UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to ____________ .
Commission File Number: 000-27687
BSQUARE CORPORATION
(Exact name of registrant as specified in its charter)
| Washington (State or other jurisdiction of incorporation or organization) |
91-1650880 (I.R.S. Employer Identification No.) |
|
| 3150 139th Avenue SE, Suite 500, Bellevue WA (Address of principal executive offices) |
98005 (Zip Code) |
(425) 519-5900
(Registrant’s telephone number, including area code)
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 X No .
As of August 1, 2002, there were 36,886,414 shares of the registrant’s common stock outstanding.
BSQUARE CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2002
TABLE OF CONTENTS
| Page | ||||||||
| PART I. | FINANCIAL INFORMATION |
|||||||
| Item 1. | Condensed Consolidated Financial Statements |
3 | ||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
13 | ||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
32 | ||||||
| PART II. | OTHER INFORMATION |
|||||||
| Item 1. | Legal Proceedings |
34 | ||||||
| Item 4. | Submission of Matters to a Vote of Security Holders |
34 | ||||||
| Item 6. | Exhibits and Reports on Form 8-K |
34 | ||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
| (unaudited) | |||||||||||
ASSETS |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 25,894 | $ | 30,303 | |||||||
Short-term investments |
27,628 | 39,408 | |||||||||
Accounts receivable, net |
7,986 | 8,833 | |||||||||
Income tax receivable |
2,455 | 1,469 | |||||||||
Deferred income tax asset |
— | 5,792 | |||||||||
Prepaid expenses and other current assets |
3,551 | 2,840 | |||||||||
Total current assets |
67,514 | 88,645 | |||||||||
Furniture, equipment and leasehold improvements, net |
6,948 | 6,509 | |||||||||
Investments |
1,874 | 2,319 | |||||||||
Intangible assets, net |
22,581 | 17,569 | |||||||||
Deposits and other assets |
882 | 624 | |||||||||
Total assets |
$ | 99,799 | $ | 115,666 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 1,683 | $ | 435 | |||||||
Accrued compensation |
3,374 | 3,570 | |||||||||
Accrued restructuring costs |
4,390 | 4,534 | |||||||||
Accrued expenses |
4,161 | 4,291 | |||||||||
Deferred income taxes |
— | 1,071 | |||||||||
Deferred revenue |
2,111 | 2,944 | |||||||||
Total current liabilities |
15,719 | 16,845 | |||||||||
Shareholders’ equity: |
|||||||||||
Preferred stock, no par value: authorized 10,000,000 shares;
no shares issued and outstanding |
— | — | |||||||||
Common stock, no par value: authorized 50,000,000 shares;
36,718,377 shares issued and outstanding as of June 30, 2002;
and 34,875,585 shares issued and outstanding as of December
31, 2001 |
117,266 | 111,459 | |||||||||
Deferred stock compensation |
(229 | ) | (121 | ) | |||||||
Cumulative foreign currency translation adjustment |
(361 | ) | (513 | ) | |||||||
Accumulated other comprehensive loss, net of tax |
— | (1,367 | ) | ||||||||
Accumulated deficit |
(32,596 | ) | (10,637 | ) | |||||||
Total shareholders’ equity |
84,080 | 98,821 | |||||||||
Total liabilities and shareholders’ equity |
$ | 99,799 | $ | 115,666 | |||||||
See notes to condensed consolidated financial statements.
3
BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
| Three Months | Six Months | |||||||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||||
| (unaudited) | ||||||||||||||||||||
Revenue: |
||||||||||||||||||||
Service |
$ | 5,141 | $ | 15,901 | $ | 11,148 | $ | 32,434 | ||||||||||||
Product |
4,379 | 2,318 | 7,068 | 4,413 | ||||||||||||||||
Total revenue |
9,520 | 18,219 | 18,216 | 36,847 | ||||||||||||||||
Cost of revenue: |
||||||||||||||||||||
Service |
4,551 | 8,417 | 8,935 | 16,631 | ||||||||||||||||
Product |
3,169 | 415 | 4,220 | 816 | ||||||||||||||||
Total cost of revenue |
7,720 | 8,832 | 13,155 | 17,447 | ||||||||||||||||
Gross profit |
1,800 | 9,387 | 5,061 | 19,400 | ||||||||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
5,012 | 2,696 | 9,154 | 5,741 | ||||||||||||||||
Selling, general and administrative |
5,309 | 5,434 | 9,866 | 10,081 | ||||||||||||||||
Acquired in-process research and development |
— | — | 1,698 | — | ||||||||||||||||
Amortization of intangible assets |
688 | 1,415 | 1,109 | 2,770 | ||||||||||||||||
Restructuring charge |
— | — | 2,205 | — | ||||||||||||||||
Stock compensation |
23 | 48 | 60 | 117 | ||||||||||||||||
Total operating expenses |
11,032 | 9,593 | 24,092 | 18,709 | ||||||||||||||||
Income (loss) from operations |
(9,232 | ) | (206 | ) | (19,031 | ) | 691 | |||||||||||||
Other income (expense), net: |
||||||||||||||||||||
Investment income, net |
400 | 798 | 935 | 1,362 | ||||||||||||||||
Other income (expense), net |
(1,759 | ) | — | (1,759 | ) | — | ||||||||||||||
Income (loss) before income taxes |
(10,591 | ) | 592 | (19,855 | ) | 2,053 | ||||||||||||||
Provision for income taxes |
2,153 | 131 | 2,124 | 762 | ||||||||||||||||
Net income (loss) |
$ | (12,744 | ) | $ | 461 | $ | (21,979 | ) | $ | 1,291 | ||||||||||
Basic earnings (loss) per share |
$ | (0.35 | ) | $ | 0.01 | $ | (0.61 | ) | $ | 0.04 | ||||||||||
Weighted average shares outstanding used to
compute basic earnings (loss) per share |
36,572 | 34,190 | 35,972 | 34,097 | ||||||||||||||||
Diluted earnings (loss) per share |
$ | (0.35 | ) | $ | 0.01 | $ | (0.61 | ) | $ | 0.04 | ||||||||||
Weighted average shares outstanding used to
compute diluted earnings (loss)
per share |
36,572 | 35,615 | 35,972 | 35,523 | ||||||||||||||||
See notes to condensed consolidated financial statements.
4
BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2002 | 2001 | |||||||||||
| (unaudited) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net (loss) income |
$ | (21,979 | ) | $ | 1,291 | |||||||
Adjustments to reconcile net income to net cash provided (used) by
operating activities: |
||||||||||||
Depreciation and amortization |
2,598 | 4,214 | ||||||||||
Deferred income taxes |
(1,363 | ) | (701 | ) | ||||||||
Amortization of deferred stock option compensation |
60 | 117 | ||||||||||
Write down of cost basis investments |
1,810 | — | ||||||||||
Acquired in-process research and development |
1,698 | — | ||||||||||
Restructuring charge |
2,205 | — | ||||||||||
Other |
— | 308 | ||||||||||
Changes in operating assets and liabilities, net of
effects from acquisitions: |
||||||||||||
Accounts receivable |
979 | 1,052 | ||||||||||
Prepaid expenses and other current assets |
(585 | ) | (56 | ) | ||||||||
Deposits and other assets |
(26 | ) | 191 | |||||||||
Accounts payable and accrued expenses |
3,763 | 331 | ||||||||||
Deferred revenue |
(987 | ) | (199 | ) | ||||||||
Net cash provided by (used in) operating activities |
(11,827 | ) | 6,548 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of furniture, equipment and leasehold improvements |
(1,641 | ) | (3,472 | ) | ||||||||
Maturity (purchase) of short-term investments, net |
11,780 | (14,499 | ) | |||||||||
Purchase of Infogation Corporation, net of cash acquired |
(3,893 | ) | — | |||||||||
Acquisition of a business |
— | (2,183 | ) | |||||||||
Net cash provided by (used in) investing activities |
6,246 | (20,154 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||
Payments on long-term obligations |
— | (350 | ) | |||||||||
Proceeds from exercise of stock options and warrants |
1,059 | 1,244 | ||||||||||
Net cash provided by (used in) financing activities |
1,059 | 894 | ||||||||||
Effect of exchange rate changes on cash |
113 | (537 | ) | |||||||||
Net decrease in cash and cash equivalents |
(4,409 | ) | (13,249 | ) | ||||||||
Cash and cash equivalents, beginning of period |
30,303 | 39,566 | ||||||||||
Cash and cash equivalents, end of period |
$ | 25,894 | $ | 26,317 | ||||||||
See notes to condensed consolidated financial statements.
5
BSQUARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
1. Basis of Presentation.
The condensed consolidated financial statements have been prepared by BSQUARE Corporation (the “Company” or “BSQUARE”) pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of the Company and its subsidiaries. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position at June 30, 2002 and its operating results and cash flows for the three and six months ended June 30, 2002 and 2001. These financial statements and the notes should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2001 (File No. 000-27687) filed with the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year.
2. Consolidation of Excess Facilities and Restructuring Charge.
Due to economic and research and development expenditure issues surrounding the smart device market, as well as a decrease in the service levels that BSQUARE provides to Microsoft, the Company announced a facility and workforce reduction plan in July 2001. In connection with this plan, the Company recorded a restructuring charge of $6.7 million relating to consolidation of excess facilities and other restructuring charges during the third quarter of 2001, which included $5.4 million for excess facilities primarily relating to noncancelable leases, approximately $1.1 million for property and equipment that were disposed of or removed from operations, and $227,000 for severance and other costs associated with a reduction of workforce that occurred on July 17, 2001.
Due to further deterioration in the U.S and international business climate, continued decline in the service levels that the Company provides to Microsoft, as well as a decline in the demand for OEM professional services, on January 8, 2002 BSQUARE announced a 20% reduction of workforce as well as the closure of its professional engineering services facility in Eden Prairie, Minnesota. In connection with this reduction in force, the Company recorded a restructuring charge of $2.2 million during the first quarter of 2002, which included approximately $1.1 million for severance and other benefits paid by the Company, approximately $947,000 for excess facilities primarily relating to noncancelable leases, and approximately $160,000 of property and equipment that were disposed of or removed from operations.
A summary of the restructuring costs and other restructuring charges is outlined as follows:
| Restructuring | First Quarter | Non-Cash | Restructuring | ||||||||||||||||||
| Liability at | Restructuring | Charges and | Cash | Liability at June | |||||||||||||||||
| (in thousands) | December 31, 2001 | Charge | Adjustments | Payments | 30, 2002 | ||||||||||||||||
Consolidation of excess facilities |
$ | 4,524 | $ | 1,067 | $ | 401 | $ | (1,612 | ) | $ | 4,380 | ||||||||||
Workforce reduction and other
costs |
10 | 1,138 | — | (1,138 | ) | 10 | |||||||||||||||
Total |
$ | 4,534 | $ | 2,205 | $ | 401 | $ | (2,750 | ) | $ | 4,390 | ||||||||||
6
Included in the charge recorded during the first quarter of 2002 was $401,000 due to the re-valuation of assumptions from the third quarter of 2001 related to subleasing of excess facilities. The net lease expense due to the excess capacity of the Company’s facilities will be paid over the respective lease terms through fiscal 2006. The Company continues to market its excess space for sublease.
On July 17, 2002 the Company announced a planned 30% reduction of workforce to further reduce expenses. These reductions will result in the curtailment of certain research and development initiatives and reductions in each of its sales, general and administrative departments. The Company expects these actions will result in an overall reduction in company-wide headcount by 120 people by October 31, 2002 and will require impairment analysis of certain company assets. A restructuring charge related to these actions will be taken in the third quarter of 2002.
3. Acquisitions.
On March 13, 2002, the Company acquired Infogation Corporation in a purchase transaction valued at approximately $8.7 million. Infogation Corporation, located in San Diego, California, is dedicated to the development of on-board and handheld vehicle navigation systems. Total consideration included the issuance of approximately 1.2 million shares of BSQUARE common stock valued at $3.55 per share, the market price on the date of closing, and approximately $3.9 million in cash. The Company assumed Infogation’s outstanding vested and unvested employee stock options, which were converted into options to acquire approximately 200,000 shares of the Company’s common stock. The fair value of these vested and unvested options has been included in the purchase price and recorded as deferred stock compensation. In addition, $300,000 of cash and 129,762 shares of common stock are being held in escrow subject to the terms and conditions of the merger agreement. The agreement also contains provision for the payment of up to $3.0 million of additional consideration in cash and/or common stock based upon the attainment of certain revenue targets, as defined in the merger agreement. The cash held in escrow is included in cash and cash equivalents at June 30, 2002.
A summary of the purchase price paid in connection with the acquisition is as follows: