BSQUARE CORPORATION 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.
2022 Key Highlights
Continued supply chain disruptions and other macroeconomic factors affected the ordering patterns of our Partner Solutions customers in 2022, resulting in a year-over-year revenue decrease in that segment. We believe our Partner Solutions revenue is 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 path to IoT operations.
In our Edge to Cloud segment, we continue to focus our efforts on a relatively small number of key customers that help us gain credibility as a reliable technology partner. For example, we support Itron, Inc. with its intelligent utility grid. We believe our experience serving Itron and our other large IoT customers positions us to improve our IoT software and services in 2023 and beyond.
Our focus on expense discipline continued in 2022. As planned, we made targeted and strategic investments in marketing, which was the primary driver of the year-over-year increase in our selling, general and administrative expenses.
Throughout 2021 and 2022, we invested in the development of new product
offerings for our customers. In 2022, our product development investment totaled
over
During the fourth quarter of 2022, we executed a reduction in force ("RIF") as
part of broader efforts to align our cost base with our 2023 strategic and
operating priorities, which include breakeven operations. Our headcount was
reduced by nearly 20% and we incurred
In the fourth quarter of 2022, we also announced a plan to repurchase up to
14
--------------------------------------------------------------------------------
Table of Contents
Our cash, cash equivalents, restricted cash and short-term investments decreased
by
Cash will be invested strategically to grow our business and enhance our value proposition to customers.
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. For revenue recognized over-time, we use either the input or output method, whichever most faithfully depicts the transfer of goods or services.
Our contracts with customers sometimes include promises to transfer multiple products and services, such as professional services, a perpetual or term software license, and support and maintenance. A performance obligation is a promise in a contract with a customer to transfer products or services that are concluded to be distinct. In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment. We allocate the transaction price to each distinct performance obligation based on the estimated standalone selling price ("SSP") for each performance obligation.
Judgment is required to determine the SSP for each distinct performance obligation. Where possible, we determine SSP based on list prices or other observable inputs. In instances where SSP is not directly observable, we determine the SSP using information that may include internal costs, market conditions, and other observable inputs. In some cases, when the selling price is highly uncertain or variable, we may utilize the residual method to determine SSP. When using the residual method the SSP of a performance obligations is calculated by subtracting the sum of the SSPs of all other goods and services promised under the contract from the total transaction price.
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
15
--------------------------------------------------------------------------------
Table of Contents
Results of Operations - Year-over-Year Comparison
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.
Year Ended December 31,
(In thousands, except percentages) 2022 2021 $ Change % Change
Revenue $ 36,487 $ 40,367 $ (3,880 ) (10 )%
Cost of revenue 31,034 34,952 (3,918 ) (11 )%
Gross profit 5,453 5,415 38 1 %
Operating expenses 9,719 9,307 412 4 %
Loss from operations (4,266 ) (3,892 ) (374 ) (10 )%
Other income, net 408 1,650 (1,242 ) (75 )%
Loss before income taxes (3,858 ) (2,242 ) (1,616 ) (72 )%
Income tax expense - - - 0 %
Net loss $ (3,858 ) $ (2,242 ) $ (1,616 ) (72 )%
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 in 2022 compared to 2021, due to
decreased sales in our Partner Solutions segment, primarily in
Additional revenue details are as follows:
Year Ended December 31 ,
(In thousands, except percentages) 2022 2021 $ Change % Change Revenue: Partner Solutions
$ 33,119 $ 36,516 $ (3,397 ) (9 )% Edge to Cloud 3,368 3,851 (483 ) (13 )% Total revenue$ 36,487 $ 40,367 $ (3,880 ) (10 )% As a percentage of total revenue: Partner Solutions 91 % 90 % Edge to Cloud 9 % 10 % Partner Solutions revenue
Partner solutions revenue decreased
Edge to Cloud revenue
Edge to Cloud revenue decreased
Gross profit and gross margin
Cost of revenue for the Partner Solutions segment consists primarily of embedded operating system software royalties 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, in 2021, amortization of certain intangible
assets related to acquisitions. These intangibles were fully amortized as of
Gross profit and gross margin were as follows:
Year Ended December 31 ,
(In thousands, except percentages) 2022 2021 $ Change % Change
Partner Solutions gross profit
15 % 14 % - 1.0
Edge to Cloud gross profit $ 597 $ 377 $ 220 58 %
Edge to Cloud gross margin 18 % 10 % - 8.0
Total gross profit $ 5,453 $ 5,415 $ 38 1.0 %
Total gross margin 15 % 13 % - 2.0
(1) For gross margin, amounts represent percentage point change.
16
--------------------------------------------------------------------------------
Table of Contents
Partner Solutions gross profit and gross margin
The year-over-year decline in Partner Solutions gross profit was driven by lower third-party software sales, partially offset by an improvement in gross margin rate driven by a large high-margin sale and higher rebate recognition compared to the prior period.
Partner Solutions gross profit is impacted by rebate credits earned through Microsoft's distributor incentives program. Based on the nature of the incentives, we record a portion of them as a reduction of Partner Solutions cost of revenue with the remaining portion recognized as an offset to qualified marketing expenses during the period in which the expenditure claims are approved. See Footnote 12 - Significant Concentrations for further information about these rebates.
Edge to Cloud gross profit and gross margin
Edge to Cloud gross profit dollars and gross margin rate increased in 2022
compared to 2021 driven by decreased costs of revenue. The prior period included
amortization expense related to intangible assets that were fully amortized as
of
Operating expenses
Operating expenses were as follows:
Year Ended December 31 ,
(In thousands, except percentages) 2022 2021 $ Change % Change
Operating expenses:
Selling, general and administrative
6 %
Research and development 1,042 1,304 (262 ) (20 )%
Restructuring 205 - 205 100 %
Total operating expenses $ 9,719 $ 9,307 $ 412 4 %
As a percentage of total revenue: Selling, general and administrative 23 % 20 % Research and development
3 % 3 %
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, facilities and depreciation costs, as well as professional services fees (such as consulting, legal, audit and tax). SG&A expenses increased in 2022 compared to 2021 due to an increase in marketing expenditures, partially offset by a decrease in selling costs and professional fees.
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 decreased in 2022 compared to 2021 due to increased capitalization of personnel costs, partially offset by new product amortization expense.
Restructuring
During the fourth quarter of 2022 we executed a RIF as part of broader efforts
to align our cost base with our 2023 strategic and operating priorities, which
include breakeven operations. Our headcount was reduced by nearly 20%, and we
recorded expenses of
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 consolidated statement of operations and
comprehensive loss, a
Income taxes
Income tax expense was not recorded in either 2022 or 2021.
17
--------------------------------------------------------------------------------
Table of Contents
Results of Operations - Quarter-over-Quarter Comparison
The following is a discussion of our fourth quarter 2022 results as compared to our third quarter 2022 results.
Revenue for the quarter was
Gross profit increased
Total operating expenses for the quarter were
Interest income for the fourth quarter was primarily comprised of interest income on our investments. We began making investments late in the third quarter of 2022 and, as such, interest income for that period is less because our investments were in place for less time.
In the fourth quarter of 2022, the Company announced a plan to repurchase up to
Liquidity and Capital Resources
Overview
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
Cash flows from financing activities
Financing activities used cash of
Material cash requirements and sources of liquidity
Cash requirements arising from contractual obligations relate to our office leases, see Footnote 8 - 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, short-term investments 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, "Description of Business and Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8.
© Edgar Online, source
