Note 7 - Shareholders' Equity

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Shareholders' Equity and Share-based Payments [Text Block]

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 and RSUs were estimated with the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Dividend yield		0	%		0	%		0	%		0	%
Expected life (years)		4.9			4.9			4.9			4.9
Expected volatility		111	%		63	%		111	%		63	%
Risk-free interest rate		0.6	%		0.2	%		0.6	%		0.5	%

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue — Edge to Cloud	$	6	$	26	$	30	$	50
Selling, general and administrative		188		250		515		536
Research and development		24		5		51		15
Total stock-based compensation expense	$	218	$	281	$	596	$	601

Stock Option Activity

The following table summarizes stock option activity under the Plans:

						Weighted
						Average
						Remaining
				Weighted		Contractual
	Number of			Average		Life		Aggregate
	Shares			Exercise Price		(in years)		Intrinsic Value
Balance at December 31, 2020		1,786,891		$	2.04		7.75	$	330,831
Granted		175,000			2.88
Exercised		(36,130	)		1.88
Forfeited		(74,759	)		1.34
Expired		(62,750	)		2.62
Balance at September 30, 2021		1,788,252			1.92		7.15		1,220,636
Vested and expected to vest at September 30, 2021		1,670,375			2.17		7.06		1,122,212
Exercisable at September 30, 2021		934,877		$	2.58		6.10	$	496,868

At September 30, 2021, total compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures, was $393,969. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.2 years. The following table summarizes certain information about stock options:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Weighted average grant-date fair value of options granted during the period	$	2.75	$	1.37	$	2.88	$	1.03
Options in-the-money (in shares)		629,272		59,201		629,272		59,201
Aggregate intrinsic value of options exercised during the period	$	1.20	$	1.35	$	1.88	$	1.35

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 periods indicated. 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:

	Number of			Weighted Average
	Shares			Award Price
Unvested at December 31, 2020		164,697		$	1.48
Granted		90,343			2.72
Vested		(182,004	)		1.74
Forfeited		(21,115	)		1.48
Unvested at September 30, 2021		51,921			2.72
Expected to vest after September 30, 2021		49,112		$	2.72

At September 30, 2021, total compensation cost not yet recognized related to granted RSUs was approximately $78,656, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.4 years.

Performance Stock Units

In January 2021 we issued 500,000 performance stock units (PSUs) to our executives. The PSUs vest based on a combination of Bsquare's stock price performance and executive service (continued employment). The first vesting measurement date is January 5, 2022 and the final measurement date is July 5, 2025. We estimated the fair value of the awards utilizing Monte Carlo simulations. Based on the Monte Carlo model, expense of approximately $17,000 and $51,000 was recorded in the selling, general and administrative line of our statement of operations for the three and nine months ended September 30, 2021, respectively. The PSUs had no impact on our cash flow statement. 

Award Modifications 

In June 2021, the outstanding RSU and non-qualified stock option awards of two Board members were modified. In accordance with ASC 718, we recorded incremental expense of $41,000 during the period related to the revaluation of these modified awards.

Common Stock Reserved for Future Issuance

The following table summarizes our shares of common stock reserved for future issuance under the Plans as of September 30, 2021:

	September 30, 2021
Stock options outstanding		1,788,252
Restricted stock units and performance stock units outstanding		551,921
Stock options and restricted stock units available for future grant		1,115,772
Common stock reserved for future issuance		3,455,945

Common Stock Sales 

In the second and third quarters of 2021, we sold 108,879 and 6,793,798 shares of our common stock, respectively, pursuant to a registration statement on Form S-3 under the Securities Act of 1933, as amended (the "Securities Act") filed in March 2021. We received proceeds of approximately $31,936,000, net of issuance costs of $1,157,000. The issued shares and total paid-in capital are reflected in the consolidated statement of shareholder’s equity for the three and nine months ended September 30, 2021.