Note 9 - Significant Risk Concentrations

6 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

9. Significant Risk Concentrations

Significant Customers

No customers accounted for 10% or more of total revenue for each of the three and six months ended June 30, 2023 and 2022.

GES Manufacturing Services (M) Sdn Bhd had accounts receivable of $504,000 and $900,000 at June 30, 2023 and 2022, respectively. These receivables represented approximately 14% and 17% of total accounts receivable at June 30, 2023 and 2022, respectively.

Significant Supplier

We are authorized to sell Windows IoT operating systems in Canada, the United States, Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Puerto Rico, Columbia, and several Caribbean countries. 

We were previously party to certain Original Equipment Manufacturer Distribution Agreements ("ODAs") with Microsoft pursuant to which we were 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 expired on  April 30, 2022 and were not renewed thereafter.

Our current distribution agreements with Microsoft have no automatic renewal provisions and may be terminated unilaterally by Microsoft at any time.

The majority of our revenue continues to be derived from reselling Microsoft Windows Embedded and IoT operating system software to device makers. The sale of Microsoft operating systems has historically accounted for substantially all of our Partner Solutions revenue.

Significant Supplier Incentive Earnings Program

Microsoft operates an IoT Distributor Incentives Program that provides IoT Distributors, like Bsquare, the opportunity to earn financial incentives (“incentive earnings”) by achieving objectives intended to grow the IoT customer base and the volume of embedded systems or devices that include Microsoft embedded technologies. In June 2023, Microsoft announced changes to this program.

In accordance with the program’s previous structure and rules, we had recorded 50% of the incentive earnings as a reduction of Partner Solutions cost of revenue in the period earned, with the remaining 50% recorded as an offset to marketing expense in the period our expenditures were approved for reimbursement by Microsoft. 

Under the structure and rules of the updated program, 100% of incentive earnings will be provided to us as a rebate without any requirements related to how the funds are spent. Accordingly, as of June 30, 2023, 100% of estimated incentives were recorded as a reduction of Partner Solutions cost of revenue in the period earned (i.e. the period we sold eligible products to our customers).

During the second quarter of 2023 we recorded an adjustment of approximately $0.2 million to accrue 100% of incentives estimated to have been earned from January through June 2023. The adjustment reduced Partner Solutions cost of revenue.

Also during the second quarter of 2023 we recorded an adjustment of approximately $0.1 million to Partner Solutions cost of revenue relating to another element of the program change. This was a one-time adjustment reflecting Microsoft’s decision to pay out all previously awarded, but yet unspent, cooperative marketing funds (i.e. the portion of incentive earnings that had previously been subject to proof of execution).

Both of the amounts discussed above are included in the table below.

Under this program, we recorded incentive earnings as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Reductions to cost of revenue	$	450	$	94	$	581	$	229
Reductions to marketing expense		74		69		363		174