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 an 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.

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 number of shares of common stock outstanding as of April 30, ~~2019: 12,837,534~~2020: 13,098,718

	March 31,			December 31,
	2019			2018			March 31, 2020			December 31, 2019
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,489		$	10,005		$	10,044		$	7,712
Restricted cash		338			263			600			600
Short-term investments		7,173			6,409			—			2,249
Accounts receivable, net of allowance for doubtful accounts of $31 at March 31, 2019 and $40 at December 31, 2018		9,713			11,581
Accounts receivable, net of allowance for doubtful accounts of $65 and $31 at March 31, 2020 and December 31, 2019, respectively								10,092			9,216
Contract assets								558			494
Prepaid expenses and other current assets		874			685			708			244
Contract assets		841			1,053
Total current assets		26,428			29,996			22,002			20,515
Restricted cash, long term		263			263
Equipment, furniture and leasehold improvements, net		989			911
Equipment, furniture and leasehold improvements, less accumulated depreciation								155			252
Deferred tax assets		7			7			7			7
Intangible assets, net		242			267
Right-of-use lease assets, net		1,089			—
Other non-current assets including contract assets		655			550
Intangible assets, less accumulated amortization								144			169
Right-of-use lease asset, net								1,499			1,828
Other non-current assets								166			284
Total assets	$	29,673		$	31,994		$	23,973		$	23,055
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Third-party software fees payable	$	7,317		$	7,620		$	8,579		$	7,224
Accounts payable		221			565			457			408
Accrued compensation		1,810			1,629			576			1,001
Other accrued expenses		434			653			771			306
Deferred rent, current portion		—			347
Operating lease, current portion		1,131			—
Deferred revenue, current portion		1,551			1,652
Total current liabilities		12,464			12,466
Deferred rent		—			150
Deferred revenue		1,162			1,037			2,052			1,559
Operating lease		374			—			421			702
Commitments and contingencies (Note 8)
Total current liabilities								12,856			11,200
Deferred revenue, long-term								548			903
Operating lease, long-term								1,168			1,256
Shareholders' equity:
Preferred stock, no par: 10,000,000 shares authorized; no shares issued and outstanding		—			—			—			—
Common stock, no par: 37,500,000 shares authorized; 12,823,298 issued and outstanding at March 31, 2019 and 12,777,573 issued and outstanding at December 31, 2018		138,448			138,280
Common stock, no par: 37,500,000 shares authorized; 13,098,718 and 13,042,293 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively								139,091			138,877
Accumulated other comprehensive loss		(916	)		(926	)		(1,022	)		(987	)
Accumulated deficit		(121,859	)		(119,013	)		(128,668	)		(128,194	)
Total shareholders' equity		15,673			18,341			9,401			9,696
Total liabilities and shareholders' equity	$	29,673		$	31,994		$	23,973		$	23,055

	Three Months Ended March 31,						Three Months Ended March 31,
	2019			2018			2020			2019
Revenue:
Third-party software	$	13,101		$	16,064
Proprietary software		251			1,795
Professional engineering service		1,744			2,819
Partner Solutions							$	15,905		$	13,101
Edge to Cloud								824			1,995
Total revenue		15,096			20,678			16,729			15,096
Cost of revenue:
Third-party software		11,149			13,354
Proprietary software		213			41
Professional engineering service		1,343			2,083
Partner Solutions								13,156			11,149
Edge to Cloud								988			1,556
Total cost of revenue		12,705			15,478			14,144			12,705
Gross profit		2,391			5,200			2,585			2,391
Operating expenses:
Selling, general and administrative		2,934			5,448			2,897			2,934
Research and development		2,336			2,230			127			2,336
Total operating expenses		5,270			7,678			3,024			5,270
Loss from operations		(2,879	)		(2,478	)		(439	)		(2,879	)
Other income, net		33			44
Other income (loss), net								(35	)		33
Loss before income taxes		(2,846	)		(2,434	)		(474	)		(2,846	)
Income tax (expense) benefit		—			—
Income tax benefit								—			—
Net loss	$	(2,846	)	$	(2,434	)	$	(474	)	$	(2,846	)
Basic loss per share	$	(0.22	)	$	(0.19	)	$	(0.04	)	$	(0.22	)
Diluted loss per share	$	(0.22	)	$	(0.19	)	$	(0.04	)	$	(0.22	)
Shares used in per share calculations:
Basic		12,795			12,673			13,055			12,795
Diluted		12,795			12,673			13,055			12,795
Comprehensive loss:

Net loss	$	(2,846	)	$	(2,434	)	$	(474	)	$	(2,846	)
Other comprehensive income (loss):
Other comprehensive income (loss)
Foreign currency translation, net of tax		2			(11	)		(34	)		2
Unrealized gain on investments, net of tax		8			10
Unrealized gain (loss) on investments, net of tax								(1	)		8
Total other comprehensive income (loss)		10			(1	)		(35	)		10
Comprehensive loss	$	(2,836	)	$	(2,435	)	$	(509	)	$	(2,836	)

	Three Months Ended March 31,						Three Months Ended March 31,
	2019			2018			2020			2019
Cash flows from operating activities:
Net loss	$	(2,846	)	$	(2,434	)	$	(474	)	$	(2,846	)
Adjustments to reconcile net loss to net cash from operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		194			141			196			194
Stock-based compensation		168			331			215			168
Changes in operating assets and liabilities:
Accounts receivable, net		1,868			1,302			(876	)		1,868
Contract assets								(81	)		75
Prepaid expenses and other assets		(176	)		(359	)		(331	)		(176	)
Contract assets		75			3
Third-party software fees payable		(303	)		142			1,355			(303	)
Accounts payable and accrued expenses		(382	)		(27	)		89			(382	)
Operating lease		416			—			(40	)		416
Deferred revenue		24			(2,266	)		138			24
Deferred rent		(497	)		(83	)		—			(497	)
Net cash used by operating activities		(1,459	)		(3,250	)
Net cash provided by (used in) operating activities								191			(1,459	)
Cash flows from investing activities:
Purchases of equipment and furniture		(246	)		(82	)		(33	)		(246	)
Proceeds from maturities of short-term investments		4,390			6,125			2,250			4,390
Purchases of short-term investments		(5,127	)		(4,983	)		—			(5,127	)
Net cash provided (used) by investing activities		(983	)		1,060
Net cash provided by (used in) investing activities								2,217			(983	)
Cash flows from financing activities—proceeds from exercise of stock options		9			12			—			9
Effect of exchange rates on cash		(8	)		11
Net decrease in cash, restricted cash, and cash equivalents		(2,441	)		(2,167	)
Cash, restricted cash, and cash equivalents, beginning of year		10,531			12,859
Cash, restricted cash, and cash equivalents, end of quarter	$	8,090		$	10,692
Effect of exchange rate changes on cash and cash equivalents								(76	)		(8	)
Net increase (decrease) in cash and cash equivalents								2,332			(2,441	)
Cash, restricted cash, and cash equivalents, beginning of period								8,312			10,531
Cash, restricted cash, and cash equivalents, end of period							$	10,644		$	8,090

									Accumulated																		Accumulated
									Other						Total												Other						Total
	Preferred Stock				Common Stock				Comprehensive			Accumulated			Shareholders'			Preferred Stock				Common Stock					Comprehensive			Accumulated			Shareholders'
	Shares		Amount		Shares		Amount		Income (Loss)			Deficit			Equity
Balance as of December 31, 2018		—	$	—		12,777,573	$	138,280	$	(926	)	$	(119,013	)	$	18,341
For the Three Months Ended March 31,																		Shares		Amount		Shares		Amount			Income (Loss)			Deficit			Equity
Balance as of December 31, 2019																			—	$	—		13,042,293	$	138,877		$	(987	)	$	(128,194	)	$	9,696
Exercise of stock options		—		—		—		—		—			—			—			—		—		—		—			—			—			—
Share-based compensation, including issuance of restricted stock		—		—		45,725		168		—			—			168			—		—		56,425		215			—			—			215
Shares of restricted stock withheld for taxes		—		—		—		—		—			—			—			—		—		—		—			—			—			—
Net loss		—		—		—		—		—			(2,846	)		(2,846	)		—		—		—		—			—			(474	)		(474	)
Foreign currency translation adjustment, net of tax		—		—		—		—		2			—			2			—		—		—		(1	)		(34	)		—			(35	)
Unrealized gain on investments, net of tax		—		—		—		—		8			—			8			—		—		—		—			(1	)		—			(1	)
Balance as of March 31, 2019		—	$	—		12,823,298	$	138,448	$	(916	)	$	(121,859	)	$	15,673
Balance as of March 31, 2020																			—	$	—		13,098,718	$	139,091		$	(1,022	)	$	(128,668	)	$	9,401

BSQUARE Corporation (“BSQUARE,” “we,” “us” and “our”) was incorporated in Washington State in July 1994. Since our inception, our business has largely been focused on providing software solutions (including reselling software from Microsoft Corporation (“Microsoft”)) and related engineering services to businesses that develop, market and sell dedicated-purpose standalone intelligent systems. Examples of dedicated-purpose standalone intelligent systems include smart, connected computing devices such as smart phones, set-top boxes, point-of-sale terminals, kiosks, tablets and handheld data collection devices, as well as smart vending machines, ATM machines, digital signs and in-vehicle telematics and entertainment devices.

Bsquare builds technology that is powering the next generation of intelligent systems. We help companies realize the promise of the Internet of Things (“IoT”) through the development of devices and systems that are cloud-enabled, share data seamlessly, facilitate distributed learning and control, and operate securely at scale. We believe that IoT-enabled systems can not only deliver value to our customers but also help people make better use of the resources of our planet. Bsquare's suite of services and software components create new revenue streams and operating models for our customers while providing opportunities for lowering costs and improving operations.

The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“BSQUARE”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. In the Condensed Consolidated Statements of Operations and Comprehensive Loss, prior period software revenue has been separately presented as third-party software and proprietary software to conform to current period presentation. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In ~~our~~management’s opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of March 31, ~~2019,~~2020 and our operating results and cash flows for ~~the~~ three months ended March 31, ~~2019~~2020 and ~~2018 and our cash flows for the three months ended March 31, 2019 and 2018.~~2019. The accompanying financial information as of December 31, ~~2018~~2019 is derived from our audited financial statements as of that date.

~~Preparing~~These unaudited condensed financial statements ~~requires us to make estimates~~ and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year.

~~The information included in this Quarterly Report on Form 10-Q~~related notes should be read in conjunction with our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the SEC on ~~March 4, 2019.~~ February 24, 2020.

The consolidated financial statements include the accounts of BSQUARE and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

~~We adopted Accounting Standard Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”) on January 1, 2019. See Note 6, “Leases.”~~

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 of progress on professional engineering service arrangements, bonus accruals, fair value of intangible assets and property and equipment, fair values of stock-based awards, and assumptions used to determine the net present value of operating lease liabilities, ~~and the fair values of acquired assets and liabilities,~~ among other ~~estimates.~~estimates and assumptions. Actual results may differ from these ~~estimates.~~estimates and assumptions.

We compute basic loss per share using the weighted average number of shares of common ~~shares~~stock outstanding during the period. We consider restricted stock units as outstanding shares of common ~~shares~~stock and include them in the computation of basic loss per share only when vested. We compute diluted loss per share using the weighted average number of shares of common ~~shares~~stock outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. We exclude common stock equivalent shares from the computation if their effect is anti-dilutive.

The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

	Three Months Ended March 31,				Three Months Ended March 31,
	2019		2018		2020		2019
Stock options		1,485,981		1,528,907		1,574,500		1,485,981
Restricted stock units		77,532		64,192		74,981		77,532

The following table provides information about disaggregated revenue by primary geographical ~~market~~area and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):

	Three Months Ended March 31, 2019								Three Months Ended March 31, 2018								Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
	Third-Party Software		Proprietary Software		Professional Engineering Service		Total		Third-Party Software		Proprietary Software		Professional Engineering Service		Total		Partner Solutions		Edge to Cloud		Total		Partner Solutions		Edge to Cloud		Total
Primary geographical markets:
Primary geographic area:
North America	$	12,727	$	244	$	1,557	$	14,528	$	15,119	$	1,683	$	2,487	$	19,289	$	13,171	$	605	$	13,776	$	12,727	$	1,801	$	14,528
Europe		320		6		135		461		593		100		246		939		426		213		639		320		141		461
Asia		54		1		52		107		352		12		86		450		2,308		6		2,314		54		53		107
Total	$	13,101	$	251	$	1,744	$	15,096	$	16,064	$	1,795	$	2,819	$	20,678	$	15,905	$	824	$	16,729	$	13,101	$	1,995	$	15,096

We receive payments from customers based upon contractual billing schedules; accounts receivable is 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 and deferred contract acquisition costs, which are amortized over time as the associated revenue is recognized. Contract liabilities, presented as deferred revenue on our condensed consolidated balance sheets, include payments received in advance of performance under the contract and are realized when the associated revenue is recognized. We had no asset impairment charges related to contract assets for each of the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019.

Significant changes in the contract assets and the deferred revenue balances during the three months ended March 31, ~~2019~~2020 were as follows (in thousands):

We capitalize contract acquisition costs for contracts with a life exceeding one ~~year, as is more common with our DataV software bookings.~~year. Amortization of contract acquisition costs was ~~$7,000~~$35,000 and ~~$80,000~~$7,000 for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. There were no asset impairment charges for contract acquisition costs for any of the periods noted above.

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 ~~are~~were unexercised as of March 31, ~~2019:~~2020:

We apply a practical expedient and fully expense contract acquisition costs, such as sales commissions, as incurred because the amortization period is less than one year. We record these costs within selling, general and administrative expenses.

Cash, cash equivalents and short-term investments consisted of the following (in thousands):

	March 31, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Cash	$	5,976	$	6,780	$	4,189	$	4,092
Cash equivalents (see detail in Note 4)		1,513		3,225		5,855		3,620
Restricted cash		338		263		600		600
Restricted cash, long-term		263		263
Total cash and cash equivalents		8,090		10,531		10,644		8,312
Short-term investments (see detail in Note 4)		7,173		6,409		—		2,249
Total cash, cash equivalents and short-term investments	$	15,263	$	16,940	$	10,644	$	10,561

We measure our cash equivalents and short-term investments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

We classify our cash equivalents and short-term investments within Level 1 or Level 2 because our cash equivalents and short-term investments are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

Assets measured at fair value on a recurring basis as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 are summarized below (in thousands):

	March 31, 2019						December 31, 2018						March 31, 2020						December 31, 2019
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	264	$	—	$	264	$	1,277	$	—	$	1,277	$	3,607	$	—	$	3,607	$	1,871	$	—	$	1,871
Government and agencies		—		500	$	500		—		—		—
Corporate commercial paper		—		749		749		—		1,198		1,198		—		1,748		1,748		—		999		999
Corporate debt		—		—		—		—		750		750		—		500		500		—		750		750
Total cash equivalents		264		1,249		1,513		1,277		1,948		3,225		3,607		2,248		5,855		1,871		1,749		3,620
Restricted cash:
Money market funds		601		—		601		526		—		526		600		—		600		600		—		600
Short-term investments:
Corporate commercial paper		—		5,276		5,276		—		3,874		3,874		—		—		—		—		748		748
Corporate debt		—		1,897		1,897		—		2,535		2,535		—		—		—		—		1,501		1,501
Total short-term investments		—		7,173		7,173		—		6,409		6,409		—		—		—		—		2,249		2,249
Total assets measured at fair value	$	865	$	8,422	$	9,287	$	1,803	$	8,357	$	10,160	$	4,207	$	2,248	$	6,455	$	2,471	$	3,998	$	6,469

As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, contractual maturities of our short-term investments were less than one year, and gross unrealized gains and losses on those investments were not material.

Intangible assets are related to customer relationships that we acquired from TestQuest, Inc. in November 2008 and from the acquisition of BSQUARE EMEA, Ltd. in September 2011.

March 31, 2019

December 31, 2018

Gross Carrying

Accumulated

Net Book

Gross Carrying

Accumulated

Net Book

Amount

Amortization

Value

Amount

Amortization

Value

Customer relationships:

$
1,275

$
(1,033
)

$
242

$
1,275

$
(1,008
)

$
267

	March 31, 2020							December 31, 2019
	Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value
Customer relationships	$	1,275	$	(1,131	)	$	144	$	1,275	$	(1,106	)	$	169

Amortization expense was $25,000 for each of the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019. Amortization in future periods is expected to be as follows (in thousands):

2019		73
2020		98
Remainder of 2020			$	73
2021		71		71
Total	$	242	$	144

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, requiring most leases to be recognized by lessees on their balance sheets as right-of-use (“ROU”) assets, along with corresponding lease liabilities. ASU 2016-02 is effective for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. We adopted ASU 2016-02 effective January 1, 2019 and elected the modified retrospective transition method, recording a cumulative-effect adjustment as of that date and presenting comparative prior year periods in accordance with Accounting Standards Codification Topic 840. On the date of adoption, we recorded a cumulative adjustment to recognize new net lease liabilities of $1.7 million and new ROU assets of $1.2 million, for operating leases on our consolidated balance sheets, based on the present value of remaining rental payments for existing operating leases. As part of adoption, we also de-recognized $0.5 million in deferred rent. Adoption of the standard did not have a material impact on our statement of operations or statement of cash flows. As part of adoption, we elected the short-term lease recognition exemption for our facility rental and equipment leases (all leases that qualified), which means that we did not recognize ROU assets or lease liabilities for existing short-term leases (leases of 12-months or less) as of the January 1, 2019 adoption date. In addition, when adopting ASU 2016-02 we applied the following practical expedients to forego assessing:

We determine if an arrangement is a lease at inception. On our balance sheet, our office leases are included in ~~ROU assets~~right-of-use (“ROU”) lease asset, net and related lease liabilities are included in ~~the Operating~~operating lease ~~current portion~~ and ~~Operating~~operating lease, ~~statement line items.~~long-term. We determined that we do not currently have any leases that we are required to classify as finance leases.

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. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

10In 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. As a result of entering this lease agreement, in December 2019, we recorded additional ROU assets and net lease liabilities of $1.2 million on our consolidated balance sheets. 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 one to ~~four~~eight years. The only leases that contain renewal options are for office space leases at our Seattle, Bellevue and Taiwan locations. ~~However, because~~In the fourth quarter of 2019, we made the decision not to renew our Bellevue lease, which expires at the end of May 2020, and we made the decision not to renew our Taiwan lease, exiting that facility in February 2020 (see Note 11, “Restructuring Costs”). Because of changes in our business, we are not able to determine with reasonable certainty whether ~~either or both of these leases~~we will ~~be renewed.~~renew our Seattle lease. As a result, we have not considered renewal options when recording ROU assets, lease liabilities or lease expense.

The following tables present the components of our lease expense and supplemental cash flow information related to our leases for the three months ended March 31, 2020 (in thousands):

The following table presents supplemental balance sheet information related to our operating leases as of March 31, 2020 (dollars in thousands):

The following table presents the amounts we are obligated to pay, by maturity, under our operating leases liabilities as of March 31, 2020 (in thousands):

We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (together with the Stock Plan, the “Plans”). Under the Plans, stock options to purchase shares of our common stock may be granted with a fixed exercise price that is equal to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and restricted stock units (“RSUs”).

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 activities. The fair value of RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:

	Three Months Ended March 31,						Three Months Ended March 31,
	2019			2018			2020			2019
Dividend yield		0	%		0	%		0	%		0	%
Expected life	6.0 years			5.4 years			4.9 years			6.0 years
Expected volatility		64	%		54	%		60	%		64	%
Risk-free interest rate		2.2	%		2.4	%		1.1	%		2.2	%

The impact on our results of operations from stock-based compensation expense was as follows (in thousands, except per share amounts):

	Three Months Ended March 31,					Three Months Ended March 31,
	2019			2018		2020		2019
Cost of revenue — professional engineering service	$	6		$	11
Cost of revenue — Edge to Cloud						$	4	$	6
Selling, general and administrative		188			264		206		188
Research and development		(26	)		56		5		(26	)
Total stock-based compensation expense	$	168		$	331	$	215	$	168
Per diluted share	$	0.01		$	0.03

						Weighted Average									Weighted Average
						Remaining									Remaining
				Weighted Average		Contractual Life		Aggregate		Number of			Weighted Average		Contractual Life		Aggregate
	Number of Shares			Exercise Price		(in years)		Intrinsic Value		Shares			Exercise Price		(in years)		Intrinsic Value
Balance at December 31, 2018		1,390,012		$	4.77		6.83	$	—
Balance at December 31, 2019											1,544,826		$	2.74		7.47	$	46,582
Granted		575,625			1.97						564,900			1.02
Exercised		—			—						—			—
Forfeited		(54,194	)		4.90						(1,500	)		4.02
Expired		(20,296	)		5.17						(168,448	)		4.79
Balance at March 31, 2019		1,891,147		$	3.90		6.96	$	180
Vested and expected to vest at March 31, 2019		1,638,226		$	4.13		6.55	$	117
Exercisable at March 31, 2019		979,630		$	4.85		4.00	$	—
Balance at March 31, 2020											1,939,778			2.06		8.62		—
Vested and expected to vest at March 31, 2020											1,631,708			2.19		8.46		—
Exercisable at March 31, 2020											467,687		$	3.88		6.14	$	—

At March 31, ~~2019,~~2020, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was ~~$159,524.~~$764,296. This cost will be amortized on the straight-line method over a weighted-average period of approximately ~~1.9~~1.8 years. The following table summarizes certain information about stock options:

	Three Months Ended March 31,				Three Months Ended March 31,
	2019		2018		2020		2019
Weighted average grant-date fair value of options granted during the period	$	1.97	$	2.09	$	1.02	$	1.97
Options in-the-money (in shares)		6,000		737,632		—		6,000
Aggregate intrinsic value of options exercised during the period	$	—	$	275	$	—	$	—

The aggregate intrinsic value represents the difference between the exercise price of the underlying options and the quoted price of our common stock for the number of options exercised during the period. We issue new shares of common stock upon exercise of stock options.

	Number of			Weighted Average		Number of			Weighted Average
	Shares			Award Price		Shares			Award Price
Unvested at December 31, 2018		186,516		$	2.88
Unvested at December 31, 2019							112,846		$	1.44
Granted		—			—		—			—
Vested		(45,725	)		2.82		(56,425	)		1.44
Forfeited		(18,876	)		4.23		—			—
Unvested at March 31, 2019		121,915		$	2.69
Expected to vest after March 31, 2019		114,770		$	2.65
Unvested at March 31, 2020							56,421		$	1.44
Expected to vest after March 31, 2020							159,795		$	1.44

At March 31, ~~2019,~~2020, total compensation cost related to RSUs granted but not yet recognized, net of estimated forfeitures, was ~~$161,747.~~$15,561. This cost will be amortized on the straight-line method over a weighted-average period of approximately ~~0.3~~0.2 years.

The following table summarizes our shares of common stock reserved for future issuance under the Plans as of March 31, ~~2019:~~2020:

Our commitments include obligations outstanding under operating leases, which expire through ~~2021.~~2027. We have lease commitments for office space in Bellevue, Washington; ~~Boston, Massachusetts; Taipei, Taiwan;~~Seattle, Washington; and Trowbridge, UK. See Note 6, “Leases.”

From time to time, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. We defend ourselves vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals 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.

Our chief operating decision-makers (i.e. our Chief Executive Officer and certain direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by our chief operating decision-makers, or anyone else, for operations, operating results, or planning for levels or components below the consolidated unit level. We operate within a single industry segment of computer software and services.

We have ~~three~~two major product lines, ~~– third-party software, proprietary software~~Partner Solutions and ~~professional engineering service –~~Edge to Cloud, each of which we consider to be operating and reportable segments. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements, and we do not produce asset information by reportable segment. The following table sets forth profit and loss information about our segments (in thousands):

	Three Months Ended March 31,						Three Months Ended March 31,
	2019			2018			2020			2019
Third-party software:
Partner Solutions:
Revenue	$	13,101		$	16,064		$	15,905		$	13,101
Cost of revenue		11,149			13,354			13,156			11,149
Gross profit		1,952			2,710			2,749			1,952
Proprietary software:
Revenue		251			1,795
Cost of revenue		213			41
Gross profit		38			1,754
Professional Engineering Service:
Edge to Cloud:
Revenue		1,744			2,819			824			1,995
Cost of revenue		1,343			2,083			988			1,556
Gross profit		401			736			(164	)		439
Total gross profit		2,391			5,200			2,585			2,391
Operating expenses		5,270			7,678			3,024			5,270
Other income, net		33			44			(35	)		33
Income tax (expense) benefit		—			—			—			—
Net loss	$	(2,846	)	$	(2,434	)	$	(474	)	$	(2,846	)

Revenue by ~~geography~~geographic area is based on the sales region of the customer. The following tables set forth total revenue and long-lived assets by geographic area (in thousands):

	Three Months Ended March 31,				Three Months Ended March 31,
	2019		2018		2020		2019
Total revenue:
North America	$	14,528	$	19,289	$	13,776	$	14,528
Asia		107		450		2,314		107
Europe		461		939		639		461
Total revenue	$	15,096	$	20,678	$	16,729	$	15,096

	March 31, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Long-lived assets:
North America	$	1,545	$	1,578	$	1,688	$	2,016
Asia		83		91		—		177
Europe		258		4,023		275		340
Total long-lived assets	$	1,886	$	5,692	$	1,963	$	2,533

14Long-lived assets decreased due to utilization of ROU leased assets in North America and from retirement of ROU leased assets in Asia due to closure of our Taiwan office.

No ~~customers~~customer accounted for 10% or more of total revenue for each of the three months ended March 31, 2020 and 2019.

Kodak Alaris, Inc. had accounts receivable balances of $1.6 million or approximately 16% of total accounts receivable at March 31, 2020. Honeywell International, Inc. and affiliated entities (“Honeywell”) ~~accounted for $2.7 million or 13% of total revenue for the three months ended March 31, 2018.~~ No ~~other customers accounted for 10% or more of total revenue for the 2018 period noted above.~~

~~Honeywell~~ had accounts receivable balances of ~~$2.3~~$1.2 million or approximately ~~24%~~12% of total accounts receivable at March 31, ~~2019~~2020 and ~~$2.8~~$1.2 million or approximately ~~24%~~13% of total accounts receivable at December 31, ~~2018.~~2019. No other customer accounted for 10% or more of total accounts receivable at March 31, ~~2019~~2020 or December 31, ~~2018.~~2019.

Effective March 1, 2019, pursuant to a new Global Partnership Agreement with Microsoft Corporation (“Microsoft”), we are authorized to sell Windows Embedded operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Puerto Rico, ~~Cuba, Haiti, Dominican Republic, Jamaica, Trinidad~~Columbia, and ~~Tobago, Guadeloupe, Martinique, Bahamas, Barbados, Saint Lucia, Curacao, Aruba, Saint Vincent~~several Caribbean countries. Of our total revenue, 79% in 2019 and 75% in 2018 resulted from the Grenadines, U.S. Virgin Islands, Grenada, Dominica, Cayman Islands, Saint Kitts and Nevis, Sint Maarten, Turks and Caicos Islands, Saint Martin, British Virgin Islands, Sint Eustatius, Saba, Anguilla, Montserrat, Colombia, Saint Barthelemy, Antigua and Barbuda.sale of Windows IoT operating systems. Our existing distribution agreement for sales of Windows ~~Embedded~~IoT operating systems in the ~~E.U.,~~European Union, the European Free Trade Association, Turkey and Africa, ~~from which we generated approximately 3.7% of our third-party software sales in 2018, expires~~expired on June 30, 2019 and ~~will~~was not be renewed thereafter. We generated approximately 3% of our Partner Solutions software sales under this agreement in 2019. 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.

Software sales under these agreements constitute a significant portion of our ~~software~~Partner Solutions revenue and total revenue. There is no automatic renewal provision in any of these agreements, and these agreements can be terminated unilaterally by Microsoft at any time.

Microsoft currently offers a rebate program to sell Microsoft Windows Embedded operating systems pursuant to which we earn money for achieving certain predefined objectives. In accordance with Microsoft rebate program rules:

Under this rebate program, we recorded rebate credits as follows (in thousands):

	Three Months Ended March 31,				Three Months Ended March 31,
	2019		2018		2020		2019
Reductions to cost of revenue	$	82	$	260	$	113	$	82
Reductions to marketing expense	$	413	$	267	$	219	$	413

There was a balance of approximately ~~$328,000~~$168,000 in qualified outstanding rebate credits at March 31, ~~2019,~~2020, which will be accounted for as a reduction in marketing expense in the period in which qualified program expenditures are ~~made.~~claimed and approved.

In ~~September 2015,~~May 2019, we entered into a two-year unsecured line of credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Bank”) in the principal amount of up to $12.0 million. In September 2016, the Credit Agreement was modified to extend the final due date to September 2018, at which point it expired. No borrowings were ever outstanding under the Credit Agreement.

~~On May 9, 2019, our Board of Directors~~ approved a severance plan that ~~includes~~included a workforce elimination of approximately 38 positions ~~comprised~~in the United States and internationally. In October 2019, we determined to close our Taiwan branch office, which resulted in elimination of ~~32 employees and 6 consultants. This one-time~~approximately 17 additional positions. An involuntary termination benefit plan ~~reduced our workforce by approximately 25% and~~ was done in order to reduce go-forward operating costs and re-align our go-forward business model to support future business initiatives.

The costs associated with these actions consisted primarily of charges for restructuring costs related to severance and benefits, and a non-cash impairment charge related to certain software development cost assets. We ~~currently anticipate incurring pre-tax severance~~incurred aggregate restructuring charges ~~under this severance plan~~ of approximately ~~$1.1~~$2.3 million ~~representing one-time cash employee termination benefits including severance and other employment obligations, which will be paid out~~associated with these actions during 2019, not beginning in the second quarter of 2019. For the three months ended March 31, 2019 ~~through early 2020. We expect~~and 2018, respectively, we did incur any charges for restructuring

costs under this plan. For the ~~workforce reductions will be substantially completed by~~three months ended March 31, 2020, $0.4 million in restructuring costs were paid. The ending balance for accrued restructuring charges is $0.1 million as of March 31, 2020 and is included as part of accrued compensation on the ~~end~~consolidated balance sheets.

The following tables show the activity and estimated timing of future payouts for accrued restructuring costs (in thousands):

On April 10, 2020, the Company received loan proceeds of $1.6 million (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the ~~third quarter~~Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying companies in amounts up to 2.5 times their average monthly payroll expenses.

The PPP Loan is evidenced by a promissory note, dated as of ~~2019~~April 7, 2020 (the “Note”), between the Company and ~~anticipate~~JPMorgan Chase Bank, N.A. (the ��Lender”). The Note has a two-year term, bears interest at the rate of 0.98% per annum, and may be prepaid at any time without payment of any premium. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”). The principal and accrued interest under the Note is forgivable after eight weeks if the Company uses the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with PPP requirements. In order to obtain forgiveness of the PPP Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements. The Company must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period. The Company intends to use the proceeds of the PPP Loan for eligible purposes and to pursue forgiveness, although the Company may take action that ~~cost savings will be realized beginning~~could cause some or all of the PPP Loan to become ineligible for forgiveness.

The Note contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties or covenants. The occurrence of an event of default may result in the ~~third quarter~~repayment of ~~2019.~~ all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company.

In March 2020, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak. In addition, multiple governmental authorities have imposed “stay home,” “shelter-in-place” and similar orders that may disrupt business operations and present economic uncertainties that could impact our results and financial position. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on many factors, including the duration and spread of the outbreak, all of which are uncertain and cannot be predicted. The related financial impact cannot be reasonably estimated at this time.

~~As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” and “the Company” refer to BSQUARE Corporation, a Washington corporation, and its subsidiaries.~~

The following ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~discussion should be read in conjunction with our condensed consolidated financial statements and related notes. Some statements and information contained in this ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~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 ~~guarantes~~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 December 31, ~~2018 entitled “Risk Factors,”~~2019 as well as similar discussions contained in ~~subsequently filed Quarterly Reports on Form 10-Q, including this Form 10-Q, as applicable,~~our periodic reports, and ~~those contained~~other documents or filings and documents that we may from time to time ~~in our other filings~~file or furnish with the ~~Securities and Exchange Commission.~~SEC. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Since our inception, our business has largely been focused on providing software solutions (including reselling software from Microsoft Corporation (“Microsoft”)) and related engineering services to businessesBsquare builds technology that develop, market and sell dedicated-purpose standalone intelligent systems. Examples of dedicated-purpose standalone intelligent systems include smart, connected computing devices such as smart phones, set-top boxes, point-of-sale terminals, kiosks, tablets and handheld data collection devices, as well as smart vending machines, ATM machines, digital signs and in-vehicle telematics and entertainment devices. We focus on systems that utilize various Microsoft Windows Embedded operating systems as well as devices running other popular operating systems such as Android, Linux, and QNX, and that are usually connected to a network via a wired or wireless connection. Our customers include world-class original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), corporate enterprises (“Enterprises”), silicon vendors (“SVs”) and peripheral vendors. A significant portion of our business historically has also been focused on reselling software from Microsoft, from which a majority of our revenue currently continues to be derived.

Beginning in early 2014, we initiated development efforts focused on new proprietary software products addressing the Industrial Internet of Things (“IIoT”) market, extracting data from uniquely identifiable devices and applying advanced analytics and machine learning to the data in order to derive meaningful and actionable insights. While IIoT is a relatively new market, we believe the work we have engaged in since our inception—namely adding intelligence to discrete standalone devices and systems—embodies much of what is central to the core functionality of IIoT. These software development efforts have driven a new business initiative for BSQUARE, which we refer to as DataV™. Our DataV solution includes software products, applications and services that are designed to turn raw IIoT device data into meaningful and actionable data for our customers.

We began marketing DataV late in the first quarter of 2016 and announced our first three major customer bookings later that year which comprised software licensing, software maintenance and related systems integration services. During 2017 we began selling data analytics services and DataV application pilots to major industrial customers primarily in the transportation, oil and gas, and manufacturing vertical markets. One of these pilots led to a multi-year SaaS and related services agreement in 2018. The remaining pilots were completed, and while no additional licensing arrangements resulted from these pilots, we believe there may be future opportunities with a number of these customers.

We believe that IIoT represents a large, expanding addressable market that industrial customers are only now starting to embrace. We also believe that many potential customers need assistance with their digital transformation activities prior to making long-term solutions commitments as they transition from a non-cloud business to a cloud-based business. We also believe there is still a viable market for our legacy third-party Embedded OS license software. In 2019, we intend to go to market with a pragmatic edge-to-cloud message and product strategy that allows us to build on our legacy of helping our customers build intelligent devices but now offers a complete solution that allows our customers to build and operatepowering the next generation of intelligent systems. We help companies realize the promise of IoT through the development of devices and systems that are cloud-enabled, share data seamlessly, facilitate distributed learning and control, and operate securely at scale. We believe that IoT-enabled systems can not only deliver value to our customers, but also can help people make better use of the resources of our planet and work more effectively to improve quality of life. Bsquare's suite of services and software components create for our customers new revenue streams and operating models while providing opportunities for lowering costs and improving operations.

Since our founding in 1994, Bsquare has been at the intersection of hardware and software. Today that intersection is the “edge” where cloud-enabled devices connect to create intelligent systems that share data, facilitate distributed control and machine learning, and operate securely at scale. From device hardware, to the operating system, to IoT software solutions, and cloud services that make intelligent systems possible, Bsquare’s expertise, products and services are at the center of digital transformation.

2019 was a year of transition for Bsquare and we expect 2020 to be a year of focus and discipline as we seek to accelerate the recovery that we started in 2019. During the first quarter of 2020, we began to experience the challenging social and economic conditions created by the novel strain of coronavirus, SARS-CoV-2, which causes the disease known as COVID-19. The impact the COVID-19 pandemic will have on our business and the overall economic landscape remains unclear. While we believe the foundation that we established in 2019 positions us to take advantage of growth opportunities, it is possible that the uncertainty created by COVID-19 will make those opportunities less readily apparent and less frequently available. We intend to display the discipline and adaptability that delivered results in 2019 and the first quarter of 2020.

Our Partner Solutions business segment is a source of both cash and important partner and customer relationships. We are uniquely positioned as a software-only Microsoft distributor. Because we sell operating system (“OS”) software decoupled from hardware, we can partner with a wide range of customers, especially those who are concerned about procuring their software from a potential hardware competitor. Nearly every customer that has been buying OS software is now contemplating their IoT strategy and our longstanding relationship allows us to cross sell our Edge to Cloud products and services.

In our Edge to Cloud business segment, we plan to expand on the valuable experience we gained serving our large customers in 2019 building and operating their IoT solutions at scale. Our B2IQ software and consulting suite and our improved engineering methodologies create a foundation upon which we can build and grow this business segment. We plan to continue to invest in creating an agile and quality-oriented customer service function that will become an integral part of our customers’ IoT operations, allowing our customers to rely on Bsquare to ensure that their products are well designed and can operate in a fully connected IoT-enabled world.

In addition to the system design and software engineering services included in the B2IQ suite, we have expanded our services to include 24/7 support, dev/ops, and cloud management – the services that are critical when a customer puts an edge-to-cloud solution into production. Experience with our early IoT customers showed that Bsquare’s role could last well beyond the design and development phase and continue into their on-going operations. This role as an operating partner for our customers represents an opportunity for future collaboration and on-going business in the form of monthly support and services fees to Bsquare.

The distribution market is and has been changing dramatically, even prior to the economic impacts of COVID-19. Our customers’ products, essentially hardware and associated software, cannot be sold, installed, and then forgotten. Today, our customers constantly seek to maintain and optimize the operating system, firmware, and software in their products. Furthermore, these devices are increasingly becoming a part of complex networks, what is often referred to as IoT, and what we call intelligent systems. This evolution created new opportunities for our business and may continue to do so in the future. Our software and edge expertise combined with our position as a supply chain partner makes us uniquely suited to address these complex requirements.

We see a natural progression between the increasing level of control provided by network-aware devices, the connected ubiquity of these devices, the distributed computing that the cloud offers, the rules and rules engines that make up machine learning, and, ultimately, the distributed decision making and control created by these intelligent devices and systems. ~~We will continue~~In pursuing revenue growth in both segments, we seek to ~~support~~exploit what we believe to be the obvious synergy between our ~~existing DataV~~two core businesses.

Both Seattle and Bellevue, in Washington state, were impacted in the initial days of the COVID-19 pandemic in the United States. Early in the evolution of our collective understanding of the situation, we encouraged our Bsquare team members in the UK and US to work remotely and to make a personal decision about traveling to and working in the office. In mid-March, in response to local government “stay home,” “shelter-in-place” and similar orders intended to reduce the spread of the virus, Bsquare closed our offices in Trowbridge in the United Kingdom and stopped all non-essential activities in our Bellevue, Washington office. The company went fully virtual by mid-March.

Also, in mid-March, a number of customers notified Bsquare that it is an essential supplier to their business which has been designated essential to the country’s infrastructure. Throughout the rapid change created by the COVID-19 crisis, Bsquare has continued to meet customer ~~commitments but will stop marketing DataV~~demands. In April, as an IIoT platform. Instead, we intend to offer customers a set of IIoT solution components, solution accelerators and software engineering services. We intend to continue to run our legacy third-party embedded OS software resale business to maximize opportunities and cash flow within that market. Our legacy professional engineering service business is now managed as a part of our ~~overall services~~contingency planning to meet our obligations we applied for and received $1.6 million in funding through the Paycheck Protection Program.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on many factors, including the duration and spread of the outbreak, impact on our customers’ and our sales cycles, employee or industry events, and effects on our vendors. All of these factors remain highly uncertain and cannot be predicted. By the end of the first quarter of 2020, the COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers, and partners conduct business. As a result, we may experience adverse conditions for our business in future periods. Specifically, we may experience impact from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, supply and distribution chain delays including closures of manufacturing facilities and warehouses used by our suppliers and distributors, staffing shortages for our customers, suppliers and other partners, decreases or delays in customer demand and spending, and difficulties or changes to our sales process and customer support. The extent to which ~~we anticipate will increasingly serve our IIoT customers.~~

~~Management’s discussion and analysis of~~COVID-19 may impact our financial condition ~~and~~or results is uncertain. See “Risk Factors” for further discussion of ~~operations are based~~the possible impact of the COVID-19 pandemic on our business.

Our condensed consolidated financial statements ~~which~~ have been prepared in accordance with ~~accounting principles generally accepted in the United States.~~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 ~~believed to be~~ reasonable ~~under~~in the circumstances, ~~the results of~~ 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 December 31, ~~2018.~~2019.

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,												Three Months Ended March 31,
(In thousands, except percentages)	2019			2018			$ Change			% Change			2020			2019			$ Change			% Change
Revenue	$	15,096		$	20,678		$	(5,582	)		(27	)%
Cost of revenue		12,705			15,478			(2,773	)		(18	)%
Total revenue													$	16,729		$	15,096		$	1,633			11	%
Total cost of revenue														14,144			12,705			1,439			11	%
Gross profit		2,391			5,200			(2,809	)		(54	)%		2,585			2,391			194			8	%
Operating expenses		5,270			7,678			(2,408	)		(31	)%		3,024			5,270			(2,246	)		(43	)%
Loss from operations		(2,879	)		(2,478	)		(401	)		(16	)%		(439	)		(2,879	)		2,440			85	%
Other income, net		33			44			(11	)		(25	)%
Other income (loss), net														(35	)		33			(68	)		(206	)%
Loss before income taxes		(2,846	)		(2,434	)		(412	)		(17	)%		(474	)		(2,846	)		2,372			83	%
Income tax benefit		—			—			—		n/a				—			—			—			(—	)%
Net loss	$	(2,846	)	$	(2,434	)	$	(412	)		(17	)%	$	(474	)	$	(2,846	)	$	2,372			83	%

We generate revenue from the sale of software, both ~~third-party~~embedded operating system software that we resell and our own proprietary software, and ~~the sale of~~related professional ~~engineering service.~~services. Total revenue ~~decreased~~increased for the quarterly period ended March 31, ~~2019~~2020 compared to the prior year period, primarily due to increased sales in our Partner Solutions segment, partially offset by lower sales of Microsoft Windows Embedded operating systems and Microsoft Windows Mobile operating systems, and lower revenue from professional engineering service and other (non-DataV) proprietary software.Edge to Cloud revenue.

Three Months Ended March 31,

(In thousands, except percentages)
2019

2018

$ Change

% Change

Revenue

Third-party software
$
13,101

$
16,064

$
(2,963
)

(18
)%
Proprietary software

251

1,795

(1,544
)

(86
)%
Professional engineering service

1,744

2,819

(1,075
)

(38
)%
Total revenue
$
15,096

$
20,678

$
(5,582
)

(27
)%
As a percentage of total revenue:

Third-party software

87
%

78
%

Proprietary software

2
%

9
%

Professional engineering service

12
%

14
%

	Three Months Ended March 31,
(In thousands, except percentages)	2020			2019			$ Change			% Change
Revenue
Partner Solutions	$	15,905		$	13,101		$	2,804			21	%
Edge to Cloud		824			1,995			(1,171	)		(59	)%
Total revenue	$	16,729		$	15,096		$	1,633			11	%
As a percentage of total revenue:
Partner Solutions		95	%		87	%
Edge to Cloud		5	%		13	%

~~Third-party software~~Partner Solutions revenue ~~decreased~~increased for the quarterly period ended March 31, ~~2019,~~2020, primarily due to ~~lower~~a $2.4 million increase in sales of Microsoft Windows ~~Embedded~~ operating systems ~~to Honeywell. During the first quarter~~in North America and Asia and a $0.9 million increase in other embedded software sales, partially offset by a $0.5 million decrease in sales of 2018, we decided not to compete for sales in intense price competitive situations in an effort to maintain a certain gross margin level, and therefore decided not to pursue sales opportunities with Honeywell in Europe. As a result, our sales to Honeywell decreased by $2.0 million, from $2.7 million for the three months ended March 31, 2018 to $0.7 million for the three months ended March 31, 2019.Microsoft Mobile operating systems.

Sales of Microsoft operating systems represented approximately ~~84%~~87% and ~~75%~~84% of our total revenue and ~~74%~~76% and ~~44%~~74% of our total gross margin for the three months ended March 31, 2020 and March 31, 2019, ~~and 2018,~~ respectively.

~~Proprietary software~~Edge to Cloud revenue decreased for the quarterly period ended March 31, ~~2019,~~2020, primarily due to ~~lower~~significant DataV ~~software~~^TM related professional service revenue recognized in the ~~current quarter compared to the~~ prior year ~~quarter due to~~period that was not repeated in the ~~timing of license acceptance.~~current quarter. We expect Edge to Cloud revenue ~~from both DataV~~to grow over time as we turn our strategic focus toward cloud-based and ~~our~~ other ~~proprietary software~~IoT-related service offerings. We expect Edge to Cloud revenue will continue to ~~fluctuate in timing and amount in future periods and will decline over time as they approach the end of their life cycles.~~

Professional engineering service revenue decreased for the quarterly period ended March 31, 2019, largely due to a decrease in service revenue in North America with the completion of several existing customer DataV projects in 2018. We expect that professional engineering service revenue will vary in timing and ~~amount in future periods as we continue to align our organizational structure.~~amount.

Cost of ~~software~~Partner Solutions revenue consists primarily of the cost of ~~third-party~~embedded operating system software ~~products~~product costs payable to third-party vendors and support costs associated with our proprietary software products. Cost of ~~service~~Edge to Cloud revenue consists primarily of salaries and benefits, contractor costs and re-billable expenses, related facilities and depreciation costs, and amortization of certain intangible assets related to acquisitions.

Three Months Ended March 31,

(In thousands, except percentages)
2019

2018

$ Change

% Change

Third-party software gross profit
$
1,952

$
2,710

$
(758
)

(28
)%
Third-party software gross margin

15
%

17
%

(12
)%
Proprietary software gross profit
$
38

$
1,754

$
(1,716
)

(98
)%
Proprietary software gross margin

15
%

98
%

(85
)%
Professional engineering service gross profit
$
401

$
736

$
(335
)

(46
)%
Professional engineering service gross margin

23
%

26
%

(12
)%
Total gross profit
$
2,391

$
5,200

$
(2,809
)

(54
)%
Total gross margin

16
%

25
%

(36
)%

	Three Months Ended March 31,
(In thousands, except percentages)	2020			2019			$ Change			% Change
Partner Solutions	$	2,749		$	1,952		$	797			41	%
Partner Solutions gross margin		17	%		15	%					13	%
Edge to Cloud	$	(164	)	$	439		$	(603	)		(137	)%
Edge to Cloud gross margin		-20	%		22	%					(191	)%
Total gross profit	$	2,585		$	2,391		$	194			8	%
Total gross margin		15	%		16	%					(6	)%

~~Third-party software gross profit decreased~~increased for the quarterly period ended March 31, ~~2019~~2020 primarily due to ~~lower~~increased sales of ~~third-party~~other embedded and Microsoft operating systems software. ~~Third-party software gross margin decreased as a result of a $178,000 reduction in the amount of Microsoft rebate credits recognized in the current quarterly period compared to the prior year period.~~

Gross profit on ~~third-party software~~Partner Solutions is positively impacted by rebate credits that we receive from Microsoft for the sale of Windows ~~Embedded~~ operating systems earned through the achievement of defined objectives. Under the Microsoft rebate program, we recognized ~~$82,000 of~~$113,000 in rebate credits during the three months ended March 31, ~~2019,~~2020, compared to ~~$260,000~~$82,000 in rebate credits during the three months ended March 31, ~~2018,~~2019, all of which were accounted for as reductions in cost of revenue. For 2020 and 2019 periods, we allocated 20% of rebates to reduce cost of sales. See “Note 10, Significant Risk Concentrations.”

~~Proprietary software~~Edge to Cloud gross profit ~~decreased for the quarterly period ended March 31, 2019 primarily due to lower proprietary software revenue. Proprietary software~~and gross margin decreased for the quarterly period ended March 31, ~~2019 largely due to higher cost of sales related to maintenance and support activities for DataV.~~

~~Professional engineering service gross profit decreased for the quarterly period ended March 31, 2019~~2020 primarily due to ~~lower~~decreased sales of DataV^TM professional ~~engineering service revenue. Professional engineering service gross margin decreased for the quarterly period ended March 31, 2019~~services, primarily ~~due to a higher utilization of engineering services~~ in ~~the prior year period.~~North America.

	Three Months Ended March 31,												Three Months Ended March 31,
(In thousands, except percentages)	2019			2018			$ Change			% Change			2020			2019			$ Change			% Change
Operating expenses:
Selling, general and administrative	$	2,934		$	5,448		$	(2,514	)		(46	)%	$	2,897		$	2,934		$	(37	)		(1	)%
Research and development		2,336			2,230			106			5	%		127			2,336			(2,209	)		(95	)%
Total operating expenses	$	5,270		$	7,678		$	(2,408	)		(31	)%	$	3,024		$	5,270		$	(2,246	)		(43	)%
As a percentage of total revenue:
Selling, general and administrative		19	%		26	%								17	%		19	%
Research and development		15	%		11	%								1	%		15	%

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 quarterly period ended March 31, ~~2019,~~2020, primarily due to lower salaries and related benefits resulting from our ~~spending reduction~~restructuring efforts ~~that began~~ in ~~the second half of 2018~~prior periods, partially offset by increased costs for sales commissions and ~~into 2019, reduced commission expense on lower sales, lower~~bonuses, stock compensation expense ~~due to forfeitures of stock options~~ and ~~RSUs, and lower marketing spend. These decreases for the year-to-date period were partially offset by higher severance costs.~~corporate insurance expense.

Research and development (“R&D”) expenses consist primarily of salaries and related benefits for software development and quality assurance personnel, contractor and consultant costs, and related facilities and depreciation costs. R&D expenses ~~increased slightly~~decreased for the quarterly period ended March 31, ~~2019,~~2020 due to ~~increased headcount~~lower salaries and ~~associated spending for continued development~~related benefits resulting from restructuring efforts in prior periods, including elimination of R&D positions as a result of our decision to discontinue marketing of DataV ~~product line.~~as an IoT platform in the second quarter of 2019.

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 March 31, ~~2019~~2020 as compared to the prior year period.

Income taxes were not recorded for the quarterly periods ended March 31, 2020 and March 31, 2019, ~~and 2018 as a result of having a net loss in both respective periods.~~ respectively.

As of March 31, ~~2019,~~2020, we had ~~$15.3~~$10.6 million of cash, restricted cash and cash equivalents and investments, compared to $16.9 million at December 31, 2018, reflecting a net use of approximately $1.6 million in cash, restricted cash, cash equivalents and investments during the three months ended March 31, 2019.equivalents. We generally invest our excess cash in high quality marketable investments. These investments typically 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. Our investments held at March 31, ~~2019~~2020 had minimal default risk and ~~consisted~~consist of cash equivalents. We held no short-term ~~maturities.~~

~~Operating activities used cash of approximately $1.5 million for the three months ended~~investments at March 31, 2019, which included a working capital increase of approximately $1.0 million and our net loss (offset by non-cash adjustments) of $2.5 million. The working capital increase included $1.9 million of cash inflows related to accounts receivable, primarily from lower sales to Honeywell in Europe. This increase was partially offset by cash outflows of $0.4 million related to accounts payable and accrued expenses and $0.3 million in third-party software fees payable.

Operating activities used cash of approximately $3.3 million for the three months ended March 31, 2018, which included a working capital usage of approximately $1.3 million and our net loss (offset by non-cash adjustments) of $2.0 million. The working capital usage included cash outflows of $2.3 million related to deferred revenue, primarily on DataV contracts. The working capital usage was offset by $1.3 million of cash inflows related to accounts receivable.

Investing activities used cash of approximately $1.0 million for the three months ended March 31, 2019, due to net cash outflows on short-term investments of $0.8 million and $0.2 million in purchases of equipment and furniture related to capitalized software development costs.

~~Investing activities provided cash of approximately $1.1 million for the three months ended March 31, 2018,~~2020, primarily due to ~~net cash inflows~~the timing of maturities on previously held short-term investments.

~~Financing activities provided negligible cash for each~~On April 10, 2020, the Company received loan proceeds of $1.6 million under the Paycheck Protection Plan (“PPP”). The PPP, established as part of the ~~three months ended March 31, 2019~~Coronavirus Aid, Relief and ~~2018.~~Economic Security Act (“CARES Act”), provides for loans to qualifying companies in amounts up to 2.5 times their average monthly payroll expenses. We proactively applied for the PPP funds as part of our ongoing contingency planning related to economic uncertainty due to COVID-19. With these funds, we are better positioned to maintain our personnel levels and continue to serve our customers. See Note 12, “Subsequent Events”.

We believe that our existing cash, cash equivalents and investments will be sufficient to meet our needs for working capital and capital ~~expenditures~~e3xpenditures for at least the next 12 months.

Operating activities provided cash of approximately $0.2 million for the three months ended March 31, 2020, which included our net loss, more than offset by non-cash adjustments of $0.4 million and a working capital increase of approximately $0.3 million. The working capital increase included a $1.4 million decrease in third-party software fees payable, partially offset by decreased cash inflows of $0.9 million related to the increase in accounts receivable associated with higher revenue, and $0.3 million related to prepaid expenses and other assets.

~~On September 22, 2015, we entered into~~Operating activities used cash of approximately $1.5 million for the three months ended March 31, 2019, which included our net loss, offset by non-cash adjustments of $0.4 million, and a ~~two-year unsecured line~~working capital increase of ~~credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A.~~approximately $0.9 million. The working capital increase included cash inflows of $1.9 million related to accounts receivable, primarily from Honeywell in Europe. This increase was partially offset by cash outflows of $0.4 million related to accounts payable and accrued expenses, $0.3 million related to third-party software fees payable, and $0.3 million related to prepaid expenses and other assets.

Investing activities provided cash of approximately $2.2 million for the three months ended March 31, 2020, due to net cash inflows on short-term investments. Our short-term investments matured near the end of the first quarter of 2020 and were held as cash equivalents as of March 31, 2020.

Investing activities used cash of approximately $1.0 million for the three months ended March 31, 2019, primarily due to net cash outflows of $0.8 million on short-term investments and a $0.2 million increase in capitalized software development costs, which was reflected in the ~~principal amount~~equipment, furniture and leasehold improvements, less accumulated depreciation statement line on the consolidated balance sheets.

Financing activities provided negligible cash for each of ~~up to $12.0 million. On September 29, 2016,~~ the ~~Credit Agreement was modified to extend the final due date for an additional year to September 22, 2018. The Credit Agreement expired on September 22, 2018 in accordance with its terms~~three months ended March 31, 2020 and there were no amounts outstanding under the Credit Agreement as of December 31, 2018. See Note 11, “Credit Agreement” in the Notes to Condensed Consolidated Financial Statements in Item 1 for more information regarding the Credit Agreement.2019.

~~See Note 1, “Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements in Item 1.~~

~~See Note 12, “Subsequent Event” in the Notes to Condensed Consolidated Financial Statements in Item 1, and Item 5, “Other Information” in Part II.~~

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the ~~Securities~~ Exchange Act ~~of 1934~~ is recorded, processed, summarized and reported within the time periods specified in the ~~Securities and Exchange Commission’s~~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. Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes in our internal controls over financial reporting during the three months ended March 31, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

There have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, other than as listed below.

The unprecedented nature of the COVID-19 pandemic creates uncertainty for Bsquare and its customers, and for the overall global business environment.

As the scope and impact of the COVID-19 pandemic continues to evolve, a number of potential risks to our business may emerge. We may face challenges selling or delivering our software and services, as our employees and many of those of our customers work from home, are unable to attend company and industry events, and face restrictions on travel and in-person meetings. Closures of manufacturing facilities and warehouses, or staffing shortages, may disrupt our supply and distribution chains. Our customers could experience a slow-down in demand for their products, decreased budgets, or delayed business initiatives, reducing the need for our software and services. If our ~~proprietary software solutions and engineering services offering fail to gain or maintain traction with potential customers, or if we~~customers’ global supply chains are ~~not otherwise successful in developing competitive product and services offerings that keep pace with technological changes and needs, our business would be negatively impacted.~~

~~In 2019, we intend to go to market with a pragmatic edge-to-cloud message and product strategy that allow us to build on our legacy~~disrupted because of helping our customers build intelligent devices but now offer a complete solution that allows our customers to build and operate the next generation of intelligent devices and systems. We will continue to support our existing DataV solution customer commitments but will stop marketing DataV as an IIoT platform. Instead, we intend to offer customers a set of IIoT solution components, solution accelerators and software engineering services. Our ability to grow our higher-margin proprietary software revenue is contingent on the success of these IIoT solution components, solution accelerators and software engineering services, and ifCOVID-19, they fail to gain or maintain traction with potential customers, or if we are not otherwise successful in developing competitive product offerings that keep pace with technological changes and needs, our business would be negatively impacted.

~~Expected operating efficiencies from our restructuring plans~~ may not be ~~realized as anticipated.~~

~~In the second quarter~~able to meet demands for their end-product and they may reduce or eliminate their purchases from Bsquare for an uncertain period of ~~2019, we effected a workforce reduction intended~~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 ~~expenses and better align~~their workforce through layoffs or furloughs, to cease operations temporarily, or, in extreme cases, declare bankruptcy. In those situations, disruptions to our ~~organizational structure with our strategic focus. Factors which may affect~~business will range from a loss of key customer relationships to an inability to timely collect potentially significant receivables.

The extent of the ~~potential operating efficiencies we realize from our restructuring plans include the adverse~~ impact of ~~job eliminations, uncertainties associated with loss~~the COVID-19 pandemic on our operational and financial performance will depend on many factors, including the duration and spread of ~~customer~~the outbreak and ~~vendor confidence, potential negative impact on sales~~the reactions of governments and customer service as well as factors outside of our control such as changes in the economic environment. We cannot be certain that the anticipated benefits will be realized under our restructuring plans, which could result in further restructuring efforts. If our restructuring plans are not successful, our business ~~and results of operations may be negatively impacted.~~

~~On May 9, 2019, our Board of Directors approved a restructuring plan that includes a workforce reduction of 38 positions, representing approximately 25% of our pre-reduction headcount.~~

~~This restructuring is intended~~ to reduce operating costs and re-align our business model to support future business initiatives. We currently anticipate incurring pre-tax severance charges of approximately $1.1 million in the second quarter of 2019, representing one-time cash employee termination benefits including severance and other employment obligations.

~~The Company expects the staff reductions will be substantially completed by~~manage its adverse impacts. At the end of the ~~third~~first quarter, the adverse effects of ~~2019~~the COVID-19 pandemic were becoming more prevalent in the locations where we and ~~anticipates~~our customers, suppliers and partners conduct business. As a result, we may experience adverse conditions for our business in future periods. The extent to which COVID-19 may impact our financial condition or results is uncertain.

We received a PPP loan, which may not be forgivable and may subject us to litigation or public scrutiny that harms our business.

In April 2020, we received loan proceeds of $1.6 million under the PPP, which provides for loans to qualifying companies in amounts up to 2.5 times their average monthly payroll expenses. No payments of principal or interest are due during a six-month deferral period, and all principal and accrued interest is forgivable after eight weeks if we use the PPP loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise comply with PPP requirements. While we intend to use the proceeds of the PPP loan for eligible purposes and to pursue forgiveness, we may take action that could cause some or all of the PPP loan to become ineligible for forgiveness, which may reduce our liquidity and harm our business, financial condition and results of operations.

As part of our PPP loan application, we certified that current economic uncertainty makes the loan request necessary to support our ongoing operations. Subsequent to our receiving the PPP loan, the Small Business Administration (“SBA”) issued guidance that questions whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP, indicating that any such company should be prepared to provide the basis for the certifications upon SBA request. We believe that we made this certification in good faith, taking into account our current business activity and ability to access other sources of liquidity sufficient to support our ongoing operations in a manner that is not significantly detrimental to our business. The SBA or other governmental authorities may disagree, however, and commence an audit, investigation or litigation. In any situation this would divert our management’s time and attention and impose legal and reputational costs, and an adverse finding or judgment may require us to return the PPP loan, face fines and penalties, and be excluded from government contracts, which would reduce our liquidity and harm our business. In particular, the federal False Claims Act (the “FCA”), among other things, prohibits persons from knowingly filing a false statement, knowingly causing a false statement to be filed, or knowingly using a false statement to obtain payment from the federal government. FCA claims may be initiated by the Department of Justice or by private plaintiffs. Violations of the FCA are subject to treble damages, and a court may determine that the ~~cost savings will be realized beginning in~~unit of damages for an FCA violation is the ~~third quarter~~amount of ~~2019.~~the PPP loan, causing treble damages (and associated costs) to have an even more pronounced adverse effect on our liquidity. Furthermore, if the media, watch groups, government officials or others portray us as a business that should not have availed itself of PPP funding, we may face negative publicity that harms our business and operations.

~~Item 6. Exhibits~~

Exhibit

Description

Filed or

Incorporated by Reference
Number

Furnished

Herewith

Form

Filing Date

Exhibit

File No.
    3.1

Amended and Restated Articles of Incorporation

S-1

August 17, 1999

3.1
(a)

333-85351
    3.1(a)

Articles of Amendment to Amended and Restated Articles of Incorporation

10-Q

August 7, 2000

3.1

000-27687
    3.1(b)

Articles of Amendment to Amended and Restated Articles of Incorporation

8-K

October 11, 2005

3.1

000-27687
    3.2

Bylaws and all amendments thereto

10-K

March 19, 2003

3.2

000-27687
  10.1  (1)

Global Partner Agreement with Microsoft Corporation effective March 1, 2019

X

  31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) under the Securities and Exchange Act of 1934

X

  31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) under the Securities and Exchange Act of 1934

X

  32.1

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

X

  32.2

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

X

101.INS

XBRL Instance Document

X

101.SCH

XBRL Taxonomy Extension Schema Document

X

101.CAL

XBRL Taxonomy Extension Calculation Document

X

101.DEF

XBRL Taxonomy Extension Definitions

X

101.LAB

XBRL Taxonomy Extension Label Document

X

101.PRE

XBRL Taxonomy Extension Presentation Document

X

Item 6.

Exhibits

~~(1) Certain portions of the referenced exhibit have been omitted.~~

(b) Exhibits

Filed or

Incorporated by Reference

Exhibit

Furnished

Number

Description

Herewith

Form

Filing Date

Exhibit

File No.

3.1

Amended and Restated Articles of Incorporation

S-1

August 17, 1999

3.1

(a)

333-85351

3.1(a)

Articles of Amendment to Amended and Restated Articles of Incorporation

10-Q

August 7, 2000

3.1

000-27687

3.1(b)

Articles of Amendment to Amended and Restated Articles of Incorporation

8-K

October 11, 2005

3.1

000-27687

3.2

Bylaws and all amendments thereto

10-K

March 19, 2003

3.2

000-27687

31.1

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

32.1

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

32.2

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

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Document

101.DEF

XBRL Taxonomy Extension Definitions

101.LAB

XBRL Taxonomy Extension Label Document

101.PRE

XBRL Taxonomy Extension Presentation Document

SIGN~~SIGNAT~~ATURES

Pursuant to the requirements 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.

	BSQUARE CORPORATION (Registrant)

Date: May ~~13, 2019~~11, 2020	By:	/s/ ~~Peter J. Biere~~Christopher Wheaton
		~~Peter J. Biere~~Christopher Wheaton
		Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Duly Authorized Signatory)

2427

Washington		91-1650880
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
110 110^th Avenue NE, Suite 300, Bellevue WA		98004
(Address of principal executive offices)		(Zip Code)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, no par value		BSQR		The NASDAQ Stock Market LLC

		Page
	PART I. FINANCIAL INFORMATION

Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1718
Item 3	Quantitative and Qualitative Disclosures About Market Risk	2123
Item 4	Controls and Procedures	2123
	PART II. OTHER INFORMATION
Item 1A	Risk Factors	22
~~Item 5~~	~~Other Information~~	2224
Item 6	Exhibits	2326
	Signatures	2427

	Three Months Ended March 31, 2019
	Contract Assets		Deferred Revenue
Revenue recognized that was included in deferred revenue at December 31, 2018	$	—	$	369
Transferred to receivables from contract assets recognized at December 31, 2018		302		—

	Three Months Ended March 31, 2020
	Contract Assets		Deferred Revenue
Revenue recognized that was included in deferred revenue at December 31, 2019	$	—	$	278
Transferred to receivables from contract assets recognized at December 31, 2019		15		—

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company	☐

	Remainder of 2019		2020		2021		2022
Third-party software	$	37	$	14	$	—	$	—
Proprietary software		2,179		1,755		1,936		196
Professional engineering services		—		—		—		—

	March 31, 2019							December 31, 2018
	Gross Carrying		Accumulated			Net Book		Gross Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value
Customer relationships:	$	1,275	$	(1,033	)	$	242	$	1,275	$	(1,008	)	$	267

	Three months ended
Total component lease expense was as follows (in thousands):	March 31, 2019
Operating leases	$	348
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities	$	429
Supplemental balance sheet information related to leases was as follows (dollars in thousands):	March 31, 2019
Operating leases:
Right of use	$	1,089
Current portion of operating lease liability	$	1,131
Operating lease liability, net of current portion		374
Total operating lease liabilities	$	1,505
Weighted Average Remaining Lease Term	1.4 years
Weighted Average Discount Rate		7.0	%

	March 31, 2020
Right-of-use lease assets	$	1,499

Current portion of operating lease liability	$	421
Operating lease liability, net of current portion		1,168
Total operating lease liabilities	$	1,589

Weighted average remaining lease term	6.2 years
Weighted average discount rate		8.2	%

As of March 31, 2019, maturities of lease liabilities were as follows:	Operating leases
Years Ended December 31,
Remainder of 2019	$	900
2020		624
2021		61
Total minimum lease payments		1,585
Less: amount representing interest		(80	)
Present value of lease liabilities	$	1,505


Years Ended December 31,
2020, remainder of year	$	349
2021		272
2022		249
2023		255
2024		262
After 2024		709
Total minimum lease payments		2,096
Less: amount representing interest		(507	)
Present value of lease liabilities	$	1,589

	March 31, ~~2019~~2020
Stock options outstanding		~~1,891,147~~1,939,778
Restricted stock units outstanding		~~121,915~~56,421
Stock options and restricted stock units available for future grant		~~1,593,641~~1,335,084
Common stock reserved for future issuance		~~3,606,703~~3,331,283

	For the three months ended
	March 31, 2020
Balance at beginning of period	$	472
Restructuring costs		—
Cash payments		(428	)
Balance at end of period	$	44

	As of March 31,2020
Estimated timing of future payments:
Remainder of 2020	$	44