●

Revenue was $26.4 million, an 8% decrease compared to the second quarter of 2015 and an 8% increase over the third quarter of 2014.

●

Net income was $1.2 million, or $0.10 per share, compared to $1.9 million, or $0.15 per share, in the second quarter of 2015 and $0.7 million, or $0.06 per share, in the year-ago quarter.

●

Adjusted EBITDAS* was $2.0 million, a decrease of $341,000 from $2.3 million in the second quarter of 2015, and an increase of $872,000 compared to $1.1 million in the year-ago quarter.

●

Cash and investments at September 30, 2015 were $29.6 million, a decrease of $0.1 million from June 30, 2015.

Three Months Ended

9/30/2015

6/30/2015

9/30/2014

Revenue:

Third-party Software

$

20,790

$

23,316

$

19,217

Engineering Services

5,220

5,197

4,767

Proprietary Software

425

360

551

Total Revenue

26,435

28,873

24,535

Total Gross Profit

4,873

5,232

3,963

Gross Margins:

Third-party Software

15

%

15

%

14

%

Engineering Services

26

%

29

%

20

%

Proprietary Software

74

%

64

%

74

%

Total Gross Margin

18

%

18

%

16

%

Total Operating Expenses

3,486

3,361

3,240

Net Income

$

1,245

$

1,885

$

691

Per Share-Diluted

$

0.10

$

0.15

$

0.06

Adjusted EBITDAS*

$

1,977

$

2,318

$

1,105

Cash and Investments EoQ**

$

29,561

$

29,680

$

25,471

●

Revenue from third-party software was $20.8 million, a decrease of 11% from $23.3 million in the second quarter of 2015, due primarily to Microsoft June 30 fiscal year-end sales incentives which positively impacted second quarter revenue.

●

Engineering services revenue was essentially flat at $5.2 million, while engineering services margin decreased by three percentage points to 26%.  The margin decrease resulted from higher than planned labor hours required on a large project.

●

The decrease in cash and investments of $0.1 million was primarily due to an increase in accounts receivable and a decrease in third-party software fees payable, which reduced cash balances by more than the positive Adjusted EBITDAS contribution of $2.0 million. Days sales outstanding (DSO) increased to 54 days at September 30, 2015, from 47 days at June 30, 2015 and 49 days at December 31, 2014. The DSO increase is a result of extended payment terms granted to a Fortune 100 customer.

●

Revenue was $81.6 million, a 16% increase compared to $70.3 million for the year-ago period, driven primarily by increased software revenue.

●

Net income was $5.0 million or $0.40 per share, a $4.0 million increase compared to net income of $0.9 million or $0.08 per share in the first nine months of 2014. Increased software revenue, higher margins and lower operating costs all contributed to this improvement.

●

Adjusted EBITDAS* was $6.6 million, an increase of $4.2 million compared to $2.4 million in the year-ago period.

Nine Months Ended

9/30/2015

9/30/2014

Revenue:

Third-party Software

$

63,914

$

53,877

Engineering Services

14,894

14,690

Proprietary Software

2,765

1,754

Total Revenue

81,573

70,321

Total Gross Profit

15,554

11,763

Gross Margins:

Third-party Software

15

%

13

%

Engineering Services

24

%

23

%

Proprietary Software

87

%

72

%

Total Gross Margin

19

%

17

%

Total Operating Expenses

10,420

10,567

Net Income

$

4,953

$

949

Per Share-Diluted

$

0.40

$

0.08

Adjusted EBITDAS*

$

6,581

$

2,366

Cash and Investments EoQ**

$

29,561

$

25,471

●

Revenue from third-party software was $63.9 million, a 19% increase from $53.9 million recorded in the prior year period, due to increased customer demand.

●

Third-party software gross profit was $9.6 million, a $2.4 million or 33% increase from $7.2 million in the prior year period. The increase was due to the 19% revenue increase, improved operational efficiencies, product mix and customer mix, contributing to an increase in gross margin percentage from 13% in the nine months ended September 30, 2014 to 15% in the current year period.

●

Engineering services gross profit was $3.6 million, an increase of 9% from $3.3 million in the prior year period. The 2014 period marked the completion of a large hand-held terminal project in Japan resulting in the recognition of $478,000 of revenue and gross profit in the second quarter of 2014.

●

Proprietary software gross profit was $2.4 million, an increase of $1.1 million from $1.3 million in the prior year period. The increase was due to sales of our legacy software in the first quarter of 2015 that exceeded the historical trend combined with a relatively fixed cost of sales.

●

Operating expenses totaled $10.4 million, a decrease of $147,000 from $10.6 million in the prior year period. This decrease was primarily due to the operational efficiencies and reduction in overhead costs implemented in late 2013 that were fully realized in the second half of 2014.

●

Total revenue will be in the range of $23 to $26 million;

●

Gross margin for services will continue in the mid-20% range;

●

Bookings and initial revenue from DataV;

●

Continued GAAP profitability; and

●

Accounts receivable balance is expected to continue to increase into early 2016 as we have selectively provided extended payment terms to a highly credit-worthy customer beginning mid-year 2015. We believe this new arrangement will leverage our strong cash position to improve our third-party gross margins and profitability. Our accounts receivable balance and DSO metrics will therefore increase, with a commensurate decrease in cash and/or short-term investments balances.

September 30,

2015

December 31,

2014

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

13,385

$

13,127

Short-term investments

15,926

13,263

Accounts receivable, net of allowance for doubtful

   accounts of $36 at September 30, 2015

   and $125 at December 31, 2014

15,560

13,626

Deferred tax assets

10

10

Prepaid expenses and other current assets

514

717

Total current assets

45,395

40,743

Equipment, furniture and leasehold improvements, net

1,236

1,336

Restricted cash

250

250

Deferred tax assets

294

391

Intangible assets, net

628

729

Goodwill

3,738

3,738

Other non-current assets

52

54

Total assets

$

51,593

$

47,241

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Third-party software fees payable

$

10,184

$

12,247

Accounts payable

285

165

Accrued compensation

2,333

2,106

Other accrued expenses

1,320

1,539

Deferred rent, current portion

293

275

Deferred revenue

705

712

Total current liabilities

15,120

17,044

Deferred tax liability

141

144

Deferred rent

1,255

1,476

Shareholders’ equity:

Preferred stock, no par value: 10,000,000 shares

   authorized; no shares issued and outstanding

—

—

Common stock, no par value: 37,500,000 shares

   authorized; 12,012,358 shares issued and

   outstanding at September 30, 2015 and 11,767,577

   shares issued and outstanding at December 31,

   2014

132,601

131,071

Accumulated other comprehensive loss

(829

)

(846

)

Accumulated deficit

(96,695

)

(101,648

)

Total shareholders’ equity

35,077

28,577

Total liabilities and shareholders’ equity

$

51,593

$

47,241

Three Months Ended

September 30,

Nine Months Ended

September 30,

2015

2014

2015

2014

Revenue:

Software

$

21,215

$

19,768

$

66,679

$

55,631

Service

5,220

4,767

14,894

14,690

Total revenue

26,435

24,535

81,573

70,321

Cost of revenue:

Software

17,698

16,760

54,732

47,189

Service

3,864

3,812

11,287

11,369

Total cost of revenue

21,562

20,572

66,019

58,558

Gross profit

4,873

3,963

15,554

11,763

Operating expenses:

Selling, general and administrative

3,174

2,880

9,120

9,352

Research and development

312

360

1,300

1,215

Total operating expenses

3,486

3,240

10,420

10,567

Income from operations

1,387

723

5,134

1,196

Other income (expense), net

32

(16

)

124

(118

)

Income before income taxes

1,419

707

5,258

1,078

Income tax expense

(174

)

(16

)

(305

)

(129

)

Net income

$

1,245

$

691

$

4,953

$

949

Basic income per share

$

0.10

$

0.06

$

0.42

$

0.08

Diluted income per share

$

0.10

$

0.06

$

0.40

$

0.08

Shares used in calculation of income per share:

Basic

11,959

11,655

11,867

11,520

Diluted

12,466

11,832

12,294

11,732

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

Adjusted EBITDAS:

Operating income as reported

$

1,387

$

723

$

5,134

$

1,196

Depreciation and amortization

137

154

425

479

Stock-based compensation expense

453

228

1,022

691

Adjusted EBITDAS (1)

$

1,977

$

1,105

$

6,581

$

2,366

(1)

Adjusted EBITDAS is a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. Adjusted EBITDAS is defined as operating income (loss) before depreciation expense on fixed assets and amortization expense (including impairment) on intangible assets, and stock-based compensation expense. Adjusted EBITDAS should not be construed as a substitute for net income (loss) or net cash provided by (used in) operating activities (all as determined in accordance with GAAP) for the purpose of analyzing our operating performance, financial position and cash flows, as Adjusted EBITDAS is not defined by GAAP. However, BSQUARE regards Adjusted EBITDAS as a complement to net income and other GAAP financial performance measures, including an indirect measure of operating cash flow.