BSQUARE CORPORATION The following discussion should be read in conjunction with our condensed
consolidated financial statements and related notes. Some statements and
information contained in this discussion are not historical facts but are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In some cases,
readers can identify forward- looking statements by terms such as "may," "will,"
"should," "expect," "plan," "intend," "forecast," "anticipate," "believe,"
"estimate," "predict," "potential," "continue," or the negative of these terms
or other comparable terminology, which when used are meant to signify the
statement as forward-looking. These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements that are not historical facts. These
forward-looking statements are not guarantees of future performance and involve
known and unknown risks, uncertainties and situations that are difficult to
predict and that may cause our own, or our industry's actual results, to be
materially different from the future results that are expressed or implied by
these statements. Accordingly, actual results may differ materially from those
anticipated or expressed in such statements as a result of a variety of factors,
including those discussed in the sections entitled "Risk Factors" in this
Quarterly Report on Form 10-Q and in in Item 1A of Part I of our Annual Report
on Form 10-K for the year ended
Overview
Bsquare is a software and services company that designs, configures, and deploys technologies that solve difficult problems for manufacturers and operators of connected devices. Our customers choose Bsquare to help realize the promise of the Internet of Things (IoT) to transform their businesses. Our products include software that connects devices to create intelligent systems that are cloud-enabled, contribute critical data, and facilitate distributed control and decision making. Our services include 24/7 IoT operations that allow our customers to focus on their businesses while we take care of security, monitoring, and general technology updates. The opportunity to help companies explore and capture the value of IoT is attractive and growing. In the last two years alone, we helped hundreds of companies deploy and manage over two million devices. We operate large IoT systems for our customers with device fleets that range in size and complexity. We believe we offer a unique combination of expertise in device-level solutions, embedded operating systems, and IoT services and software that is valued by a global customer base, from start-ups to Fortune 100 companies, across a diverse set of industries.
In the first quarter of 2021, we continued our ongoing initiatives to reposition and rebuild our business and are pursuing business opportunities in the intersection of our two business segments. In the Partner Solutions segment, customers who have been purchasing Operating System (OS) software from us are recognizing that their products, essentially interconnected devices and associated software, cannot be sold, installed, and then forgotten. For these customers, we offer software-based solutions that address the operational headaches caused by this relatively new and increasingly complex business requirement. In the Edge to Cloud segment, customers are relying on Bsquare for a complete solution, ranging from OS configuration to 24/7 support, dev/ops, and cloud management - the services that are critical when a customer puts an IoT solution into production. Experience with those customers has shown that Bsquare's role can last well beyond the development phase and continue into their on-going operations. Our software and edge expertise combined with our position as a supply chain partner makes us uniquely suited to address these complex requirements, in both business segments.
Revenue
The COVID-19 pandemic continues to affect our customer ordering patterns, causing ongoing disruptions to our Partner Solutions business. After strong revenue in the first quarter of 2020, we saw a significant decrease in Partner Solution revenue in the second quarter of 2020 that continued through at least the first quarter of 2021. While Partner Solutions revenue improved and stabilized in the third and fourth quarters of 2020, results for the first quarter of 2021 remain at levels lower than our pre-COVID-19 expectations. We believe our Partner Solutions revenue also decreased because competing Microsoft distributors offered deep discounts on Windows IoT OS software as part of hardware / software bundles. We expect this may continue in future quarters. We are working aggressively to retain our large customers and attract new customers with superior service and technical support, pricing that rewards loyalty, and a path to IoT operations.
Investments we made to ensure we were meeting our operating commitments, while re-tooling and addressing issues with software previously delivered to some of our larger IoT customers, started to generate revenue for us in 2020. In the first quarter of 2021, we worked closely with Itron, Inc. to help them build their intelligent utility grid. We anticipate investments in our other large IoT customers will continue in 2021, but at lower levels than in 2020 as the bulk of the rework is now complete. Beyond gaining credibility as a reliable technology partner, we believe the experience we have gained serving Itron and our other large IoT customers positions us to improve our IoT software and services in 2021 and beyond.
Expenses
Our work in 2020 to reduce our operating expense structure has provided a
foundation from which business rebuilding and re-tooling can continue. Our
operating expenses in the first quarter of 2021 were
Cash and Liquidity
Our cash and cash equivalents decreased by
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At The Market Offering
In
Critical Accounting Judgments
Our condensed consolidated financial statements have been prepared in accordance
with GAAP. The preparation of these condensed consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, sales, cost of sales and expenses and related disclosure of
contingent assets and liabilities. We evaluate our estimates on an on-going
basis. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable in the circumstances, which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. There have been no
significant changes to our critical accounting judgments, policies and estimates
as described in our Annual Report on Form 10-K for the year ended
Results of Operations
The following table presents our summarized results of operations for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.
Three Months Ended March 31,
(In thousands, except percentages) 2021 2020 $ Change % Change
Total revenue $ 9,972 $ 16,729 $ (6,757 ) (40 )%
Total cost of revenue 8,379 14,144 (5,765 ) (41 )
Gross profit 1,593 2,585 (992 ) (38 )
Operating expenses 2,444 3,024 (581 ) (19 )
Loss from operations (851 ) (439 ) (412 ) (94 )
Other income (loss), net (9 ) (35 ) 26 (73 )
Loss before income taxes (860 ) (474 ) (386 ) (81 )
Income tax benefit - - - -
Net loss $ (860 ) $ (474 ) $ (386 ) (81 )
Revenue
We generate revenue from the sale of software, both embedded operating system
software that we resell and our own proprietary software, and related
professional services. Total revenue decreased for the three months ended
Additional revenue details are as follows:
Three Months Ended March 31 ,
(In thousands, except percentages) 2021 2020 $ Change % Change Revenue Partner Solutions
$ 8,795 $ 15,905 $ (7,110 ) (45 )% Edge to Cloud 1,177 824 353 43 Total revenue$ 9,972 $ 16,729 $ (6,757 ) (40 ) As a percentage of total revenue: Partner Solutions 88 % 95 % Edge to Cloud 12 % 5 % Partner Solutions revenue
Partner Solutions revenue decreased
Edge to Cloud revenue
Edge to Cloud revenue increased for the three months ended
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Gross profit and gross margin
Cost of Partner Solutions revenue 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 Edge to Cloud revenue consists primarily of salaries and benefits, contractor costs and re-billable expenses, and amortization of certain intangible assets. Gross profit and gross margin were as follows:
Three Months Ended March 31 ,
(In thousands, except percentages) 2021 2020 $ Change % Change Partner Solutions
$ 1,336 $ 2,749 $ (1,413 ) (51 )% Partner Solutions gross margin 15 % 17 % (12 ) Edge to Cloud 257$ (164 ) $ 421 (257 ) Edge to Cloud gross margin 22 % (20 )% (210 ) Total gross profit$ 1,593 $ 2,585 $ (992 ) (38 ) Total gross margin 16 % 15 % 3
Partner Solutions gross profit and gross margin
Partner Solutions gross profit decreased for the three months ended
Gross profit on Partner Solutions 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 in the period
the expenditures are claimed and approved. For the quarterly period ended
Edge to Cloud gross profit and gross margin
Edge to Cloud gross profit and gross margin increased for the three months ended
Operating expenses
The following table presents our operating expenses for the periods indicated:
Three Months Ended March 31 ,
(In thousands, except percentages) 2021 2020 $ Change % Change
Operating expenses:
Selling, general and administrative
168 127 41 32
Total operating expenses $ 2,444 $ 3,024 $ (581 ) (19 )
As a percentage of total revenue: Selling, general and administrative 23 % 17 % Research and development
2 % 1 %
Selling, general and administrative
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related benefits, commissions and bonuses for our sales, marketing
and administrative personnel and related facilities and depreciation costs, as
well as professional services fees (e.g., consulting, legal, audit and tax).
SG&A expenses decreased for the three months ended
Research and development
Research and development ("R&D") expenses consist primarily of salaries and
related benefits for software development and quality assurance personnel,
contractor and consultant costs. R&D expenses increased for the three months
ended
Other income (loss), net
Other income (loss), net consists primarily of interest income on our cash and
investments, gains and losses we may recognize on our investments, and gains and
losses on foreign exchange transactions and other items. We had an immaterial
change in other income (loss), net for the quarterly period ended
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Income taxes
Income taxes were not recorded for the quarterly periods ended
Liquidity and Capital Resources
As of
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
Cash Flows from Investing Activities
Investing activities used cash of approximately
Cash Flows from Financing Activities
Financing activities provided negligible cash for the three months ended
Cash Commitments
Our future or potential cash commitments relate to minimum rents payable under
operating leases, which total
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