e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission file number
000-27687
BSQUARE CORPORATION
(Exact name of registrant as
specified in its charter)
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Washington
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91-1650880
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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110
110th Avenue
NE, Suite 200, Bellevue, Washington 98004
(Address
of principal executive offices)
(425) 519-5900
(Registrants telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, no par value
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The NASDAQ Stock Market LLC
(NASDAQ Global Market)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of common stock held by
non-affiliates of the registrant as of June 30, 2006 was
approximately $13,367,000 based on the closing price of
$2.217 per share of the registrants common stock as
listed on the NASDAQ Global Market.
The number of shares of common stock outstanding as of
January 31, 2007: 9,618,291
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be delivered to
shareholders in connection with the annual meeting of
shareholders to be held on June 6, 2007 are incorporated by
reference into Part III of this
Form 10-K.
BSQUARE
CORPORATION
FORM 10-K
TABLE OF
CONTENTS
2
PART I
Item 1. Business.
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
and the documents incorporated herein by reference contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 based on
current expectations, estimates and projections about our
industry and our managements beliefs and assumptions. When
used in this
Form 10-K
and elsewhere, the words believes,
plans, estimates, intends,
anticipates, seeks and
expects and similar expressions are intended to
identify forward-looking statements. These forward-looking
statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions and other
statements that are not historical facts. These forward-looking
statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to
predict. Accordingly, actual results may differ materially from
those anticipated or expressed in such statements as a result of
a variety of factors, including those set forth under
Item 1A, Risk Factors. Such forward-looking
statements include, but are not limited to, statements with
respect to the following:
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The development of the smart device market and our ability to
address its opportunities and challenges;
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The adoption of Windows CE, Windows XP Embedded, Pocket PC and
Smartphone as operating systems of choice for many smart device
hardware and software applications vendors;
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Our business plan and our strategy for implementing our plan;
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Our ability to expand our strategic relationships with hardware
and software vendors;
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Our ability to maintain our relationship with Microsoft
Corporation (Microsoft);
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Our ability to address challenges and opportunities in the
international marketplace;
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Our ability to develop our technology and expand our proprietary
software and service offerings; and
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Our anticipated working capital needs and capital expenditure
requirements, including our ability to meet our anticipated cash
needs.
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Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date
made. Except as required by law, we undertake no obligation to
update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however,
should carefully review the factors set forth in this and other
reports or documents that we file from time to time with the
Securities and Exchange Commission (SEC).
3
BUSINESS
Overview
As used in this Annual Report on
Form 10-K,
we, us and our refer to
BSQUARE Corporation. We provide software and engineering service
offerings to the smart device marketplace. A smart device is a
dedicated purpose computing device that typically has the
ability to display information, runs an operating system (e.g.,
Microsoft®
Windows®
CE 6.0) and may be connected to a network via a wired or
wireless connection. Examples of smart devices that we target
include set-top boxes, home gateways,
point-of-sale
terminals, kiosks, voting machines, gaming platforms, personal
digital assistants (PDAs), personal media players and
smartphones. We primarily focus on smart devices that utilize
embedded versions of the Microsoft Windows family of operating
systems, specifically Windows CE, Windows XP Embedded and
Windows
Mobiletm.
We have been providing software and engineering services to the
smart device marketplace since our inception. Our customers
include world class original equipment manufacturers (OEMs),
original design manufacturers (ODMs), silicon vendors,
peripheral vendors, and enterprises that develop, market and
distribute smart devices. The software and engineering services
we provide our customers are utilized and deployed throughout
various phases of our customers device life cycle,
including design, development, customization, quality assurance
and deployment.
Until mid-2004, we were also in the business of manufacturing
and distributing our own proprietary hardware device, called the
Power Handheld, which was sold to telecommunication carriers.
During the second quarter of 2004, we decided to discontinue
this hardware business and end the manufacturing of the device.
The hardware business segment is reported as a discontinued
operation in our financial results.
We were incorporated in the State of Washington in July 1994.
Our principal office is located at 110
110th
Avenue NE, Suite 200, Bellevue, Washington 98004, and our
telephone number is
(425) 519-5900.
Industry
Background
The increasing need for connectivity among both business and
consumer users is driving demand for
easy-to-use,
cost-effective and customizable methods of electronic
communication. Although the personal computer (PC) has been the
traditional means of electronically connecting suppliers,
partners and customers, the benefits of smart
devices have led to their rapid adoption as a new class of
powerful technology.
Smart devices are particularly attractive to businesses and
consumers because they are often less expensive than desktop and
laptop computers; have adaptable configurations, including size,
weight and shape; and are able to support a variety of
customized applications and user interfaces that can be designed
for specific tasks. These devices also are typically compatible
with existing business information systems.
The smart device industry is characterized by a wide variety of
hardware configurations and end-user applications, often
designed to address a specific vertical market. To accommodate
these diverse characteristics in a cost-effective manner, OEMs
and ODMs require operating systems that can be integrated with a
diverse set of smart devices and can support an expanding range
of industry-specific functionality, content and applications.
The Microsoft Windows family of embedded operating
systems specifically Windows CE, Windows Mobile and
Windows XP Embedded helps satisfy these requirements
because it leverages the existing industry-wide base of
Microsoft Windows developers and technology standards, can be
customized to operate across a variety of smart devices and
integrate with existing information systems, offers Internet
connectivity, and reduces systems requirements compared to
traditional PC operating systems.
The smart device marketplace is being influenced by the
following factors:
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Growing demand by business professionals and high-end consumers
for converged mobile devices that combine telephony, data (such
as email and internet browsing), multimedia and location
awareness is driving new sophisticated smart device designs by
our OEM customers;
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The ubiquity of cellular and WLAN wireless networks is driving
rapid adoption of smart devices that leverage broadband and
high-speed wireless data networks, including Internet Protocol
(IP) set-top boxes,
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voice-over-IP
(VoIP) phones, residential gateways, and home networking
solutions linking smart devices with PCs;
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The baseline expectation for device functionality continues to
grow. Users of smart devices expect to be able to access email
and the Internet and synchronize their devices with corporate
data sources. Microsoft operating systems are already well
positioned to leverage this trend with built-in synchronization
capabilities, access to Exchange email servers, and similar
functionality;
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Security is becoming an increasingly important concern as
devices are able to access networks and store sensitive
information locally such as email, spreadsheets and other
documents. Users are demanding that these types of information
be protected in the same ways they are protected on the
desktop; and
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Higher bandwidth networks coupled with the larger displays and
increased processing power found on new devices means that more
multi-media content will be available to devices
increasing demand for digital rights management, content
management and related technologies.
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Software
and Service Solutions for Smart Device Makers
Our customers include world class OEMs and ODMs, device
component suppliers such as silicon vendors and peripheral
vendors and enterprises with customized device needs such as
retailers and field service organizations. Representative
customer relationships in 2006 included:
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A large North American OEM continued to engage us to assist in
the development and testing of mobile office phones;
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Palm, Inc. continued to engage us to provide engineering
services for its series of Windows Mobile Smartphone devices;
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A silicon vendor engaged us to develop drivers for several of
its silicon solutions and to include its components on our
proprietary hardware reference designs;
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A silicon vendor engaged us to assist in the development of a
series of board support packages (BSPs) in support of various
processors;
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Several large Asian OEMs engaged us to assist in the development
of new lines of Windows Mobile-based handheld devices;
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A large North American silicon vendor engaged us to assist in
developing several Windows Mobile BSPs in support of its new
line of processors focused on the handset market; and
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Over 75 OEMs and silicon vendors including Symbol
Technologies, Hewlett-Packard Company (HP), ASUStek Computer,
Hand Held Products and Lite-On Technology
Corporation licensed our SDIO Now! technology
in 2006 for integration into their smart devices.
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We offer a range of software products to our customers for the
development and deployment of smart devices, including both
those of third parties and our own proprietary software
products, along with our engineering service offerings. Our goal
is to increase the breadth and depth of our software and
engineering service offerings to smart device customers to
enhance our position as an overall solutions provider.
Third-Party
Software Products
We have multiple license and distribution agreements with
third-party software vendors. Our ability to resell these
third-party software products, whether stand-alone or in
conjunction with our own proprietary software and engineering
service offerings, provides our customers with a significant
source for their smart device project needs. Our third-party
software offerings include the following:
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We are a Microsoft authorized Value-Added Provider (VAP) of
Windows Embedded operating systems (OS) and toolkits for Windows
CE, Windows XP/NT Embedded, Windows XP Professional with
Embedded Restrictions, Windows Server with Embedded
Restrictions, Windows XP Embedded for Point of Sale and
Microsoft Classic operating systems with Embedded
restrictions, including DOS and Windows 98/2000/
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ME/NT. The majority of our software revenue in 2006 was earned
through the resale of Microsoft Embedded operating
systems; and
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We
sub-license
and resell other third-party software such as the Esmertec Jeode
Java Virtual Machine (JVM) under our
JEM-CEtm
brand name and Datalight Inc.s FlashFX and Reliance
products.
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Proprietary
Software Products
Our proprietary software offerings include:
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SDIO Hx SDIO (Secure Digital Input Output) is an
industry standard format that allows very small form-factor
peripheral and memory cards to be used with smart devices. Our
SDIO solutions have become the industry standard software
development kit used by OEMs, ODMs and peripheral vendors who
are creating SDIO solutions for smart devices running Microsoft
Windows CE and Windows Mobile operating systems. There are
currently over 100 licensees of our SDIO technology.
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In response to customer demand and the changing technology
landscape affecting secure digital (SD) technology, we released
SDIO Now! 2.2 in the first quarter of 2006. Differentiated from
other competitive offerings, this product included features
requested by licensees such as support for larger SD memory
cards, increased performance and a cost-effective solution for
adding any combination of two MultiMediaCards (MMC), SD cards or
SDIO cards to converged devices.
In the second quarter of 2006, we extended our SDIO product line
with the introduction of our SDIO Hx architecture, which
significantly increases the data throughput performance for
handheld devices. OEMs can now economically add high performance
Wi-Fi capabilities to smartphones and other embedded devices by
using an internal SDIO Wi-Fi card while adding a second external
expansion slot for high-density memory cards or other SDIO
peripherals. The demand for this cost-effective high performance
Wi-Fi/memory
solution has made it a highly desirable feature on the next
generation of handheld devices.
Microsoft has incorporated our SDIO Now! v2.0 technology into
its CE 5.0 and Windows Mobile 5.0 operating systems. While the
SDIO Hx versions of software have functionality and performance
enhancements not found in the SDIO Now! v2.0, there can be no
assurance that the inclusion of the SDIO Now! v2.0 software in
the base Microsoft operating system will not have a detrimental
effect on sales of the SDIO Hx software in the future.
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Media+ Portable Media Player Media+ is a digital
media-management and player software solution based on
Microsoft®
Windows®
CE 5.0 that enables OEMs to quickly enter the growing market for
PMP players, a new product category that enables consumers to
enjoy movies and video clips, view family photos, and listen to
music on a single mobile device.
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Our DevkitIDP line of Marvell
XScale®
Technology-based development platforms accelerate time to market
for OEMs building Windows CE 5.0, Windows CE 6.0 and Windows
Mobile 5.0 embedded devices. We currently ship DevkitIDP 255,
acquired from Vibren Technologies, Inc. (Vibren) in August 2005.
The DevkitIDP 255 is based on the Marvel PXA255 Embedded
Processor. In 2006, we launched the DevkitIDP 270 based on a new
generation Marvell PXA270 embedded processor, as well as
DevKitIDP 320 based on the new Marvell 320 PROCESSORS.. We
intend on introducing additional development platforms in the
future which may be based on other silicon vendors processor
families. Our DevkitIDP products uniquely offer a wide variety
of peripheral chips and multiple expansion slots, which provides
developers valuable flexibility in the early stages of
development when device functionality is being validated. The
DevkitIDP product layout is optimized so developers can quickly
access hardware test points which shortens debug time.
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Our SchemaBSP tool, acquired from Vibren, reduces customer
development efforts. SchemaBSP offers a revolutionary three-step
process that, when used in conjunction with Microsoft Platform
Builder, reduces Windows CE board bring up time by up to 40%.
Once an BSP is created with SchemaBSP, the architecture of the
tool enables code reuse across multiple product lines, easy BSP
updates when new hardware features are added to a design, and
quick migration to new OS versions of Windows CE.
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Universal serial bus (USB) interfaces.
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Software revenue for the last three fiscal years was as follows
(in thousands):
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Year Ended December 31,
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2006
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2005
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2004
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Software revenue:
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Third-party software
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$
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30,317
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$
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28,561
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$
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25,663
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BSQUARE proprietary software
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2,617
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2,649
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2,701
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Total software revenue
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$
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32,934
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$
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31,210
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$
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28,364
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Software revenue as a percentage
of total revenue
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66
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%
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73
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%
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73
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%
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Third-party software revenue as a
percentage of total software revenue
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92
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%
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92
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%
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90
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%
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The resale of Microsoft Embedded operating systems and related
products accounts for substantially all of our third-party
software revenue.
Engineering
Service Offerings
We provide Windows Embedded and Windows Mobile smart device
makers with consulting and professional engineering services
including:
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Device solution strategy consulting;
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Software and hardware design and development services;
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Platform development systems integration;
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Application, middleware and multimedia software development;
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Quality assurance and testing services;
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Hardware design, prototype and product development services;
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Customer technical support; and
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Platform development and quality assurance training.
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Customers utilize our engineering service offerings because our
deep experience with Windows Embedded operating systems
typically results in shorter development cycles and reduced time
to market, lower overall costs to complete projects, and product
robustness and features the customer may have been unable to
achieve through other means.
Revenue from professional engineering services for the last
three fiscal years was as follows (in thousands):
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Year Ended December 31,
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2006
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2005
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2004
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Total service revenue
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$
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16,881
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$
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11,713
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$
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10,556
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Service revenue as a percentage of
total revenue
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34
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%
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27
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%
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27
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%
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Strategy
Our strategy is to continue to enhance our position as a leading
provider of smart device software. To advance this strategy, we
intend to focus on the following areas:
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Enhance our proprietary software product portfolio to generate
additional revenue, particularly higher margin revenue, through
which will have the added benefit of increasing opportunities to
sell additional engineering services and third-party software
products to our customers. During 2006, we increased our level
of research and development in conjunction with the SDIO Hx
version releases mentioned previously as well as through the
development of our DevKitIDP references designs. We are
continuing to execute and
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evolve our product strategy and expect to continue to invest in
new product development initiatives during 2007;
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Provide our North American customers of Windows Embedded
operating systems with additional product offerings as they
become available from Microsoft. For example, in 2006, Microsoft
made available to its authorized distributors the Window
Embedded Point CE 6.0 operating system, which is targeted at the
general device market;
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Expand our engineering service offerings by adding new packaged
engineering services, engineering capabilities, training and
custom consulting offerings; for example, we were funded by
Microsoft to develop the Windows CE 6.0 training curriculum and
plan to deliver the first training course to customers early in
2007;
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Leverage the significant number of customers gained through our
resale of Microsoft Embedded operating systems by selling these
customers additional software and service offerings. In each
quarter, we typically sell Microsoft Embedded operating systems
to over 400 unique customers. Today, more of these customers
purchase service or software offerings other than the core
Microsoft Embedded operating systems than in the past; and
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Increase the percentage of sales derived from our international
customers, particularly by focusing on growing sales in the
Asia-Pacific region.
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A key element of our strategy is the expansion of our
proprietary products that we license to our smart device
customers. We believe that the continuing complexity and demands
of device development will require our customers to seek out
partners that are able to provide more complete device software
solutions that can be quickly customized and brought to market.
Relationship
with Microsoft and Impact on our Smart Device Solutions
Business
We have a long-standing relationship with Microsoft and this
relationship is critical to the continuing success of our
business. Our credentials as a Microsoft partner include:
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We are one of Microsofts largest distributors of embedded
operating systems worldwide;
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We are a Windows Embedded Gold-level Systems Integrator;
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We were the Microsoft Systems Integrator of the Year for 2006;
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We are a developer and provider of Microsoft Official Curriculum
Training for Windows CE and Windows XP Embedded;
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We are a leading systems integrator for Microsofts Windows
Mobile for Smartphone and Pocket PC-based device development
projects;
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We are a Preferred Provider of Visual Tools to Microsoft;
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We are a Gold-level member of Microsofts Third-Party Tools
Provider Program;
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We are an authorized Microsoft Windows CE for Automotive
Solutions Integrator; and
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We have been engaged by Microsoft on various service engagements.
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We work closely with Microsoft executives, developers, and
product managers. We leverage these relationships in a variety
of ways, including:
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We gain early access to new Microsoft embedded software and
other technologies;
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We are able to leverage co-marketing resources from Microsoft,
including market development funds, to support our own marketing
and sales efforts;
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We participate in Microsoft-sponsored trade shows, seminars, and
other events;
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We receive sales leads from Microsoft that enable us to sell our
smart device software and service solutions;
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We receive certain rebates based upon certain predefined
objectives and our Microsoft Embedded operating systems sales
volume; and
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We participate in Windows Embedded and Windows Mobile design
reviews, enabling early access to product roadmap information
wherein we provide important technical and customer feedback.
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See Item 1A, Risk Factors, for more information
regarding our relationship with Microsoft.
Customers
Customers of our smart device software and engineering service
offerings include leading OEMs, ODMs, enterprises, silicon
vendors and peripheral vendors seeking to leverage the benefits
of Windows Embedded operating systems to develop high-quality,
full-featured smart devices that meet the requirements of
numerous end-markets. Representative customers include Digipos
Systems Inc., Electronics for Imaging, Inc., Lockheed Martin,
Micros Systems, Inc., Microsoft Corporation, PalmOne, Inc. and
Solectron.
Sales and
Marketing
We market our smart device software and engineering services to
OEMs, ODMs, enterprises, silicon vendors and peripheral vendors
predominantly through our direct sales force located in the
United States, Taipei, Taiwan and Tokyo, Japan. We do not make
significant use of resellers, channel partners, representative
agents or other indirect channels.
Key elements of our sales and marketing strategy include direct
marketing, advertising, event marketing, public relations,
customer and strategic alliance partner co-marketing programs
and a comprehensive website. We rely significantly on lead
referral and other marketing support programs from strategic
partners, particularly Microsoft.
Research
and Development
Our research and development organization is responsible for the
design, development and release of our reference design and
software products. Members of our research and development staff
work closely with our sales and marketing departments, as well
as with our customers and potential customers, to better
understand market needs and requirements. We perform our
research and development primarily utilizing our engineering
staff located in Bellevue, Washington and Akron, Ohio.
Competition
The market for Windows-based embedded software and services is
extremely competitive. We face competition from the
following:
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Our current and potential customers internal research and
development departments, which may seek to develop their own
proprietary products and solutions that compete with our
proprietary software products and engineering services;
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North American engineering service firms such as Intrinsyc,
Vanteon and Teleca;
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Off-shore development companies such as WiPro, particularly
those focused on the North American marketplace
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ODMs, particularly those in Taiwan who are adding software
development capabilities to their offerings;
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Contract manufacturers who are adding software development
capabilities to their offerings; and
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Microsoft Embedded operating system distributors such as Arrow
and Avnet. Larger customers of Microsoft Embedded operating
systems are typically knowledgeable of the competing
distributors in the North American market and,
consequently, will often put large orders out to bid amongst the
distributors, which can create margin pressure and make it
difficult to maintain long-term relationships with these
customers. The gross profit
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9
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margin on sales of Microsoft Embedded Windows licenses is
relatively low, historically about 14% on average. There can be
no assurance that gross profit on future sales will not decline
given these competitive pressures.
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As we develop new products, particularly products focused on
specific industries, we may begin competing with companies with
which we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors
will form alliances, including alliances with Microsoft, that
may enable them to rapidly increase their market share.
Microsoft has not agreed to any exclusive arrangement with us,
nor has it agreed not to compete with us. Microsoft may decide
to bring more of the core embedded development services and
expertise that we provide in-house, possibly resulting in
reduced product and service revenue opportunities for us. The
barrier to entering the market as a provider of Windows-based
smart device software and services is low. In addition,
Microsoft has created marketing programs to encourage systems
integrators to work on Windows Embedded operating system
products and services. These systems integrators are given
substantially the same access by Microsoft to the Windows
technology as we are. New competitors may have lower overhead
than we do and may be able to undercut our pricing. We expect
that competition will increase as other established and emerging
companies enter the Windows-based smart device market, and as
new products and technologies are introduced.
International
Operations
During 2006, our international operations consisted principally
of subsidiaries and operations in Taipei, Taiwan and Vancouver,
British Columbia, Canada. Because our OEM Distribution Agreement
with Microsoft restricts our resale of Microsoft Embedded
operating systems to North America, including Mexico, our
foreign operations have traditionally focused on the sale of our
own proprietary software products, particularly SDIO Now!, and
engineering services. In the fourth quarter of 2005, we
re-established a direct sales presence in Tokyo, Japan. We
intend to continue to rebuild our ability to sell our products
and services in Japan during 2007 and also plan on broadening
our sales presence throughout the Asia-Pacific marketplace. We
formalized and expanded our partnership with an engineering
services firm in Hydrabad, India during 2006 although there are
no commitments in terms of the utilization of those resources.
See Item 1A, Risk Factors, and Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, for more information
regarding our international operations.
Personnel
As of December 31, 2006, we had 170 employees, including
109 employees in professional engineering services, 12 employees
in research and product development, and 49 employees in sales,
marketing and administrative services. Of these employees, 138
are located in the United States, 11 are located in Canada and
21 are located in Taiwan. In addition, from time to time, we
employ temporary employees, consultants and contractors. As of
December 31, 2006, we employed 41 contractors compared to
31 at December 31, 2005.
The following highlights the number of employees by area:
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|
|
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December 31,
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|
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2006
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|
|
2005
|
|
|
2004
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|
|
Professional Engineering Services
|
|
|
109
|
|
|
|
68
|
|
|
|
59
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|
Research and Product Development
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12
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|
|
|
9
|
|
|
|
7
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|
Sales, Marketing and Administrative
|
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49
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|
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47
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48
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|
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|
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|
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Total
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170
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|
|
124
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|
|
114
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As conditions necessitate, periodically professional engineering
service employees will perform research and development
engineering and visa versa.
Intellectual
Property and Other Proprietary Rights
Our intellectual property is critical to our success. In
general, we attempt to protect our intellectual property rights
through patent, copyright, trademark and trade secret laws and
contractual arrangements. There can, however, be no assurance
that our efforts will be effective to prevent the
misappropriation of our intellectual property, or to
10
prevent the development and design by others of products or
technologies similar to, or competitive with those developed by
us.
Additionally, because a significant portion of our revenue
relates to the resale of third-party software products, we are
also reliant on our partners, particularly Microsoft, to
appropriately protect their own intellectual property.
We currently have a number of pending U.S. and international
patent applications. We have 19 issued patents worldwide and a
number of registered trademarks. We will continue to pursue
appropriate protections for our intellectual property.
See Item 1A, Risk Factors, for more information
regarding our intellectual property and other proprietary rights.
Available
Information
We are a reporting company and file annual, quarterly and
current reports and other information with the SEC. You may read
and copy any materials we file with the SEC at the SECs
Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. You also may obtain information on the operation of
the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information we file
electronically with the SEC at http://www.sec.gov.
Our Internet website can be found at www.bsquare.com. We
make available free of charge through our investor relations
section, under SEC Filings, all our filings,
including our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K
and amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as soon as reasonably practicable after such material is
filed with, or furnished to, the SEC.
Directors
and Executive Officers
The following table sets forth certain information with respect
to our directors and executive officers as of January 31,
2007.
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Name
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Age
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Positions
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Donald B. Bibeault
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65
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Chairman of the Board
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Brian T. Crowley
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46
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President and Chief Executive
Officer, Director
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Elwood D. Howse, Jr.
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67
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Director
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Elliott H. Jurgensen, Jr.
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62
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Director
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Scot E. Land
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53
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Director
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William D. Savoy
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42
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Director
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Kendra A. VanderMeulen
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55
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Director
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Carey E. Butler
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52
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Vice President, Professional
Engineering Services
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Scott C. Mahan
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42
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Vice President, Finance; Chief
Financial Officer; Secretary and Treasurer
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Larry C. Stapleton
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44
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Vice President, North American
Sales
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Donald B. Bibeault has been our Chairman of the Board since July
2003. His term of office as a director expires at the 2008
Annual Meeting of Shareholders. Mr. Bibeault is currently
President of Bibeault & Associates, Inc. a
turnaround-consulting firm, a position he has held since 1975.
During that period, Mr. Bibeault has served as chairman,
chief executive officer, or chief operating officer of numerous
corporations, including Pacific States Steel, PLM International,
Best Pipe and Steel, Inc., Ironstone Group, Inc., American
National Petroleum, Inc., Tyler-Dawson Supply and Iron Oak
Supply Corporation. He has also served as special turnaround
advisor to the CEOs of Silicon Graphics Inc., Varity
Corporation, Bank of America amongst others. In 2005,
Dr. Bibeault was given the first ever Lifetime Achievement
Award by the Association of Certified Turnaround Professionals
(ACTP). He has been a member of the Board of Overseers of
Columbia Business School, a trustee of Golden Gate University, a
member of the University of Rhode Island Business Advisory
Board, and the Board of Visitors of Golden Gate
11
University Law School. Mr. Bibeault received a B.S. in
electrical engineering from the University of Rhode Island, a
M.B.A. from Columbia University and a Ph.D from Golden Gate
University. He is also a recipient of a Doctor of Laws degree
(honoris causa) from Golden Gate University Law School.
Brian T. Crowley has been our President and Chief Executive
Officer since July 2003. His term of office as a director
expires at the 2008 Annual Meeting of Shareholders. From April
2002 to July 2003, Mr. Crowley served as our Vice
President, Product Development. From December 1999 to November
2001, Mr. Crowley held various positions at DataChannel, a
market leader in enterprise portals, including Vice President of
Engineering and Vice President of Marketing. From April 1999 to
December 1999, Mr. Crowley was Vice President, Operations
of Consortio, a software company. From December 1997 to April
1999, Mr. Crowley was Director of Development at Sequel
Technology, a network solutions provider. From 1986 to December
1997, Mr. Crowley held various positions at Applied
Microsystems Corporation, including Vice President and General
Manager of the Motorola products and quality assurance
divisions. Mr. Crowley also serves as a director of the WSA
(formerly Washington Software Association). Mr. Crowley
holds a B.S. in Electrical Engineering from Arizona State
University.
Elwood D. Howse, Jr. has been a director of BSQUARE since
November 2002. His current term of office as a director expires
at the 2009 Annual Meeting of Shareholders. Mr. Howse was
formerly President of Cable & Howse Ventures, a
Northwest venture capital management firm formed in 1977.
Mr. Howse also participated in the founding of Cable, Howse
and Ragen, investment banking and stock brokerage firm, today
owned by Wells Fargo and known as Ragen MacKenzie.
Mr. Howse has served as corporate director and advisor to
various public, private and non-profit enterprises. He served on
the board of the National Venture Capital Association and is
past President of the Stanford Business School Alumni
Association. He currently serves on the boards of directors of
Formotus, Inc., OrthoLogic Corporation, Perlego Systems Inc.,
PowerTech Group, Inc. and not-for profits Junior Achievement
Worldwide and Junior Achievement of Washington. He has served on
a number of other corporate boards in the past. Mr. Howse
received both a B.S. in engineering and a M.B.A. from Stanford
University and served in the U.S. Navy submarine force.
Elliott H. Jurgensen, Jr. has been a director of BSQUARE
since January 2003. His term of office as a director expires at
this years Annual Meeting of Shareholders.
Mr. Jurgensen retired from KPMG LLP in 2003 after
32 years, including 23 years as an audit partner.
During his career he held a number of leadership roles,
including Managing Partner of the Bellevue, Washington office of
KPMG from 1982 to 1991, and Managing Partner of the Seattle,
Washington office of KPMG from 1993 to 2002. He is also a
director of McCormick & Schmicks Seafood
Restaurants, Inc., Isilon Systems, Inc. and ASC Management, Inc.
Mr. Jurgensen has a B.S. in accounting from San Jose
State University.
Scot E. Land has been a director of BSQUARE since February 1998.
His term of office as a director expires at this years
Annual Meeting of Shareholders. Mr. Land is currently
Executive Director, Program on Technology Commercialization,
University of Washington. Prior to joining the faculty of the
UW, Mr. Land was a managing director of Cascadia Capital
LLC. Mr. Land was a founder and managing director of
Encompass Ventures from September 1997 to July 2005,
Mr. Land was a Senior Technology Analyst and Strategic
Planning Consultant with Microsoft from June 1995 to September
1997, and a technology research analyst and investment banker
for First Marathon Securities, a Canadian investment bank, from
September 1993 to April 1995. From October 1988 to February
1993, Mr. Land was the President and Chief Executive
Officer of InVision Technologies, (a wholly owned subsidiary of
GE) founded by Mr. Land in October 1988, that designs and
manufacturers high-speed computer-aided topography systems for
automatic explosives detection for aviation security. Prior to
founding InVision Technologies, Mr. Land served as a
principal in the international consulting practice of
Ernst & Young LLP, a public accounting firm, from April
1984 to October 1988. Mr. Land serves as a director of
several privately held companies.
William D. Savoy has been a director of BSQUARE since May 2004.
His current term of office as a director expires at the 2009
Annual Meeting of Shareholders. Mr. Savoy currently
consults with The Muckleshoot Indian Tribe on investment-related
matters, strategic planning and economic development.
Mr. Savoy served as a consultant for Vulcan Inc., an
investment entity that manages the personal financial activities
of Paul Allen, from September 2003 to December 2005. Vulcan Inc.
resulted from the consolidation in 2000 of Vulcan Ventures Inc.,
a venture capital fund, and Vulcan Northwest. Mr. Savoy
served in various capacities at Vulcan Inc. and its
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predecessors from 1988 to September 2003, most recently as the
president of the portfolio and asset management division,
managing Vulcans commercial real estate, hedge fund,
treasury and other financial activities, and as the president of
both Vulcan Northwest and Vulcan Ventures. Mr. Savoy served
as the president and chief executive officer of Layered, Inc., a
software company, from June 1989 until its sale in June 1990 and
as its chief financial officer from August 1988 to June 1989. He
is also a director of Drugstore.com, where he is a member of the
audit committee and chairman of the compensation committee.
Mr. Savoy received a B.S. in computer science, accounting
and finance from Atlantic Union College.
Kendra VanderMeulen has been a director at BSQUARE since March
2005. Her term of office as a director expires at this
years Annual Meeting of Shareholders.
Ms. VanderMeulen recently served as executive vice
president, Mobile at InfoSpace, and is an active board member or
advisor to a variety of companies in the wireless Internet
arena, including Perlego Systems, Inc., and Inrix, Inc.
Ms. VanderMeulen joined AT&T Wireless (formerly McCaw
Cellular Communications, now Cingular) in 1994 to lead the
formation of the wireless data division. Prior to McCaw,
Ms. VanderMeulen served as COO and president of the
Communications Systems Group of Cincinnati Bell Information
Systems (now Convergys). She also held a variety of business and
technical management positions at AT&T in the fields of
software development, voice processing, and signaling systems.
Ms. VanderMeulen received a BS degree in mathematics from
Marietta College and a MS degree in computer science from Ohio
State University. She is the recipient of the 1999 Catherine B.
Cleary award as the outstanding woman leader of AT&T.
Carey E. Butler has been our Vice President, Professional
Engineering Services since November 2003 and directs development
teams located in Washington State and Taiwan. From 2002 to 2003,
Ms. Butler served as Western Region Area Manager at
Information Builders, a business intelligence software and
services company. From 2000 to 2001, Ms. Butler was Vice
President at Aris Corporation, a professional services company,
and from 1996 to 2000 was Partner at BDO Seidman, LLP, a public
accounting and management consulting firm. From 1990 to
1996, Ms. Butler was Principal of Performance Computing,
Inc., a technology consulting company, subsequently sold to BDO
Seidman. From 1982 to 1990, Ms. Butler was Vice President
of Operations, Sales and Marketing of Mytec, Inc., a value-added
reseller of turnkey financial systems. Ms. Butler holds a
B.A. in Business, Quantitative Methods (Computer Science) from
University of Washington.
Scott C. Mahan has been our Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer since January 2004.
From October 2003 to December 2003, Mr. Mahan served as a
consultant to BSQUARE. From February 2003 to July 2003,
Mr. Mahan served as the Interim CFO and Head of
Business & Corporate Development at Cranium, Inc., a
games manufacturer. From March 2002 to November 2002,
Mr. Mahan served as Chief Operating Officer at Xylo, Inc.,
a company that provides human resource technology and services
to Fortune 1000 companies, and from June 1998 to December
2001 as CFO and Vice President, Administration at Qpass, Inc, a
provider of billing serves to wireless carriers. From September
1996 to May 1998, Mr. Mahan served as Director of Finance
at Sequel Technology Corporation, a company that delivered
licensed software for the network traffic monitoring market.
From August 1994 to August 1996, Mr. Mahan was Controller
of Spry, Inc., an Internet software company and Internet service
provider. Prior to that, Mr. Mahan was the Assistant
Corporate Controller at Paccar Inc. from August 1993 to July
1994 and was an Audit Manager at Ernst & Young LLP in
Seattle where he was employed from July 1987 to August 1993.
Mr. Mahan holds a B.S. in Management from Tulane University.
Larry C. Stapleton has been our Vice President of North America
Sales since March 2005. Mr. Stapleton is responsible for
sales of professional engineering services, products and
distribution. Prior to joining BSQUARE, Mr. Stapleton
served as Vice President of Global Business Development at
Terabeam from November 1999 to April 2004, where he was
responsible for developing telecom carrier business for
broadband wireless access equipment in Asia and managing
employees and VAR partnerships in Singapore, Malaysia, Japan,
China, Philippines, and South Korea. Prior to that,
Mr. Stapleton served as Terabeams Vice President,
Product Development, responsible for developing all of
Terabeams optical telecommunications equipment. From
November 1997 to November 1999, Mr. Stapleton was Vice
President of Sales and Marketing for SelfCHARGE, a contract
product design and manufacturing (ODM) startup developing
products for the medical, consumer and industrial markets.
Before that he was Senior Director of Client Services at Teague
from April 1992 to November 1997, generating designs for
AT&T, Microsoft, John Deere, and many other Fortune
500 companies. He also has held a variety of product
development, marketing, and engineering positions with several
Fortune 100 companies. His degrees include an M.B.A. from
University of Washington and a B.S., Mechanical Engineering,
from San Jose State University.
13
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us, or that we
currently deem immaterial, may also impair our business
operations. If any of the following risks occur, our business,
financial condition, operating results and cash flows could be
materially adversely affected.
Microsoft-Related
Risk Factors
Due to the market that we serve and, in particular, our focus on
devices utilizing Microsofts Embedded operating systems as
well as the fact that a significant portion of our revenue is
derived from the resale of Microsoft Embedded operating systems,
Microsoft has a significant direct and indirect influence on our
business. The following represent several Microsoft-related risk
factors which may negatively impact our business and operating
results.
If we
do not maintain our OEM Distribution Agreement with Microsoft,
our revenue would decrease and our business would be adversely
affected.
We have an OEM Distribution Agreement (ODA) with Microsoft,
which enables us to resell Microsoft Windows Embedded operating
systems to our customers in the United States, Canada, the
Caribbean (excluding Cuba) and Mexico. Software sales under this
agreement constitute a significant portion of our revenue. If
the ODA was terminated, our software revenue and resulting gross
profit would decrease significantly and our operating results
would be negative impacted. Moreover, if the ODA with Microsoft
is renewed on less favorable terms, our revenue could decrease,
our gross profit from these transactions, which is low relative
to our gross profit from sales of our proprietary software
products, could further decline
and/or our
operating expenses could increase. Microsoft offers us, and our
competitors, largely volume-based rebates under the ODA and its
related programs which have the effect of increasing our
software gross profit. If Microsoft were to reduce, or
eliminate, these rebate programs, which can contribute 2-3% of
our total gross profit percentage from sales of Microsoft
Embedded operating systems on a quarterly basis, our gross
profit and operating results would be negatively impacted.
Microsoft informed us in the fourth quarter of 2006 that they
are restructuring the rebate program beginning in the first
quarter of 2007. We expect this restructuring to have a negative
impact on our gross profit but are not yet able to quantify the
impact. The ODA is renewable annually, and there is no automatic
renewal provision in the agreement. The ODA was last renewed in
October 2006 and will expire on June 30, 2007, unless
terminated earlier under the provisions of the ODA.
Microsoft
has audited our records under our OEM Distribution Agreement in
the past and will do so again in the future, and any negative
audit results could result in additional charges
and/or the
termination of the ODA.
There are provisions in the ODA that require us to maintain
certain internal records and processes for royalty auditing and
other reasons. Non-compliance with these and other requirements
could result in the termination of the ODA. We underwent an
audit under the ODA with Microsoft covering a period of five
years which concluded in the second quarter of 2004. Microsoft
determined that we had correctly reported royalties during the
audit period but that we could not account for all license
inventory that we had received from Microsofts authorized
replicators. While we disagreed with many of the audit findings,
we ultimately chose to settle the dispute. Total settlement
costs of $310,000 were recognized in the second quarter of 2004,
which included audit costs of $140,000. In addition, we were
notified during the fourth quarter of 2006 that Microsoft will
be conducting another audit, which is currently scheduled to
begin in March 2007. It is possible that future audits could
result in additional charges.
14
If we
do not maintain our favorable relationship with Microsoft, we
will have difficulty marketing and selling our software and
services and may not receive developer releases of Windows
Embedded operating systems and Windows Mobile targeted
platforms. As a result, our revenue and operating results could
suffer.
We maintain a strategic marketing relationship with Microsoft.
In the event that our relationship with Microsoft were to
deteriorate, our efforts to market and sell our software and
services to OEMs and others could be adversely affected and our
business could be harmed. Microsoft has significant influence
over the development plans and buying decisions of OEMs and
others utilizing Windows Embedded operating systems and Windows
Mobile targeted platforms for smart devices and these targeted
platforms are a significant focus for us. Microsoft provides
customers referrals to us. Moreover, Microsoft controls the
marketing campaigns related to its operating systems.
Microsofts marketing activities, including trade shows,
direct mail campaigns and print advertising, are important to
the continued promotion and market acceptance of Windows
Embedded operating systems and Windows Mobile targeted platforms
and, consequently, to our sale of Windows-based embedded
software and services. We must maintain a favorable relationship
with Microsoft to continue to participate in joint marketing
activities with them, which includes participating in
partner pavilions at trade shows, listing our
services on Microsofts website, and receiving customer
referrals. In the event that we are unable to continue our joint
marketing efforts with Microsoft, or fail to receive referrals
from them, we would be required to devote significant additional
resources and incur additional expenses to market software
products and services directly to potential customers. In
addition, we depend on Microsoft for developer releases of new
versions of, and upgrades to, Windows Embedded and Windows
Mobile software in order to facilitate timely development and
delivery of our own software and services. If we are unable to
maintain our favorable relationship with Microsoft, our revenue
could decline
and/or our
costs could increase thereby negatively impacting our operating
results.
Unexpected
delays or announcement of delays by Microsoft of Windows
Embedded operating systems and Windows Mobile targeted platforms
product releases could adversely affect our revenue and
operating results.
Unexpected delays or announcement of delays in Microsofts
delivery schedule for new versions of its Windows Embedded
operating systems and Windows Mobile targeted platforms could
cause us to delay our product introductions or impede our
ability to sell our products and services
and/or to
complete customer projects on a timely basis. These delays, or
announcements of delays by Microsoft, could also cause our
customers to delay or cancel their project development
activities or product introductions, which could have a negative
impact on our revenue and operating results.
If
Microsoft adds features to its Windows operating system or
develops products that directly compete with products and
services we provide, our revenue and operating results could be
negatively impacted.
As the developer of Windows, Windows XP Embedded, Windows CE and
Windows Mobile, Microsoft could add features to its operating
systems or could develop products that directly compete with the
products and services we provide to our customers. The ability
of our customers, or potential customers, to obtain products and
services directly from Microsoft that compete with our products
and services could negatively affect our revenue and operating
results. Even if the standard features of future Microsoft
operating system software were more limited than our offerings,
a significant number of our customers, and potential customers,
might elect to accept more limited functionality in lieu of
purchasing additional software from us or delay the purchase of
our products and services while they perform a comparison of
Microsofts competing offerings. Moreover, the resulting
competitive pressures could lead to price reductions for our
products and reduce our revenue and gross profit margin
accordingly and our operating results could be adversely
impacted.
Microsoft has released Windows CE version 6.0 and version 5.0 of
its Windows Mobile Smartphone and PocketPC operating systems
which contain basic SDIO functionality and is therefore
competitive with our SDIO Hx Now! and SDIO Hx product offerings.
An agreement with Microsoft required us to deliver to Microsoft
our SDIO Now! v.1.0 source code for inclusion into Windows CE
5.0 and Windows Mobile 5.0. Since that source code was delivered
to Microsoft, we have continued to develop our SDIO Now! product
line, introducing SDIO Now! v.2.0, v.2.2 and most recently SDIO
Now! Hx, with new features and performance improvements that we
believe are
15
important to customers. Additionally, we plan further
enhancements to our SDIO Now! software product in 2007 and
beyond. However, there can be no assurance that our
next-generation SDIO Now! product offerings will continue to be
competitive in the marketplace or that customers will not decide
to use the basic functionality they receive from Microsoft as
part of the operating system. Sales of SDIO Now! have
traditionally represented the majority of our high-margin
proprietary software revenue.
If the
market for Windows Embedded operating systems and Windows Mobile
targeted platforms fails to develop further, develops more
slowly than expected, or declines, our business and operating
results may be materially harmed.
Because a significant portion of our revenue to date has been
generated by software products and engineering services targeted
at the Windows Embedded operating systems and Windows Mobile
platforms, if the market for these systems or platforms fails to
develop further or develops more slowly than expected, or
declines, our business and operating results could be negatively
impacted. Market acceptance of Windows Embedded and Windows
Mobile will depend on many factors, including:
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Microsofts development and support of the Windows Embedded
and Windows Mobile markets. As the developer and primary
promoter of Windows CE, Windows XP Embedded and Windows Mobile,
if Microsoft were to decide to discontinue or lessen its support
of these operating systems and platforms, potential customers
could select competing operating systems, which could reduce the
demand for our Windows Embedded and Windows Mobile software
products and engineering services which is our primary focus
today;
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The ability of the Microsoft Windows Embedded operating systems
and Windows Mobile software to compete against existing and
emerging operating systems for the smart device market,
including: VxWorks and pSOS from WindRiver Systems Inc.; Symbian
and Palm OS from PalmSource, Inc.; JavaOS from Sun Microsystems,
Inc.; and other proprietary operating systems. In particular, in
the market for handheld devices, Windows Mobile faces intense
competition from the Linux operating system. In the market for
converged devices, Windows Mobile faces intense competition from
the Symbian operating system. Windows Embedded operating systems
and the Windows Mobile for Smartphone may be unsuccessful in
capturing a significant share of these two segments of the smart
device market, or in maintaining its market share therein;
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The acceptance by OEMs and consumers of the mix of features and
functions offered by Windows Embedded operating systems and
Windows Mobile targeted platforms; and
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The willingness of software developers to continue to develop
and expand the applications that run on Windows Embedded
operating systems and Windows Mobile targeted platforms. To the
extent that software developers write applications for competing
operating systems that are more attractive to smart device users
than those available on Windows Embedded operating systems and
Windows Mobile targeted platforms, potential purchasers could
select competing operating systems over Windows Embedded
operating systems and Windows Mobile targeted platforms.
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General
Business-Related Risk Factors
Our
marketplace is extremely competitive, which may result in price
reductions, lower gross profit margins and loss of market
share.
The market for Windows-based embedded software and services is
extremely competitive. Increased competition may result in price
reductions, lower gross profit margin and loss of customers and
market share, which would harm our business. We face competition
from:
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Our current and potential customers internal research and
development departments, which may seek to develop their own
proprietary products and solutions that compete with our
proprietary software products and engineering services;
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North American engineering service firms such as Intrinsyc,
Vanteon and Teleca;
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16
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Off-shore development companies such as WiPro, particularly
those focused on the North American marketplace;
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ODMs, particularly those in Taiwan who are adding software
development capabilities to their offerings;
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Contract manufacturers who are adding software development
capabilities to their offerings; and
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Microsoft Embedded operating system distributors such as Arrow
and Avnet. Larger customers of Microsoft Embedded operating
systems are typically knowledgeable of the competing
distributors in the North American market and,
consequently, will often put large orders out to bid amongst the
distributors, which can create margin pressure and make it
difficult to maintain long-term relationships with these
customers. The gross profit margin on sales of Microsoft
Embedded Windows licenses is relatively low, historically about
14% on average. There can be no assurance that gross profit on
future sales will not decline given these competitive pressures.
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As we develop new products, particularly products focused on
specific industries, we may begin competing with companies with
which we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors
will form alliances, including alliances with Microsoft, that
may enable them to rapidly increase their market share.
Microsoft has not agreed to any exclusive arrangement with us,
nor has it agreed not to compete with us. Microsoft may decide
to bring more of the core embedded development services and
expertise that we provide in-house, possibly resulting in
reduced product and service revenue opportunities for us. The
barrier to entering the market as a provider of Windows-based
smart device software and services is low. In addition,
Microsoft has created marketing programs to encourage systems
integrators to work on Windows Embedded operating system
products and services. These systems integrators are given
substantially the same access by Microsoft to the Windows
technology as we are. New competitors may have lower overhead
than we do and may be able to undercut our pricing. We expect
that competition will increase as other established and emerging
companies enter the Windows-based smart device market, and as
new products and technologies are introduced.
Our
ability to maintain or grow the portion of our software revenue
attributable to our own proprietary software products is
contingent on our ability to bring to market competitive, unique
offerings that keep pace with technological changes and needs.
If we are not successful in doing so, our business would be
harmed.
Proprietary software product sales provide us with much higher
gross profit margins than we typically receive from third-party
software products and our engineering service offerings as well
as other advantages. Increasing the number and amount of
proprietary products we sell is an important part of our growth
strategy. Our ability to maintain and increase the revenue
contribution from proprietary software products is contingent on
our ability to enhance the features and functionality of our
current proprietary products as well as to devise, develop and
introduce new products. There can be no assurance that we will
be able to maintain and expand the number of proprietary
products that we sell, and our failure to do so could negatively
impact revenue and our operating results.
We may
experience delays in our efforts to develop new products and
services, and these delays could cause us to miss market
opportunities which could negatively impact our revenue and
operating results.
The market for Windows-based embedded software and services is
very competitive. As a result, the life cycles of our products
and services are difficult to estimate. To be successful, we
believe we must continue to enhance our current offerings and
provide new software product and service offerings with
attractive features, prices and terms that appeal to our
customers. We have experienced delays in enhancements and new
product release dates in the past and may be unable to introduce
enhancements or new products successfully or in a timely manner
in the future. Our revenue and operating results may be
negatively impacted if we delay releases of our products and
product enhancements, or if we fail to accurately anticipate our
customers needs or technical trends and are unable to
introduce new products and service offerings into the market
successfully. In addition, our customers may defer or forego
purchases of our products if we, Microsoft, our competitors or
major hardware, systems or software vendors introduce or
announce new products.
17
If the
market for smart devices develops more slowly than we expect, or
declines, our revenue may not develop as anticipated, if at all,
and our business would be harmed.
The market for smart devices is still emerging and the potential
size of this market and the timing of its development are not
known. As a result, our profit potential is uncertain and our
revenue may not develop as anticipated, if at all. We are
dependent upon the broad acceptance by businesses and consumers
of a wide variety of smart devices, which will depend on many
factors, including:
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The development of content and applications for smart devices;
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The willingness of large numbers of businesses and consumers to
use devices such as smartphones, PDAs and handheld industrial
data collectors to perform functions historically carried out
manually, or by traditional PCs, including inputting and sharing
data, communicating among users and connecting to the
Internet; and
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The evolution of industry standards or the necessary
infrastructure that facilitate the distribution of content over
the Internet to these devices via wired and wireless
telecommunications systems, satellite or cable.
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The
success and profitability of our engineering service offerings
are contingent on our ability to differentiate our offerings
adequately in the marketplace, which is, in turn, contingent on
our ability to retain our engineering personnel and defend our
billing rate structure against those of our competitors,
including those using lower-cost offshore resources. If we are
unable to do so successfully, our business could be
harmed.
We are a leader in providing engineering services to smart
device customers. Our market differentiation is created through
several factors, including our experience with a variety of
smart device platforms and applications. Our differentiation is
contingent, in part, on our ability to attract and retain
employees with this expertise, significantly all of whom are
currently based in the United States. To the extent we are
unable to retain critical engineering services talent
and/or our
competition is able to deliver the same services by using
lower-cost offshore resources, our service revenue and operating
results could be negatively impacted.
The
success and profitability of our service engagements are
contingent upon our ability to scope and bid engagements and
deliver our services profitably. If we are unable to do so, our
service revenue service gross profit margin and operating
results could be negatively impacted.
Various factors may cause the total cost of service projects to
exceed the original estimate provided to the customer or the
contractual maximum in the case of fixed price contracts,
including specification changes, customer deliverable delays,
inadequate scoping and inefficient service delivery. If we are
unable to adequately scope, bid and deliver on service
engagements successfully, our service revenue, service gross
profit and operating results could be negatively impacted. In
addition, depending on the cause of an overrun for a given
customer, we may also decide to provide pricing concessions to
that customer which could negatively impact our service revenue,
service gross profit and operating results.
We
have entered into engineering service agreements in which we
have agreed to perform our engineering service work at
relatively low rates per hour in exchange for royalties,
sometimes guaranteed, in the future. There is no guarantee that
these arrangements will culminate as anticipated.
We have entered into service contracts that involve reducing
up-front engineering service fees in return for a per-device
royalty as our customers ship their devices, and we may enter
into more such agreements in the future. Many of these contracts
call for guaranteed royalty payments by our customers. Because
we are delaying revenue past the point where our services are
performed, there is a risk that our customers may cancel their
device projects or that their devices may not be successful in
the market. In addition, these customers may not pay us all
royalties owed, which could negatively impact our revenue and
operating results.
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Cooperation
and support from silicon vendors is critical for the success of
our hardware reference designs. Such cooperation cannot be
assured.
We have been developing hardware reference designs based on the
Marvell PXA Xscale architecture and plan to develop reference
designs based on other silicon architectures. It is important
that the silicon on which we base our reference designs receive
continued support in the marketplace by the silicon vendors. For
example, during the development of our designs, Intel made a
strategic decision to sell its PXA Xscale division to Marvell
which negatively impacted the sale of our Xscale-based reference
designs. There can be no assurance that Marvell will continue to
pursue and support the markets that we have been targeting with
our reference designs. Cooperation and support from silicon
vendors is critical to the success of our reference designs, and
should silicon vendors not support our efforts, our revenue and
operating results could be negatively impacted.
The
long sales cycle of our products and services makes our revenue
susceptible to fluctuations.
Our sales cycle is typically three to nine months because the
expense and complexity of the software and engineering service
offerings we sell generally require a lengthy customer approval
process and may be subject to a number of significant risks over
which we have little or no control, including:
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Customers budgetary constraints and internal acceptance
review procedures;
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The timing of budget cycles; and
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The timing of customers competitive evaluation processes.
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In addition, to successfully sell software and engineering
service offerings, we must frequently educate our potential
customers about the full benefits of these software and
services, which can require significant time. If our sales cycle
further lengthens unexpectedly, it could adversely affect the
timing of our revenue which could cause our quarterly results to
fluctuate.
Erosion
of the financial condition of our customers could adversely
affect our business.
Our business could be adversely affected should the financial
condition of our customers erode, given that such erosion could
reduce demand from those customers for our software and
engineering services, could cause them to terminate their
relationships with us,
and/or could
increase the credit risk of those customers. If the global
information technology market weakens, the likelihood of the
erosion of the financial condition of our customers increases,
which could adversely affect the demand for our software and
services. Additionally, while we believe that our allowance for
doubtful accounts is adequate, those allowances may not cover
actual losses, which could adversely affect our business and
operating results.
We may
be subject to product liability claims that could result in
significant costs.
Our license, warranty and service agreements with our customers
typically contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however,
that these provisions may be ineffective under the laws of
certain jurisdictions. Although we have not experienced any
product liability claims to date, the sale and support of our
products and services may be subject to such claims in the
future. In addition, to the extent we develop and sell
increasingly comprehensive, customized turnkey solutions for our
customers, we may be increasingly subject to risks of product
liability claims. There is a risk that any such claims or
liabilities may exceed, or fall outside, the scope of our
insurance coverage, and we may be unable to retain adequate
liability insurance in the future. A product liability claim
brought against us, whether successful or not, could harm our
business and operating results.
Past
acquisitions have proven difficult to integrate, and future
acquisitions, if any, could disrupt our business, dilute
shareholder value and adversely affect our operating
results.
We have acquired the technologies, assets
and/or
operations of other companies in the past and may acquire or
make investments in companies, products, services and
technologies in the future as part of our growth strategy. As an
example, on June 30, 2005, we acquired certain assets of
Vibren Technologies, Inc. for $500,000 in cash and the
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assumption of certain liabilities and obligations. If we fail to
properly evaluate, integrate and execute on our acquisitions and
investments, our business and prospects may be seriously harmed.
In some cases, we have implemented reductions in workforce and
office closures in connection with an acquisition, which has
resulted in significant costs to us. To successfully complete an
acquisition, we must properly evaluate the technology,
accurately forecast the financial impact of the transaction,
including accounting charges and transaction expenses, integrate
and retain personnel, combine potentially different corporate
cultures and effectively integrate products and research and
development, sales, marketing and support operations. If we fail
to do any of these, we may suffer losses and impair
relationships with our employees, customers and strategic
partners. Additionally, management may be distracted from
day-to-day
operations. We also may be unable to maintain uniform standards,
controls, procedures and policies, which are especially critical
in light of the Sarbanes-Oxley and other corporate governance
requirements, and significant demands may be placed on our
management and our operations, information services and
financial, legal and marketing resources. Finally, acquired
businesses sometimes result in unexpected liabilities and
contingencies, which could be significant.
Intellectual
Property-Related Risk Factors
Our
software and service offerings could infringe the intellectual
property rights of third parties, which could expose us to
additional costs and litigation and could adversely affect our
ability to sell our products and services or cause shipment
delays or stoppages.
It is difficult to determine whether our products and
engineering services infringe third-party intellectual property
rights, particularly in a rapidly evolving technological
environment in which technologies often overlap and where there
may be numerous patent applications pending, many of which are
confidential when filed. If we were to discover that one of our
products or service offerings, or a product based on one of our
reference designs, violated a third-partys proprietary
rights, we may not be able to obtain a license on commercially
reasonable terms, or at all, to continue offering that product
or service. Similarly, third parties may claim that our current
or future products and services infringe their proprietary
rights, regardless of whether such claims have merit. Any such
claims could increase our costs and negatively impact our
business and operating results. In certain cases, we have been
unable to obtain indemnification against claims that third-party
technology incorporated into our products and services infringe
the proprietary rights of others. However, any indemnification
we do obtain may be limited in scope or amount. Even if we
receive broad third-party indemnification, these entities may
not have the financial capability to indemnify us in the event
of infringement. In addition, in some circumstances we are
required to indemnify our customers for claims made against them
that are based on our products or services. There can be no
assurance that infringement or invalidity claims related to the
products and services we provide, or arising from the
incorporation by us of third-party technology, and claims for
indemnification from our customers resulting from such claims,
will not be asserted or prosecuted against us. Some of our
competitors have, or are affiliated, with companies with
substantially greater resources than we have, and these
competitors may be able to sustain the costs of complex
intellectual property litigation to a greater degree and for
longer periods of time than we could. In addition, we expect
that software developers will be increasingly subject to
infringement claims as the number of products and competitors in
the software industry grows, and as the functionality of
products in different industry segments increasingly overlap.
Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources in
addition to potential product redevelopment costs and delays.
Furthermore, if we were unsuccessful in resolving a patent or
other intellectual property infringement action claim against
us, we may be prohibited from developing or commercializing
certain of our technologies and products, or delivering services
based on the infringing technology, unless we obtain a license
from the holder of the patent or other intellectual property
rights. There can be no assurance that we would be able to
obtain any such license on commercially favorable terms, or at
all. If such license is not obtained, we would be required to
cease these related business operations, which could have a
material adverse effect on our business, revenue and operating
results.
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If we
fail to adequately protect our intellectual property rights,
competitors may be able to use our technology or trademarks,
which could weaken our competitive position, reduce our revenue
and increase our costs.
If we fail to adequately protect our intellectual property, our
competitive position could be weakened and our revenue adversely
affected. We rely primarily on a combination of patent,
copyright, trade secret and trademark laws, as well as
confidentiality procedures and contractual provisions, to
protect our intellectual property. These laws and procedures
provide only limited protection. We have applied for a number of
patents relating to our engineering work although we do not rely
on patents as our primary defensive measure in protecting our
intellectual property. These patents, both issued and pending,
may not provide sufficiently broad protection, or they may not
prove to be enforceable, against alleged infringers. There can
be no assurance that any of our pending patents will be granted.
Even if granted, these patents may be circumvented or challenged
and, if challenged, may be invalidated. Any patents obtained may
provide limited or no competitive advantage to us. It is also
possible that another party could obtain patents that block our
use of some, or all, of our products and services. If that
occurred, we would need to obtain a license from the patent
holder or design around those patents. The patent holder may or
may not choose to make a license available to us at all or on
acceptable terms. Similarly, it may not be possible to design
around a blocking patent. In general, there can be no assurance
that our efforts to protect our intellectual property rights
through patent, copyright, trade secret and trademark laws will
be effective to prevent misappropriation of our technology, or
to prevent the development and design by others of products or
technologies similar to or competitive with those developed by
us.
We frequently license the source code of our products and the
source code results of our services to customers. There can be
no assurance that customers with access to our source code will
comply with the license terms or that we will discover any
violations of the license terms or, in the event of discovery of
violations, that we will be able to successfully enforce the
license terms
and/or
recover the economic value lost from such violations. To license
some of our software products, we rely in part on
shrinkwrap and clickwrap licenses that
are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. As with
other software, our products are susceptible to unauthorized
copying and uses that may go undetected, and policing such
unauthorized use is difficult. A significant portion of our
marks include the word BSQUARE or the preface
b. Other companies use forms of BSQUARE
or the preface b in their marks alone, or in
combination with other words, and we cannot prevent all such
third-party uses. We license certain trademark rights to third
parties. Such licensees may not abide by our compliance and
quality control guidelines with respect to such trademark rights
and may take actions that would harm our business.
The computer software market is characterized by frequent and
substantial intellectual property litigation, which is often
complex and expensive, and involves a significant diversion of
resources and uncertainty of outcome. Litigation may be
necessary in the future to enforce our intellectual property or
to defend against a claim of infringement or invalidity.
Litigation could result in substantial costs and the diversion
of resources and could negatively impact our business and
operating results.
Our
software or hardware products or the third-party hardware or
software integrated with our products may suffer from defects or
errors that could impair our ability to sell our products and
services.
Software and hardware components as complex as those needed for
smart devices frequently contain errors or defects, especially
when first introduced or when new versions are released. We have
had to delay commercial release of certain versions of our
products until problems were corrected and, in some cases, have
provided product enhancements to correct errors in released
products. Some of our contracts require us to repair or replace
products that fail to work. To the extent that we repair or
replace products our expenses may increase. In addition, it is
possible that by the time defects are fixed, the market
opportunity may decline which may result in lost revenue.
Moreover, to the extent that we provide increasingly
comprehensive products and services, particularly those focused
on hardware, and rely on third-party manufacturers and suppliers
to manufacture these products, we will be dependent on the
ability of third-party manufacturers to correct, identify and
prevent manufacturing errors. Errors that are discovered after
commercial release could result in loss of revenue or delay in
market acceptance, diversion of development resources, damage to
our reputation and increased service and warranty costs, all of
which could negatively affect our business and operating results.
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If we
are unable to license key software from third parties, our
business could be harmed.
We sometimes integrate third-party software with our proprietary
software and engineering service offerings or sell such
third-party software offerings on a standalone basis (e.g.
embedded operating systems under our ODA with Microsoft). If our
relationships with these third-party software vendors were to
deteriorate, or be eliminated in their entirety, we might be
unable to obtain licenses on commercially reasonable terms, if
at all. In the event that we are unable to obtain these
third-party software offerings, we would be required to develop
this technology internally, assuming it was economically or
technically feasible, or seek similar software offerings from
other third parties assuming there were competing offerings in
the marketplace, which could delay or limit our ability to
introduce enhancements or new products, or to continue to sell
existing products and engineering services, thereby negatively
impacting our revenue and operating results.
Governace
and Contract-Related Risk Factors
It
might be difficult for a third-party to acquire us even if doing
so would be beneficial to our shareholders.
Certain provisions of our articles of incorporation, bylaws and
Washington law may discourage, delay or prevent a change in the
control of us or a change in our management, even if doing so
would be beneficial to our shareholders. Our Board of Directors
has the authority under our amended and restated articles of
incorporation to issue preferred stock with rights superior to
the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily with terms
calculated to delay or prevent a change in control of our
company or make removal of our management more difficult. In
addition, our Board of Directors is divided into three classes.
The directors in each class serve for three-year terms, one
class being elected each year by our shareholders. This system
of electing and removing directors may discourage a third-party
from making a tender offer or otherwise attempting to obtain
control of our company because it generally makes it more
difficult for shareholders to replace a majority of our
directors. In addition, Chapter 19 of the Washington
Business Corporation Act generally prohibits a target
corporation from engaging in certain significant business
transactions with a defined acquiring person for a
period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority
of the members of the target corporations Board of
Directors prior to the time of acquisition. This provision may
have the effect of delaying, deterring or preventing a change in
control of our company. The existence of these anti-takeover
provisions could limit the price that investors might be willing
to pay in the future for shares of our common stock.
We
will incur substantial costs to comply with the requirements of
the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 (the Act) introduced new
requirements regarding corporate governance and financial
reporting. Among the many requirements is the requirement under
Section 404 of the Act for management to annually assess
and report on the effectiveness of our internal control over
financial reporting and for our registered public accountant to
attest to this report. The SEC has modified the effective date
and adoption requirements of Section 404 implementation for
non-accelerated filers, such as us, such that we are first
required to issue our management report on internal control over
financial reporting in our annual report on
Form 10-K
for the fiscal year ending December 31, 2007. We will be
required to dedicate significant time and resources during
fiscal 2007 to ensure compliance. The costs to comply with these
requirements will likely be significant and adversely affect our
operating results. In addition, there can be no assurance that
we will be successful in our efforts to comply with
Section 404. Failure to do so could result in penalties and
additional expenditures to meet the requirements, which could
affect the ability of our auditors to issue an unqualified
report (currently required by December 31,
2008) which, in turn, may further adversely affect our
business and operating results.
Non-compliance
with our lease agreement could have a material adverse impact on
our financial position.
If we default under our corporate headquarters lease, the
landlord has the ability to demand cash payments forgiven in
2004 under the former headquarters lease. The amount of the
forgiven payments for which the landlord has the ability to
demand repayment, in the event of default, decreases on a
straight-line basis over the length of our
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ten-year headquarters lease. The total amount of cash payments
forgiven for which the landlord has the ability to demand
repayment was $1.8 million at December 31, 2006. Any
breach of or non-compliance with these lease agreements could
have a material adverse impact on our business.
Decreased
effectiveness of equity compensation could adversely affect our
ability to attract and retain employees, and required changes in
accounting for equity compensation could adversely affect
earnings.
We have historically used stock options and other forms of
equity-related compensation as key components of our overall
employee compensation program in order to align employees
interests with the interests of our shareholders, encourage
employee retention, and provide competitive compensation
packages. Applicable stock exchange listing standards relating
to obtaining shareholder approval of equity compensation plans
could make it more difficult or expensive for us to grant
options or new forms of equity instruments to employees in the
future. As a result, we may incur increased compensation costs,
change our equity compensation strategy or find it difficult to
attract, retain and motivate employees, any of which could
materially adversely affect our business.
International
Operations-Related Risk Factors
Our
international operations expose us to greater intellectual
property, management, collections, regulatory and other
risks.
Customers outside of North America generated approximately 5% of
our total revenue for the year ended December 31, 2006. We
currently have international operations in Taipei, Taiwan;
Vancouver, British Columbia, Canada; and Tokyo, Japan. Our
international activities and operations expose us to a number of
risks, including the following:
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Greater difficulty in protecting intellectual property due to
less stringent foreign intellectual property laws and
enforcement policies;
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Longer collection cycles than we typically experience in the
North America;
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Unfavorable changes in regulatory practices and tariffs;
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Complex
and/or
adverse tax laws
and/or
changes thereto. Additionally, we may be subject to income,
withholding and other taxes for which we may realize no current
benefit despite the existence of significant net operating
losses and tax credits in the U.S.;
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Loss or reduction of withholding tax exemptions;
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The impact of fluctuating exchange rates between the
U.S. dollar and foreign currencies; and
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General economic and political conditions in international
markets which may differ from those in the U.S.
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These risks could have a material adverse effect on the
financial and managerial resources required to operate our
foreign offices, as well as on our future international revenue,
which could harm our business and operating results.
As we
increase the amount of software development conducted in
non-U.S. locations,
potential delays and quality issues may impact our ability to
timely deliver our software and services, potentially impacting
our revenue and profitability.
We conduct development activities in
non-U.S. locations,
primarily India, through a partnership with a local company, and
Taiwan, to take advantage of the high-quality, low-cost software
development resources found in these countries. Additionally, we
have plans to increase development activity in both our Taiwan
operation and other
non-U.S. locations
as engineering demands necessitate the hiring of additional
engineering personnel. To date, we have limited experience in
managing large scale software development done in
non-U.S. locations.
Moving portions of our software development to these locations
inherently increases the complexity of managing these programs
and may result in delays in introducing new products to market,
or delays in completing service projects for our customers,
which in turn may adversely impact the revenue we recognize from
related products and services and could also adversely impact
the profitability of service engagements employing offshore
resources.
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As our
customers seek more cost-effective locations to develop and
manufacture their smart devices, particularly overseas
locations, our ability to continue to sell these customers our
products and services could be limited, which could negatively
impact our revenue and operating results.
Due to competitive and other pressures, some of our customers
have and others may seek to move the development and
manufacturing of their smart devices to overseas locations which
may limit our ability to sell these customers our products and
services. As an example, under our OEM Distribution Agreement
with Microsoft, we are only able to resell Microsoft Embedded
operating systems largely in North America. If our customers, or
potential customers, move their manufacturing overseas we may be
restricted from reselling these customers Microsoft Embedded
operating systems, or our other products and services, which
could negatively impact our revenue and operating results.
Our corporate headquarters are located in 43,400 square
feet of leased space in a single location in Bellevue,
Washington. The underlying lease expires in 2014.
In North America, we also lease office space in San Diego,
California; Longmont, Colorado; Akron, Ohio; and Vancouver,
British Columbia, Canada. We also lease office space
internationally in Taipei, Taiwan. Our facilities have
sufficient capacity to support our current operational needs as
well as short-term growth plans.
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Item 3.
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Legal
Proceedings.
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IPO
Litigation
In Summer and early Fall 2001, four purported shareholder class
action lawsuits were filed in the United States District Court
for the Southern District of New York against us, certain of our
current and former officers and directors (the Individual
Defendants), and the underwriters of our initial public
offering (the Underwriter Defendants). The suits
purport to be class actions filed on behalf of purchasers of our
common stock during the period from October 19, 1999 to
December 6, 2000. The complaints against us have been
consolidated into a single action and a Consolidated Amended
Complaint, which was filed on April 19, 2002 and is now the
operative complaint.
The plaintiffs allege that the Underwriter Defendants agreed to
allocate stock in our initial public offering to certain
investors in exchange for excessive and undisclosed commissions
and agreements by those investors to make additional purchases
of stock in the aftermarket at pre-determined prices. The
plaintiffs allege that the prospectus for our initial public
offering was false and misleading in violation of the securities
laws because it did not disclose these arrangements. The action
seeks damages in an unspecified amount.
The action is being coordinated with approximately 300 other
nearly identical actions filed against other companies. On
July 15, 2002, we moved to dismiss all claims against us
and the Individual Defendants. On October 9, 2002, the
district court dismissed the Individual Defendants from the case
without prejudice based upon stipulations of dismissal filed by
the plaintiffs and the Individual Defendants. On
February 19, 2003, the district court denied the motion to
dismiss the complaint against us. On October 13, 2004, the
district court certified a class in six of the approximately 300
other nearly identical actions (the focus cases) and
noted that the decision is intended to provide strong guidance
to all parties regarding class certification in the remaining
cases. The Underwriter Defendants appealed this decision and the
Second Circuit vacated the district courts decision
granting class certification in the six focus cases on
December 5, 2006. The plaintiffs have not yet moved to
certify a class in our case.
We have approved a settlement agreement and related agreements
which set forth the terms of a settlement between us, the
Individual Defendants, the plaintiff class and the vast majority
of the other approximately 300 issuer defendants. It is unclear
what impact the Second Circuits decision vacating class
certification in the focus cases will have on the settlement,
which has not yet been finally approved by the district court.
On December 14, 2006, Judge Scheindlin held a hearing. The
plaintiffs informed the district court that they planned to file
a petition for rehearing and rehearing en banc. The
district court stayed all proceedings, including a decision on
final approval of the
24
settlement and any amendments of the complaints, pending the
Second Circuits decision on the plaintiffs petition
for rehearing. The plaintiffs filed the petition for rehearing
and rehearing en banc on January 5, 2007.
Pursuant to the settlement and related agreements, if the
settlement receives final approval by the district court, the
settlement provides for a release of us and the Individual
Defendants for the conduct alleged in the action to be wrongful.
We would agree to undertake certain responsibilities, including
agreeing to assign away, not assert, or release certain
potential claims we may have against the Underwriter Defendants.
The settlement agreement also provides a guaranteed recovery of
$1 billion to plaintiffs for the cases relating to all of
the approximately 300 issuers. To the extent that the
Underwriter Defendants settle all of the cases for at least
$1 billion, no payment will be required under the
issuers settlement agreement. To the extent that the
Underwriter Defendants settle for less than $1 billion, the
issuers are required to make up the difference. On
April 20, 2006, JPMorgan Chase and the plaintiffs reached a
preliminary agreement to settle for $425 million. The
JPMorgan Chase preliminary agreement has not yet been approved
by the district court. In an amendment to the issuers
settlement agreement, the issuers insurers agreed that the
JPMorgan Chase preliminary agreement, if approved, will only
offset the insurers obligation to cover the remainder of
the plaintiffs guaranteed $1 billion recovery by 50%
of the value of the JPMorgan Chase settlement, or
$212.5 million. Therefore, if the JPMorgan Chase
preliminary agreement to settle is finalized and then approved
by the district court, then the maximum amount that the
issuers insurers will be potentially liable for is
$787.5 million. It is unclear what impact the Second
Circuits decision vacating class certification in the
focus cases will have on the JPMorgan Chase preliminary
agreement.
We anticipate that any potential financial obligation of us to
plaintiffs pursuant to the terms of the issuers settlement
agreement and related agreements will be covered by existing
insurance. We currently are not aware of any material
limitations on the expected recovery of any potential financial
obligation to plaintiffs from our insurance carriers. Our
carriers are solvent, and we are not aware of any uncertainties
as to the legal sufficiency of an insurance claim with respect
to any recovery by plaintiffs. Therefore, we do not expect that
the settlement will involve any payment by us. If material
limitations on the expected recovery of any potential financial
obligation to the plaintiffs from our insurance carriers should
arise, our maximum financial obligation to plaintiffs pursuant
to the settlement agreement would be less than
$3.4 million. However, if the JPMorgan Chase preliminary
agreement is preliminarily and then finally approved, our
maximum financial obligation to the plaintiffs pursuant to the
settlement agreement would be approximately $2.7 million.
There is no assurance that the district court will grant final
approval to the issuers settlement. If the settlement
agreement is not approved and we are found liable, we are unable
to estimate or predict the potential damages that might be
awarded, whether such damages would be greater than our
insurance coverage, and whether such damages would have a
material impact on our results of operations or financial
condition in any future period.
Customer
Litigation
As previously reported, we had been in dispute with a former
customer (Former Customer) regarding payment of
amounts due for a contract under which we provided professional
engineering services. We had an account receivable outstanding
with the Former Customer of $475,000 as of September 30,
2006 and increased the allowance for doubtful accounts by
$475,000 in the fourth quarter of 2005 related to this account
receivable. As a result of the dispute, we filed a Complaint for
breach of contract and misappropriation of intellectual property
against the Former Customer on December 22, 2005 in federal
district court in the state of Delaware. On January 27,
2006, the Former Customer filed an Answer and Counterclaim
against us, and we filed our Reply to the Former Customers
Answer and Counterclaim on February 16, 2006, denying all
counterclaims against us.
On October 31, 2006, we and the Former Customer settled
this dispute by entering into a settlement agreement (the
Settlement Agreement). Under the Settlement
Agreement, the Former Customer has agreed to pay a Settlement
Amount of $200,000 to us on or before December 31, 2009 and
also provide certain intellectual property to us, under a
license agreement. The Former Customer made an initial payment
of $10,000 upon execution of the Settlement Agreement. The
remaining amount owed to us under the Settlement Agreement will
be satisfied through the purchase of Microsoft embedded
operating systems from us or through commissions and royalties
earned by us related to the sale of the Former Customers
intellectual property. The Former Customers parent company
has placed its common stock in escrow to guarantee performance
under the Settlement Agreement, including an
25
agreement that the Settlement Amount is satisfied by
December 31, 2009. Additionally, the Settlement Agreement
provides that all claims between the parties are terminated. The
settlement structure provides for the possibility of ongoing
commission and royalty revenue to us after the satisfaction of
the $200,000 settlement amount such that the total recovery may
be greater than $200,000.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matters were submitted to a vote of shareholders during the
fourth quarter ended December 31, 2006.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Market
Information
Our common stock is traded on the NASDAQ Global Market (formerly
known as the NASDAQ National Market) under the symbol
BSQR. The following table sets forth the high and
low sale prices for our common stock for the periods indicated,
as reported by the NASDAQ Global Market. These prices reflect
the 1-for-4
reverse stock split that occurred effective October 7,
2005. For 20 trading days subsequent to and including the
effective date of the reverse split, our common stock traded
under the symbol BSQRD.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31,
2006:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.99
|
|
|
$
|
2.77
|
|
Second Quarter
|
|
$
|
3.04
|
|
|
$
|
1.87
|
|
Third Quarter
|
|
$
|
2.50
|
|
|
$
|
1.93
|
|
Fourth Quarter
|
|
$
|
3.00
|
|
|
$
|
1.93
|
|
Year Ended December 31,
2005:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
6.00
|
|
|
$
|
1.84
|
|
Second Quarter
|
|
$
|
2.32
|
|
|
$
|
1.52
|
|
Third Quarter
|
|
$
|
3.04
|
|
|
$
|
1.84
|
|
Fourth Quarter
|
|
$
|
4.06
|
|
|
$
|
1.90
|
|
Holders
As of January 31, 2007 there were approximately 206 holders
of record of our common stock. Because many shares of our common
stock are held by brokers and other institutions on behalf of
shareholders, we are unable to determine the total number of
shareholders represented by these holders of record.
Dividends
We have never paid cash dividends on our common stock. We
currently intend to retain any future earnings to fund future
development and growth and, therefore, do not anticipate paying
any cash dividends in the foreseeable future.
26
|
|
Item 6.
|
Selected
Financial Data.
|
The following selected consolidated financial data should be
read in conjunction with the consolidated financial statements
and the notes thereto in Item 8 of Part II,
Financial Statements and Supplementary Data, and the
information contained in Item 7 of Part II,
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Historical results
are not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
49,815
|
|
|
$
|
42,923
|
|
|
$
|
38,920
|
|
|
$
|
37,542
|
|
|
$
|
37,506
|
|
Cost of revenue(1)
|
|
|
37,828
|
|
|
|
33,039
|
|
|
|
29,870
|
|
|
|
31,141
|
|
|
|
30,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,987
|
|
|
|
9,884
|
|
|
|
9,050
|
|
|
|
6,401
|
|
|
|
6,711
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative(1)
|
|
|
10,046
|
|
|
|
9,504
|
|
|
|
9,176
|
|
|
|
12,609
|
|
|
|
19,230
|
|
Research and development(1)
|
|
|
2,820
|
|
|
|
1,950
|
|
|
|
855
|
|
|
|
1,768
|
|
|
|
10,747
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,698
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
847
|
|
Impairment of goodwill and other
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
453
|
|
|
|
6,472
|
|
Restructuring and other related
charges (credits)
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
(2,960
|
)
|
|
|
16,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,866
|
|
|
|
11,454
|
|
|
|
10,071
|
|
|
|
11,920
|
|
|
|
55,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(879
|
)
|
|
|
(1,570
|
)
|
|
|
(1,021
|
)
|
|
|
(5,519
|
)
|
|
|
(48,532
|
)
|
Interest and other income (expense)
|
|
|
442
|
|
|
|
287
|
|
|
|
237
|
|
|
|
1,059
|
|
|
|
(1,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(437
|
)
|
|
|
(1,283
|
)
|
|
|
(784
|
)
|
|
|
(4,460
|
)
|
|
|
(50,432
|
)
|
Income tax provision
|
|
|
(29
|
)
|
|
|
(14
|
)
|
|
|
(11
|
)
|
|
|
(75
|
)
|
|
|
(1,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(466
|
)
|
|
|
(1,297
|
)
|
|
|
(795
|
)
|
|
|
(4,535
|
)
|
|
|
(52,128
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(6,256
|
)
|
|
|
(9,449
|
)
|
|
|
(6,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(466
|
)
|
|
|
(1,297
|
)
|
|
|
(7,051
|
)
|
|
|
(13,984
|
)
|
|
|
(58,606
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(466
|
)
|
|
$
|
(1,297
|
)
|
|
$
|
(7,051
|
)
|
|
$
|
(13,984
|
)
|
|
$
|
(73,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(5.73
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.66
|
)
|
|
|
(1.01
|
)
|
|
|
(0.71
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(1.50
|
)
|
|
$
|
(8.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue service
|
|
$
|
190
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Selling, general and administrative
|
|
|
445
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
715
|
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short-term
investments and restricted cash
|
|
$
|
11,109
|
|
|
$
|
10,694
|
|
|
$
|
12,943
|
|
|
$
|
17,745
|
|
|
$
|
35,425
|
|
Working capital
|
|
$
|
10,252
|
|
|
$
|
9,502
|
|
|
$
|
11,125
|
|
|
$
|
16,490
|
|
|
$
|
27,957
|
|
Total assets
|
|
$
|
19,676
|
|
|
$
|
19,570
|
|
|
$
|
18,944
|
|
|
$
|
30,113
|
|
|
$
|
53,569
|
|
Long-term obligations, net of
current portion
|
|
$
|
355
|
|
|
$
|
379
|
|
|
$
|
375
|
|
|
$
|
|
|
|
$
|
5,431
|
|
Shareholders equity
|
|
$
|
12,076
|
|
|
$
|
11,463
|
|
|
$
|
12,734
|
|
|
$
|
19,338
|
|
|
$
|
32,634
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with our consolidated financial statements and
related notes. Some statements and information contained in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations are not historical facts but are
forward-looking statements. For a discussion of these
forward-looking statements, and of important factors that could
cause results to differ materially from the forward-looking
statements contained in this report, see Item 1 of
Part I, Business Forward-Looking
Statements and Item 1A of Part I, Risk
Factors.
Overview
We provide software and engineering services to the smart device
marketplace. A smart device is a dedicated purpose computing
device that typically has the ability to display information,
runs an operating system (e.g.,
Microsoft®
Windows®
CE 6.0) and may be connected to a network via a wired or
wireless connection. Examples of smart devices that we target
include set-top boxes, home gateways,
point-of-sale
terminals, kiosks, voting machines, gaming platforms, PDAs,
personal media players and smartphones. We primarily focus on
smart devices that utilize embedded versions of the Microsoft
Windows family of operating systems, specifically Windows CE,
Windows XP Embedded and Windows
Mobiletm.
We have been providing software and engineering services to the
smart device marketplace since our inception. Our customers
include world class OEMs, ODMs, silicon vendors, peripheral
vendors, and enterprises with customized device needs such as
retailers and wireless operators that market and distribute
connected smart devices. The software and engineering services
we provide our customers are utilized and deployed throughout
various phases of our customers device life cycle,
including design, development, customization, quality assurance
and deployment.
Until 2004, we were also in the business of manufacturing and
distributing our own proprietary hardware device, called the
Power Handheld, which was sold to telecommunication carriers.
During the second quarter of 2004, we decided to discontinue
this hardware business and end the manufacturing of the device.
The hardware business segment is reported as a discontinued
operation in our financial results.
Critical
Accounting Judgments
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires estimates and assumptions that affect the reported
amounts of assets and liabilities, revenue and expenses and
related disclosures of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The
SEC has defined a companys critical accounting policies as
those that are most important to the portrayal of our financial
condition and results of operations, and those that require us
to make our most difficult and subjective judgments, often as a
result of the need to make estimates related to matters that are
inherently uncertain. Based on this definition, we have
identified the critical accounting policies and judgments
addressed below. We also have other key accounting policies,
which involve the use of estimates, judgments and assumptions
that are relevant to understanding our results. For additional
information see Item 8 of Part II, Financial
Statements and Supplementary Data
Note 1 Description of Business and Accounting
Policies.
28
Although we believe that our estimates, assumptions and
judgments are reasonable, they are necessarily based upon
presently available information. Actual results may differ
significantly from these estimates under different assumptions,
judgments or conditions.
Revenue
Recognition
We recognize revenue from software and engineering service sales
when the following four revenue recognition criteria are met:
persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the selling price is
fixed or determinable; and collectibility is reasonably assured.
Contracts and customer purchase orders are generally used to
determine the existence of an arrangement. Shipping documents
and customer acceptance, when applicable, are used to verify
delivery. We assess whether the selling price is fixed or
determinable based on the contract and payment terms associated
with the transaction and whether the sales price is subject to
refund or adjustment. We assess collectibility based primarily
on the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customers payment
history.
We recognize revenue upon shipment provided that no significant
obligations remain on our part and substantive acceptance
conditions, if any, have been met. We also enter into
arrangements in which a customer purchases a combination of
software licenses, engineering services and post-contract
customer support or maintenance (PCS). As a result, significant
contract interpretation is sometimes required to determine the
appropriate accounting, including how the price should be
allocated among the deliverable elements if there are multiple
elements, whether undelivered elements are essential to the
functionality of delivered elements, and when to recognize
revenue. PCS includes rights to upgrades, when and if available,
telephone support, updates, and enhancements. When vendor
specific objective evidence (VSOE) of fair value exists for all
elements in a multiple element arrangement, revenue is allocated
to each element based on the relative fair value of each of the
elements. VSOE of fair value is established by the price charged
when the same element is sold separately. Accordingly, the
judgments involved in assessing VSOE have an impact on the
recognition of revenue in each period. Changes in the allocation
of the sales price between deliverables might impact the timing
of revenue recognition but would not change the total revenue
recognized on the contract.
When elements such as software and engineering services are
contained in a single arrangement, or in related arrangements
with the same customer, we allocate revenue to each element
based on its relative fair value, provided that such element
meets the criteria for treatment as a separate unit of
accounting. In the absence of fair value for a delivered
element, we allocate revenue first to the fair value of the
undelivered elements and allocate the residual revenue to the
delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a delay of revenue
recognition for the delivered elements until the undelivered
elements are fulfilled. As a result, contract interpretations
and assessments of fair value are sometimes required to
determine the appropriate accounting.
Service revenue from fixed-priced contracts is recognized using
the percentage of completion method. Percentage of completion is
measured based primarily on input measures such as hours
incurred to date compared to total estimated hours to complete,
with consideration given to output measures, such as contract
milestones, when applicable. We rely on estimates of total
expected hours as a measure of performance and cost in order to
determine the amount of revenue to be recognized. Revisions to
hour and cost estimates are recorded in the period the facts
that give rise to the revision become known. Service revenue
from time and materials contracts and training services is
recognized as services are performed.
When elements such as engineering services and royalties are
contained in a single arrangement, we recognize revenue from
engineering services as earned in accordance with the four
revenue recognition criteria stated above. We recognize royalty
revenue when we receive the royalty report from the customer,
which is usually thirty to forty-five days after month end.
Deferred revenue includes deposits received from customers for
service contracts and unamortized service contract revenue,
customer advances under OEM licensing agreements and maintenance
revenue. In instances where final acceptance of the software or
services is specified by the customer, revenue is deferred until
all acceptance criteria have been met.
29
Allowance
for Doubtful Accounts
Our accounts receivable balances are net of an estimated
allowance for doubtful accounts. We perform ongoing credit
evaluations of our customers financial condition and
generally do not require collateral. We estimate the
collectability of our accounts receivable and record an
allowance for doubtful accounts. We consider many factors when
making this estimate, including analyzing accounts receivable
and historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in
customer payment history, when evaluating the adequacy of the
allowance for doubtful accounts. Because the allowance for
doubtful accounts is an estimate, it may be necessary to adjust
it if actual bad debt expense exceeds the estimated reserve.
Stock-Based
Compensation
Effective January 1, 2006, we began recording compensation
expense associated with stock options and other forms of equity
compensation in accordance with Statement of Financial
Accounting Standards No. 123R, Share-Based Payment
(SFAS 123R), as interpreted by SEC Staff
Accounting Bulletin No. 107. Prior to
December 31, 2005, we accounted for stock options according
to the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, as
permitted by SFAS 123, Accounting for Stock-Based
Compensation, and, therefore, no related compensation
expense was recorded for awards granted with no intrinsic value.
We adopted the modified prospective transition method provided
for under SFAS 123R and consequently have not retroactively
adjusted results for prior periods. Under this transition
method, compensation cost associated with stock options
includes: 1) compensation cost related to the remaining
unvested portion of all stock option awards granted prior to
December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS 123; and 2) compensation cost related to all
stock option awards granted subsequent to December 31,
2005, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. We record expense over
the vesting period using the straight-line method. Compensation
expense for awards under SFAS 123R includes an estimate for
forfeitures.
At December 31, 2006, total compensation cost related to
stock options granted to employees under the Companys
stock option plans but not yet recognized was $470,000, net of
estimated forfeitures. This cost will be amortized on the
straight-line method over a weighted-average period of
approximately 1.4 years and will be adjusted for subsequent
changes in estimated forfeitures.
Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate income taxes in each of
the countries in which we operate. This process involves
estimating our current tax exposure together with assessing
temporary differences resulting from differing treatment of
items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities. We must then assess the
likelihood that our deferred tax assets will be recovered from
future taxable income, and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance.
To the extent we establish a valuation allowance, or increase
this allowance in a period, it may result in an expense within
the tax provision in the statements of operations. Significant
management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax
assets. We have provided a full valuation allowance on deferred
tax assets because of our uncertainty regarding their
realizability based on our valuation estimates. If we determine
that it is more likely than not that the deferred tax assets
would be realized, the valuation allowance would be reversed. In
order to realize our deferred tax assets, we must be able to
generate sufficient taxable income. Additionally, because we do
business in foreign tax jurisdictions, our sales may be subject
to other taxes, particularly withholding taxes. The tax
regulations governing withholding taxes are complex, causing us
to have to make assumptions about the appropriate tax treatment
and estimates of resulting withholding taxes.
In the second quarter of 2005, we became aware that certain
amounts remitted, or that were planned to be remitted, from our
Taiwan subsidiary or Taiwanese customers might be subject to
withholding tax at 20% of the amount remitted. In the fourth
quarter of 2005, we began applying for withholding tax
exemptions from the Taiwan government on all significant
contracts on which withholding tax might be owed. When granted,
these exemptions
30
eliminate any withholding tax and Taiwan-based income tax, as
applicable, for the contract to which the exemption relates. To
date, we have received approval for all withholding exemption
applications that we have filed for which significant
withholding tax might be owed. However, there is no assurance
that future exemptions will be granted, and if we do not receive
all, or some, of the exemptions for which we apply, we could be
obligated to pay withholding tax in the future. We are
continuing to evaluate alternative business and tax planning
strategies to minimize corporate income and withholding tax
obligations in connection with our Taiwan subsidiary.
Results
of Operations
The following table presents certain financial data as a
percentage of total revenue for the periods indicated. Our
historical operating results are not necessarily indicative of
the results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of Total Revenue
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
66
|
%
|
|
|
73
|
%
|
|
|
73
|
%
|
Service
|
|
|
34
|
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
52
|
|
|
|
58
|
|
|
|
56
|
|
Service
|
|
|
24
|
|
|
|
19
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
76
|
|
|
|
77
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24
|
|
|
|
23
|
|
|
|
23
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
20
|
|
|
|
22
|
|
|
|
24
|
|
Research and development
|
|
|
6
|
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26
|
|
|
|
27
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2
|
)%
|
|
|
(4
|
)%
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Years Ended December 31, 2006, 2005 and
2004
Revenue
Total revenue consists of sales of software and engineering
services to smart device makers. Software revenue consists of
sales of third-party software and sales of our own proprietary
software products which include royalties from our software
products, software development kits and smart device reference
designs as well as royalties from our software products.
Engineering service revenue is derived from hardware and
software development, maintenance and support contracts, fees
for customer training, and rebillable expenses.
Total revenue was $49.8 million in 2006 and
$42.9 million in 2005, representing an increase of
$6.9 million or 16%. This increase was due to higher sales
of software and engineering services discussed further below.
Total revenue was $42.9 million in 2005 and
$38.9 million in 2004, representing an increase of
$4 million or 10%. This increase was due to higher sales of
software and professional engineering services discussed further
below. A significant portion of our total revenue in 2004 was
attributable to Cardinal Healthcare Systems (Cardinal), which
accounted for 19% of our total revenue. In 2005, Cardinal
represented $831,000, or 2%, of total revenue. In the second
quarter of 2005, Cardinal began purchasing from a competitor and
discontinued purchasing from us.
31
Revenue from customers located outside of North America includes
revenue attributable to our foreign operations, as well as
software and services delivered to foreign customers from our
operations located in North America. We currently have
international operations in Taipei, Taiwan; Vancouver, British
Columbia, Canada; and Tokyo, Japan. In the fourth quarter of
2003, we closed our Japan operations, but re-established a
direct sales presence in Tokyo, Japan, in the fourth quarter of
2005. Revenue from customers located outside of North America
was $2.7 million in 2006 and $2.3 million in 2005,
representing an increase of $.4 million or 17%. This
increase was primarily due to increased service revenue at our
Taiwan subsidiary. Billable hours in Taiwan for 2006 increased
144% from 2005 offset by a 56% decline in our realized rate per
hour in Taiwan attributable to some service contracts on which
we have agreed to perform services at relatively low rates in
exchange for per device royalties, some of which are guaranteed.
Revenue from customers located outside of the United States was
$3.8 million in 2005 and $4.8 million in 2004,
representing a decrease of $1.0 million or 20%. This
decrease was primarily due to a continued decrease in
engineering projects in Asia.
Software
revenue
Software revenue for 2006, 2005 and 2004 is presented below
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Software revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party software
|
|
$
|
30,317
|
|
|
$
|
28,561
|
|
|
$
|
25,663
|
|
BSQUARE proprietary software
|
|
|
2,617
|
|
|
|
2,649
|
|
|
|
2,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total software revenue
|
|
$
|
32,934
|
|
|
$
|
31,210
|
|
|
$
|
28,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software revenue as a percentage
of total revenue
|
|
|
66
|
%
|
|
|
73
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party software revenue as a
percentage of total software revenue
|
|
|
92
|
%
|
|
|
92
|
%
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The vast majority of our third-party software revenue is
comprised of the resale of Microsoft Embedded operating systems.
The majority of our proprietary software revenue is attributable
to sales of our SDIO Now! software product.
Software revenue was $32.9 million in 2006 and
$31.2 million in 2005, representing an increase of
$1.7 million or 6%. This increase was primarily due to
higher third-party software revenue of $1.8 million,
partially offset by a decrease of $32,000 in proprietary
software revenue. The increase in third-party software sales was
primarily attributable to an increase in sales to new accounts
obtained through a customer referral arrangement entered into in
the fourth quarter of 2005. We expect third-party software sales
in 2007 to increase approximately 5-10% from 2006 based on
current industry projections, a new customer referral
arrangement entered into in the fourth quarter of 2006 and
growth in the market for Microsoft embedded server products
which we resell.
Software revenue was $31.2 million in 2005 and
$28.4 million in 2004, representing an increase of
$2.8 million or 10%. Excluding sales to Cardinal of
$831,000 in 2005 and $7.4 million in 2004, software sales
to customers other than Cardinal increased $9.4 million or
45% from 2004. This increase was due to third-party software
sales growth within our top-10 accounts, increases in new
account revenue, higher per account revenue for non-top-10
accounts and an increase in customer referral revenue beginning
in the fourth quarter of 2005. Effective October 1, 2005,
we entered into a relationship with a third party and obtained
its customer list. Under this relationship, we paid a referral
fee on the gross margin generated from these customers through
September 30, 2006.
Proprietary software revenue was $2.6 million in 2006 and
2005 and $2.7 million in 2004. Revenue was flat due to
decreased sales of our SDIO Now! product, offset by higher sales
of our reference design products including Schema BSP and our
IDP Development kits. Sales of our SDIO Now! software product
fell primarily due to competing technology being introduced from
Microsoft. Sales of our reference design products increased due
to the acquisition of certain of these products from Vibren
Technologies, Inc. in June 2005 coupled with the launch of our
IDP 270 development platform. Proprietary software revenue in
2006 included $169,000 of royalty revenue from several Asia
Pacific service contracts, which contain minimum guaranteed
royalties. We expect proprietary
32
software revenue to increase approximately
50-85% in
2007 as compared to 2006 based on renewed strength of SDIO Now!
product sales, increased reference design and related product
sales due primarily to the introduction of our new IDP 320
development platform and royalty revenue stemming from the Asia
Pacific contracts referenced previously assuming these customers
fulfill their contractual obligations.
Service
revenue
Service revenue for 2006, 2005 and 2004 is presented below
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total service revenue
|
|
$
|
16,881
|
|
|
$
|
11,713
|
|
|
$
|
10,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue as a percentage of
total revenue
|
|
|
34
|
%
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue was $16.9 million in 2006 and
$11.7 million in 2005, representing an increase of
$5.2 million or 44%. This increase was due to higher
activity levels driven by overall market strength, sales
improvements and improved personnel utilization. Billable hours
increased 58%, while the realized rate per hour decreased 11%.
Billable hour growth occurred both in North America and our
Taiwan subsidiary. The decrease in our realized rate per hour
was driven by our Taiwan subsidiary, where we are engaged in
several contracts pursuant to which we have provided or are
providing services at relatively low rates in exchange for
royalty payments in the future, some of which are guaranteed.
Royalties on such contracts are not recognized until reported by
the customer.
Service revenue was $11.7 million in 2005 and
$10.6 million in 2004, representing an increase of
$1.1 million or 11%. This increase was due to higher
activity levels driven by overall market strength, sales
improvements and improved personnel utilization. The realized
rate per hour in 2005 was up 14% from 2004, while billable hours
remained relatively flat.
Gross
profit
Cost of revenue related to software revenue consists primarily
of license fees and royalties for third-party software and the
costs of product media, product duplication and manuals.
Amortization of intangible assets, acquired from Vibren in June
2005, is included in cost of software revenue and was $190,000
in 2006, $95,000 in 2005 and zero in 2004. Cost of revenue
related to service revenue consists primarily of salaries and
benefits for our engineers, contractor costs, plus related
facilities and depreciation costs. Gross profit on the sales of
third-party software products were also positively affected by
rebates we received from Microsoft which we earn through the
achievement of previously defined objectives. Rebates comprised
$599,000 of our gross profit in 2006, $632,000 in 2005 and
$360,000 in 2004.
The following table outlines software, services and total gross
profit (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Software gross profit
|
|
$
|
6,817
|
|
|
$
|
6,531
|
|
|
$
|
6,471
|
|
As a percentage of software revenue
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
23
|
%
|
Service gross profit
|
|
$
|
5,170
|
|
|
$
|
3,353
|
|
|
$
|
2,579
|
|
As a percentage of service revenue
|
|
|
31
|
%
|
|
|
29
|
%
|
|
|
24
|
%
|
Total gross profit
|
|
$
|
11,987
|
|
|
$
|
9,884
|
|
|
$
|
9,050
|
|
As a percentage of total revenue
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
23
|
%
|
Software
gross profit
Software gross profit as a percentage of software revenue was
21% in 2006 and 21% in 2005. Higher margins on third-party
software sales were offset by lower margins on proprietary
product sales primarily due to intangible asset amortization
affecting proprietary software
cost-of-sales
for a full year in 2006 compared to half a year in 2005.
Third-party software revenue typically generates a much lower
profit margin than our proprietary software;
33
our proprietary software revenue has typically generated 90% and
greater gross margins. The third-party software gross profit
percentage was 14.9% in 2006, 14.0% in 2005 and 14.7% in 2004.
Software gross profit as a percentage of software revenue was
21% in 2005 and 23% in 2004. The decrease in software gross
profit percentage was primarily due to the increase in lower
margin third-party software revenue as a percentage of total
software revenue.
We expect third-party software sales to continue to be a
significant percentage of our software revenue, and, therefore,
our software gross margin is likely to remain relatively low in
the foreseeable future. We expect our third-party software gross
profit margin to decline to approximately 13% in 2007, based on
increased competitive pressures and lower projected rebates. We
expect our proprietary software gross margin, historically very
high, to improve in 2007 based on higher revenue levels and the
discontinuance in the third quarter of 2007 of the Vibren
intangible asset amortization discussed previously.
Service
gross profit
Service gross profit was 31% in 2006, 29% in 2005 and 24% in
2004. The overall improvements in gross profit were attributable
to increased service revenue, improved resource utilization,
improved pricing and contract management, partially offset by a
decrease in realized rate per hour for reasons discussed
previously. Until the end of the second quarter of 2005, we
generally employed more service engineering personnel than
near-term service engineering demands dictated such that as
revenue levels increased in 2004 and the first half of 2005, the
service gross profit margin increased accordingly. In addition,
our facilities and depreciation costs, a portion of which is
included in service cost of revenue, are relatively fixed such
that as service revenue levels increased in 2005 and 2006,
service gross profit margin improved due to fixed costs being
spread over a larger revenue base. Facilities and related
allocations represented approximately 7% of total service cost
of revenue in 2006 and 10% in 2005 and 2004.
Operating
expenses
Selling,
general and administrative
Selling, general and administrative expenses consist primarily
of salaries and benefits for our sales, marketing and
administrative personnel and related facilities and depreciation
costs as well as professional services (e.g., legal and audit).
Selling, general and administrative expenses were
$10.0 million in 2006 and $9.5 million in 2005,
representing an increase of $500,000 or 5%. Selling, general and
administrative expenses represented 20% of our total revenue in
2006 and 22% in 2005. Total selling, general and administrative
expenses increased due to stock-based compensation expense of
$445,000 recognized during 2006, higher facilities and related
costs, higher personnel costs and higher sales commissions and
bonuses, partially offset by lower bad debt expense, lower
professional fees and lower marketing costs.
Selling, general and administrative expenses were
$9.5 million in 2005 and $9.2 million in 2004,
representing an increase of $328,000 or 4%. Selling, general and
administrative expenses represented 22% of our total revenue in
2005 and 24% in 2004. Total selling, general and administrative
expenses increased due to bad debt expense of $399,000 related
to a customer contract dispute, higher facilities and related
costs, higher personnel costs and higher recruiting costs to
support increased hiring, partially offset by lower marketing
costs, lower commissions and the audit settlement costs of
$310,000 recognized in 2004 related to our OEM Distribution
Agreement with Microsoft.
Research
and development
Research and development expenses consist primarily of salaries
and benefits for software development and quality assurance
personnel, and related facilities and depreciation costs.
Research and development expenses in all periods exclude
expenses related to the hardware business unit, which are
included in discontinued operations.
34
Research and development expenses were $2.8 million in 2006
and $2.0 million in 2005, representing an increase of
$800,000 or 40%. Research and development expenses represented
6% of our total revenue in 2006 and 5% in 2005. During 2006, we
increased our level of research and development in conjunction
with the SDIO Now! version releases mentioned previously as well
as the initiation and continuation of our reference design
development efforts. The increase was specifically attributable
to increased payroll and related expenses resulting from
headcount growth as well as increased allocated expenses where
service engineering personnel were contributing to the product
development effort. We are continuing to execute and evolve our
product strategy and expect to continue to invest in new product
development initiatives during 2007.
Research and development expenses were $2.0 million in 2005
and $855,000 in 2004, representing an increase of
$1.1 million or 128%. Research and development expenses
represented 5% of our total revenue in 2005 and 2% in 2004.
During 2005, we increased our level of research and development
significantly in conjunction with the SDIO Now! version releases
mentioned previously as well as the initiation of our PMP and
other reference design development efforts. The increase was
specifically attributable to increased payroll and related
expenses resulting from headcount growth as well as increased
allocated expenses where service engineering personnel were
contributing to the product development effort.
Interest
and other
Interest and other income consists of interest earnings on our
cash, cash equivalents and short-term investments, as well as
adjustments made to the carrying value of cost-based
investments. Interest and other income was $442,000 in 2006 and
$287,000 in 2005, representing an increase of $155,000, or 54%,
with the increase attributable to higher balances in short-term
investments and higher prevailing interest rates in 2006 as
compared to 2005. Interest and other income was $287,000 in 2005
and $237,000 in 2004, representing an increase of $50,000, or
21%, with the increase attributable to generally higher
prevailing interest rates in 2005 as compared to 2004.
Taxes
Federal, state and foreign income taxes resulted in a tax
provision of $29,000 in 2006, $14,000 in 2005 and $11,000 in
2004, yielding an effective rate of (6.7%) in 2006, (1.1%) in
2005 and (0.2%) in 2004. The tax provision in all three years
related to our Taiwan subsidiary.
We provided full valuation allowances on deferred tax assets
during 2006, 2005 and 2004 because of uncertainty regarding
their realizability. The increase in the valuation allowance on
our deferred tax assets was $887,000 in 2006, $360,000 in 2005
and $3.2 million in 2004. At December 31, 2006 we had
approximately $70.4 million of net operating loss
carryforwards and $2.0 million of tax credit carryforwards,
which begin to expire in 2021. In addition, we have
$8.2 million of capital loss carryforwards, which expire in
2008. Utilization of these net operating losses and tax credits
may be subject to an annual limitation due to provisions of the
Internal Revenue Code of 1986, as amended. Events which cause
limitations in the amount of net operating losses and tax
credits that we may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50% as
defined, over a three-year period.
In the second quarter of 2005, we became aware that certain
amounts remitted, or that were planned to be remitted, from our
Taiwan subsidiary or Taiwanese customers might be subject to
withholding tax at 20% of the amount remitted. In the fourth
quarter of 2005, we began applying for withholding tax
exemptions from the Taiwan government on all significant
contracts on which withholding tax might be owed. When granted,
we expect these exemptions would eliminate any withholding tax
and Taiwan-based income tax, as applicable, for the contract to
which the exemption relates. To date, we have received approval
for all withholding exemption applications that we have filed
for which significant withholding tax might be owed. However,
there is no assurance that future exemptions will be granted and
if we do not receive all, or some, of the exemptions for which
we apply, we could be obligated to pay withholding tax in the
future. We are continuing to evaluate alternative business and
tax planning strategies to minimize corporate income and
withholding tax obligations in connection with our Taiwan
subsidiary.
35
Loss
from discontinued operations
During the second quarter of 2004, we decided to discontinue our
hardware business and, consequently, the results of those
operations have been accounted for and presented as a
discontinued operation. A reconciliation of the loss from
discontinued operations for 2004 is presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Hardware revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
890
|
|
Cost of hardware revenue
|
|
|
|
|
|
|
|
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
|
(2,248
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
2,272
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Restructuring and related charges
|
|
|
|
|
|
|
|
|
|
|
312
|
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(6,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cost of hardware revenue in 2004 is a
$1.6 million net charge related to the impairment of
inventory. Included in operating expenses of the discontinued
operations are $74,000 related to corporate allocations.
Restructuring and related charges included in loss from
discontinued operations include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Employee separation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
194
|
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
Other charges
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and impairment
charges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2004, we eliminated ten positions in
the hardware business unit, representing 7% of our then
remaining workforce. We incurred severance of $79,000 and
$10,000 of related charges.
As a result of our decision to discontinue our hardware
business, we recorded a $1.5 million charge in the second
quarter of 2004, of which $608,000 related to the impairment of
tooling, $585,000 related to the impairment of software licenses
used in the device, $120,000 related to severance for eight
employees terminated, representing 7% of our then remaining
workforce, and $162,000 related to other charges.
Liquidity
and Capital Resources
As of December 31, 2006, we had $11.1 million of cash,
cash equivalents, short-term investments and restricted cash
compared to $10.7 million at December 31, 2005.
Specifically, we had $9.9 million of unrestricted cash,
cash equivalents, and short-term investments and
$1.2 million of restricted cash at December 31, 2006.
Our restricted cash balance relates to the securitization of a
letter of credit for our current corporate headquarters lease
obligation, the majority of which will continue to secure that
obligation through its expiration in 2014. During 2006, net cash
provided by operating activities was $413,000. This cash
provided was primarily attributable to a $129,000 decrease in
accounts receivable driven by improved cash collections, offset
by our net loss of $466,000 excluding the effect of non-cash
expenses totaling $1.2 million. Our working capital at
December 31, 2006 was $10.3 million compared to
$9.5 million at December 31, 2005.
During 2005, net cash used in operating activities was
$1.6 million, primarily attributable to our net loss of
$1.3 million.
36
During 2004, net cash used in operating activities was
$1.9 million, primarily attributable to our net loss of
$7.1 million. The use of cash attributable to our net loss
was largely offset by a $3.1 million non-cash impairment
charge related to the discontinuance of our hardware business
unit and a $2.7 million decrease in restricted cash related
to planned reductions in letters of credit supporting our former
corporate headquarters facility lease.
Investing activities used cash of $5.8 million in 2006 and
provided cash of $4.3 million in 2005 and $648,000 in 2004.
Investing activities in 2006 included $5.4 million used to
purchase short-term investments and $357,000 used for capital
equipment purchases. Investing activities in 2005 included
$5.0 million provided by the maturity of short-term
investments, offset by $500,000 of net cash used in the
acquisition of certain assets of Vibren Technologies in the
second quarter of 2005 and $226,000 used for capital equipment
purchases. Investing activities in 2004 included
$1.3 million provided by the maturity of short-term
investments and $776,000 used for capital expenditures primarily
related to the purchase of furniture, equipment and leasehold
improvements for our new corporate headquarters in the second
and third quarters of 2004.
Financing activities provided cash of $121,000 in 2006, $26,000
in 2005 and $461,000 in 2004 as a result of employees
exercise of stock options.
Tabular
Disclosure of Contractual Obligations
We have significant lease commitments, which expire through
2014. We have operating lease commitments for office space in
Bellevue, Washington; San Diego, California; Longmont,
Colorado; Vancouver, British Columbia, Canada; and Taipei,
Taiwan. The following are our contractual commitments associated
with these lease and other obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due through Year Ended December 31:
|
|
Contractual Obligations
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Equipment financing obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
1,024
|
|
|
|
952
|
|
|
|
853
|
|
|
|
926
|
|
|
|
975
|
|
|
|
2,889
|
|
|
|
7,619
|
|
Purchase obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,024
|
|
|
$
|
952
|
|
|
$
|
853
|
|
|
$
|
926
|
|
|
$
|
975
|
|
|
$
|
2,889
|
|
|
$
|
7,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to these lease obligations, we have the following
future or potential cash commitment:
|
|
|
|
|
In February 2004, we signed an amendment to the lease for our
former corporate headquarters and simultaneously entered into a
ten-year lease for a new corporate headquarters, also located in
Bellevue, Washington. The amendment of the former headquarters
lease, which was scheduled to terminate on December 31,
2004, provided that no cash lease payments were to be made for
the remainder of that lease term. Similarly, the new corporate
headquarters lease also provided that no cash lease payments
were to be made during 2004. However, if we default under our
new corporate headquarters lease, the landlord has the ability
to demand payment for cash payments forgiven in 2004 under the
former headquarters lease. The amount of the forgiven payments
for which the landlord can demand repayment was
$1.8 million at December 31, 2006. The amount of the
forgiven payments for which the landlord has the ability to
demand repayment decreases on the straight-line basis over the
length of our new ten-year headquarters lease.
|
We believe that our existing cash, cash equivalents and
short-term investments will be sufficient to meet our needs for
working capital and capital expenditures for at least the next
12 months.
Related
Party Transactions
Pursuant to a consulting agreement between us and
Mr. Donald Bibeault, the Chairman of our Board of
Directors, Mr. Bibeault provided us with onsite consulting
services from July 2003, when he was appointed to our Board of
Directors, to September 2006. We incurred expenses of $72,000 in
2006, $113,000 in 2005 and $158,000 in 2004 under this
consulting agreement. On June 29, 2006, we and
Mr. Bibeault agreed to terminate this consulting
37
agreement, effective September 30, 2006. Mr. Bibeault
continues to serve as the Chairman of our Board of Directors.
Impact
of New Accounting Pronouncements
Effective January 1, 2006, we began recording compensation
expense associated with stock options and other forms of equity
compensation in accordance with Statement of Financial
Accounting Standards No. 123R, Share-Based Payment,
(SFAS 123R) as interpreted by SEC Staff
Accounting Bulletin No. 107. The following table
presents stock-based compensation expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of revenue service
|
|
$
|
190
|
|
|
$
|
|
|
|
$
|
|
|
Selling, general and administrative
|
|
|
445
|
|
|
|
17
|
|
|
|
|
|
Research and development
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
715
|
|
|
$
|
17
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 154, Accounting Changes and Error
Corrections, a Replacement of APB Opinion No. 20 and FASB
Statement No. 3. SFAS 154 establishes,
unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to a newly
adopted accounting principle. Previously, most changes in
accounting principle were recognized by including the cumulative
effect of changing to the new accounting principle in net income
of the period of the change. SFAS 154 carries forward the
guidance in APB Opinion 20 Accounting Changes,
requiring justification of a change in accounting principle on
the basis of preferability. SFAS 154 also carries forward
without change the guidance contained in APB Opinion 20,
for reporting the correction of an error in previously issued
financial statements and for a change in an accounting estimate.
The adoption of SFAS 154 on January 1, 2006 did not
impact our financial position or results of operations.
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB
Statements No. 133 and 140. SFAS 155 amends
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities and SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS 155 (i) permits fair value
remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation,
(ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of
SFAS 133, (iii) establishes a requirement to evaluate
interests in securitized financial assets to identify interests
that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, (iv) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives,
and (v) amends SFAS 140 to eliminate the prohibition
on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest
other than another derivative financial instrument.
SFAS 155 is effective for us on January 1, 2007 and is
not expected to have a material impact our financial position or
results of operations.
SFAS No. 157, Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for us on
January 1, 2008 and is not expected to have a material
impact on our financial position or results of operations.
Financial
Accounting Standards Board Staff Positions and
Interpretations
FASB Staff Position (FSP)
No. 115-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments.
FSP
115-1
provides guidance for determining when an investment is
considered impaired, whether impairment is
other-than-temporary,
and measurement of an impairment loss. An investment is
38
considered impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence
to evaluate the realizable value of its investment, impairment
is determined to be
other-than-temporary,
then an impairment loss should be recognized equal to the
difference between the investments cost and its fair
value. FSP
115-1
nullifies certain provisions of Emerging Issues Task Force
(EITF) Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments,
while retaining the disclosure requirements of EITF
03-1 which
were adopted in 2003. The adoption of FSP
115-1 on
January 1, 2006 did not impact our financial position or
results of operations.
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB
Statement 109. Interpretation 48 prescribes a
recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits
from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax
position will be sustained upon examination by the appropriate
taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of
benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. Tax positions that previously
failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is
no longer met. Interpretation 48 also provides guidance on the
accounting for and disclosure of unrecognized tax benefits,
interest and penalties. Interpretation 48 is effective for us on
January 1, 2007 and is not expected to have a material
impact on our financial position or results of operations.
SEC Staff
Accounting Bulletins
Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of a Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial
Statements. SAB 108 addresses how the effects of
prior year uncorrected errors must be considered in quantifying
misstatements in the current year financial statements. The
effects of prior year uncorrected errors include the potential
accumulation of improper amounts that may result in a material
misstatement on the balance sheet or the reversal of prior
period errors in the current period that result in a material
misstatement of the current period income statement amounts.
Adjustments to current or prior period financial statements
would be required in the event that after application of various
approaches for assessing materiality of a misstatement in
current period financial statements and consideration of all
relevant quantitative and qualitative factors, a misstatement is
determined to be material. SAB 108 is applicable to all
financial statements issued by us after November 15, 2006.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Interest Rate Risk. We primarily hold
non-derivative financial instruments in our short-term
investment portfolio. Our cash equivalents consist of
high-quality securities, as specified in our investment policy
guidelines. The policy limits the amount of credit exposure to
any one issue to a maximum of 15% and any one issuer to a
maximum of 10% of the total portfolio, with the exception of
treasury securities, commercial paper and money market funds,
which are exempt from size limitation. The policy limits all
short-term investments to mature in two years or less, with the
average maturity being one year or less. These securities are
subject to interest rate risk and will decrease in value if
interest rates increase.
39
The following table presents the amounts of our short-term
investments that are subject to market risk by range of expected
maturity and weighted average interest rates as of
December 31, 2006 and 2005. This table does not include
cash equivalents or money market funds, as those funds are not
subject to market risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
Fair
|
|
|
|
or Less
|
|
|
to One Year
|
|
|
Total
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
As of December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
7,200
|
|
|
$
|
226
|
|
|
$
|
7,426
|
|
|
$
|
7,426
|
|
Weighted average interest rate
|
|
|
5.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments
|
|
$
|
1,800
|
|
|
$
|
|
|
|
$
|
1,800
|
|
|
$
|
1,800
|
|
Weighted average interest rate
|
|
|
4.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange Rate
Risk. Currently, the majority of our revenue and
expenses is denominated in U.S. dollars, and, as a result,
we have not experienced significant foreign exchange gains or
losses to date. While we have conducted some transactions in
foreign currencies and expect to continue to do so, we do not
anticipate that foreign exchange gains or losses will be
significant. We have not engaged in foreign currency hedging to
date, although we may do so in the future.
Our international business is subject to risks typical of
international activity, including, but not limited to, differing
economic conditions, changes in political climate, differing tax
structures and regulations and other regulations and
restrictions. Accordingly, our future results could be impacted
by changes in these or other factors.
Our exposure to foreign exchange rate fluctuations can vary as
the financial results of our foreign subsidiary are translated
into U.S. dollars in consolidation. The effect of foreign
exchange rate fluctuations for the year ended December 31,
2006 was not material.
40
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
BSQUARE
CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
41
REPORT OF
MOSS ADAMS, LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
BSQUARE Corporation
We have audited the accompanying consolidated balance sheet of
BSQUARE Corporation as of December 31, 2006 and the related
consolidated statements of operations, stockholders equity
and cash flows for the year ended December 31, 2006. Our
audits also included the financial statement schedule listed at
Item 15(a)(2) for the year ended December 31, 2006.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of BSQUARE Corporation as of December 31, 2006 and
the results of its operations and its cash flows for the year
ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule for the year
ended December 31, 2006, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment.
Moss Adams LLP
Seattle, Washington
February 15, 2007
42
REPORT OF
ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Shareholders of BSQUARE Corporation
We have audited the accompanying consolidated balance sheet of
BSQUARE Corporation and subsidiaries as of December 31,
2005, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the two
years in the period ended December 31, 2005. Our audits
also included the financial statement schedule listed at
Item 15(a)(2) for the years ended December 31, 2005
and 2004. These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of BSQUARE Corporation and subsidiaries at
December 31, 2005, and the consolidated results of their
operations and their cash flows for each of the two years in the
period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule for the years
ended December 31, 2005 and 2004, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
Seattle, Washington
February 24, 2006
43
BSQUARE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,483
|
|
|
$
|
7,694
|
|
Short-term investments
|
|
|
7,426
|
|
|
|
1,800
|
|
Accounts receivable, net of
allowance for doubtful accounts of $198 at December 31,
2006 and $687 at December 31, 2005
|
|
|
7,167
|
|
|
|
7,296
|
|
Prepaid expenses and other current
assets
|
|
|
421
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,497
|
|
|
|
17,230
|
|
Equipment, furniture and leasehold
improvements, net
|
|
|
821
|
|
|
|
792
|
|
Intangible assets, net
|
|
|
101
|
|
|
|
304
|
|
Restricted cash
|
|
|
1,200
|
|
|
|
1,200
|
|
Other non-current assets
|
|
|
57
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,676
|
|
|
$
|
19,570
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,634
|
|
|
$
|
2,662
|
|
Other accrued expenses
|
|
|
2,877
|
|
|
|
3,298
|
|
Accrued compensation
|
|
|
1,046
|
|
|
|
964
|
|
Accrued legal fees
|
|
|
534
|
|
|
|
534
|
|
Deferred revenue
|
|
|
154
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,245
|
|
|
|
7,728
|
|
Deferred rent
|
|
|
355
|
|
|
|
379
|
|
Commitments and contingencies
(Note 7)
|
|
|
|
|
|
|
|
|
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; 9,617,755 shares issued
and outstanding at December 31, 2006 and
9,553,566 shares issued and outstanding at
December 31, 2005
|
|
|
119,229
|
|
|
|
118,393
|
|
Accumulated other comprehensive
loss
|
|
|
(180
|
)
|
|
|
(423
|
)
|
Accumulated deficit
|
|
|
(106,973
|
)
|
|
|
(106,507
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
12,076
|
|
|
|
11,463
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
19,676
|
|
|
$
|
19,570
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements.
44
BSQUARE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share
|
|
|
|
|
|
|
amounts)
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
32,934
|
|
|
$
|
31,210
|
|
|
$
|
28,364
|
|
Service
|
|
|
16,881
|
|
|
|
11,713
|
|
|
|
10,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
49,815
|
|
|
|
42,923
|
|
|
|
38,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
26,117
|
|
|
|
24,679
|
|
|
|
21,893
|
|
Service(1)
|
|
|
11,711
|
|
|
|
8,360
|
|
|
|
7,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
37,828
|
|
|
|
33,039
|
|
|
|
29,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,987
|
|
|
|
9,884
|
|
|
|
9,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative(1)
|
|
|
10,046
|
|
|
|
9,504
|
|
|
|
9,176
|
|
Research and development(1)
|
|
|
2,820
|
|
|
|
1,950
|
|
|
|
855
|
|
Restructuring and other related
charges
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,866
|
|
|
|
11,454
|
|
|
|
10,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(879
|
)
|
|
|
(1,570
|
)
|
|
|
(1,021
|
)
|
Interest and other income
|
|
|
442
|
|
|
|
287
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(437
|
)
|
|
|
(1,283
|
)
|
|
|
(784
|
)
|
Income tax provision
|
|
|
(29
|
)
|
|
|
(14
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(466
|
)
|
|
|
(1,297
|
)
|
|
|
(795
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(6,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(466
|
)
|
|
$
|
(1,297
|
)
|
|
$
|
(7,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.08
|
)
|
Loss from discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of
basic and diluted loss per share
|
|
|
9,586
|
|
|
|
9,541
|
|
|
|
9,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the following amounts related to stock-based
compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue service
|
|
$
|
190
|
|
|
$
|
|
|
|
$
|
|
|
Selling, general and administrative
|
|
|
445
|
|
|
|
17
|
|
|
|
|
|
Research and development
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
715
|
|
|
$
|
17
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements.
45
BSQUARE
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
Balance, January 1, 2004
|
|
|
|
|
|
|
|
|
|
|
9,375,493
|
|
|
$
|
117,889
|
|
|
$
|
(392
|
)
|
|
$
|
(98,159
|
)
|
|
$
|
19,338
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,051
|
)
|
|
|
(7,051
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,065
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
157,589
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
9,533,082
|
|
|
|
118,350
|
|
|
|
(406
|
)
|
|
|
(105,210
|
)
|
|
|
12,734
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,297
|
)
|
|
|
(1,297
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,314
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
20,484
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
9,553,566
|
|
|
|
118,393
|
|
|
|
(423
|
)
|
|
|
(106,507
|
)
|
|
|
11,463
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(466
|
)
|
|
|
(466
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
17
|
|
Unrealized gain on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
64,189
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
9,617,755
|
|
|
$
|
119,229
|
|
|
$
|
(180
|
)
|
|
$
|
(106,973
|
)
|
|
$
|
12,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements.
46
BSQUARE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(466
|
)
|
|
$
|
(1,297
|
)
|
|
$
|
(7,051
|
)
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
532
|
|
|
|
379
|
|
|
|
584
|
|
Stock-based compensation
|
|
|
715
|
|
|
|
17
|
|
|
|
|
|
Impairment and restructuring
charges of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
3,069
|
|
Decrease of assets of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
781
|
|
Restructuring and other related
charges
|
|
|
|
|
|
|
|
|
|
|
40
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
Changes in operating assets and
liabilities, net of effects of acquisitions and discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
2,706
|
|
Accounts receivable, net
|
|
|
133
|
|
|
|
(2,465
|
)
|
|
|
1,422
|
|
Prepaid expenses and other assets
|
|
|
7
|
|
|
|
(41
|
)
|
|
|
841
|
|
Accounts payable and accrued
expenses
|
|
|
(367
|
)
|
|
|
1,979
|
|
|
|
(3,826
|
)
|
Deferred revenue
|
|
|
(117
|
)
|
|
|
(118
|
)
|
|
|
(756
|
)
|
Deferred rent
|
|
|
(24
|
)
|
|
|
4
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
413
|
|
|
|
(1,542
|
)
|
|
|
(1,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of furniture, equipment
and leasehold improvements
|
|
|
(357
|
)
|
|
|
(226
|
)
|
|
|
(776
|
)
|
Maturity (purchases) of short-term
investments, net
|
|
|
(5,400
|
)
|
|
|
5,000
|
|
|
|
1,339
|
|
Acquisition of Vibren assets
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
Proceeds from the disposal of
equipment
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(5,757
|
)
|
|
|
4,274
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
121
|
|
|
|
26
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
121
|
|
|
|
26
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
12
|
|
|
|
(7
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(5,211
|
)
|
|
|
2,751
|
|
|
|
(757
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
7,694
|
|
|
|
4,943
|
|
|
|
5,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
2,483
|
|
|
$
|
7,694
|
|
|
$
|
4,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements.
47
BSQUARE
CORPORATION
|
|
1.
|
Description
of Business and Accounting Policies
|
Description
of Business
BSQUARE Corporation (BSQUARE), a Washington corporation, and its
subsidiaries (collectively, the Company) provides software and
engineering services to the smart device marketplace. A smart
device is a dedicated purpose computing device that typically
has the ability to display information, runs an operating system
(e.g.,
Microsoft®
Windows®
CE) and may be connected to a network via a wired or wireless
connection. Examples of smart devices that BSQUARE targets
include set-top boxes, home gateways,
point-of-sale
terminals, kiosks, voting machines, gaming platforms, personal
digital assistants (PDAs), personal media players and
smartphones.
The Companys software and engineering services are focused
on devices running versions of the Microsoft Windows family of
embedded operating systems, specifically Windows CE, Windows XP
Embedded and Windows
Mobiletm.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Estimates are used for, but not limited to, recognizing revenue,
assessing the collectability of accounts receivable, the
adequacy of the allowance for doubtful accounts, the realization
of deferred tax assets and contingencies. Estimates and
assumptions are reviewed periodically, and the effects of
revisions are reflected in the consolidated financial statements
in the period they are determined to be necessary.
Earnings
Per Share
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period, and
excludes any dilutive effects of common stock equivalent shares,
such as options and warrants (using the treasury stock method)
and convertible securities (using the if-converted method).
Diluted earnings per share is computed using the weighted
average number of common and common stock equivalent shares
outstanding during the period; common stock equivalent shares
are excluded from the computation if their effect is
antidilutive. Common stock equivalent shares were 2,069,530 at
December 31, 2006, 1,860,368 at December 31, 2005 and
1,765,058 at December 31, 2004.
Cash
and Cash Equivalents
Cash and cash equivalents include demand deposits, money market
accounts and all highly liquid debt instruments with a maturity
date at the time of purchase of three months or less.
Restricted
Cash
Restricted cash represents deposits held at a financial
institution as security for an outstanding letter of credit
expiring through 2014 related to the Companys headquarters
lease obligation.
48
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Short-term
Investments
The Companys short-term investments consist primarily of
investment-grade marketable securities, which are classified as
held-to-maturity
and recorded at amortized cost, which approximates fair value.
Due to the short-term nature of these investments, changes in
market interest rates would not have a significant impact on
their fair value. In addition, the Company holds investments in
equity securities, which are classified as
available-for-sale.
Financial
Instruments and Concentrations of Risk
The Company has the following financial instruments: cash and
cash equivalents, short-term investments, accounts receivable,
accounts payable and accrued liabilities. The carrying value of
these instruments approximates fair value based on their
liquidity or short-term nature.
Allowance
for Doubtful Accounts
The Companys accounts receivable balances are net of an
estimated allowance for doubtful accounts. The Company performs
ongoing credit evaluations of its customers financial
condition and generally does not require collateral. The Company
estimates the collectability of our accounts receivable and
records an allowance for doubtful accounts. The Company
considers many factors when making this estimate, including
analyzing accounts receivable and historical bad debts, customer
concentrations, customer creditworthiness, current economic
trends and changes in customer payment history when evaluating
the adequacy of the allowance for doubtful accounts. Because the
allowance for doubtful accounts is an estimate, it may be
necessary to adjust it if actual bad debt expense exceeds the
estimated reserve.
Furniture,
Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are stated at
cost less accumulated depreciation and amortization.
Depreciation is provided on the straight-line method over
estimated useful lives:
|
|
|
|
|
Computer equipment and system
software
|
|
|
3 years
|
|
Office furniture and equipment
|
|
|
3-5 years
|
|
Leasehold improvements are amortized over the shorter of the
lease term or estimated useful lives. Maintenance and repairs
costs are expensed as incurred. When properties are retired or
otherwise disposed of, gains or losses are reflected in the
statement of operations. When facts and circumstances indicate
that the cost of long-lived assets may be impaired, an
evaluation of recoverability is performed by comparing the
carrying value of the asset to projected future cash flows. Upon
indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss as a
charge against current operations based on the difference
between the carrying value of the asset and its fair value.
Acquired
Intangible Assets
Acquired intangible assets are recognized and measured based on
fair value, which was computed by discounting the present value
of the estimated net cash flows at a rate of 20%. The Company
computes amortization on the straight-line method over the
assets estimated useful life, which the Company has
estimated to be two years. Intangible assets are periodically
reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.
Software
Development Costs
Under the criteria set forth in SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed, capitalization of software
development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the
completion of beta testing of a
49
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
working product. The establishment of technological feasibility
and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to
certain external factors, including, but not limited to,
anticipated future revenue, estimated economic life and changes
in software and hardware technology. Amounts that could have
been capitalized under this statement after consideration of the
above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Research
and Development
Research and development costs are expensed as incurred.
Advertising
Costs
All costs of advertising, including cooperative marketing
arrangements, are expensed as incurred. Advertising expense was
$39,000 in 2006, $10,000 in 2005 and $7,000 in 2004.
Stock-Based
Compensation
Effective January 1, 2006, the Company began recording
compensation expense associated with stock options and other
forms of equity compensation in accordance with Statement of
Financial Accounting Standards No. 123R, Share-Based
Payment, (SFAS 123R) as interpreted by SEC
Staff Accounting Bulletin No. 107. Prior to
December 31, 2005, the Company accounted for stock options
granted to employees according to the provisions of Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, as permitted by SFAS 123, Accounting
for Stock-Based Compensation, and, therefore, no related
compensation expense was recorded for awards granted with no
intrinsic value. The Company adopted the modified prospective
transition method provided for under SFAS 123R, and
consequently has not retroactively adjusted results for prior
periods. Under this transition method, compensation cost
associated with stock options includes: 1) compensation
cost related to the remaining unvested portion of all stock
option awards granted prior to December 31, 2005, based on
the grant date fair value estimated in accordance with the
original provisions of SFAS 123; and 2) compensation
cost related to all stock option awards granted subsequent to
December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R.
The Company records expense over the vesting period using the
straight-line method. Compensation expense for awards under
SFAS 123R includes an estimate for forfeitures.
The adoption of SFAS 123R had and will have a material
impact on the Companys consolidated financial position and
results of operations. See Note 8 for further information
regarding the Companys stock-based compensation
assumptions and expenses, including pro forma disclosures for
prior periods as if the Company had recorded stock-based
compensation expense.
Comprehensive
Income (Loss)
Comprehensive income (loss) consists of two components, net
income and other comprehensive income. Other comprehensive
income refers to revenue, expenses, gains and losses that under
generally accepted accounting principles are recorded as an
element of shareholders equity but are excluded from net
income. The Companys other comprehensive income is
comprised of foreign currency translation adjustments from its
subsidiaries not using the U.S. dollar as their functional
currency and unrealized gains and losses, net of tax, on
marketable securities categorized as
available-for-sale.
50
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of accumulated other comprehensive income (loss)
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accumulated net unrealized gain on
available-for-sale
securities
|
|
$
|
226
|
|
|
$
|
|
|
Accumulated foreign currency
translation
|
|
|
(406
|
)
|
|
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
loss
|
|
$
|
(180
|
)
|
|
$
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
Income
Taxes
The Company computes income taxes using the asset and liability
method, under which deferred income taxes are provided for on
the temporary differences between the financial reporting basis
and the tax basis of the Companys assets and liabilities.
Deferred tax assets and liabilities are measured using currently
enacted tax rates that are expected to apply to taxable income
in the years in which those temporary differences are expected
to be recovered or settled. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Foreign
Currency Translation
The functional currency of foreign subsidiaries is the local
currency. Accordingly, assets and liabilities are translated
into U.S. dollars at exchange rates in effect at the
balance sheet date and revenue and expense accounts at the
average exchange rates during the year. Resulting translation
adjustments are included in Accumulated other
comprehensive loss, a separate component of
shareholders equity. The net gains and losses resulting
from foreign currency transactions are recorded in the period
incurred and were not significant for any of the periods
presented.
Revenue
Recognition
The Company recognizes revenue from software and engineering
service sales when the following four revenue recognition
criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the
selling price is fixed or determinable; and collectability is
reasonably assured. Contracts and customer purchase orders are
generally used to determine the existence of an arrangement.
Shipping documents and customer acceptance, when applicable, are
used to verify delivery. The Company assesses whether the
selling price is fixed or determinable based on the contract and
payment terms associated with the transaction and whether the
sales price is subject to refund or adjustment. The Company
assesses collectability based primarily on the creditworthiness
of the customer as determined by credit checks and analysis, as
well as the customers payment history.
The Company recognizes revenue upon shipment provided that no
significant obligations remain on its part and substantive
acceptance conditions, if any, have been met. The Company also
enters into arrangements in which a customer purchases a
combination of software licenses, engineering services and
post-contract customer support or maintenance (PCS). As a
result, significant contract interpretation is sometimes
required to determine the appropriate accounting, including how
the price should be allocated among the deliverable elements if
there are multiple elements, whether undelivered elements are
essential to the functionality of delivered elements, and when
to recognize revenue. PCS includes rights to upgrades, when and
if available, telephone support, updates, and enhancements. When
vendor specific objective evidence (VSOE) of fair value exists
for all elements in a multiple element arrangement, revenue is
allocated to each element based on the relative fair value of
each of the elements. VSOE of fair value is established by the
price charged when the same element is sold separately.
Accordingly, the judgments involved in assessing VSOE have an
impact on the recognition of revenue in each period. Changes in
the allocation of the sales price between deliverables might
impact the timing of revenue recognition but would not change
the total revenue recognized on the contract.
51
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When elements such as software and engineering services are
contained in a single arrangement, or in related arrangements
with the same customer, the Company allocates revenue to each
element based on its relative fair value, provided that such
element meets the criteria for treatment as a separate unit of
accounting. In the absence of fair value for a delivered
element, the Company allocates revenue first to the fair value
of the undelivered elements and allocate the residual revenue to
the delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a delay of revenue
recognition for the delivered elements until the undelivered
elements are fulfilled. As a result, contract interpretations
and assessments of fair value are sometimes required to
determine the appropriate accounting.
Service revenue from fixed-priced contracts is recognized using
the percentage of completion method. Percentage of completion is
measured based primarily on input measures such as hours
incurred to date compared to total estimated hours to complete,
with consideration given to output measures, such as contract
milestones, when applicable. The Company relies on estimates of
total expected hours as a measure of performance and cost in
order to determine the amount of revenue to be recognized.
Revisions to hour and cost estimates are recorded in the period
the facts that give rise to the revision become known. Service
revenue from time and materials contracts and training services
is recognized as services are performed.
When elements such as engineering services and royalties are
contained in a single arrangement, the Company recognizes
revenue from engineering services as it is earned in accordance
with the four revenue recognition criteria stated above. The
Company recognizes royalty revenue when it receives the royalty
report from the customer, which is usually thirty to forty-five
days after month end.
Deferred revenue includes deposits received from customers for
service contracts and unamortized service contract revenue,
customer advances under OEM licensing agreements and maintenance
revenue. In instances where final acceptance of the software or
services is specified by the customer, revenue is deferred until
all acceptance criteria have been met.
Recent
Accounting Pronouncements
SFAS No. 123, Share-Based Payment (Revised
2004). SFAS 123R establishes standards for the
accounting for transactions in which an entity
(i) exchanges its equity instruments for goods or services,
or (ii) incurs liabilities in exchange for goods or
services that are based on the fair value of the entitys
equity instruments or that may be settled by the issuance of the
equity instruments. SFAS 123R eliminates the ability to
account for stock-based compensation using APB 25 and
requires that such transactions be recognized as compensation
cost in the income statement based on their fair values on the
measurement date, which is generally the date of the grant. The
Company adopted the provisions of SFAS 123R on
January 1, 2006. Details related to the adoption of
SFAS 123R and the impact to the Companys financial
statements are more fully discussed in Note 8
Shareholders Equity.
SFAS No. 154, Accounting Changes and Error
Corrections, a Replacement of APB Opinion No. 20 and FASB
Statement No. 3. SFAS 154 establishes,
unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to a newly
adopted accounting principle. Previously, most changes in
accounting principle were recognized by including the cumulative
effect of changing to the new accounting principle in net income
of the period of the change. SFAS 154 carries forward the
guidance in APB Opinion 20 Accounting Changes,
requiring justification of a change in accounting principle on
the basis of preferability. SFAS 154 also carries forward
without change the guidance contained in APB Opinion 20,
for reporting the correction of an error in previously issued
financial statements and for a change in an accounting estimate.
The adoption of SFAS 154 on January 1, 2006 did not
impact the Companys financial position or results of
operations.
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB
Statements No. 133 and 140. SFAS 155 amends
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities and SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.
52
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS 155 (i) permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation, (ii) clarifies
which interest-only strips and principal-only strips are not
subject to the requirements of SFAS 133,
(iii) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, (iv) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives,
and (v) amends SFAS 140 to eliminate the prohibition
on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest
other than another derivative financial instrument.
SFAS 155 was effective for the Company on January 1,
2007 and is not expected to have a material impact on the
Companys financial position or results of operations.
SFAS No. 157, Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for the Company on
January 1, 2008 and is not expected to have a material
impact on the Companys financial position or results of
operations.
Financial
Accounting Standards Board Staff Positions and
Interpretations
FASB Staff Position (FSP)
No. 115-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments.
FSP
115-1
provides guidance for determining when an investment is
considered impaired, whether impairment is
other-than-temporary,
and measurement of an impairment loss. An investment is
considered impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence
to evaluate the realizable value of its investment, impairment
is determined to be
other-than-temporary,
then an impairment loss should be recognized equal to the
difference between the investments cost and its fair
value. FSP
115-1
nullifies certain provisions of Emerging Issues Task Force
(EITF) Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments,
while retaining the disclosure requirements of EITF
03-1 which
were adopted in 2003. The adoption of FSP
115-1 on
January 1, 2006 did not impact the Companys financial
position or results of operations.
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB
Statement 109. Interpretation 48 prescribes a
recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits
from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax
position will be sustained upon examination by the appropriate
taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of
benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. Tax positions that previously
failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is
no longer met. Interpretation 48 also provides guidance on the
accounting for and disclosure of unrecognized tax benefits,
interest and penalties. Interpretation 48 was effective for the
Company on January 1, 2007 and is not expected to have a
material impact on the Companys financial position or
results of operations.
SEC Staff
Accounting Bulletins
Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of a Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial
Statements. SAB 108 addresses how the effects of
prior year uncorrected errors must be considered in quantifying
misstatements in the current year financial statements. The
effects of prior year uncorrected errors include the potential
accumulation of improper amounts that may result in a material
misstatement on the balance sheet or the reversal of prior
period errors in the current period that result in a material
misstatement of the current period income statement amounts.
Adjustments to current or prior period
53
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial statements would be required in the event that after
application of various approaches for assessing materiality of a
misstatement in current period financial statements and
consideration of all relevant quantitative and qualitative
factors, a misstatement is determined to be material.
SAB 108 is applicable to all financial statements issued by
the Company after November 15, 2006.
|
|
2.
|
Cash,
Cash Equivalents, Short-Term Investments and Restricted
Cash
|
The Companys cash, cash equivalents, short-term
investments and restricted cash consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash and equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,504
|
|
|
$
|
6,348
|
|
Cash
|
|
|
979
|
|
|
|
1,346
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,483
|
|
|
$
|
7,694
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
7,200
|
|
|
$
|
1,800
|
|
Equity securities,
available-for-sale
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,426
|
|
|
$
|
1,800
|
|
|
|
|
|
|
|
|
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
Commercial time deposits
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on short-term investments were $226,000 in 2006
and zero in 2005 and 2004.
|
|
3.
|
Equipment,
Furniture and Leasehold Improvements
|
Major components of equipment, furniture, and leasehold
improvements consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Computer equipment and software
|
|
$
|
2,660
|
|
|
$
|
2,344
|
|
Office furniture and equipment
|
|
|
1,079
|
|
|
|
1,041
|
|
Leasehold improvements
|
|
|
529
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,268
|
|
|
|
3,909
|
|
Less: accumulated depreciation and
amortization
|
|
|
(3,447
|
)
|
|
|
(3,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
821
|
|
|
$
|
792
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $329,000 in 2006,
$277,000 in 2005 and $584,000 in 2004.
On June 30, 2005, the Company entered into an Asset
Purchase Agreement with Vibren Technologies, Inc. (Vibren). The
Company purchased certain assets of Vibren in exchange for
$500,000 in cash and the assumption of certain obligations of
Vibren. The Company incurred related transaction costs of
$26,000, primarily legal fees. The transaction provided the
Company access to four software products that enhanced its
proprietary products portfolio and access to a broadened
customer base.
54
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the estimated fair values of the
assets acquired and obligations assumed at June 30, 2005 in
connection with the Vibren transaction (in thousands):
|
|
|
|
|
|
|
Purchase
|
|
|
|
Price
|
|
|
|
Allocation
|
|
|
Inventory
|
|
$
|
63
|
|
Lease deposit
|
|
|
5
|
|
Equipment
|
|
|
61
|
|
Acquired technology
|
|
|
406
|
|
|
|
|
|
|
Total assets acquired
|
|
|
535
|
|
Accrued transaction expenses
|
|
|
(26
|
)
|
Accrued compensation
|
|
|
(9
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
500
|
|
|
|
|
|
|
Tangible assets were valued at estimated replacement cost while
intangible assets were valued by discounting the present value
of the estimated net cash flows at a rate of 20%. The
amortization period of the acquired technology is two years.
Intangible assets relate to technology acquired in the Vibren
acquisition in June 2005. The Companys gross carrying
value of the acquired intangible assets subject to amortization
was $406,000 as of December 31, 2006. The accumulated
amortization of these assets was $305,000 and the net book value
was $101,000.
Amortization expense was $203,000 in 2006 and $102,000 in 2005
and is expected to be $101,000 in 2007.
The income tax provision is attributable to income and
withholding taxes and was $29,000 in 2006, $14,000 in 2005 and
$11,000 in 2004 all related to the Companys Taiwan
subsidiary. The components of net deferred tax assets consist of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,594
|
|
|
$
|
1,915
|
|
Accrued expenses and reserves
|
|
|
500
|
|
|
|
744
|
|
Net operating loss carryforwards
|
|
|
23,912
|
|
|
|
22,589
|
|
Capital loss carryforwards
|
|
|
2,898
|
|
|
|
2,773
|
|
Research and development credit
carryforwards
|
|
|
2,048
|
|
|
|
2,010
|
|
Stock-based compensation
|
|
|
118
|
|
|
|
|
|
Other
|
|
|
2
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
31,072
|
|
|
|
30,185
|
|
Less: valuation allowance
|
|
|
(31,072
|
)
|
|
|
(30,185
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
55
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory
federal income tax rate to pre-tax income, as a result of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Taxes at the U.S. statutory
rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in valuation allowance
|
|
|
(41.9
|
)
|
|
|
(28.1
|
)
|
|
|
(37.3
|
)
|
International operations
|
|
|
(6.4
|
)
|
|
|
1.7
|
|
|
|
(0.2
|
)
|
State income tax
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
6.4
|
|
|
|
(8.7
|
)
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.7
|
)%
|
|
|
(1.1
|
)%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has provided a full valuation allowance on deferred
tax assets during 2006, 2005 and 2004 because of the uncertainty
regarding their realizability. The valuation allowance increased
$887,000 in 2006, $360,000 in 2005 and $3.2 million in
2004. At December 31, 2006, the Company had approximately
$70.3 million of net operating loss carryforwards and
$2.0 million of tax credit carryforwards, which begin to
expire in 2021. In addition, the Company has $8.2 million
of capital loss carryforwards, which expire in 2008. Utilization
of these net operating losses and tax credits may be subject to
an annual limitation due to provisions of the Internal Revenue
Code of 1986, as amended. Events which cause limitations in the
amount of net operating losses and tax credits that the Company
may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% as defined, over a
three-year period.
In the second quarter of 2005, the Company became aware that
certain amounts remitted, or that were planned to be remitted,
from its Taiwan subsidiary or Taiwanese customers, might be
subject to withholding tax at 20% of the amount remitted. In the
fourth quarter of 2005, the Company began applying for
withholding tax exemptions from the Taiwan government on all
significant contracts on which withholding tax might be owed.
When granted, these exemptions eliminate any withholding tax and
Taiwan-based income tax, as applicable, for the contract to
which the exemption relates. To date, the Company has received
approval for all withholding exemption applications that it has
filed for which significant withholding tax might be owed.
However, there is no assurance that future exemptions will be
granted and if the Company does not receive all, or some, of the
exemptions for which it applies, it could be obligated to pay
withholding tax in the future. Management is continuing to
evaluate alternative business and tax planning strategies to
minimize corporate income and withholding tax obligations in
connection with its Taiwan subsidiary.
|
|
7.
|
Commitments
and Contingencies
|
Contractual
Commitments
The Companys principal commitments consist of obligations
outstanding under operating leases, which expire through 2014.
The Company has lease commitments for office space in Bellevue,
Washington; San Diego, California; Longmont, Colorado;
Vancouver, British Columbia, Canada; and Taipei, Taiwan. The
company leases office space in Akron, Ohio on a
month-to-month
basis.
In February 2004, the Company signed an amendment to the lease
for its then corporate headquarters and simultaneously entered
into a ten-year lease for a new corporate headquarters, also
located in Bellevue, Washington. The amendment to the former
headquarters lease, which was scheduled to terminate on
December 31, 2004, provided that no cash lease payments
were to be made for the remainder of that lease term. Similarly,
the new corporate headquarters lease also provided that no cash
lease payments were to be made during 2004. However, in the
event the Company was to default under its new corporate
headquarters lease, the landlord has the ability to demand
payment for cash payments forgiven in 2004 under the former
headquarters lease. The amount of the
56
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
forgiven payments that the landlord has the ability to demand
repayment for decreases on the straight-line basis over the
length of the new ten-year headquarters lease. Cash payments for
which the landlord has the ability to demand repayment were
$1.8 million at December 31, 2006. The lease agreement
for the new corporate headquarters contains a lease escalation
clause calling for increased rents during the second half of the
ten-year lease.
Rent expense was $1,048,000 in 2006, $839,000 in 2005 and
$472,000 in 2004.
As of December 31, 2006, the Company had $1.2 million
pledged as collateral for a bank letter of credit under the
terms of its headquarters facility lease. The pledged cash
supporting the outstanding letter of credit is recorded as
restricted cash.
Contractual commitments at December 31, 2006 were as
follows (in thousands):
|
|
|
|
|
Operating leases:
|
|
|
|
|
2007
|
|
$
|
1,024
|
|
2008
|
|
|
952
|
|
2009
|
|
|
853
|
|
2010
|
|
|
926
|
|
2011
|
|
|
975
|
|
Thereafter
|
|
|
2,889
|
|
|
|
|
|
|
Total commitments
|
|
$
|
7,619
|
|
|
|
|
|
|
Legal
Proceedings
IPO
Litigation
In Summer and early Fall 2001, four purported shareholder class
action lawsuits were filed in the United States District Court
for the Southern District of New York against the Company,
certain of its current and former officers and directors (the
Individual Defendants), and the underwriters of its
initial public offering (the Underwriter
Defendants). The suits purport to be class actions filed
on behalf of purchasers of the Companys common stock
during the period from October 19, 1999 to December 6,
2000. The complaints against the Company have been consolidated
into a single action and a Consolidated Amended Complaint, which
was filed on April 19, 2002 and is now the operative
complaint.
The plaintiffs allege that the Underwriter Defendants agreed to
allocate stock in the Companys initial public offering to
certain investors in exchange for excessive and undisclosed
commissions and agreements by those investors to make additional
purchases of stock in the aftermarket at pre-determined prices.
The plaintiffs allege that the prospectus for the Companys
initial public offering was false and misleading in violation of
the securities laws because it did not disclose these
arrangements. The action seeks damages in an unspecified amount.
The action is being coordinated with approximately 300 other
nearly identical actions filed against other companies. On
July 15, 2002, the Company moved to dismiss all claims
against it and the Individual Defendants. On October 9,
2002, the district court dismissed the Individual Defendants
from the case without prejudice based upon stipulations of
dismissal filed by the plaintiffs and the Individual Defendants.
On February 19, 2003, the district court denied the motion
to dismiss the complaint against the Company. On
October 13, 2004, the district court certified a class in
six of the approximately 300 other nearly identical actions (the
focus cases) and noted that the decision is intended
to provide strong guidance to all parties regarding class
certification in the remaining cases. The Underwriter Defendants
appealed this decision and the Second Circuit vacated the
district courts decision granting class certification in
the six focus cases on December 5, 2006. The plaintiffs
have not yet moved to certify a class in the Companys case.
57
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has approved a settlement agreement and related
agreements which set forth the terms of a settlement between the
Company, the Individual Defendants, the plaintiff class and the
vast majority of the other approximately 300 issuer defendants.
It is unclear what impact the Second Circuits decision
vacating class certification in the focus cases will have on the
settlement, which has not yet been finally approved by the
district court. On December 14, 2006, Judge Scheindlin of
the district court held a hearing. The plaintiffs informed the
district court that they planned to file a petition for
rehearing and rehearing en banc. The district court
stayed all proceedings, including a decision on final approval
of the settlement and any amendments of the complaints, pending
the Second Circuits decision on the plaintiffs
petition for rehearing. The plaintiffs filed the petition for
rehearing and rehearing en banc on January 5, 2007.
Pursuant to the settlement and related agreements, if the
settlement receives final approval by the district court, the
settlement provides for a release of the Company and the
Individual Defendants for the conduct alleged in the action to
be wrongful. The Company would agree to undertake certain
responsibilities, including agreeing to assign away, not assert,
or release certain potential claims the Company may have against
the Underwriter Defendants. The settlement agreement also
provides a guaranteed recovery of $1 billion to plaintiffs
for the cases relating to all of the approximately 300 issuers.
To the extent that the Underwriter Defendants settle all of the
cases for at least $1 billion, no payment will be required
under the issuers settlement agreement. To the extent that
the Underwriter Defendants settle for less than $1 billion,
the issuers are required to make up the difference. On
April 20, 2006, JPMorgan Chase and the plaintiffs reached a
preliminary agreement to settle for $425 million. The
JPMorgan Chase preliminary agreement has not yet been approved
by the district court. In an amendment to the issuers
settlement agreement, the issuers insurers agreed that the
JPMorgan Chase preliminary agreement, if approved, will only
offset the insurers obligation to cover the remainder of
the plaintiffs guaranteed $1 billion recovery by 50%
of the value of the JPMorgan Chase settlement, or
$212.5 million. Therefore, if the JPMorgan Chase
preliminary agreement to settle is finalized and then approved
by the district court, then the maximum amount that the
issuers insurers will be potentially liable for is
$787.5 million. It is unclear what impact the Second
Circuits decision vacating class certification in the
focus cases will have on the JPMorgan Chase preliminary
agreement.
The Company anticipates that any potential financial obligation
of the Company to plaintiffs pursuant to the terms of the
issuers settlement agreement and related agreements will
be covered by existing insurance. The Company currently is not
aware of any material limitations on the expected recovery of
any potential financial obligation to plaintiffs from its
insurance carriers. Its carriers are solvent, and the Company is
not aware of any uncertainties as to the legal sufficiency of an
insurance claim with respect to any recovery by plaintiffs.
Therefore, we do not expect that the settlement will involve any
payment by the Company. If material limitations on the expected
recovery of any potential financial obligation to the plaintiffs
from the Companys insurance carriers should arise, the
Companys maximum financial obligation to plaintiffs
pursuant to the settlement agreement would be less than
$3.4 million. However, if the JPMorgan Chase preliminary
agreement is preliminarily and then finally approved, the
Companys maximum financial obligation to the plaintiffs
pursuant to the settlement agreement would be approximately
$2.7 million.
There is no assurance that the district court will grant final
approval to the issuers settlement. If the settlement
agreement is not approved and the Company is found liable, we
are unable to estimate or predict the potential damages that
might be awarded, whether such damages would be greater than the
Companys insurance coverage, and whether such damages
would have a material impact on our results of operations or
financial condition in any future period.
Customer
Litigation
As previously reported, the Company had been in dispute with a
former customer (Former Customer) regarding payment
of amounts due for a contract under which the Company provided
professional engineering services. The Company had an account
receivable outstanding with the Former Customer of $475,000 as
of September 30, 2006 and increased the allowance for
doubtful accounts by $475,000 in the fourth quarter of 2005
58
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related to this account receivable. As a result of the dispute,
the Company filed a Complaint for breach of contract and
misappropriation of intellectual property against the Former
Customer on December 22, 2005 in federal district court in
the state of Delaware. On January 27, 2006, the Former
Customer filed an Answer and Counterclaim against the Company,
and the Company filed its Reply to the Former Customers
Answer and Counterclaim on February 16, 2006, denying all
counterclaims against it.
On October 31, 2006, the Company and the Former Customer
settled their dispute by entering into a settlement agreement
(the Settlement Agreement). Under the Settlement
Agreement, the Former Customer has agreed to pay a Settlement
Amount of $200,000 to the Company on or before December 31,
2009 and also provide certain intellectual property to the
Company, under a license agreement. The Former Customer made an
initial payment of $10,000 upon execution of the Settlement
Agreement. The remaining amount owed to the Company under the
Settlement Agreement will be satisfied through the purchase of
Microsoft embedded operating systems from the Company or through
commissions and royalties earned by the Company related to the
sale of the Former Customers intellectual property. The
Former Customers parent company has placed its common
stock in escrow to guarantee performance under the Settlement
Agreement, including an agreement that the Settlement Amount is
satisfied by December 31, 2009. Additionally, the
Settlement Agreement provides that all claims between the
parties are terminated. The settlement structure provides for
the possibility of ongoing commission and royalty revenue to the
Company after the satisfaction of the $200,000 settlement amount
such that the total recovery may be greater than $200,000.
Stock
Options
In May 1997, the Company adopted a Stock Option Plan, which has
subsequently been amended and restated (the Amended
Plan). Under the Amended Plan, the Board of Directors may
grant non-qualified stock options at a price determined by the
Board, not to be less than 85% of the fair market value of the
common stock. These options have a term of up to 10 years
and vest over a schedule determined by the Board of Directors,
generally four years. Incentive stock options granted under the
Amended Plan may only be granted to employees of the Company,
have a term of up to 10 years, and shall be granted at a
price equal to the fair market value of the Companys
stock. The Amended Plan was amended in 2003 to allow for an
automatic annual increase in the number of shares reserved for
issuance during each of the Companys fiscal years by an
amount equal to the lesser of: (i) four percent of the
Companys outstanding shares at the end of the previous
fiscal year, (ii) an amount determined by the
Companys Board of Directors, or
(iii) 375,000 shares. The Amended Plan was further
amended in 2005 to allow for awards of stock appreciation rights
and restricted and unrestricted stock.
In July 2000, the Company adopted the 2000 Non-Qualified Stock
Option Plan (the 2000 Plan). Under the 2000 Plan, the Board of
Directors may grant non-qualified stock options at a price
determined by the Board. These stock options have a term of up
to 10 years and vest over a schedule determined by the
Board of Directors, generally over four years.
Stock-Based
Compensation
Effective January 1, 2006, the Company began recording
compensation expense associated with stock options and other
forms of equity compensation in accordance with Statement of
Financial Accounting Standards No. 123R, Share-Based
Payment, (SFAS 123R) as interpreted by SEC
Staff Accounting Bulletin No. 107. Prior to
December 31, 2005, the Company accounted for stock options
granted to employees according to the provisions of Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, as permitted by SFAS 123, Accounting
for Stock-Based Compensation, and, therefore, no related
compensation expense was recorded for awards granted with no
intrinsic value. The Company adopted the modified prospective
transition method provided for under SFAS 123R, and
consequently has not retroactively adjusted results for prior
periods. Under this transition method, compensation cost
associated with stock options includes:
59
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1) compensation cost related to the remaining unvested
portion of all stock option awards granted prior to
December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS 123; and 2) compensation cost related to all
stock option awards granted subsequent to December 31,
2005, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. The Company records
expense over the vesting period using the straight-line method.
Compensation expense for awards under SFAS 123R includes an
estimate for forfeitures.
Stock-based compensation expense was recorded on the statement
of operations in the same line items as cash compensation for
our employees as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of revenue service
|
|
$
|
190
|
|
|
$
|
|
|
|
$
|
|
|
Selling, general and administrative
|
|
|
445
|
|
|
|
17
|
|
|
|
|
|
Research and development
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-compensation expense
|
|
$
|
715
|
|
|
$
|
17
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact of stock-based compensation expense under
FAS 123R reduced net income by $715,000 and basic and
diluted earnings per share by $0.08.
At December 31, 2006, total compensation cost related to
stock options granted to employees under the Companys
stock option plans but not yet recognized was $470,000, net of
estimated forfeitures. This cost will be amortized on the
straight-line method over a weighted-average period of
approximately 1.4 years and will be adjusted for subsequent
changes in estimated forfeitures.
Key
Assumptions
The fair value of the Companys stock options was estimated
on the date of grant using the Black-Scholes-Merton option
pricing model, with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
SFAS 123R
|
|
|
SFAS 123
|
|
|
SFAS 123
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
Expected volatility
|
|
|
92
|
%
|
|
|
99
|
%
|
|
|
140
|
%
|
Risk-free interest rate
|
|
|
4.8
|
%
|
|
|
4.1
|
%
|
|
|
3.1
|
%
|
Estimated forfeitures
|
|
|
36
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
Expected Dividend The Black-Scholes-Merton
valuation model calls for a single expected dividend yield as an
input. The dividend yield is determined by dividing the expected
per share dividend during the coming year by the grant date
stock price. The expected dividend assumption is based on the
Companys current expectations about its anticipated
dividend policy.
Expected Life: The Companys expected
term represents the period that the Companys stock-based
awards are expected to be outstanding and was determined based
on historical experience and vesting schedules of similar awards.
Expected Volatility: The Companys
expected volatility represents the weighted average historical
volatility of the Companys common stock for the most
recent four-year period.
60
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Risk-Free Interest Rate: The Company bases the
risk-free interest rate used in the Black-Scholes-Merton
valuation method on the implied yield currently available on
U.S. Treasury zero-coupon issues with an equivalent
remaining term. Where the expected term of the Companys
stock-based awards do not correspond with the terms for which
interest rates are quoted, the Company performed a straight-line
interpolation to determine the rate from the available term
maturities.
Estimated Forfeitures: Estimated forfeitures
represents the Companys historical forfeitures for the
most recent two-year period and considers termination behavior
as well as analysis of actual option forfeitures.
Stock
Option Activity
The following table summarizes activity under the Companys
stock option plans for the three years ended December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Weighted Average
|
|
|
Contractual
|
|
|
Aggregate Intrinsic
|
|
Stock Options
|
|
of Shares
|
|
|
Exercise Price
|
|
|
Life (In Years)
|
|
|
Value
|
|
|
Outstanding at January 1, 2004
|
|
|
1,443,427
|
|
|
$
|
9.69
|
|
|
|
|
|
|
|
|
|
Granted at fair value
|
|
|
794,233
|
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(157,589
|
)
|
|
|
2.86
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(260,044
|
)
|
|
|
6.61
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(154,969
|
)
|
|
|
21.50
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
1,665,058
|
|
|
|
6.33
|
|
|
|
8.52
|
|
|
$
|
3,578,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at fair value
|
|
|
580,351
|
|
|
|
2.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,484
|
)
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(201,490
|
)
|
|
|
3.15
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(263,067
|
)
|
|
|
12.15
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
1,760,368
|
|
|
|
4.75
|
|
|
|
8.26
|
|
|
$
|
905,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at fair value
|
|
|
558,400
|
|
|
|
2.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(64,189
|
)
|
|
|
1.94
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(138,084
|
)
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(146,965
|
)
|
|
|
9.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
1,969,530
|
|
|
$
|
3.98
|
|
|
|
7.98
|
|
|
$
|
712,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
December 31, 2006
|
|
|
1,596,116
|
|
|
$
|
4.31
|
|
|
|
0.35
|
|
|
$
|
545,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
1,058,280
|
|
|
$
|
5.12
|
|
|
|
7.04
|
|
|
$
|
320,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value was $1.73 per
share for options granted during 2006, $2.50 during 2005 and
$4.99 during 2004. The aggregate intrinsic value represents the
difference between the exercise price of the underlying options
and the quoted price of the Companys common stock as of
December 31, 2006 for the number of options that were
in-the-money
at year end. There were 416,979 options that were
in-the-money
at December 31, 2006, 346,522 at December 31, 2005 and
458,054 at December 31, 2004. The Company issues new
61
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares of common stock upon exercise of stock options. The
aggregate intrinsic value of options exercised under the
Companys stock option plans was approximately $59,000 for
2006, $26,000 for 2005 and $324,000 for 2004.
Pro
Forma Disclosure
The following table illustrates the effect on net loss and net
loss per share if the Company had applied the fair value
recognition provisions of SFAS 123 to options granted under
the Companys stock-based compensation plans prior to
January 1, 2006 (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss, as reported
|
|
$
|
(1,297
|
)
|
|
$
|
(7,051
|
)
|
Compensation expense recognized
under APB No. 25
|
|
|
|
|
|
|
|
|
Employee compensation expense
under SFAS No. 123
|
|
|
(848
|
)
|
|
|
(1,592
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(2,145
|
)
|
|
$
|
(8,643
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share,
as reported
|
|
$
|
(0.14
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted loss
per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
|
Shares used to calculate pro forma
basic and diluted loss per share
|
|
|
9,541
|
|
|
|
9,464
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Reserved for Future Issuance
The Company had the following shares of common stock reserved
for future issuance:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Stock options outstanding
|
|
|
1,969,530
|
|
|
|
1,760,368
|
|
Stock options available for future
grant
|
|
|
516,572
|
|
|
|
319,438
|
|
Warrants outstanding
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,586,102
|
|
|
|
2,179,806
|
|
|
|
|
|
|
|
|
|
|
Warrants
In June 2003, as a result of a facilities restructuring
settlement agreement, the Company issued warrants to purchase up
to 100,000 shares of the Companys common stock at an
exercise price of $4.56 per share. The warrants were fully
vested at the time of issuance and expire in June 2008. The
warrants value was estimated at $332,000 using the
Black-Scholes-Merton option pricing model with an expected
dividend yield of 0.0%, a risk-free interest rate of 1.5%,
volatility of 180% and a contractual life of five years.
Reverse
Stock Split
On October 5, 2005, the Board of Directors approved an
amendment to the Companys articles of incorporation to
reduce the Companys number of authorized shares of common
stock from 150,000,000 to 37,500,000 and also approved a
one-for-four
reverse stock split of the Companys outstanding common
stock. The reverse stock split was effective with respect to
shareholders of record at the close of trading on
October 6, 2005, and the Companys common stock began
trading as adjusted for the reverse stock split on
October 7, 2005. As a result of the reverse stock split,
each four shares of common stock were exchanged for one share of
common stock and the total number of shares outstanding were
reduced from approximately 38.2 million shares to
approximately 9.5 million
62
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares. The Company has retroactively adjusted all share
information to reflect the reverse stock split in the
accompanying financial statements and footnotes.
Profit
Sharing and Deferred Compensation Plan
The Company has a Profit Sharing and Deferred Compensation Plan
(Profit Sharing Plan) under Section 401(k) of the Internal
Revenue Code of 1986, as amended. Substantially all full-time
employees are eligible to participate. The Company, at its
discretion, may elect to match the participants
contributions to the Profit Sharing Plan. Participants will
receive their share of the value of their investments and any
applicable vesting upon retirement or termination, subject to a
vesting schedule. The Company made matching contributions of
$269,000 in 2006, $200,000 in 2005 and $91,000 in 2004.
|
|
10.
|
Supplemental
Disclosure of Cash Flow Information (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash paid for income taxes
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
All other significant non-cash financing activities are
described elsewhere in the financial statements or the notes
thereto.
|
|
11.
|
Significant
Customers
|
The Company did not have any customers that accounted for at
least 10% of revenue in 2006 or 2005. Sales to Cardinal
Healthcare Systems (Cardinal) represented 19% of revenue in
2004. Substantially all of our sales to Cardinal were of
Microsoft Embedded operating systems. Cardinal discontinued
purchasing from the Company in the first quarter of 2005.
|
|
12.
|
Related
Party Transactions
|
Pursuant to a consulting agreement between the Company and
Mr. Donald Bibeault, the Chairman of the Companys
Board of Directors, Mr. Bibeault has provided the Company
with onsite consulting services since July 2003, when he was
appointed to the Companys Board of Directors. The Company
incurred expenses of $72,000 in 2006, $113,000 in 2005 and
$158,000 in 2004 under this consulting agreement. On
June 29, 2006, the Company and Mr. Bibeault agreed to
terminate this consulting agreement, effective
September 30, 2006. Mr. Bibeault continues to serve as
the Chairman of the Companys Board of Directors.
|
|
13.
|
Geographic
and Segment Information
|
The Company follows the requirements of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
Information. The Company has one operating segment,
software and services delivered to smart device makers.
63
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about the
Companys revenue and long-lived asset information by
geographic areas (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
47,108
|
|
|
$
|
40,600
|
|
|
$
|
35,812
|
|
Asia
|
|
|
2,561
|
|
|
|
2,261
|
|
|
|
2,887
|
|
Other foreign
|
|
|
146
|
|
|
|
62
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue(1)
|
|
$
|
49,815
|
|
|
$
|
42,923
|
|
|
$
|
38,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
877
|
|
|
$
|
1,047
|
|
Asia
|
|
|
45
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
922
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revenue is attributed to countries based on location of customer
invoiced. |
|
|
14.
|
Discontinued
Operations
|
The loss from discontinued operations is presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Hardware revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
890
|
|
Cost of hardware revenue
|
|
|
|
|
|
|
|
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
|
(2,248
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
2,272
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Restructuring and related charges
|
|
|
|
|
|
|
|
|
|
|
312
|
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(6,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cost of hardware revenue is a $1.6 million net
charge related to the impairment of inventory. Included in
operating expenses of the discontinued operations are $74,000
related to corporate allocations, which are now allocated to
continuing operations.
64
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring and impairment charges included in loss from
discontinued operations include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Employee separation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
194
|
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
Other charges
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and impairment
charges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2004, the Company eliminated ten
positions in the hardware business, representing 7% of the
Companys then remaining workforce. The Company incurred
severance of $79,000 and $10,000 of related charges.
During the second quarter of 2004, the Companys Board of
Directors decided to discontinue the Companys hardware
business unit resulting in a $1.5 million charge in that
quarter, of which $608,000 related to the impairment of tooling,
$585,000 related to the impairment of prepaid software licenses
used in the Companys Power Handheld device, $120,000
related to severance for eight employees terminated,
representing 7% of the Companys then remaining workforce,
and $162,000 related to other charges.
|
|
15.
|
Quarterly
Financial Information (Unaudited)
|
Summarized quarterly financial information for 2006 and 2005 are
as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
11,584
|
|
|
$
|
12,645
|
|
|
$
|
11,495
|
|
|
$
|
14,091
|
|
Gross profit
|
|
|
2,317
|
|
|
|
3,007
|
|
|
|
2,827
|
|
|
|
3,836
|
|
Income (loss) from operations(1)
|
|
|
(936
|
)
|
|
|
(177
|
)
|
|
|
(355
|
)
|
|
|
589
|
|
Net income (loss)
|
|
$
|
(849
|
)
|
|
$
|
(88
|
)
|
|
$
|
(235
|
)
|
|
$
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss)
per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,564
|
|
|
|
9,586
|
|
|
|
9,589
|
|
|
|
9,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
9,564
|
|
|
|
9,586
|
|
|
|
9,589
|
|
|
|
9,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Stock-based compensation
expense included in cost of revenue and operating expenses
|
|
$
|
154
|
|
|
$
|
175
|
|
|
$
|
185
|
|
|
$
|
201
|
|
65
BSQUARE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Quarter Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenue
|
|
$
|
9,815
|
|
|
$
|
10,316
|
|
|
$
|
10,096
|
|
|
$
|
12,696
|
|
Gross profit
|
|
|
1,908
|
|
|
|
2,525
|
|
|
|
2,254
|
|
|
|
3,197
|
|
Loss from operations(2)(3)
|
|
|
(604
|
)
|
|
|
(54
|
)
|
|
|
(544
|
)
|
|
|
(368
|
)
|
Net loss
|
|
$
|
(545
|
)
|
|
$
|
(37
|
)
|
|
$
|
(469
|
)
|
|
$
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of
basic and diluted loss per share
|
|
|
9,535
|
|
|
|
9,536
|
|
|
|
9,542
|
|
|
|
9,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Stock-based compensation
expense included in operating expenses
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17
|
|
|
$
|
|
|
|
|
|
|
(3)
|
In the fourth quarter of 2005, the Company incurred bad debt
expense of $399,000 related to an ongoing customer dispute.
|
66
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
We carried out an evaluation required by the Securities Exchange
Act of 1934, under the supervision and with the participation of
our senior management, including our principal executive officer
and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on
this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and
procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, are effective in
timely alerting them to material information required to be
included in our periodic SEC reports.
There has been no change in our internal control over financial
reporting during our fourth quarter of 2006 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by this Item regarding our directors
and executive officers is set forth in Part I of this
report Item 1, Business Directors and
Executive Officers and is incorporated herein by this
reference.
The information required by this Item regarding compliance by
our directors, executive officers and holders of ten percent of
a registered class of our equity securities with
Section 16(a) of the Securities Exchange Act of 1934 is
included in our definitive proxy statement for our 2007 annual
meeting of shareholders to be filed with the SEC under the
caption Section 16(a) Beneficial Ownership Reporting
Compliance and is incorporated herein by this reference.
The information required by this Item regarding our audit
committee and audit committee financial expert and any material
changes to the procedures by which shareholders may recommend
nominees to our board of directors is included in our definitive
proxy statement for our 2007 annual meeting of shareholders to
be filed with the SEC under the caption Corporate
Governance and is incorporated herein by this reference.
We have adopted a Code of Business Conduct and Ethics in
compliance with the applicable rules of the SEC that applies to
our principal executive officer, our principal financial officer
and our principal accounting officer or controller, or persons
performing similar functions. A copy of this policy is available
free of charge upon written request to the attention of our
Corporate Secretary by regular mail, email to
investorrelations@bsquare.com, or facsimile at
425-519-5998.
We intend to disclose any amendment to, or a waiver from, a
provision of our code of ethics that applies to our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions and that relates to any element of the code of ethics
enumerated in applicable rules of the SEC.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this Item is included in our
definitive proxy statement for our 2007 annual meeting of
shareholders to be filed with the SEC under the captions
Corporate Governance and Information Regarding
Executive Officer Compensation and is incorporated herein
by this reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item regarding security
ownership is included in our definitive proxy statement for
our 2007 annual meeting of shareholders to be filed with the SEC
under the caption Security Ownership of Principal
Shareholders, Directors and Management and is incorporated
herein by this reference.
67
The information required by this Item regarding equity
compensation plan information is included in our definitive
proxy statement for our 2007 annual meeting of shareholders to
be filed with the SEC under the caption Equity
Compensation Plan Information and is incorporated herein
by this reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this Item is included in our
definitive proxy statement for our 2007 annual meeting of
shareholders to be filed with the SEC under the captions
Corporate Governance and Certain Relationships
and Related Transactions and is incorporated herein by
this reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this Item with respect to principal
accounting fees and services is included in our definitive proxy
statement for our 2007 annual meeting of shareholders to be
filed with the SEC under the caption The Companys
Independent Auditors and is incorporated herein by this
reference.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
|
|
(a)
|
Financial
Statements and Schedules
|
1. Financial Statements.
The following consolidated financial statements are filed as
part of this report under Item 8 of Part II,
Financial Statements and Supplementary Data.
A. Consolidated Balance Sheets at December 31, 2006
and 2005.
B. Consolidated Statements of Operations for the Years
Ended December 31, 2006, 2005 and 2004.
C. Consolidated Statements of Shareholders Equity for
the Years Ended December 31, 2006, 2005 and 2004.
D. Consolidated Statements of Cash Flows for the Years
Ended December 31, 2006, 2005 and 2004.
2. Financial Statement Schedules.
The following financial statement schedule is filed as part of
this report:
A. Schedule II Valuation and Qualifying
Accounts.
Financial statement schedules not included herein have been
omitted because they are either not required, not applicable, or
the information is otherwise included herein.
The exhibits listed in the accompanying Index to Exhibits on
pages 77 to 80 are filed or incorporated by reference as
part of this Annual Report on
Form 10-K.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BSQUARE CORPORATION
Date: February 15, 2007
Brian T. Crowley
President and Chief Executive Officer
Date: February 15, 2007
Scott C. Mahan
Vice President, Finance and
Chief Financial Officer
POWER OF
ATTORNEY
Each person whose individual signature appears below hereby
authorizes and appoints Brian T. Crowley and Scott C. Mahan, and
each of them, with full power of substitution and resubstitution
and full power to act without the other, as his true and lawful
attorney-in-fact
and agent to act in his name, place and stead and to execute in
the name and on behalf of each person, individually and in each
capacity stated below, and to file, any and all amendments to
this report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing, ratifying and confirming
all that said
attorneys-in-fact
and agents or any of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on February 15, 2007, on behalf of the registrant and in
the capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Brian
T. Crowley
Brian
T. Crowley
|
|
President and Chief Executive
Officer (Principal Executive Officer)
|
|
|
|
/s/ Scott
C. Mahan
Scott
C. Mahan
|
|
Vice President, Finance and Chief
Financial Officer(Principal Financial and Accounting Officer)
|
|
|
|
/s/ Donald
B. Bibeault
Donald
B. Bibeault
|
|
Chairman of the Board
|
|
|
|
/s/ Scot
E. Land
Scot
E. Land
|
|
Director
|
69
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Elwood
D.
Howse, Jr.
Elwood
D. Howse, Jr.
|
|
Director
|
|
|
|
/s/ Elliott
H.
Jurgensen, Jr.
Elliott
H. Jurgensen, Jr.
|
|
Director
|
|
|
|
/s/ William
D. Savoy
William
D. Savoy
|
|
Director
|
|
|
|
/s/ Kendra
VanderMeulen
Kendra
VanderMeulen
|
|
Director
|
70
BSQUARE
CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance
for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
Amounts
|
|
|
Balance at
|
|
Year Ended
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Written Off
|
|
|
End of Period
|
|
|
|
(In thousands)
|
|
|
December 31, 2006(1)
|
|
$
|
687
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
489
|
|
|
$
|
198
|
|
December 31, 2005(2)
|
|
$
|
222
|
|
|
$
|
399
|
|
|
$
|
86
|
|
|
$
|
20
|
|
|
$
|
687
|
|
December 31, 2004
|
|
$
|
320
|
|
|
$
|
59
|
|
|
$
|
|
|
|
$
|
157
|
|
|
$
|
222
|
|
|
|
|
(1) |
|
In the fourth quarter of 2006, the Company settled an ongoing
dispute with a former customer, which resulted in a write off of
$475,000. |
|
(2) |
|
In the fourth quarter of 2005, the Company incurred bad debt
expense of $399,000 related to an ongoing customer dispute. |
71
BSQUARE
CORPORATION
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Articles of
Incorporation(1)
|
|
3
|
.1(a)
|
|
Articles of Amendment to Amended
and Restated Articles of Incorporation(2)
|
|
3
|
.1(b)
|
|
Articles of Amendment to Amended
and Restated Articles of Incorporation(20)
|
|
3
|
.2
|
|
Bylaws and all amendments
thereto(14)
|
|
4
|
.1
|
|
See Exhibits 3.1, 3.1(a),
3.1(b) and 3.2 for provisions defining the rights of the holders
of common stock
|
|
4
|
.2
|
|
Form of Warrant to purchase common
stock(16)
|
|
10
|
.1
|
|
Amended and Restated Stock Option
Plan, as amended(25)
|
|
10
|
.1(a)
|
|
1998 Mainbrace Stock Option Plan(3)
|
|
10
|
.1(b)
|
|
2000 Non-Qualified Stock Option
Plan(4)
|
|
10
|
.1(c)
|
|
Infogation Corporation 1996 Stock
Option Plan(12)
|
|
10
|
.1(d)
|
|
Infogation Corporation 2001 Stock
Options/Stock Issuance Plan(12)
|
|
10
|
.1(e)
|
|
Form of Stock Option Agreement(24)
|
|
10
|
.2
|
|
Employee Stock Purchase Plan(1)
|
|
10
|
.2 (a)
|
|
Amendment No. 1 to the
Employee Stock Purchase Plan(13)
|
|
10
|
.3
|
|
401(k) Plan(1)
|
|
10
|
.4
|
|
Form of Indemnification
Agreement(1)
|
|
10
|
.6
|
|
Office Lease Agreement between
Seattle Office Associates, LLC and BSQUARE Corporation dated
March 24, 1997 (for Suite 100)(1)
|
|
10
|
.7
|
|
Sunset North Corporate Campus
Lease Agreement between WRC Sunset North and
BSQUARE Corporation(1)
|
|
10
|
.8
|
|
First Amendment to Office Lease
Agreement between WRC Sunset North LLC and BSQUARE(5)
|
|
10
|
.9*
|
|
Master Development &
License Agreement between Microsoft Corporation and
BSQUARE Corporation dated effective as of October 1,
1998(1)
|
|
10
|
.9(a)*
|
|
Amendment No. 1 to the Master
Development and License Agreement between
BSQUARE Corporation and Microsoft Corporation dated
December 23, 1999(6)
|
|
10
|
.9(b)*
|
|
Amendment No. 2 to the Master
Development and License Agreement between
BSQUARE Corporation and Microsoft Corporation dated
July 26, 2001(6)
|
|
10
|
.10
|
|
Stock Purchase and Shareholders
Agreement dated as of January 30, 1998(1)
|
|
10
|
.11
|
|
Stock Purchase Agreement dated
August 18, 1999 by and between BSQUARE Corporation and
Vulcan Ventures Incorporated(1)
|
|
10
|
.12
|
|
Agreement and Plan of Merger among
BSQUARE, BlueWater Systems, Inc. and H2O Merger Corporation
dated as of January 5, 2000(7)
|
|
10
|
.13
|
|
Agreement and Plan of Merger among
BSQUARE Corporation, Mainbrace Corporation and Mainbrace
Acquisition Inc. dated as of May 10, 2000(8)
|
|
10
|
.14
|
|
Single-Tenant Commercial Space
Lease among One South Park Investors, Paul Enterprises and FKLM
as Landlord and BSQUARE as Tenant(9)
|
|
10
|
.14 (a)
|
|
Lease cancellation, termination,
and release agreement among One South Park Investors,
Partnership as Landlord and BSQUARE as Tenant(16)
|
|
10
|
.15
|
|
Single-Tenant Commercial Space
Lease (NNN), dated as of August 30, 2000, by and between
One South Park Investors, Partnership and BSQUARE Corporation(10)
|
|
10
|
.16
|
|
Fourth Amendment to Office Lease
Agreement between WRC Sunset North LLC and
BSQUARE Corporation(11)
|
72
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.16 (a)
|
|
Fifth Amendment to Office Lease
Agreement between WA Sunset North Bellevue LLC and
BSQUARE Corporation(18)
|
|
10
|
.16(b)
|
|
Rent Deferral Agreement between
WA Sunset North Bellevue, L.L.C and
BSQUARE Corporation(18)
|
|
10
|
.17
|
|
Agreement and Plan of Merger among
BSQUARE, BSQUARE San Diego Corporation and Infogation
Corporation dated as of March 10, 2002(14)
|
|
10
|
.18*
|
|
OEM Distribution Agreement for
Software Products for Embedded Systems between
BSQUARE Corporation and Microsoft Licensing, GP dated
September 16, 2003(17)
|
|
10
|
.18(a)*
|
|
OEM Distribution Agreement for
Software Products for Embedded Systems between
BSQUARE Corporation and Microsoft Licensing, GP dated
effective as of October 1, 2004(19)
|
|
10
|
.18(b)*
|
|
OEM Distribution Agreement for
Software Products for Embedded Systems between
BSQUARE Corporation and Microsoft Licensing, GP dated
effective as of October 1, 2005(21)
|
|
10
|
.18(c)+
|
|
OEM Distribution Agreement for
Software Products for Embedded Systems between
BSQUARE Corporation and Microsoft Licensing, GP dated
effective as of October 1, 2006(26)
|
|
10
|
.19
|
|
Office lease Agreement between WA
110 Atrium Place, LLC and BSQUARE Corporation(18)
|
|
10
|
.20
|
|
Employment Agreement between Scott
C. Mahan and BSQUARE Corporation(18)
|
|
10
|
.21
|
|
Employment Agreement between Carey
E. Butler and BSQUARE Corporation(18)
|
|
10
|
.22
|
|
Employment Offer Letter Agreement
between Pawan Gupta and BSQUARE Corporation(24)
|
|
10
|
.22(a)
|
|
Separation and Release Agreement
between Pawan Gupta and BSQUARE Corporation dated effective as
of October 30, 2006
|
|
10
|
.23
|
|
Employment Agreement between Brian
T. Crowley and BSQUARE Corporation(22)
|
|
10
|
.24
|
|
Asset Purchase Agreement between
Vibren Technologies, Inc. and BSQUARE Corporation dated
effective June 30, 2005(23)
|
|
10
|
.25
|
|
Employment offer letters, as
amended, between Larry Stapleton and BSQUARE Corporation(25)
|
|
21
|
.1
|
|
Subsidiaries of the registrant
|
|
23
|
.1(a)
|
|
Consent of Moss Adams LLP,
Independent Registered Public Accounting Firm
|
|
23
|
.1(b)
|
|
Consent of Ernst & Young
LLP, Independent Registered Public Accounting Firm
|
|
24
|
.1
|
|
Power of Attorney (included on
signature page hereof)
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Exchange Act
Rule 13a-14(a)
under the Securities and Exchange Act of 1934
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Exchange Act
Rule 13a-14(a)
under the Securities and Exchange Act of 1934
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Subject to confidential treatment. |
|
+ |
|
Confidential treatment requested. |
|
(1) |
|
Incorporated by reference to the registrants registration
statement on
Form S-1
(File
No. 333-85351)
filed with the Securities and Exchange Commission on
October 19, 1999. |
|
(2) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on August 7,
2000. |
|
(3) |
|
Incorporated by reference to the registrants registration
statement on
Form S-8
(File
No. 333-44306)
filed with the Securities and Exchange Commission on
August 23, 2000. |
|
(4) |
|
Incorporated by reference to the registrants registration
statement on
Form S-8
(File
No. 333-70290)
filed with the Securities and Exchange Commission on
September 27, 2001. |
73
|
|
|
(5) |
|
Incorporated by reference to the registrants annual report
on
Form 10-K
filed with the Securities and Exchange Commission on
March 2, 2000. |
|
(6) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on November 9,
2001. |
|
(7) |
|
Incorporated by reference to the registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
January 18, 2000. |
|
(8) |
|
Incorporated by reference to the registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
May 23, 2000. |
|
(9) |
|
Incorporated by reference to the registrants registration
statement on
Form S-1
(File
No. 333-45506)
filed with the Securities and Exchange Commission on
September 14, 2000. |
|
(10) |
|
Incorporated by reference to the registrants annual report
on
Form 10-K
filed with the Securities and Exchange Commission on
March 26, 2001. |
|
(11) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on November 14,
2002. |
|
(12) |
|
Incorporated by reference to the registrants statement on
Form S-8
(File
No. 333-85340)
filed with the Securities and Exchange Commission on
April 2, 2002. |
|
(13) |
|
Incorporated by reference to the registrants statement on
Form S-8
(File
No. 333-90848)
filed with the Securities and Exchange Commission on
June 20, 2002. |
|
(14) |
|
Incorporated by reference to the registrants annual report
on
Form 10-K
filed with the Securities and Exchange Commission on
March 19, 2003. |
|
(15) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on May 8, 2003. |
|
(16) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on August 14,
2003. |
|
(17) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on November 14,
2003. |
|
(18) |
|
Incorporated by reference to the registrants annual report
on
Form 10-K
filed with the Securities and Exchange Commission on
March 30, 2004. |
|
(19) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on November 5,
2004. |
|
(20) |
|
Incorporated by reference to the registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 11, 2005. |
|
(21) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on November 8,
2005. |
|
(22) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on May 12, 2005. |
|
(23) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on August 12,
2005. |
|
(24) |
|
Incorporated by reference to the registrants annual report
on
Form 10-K
filed with the Securities and Exchange Commission on
March 11, 2005. |
|
(25) |
|
Incorporated by reference to the registrants annual report
on
Form 10-K
filed with the Securities and Exchange Commission on
March 10, 2006. |
|
(26) |
|
Incorporated by reference to the registrants quarterly
report on Form
10-Q filed
with the Securities and Exchange Commission on November 9,
2006. |
74