UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2020~~2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-27687

BSQUARE CORPORATION

(Exact name of registrant as specified in its charter)

Washington		91-1650880
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~110 110~~^th ~~Avenue NE,~~1415 Western Ave, Suite ~~300,~~700, ~~Bellevue~~Seattle, WA		~~98004~~ 98101
(Address of principal executive offices)		(Zip Code)

(425) 519-5900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

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

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.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock outstanding as of April 30, ~~2020: 13,098,718~~2021: 13,407,029

Table of Contents

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, ~~2020~~2021

TABLE OF CONTENTS

					Page
		PART I. FINANCIAL INFORMATION

Item 1		Financial Statements	3
	3
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	18
Item 3		Quantitative and Qualitative Disclosures About Market Risk	18
	23
Item 4		Controls and Procedures			2318

	PART II. OTHER INFORMATION

Item 1A		Risk Factors	19
	24
Item 6		Exhibits			2620

	Signatures			2721

Table of Contents

PART I. FINANCIAL INFORMATION

I~~tem~~Item 1.

Financial Statements

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	March 31, 2020			December 31, 2019			March 31, 2021			December 31, 2020
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	10,044		$	7,712		$	10,028		$	12,623
Restricted cash		600			600			337			337
Short-term investments		—			2,249
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
Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at March 31, 2021 and December 31, 2020, respectively								5,491			6,177
Contract assets		558			494			194			456
Prepaid expenses and other current assets		708			244			828			409
Total current assets		22,002			20,515			16,878			20,002
Equipment, furniture and leasehold improvements, less accumulated depreciation		155			252
Property and equipment, net of accumulated depreciation								580			322
Deferred tax assets		7			7			7			7
Intangible assets, less accumulated amortization		144			169
Intangible assets, net of accumulated amortization								46			71
Right-of-use lease asset, net		1,499			1,828			1,773			1,853
Other non-current assets		166			284			26			27
Total assets	$	23,973		$	23,055		$	19,310		$	22,282
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Third-party software fees payable	$	8,579		$	7,224		$	5,221		$	6,458
Accounts payable		457			408			468			489
Paycheck Protection Program loan								1,588			950
Accrued compensation		576			1,001			504			717
Other accrued expenses		771			306			146			216
Deferred revenue		2,052			1,559			1,500			2,165
Operating lease		421			702			344			344
Total current liabilities		12,856			11,200			9,771			11,339
Deferred revenue, long-term		548			903			24			28
Operating lease, long-term		1,168			1,256			1,552			1,630
Paycheck Protection Program loan, long-term								—			634

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; 13,098,718 and 13,042,293 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		139,091			138,877
Common stock, no par: 37,500,000 shares authorized: 13,298,150 and 13,235,038 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively								139,907			139,726
Accumulated other comprehensive loss		(1,022	)		(987	)		(1,001	)		(992	)
Accumulated deficit		(128,668	)		(128,194	)		(130,943	)		(130,083	)
Total shareholders' equity		9,401			9,696			7,963			8,651
Total liabilities and shareholders' equity	$	23,973		$	23,055		$	19,310		$	22,282

	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021			2020
Revenue:
Partner Solutions	$	15,905		$	13,101		$	8,795		$	15,905
Edge to Cloud		824			1,995			1,177			824
Total revenue		16,729			15,096			9,972			16,729
Cost of revenue:
Partner Solutions		13,156			11,149			7,459			13,156
Edge to Cloud		988			1,556			920			988
Total cost of revenue		14,144			12,705			8,379			14,144
Gross profit		2,585			2,391			1,593			2,585
Operating expenses:
Selling, general and administrative		2,897			2,934			2,276			2,897
Research and development		127			2,336			168			127
Total operating expenses		3,024			5,270			2,444			3,024
Loss from operations		(439	)		(2,879	)		(851	)		(439	)
Other income (loss), net		(35	)		33			(9	)		(35	)
Loss before income taxes		(474	)		(2,846	)		(860	)		(474	)
Income tax benefit		—			—
Income taxes								—			—
Net loss	$	(474	)	$	(2,846	)	$	(860	)	$	(474	)
Basic loss per share	$	(0.04	)	$	(0.22	)	$	(0.07	)	$	(0.04	)
Diluted loss per share	$	(0.04	)	$	(0.22	)	$	(0.07	)	$	(0.04	)
Shares used in per share calculations:
Basic		13,055			12,795			13,186			13,055
Diluted		13,055			12,795			13,186			13,055

Net loss	$	(474	)	$	(2,846	)	$	(860	)	$	(474	)
Other comprehensive income (loss)
Foreign currency translation, net of tax		(34	)		2			(9	)		(34	)
Unrealized gain (loss) on investments, net of tax		(1	)		8			—			(1	)
Total other comprehensive income (loss)		(35	)		10			(9	)		(35	)
Comprehensive loss	$	(509	)	$	(2,836	)	$	(869	)	$	(509	)

	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021			2020
Cash flows from operating activities:
Net loss	$	(474	)	$	(2,846	)	$	(860	)	$	(474	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		196			194			145			196
Stock-based compensation		215			168			168			215
Interest expense								4			—
Changes in operating assets and liabilities:
Accounts receivable, net		(876	)		1,868			686			(876	)
Contract assets		(81	)		75			23			(81	)
Prepaid expenses and other assets		(331	)		(176	)		(381	)		(331	)
Third-party software fees payable		1,355			(303	)		(1,237	)		1,355
Accounts payable and accrued expenses		89			(382	)		(305	)		89
Operating lease		(40	)		416			2			(40	)
Deferred revenue		138			24			(669	)		138
Deferred rent		—			(497	)
Net cash provided by (used in) operating activities		191			(1,459	)
Net cash (used in) provided by operating activities								(2,424	)		191
Cash flows from investing activities:
Purchases of equipment and furniture		(33	)		(246	)
Additions to property and equipment								(175	)		(33	)
Proceeds from maturities of short-term investments		2,250			4,390			—			2,250
Purchases of short-term investments		—			(5,127	)
Net cash provided by (used in) investing activities		2,217			(983	)
Cash flows from financing activities—proceeds from exercise of stock options		—			9
Net cash (used in) provided by investing activities								(175	)		2,217
Cash flows from financing activities:
Proceeds from exercise of stock options								36			—
Net cash provided by financing activities								36			—
Effect of exchange rate changes on cash and cash equivalents		(76	)		(8	)		(32	)		(76	)
Net increase (decrease) in cash and cash equivalents		2,332			(2,441	)
Net (decrease) increase in cash and cash equivalents								(2,595	)		2,332
Cash, restricted cash, and cash equivalents, beginning of period		8,312			10,531			12,960			8,312
Cash, restricted cash, and cash equivalents, end of period	$	10,644		$	8,090		$	10,365		$	10,644

Accumulated

Other

Total

Preferred Stock

Common Stock

Comprehensive

Accumulated

Shareholders'

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

—

—

56,425

215

—

—

215

Shares of restricted stock withheld for taxes

—

—

—

—

—

—

—

Net loss

—

—

—

—

—

(474
)

(474
)
Foreign currency translation adjustment, net of tax

—

—

—

(1
)

(34
)

—

(35
)
Unrealized gain on investments, net of tax

—

—

—

—

(1
)

—

(1
)
Balance as of March 31, 2020

—

$
—

13,098,718

$
139,091

$
(1,022
)

$
(128,668
)

$
9,401

										Accumulated
										Other						Total
	Preferred Stock				Common Stock					Comprehensive			Accumulated			Shareholders'
For the Three Months Ended March 31, 2021	Shares		Amount		Shares		Amount			Income (Loss)			Deficit			Equity
Balance as of December 31, 2020		—	$	—		13,235,038	$	139,726		$	(992	)	$	(130,083	)	$	8,651
Exercise of stock options		—		—		63,112		36			—			—			36
Share-based compensation, including issuance of restricted stock		—		—		—		168			—			—			168
Net loss		—		—		—		—			—			(860	)		(860	)
Foreign currency translation adjustment, net of tax		—		—		—		(23	)		(9	)		—			(32	)
Balance as of March 31, 2021		—	$	—		13,298,150	$	139,907		$	(1,001	)	$	(130,943	)	$	7,963

1. Description of Business and Summary of Significant Accounting Policies

Description of ~~business~~Business

BSQUARE Corporation (“~~BSQUARE,~~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 connected devices and intelligent systems. We help companies realize the promise of the Internet of Things ~~(“IoT”~~("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.

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. We believe that our expertise, products, and services are applicable in customer projects and initiatives ranging from device hardware, to the operating system, to IoT software solutions, and cloud services that make intelligent systems possible.

Our business has largely been focused on providing software solutions (including reselling software from 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 point-of-sale terminals, kiosks, tablets and handheld devices, as well as smart vending machines, ATM machines, digital signs, smart phones, set-top boxes and in-vehicle telematics and entertainment devices.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ~~BSQUARE Corporation (“BSQUARE”)~~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~~Bsquare and our wholly owned subsidiaries. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In 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, ~~2020~~2021 and our operating results and cash flows for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. The accompanying financial information as of December 31, ~~2019~~2020 is derived from our audited financial statements as of that date.

These unaudited condensed financial statements and 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, ~~2019,~~2020, as filed with the SEC on ~~February 24, 2020.~~March 18, 2021.

Basis of consolidation

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

Use of estimates

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements, bonus accruals, ~~fair value~~useful lives 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, among other estimates and assumptions. Actual results may differ from these estimates and assumptions.

Income (Loss) Per Share

We compute basic loss per share using the weighted average number of shares of common stock outstanding during the period. We consider restricted stock units as outstanding shares of common 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 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 weighted 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,
	2020		2019		2021		2020
Stock options		1,574,500		1,485,981		163,393		1,574,500
Restricted stock units		74,981		77,532		108,828		74,981

2. Revenue Recognition

~~2. Revenue Recognition~~

Disaggregation of revenue

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

													Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
	Three Months Ended March 31, 2020						Three Months Ended March 31, 2019								Edge to						Edge to
	Partner Solutions		Edge to Cloud		Total		Partner Solutions		Edge to Cloud		Total		Partner Solutions		Cloud		Total		Partner Solutions		Cloud		Total
Primary geographic area:
North America	$	13,171	$	605	$	13,776	$	12,727	$	1,801	$	14,528	$	7,523	$	1,065	$	8,588	$	13,171	$	605	$	13,776
Europe		426		213		639		320		141		461		110		112		222		426		213		639
Asia		2,308		6		2,314		54		53		107		1,162		—		1,162		2,308		6		2,314
Total	$	15,905	$	824	$	16,729	$	13,101	$	1,995	$	15,096	$	8,795	$	1,177	$	9,972	$	15,905	$	824	$	16,729

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, ~~2020~~2021 and ~~2019.~~2020.

We capitalize contract acquisition costs for contracts with a life exceeding one year. A~~mortization~~Amortization of contract acquisition costs was ~~$35,000~~$22,000 and ~~$7,000~~$35,000 for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, 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 were unexercised as of March 31, ~~2020:~~2021:

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

When applicable and appropriate, the Company utilizes the ‘as-invoiced’ practical expedient which permits revenue recognition upon invoicing.

4. Fair Value Measurements

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

Level 1:

Quoted prices in active markets for identical assets or liabilities.

Level 2:

Directly or indirectly observable market-based inputs or unobservable inputs used in models or other valuation methodologies.

Level 3:

Unobservable inputs that are not corroborated by market data. The inputs require significant management judgment or estimation.

We classify our cash equivalents and ~~short-term investments~~restricted cash within Level 1 or Level 2 because our cash equivalents and ~~short-term investments~~restricted cash 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, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized below (in thousands):

													March 31, 2021						December 31, 2020
													Quoted Prices in		Direct or				Quoted Prices in		Direct or
													Active Markets		Indirect				Active Markets		Indirect
	March 31, 2020						December 31, 2019						for Identical		Observable				for Identical		Observable
	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 (Level 1)		Inputs (Level 2)		Total		Assets (Level 1)		Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	3,607	$	—	$	3,607	$	1,871	$	—	$	1,871	$	6,114	$	—	$	6,114	$	6,114	$	—	$	6,114
Corporate commercial paper		—		1,748		1,748		—		999		999		—		—		—		—		—		—
Corporate debt		—		500		500		—		750		750		—		—		—		—		—		—
Total cash equivalents		3,607		2,248		5,855		1,871		1,749		3,620		6,114		—		6,114		6,114		—		6,114
Restricted cash:
Money market funds		600		—		600		600		—		600		337		—		337		337		—		337
Short-term investments:
Corporate commercial paper		—		—		—		—		748		748
Corporate debt		—		—		—		—		1,501		1,501
Total short-term investments		—		—		—		—		2,249		2,249
Total assets measured at fair value	$	4,207	$	2,248	$	6,455	$	2,471	$	3,998	$	6,469	$	6,451	$	—	$	6,451	$	6,451	$	—	$	6,451

As of March 31, 2020 and December 31, 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.

5. Intangible Assets

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

~~Information regarding our intangible assets is~~2011 and were as follows (in thousands):

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

	March 31, 2021							December 31, 2020
	Gross							Gross
	Carrying		Accumulated			Net Book		Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value
Customer relationships	$	982	$	(936	)	$	46	$	982	$	(911	)	$	71

Amortization expense was $25,000 for each of the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. Amortization in future periods is expected to be as follows (in thousands):

Remainder of 2020

$
73

2021

71

Total

$
144

Remainder of 2021	$	46
2022		—
Total	$	46

6. Leases

We determine if an arrangement is a lease at inception. On our balance sheet, our office leases are included in right-of-use (“ROU”) lease asset, net and related lease liabilities are included in operating lease and operating lease, 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 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.

In December 2019, we entered into an operating lease agreement for a new corporate office facility in Seattle, Washington. The term of the lease is 87 months, with a rent date ~~starting~~which started 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.

Table of Contents

In November 2020, we renewed the lease for our office facility in the UK. The term of the lease is 120 months, with rent payments starting on November 30, 2020 and the lease term ending on November 8, 2030. The Company has an opportunity to break the lease at the five-year mark in November 2025. As it is reasonably certain that we will utilize this option, the accounting for this lease utilized November 2025 as the end date. The lease commencement date was November 9, 2020. As a result of entering this lease agreement, we recorded additional ROU assets and net lease liabilities of $365,559 on our consolidated balance sheet as of December 31, 2020. There was no material impact to our statement of operations or statement of cash flows as a result of entering into this lease.

Our leases have remaining terms of ~~one~~five to ~~eight~~seven years. The only leases that contain renewal options are for office space leases at our Seattle ~~Bellevue~~ and ~~Taiwan~~Trowbridge locations. In the fourth quarter of 2019, we made the decision not to renew our Bellevue lease, which ~~expires~~expired 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”).~~2020. Because of changes in our business, we are not able to determine with reasonable certainty whether we will 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~~2021 (in thousands):

	Three months ended		Three Months Ended
Total component lease expense was as follows (in thousands):	March 31, 2020
Total component lease expense was as follows:			March 31, 2021
Operating leases	$	264	$	105
Supplemental cash flow information related to leases was as follows (in thousands):
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities	$	173	$	104

The following table presents supplemental balance sheet information related to our operating leases as of March 31, ~~2020~~2021 (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~~2021 (in thousands):

7. Shareholders’ Equity

Equity Compensation Plans

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”).

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Stock-Based Compensation

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures based on historical experience and expected future 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 and RSUs were estimated with the following weighted average assumptions:

	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021			2020
Dividend yield		0	%		0	%		0	%		0	%
Expected life	4.9 years			6.0 years
Expected life (years)								4.9			4.9
Expected volatility		60	%		64	%		83	%		60	%
Risk-free interest rate		1.1	%		2.2	%		0.4	%		1.1	%

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

						Weighted Average									Weighted
						Remaining									Average
	Number of			Weighted Average		Contractual Life		Aggregate							Remaining
	Shares			Exercise Price		(in years)		Intrinsic Value					Weighted		Contractual
Balance at December 31, 2019		1,544,826		$	2.74		7.47	$	46,582
										Number of			Average		Life		Aggregate
										Shares			Exercise Price		(in years)		Intrinsic Value
Balance at December 31, 2020											1,786,891		$	2.04		7.75	$	330,831
Granted		564,900			1.02						75,000			3.17
Exercised		—			—						(6,963	)		5.15
Forfeited		(1,500	)		4.02						(32,450	)		1.02
Expired		(168,448	)		4.79						(10,250	)		2.91
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	$	—
Balance at March 31, 2021											1,812,228			2.09		7.73		2,789,370
Vested and expected to vest at March 31, 2021											1,637,437			2.14		7.63		2,468,576
Exercisable at March 31, 2021											800,338			2.76		6.60		909,183

At March 31, ~~2020,~~2021, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was ~~$764,296.~~$406,780. This cost will be amortized on the straight-line method over a weighted-average period of approximately ~~1.8~~1.4 years. The following table summarizes certain information about stock options:

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.~~periods indicated. We issue new shares of common stock upon exercise of stock options.

At March 31, ~~2020,~~2021, total compensation cost ~~related to RSUs granted but~~ not yet recognized related to granted RSUs was approximately $28,000, net of estimated ~~forfeitures, was $15,561.~~forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.2 years.

The following table summarizes our shares of common stock reserved for future issuance under the Plans as of March 31, ~~2020:~~2021:

9. Information about Geographic Areas and Operating Segments

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

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We have two major product lines, Partner Solutions and 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,
	2020			2019			2021			2020
Partner Solutions:
Revenue	$	15,905		$	13,101		$	8,795		$	15,905
Cost of revenue		13,156			11,149			7,459			13,156
Gross profit		2,749			1,952			1,336			2,749
Edge to Cloud:
Revenue		824			1,995			1,177			824
Cost of revenue		988			1,556			920			988
Gross profit		(164	)		439			257			(164	)
Total gross profit		2,585			2,391			1,593			2,585
Operating expenses		3,024			5,270			2,444			3,024
Other income, net		(35	)		33			(9	)		(35	)
Income tax (expense) benefit		—			—			—			—
Net loss	$	(474	)	$	(2,846	)	$	(860	)	$	(474	)

Revenue by 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):

Long-lived assets ~~decreased~~increased due to ~~utilization~~additions of ~~ROU leased assets~~internally developed software during the quarter in North ~~America and from retirement of ROU leased assets in Asia due to closure of our Taiwan office.~~America.

10. Significant Risk Concentrations

Significant Customers

No ~~customer~~customers accounted for 10% or more of total revenue for each of the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.

~~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”) had accounts receivable balances of ~~$1.2 million~~$563,000 or approximately 10% of total accounts receivable at March 31, 2021 and $680,000 or approximately 12% of total accounts receivable at ~~March~~December 31, 2020 ~~and $1.2 million~~. Kodak Alaris had accounts receivable balances of $866,000 or approximately ~~13%~~15% of total accounts receivable at December 31, ~~2019.~~2020. No other customer accounted for 10% or more of total accounts receivable at March 31, ~~2020~~2021 or December 31, ~~2019.~~2020.

Significant Supplier

~~Effective March 1, 2019, pursuant to a new Global Partnership Agreement with Microsoft Corporation (“Microsoft”), we~~

We are authorized to sell Windows ~~Embedded~~IoT operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Puerto Rico, Columbia, and several Caribbean countries. ~~Of our total revenue, 79% in 2019 and 75% in 2018 resulted from the sale of Windows IoT operating systems.~~ Our ~~existing~~ distribution agreement for sales of Windows IoT operating systems in the European Union (“E.U.”), the European Free Trade Association, Turkey and Africa, expired on June 30, 2019 and was not renewed thereafter. ~~We generated approximately 3% of our Partner Solutions software sales under this agreement in 2019.~~

We have also entered into ~~ODAs~~Original Equipment Manufacturer Distribution Agreements ("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~~

Table of ~~our Partner Solutions revenue and total revenue.~~ Contents

There is no automatic renewal provision in any of these agreements, and these agreements can be terminated unilaterally by Microsoft at any time.

The majority of our revenue continues to be derived from reselling Microsoft Windows Embedded and IoT operating system software to device makers. The sale of Microsoft operating systems has historically accounted for substantially all of our Partner Solutions revenue.

Microsoft currently offers a ~~rebate~~distributor incentives program ~~to sell Microsoft Windows Embedded operating systems pursuant to~~through which we earn ~~money for achieving certain~~rebates pursuant to predefined ~~objectives.~~objectives related to sales of Microsoft Windows IoT operating systems. In accordance with ~~Microsoft rebate~~ program ~~rules:~~

~~for~~rules, we allocate a portion of the ~~three months ended March 31, 2020 and March 31, 2019, respectively, we allocated 20% of rebates~~incentive earnings to reduce cost of ~~sales,~~revenue with the remaining ~~80% potentially available~~portion utilized to offset qualified marketing expenses ~~related to Microsoft Azure products~~ in the period ~~that~~the expenditures are claimed and approved. During the second quarter of 2020 the program allocation was changed by Microsoft to a 50/50 split between the two components.

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

	Three Months Ended March 31,				Three Months Ended March 31,
	2020		2019		2021		2020
Reductions to cost of revenue	$	113	$	82	$	106	$	113
Reductions to marketing expense	$	219	$	413	$	57	$	219

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

In May 2019, we approved a severance plan that included a workforce elimination of approximately 38 positions in the United States and internationally. In October 2019, we determined to close our Taiwan branch office, which resulted in elimination of approximately 17 additional positions. An involuntary termination benefit plan 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 incurred aggregate restructuring charges of approximately $2.3 million associated with these actions during 2019, not beginning in the second quarter of 2019. For the three months ended March 31, 2019 and 2018, respectively, we did incur any charges for restructuring

costs under this plan. For the 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 consolidated balance sheets.

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

The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes. Some statements and information contained in this discussion are not historical facts but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, readers can identify forward- looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology, which when used are meant to signify the statement as forward-looking. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements that are not historical facts. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s actual results, to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in the sections entitled “Risk Factors” in this Quarterly Report on Form 10-Q and in in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 as well as similar discussions contained in our periodic reports, and other documents or filings and documents that we may from time to time file or furnish with the 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.

Bsquare ~~builds technology~~is a software and services company that ~~is powering the next generation~~designs, configures, and deploys technologies that solve difficult problems for manufacturers and operators of ~~intelligent systems. We~~connected devices. Our customers choose Bsquare to help ~~companies~~ realize the promise of ~~IoT through~~ the ~~development~~Internet of ~~devices and systems~~Things (IoT) to transform their businesses. Our products include software 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~~connects devices ~~connect~~ to create intelligent systems that ~~share~~are cloud-enabled, contribute critical data, and facilitate distributed control and ~~machine learning,~~decision making. Our services include 24/7 IoT operations that allow our customers to focus on their businesses while we take care of security, monitoring, and general technology updates. The opportunity to help companies explore and capture the value of IoT is attractive and growing. In the last two years alone, we helped hundreds of companies deploy and manage over two million devices. We operate ~~securely at scale. From~~large IoT systems for our customers with device ~~hardware,~~fleets that range in size and complexity. We believe we offer a unique combination of expertise in device-level solutions, embedded operating systems, and IoT services and software that is valued by a global customer base, from start-ups to ~~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~~Fortune 100 companies, across a diverse set of ~~digital transformation.~~industries.

~~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~~

In the first quarter of ~~2020,~~2021, we ~~began~~continued our ongoing initiatives to ~~experience the challenging social~~reposition 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~~rebuild our business and are pursuing business opportunities in the ~~overall economic landscape remains unclear. While we believe~~intersection of our two business segments. In 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~~have been purchasing Operating System (OS) software from ~~a potential hardware competitor. Nearly every customer~~us are recognizing that ~~has been buying OS~~their products, essentially interconnected devices and associated software, ~~is now contemplating their IoT strategy~~cannot be sold, installed, and ~~our longstanding relationship allows us to cross sell our~~then forgotten. For these customers, we offer software-based solutions that address the operational headaches caused by this relatively new and increasingly complex business requirement. In the Edge to Cloud ~~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 relyare relying on Bsquare ~~to ensure that their products are well designed and can operate in~~for a ~~fully connected IoT-enabled world.~~

~~In addition~~complete solution, ranging from OS configuration 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~~IoT solution into production. Experience with ~~our early IoT~~those customers ~~showed~~has shown that Bsquare’s role ~~could~~can 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. In pursuing revenue growthrequirements, in both ~~segments, we seek to exploit what we believe to be the obvious synergy between our two core businesses.~~business segments.

~~Both Seattle and Bellevue, in Washington state, were impacted in the initial days of the~~Revenue

The COVID-19 pandemic ~~in the United States. Early in the evolution of~~continues to affect our ~~collective understanding of the situation, we encouraged~~customer ordering patterns, causing ongoing disruptions to our ~~Bsquare team members~~Partner Solutions business. After strong revenue 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 demands. In April, as part of our 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~~we saw a significant decrease in Partner Solution revenue in the ~~locations where~~second quarter of 2020 that continued through at least the first quarter of 2021. While Partner Solutions revenue improved and stabilized in the third and fourth quarters of 2020, results for the first quarter of 2021 remain at levels lower than our pre-COVID-19 expectations. We believe our Partner Solutions revenue also decreased because competing Microsoft distributors offered deep discounts on Windows IoT OS software as part of hardware / software bundles. We expect this may continue in future quarters. We are working aggressively to retain our large customers and attract new customers with superior service and technical support, pricing that rewards loyalty, and a path to IoT operations.

Investments we made to ensure we were meeting our operating commitments, while re-tooling and addressing issues with software previously delivered to some of our larger IoT customers, ~~suppliers,~~started to generate revenue for us in 2020. In the first quarter of 2021, we worked closely with Itron, Inc. to help them build their intelligent utility grid. We anticipate investments in our other large IoT customers will continue in 2021, but at lower levels than in 2020 as the bulk of the rework is now complete. Beyond gaining credibility as a reliable technology partner, we believe the experience we have gained serving Itron and ~~partners conduct business. As~~our other large IoT customers positions us to improve our IoT software and services in 2021 and beyond.

Our work in 2020 to reduce our operating expense structure has provided a ~~result, we may experience adverse conditions~~foundation from which business rebuilding and re-tooling can continue. Our operating expenses in the first quarter of 2021 were $600,000 less than our operating expenses the first quarter of 2020. We have an expense structure that makes sense for our business and an entrepreneurial leadership team that acts on changing business circumstances and opportunities as they emerge. We believe this operating discipline demonstrates our ability to manage through adversity.

Our cash and cash equivalents decreased by $2.6 million in ~~future periods. Specifically,~~the first quarter of 2021. Most of this cash was used for Microsoft royalties payable following the conclusion of a strong fourth quarter of 2020. In 2020 we ~~may experience impact from changes in how we and companies worldwide conduct business due~~received a $1.6 million loan under the Paycheck Protection Program ("PPP") 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, supplierscover payroll and other ~~partners, decreases or delays in customer demand and spending, and difficulties or changes~~permitted expenses, which helped to ~~our sales process and customer support. The extent to which COVID-19 may impact our financial condition or results is uncertain. See “Risk Factors” for further discussion of the possible impact~~mitigate negative effects of the COVID-19 ~~pandemic on~~pandemic. We believe our current cash balance and lack of debt service obligations (other than any unforgiven portions of our PPP loan principal) have provided and will continue to provide sufficient liquidity for the business.

In April 2021, we commenced a registered securities offering pursuant to an At-Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley”). The Sales Agreement provides that we may offer and sell our common stock having an aggregate offering price of up to $25.0 million from time to time (the “Offering”) through or to B. Riley, acting as our sales agent or principal. We did not receive any proceeds from the Offering during the first quarter of 2021.

Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, cost of sales and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances, which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes to our critical accounting judgments, policies and estimates as described in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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)	2020			2019			$ Change			% Change			2021			2020			$ Change			% Change
Total revenue	$	16,729		$	15,096		$	1,633			11	%	$	9,972		$	16,729		$	(6,757	)		(40	)%
Total cost of revenue		14,144			12,705			1,439			11	%		8,379			14,144			(5,765	)		(41	)
Gross profit		2,585			2,391			194			8	%		1,593			2,585			(992	)		(38	)
Operating expenses		3,024			5,270			(2,246	)		(43	)%		2,444			3,024			(581	)		(19	)
Loss from operations		(439	)		(2,879	)		2,440			85	%		(851	)		(439	)		(412	)		(94	)
Other income (loss), net		(35	)		33			(68	)		(206	)%		(9	)		(35	)		26			(73	)
Loss before income taxes		(474	)		(2,846	)		2,372			83	%		(860	)		(474	)		(386	)		(81	)
Income tax benefit		—			—			—			(—	)%		—			—			—			—
Net loss	$	(474	)	$	(2,846	)	$	2,372			83	%	$	(860	)	$	(474	)	$	(386	)		(81	)

We generate revenue from the sale of software, both embedded operating system software that we resell and our own proprietary software, and related professional services. Total revenue ~~increased~~decreased for the ~~quarterly period~~three months ended March 31, ~~2020~~2021 compared to the prior year period, primarily due to ~~increased~~decreased sales in our Partner Solutions segment ~~partially~~across all geographies slightly offset ~~by lower~~with higher revenue in our Edge to Cloud ~~revenue.~~segment.

~~Partner Solutions revenue increased~~ decreased $7.1 million or 45% for the quarterly period ended March 31, 2021, compared to the same period in 2020. This decrease reflects that Partner Solutions revenue in the first quarter of 2020 ~~primarily due~~was among the strongest in recent periods, while Partner Solutions revenue in the first quarter of 2021 reflected the ongoing disruptions and uncertainty caused by the global COVID-19 pandemic.

Edge to a $2.4 million increase in sales of Microsoft Windows operating systems 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 Microsoft Mobile operating systems.Cloud revenue

~~Sales of Microsoft operating systems represented approximately 87% and 84% of our total~~

~~Edge to Cloud revenue decreased for~~ the ~~quarterly~~same period ~~ended March 31,~~in 2020, primarily due to ~~significant DataV~~^TM ~~related~~an increase in professional service revenue recognized in the prior year period that was not repeated in the current quarter. We expect Edge to Cloud revenue to grow over time as we turn our strategic focus toward cloud-based and other IoT-related service offerings.services revenue. We expect Edge to Cloud revenue will continue to vary in timing and amount.

Cost of Partner Solutions revenue consists primarily ~~of the cost~~ of embedded operating system software product costs payable to third-party vendors, ~~and support costs associated with our proprietary software products.~~net of rebate credits earned through Microsoft’s distributor incentive program. Cost of Edge to Cloud revenue consists primarily of salaries and benefits, contractor costs and re-billable expenses, ~~related facilities and depreciation costs,~~ and amortization of certain intangible ~~assets related to acquisitions.~~assets. Gross profit and gross margin were as follows:

Partner Solutions gross profit ~~increased~~decreased for the three months ended March 31, 2021 primarily due to decreased Partner Solutions revenue and gross margin rate deterioration driven by customer and product mix.

Gross profit on Partner Solutions is impacted by rebate credits earned through Microsoft’s distributor incentives program. In accordance with program rules, we allocate a portion of the incentive earnings to reduce cost of revenue with the remaining portion utilized to offset qualified marketing expenses in the period the expenditures are claimed and approved. For the quarterly period ended March 31, 2021, we allocated 50% of rebates to reduce cost of sales and 50% to marketing expenses, and for the quarterly period ended March 31, 2020, ~~primarily due to increased sales of other embedded and Microsoft operating systems software.~~

Gross profit on Partner Solutions is positively impacted by rebate credits that we receive from Microsoft for the sale of Windows operating systems earned through the achievement of defined objectives. Under the Microsoft rebate program, we recognized $113,000 in rebate credits during the three months ended March 31, 2020, compared to $82,000 in rebate credits during the three months ended March 31, 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.”~~sales and 80% to marketing expenses. In the first quarter of 2021 we recorded approximately $106,000 in rebate credits as an offset to cost of revenue compared to approximately $113,000 in the first quarter of 2020.

Edge to Cloud gross profit and gross margin ~~decreased~~increased for the ~~quarterly period~~three months ended March 31, ~~2020~~2021 primarily due to ~~decreased sales of DataV~~^TM ~~professional services, primarily in North America.~~increased revenue and less low margin project work.

Three Months Ended March 31,

(In thousands, except percentages)

2020

2019

$ Change

% Change

Operating expenses:

Selling, general and administrative

$
2,897

$
2,934

$
(37
)

(1
)%
Research and development

127

2,336

(2,209
)

(95
)%
Total operating expenses

$
3,024

$
5,270

$
(2,246
)

(43
)%
As a percentage of total revenue:

Selling, general and administrative

17
%

19
%

Research and development

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~~three months ended March 31, ~~2020,~~2021 primarily due to lower salaries and related benefits resulting from our prior restructuring efforts ~~in prior periods,~~as well as reduced office rent, partially offset by ~~increased costs for sales commissions and bonuses, stock compensation expense and corporate insurance expense.~~one-time professional fees.

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 ~~decreased~~increased for the ~~quarterly period~~three months ended March 31, ~~2020~~2021 primarily due to ~~lower~~higher salaries and related benefits ~~resulting from restructuring efforts in prior periods, including elimination of R&D positions as a result of our decision~~and other costs related to ~~discontinue marketing of DataV as an IoT platform in the second quarter of 2019.~~product development.

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, ~~2020~~2021 as compared to the prior year period.

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 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. 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 and cash equivalents ~~and investments~~ will be sufficient to meet our needs for working capital and capital ~~e3xpenditures~~expenditures 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.

Operating activities used cash of approximately ~~$1.5~~$2.4 million for the three months ended March 31, ~~2019,~~2021, which included our net loss offset by non-cash adjustments of ~~$0.4~~$0.3 million and a working capital ~~increase~~decrease of approximately ~~$0.9~~$1.9 million. The working capital ~~increase~~decrease primarily included cash inflows of ~~$1.9~~$0.7 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~~$2.6 million related to third-party software fees payable ~~and $0.3~~of $1.2 million, $0.7 million related to deferred revenue, a $0.4 million change in prepaid expenses and other ~~assets.~~assets, and a $0.3 million change in accounts payable and accrued expenses.

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~~$0.2 million for the three months ended March 31, ~~2019, primarily due~~2021, related to ~~net cash outflows of $0.8 million on short-term investments~~additions to property and ~~a $0.2 million increase in capitalized software development costs, which was reflected in the equipment, furniture and leasehold improvements, less accumulated depreciation statement line on the consolidated balance sheets.~~equipment.

Our future or potential cash commitments relate to minimum rents payable under operating leases, which total ~~$0.3~~$0.2 million for the remainder of ~~2020,~~2021, $0.3 ~~million in 2021, $0.2~~ million in 2022, $0.3 million in 2023, $0.3 million in 2024, $0.3 million in 2025, and ~~$0.7~~$0.4 million thereafter.

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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 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~~control over financial reporting during the three months ended March 31, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal ~~controls~~control 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, ~~2019,~~2020, other than as listed below.

~~The unprecedented nature~~Future sales of substantial amounts of our common stock, or the possibility that such sales could occur, could adversely affect the market price of our common stock.

As part of the ~~COVID-19 pandemic creates uncertainty for Bsquare~~Offering, we may issue up to $25.0 million of common stock from time to time. The issuance from time to time of shares in the Offering, as well as the possibility that we may issue shares in future offerings, could have the effect of depressing the market price, or increasing the market price volatility, of our common stock. The number of shares we may sell, and ~~its customers, and for~~any resulting impact on market price or volatility, is highly uncertain because we have the ~~overall global business environment.~~

Asbroad discretion regarding the ~~scope and impact~~number of shares we instruct the Sales Agent to sell, the market price of the ~~COVID-19 pandemic continues~~common stock during the sales period, the limits we set with the Sales Agent in any applicable placement notice, and the demand for our common stock during the sales period. It is not currently possible to ~~evolve, a~~predict the number of ~~potential risks~~shares that will be sold or the gross proceeds to ~~our business~~be raised in connection with those sales.

You may ~~emerge. We~~experience future dilution as a result of future equity offerings.

In order to raise additional capital, we may ~~face challenges selling or delivering our software and services, as our employees and many of those~~in the future offer additional shares 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,~~common stock or ~~staffing shortages, may disrupt our supply and distribution chains. Our customers could experience a slow-down in demand for their products, decreased budgets,~~other securities convertible into or ~~delayed business initiatives, reducing the need~~exchangeable for our ~~software and services. If our customers’ global supply chains are disrupted because of COVID-19, they~~common stock. We may not be able to ~~meet demands~~sell shares or other securities in any offering at a price per share that is equal to or greater than prevailing market prices, and investors purchasing shares or other securities in the future could have rights superior to existing shareholders. The price per share at which we sell additional shares of our common stock or other securities convertible into or exchangeable for ~~their end-product and they may reduce or eliminate their purchases from Bsquare for an uncertain period of time, if not permanently. Our customers~~our common stock in future transactions may be ~~slow to collect from their customers~~higher or ~~otherwise face liquidity problems, which may cause delays in satisfaction~~lower than currently prevailing prices per share.

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 and the reactions of governments and business to manage its adverse impacts. At the end of the first quarter, the adverse effects of the COVID-19 pandemic were becoming more prevalent in the locations where we and 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 unit of damages for an FCA violation is the amount of 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.

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.

	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		—

							Remainder of
	Remainder of 2020		2021		After 2021		2021			2022			After 2022
Partner Solutions	$	13	$	3	$	9	$	(56,873	)	$	(6,150	)	$	(14,750	)
Edge to Cloud		1,352		2,268		274		(1,125,868	)		(163,688	)		(157,083	)

	March 31, 2020			March 31, 2021
Right-of-use lease assets	$	1,499		$	1,773

Current portion of operating lease liability	$	421		$	344
Operating lease liability, net of current portion		1,168			1,552
Total operating lease liabilities	$	1,589		$	1,896

Weighted average remaining lease term	6.2 years
Weighted average remaining lease term (years)					5.9
Weighted average discount rate		8.2	%		8.5	%


Years Ended December 31,
2020, remainder of year	$	349
2021		272
Years Ending December 31,
2021, remainder of year				$	214
2022		249			317
2023		255			324
2024		262			331
After 2024		709
2025					326
After 2025					440
Total minimum lease payments		2,096			1,952
Less: amount representing interest		(507	)		(56	)
Present value of lease liabilities	$	1,589		$	1,896

	Number of			Weighted Average		Number of			Weighted Average
	Shares			Award Price		Shares			Award Price
Unvested at December 31, 2019		112,846		$	1.44
Unvested at December 31, 2020							164,697		$	1.48
Granted		—			—		—			—
Vested		(56,425	)		1.44		(54,899	)		1.48
Forfeited		—			—		—			—
Unvested at March 31, 2020		56,421		$	1.44
Expected to vest after March 31, 2020		159,795		$	1.44
Unvested at March 31, 2021							109,798			1.48
Expected to vest after March 31, 2021							107,223			1.48

	Three Months Ended March 31, 2021
	Contract		Deferred
	Assets		Revenue
Revenue recognized that was included in deferred revenue at December 31, 2020	$	—	$	755,595
Transferred to receivables from contract assets outstanding at December 31, 2020		—		—

	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

	March 31, ~~2020~~2021
Stock options outstanding		~~1,939,778~~ 1,812,228
Restricted stock units and performance stock units outstanding		~~56,421~~ 609,798
Stock options and restricted stock units available for future grant		~~1,335,084~~ 1,209,825
Common stock reserved for future issuance		~~3,331,283~~ 3,631,851

	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

	March 31, 2021		December 31, 2020
PPP Loan, .98%, due April 2022:
Principal	$	1,572	$	1,572
Accrued interest		16		12
	$	1,588	$	1,584

PPP Loan payable:
Current portion	$	1,588		950
Long-term portion		—		634
	$	1,588	$	1,584

	BSQUARE CORPORATION (Registrant)

Date: May ~~11, 2020~~13, 2021	By:	/s/ Christopher Wheaton
		Christopher Wheaton
		Chief Financial and Operating Officer, Secretary and Treasurer ~~(Principal~~ (Principal Financial Officer and Duly Authorized Signatory)