BSQUARE CORP /WA (Form: 10-Q, Received: 11/10/2011 16:33:06)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

¨	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

BSQUARE CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1650880

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

110 110 ^th Avenue NE, Suite 200,

Bellevue WA

98004

(Address of principal executive offices)

(Zip Code)

(425) 519-5900

(Registrant’s telephone number, including area code)

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

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

The number of shares of common stock outstanding as of October 31, 2011: 10,714,635

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2011

TABLE OF C ONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1	Financial Statements		3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4	Controls and Procedures		22

PART II. OTHER INFORMATION
Item 1A	Risk Factors		22
Item 6	Exhibits		22

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	9,053		$	10,814
Short-term investments		7,652			11,329
Accounts receivable, net of allowance for doubtful accounts of $288 at September 30, 2011 and $290 at December 31, 2010		16,476			14,128
Deferred tax assets		145			145
Prepaid expenses and other current assets		1,037			403

Total current assets		34,363			36,819
Long-term investment		116			122
Equipment, furniture and leasehold improvements, net		946			653
Intangible assets, net		2,064			1,049
Restricted cash		875			875
Deferred tax assets		2,495			2,495
Goodwill		3,989			—
Other non-current assets		91			83

Total assets	$	44,939		$	42,096

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Third-party software fees payable	$	10,101		$	11,132
Accounts payable		373			261
Accrued compensation		2,062			2,497
Other accrued expenses and liabilities		3,949			1,467
Deferred revenue		984			1,417

Total current liabilities		17,469			16,774
Deferred rent		187			240
Long-term tax liability		368			—
Shareholders’ equity:
Preferred stock, no par value: 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, no par value: 37,500,000 shares authorized; 10,698,230 shares issued and outstanding at September 30, 2011 and 10,415,541 shares issued and outstanding at December 31, 2010		126,682			124,716
Accumulated other comprehensive loss		(617	)		(445	)
Accumulated deficit		(99,150	)		(99,189	)

Total shareholders’ equity		26,915			25,082

Total liabilities and shareholders’ equity	$	44,939		$	42,096

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts) (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenue:
Software	$	17,021		$	19,125		$	52,829		$	48,383
Service		7,008			6,213			20,630			20,805

Total revenue		24,029			25,338			73,459			69,188

Cost of revenue:
Software		13,856			15,588			42,233			39,265
Service		5,369			4,709			16,065			15,924

Total cost of revenue		19,225			20,297			58,298			55,189

Gross profit		4,804			5,041			15,161			13,999
Operating expenses:
Selling, general and administrative		4,332			3,280			12,371			9,397
Research and development		950			766			2,849			2,475

Total operating expenses		5,282			4,046			15,220			11,872

Income (loss)from operations		(478	)		995			(59	)		2,127
Other income (expense)		43			16			85			(477	)

Income (loss) before income taxes		(435	)		1,011			26			1,650
Income tax benefit (expense)		269			(75	)		13			(181	)

Net income (loss)	$	(166	)	$	936		$	39		$	1,469

Basic income (loss) per share	$	(0.02	)	$	0.09		$	0.00		$	0.14

Diluted income (loss) per share	$	(0.02	)	$	0.09		$	0.00		$	0.14

Shares used in calculation of income per share:
Basic		10,610			10,196			10,578			10,160

Diluted		10,610			10,390			11,780			10,340

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	39		$	1,469
Adjustments to reconcile net income to net cash provided by operating activities:
Realized loss (gain) on investments		(19	)		546
Depreciation and amortization		599			690
Stock-based compensation		1,685			554
Changes in operating assets and liabilities:
Accounts receivable, net		(1,264	)		(2,701	)
Prepaid expenses and other assets		(612	)		164
Third-party software fees payable		(1,031	)		5,400
Accounts payable and accrued expenses		(585	)		(508	)
Deferred revenue		(437	)		(1,757	)
Deferred rent		(53	)		(53	)

Net cash provided by (used in) by operating activities		(1,678	)		3,804
Cash flows from investing activities:
Purchases of equipment and furniture		(528	)		(121	)
Acquisition of business, less acquired cash		(3,362	)		—
Proceeds from maturities of short-term investments		17,944			5,250
Purchases of short-term investments		(14,274	)		(12,561	)
Proceeds from sale of auction rate securities		25			3,108
Other		—			25

Net cash used by investing activities		(195	)		(4,299	)
Cash flows from financing activities - proceeds from exercise of stock options		281			79
Effect of exchange rate changes on cash		(169	)		(28	)

Net decrease in cash and cash equivalents		(1,761	)		(444	)
Cash and cash equivalents, beginning of period		10,814			12,918

Cash and cash equivalents, end of period	$	9,053		$	12,474

Supplemental disclosures of cash flow information:
Contingent consideration for acquisition of business	$	810		$	—

Accrued payment for acquisition of business	$	1,425		$	—

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

1. Summary of Significant Accounting Policies

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 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 our opinion, the unaudited 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 September 30, 2011 and our operating results and cash flows for the three and nine months ended September 30, 2011 and 2010. The accompanying financial information as of December 31, 2010 is derived from audited financial statements. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010. All intercompany balances have been eliminated.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income.” This new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. This guidance affects presentation only and will have no effect on our financial condition, results of operations or cash flows.

In May 2011, the FASB amended ASC 820, “Fair Value Measurements.” This amendment is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards requirements for measurement of and disclosures about fair value. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The updated guidance is effective on a prospective basis for financial statements issued for interim and annual periods beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” ASU 2011-08 simplifies the goodwill impairment assessment by permitting a company to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the company would be required to conduct the current two-step goodwill impairment test. Otherwise, it would not need to apply the two-step test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We don’t expect the adoption of ASU 2011-08 to have a material impact on our financial position, results of operations, or cash flows.

Income or Loss Per Share

Basic income or loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares, such as stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). RSAs are considered outstanding and included in the computation of basic income or loss per share when underlying restrictions expire and the awards are no longer forfeitable. RSUs are considered outstanding and included in the computation of basic income or loss per share only when vested. Diluted income or loss per share is computed using the weighted

average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock and if-converted method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

2. Investments

Investments consist of the following (in thousands):


	September 30, 2011		December 31, 2010
Short-term investments:
U.S. agency securities	$	750	$	2,250
Municipal securities		355		450
Corporate commercial paper		2,250		2,749
Foreign government bonds		500		775
Corporate debt securities		3,797		5,105

Total short-term investments		7,652		11,329
Long-term investment—auction rate security (“ARS”)		116		122

Total investments	$	7,768	$	11,451

We record our 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.

Our short-term investments consist entirely of marketable securities classified as available for sale, and were valued based on quoted market prices of similar instruments and other significant Level 2 inputs derived from, or corroborated by, observable market data.

Our long-term investment consists entirely of a single ARS issuance. Due to the lack of observable market quotes on our ARS, we recorded an other-than-temporary impairment against this ARS issuance in prior periods reducing the cost basis of the investment to $116,000.

We had $1,000 of unrealized losses on our short-term investments as of both September 30, 2010, and December 31, 2011.

3. Acquisition of MPC Data Limited

On September 11, 2011 we completed the acquisition of MPC Data Ltd (“MPC”), a United Kingdom based provider of embedded software engineering services and products for OEMs, semiconductor companies and high performance application developers. The acquisition is part of our overall growth strategy and is designed to capitalize on the growing market for smart, connected devices by expanding both the breadth of services offered and the geographies that we serve.

We acquired all outstanding shares of MPC preferred and common stock in exchange for total consideration of $7.1 million, which includes $4.8 million of cash paid on the acquisition date, $1.5 million of cash paid in November 2011, and a potential earn-out with an estimated present value of $810,000 as of September 30, 2011. This earn-out will be calculated based on specific revenue earned in specific regions of Europe over the next year and is not capped. If our estimate of applicable revenue is different from actuals by 10%, the impact on the earn-out would be $90,000. As of September 30, 2011, the funds paid in November 2011 and the estimate of the earn-out were classified as other accrued expenses and liabilities. We also acquired $1.5 million in cash and cash equivalents as part of the acquisition, for a net estimated total cash price of $5.6 million.

In connection with the business combination, we incurred merger-related costs, including legal, consulting, accounting and other costs, of $152,000 during the three months ended September 30, 2011 which we recognized as expense in the period.

Accounting for the Acquisition of MPC

The business combination was accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and liabilities assumed at the acquisition date measured at their fair values, including intangible assets acquired consisting of trade names and trademarks, non-compete agreements, and customer relationships. The acquisition of MPC was structured as a stock purchase and therefore the values assigned to the intangible assets and goodwill are not deductible for tax purposes, and as such tax liabilities of $418,000 were recognized as part of the transaction as well. The excess of the purchase price, including the estimate of the earn-out, over the fair value of net assets acquired was recorded as goodwill. Our preliminary allocation of the purchase price to assets and liabilities based upon fair value determinations was as follows (in thousands):


Cash and cash equivalents	$	1,481
Other current assets		1,124
Property, equipment, and furniture		103
Intangible assets – customer relationships		973
Intangible assets – non-compete agreements		206
Intangible assets – trade names and trademarks		96
Current liabilities		(472	)
Tax liabilities		(418	)
Goodwill		3,989

Purchase consideration	$	7,082

The excess of the $7.1 million purchase price over the $3.1 million of identifiable net assets acquired resulted in goodwill of $4.0 million. Of the intangible assets acquired, customer relationships have a weighted-average useful life of 10 years, non-compete agreements have a weighted-average useful life of 2 years, and trade names and trademarks have a weighted-average useful life of 1 year. We will assess the fair value of the earn-out associated with the purchase each period using level 3 inputs represented by management’s estimation of future services revenue attributable to MPC through September 30, 2012. Any such changes to the earn-out would be realized as other income (expense) during the period.

Unaudited Pro Forma Results of Operations

The unaudited pro forma results of operations data are being furnished solely for informational purposes and are not intended to represent or be indicative of the consolidated results of operations that we would have reported had the MPC acquisition been completed as of the dates and for the periods presented, nor are they necessarily indicative of future results.

The unaudited pro forma results of operations data are derived from our consolidated financial statements and MPC and include pro forma adjustments relating to the MPC acquisition that are of a recurring nature representing pro forma amortization of intangible assets. Included in these pro forma results are revenue of $333,000 and net income of $118,000 related to MPC since the date of acquisition. The pro forma results were adjusted to assume the $152,000 of nonrecurring expenses directly related to the MPC acquisition were incurred on January 1, 2010. These pro forma results of operations do not give effect to any cost savings, revenue synergies or restructuring costs which may result from the integration of MPC operations.

The unaudited pro forma combined condensed results of operations are presented below as if the MPC acquisition had occurred on January 1, 2010 (amounts in 000’s, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
Net sales	$	25,266	$	26,671	$	77,254		$	72,989
Gross profit	$	5,415	$	5,660	$	16,828		$	15,607
Operating income	$	21	$	1,085	$	(81	)	$	2,016
Income before income taxes	$	161	$	1,088	$	(10	)	$	1,592
Net income	$	450	$	1,013	$	16		$	1,411
Basic earnings per share	$	0.04	$	0.10	$	0.00		$	0.14
Diluted earnings per share	$	0.04	$	0.10	$	0.00		$	0.14

4. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2011 are as follows (in thousands):


Balance as of December 31, 2010	$	—
Goodwill acquired		3,989
Goodwill adjustment		—

Total	$	3,989

Intangible assets relate to customer relationships, trade names, trademarks, non-compete agreements, and technology that we acquired from TestQuest in November 2008, and through the acquisition of MPC in September 2011. The following table presents the gross carrying value of the acquired intangible assets and accumulated amortization (in thousands):


	As of September 30, 2011
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Acquired technology	$	1,782	$	1,195	$	587
Customer relationships		1,275		108		1,167
Trade names and trademarks		180		63		117
Non-compete agreements		196		3		193

Total	$	3,433	$	1,369	$	2,064


	As of December 31, 2010
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Acquired technology	$	1,782	$	988	$	794
Customer relationships		293		78		215
Trade names and trademarks		83		44		39

Total	$	2,158	$	1,110	$	1,048

Amortization expense was $92,000 and $259,000 for the three and nine months ended September 30, 2011, respectively, and $113,000 and $369,000 for the three and nine months ended September 30, 2010 respectively. Amortization in future periods is expected to be as follows (in thousands):


Remainder of 2011	$	155
2012		595
2013		450
2014		133
2015		132
Thereafter		599

Total	$	2,064

5. Shareholders’ Equity

Stock Options

We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (the “Inducement Plan”) (together the “Plans”). Under the Plans, stock options may be granted with a fixed exercise price that is equivalent to fair market value 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 Stock Plan also allows for awards of non-qualified stock options, stock appreciation rights, RSAs and unrestricted stock awards, and RSUs. The Stock Plan allows for an automatic annual increase in the number of shares reserved for issuance under the Stock Plan. Such automatic annual increase is in an amount equal to the lesser of: (i) four percent of our outstanding shares at the end of the previous fiscal year, (ii) an amount determined by our Board of Directors, or (iii) 375,000 shares. The Inducement Plan was established during the three months ended September 30, 2011 in connection with the MPC acquisition. The Inducement Plan may only be used to grant non-qualified stock option awards to new employees. Initially, 250,000 shares were allocated for award under the Inducement Plan. The number of shares available for award may be modified by our Board of Directors, subject to SEC and NASDAQ limitations.

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 activity. The fair values of RSAs and RSUs are determined based on the number of shares granted and the quoted price of our common stock on the date of grant, less our estimation of future forfeitures. 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 equity awards, primarily stock option grants, were estimated with the following weighted average assumptions:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Dividend yield		0	%		0	%		0	%		0	%
Expected life		4 years			4 years			4 years			4 years
Expected volatility		73	%		73	%		74	%		72	%
Risk-free interest rate		0.8	%		1.2	%		1.2	%		1.6	%

The impact on our results of operations of recording stock-based compensation expense for the three and nine months ended September 30, 2011 and 2010 was as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cost of revenue — service	$	184	$	78	$	560	$	197
Selling, general and administrative		346		187		1,000		327
Research and development		48		11		125		30

Total stock-based compensation expense	$	578	$	276	$	1,685	$	554

Per diluted share	$	0.05	$	0.03	$	0.14	$	0.05

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 2011:


Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2011		1,942,723		$	3.66
Granted at fair value		423,215			7.93
Exercised		(172,867	)		2.84
Forfeited		(35,910	)		3.32
Expired		(114,682	)		6.02

Balance at September 30, 2011		2,042,479		$	4.49		4.63	$	1,999,000

Vested and expected to vest at September 30, 2011		1,935,135		$	4.39		4.53	$	1,939,000

Exercisable at September 30, 2011		1,393,341		$	3.87		3.78	$	1,542,000

At September 30, 2011, total compensation cost related to stock options granted to employees but not yet recognized was $1,130,000, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.62 years.

The following table summarizes certain information about stock options for the three and nine months ended September 30, 2011 and 2010:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Weighted-average grant-date fair value of option grants for the period	$	3.67	$	1.89	$	4.52		1.71

Options in-the-money at period end		1,040,047		874,328		1,040,047		874,328

Aggregate intrinsic value	$	119,000	$	20,000	$	871,000	$	26,000

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 that were in-the-money at period end or that were exercised during the period. We issue new shares of common stock upon exercise of stock options.

Restricted Stock Award Activity

The following table summarizes RSA activity for the nine months ended September 30, 2011:


	Number of Shares			Weighted Average Grant-Date Fair Value Per Share
Unvested at December 31, 2010		42,000		$	3.38
Granted		30,000			6.58
Vested		(36,000	)		3.26
Forfeited		—			—

Unvested at September 30, 2011		36,000		$	6.17

Expected to vest after September 30, 2011		32,400		$	6.47

At September 30, 2011, total compensation cost related to RSAs granted but not yet recognized was $100,000, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 0.5 years. Currently, only non-employee members of our Board of Directors receive restricted RSAs. Compensation for non-employee Directors has been modified such that future equity compensation will be issued through RSUs.

Restricted Stock Unit Activity

The following table summarizes RSU activity for the nine months ended September 30, 2011:


	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2010		346,776		$	4.47
Granted		146,966			5.88
Vested		(108,901	)		3.21
Forfeited		(29,760	)		4.75

Unvested at September 30, 2011		355,081		$	5.34

Expected to vest after September 30, 2011		321,289		$	5.33

At September 30, 2011, total compensation cost related to RSUs granted but not yet recognized was $1.0 million, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 2.0 year.

Common Stock Reserved for Future Issuance

The following table summarizes our shares of common stock reserved for future issuance at September 30, 2011:


	September 30, 2011
Stock options outstanding		2,042,479
Restricted stock units outstanding		355,081
Stock options available for future grant		590,830

Common stock reserved for future issuance		2,988,390

6. Other Comprehensive Income or Loss

Comprehensive income or loss refers to net income or loss and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of shareholders’ equity but are excluded from the calculation of net income or loss. The changes in the components of other comprehensive income or loss are as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net unrealized gain (loss) on investments	$	(12	)	$	(9	)	$	(7	)	$	299
Foreign currency translation loss		(62	)		(5	)		(165	)		(24	)

Other comprehensive income (loss)	$	(74	)	$	(14	)	$	(172	)	$	275

7. Commitments and Contingencies

Lease and rent obligations

Our commitments include obligations outstanding under operating leases, which expire through 2018. We have lease commitments for office space in Bellevue, Washington; San Diego, California; Longmont, Colorado; Chanhassen, Minnesota; Dallas, Texas; Taipei, Taiwan; Beijing, China; Seoul, Korea; Nishi-Shinjuku, Japan, and Trowbridge, UK. We also lease office space on a month-to-month basis in Akron, Ohio and Redmond, Washington.

If we default under the terms of our corporate headquarters’ lease in Bellevue, Washington, signed in February 2004, the landlord has the ability to demand payment for cash payments forgiven in 2004. The amount of the forgiven payments for which the landlord can demand repayment was $699,000 at September 30, 2011.

Rent expense was $401,000 and $1.2 million for the three and nine months ended September 30, 2011, respectively. Rent expense was $378,000 and $1.2 million for the three and nine months ended September 30, 2010, respectively.

As of September 30, 2011, we had $875,000 pledged as collateral for a bank letter of credit under the terms of our headquarters’ facility lease. The pledged cash supporting the outstanding letter of credit is recorded as restricted cash.

Future operating lease commitments are as follows by calendar year (in thousands):


2011	$	402
2012		1,294
2013		1,230
2014		910
Thereafter		517

Total commitments	$	4,353

Contingent acquisition consideration

Under the terms of the Share Purchase Agreement for MPC, we will pay an earn-out to the sellers of MPC in September 2012 if certain revenue milestones are met in certain countries of Europe. We currently estimate this earn-out to be $828,000 based on our revenue forecasts for that region. This amount has been recorded at fair value as part of the purchase price allocation.

8. Information about Geographic Areas

Our chief operating decision-makers (i.e., 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. Accordingly, we consider ourselves to be in a single reporting segment and operating unit structure.

Revenues by geography are based on the billing address of the customer. The following table sets forth revenues and long-lived assets by geographic area (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Total revenue:
North America	$	19,197	$	21,414	$	56,900	$	59,770
Asia		3,449		3,507		13,499		8,142
Europe		1,348		417		2,981		1,276
Other foreign		35		—		79		—

Total revenue	$	24,029	$	25,338	$	73,459	$	69,188


	September 30, 2011		December 31, 2010
Long-lived assets:
North America	$	4,840	$	5,160
Asia		77		117
Europe		5,659		—

Total long-lived assets	$	10,576	$	5,277

9. Significant Risk Concentrations

Significant Customer

Ford Motor Company (“Ford”) accounted for $2.5 million or 11% of total revenue for the three months ended September 30, 2011 and $7.2 million, or 10%, of total revenue for the nine months ended September 30, 2011. Ford accounted for $2.5 million, or 10%, of total revenue for the three months ended September 30, 2010 and $11.0 million, or 16%, of total revenue for the nine months ended September 30, 2010. No other customer accounted for 10% or more of total revenue for the three and nine months ended September 30, 2011, or September 30, 2010.

Ford had an accounts receivable balance of $2.5 million, or 15% of total accounts receivable, as of September 30, 2011; all of which was subsequently collected. No customer accounted for 10% or more of total accounts receivable as of September 30, 2010. No other customer accounted for 10% or more of total accounts receivable as of September 30, 2011 or December 31, 2010.

Significant Supplier

We have OEM Distribution Agreements (“ODAs”) with Microsoft which enable us to sell Microsoft Windows Embedded operating systems to our customers in the United States, Canada, the Caribbean (excluding Cuba), Mexico, the European Union and the European Free Trade Association, which expire on June 30, 2012. We also have ODAs with Microsoft which allow us to sell Microsoft Windows Mobile operating systems, and related applications such as Office Mobile, on a world-wide basis, which expire on June 30, 2012 and one ODA that expires on January 31, 2012.

Software sales under these agreements constitute a significant portion of our software revenue and total revenue. These agreements are typically renewed annually or semi-annually; however there is no automatic renewal provision in any of these agreements. Further, these agreements can be terminated unilaterally by Microsoft at any time. Microsoft currently offers a rebate program to sell Microsoft Windows Embedded operating systems in which we earn money for achieving certain predefined objectives. Under this rebate program we earned $212,000 and $555,000 for the three and nine months ended September 30, 2011, respectively, and $208,000 and $561,000 for the three and nine months ended September 30, 2010, respectively. These rebates are accounted for as a reduction in software cost of revenue.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” and “the Company” refer to BSQUARE Corporation, a Washington corporation, and its subsidiaries.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes. Some statements and information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are not historical facts but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). In some cases, readers can identify forward- looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology, which when used are meant to signify the statement as forward-looking. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements that are not historical facts. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s actual results, to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010 entitled “Risk Factors,” as well as those contained from time to time in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

We provide software solutions to companies that develop smart, connected devices and to companies that assist others in developing smart, connected devices. A smart, connected device is a dedicated purpose computing device that typically has a display, runs an operating system and may be connected to a network via a wired or wireless connection. Examples of smart devices include set-top boxes, home gateways, point-of-sale terminals, kiosks, voting machines, gaming platforms, tablets, handheld data collection devices, personal media players, smart phones and devices targeted at automotive applications. We primarily focus on smart devices that utilize embedded versions of the Microsoft Windows family of operating systems, specifically Windows CE, Windows XP Embedded and Windows Mobile™. We also provide software solutions to customers developing devices utilizing other operating systems such as Android, QNX and Linux.

We have been providing software solutions to the smart device marketplace since our inception. Our customers include world class original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and enterprises, as well as silicon vendors (“SVs”) and peripheral vendors which purchase our software solutions for purposes of facilitating processor and peripheral sales to the aforementioned customer categories. In the case of enterprises, our customers include those which develop, market and distribute smart devices on their own behalf as well as those that purchase devices from OEMs or ODMs and require additional device software or testing. The software solutions we provide are utilized and deployed throughout various phases of our customers’ device life cycle, including design, development, customization, quality assurance and deployment.

Critical Accounting Judgments

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in our financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the allowance for doubtful accounts, percentage of completion on fixed-price service contracts, fair values of financial instruments, deferred tax asset allowances, useful lives and fair value of intangible assets and property and equipment, fair values of stock-based awards and income tax accruals, fair values of acquired assets and liabilities and the fair value of a contingent purchase consideration, among other estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying value of our assets and liabilities.

Revenue Recognition

We recognize revenue from software and engineering service sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured. Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and time records are generally used to verify delivery. We assess whether the

selling price is fixed or determinable based on the contract and/or customer purchase order and payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Periodically, we will begin work on engineering service engagements prior to having a signed contract and in some cases the contract is signed in a period after which service delivery costs are incurred. We do not defer costs associated with these non-contracted engagements.

We recognize software revenue upon shipment provided that no significant obligations remain on our part, substantive acceptance conditions, if any, have been met and the other revenue recognition criteria have been met. Service revenue from time and materials contracts, and training service agreements, is recognized as services are performed. Certain fixed-price service agreements, and time and materials service agreements with capped fee structures, are accounted for using the percentage-of-completion method. We use the percentage-of-completion method of accounting because it is the most accurate method to recognize revenue based on the nature and scope of our fixed-price professional engineering service contracts; it is a better measure of periodic income results than other methods and it better matches revenue recognized with the costs incurred. Percentage of completion is measured based primarily on input measures such as hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. The estimation of total hours and progress to completion on these arrangements determines the amount of revenue we recognize as well as whether a loss is recognized if one is expected to be incurred for the remainder of the project. Revisions to hour and cost estimates are incorporated in the period in which the facts that give rise to the revision become known.

We also enter into arrangements in which a customer purchases a combination of software licenses, engineering services and post-contract customer support and/or maintenance (“PCS”). As a result, contract interpretation is sometimes required to determine the appropriate accounting, including how the price should be allocated among the deliverable elements if there are multiple elements. PCS may include rights to upgrades, when and if available, telephone support, updates and enhancements. When vendor specific objective evidence (“VSOE”) of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. When a discount is given on a multiple element agreement, the discount is applied pro-rata to all elements of the agreement. VSOE of fair value is established by the price charged when the same element is sold separately. Accordingly, the judgments involved in assessing the fair values of various elements of an agreement can impact the recognition of revenue in each period. Changes in the allocation of the sales price between deliverables might impact the timing of revenue recognition, but would not change the total revenue recognized on the contract. When elements such as software and engineering services are contained in a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. In the absence of fair value for a delivered element, revenue is first allocated to the fair value of the undelivered elements and then allocated to the residual delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. As a result, contract interpretations and assessments of fair value are sometimes required to determine the appropriate accounting.

When engineering services and royalties are contained in a single arrangement, we recognize revenue from engineering services as earned in accordance with the criteria above even though the effective rate per hour may be lower than typical because the customer is contractually obligated to pay royalties on their device shipments. We recognize royalty revenue, classified as software revenue, when the royalty report from the customer is received or when such royalties are contractually guaranteed and the revenue recognition criteria are met, particularly that collectability is reasonably assured.

There are two items involving revenue recognition that require us to make more difficult and subjective judgments: the determination of VSOE of fair value in multiple element arrangements and the estimation of percentage of completion on fixed-price service contracts. Historically, we have entered into very few multiple-element arrangements other than those involving the sale of PCS related to the sale of our TestQuest automated testing tools. We establish VSOE of fair value for TestQuest PCS, based on the price when PCS is sold separately. VSOE of TestQuest PCS has been well established in the past as these products have been sold on a stand-alone basis for a number of years even prior to our acquisition of TestQuest assets in November 2008.

We measure our estimate of completion on fixed-price contracts, which in turn determines the amount of revenue we recognize, based primarily on actual hours incurred to date and our estimate of remaining hours necessary to complete the contract. The process of estimating the remaining hours on a contract involves detailed estimates of remaining hours by the engineers and project managers involved with the project, factoring in such variables as the remaining tasks, the complexity of the tasks, the contracted quality of the software to be provided, the customer’s estimated delivery date, integration of third-party software and quality thereof and other factors. Every fixed-price contract requires various approvals within our company including our Chief Executive Officer if significant. This approval process takes into consideration a number of factors including the complexity of engineering. Historically our estimation processes related to fixed-price contracts have been accurate based on the information known at the time of the reporting of our results. However, percentage-of-completion estimates require significant judgment. As of September 30, 2011, we were delivering engineering services under 16 fixed-price service contracts. The percentage of completion calculations on these contracts represents

management’s best estimates based on the facts and circumstances as of the filing of this report. If there are changes to the underlying facts and circumstances, revisions to the percentage-of-completion calculations will be recorded in the period the changes are noted. If we were 10% under in our estimates of completion on every fixed-bid contract active on September 30, 2011, our revenue would be over-stated by $215,000 for the nine months ended September 30, 2011.

Allowance for Doubtful Accounts

We review our accounts receivable regularly for collectability concerns. In determining the amount of our allowance for doubtful accounts, we make judgments about the creditworthiness of customers based on ongoing credit evaluations.

Stock-Based Compensation

Our stock-based compensation expense for stock options is estimated at the grant date based on the stock award’s fair value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model and is recognized as expense over the requisite service period. 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. Restricted Stock Units (“RSUs”) and Restricted Stock Awards (“RSAs”) are measured based on the fair market values of the underlying stock on the dates of grant as determined based on the number of shares granted and the quoted price of our common stock on the date of grant. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimates, stock-based compensation expense is adjusted accordingly.

Incentive Compensation

We make certain estimates, judgments and assumptions regarding the likelihood of attainment, and the level thereof, of bonuses payable under our annual incentive compensation programs. We accrue bonuses and recognize the resulting expense when the bonus is judged to be reasonably likely to be earned as of year-end and is estimable. The amount accrued, and expense recognized, is the estimated portion of the bonus earned on a year-to-date basis less any amounts previously accrued. These estimates, judgments and assumptions are made quarterly based on available information and take into consideration our year-to-date actual results and expected results for the remainder of the year. Because we consider estimated future results in assessing the likelihood of attainment, significant judgment is required. If actual results differ materially from our estimates, the amount of bonus expense recorded in a particular quarter could be significantly over or under estimated.

Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the countries and other jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from the differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Net operating losses and tax credits, to the extent not already utilized to offset taxable income or income taxes, also give rise to deferred tax assets. We must then assess the likelihood that any deferred tax assets will be realized from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets.

Beginning in 2002 and through the third quarter of 2010, we maintained a full valuation allowance against our deferred tax assets. In the fourth quarter of 2010, we determined that it was more likely than not that we would generate sufficient future taxable income to realize a portion of our net operating loss carryforwards, and recorded a portion of our deferred tax assets related to such estimated future taxable income. We estimate the valuation allowance related to our deferred tax assets on a quarterly basis.

Our sales may be subject to other taxes, particularly withholding taxes, due to our sales to customers in countries other than the United States. The tax regulations governing withholding taxes are complex, causing us to have to make assumptions about the appropriate tax treatment. Further, we make sales in many jurisdictions across the United States, where tax regulations are increasingly becoming more aggressive and complex. We must therefore continue to analyze our state tax exposure and determine what the appropriate tax treatments are, and make estimates for sales, franchise, income and other state taxes.

Results of Operations

The following table presents certain financial data as a percentage of total revenue for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(unaudited)						(unaudited)
Revenue:
Software		71	%		75	%		72	%		70	%
Service		29			25			28			30

Total revenue		100			100			100			100

Cost of revenue:
Software		58			62			57			57
Service		22			18			22			23

Total cost of revenue		80			80			79			80

Gross profit		20			20			21			20
Operating expenses:
Selling, general and administrative		18			13			17			13
Research and development		4			3			4			4

Total operating expenses		22			16			21			17

Income (loss) from operations		(2	)		4			0			3
Other income (expense)		0			0			0			(1	)

Income (loss) before income taxes		(2	)		4			0			2
Income tax benefit (expense)		1			0			0			0

Net income		(1	)%		4	%		0	%		2	%

Acquisition of MPC Data Limited

Revenue

Our revenue is generated from the sale of software, both our own proprietary software and software of third parties that we resell, and the sale of engineering services. Total revenue decreased $1.3 million, or 5%, to $24.0 million during the three months ended September 30, 2011, from $25.3 million in the year-ago period, due primarily to a decline in third party software sales.

Total revenue increased $4.3 million, or 6%, to $73.5 million for the nine months ended September 30, 2011, from $69.2 million in the year-ago period. This increase was driven by higher sales of third-party and proprietary software.

Revenue from customers located outside of North America includes revenue attributable to our foreign operations, as well as software and services delivered to foreign customers from our operations located in North America. Our international operations outside of North America consist principally of operations in Taiwan and the United Kingdom. We also have established relatively minor sales and/or support presences in China, India, Japan, and Korea. Revenue from customers located outside of North America was $4.8 million during the three months ended September 30, 2011, or 20% of total revenue, an increase from $3.9 million, or 15% of total revenue, in the year-ago period. Revenue from customers located outside of North America was $16.6 million during the nine months ended September 30, 2011, or 23% of total revenue, an increase from $9.4 million, or 14% of total revenue, in the year-ago period. This international growth was primarily attributable to increased sales of the Microsoft Windows Mobile operating system in the Asia Pacific (“APAC”) region and, to a lesser extent, increased engineering service revenue generated in the APAC and Europe regions.

Software revenue

Software revenue consists of sales of third-party software and revenue realized from our own proprietary software products, which include software license sales, royalties from our software products, sales of software development kits, support and maintenance revenue, as well as royalties from certain engineering service contracts. Software revenue for the three and nine months ended September 30, 2011 and 2010 was as follows (dollars in thousands):


	Three months Ended September 30,						Nine months Ended September 30,
	2011			2010			2011			2010
	(unaudited)						(unaudited)
Software revenue:
Third-party software	$	15,593		$	18,031		$	48,259		$	45,359
Proprietary software		1,428			1,094			4,570			3,024

Total software revenue	$	17,021		$	19,125		$	52,829		$	48,383

Software revenue as a percentage of total revenue		71	%		75	%		72	%		70	%

Third-party software revenue as a percentage of total software revenue		92	%		94	%		91	%		94	%

The vast majority of our third-party software revenue is comprised of sales of Microsoft Windows Embedded operating systems in North America and sales of Microsoft Windows Mobile operating systems on a worldwide basis. Third-party software revenue decreased $2.4 million, or 14%, to $15.6 million for the three months ended September 30, 2011, from $18.0 million in the year-ago period. The decrease was primarily due to several large Windows Embedded operating systems customers who have either not repurchased in the current year, or who have not repurchased at the volumes as in the prior year. This decline was offset in part by a $600,000 increase in sales of Windows Mobile operating systems.

Third-party software revenue increased $2.9 million, or 6%, for the nine months ended September 30, 2011, compared to the year-ago period, primarily driven by a $5.1 million increase in Windows Mobile operating systems sales and higher sales of Adobe Flash products, offset by the decline in Windows Embedded operating system sales for the same reason noted previously.

Proprietary software revenue increased $334,000, or 31%, to $1.4 million for the three months ended September 30, 2011, from $1.1 million in the year-ago period. This increase was primarily due to increases in sales of Qualcomm Snapdragon Mobile Development Kits (“Snapdragon”). Proprietary software revenue increased $1.5 million, or 51%, for the nine months ended September 30, 2011, compared to the year-ago period, driven by higher sales of Snapdragon, HCP, as well as higher sales of our Texas Instruments OMAP software products.

Service revenue

Service revenue for the three and nine months ended September 30, 2011 and 2010 was as follows (dollars in thousands):


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
	(unaudited)						(unaudited)
Service revenue	$	7,008		$	6,213		$	20,630		$	20,805

Service revenue as a percentage of total revenue		29	%		25	%		28	%		30	%

Ford Motor Company (“Ford”) continued to be our largest engineering services customer in the quarter, representing 36% and 35% of service revenue during the three and nine months ended September 30, 2011, respectively, compared to 40% and 53% of service revenue for the three and nine months ended September 30, 2010, respectively. We began working with Ford in the second quarter of 2008 assisting in the development of their next generation in-dash infotainment offering called MyFord Touch. Our initial project with Ford began in the second quarter of 2008 and was completed in the third quarter of 2010. During the initial project we provided hardware design and implementation, platform level software development, application level software development, quality assurance services and systems integration services. Since approximately the completion of the initial project in the third quarter of 2010, we have performed all services for Ford under a time and materials contract which contains certain minimum commitments in terms of the number of resources we provide Ford, and amounts they pay us. The time and materials contract is referred to as the Ford Telematics Competency Center (“FCC”).

Ford contributed $2.5 million and $7.2 million in service revenue in the three and nine months ended September 30, 2011, respectively, compared to $2.5 million and $11.0 million in the three and nine months ended September 30, 2010, respectively. The number of engineers working on Ford has declined under the FCC compared to the number of engineers working on the original project in the prior year as we are no longer in the development stage of the MyFord Touch platform, but are now focused on developing and integrating new user applications for the MyFord Touch, enhancing existing applications and customizing the MyFord Touch platform for additional vehicle models.

Service revenue increased $795,000, or 13%, to $7.0 million for the three months ended September 30, 2011, from $6.2 million in the year-ago period. This increase was due primarily to a new customer in North America in the current year who contributed approximately $650,000 in revenue, and to a lesser extent to the addition of service revenue associated with MPC late in the quarter which contributed $330,000 in revenue. Total billed hours increased 19% from the year ago period due primarily to the new North American customer and the addition of MPC. The positive revenue impact of the increased billable hours was offset in part by 5% decline in our realized rate per hour.

Service revenue decreased $175,000, or 1%, for the nine months ended September 30, 2011 compared to the year-ago period. This decrease was primarily due to lower revenue attributed to Ford as previously discussed, which was down $3.8 million from the year ago period. This decrease was largely offset by revenue associated with two new customers in North America who contributed $3.2 million during the nine months ended September 30, 2011, compared to a negligible amount in the year-ago period. Additionally, service revenue in the APAC region increased $766,000 during the nine months ended September 30, 2011 compared to the year-ago period. Total billable hours outside of Ford increased 53% due to the factors previously stated, offset in part by 10% decline in our realized billing rate per hour.

Gross profit and gross margin

Cost of revenue related to software revenue consists primarily of the cost of third-party software, software development kit costs, as well as the amortization of certain intangible assets related to acquisitions.

Cost of revenue related to service revenue consists primarily of salaries and benefits, contractor costs, re-billable expenses and related facilities and depreciation costs. Gross profit on the sale of third-party software products is also positively affected by rebate credits we received from Microsoft for the sale of Windows Embedded operating system which we earned through the achievement of defined sales objectives and treated as a reduction in the cost of software revenue. Under this rebate program we earned $212,000 and $554,000 for the three and nine months ended September 30, 2011, respectively, compared to $208,000 and $561,000 for the three and nine months ended September 30, 2010, respectively.

The following table outlines software, services and total gross profit (dollars in thousands):


	Three months Ended September 30,						Nine months Ended September 30,
	2011			2010			2011			2010
	(unaudited)						(unaudited)
Software gross profit	$	3,165		$	3,537		$	10,596		$	9,118
Software gross margin		19	%		18	%		20	%		19	%
Service gross profit	$	1,639		$	1,504		$	4,565		$	4,881
Service gross margin		23	%		24	%		22	%		23	%
Total gross profit	$	4,804		$	5,041		$	15,161		$	13,999
Total gross margin		20	%		20	%		21	%		20	%

Software gross profit and gross margin

Software gross profit decreased by $372,000, or 11%, to $3.2 million for the three months ended September 30, 2011, from $3.5 million in the year-ago period, while software gross margin increased by one percentage point. These fluctuations were primarily caused by a decline in sales of Windows Embedded operating systems, which negatively impacted gross profit but improved software gross margin because of the relatively low margin on these software sales coupled with the impact of Snapdragon sales. Third-party software margin was 15% for both the three months ended September 30, 2011 and September 30, 2010. Proprietary software margin was 62% during the three months ended September 30, 2011, compared to 83% in the year-ago period. The lower proprietary software margins were caused by an increase in Snapdragon sales which are at a much lower margin than our typical proprietary software products.

Software gross profit increased by $1.5 million, or 16%, to $10.6 million for the nine months ended September 30, 2011, from $9.1 million in the year-ago period, while software gross margin increased by one percentage point. The increase in software gross profit was driven by higher sales of Windows Mobile operating systems, Adobe Flash, Snapdragon and Texas Instrument OMAP products. The increase in software gross margin was the result of the higher proportion of Adobe Flash sales, which is sold at a higher margin than our other third party products, and the growth in Windows Mobile operating systems sales which generates a higher

margin than Windows Embedded operating system sales. The impact of these items was mitigated in part by the higher Snapdragon sales, which is sold at a relatively lower margin compared to our typical proprietary software sales. Third-party software margin was 15% for the nine months ended September 30, 2011, compared to 14% in the year ago period. Proprietary software margin was 75% during the nine months ended September 30, 2011, compared to 85% in the year-ago period.

Service gross profit and gross margin

Service gross profit increased $135,000, or 9%, to $1.6 million for the three months ended September 30, 2011, from $1.5 million in the year-ago period while service gross margin declined by one percentage point. Our service gross margin was 23% for the three months ended September 30, 2011, a one percentage point decrease from 24% in the year-ago period. Service gross profit increased due to the higher billable hours in the period, and the lower margin was the result of a lower average rate per hour as discussed previously.

Service gross profit decreased $316,000, or 6%, to $4.6 million for the nine months ended September 30, 2011, from $4.9 million in the year-ago period while service gross margin declined by one percentage point. Service gross margin was 22% for the nine months ended September 30, 2011, a one percentage point decrease from 24% in the year-ago period. The primary driver for these declines was an 8% reduction in our worldwide utilization rate.

Operating expenses

Selling, general and administrative

Selling, general and administrative expenses consist primarily of salaries and related benefits, commissions and bonuses for our sales, marketing and administrative personnel and related facilities and depreciation costs, as well as professional services fees (e.g., consulting, legal and audit). Selling, general and administrative expenses increased $1.1 million, or 32%, to $4.3 million for the three months ended September 30, 2011, from $3.3 million in the year-ago period. Selling, general and administrative expenses represented 18% of our total revenue for the three months ended September 30, 2011 and 13% in the year-ago period. The increase was primarily due to a $731,000 increase in sales and marketing expense, which was driven by growth in our sales capacity in Asia, Europe and in North America, as well as a $172,000 increase in stock compensation expense included in sales and marketing expense. The current period was also negatively affected by $152,000 in transaction related expenses associated with the MPC acquisition.

Selling, general and administrative expenses increased $3.0 million, or 32%, to $12.4 million for the nine months ended September 30, 2011, from $9.4 million in the year-ago period. Selling, general and administrative expenses represented 17% of our total revenue for the nine months ended September 30, 2011 and 13% for the year-ago period. These increases were driven by the same factors that accounted for the three-month increase.

Research and development

Research and development expenses consist primarily of salaries and benefits for software development and quality assurance personnel, contractor and consultant costs and related facilities and depreciation costs. Research and development expenses increased $184,000, or 24%, to $950,000 for the three months ended September 30, 2011, from $766,000 in the year-ago period. Research and development expenses represented 4% of our total revenue for the three months ended September 30, 2011 and 3% in the year-ago period. Research and development expenses increased $374,000, or 15%, to $2.8 million for the nine months ended September 30, 2011, from $2.5 million in the year-ago period. Research and development expenses represented 4% of our total revenue for the nine months ended September 30, 2011 and 4% for the year-ago period. These increases were driven by higher costs associated with the development and roll-out of our Handset Certification Platform based on our TestQuest automated testing tool platform. These increases were driven by higher costs associated with the development and roll-out of our Handset Certification Platform.

Other income or expense

Other income or expense consists of interest income on our cash, cash equivalents and investments, gains and/or losses recognized on our investments, as well as gains or losses on foreign exchange transactions. Other income increased $27,000, or 169%, to $43,000 for the three months ended September 30, 2011, from $16,000 in the year-ago period.

Other income increased $562,000, or 118%, to $85,000 for the nine months ended September 30, 2011, from an expense of $477,000 in the year-ago period. This increase was due primarily to a $546,000 other-than-temporary impairment loss on the carrying value of our auction rate securities that was charged to other expense during the nine months ended September 30, 2010.

Income tax expense

Income tax expense decreased $344,000 to an income tax benefit of $269,000 for the three months ended September 30, 2011, compared to income tax expense of $75,000 in the year-ago period. The income tax benefit was $13,000 for the nine months ended September 30, 2011, a decrease of $194,000 compared to tax expense of $181,000 in the year ago period. Our worldwide effective

income tax rate is expected to be approximately 35% of pre-tax net income which includes both state and federal income taxes. The remainder of the tax expense we recognized during the three and nine months ended September 30, 2011 relates to withholding taxes incurred on international sales by our U.S. Corporation, and a $103,000 tax benefit for the carryback election made to apply alternative NOL’s to our 2009 federal tax return.

Liquidity and Capital Resources

As of September 30, 2011, we had $17.7 million of cash, cash equivalents, short-term and long-term investments and restricted cash, compared to $23.1 million at December 31, 2010. Of these amounts, $9.1 million and $10.8 million were cash at September 30, 2011 and December 31, 2010, respectively and $1.0 million were long-term at September 30, 2011 and December 31, 2010. These balances are net of a valuation allowance of $359,000 recorded against our ARS at September 30, 2011 and $378,000 at December 31, 2010. Our restricted cash balance of $875,000 at both September 30, 2011 and December 31, 2010 relates to the securitization of a letter of credit for our current corporate headquarters lease obligation, the majority of which will continue to secure that obligation through its expiration in 2014. Our working capital was $16.9 million at September 30, 2011 compared to $20.0 million at December 31, 2010.

Net cash used in operating activities was $1.7 million for the nine months ended September 30, 2011, driven by a $1.0 million decrease to in our third-party software fees payable, a $1.3 million increase to in accounts receivable, and $1.7 million in other working capital items. These amounts were offset in part by $2.3 million in non-cash charges. Net cash provided by operating activities was $3.8 million for the nine months ended September 30, 2010, driven by net income of 1.5 million, $1.6 million in non-cash charges, a $5.4 million increase in third-party software fees payable accounts payable. These amounts were offset in part by a $2.7 million increase in accounts receivable and a $1.8 million decline in deferred revenue.

Investing activities used cash of $195,000 for the nine months ended September 30, 2011, primarily due to an acquisition of MPC which resulted in $3.4 million of cash payments, which is net of the cash acquired in the transaction. This amount was offset in part by net maturities of our marketable securities of $3.7 million. Investing activities used cash of $4.3 million for the nine months ended September 30, 2010, primarily due to purchases of marketable securities of $12.6 million, offset by $5.3 million of proceeds from maturities of marketable securities, and $3.1 million generated by through the sale of our ARS auction rate security investments. Financing activities generated $281,000 in cash during the nine months ended September 30, 2011, and $79,000 during the nine months ended September 30, 2010, as a result of employees’ exercise of stock options.

We believe that our existing cash, cash equivalents and investments will be sufficient to meet our needs for working capital and capital expenditures for at least the next 12 months.

Cash Commitments

We have the following future or potential cash commitments:

•

Minimum rents payable under operating leases total $387,000 for the remainder of 2011, $1.3 million in 2012, $1.2 million in 2013, $910,000 in 2014, $141,000 in 2015, $141,000 in 2016, $141,000 in 2017, and $94,000 in 2018.

•

Under the terms of our corporate headquarters’ lease signed in February 2004, the landlord has the ability to demand payment for cash payments forgiven in 2004 if we default under the lease. The amount of the forgiven payments for which the landlord can demand repayment was $699,000 at September 30, 2011.

•

Under the terms of the Share Purchase Agreement for MPC, we paid $1.5 million of the purchase price of MPC in November 2011.

•

Under the terms of the Share Purchase Agreement for MPC, we will pay an earn-out to the sellers of MPC in the fourth quarter of 2012 if certain revenue milestones are met in certain countries of Europe. We currently estimate this earn-out payment to be $828,000 based on our probability weighted revenue forecasts for that region. There is no cap on this contingent obligation.

Recently Issued Accounting Standards

See Note 1, “Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements in Item 1.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes to our disclosure controls during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A.

Risk Factors

There has been no material change in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, other than the following:

A decrease in our estimated future taxable income may negatively affect the valuation allowance we have recorded against our deferred tax assets (DTAs).

At December 31, 2010, we had $59.2 million in net operating loss carryforwards and $2.4 million of tax credit carryforwards. These net operating losses and tax credits give rise to deferred tax assets (“DTAs”) to the extent that they may offset future taxable income. Beginning in 2002 and through the third quarter of 2010, we maintained a full valuation allowance against our DTAs as we could not determine that it was more likely than not that they would be utilized to offset future taxable income or income taxes.

In the fourth quarter of 2010, we determined that it was more likely than not that we would generate sufficient future taxable income to utilize a portion of our DTAs and, as a result, recorded a $2.6 million reduction in our deferred tax asset valuation allowance and corresponding income tax benefit. In determining the amount of our DTAs that we would realize as of December 31, 2010, we determined the amount of our DTAs that had a greater than 50% likelihood of being utilized to offset future taxable income.

We continually assess the carrying value of our DTAs through the estimation of our future taxable income on a more likely than not basis. If it is determined that we are unable to estimate, on a more likely than not basis, that our future taxable income is sufficient to utilize all, or any, of our recorded DTAs. If this was to occur, we would increase the valuation allowance on our DTAs, and recognize a corresponding income tax expense which would have a negative impact on our operating results.

Negative business conditions may negatively affect the carrying value of the intangible assets and goodwill we have acquired.

In the fourth quarter of 2008, we purchased certain assets of TestQuest including acquired technology and other intangible assets with a total gross carrying value of $1.9 million. In the third quarter of 2011, we acquired MPC Data Limited including certain intangible assets with a gross carrying value of $1.3 million and goodwill of $4.0 million. Although we expect to generate cash from the intangible assets in the future, and do not foresee any impairment of our goodwill, it is possible that we may be required to reassess the carrying value of these assets in the future if certain negative business conditions occur such as negative results of our business associated with our intangible assets or a low stock price. Any reduction in the carrying value of these intangible assets or goodwill would result in an impairment charge that would negatively impact our operating results.

Item 6.

Exhibits

The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	BSQUARE CORPORATION

	(Registrant)

Date: November 10, 2011	By:	/ S / B RIAN T. C ROWLEY
		Brian T. Crowley President and Chief Executive Officer

	BSQUARE CORPORATION

Date: November 10, 2011	By:	/ S / S COTT C. M AHAN
		Scott C. Mahan Vice President, Finance and Chief Financial Officer

BSQUARE CORPORATION

INDEX TO EXHIBITS

Exhibit
Number

Description

Filed
Here

with

Incorporated by Reference

Form

Filing Date

Exhibit

File No.

3.1

Amended and Restated Articles of Incorporation

S-1

8/17/1999

3.1(a)

333-85351

3.1(a)

Articles of Amendment to Amended and Restated Articles of Incorporation

10-Q

8/7/2000

3.1

000-27687

3.1(b)

Articles of Amendment to Amended and Restated Articles of Incorporation

8-K

10/11/2005

3.1

000-27687

3.2

Bylaws and all amendments thereto

10-K

3/19/2003

3.2

000-27687

10.1+

Share Purchase Agreement among BSQUARE Corporation and certain shareholders of MPC Data Limited

8-K

9/13/2011

10.1

000-27687

10.1*

BSQUARE Corporation 2011 Inducement Award Plan

10.1(a)*

Form of Non-Qualified Stock Option Agreement under the BSQUARE Corporation 2011 Inducement Award Plan

10.2

Amendment #3, effective as of October 1, 2011, to the Microsoft OEM Windows Mobile Distribution Agreement between Microsoft Licensing, GP and BSQUARE Corporation (Americas)

10.3

Amendment #3, effective as of October 1, 2011, to the Microsoft OEM Windows Mobile Distribution Agreement between Microsoft Licensing, GP and BSQUARE Corporation (Japan)

10.4

Amendment #3, effective as of October 1, 2011, to the Microsoft OEM Windows Mobile Distribution Agreement between Microsoft Licensing, GP and BSQUARE Corporation (Asia, other than Japan)

10.5

Amendment #3, effective as of October 1, 2011, to the Microsoft OEM Windows Mobile Distribution Agreement between Microsoft Ireland Operations Limited and BSQUARE Corporation (Europe, Middle East, Africa)

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase

101.LAB**

XBRL Taxonomy Extension Label Linkbase

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase

+	Confidential treatment has previously been granted by the Securities and Exchange Commission for certain portions of the referenced exhibit.

*	Indicates a management contract or compensatory plan or arrangement.

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

Exhibit 10.1

BSQUARE CORPORATION

2011 INDUCEMENT AWARD PLAN

TABLE OF CONTENTS


			Page

1.	DEFINITIONS			1

2.	PURPOSES			3

3.	ADMINISTRATION			3

	(a)	Committee		3
	(b)	Appointment of Committee		4
	(c)	Powers; Regulations		4

4.	ELIGIBILITY			4

5.	STOCK			5

6.	TERMS AND CONDITIONS OF OPTIONS			5

	(a)	Number of Shares and Type of Option		5
	(b)	Date of Grant		5
	(c)	Option Price		5
	(d)	Duration of Options		5
	(e)	Vesting Schedule and Exercisability of Options		6
	(f)	Acceleration of Vesting		6
	(g)	Term of Option		6
	(h)	Exercise of Options		7
	(i)	Payment upon Exercise of Option		7
	(j)	Rights as a Shareholder		8
	(k)	Transfer of Option		8
	(l)	Securities Regulation and Tax Withholding		9
	(m)	Stock Split, Reorganization or Liquidation		10
	(n)	Approved Transactions; Control Purchase		11

7.	TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS			12

	(a)	Award of Stock Appreciation Rights		12
	(b)	Restrictions of Tandem SARs		12
	(c)	Amount of Payment Upon Exercise of SARs		12
	(d)	Form of Payment Upon Exercise of SARs		12

8.	RESTRICTED STOCK AWARDS			12

	(a)	Nature of Restricted Stock Awards		12
	(b)	Rights as a Shareholder		13
	(c)	Restrictions		13
	(d)	Vesting of Restricted Stock		13
	(e)	Waiver, Deferral and Reinvestment of Dividends		13

9.	UNRESTRICTED STOCK AWARDS			13

	(a)	Grant or Sale of Unrestricted Stock		13
	(b)	Elections to Receive Unrestricted Stock In Lieu of Compensation		13
	(c)	Restrictions on Transfers		14

10.	TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS			14

	(a)	Restricted Stock Unit Agreement		14
	(b)	Number of Shares		14
	(c)	Payment for Awards		14

TABLE OF CONTENTS

(Continued)


			Page

	(d)	Vesting of Restricted Stock Units		14
	(e)	Voting and Dividend Rights		14
	(f)	Form and Time of Settlement of Restricted Stock Units		14
	(g)	Creditors’ Rights		15

11.	SECURITIES REGULATION AND TAX WITHHOLDING			15

12.	STOCK SPLIT, REORGANIZATION OR LIQUIDATION			16

13.	APPROVED TRANSACTIONS; CONTROL PURCHASE			17

14.	EFFECTIVE DATE; TERM			18

15.	NO OBLIGATIONS TO EXERCISE AWARD			18

16.	NO RIGHT TO AWARDS OR TO EMPLOYMENT			18

17.	APPLICATION OF FUNDS			18

18.	INDEMNIFICATION OF COMMITTEE			18

19.	SHAREHOLDERS AGREEMENT			19

20.	NON-EXCLUSIVITY OF THE PLAN			19

21.	EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION			19

22.	AMENDMENT OF PLAN			19

ii.

BSQUARE CORPORATION

2011 INDUCEMENT AWARD PLAN

1.	DEFINITIONS.

Capitalized terms not defined elsewhere in the Plan shall have the following meanings (whether used in the singular or plural).

(a) “Agreement” means a written agreement approved by the Committee evidencing Awards granted under the Plan.

(b) “Approved Transaction” means

(i) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Common Stock for the account of the Company to the public with aggregate proceeds paid to the Company of not less than $10,000,000 (after the deduction of underwriting commissions and offering expenses);

(ii) the acquisition of the Company by another entity by means of merger, consolidation or other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Company for securities of, or consideration issued, or caused to be issued by, the acquiring entity or any of its affiliates, provided, that after such event the shareholders of the Company immediately prior to the event own less than a majority of the outstanding voting equity securities of the surviving entity immediately following the event;

(iii) any liquidation or dissolution of the Company; and

(iv) any sale, lease, exchange or other transfer not in the ordinary course of business (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company.

(c) “Award” means any award granted under the Plan, including Options, Stock Awards, Restricted Stock Units and SARs.

(d) “Awardee” means any person to whom an Award is granted under the Plan (as well as any permitted transferee of an Award).

(e) “Board” means the Board of Directors of the Company.

(f) “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Code shall include any successor section.

(g) “Committee” shall mean the Board, or the committee appointed by the Board pursuant to Section 3(b) of the Plan, if it is administering the Plan.

(h) “Common Stock” means the Common Stock, no par value, of the Company.

(i) “Company” means BSQUARE CORPORATION, a Washington corporation.

(j) “Control Purchase” means any transaction (or series of related transactions) in which any person, corporation or other entity (including any “person” as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored by the Company):

(i) purchases any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer unless by the terms of such offer the offeror, upon consummation thereof, would be the “beneficial owner” (as that term is defined in Rule 13d-3 under the Exchange Act) of less than 30% of the shares of Common Stock then outstanding; or

(ii) becomes the “beneficial owner,” directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company’s securities);

provided, however, that the foregoing shall not constitute a Control Purchase if the transactions or related transactions received the prior approval of a majority of all of the directors of the Company, excluding for such purpose the votes of directors who are directors or officers of, or have a material financial interest in any Person (other than the Company) who is a party to the event specified in either clauses (i) or (ii).

(k) “Date of Grant” means that date the Committee has deemed to be the effective date of the Award for purposes of the Plan.

(l) “Disability” means any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months that renders the Awardee unable to engage in any substantial gainful activity.

(m) “Effective Date” means at the time specified in the resolutions of the Board adopting the Plan, in accordance with Rule 5635(c)(4) of the NASDAQ Listing Rules.

(n) “Employees” means individuals employed by the Company or a Related Corporation.

(o) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Exchange Act shall include any successor section.

(p) “Fair Market Value” means, if the Common Stock is publicly traded, the last sales price (or, if no last sales price is reported, the average of the high bid and low asked prices) for a share of Common Stock on that day (or, if that day is not a trading day, on the next preceding trading day), as reported by the principal exchange on which the Common Stock is listed, or, if the Common Stock is publicly traded but not listed on an exchange, as reported by The Nasdaq Stock Market, or if such prices or quotations are not reported by The Nasdaq Stock Market, as reported by any other available source of prices or quotations selected by the Committee. If the Common Stock is not publicly traded or if the Fair Market Value is not determinable by any of the foregoing means, the Fair Market Value on any day shall be determined in good faith by the Committee on the basis of such considerations as the Committee deems important.

(q) “Immediate Family Member” means a spouse, children or grandchildren of the Optionee.

(r) “Non-Employee Director” has the meaning given to it by Rule 16b-3 promulgated under the Exchange Act of 1934.

(s) “Non-Qualified Stock Option” means an Option that is not an incentive stock option within the meaning of Section 422 of the Code.

(t) “Option” means an option with respect to shares of Common Stock awarded pursuant to Section 6.

(u) “Optionee” means any person to whom an Option is granted under the Plan (as well as any permitted transferee of an Option).

(v) “Plan” means the BSQUARE CORPORATION 2011 Inducement Award Plan.

(w) “Related Corporation” means any corporation (other than the Company) that is a “parent” of the Company or “subsidiary” of the Company, as defined in Rule 405 of the Securities Act.

(x) “Restricted Stock Awards” means Awards granted pursuant to Section 8.

(y) “Restricted Stock Unit” means a bookkeeping entry representing the equivalent of one share of Common Stock, as awarded under the Plan.

(z) “SARs” means Awards granted pursuant to Section 7.

(aa) “Securities Act” means the Securities Act of 1933, as amended from time to time, or any successor statute or statutes thereto. References to any specific section of the Securities Act shall include any successor section.

(bb) “Stock Awards” means Restricted and Unrestricted Stock Awards granted pursuant to Sections 8 and 9, respectively.

(cc) “Unrestricted Stock Awards” means Awards granted pursuant to Section 9.

2.	PURPOSES.

The purposes of the Plan are to retain the services of persons not previously employees or directors of the Company or following a bona fide period of non-employment, as an inducement material to the individuals’ entering into employment with the Company within the meaning of Rule 5635(c)(4) of the NASDAQ Listing Rules, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.

3.	ADMINISTRATION.

(a) Committee.

The Plan shall be administered by the Board unless the Board appoints a separate committee of the board to administer the Plan pursuant to Section 3(b) below. A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members of the Committee and any action so taken shall be fully effective as if it had been taken at a meeting.

(b) Appointment of Committee.

The Board may appoint a committee consisting of two or more of its members to administer the Plan. The committee may consist of solely two or more Non-Employee Directors in accordance with Rule 16b-3 promulgated under the Exchange Act of 1934. The Committee shall have the powers and authority vested in the Board hereunder (including the power and authority to interpret any provision of the Plan or of any Option). The members of any such Committee shall serve at the pleasure of the Board.

(c) Powers; Regulations.

Subject to the provisions of the Plan, and with a view to effecting its purpose, the Committee shall have sole authority, in its absolute discretion, to:

(i) construe and interpret the Plan;

(ii) define the terms used in the Plan;

(iii) prescribe, amend and rescind rules and regulations relating to the Plan;

(iv) correct any defect, supply any omission or reconcile any inconsistency in the Plan;

(v) grant Awards under the Plan;

(vi) determine the individuals to whom Awards shall be granted under the Plan and the type of Award;

(vii) determine the time or times at which Awards shall be granted under the Plan;

(viii) determine the number of shares of Common Stock subject to each Award, the exercise price of each Award, the duration of each Award and the times at which each Award shall become exercisable;

(ix) determine all other terms and conditions of Awards;

(x) adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States; and

(xi) make all other determinations necessary or advisable for the administration of the Plan.

Notwithstanding the foregoing and any other provision of the Plan to the contrary, all Awards must be granted either by a majority of the Company’s independent directors or by the independent compensation committee of the Board within the meaning of Rule 5605(a)(2) of the NASDAQ Listing Rules. All decisions, determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs and beneficiaries.

4.	ELIGIBILITY.

Awards may be granted only to Employees not previously an Employee or member of the Board, or following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company within the meaning of Rule 5635(c)(4) of the NASDAQ Listing Rules.

5.	STOCK.

The Company is authorized to grant up to a total of 250,000 shares of the Company’s authorized but unissued, or reacquired, Common Stock pursuant to Awards under the Plan. The number of shares with respect to which Awards may be granted hereunder is subject to adjustment as set forth herein. In the event that any outstanding Award expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised or forfeited portion of such Award may again be subject to an Award granted to the same Awardee or to a different person eligible under Section 4.

6.	TERMS AND CONDITIONS OF OPTIONS.

Each Option granted under the Plan shall be evidenced by an Agreement. Agreements may contain such provisions, not inconsistent with the Plan, as the Committee, in its discretion, may deem advisable. All Options also shall comply with the following requirements:

(a) Number of Shares and Type of Option.

Each Agreement shall state the number of shares of Common Stock to which it pertains. All Options shall be Non-Qualified Stock Options.

(b) Date of Grant.

Each Agreement shall state the Date of Grant.

(c) Option Price.

Each Agreement shall state the price per share of Common Stock at which it is exercisable. The exercise price shall be fixed by the Committee at whatever price the Committee may determine in the exercise of its sole discretion; provided, however, that the per share exercise price shall not be less than the Fair Market Value at the Date of Grant; and, provided further , that Options granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization involving such other corporation and the Company or any subsidiary of the Company may be granted with an exercise price equal to the exercise price for the substituted option of the other corporation, subject to any adjustment consistent with the terms of the transaction pursuant to which the substitution is to occur.

(d) Duration of Options.

On the Date of Grant, the Committee shall designate, subject to Section 6(g), the expiration date of the Option. In the absence of action to the contrary by the Committee in connection with the grant of an Option, all Options granted under this Section 6 shall expire ten (10) years from the Date of Grant.

(e) Vesting Schedule and Exercisability of Options.

No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Committee at the time of grant of the Option; provided , however , that if no vesting schedule is specified at the time of grant, the Option shall be vested according to the following schedule:


Number of Years of Continuous Employment With the Company Following Grant Date	Portion of Total Option Which Will Become Vested
1		25	%
2		50	%
3		75	%
4		100	%

The Committee may specify a vesting schedule for all or any portion of an Option based on the achievement of performance objectives.

(f) Acceleration of Vesting.

Except to the extent that such acceleration would render unavailable “pooling of interests” accounting treatment for any reorganization, merger or consolidation of the Company, the vesting of one or more outstanding Options may be accelerated by the Board at such times and in such amounts as it shall determine in its sole discretion.

(g) Term of Option.

Any vested Option granted to an Optionee shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events:

(i) as designated by (x) the Board in accordance with Section 6(n) hereof or (y) the Committee in accordance with Section 6(d) hereof;

(ii) the date of the Optionee’s termination of employment or contractual relationship with the Company or any Related Corporation for cause (as determined in the sole discretion of the Committee);

(iii) the expiration of ninety (90) days from the date of the Optionee’s termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than cause, death or Disability unless the exercise period is extended by the Committee a date not later than the expiration date of the Option;

(iv) the expiration of one year from (A) the date of death of the Optionee or (B) cessation of the Optionee’s employment or contractual relationship by reason of Disability unless the exercise period is extended by the Committee until a date not later than the expiration date of the Option; or

(v) any other event specified by the Committee at the time of grant of the Option.

If an Optionee’s employment or contractual relationship is terminated by death, any Option granted to the Optionee shall be exercisable only by the person or persons to whom such Optionee’s rights under such Option shall pass by the Optionee’s will or by the laws of descent and distribution of the state or county of the Optionee’s domicile at the time of death. The Committee shall determine whether an Optionee has incurred a Disability on the basis of medical evidence reasonably acceptable to the Committee. Upon making a determination of Disability, the Committee shall, for purposes of the Plan, determine the date of an Optionee’s termination of employment or contractual relationship.

Unless accelerated in accordance with Section 6(f), any unvested Option granted to an Optionee shall terminate immediately upon termination of employment of the Optionee by the Company for any reason whatsoever, including death or Disability. For purposes of the Plan, transfer of employment between or among the Company and/or any Related Corporation shall not be deemed to constitute a termination of employment with the Company or any Related Corporation.

(h) Exercise of Options.

If less than all of the shares included in an Option are purchased, the remainder may be purchased at any subsequent time prior to the expiration date with respect to, or the termination of, the Option. No portion of any Option may be exercised for less than one hundred (100) shares (as adjusted pursuant to Section 6(m)); provided, however, that if the Option is less than one hundred (100) shares, it may be exercised with respect to all shares for which it is vested. Only whole shares may be issued upon exercise of an Option, and to the extent that an Option covers less than one (1) share, it is unexercisable.

An Option or any portion thereof may be exercised by giving written notice to the Company upon such terms and conditions as the Agreement evidencing the Option may provide and in accordance with such other procedures for the exercise of an Option as the Committee may establish from time to time. Such notice shall be accompanied by payment in the amount of the aggregate exercise price for such shares, which payment shall be in the form specified in Section 6(i). The Company shall not be obligated to issue, transfer or deliver a certificate of Common Stock to the holder of any Option until provision has been made by the holder, to the satisfaction of the Company, for the payment of the aggregate exercise price for all shares for which the Option shall have been exercised and for satisfaction of any tax withholding obligations associated with such exercise. Options granted to an Optionee are, during the Optionee’s lifetime, exercisable only by the Optionee or a transferee who takes title to the Option in the manner permitted by Section 6(k).

(i) Payment upon Exercise of Option.

Upon the exercise of an Option, the Optionee shall pay to the Company the aggregate exercise price therefor in cash, by certified or cashier’s check. In addition, such Optionee may pay for all or any portion of the aggregate exercise price by complying with one or more of the following alternatives:

(1) by delivering to the Company whole shares of Common Stock then owned by such Optionee, or, subject to the prior approval of the Committee, by the Company withholding whole shares of Common Stock otherwise issuable to the Optionee upon exercise of the Option, which shares of Common Stock received or withheld shall be valued for such purpose at their Fair Market Value on the date of exercise.

(2) by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price;

(3) by any combination of the foregoing methods of payment; or

(4) by complying with any other payment mechanism, including through the execution of a promissory note, as may be permitted for the issuance of equity securities under applicable securities and other laws and approved by the Committee at the time of exercise.

(j) Rights as a Shareholder.

An Optionee shall have no rights as a shareholder with respect to any shares of Common Stock issuable upon exercise of the Option until such holder becomes a record holder of such shares. Subject to the provisions of Sections 6(m), no rights shall accrue to an Optionee and no adjustments shall be made on account of dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights declared on, or created in, the Common Stock for which the record date is prior to the date such Optionee becomes a record holder of the shares of Common Stock issuable upon exercise of such Option.

(k) Transfer of Option.

Options granted under the Plan and the rights and privileges conferred by the Plan may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by applicable laws of descent and distribution or pursuant to a domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder), and shall not be subject to execution, attachment or similar process; provided, however , that the Committee may, in its discretion, authorize all or a portion of the Options to be granted to an Optionee to be on terms which permit transfer by such Optionee to:

(i) Immediate Family Members,

(ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or

(iii) a partnership in which such Immediate Family Members are the only partners, provided that:

(x) there may be no consideration for any such transfer,

(y) the Agreement evidencing such Options must be approved by Committee, and must expressly provide for transferability in a manner consistent with this Section, and

(z) subsequent transfers of transferred Options shall be prohibited other than by will, by applicable laws of descent and distribution or pursuant to a domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder).

Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Section 6(l)(2), the term “Optionee” shall be deemed to refer to the initial transferor. The events of termination of employment of Section 6(g) shall continue to be applied with respect to the original Optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods, specified in Section 6(g). Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of any right or privilege conferred by the Plan contrary to the provisions hereof, or upon the sale, levy or any attachment or similar process upon the rights and privileges conferred by the Plan, such Option shall thereupon terminate and become null and void.

(l) Securities Regulation and Tax Withholding.

(1) No shares of Common Stock shall be issued upon exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act, the Exchange Act, the rules and regulations thereunder and the requirements of any stock exchange upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under the Plan, or the unavailability of an exemption from registration for the issuance and sale of any shares under the Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares.

As long as the Common Stock is not registered under the Exchange Act, the Company intends that all offers and sales of Options and shares of Common Stock issuable upon exercise of Options shall be exempt from registration under the provisions of Section 5 of the Securities Act, and the Plan shall be administered in a manner so as to preserve such exemption. The Company also intends that the Plan shall constitute a written compensatory benefit plan, within the meaning of Rule 701(b) promulgated under the Securities Act, and that each Option granted pursuant to the Plan at a time when the Common Stock is not registered under the Exchange Act shall, unless otherwise specified by the Committee at the time the Option is granted or at any time thereafter, be granted in reliance on the exemption from the registration requirements of Section 5 of the Securities Act provided by Rule 701.

As a condition to the exercise of an Option, the Committee may require the Optionee to represent and warrant in writing at the time of such exercise that the shares of Common Stock issuable upon exercise of the Option are being purchased only for investment and without any then-present intention to sell or distribute such shares. At the option of the Committee, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Committee also may require such other documentation as it shall, in its discretion, deem necessary from time to time to comply with federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF ANY OPTION OR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANY OPTION.

(2) The Optionee shall pay to the Company by certified or cashier’s check, promptly upon exercise of the Option or, if later, the date that the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes that the Committee, in accordance with the applicable rules and regulations, determines to result from the exercise of the Option or from a transfer or other disposition of shares of Common Stock acquired upon exercise of the Option or otherwise related to the Option or shares of Common Stock acquired upon exercise of the Option, which determination by the Committee of the amount due shall be binding upon the Optionee. Upon approval of the Committee, such Optionee may satisfy such obligation by complying with one or more of the following alternatives selected by the Committee:

(A) by delivering to the Company whole shares of Common Stock then owned by such Optionee, or by the Company withholding whole shares of Common Stock otherwise issuable to the Optionee upon exercise of the Option, which shares of Common Stock received or withheld shall have a Fair Market Value on the date of exercise (as determined by the Committee in good faith) equal to the tax obligation to be paid by such Optionee upon such exercise;

(B) by executing appropriate loan documents approved by the Committee by which such Optionee borrows funds from the Company to pay the withholding taxes due under this Section 6(l)(2), with such repayment terms as the Committee shall select;

(C) by any combination of the foregoing methods of payment; or

(D) by complying with any other payment mechanism as may be permitted for the issuance of equity securities under applicable securities and other laws and approved by the Committee from time to time.

(3) The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of an Option may be delayed, at the discretion of the Committee, until the Committee is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met.

(m) Stock Split, Reorganization or Liquidation.

(1) Upon the occurrence of any of the following events, the Committee shall, with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Option, the per share exercise price or both so as to preserve the rights of the Optionee substantially proportionate to the rights of such Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Options, the number of shares available under Section 5 shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company’s shareholders, or any Optionee:

(i) the Company shall at any time be involved in a transaction described in Section 424(a) of the Code (or any successor provision) or any “corporate transaction” described in the regulations promulgated thereunder;

(ii) the Company subdivides its outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock dividend, stock split, reclassification or otherwise) or combines its outstanding shares of Common Stock into a smaller number of shares of Common Stock (by reverse stock split, reclassification or otherwise); or

(iii) any other event with substantially the same effect shall occur.

(2) If the Company shall at any time declare an extraordinary dividend with respect to the Common Stock, whether payable in cash or other property, or is involved in any recapitalization, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock, or other similar event (including a merger or consolidation other than one that constitutes an Approved Transaction), the Committee may, in the exercise of its sole discretion and with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Option, the per share exercise price or both so as to preserve the rights of the Optionee substantially proportionate to the rights of such Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Options, the number of shares available under Section 5 of the Plan shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company’s shareholders, or any Optionee.

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(3) The foregoing adjustments shall be made by the Committee or by the applicable terms of any assumption or substitution document.

(4) With respect to the foregoing adjustments, the number of shares subject to an Option shall always be a whole number. The Committee may, if deemed appropriate, provide for a cash payment to any Optionee in connection with any adjustment made pursuant to this Section 6(m).

(5) The grant of an Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or any part of its business or assets.

(n) Approved Transactions; Control Purchase.

In the event of any Approved Transaction or Control Purchase, if so provided for in the Agreement representing such Option, an Option may become exercisable in full in respect of the aggregate number of shares thereunder effective upon the Control Purchase or immediately prior to consummation of the Approved Transaction. In the case of an Approved Transaction, the Company shall provide notice of the pendency of the Approved Transaction at least fifteen (15) days prior to the expected date of consummation thereof to each Optionee entitled to acceleration. Each such Optionee shall thereupon be entitled to exercise the vested portion of the Option at any time prior to consummation of the Approved Transaction or immediately following the Control Purchase. Any such exercise shall be contingent on such consummation.

Following consummation of the Approved Transaction or Control Purchase, and until such Option is terminated pursuant to Section 6(g) hereof, any vested portion of Options that are not exercised shall remain exercisable, and any unvested portions of any Options shall remain in effect and continue to vest in accordance with the vesting schedule specified at the time of grant, and upon such vesting shall become exercisable. Notwithstanding the foregoing, in its reasonable discretion, the Board may determine that any or all outstanding Options that are unvested at the time of, or are not exercised upon consummation of, the Approved Transaction or Control Purchase shall thereafter terminate, provided that, in making such determination, the Board shall consider the best interests of the Optionees, the Company and its shareholders, and will make such determination only if the action to be taken, in the opinion of the Board, is appropriate in light of the circumstances under which such determination is made.

Moreover, except to the extent that such determination would render unavailable “pooling of interests” accounting treatment for any reorganization, merger or consolidation of the Company, the Board may take, or make effective provision for the taking of, such action as in the opinion of the Board is equitable and appropriate in order to substitute new stock options for any or all outstanding Options that do not become exercisable on an accelerated basis, or to assume such Options (which assumption may be effected by any means determined by the Board, in its discretion, including, but not limited to, by a cash payment to each Optionee, in cancellation of the Options held by him or her, of such amount as the Board determines, in its sole discretion, represents the then value of the Options) and in order to make such new stock options or assumed Options, as nearly as practicable, equivalent to the old Options, taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Common Stock may be changed, converted or exchanged in connection with the Approved Transaction.

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7.	TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.

(a) Award of Stock Appreciation Rights.

Stock appreciation rights (“SARs”) may be granted to eligible participants, either on a free-standing basis (without regard to or in addition to the grant of an Option) or on a tandem basis (related to the grant of an underlying Option). SARs granted in tandem with or in addition to an Option may be granted either at the same time as the Option or at a later time. SARs shall be evidenced by Agreements stating the number of shares of Common Stock subject to the SAR evidenced thereby and the terms and conditions of such SAR. In no event shall a SAR be exercisable more than ten years from the date it is granted . The Awardee shall have none of the rights of a shareholder of the Company with respect to any shares of Common Stock represented by a SAR.

(b) Restrictions of Tandem SARs.

SARs granted in tandem with Options shall be exercisable only to the same extent and subject to the same conditions as the Options related thereto are exercisable. Additional conditions to the exercise of any such tandem SAR may be prescribed.

(c) Amount of Payment Upon Exercise of SARs.

A SAR shall entitle the Awardee to receive, subject to the provisions of the Plan and the applicable Agreement, a payment having an aggregate value equal to the product of (i) the excess of (A) the Fair Market Value on the exercise date of one share of Common Stock over (B) the base price per share specified in the applicable Agreement, times (ii) the number of shares specified by the SAR, or portion thereof, which is exercised. In the case of exercise of a tandem SAR, such payment shall be made in exchange for the surrender of the unexercised related Option (or any portion or portions thereof which the Awardee from time to time determines to surrender for this purpose).

(d) Form of Payment Upon Exercise of SARs.

Payment by the Company of the amount receivable upon any exercise of a SAR may be made by the delivery of Common Stock or cash, or any combination of Common Stock and cash, as determined in the sole discretion of the Committee from time to time. If upon settlement of the exercise of a SAR an Awardee is to receive a portion of such payment in shares of Common Stock, the number of shares shall be determined by dividing such portion by the Fair Market Value of a share of Common Stock on the exercise date. No fractional shares shall be used for such payment and the Committee shall determine whether cash shall be given in lieu of such fractional shares or whether such fractional shares shall be eliminated.

8.	RESTRICTED STOCK AWARDS.

(a) Nature of Restricted Stock Awards.

A Restricted Stock Award is an Award pursuant to which the Company may, in its sole discretion, grant or sell, at such purchase price as determined by the Committee, in its sole discretion, shares of Common Stock subject to such restrictions and conditions as the Committee may determine at the time of grant (“Restricted Stock”), which purchase price shall be payable in cash or other form of consideration acceptable to the Committee. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The terms and conditions of each such Agreement shall be determined by the Committee, and such terms and conditions may differ among individual Awards and Awardees.

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(b) Rights as a Shareholder.

Upon execution of an Agreement setting forth the Restricted Stock Award and payment of any applicable purchase price, an Awardee shall have the rights of a shareholder with respect to the voting of the Restricted Stock, subject to such conditions contained in the applicable Agreement. Unless the Committee shall otherwise determine, certificates evidencing the Restricted Stock shall remain in the possession of the Company until such Restricted Stock is vested as provided in Section 8(d) below, and the Awardee shall be required, as a condition of the grant, to deliver to the Company a stock power endorsed in blank.

(c) Restrictions.

Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the applicable Agreement. If an Awardee’s employment (or other service relationship) with the Company terminates under the conditions specified in the applicable Agreement, or upon such other event or events as may be stated in the applicable Agreement, the Company or its assigns shall have the right or shall agree, as may be specified in the applicable Agreement, to repurchase some or all of the shares of Common Stock subject to the Award at such purchase price as is set forth in such instrument.

(d) Vesting of Restricted Stock.

The Committee at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which Restricted Stock shall become vested, subject to such further rights of the Company or its assigns as may be specified in the applicable Agreement.

(e) Waiver, Deferral and Reinvestment of Dividends.

The Restricted Stock Award Agreement may require or permit the immediate payment, waiver, deferral or investment of dividends paid on the Restricted Stock.

9.	UNRESTRICTED STOCK AWARDS.

(a) Grant or Sale of Unrestricted Stock.

The Committee may, in its sole discretion, grant (or sell at a purchase price determined by the Committee) an Unrestricted Stock Award to any Awardee, pursuant to which such Awardee may receive shares of Common Stock free of any vesting restrictions (“Unrestricted Stock”) under the Plan. Unrestricted Stock Awards may be granted or sold as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such individual.

(b) Elections to Receive Unrestricted Stock In Lieu of Compensation.

Upon the request of an Awardee and with the consent of the Committee, each such Awardee may, pursuant to an advance written election delivered to the Company no later than the date specified by the Committee, receive a portion of the cash compensation otherwise due to such Awardee in the form of shares of Unrestricted Stock either currently or on a deferred basis.

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(c) Restrictions on Transfers.

The right to receive shares of Unrestricted Stock on a deferred basis may not be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution.

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TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS.

(a) Restricted Stock Unit Agreement.

Each grant of Restricted Stock Units under the Plan shall be evidenced by an Agreement between the recipient and the Company. Such Restricted Stock Units shall be subject to the terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Agreements evidencing Restricted Stock Units under the Plan need not be identical.

(b) Number of Shares.

Each Agreement evidencing a Restricted Stock Unit shall specify the number of shares of Common Stock to which the Restricted Stock Unit pertains and shall provide for the adjustment of such number in accordance with Section 12.

(c) Payment for Awards.

To the extent that an Award is granted in the form of Restricted Stock Units, no cash consideration shall be required of the Awardee.

(d) Vesting of Restricted Stock Units.

The Committee at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which the Restricted Stock Unit shall become vested, subject to such further rights of the Company or its assigns as may be specified in the applicable Agreement.

(e) Voting and Dividend Rights.

The holders of Restricted Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Restricted Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one share of Common Stock while the Restricted Stock Unit is outstanding. Dividend equivalents may be converted into additional Restricted Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of shares of Common Stock, or in a combination of both. Prior to distribution, any dividend equivalents that are not paid shall be subject to the same conditions and restrictions as the Restricted Stock Units to which they attach.

(f) Form and Time of Settlement of Restricted Stock Units.

Settlement of vested Restricted Stock Units may be made in the form of (a) cash, (b) shares of Common Stock or (c) any combination of both, as determined by the Committee. The actual number of Restricted Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Restricted Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of shares of Common Stock over a series of trading days. Vested Restricted Stock Units may be settled in a lump

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sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Restricted Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Restricted Stock Units is settled, the number of such Restricted Stock Units shall be subject to adjustment pursuant to Section 12.

(g) Creditors’ Rights.

A holder of Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Restricted Stock Agreement.

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SECURITIES REGULATION AND TAX WITHHOLDING.

(a) No shares of Common Stock shall be issued upon exercise of an Award unless the exercise of such Award and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act, the Exchange Act, the rules and regulations thereunder and the requirements of any stock exchange upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under the Plan, or the unavailability of an exemption from registration for the issuance and sale of any shares under the Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares.

As long as the Common Stock is not registered under the Exchange Act, the Company intends that all offers and sales of Awards and shares of Common Stock issuable upon exercise of Awards shall be exempt from registration under the provisions of Section 5 of the Securities Act, and the Plan shall be administered in a manner so as to preserve such exemption. The Company also intends that the Plan shall constitute a written compensatory benefit plan, within the meaning of Rule 701(b) promulgated under the Securities Act, and that each Award granted pursuant to the Plan at a time when the Common Stock is not registered under the Exchange Act shall, unless otherwise specified by the Committee at the time the Award is granted or at any time thereafter, be granted in reliance on the exemption from the registration requirements of Section 5 of the Securities Act provided by Rule 701.

As a condition to the exercise of an Award, the Committee may require the Awardee to represent and warrant in writing at the time of such exercise that the shares of Common Stock issuable upon exercise of the Award are being purchased only for investment and without any then-present intention to sell or distribute such shares. At the option of the Committee, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Committee also may require such other documentation as it shall, in its discretion, deem necessary from time to time to comply with federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF ANY AWARD OR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANY AWARD.

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(b) The Awardee shall pay to the Company by certified or cashier’s check, promptly upon exercise of the Award or, if later, the date that the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes that the Committee, in accordance with the applicable rules and regulations, determines to result from the exercise of the Award or from a transfer or other disposition of shares of Common Stock acquired upon exercise of the Award or otherwise related to the Award or shares of Common Stock acquired upon exercise of the Award, which determination by the Committee of the amount due shall be binding upon the Awardee. Upon approval of the Committee, such Awardee may satisfy such obligation by complying with one or more of the following alternatives selected by the Committee:

(i) by delivering to the Company whole shares of Common Stock then owned by such Awardee, or by the Company withholding whole shares of Common Stock otherwise issuable to the Awardee upon exercise of the Award, which shares of Common Stock received or withheld shall have a Fair Market Value on the date of exercise (as determined by the Committee in good faith) equal to the tax obligation to be paid by such Awardee upon such exercise;

(ii) by executing appropriate loan documents approved by the Committee by which such Awardee borrows funds from the Company to pay the withholding taxes due under this Section 11, with such repayment terms as the Committee shall select;

(iii) by any combination of the foregoing methods of payment; or

(iv) by complying with any other payment mechanism as may be permitted for the issuance of equity securities under applicable securities and other laws and approved by the Committee from time to time.

(c) The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of an Award may be delayed, at the discretion of the Committee, until the Committee is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met.

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STOCK SPLIT, REORGANIZATION OR LIQUIDATION.

(a) Upon the occurrence of any of the following events, the Committee shall, with respect to each outstanding Award, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Award, the per share exercise price or both so as to preserve the rights of the Awardee substantially proportionate to the rights of such Awardee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Awards, the number of shares available under Section 5 shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company’s shareholders, or any Awardee:

(iii) any other event with substantially the same effect shall occur.

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(b) If the Company shall at any time declare an extraordinary dividend with respect to the Common Stock, whether payable in cash or other property, or is involved in any recapitalization, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock, or other similar event (including a merger or consolidation other than one that constitutes an Approved Transaction), the Committee may, in the exercise of its sole discretion and with respect to each outstanding Award, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Award, the per share exercise price or both so as to preserve the rights of the Awardee substantially proportionate to the rights of such Awardee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Awards, the number of shares available under Section 5 of the Plan shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company’s shareholders, or any Awardee.

(c) The foregoing adjustments shall be made by the Committee or by the applicable terms of any assumption or substitution document.

(d) With respect to the foregoing adjustments, the number of shares subject to an Award shall always be a whole number. The Committee may, if deemed appropriate, provide for a cash payment to any Awardee in connection with any adjustment made pursuant to this Section 12.

(e) The grant of an Award shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or any part of its business or assets.

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APPROVED TRANSACTIONS; CONTROL PURCHASE.

In the event of any Approved Transaction or Control Purchase, if so provided for in the Agreement representing such Award, an Award may become exercisable in full in respect of the aggregate number of shares thereunder effective upon the Control Purchase or immediately prior to consummation of the Approved Transaction. In the case of an Approved Transaction, the Company shall provide notice of the pendency of the Approved Transaction at least fifteen (15) days prior to the expected date of consummation thereof to each Awardee entitled to acceleration. Each such Awardee shall thereupon be entitled to exercise the vested portion of the Award at any time prior to consummation of the Approved Transaction or immediately following the Control Purchase. Any such exercise shall be contingent on such consummation.

Following consummation of the Approved Transaction or Control Purchase, and until such Award is terminated, any vested portion of Awards that are not exercised shall remain exercisable, and any unvested portions of any Awards shall remain in effect and continue to vest in accordance with the vesting schedule specified at the time of grant, and upon such vesting shall become exercisable. Notwithstanding the foregoing, in its reasonable discretion, the Board may determine that any or all outstanding Awards that are unvested at the time of, or are not exercised upon consummation of, the Approved Transaction or Control Purchase shall thereafter terminate, provided that, in making such determination, the Board shall consider the best interests of the Awardees, the Company and its shareholders, and will make such determination only if the action to be taken, in the opinion of the Board, is appropriate in light of the circumstances under which such determination is made.

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by any means determined by the Board, in its discretion, including, but not limited to, by a cash payment to each Awardee, in cancellation of the Awards held by him or her, of such amount as the Board determines, in its sole discretion, represents the then value of the Awards) and in order to make such new stock options or assumed Awards, as nearly as practicable, equivalent to the old Awards, taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Common Stock may be changed, converted or exchanged in connection with the Approved Transaction.

14.

EFFECTIVE DATE; TERM.

The Plan shall be on the Effective Date. Awards may be granted by the Committee from time to time thereafter until the Plan is terminated. Termination of the Plan shall not terminate any Award granted prior to such termination. Issuance of Non-Qualified Stock Options under the Plan shall be subject to the requirement of RCW 21.20.310(10) that the Administrator of Securities of the Department of Financial Institutions of the State of Washington be provided with notification of the adoption of the Plan. No Non-Qualified Stock Option shall be granted hereunder until this notification requirement has been satisfied.

15.

NO OBLIGATIONS TO EXERCISE AWARD.

The grant of an Award shall impose no obligation upon the Awardee to exercise such Award.

16.

NO RIGHT TO AWARDS OR TO EMPLOYMENT.

Whether or not any Awards are to be granted under the Plan shall be exclusively within the discretion of the Committee, and nothing contained in the Plan shall be construed as giving any person any right to participate under the Plan. The grant of an Award to any Awardee shall in no way constitute any form of agreement or understanding binding on the Company or any Related Corporation, express or implied, that the Company or such Related Corporation will employ or contract with such Awardee for any length of time, nor shall it interfere in any way with the Company’s or, where applicable, a Related Corporation’s right to terminate such Awardee’s employment at any time, which right is hereby reserved.

17.

APPLICATION OF FUNDS.

The proceeds received by the Company from the sale of Common Stock issued upon the exercise of Awards shall be used for general corporate purposes, unless otherwise directed by the Board.

18.

INDEMNIFICATION OF COMMITTEE.

In addition to all other rights of indemnification they may have by virtue of being a member of the Board or an executive officer of the Company, members of the Committee shall be indemnified by the Company for all reasonable expenses and liabilities of any type or nature, including attorneys’ fees, incurred in connection with any action, suit or proceeding to which they or any of them are a party by reason of, or in connection with, the Plan or any Award granted under the Plan, and against all amounts paid by them in settlement thereof (provided that such settlement is approved by independent legal counsel selected by the Company), except to the extent that such expenses relate to matters for which it is adjudged that such Committee member is liable for willful misconduct; provided, however, that within fifteen (15) days after the institution of any such action, suit or proceeding, the Committee member involved therein shall, in writing, notify the Company of such action, suit or proceeding, so that the Company may have the opportunity to make appropriate arrangements to prosecute or defend the same.

18.

19.

SHAREHOLDERS AGREEMENT.

Unless the Agreement evidencing an Award expressly provides otherwise, each Awardee may be required, as a condition to the issuance of any shares of Common Stock that such Awardee acquires upon the exercise of the Award, to execute and deliver to the Company a shareholders agreement in such form as may be required by the Company at the time of such exercise, or a counterpart thereof, together with, unless the Awardee is unmarried, a spousal consent in the form required thereby, unless the Awardee has previously executed and delivered such documents and they are in effect at the time of exercise and apply by their terms to the shares to be issued.

20.

NON-EXCLUSIVITY OF THE PLAN.

The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than pursuant to the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

21.

EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION.

By acceptance of an Award, unless otherwise provided in the Agreement evidencing the Award, the Awardee with respect to such Award shall be deemed to have agreed that the Award is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment or other benefit under any pension, retirement or other employee benefit plan, program or policy of the Company or any of its affiliates.

22.

AMENDMENT OF PLAN.

The Board may, at any time, modify, amend or terminate the Plan or modify or amend any Award granted pursuant to the Plan, including, without limitation, such modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; provided, however , that no amendment with respect to an outstanding Award which has the effect of reducing the benefits afforded to the Awardee shall be made over the objection of such Awardee; further provided , that the events triggering acceleration of vesting of an outstanding Award may be modified, expanded or eliminated without the consent of the Awardee. The Board may condition the effectiveness of any such amendment on the receipt of shareholder approval at such time and in such manner as the Committee may consider necessary for the Company to comply with or to avail the Company, the Awardees or both of the benefits of any securities, tax, market listing or other administrative or regulatory requirement which the Board determines to be desirable. Without limiting the generality of the foregoing, the Board may modify grants to persons who are eligible to receive Awards under the Plan who are foreign nationals or employed outside the United States to recognize differences in local law, tax policy or custom.

Date Plan was Approved by Board of Directors of Company: September 6, 2011

19.

Exhibit 10.1(a)

THIS OPTION AGREEMENT MAY NOT BE TRANSFERRED EXCEPT BY WILL OR UNDER THE LAWS OF DESCENT AND DISTRIBUTION OR PURSUANT TO A QUALIFIED DOMESTIC RELATIONS ORDER.

BSQUARE CORPORATION

2011 INDUCEMENT AWARD PLAN

NON-QUALIFIED STOCK OPTION AGREEMENT

THIS AGREEMENT is entered into as of the <date> day of <month>, [ ] (the “Date of Grant”) between BSQUARE CORPORATION, a Washington corporation (the “Company”), and <Optionee’s Name> (the “Optionee”).

RECITALS:

A. The Company has approved and adopted the BSQUARE CORPORATION 2011 Inducement Award Plan (the “Plan”), pursuant to which the Company is authorized to grant to persons not previously employees or directors of the Company, or following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company (such persons, “Employees”) options to purchase shares of the Company’s common stock, no par value (the “Common Stock”);

B. The Optionee is an Employee;

C. The options granted hereunder are intended to qualify as Non-Qualified Stock Options which are not incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”);

D. Capitalized terms used herein and not otherwise defined shall have the definitions given to them in the Plan.

AGREEMENT:

NOW, THEREFORE, the Company hereby grants to the Optionee the option to purchase, upon the terms and conditions set forth herein and in the Plan, <# of Options> shares of Common Stock (the “Option”).

1. EXERCISE PRICE .

The exercise price for the Option shall be $<Price> per share, which is not less than 100 percent of the Fair Market Value of the Common Stock on the Date of Grant.

2. VESTING SCHEDULE .

No Option shall be exercisable until it has vested. The Option shall be vested according to the following schedule: Option vests [1/16 each quarter] from <Base Date>.

3. TERM OF OPTIONS

All Options granted under this Agreement shall expire ten (10) years from the Date of Grant.

4. OPTION NOT TRANSFERABLE .

The Option may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by the applicable laws of descent and distribution or pursuant to any qualified domestic relations order, and shall not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Option or of any right or privilege conferred hereby contrary to the provisions hereof, or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, the Option shall thereupon terminate and become null and void.

5. INVESTMENT INTENT .

By accepting the Option, the Optionee represents and agrees, for the Optionee and all persons who acquire rights in the Option through the Optionee, that none of the shares of Common Stock purchased upon exercise of the Option will be distributed in violation of applicable federal and state laws and regulations. If requested by the Company, the Optionee shall furnish evidence satisfactory to the Company (including a written and signed representation letter and a consent to be bound by all transfer restrictions imposed by applicable law, legend condition or otherwise) to that effect, before delivery of the purchased shares of Common Stock.

6. TERMINATION OF OPTION .

Any vested Option granted to an Optionee shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events:

(a) as designated by (x) the Board in accordance with Section 6(n) of the Plan or (y) the Committee in accordance with Section 6(d) of the Plan;

(b) the date of the Optionee’s termination of employment or contractual relationship with the Company or any Related Corporation for cause (as determined in the sole discretion of the Committee);

(c) the expiration of ninety (90) days from the date of the Optionee’s termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than cause, death or Disability unless the exercise period is extended by the Committee a date not later than the expiration date of the Option;

(d) the expiration of one year from (A) the date of death of the Optionee or (B) cessation of the Optionee’s employment or contractual relationship by reason of Disability unless the exercise period is extended by the Committee until a date not later than the expiration date of the Option; or

(e) any other event specified by the Committee at the time of grant of the Option.

Unless accelerated in accordance with Section 6(f) of the Plan, any unvested Option granted to an Optionee shall terminate immediately upon termination of employment of the Optionee by the Company for any reason whatsoever, including death or Disability. For purposes of the Plan, transfer of employment between or among the Company and/or any Related Corporation shall not be deemed to constitute a termination of employment with the Company or any Related Corporation.

7. STOCK .

In the case of any stock split, stock dividend or like change in the nature of shares granted by this Agreement, the number of shares and option price shall be proportionately adjusted as set forth in Section 6(m) of the Plan.

8. EXERCISE OF OPTION .

Each exercise of the Option shall be by means of delivery of a Notice of Election to Exercise (which may be in the form attached hereto as Exhibit A ) to the Secretary of the Company at its principal executive office, specifying the number of shares of Common Stock to be purchased and accompanied by payment in cash, or by certified or cashier’s check payable to the order of the Company, of the full exercise price for the Common Stock to be purchased. Upon approval of the Committee, the Optionee may pay for all or any portion of the exercise price by (i) delivery of already held shares of Common Stock, (ii) having shares withheld from the amount of shares of Common Stock to be received by the Optionee upon exercise of the Option or (iii) execution and delivery of appropriate loan documents approved by the Committee. The shares of Common Stock received or withheld by the Company as payment shall have a Fair Market Value equal to or greater than the aggregate exercise price to be paid by the Optionee upon such exercise. The Optionee agrees to also pay to the Company the amount necessary for the Company to satisfy its federal, state, local and foreign withholding obligations.

9. OPTIONEE ACKNOWLEDGMENTS .

The Optionee acknowledges that he or she has read and understands the terms of this Agreement and the Plan, and that:

(a) The issuance of shares of Common Stock pursuant to the exercise of the Option, and any resale of the shares of Common Stock, may only be effected in compliance with applicable state and federal laws and regulations and that the Optionee may be required to execute and deliver representations and warranties to that effect prior to the exercise of any portion of the Option;

(b) The Optionee is not entitled to any rights as a shareholder with respect to any shares of Common Stock issuable hereunder until the Optionee becomes a shareholder of record;

(c) The shares of Common Stock subject hereto may be adjusted in the event of certain changes in the capital structure of the Company or for any other reason required or permitted by the Plan;

(d) As a condition to the exercise of the Option, the Optionee may be required to make such arrangements as the Committee requires for the satisfaction of any federal, state or local withholding tax obligations; and

(e) This Agreement does not constitute an employment agreement nor does it entitle the Optionee to any specific employment or to employment for a period of time and that the Optionee’s continued employment, if any, with the Company shall be at will and is subject to termination in accordance with the Company’s prevailing policies and any other agreement between the Optionee and the Company.

10. PROFESSIONAL ADVICE . The acceptance and exercise of the Option and the sale of Common Stock issued pursuant to the exercise of the Option may have consequences under federal and state tax and securities laws which may vary depending on the individual circumstances of the Optionee. Accordingly, the Optionee acknowledges that the Optionee has been advised to consult his or her personal legal and tax advisor in connection with this Agreement and the Optionee’s dealings with respect to the Option or the Common Stock.

11. NOTICES . Any notice required or permitted to be made or given hereunder shall be mailed or delivered personally to the addresses set forth below, or as changed from time to time by written notice to the other:


Company:		BSQUARE CORPORATION 110 110th Avenue SE Suite 200 Bellevue, Washington 98004 Attention: Secretary

Optionee:		<Optionee Name> <Optionee Address> <Optionee Address>

12. AGREEMENT SUBJECT TO PLAN . The Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. A copy of the Plan previously has been delivered to the Optionee. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. This Agreement and the Plan comprise the entire understanding between the Company and the Optionee with respect to the Option and shall be construed and enforced under the laws of the State of Washington.

IN WITNESS WHEREOF, clicking the “Accept” button along with the electronic signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement.


OPTIONEE	BSQUARE CORPORATION

	By:	/s/ Brian T. Crowley
Signature		Brian T. Crowley, CEO


Name Typed or Printed

Exhibit A

Notice of Election to Exercise

This Notice of Election to Exercise shall constitute proper notice pursuant to Section 6(h) of the BSQUARE CORPORATION 2011 Inducement Award Plan (the “Plan”) and Section 8 of that certain Non-Qualified Stock Option Agreement (the “Agreement”) dated as of between BSQUARE CORPORATION (the “Company”) and the undersigned.

The undersigned hereby elects to exercise the Optionee’s option to purchase shares of the Company’s common stock, no par value, at a purchase price of $ per share, for aggregate consideration of $ , on the terms and conditions set forth in the Agreement and the Plan. Such aggregate consideration, in the form specified in Section 8 of the Agreement, accompanies this Notice.

The undersigned has executed this Notice this day of , .

Name Typed or Printed

Signature

Exhibit 10.2


Amendment Number:		3
Amendment Date:		October 1, 2011
COMPANY Name:		BSQUARE CORPORATION (MOBILITY – AMERICAS)
MS Agreement Number:		5161440075
Agreement Effective Date:		November 1, 2009

AMENDMENT TO THE

MICROSOFT OEM WINDOWS MOBILE DISTRIBUTION AGREEMENT

Effective as of the Amendment Date indicated above, the below signed parties agree that the indicated portions of the above referenced agreement (the “Agreement”) are amended by this instrument (the “Amendment”), as follows:

The End Date of the Agreement is hereby amended to read: “June 30, 2012”

All capitalized terms used but not defined in this Amendment have the meanings ascribed to them in the Agreement. The terms of this Amendment supersede any inconsistent terms contained in the Agreement.

IN WITNESS WHEREOF, the parties have executed this Amendment in duplicate as of the date first written above. All signed copies of this Amendment are to be deemed originals. This Amendment is executed only in the English language.


MICROSOFT LICENSING, GP		BSQUARE CORPORATION (MOBILITY – AMERICAS)

A general partnership organized under the laws of: State of Nevada, U.S.A.		A company organized under the laws of: State of Washington, U.S.A.

By:	/s/ Sal Onas	By:	/s/ Scott Mahan
	(signature)		(signature)

Name:	Sal Onas	Name:	Scott Mahan
	(printed)		(printed)

Title:	Sr. Program Manager	Title:	Chief Financial Officer
	(printed)		(printed)

Date:	October 27, 2011	Date:	October 27, 2011


		CONFIDENTIAL


58624v4 06/03/04 Amendment to Other Agreement - MSLGP/MIOL/MCCL
		Form 2.8.24
		Document Tracking Number: 5140520081-7

Exhibit 10.3


Amendment Number:		3
Amendment Date:		October 1, 2011
COMPANY Name:		BSQUARE CORPORATION (MOBILITY - JAPAN)
MS Agreement Number:		5161440077
Agreement Effective Date:		November 1, 2009

AMENDMENT TO THE

MICROSOFT OEM WINDOWS MOBILE DISTRIBUTION AGREEMENT

Section 13(a) is deleted in its entirety and replaced as follows:

(a)

This Agreement is effective from the Start Date until June 30, 2012.


MICROSOFT LICENSING, GP		BSQUARE CORPORATION (MOBILITY – JAPAN)
A general partnership organized under the laws of: State of Nevada, U.S.A.		A company organized under the laws of: State of Washington, U.S.A

By:	/s/ Sal Onas	By:	/s/ Scott Mahan
	(signature)		(signature)

Name:	Sal Onas	Name:	Scott Mahan
	(printed)		(printed)

Title:	Sr. Program Manager	Title:	Chief Financial Officer
	(printed)		(printed)

Date:	October 27, 2011	Date:	October 27, 2011


		CONFIDENTIAL


58624v4 06/03/04 Amendment to Other Agreement - MSLGP/MIOL/MCCL
		Form 2.8.24
		Document Tracking Number: 5140520082-3

Exhibit 10.4


Amendment Number:		3
Amendment Date:		October 1, 2011
COMPANY Name:		BSQUARE CORPORATION (MOBILITY – ASIA)
MS Agreement Number:		5161440076
Agreement Effective Date:		November 1, 2009

AMENDMENT TO THE

MICROSOFT OEM WINDOWS MOBILE DISTRIBUTION AGREEMENT

Section 13(a) is deleted in its entirety and replaced as follows:

(a)

This Agreement is effective from the Start Date until January 31, 2012.


MICROSOFT LICENSING, GP A general partnership organized under the laws of: State of Nevada, U.S.A.		BSQUARE CORPORATION (MOBILITY - ASIA) A company organized under the laws of: State of Washington, U.S.A

By:	/s/ Sal Onas	By:	/s/ Scott Mahan
	(signature)		(signature)

Name:	Sal Onas	Name:	Scott Mahan
	(printed)		(printed)

Title:	Sr. Program Manager	Title:	Chief Financial Officer
	(printed)		(printed)

Date:	October 27, 2011	Date:	October 27, 2011


		CONFIDENTIAL


58624v4 06/03/04 Amendment to Other Agreement – MSLGP/MIOL/MCCL
		Form 2.8.24
		Document Tracking Number: 5140520084-7

Exhibit 10.5


Amendment Number:		3
Amendment Date:		October 1, 2011
COMPANY Name:		BSQUARE CORPORATION (MOBILITY – EUROPE, MIDDLE EAST, AFRICA)
MS Agreement Number:		5161440085
Agreement Effective Date:		November 1, 2009

AMENDMENT TO THE

MICROSOFT OEM WINDOWS MOBILE DISTRIBUTION AGREEMENT

Section 13(a) is deleted in its entirety and replaced as follows:

(a)

This Agreement is effective from the Start Date until June 30, 2012.


MICROSOFT IRELAND OPERATIONS LIMITED A general partnership organized under the laws of: Ireland.		BSQUARE CORPORATION (MOBILITY - EUROPE, MIDDLE EAST, AFRICA) A company organized under the laws of: State of Washington, U.S.A

By:	/s/ Louise Heaney	By:	/s/ Scott Mahan
	(signature)		(signature)

Name:	Louise Heaney	Name:	Scott Mahan
	(printed)		(printed)

Title:	Processor	Title:	Chief Financial Officer
	(printed)		(printed)

Date:	November 1, 2011	Date:	October 31, 2011


		CONFIDENTIAL


58624v4 06/03/04 Amendment to Other Agreement - MSLGP/MIOL/MCCL
		Form 2.8.24
		Document Tracking Number: 5140520083-5

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

RULE 13(a)-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Brian T. Crowley, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of BSQUARE Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Dated: November 10, 2011								/s/ Brian T. Crowley
								Brian T. Crowley
								President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

RULE 13(a)-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Scott C. Mahan, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of BSQUARE Corporation;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Dated: November 10, 2011								/s/ Scott C. Mahan
								Scott C. Mahan
								Vice President, Finance and Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Brian T. Crowley, President and Chief Executive Officer, certify that:

1. To my knowledge, this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. To my knowledge, the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of BSQUARE Corporation.


Dated: November 10, 2011								/s/ Brian T. Crowley
								Brian T. Crowley
								President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Scott C. Mahan, Vice President, Finance and Chief Financial Officer, certify that:

1. To my knowledge, this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. To my knowledge, the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of BSQUARE Corporation.


Dated: November 10, 2011								/s/ Scott C. Mahan
								Scott C. Mahan
								Vice President, Finance and Chief Financial Officer

Large accelerated filer

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Smaller reporting company