•

Revenue for the quarter was $19.5 million, down 27% compared to the fourth quarter of 2016 and down 1% compared to the third quarter of 2017.

•

Net loss for the quarter was $4.2 million, or $(0.33) per diluted share, compared to net loss of $1.3 million, or $(0.10) per diluted share, in the fourth quarter of 2016 and net loss of $2.5 million, or $(0.20) per diluted share, in the third quarter of 2017.

•

Adjusted EBITDAS⁽¹⁾ for the quarter was negative $3.7 million, down $2.9 million from the fourth quarter of 2016 and down $1.9 million from the third quarter of 2017.

•

Cash, cash equivalents and short-term investments totaled $24.8 million at December 31, 2017, a decrease of approximately $8.4 million from December 31, 2016 and a decrease of $2.0 million from September 30, 2017.

Three Months Ended

December 31, 2017

December 31, 2016

Q4-Q4 Change ⁽²⁾

September 30, 2017

Q4-Q3 Change ⁽²⁾

Revenue:

Third-party software

$

17,213

$

23,751

$

(6,538

)

$

16,240

$

973

Proprietary software

311

301

10

1,200

(889

)

Professional engineering service

1,945

2,745

(800

)

2,213

(268

)

Total revenue

$

19,469

$

26,797

$

(7,328

)

$

19,653

$

(184

)

Total gross profit

$

3,616

$

3,954

(338

)

$

4,380

$

(764

)

Gross margins:

Third-party software

17

%

15

%

2

%

16

%

1

%

Proprietary software

81

%

82

%

(1

)%

97

%

(16

)%

Professional engineering service

26

%

7

%

19

%

27

%

(1

)%

Total gross margin

19

%

15

%

4

%

22

%

(3

)%

Total operating expenses

$

7,913

$

5,261

$

2,652

$

6,926

$

987

Net loss

$

(4,232

)

$

(1,261

)

$

(2,971

)

$

(2,468

)

$

(1,764

)

Per diluted share

$

(0.33

)

$

(0.10

)

$

(0.23

)

$

(0.20

)

$

(0.13

)

Adjusted EBITDAS ⁽¹⁾

$

(3,739

)

$

(812

)

$

(2,927

)

$

(1,843

)

$

(1,896

)

Cash, cash equivalents and short-term investments

$

24,754

$

33,200

$

(8,446

)

$

26,758

$

(2,004

)

⁽¹⁾

Adjusted EBITDAS = Operating loss before depreciation, amortization and stock compensation expense. Adjusted EBITDAS is a non-GAAP measurement (reconciliation provided after financial statement tables).

⁽²⁾

For gross margin, amount represents percentage point change.

•

Third-party software revenue decreased for the fourth quarter of 2017 compared to the prior year period, primarily due to lower sales of Microsoft Windows Embedded operating systems in the current period. The 2016 period benefitted from customer purchases made in advance of anticipated 2017 price increases by Microsoft.

•

Proprietary software revenue was relatively stable compared to the prior year period. Approximately half of the revenue from proprietary software in the current period was related to DataV, while nearly all of the proprietary software revenue in the prior year period resulted from legacy software sales.

•

Professional engineering service revenue decreased, primarily due to the completion of several legacy customer projects and a shift in our sales generation and staffing priorities towards DataV. Professional engineering service gross margin increased, primarily due to higher utilization of professional engineering personnel in the current period.

•

Operating expenses increased, due to continued investment in DataV sales, marketing and product development.

•

Revenue was $80.8 million, down 17% compared to the prior year.

•

Net loss was $9.1 million, or $(0.72) per diluted share, compared to net loss of $1.1 million, or $(0.09) per diluted share, in the prior year.

•

Adjusted EBITDAS⁽¹⁾ was negative $7.0 million, down $7.7 million from the prior year.

Year Ended

December 31, 2017

December 31, 2016

Change ⁽²⁾

Revenue:

Third-party software

$

65,755

$

80,231

$

(14,476

)

Proprietary software

4,646

1,939

2,707

Professional engineering service

10,410

15,271

(4,861

)

Total revenue

$

80,811

$

97,441

$

(16,630

)

Total gross profit

$

18,122

$

15,820

2,302

Gross margins:

Third-party software

16

%

15

%

1

%

Proprietary software

96

%

83

%

13

%

Professional engineering service

29

%

12

%

17

%

Total gross margin

22

%

16

%

6

%

Total operating expenses

$

27,543

$

16,978

$

10,565

Net loss

$

(9,058

)

$

(1,052

)

$

(8,006

)

Per diluted share

$

(0.72

)

$

(0.09

)

$

(0.63

)

Adjusted EBITDAS ⁽¹⁾

$

(7,030

)

$

687

$

(7,717

)

⁽¹⁾

Adjusted EBITDAS = Operating loss before depreciation, amortization and stock compensation expense. Adjusted EBITDAS is a non-GAAP measurement (reconciliation provided after financial statement tables).

⁽²⁾

For gross margin, amount represents percentage point change.

•

We recorded approximately $3.2 million in DataV bookings in the fourth quarter of 2017, and approximately $4.0 million for the full year. Each amount includes our $2.9 million renewal from Itron. DataV bookings is a non-GAAP measure defined as the contract value of new agreements signed with customers.

•

Cash receipts from DataV contracts totaled $3.2 million during 2017.

•

DataV backlog (a non-GAAP measure defined as total DataV bookings less total DataV revenue recognized to date) was approximately $6.5 million at December 31, 2017, compared to approximately $5.7 million at December 31, 2016.

•

Total deferred revenue at December 31, 2017 was $3.3 million, compared to $3.9 million at December 31, 2016. The balance at December 31, 2017 included DataV deferred revenue of approximately $2.8 million. The deferred revenue balance relating to our DataV sales does not represent the total contract value of our DataV agreements.

•

DataV unbilled deferred revenue (a non-GAAP measure defined as future contract billings that have not been invoiced and, accordingly, are not included in deferred revenue) was an additional $3.7 million at December 31, 2017 and approximately $2.5 million at December 31, 2016.

•

Revenue in the range of $17.5 million to $19.0 million, with some potential upside in revenue from our Itron contract;

•

During the current quarter we entered into a DataV services contract that we believe will lead to a significant multi-year SaaS engagement for DataV, which we expect to sign in late first quarter or early second quarter 2018;

•

We expect to sign additional pilots in the quarter;

•

Blended gross margin will be in the 17% to 19% range, with some potential upside in margin from our Itron contract; and

•

A net loss, reflecting continued investments in R&D, sales and marketing to grow DataV.

December 31,

2017

2016

ASSETS

Current assets:

Cash and cash equivalents

$

12,859

$

14,312

Short-term investments

11,895

18,888

Accounts receivable, net of allowance for doubtful accounts of $50 at December 31, 2017 and $50 at December 31, 2016

18,014

21,579

Prepaid expenses and other current assets

548

878

Contract assets

937

—

Total current assets

44,253

55,657

Equipment, furniture and leasehold improvements, net

989

1,089

Deferred tax assets

—

7

Intangible assets, net

365

464

Goodwill

3,738

3,738

Other non-current assets including contract assets

89

53

Total assets

$

49,434

$

61,008

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Third-party software fees payable

$

10,547

$

14,831

Accounts payable

375

283

Accrued compensation

2,266

2,008

Other accrued expenses

681

714

Deferred rent, current portion

339

321

Deferred revenue

3,219

2,064

Total current liabilities

17,427

20,221

Deferred tax liability

—

23

Deferred rent

516

854

Deferred revenue

61

1,798

Commitments and contingencies

Shareholders' equity:

Preferred stock, no par: 10,000,000 shares authorized; no shares issued and outstanding

—

—

Common stock, no par: 37,500,000 shares authorized; 12,664,489 issued and outstanding at December 31, 2017 and 12,532,348 issued and outstanding at December 31, 2016

137,622

135,660

Accumulated other comprehensive loss

(916

)

(941

)

Accumulated deficit

(105,276

)

(96,607

)

Total shareholders' equity

31,430

38,112

Total liabilities and shareholders' equity

$

49,434

$

61,008

Three Months Ended December 31,

Year Ended December 31,

2017

2016

2017

2016

Revenue:

Third-party software

$

17,213

$

23,751

$

65,755

$

80,231

Proprietary software

311

301

4,646

1,939

Professional engineering service

1,945

2,745

10,410

15,271

Total revenue

19,469

26,797

80,811

97,441

Cost of revenue:

Third-party software

14,357

20,228

55,161

67,853

Proprietary software

58

53

163

329

Professional engineering service

1,438

2,562

7,365

13,439

Total cost of revenue

15,853

22,843

62,689

81,621

Gross profit

3,616

3,954

18,122

15,820

Operating expenses:

Selling, general and administrative

5,733

4,426

20,982

14,119

Research and development

2,180

835

6,561

2,859

Total operating expenses

7,913

5,261

27,543

16,978

Loss from operations

(4,297

)

(1,307

)

(9,421

)

(1,158

)

Other income, net

66

43

214

247

Loss before income taxes

(4,231

)

(1,264

)

(9,207

)

(911

)

Income tax benefit (expense)

(1

)

3

149

(141

)

Net loss

$

(4,232

)

$

(1,261

)

$

(9,058

)

$

(1,052

)

Basic loss per share

$

(0.33

)

$

(0.10

)

$

(0.72

)

$

(0.09

)

Diluted loss per share

$

(0.33

)

$

(0.10

)

$

(0.72

)

$

(0.09

)

Shares used in per share calculations:

Basic

12,640

12,473

12,594

12,260

Diluted

12,640

12,473

12,594

12,260

BSQUARE CORPORATION

NON-GAAP INFORMATION AND RECONCILIATION TO COMPARABLE GAAP FINANCIAL MEASURES

(In thousands) (unaudited)

Three Months Ended December 31,

Year Ended December 31,

2017

2016

2017

2016

Loss from operations as reported

$

(4,297

)

$

(1,307

)

$

(9,421

)

$

(1,158

)

Depreciation and amortization

151

156

634

598

Stock-based compensation

407

339

1,757

1,247

Adjusted EBITDAS ⁽¹⁾

$

(3,739

)

$

(812

)

$

(7,030

)

$

687

⁽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 income (loss) from operations 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 (used) by 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.