BSQUARE - Investment In Growth Is Paying Off - Performance And Share Price At Inflection Point. IoT Play With 62% Insider, 22% Institutional Ownership, 3M Share Float, And $12/Share Price Target

Summary

• BSQR is a well-funded software company with $1/share cash and on a clearly defined growth path despite Covid-related challenges. An analyst has a $12/share price target for BSQR stock.
• The company has implemented performance excellence initiatives in many fronts and strong execution has resulted in significant improvements to the top and bottom lines.
• For 3Q 2020, cash, cash equivalents, restricted cash, short-term investments totaled $12.6M on September 30, 2020, unchanged from June 30, 2020 and down from $1M cash burn in 3Q 2019.
• In the most recent 3Q 2022 quarter the company reported $10.4M in revenues, up $1.5M from Q2 2020 despite pandemic-related challenges.
• Fintel reports 64% insider ownership with several members of management, including CEO Derrickson having bought stock onopen market purchases throughout 2020. Institutional ownership stands at 22% with several well-known institutions owning shares. The resulting public float is only about 3M shares.

Discussion

According to its website, BSQUARE Corporation (NASDAQ:BSQR) is a global company headquartered in Seattle, Washington, a short drive/walk to the corporate headquarters of clients Microsoft and Amazon. The company also has operations in the United Kingdom. The company was founded in 1994. 

BSQUARE's technology is powering the next generation of intelligent devices and systems. BSQUARE aims to drive technology to maximize the promise of IoT. This promise is realized through the development of intelligent devices and the systems in which they operate. These devices and systems must be secure, cloud-enabled, contribute data, facilitate distributed control & decision making, and operate at scale. BSQUARE products and technology create new revenue streams and operating models as well as provide new opportunities for lowering costs and improving operations for hundreds of clients in almost every industry.

BSQUARE develops, deploys, and operates IoT systems for various businesses from OEMs, original design manufacturers, corporate enterprises, silicon vendors, and peripheral vendors. 

Additionally, BSQUARE offers various professional services, such as operating system (OS) upgrade and porting, embedded OS support, field upgrade consulting, OS lockdown, and Microsoft Azure Sphere engineering services, as well as Windows 10 Internet of Things (IoT) enterprise training services.

In a nutshell, BSQUARE provides software solutions and related engineering services to businesses that develop, market, and sell standalone intelligent systems in North America, Europe, and Asia. The company operates through two segments, Partner Solutions and Edge to Cloud. 

Improving Fundamentals and Execution

Ralph C. Derrickson, President and CEO, BSQUARE recently stated: "Many of our customers have notified us that we are an essential supplier to their business which has in turn been designated as essential." Essential is good in my opinion and this, if managed properly, leads to sustainability and growth. And it apprears that the company is doing just that as seen by a significant turnaround Y/Y and Q/Q as reported in its 3Q 2020 earnings report and conference call.

In the company's 3Q 2020 financial report, CEO Derrickson commented:

"We had a good quarter especially given the challenges we experienced in Q2. Revenue and margins were up sequentially, EBITDAS results improved, and cash utilization was minimal, all suggesting that COVID-19 did not derail us."

CEO Derrickson added:

"The investments we made in our large Edge-to-Cloud customer relationships are bearing fruit and suggest that at the intersection of our two business segments, there lies the potential to accelerate our emergence from the period of business rebuilding that has dominated our management attention for the last five quarters."

Third Quarter 2020 Financial Highlights:

• Cash, cash equivalents, restricted cash, and short-term investments totaled $12.6M on September 30, 2020, unchanged from June 30, 2020.
• Revenue for Q3 2020 was $10.4M, up $1.5M from Q2 2020. Revenue increases were driven by higher sales in the Partner Solutions segment and increased service revenue in the Edge-to-Cloud segment.
• Adjusted EBITDAS was approximately $0.3M, a $1.1M improvement over the negative $0.8M in the second quarter of 2020.
• Net loss for 3Q 2020 was $0.1M, or $(0.01) per diluted share, compared to a net loss of $1.1M, or $(0.08) per diluted share, in Q 2020.

During the conference call CEO Derrickson commented:

"I'm pleased to share that we saw continued improvement this quarter. As you know, I have been laser-focused on managing costs and shifting the company to a more appropriate expense structure. That effort played a significant role in delivering the smallest net quarterly loss since I joined the company and in keeping our cash utilization to break even."

"While I realize there is more to making Bsquare successful than managing expense, without careful and deliberate attention to it, we would not have created the breathing room we need to pursue new opportunities for financial upside. That is why I have placed such a heavy emphasis on it, especially during this early phases of our business rebuilding."

CFO Chris Wheaton added:

"In preparing today's remarks, I found myself frequently looking back in the 4 quarters of hard work that had passed since I first spoke with you. I hope that the quality of today's results also gives you the same sense of accomplishment that I know I feel. I'm proud of how far Bsquare has come, both financially and operationally. The team we've assembled is built for the exciting future, and we'll be operating from a position of stability created by the quality of our business fundamentals."

"A year ago, we reported cash burn of approximately $1 million compared to a cash flow breakeven today. A year ago, we had $3.8 million in operating expenses compared to $2 million today. Simply put, Bsquare is a different company than it was 12 months ago."

"We've come a long way over this past year and have done so in a business environment unlike any other. The confidence I have in our ability to create and manage opportunities for profitable growth has been bolstered rather than diminished by the pandemic-induced challenges of these last 2 quarters. Ralph (CEO Derrickson) and I are here to use entrepreneurial muscle to find opportunities through innovation, and COVID does not close that intent or reduced our confidence."

A key element of the improvements the company is starting to realize lies in the implementation of their revised go-to-market strategy mentioned in the last two conference calls that I recall.

Regarding the improved, more visionary, and more focused "go-to-market" strategy, CEO Derrickson commented:

"On prior calls, you've heard me describe a growing synergy between the needs of our Partner Solutions and our Edge-to-Cloud customers. Customers in both segments are encountering a common complication at the heart of IoT, specifically the challenge of deploying and operating devices securely in a widely heterogeneous persistently connected system."

"As we've seen working with our large IoT customers, this isn't a software-only problem. It's equally a service and operation problem. For these customers, we built large components of their system, and we are now playing a key role in operating it."

"Our Partner Solutions customers encounter the same challenge but arrive at it from the individual device for these customers, who are helping them design and prepare their products to operate as part of the system."

"This commonality in our customer base is what inspired the statement on our website and that is what we use to frame every customer conversation, "Our technology is powering the next generation of intelligent devices and systems.""

"Turning next to the initiative to improve our partnerships. That work has been twofold: our technology partnerships and our customer partnerships. First, we have doubled down on our Microsoft technology partnership. Why? We could say, the bulk of our revenue comes from licensing Microsoft's OS technology to purpose-built device makers. This generates cash for us and provides an on-ramp for our legacy customers to the intelligent device and systems business I just described. That partnership isn't limited to just OS software. We support Azure and other technologies that are part of Microsoft's IoT solutions. We also continue to operate some of our largest customers on the AWS platform, and that relationship is critical to us and to our customers."

"Turning to our customer partnerships. A highlight from market research work this quarter would be that Bsquare has a reputation for consistently creative technical support and service. In the Partner Solutions segment, we have helped customers get their products to market faster and reduce their unit costs. In the Edge-to-Cloud segment, we invested aggressively to address issues with prior commitments. In both segments, we are forging strong relationships that are improving our product and are helping our customers meet their goals."

Recent Trading Observations

The weekly chart below shows that the stock price and volume have been trending up right after the 3Q 2020 earnings release and conference call in November 2020. Being that BSQR has as estimated public float of little over 3M shares, any surge on volume could cause a significant increase in share price:

You know what will happen when volume and price hit traders' radars - the stock could potentially explode ahead or after the February 2021 4Q 2020 earnings report and conference call. Just look at garbage company Marathon Patent (NASDAQ:MARA) having reached a $1.5B market cap with nothing to show for courtesy big traders and their thousands of followers. Most of us know that many novice traders will be caught holding huge bags after the bubble bursts. Traders also cause unreasonable collapses when they exit a stock at the same time. It is the nature of the beast and something that we have to live with. The important thing is to understand the fundamentals of a company and invest accordingly despite the noise created by day traders and Robinhooders.

Bsquare Partners Products and Services

Bsquare has long and mutually trusted IoT partnerships with Microsoft (NASDaQ:MSFT), AWS (NASDAQ:AMZN), Intel (NASDAQ:INTC), and SYNNEX (NYSE:SNX). 

According to the company website: 

"These software and hardware partners help us design, build, and support intelligent devices. Our longstanding relationships with these partners reflect our mutual commitment to helping your customized IoT or IIoT solution succeed."

Regarding products, Bsquare has them categorized as: 1) Embedded OS Software and Services; 2) IoT Software and Services; 3) B2IQ Edge to Cloud Suite and Utilities; and 4) 24/7 Operations Services

Each link contains a myriad of sublinks each describing the features the company offers to enhance the client's own offerings and to help them reduce  costs and optimize operations.

For instance, regarding Windows IoT applications, Bsquare states:

"When you’re building a fixed-purpose intelligent device, you need an operating system designed with IoT in mind. Windows 10 IoT Enterprise and Windows Server IoT 2019 provide fast, safe, and smart solutions that you can scale to fit your exact needs."

"Microsoft offers over 500 Windows IoT and embedded SKUs. As a Microsoft distributor and partner for more than 25 years, Bsquare helps you pick the right system for your hardware and your budget. We understand the ins and out of licensing terms and compliance."

"You’ll get your product to market quickly, with the confidence that your intelligent device is secure and your system is scalable, at a price that keeps your BOM costs in mind."

 Likewise, regarding Amazon Web Servises offerings, the company states:

"Looking for an AWS IoT systems partner? Bsquare develops, deploys, and operates Amazon Web Services-based IoT systems for global Fortune 500 companies and large private organizations. And our customers trust us with ongoing development and operational support for their embedded projects."

"As a multi-year AWS IoT systems partner, we keep our fingers on the pulse of AWS IoT developments and understand how to integrate and secure devices and device data storage on AWS."

It's no wonder that BSQUARE emphasizes that it is a global company headquartered in Seattle, Washington, a short drive/walk to the corporate headquarters of clients Microsoft and Amazon. 

Regarding BSQUARE edge technologies, it provides the necessary capabilities to connect to an asset, perform analysis, securely transfer data to the cloud, and manage the lifecycle of devices. Since this is still a fast developing technological sector, the historically unreliable connectivity, lack of near real-time control, the high cost of moving large volumes of data, managing thousands of devices, and meeting industry regulation. These are some of the challenges that BSQUARE cloud edge technologies address based on over two decades of experience and staying closely in touch with cleints to address their specific needs.

Another valuable company offering is Square One. Square One encompasses a secure device lifecycle management software and services suite for Windows IoT and Linux devices. It allows clients to remotely monitor and manage intelligent devices and systems at scale, extending their value while lowering operating costs. According to the company wegsite, SquareOne delivers device and system intelligence where the client needs it to provide actionable insights that they can use to  can use to optimize their offerings while cutting costs.

Why is BSQUARE a compelling value at these prices? In my opinion, because of potentially exponential growth prospects. The future of IoT has the potential to be limitless. Advances to the industrial internet will be accelerated through increased network agility, integrated artificial intelligence (AI) and the capacity to deploy, automate, orchestrate and secure diverse use cases at hyperscale. The potential is not just in enabling billions of devices simultaneously but leveraging the huge volumes of actionable data which can automate diverse business processes. As networks and IoT platforms evolve to overcome these challenges, through increased capacity and AI, service providers will edge furthermore into IT and web scale markets – opening entire new streams of revenue.

Ongoing Technology Advancements and Product Development

During the 3Q 2020 conference call CEO Derrickson commented:

"The last initiative I'd like to touch on today is improving our product and service offering. This work takes more time because it can only happen as a result of collaboration between our customers and our engineering and operations service teams. We've made big strides in harvesting software components and operations expertise that we can deploy and operate at scale. What you've not yet heard me talk a lot about is new customers or new products. In this area, I have intentionally chosen to wait to be certain that what we're doing is something that we can sell, deliver and operate at scale. We don't want to be just another company hyping some future technology. We want to be able to speak to what we are already doing successfully and repeatedly. And when we do speak, we want our customers to speak alongside us. Until then, we will continue to work methodically to refine our offering in collaboration with our customers and our technology partners to prepare Bsquare for accelerated growth."

This last statement is very important for any value investors like myself. Because in addition to executing an improved business plan, a company in the tech sector must continually develop new, better, and complimentary offerings. We know what happened to Blackberry and Atari right? - they became complacent and got bulldozed by more innovative and agressive companies like Apple (NYSE:AAPL) and orthers

Serious investors will appreciate Bsquare's Mission and Vision

"Bsquare is helping our customers build the next generation of intelligent devices and systems."

"These systems make people more productive, enhance quality of life, and reduce demand on the resources of our planet."

"We seek long-term relationships with our customers, knowing their success is our success."

The company is hiring key personnel to continue driving operational excellence.

Insider Ownership

Fintel reports 64% insider ownership with several members of management, including CEO Derrickson having bought stock in recent months:

The following table shows the most recent open market purchases, all in 2020, that were not part of an automatic trading plan:

Trade Date	Insider	Shares	ReportedPrice	ReportedCost Basis
2020-08-26	WHEATON CHRISTOPHER	6,667	1.44	9,617
2020-08-26	Vardeman Ryan L.	21,115	1.45	30,581
2020-08-20	Vardeman Ryan L.	3,773	1.35	5,089
2020-08-19	Vardeman Ryan L.	25,112	1.34	33,748
2020-08-19	Derrickson Ralph C	10,000	1.34	13,400
2020-05-21	Derrickson Ralph C	200	1.33	266
2020-05-21	Derrickson Ralph C	5,000	1.41	7,050
2020-05-21	Derrickson Ralph C	3,529	1.35	4,764
2020-05-21	Derrickson Ralph C	1,271	1.34	1,703

Institutional Ownership

Fintel reports 22% institutional ownership. Major institutions holding BSQR shares are Renaissance Technologies with 991K shares, Vanguard Group with 401K shares, Dimensional Fund Advisors with 654K shares, Blackrock with 291K shares, and the largest Palogic Value Management with 1.6M shares.

Analyst Opinion

One analyst recently assigned a $12/share to BSQR stock

Management

Key members of management joined the company in 2019 bringuing with them entrepreneurial leadership and vision and whose impetus and vision is just now starting to pay dividends:

Name	Age	Position	Appointed
Andrew Stanley Guy Harries	53	Chairman Of The Board	2019
Ralph C. Derrickson	61	President, Chief Executive Officer, Director	2019
Christopher Wheaton	48	Chief Financial Officer	2019
Kevin Walsh	59	Vice President - Marketing	2019
Mary Haggard	--	Vice President Of Strategic Partnerships	2019

Conclusions

1. BSQR is a well-funded software company with $1/share cash and on a clearly defined growth path despite Covid-related challenges. The $12/share price target recently assigned by an analyst represents a potential 800% upside from current share prices. My 12-month price target is $6/share.
2. The company has implemented performance excellence initiatives in many fronts and strong execution has resulted in significant improvements to the bottom line while making progress in the top line as well despite the challenging pandemic-affected economy.
3. Key members of management joined the company in 2019 bringing with them entrepreneurial leadership and vision and whose impetus and vision is just now starting to pay dividends.
4. In the most recent 3Q 2022 quarter the company reported $10.4M in revenues, up $1.5M from Q2 2020.
5. For 3Q 2020, cash, cash equivalents, restricted cash, and short-term investments totaled $12.6M on September 30, 2020, unchanged from June 30, 2020.
6. In 3Q 2019, the company reported cash burn of approximately $1M compared to a cash flow breakeven today. in 3Q 2019 operating expenses were $3.8M in compared to $2M in 3Q 2020.
7. BSQUARE has long and mutually trusted IoT partnerships with Microsoft, AWS, Intel, and SYNNEX.
8. As a Microsoft distributor and partner for more than 25 years, BSQUARE helps clients pick the right system for their hardware and their budget from the over 500 Microssoft Windows IoT and embedded SKUs
9. BSQUARE develops, deploys, and operates Amazon Web Services-based IoT systems for global Fortune 500 companies and large private organizations.
10. Regarding new product offerings and innovation, the company continues to work methodically to refine its offerings in collaboration with its customers and our technology partners to prepare BSQUARE for accelerated profitable growth going forward.
11. Fintel reports 64% insider ownership with several members of management, including CEO Derrickson having bought stock in recent months on open market purchases throughout 2020.
12. Fintel also reports 22% institutional BSQR ownership. Major institutions holding BSQR shares are Renaissance Technologies with 991K shares, Vanguard Group with 401K shares, Dimensional Fund Advisors with 654K shares, Blackrock with 291K shares, and the largest Palogic Value Management with 1.6M shares.
13. Why is BSQUARE a compelling value at these prices? in my opinion, because of potentially exponential growth prospects. The future of IoT has the potential to be limitless. Advances to the industrial internet will be accelerated through increased network agility, integrated artificial intelligence (AI) and the capacity to deploy, automate, orchestrate and secure diverse use cases at hyperscale. The potential is not just in enabling billions of devices simultaneously but leveraging the huge volumes of actionable data which can automate diverse business processes. As networks and IoT platforms evolve to overcome these challenges, through increased capacity and AI, service providers will edge furthermore into IT and web scale markets – opening entire new streams of revenue.
14. I encourage investors interested in purchasing BSQR shares to read the related risks and uncertainties as detailed in the company's most recent filings with the SEC.