account for could result in liability for back taxes, interest, and
penalties. If we are unable to utilize our carryforwards and/or if we previously utilized carryforwards to which we were not entitled, it would
negatively impact our business, financial condition and operating results.
If we are unable to attract, hire, and retain employees with the skills and experience required by our business, our ability to
compete may be harmed.
Competition for qualified personnel in the technology industry has historically been intense, particularly for software engineers and
other technical staff. Recently, that competition has surpassed even historical norms and the fight for talent has expanded beyond technical
roles and into virtually all areas of our company. The loss to competitors of any of our key employees, or the inability to hire, train, retain,
motivate, and manage qualified personnel, could harm our business. Recruiting efforts, particularly for senior employees or employees with
specialized skills, may be time-consuming, which may delay the execution of our plans. Failure to ensure effective transfer of knowledge and
smooth transitions involving key employees who do depart could hinder our strategic planning and execution. If we are not successful in
managing these risks, our business, financial condition, and operating results may be harmed.
Our customers face manufacturing and supply chain risks that could reduce demand for our products, harming our financial
condition, operating results, and prospects.
Our customers purchase software products from us that are incorporated with other components into finished goods for sale into
their own markets. They rely on a variety of third-party suppliers, contract manufacturers and service providers to provide raw materials, parts
and sub-systems. Recent global shortages in energy, raw materials, and labor have harmed our customers' ability to acquire the necessary
components for their products, which have in turn caused them to delay or cancel some of their orders with us. If our customers experience
ongoing supply shortages and price increases driven by raw material shortages, part availability, manufacturing capacity, labor shortages,
industry allocations, tariffs, trade barriers, natural disasters, and/or pandemics (including COVID-19), their buying patterns and volumes may
continue to be volatile. As a result, our revenue, overall financial condition, and operating results could be harmed.
Risks Related to Technology and Intellectual Property
Our software or hardware products or the third-party hardware or software integrated with our products or delivered as part of our
service offerings may suffer from defects or errors that could impair our ability to sell our products and services.
Software and hardware components as complex as those needed for dedicated purpose intelligent systems frequently contain errors
or defects, especially when first introduced or when new versions are released. We have had to delay commercial release of certain versions
of our products until problems were corrected and, in some cases, have provided product enhancements to correct errors in released
products. Some of our contracts require us to repair or replace products that fail to work. To the extent that we repair or replace products, our
expenses may increase. In addition, it is possible that by the time defects are repaired, the market opportunity may decline which may result
in lost revenue.
Moreover, to the extent that we provide increasingly complex and comprehensive products and services, particularly those focused
on IoT hardware, and rely on third-party manufacturers and suppliers to manufacture these products, we will be dependent on the ability of
such third-party manufacturers and suppliers to correct, identify and prevent manufacturing errors or defects. Errors or defects that are
discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources,
damage to our reputation and increased service and warranty costs, all of which could negatively impact our business and operating results.
Our business and operations would be adversely impacted in the event of a failure or interruption of our IT infrastructure.
The proper functioning of our IT infrastructure is critical to the efficient operation and management of our business. Despite ongoing
mitigation efforts, our infrastructure may be vulnerable to cyberattacks, cyberterrorism, computer viruses, worms and other malicious
software programs, physical and electronic break-ins, sabotage and similar disruptions from unauthorized tampering with our computer
systems. We believe that we have adopted appropriate measures to mitigate potential risks to our technology infrastructure and our
operations from these IT-related and other potential disruptions. However, given the unpredictability of the timing, nature and scope of such
disruptions, we could potentially be subject to downtime, operational delays, other detrimental impacts on our operations or ability to provide
products and services to our customers, the compromising of confidential or personal information, destruction or corruption of data, security
breaches, other manipulation or improper use of our systems and networks, financial losses from remedial actions, loss of business or
potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our cash flows, competitive position,
financial condition or results of operations.
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Interruptions or delays in services from third-party data center hosting facilities or cloud computing platform providers could
impair the delivery and availability of our products and services and harm our business.
We currently serve certain customers through third-party data center hosting facilities and cloud computing platform providers
located in the United States and other countries. Any damage to, or failure of, these systems generally could result in interruptions in the
availability of our products and services. We have from time to time experienced, and may continue to experience, such interruptions, which
could cause us to issue credits or pay penalties, cause customers to terminate their subscriptions, and adversely affect our customer attrition
rates and our ability to attract new customers, all of which would reduce our revenue. Our business would also be harmed if our customers
and potential customers believe our product and services offerings are unreliable. Despite contract provisions to protect us, customers may
look to us to support and provide warranties for these third-party systems, which may expose us to potential claims, liabilities and obligations
for technology or services we did not develop or sell, all of which could harm our business. Further, third-party software and cloud platforms
that we currently or may in the future utilize may not continue to be available at reasonable prices, on commercially reasonable terms, or may
become unavailable. Any of these outcomes could significantly increase our expenses and result in delays in the provisioning of our products
and services until we are able to procure alternative solutions, either by developing equivalent technology or, if available, obtaining such
technology through purchase or license from other third parties.
We do not control the operation or security of any of these hosting facilities or cloud computing platforms, and they may be
vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may
also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, as well as local administrative actions, changes
to legal or permitting requirements and litigation to stop, limit or delay operation. Despite precautions taken by providers of these facilities and
platforms, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities or platforms without adequate notice or
other unanticipated problems at these facilities or platforms could result in lengthy interruptions in or cessation of our services.
Breaches in data security or incidents of cybercrime could damage our customers’ business and our reputation, which may harm
our ability to gain new customers or cause our existing customer to look to our competitors for products and services.
Our products and services involve the storage and transmission of customers’ proprietary data and personal information and security
breaches could result in a risk of loss of this data or information, litigation and possible liability. While we have security measures in place,
they may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance
or otherwise and result in someone obtaining unauthorized access to our IT systems, our customers’ data or our data, including our
intellectual property and other confidential business information. Additionally, third parties may attempt to fraudulently induce employees or
customers into disclosing sensitive personal information such as usernames, passwords or other information in order to gain access to our
customers’ data, our data or our IT systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change
frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement
adequate preventative measures. In addition, our customers may authorize third-party technology providers to access their customer data,
and some of our customers may not have adequate security measures in place to protect their data. Because we do not control the IT
security of our customers or third-party technology providers, or of the processing of such data by third-party technology providers, we cannot
ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct attacks designed to temporarily
deny customers access to our products and services. Any security breach could result in a loss of confidence in the security of our products
and services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability.
Our software and service offerings could infringe the intellectual property rights of third parties, which could expose us to
additional costs and litigation and could adversely affect our ability to sell our products and services or cause shipment delays or
stoppages.
It is difficult to determine whether our software products and engineering services infringe third-party intellectual property rights,
particularly in a rapidly evolving technological environment in which technologies often overlap and where there may be numerous patent
applications pending, many of which are confidential when filed. If we were to discover that one of our software products or service offerings,
or a product based on one of our reference designs, violated a third party’s proprietary rights, we may not be able to obtain a license on
commercially reasonable terms, or at all, to continue offering that product or service. Similarly, third parties may claim that our software
products and services infringe their proprietary rights, regardless of whether such claims have merit. Any such claims could increase our
costs and negatively impact our business and operating results. In certain cases, we have been unable to obtain indemnification against
claims that third-party technology incorporated into our software products and services infringe the proprietary rights of others. However, any
indemnification we do obtain may be limited in scope or amount. Even if we receive broad third-party indemnification, these entities may not
have the financial capability to indemnify us in the event of infringement.
In addition, in some circumstances we are required to indemnify our customers for claims made against them that are based on our
software products or services. We may face claims of infringement or invalidity related to the software products and services we provide or
arising from the incorporation by us of third-party technology and claims for indemnification from our customers resulting from such claims.
Some of our competitors have, or are affiliated with companies with, substantially greater resources than we have, and these competitors
may be able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In
addition, we expect that software developers will be increasingly subject to infringement claims as the number of products and competitors in
the software industry grows, and as the functionality of products in different industry segments increasingly overlap. Such claims, even if not
meritorious, could result in the expenditure of significant financial and managerial resources in addition to potential product redevelopment
costs and delays. Furthermore, if we were unsuccessful in resolving a patent or other intellectual property infringement action claim against
us, we may be prohibited from developing or commercializing certain of our technologies and products, or delivering services based on the
infringing technology, unless we obtain a license from the holder of the patent or other intellectual property rights. We may not be able to
obtain any such license on commercially favorable terms, or at all. If such license were not obtained, we would be required to cease these
related business operations, which could negatively impact our business, revenue and operating results.
If we are unable to license key software from third parties, our business could be harmed.
We sometimes integrate third-party software with our proprietary software and engineering service offerings or sell such third-party
software offerings on a standalone basis, such as we do with Microsoft Windows IoT and Mobile operating systems under our ODAs with
Microsoft. If our relationships with these third-party software vendors were to deteriorate, or be eliminated in their entirety, we might be
unable to obtain licenses on commercially reasonable terms, if at all. In the event that we are unable to obtain these third-party software
offerings, we would be unable to continue to generate revenue from our reseller relationships or, with respect to our proprietary software and
engineering services offerings, we would be required to develop this technology internally, assuming it was economically or technically
feasible, or seek similar software offerings from other third parties assuming there were competing offerings in the marketplace, which could
delay or limit our ability to introduce enhancements or new products, or to continue to sell existing products and engineering services,
thereby negatively impacting our revenue and operating results.
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If we fail to adequately protect our intellectual property rights, competitors may be able to use our technology which could weaken
our competitive position, reduce our revenue and increase our costs.
We rely primarily on confidentiality policies and procedures and contractual provisions as well as a combination of patent, copyright,
trade secret and trademark laws, to protect our intellectual property. These laws, policies and procedures provide only limited protection. It is
possible that another party could obtain patents that block our use of some, or all, of our software products and services. If that occurred, we
would need to obtain a license from the patent holder or design around those patents. The patent holder may or may not choose to make a
license available to us on acceptable terms, or at all. Similarly, it may not be possible to design around a blocking patent. Our efforts to
protect our intellectual property rights through patent, copyright, trade secret and trademark laws may not be effective to prevent
misappropriation of our technology, or to prevent the development and design by others of products or technologies similar to or competitive
with those developed by us.
We license our computer source code to customers. Customers with access to our source code may not comply with the license
terms. We may not discover any violations of the license terms and, in the event of discovery of violations, we may not be able to
successfully enforce the license terms or recover the economic value lost from such violations. To license some of our software products, we
rely in part on “shrink-wrap” and “click wrap” licenses that are not signed by the end user and, therefore, may be unenforceable under the
laws of certain jurisdictions. As with other software, our software products are susceptible to unauthorized copying and uses that may go
undetected, and policing such unauthorized use is difficult.
A significant portion of our marks include the word “BSQUARE.” Other companies use forms of “BSQUARE” in their marks alone, or
in combination with other words, and we cannot prevent all such third-party uses. We license certain trademark rights to third parties. Such
licensees may not abide by our compliance and quality control guidelines with respect to such trademark rights. Any of these outcomes could
negatively impact our brand, dilute its recognition in the marketplace, or confuse potential customers, all of which could harm our business.
The computer software market is characterized by frequent and substantial intellectual property litigation, which is often complex and
expensive, and involves a significant diversion of resources and uncertainty of outcome. Litigation may be necessary in the future to enforce
our intellectual property or to defend against a claim of infringement or invalidity. Litigation could result in substantial costs and the diversion
of resources and could negatively impact our business and operating results.
Risks Related to Our Partnership with Microsoft
We provide software and services to customers building devices utilizing Microsoft’s Windows IoT and Windows Mobile operating
systems and a significant portion of our revenue is derived from the sale of Microsoft Windows IoT and Windows Mobile operating systems.
As a result, Microsoft has a significant direct and indirect influence on our business. The following Microsoft-related risks may negatively
impact our business and operating results.
If we do not maintain our distribution relationship with Microsoft as currently structured, our revenue would decrease, and our
business would be adversely affected.
We have entered into 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. If any of our other ODAs are terminated by Microsoft
(which Microsoft can do unilaterally) or not renewed, Partner Solutions revenue and resulting gross profit could decrease significantly and our
operating results would be negatively impacted. Future renewals by Microsoft, if any, could be on less favorable terms, which could also
negatively impact our business and operating results.
We currently recognize revenue from the sale of Microsoft software generally upon shipment of physical software licenses. If
Microsoft were to change the method of providing software licenses to a digital rather than physical medium, our revenue recognition policies
may need to change, and that change in policy could result in a significant decrease in revenue. While such a change is not expected, and
would not immediately impact our cash flows, the full financial scope of the impact is uncertain and potentially significantly negative.
Microsoft can change its product pricing at any time, and unless we are able to pass through price increases to our customers, our
revenue, gross profit and operating results would be negatively impacted.
Further, Microsoft currently offers a rebate program in conjunction with our resale activities in which we earn money for achieving
certain predefined objectives. If Microsoft changes the way that rebates are earned by eliminating or negatively modifying the rebate
program, our gross profit and operating results would be adversely impacted. If we are unable to meet rebate criteria, or if the rebate criteria
is modified, we may not be able to sustain the financial benefits of the rebate program and our operating results could be harmed.
Our business and results of operations could be negatively impacted by changes Microsoft implements in its pricing of its
operating systems.
Microsoft has historically implemented significant pricing changes for its operating systems products and Microsoft could make
further pricing changes in the future. These changes have altered the competitive dynamics because the same pricing discounts are
available to all distributors of these Microsoft products. As a distributor of Microsoft products, this may impact both the sales prices we charge
our customers and the cost of goods sold that we incur for many of the Microsoft products we sell. Microsoft has indicated that a new version
of an operating system product we frequently sell to customers will be released in the near future. While Microsoft has not indicated the
pricing of this new product version, any significant declines in the market price for the product will reduce our revenue and may reduce our
gross profits. The amount and impact of the change, and other pricing changes, on our revenue and gross profit are currently not
determinable; however, they may negatively impact our operating results in future reporting periods.
Microsoft offers certain consumer Windows phone and tablet-based operating systems to customers free of charge, subject to
certain limitations. While we do not distribute these operating systems today under our ODAs with Microsoft, if Microsoft were to offer, free of
charge, operating systems that we do distribute, our business and results of operations would be adversely impacted.
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In recent years, the markets for Windows IoT and Windows Mobile operating systems have declined; if the markets for these
operating systems continue to decline or decline more rapidly than anticipated, our business and operating results would be
materially harmed.
A significant portion of our revenue to date has been generated by software and services targeted at customers and devices running
various Microsoft Windows IoT and Windows Mobile operating systems. In recent years, the markets for these systems have declined. If the
markets for these operating systems continue to decline or decline more rapidly than anticipated, our business and operating results would
be negatively impacted. Continued market acceptance of Microsoft Windows IoT and Windows Mobile operating systems will depend on
many factors, including:
•
•
•
•
Microsoft’s development and support of various Windows IoT and Windows Mobile markets. As the developer and primary
promoter of Windows IoT and Windows Mobile operating systems, if Microsoft were to decide to discontinue or lessen its
support of these operating systems, potential customers could select competing operating systems, which could reduce the
demand for our Microsoft Windows IoT and Windows Mobile software products and engineering services, from which a
significant portion of our revenue continues to be generated;
The ability of the Microsoft Windows IoT and Windows Mobile operating systems to compete against existing and emerging
operating systems for the smart connected systems market, including iOS from Apple, Inc.; VxWorks and Linux from
WindRiver Systems Inc.; Android from Google Inc.; QNX from BlackBerry Limited; and other proprietary operating systems.
Microsoft Windows IoT and Windows Mobile operating systems may be unsuccessful in capturing or retaining a significant
share of the smart connected systems market in the future;
The acceptance by customers of the mix of features and functions offered by Microsoft Windows IoT and Windows Mobile
operating systems; and
The willingness of software developers to continue to develop and expand the applications running on Microsoft Windows IoT
and Windows Mobile operating systems is uncertain. To the extent that software developers write applications for competing
operating systems that are more attractive to users than those available on Microsoft Windows IoT and Windows Mobile
operating systems, this could cause potential customers to select competing operating systems and our revenue could decline.
Microsoft has audited our records under the ODAs in the past and may audit our records again in the future, and any negative
audit results could result in additional charges and/or the termination of our distributor relationship with Microsoft.
There are provisions in the ODAs that require us to maintain certain internal records and processes for auditing purposes. Non-
compliance with these or other contractual requirements could result in the termination of our distributor relationship with Microsoft. Microsoft
conducted previous audits of our records pertaining to the ODAs, none of which had material findings. It is possible that future audits could
result in charges due to any material findings that are found. We may also be contractually liable for payment of royalties to Microsoft in the
event that certificates of authenticity are lost, damaged or stolen.
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Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
During the second quarter of 2020, we completed a move of our corporate headquarters from the prior location in Bellevue,
Washington to a 6,780 square-foot facility in downtown Seattle, Washington. As of December 31, 2021, we have consolidated almost all our
operations into that single location. The lease term on the Seattle facility ends in July 2027.
We also lease 8,217 square feet of office space in Trowbridge, England, U.K. for use by the team of engineers and sales and
marketing personnel operating from that location. In the fourth quarter of 2020, we renewed the lease for that facility for a 10-year term with
substantially the same terms as the now-terminated lease. We have an option to cancel the second half of the lease term (5 years).
We believe that our facilities meet our current operational needs now and in the near-term future.
Item 3.
Legal Proceedings.
None.
Item 4.
Mine Safety Disclosures.
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on The NASDAQ Stock Market, LLC under the symbol “BSQR.”
Holders
As of February 28, 2022, there were 108 holders of record of our common stock. Because many shares of our common stock are
held by brokers and other institutions on behalf of shareholders, we are unable to determine the total number of shareholders represented by
these holders of record.
Item 6.
[Reserved]
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction
with our consolidated financial statements and related notes. This Management’s Discussion and Analysis of Financial Condition and Results
of Operations may contain some statements and information that are not historical facts but are forward-looking statements. For a discussion
of these forward-looking statements, and of important factors that could cause results to differ materially from the forward-looking statements
contained in this report, see Item 1 of Part I, “Business—Cautionary Note Regarding Forward-Looking Statements,” and Item 1A of Part I,
“Risk Factors.”
Overview
Bsquare develops and deploys technologies for the makers and operators of connected devices. These fleets of business-oriented
devices, often called the Internet of Things (IoT), offer a powerful means to connect organizations, people, information, and ideas. Hundreds
of millions of connected devices have already been deployed and it is estimated that billions more will be. Despite their growing prevalence,
these devices and the systems in which they operate remain a significant source of complexity, unplanned and often uncontrolled expense,
and operational risk. Our customers are undergoing a massive change in their business practices and Bsquare provides technology that
helps them capture the value of connected devices and reduces the cost and risk of doing so.
Since our founding in 1994, Bsquare has helped embedded device manufacturers (“Original Equipment Manufacturers” or “OEMs”)
design and build cost-effective products. For most of our history, we operated at the intersection of hardware and software, helping our
customers select, develop, and configure system software for a variety of purpose-built devices, from mobile computing to point-of-sale
systems to healthcare equipment to hospitality, gaming, and more. Our expertise in hardware, device configuration, and operating systems
became essential to our customers’ design cycles and purchasing decisions. As our customers deployed ever-larger fleets of devices, our
understanding of the requirements for large-scale device operations increased.
More recently, our expertise and business prospects have shifted to cloud-connected devices that have been connected to create
intelligent systems. This shift coincides with the overall growth of IoT technologies and with our customers’ recognition that connected
intelligent devices create significant business opportunities. Device makers have increasingly specified their products not only to be
connection-ready, but also to be enhanced by the breadth and depth of functionality that connection creates. We have taken to market a
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.
2021 Key Highlights
The COVID-19 pandemic, including its impact on the microchip supply chain, continued to affect our customer ordering patterns and
caused ongoing disruptions and revenue variability in 2021, particularly in the Partner Solutions segment. After experiencing year-over-year
revenue increases in the second and third quarters of 2021, fourth quarter 2021 revenue decreased $1 million or 11% from the fourth quarter
of 2020. Full year 2021 revenue reflected a $7 million or 14% decrease from 2020. We believe our Partner Solutions revenue was also
affected by other Microsoft distributors offering deep discounts on Windows IoT OS software as part of hardware / software bundles. We
expect this market trend may continue in future quarters. We are working to retain and attract customers with superior service and technical
support, pricing that rewards loyalty, and a clear upgrade path for efficient, effective, and secure IoT operations.
In 2021, our Edge to Cloud segment revenue reflected a strategic and intentional shift away from many smaller customers to a
few key customers, all operating in the IoT space. While this shift was the primary driver of the year-over-year decrease in revenue, we
believe the experience we gained serving our large IoT customers has positioned us to improve our IoT software and services in 2022 and
beyond. We plan to leverage this expertise both to expand existing customer relationships and to attract new customers to our offerings.
Our work in 2019 and 2020 to right-size our operating expense structure was evident in 2021 as our selling, general and
administrative expenses were $1.3 million less than selling, general and administrative expenses in 2020. We anticipate increasing our
marketing spend during 2022 as we support the launch of new products and build brand awareness.
Throughout 2021, we invested in the development of new product offerings for our customers, two of which we announced in the
fourth quarter of 2021: SquareOne, a secure device management solution and Device Hardening, a solution ensuring appropriate OS
configuration. In 2021, our product development investment totaled over $1.7 million, of which $0.4 million was capitalized as internally
developed software and the remainder is captured on the income statement as research and development expense.
Our cash, cash equivalents, and restricted cash increased by $27.1 million during 2021. This increase in cash was driven by the
receipt of net proceeds of $31.9 million from the sale of our common stock. This increase was partially offset by the use of cash for R&D
investment, operational shortfalls (primarily soft Partner Solutions revenue) and variations in working capital items.
Cash will be invested strategically to grow our business and enhance our value proposition to customers.
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Critical Accounting Estimates
Revenue recognition
Our revenue recognition accounting methodology contains uncertainties because it requires us to make significant estimates and
assumptions, and to apply judgment. For example, for arrangements that have multiple performance obligations, we must exercise judgment
and use estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2)
determine the standalone selling price of each performance obligation; (3) allocate the transaction price among the various performance
obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be
recognized at a point in time or over time.
We have not made any changes to the significant estimates utilized to determine the total transaction price and stand-alone selling
prices at contract inception. Our customer contracts that involve perpetual licenses are less sensitive to changes in estimates than contracts
involving SaaS as those arrangements require us to estimate customer usage. Changes to our customer usage estimates could have a
material impact on the total transaction price.
In addition, we exercise judgment in certain transactions when determining whether we should recognize revenue based on the
gross amount billed to a customer (as a principal) or the net amount retained (as an agent). These judgments are based on our determination
of whether or not we control the service before it is transferred to the customer.
Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the
countries and other jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing
temporary differences resulting from the differing treatment of items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities. Net operating losses and tax credits, to the extent not already utilized to offset taxable income or income taxes, also
give rise to deferred tax assets. We must then assess the likelihood that any deferred tax assets will be realized from future taxable income,
and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. We are required to use judgment as to the
appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part
of this analysis, we examine all available evidence on a jurisdiction-by-jurisdiction basis and weigh the positive and negative information
when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items,
(i) the historical levels of income or loss over a range of time periods that extends beyond the two years presented, (ii) the historical sources
of income and losses, (iii) the expectations and risk associated with underlying estimates of future taxable income, (iv) the expectations and
risk associated with new product offerings and uncertainties with the timing of future taxable income, and (v) prudent and feasible tax
planning strategies. Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against our deferred tax assets. We estimate the valuation allowance related to our deferred tax assets on a
quarterly basis.
Our sales may be subject to other taxes, particularly withholding taxes, due to our sales to customers in countries other than the
United States. The tax regulations governing withholding taxes are complex, causing us to have to make assumptions about the appropriate
tax treatment. Further, we make sales in many jurisdictions across the United States, where tax regulations are varied and complex. We must
therefore continue to analyze our state tax exposure and determine what the appropriate tax treatments are, and make estimates for sales,
franchise, income and other state taxes.
Results of Operations
The following table presents our summarized results of operations for the periods indicated. Our historical operating results are not
necessarily indicative of the results for any future period.
(In thousands, except percentages)
Revenue
Cost of revenue
Gross profit
Operating expenses
Loss from operations
Other income, net
Loss before income taxes
Income tax expense
Net loss
Revenue
Year Ended December 31,
2021
2020
$ Change % Change
$
$
40,367 $
34,952
5,415
9,307
(3,892)
1,650
(2,242)
—
(2,242) $
47,144 $
39,418
7,726
9,580
(1,854)
(35)
(1,889)
—
(1,889) $
(6,777)
(4,466)
(2,311)
(273)
(2,038)
1,685
(353)
—
(353)
(14)%
(11)%
(30)%
(3)%
(110)%
4813%
(19)%
0%
(19)%
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 in 2021 compared to 2020, due to decreased sales in our Partner
Solutions segment, primarily in North America and Europe, as well as decreased revenue in our Edge to Cloud segment.
Additional revenue details are as follows:
(In thousands, except percentages)
Revenue:
Partner Solutions
Edge to Cloud
Total revenue
As a percentage of total revenue:
Partner Solutions
Edge to Cloud
Year Ended December 31,
2021
2020
$ Change % Change
$
$
36,516
3,851
40,367
$
$
42,257
4,887
47,144
$
$
(5,741)
(1,036)
(6,777)
(14)%
(21)%
(14)%
90%
10%
90%
10%
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Partner Solutions revenue
Partner solutions revenue decreased $5.7 million (or 14%) in 2021 compared to 2020. We believe customer demand for embedded
operating systems was adversely impacted by the economic downturn and related uncertainty stemming from the global COVID-19
pandemic. We have some moderate customer concentration in industries particularly impacted by COVID-19, such as casino gaming,
hospitality, and point-of-sale systems.
Edge to Cloud revenue
Edge to Cloud revenue decreased $1.0 million (or 21%) in 2021 compared to 2020, primarily due to a decrease in professional
services revenue driven primarily by purchasing delays from one of our large customers. In addition, our relationships with some smaller
customers concluded and we have strategically shifted our focus to larger customers and product development opportunities.
Gross profit and gross margin
Cost of revenue for the Partner Solutions segment consists primarily of embedded operating system software product costs payable
to third-party vendors, net of rebate credits earned through Microsoft's distributor incentive program. Cost of revenue for Edge to Cloud
revenue consists primarily of salaries, benefits, rebillable expenses, and amortization of certain intangible assets related to acquisitions.
Gross profit and gross margin were as follows:
(In thousands, except percentages)
Partner Solutions gross profit
Partner Solutions gross margin
Edge to Cloud gross profit
Edge to Cloud gross margin
Total gross profit
Total gross margin
(1) For gross margin, amounts represent percentage point change.
$
$
$
Partner Solutions gross profit and gross margin
Year Ended December 31,
2021
2020
$ Change
% Change
(1)
5,038
377
$
14%
$
10%
$
13%
5,415
7,086
640
$
17%
$
13%
$
16%
7,726
(2,048)
—
(263)
—
(2,311)
—
(29)%
(3.0)
(41)%
(3.0)
(30)%
(3.0)
The year-over-year decline in Partner Solutions gross profit was driven by lower third-party software sales and gross margin rate
deterioration due to a decrease in Microsoft rebates and a change in the mix of customer types and in products sold.
Partner Solutions gross profit is impacted by rebate credits earned through Microsoft’s distributor incentives program. 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 during the period in which expenditures are approved. During the first half of 2020, we allocated 20% of
rebates to reduce cost of sales and 80% to marketing expenses. In the second half of 2020, we began allocating the rebates 50/50 which
continued throughout 2021. See Footnote 13 – Significant Concentrations for further information about these rebates.
Edge to Cloud gross profit and gross margin
The year-over-year decrease in Edge to Cloud gross profit was driven by a decrease in revenue partially offset by a decrease in cost
of revenue resulting from the conclusion of one-time customer investments.
Operating expenses
Operating expenses were as follows:
(In thousands, except percentages)
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
As a percentage of total revenue:
Selling, general and administrative
Research and development
Selling, general and administrative
Year Ended December 31,
2021
2020
$ Change % Change
$
$
8,003
1,304
9,307
$
$
9,314
266
9,580
$
$
(1,311)
1,038
(273)
(14)%
390%
(3)%
20%
3%
20%
1%
Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related benefits, commissions and bonuses
for our sales, marketing and administrative personnel, facilities and depreciation costs, as well as professional services fees (such as
consulting, legal, audit and tax). SG&A expenses decreased in 2021 compared to 2020 due to lower salaries and related benefits resulting
from prior period restructuring efforts, partially offset by a reduction in the amount of Microsoft rebates recognized as a marketing contra
expense.
Research and development
Research and development (“R&D”) expenses consist primarily of salaries and benefits for software development and quality
assurance personnel, and contractor and consultant costs. R&D expenses increased in 2021 compared to 2020, primarily due to
higher salaries and related benefits and other costs related to product development.
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Other income (loss), net
Other income and loss typically consist primarily of interest income on our cash and investments, gains and losses we may
recognize on our investments, gains and losses on foreign exchange transactions and other items. During the second quarter of 2021, we
recorded on the statement of operations for the year ended December 31, 2021, a $1.6 million gain on the extinguishment of debt related to
the forgiveness of our Paycheck Protection Program loan. See Footnote 14 – Paycheck Protection Program Loan for additional information.
Income taxes
Income tax expense was not recorded in either 2021 or 2020.
Liquidity and Capital Resources
Overview
As of December 31, 2021, we had $40.1 million of cash, cash equivalents and restricted cash, compared to $13.0 million at
December 31, 2020, reflecting a net increase of approximately $27.1 million. We generally invest our excess cash in high quality marketable
investments. These investments generally 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. There were no investments held at December 31, 2021 or
December 31, 2020.
We believe that our existing cash and cash equivalents will be sufficient to meet our needs for working capital and capital
expenditures for at least the next 12 months.
Cash flows from operating activities
Operating activities used cash of approximately $4.4 million during the year ended December 31, 2021. The cash use was primarily
driven by a net loss, adjusted for non-cash items, of $2.7 million, a decrease in deferred revenue of $1.0 million, and changes in working
capital of $0.7 million.
Cash flows from investing activities
Investing activities used cash of $0.5 million during the year ended December 31, 2021. The cash use related primarily to property
and equipment additions in the form of internally developed software.
Cash flows from financing activities
Financing activities provided cash of $32.0 million during the year ended December 31, 2021. This cash is related primarily to the
sale of our common stock, in addition to employee stock options exercised throughout 2021. See Footnote 11 – Shareholders’ Equity for
more information about the sale of our common stock.
Material cash requirements and sources of liquidity
Cash requirements arising from contractual obligations relate to our office leases, see Footnote 9 – Leases for further information.
Other significant cash requirements include software royalties, which become a liability at the point we sell third-party software to our
customers, and salary and benefit expenditures related to our personnel. Our sources of liquidity include cash and cash equivalents currently
on-hand, and cash generated from operations. We believe that our existing cash and cash equivalents are sufficient to meet our cash
requirements for the foreseeable future.
Recently Issued Accounting Standards
See Note 1, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Item 8.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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Item 8.
Financial Statements and Supplementary Data.
BSQUARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Seattle, WA, PCAOB ID: 659)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations and Comprehensive Loss for 2021 and 2020
Consolidated Statements of Shareholders’ Equity for 2021 and 2020
Consolidated Statements of Cash Flows for 2021 and 2020
Notes to Consolidated Financial Statements
19
20
22
22
24
25
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Bsquare Corporation
Opinion on the Financial Statements
We have audited the consolidated balance sheets of Bsquare Corporation (the “Company”) as of December 31, 2021 and 2020, the related
consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the years then ended, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated
results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that
was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to
the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Edge to Cloud Revenue Recognition
As described in Notes 1 and 2 to the consolidated financial statements, the Edge to Cloud revenue stream comprises multiple performance
obligations, and generally include professional services, a perpetual or term license, and support and maintenance. Due to the multiple
element nature of the Company’s contracts, appropriate revenue recognition requires the Company to exercise significant judgment in the
following areas:
● Determination of whether products and services are considered distinct performance obligations that should be accounted for
separately versus combined, such as software licenses and related services.
● Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold
separately.
● The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
● Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable
consideration and material right).
Given these factors, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer
agreements was extensive and required a high degree of auditor judgment. These were the principal considerations that led us to determine
that the matter was a critical audit matter.
The primary procedures we performed to address this critical audit matter included:
● We evaluated management's significant accounting policies related to these customer agreements for reasonableness.
● We selected a sample of customer agreements and performed the following substantive audit procedures:
o Obtained and read contract source documents for each selection, including master agreements, and other documents that
were part of the original agreement or contract modification.
o Analyzed the contract to determine if arrangement terms that may have an impact on revenue recognition were identified
o
and properly considered in the evaluation of the accounting for the contract.
Tested management's identification of distinct performance obligations by evaluating whether the underlying software
licenses and services were highly interdependent and interrelated.
o Evaluated the total transaction price determined by management based on the terms of the contract, including any variable
consideration, and recalculated the allocation of the total transaction price to each distinct performance obligation based on
respective standalone selling prices.
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● We evaluated the reasonableness of management's methodology and assumptions in determining estimates of stand-alone selling
prices for products and services that are not sold separately.
● We tested the mathematical accuracy of management's calculations of recognized revenue and the associated timing of revenue
recognized in the consolidated financial statements.
/s/ Moss Adams LLP
Seattle, Washington
March 10, 2022
We have served as the Company’s auditor since 2006.
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BSQUARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at December 31,
2021 and December 31, 2020, respectively
Prepaid expenses and other current assets
Contract assets
Total current assets
Property and equipment, net of accumulated depreciation
Deferred tax assets
Intangible assets, net of accumulated amortization
Right-of-use lease assets, net
Other non-current assets
Total assets
Current liabilities:
LIABILITIES AND SHAREHOLDERS' EQUITY
Third-party software fees payable
Accounts payable
Paycheck Protection Program loan
Accrued compensation
Other accrued expenses
Deferred revenue
Operating leases
Total current liabilities
Deferred revenue, long-term
Operating leases, long-term
Paycheck Protection Program loan, long-term
Shareholders' equity:
$
$
$
Preferred stock, no par value: 10,000,000 shares authorized; no shares issued and outstanding
Common stock, no par value: 37,500,000 shares authorized; 20,374,406 and 13,235,038 issued
and outstanding on December 31, 2021 and December 31, 2020, respectively
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
$
See notes to consolidated financial statements.
22
December 31,
2021
2020
39,529 $
557
4,914
364
46
45,410
726
—
—
1,598
24
47,758 $
4,628 $
426
—
502
219
944
357
7,076
194
1,363
—
—
12,623
337
6,177
409
456
20,002
322
7
71
1,853
27
22,282
6,458
489
950
717
216
2,088
344
11,262
28
1,630
634
—
172,397
(1,024)
(132,248)
39,125
47,758 $
139,726
(992)
(130,006)
8,728
22,282
Table of Contents
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
Revenue:
Partner Solutions
Edge to Cloud
Total revenue
Cost of revenue:
Partner Solutions
Edge to Cloud
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Loss from operations
Other income (loss), net
Loss before income taxes
Income taxes
Net loss
Basic loss per share
Diluted loss per share
Shares used in per share calculations:
Basic
Diluted
Comprehensive loss:
Net loss
Other comprehensive (loss) income:
Foreign currency translation, net of tax
Unrealized gain on investments, net of tax
Total other comprehensive (loss) income
Comprehensive loss
See notes to consolidated financial statements.
23
Year Ended December 31,
2020
2021
$
$
$
$
36,516 $
3,851
40,367
31,478
3,474
34,952
5,415
8,003
1,304
9,307
(3,892)
1,650
(2,242)
—
(2,242) $
(0.13) $
(0.13) $
16,640
16,640
$
(2,242) $
(39)
—
(39)
(2,281) $
$
42,257
4,887
47,144
35,171
4,247
39,418
7,726
9,314
266
9,580
(1,854)
(35)
(1,889)
—
(1,889)
(0.14)
(0.14)
13,139
13,139
(1,889)
26
7
33
(1,856)
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BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share amounts)
Preferred Stock
Shares Amount
Common Stock
Comprehensive Accumulated Shareholders'
Shares Amount
Income (Loss)
Deficit
Equity
Accumulated
Other
Total
Balance as of December 31,
2019
Exercise of stock options
Stock-based compensation,
including issuance of restricted
stock
Net loss
Foreign currency translation
adjustment, net of tax
Unrealized gain on investments,
net of tax
Balance as of December 31,
2020
Exercise of stock options
Vesting of restricted stock awards
Sale of common stock
Stock-based compensation,
including issuance of restricted
stock
Net loss
Foreign currency translation
adjustment, net of tax
Balance as of December 31,
2021
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 13,042,293 $ 138,877 $
(1)
—
192,745
(987) $
—
(128,117) $
—
9,773
(1)
—
—
—
—
—
—
—
—
812
—
38
—
— 13,235,038 139,726
68
37,380
—
—
199,311
—
31,936
— 6,902,677
—
—
—
—
—
—
674
—
(7)
—
—
(12)
7
(992)
—
—
—
—
—
(32)
—
(1,889)
812
(1,889)
—
—
(130,006)
—
—
—
26
7
8,728
68
—
31,936
—
(2,242)
674
(2,242)
—
(39)
— 20,374,406 $ 172,397 $
(1,024) $
(132,248) $
39,125
See notes to consolidated financial statements.
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BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Stock-based compensation
Gain on extinguishment of PPP loan
Changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses and other assets
Contract assets
Third-party software fees payable
Accounts payable and accrued expenses
Operating leases
Deferred revenue
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Additions to property and equipment
Proceeds from maturities of short-term investments
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from PPP note payable
Proceeds from sale of common stock, net of issuance fees
Proceeds from exercise of stock options
Net cash provided by financing activities
Effect of exchange rates on cash
Net increase in cash, restricted cash, and cash equivalents
Cash, restricted cash, and cash equivalents, beginning of year
Cash, restricted cash, and cash equivalents, end of year
See notes to consolidated financial statements.
25
Year Ended December 31,
2020
2021
$
(2,242) $
(1,889)
485
674
(1,584)
1,263
166
(46)
(1,830)
(275)
1
(978)
(4,366)
(474)
—
(474)
—
31,936
68
32,004
(38)
27,126
12,960
40,086 $
633
812
—
3,038
(6)
(189)
(766)
(293)
(9)
(269)
1,062
(274)
2,250
1,976
1,584
—
(1)
1,583
27
4,648
8,312
12,960
$
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BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business and 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 consolidation
The consolidated financial statements include the accounts of Bsquare and our wholly owned subsidiary. All intercompany balances
and transactions have been eliminated.
Recently adopted accounting standards
We adopted Accounting Standard Update (ASU) No. 2019-02, Simplifying the Accounting for Income Taxes (Topic 740) on January
1, 2020. Since we maintain a full valuation allowance on our net deferred tax assets, the adoption did not have a material impact on our
financial condition, results of operations and cash flows, or financial statement disclosures.
Standards issued and not yet implemented
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326).
The new standard is effective for reporting periods beginning after December 15, 2022. The standard replaces the incurred loss impairment
methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected
credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach
through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.
We plan to adopt the new credit loss standard effective January 1, 2023. We do not expect the new credit loss standard to have a material
impact on our financial condition, results of operations and cash flows, or financial statement disclosures.
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.
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Income (loss) per share
We compute basic per share amounts using the weighted average number of common shares outstanding during the period and
exclude any dilutive effects of common stock equivalent shares, such as options and restricted stock units (“RSUs”). We consider RSUs as
outstanding and include them in the computation of basic income or loss per share only when vested. We compute diluted per share
amounts using the weighted average number of common shares outstanding plus 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.
Unvested but outstanding RSUs are included in the diluted per share calculation. In a period where we are in a net loss position, the diluted
loss per share is computed using the basic share count.
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted per share amounts
(in thousands):
Weighted average common shares outstanding, basic
Dilutive potential common shares
Weighted average common shares outstanding, diluted
Year Ended December 31,
2020
2021
16,640
—
16,640
13,139
—
13,139
Common stock equivalent shares of approximately 480,000 and 1,837,000 were excluded from the computation of diluted per share
amounts for the years ended December 31, 2021 and 2020, respectively, because their effect was anti-dilutive.
Cash, cash equivalents and investments
We invest our excess cash primarily in one or more of the following: highly liquid debt instruments of U.S. government agencies and
municipalities, debt instruments issued by foreign governments, corporate commercial paper, money market funds, and corporate debt
securities. We classify all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents
and all highly liquid investments with stated maturities of greater than three months and not longer than 12 months as short-term
investments.
Restricted cash
Restricted cash represents security on our corporate card credit lines.
Financial instruments and concentrations of risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, cash equivalents, short-
term investments, and accounts receivable.
Allowance for doubtful accounts
We record accounts receivable at the invoiced amount net of an estimated allowance for doubtful accounts to reserve for potentially
uncollectible receivables. We review customers that have past due invoices to identify specific customers with known disputes or
collectability issues. In determining the amount of the allowance, we make judgments about the creditworthiness of significant customers
based on ongoing credit evaluations.
Property and equipment
We account for property and equipment at cost less accumulated depreciation and amortization. We compute depreciation of
equipment and furniture using the straight-line method over the estimated useful lives of the assets, generally three years. Leasehold
improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful lives, generally
seven years. We expense maintenance and repair costs as incurred. When assets are retired or otherwise disposed of, gains or losses are
included in the consolidated statements of operations. When facts and circumstances indicate that the value of long-lived assets may be
impaired, we perform an evaluation of recoverability comparing the carrying value of the asset to projected undiscounted future cash flows.
Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss as a charge against current
operations based on the difference between the carrying value of the asset and its fair value.
Leases
We lease office facilities, primarily under operating leases, which expire at various dates through 2027. These leases generally
contain renewal options for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement, which the
Company has an option to exercise at the end of the initial lease term.
We determine if an arrangement is a lease at inception. On our balance sheet, our office facility leases, with a lease term greater
than 12-months, are included in Right-of-Use (“ROU”) assets and related lease liabilities are included in the Operating leases and Operating
leases, long-term statement line items. 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 will use the implicit rate in the lease when readily determinable. The Company accounts for its
lease expense with free rent periods and step-rent provisions on a straight-line basis over the original term of the lease and any extension
options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases
provide for periodic rental increases based on price indices. Lease expense for lease payments is recognized on a straight-line basis over
the lease term.
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Intangible assets
Intangible assets were recorded in connection with business acquisitions and are stated at estimated fair value at the time of
acquisition less accumulated amortization. We amortize our acquired intangible assets using the straight-line method using lives ranging from
one to ten years. We review intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of
an asset may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted
cash flows the assets are expected to generate. If intangible assets are considered impaired, the impairment to be recognized equals the
amount by which the carrying value of the asset exceeds its fair market value.
Third-party software fees payable
We record all royalties owed related to the sale of embedded operating system software, such as Microsoft Windows IoT and
Windows Mobile operating systems, as third-party software fees payable.
Research and development
Research and development costs are expensed as incurred except as noted below under Internally developed software. Research
and development costs include compensation and benefit costs for engineering and product development personnel, third-party contractor
expenses, software development tools and other expenses related to researching and developing new solutions, or upgrading and
enhancing existing solutions, that do not qualify for capitalization.
Internally developed software
We incur certain costs associated with the development of internal-use software, which are primarily related to activities performed to
develop our SaaS solutions. Internal and external costs incurred in the preliminary project stage of internal-use software development are
expensed as incurred. Once the software being developed has reached the application development stage, qualifying internal costs including
payroll and payroll-related costs of employees who are directly associated with, and devote time to, the project are capitalized. Capitalization
ceases at the point at which the developed software is substantially complete and ready for its intended use, which is typically upon
completion of all substantial testing. Capitalized software development costs are classified as property and equipment on our consolidated
balance sheet. We capitalized $0.4 million and $0.2 million in 2021 and 2020, respectively.
Qualifying capitalized software development costs are amortized over the software asset’s estimated useful life. Amortization
expense is classified as research and development on our consolidated statement of operations. We evaluate the useful lives of these assets
on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these
assets. There were no impairment charges related to capitalized software development costs during the years ended December 31, 2021
and 2020.
Advertising costs
All costs of advertising are expensed as incurred. Advertising expense was approximately $375,000 and $112,000 in 2021 and
2020, respectively. A portion of these expenses are offset by rebates received from Microsoft. See Footnote 13 - Significant Concentrations
for additional information.
Stock-based compensation
The estimated fair value of stock-based awards is recognized as compensation expense over the requisite service period, net of
estimated forfeitures. We estimate forfeitures of stock-based awards 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 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 value of performance stock units ("PSUs") is estimated at the grant date based on
the fair value of each vesting tranche as calculated by a Monte Carlo simulation.
Comprehensive loss
Comprehensive loss refers to net loss and other revenue, expenses, gains and losses that, under generally accepted accounting
principles, are recorded as an element of shareholders’ equity but are excluded from the calculation of net loss.
Income taxes
We are subject to income taxes in the U.S. and certain foreign jurisdictions. Significant judgment is required in determining our
provision for income taxes. We compute income taxes using the asset and liability method, under which deferred income taxes are provided
for on the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Our deferred tax
amounts are measured using currently enacted tax rates that are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
We apply judgment as to the appropriate weighting of all available evidence when assessing the need for the establishment or the
release of valuation allowances. As part of this analysis, we examine all available evidence on a jurisdiction-by-jurisdiction basis and weigh
the positive and negative information when determining the need for full or partial valuation allowances. The evidence considered for each
jurisdiction includes, among other items, (i) the historical levels of income or loss over a range of time periods that extends beyond the two
years presented, (ii) the historical sources of income and losses, (iii) the expectations and risk associated with underlying estimates of future
taxable income, (iv) the expectations and risk associated with new product offerings and uncertainties with the timing of future taxable
income, and (v) prudent and feasible tax planning strategies. Based on the analysis conducted as of December 31, 2021, we determined that
we would not release, in full or in part, the valuation allowance against our U.S. gross deferred tax assets.
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We recognize tax benefits from an uncertain position only if it is “more likely than not” that the position is sustainable, based on its
technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than fifty percent likely of being
realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. Interest and penalties related to
uncertain tax positions are classified in the consolidated financial statements as income tax expense.
Foreign currency
The functional currency of our foreign subsidiary is their local currency. Accordingly, assets and liabilities are translated into U.S.
dollars at exchange rates in effect at the balance sheet date. Resulting translation adjustments are included in other comprehensive loss and
accumulated other comprehensive loss, a separate component of shareholders’ equity. The net gains and losses resulting from foreign
currency transactions are recorded in the period incurred and were not significant for any of the periods presented.
Revenue recognition
We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the
consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with
customers.
Partner Solutions
We sell embedded operating system software licenses based upon a customer purchase order, shipping a Certificate of Authenticity
("COA") to satisfy this single performance obligation. These shipments are subject to limited return rights; historically, returns have been
insignificant. In accordance with ASC Topic 606, Revenue from Contracts with Customers, (“Topic 606”), we recognize revenue from
these products at the time of shipment which is when the customer accepts control of the COA (point-in-time revenue recognition).
Edge to Cloud
We analyze each customer contract within the Edge to Cloud segment and determine revenue recognition through the following
steps: (i) identification of the contract, or contracts, with a customers; (ii) identification of the performance obligations in the contract; (iii)
determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contracts; and (v)
recognition of revenue when (point-in-time), or as (over-time), we satisfy performance obligations.
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2.
Revenue Recognition
Disaggregation of revenue
The following table provides information about disaggregated revenue by primary geographical area and operating segment (in
thousands):
Year Ended December 31, 2021
Edge to
Cloud
Partner
Solutions
Total
Partner
Solutions
Year Ended December 31, 2020
Edge to
Cloud
Total
Primary geographical area:
$
North America
Europe
Asia
Total
31,226 $
360
4,930
36,516 $
3,615 $
236
—
3,851 $
34,841 $
596
4,930
40,367 $
36,141 $
1,460
4,656
42,257 $
4,198 $
595
94
4,887 $
40,339
2,055
4,750
47,144
$
For the years ended December 31, 2021 and 2020, $38.1 million and $43.7 million of revenue was recorded at a point-in-time, and
$2.3 million and $3.4 million of revenue was 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. We had no asset impairment charges related to contract assets during 2021 or 2020. Contract
liabilities, presented as deferred revenue on our consolidated balance sheet, include payments received in advance of performance under
the contract and are recognized as revenue when performance obligations are satisfied.
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in
thousands):
December 31,
2021
December 31,
2020
Receivables
Short-term contract assets
Long-term contract assets
Short-term contract liabilities (deferred revenue)
Long-term contract liabilities (deferred revenue)
$
4,914 $
46
—
944
194
Significant changes in the balances of contract assets and liabilities were as follows (in thousands):
2021
Contract
Assets
6,177
456
—
2,088
28
2020
Contract
Assets
Transferred to receivables from contract assets outstanding at the beginning of the period
$
— $
47
2021
Contract
Liabilities
2020
Contract
Liabilities
Revenue recognized that was included in contract liabilities at the beginning of the period
$
1,273 $
1,633
Contract acquisition costs
We capitalize certain contract acquisition costs consisting primarily of commissions paid when contracts are signed. We capitalized
contract acquisition costs for contracts with a life exceeding one year. Amortization of contract acquisition costs was $61,000 and $89,000 for
fiscal year ended December 31, 2021 and December 31, 2020, respectively. There were no asset impairment charges for contract acquisition
costs for the periods noted above.
Transaction Price Allocated To 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 December 31, 2021.
Edge to Cloud
$
1,527 $
452 $
— $
— $
2022
2023
2024
2025
2026
Thereafter
—
— $
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.
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3.
Cash and Investments
Cash, cash equivalents and restricted cash consisted of the following (in thousands):
Cash
Cash equivalents (see detail in Note 4)
Restricted cash
$
Total cash, cash equivalents and restricted cash as presented in the
consolidated statement of cash flows
$
December 31,
2021
2020
2,506 $
37,023
557
40,086 $
6,509
6,114
337
12,960
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:
Level 2:
Level 3:
Quoted prices in active markets for identical assets or liabilities.
Directly or indirectly observable market-based inputs or unobservable inputs used in models or other valuation
methodologies.
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 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 were as follows (in thousands):
December 31, 2021
Quoted Prices in
Active Markets
for
Identical Assets
Direct or Indirect
Observable
Assets
Cash equivalents:
Money market funds
Total cash equivalents
Restricted cash:
Money market funds
Total assets measured at fair value
Assets
Cash equivalents:
Money market funds
Total cash equivalents
Restricted cash:
Money market funds
Total assets measured at fair value
(Level 1)
Inputs (Level 2)
Total
$
$
37,023 $
37,023
557
37,580 $
— $
—
—
— $
37,023
37,023
557
37,580
December 31, 2020
Quoted Prices in
Active Markets
for
Identical Assets
Direct or Indirect
Observable
(Level 1)
Inputs (Level 2)
Total
$
$
6,114 $
6,114
337
6,451 $
— $
—
—
— $
6,114
6,114
337
6,451
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5.
Property and Equipment
Property and equipment consisted of the following (in thousands):
Computer equipment and software
Office furniture and equipment
Leasehold improvements
Internally developed software
Total
Less: Accumulated depreciation and amortization
Property and equipment, net of accumulated depreciation
December 31,
2021
2020
691 $
146
187
583
1,607
(881)
726 $
987
147
187
36
1,357
(1,035)
322
$
$
Depreciation and amortization expense related to these assets was $70,000 and $187,000 in 2021 and 2020, respectively.
6.
Intangible Assets
Intangible assets relate to customer relationships that we acquired from TestQuest, Inc. in November 2008 and from the acquisition
of Bsquare EMEA, Ltd. in September 2011 and were as follows (in thousands):
Gross Carrying Accumulated Net Carrying
Amortization
Amount
Value
Customer relationships:
Balance as of December 31, 2021
Balance as of December 31, 2020
$
982 $
982
(982) $
(911)
—
71
Amortization expense was $71,000 and $98,000 for 2021 and 2020, respectively. As of September 30, 2021, the gross carrying
amount of the intangible assets has been fully amortized.
7.
Other Income and Loss
Other income and loss consisted of the following (in thousands):
Interest income
Other income (loss)
Total other income (loss)
Year Ended December 31,
2020
2021
$
$
34 $
1,616
1,650 $
24
(59)
(35)
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8.
Income Taxes
Pre-tax loss consisted of the following (in thousands):
U.S.
Foreign
Total
Income tax expense consisted of the following (in thousands):
Current taxes:
Federal
State and local
Foreign
Current taxes
Deferred taxes:
Federal
State and local
Foreign
Deferred taxes
Total
Year Ended December 31,
2020
2021
(820) $
(1,422)
(2,242) $
(851)
(1,038)
(1,889)
Year Ended December 31,
2020
2021
— $
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
$
$
$
$
Net deferred tax assets and liabilities consisted of the following (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Research and development credit carryforwards
Stock-based compensation
Accrued expenses and reserves
Depreciation and amortization
Deferred revenue
Right of use liability
Other
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Right of use asset
Net deferred tax assets
December 31,
2021
2020
$
$
19,230 $
2,747
382
58
—
107
318
7
22,849
(22,544)
305
(16)
(289)
— $
18,141
3,058
449
137
38
253
357
23
22,456
(22,121)
335
—
(328)
7
Net deferred tax assets and liabilities were recorded as follows (in thousands):
Deferred tax assets, non-current
Deferred tax liability, non-current
Net deferred tax assets
December 31,
2021
2020
$
$
— $
—
— $
7
—
7
As of December 31, 2021, our deferred tax assets were primarily the result of U.S. net operating loss, research and development
credit carryforwards and stock-based compensation expense. We have applied a full valuation allowance against the U.S. deferred tax
assets in the U.S. and foreign jurisdictions.
We use judgment as to the appropriate weighting of all available evidence when assessing the need for the establishment or the
release of valuation allowances. As part of this analysis, we examine all available evidence on a jurisdiction-by-jurisdiction basis and weigh
the positive and negative information when determining the need for full or partial valuation allowances. The evidence considered for each
jurisdiction includes, among other items, (i) the historical levels of income or loss over a range of time periods that extends beyond the two
years presented, (ii) the historical sources of income and losses, (iii) the expectations and risk associated with underlying estimates of future
taxable income, (iv) the expectations and risk associated with new product offerings and uncertainties with the timing of future taxable
income, and (v) prudent and feasible tax planning strategies. Based on the analysis conducted as of December 31, 2021, we determined that
we would maintain a full valuation allowance against our U.S. gross deferred tax assets.
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The provision for income taxes differed from the amount of expected income tax expense determined by applying the applicable U.S.
statutory federal income tax rate to pre-tax loss as follows (in thousands, except percentages):
U.S. Federal tax benefit at statutory rates
Impact of:
Tax credits
State income tax
International operations
Stock-based compensation
Valuation allowance
Expiration of tax attributes
PPP loan forgiveness
Other, net
Tax expense and effective tax rate
2021
(471)
—
(83)
28
93
429
311
(333)
26
—
Year Ended December 31,
21.0% $
—
3.7
(1.3)
(4.2)
(19.1)
(13.9)
14.9
(1.1)
0.0% $
2020
(397)
109
(53)
(6)
317
(1,224)
1,330
—
(76)
—
$
$
21.0%
(5.8)
2.8
0.3
(16.8)
64.8
(70.4)
—
4.0
0.0%
At December 31, 2021, we had approximately $83.7 million of federal and $12.8 million of state net operating loss carryforwards,
which have begun to expire. Of the federal net operating loss carryforwards, approximately $62.7 million will expire by 2037 and $21.0 million
are indefinite. We also have approximately $2.7 million of tax credit carryforwards, which have begun to expire. Use of these carryforwards
may subject us to an annual limitation due to Section 382 of the U.S. Internal Revenue Code that restricts the ability of a corporation that
undergoes an ownership change to use its carryforwards. Under the applicable tax rules, an ownership change occurs if holders of more than
five percent of an issuer’s outstanding common stock, collectively, increase their ownership percentage by more than 50 percentage points
over a rolling three-year period. We have performed analyses of possible ownership changes in the past, which included consideration of
third-party studies, and do not believe that an ownership change of more than 50 percentage points has occurred.
We have evaluated all the material income tax positions taken on our income tax filings to various tax authorities, and we determined
that we did not have unrealized tax benefits related to uncertain tax positions recorded at December 31, 2021 and 2020.
Because of net operating loss and tax credit carryforwards, substantially all of our tax years remain open and subject to examination.
9.
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 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 lease. As a result, we
have not considered renewal options when recording ROU assets, lease liabilities or lease expense.
Total component lease expense was as follows (in thousands):
Operating leases
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities
34
Twelve months ended
December 31,
2021
December 31,
2020
$
$
450 $
452 $
661
668
Table of Contents
Supplemental balance sheet information related to leases was as follows (dollars in
thousands):
Operating leases:
Right of use
Current portion of operating leases liability
Operating leases liability, net of current portion
Total operating leases liabilities
Weighted Average Remaining Lease Term (in years)
Weighted Average Discount Rate
December 31,
2021
December 31,
2020
$
$
1,598
357
1,363
1,720
5.18
$
$
8.5%
1,853
344
1,630
1,974
6.15
8.5%
Future operating lease commitments are as follows (in thousands):
As of December 31, 2021, maturities of lease liabilities were as follows:
Years Ended December 31,
2022
2023
2024
2025
2026
Thereafter
Total minimum lease payments
Less: amount representing imputed interest
Present value of lease liabilities
10.
Commitments and Contingencies
Lease and rent obligations
Operating
leases
$
$
$
370
377
384
370
276
163
1,940
(220)
1,720
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 9 - 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 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.
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11.
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:
Dividend yield
Expected life (in years)
Expected volatility
Risk-free interest rate
Year Ended December 31,
2020
2021
0%
4.9
111%
1.0%
0%
4.9
64%
0.5%
The impact on our results of operations from stock-based compensation expense was as follows (in thousands, except per share
amounts):
Cost of revenue — Edge to Cloud
Selling, general and administrative
Research and development
Total stock-based compensation expense
Per basic share
Per diluted share
Stock option activity
The following table summarizes stock option activity:
Year Ended December 31,
2020
2021
35 $
625
14
674 $
0.04 $
0.04 $
79
735
(2)
812
0.06
0.06
$
$
$
$
Balance at December 31, 2019
Granted
Exercised
Forfeited
Expired
Balance at December 31, 2020
Granted
Exercised
Forfeited
Expired
Balance at December 31, 2021
Vested and expected to vest at December 31, 2021
Exercisable at December 31, 2021
Weighted
Average
Remaining
Weighted
Average
Contractual Life
Aggregate
Number of
Shares
Exercise Price
(in years)
Intrinsic Value
1,544,826 $
683,900
(26,250)
(215,218)
(200,367)
1,786,891
195,000
(36,130)
(180,592)
(101,155)
1,664,014
1,664,014
993,041 $
2.74
1.08
1.34
1.50
4.82
3.10
2.76
1.88
1.95
3.24
2.07
2.07
2.41
7.47
7.75 $
330,831
6.64 $
6.64
5.76 $
405,223
405,223
188,009
At December 31, 2021, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures,
was approximately $252,000. This cost will be amortized on the straight-line method over a weighted-average period of approximately
1.1 years.
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Table of Contents
The following table summarizes certain additional information about stock options:
Weighted average grant-date fair value for options granted during the year
Vested options in-the-money
Aggregate intrinsic value of options exercised during the year
Year Ended December 31,
2020
2021
$
$
2.86 $
327,476
1.88 $
1.08
71,993
1.00
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 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:
Unvested at December 31, 2019
Granted
Vested
Forfeited
Unvested at December 31, 2020
Granted
Vested
Forfeited
Unvested at December 31, 2021
Expected to vest after December 31, 2021
Number of
Shares
Weighted
Average
Award Price
112,846 $
219,596
(167,745)
—
164,697
90,343
(199,311)
(21,115)
34,614
34,614 $
1.44
1.48
1.45
—
1.48
2.72
1.83
1.48
2.72
2.72
At December 31, 2021, total compensation cost not yet recognized related to granted RSUs was approximately $33,000, net of
estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.3 years.
Performance Stock Units
In January 2021, we issued 500,000 PSUs to our executives. The PSUs vest based on a combination of Bsquare's stock price
performance and executive service (continued employment). The first vesting measurement date is 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 $77,000 was recorded in the selling, general and administrative line of our consolidated statement of
operations for the year ended December 31, 2021. The PSUs had no impact on cash in 2021. At December 31, 2021, total compensation
cost not yet recognized related to granted PSUs was approximately $59,000 and will be amortized over a weighted-average period of
approximately 3.5 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 December 31, 2021:
Stock options outstanding
Restricted stock units outstanding
Performance stock units outstanding
Stock options available for future grant
Common stock reserved for future issuance
Common Stock Sales
1,664,014
34,614
500,000
1,095,772
3,294,400
In the second and third quarters of 2021, we sold 108,879 and 6,793,798 shares of our common stock, respectively, pursuant to a
registration statement on Form S-3 under the Securities Act of 1933, as amended (the "Securities Act") filed in March 2021. We received
proceeds of approximately $31,936,000, net of issuance costs of $1,157,000. The issued shares and total paid-in capital are reflected in the
consolidated statement of shareholders' equity for the twelve months ended December 31, 2021.
12.
Employee Benefit Plan
We maintain a Profit Sharing and Deferred Compensation Plan, the BSQUARE Corporation 401(k) Plan and Trust (the “Profit
Sharing Plan”) under Section 401(k) of the Internal Revenue Code. Substantially all full-time employees are eligible to participate in the
Profit-Sharing Plan. We typically elect to match the participants’ contributions to the Profit-Sharing Plan up to a certain amount subject to
vesting. Participants will receive their share of the value of their investments, and any applicable vested match, upon retirement or
termination. We made matching contributions of $200,000 and $135,000 in 2021 and 2020, respectively.
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13.
Significant Concentrations
Significant customer
No customers accounted for 10% or more of total revenue during 2021 or 2020.
No customers accounted for more than 10% of accounts receivable at December 31, 2021. Kodak Alaris had accounts receivable
balances of approximately $866,000, or 15% of total accounts receivable, at December 31, 2020. Honeywell International, Inc. and affiliated
entities (“Honeywell”) had accounts receivable balances of approximately $680,000, or 12% of total accounts receivable, at December 31,
2020.
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 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 incentive program, we recorded rebate credits as follows (in thousands):
Reductions to cost of revenue
Reductions to marketing expense
14.
Paycheck Protection Program Loan
Year Ended December 31,
2020
2021
$
311 $
373
757
1,115
We obtained a $1.6 million loan (the "PPP Loan") from JPMorgan Chase Bank, N.A. (the “Lender”) under the Paycheck Protection
Program ("PPP") on April 7, 2020 (the “Note”). The Note had a two-year term, bore interest at the rate of 0.98% per annum, and could be
prepaid at any time without payment of any premium or penalty. The principal and accrued interest under the Note was forgivable after
an eight- or 24-week period if we used the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and
otherwise comply with PPP requirements. In April 2021, we applied for forgiveness of this loan in accordance with the program, and in June
2021, we received confirmation that the loan principal (and related accrued interest) was forgiven in its entirety. The gain on loan forgiveness
is included in other income (loss), net on the statement of operations for the year ended December 31, 2021, and as a gain on
extinguishment of debt in the statement of cash flows for the year ended December 31, 2021.
At December 31, 2021 and December 31, 2020, the PPP Loan balance was as follows (in thousands):
PPP Loan, .98%, due April 2022:
Principal
Accrued interest
PPP Loan payable:
Current portion
Long-term portion
December 31,
2021
December 31,
2020
$
$
$
$
— $
—
— $
— $
—
— $
1,572
12
1,584
950
634
1,584
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15.
Information about Operating Segments and Geographic 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):
Partner Solutions:
Revenue
Cost of revenue
Segment gross profit
Edge to Cloud:
Revenue
Cost of revenue
Segment gross profit
Total gross profit
$
Year Ended December 31,
2020
2021
36,516 $
31,478
5,038
3,851
3,474
377
5,415
42,257
35,171
7,086
4,887
4,247
640
7,726
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):
Long-lived assets:
North America
Europe
Total long-lived assets
December 31,
2021
2020
$
$
1,430 $
177
1,607 $
1,179
178
1,357
16.
Revision of Prior Period Financial Statements
We revised certain prior period financial statements due to a $77,000 error related to the recognition of certain revenues in our Edge
to Cloud segment. The error occurred in the third quarter of 2019 and had a rollforward effect on consolidated equity and deferred revenue
through the first quarter of 2021. A summary of the revisions to our previously reported financial statements is presented below (in
thousands):
Revised Consolidated Balance Sheets
Deferred revenue, current portion
Total current liabilities
Accumulated deficit
Total shareholders' equity
Revised Consolidated Statement of Shareholder's Equity
Accumulated deficit
As reported
As of December 31, 2020
Adjustment
As revised
$
2,165 $
11,339
(130,083)
8,651
(77) $
(77)
77
77
2,088
11,262
(130,006)
8,728
As reported
Year Ended
December 31, 2020
Adjustment
As revised
$
(130,083) $
77 $
(130,006)
39
Table of Contents
17. Quarterly Financial Information (Unaudited)
Revenue
Gross profit
Loss from operations
Net loss
Basic net (loss) income per share
Diluted net (loss) income per share
Shares used in per share calculations:
Basic
Diluted
Revenue
Gross profit
Loss from operations
Net loss
Basic and diluted net loss per share
Shares used in per share calculations:
Basic and diluted
Cash, cash equivalents and restricted cash
Total current assets
Total assets
Total current liabilities
Total shareholders' equity
Cash, cash equivalents and restricted cash
Total current assets
Total assets
Total current liabilities
Total shareholders' equity
Condensed Consolidated Statements of Operations
2021
Q1
Q2
Q3
Q4
(in thousands, except per share data)
10,646 $
1,328
(866)
(895)
(0.05) $
(0.05) $
10,671 $
1,192
(1,321)
293
0.02 $
0.02 $
9,972 $
1,593
(851)
(860)
(0.07) $
(0.07) $
9,078
1,302
(855)
(780)
(0.04)
(0.04)
13,186
13,186
13,332
13,881
19,603
19,603
19,607
19,607
Q1
Q2
Q3
Q4
2020
(in thousands, except per share data)
10,420 $
1,890
(138)
(136)
(0.01) $
8,924 $
1,046
(1,075)
(1,073)
(0.08) $
16,729 $
2,585
(439)
(474)
(0.04) $
11,071
2,205
(202)
(206)
(0.02)
$
$
$
$
$
13,055
13,110
13,165
13,225
Condensed Consolidated Balance Sheets
2021
March 31
June 30
September
30
December
31
$
$
10,365 $
16,878
19,310
9,771
7,963 $
(in thousands)
9,229 $
16,336
18,755
8,082
8,886 $
41,367 $
47,954
50,343
8,830
39,836 $
40,086
45,410
47,758
7,076
39,125
March 31
June 30
2020
September
30
December
31
$
$
10,644 $
22,002
23,973
12,856
9,401 $
(in thousands)
12,582 $
20,245
22,075
11,422
8,432 $
12,572 $
19,062
21,063
10,544
8,622 $
12,960
20,002
22,282
11,339
8,651
40
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934 (“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. In connection with the preparation of this Form 10-K, our management carried out an evaluation, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer, as of December 31, 2021, of the effectiveness of the design and
operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Exchange
Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2021.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and
the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act and includes those policies and
procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. All
internal controls, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control—Integrated Framework (2013).
Based on its assessment, our management concluded that, as of December 31, 2021, our internal control over financial reporting
was effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fourth quarter of 2021 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated by reference to our definitive proxy statement for our 2022 annual meeting of
shareholders which will be filed with the SEC no later than 120 days after December 31, 2021 (our "2022 Proxy Statement").
Item 11.
Executive Compensation
The information required by this Item is incorporated by reference to our 2022 Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to our 2022 Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to our 2022 Proxy Statement.
Item 14.
Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to our 2022 Proxy Statement.
41
Table of Contents
Item 15.
Exhibits, Financial Statement Schedules
(a) Financial Statements and Schedules
1. Financial Statements
PART IV
See “Index to Consolidated Financial Statements” in Part II Item 8 of this report.
2. Financial Statement Schedules
Financial statement schedules not included herein have been omitted because they are either not required, not applicable, or the
information is otherwise included herein.
3. Exhibits
Exhibits are incorporated herein by reference or are filed with this report as indicated below.
42
Table of Contents
(b) Exhibits
Exhibit
Number
3.1
3.1(a)
Description
Amended and Restated Articles of Incorporation
Articles of Amendment to Amended and
Restated Articles of Incorporation
Filed or
Furnished
Herewith
Incorporated by Reference
Form
Filing Date
Exhibit
S-1
10-Q
8/17/1999
8/7/2000
3.1(a)
3.1
3.1(b)
Articles of Amendment to Amended and
8-K
10/11/2005
3.2
4.1
10.1(1)
10.1(a)(1)
10.1(b)(1)
10.1(c)(1)
10.2(1)
10.2(a)(1)
Restated Articles of Incorporation
Amended and Restated Bylaws
Description of Capital Stock
Fourth Amended and Restated Stock Plan, as
amended
Form of Stock Option Agreement
Form of Restricted Stock Grant Agreement
Form of Restricted Stock Unit Agreement
2011 Inducement Award Plan
Form of Stock Option Agreement under the 2011
Inducement Award Plan
8-K
10-K
S-8
10-Q
10-Q
10-Q
10-Q
10-Q
8/11/2020
2/25/2020
8/8/2017
8/9/2012
8/9/2012
8/9/2012
11/10/2011
11/10/2011
3.1
3.2
4.1
4.1
10.19(a)
10.19(b)
10.19(c)
10.1
10.1(a)
File No.
333-85351
000-27687
000-27687
000-27687
000-27687
333-219799
000-27687
000-27687
000-27687
000-27687
000-27687
10.2(b)(1)
Form of Restricted Stock Unit Agreement under
10-K
2/19/2015
10.2(b)(1)
000-27687
10.3(1)
10.4(1)
10.5
10.6(1)
the 2011 Inducement Award Plan
Executive Bonus Plan
Form of Indemnification Agreement
Market Square Office Lease between 1415
Western LLC and Bsquare Corporation
Employment letter agreement with Ralph
Derrickson dated February 4, 2019
10.7(1)
Employment letter agreement with Christopher
Wheaton dated August 20, 2019
10.8(2)
Microsoft OEM Distribution Agreement for
10.9
10.10
10.11
21.1
23.1
31.1
Software Products for Embedded Systems with
Microsoft Licensing, GP effective July 1, 2014
Board Observer Agreement with Palogic Value
Fund, L.P, Palogic Value Management, L.P. and
Palogic Capital Management, LLC dated June
25, 2018
Promissory note, dated as of April 7, 2020 with
JPMorgan Chase Bank, N.A.
Side Letter, dated July 6, 2021 between Bsquare
Corporation and B. Riley Securities, Inc.
Subsidiaries of the registrant
Consent of Independent Registered Public
Accounting Firm
Certification of Chief Executive Officer pursuant
to Exchange Act Rule 13a-14(a) under the
Securities and Exchange Act of 1934
31.2
Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a) under the
Securities and Exchange Act of 1934
X
X
X
X
8-K
10-K
10-K
3/20/2020
2/21/2017
3/18/2021
10.1
10.3
10.5
000-27687
000-27687
000-27687
10-K
2/25/2020
10.11
000-27687
8-K
8/23/2019
10-Q
8/14/2014
10.1
10.1
000-27687
000-27687
8-K
6/26/2018
10.1
000-27687
8-K
4/16/2020
8-K
7/7/2021
10.1
10.1
000-27687
000-27687
Exhibit
Number
32.1
32.2
Description
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
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
101.INS
101.SCH
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema
Document
101.CAL
Inline XBRL Taxonomy Extension Calculation
Document
101.DEF
101.LAB
101.PRE
Inline XBRL Taxonomy Extension Definitions
Inline XBRL Taxonomy Extension Label Document
Inline XBRL Taxonomy Extension Presentation
Document
104
Cover Page Interactive Data File (embedded
within the Inline XBRL and contained in Exhibit
101)
Filed or
Furnished
Herewith
Incorporated by Reference
Form
Filing Date
Exhibit
File No.
X
X
X
X
X
X
X
X
(1) Indicates a management contract or compensatory plan or arrangement.
(2) Confidential treatment has previously been granted by the SEC for certain portions of the referenced exhibit.
43
Table of Contents
Item 16.
Form 10-K Summary
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 10, 2022
Date: March 10, 2022
BSQUARE CORPORATION
By:
By:
/S/ RALPH C. DERRICKSON
Ralph C. Derrickson
President and Chief Executive Officer
/S/ CHRISTOPHER WHEATON
Christopher Wheaton
Chief Financial and Operating Officer, Secretary and Treasurer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Ralph C. Derrickson and Christopher
Wheaton, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful
attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in
each capacity stated below, and to file, any and all amendments to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in fact and agents, and each
of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
March 10, 2022, on behalf of the registrant and in the capacities indicated.
Signature
Title
/S/ RALPH C. DERRICKSON
Ralph C. Derrickson
/S/ CHRISTOPHER WHEATON
Christopher Wheaton
/S/ RYAN L. VARDEMAN
Ryan L. Vardeman
/S/ ROBERT J. CHAMBERLAIN
Robert J. Chamberlain
/S/ DAVIN W. CUSHMAN
Davin W. Cushman
/S/ MARY JESSE
Mary Jesse
President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial and Operating Officer, Secretary and Treasurer
(Principal Financial Officer)
Chairman of the Board
Director
Director
Director
44
The following is a list of subsidiaries of the registrant as of December 31, 2021.
Name
BSQUARE KK
BSQUARE EMEA Limited
Jurisdiction of incorporation or organization
Japan
United Kingdom
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements of Form S-8 (Nos. 333-230726, 333-89333, 333-70210,
333‑114104, 333-116279, 333-162925, 333-166804, 333-172904, 333-183668, 333‑205706, 333-205707, 333-215095, and 333-259425)
and Form S-3 (No. 333-254458) of Bsquare Corporation of our report dated March 10, 2022, relating to the consolidated financial statements
of Bsquare Corporation (which report expresses an unqualified opinion) appearing in this Annual Report on Form 10-K for the year ended
December 31, 2021.
/s/ Moss Adams LLP
Seattle, Washington
March 10, 2022
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13(a)-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Ralph C. Derrickson, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bsquare Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 10, 2022
/s/ Ralph C. Derrickson
Ralph C. Derrickson
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13(a)-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Christopher Wheaton, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bsquare Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 10, 2022
/s/ Christopher Wheaton
Christopher Wheaton
Chief Financial and Operating Officer, Secretary and Treasurer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Ralph C. Derrickson,
President and Chief Executive Officer, certify that:
1. To my knowledge, this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2. To my knowledge, the information contained in this report fairly presents, in all material respects, the financial condition and results
Exhibit 32.1
of operations of Bsquare Corporation.
Dated: March 10, 2022
/s/ Ralph C. Derrickson
Ralph C. Derrickson
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Christopher Wheaton,
Chief Financial and Operating Officer, Secretary and Treasurer, certify that:
1. To my knowledge, this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2. To my knowledge, the information contained in this report fairly presents, in all material respects, the financial condition and results
Exhibit 32.2
of operations of Bsquare Corporation.
Dated: March 10, 2022
/s/ Christopher Wheaton
Christopher Wheaton
Chief Financial and Operating Officer, Secretary and Treasurer