BSQUARE CORP /WA - 10-Q Quarterly Report

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 September 30, 2003


[ ]		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.)

3150 139th Avenue SE, Suite 500, Bellevue WA		98005
(Address of principal executive offices)		(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 [ ].

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of October 31, 2003, there were 37,457,164 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
INDEX TO EXHIBITS
EXHIBIT 10.18
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2003

TABLE OF CONTENTS


		Page

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 6.	Exhibits and Reports on Form 8-K	31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)


			September 30,			December 31,
			2003			2002

ASSETS
Current assets:
	Cash and cash equivalents		$	8,962		$	11,041
	Restricted cash			2,000			2,582
	Short-term investments			7,730			18,444
	Accounts receivable, net			6,512			6,494
	Income taxes receivable			155			2,934
	Prepaid expenses and other current assets			1,075			1,966
	Deferred income taxes			28			28

		Total current assets		26,462			43,489
Furniture, equipment and leasehold improvements, net				2,064			3,124
Restricted cash				4,192			3,358
Investments				—			210
Intangible assets, net				412			850
Deposits and other assets				730			2,566

		Total assets	$	33,860		$	53,597

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,976		$	1,942
	Accrued compensation			1,107			3,079
	Restructuring costs, current portion			2,126			5,659
	Other accrued expenses			2,962			3,204
	Deferred income taxes			28			28
	Deferred revenue			1,960			1,620

		Total current liabilities		10,159			15,532
Restructuring costs, net of current portion				556			5,431

		Total liabilities		10,715			20,963

Commitments and contingencies
Shareholders’ equity:
	Preferred stock, no par value: authorized 10,000,000 shares; no shares issued and outstanding			—			—
	Common stock, no par value: authorized 150,000,000 shares, issued and outstanding, 37,451,988 shares as of September 30, 2003 and 36,968,128 shares as of December 31, 2002			117,844			117,149
	Deferred stock-based compensation			—			(15	)
	Accumulated other comprehensive loss			(213	)		(325	)
	Accumulated deficit			(94,486	)		(84,175	)

		Total shareholders’ equity		23,145			32,634

		Total liabilities and shareholders’ equity	$	33,860		$	53,597

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)


				Three Months						Nine Months
				Ended September 30,						Ended September 30,

				2003			2002			2003			2002

Revenue:
	Product			$	7,101		$	5,594		$	19,570		$	12,662
	Service				2,307			4,412			7,287			15,560

		Total revenue			9,408			10,006			26,857			28,222

Cost of revenue:
	Product				5,002			4,482			14,566			8,702
	Service				2,441			4,556			7,317			13,491

		Total cost of revenue			7,443			9,038			21,883			22,193

			Gross profit		1,965			968			4,974			6,029
Operating expenses:
	Research and development				2,156			3,636			7,387			12,790
	Selling, general and administrative				2,967			5,043			10,326			14,969
	Acquired in-process research and development				—			—			—			1,698
	Amortization of intangible assets				146			133			438			1,242
	Impairment of goodwill and other intangible assets				—			6,472			435			6,472
	Restructuring and other related charges (credit)				360			9,885			(2,416	)		12,090

			Total operating expenses		5,629			25,169			16,170			49,261

			Loss from operations		(3,664	)		(24,201	)		(11,196	)		(43,232	)
Other income (expense), net:
	Investment income, net				144			298			450			1,233
	Other income (expense), net				591			(1,644	)		504			(3,403	)

Loss before income taxes and cumulative effect of change in accounting principle					(2,929	)		(25,547	)		(10,242	)		(45,402	)
Provision for income taxes					(40	)		—			(69	)		(2,124	)

Loss before cumulative effect of change in accounting principle					(2,969	)		(25,547	)		(10,311	)		(47,526	)
Cumulative effect of change in accounting principle					—			—			—			(14,932	)

		Net loss		$	(2,969	)	$	(25,547	)	$	(10,311	)	$	(62,458	)

	Basic and diluted loss per share:
		Loss before cumulative effect of change in accounting principle		$	(0.08	)	$	(0.69	)	$	(0.28	)	$	(1.31	)
		Cumulative effect of change in accounting principle			—			—			—			(0.41	)

			Basic and diluted loss per share	$	(0.08	)	$	(0.69	)	$	(0.28	)	$	(1.72	)

	Shares used in calculation of loss per share:
		Basic and diluted			37,323			36,783			37,179			36,245

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


					Nine Months Ended
					September 30,

					2003			2002

Cash flows from operating activities:
	Net loss				$	(10,311	)	$	(62,458	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				1,511			3,085
		Deferred income taxes				—			5,792
		Write down of investments				78			3,446
		Gain on sale of investments				(627	)		—
		Acquired in-process research and development				—			1,698
		Cumulative effect of change in accounting principle				—			14,932
		Restructuring and other related charges (credit)				(2,416	)		12,090
		Impairment of goodwill				435			6,472
		Issuance of common stock warrants				332			—
		Other				114			33
		Changes in operating assets and liabilities, net of effects of acquisition:
			Restricted cash			(552	)		(5,940	)
			Income taxes receivable			2,779			—
			Accounts receivable, net			(18	)		2,284
			Prepaid expenses and other current assets			891			(1,498	)
			Deposits and other assets			1,836			(291	)
			Accounts payable, restructuring costs, accrued compensation and other accrued expenses			(8,172	)		(5,580	)
			Deferred revenue			340			(1,255	)

				Net cash used in operating activities		(13,780	)		(27,190	)

Cash flows from investing activities:
	Purchases of furniture, equipment and leasehold improvements					(116	)		(1,856	)
	Maturity of short-term investments					10,714			9,873
	Proceeds from the sale of investments					759			—
	Purchase of Infogation Corporation, net of cash acquired					—			(3,893	)
	Purchase of customer list					—			(75	)

				Net cash provided by investing activities		11,357			4,049

Cash flows from financing activities:
	Proceeds from exercise of stock options					232			1,095

				Net cash provided by financing activities		232			1,095

Effect of exchange rate changes on cash						112			78

				Net decrease in cash and cash equivalents		(2,079	)		(21,968	)
Cash and cash equivalents, beginning of period						11,041			30,303

Cash and cash equivalents, end of period					$	8,962		$	8,335

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited 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 for interim financial reporting and include the accounts of the Company and its subsidiaries. Certain information and footnote disclosures normally included in annual 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, in conformity with U.S. generally accepted accounting principles, of the Company’s financial position at September 30, 2003 and its operating results and cash flows for the three and nine months ended September 30, 2003 and 2002. The accompanying consolidated balance sheet as of December 31, 2002 has been derived from the audited financial statements included in the Company’s annual report on Form 10-K for the year then ended. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provision for bad debts, valuation of long-lived assets and deferred revenue. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q 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, 2002 filed with the Securities and Exchange Commission. Certain reclassifications have been made for consistent presentation.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for employee stock options rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense related to the Company’s employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123, amended by SFAS No. 148 “Accounting for Stock-Based-Compensation - Transition and Disclosure,” requires companies that continue to follow APB No. 25 to provide pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. The Company recognizes compensation expense for options granted to non-employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force consensus Issue 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” which require using the Black-Scholes option pricing model and re-measuring such stock options to the current fair market value as the underlying options vest.

Deferred stock-based compensation consists of amounts recorded when the exercise price of an option is lower than the subsequently determined fair value of the underlying common stock on the date of grant. Deferred stock-based compensation is amortized in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 28, on an accelerated basis, over the vesting period of the underlying option.

Pro forma information regarding net loss is required by SFAS No. 123 and SFAS No. 148 as if the Company had accounted for its employee stock options under the fair value method. The fair value of the Company’s options was estimated on the date of grant using the Black-Scholes method, with the following assumptions:


	Three Months Ended
	September 30,

	2003			2002

Dividend yield		0	%		0	%
Expected life	4 years			5 years
Expected volatility		170	%		180	%
Risk-free interest rate		2.7	%		2.8	%

Because the determination of the fair value of the Company’s options is based on assumptions described above, and because additional option grants are expected to be made in future periods, this pro forma information is not likely to be representative of the pro forma effects on reported net income or loss for future periods.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The following table illustrates what net loss would have been had the Company accounted for its stock options under the provisions of SFAS 123 (in thousands, except per share data):


	Three Months						Nine months
	Ended September 30,						Ended September 30,

	2003			2002			2003			2002

	(unaudited)
Net loss, as reported	$	(2,969	)	$	(25,547	)	$	(10,311	)	$	(62,458	)
Compensation expense recognized under APB 25		7			38			15			98
Incremental pro forma compensation expense under SFAS 123		(397	)		(316	)		(112	)		(2,008	)

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