BSQUARE CORP /WA - Quarter Report: 2020 June (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020 

 

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number: 000-27687

 

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BSQUARE CORPORATION

(Exact name of registrant as specified in its charter)

 

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Washington		91-1650880
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1415 Western Ave, Suite 700, Seattle, WA		98101
(Address of principal executive offices)		(Zip Code)

 

(425) 519-5900

(Registrant’s telephone number, including area code)

 

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Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, no par value		BSQR		The NASDAQ Stock Market LLC

 

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  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

The number of shares of common stock outstanding as of July 31, 2020: 13,155,139

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BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2020

TABLE OF CONTENTS

 

		Page
	PART I. FINANCIAL INFORMATION
Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4	Controls and Procedures	18
	PART II. OTHER INFORMATION
Item 1A	Risk Factors	19
Item 6	Exhibits	20
	Signatures	21

 

 

 

		June 30, 2020				December 31, 2019
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	11,982			$	7,712
Restricted cash			600				600
Short-term investments			—				2,249
Accounts receivable, net of allowance for doubtful accounts of $69 and $31 at June 30, 2020 and December 31, 2019, respectively			6,243				9,216
Contract assets			638				494
Prepaid expenses and other current assets			782				244
Total current assets			20,245				20,515
Equipment, furniture and leasehold improvements, less accumulated depreciation			294				252
Deferred tax assets			7				7
Intangible assets, less accumulated amortization			120				169
Right-of-use lease asset, net			1,343				1,828
Other non-current assets			66				284
Total assets		$	22,075			$	23,055
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Third-party software fees payable		$	6,198			$	7,224
Accounts payable			371				408
Paycheck Protection Program loan			695				—
Accrued compensation			643				1,001
Other accrued expenses			665				306
Deferred revenue			2,558				1,559
Operating lease			292				702
Total current liabilities			11,422				11,200
Deferred revenue, long-term			205				903
Operating lease, long-term			1,135				1,256
Paycheck Protection Program loan, long-term			881				—
Shareholders' equity:
Preferred stock, no par: 10,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, no par: 37,500,000 shares authorized; 13,155,139 and 13,042,293 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively			139,199				138,877
Accumulated other comprehensive loss			(1,026	)			(987	)
Accumulated deficit			(129,741	)			(128,194	)
Total shareholders' equity			8,432				9,696
Total liabilities and shareholders' equity		$	22,075			$	23,055

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Revenue:
Partner Solutions		$	8,110			$	11,684			$	24,015			$	24,785
Edge to Cloud			814				2,496				1,638				4,491
Total revenue			8,924				14,180				25,653				29,276
Cost of revenue:
Partner Solutions			6,944				9,923				20,100				21,072
Edge to Cloud			934				1,834				1,922				3,390
Total cost of revenue			7,878				11,757				22,022				24,462
Gross profit			1,046				2,423				3,631				4,814
Operating expenses:
Selling, general and administrative			2,067				3,082				4,964				6,016
Research and development			54				1,894				181				4,230
Restructuring costs			—				1,376				—				1,376
Total operating expenses			2,121				6,352				5,145				11,622
Loss from operations			(1,075	)			(3,929	)			(1,514	)			(6,808	)
Other income (loss), net			2				61				(33	)			94
Loss before income taxes			(1,073	)			(3,868	)			(1,547	)			(6,714	)
Income taxes			—				—				—				—
Net loss		$	(1,073	)		$	(3,868	)		$	(1,547	)		$	(6,714	)
Basic loss per share		$	(0.08	)		$	(0.30	)		$	(0.12	)		$	(0.52	)
Diluted loss per share		$	(0.08	)		$	(0.30	)		$	(0.12	)		$	(0.52	)
Shares used in per share calculations:
Basic			13,110				12,855				13,051				12,879
Diluted			13,110				12,855				13,051				12,879
Net loss		$	(1,073	)		$	(3,868	)		$	(1,547	)		$	(6,714	)
Other comprehensive income (loss)
Foreign currency translation, net of tax			(4	)			(82	)			(38	)			(80	)
Unrealized gain (loss) on investments, net of tax			—				(2	)			(1	)			6
Total other comprehensive income (loss)			(4	)			(84	)			(39	)			(74	)
Comprehensive loss		$	(1,077	)		$	(3,952	)		$	(1,586	)		$	(6,788	)

 

		Six Months Ended June 30,
		2020				2019
Cash flows from operating activities:
Net loss		$	(1,547	)		$	(6,714	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			360				480
Stock-based compensation			320				183
Impairment of capitalized software development costs			—				375
Changes in operating assets and liabilities:
Accounts receivable, net			2,973				2,624
Contract assets			(25	)			265
Prepaid expenses and other assets			(598	)			88
Third-party software fees payable			(1,026	)			(242	)
Accounts payable and accrued expenses			(36	)			(517	)
Operating lease			(46	)			329
Deferred revenue			301				(491	)
Deferred rent			—				(497	)
Net cash provided by (used in) operating activities			676				(4,117	)
Cash flows from investing activities:
Purchases of equipment and furniture			(233	)			(264	)
Proceeds from maturities of short-term investments			2,250				6,990
Purchases of short-term investments			—				(6,121	)
Net cash provided by (used in) investing activities			2,017				605
Cash flows from financing activities - proceeds from Paycheck Protection Program loan			1,576				—
Effect of exchange rate changes on cash and cash equivalents			1				(86	)
Net increase (decrease) in cash and cash equivalents			4,270				(3,598	)
Cash, restricted cash, and cash equivalents, beginning of period			8,312				10,531
Cash, restricted cash, and cash equivalents, end of period		$	12,582			$	6,933

 

																		Accumulated
																		Other								Total
		Preferred Stock								Common Stock								Comprehensive				Accumulated				Shareholders'
For the Three Months Ended June 30, 2020		Shares				Amount				Shares				Amount				Income (Loss)				Deficit				Equity
Balance as of March 31, 2020			—			$	—				13,098,718			$	139,091			$	(1,022	)		$	(128,668	)		$	9,401
Share-based compensation, including issuance of restricted stock			—				—				56,421				105				—				—				105
Net loss			—				—				—				—				—				(1,073	)			(1,073	)
Foreign currency translation adjustment, net of tax			—				—				—				3				(4	)			—				(1	)
Unrealized gain on investments, net of tax			—				—				—				—				—				—				—
Balance as of June 30, 2020			—			$	—				13,155,139			$	139,199			$	(1,026	)		$	(129,741	)		$	8,432

																		Accumulated
																		Other								Total
		Preferred Stock								Common Stock								Comprehensive				Accumulated				Shareholders'
For the Six Months Ended June 30, 2020		Shares				Amount				Shares				Amount				Income (Loss)				Deficit				Equity
Balance as of December 31, 2019			—			$	—				13,042,293			$	138,877			$	(987	)		$	(128,194	)		$	9,696
Share-based compensation, including issuance of restricted stock			—				—				112,846				320				—				—				320
Net loss			—				—				—				—				—				(1,547	)			(1,547	)
Foreign currency translation adjustment, net of tax			—				—				—				2				(38	)			—				(36	)
Unrealized gain on investments, net of tax			—				—				—				—				(1	)			—				(1	)
Balance as of June 30, 2020			—			$	—				13,155,139			$	139,199			$	(1,026	)		$	(129,741	)		$	8,432

 

1. Description of Business and Summary of Significant Accounting Policies

 

Description of business

 

BSQUARE Corporation (“BSQUARE,” “we,” “us” and “our”) was incorporated in Washington State in July 1994. Since our inception, our business has largely been focused on providing software solutions (including reselling software from Microsoft Corporation (“Microsoft”)) and related engineering services to businesses that develop, market, and sell dedicated-purpose standalone intelligent systems. Examples of dedicated-purpose standalone intelligent systems include smart, connected computing devices such as smart phones, set-top boxes, point-of-sale terminals, kiosks, tablets and handheld data collection devices, as well as smart vending machines, ATM machines, digital signs and in-vehicle telematics and entertainment devices.

 

Bsquare builds technology that is powering the next generation of intelligent systems. We help companies realize the promise of the Internet of Things (“IoT”) through the development of devices and systems that are cloud-enabled, share data seamlessly, facilitate distributed learning and control, and operate securely at scale. We believe that IoT-enabled systems can not only deliver value to our customers but also help people make better use of the resources of our planet. Bsquare's suite of services and software components create new revenue streams and operating models for our customers while providing opportunities for lowering costs and improving operations.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“BSQUARE”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of June 30, 2020 and our operating results and cash flows for six months ended June 30, 2020 and 2019. The accompanying financial information as of December 31, 2019 is derived from our audited financial statements as of that date.

 

These unaudited condensed financial statements and related notes should be read in conjunction with our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 24, 2020.

 

Basis of consolidation

 

The consolidated financial statements include the accounts of BSQUARE and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

Use of estimates

 

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements, bonus accruals, fair value of intangible assets and property and equipment, fair values of stock-based awards, and assumptions used to determine the net present value of operating lease liabilities, among other estimates and assumptions. Actual results may differ from these estimates and assumptions.

 

Income (Loss) Per Share

 

We compute basic loss per share using the weighted average number of shares of common stock outstanding during the period. We consider restricted stock units as outstanding shares of common stock and include them in the computation of basic loss per share only when vested. We compute diluted loss per share using the weighted average number of shares of common stock outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. We exclude common stock equivalent shares from the computation if their effect is anti-dilutive.

 

The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

Small Business Administration Paycheck Protection Program loan

 

On April 10, 2020, we received loan proceeds of $1.6 million (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the Small Business Administration (“SBA”), provides for loans to qualifying companies in amounts up to 2.5 times their average payroll expenses. We treat our PPP Loan as financial liability and accrue interest under the interest method, per the terms of the underlying promissory note. On our balance sheet, amounts due within 12 months are classified as a current liability and amounts due more than 12 months after the balance sheet date are classified as a long-term liability.

 

COVID-19 impact

 

In March 2020, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (“COVID-19”) outbreak. In addition, multiple governmental authorities have imposed “stay at home,” “shelter-in-place” and similar orders that have and may continue to disrupt business operations and present economic uncertainties. We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it has impacted and may continue to impact our customers, employees, suppliers, and vendors. For the quarterly period ended June 30, 2020, we experienced adverse conditions for our business as a result of COVID-19, including a reduction in customer demand for certain products. Due to the uncertainties surrounding COVID-19, we are unable to predict the extent the pandemic will continue to impact our operational and financial performance in future periods. We will continue to closely monitor the effects of the pandemic on our business operations and will make any necessary adjustments to our financial statements and presentation of operating results in future periods. As a result, our estimates and judgments may change materially as new events occur or additional information becomes available to us.

 

 

2. Revenue Recognition 

 

Disaggregation of revenue

 

The following table provides information about disaggregated revenue by primary geographical area and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):

 

 

 

Contract balances

 

We receive payments from customers based upon contractual billing schedules; accounts receivable is recorded when the right to consideration becomes unconditional. Contract assets include amounts related to our contractual right to consideration for completed performance obligations not yet invoiced and deferred contract acquisition costs, which are amortized over time as the associated revenue is recognized. Contract liabilities, presented as deferred revenue on our condensed consolidated balance sheets, include payments received in advance of performance under the contract and are realized when the associated revenue is recognized. We had no asset impairment charges related to contract assets for each of the three and six months ended June 30, 2020 and 2019. 

 

Significant changes in the contract assets and the deferred revenue balances during the three and six months ended June 30, 2020 were as follows (in thousands):

 

 

Contract acquisition costs

 

We capitalize contract acquisition costs for contracts with a life exceeding one year. Amortization of contract acquisition costs was $35,000 and $7,000 for the three months ended June 30, 2020 and 2019, respectively and was $70,000 and $7,000 for the six months ended June 30, 2020 and 2019, respectively. There were no asset impairment charges for contract acquisition costs for any of the periods noted above. 

 

 

Transaction price allocated to the remaining performance obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands). The estimated revenue does not include contracts with original durations of one year or less, amounts of variable consideration attributable to royalties, or contract renewals that were unexercised as of June 30, 2020:

 

 

Practical expedients and exemptions

 

We apply a practical expedient and fully expense contract acquisition costs, such as sales commissions, as incurred because the amortization period is less than one year. We record these costs within selling, general and administrative expenses.

 

 

3. Cash, Cash Equivalents and Short-Term Investments

 

Cash, cash equivalents and short-term investments consisted of the following (in thousands):

 

 

 

4. Fair Value Measurements

 

We measure our cash equivalents and short-term investments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

 

Level 1:

Quoted prices in active markets for identical assets or liabilities.

Level 2:

Directly or indirectly observable market-based inputs or unobservable inputs used in models or other valuation methodologies.

Level 3:

Unobservable inputs that are not corroborated by market data. The inputs require significant management judgment or estimation.

 

We classify our cash equivalents and short-term investments within Level 1 or Level 2 because our cash equivalents and short-term investments are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

 

Assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 are summarized below (in thousands):

 

 

As of June 30, 2020, and December 31, 2019, contractual maturities of our short-term investments were less than one year, and gross unrealized gains and losses on those investments were not material.

 

5. Intangible Assets

 

Intangible assets are related to customer relationships that we acquired from TestQuest, Inc. in November 2008 and from the acquisition of BSQUARE EMEA, Ltd. in September 2011.

 

Information regarding our intangible assets is as follows (in thousands):

 

 

Amortization expense was $25,000 for each of the three months ended June 30, 2020 and 2019, and was $49,000 for each of the six months ended June 30, 2020 and 2019. Amortization in future periods is expected to be as follows (in thousands):

 

 

 

 

6. Leases

 

We determine if an arrangement is a lease at inception. On our balance sheet, our office leases are included in right-of-use (“ROU”) lease asset, net and related lease liabilities are included in operating lease and operating lease, long-term. We determined that we do not currently have any leases that we are required to classify as finance leases.

 

ROU assets represent our right to use the underlying assets for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease agreements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the term of the lease. For leases that do not provide an implicit rate, we use an incremental borrowing rate based on information available at the commencement date to determine the present value of lease payments. We use the implicit rate in the lease when readily determinable. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

In December 2019, we entered into an operating lease agreement for a new corporate office facility in Seattle, Washington. The term of the lease is 87 months, with a rent date which started on May 1, 2020 and the lease term ending on July 31, 2027. As a result of entering this lease agreement, in December 2019, we recorded additional ROU assets and net lease liabilities of $1.2 million on our consolidated balance sheets. There was no material impact to our statement of operations or statement of cash flows as a result of entering into this lease.

 

Our leases have remaining terms of one to eight years. The only leases that contain renewal options are for office space leases at our Seattle and Trowbridge locations. In the fourth quarter of 2019, we made the decision not to renew our Bellevue lease, which expired at the end of May 2020, and we made the decision not to renew our Taiwan lease, exiting that facility in February 2020 (see Note 11, “Restructuring Costs”). Because of changes in our business, we are not able to determine with reasonable certainty whether we will renew our Seattle lease. As a result, we have not considered renewal options when recording ROU assets, lease liabilities or lease expense.

 

The following tables present the components of our lease expense and supplemental cash flow information related to our leases for the six months ended June 30, 2020 (in thousands):

 

 

The following table presents supplemental balance sheet information related to our operating leases as of June 30, 2020 (dollars in thousands):

 

 

The following table presents the amounts we are obligated to pay, by maturity, under our operating leases liabilities as of June 30, 2020 (in thousands):

 

 

 

7. Shareholders’ Equity

 

Equity Compensation Plans

 

We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (together with the Stock Plan, the “Plans”). Under the Plans, stock options to purchase shares of our common stock may be granted with a fixed exercise price that is equal to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and restricted stock units (“RSUs”).

 

Stock-Based Compensation

 

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures based on historical experience and expected future activities. The fair value of RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:

 

 

The impact on our results of operations from stock-based compensation expense was as follows (in thousands, except per share amounts):

 

 

Stock Option Activity

 

The following table summarizes stock option activity under the Plans:

 

 

At June 30, 2020, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was $764,296. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.8 years. The following table summarizes certain information about stock options:

 

 

The aggregate intrinsic value represents the difference between the exercise price of the underlying options and the quoted price of our common stock for the number of options exercised during the period. We issue new shares of common stock upon exercise of stock options.

 

Restricted Stock Unit Activity

 

The following table summarizes RSU activity under the Plans:

 

 

At June 30, 2020, total compensation cost related to RSUs granted but not yet recognized, net of estimated forfeitures, was $15,561. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.2 years.

 

Common Stock Reserved for Future Issuance

 

The following table summarizes our shares of common stock reserved for future issuance under the Plans as of June 30, 2020:

 

 

8. Commitments and Contingencies

 

Lease and rent obligations

 

Our commitments include obligations outstanding under operating leases, which expire through 2027. We have lease commitments for office space in Seattle, Washington and Trowbridge, UK. See Note 6, “Leases.”

 

Loss Contingencies

 

From time to time, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. We defend ourselves vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.

 

9. Information about Geographic Areas and Operating Segments

 

Our chief operating decision-makers (i.e. our Chief Executive Officer and certain direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by our chief operating decision-makers, or anyone else, for operations, operating results, or planning for levels or components below the consolidated unit level. We operate within a single industry segment of computer software and services.

 

We have two major product lines, Partner Solutions and Edge to Cloud, each of which we consider to be operating and reportable segments. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements, and we do not produce asset information by reportable segment. The following table sets forth profit and loss information about our segments (in thousands):

 

 

Revenue by geographic area is based on the sales region of the customer. The following tables set forth total revenue and long-lived assets by geographic area (in thousands):

 

 

Long-lived assets decreased due to utilization of ROU leased assets in North America and from retirement of ROU leased assets in Asia due to closure of our Taiwan office.

 

 

10. Significant Risk Concentrations

 

Significant Customers

 

CCIntegration, Inc. had revenue of $1.2 million or approximately 14% of total revenue for the three months ended June 30, 2020.  No other customers accounted for 10% or more of total revenue for each of the three and six months ended June 30, 2020 and 2019.

 

Honeywell International, Inc. and affiliated entities (“Honeywell”) had accounts receivable balances of $1.1 million or approximately 18% of total accounts receivable at June 30, 2020 and $1.2 million or approximately 13% of total accounts receivable at December 31, 2019. No other customer accounted for 10% or more of total accounts receivable at June 30, 2020 or December 31, 2019.

 

 

Significant Supplier

 

Effective March 1, 2019, pursuant to a new Global Partnership Agreement with Microsoft Corporation (“Microsoft”), we are authorized to sell Windows Embedded operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Puerto Rico, Columbia, and several Caribbean countries. Of our total revenue, 79% in 2019 and 75% in 2018 resulted from the sale of Windows IoT operating systems. Our existing distribution agreement for sales of Windows IoT operating systems in the European Union, the European Free Trade Association, Turkey, and Africa, expired on June 30, 2019 and was not renewed thereafter. We generated approximately 3% of our Partner Solutions software sales under this agreement in 2019. We have also entered into OEM distributor agreements (“ODAs”) with Microsoft pursuant to which we are licensed to sell Microsoft Windows Mobile operating systems to customers in North America, South America, Central America (excluding Cuba), Japan, Taiwan, Europe, the Middle East, and Africa. The ODAs to sell Windows Mobile operating systems are effective through April 30, 2022.

 

Software sales under these agreements constitute a significant portion of our Partner Solutions revenue and total revenue. There is no automatic renewal provision in any of these agreements, and these agreements can be terminated unilaterally by Microsoft at any time.

 

Microsoft currently offers a rebate program to sell Microsoft Windows Embedded operating systems pursuant to which we earn money for achieving certain predefined objectives. In accordance with Microsoft rebate program rules:

 

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For the three and six months ended June 30, 2020 and 2019, respectively, we allocated 20% of rebates to reduce cost of sales, with the remaining 80% potentially available to offset qualified marketing expenses related to Microsoft Azure products in the period that expenditures are claimed and approved.

 

Under this rebate program, we recorded rebate credits as follows (in thousands):

 

 

There was a balance of approximately $168,000 in qualified outstanding rebate credits at June 30, 2020, which will be accounted for as a reduction in marketing expense in the period in which qualified program expenditures are claimed and approved.

 

11. Restructuring costs

 

In May 2019, we approved a severance plan that included a workforce elimination of approximately 38 positions in the United States and internationally. In October 2019, we determined to close our Taiwan branch office, which resulted in elimination of approximately 17 additional positions. An involuntary termination benefit plan was done in order to reduce go-forward operating costs and re-align our go-forward business model to support future business initiatives. The costs associated with these actions consisted primarily of charges for restructuring costs related to severance and benefits, and a non-cash impairment charge related to certain software development cost assets. We incurred aggregate restructuring charges of approximately $2.3 million associated with these actions during 2019, beginning in the second quarter of 2019. For the three and six months ended June 30, 2020, we did incur any charges for restructuring costs under this plan. For the six months ended June 30, 2020, $0.5 million in restructuring costs were paid and there is no remaining balance of accrued restructuring charges on our consolidated balance sheet at June 30, 2020.

 

The following tables show the activity and estimated timing of future payouts for accrued restructuring costs (in thousands):

 

 

12. Paycheck Protection Program loan

 

Our PPP Loan is evidenced by a promissory note, dated as of April 7, 2020 (the “Note”), between us and JPMorgan Chase Bank, N.A. (the “Lender”). The Note has a two-year term, bears interest at the rate of 0.98% per annum, and may be prepaid at any time without payment of any premium.  No payments of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”).  The principal and accrued interest under the Note is forgivable after eight weeks if we use the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise comply with PPP requirements. In order to obtain forgiveness of the PPP Loan, we must submit a request and provide satisfactory documentation regarding our compliance with applicable requirements.  We must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period.  We intend to use the proceeds of the PPP Loan for eligible purposes and to pursue forgiveness, although we may take action that could cause some or all of the PPP Loan to become ineligible for forgiveness.

 

The Note contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties, or covenants.  The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from us, or filing suit and obtaining judgment against us.

 

At June 30, 2020 and December 31, 2019, the PPP Loan balance was as follows (in thousands):

 

 

 

 

 

In our Edge to Cloud business segment, we plan to expand on the valuable experience we gained serving our large customers in 2019 building and operating their IoT solutions at scale. Our B2IQ software and consulting suite and our improved engineering methodologies create a foundation upon which we can build and grow this business segment. We plan to continue to invest in creating an agile and quality-oriented customer service function that will become an integral part of our customers’ IoT operations, allowing our customers to rely on Bsquare to ensure that their products are well designed and can operate in a fully connected IoT-enabled world.