BSQUARE Corporation

Ladies and gentlemen, you are currently holding for the B-Square Corporation third quarter 2022 earnings call. At this time, we are still admitting additional participants and plan to be underway shortly. We appreciate your patience and ask that you please remain on the line. Thank you. Good day and welcome to the B-Square Corporation third quarter 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ralph Derrickson, President and CEO. Please go ahead.

Thank you. Good afternoon, investors, and welcome to the Q3 2022 B-Square quarterly earnings call. Joining me on today's call is B-Square CFO and COO Chris Wheaton. Chris and I appreciate your interest in B-Square, and thank you for taking the time to be with us this afternoon. Before we begin, we'd like to remind you that this call is being webcast and is a recording of the call, and the text of our prepared remarks will be available on the B-Square website. During the call, we'll be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially. In our commentary, we may also refer to GAAP and non-GAAP financial measures. Please refer to the cautionary text regarding forward-looking statements contained in B-Square's earnings release issued today and on our website at www.bsquare.com under Investors. All per share amounts discussed today are fully diluted numbers where applicable. We will be taking questions after our prepared remarks. For anyone who would like to arrange a follow-up conversation with us, please send an email to investorrelations at bsquare.com. The mailbox is monitored regularly, and you will get a response within one business day. Okay, with that out of the way, let's get started. There are four items on the agenda for our call today. The first item is the Q3 results. Chris will take us through what was a tough revenue quarter for us. After that, I'll discuss the rationale for our planning priorities for 2023 and and our shift from growing revenue to achieving break-even business operations. I'll also cover a question that several shareholders have asked me to address, and that is what we intend to do with our cash reserves. Finally, we will close with a couple governance and administrative matters. And of course, we'll have time for questions at the end. Chris, let's get into the Q3 results.

Thank you, Ralph, and good afternoon, investors. I'm going to take you relatively quickly through the most relevant financial highlights of the quarter. While these results are not what we'd anticipated, they provide an important backdrop for the change in operating priorities that Ralph just mentioned. Most of my financial comparisons on the call today will be to the second quarter of this year, and if not, I'll indicate where I'm comparing to other periods. I'll start with a review of our income statement and then move to a discussion of our balance sheet, specifically changes in our cash balance and recent short-term investments. Total revenue for the third quarter of 2022 decreased $2 million, or 19%. Partner Solutions decreased $1.8 million, and Edge to Cloud decreased $200,000. We'll first take a closer look at the results in Partner Solutions. Revenue in that segment decreased 19% quarter over quarter. Few large orders in each of the first two quarters bolstered our first half results, but we didn't close similarly large orders in the third quarter. Our OS licensing customers continue to cite struggles with their supply chains, causing delays in product launches and purchasing decisions. Further, the threat of recession and increasing interest rates seem to have affected ordering patterns as our customers have become exceptionally cautious about inventories and near-term demand for their products. In the edge-to-cloud segment, total revenue in the quarter was $800,000, down $200,000, or 20%. The second quarter included one-time revenue stemming from a contract amendment that renewed the relationship with one of our largest customers. As we noted last quarter, this contract amendment both extended our relationship and stabilized revenue recognition with this customer, albeit at a quarterly rate lower than was recorded in the second quarter. Overall, we have strong relationships with the customers in this segment and have clear visibility to their needs and plans. Turning now to gross profit, Commensurate with the quarterly revenue decline, total gross profit decreased $500,000, driven again by the partner solution segment. Gross margin rate for that segment was 13%, roughly in line with the second quarter, indicating that the $300,000 decrease in gross profit dollars was fundamentally driven by the 19% revenue decline, rather than by pricing or mixed changes. As we've discussed previously, cost of revenue in the edge to cloud segment tends to be fairly stable, resulting in gross profit dollars moving in correlation with revenue. This remained true for the third quarter of 2022, as both segment revenue and gross profit decreased to $200,000 compared to the prior quarter. In better news, operating expense controls remain a relative bright spot in our financial picture. Total operating expenses in the third quarter were $2.3 million, which was essentially flat to the second quarter. Both of the expense categories on our income statement were flat quarter over quarter. Overall, loss from operations for the quarter was $1.2 million compared to the second quarter loss from operations of $700,000. Net loss for the quarter was $1.1 million, or 5 cents per diluted share, which was more than the second quarter net loss of $600,000, or 3 cents per diluted share. The increased loss was directly attributable to the decrease in revenue. Turning now to the balance sheet, I want to call your attention to an investment strategy we implemented during the quarter. We purchased $22.1 million in treasury bills to take advantage of rising interest rates while maintaining a focus on liquidity. Approximately $11.4 million was invested in T-bills with a maturity of less than 90 days and is classified as a cash equivalent on the balance sheet. The remaining investment of $10.7 million had a maturity of just over 90 days and is classified as a short-term investment. This laddered investment strategy will continue into the foreseeable future. The true liquidity of the business and our ability to deploy cash as needed and warranted has not changed. In total, cash, cash equivalents, restricted cash, and short-term investments totaled $37.1 million on September 30th, 2022. While this reflects a net cash use of $3 million since December 31st, 2021, our liquidity position remains healthy, as is the rest of our balance sheet with mostly current receivables and no debt. I'll turn it back to Ralph now to discuss how these financial results have influenced our plans and priorities for 2023.