•

Revenue for the quarter was $19.7 million, down 13% compared to the third quarter of 2016 and up 4% compared to the second quarter of 2017.

•

Net loss for the quarter was $2.5 million, or $0.20 per diluted share, compared to net loss of $0.1 million, or $0.01 per diluted share, in the third quarter of 2016 and net loss of $2.6 million, or $0.20 per diluted share, in the second quarter of 2017.

•

Adjusted EBITDAS ⁽¹⁾ was negative $1.8 million, down $1.8 million from the third quarter of 2016 and improved by $0.2 million from the second quarter of 2017.

•

Cash, cash equivalents and short-term investments at September 30, 2017 totaled $26.8 million, a decrease of approximately $4.8 million from September 30, 2016 and $0.5 million from June 30, 2017.

Three Months Ended

Q3-Q3

Q3-Q2

9/30/2017

9/30/2016

Change ⁽²⁾

6/30/2017

Change ⁽²⁾

Revenue:

Third-party Software

$

16,240

$

18,226

$

(1,986

)

$

15,505

$

735

Proprietary Software

1,200

990

210

481

719

Professional Engineering Service

2,213

3,251

(1,038

)

2,862

(649

)

Total Revenue

$

19,653

$

22,467

$

(2,814

)

$

18,848

$

805

Total Gross Profit

$

4,380

$

3,677

$

703

$

3,873

$

507

Gross Margins:

Third-party Software

16

%

16

%

0

%

15

%

1

%

Proprietary Software

97

%

96

%

1

%

92

%

5

%

Professional Engineering Service

27

%

(8

)

%

35

%

36

%

(9

)

%

Total Gross Margin

22

%

16

%

6

%

21

%

1

%

Total Operating Expenses

$

6,926

$

4,092

$

2,834

$

6,492

$

434

Net Loss

$

(2,468

)

$

(106

)

$

(2,362

)

$

(2,560

)

$

92

Per Share-Diluted

$

(0.20

)

$

(0.01

)

$

(0.19

)

$

(0.20

)

$

-

Adjusted EBITDAS ⁽¹⁾

$

(1,843

)

$

4

$

(1,847

)

$

(2,041

)

$

198

Cash, Cash Equivalents and Short-Term Investments

$

26,758

$

31,577

$

(4,819

)

$

27,296

$

(538

)

⁽¹⁾

Adjusted EBITDAS = Income (loss) from operations 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 third quarter of 2017 compared to the prior year period, primarily due to lower sales of Microsoft Windows Embedded operating systems in the current period.

•

Proprietary software revenue increased, primarily due to DataV software revenue recognized in the current period.

•

Professional engineering service revenue decreased, primarily due to the completion in 2016 and early 2017 of several existing 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. In addition, the third quarter of 2016 included restructuring costs (completed in the fourth quarter of 2016).

•

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

•

During the third quarter of 2017, we recorded $318,000 in DataV bookings (a non-GAAP measure defined as the contract value of new agreements signed with customers), including seven new paid pilots. Cash receipts from DataV contracts totaled $2.1 million in the first nine months of 2017.

•

DataV backlog (a non-GAAP measure defined as total DataV bookings less DataV revenue recognized to date) was $3.5 million at September 30, 2017, compared to approximately $5.7 million at December 31, 2016.

•

Total deferred revenue at September 30, 2017 was $2.7 million, compared to $3.9 million at December 31, 2016. The September 30, 2017 balance included DataV deferred revenue of $2.0 million. The deferred revenue balances relating to our DataV sales do 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 $1.5 million at September 30, 2017 and approximately $2.5 million at December 31, 2016.

•

Revenue in the range of $19.0 million to $21.0 million.

•

The Company expects to close additional paid pilots in the quarter, in addition to booking the $2.9 million, 4-year license renewal with Itron, Inc.

•

Blended gross margin in the 18% to 20% range.

•

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

September 30, 2017

December 31, 2016

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

13,131

$

14,312

Short-term investments

13,627

18,888

Accounts receivable, net of allowance for doubtful

   accounts of $50 at September 30, 2017

   and December 31, 2016

16,609

21,579

Prepaid expenses and other current assets

957

878

Contract assets

697

—

Total current assets

45,021

55,657

Equipment, furniture and leasehold improvements, net

1,019

1,089

Deferred tax assets

7

7

Intangible assets, net

390

464

Goodwill

3,738

3,738

Other non-current assets including contract assets

72

53

Total assets

$

50,247

$

61,008

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Third-party software fees payable

$

7,962

$

14,831

Accounts payable

393

283

Accrued compensation

2,225

2,008

Other accrued expenses

814

714

Deferred rent, current portion

335

321

Deferred revenue

2,622

2,064

Total current liabilities

14,351

20,221

Deferred tax liability

—

23

Deferred rent

602

854

Deferred revenue

56

1,798

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; 12,625,455 shares issued and

   outstanding at September 30, 2017 and 12,532,348

   shares issued and outstanding at December 31,

   2016

137,187

135,660

Accumulated other comprehensive loss

(905

)

(941

)

Accumulated deficit

(101,044

)

(96,607

)

Total shareholders’ equity

35,238

38,112

Total liabilities and shareholders’ equity

$

50,247

$

61,008

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Revenue:

Software

$

17,440

$

19,216

$

52,877

$

58,118

Professional engineering service

2,213

3,251

8,465

12,526

Total revenue

19,653

22,467

61,342

70,644

Cost of revenue:

Software

13,653

15,281

40,909

47,901

Professional engineering service

1,620

3,509

5,927

10,877

Total cost of revenue

15,273

18,790

46,836

58,778

Gross profit

4,380

3,677

14,506

11,866

Operating expenses:

Selling, general and administrative

5,338

3,283

15,249

9,693

Research and development

1,588

809

4,381

2,024

Total operating expenses

6,926

4,092

19,630

11,717

Income (loss) from operations

(2,546

)

(415

)

(5,124

)

149

Other income, net

34

128

148

204

Income (loss) before income taxes

(2,512

)

(287

)

(4,976

)

353

Income tax benefit (expense)

44

181

150

(144

)

Net income (loss)

$

(2,468

)

$

(106

)

$

(4,826

)

$

209

Basic income (loss) per share

$

(0.20

)

$

(0.01

)

$

(0.38

)

$

0.02

Diluted income (loss) per share

$

(0.20

)

$

(0.01

)

$

(0.38

)

$

0.02

Shares used in calculation of income (loss) per share:

Basic

12,607

12,310

12,578

12,189

Diluted

12,607

12,310

12,578

12,576

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Adjusted EBITDAS:

Income (loss) from operations as reported

$

(2,546

)

$

(415

)

$

(5,124

)

$

149

Depreciation and amortization

163

139

483

442

Stock-based compensation expense

540

280

1,350

908

Adjusted EBITDAS ⁽¹⁾

$

(1,843

)

$

4

$

(3,291

)

$

1,499

⁽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.