BSQUARE CORP /WA (Form: 10-Q, Received: 08/09/2012 16:19:56)

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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 June 30, 2012

¨	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 July 31, 2012: 10,964,573

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2012

TABLE OF CONTENTS


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

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	June 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	10,515		$	8,505
Short-term investments		9,402			9,619
Accounts receivable, net of allowance for doubtful accounts of $366 at June 30, 2012 and $311 at December 31, 2011		15,013			13,403
Deferred tax assets		344			520
Prepaid expenses and other current assets		1,168			1,281

Total current assets		36,442			33,328
Equipment, furniture and leasehold improvements, net		895			1,037
Intangible assets, net		1,214			1,390
Restricted cash		875			875
Deferred tax assets		2,537			2,302
Goodwill		3,738			3,738
Other non-current assets		125			122

Total assets	$	45,826		$	42,792

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Third-party software fees payable	$	10,683		$	8,460
Accounts payable		338			695
Accrued compensation		2,429			2,645
Other accrued expenses and liabilities		2,666			2,330
Deferred revenue		1,790			1,233

Total current liabilities		17,906			15,363
Deferred rent		178			184
Long-term tax liability		211			210
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; 10,947,478 shares issued and outstanding at June 30, 2012 and 10,874,050 shares issued and outstanding at December 31, 2011		128,203			127,318
Accumulated other comprehensive loss		(630	)		(631	)
Accumulated deficit		(100,042	)		(99,652	)

Total shareholders’ equity		27,531			27,035

Total liabilities and shareholders’ equity	$	45,826		$	42,792

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenue:
Software	$	17,794		$	17,059		$	36,010		$	35,808
Service		6,711			6,363			14,043			13,622

Total revenue		24,505			23,422			50,053			49,430

Cost of revenue:
Software		14,757			13,108			29,364			28,377
Service		5,358			5,207			11,497			10,696

Total cost of revenue		20,115			18,315			40,861			39,073

Gross profit		4,390			5,107			9,192			10,357
Operating expenses:
Selling, general and administrative		3,552			4,108			7,691			8,039
Research and development		1,108			985			2,048			1,899

Total operating expenses		4,660			5,093			9,739			9,938

Income (loss) from operations		(270	)		14			(547	)		419
Other income, net		103			34			94			42

Income (loss) before income taxes		(167	)		48			(453	)		461
Income tax benefit (expense)		(35	)		(27	)		63			(256	)

Net income (loss)	$	(202	)	$	21		$	(390	)	$	205

Basic income (loss) per share	$	(0.02	)	$	0.00		$	(0.04	)	$	0.02

Diluted income (loss) per share	$	(0.02	)	$	0.00		$	(0.04	)	$	0.02

Shares used in calculation of income (loss) per share:
Basic		10,922			10,563			10,898			10,497

Diluted		10,922			11,529			10,898			11,657

Comprehensive income (loss): Net income (loss)	$	(202	)	$	21		$	(390	)	$	205
Other comprehensive income (expense):
Foreign currency translation, net of tax		(29	)		(40	)		(11	)		(67	)
Change in unrealized gains on investments, net of tax		(1	)		4			12			3

Total other comprehensive income (expense)		(30	)		(36	)		1			(64	)

Comprehensive income (loss)	$	(232	)	$	(15	)	$	(389	)	$	141

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income (loss)	$	(390	)	$	205
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized gain on investments		—			(19	)
Depreciation and amortization		483			402
Stock-based compensation		892			1,107
Deferred income tax expense (benefit)		(58	)		145
Changes in operating assets and liabilities:
Accounts receivable, net		(1,608	)		741
Prepaid expenses and other assets		111			(385	)
Third-party software fees payable		2,223			(2,011	)
Accounts payable and accrued expenses		(241	)		53
Deferred revenue		556			95
Deferred rent		(6	)		(35	)

Net cash provided by operating activities		1,962			298
Cash flows from investing activities:
Purchases of equipment and furniture		(164	)		(339	)
Proceeds from maturities of short-term investments		5,200			9,675
Purchases of short-term investments		(4,965	)		(12,064	)
Proceeds from sale of auction rate securities		—			25

Net cash provided by (used by) investing activities		71			(2,703	)
Cash flows from financing activities—proceeds from exercise of stock options		66			209
Effect of exchange rate changes on cash		(89	)		(108	)

Net increase (decrease) in cash and cash equivalents		2,010			(2,304	)
Cash and cash equivalents, beginning of period		8,505			10,814

Cash and cash equivalents, end of period	$	10,515		$	8,510

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(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 (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of June 30, 2012 and our operating results and cash flows for the three and six months ended June 30, 2012 and 2011. The accompanying financial information as of December 31, 2011 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, 2011. All intercompany balances have been eliminated.

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued amended guidance related to the presentation of comprehensive income which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. We adopted the requirements of the new guidance effective January 1, 2012 using a single continuous statement for all periods presented. The adoption did not impact our financial position or results of operations.

Income (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 options, restricted stock awards and restricted stock units. Restricted stock awards (“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. Restricted stock units (“RSUs”), which vest over a period of one to four years, are considered outstanding and included in the computation of basic income or loss per share only when vested. Diluted income 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 method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive. Unvested but outstanding RSUs and RSAs which are forfeitable are included in the diluted income per share calculation. In a period where we are in a net loss position, the diluted loss per share is computed using the basic share count.

2. Cash and Investments

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


	June 30, 2012		December 31, 2011
Cash	$	2,323	$	1,428
Cash equivalents:
Corporate debt		750		501
Money market funds		7,442		6,576

Total cash equivalents		8,192		7,077

Total cash and cash equivalents		10,515		8,505
Short-term investments:
U.S. agency securities		—		1,751
Municipal securities		355		355
Corporate commercial paper		2,299		1,250
Foreign government bonds		501		500
Corporate debt		6,247		5,763

Total short-term investments		9,402		9,619
Restricted cash—money market fund		875		875

Total cash, cash equivalents, investments and restricted cash	$	20,792	$	18,999

Gross unrealized gains and losses on our short-term investments were not material as of June 30, 2012 and December 31, 2011. Our restricted cash balance at June 30, 2012 and December 31, 2011 relates to a letter of credit which will continue to secure our corporate headquarter lease obligation through its expiration in 2014.

3. Fair Value Measurements

We measure our cash equivalents, marketable securities, and the earn-out liability associated with our acquisition of MPC Data Limited (“MPC”) (see Note 4) at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:


Level 1:		Quoted prices in active markets for identical assets or liabilities.

Level 2:		Directly or indirectly observable market-based inputs or unobservable inputs used in models or other valuation methodologies.

Level 3:		Unobservable inputs that are not corroborated by market data. The inputs require significant management judgment or estimation.

We classify our cash equivalents and marketable securities within Level 1 or Level 2 because our cash equivalents and marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. We classify our earn-out liability associated with MPC within Level 3 as it is valued using inputs such as management’s estimation of future sales. Some of the inputs to these models are unobservable in the market and are significant.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 are summarized below (in thousands):


	June 30, 2012
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Cash equivalents:
Money market funds	$	7,442	$	—	$	—	$	7,442
Corporate debt		—		750		—		750

Total cash equivalents		7,442		750		—		8,192
Short-term investments:
Municipal securities		—		355		—		355
Corporate commercial paper		—		2,299		—		2,299
Foreign government bonds		—		501		—		501
Corporate debt		—		6,247		—		6,247

Total short-term investments		—		9,402	$	—		9,402
Restricted cash—money market fund		875		—		—		875

Total assets	$	8,317	$	10,152	$	—	$	18,469

MPC earn-out liability	$	—	$	—	$	696	$	696


	December 31, 2011
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Cash equivalents:
Money market funds	$	6,576	$	—	$	—	$	6,576
Corporate debt		—		501		—		501

Total cash equivalents		6,576		501		—		7,077
Short-term investments:
U.S. agency securities		—		1,751		—		1,751
Municipal securities		—		355		—		355
Corporate commercial paper		—		1,250		—		1,250
Foreign government bonds		—		500		—		500
Corporate debt		—		5,763		—		5,763

Total short-term investments		—		9,619	$	—		9,619
Restricted cash—money market fund		875		—		—		875

Total assets	$	7,451	$	10,120	$	—	$	17,571

MPC earn-out liability	$	—	$	—	$	766	$	766

4. Acquisition

On September 11, 2011, we completed the acquisition of MPC, a United Kingdom based provider of embedded software engineering services.

We acquired all outstanding shares of MPC preferred and common stock in exchange for total consideration of $7.0 million, which included an earn-out which is re-measured to estimated fair value each reporting period based on specific revenue earned and forecasted in designated regions of Europe through September 30, 2012. This earn-out had an estimated fair value of $810,000 as of the acquisition date, and $696,000 as of June 30, 2012. If actual applicable revenue exceeds our estimates by 10%, the impact on the earn-out would be and additional $24,000. We also acquired $1.5 million in cash and cash equivalents as part of the acquisition, for a net estimated total cash price of $5.5 million.

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. Deferred tax liabilities of $233,000 were recognized as part of the transaction. The excess of the acquisition consideration, including the initial estimated fair value of the earn-out, over the fair value of net assets acquired was recorded as goodwill. Our allocation of the acquisition consideration to the assets acquired and liabilities assumed as of the date of the acquisition is as follows (in thousands):


Acquisition consideration	$	7,038
Net assets acquired:
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		(473	)
Long-term tax liabilities		(210	)

Net assets acquired		3,300

Goodwill	$	3,738

Of the intangible assets acquired, customer relationships had a weighted-average useful life of 10 years, non-compete agreements had a weighted-average useful life of two years, and trade names and trademarks had a weighted-average useful life of one year. We assess the fair value of the earn-out associated with the acquisition each period using Level 3 inputs represented by management’s estimation of future applicable engineering service revenue attributable to MPC through September 30, 2012. Changes to the estimated fair value of the earn-out are recognized as other income (expense), net in the period in which the changes occur.

Unaudited Pro Forma Results of Operations

Unaudited pro forma results of operations 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 the consolidated financial statements of MPC and include pro forma adjustments relating to the MPC acquisition that are of a recurring nature representing pro forma amortization of intangible assets. The pro forma results were adjusted to assume all of the acquisition expenses directly related to MPC were incurred on January 1, 2011, and do not give effect to any cost savings, revenue synergies, integration or restructuring costs which may result from the MPC operations (in thousands, except per share amounts):


	Three months ended June 30, 2011			Six months ended June 30, 2011
Net sales	$	24,441		$	51,988
Gross profit	$	5,383		$	11,412
Loss from operations	$	(293	)	$	(254	)
Loss before income taxes	$	(262	)	$	(344	)
Net loss	$	(289	)	$	(586	)
Basic loss per share	$	(0.03	)	$	(0.06	)
Diluted loss per share	$	(0.03	)	$	(0.05	)

5. Goodwill and Intangible Assets

There was no change in the carrying amount of goodwill during the six months ended June 30, 2012.

Intangible assets relate to developed technology, trade names and trademarks, customer relationships, and non-compete agreements that we acquired from TestQuest Inc. in November 2008 and from the acquisition of MPC in September 2011.

Information regarding our intangible assets as of June 30, 2012 and December 31, 2011 is as follows (in thousands):


	June 30, 2012
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Trade names and trademarks	$	180	$	151	$	29
Customer relationships		1,275		209		1,066
Non-compete agreements		196		77		119

Total	$	1,651	$	437	$	1,214


	December 31, 2011
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Trade names and trademarks	$	180	$	92	$	88
Customer relationships		1,275		142		1,133
Non-compete agreements		196		27		169

Total	$	1,651	$	261	$	1,390

Amortization expense was $88,000 and $176,000 for the three and six months ended June 30, 2012, respectively, and $83,000 and $167,000 for the three and six months ended June 30, 2011, respectively. Amortization in future periods is expected to be as follows (in thousands):


Remainder of 2012	$	145
2013		206
2014		135
2015		135
2016		130
Thereafter		463

Total	$	1,214

6. Shareholders’ Equity

Stock Options

We have a Fourth Amended and Restated Stock Plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (the “Inducement Plan”) (collectively, 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 Plans also allow for awards of non-qualified stock options, stock appreciation rights, RSAs and unrestricted stock awards, and RSUs. The Inducement Plan was established in connection with the MPC acquisition. Initially, 250,000 shares were allocated for award under the Inducement Plan. The number of shares available for award under the Inducement Plan 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 of stock-based awards based on historical experience and expected future activity. The fair value of RSAs and RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Dividend yield		0	%		0	%		0	%		0	%
Expected life		4 years			4 years			4 years			4 years
Expected volatility		73	%		74	%		73	%		74	%
Risk-free interest rate		0.6	%		1.3	%		0.6	%		1.5	%

The impact on our results of operations of recording stock-based compensation expense for the three and six months ended June 30, 2012 and 2011 was as follows (in thousands, except per share amounts):


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Cost of revenue — service	$	100	$	157	$	207	$	376
Selling, general and administrative		278		415		622		654
Research and development		30		35		63		77

Total stock-based compensation expense	$	408	$	607	$	892	$	1,107

Per diluted share	$	0.04	$	0.05	$	0.08	$	0.09

Stock Option Activity

The following table summarizes stock option activity under the Plans for the six months ended June 30, 2012:


Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2012		1,939,475		$	4.49
Granted at fair value		164,875			3.44
Exercised		(29,476	)		2.49
Forfeited		(67,165	)		3.73
Expired		(50,501	)		9.84

Balance at June 30, 2012		1,957,208		$	4.32		3.72	$	395,000

Vested and expected to vest at June 30, 2012		1,872,527		$	4.27		3.63	$	391,000

Exercisable at June 30, 2012		1,373,749		$	3.83		3.02	$	353,000

At June 30, 2012, total compensation cost related to stock options granted to employees but not yet recognized was $788,000, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately two years.

The following table summarizes certain information about stock options for the three and six months ended June 30, 2012 and 2011:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Weighted-average grant-date fair value of option grants for the period	$	1.88	$	3.99	$	2.23		4.61

Options in-the-money at period end		616,000		1,365,882		616,000		1,365,882

Aggregate intrinsic value of options exercised	$	1,000	$	209,000	$	33,000	$	751,000

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 six months ended June 30, 2012:


	Number of Shares			Weighted Average Grant-Date Fair Value Per Share
Unvested at December 31, 2011		27,000		$	6.49
Granted		—			—
Vested		(18,000	)		7.33
Forfeited		—			—

Unvested at June 30, 2012		9,000		$	4.82

Expected to vest after June 30, 2012		8,100		$	4.82

At June 30, 2012, total compensation cost related to RSAs granted but not yet recognized was $4,000, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 0.1 years.

Restricted Stock Unit Activity

The following table summarizes RSU activity for the six months ended June 30, 2012:


	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2011		241,248		$	6.20
Granted		167,592			3.52
Vested		(47,844	)		5.15
Forfeited		(17,584	)		6.28

Unvested at June 30, 2012		343,412		$	5.03

Expected to vest after June 30, 2012		306,730		$	4.94

At June 30, 2012, total compensation cost related to RSUs granted but not yet recognized was $1.2 million, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 2.1 years.

Common Stock Reserved for Future Issuance

The following table summarizes our shares of common stock reserved for future issuance under the Plans at June 30, 2012:


	June 30, 2012
Stock options outstanding		1,957,208
Restricted stock units outstanding		343,412
Stock options available for future grant		794,869

Common stock reserved for future issuance		3,095,489

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; Munich, Germany; and Trowbridge, UK. We also lease office space on a month-to-month basis in Akron, Ohio.

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 $519,000 at June 30, 2012.

Rent expense was $423,000 and $903,000 for the three and six months ended June 30, 2012, respectively. Rent expense was $385,000 and $767,000 for the three and six months ended June 30, 2011, respectively.

As of June 30, 2012, 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 classified as restricted cash.

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


Remainder of 2012	$	794
2013		1,366
2014		1,038
2015		268
2016		268
Thereafter		235

Total commitments	$	3,969

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.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Total revenue:
North America	$	17,804	$	18,347	$	35,764	$	37,703
Asia		5,456		4,368		11,218		10,050
Europe		1,244		677		3,044		1,634
Other foreign		1		30		27		43

Total revenue	$	24,505	$	23,422	$	50,053	$	49,430


	June 30, 2012		December 31, 2011
Long-lived assets:
North America	$	4,363	$	4,334
Asia		144		111
Europe		4,877		5,019

Total long-lived assets	$	9,384	$	9,464

9. Significant Risk Concentrations

Significant Customer

No customer accounted for 10% or more of total revenue for the three or six months ended June 30, 2012. Ford Motor Company (“Ford”) accounted for $2.4 million, or 10% of total revenue, for the three months ended June 30, 2011 and $4.7 million, or 10% of total revenue, for the six months ended June 30, 2011.

Microsoft Corporation (“Microsoft”) had an accounts receivable balance of $1.9 million, or 12% of total accounts receivable, as of June 30, 2012, all of which was subsequently collected. Ford had an accounts receivable of $1.6 million, or 12% of total accounts receivable, as of December 31, 2011, all of which was subsequently collected. No other customer accounted for 10% or more of total accounts receivable as of June 30, 2012 or December 31, 2011.

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 December 31, 2012 or June 30, 2013, depending on the territory. We also have ODAs with Microsoft which allow us to sell Microsoft Windows Mobile operating systems in the Americas, Japan, Taiwan, Korea, Europe, the Middle East, and Africa, which will expire on August 31, 2012 or December 31, 2012, depending on the territory.

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 pursuant to which we earn money for achieving certain predefined objectives. Under this rebate program we earned $184,000 and $413,000 during the three and six months ended June 30, 2012, respectively, and $161,000 and $343,000 during the three and six months ended June 30, 2011, 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 condensed 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, 2011 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. 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 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

Management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, cost of sales and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes to the Company’s critical accounting policies and estimates as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
Revenue:
Software		73	%		73	%		72	%		72	%
Service		27			27			28			28

Total revenue		100			100			100			100

Cost of revenue:
Software		60			56			59			57
Service		22			22			23			22

Total cost of revenue		82			78			82			79

Gross profit		18			22			18			21
Operating expenses:
Selling, general and administrative		15			18			15			16
Research and development		4			4			4			4

Total operating expenses		19			22			19			20

Income (loss) from operations		(1	)		0			(1	)		1
Other income, net		0			0			0			0

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

Net income (loss)		(1	)%		0	%		(1	)%		0	%

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 increased $1.1 million, or 5%, to $24.5 million for the three months ended June 30, 2012, from $23.4 million in the year-ago period. Total revenue increased $623,000, or 1%, to $50.1 million for the six months ended June 30, 2012, from $49.4 million in the year-ago period. These increases were driven by higher sales of Microsoft Windows Embedded operating systems.

A year ago, our operations outside of North America consisted principally of operations in Taiwan, as well as relatively minor sales and/or support presences in China, India, Japan, Korea, and the United Kingdom. During 2011, we expanded our sales teams across Asia and our development presence in China and, in September, acquired the operations of MPC Data Limited (“MPC”) in the United Kingdom. The MPC acquisition positively impacted revenue by $1.1 million for the three months ended June 30, 2012 and drove total revenue in Europe to increase $567,000 and $1.4 million for the three and six months ended June 30, 2012, respectively, compared to the year-ago periods. Additionally, sales to Asia increased $1.1 million and $1.2 million during the three and six months ended June 30, 2012, respectively, compared to the year-ago periods, primarily due to increased engineering services revenue from new customers in Japan. Revenue from our customers outside of North America represented 27% and 29% of our total revenue during the three and six months ended June 30, 2012, respectively, compared to 22% and 24% in the year-ago periods, respectively.

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, and support and maintenance revenue. Software revenue for the three and six months ended June 30, 2012 and 2011 was as follows (dollars in thousands):


	Three months Ended June 30,						Six months Ended June 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
Software revenue:
Third-party software	$	17,006		$	15,336		$	34,085		$	32,666
Proprietary software		788			1,723			1,925			3,142

Total software revenue	$	17,794		$	17,059		$	36,010		$	35,808

Software revenue as a percentage of total revenue		73	%		73	%		72	%		72	%

Third-party software revenue as a percentage of total software revenue		96	%		90	%		95	%		91	%

The vast majority of our third-party software revenue is comprised of sales of Microsoft Windows Embedded and Windows Mobile operating systems. Third-party software revenue increased $1.7 million, or 11%, for the three months ended June 30, 2012, from the year-ago period. The increase was due primarily to higher sales of Microsoft Windows Embedded operating systems across all customer segments, offset in part by a decline in Microsoft Windows Mobile operating system sales, particularly in the APAC region, and a decline in Adobe Flash sales.

Third-party software revenue increased $1.4 million, or 4%, for the six months ended June 30, 2012, compared to the year-ago period, driven by the same factors that accounted for the three-month increase.

Proprietary software revenue decreased $935,000, or 54%, to $788,000 for the three months ended June 30, 2012, from $1.7 million in the year-ago period. This decrease was driven by a significant sale of our Texas Instruments OMAP software during the three months ended June 30, 2011, which did not reoccur in the current period. Additionally, $263,000 in Snapdragon devkit sales were classified as proprietary software revenue in the year-ago period, which are now classified as third-party software revenue.

Proprietary software revenue decreased $1.2 million, or 39%, for the six months ended June 30, 2012, compared to the year-ago period, driven by the same factors that accounted for the three-month decrease.

Service revenue

Service revenue for the three months ended June 30, 2012 and 2011 was as follows (dollars in thousands):


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
Service revenue	$	6,711		$	6,363		$	14,043		$	13,622

Service revenue as a percentage of total revenue		27	%		27	%		28	%		28	%

Service revenue increased $348,000, or 5%, for the three months ended June 30, 2012, from the year-ago period. This increase was the result of $1.1 million in service revenue from MPC as a result of our acquisition in September 2011 coupled with growth in APAC driven by a new major customer in Japan which contributed $624,000 in revenue for the three months ended June 30, 2012. This increase was offset in part by a $1.2 million decline in North America service revenue led by a $690,000 decline in revenue associated with the MyFord Touch project. Our billed hours increased 1% and our realized rate per hour increased 6% for the three months ended June 30, 2012, compared to the year-ago period.

Service revenue increased $421,000, or 3%, for the six months ended June 30, 2012 compared to the year-ago period. This increase was primarily the result of $2.4 million in service revenue from MPC and a new major customer in Japan which contributed $1.5 million to revenue for the six months ended June 30, 2012, offset by a $2.9 million decline in North America service revenue which was led by a $1.2 million decline in MyFord Touch revenue. Our billed hours increased 4% and our realized rate per hour remained flat for the six months ended June 30, 2012, compared to the year-ago period.

Microsoft Corporation (“Microsoft”) became our largest engineering services customer during the first quarter of this year, replacing Ford Motor Company (“Ford”), as Microsoft replaced Ford as the invoiced customer on the MyFord Touch program. We continue to work on the MyFord Touch, a project we began with Ford during the second quarter of 2008, however we now conduct these services through an agreement with Microsoft. During the initial project with Ford, we provided hardware design and implementation, platform level software development, application level software development, quality assurance services and systems integration services. The project has transitioned since the initial project such that we are now primarily 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 from the MyFord Touch program declined $690,000 to $1.7 million, or 26% of total service revenue, for the three months ended June 30, 2012, compared to $2.4 million, or 38% of total service revenue, in the year-ago period. Service revenue from the MyFord Touch program declined $1.2 million to $3.5 million, or 25% of total service revenue, for the six months ended June 30, 2012, compared to $4.7 million, or 35% of total service revenue, in the year-ago period. The number of engineers working on the MyFord Touch project has declined in the current year under the new agreement with Microsoft.

Gross profit and gross margin

Cost of software revenue consists primarily of the cost of third-party software products payable to third-party vendors and support costs associated with our proprietary software products. Cost of service revenue consists primarily of salaries and benefits, contractor costs and re-billable expenses, related facilities and depreciation costs, and amortization of certain intangible assets related to acquisitions. Gross profit on the sale of third-party software products is also positively affected by rebate credits we receive from Microsoft for the sale of Windows Embedded operating systems earned through the achievement of defined objectives and treated as a reduction in the cost of software revenue. Under this rebate program we earned $184,000 and $413,000 for the three and six months ended June 30, 2012, respectively, compared to $161,000 and $343,000 for the three and six months ended June 30, 2011, respectively.

Gross profit and related gross margin for the three and six months ended June 30, 2012 and 2011 were as follows (dollars in thousands):


	Three months Ended June 30,						Six months Ended June 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
Software gross profit	$	3,037		$	3,951		$	6,646		$	7,431
Software gross margin		17	%		23	%		18	%		21	%
Service gross profit	$	1,353		$	1,156		$	2,546		$	2,926
Service gross margin		20	%		18	%		18	%		21	%
Total gross profit	$	4,390		$	5,107		$	9,192		$	10,357
Total gross margin		18	%		22	%		18	%		21	%

Software gross profit and gross margin

Software gross profit decreased by $914,000, or 23%, for the three months ended June 30, 2012, from the year-ago period, while software gross margin declined by six percentage points. These declines were primarily driven by the $935,000 reduction in proprietary software revenue, compared to a relatively fixed cost of sales base. Third-party software gross margin was 15% for the three months ended June 30, 2012, compared to 17% in the year-ago period. This decline was primarily due to higher sales of non-Microsoft third-party products in the year-ago period which carry a higher margin. Proprietary software gross margin was 61% in the three months ended June 30, 2012, compared to 80% in the year-ago period. This decline was due to lower proprietary software revenue compared to a relatively fixed cost base.

Software gross profit decreased by $785,000, or 11%, for the six months ended June 30, 2012, from the year-ago period, while software gross margin declined by three percentage points. The decreases in software gross profit and gross margin were driven by the same factors that accounted for the three-month decline. Third-party software margin was 15% for the six months ended June 30, 2012 and June 30, 2011. Proprietary software margin was 71% for the six months ended June 30, 2012, compared to 81% in the year-ago period. This decline was due to the same factors that accounted for the three-month decline in software gross profit and gross margin.

Service gross profit and gross margin

Service gross profit increased $197,000, or 17%, to $1.4 million for the three months ended June 30, 2012, from $1.2 million in the year-ago period, while service gross margin increased by two percentage points to 20% in the three months ended June 30, 2012, compared to 18% in the year-ago period. The improvements in service gross profit and gross margin were due primarily to a 6% improvement in our realized rate per hour, as well as project overruns in the year-ago period, which did not reoccur in the current year.

These increases were offset in part by higher costs per billable hour in the current year, as we have seen our utilization rate drop six percentage points for the three months ended June 30, 2012, compared to the year-ago period.

Service gross profit decreased $380,000, or 13%, to $2.5 million for the six months ended June 30, 2012, from $2.9 million in the year-ago period. Service gross margin was 18% for the six months ended June 30, 2012, a three percentage point decrease from 21% in the year-ago period. These declines were primarily the result of a three percentage point decline in our utilization rate for the six months ended June 30, 2012, compared to the year-ago period.

Operating expenses

Selling, general and administrative

Selling, general and administrative expenses consist primarily of salaries and related benefits, commissions for our sales teams, marketing and administrative personnel and related facilities and depreciation costs, as well as professional services fees (e.g., consulting, legal, tax and audit). Selling, general and administrative expenses decreased $556,000, or 14%, to $3.6 million for the three months ended June 30, 2012, from $4.1 million in the year-ago period. This decrease was due primarily to a reduction in selling expense of $673,000 due to net reductions in our sales teams both domestically and internationally, coupled with a $137,000 decline in stock compensation expense across all selling, general, and administrative departments. These declines were offset partially by an increase in general and administrative expense associated with our international expansion. Selling, general and administrative expenses represented 15% of our total revenue for the three months ended June 30, 2012 and 18% in the year-ago period.

Selling, general and administrative expenses decreased $348,000, or 4%, to $7.7 million for the six months ended June 30, 2012, from $8.0 million in the year-ago period. This decrease was driven by the same factors that accounted for the three-month decrease. Selling, general and administrative expenses represented 15% of our total revenue for the six months ended June 30, 2012 and 16% for the year-ago period.

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 $123,000, or 12%, to $1.1 million for the three months ended June 30, 2012, from $985,000 in the year-ago period. The increase was driven by development efforts associated with a new initiative with Texas Instruments which is expected to be completed in the third quarter of 2012. Research and development expenses represented 4% of our total revenue for the three months ended June 30, 2012 and 4% in the year-ago period.

Research and development expenses increased $149,000, or 8%, to $2.0 million for the six months ended June 30, 2012, from $1.9 million in the year-ago period. This increase was driven by the same factor that accounted for the three-month increase. Research and development expenses represented 4% of our total revenue for the six months ended June 30, 2012 and 4% for the year-ago period.

Other income, net

Other income consists of interest income on our cash, cash equivalents and investments, gains and/or losses recognized on our investments, changes in the estimated fair value of acquisition-related contingent consideration, as well as gains or losses on foreign exchange transactions. Other income increased $69,000, or 203%, to $103,000 for the three months ended June 30, 2012, from $34,000 in the year-ago period. This increase was primarily the result of a reduction in our estimated earn-out payment associated with our purchase of MPC in the prior year, which resulted in $73,000 of other income.

Other income increased $52,000, or 124%, to $94,000 for the six months ended June 30, 2012, from $42,000 in the year-ago period. This increase was due primarily to the $73,000 of other income realized during the second quarter for the reduction in the estimated earn-out associated with our purchase of MPC.

Income tax benefit (expense)

Income tax expense increased $8,000 to $35,000 for the three months ended June 30, 2012, compared to $27,000 in the year-ago period primarily related to taxable income generated in the United Kingdom by MPC. Income tax expense decreased $319,000 to a benefit of $63,000 for the six months ended June 30, 2012, compared to expense of $256,000 in the year-ago period primarily related to U.S. federal and state income taxes incurred as a result of our taxable income during the six months ended June 30, 2011. This is compared to a tax benefit incurred during the six months ended June 30, 2012 for the net loss recognized in the U.S. during the period.

Liquidity and Capital Resources

As of June 30, 2012, we had $20.8 million of cash, cash equivalents, short-term and long-term investments and restricted cash, compared to $19.0 million at December 31, 2011. Of these amounts, $10.5 million and $8.5 million were classified as cash and cash equivalents at June 30, 2012 and December 31, 2011, respectively, and $875,000 was classified as long-term at both June 30, 2012 and December 31, 2011.

Net cash generated by operating activities was $2.0 million for the six months ended June 30, 2012, driven by a $2.2 million increase in our third-party software fees payable to Microsoft as a result of increased sales of Windows Embedded operating systems during the period. Additionally, non-cash charges increased our net cash generated by operating activities by $1.4 million for the period, which were offset in part by a $1.6 million increase in our accounts receivable. Net cash provided by operating activities was $298,000 for the six months ended June 30, 2011, driven by our net income during the period and $1.5 million of non-cash charges offset by a $2.0 million decrease in our third-party software fees payable.

Investing activities provided cash of $71,000 for the six months ended June 30, 2012, primarily due to net maturities of short-term investments of $235,000 offset by $164,000 in equipment purchases. Investing activities used cash of $2.7 million for the six months ended June 30, 2011, primarily due to net purchases of short-term investments for $2.4 million coupled with $339,000 in equipment purchases.

Financing activities generated $66,000 during the six months ended June 30, 2012, and $209,000 during the six months ended June 30, 2011, 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 $794,000 for the remainder of 2012, $1.4 million in 2013, $1.0 million in 2014, $268,000 in 2015, $268,000 in 2016 and $235,000 thereafter;

•

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 $519,000 at June 30, 2012; and

•

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 $696,000 as of June 30, 2012 based on our probability weighted revenue forecasts. There is no cap on this contingent obligation and this amount is accrued as of June 30, 2012. See Note 4, “Acquisition” of the Notes to Condensed Consolidated Financial Statements in Item 1 for further discussion of this amount.

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 June 30, 2012 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, 2011.

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: August 9, 2012	By:	/s/ B RIAN T. C ROWLEY

		Brian T. Crowley President and Chief Executive Officer

Date: August 9, 2012	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

Incorporated by Reference

with

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

10.12+***

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems with Microsoft Licensing, GP effective as of July 1, 2012

10.18(b)+

Statement of Work effective as of July 1, 2012 under the Microsoft Master Vendor Agreement between the Company and Microsoft Corporation dated effective as of June 8, 2008

10.19*

Fourth Amended and Restated Stock Plan

10.19(a)*

Form of Stock Option Agreement

10.19(b)*

Form of Restricted Stock Grant Agreement

10.19(c)*

Form of Restricted Stock Unit Agreement

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 been requested with respect to the redacted 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.

***	Replaces previously filed exhibit

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

Exhibit 10.12


Company Name:		BSQUARE CORPORATION

MS Agreement Number:		*******

Start Date:		July 01, 2012

End Date:		June 30, 2013

Company’s MS ID Number:		*******

Territory:		United States of America, Canada, Caribbean (excluding Cuba) and Mexico

MICROSOFT OEM DISTRIBUTION AGREEMENT FOR SOFTWARE PRODUCTS FOR EMBEDDED SYSTEMS

Microsoft Licensing, GP (“MS”), and the undersigned company (“Company”) agree to be bound by the terms of this MICROSOFT OEM DISTRIBUTION AGREEMENT FOR SOFTWARE PRODUCTS FOR EMBEDDED SYSTEMS (“Agreement”) effective as of the date above (“Start Date”).

This Agreement consists of the following:

•

This Signature Page

•

Reporting and Payment Schedule

•

Notices Schedule

•

Terms

•

OEM Volume Royalty Program Schedule

•

DOC, MOO, and ECE Schedule

•

Virtual Warehouse Schedule


MICROSOFT LICENSING, GP		BSQUARE CORPORATION

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

By:	***	By:
	(signature)		(signature)

Name:	***	Name:	Scott Mahan
	(printed)		(printed)

Title:	Group Manager	Title:	Chief Financial Officer
	(printed)		(printed)

Date:	June 27, 2012	Date:	June 27, 2012


x

CONFIDENTIAL

05/08/12 *** Microsoft OEM Distribution Agreement for Software Products for Embedded Systems

Document Tracking Number: ***

Confidential treatment has been requested for portions of this document. This document omits the information subject to the confidential treatment request. Omissions are designated as ***. A complete version of this document has been filed separately with the Securities and Exchange Commission.

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

REPORTING AND PAYMENT SCHEDULE

Shipping, Billing, Rebates, Support


Company “Ship To” Address		Company Billing Address

***		***
BSQUARE CORPORATION 110 110th Ave. NE Ste. 200 Bellevue, Washington 98004 United States Telephone: +1 425 519 5900 Fax: +1 425 519 5999 E-mail: ***		BSQUARE CORPORATION 110 110th Ave. NE Ste. 200 Bellevue, Washington 98004 United States Telephone: +1 425 519 5900 Fax: +1 425 519 5999 E-mail: ***

Company Technical Support Number: +1 425 519 5900

Payment

Company must include applicable MS invoice numbers and its VAT number on all payments.

Send Payments via Wire Transfer Only to:

Microsoft Licensing, GP

***

Or to such other address or account as MS may specify from time to time.

DOC, MOO, and ECE Company Administrator

Company designates as its DOC, MOO, and ECE Company Administrator(s) the following individual(s).

Name: ***

BSQUARE CORPORATION

110—110 ^th Ave NE

Suite 200

Bellevue, Washington 98004

Telephone: +1 425 519 5223

Fax: +1 425 519 5999

Email: ***


x		2

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

NOTICES SCHEDULE

The parties must address any notices related to this Agreement to the contacts and locations listed below. Either party may change these contacts by providing *** prior notice to the other party. All written notices must be in the English language.


Company Information		MS Information

***
BSQUARE CORPORATION		Microsoft Licensing, GP
110 110th Ave. NE Ste. 200		***
Bellevue, Washington 98004
United States
Telephone: +1 425 519 5900
Fax: +1 425 519 5999
E-mail: ***

*With a copy to:*
***
BSQUARE CORPORATION
110 110th Ave. NE Ste. 200
Bellevue, Washington 98004
United States
Telephone: +1 425 519 5900
Fax: +1 425 519 5999
E-mail: ***


x		3

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

TERMS

1.	Definitions

“APM” means associated product materials MS designates as a part of the Product. Examples of APM include documentation and external media containing software, and other tangible materials related to the Product. APM does not include COAs.

“AR” or “Authorized Replicator” means an MS supplier of APM and COAs.

“CLA” means the serialized OEM Customer License Agreement for Embedded Systems as made available by MS. For additional information on the CLA, Company should contact its MS account manager.

“COA” or “Certificate of Authenticity” means a non-removable sticker designated by MS as specific to a Product.

“Default Charge” means an amount owed as liquidated damages for the unauthorized distribution of Product software, recovery media, or COAs.

“Design Management Tool” or “DM Tool” means an online application used by Company to document and maintain Embedded System designs.

“Distributor ALPs” means the licensing terms and conditions for a Product on the Royalty Rate List.

“DOC” means the Digital Operation Center located at *** (or any successor URL).

“ECE” means the Mobile & Embedded Communications Extranet website located at *** (or any successor URL). The ECE is made available to Company as an informational resource.

“EFTA” means European Free Trade Association.

“Embedded Application” means an industry- or task-specific software program and/or functionality with all of the following attributes:

(a)

it provides the primary functionality of the Embedded System,

(b)

it is designed to meet the functionality requirements of the specific industry into which the Embedded System is marketed and distributed, and

(c)

it offers functionality in addition to the Product software.

“Embedded System” means an OEM Customer’s computing device that is designed for and on which an Embedded Application is installed as part of the Image. The Embedded System must not be marketed or useable as a general-purpose personal computing device (such as a personal computer), or a multi-function server or a commercially viable substitute for one of these systems.

“Force Majeure Event” means fire, disaster caused by forces of nature, riot, terrorist act, war, labor dispute, material changes in applicable law or regulation, or decree of any court. Force Majeure Event does not include theft.

“Image” means the binaries for the Product included on an Embedded System and the OEM Customer’s binaries.

“Material Amount” means ***.

“MCCL” means Microsoft (China) Company Limited, a company organized under the laws of the People’s Republic of China. MCCL is a wholly-owned subsidiary of MSCORP.

“MIOL” means Microsoft Ireland Operations Limited, a company organized under the laws of Ireland. MIOL is an indirect, wholly-owned subsidiary of MSCORP.

“MOO” means the MS OEM Online website located at *** (or any successor URL).

“MS Affiliate” means any entity that directly or indirectly controls, is controlled by, or is under common control with MS, including MSCORP.

“MS Parties” means MS, Suppliers, and/or their respective officers, employees, and agents.

“MSCORP” means Microsoft Corporation, a company organized under the laws of the State of Washington, U.S.A.

“MSLI” means Microsoft Licensing, GP, a general partnership organized under the laws of the State of Nevada, U.S.A., of which MSCORP is a general partner.

“OEM ATs” means licensing terms and conditions for the Product on the “Additional Terms” affixed to the Runtime License Envelope. Courtesy copies of the OEM ATs are available on the ECE.

“OEM Customer” means an original equipment manufacturer of one or more Embedded Systems that has signed a current CLA.

“OEM Volume Royalty Program” has the meaning specified in the OEM Volume Royalty Program Schedule.


x		4

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

“Outsource Manufacturer” or “OM” is an entity approved by MS in writing that an OEM Customer engages to:

(a)

install an Image on an Embedded System,

(b)

manufacture an Embedded System,

(c)

place orders to MS Distributors to obtain COAs;

(d)

prepare the Embedded System for distribution, or

(e)

distribute Embedded Systems to OEM Customer or to OEM Customer’s Channel, and End Users (as defined in the CLA).

An Outsource Manufacturer can be a third party or owned by the OEM Customer. In order to maintain status as an approved OM, the OM must not develop or build the Image.

“Products” means the Microsoft products identified as licensed in the Product Search Tool. Products are available from an AR or an MS Party for redistribution to OEM Customers. Products include MS software (including Supplements), COAs, and APM, and, where applicable, Sample Code. With the exception of some Sample Code, MS does not provide Product in source code form.

“Product Search Tool” means the functionality in DOC that allows users to search for MS part numbers, and bills of materials for Products.

“Recovery Image” means a copy of the Image as originally installed on the Embedded System. A Recovery Image is used to reinstall the Image.

“Reporting Guidelines” means the Sales-Out and Royalty Reporting Guidelines posted on the ECE.

“Resource Guide” means the Microsoft Embedded Distributor Resource Guide posted on the ECE. It contains general licensing, operational, and Product ordering information, but not licensing terms. MS reserves the right to modify the Resource Guide with *** notice. Any part of the Resource Guide that conflicts with any term or condition of this Agreement shall not apply to this Agreement.

“Royalty Rate List” means the list of royalty-bearing Products and royalty rates. This list also contains Distributor ALPs and other information.

“Runtime License” means a license to distribute a single Image on an Embedded System.

“Runtime License Envelope” means the envelope that contains the OEM ATs for the Product. A Runtime License Envelope may contain COAs.

“Sample Code” means the software marked as “sample” or delivered in a folder marked “sample” that may be included as a part of the Product. Sample Code may be in source code or object code format. Sample Code is not “covered software” under MS’ published indemnification policy.

“Standards” means

(a)

telecommunications standards;

(b)

CODEC standards;

(c)

proximity communications over an NFC link as defined by the NFC Forum published specifications and any normative references contained therein;

(d)

standards related to enabling secure element management and operation on a device, between devices, and between a device and an internet service;

(e)

any related successors or derivatives to (a)—(d); and

(f)

any rights offered by patent pool licensing agencies such as MPEGLA, VIA Licensing and HDMI Licensing.

For clarification, “normative reference,” as used in this definition, means an expression in the content of a specification or reference conveying criteria to be fulfilled if compliance with the specification or reference is to be claimed and from which no deviation is permitted.

Examples of Standards include, without limitation:

•

Global System for Mobile (Communications) (GSM)

•

General Packet Radio Services (GPRS)

•

Code Division Multiple Access (CDMA)

•

Single Carrier Radio Transmission Technology (CDMA/1xRTT)

•

Long Term Evolution (LTE)

•

MPEG (audio and video)

•

NFC and NFC Forum

•

RFID

•

Global Platform


x		5

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

•

EMVCo

•

Single-Wire Protocol

•

Host-Controller Interface Protocol

MS may update this list of examples, for Company’s reference purposes on the ECE.

“Successor Agreement” is defined in Section 13(b).

“Supplement” means a supplement to or replacement of, or re-release of any part of a Product that MS provides to Company for redistribution to OEM Customers.

“Suppliers” means MSCORP, MSLI, and other licensors or suppliers of Product or portions of Product.

“Territory” means the specific countries or regions of the world listed in the caption box on the Signature Page.

“Trade Secret” has the same meaning given in the Uniform Trade Secrets Act.

“Update Image” means an Image that includes

(a)

an updated version of the Product binaries (including a Supplement), or

(b)

an updated version of the OEM Customer binaries, or

(c)

an updated version of the Product binaries and an updated version of the OEM Customer binaries.

An Update Image may include the previously distributed version of the Product binaries or the OEM Customer binaries, but not both.

“VAT Number” is defined in Section 3(f)(1) (Foreign Taxes).

2.	License Grant and Limitations

(a)

License Grant . If Company complies with the terms of this Agreement, MS grants to Company a non-exclusive, limited license to distribute Products solely:

(1)

to OEM Customers located in the Territory,

(2)

worldwide to OMs (subject to Sections 2(s) (Drop Ship Option Available) and 17 (Government Regulations)).

Additional countries may be added to the Territory only after Company’s MS regional channel manager approves the addition and it is added to MOO.

(b)

Ordering

(1)

Company shall only accept orders from OEM Customers or on behalf of OEM Customers from OMs.

(2)

Company shall verify via the MOO (or replacement) tool that all orders are from (or on behalf of) parties that have current OEM Customer status.

(3)

Company shall not execute a CLA. Company is not permitted to act as an OEM Customer.

(c)

ARs and Available Products

(1)

Company may only acquire APM and COAs from ARs. A list of ARs is available on the ECE. MS may update that listing from time to time. Unless Company has prior written authorization from MS, Company must require ARs to ship the APM and COAs to premises owned or controlled by Company in the Territory.

(2)

Company shall order and acquire from an AR (or MS Party) only Products listed on the Product Search Tool.

(3)

If MS has removed a Product from the Product Search Tool, Company may only continue to distribute the Product until the earlier of:

(i)

The Product distribution end date that is set by MS; and

(ii)

Termination or expiration of this Agreement.

(4)

Company may order Recovery Images and Update Images (on behalf of OEM Customers) that are based on Products listed on the Product Search Tool. Recovery Images and Update Images may only be distributed to OEM Customers, or OMs on behalf of OEM Customers.

(d)

Packaging Intact

(1)

Company shall distribute the Product in the same form/packaging as received from the AR and/or MS Party.

(2)

Company shall not modify or remove any part of the contents or packaging of the Product.

(e)

Inventory Control . Company shall maintain a level of security sufficient to prevent loss or unauthorized distribution of Product.


x		6

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(f)

No Conflicts . Company shall not provide to OEM Customers any non-MS information that conflicts with, supersedes, or purports to supersede the CLA, or the OEM ATs.

(g)

Product-Specific Terms . Company shall comply with the Distributor ALPs.

(h)

Potential OEM Customers . Company shall perform the following steps for each potential OEM Customer. Company shall:

(1)

Ensure that it uses the most current CLA form.

(2)

Before any potential OEM Customer signs a CLA, ensure that the company’s physical or street address is within the Territory.

(3)

Notify each potential OEM Customer that only an authorized signatory of the prospective OEM Customer may execute the CLA.

(4)

Provide the potential OEM Customer a courtesy copy of the applicable OEM ATs before the OEM Customer first licenses any Product.

(5)

Verify that:

(i)

The information provided by the potential OEM Customer is complete and correct;

(ii)

No changes or alterations have been made to the CLA; and

(iii)

The CLA has been properly completed and executed by an authorized representative of the potential OEM Customer.

(i)

OEM Customers . Company shall perform the following steps for each OEM Customer. Company shall:

(1)

Provide Recovery Images and Update Images to OEM Customers as received from an AR and in accordance with the Resource Guide.

(2)

Provide Supplements on external media and any related OEM ATs for OEM Customer as received from an AR or MS Party.

(3)

Forward to MS OEM Customer-signed originals of any CLAs returned to Company in time for sales-out reporting.

(j)

Product Distribution . MS agrees that between the time Company is notified the OEM Customer has signed the CLA and the date MS countersigns:

(1)

Company may distribute Products to the OEM Customer, and

(2)

***. CLAs should be processed in time for sales-out reporting.

(k)

OEM Customer Notices . Company shall instruct each OEM Customer that:

(1)

No High Risk Use

WARNING: The Products are not fault-tolerant. The Products are not designed or intended for use in any Embedded Systems where failure or fault of any kind of the Product could reasonably be seen to lead to death or serious personal injury of any person, or to severe physical or environmental damage (“High Risk Use”). OEM Customers are not licensed to use, distribute, or sublicense the use of the Products in any High Risk Use. High Risk Use is STRICTLY PROHIBITED.

(2)

Distribution Restrictions . OEM Customers may only distribute Products:

(i)

as part of the OEM Customers’ Embedded Systems;

(ii)

that were obtained by the OEM Customers directly from an MS-authorized distributor; and

(iii)

in accordance with the CLA and the OEM ATs.

(3)

Reproduction Restrictions . OEM Customers may only reproduce and distribute Update Images, Supplements, and Recovery Images in accordance with the CLA.

(l)

IP Notices . Company shall not remove or obscure any copyright, trademark or patent notices that appear on the Product as delivered to Company.

(m)

Logos . Company’s use of any logo of MS or MSCORP requires a separate logo license from MSCORP. Logo licenses and standard guidelines are posted at ***.

(n)

Unauthorized Distribution . Upon notice from MS, Company shall promptly discontinue distribution of Product to OEM Customers. Company shall cooperate with MS in investigating instances of unauthorized distribution of Products. Company shall make commercially reasonable efforts to retrieve any Products previously distributed to such OEM Customers.


x		7

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(o)

No Reverse Engineering

Company must not reverse engineer, decompile, or disassemble the Product, except and only to the extent applicable law expressly permits the activity.

(p)

No Representations for MS. Company shall not make any representation or warranty (express or implied) to OEM Customer, or any other third party, on behalf of MS. Company shall defend, indemnify, and hold MS and its Suppliers harmless from any claim or damages and reasonable attorneys’ fees arising out of any warranty or representation by Company.

(q)

Reservation of Rights. This Agreement does not give Company title to any Product, packaging, papers, materials, or other property of MS related to a Product.

(1)

MS retains title to all APM and COAs (and related materials) from the time that the Product is acquired by Company until Company distributes the Product to the OEM Customers or an OM on behalf of the OEM Customer.

(2)

In no circumstances will any receiver or trustee of Company be entitled to sell or distribute any Product obtained by Company pursuant to this Agreement.

(r)

Delivery Restriction. Unless otherwise provided in writing from MS, Company may not deliver Product to any other company that has an effective Microsoft OEM Distribution Agreement for Software Products for Embedded Systems.

(s)

Drop Ship Option Available. OEM Customers may request that orders from Company be shipped directly from the AR to an OM located outside of Company’s Territory. Company must forward this request using the “Drop Ship Request Form” to the MS account manager for approval. If approved, notice will be sent to Company and the AR to begin processing of the purchase order.

(t)

COAs and APM. The CLA has a Section 2(j) that reads as follows (bolded emphasis added):

“COAs and APM. ***

(u)

Outsource Manufacturer Placement of Purchase Orders. Under certain circumstances, an OM may place a purchase order directly with a MS approved distributor. The OM is required to include the following information in the purchase order: the name of the OEM Customer, CLA number of the OEM Customer, and the activity to be performed on behalf of the OEM Customer. If Company receives such a purchase order, Company must

(i)

verify that OEM Customer has an active CLA and that the OM has already been approved by MS; and

(ii)

when shipping the order to the OM, Company must notify the OEM Customer of the shipment.

(v)

Internal Development, Testing, and Customer Support. Company may acquire Product software and a commercially reasonable number of product keys strictly for internal development, testing, training, and/or OEM Customer support purposes only in non-production environments on Company premises.

3.	Reports and Payments

(a)

Royalty Rate List

(1)

At least *** prior to the first day of each month, MS will post the Royalty Rate List for the upcoming month on the ECE.

(2)

MS may modify the Royalty Rate List upon notice to Company. Submission of Product orders to ARs or distribution of Product after the effective date of any modifications to the Royalty Rate List shall constitute Company’s acceptance of such modifications. The new Royalty Rate List will be effective on the date specified on the Royalty Rate List or, if no date is specified, upon notice of the change.

(3)

If Company elects to participate in the OEM Volume Royalty Program, Company shall comply with the terms and conditions in the OEM Volume Royalty Program Schedule.

(4)

MS may offer a performance rebate program (“Rebate Program”) to encourage its distributors to promote and expand sales of Products. Company may qualify to participate in the Rebate Program and earn rebates for achieving defined objectives as outlined on ECE. Company should contact its MS account manager with any questions about the Rebate Program.

(b)

Sales-Out Reports

(1)

Within *** after the end of each calendar month, Company shall provide a report as required by the then-current Reporting Guidelines. Company must provide a final report *** after this Agreement terminates or expires. If Company does not


x		8

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

provide a sales-out report within the time-period provided in this section, and fails to provide a sales-out report after *** notice sent by MS, MS may place on hold new orders from Company. Company will be unable to place new orders until all due sales-out reports are submitted.

(2)

Company shall ensure that all reports under this Agreement:

(i)

are accurate and complete, and

(ii)

are in compliance with the requirements in the Reporting Guidelines.

(3)

Company shall take all steps necessary to ensure that they comply with all applicable local and national data protection laws when collecting and providing data to MS.

(4)

Reporting Guidelines. These guidelines provide for electronic submission to MS of sales-out information as reasonably requested by MS. MS reserves the right to modify such guidelines with *** notice. Any part of the Reporting Guidelines, which conflicts with any term or condition of this Agreement, shall not apply to this Agreement.

(c)

Invoices and Payment

(1)

Invoices. For each unit of Product distributed by Company, Company agrees to pay MS the royalty rate in the Royalty Rate List in effect during the month in which Product is shipped by Company. For each Product licensed under this Agreement, MS will invoice Company for the royalties and other amounts due for each month. MS will post any applicable invoice on DOC *** after the date of invoice. MS will also provide invoices by mail if required by law or requested by Company. To the extent permitted by applicable law, Company can opt-out of receiving mailed invoices. To the extent permitted by applicable law, MS may discontinue mailing invoices upon *** notice.

(2)

Payment. Company must remit one payment to MS as specified in the Reporting and Payment Schedule. Payments are due no later than *** after the end of each calendar month (“Payment Due Date”). Company will pay each invoice by the Payment Due Date. Company must include the MS number of the Agreement and the MS invoice numbers with each payment. All payments shall be made in US Dollars, unless otherwise specifically provided in this Agreement.

(d)

Late Fees

(1)

If Company fails to pay any royalty or other payment due under this Agreement by the applicable due date, then MS may

(i)

assess a non-recurring late charge of *** on the past due amount; and

(ii)

assesses a recurring late charge on the past due amount at an annual rate equal to ***. The recurring late charge will accrue daily from the Payment Due Date through the date of actual payment.

MS will charge late fees to the extent permitted by applicable law. If MS charges late fees, it will be without prejudice to any other right or remedy available.

(iii)

require ARs to suspend all pending Company orders.

(e)

Currency

All payments must be in U.S. dollars and amounts owed will not be satisfied by a tender or any recovery pursuant to any judgment that is expressed in or converted by MS to any currency other than U.S. dollars.

(f)

Withholding Tax

(1)

Foreign taxes. If MS is defined as MSLI or MCCL, a tax authority is a non-U.S. authority. If MS is defined as MIOL, a tax authority is a non-Irish authority. If Company is required by any tax authority to withhold taxes on payments to MS, then Company may deduct such taxes from the amount owed MS and pay them to the authority. Company must deliver to MS an official receipt for any taxes withheld (or other documents necessary) for MS to claim a tax credit or refund. Company must deliver the receipt within *** of payment of the tax or maximum time allowed for delivery of the receipt under local law. If Company does business in a jurisdiction that uses the Value Added Tax or sales tax numbers (“VAT Number”) for tax identification purpose, Company must provide its VAT Number in the Reporting and Payment Schedule. For clarity, Company will be responsible for taxes withheld on payments:

(i)

to or between Company and its affiliates (e.g., based on inter-company or jurisdictional payments to Company); and

(ii)

by an affiliate of Company, where Company is not required by the tax authority to withhold taxes on payments to MS.

(2)

Exempt Status. If Company is located in the United States, and Company is exempt from paying state sales or use tax, then Company shall deliver a reseller tax certificate for the state in which it is headquartered, to MS as specified in the Resource Guide. If Company fails to provide a valid reseller tax certificate, MS may invoice Company for these taxes.

(g)

Credit Review. MS reserves the right to review Company’s financial condition, payment history, and overall credit worthiness during the term of this Agreement. By signing this Agreement Company authorizes MS to access any credit bureaus or agencies to inquire about Company’s financial condition. Upon request, Company shall provide its current audited financial statements. After review of Company’s financial condition, payment history, and overall credit worthiness, MS may require any of the following payment assurances:


x		9

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(1)

An initial payment equal to the estimated Product royalties for the first calendar quarter of the Agreement (or the quarter following the review). Company may not recoup any of that payment against royalties due to MS or apply it against payments to any AR. If Company has complied with all material terms of this Agreement when it expires, MS will refund the initial payment amount (net of amounts due MS) within *** of Company’s final royalty report and payment for Products distributed during the term of this Agreement.

(2)

A third party guarantee, performance bond, letter of credit, prepayment of royalties, or other security.

(3)

Periodic updated financial statements.

(4)

Written assurances of due performance.

Until the deposit amount and/or payment assurances is/are received and acceptable to MS, MS may suspend Company’s license rights or require ARs to refuse to fill Company’s orders.

(h)

Over- Reporting Error. If Company discovers an over-reporting error, Company shall report the error to MS in writing within *** after the end of the calendar month in which the Product was distributed.

(i)

Order Limits. MS may require ARs to refuse or limit orders placed by Company in quantities greater than Company will be able to make timely payment for or distribute. MS will give Company written notice if it takes this action.

(j)

Taxes and AR Charges Excluded. Royalties exclude any taxes, duties, fees, excises or tariffs imposed on any of the Company’s activities in connection with this Agreement. Company must pay these charges, taxes and other fees. Royalties also exclude any charges by the AR for COAs or APM.

(k)

Default Charge. Company must pay the Default Charge for each unit of Product (including COAs) distributed in violation of the terms of this Agreement.

If Company cannot account for Product, those missing Products will be deemed to have been distributed in violation of this Agreement. The parties agree that the unauthorized distribution of Product would result in damages to MS that are impractical and difficult to ascertain. The parties also agree that the Default Charge is a reasonable and genuine estimate of the loss to MS.

The Default Charge for each Product is *** of the royalty for the Product (excluding discounts and rebates), less any royalty paid. Payment of the Default Charge and any late fees shall constitute MS’ sole and exclusive compensatory remedy in case of unauthorized distribution of Product software, recovery media or COAs, provided, that this does not limit MS’ ability to seek equitable relief in case of unauthorized distribution of same.

(l)

Design Management . Company shall enter data into the DM Tool as described on the ECE. Data will include status of MSCORP-provided leads, “design-win”, and/or “design-in” information. Before submitting such entries, Company shall confirm their accuracy. Company’s failure to adequately pursue MSCORP-provided leads in the DM Tool is considered a material breach of this Agreement. Upon request, Company shall provide to MS further details on any of the DM Tool entries made by Company.

(m)

Damaged Materials . For COAs damaged irreparably during the ordinary course of Company’s business, Company shall:

(1)

Maintain a log of each damaged or destroyed COA. For each such COA, the log must include the date damaged or destroyed, Product name, COA serial number and cause of damage or destruction.

(2)

Return each damaged COA to the AR and/or MS Affiliate from which the COA was acquired as outlined in the Returns and Destruction Process on ECE.

(n)

Materials in Transit. Company assumes all risk of loss or damage to COAs and APM in transit between AR and Company.

4.	No Warranties

(a)

Each Product is licensed “as-is”. The OEM Customer and its end users bear the risk of using it. MS gives no express warranties, guarantees, or conditions. To the extent permitted under applicable laws, MS excludes the implied warranties of merchantability, fitness for a particular purpose and non-infringement.

(b)

Neither MS nor its Suppliers shall have any liability for failure to deliver any Product by any particular date.


x		10

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

5.	Product Discontinuance and Returns

(a)

If MS or its Suppliers determine that a Product should not be distributed in a market, Company shall immediately stop distributing upon written notice.

(b)

Company shall defend, indemnify, and hold MS and its Suppliers harmless from and against all damages, costs and expenses, including reasonable attorneys’ fees, incurred due to Company’s continued distribution of Product after MS has notified Company to stop distributing the Product.

(c)

Replacement Units. No additional royalty shall accrue to MS for Product or Recovery Media that is shipped to replace a defective unit. Company must distribute such replacement units directly to OEM Customer and at no charge, except for the reasonable costs Company incurs for materials, shipping, and handling.

(d)

Returns. Company shall manage any returns of Product in accordance with the then-current Returns and Destruction Policy on the ECE.

6.	Limitations of Liability

(a)

MS Liability. MS Parties’ liability is limited for each Product. The total cumulative liability (if any) of MS and MS Affiliates to Company under this Agreement, and Company exclusive remedy for any such liability, shall be limited to Company’s direct damages incurred in reasonable reliance upon MS up to an amount not to exceed *** of the amount paid by Company to MS for that Product under this Agreement.

This limit includes MS’ duties arising under Section 8 (Intellectual Property Infringement). The liability limit in this Section 6(a) (MS Liability), however, does not apply to any attorneys’ fees and expenses incurred by MS under Section 8 (Intellectual Property Infringement) only.

(b)

Exclusion of Certain Damages and Limitation of Types of Liability

(1)

Company agrees that the MS Parties shall not be liable to Company or to any third party for any of the following:

(i)

Economic damages (i.e., damages from loss of profits or revenues, business interruption and loss of business information or data),

(ii)

Consequential damages,

(iii )

Special damages,

(iv)

Incidental damages,

(v)

Indirect damages, and

(vi)

Punitive damages.

(2)

Company agrees that the foregoing limitations apply:

(i )

even if MS Parties have been advised of the possibility of such damages;

(ii)

even in the event of any MS Parties’ fault, tort (including negligence), misrepresentation, strict liability or product liability; and

(iii)

even if any remedies fail of their essential purpose.

(c)

Release. Company releases MS Parties from all liability in excess of the limits in this Section 6 (Limitations of Liability). This release includes any claim for indemnification or contribution even if such claims arise under local law.

7.	Product Support

(a)

This Agreement does not include technical support by MS to Company, OEM Customers or any end users. Company may be able to purchase technical support services from MS or a MS Party, under a separate agreement.

(b)

Company shall provide commercially reasonable support for the Products to OEM Customers. Company shall advise OEM Customers to contact Company for support.

(c)

For the term of this Agreement, Company shall maintain a valid technical support services contract for the Products through Microsoft OEM Services for Embedded Partners or with a third party for an equivalent level of such services. Instead of such a contract, upon request, MS will verify that Company itself provides an equivalent level of such services. If Company chooses to acquire support through MSCORP, Company agrees that MSCORP may charge applicable support fees under such contract.

(d)

Upon request, Company shall provide a copy of its current OEM Customer support policy for the Products. Company shall provide MS with 90 days’ prior written notice of any substantive change in Company’s support policy for Products.


x		11

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

8.	Intellectual Property Infringement

(a)

Coverage

MS agrees to defend, at MS’ expense, Company in a lawsuit or other judicial action, and pay the amount of any adverse final judgment (or settlement that MS consents to) from the lawsuit or judicial action, for any third party claims that Products (excluding Sample Code):

(1)

infringe any copyright or trademark rights, or

(2)

infringe any patents (except for patents that are alleged to be infringed by or essential to an implementation of a Standard -provided that this exception does not apply to third party claims where Company has merely distributed the Products in compliance with this Agreement and in the form as it was provided to Company by MS); or

(3)

Misappropriate any Trade Secrets. “Misappropriate” has the same meaning given in the Uniform Trade Secrets Act. Each of the foregoing is individually referred to in this Agreement as a “Claim”.

(b)

Scope

(1)

Trade Secret Claim. MS has no duty or liability if Company acquired a Trade Secret:

(i)

through improper means;

(ii)

under circumstances giving rise to an independent duty by Company to maintain secrecy or limit the use of the Trade Secret; or

(iii)

from a person (other than MS or its Suppliers) who owed, to the party asserting the Trade Secret Claim, a duty to maintain the secrecy or limit the use of the Trade Secret.

(2)

Patent Claim. MS’ obligations shall be limited to patent Claims where the Product (excluding Sample Code) software alone, without combination or modification, constitutes direct or contributory infringement of such patent Claim.

(3)

Excluded Claims. MS has no duty based on Company’s manufacture, use, sale, offer for sale, importation or other disposition or promotion of Product or trademark in violation of the applicable Agreement, but only to the extent that such infringement claim results from such violation.

(4)

Conditions. MS has no duties for any Claim unless the following are satisfied:

(i)

Company must promptly notify MS in writing of the Claim;

(ii)

MS must have sole control over defense and/or settlement of the Claim; and

(iii)

Company shall provide MS with reasonable assistance in the defense of the Claim.

(c)

Other Claims

(1)

Regarding any claim (other than a Claim) related to a Product, Company shall promptly notify MS in writing of such claim. MS has no duty to defend Company or pay damages arising out of such claim.

(2)

Company agrees that MS has the right, in its sole discretion, to assume at any time the defense of any such claim. If MS assumes the defense of any such claim:

(i)

MS will notify Company in writing of MS’ election;

(ii)

MS must have sole control over the defense and settlement of the claim;

(iii )

Company shall provide MS with reasonable assistance in the defense of the claim;

(iv)

MS will defend Company against that claim; and

(v)

MS will pay any adverse final judgment (or settlement that MS consents to) resulting from defending such claim.

(d)

Additional Options

In addition to the obligations in Section 8(b) (Scope), if MS receives information concerning a claim (including a Claim), MS may, at its expense, but without obligation to do so, undertake further actions such as:

(1)

procure the copyright, patent, trademark or Trade Secret rights or licenses to address the claim, or

(2)

replace or modify the Product or trademark to make it non-infringing or stop the misappropriation of the Trade Secret.

(e)

Notices; Injunctions

(1)

MS may provide Company with notice of a recommendation that Company stop the manufacture, use, sale, offer for sale, importation or other disposition or promotion of Products or trademark due to a claim (including a Claim). Company shall reimburse MS and MSCORP for all damages, costs, and expenses (including reasonable attorneys’ fees) they incurred because of Company’s activities contrary to such recommendation more than *** after the date of MS’ notice.


x		12

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(2)

If, in connection with a claim (including a Claim), a court enjoins Company from distributing any Products in its inventory and within *** after the injunction

(i)

the injunction is not lifted,

(ii)

MS has not procured a license that enables Company to distribute the enjoined Products, and

(iii )

MS has not modified the affected Products to make them non-infringing,

then such Products will not be available for distribution under this Agreement. Company will return any corresponding Products in accordance with Section 9 (Records; Audit) and the then-current Resource Guide.

9.	Records; Audit

(a)

Product Records. Company will maintain accurate and complete records related to its activities under this Agreement. These records include records related to distribution of Products, including COAs and APM.

(b)

Product Returns. Company may return Products. Each return must comply with the returns policy and process on the ECE.

(c)

Product Reports. Company will account for Products in inventory on a monthly basis. Products in inventory include Products at all Company facilities. Company will make this accounting available to MS upon request. The Product accounting will reconcile beginning and ending Product inventory. It will also include:

(1)

Product and APM acquisitions from ARs and MS Parties.

(2)

COA serial number ranges on the Runtime License envelopes with corresponding shipment dates.

(3)

OEM Customers’ returns.

(4)

COAs, Product, and APM that cannot be distributed for any reason.

(5)

Product shipped as replacement units.

(d)

Payments. If Company discovers a discrepancy resulting in an underpayment to MS, Company will pay MS if there is a difference between the number of Runtime Licenses acquired by Company from ARs and:

(1)

The number of Runtime Licenses distributed by Company pursuant to this Agreement; plus

(2)

The number of Runtime Licenses that Company can verify are in the possession of Company; plus

(3)

The number of Runtime Licenses properly returned to the AR; plus

(4)

The number of Runtime Licenses destroyed on-site in the presence of an MS-approved certified public accountant.

The payment amount for each Runtime License will be the difference in units multiplied by the royalty rates for the Runtime License. Company will submit a revised sales-out report and pay in accordance with Section 3 (Reports and Payments). If Company can show (to the reasonable satisfaction of MS) that Product was destroyed due to a Force Majeure Event, then it will not pay for those units of Product.

(e)

Company Records; MS Inspection

(1)

Records Audit . MS may inspect Company’s records related to compliance with this Agreement. MS will provide written notice to Company at least *** before MS inspects these records.

(i)

Company will keep these records for at least *** after the term of this Agreement.

(ii)

Company can keep these records at different locations. If MS asks for these records, Company will make them available at a single location. Company will provide MS with reasonable access to these records.

(iii)

MS may ask third parties to help inspect these records. These third parties will be certified or chartered public accountants. They will be independent from MS. The third parties will not be hired on a contingent fee basis.

(iv)

MS will inspect the records during regular business hours.

(2)

Premises Audit. MS may also inspect Company’s premises. Company will grant access to MS with the following limits:

(i)

MS will give Company *** prior notice.

(ii)

MS’ access shall be limited. MS may only access areas where Product is stored or used; Products are copied (if Company is an OM), stored, installed (if Company is an OM), used, or distributed; and where Company maintains its records.

(iii)

Company personnel may escort MS and the third parties helping MS. MS agrees that it will not unreasonably interfere with Company’s normal course of business.

(f)

Amounts Owed. MS will provide Company with a summary of MS’ findings and conclusions of each audit.


x		13

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(1)

MS may determine Company did not report correctly. If so, Company will pay the amount owed to MS upon written notice from MS.

(2)

MS may determine Company has intentionally breached this Agreement (or a previous Microsoft OEM Distribution Agreement for Software Products for Embedded Systems), or that the amount owed exceeds the Material Amount. If so, Company will also pay the costs of the audit plus a Default Charge for each unreported unit of Product.

(g)

Audit Frequency. MS will not do an audit more than once a year. However, MS may audit more than once a year if an audit finished during the preceding year revealed a Material Amount or an intentional breach of this Agreement.

10.

Non-Disclosure

Company shall keep confidential:

(a)

the terms of this Agreement, including, without limitation, the Royalty Rate Lists;

(b)

information on the DOC, MOO, and ECE and in the Resource Guide;

(c)

information concerning current and potential OEM Customers;

(d)

any of the following with regard to MS or any of its Suppliers:

•

royalty rate information,

•

the terms of agreements concerning Products,

•

license negotiations,

•

any information relating to released or unreleased software products,

•

the marketing or promotion of any Product, and

•

business policies or practices that MS or its Suppliers disclose to Company that is non-public information, and

(e)

any other information that, in the circumstances surrounding the disclosure or in the nature of the information, ought in good faith to be treated as confidential.

11.

Assignment

Company may not assign this Agreement in whole or in part (by contract, merger, operation of law, or otherwise). Any attempted assignment in violation of this section shall have no effect. MS may assign this Agreement to a MS Affiliate as long as the assignment does not unreasonably and materially impair performance under the assigned Agreement. MS must give Company prior notice of the assignment, but failure to do so will not affect the effectiveness of the assignment

12.

DOC, MOO, and ECE

Company shall comply with the terms and conditions in the DOC, MOO, and ECE Schedule.

13.

Term

(a)

This Agreement is effective from the Start Date until the End Date. The term of this Agreement will automatically be extended for one year unless one of the parties provides notice to the other at least *** before said extension. Company’s acquisition or distribution of Product during an extension signifies Company’s agreement to the terms of the extension.

(b)

If Company enters into a new distribution agreement with MS that grants substantially similar rights for Products licensed under this Agreement (a “Successor Agreement”), Company may retain Product, if all the following are true.

(1)

The Products, are used in accordance with the terms and conditions of the Successor Agreement, including without limitation applicable royalties.

(2)

The Successor Agreement has an effective date no later than *** following the termination or expiration of this Agreement.

(3)

MS has not objected in writing to such use within *** following the effective date of the Successor Agreement.

(c)

If Company is currently licensed to distribute the Product under a valid agreement with MS (“Prior Agreement”), then as of the Start Date of this Agreement:

(1)

Company’s license to order and distribute the Product under the Prior Agreement shall cease; and

(2)

Company shall report and pay for the Product under the terms and conditions of this Agreement.

(d)

This Agreement does not create any express or implied obligation to renew or extend the Agreement or to continue the parties’ relationship on the same terms. Regardless of the number of renewals, this Agreement will always be a fixed term agreement and not an indefinite term agreement.


x		14

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

14.

Termination

(a)

Termination without Cause. Either party may terminate this Agreement at any time without cause by giving the other *** prior written notice.

(b)

Termination for Cause

(1)

Either party (“Non-Defaulting Party”) may terminate this agreement if the other party (“Defaulting Party”) materially fails to perform or comply with any provision of this Agreement.

(2)

MS may terminate this Agreement if Company

(i)

submits “zero dollar” royalty reports for ***;

(ii)

materially fails to comply with any surviving payment obligation under a prior Microsoft OEM Distribution Agreement for Software Products for Embedded Systems;

(iii)

becomes insolvent, enters bankruptcy or similar proceedings under applicable law; admits in writing its inability to pay its debts; or makes or attempts to make an assignment for the benefit of creditors; or

(iv)

if Company does not meet any of the MS payment terms required under this Agreement. (Section 14(b) (Termination for Cause) collectively defined as “Defaults”.)

(c)

Bankruptcy. If an event described in Section 14(b)(2)(iii) occurs, then:

(1)

Company’s distribution rights under this Agreement will be suspended as of the date such event occurs; and

(2)

Termination is effective upon notice to Company or, if later, as soon as permitted by applicable law.

(d)

Cure Period. Termination will be effective:

(1)

*** after notice (including reasons for termination) by the non-breaching party, provided the Defaults have not been cured within that period; or

(2)

If the cause for termination is not curable during that time, termination will take effect promptly upon notice from the party who is not in breach.

(e)

Effect of Termination. Upon termination or expiration of this Agreement, all Company’s license rights shall immediately cease.

(1)

Company shall immediately cease distribution of all Product.

(2)

Within *** from expiration or termination of the Agreement, Company shall return:

(i)

All Products in inventory to an AR per the Returns and Destruction Policy on ECE.

(ii)

Any hardcopy CLA forms to MS at the address indicated in the Notices Schedule.

(iii)

Any other property of any MS Party that Company possesses to MS at the address indicated in the Notices Schedule.

(f)

Termination Assistance . Upon notice that this Agreement is expiring or to be terminated, each party must assist the other to wind-down their respective obligations under this Agreement in an orderly manner.

(g)

Unauthorized Distribution of Products . When this Agreement terminates or if MS suspends Company’s distribution rights (as provided in Section 14(c) (Bankruptcy) above), MS may take any actions that may be advisable to prevent unauthorized distribution of Products then in Company’s inventory and to ensure timely return or destruction of such Products.

(h)

Neither party will be responsible to the other for any costs or damages resulting from ending this Agreement under this Section 14 (Termination).

(i)

MS Remedies. The remedies available to MS under this Agreement are not exclusive. In addition to such remedies, MS may exercise any and all legal, equitable, or other remedies available.

15.

Notices

(a)

Party Written Notice. All notices must be in writing, in the English language, on the notifying party’s letterhead, and signed by an authorized representative of that party (“Party Written Notice’).

(b)

Other Methods of Notice. Each party also may provide notice by sending the scanned Party Written Notice by:

(1)

fax to the fax number listed in the Notices Schedule; or

(2)

email at the email address listed in the Notices Schedule.

In addition, only for updates or changes to information, instructions or forms (but not this Agreement), MS may give Company notices, authorizations and requests by posting them to the DOC, ECE or MOO.


x		15

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(c)

Deemed Received. The parties must address all notices, authorizations, and requests related to this Agreement as stated in the Notices Schedule. Notices will be deemed received *** after any of the following occur:

(1)

for a notice address in the U.S.A.: when the notice is deposited in the U.S.A. mails, postage prepaid, certified or registered, return receipt requested.

(2)

for a notice address in a member country of the EU or EFTA: when the notice is deposited in the EU or EFTA mails, prepaid recorded delivery.

(3)

when the notice is sent by air express courier, charges prepaid.

(4)

if the notice is by MS regarding updates or changes to MS information, instructions, or forms: *** after notice is sent via email or posted on DOC, MOO, or the ECE.

(5)

for fax or email notices sent by Company: *** after notice is sent via fax or email.

(d)

Notice Schedule. Each party must keep all information in the Notices Schedule complete and current. Each party will provide the other party with notice of any changes.

(e)

Company Ownership or Name Change. If there has been a change in the Company ownership (by contract, merger, operation of law or otherwise) or Company name change, then MS may require Company:

(1)

to provide MS with additional information and relevant documents relating to the circumstances of the change; and

(2)

to enter into a new Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, if it is determined that there has been a change in ownership.

(f)

DOC / MOO / ECE. Information posted on the DOC, MOO and ECE may change without notice until the effective date of such information. MS may correct errors in information posted on the DOC, MOO and ECE or update posted documents after the Start Date by sending notice to Company.

16.

Choice of Law; Jurisdiction and Venue; Attorneys’ Fees

(a)

MSLI and MCCL. If MS is defined as MSLI or MCCL, Washington State law governs this Agreement and any claims for breach of this Agreement, regardless of conflict of laws principles. The federal courts in Washington State or New York State are the exclusive venues for all disputes arising from this Agreement. If there is no federal subject matter jurisdiction, then the state courts of Washington State are the exclusive venue. Each party consents to the exercise of personal jurisdiction by these courts. Each party agrees that it cannot revoke this consent.

(b)

MIOL. If MS is defined as MIOL, the laws of Ireland govern this Agreement and any claims for breach of this Agreement, regardless of conflict of laws principles. The courts of Ireland are the exclusive venues for all disputes arising from this Agreement. Each party consents to the exercise of personal jurisdiction by these courts. Company agrees, for the benefit of MS and MS Affiliates that the courts of Ireland will have jurisdiction to hear and determine any suit, action, or proceedings that may arise out of or in connection with this Agreement. For those purposes, Company submits to the jurisdiction of those courts. Each party agrees that it cannot revoke this consent.

(c)

Injunctive Relief. MS may pursue injunctive relief against Company in any forum to protect intellectual property rights. If MS pursues injunctive relief in a forum other than those specified in this section, MS will give prior notice to Company. No notice is required if MS reasonably determines that doing so will prevent it from reasonably protecting its intellectual property.

(d)

UN Convention. The United Nations Convention on Contracts for the International Sale of Goods does not apply to this Agreement.

(e)

Attorneys’ Fees. If either party employs attorneys to enforce any rights related to this Agreement, the primarily prevailing party will be entitled to recover its reasonable attorneys’ fees, costs and other expenses.

(f)

English Language. This Agreement shall be written and executed only in the English language, which shall be controlling in all respects. If MS provides a translation or summary of this Agreement in any other language to Company, such translation or summary shall be non-binding and for reference purposes only, and shall not constitute an amendment, modification or interpretation of this Agreement.

17.

Government Regulations

(a)

Applicable Laws and Regulations. The Products are subject to U.S. and European Union export jurisdiction. Releases or versions of certain Products may be subject to particular restrictions under the laws and regulations of a certain country or territory. MS Parties and Company will comply with all international and national laws and regulations that apply to the Products. These laws include

(1)

U.S. Export Administration Regulations; and

(2)

importation, manufacturing, end user, end-use, and destination restrictions issued by U.S. and other governments.

For additional information on exporting Products from the U.S., see ***.


x		16

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(b)

Anti-Corruption and Anti-Money Laundering Policy. MS and Company are committed to observing the standards of conduct set forth in the anti-corruption and anti-money-laundering laws of the countries and regions in which they operate. MS and Company agree to the following policy.

(1)

Compliance with Anti-Corruption Laws. MS and Company will comply with all applicable anti-corruption laws, including the United States Foreign Corrupt Practices Act (“FCPA”). No MS or Company representative shall, directly or indirectly, offer or pay anything of value (including gifts, travel, entertainment expenses, and charitable donations) to any official or employee of any government, government agency, political party, or public international organization, or any candidate for political office, to (i) improperly influence any act or decision of such official, employee, or candidate for the purpose of promoting the business interests of the other party in any respect, or (ii) otherwise improperly promote the business interests of the other party in any respect.

(2)

Anti-Money Laundering. No MS representative shall use its relationship with Company to attempt to disguise the sources of illegally obtained funds. No Company representative shall use its relationship with MS to attempt to disguise the sources of illegally obtained funds.

(3)

No Retaliation. MS and Company will not retaliate against anyone who has, in good faith, reported a possible violation of this Section 17(b) (Anti-Corruption and Anti-Money Laundering Policy) or refused to participate in activities that violate this Section 17(b) (Anti-Corruption and Anti-Money Laundering Policy).

(4)

MS reserves the right to terminate the Agreement if MS has a reasonable belief that Company is in breach of the anti-corruption and/or anti-money laundering policies set forth in this section.

(c)

Government Approvals. Company must obtain any required local government approvals, at their own expense.

(d)

Additional Information. Company must comply with all applicable laws and regulations (including tax and privacy). Company may require additional information about the Products in order to comply with applicable laws and regulations. Upon request, MS will provide Company with non-confidential Product information that Company reasonably requires, if available.

18.

General

(a)

Entire Agreement. This Agreement constitutes the entire agreement between the parties for the Products. Except as expressly provided in this Agreement, this Agreement may be modified only by a writing executed by each of the parties.

(b)

Relationship of the Parties. The parties agree that this Agreement will not be construed as creating a partnership, joint venture, or agency relationship or as granting a franchise.

(c)

No Waiver. No waiver of any breach of any part of this Agreement will be a waiver of any other breach. Any waiver must be in writing and signed by an authorized representative of the waiving party.

(d)

Severability. If any provision of this Agreement is found illegal, invalid, or unenforceable by a court of competent jurisdiction, then the remaining provisions, as applicable, shall remain in full force and effect.

(e)

Interpretation. The headings and titles of the provisions of this Agreement are for convenience only and do not affect the interpretation of any provision. Unless specifically stated, the plural shall include the singular.

(f)

Force Majeure. Neither party will be liable for failing to perform under this Agreement to the extent that a Force Majeure Event caused the failure. The party subject to the Force Majeure Event must give the other party notice within a commercially reasonable time. As soon as the Force Majeure Event stops, the party must perform the obligations that were not performed. If COAs are damaged or destroyed due to a Force Majeure Event, Company may be eligible to receive a royalty credit for those COAs. To receive a royalty credit Company must (1) provide the COA serial numbers and (2) reasonably demonstrate to MS that the COAs were damaged or destroyed due to a Force Majeure Event. Company must provide documentation related to the damaged or destroyed COAs (e.g., insurance claim documentation, police reports, etc.). If any of those COAs are found to have not been damaged or destroyed as claimed, Company agrees that it will immediately repay to MS the entire amount of the credit or refund received and a Default Charge for each of those COAs. Company must report any destroyed COAs and return any damaged COAs in accordance with the COA return timeframe requirements of the Resource Guide.

(g)

MS Affiliate. Some provisions in this Agreement include Company’s covenants and obligations to MS and MS Affiliates. Some provisions are for the benefit of MS and MS Affiliates. Company acknowledges and agrees that each MS Affiliate is entitled to its own right to require due performance by Company. To the extent necessary to establish an MS Affiliate’s rights and benefits, MS enters into this Agreement, not only in its own right, but also as an agent for each such MS Affiliate.


x		17

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

OEM VOLUME ROYALTY PROGRAM SCHEDULE

MS may offer an OEM Volume Royalty Program (“OVRP”). The OVRP enables Company to offer a *** royalty (“OVRP royalty rate”) to an OEM Customer that commits to distributing a specified high volume of Products (“OVRP Customer”) installed on a registered design over a *** period (“OVR Project”).

Company may qualify to participate in the OVRP as described in the OVRP Guidelines on ECE and by registering OVR Projects in the Design Management Tool.

Company and OVRP Customer can participate in the OVRP provided that:

(a)

Company has a valid Microsoft OEM Distribution Agreement For Software Products For Embedded Systems, and

(b)

OVRP Customer has a valid CLA in place.

1.	Term and Termination

Each OVRP period (“OVRP Period”) is ***.

The term of each OVR Project begins on the agreed start date until the earlier of:

(a)

12 months from that date, unless both Company and MS agree to extend the OVR Project to a *** OVRP Period;

(b)

termination or expiration of the CLA (if the OVRP Customer and MS do not enter into a successor agreement);

(c)

OVRP Program is cancelled as notified by MS;

(d)

MS’ decision to terminate the OVR Project due to Company failing to meet or exceed the quarterly forecasted volumes. Chargeback Amounts may apply.

(e)

MS’ decision to terminate the OVR Project due to discovery that another authorized distributor has a previously registered design and approved OVR Project with the same OEM Customer. No Chargeback Amounts will apply.

Any violation of the terms of this Schedule is grounds for termination under Section 14 (Termination) of this Agreement.

2.	*** Royalty Terms

(a)

The OVRP royalty rate applies only to Products shipped for the specified OVR Project, as registered and approved by MS in the Design Management Tool. Company may offer the OVRP royalty rate to OVRP Customers only. The volume commitments and royalty rates for OVRP are listed in the Royalty Rate List on ECE.

(b)

Company agrees to pay MS the total royalties due for the Products distributed for the specified OVR Project to the OVRP Customer at the OVRP royalty rate as listed in the then-current Royalty Rate List on the ECE.

(c)

Company will be notified via ECE or email if MS changes its OVRP royalty rates. Such royalty rate changes will be effective on the first date of the calendar month following such notice.

3.	OVRP Customer Notification

***

4.	Reporting

Company shall include Product shipped under each OVR Project in its monthly sales-out report as described in the Reporting Guidelines on the ECE.

***


x		18

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

6.	Windows Embedded Design Referral Program

The following requirements apply for any OVRP Project referred by a company meeting the eligibility requirements for receipt of *** (a “Program Participant”) under the Windows Embedded Design Referral Program (the “Design Referral Program”) Design Referral Program requirements are described in a separate Design Referral Program Agreement agreed to by Program Participants.:

(a)

Affiliate Restriction

If Company becomes an Affiliate of any Program Participant, Company must notify MS. A Program Participant will not be entitled to earn *** under the Design Referral Program if it is an Affiliate of Company. In addition, the Program Participant will no longer receive *** on any active OVR Projects after such Program Participant becomes an Affiliate of Company. For purposes of this restriction, an “Affiliate” means any entity that directly or indirectly controls, is controlled by, or is under common control with the Program Participant.

(b)

Company Restrictions

(1)

An opportunity referred by a Program Participant cannot be registered as an OVR Project if the underlying design and designated OEM Customer are already registered in the Design Registration / OVRP Online Tool. Company acknowledges MS’ right to (i) review the design opportunity to ensure this restriction is complied with and (ii) reject any OVR Project in the Design Registration / OVRP Online Tool if the underlying design was previously registered with that designated OEM Customer.

(2)

Company must not submit a registration for an OVR Project with an OEM Customer if Company previously had knowledge of the same design opportunity from a Program Participant and rejected that opportunity when presented to Company by the Program Participant.

(c)

Design Referral Program participant Access to Company Information

Company acknowledges that Program Participants will have restricted access to the Design Registration / OVRP Online Tool as part of their participation in the Design Referral Program. As a result, Program Participants will have visibility to license sales volumes related to opportunities the Program Participants refer to Company that then become OVR Projects. Company agrees that MS may provide Program Participant access to this Company sales information in connection with the Design Referral Program even if this disclosure would not be permitted by a non-disclosure agreement between MS and Company.

(d)

Sales-Out Report

With respect to each OVR Project referred by a Program Participant, Company agrees that it must include the CLA number for the applicable OVRP Customer and the OVR Project number in its monthly sales-out report as described in the Reporting Guidelines on the ECE.


x		19

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

***

DOC, MOO AND ECE SCHEDULE

1.	Additional Definitions. For purposes of this Schedule:

(a)

“Company Administrator” means the Users designated by Company on the Reporting and Payment Schedule.

(b)

“Password Information” means passwords, encryption keys or other identifiers used for the Sites’ security.

(c)

“Sites” means DOC, MOO, and the ECE.

(d)

“User” means an officer, employee, consultant or other person or agent of Company who has, or who creates the appearance of having authority from Company to use the Sites on Company’s behalf.

2.	Terms of Use

(a)

This section, the terms of the Resource Guide, and the terms posted on the Sites apply to Company’s use of the Sites. MS may update those terms from time to time. Company must:

(1)

cause its Company Administrators and Users to comply with those terms, and

(2)

not cause any harm to the Sites.

(b)

Company must give MS not less than *** notice prior to changing the Company Administrator(s). Notices for those changes should be sent to *** or *** (email aliases for DOC/MOO and the ECE respectively).

3.	Suspension or Termination

MS may suspend or terminate authorities, or suspend or block access to all or any part of the Sites or to any information. Whenever possible, MS will provide prior notice of such action.

4.	Company agrees neither MS nor any of its agents shall have any liability for any failure to provide a level of security greater in connection with the ECE than that generally afforded by the use of ***.

No Warranty and Limited Liability. MS provides each Site “as is”. The warranty disclaimers, damage exclusions, and limitations of remedies in this Agreement all apply to each of the Sites and to their information, functionality, services, and availability or lack thereof. Company will not rely on or treat any Site information as an express warranty.

MS reserves the right to change or discontinue all or any portion of the Sites at any time. Users may make a copy of Site information to document Company’s transactions or other information. MS will retain *** of transactional records. MS will have no duty to retain or make available Site information or records for later access.

The Sites are not open to the public and the way they function and all information on them shall be treated as confidential information under Section 10 (Non-Disclosure) of the Agreement. Company agrees not to distribute any Supplement Code accessed on ECE to any third party, unless expressly authorized by MS to do so.

8.	Responsibility for Use of the Sites

(a)

All actions taken by any User at or in relation to a Site shall legally bind Company if any of the following are true.

(1)

The User has supplied Password Information.

(2)

Company or Users failed to keep Password Information secure. The failure caused or contributed to creation of an appearance that actions taken on a Site were being taken by, or on behalf of, Company.

(3)

Company had approved, allowed, or accepted benefits or use of the Site by a person purporting to be its agent.

(b)

However, if Password Information is used to cause harm or damage to Company or MS by a person who obtained it by means that could not have been prevented by complying with this Schedule, then such acts taken with Password Information will not be attributed to Company under this Section 8(a). However, these acts may be attributed to MS, Company or others under principles of equity or law pertinent to the act in question.


x		20

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

9.	DOC . MS may provide additional or successor online tools or websites to be used by Company in the normal course of its business with MS. Company agrees to use such resources for all intended purposes.

10.

Access to Sites . Only the Company Administrators may grant or terminate Users’ access to or other authorities for, DOC, MOO, and ECE. Company Administrators must keep Password Information secure from unauthorized access.

11.

Electronic Signature Tool. As part of the MS OEM operations initiative, MS may provide an online tool or website to be used by Company for digital signatures of Company channel documents. If Company elects to use the tool, Company agrees to use such resource for all intended purposes.

12.

Privacy and Data Protection

(a)

In this section, “Personal Information” means any information provided by MS or collected or processed for MS by Company in connection with this Agreement:

(1)

That identifies or can be used to identify, contact, or locate the person to whom such information pertains, or

(2)

From which identification or contact information of an individual person can be derived.

Personal Information includes, but is not limited to: name, address, phone number, fax number, email address, social security number or other government-issued identifier, and credit card information. In addition, to the extent any other information (such as a personal profile, unique identifier, biometric information, or IP address) is associated or combined with Personal Information, then such information also will be considered Personal Information.

(b)

Any Personal Information collected, processed or accessed by Company in compliance with this Agreement shall be limited to that which is strictly necessary to perform such services or to fulfill any legal requirements.

(c)

Company shall use such Personal Information only as necessary to perform the services in accordance with this Agreement and not for any other purpose whatsoever. Company shall maintain such Personal Information in strict confidence in accordance with the provisions of Section 10. Company shall not share any Personal Information with any third parties for any reason except as authorized by MS in writing. If Company is served with a court order compelling disclosure of any Personal Information or with notice of proceedings for such an order, Company will

(1 )

oppose the order,

(2)

notify MS of such order or notice, and

(3)

provide MS the opportunity to intervene before Company files any response to the order or notice.

(d)

Company will take reasonable steps to protect any Personal Information in Company’s possession and immediately notify MS of any known security breach from:

•

Unauthorized use,

•

Access,

•

Disclosure,

•

Alteration, or

•

Destruction.

Security measures shall include access controls, encryption or other means, where appropriate. Company agrees to conduct an audit on at least an annual basis to evaluate the security of Personal Information in Company’s possession and to verify that the terms of this Agreement with respect to Personal Information are being followed. The results of such audit shall be made available to MS on request.

(e)

Upon request from MS, Company shall provide MS with any or all Personal Information in Company’s possession. Company shall within *** of termination or expiration of this Agreement, at MS’ sole discretion either:

(1)

Provide MS with all documents and materials (including any and all copies) containing Personal Information which are in its possession or under its control; or

(2)

Destroy all such specified documents and materials (including any and all copies in any and all formats) and provide MS with a certificate of destruction signed by an officer of Company.


x		21

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

VIRTUAL WAREHOUSE SCHEDULE

Company may establish an off-site warehouse for Products to permit flexibility in manufacturing planning and to minimize inventory-holding requirements for an individual OEM Customer (“VW OEM”). The warehouse may be owned by Company, the VW OEM, or a third party warehouse provider approved in writing by MS (any of the above, a “Warehouse Provider”).

Company may distribute Product to an MS-authorized warehouse (“Warehouse”), to be pulled by a single VW OEM, subject to the same terms and conditions applicable to Company under this Agreement and provided that the following are satisfied.

(1)

Establishment of a Warehouse

At least *** before Company intends to send inventory to a Warehouse, Company will provide MS the following information:

(a)

VW OEM legal name and CLA Number;

(b)

physical address of the Warehouse (must be within Company’s Territory);

(c)

if Company is not the Warehouse Provider, Warehouse Provider’s legal name, address, postal code, city, state/province, country (must be within the Company’s Territory), phone number, fax number contact name, job title and email address; and

(d)

the Warehouse (and Warehouse Provider, if a third party other than the VW OEM) must be approved in writing by MS prior to any distribution to the Warehouse.

(2)

Records and Reports by Company

(a)

Company agrees to track and maintain the following records on Company’s premises:

(1)

The number of Products shipped to the Warehouse, including the number of COAs; and

(2)

The number of Products shipped from the Warehouse to the VW OEM (regardless of whether Company is the Warehouse Provider).

(b)

Company will report all shipments from the Warehouse for the past month in its next required sales-out report.

(3)

Deliveries to the Warehouse

(a)

All shipments from ARs must continue to be delivered to Company. Only Company is authorized to deliver the Product to the approved Warehouse.

(b)

All Product will be delivered by Company to the Warehouse

(c)

Company shall suspend all shipments to and from the Warehouse upon notice from MS.

(4)

Warehouse Agreement

If Company is not the Warehouse Provider, it must enter into a separate written agreement with the Warehouse Provider to remain effective concurrently with this Agreement (“Warehouse Agreement”). A sample warehouse agreement may be provided on the ECE or such other website as MS may designate. MS reserves the right to modify the sample warehouse agreement without notice to Company. In the event of any inconsistencies between the sample warehouse agreement and this Schedule, the latter shall control.

(a)

The Warehouse Agreement must require the Warehouse Provider to:

(1)

Distribute Product only to VW OEM on behalf of Company;

(2)

Comply with obligations identical to those imposed on Company by Sections 2(c)(3), 2(c)(4), 2(l) (IP Notices), 2(m) (Logos), 2(p) (No Representations for MS), 2(q), 2(r) and 9(c)(2) of this Agreement;

(3)

Report monthly to Company all pulls of Product from the Warehouse;

(4)

Account for and reconcile all Products in inventory on a monthly basis, which shall include:

(i)

Beginning and ending COA inventory;

(ii)

COAs received from Company;

(iii)

COA distribution to Company or VW OEM; and

(iv)

COAs that cannot be distributed for any reason.

(5)

Maintain a log of each damaged or destroyed COA that includes the date damaged, or destroyed, Product name, COA number and cause of damage or destruction, and return each damaged COA to Company;

(6)

Report the reconciliation in Section (4)(a)(4) above to Company on a monthly basis;


x		22

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: F86CD263-4B1D-40DC-B6F7-CB6F76AE2860

(7)

Return, at Warehouse Provider’s expense, Product (including COAs) and any copies thereof, to Company as directed, within *** after cancellation or expiration of the Warehouse Agreement; and

(8)

Provide access to the Warehouse to audit or inspection teams sent on behalf of MS or Company. Such team may perform an audit of the Warehouse Provider’s records, an inspection of the Warehouse and Warehouse procedures to determine compliance with the terms of this Schedule and the Warehouse Agreement.

(b)

The Warehouse Agreement must also:

(1)

Expressly provide that MS is an intended third party beneficiary of the Warehouse Agreement; and to pay MS’ or Company’s attorneys’ fees if Company or MS employs attorneys to enforce any rights arising out of the Warehouse Agreement.

(2 )

Include the Warehouse Provider’s consent to the appropriate venue and jurisdiction as follows:

(i)

MSLI and MCCL. If MS is defined as MSLI or MCCL, Washington State law governs the Warehouse Agreement and any claims for breach of the Warehouse Agreement, regardless of conflict of laws principles. The federal courts in Washington State or New York State are the exclusive venues for all disputes arising from the Warehouse Agreement. If there is no federal subject matter jurisdiction, then the state courts of Washington State are the exclusive venue. Each party consents to the exercise of personal jurisdiction by these courts. Each party agrees that it cannot revoke this consent.

(ii)

MIOL. If MS is defined as MIOL, the laws of Ireland govern the Warehouse Agreement and any claims for breach of the Warehouse Agreement, regardless of conflict of laws principles. The courts of Ireland are the exclusive venues for all disputes arising from the Warehouse Agreement. Each party consents to the exercise of personal jurisdiction by these courts. Company and the Warehouse Provider agree, for the benefit of MS and MS Affiliates that the courts of Ireland will have jurisdiction to hear and determine any suit, action, or proceedings that may arise out of or in connection with the Warehouse Agreement. For those purposes, Company and the Warehouse Provider submit to the jurisdiction of those courts. Each party agrees that it cannot revoke this consent.

(c)

Company shall immediately cancel all Warehouse Agreements upon the cancellation or expiration of this Agreement or the CLA with the VW OEM.

(d)

Upon MS request, Company shall provide a copy of its Warehouse Agreement template, and executed agreements to MS. If the Warehouse Agreements are not in the English language, Company shall also provide an accurate and complete English translation of the Warehouse Agreements.

(e)

Company shall promptly notify MS in writing of the cancellation, expiration or significant modification of the terms of any Warehouse Agreement.

(f)

Company shall immediately cease use of any Warehouse Provider upon receipt of written notice from MS:

(1)

that the Warehouse Provider has breached a material provision of the Warehouse Agreement; or

(2)

has caused Company to be in breach of a material provision of this Agreement.

(g)

Company may resume using the services of such Warehouse Provider provided that:

(1)

Company and/or Warehouse Provider is able to completely cure such breach within *** of Company’s receipt of MS’ notice,

(2)

MS has confirmed the breach has been cured to its satisfaction, and

(3)

MS has agreed in writing to Company’s continued use of the Warehouse Provider.

(5)

Returns. All copies of Product (including COAs) in the Warehouse shall be returned to Company upon any expiration or termination of this Agreement, the Warehouse Agreement, or the CLA with the VW OEM, whichever occurs earliest.

(6)

Guarantee. Company guarantees the performance of each Warehouse Provider under its Warehouse Agreement. Such guarantee is unconditional and irrevocable.

(7)

Indemnity. Company shall defend, indemnify and hold harmless MS and its Suppliers from and against all damages (including attorneys’ fees) of any kind in connection with the Warehouse Provider’s use or distribution of the Product, including, without limitation, damages resulting from:

(a)

a breach of the terms of this Agreement and/or the Warehouse Agreement, or

(b)

any and all unauthorized distribution of any portion of the Product by the Warehouse Provider.

(8)

Survival. Sections (2) (Records and Reports by Company), (4) (Warehouse Agreement), (5) (Returns), (6) (Guarantee), and (7) (Indemnity) of this Schedule shall survive any cancellation or expiration of this Agreement.


x		23

CONFIDENTIAL

Microsoft OEM Distribution Agreement for Software Products for Embedded Systems, *** dated July 01, 2012 between MS and B SQUARE CORPORATION

DocuSign Envelope ID: AA0CA745-9895-425B-909C-ADF68A7DD369

Exhibit 10.18(B)


Microsoft PO #			***
DealPoint ID #

Statement of Work

(“SOW”)

Addresses and contacts for notices


“Microsoft”		“Vendor”

Company Name: Microsoft Corporation		Company Name: Bsquare Corporation

Primary Contact: ***		Primary Contact: ***

Address: One Microsoft Way Redmond, WA 98052-6399		Address: 110 110 ^th Ave NE, Suite 200 Bellevue, WA 98004-5840

Phone number: 425-882-8080		Phone number: 425-519-5250

Email: ***		Email: ***

Secondary Contact: ***		Secondary Contact: ***

		Microsoft Vendor Number: ***



SOW Effective Date:		July 1, 2012

SOW Expiration Date:		December 31, 2012

DealPoint # for Master Agreement		MMVA: ***

		MSCA: ***

Agreed and accepted


Microsoft		Vendor
Microsoft Signature:	***	Vendor Signature:
Microsoft Name: ***		Vendor Name: Brian Crowley

Microsoft Title: General Manager		Vendor Title: President and CEO

Microsoft Date: June 15, 2012 \| 17:20 PT		Vendor Date: June 15, 2012 \| 08:12 PT

SOW (Short Form)

January 2011 v.6

Confidential

Page 1 of 5

DocuSign Envelope ID: AA0CA745-9895-425B-909C-ADF68A7DD369

This SOW, executed in accordance with the terms of that certain Microsoft Master Vendor Agreement (the “Agreement”) dated June 6, 2008 between Microsoft and Vendor is entered into by the parties and effective as of the SOW Effective Date above.

1.	Description of Services

Pursuant to and in conformance with any standards, guidelines and/or specifications which may be provided by Microsoft to Vendor from time to time, Vendor will deliver to and/or perform for Microsoft the following goods, services and/or other items or materials as a work made for hire (collectively, the “Services”).

Vendor will provide Vendor engineers to assist with feature development, feature verification, and system stabilization via failure analysis and bug fixing for the Ford Gen2 project. The Vendor engineers will work under the supervision of the Microsoft WEB Connected Car team and may be required to work onsite in Microsoft facilities.

All Services shall be treated as Microsoft Confidential Information unless otherwise designated by Microsoft.

2.	Deliverables/Delivery Schedule

Vendor shall complete and deliver all Services to Microsoft on or before December 31, 2012. The milestone delivery schedule for the Services, if applicable, shall be as follows:


Milestone #	Brief Description of Services to be completed by Vendor and delivered to Microsoft	Due on or Before
1	Provide engineering feature dev, verification and system stabilization via failure analysis and bug fixing for the FordGen2 project		07/31/2012

2	Provide engineering feature dev, verification and system stabilization via failure analysis and bug fixing for the FordGen2 project		08/31/2012

3	Provide engineering feature dev, verification and system stabilization via failure analysis and bug fixing for the FordGen2 project		09/30/2012

4	Provide engineering feature dev, verification and system stabilization via failure analysis and bug fixing for the FordGen2 project		10/31/2012

5	Provide engineering feature dev, verification and system stabilization via failure analysis and bug fixing for the FordGen2 project		11/30/2012

6	Provide engineering feature dev, verification and system stabilization via failure analysis and bug fixing for the FordGen2 project		12/31/2012

SOW (Short Form)

January 2011 v.6

Confidential

Page 2 of 5

DocuSign Envelope ID: AA0CA745-9895-425B-909C-ADF68A7DD369

3.	Payment

3.1

Services Fees

As complete and final payment for Services which has been completed and delivered by Vendor to Microsoft and which has been accepted by Microsoft, Microsoft shall pay Vendor a total fee not to exceed Three Million Two Hundred Sixty Two Thousand One Hundred U. S. Dollars ( $3,262,100.00 USD ) in accordance with the following milestone payment schedule:


Milestone #	Not to Exceed Payment Amount	Delivery/Payment Date
1	$506,960.00 USD	07/31/2012
2	$583,004.00 USD	08/31/2012
3	$532,308.00 USD	09/30/2012
4	$532,308.00 USD	10/31/2012
5	$506,960.00 USD	11/30/2012
6	$506,960.00 USD	12/31/2012
Sub-Total	$3,168,500.00 USD
Travel Expenses (if any see Section 3.2, below)	$15,000.00 USD
Total	$3,183,500.00 USD

3.2

Expenses

Vendor will bear sole responsibility for all expense incurred in connection with the performance of the Services, unless otherwise agreed to in advance in writing by Microsoft. Table D, below, sets forth a representative sample of expenses and estimated amounts for which Vendor may seek Microsoft’s prior written approval.

Table D


Expense Description	Monthly Rate		Aggregate Rate for the term of the SOW Total
Akron Vehicle Charges (fuel, parking, tolls, service, tax, misc.)	$	***	$	***
Rent Charges (Charge-back to Microsoft)	$	***	$	***
Travel (hotels, flights, taxis, meals, parking)	$	***	$	***

Total	$	*******	$	*******

4.	Source Code

Vendor’s access to and use of the Windows Embedded Automotive source code provided by Microsoft to Vendor for purposes of performing the Work described under this SOW, shall be governed by the terms and conditions of the Microsoft Master Source Code Agreement(s) entered into by and between the parties on January 16, 2012 and the associated License Form(s) effective as of July 1, 2012 (“Source Code Agreements”). The source code shall only be used for purposes of performing the Work and may not be used for any other purpose. If a conflict arises between the terms of this SOW and the Source Code Agreements, the terms of the Source Code Agreements shall govern with respect to Vendor’s use of the source code.

SOW (Short Form)

January 2011 v.6

Confidential

Page 3 of 5

DocuSign Envelope ID: AA0CA745-9895-425B-909C-ADF68A7DD369

5.	Vendor’s Use of Microsoft Materials

In accordance with Section 3.1 of the Agreement, “Microsoft Materials” shall be defined as Windows Embedded Automotive source code and any and all other information, software or tools provided to Vendor by Microsoft for the purpose of performing the Work outlined in this SOW.

6.	Additional Obligations

6.1

Resource Requirements

6.1.1 All Vendor engineers must be proficient in embedded system design and integration, and may have more specific requirements based on specific project areas. All Vendor engineers must be proficient in spoken and written English for project communication and creating/updating engineering specifications. In addition, Vendor verification engineers must be proficient in embedded system verification testing.

6.1.2 In the event a resource in Table E is no longer available to work providing Services, Vendor will propose a qualified replacement. Microsoft will have the option to interview the candidate and add their name to Table E. Their rate level will be determined by joint agreement as between Microsoft and Vendor.

6.1.3 In the event Microsoft would like more resources from Vendor to provide Services, Vendor will propose a qualified resource. Microsoft will have the option to interview the candidate and add their name to Table E. Their rate level will be determined by joint agreement as between Microsoft and Vendor.

[Remainder of this page is intentionally left blank.]

SOW (Short Form)

January 2011 v.6

Confidential

Page 4 of 5

DocuSign Envelope ID: AA0CA745-9895-425B-909C-ADF68A7DD369

Exhibit A

This Table E defines the employees Vendor will apply to the project beginning on the SOW Effective Date.

Table E


Name		Level
*******

SOW (Short Form)

January 2011 v.6

Confidential

Page 5 of 5

Exhibit 10.19

BSQUARE CORPORATION

FOURTH AMENDED AND RESTATED

STOCK PLAN


1.		DEFINITIONS.	1

2.		PURPOSES.	4

3.		ADMINISTRATION.	4

	(A)	C OMMITTEE .	4
	(B)	A PPOINTMENT OF C OMMITTEE .	4
	(C)	P OWERS ; R EGULATIONS .	4
	(D)	D ELEGATION TO E XECUTIVE O FFICER .	5

4.		ELIGIBILITY.	5

5.		STOCK.	5

6.		TERMS AND CONDITIONS OF OPTIONS.	6

	(A)	N UMBER OF S HARES AND T YPE OF O PTION .	6
	(B)	D ATE OF G RANT .	6
	(C)	O PTION P RICE .	6
	(D)	D URATION OF O PTIONS .	7
	(E)	V ESTING S CHEDULE AND E XERCISABILITY OF O PTIONS	7
	(F)	A CCELERATION OF V ESTING .	8
	(G)	T ERM OF O PTION .	8
	(H)	E XERCISE OF O PTIONS .	9
	(I)	P AYMENT UPON E XERCISE OF O PTION .	9
	(J)	R IGHTS AS A S HAREHOLDER .	9
	(K)	T RANSFER OF O PTION .	10
	(L)	S ECURITIES R EGULATION AND T AX W ITHHOLDING .	10
	(M)	S TOCK S PLIT , R EORGANIZATION OR L IQUIDATION .	12
	(N)	A PPROVED T RANSACTIONS ; C ONTROL P URCHASE .	13

7.		TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.	13

	(A)	A WARD OF S TOCK A PPRECIATION R IGHTS .	13
	(B)	R ESTRICTIONS OF T ANDEM SAR S .	14
	(C)	A MOUNT OF P AYMENT U PON E XERCISE OF SAR S .	14
	(D)	F ORM OF P AYMENT U PON E XERCISE OF SAR S .	14

8.		RESTRICTED STOCK AWARDS.	14

	(A)	N ATURE OF R ESTRICTED S TOCK A WARDS .	14
	(B)	R IGHTS AS A S HAREHOLDER .	15
	(C)	R ESTRICTIONS .	15
	(D)	V ESTING OF R ESTRICTED S TOCK .	15
	(E)	W AIVER , D EFERRAL AND R EINVESTMENT OF D IVIDENDS .	15

9.		UNRESTRICTED STOCK AWARDS.	15

	(A)	G RANT OR S ALE OF U NRESTRICTED S TOCK .	15
	(B)	E LECTIONS TO R ECEIVE U NRESTRICTED S TOCK I N L IEU OF C OMPENSATION .	15
	(C)	R ESTRICTIONS ON T RANSFERS .	16

10.		TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS.	16

11.		SECURITIES REGULATION AND TAX WITHHOLDING.	17

12.		STOCK SPLIT, REORGANIZATION OR LIQUIDATION.	18

13.		APPROVED TRANSACTIONS; CONTROL PURCHASE.	19

14.		EFFECTIVE DATE; TERM.	20

15.		NO OBLIGATIONS TO EXERCISE AWARD.	20


16.	NO RIGHT TO AWARDS OR TO EMPLOYMENT.	20

17.	APPLICATION OF FUNDS.	20

18.	INDEMNIFICATION OF COMMITTEE.	21

19.	SHAREHOLDERS AGREEMENT.	21

20.	SEPARABILITY.	21

21.	NON-EXCLUSIVITY OF THE PLAN.	21

22.	EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION.	21

23.	AMENDMENT OF PLAN.	22

BSQUARE CORPORATION

FOURTH AMENDED AND RESTATED

STOCK 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)

“Covered Employee” has the meaning given to it by Section 162(m)(3) of the Code.

(l)

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

(m)

“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.

(n)

“Effective Date” means at the time specified in the resolutions of the Board adopting the Plan.

(o)

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

(p)

“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.

(q)

“Executive Officer” shall be defined in Section 3(d).

(r)

“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.

(s)

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

(t)

“Incentive Stock Option” means an Option that is an incentive stock option within the meaning of Section 422 of the Code.

(u)

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

(v)

“Non-Insiders” has the meaning given to by Section 162(m)(3) of the Code.

(w)

“Non-Qualified Stock Option” means an Option that is not an Incentive Stock Option.

(x)

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

(y)

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

(z)

“Outside Director” has the meaning given to it by the regulations promulgated under Section 162(m) of the Code.

(aa)

“Plan” means the BSQUARE CORPORATION Fourth Amended and Restated Stock Plan.

(bb)

“Qualified Performance-Based Compensation” has the meaning given to it by the regulations promulgated under Section 162(m) of the Code.

(cc)

“Related Corporation” means any corporation (other than the Company) that is a “parent corporation” of the Company or “subsidiary corporation” of the Company, as defined in Sections 424(e) and 424(f), respectively, of the Code.

(dd)

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

(ee)

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

(ff)

“SARs” means Awards granted pursuant to Section 7.

(gg)

“Section 16 Insiders” means individuals who are subject to Section 16(b) of the Exchange Act with respect to the Common Stock.

(hh)

“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.

(ii)

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

(jj)

“Ten Percent Shareholder” means a person who owns more than ten percent of the total combined voting power of the Company or any related corporation as determined with reference to Section 424(d) of the Code.

(kk)

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

2.	PURPOSES.

The purposes of the Plan are to retain the services of directors, valued key employees and consultants of the Company and such other persons as the Committee shall select in accordance with Section 4, to encourage such persons to acquire a greater proprietary interest in the Company, thereby strengthening their incentive to achieve the objectives of the shareholders of the Company, and to serve as an aid and inducement in hiring new employees and to provide an equity incentive to directors, consultants and other persons selected by the Committee.

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 Board shall consider whether a director is (i) an Outside Director and (ii) a Non-Employee Director when appointing any such Committee and shall appoint solely two or more individuals who qualify as Outside Directors if the Board intends for compensation attributable to Options to be Qualified Performance-Based Compensation. 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; and

(x)

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

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.

(d)

Delegation to Executive Officer.

The Committee may by resolution delegate to one or more executive officers (the “Executive Officer”) of the Company the authority to grant Awards under the Plan to consultants and employees of the Company who, at the time of grant, are not Section 16 Insiders nor Covered Employees; provided , however , that the authority delegated to the Executive Officer under this Section 3 shall not exceed that of the Committee under the provisions of the Plan and shall be subject to such limitations, in addition to those specified in this Section 3, as may be specified by the Committee at the time of delegation.

4.	ELIGIBILITY.

Incentive Stock Options may be granted to any individual who, at the time such Options are granted, is an Employee, including Employees who are also directors of the Company. Other Awards may be granted to Employees and to such other persons as the Committee shall select. Awards may be granted in substitution for outstanding options or equity-based awards of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization between such other corporation and the Company or any subsidiary of the Company. At such point as the Company first becomes subject to the periodic reporting requirements of Section 12 of the Exchange Act, no person shall be eligible to receive in any fiscal year Awards for more than 500,000 shares of Common Stock (subject to adjustment as set forth herein).

5.	STOCK.

The Company is authorized to grant up to a total of 2,922,809 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 (including the amount of the annual increase described in this Section 5) 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; provided, however, that any expired or terminated Awards will be counted against the maximum number of shares with respect to which Awards may be granted to any particular person as set forth in 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 or Executive Officer, 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 and whether the Option is intended to be an Incentive Stock Option or a Non-Qualified Stock Option. In the absence of action to the contrary by the Committee or Executive Officer in connection with the grant of an Option, all Options shall be Non-Qualified Stock Options. The aggregate Fair Market Value (determined at the Date of Grant) of the Common Stock with respect to which the Incentive Stock Options granted to the Optionee and any incentive stock options granted to the Optionee under any other stock option plan of the Company, any Related Corporation or any predecessor corporation are exercisable for the first time by the Optionee during any calendar year shall not exceed $100,000, or such other limit as may be prescribed by the Code. If

(i)

an Optionee holds one or more Incentive Stock Options under the Plan (and/or any incentive stock options under any other stock option plan of the Company, any Related Corporation or any predecessor corporation), and

(ii)

the aggregate Fair Market Value of the shares of Common Stock with respect to which, during any calendar year, such Options become exercisable for the first time exceeds $100,000 (said value to be determined as provided above),

then such Option or Options are intended to qualify under Section 422 of the Code with respect to the maximum number of such shares as can, in light of the foregoing limitation, be so qualified, with the shares so qualified to be the shares subject to the Option or Options earliest granted to the Optionee. If an Option that would otherwise qualify as an Incentive Stock Option becomes exercisable for the first time in any calendar year for shares of Common Stock that would cause such aggregate Fair Market Value to exceed $100,000, then the portion of the Option in respect of such shares shall be deemed to be a Non-Qualified Stock Option.

(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 or Executive Officer at whatever price the Committee or Executive Officer may determine in the exercise of its sole discretion; provided, however, that the per share exercise price for an Incentive Stock Option shall not be less than the Fair Market Value at the Date of Grant; provided further , that with respect to Incentive Stock Options granted to Ten Percent Shareholders of the Company, the per share exercise price shall not be less than 110 percent (110%) of 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 or Executive Officer shall designate, subject to Section 6(g), the expiration date of the Option, which date shall not be later than ten (10) years from the Date of Grant in the case of Incentive Stock Options; provided, however, that the expiration date of any Incentive Stock Option granted to a Ten Percent Shareholder shall not be later than five (5) years from the Date of Grant. In the absence of action to the contrary by the Committee in connection with the grant of an Option, and except in the case of Incentive Stock Options granted to Ten Percent Shareholders, 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 or Executive Officer 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 or Executive Officer may specify a vesting schedule for all or any portion of an Option based on the achievement of performance objectives established in advance of the commencement by the Optionee of services related to the achievement of the performance objectives. Performance objectives shall be expressed in terms of one or more of the following: return on equity, return on assets, share price, market share, sales, earnings per share, costs, net earnings, net worth, inventories, cash and cash equivalents, gross margin or the Company’s performance relative to its internal business plan. Performance objectives may be in respect of the performance of the Company as a whole (whether on a consolidated or unconsolidated basis), a Related Corporation, or a subdivision, operating unit, product or product line of the foregoing. Performance objectives may be absolute or relative and may be expressed in terms of a progression or a range. An Option which is exercisable (in whole or in part) upon the achievement of one or more performance objectives may be exercised only upon completion of the following process: (a) the Optionee must deliver written notice to the Company that the performance objective has been achieved and demonstrating, if necessary, how the objective has been satisfied, (b) within 45 days after receipt of such notice, the Committee will make a good faith determination whether such performance objective has been achieved and deliver written notice to the Optionee detailing the results of such determination; if the Company fails to respond with such 45-day period, then the performance objective shall be presumed to have been achieved and (c) upon receipt of written notice from the Company that the performance objective has been achieved (or upon expiration of such 45-day period without a determination by the Company), the Optionee may exercise the Option; upon receipt of written notice from the Company that the performance objective has not been achieved, the Optionee shall have 15 days to appeal the Company’s determination and the Company shall have 15 days after the receipt of such appeal to consider the issues presented by the Optionee and make a determination on the appeal, which determination shall be conclusive and binding on the Optionee.

(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 or the Executive Officer 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. For purposes of this subsection with respect to Incentive Stock Options, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Committee). The foregoing notwithstanding, employment shall not be deemed to continue beyond the first ninety (90) days of such leave, unless the Optionee’s re-employment rights are guaranteed by statute or by contract.

(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 solely with respect to Non-Qualified Stock Options, 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;

(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 (including the amount of the annual increase in the number of shares reserved for issuance described in 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.

(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.

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; provided, however, that a tandem SAR

shall not be granted with respect to any outstanding Incentive Stock Option without the consent of the Awardee. 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.

No Incentive Stock Option may be surrendered in connection with the exercise of a tandem SAR unless the Fair Market Value of the Common Stock subject to the Incentive Stock Option is greater than the exercise price for such Incentive Stock Option. 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.

(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.

(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.

10.

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 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.

11.

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.

(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.

12.

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 (including the amount of the annual increase in the number of shares reserved for issuance described in 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:

(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.

(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.

13.

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.

become exercisable on an accelerated basis, or to assume such Awards (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 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 effective at the time specified in the resolutions of the Board adopting the Plan (the “Effective Date”). Awards may be granted by the Committee or Executive Officer from time to time thereafter until the tenth anniversary of the Effective Date. 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. Issuance of Incentive Stock Options under the Plan within twelve (12) months after the Effective Date shall be subject to the approval of the Plan by the shareholders of the Company at a duly held meeting of shareholders at which a majority of all outstanding voting stock of the Company is represented in person or by proxy. The approval required shall be a majority of the votes cast on the proposal to approve the Plan. Such approval may also be provided pursuant to a written consent in lieu of such meeting. No Incentive Stock Option granted hereunder shall be exercisable until this approval requirement has been satisfied. If this requirement is not satisfied within twelve (12) months after the Effective Date, then, notwithstanding any contrary provision in the Plan (a) no Incentive Stock Options may thereafter be granted under the Plan, and (b) each Incentive Stock Option granted under the Plan prior thereto shall automatically be deemed to be a Non-Qualified Stock Option (except to the extent the Agreement evidencing the Option expressly provides otherwise).

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 and the Executive Officer 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 or Executive Officer 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 or Executive Officer 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.

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.

SEPARABILITY.

With respect to Incentive Stock Options, if the Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out in full herein; provided , however , that to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, the Option, to that extent, shall be deemed to be a Non-Qualified Stock Option for all purposes of the Plan.

21.

NON-EXCLUSIVITY OF THE PLAN.

Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company for approval shall 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.

22.

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.

23.

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.

Approved by Board of Directors of the Company: February 21, 2012

Approved by Shareholders of the Company: June 13, 2012

Plan Expires: February 21, 2022

Exhibit – 10.19(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

FOURTH AMENDED AND RESTATED STOCK PLAN

NON-QUALIFIED STOCK OPTION AGREEMENT

THIS AGREEMENT is entered into as of the <date> day of <month>, <year> (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 Fourth Amended and Restated Stock Plan (the “Plan”), pursuant to which the Plan Administrator is authorized to grant to employees of the Company or any Related Corporation (“Employees”) and certain other designated individuals 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:

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


Signature				Signature


Name Typed or Printed				Name


				Title

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 Fourth Amended and Restated Stock 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 – 10.19(b)

BSQUARE CORPORATION

FOURTH AMENDED AND RESTATED STOCK PLAN

RESTRICTED STOCK GRANT AGREEMENT

This Restricted Stock Grant Agreement (the “ Agreement ”) is made as of by and between BSQUARE Corporation, a Washington corporation (the “ Company ”), and (“ Participant ”).

1. Issuance of Restricted Stock . Subject to the terms and conditions of this Agreement, on the date of this Agreement the Company will issue to Participant uncertificated shares of the Company’s Common Stock (the “ Shares ”). The term “Shares” refers to the granted Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Participant is entitled by reason of Participant’s ownership of the Shares. The issuance of the Shares shall be subject to the terms, definitions and provisions of the BSQUARE Corporation Fourth Amended and Restated Stock Plan (the “ Plan ”) adopted by the Company, which is incorporated in this Agreement by reference. Unless otherwise defined in this Agreement, the terms used in this Agreement shall have the meanings defined in the Plan.

2. Issuance of Shares . The certificates representing the shares shall not be physically issued; instead, the Company’s transfer agent will record the Shares electronically in the stock records of the Company, and Participant will have reasonable access to such records.

3. Limitations on Transfer . In addition to any other limitation on transfer created by applicable securities laws, Participant shall not assign, encumber or dispose of any interest in the Shares while the Shares are subject to the Company’s Forfeiture Right (as defined below), except in compliance with the provisions below. After any Shares have been released from the Forfeiture Right, Participant shall not assign, encumber or dispose of any interest in such Shares except in compliance with applicable securities laws.

(a) Forfeiture Right .

(i) In the event of the voluntary or involuntary termination of Participant’s service as a director of the Company for any reason (including death or disability), the Company shall upon the date of such termination (the “ Termination Date ”) have an irrevocable, exclusive right (the “ Forfeiture Right ”) to require forfeiture of the Shares held by Participant as of the Termination Date for which the Forfeiture Right has not expired.

(ii) The Forfeiture Right shall be exercised by the Company by written notice at any time following the Termination Date to Participant or Participant’s executor. Upon delivery of such notice, the Shares shall become authorized but unissued capital stock of the Company, without further action by Participant.

(iii) [ ] Percent ([ ]%) of the Shares shall initially be subject to the Forfeiture Right. The Shares shall be released from the Forfeiture Right as follows: [ ].

(b) Assignment and Transfer . The Forfeiture Right may be assigned by the Company in whole or in part. Until the Shares have been released from the Company’s Forfeiture Right,

the Shares 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 without the prior written consent of the Company. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Shares or of any right or privilege conferred by this Agreement contrary to the provisions of this Agreement or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred by this Agreement, shall be null and void.

4. Restrictions Binding on Transferees . All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement, including, insofar as applicable, the Forfeiture Right. In the event the Forfeiture Right is deemed exercised by the Company pursuant to Section 3(a)(ii) hereof, the Company may deem any transferee to have transferred the Shares or interest to Participant prior to their forfeiture to the Company.

5. Legends; Stop-Transfer Orders .

(a) Legends . Any electronic record evidencing the Shares shall include substantially the following legend (as well as any legends required by applicable state and federal corporate and securities laws):

THESE SHARES MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

(b) Stop-Transfer Notices . Participant agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent.

(c) Refusal to Transfer . The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

(d) Expiration of Forfeiture Right . Upon the expiration of the Forfeiture Right, appropriate entries will be made in the Company’s stock records and/or the Depository Trust Company’s DWAC system to reflect Participant’s unrestricted ownership of the Shares.

6. Section 83(b) Election . Participant understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”), taxes as ordinary income the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, “ restriction ” means the right of the Company to require the forfeiture of the Shares pursuant to the Forfeiture Right set forth in Section 3(a) of this Agreement. Participant understands that Participant may elect to be taxed at the time the Shares are issued, rather than when and as the Forfeiture Right expires, by filing an election under Section 83(b) (an “ 83(b) Election ”) of the Code with the Internal Revenue Service within 30 days from the date of issuance. Even if the fair market value of the Shares at the time of the execution of this Agreement equals the amount paid for the Shares, the election must be made to avoid income under Section 83(a) in the future. Participant understands that failure to file such an election in a timely manner may result in adverse tax consequences for Participant. Participant further understands that an additional copy of such election form should be filed with his or her federal income tax return for the calendar year in which the date of this Agreement falls. Participant acknowledges that the foregoing is only a summary of the effect of United States federal income taxation

with respect to the issuance of the Shares hereunder, and does not purport to be complete. Participant further acknowledges that the Company has directed Participant to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which Participant may reside, and the tax consequences of Participant’s death.

7. Effect of Agreement . Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof (and has had an opportunity to consult counsel regarding the terms), and hereby accepts the Shares and agrees to be bound by the contractual terms as set forth herein and in the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions and interpretations of the Plan Administrator regarding any questions relating to the Shares. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail. This Agreement, including the Plan, constitutes the entire agreement between Participant and the Company on the subject matter hereof and supersedes all proposals, written or oral, and all other communications between the parties relating to such subject matter.

[Signature Page Follows]

The parties have executed this Agreement as of the date first set forth above.


BSQUARE CORPORATION

By:

Title:

PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE RELEASE OF THE COMPANY’S FORFEITURE RIGHT UNDER SECTION 3 HEREOF SHALL OCCUR ONLY THROUGH CONTINUING SERVICE AS A DIRECTOR OF THE COMPANY. PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON PARTICIPANT ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH RELATIONSHIP WITH THE COMPANY.


PARTICIPANT

By:

Name:

Address:

Forfeiture Commencement Date:

Exhibit – 10.19(c)

BSQUARE CORPORATION

FOURTH AMENDED AND RESTATED STOCK PLAN

RESTRICTED STOCK UNIT AGREEMENT

This Restricted Stock Unit Agreement (the “ Agreement ”) is made as of by and between BSQUARE CORPORATION, a Washington corporation (the “ Company ”), and (the “ Participant ”).

1. Award of Restricted Stock Units . Subject to the terms and conditions of this Agreement, on the date of this Agreement the company will award to Participant Restricted Stock Units representing ( ) shares of Common Stock (the “ Units ”). The award of the Units shall be subject to the terms, definitions and provisions of the BSQUARE Corporation Fourth Amended and Restated Stock Plan (now and as amended in the future, the “ Plan ”) adopted by the Company, which is incorporated in this Agreement by reference. Unless otherwise defined in this Agreement, the terms used in this Agreement shall have the meanings defined in the Plan.

2. Payment for the Units . No payment is required for the Units that Participant is receiving.

3. Vesting Schedule . The Units shall vest as follows: [ ].

4. Forfeiture of Units . If Participant’s employment or contractual relationship with the Company terminates for any reason, then Participant’s Units will be forfeited to the extent that they have not vested before the termination date and do not vest as a result of the termination. This means that the Units that have not already vested will immediately be cancelled. Participant will receive no payment for Units that are forfeited. Unless otherwise required by applicable law, the Company determines when Participant’s employment or contractual relationship with the Company terminates for this purpose.

5. Units Not Transferable . The Units 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 Units 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 Units shall thereupon terminate and become null and void.

6. Restrictions on Resale . By accepting the Units, Participant agrees not to sell any shares of Common Stock at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as Participant’s employment or contractual relationship with the Company continues and for such period of time after the termination of such employment or contractual relationship as the Company may specify.

7. Adjustments . In the case of any stock split, stock dividend or like change in the nature of shares granted by this Agreement, the number of Units shall be proportionately adjusted as set forth in the Plan.

8. Settlement of Units . Each of Participant’s Units will be settled when it vests, unless Participant and the Company have agreed to a later settlement date. At the time of settlement, Participant will receive one share of Common Stock for each vested Unit. The Company, at its sole discretion, may

substitute an equivalent amount of cash if the distribution of stock is not reasonably practicable due to the requirements of applicable law. The amount of cash will be determined on the basis of the Fair Market Value of the Company’s Common Stock at the time of settlement, as further described in the Plan.

9. Participant Acknowledgments . The Participant acknowledges that he or she has read and understands the terms of this Agreement and the Plan, and that:

(a) The Units are mere bookkeeping entries and, as such, represent only the Company’s unfunded and unsecured promise to issue shares of Common Stock on a future date, therefore, as a holder of Units, Participant has no rights other than the rights of a general creditor of the Company;

(b) The Units carry neither voting rights nor rights to cash dividends, and Participant has no rights as a shareholder of the Company unless and until Participant’s Units are settled by issuing shares of Common Stock;

(c) No shares of Common Stock will be distributed to Participant unless Participant has made acceptable arrangements to pay any withholding taxes that may be due as a result of the settlement of the Units (with the Company’s consent, these arrangements may include (i) withholding shares of Common Stock that otherwise would be issued to Participant when the Units are settled or (ii) surrendering shares of Common Stock that Participant previously acquired, in each case, the fair market value of these shares, determined as of the date when taxes otherwise would have been withheld in cash, will be applied to the withholding taxes); and

(d) This Agreement does not constitute an employment agreement nor does it entitle the Participant to any specific employment or to employment for a period of time and that the Participant’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 Participant and the Company.

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

11. Effect of Agreement . Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Unites and agrees to be bound by the contractual terms as set forth herein and in the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions and interpretations of the Plan Administrator regarding any questions relating to the Units. In the event of a conflict between the terms and provisions of the Plan and the terms and provisions of this Agreement, the Plan terms and provisions shall prevail. This Agreement, including the Plan, constitutes the entire agreement between Participant and the Company on the subject matter hereof and supersedes all proposals, written or oral, and all other communications between the parties relating to such subject matter.

[Signature Page Follows]

The parties have executed this Agreement as of the date first set forth above.


BSQUARE CORPORATION

By:

Title:

PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF UNITS UNDER SECTION 3 HEREOF SHALL OCCUR ONLY THROUGH CONTINUING SERVICE AS AN EMPLOYEE OF OR SERVICE PROVIDER TO THE COMPANY. PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON PARTICIPANT ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH RELATIONSHIP WITH THE COMPANY.


PARTICIPANT:


(Signature)


(Printed Name)

Address:

Vesting Commencement Date:

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.

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.

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.

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company