Bsquare Corporation (NASDAQ:BSQR) is a leading provider of technologies for the makers and operators of connected devices, often referred to as the Internet of Things (IoT). The company has a rich history of helping embedded device manufacturers design and build cost-effective products, leveraging its expertise in hardware, device configuration, and operating systems. As the IoT market has evolved, Bsquare has shifted its focus to cloud-connected devices, offering a valuable and expanding portfolio of products and services that enable its customers to be more productive, flexible, and financially successful.

Business Overview

Bsquare's core business is divided into two reportable segments: Partner Solutions and Edge to Cloud. The Partner Solutions segment focuses on reselling Microsoft Windows Embedded and IoT operating system software to device makers, which has historically accounted for substantially all of the company's revenue. The Edge to Cloud segment, on the other hand, encompasses Bsquare's proprietary software and services that help customers capture the value of connected devices and reduce the cost and risk of doing so.

Financials

For the fiscal year ended December 31, 2022, Bsquare reported annual revenue of $36.5 million, a decrease of 16% compared to the prior year. The company's net income for the year was a loss of $3.0 million, and its operating cash flow and free cash flow were negative $3.7 million and $4.2 million, respectively.

In the first nine months of 2023, Bsquare's total revenue decreased by 16% to $24.0 million, compared to the same period in 2022. The Partner Solutions segment saw a 17% decline in revenue, while the Edge to Cloud segment experienced a 7% decrease. Gross profit for the nine-month period was $3.7 million, down 13% from the prior-year period.

Quarterly Performance

For the third quarter of 2023, Bsquare reported total revenue of $9.3 million, an 11% increase compared to the same quarter in 2022. This was driven by a 14% increase in Partner Solutions revenue, partially offset by a 22% decline in Edge to Cloud revenue. Gross profit for the quarter was $1.0 million, a 12% decrease from the prior-year period.

The company's operating expenses for the third quarter of 2023 increased by 11% to $2.5 million, primarily due to a non-cash impairment charge of $360,000 on a right-of-use asset and a $100,000 non-cash loss on the sale of furniture, fixtures, and leasehold improvements. Excluding these charges, operating expenses decreased by approximately $200,000, mainly due to labor and benefit savings resulting from a reduction in force in December 2022.

Liquidity and Capital Resources

As of September 30, 2023, Bsquare had $31.8 million in cash, cash equivalents, restricted cash, and short-term investments, a decrease of $3.8 million from December 31, 2022. The decrease was driven by a $2.1 million increase in accounts receivable and contract assets, as well as $540,000 in other working capital changes and $660,000 in share repurchases.

Despite the negative cash flows from operating activities in recent periods, the company believes its total liquidity position is more than sufficient to meet its cash requirements and maintain operations for the next 12 months and the longer term.

Geographic Breakdown

Bsquare's revenue is primarily generated in North America, which accounted for 91% of total revenue in the first nine months of 2023. Europe and Asia contributed 2% and 7% of revenue, respectively, during the same period.

Segment Performance

The Partner Solutions segment, which includes the resale of Microsoft operating systems, generated $21.7 million in revenue during the first nine months of 2023, a 17% decrease compared to the same period in 2022. The company believes this decline is due to increasing competition from Linux and Android operating systems in the embedded device market.

The Edge to Cloud segment, which focuses on Bsquare's proprietary software and services, reported revenue of $2.3 million in the first nine months of 2023, a 7% decrease from the prior-year period. The company's strategy in this segment is to focus on a small number of key customers, which may result in quarterly fluctuations in revenue.

Risks and Challenges

Bsquare faces several risks and challenges, including the increasing competition in the embedded device market, the company's reliance on a significant customer concentration, and the potential impact of changes to Microsoft's IoT Distributor Incentives Program. Additionally, the company's ability to successfully develop and market new products and services is critical to its long-term success.

Outlook

Bsquare has not provided any specific financial guidance for the remainder of 2023 or the upcoming fiscal year. However, the company has stated that it will continue to focus on expense discipline and seek to retain and attract customers with superior service, technical support, and a path to IoT operations.

Recent Developments

On October 11, 2023, Bsquare announced that it had entered into an Agreement and Plan of Merger with Kontron America, Incorporated, a global IoT company. Kontron has commenced a tender offer to acquire all of Bsquare's outstanding shares for $1.90 per share in an all-cash transaction, representing an implied equity value of approximately $38.1 million. The transaction is expected to close later in 2023, after which Bsquare will become a privately held company.

Conclusion

Bsquare Corporation is navigating the evolving IoT landscape with its expertise in hardware, device configuration, and operating systems. While the company has faced challenges in its Partner Solutions segment due to increased competition, it continues to focus on expense discipline and developing its Edge to Cloud offerings to better serve its customers. The pending acquisition by Kontron represents a significant milestone for Bsquare and its shareholders, as the company looks to leverage its strengths as part of a larger global IoT organization.