BSQUARE CORP /WA (Form: 10-Q, Received: 08/13/2018 16:35:55)

250\‘I

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

☐	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 300, 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 ☒ 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 ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒

The number of shares of common stock outstanding as of July 31, 2018: 12,713,410

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2018

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	20
Item 5	Other Information	20
Item 6	Exhibits	21
	Signatures	22

PART I. FINANCIAL INFORMATION

I tem 1.

Financial Statements

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	June 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	10,238		$	12,859
Short-term investments		7,623			11,895
Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at June 30, 2018 and December 31, 2017, respectively		16,219			18,014
Contract assets		923			937
Prepaid expenses and other current assets		511			548
Total current assets		35,514			44,253
Equipment, furniture and leasehold improvements, less accumulated depreciation		1,220			989
Intangible assets, less accumulated amortization		316			365
Goodwill		3,738			3,738
Other non-current assets		212			89
Total assets	$	41,000		$	49,434
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Third-party software fees payable	$	9,619		$	10,547
Accounts payable		382			375
Accrued compensation		1,871			2,266
Other accrued expenses		745			681
Deferred rent		347			339
Deferred revenue		1,225			3,219
Total current liabilities		14,189			17,427
Deferred rent, long-term		340			516
Deferred revenue, long-term		836			61
Shareholders' equity:
Preferred stock, no par: 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, no par: 37,500,000 shares authorized; 12,712,134 and 12,664,489 issued and outstanding at June 30, 2018 and December 31, 2017, respectively		137,932			137,622
Accumulated other comprehensive loss		(904	)		(916	)
Accumulated deficit		(111,393	)		(105,276	)
Total shareholders' equity		25,635			31,430
Total liabilities and shareholders' equity	$	41,000		$	49,434

See notes to condensed consolidated financial statements .

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenue:
Third-party software	$	16,992		$	15,505		$	33,056		$	32,302
Proprietary software		281			481			2,076			3,135
Professional engineering service		1,930			2,862			4,749			6,252
Total revenue		19,203			18,848			39,881			41,689
Cost of revenue:
Third-party software		14,480			13,103			27,834			27,185
Proprietary software		100			39			141			71
Professional engineering service		1,362			1,833			3,445			4,307
Total cost of revenue		15,942			14,975			31,420			31,563
Gross profit		3,261			3,873			8,461			10,126
Operating expenses:
Selling, general and administrative		4,901			5,046			10,349			9,911
Research and development		2,078			1,446			4,308			2,793
Total operating expenses		6,979			6,492			14,657			12,704
Loss from operations		(3,718	)		(2,619	)		(6,196	)		(2,578	)
Other income, net		47			59			91			114
Loss before income taxes		(3,671	)		(2,560	)		(6,105	)		(2,464	)
Income tax benefit (expense)		(12	)		—			(12	)		106
Net loss	$	(3,683	)	$	(2,560	)	$	(6,117	)	$	(2,358	)
Basic loss per share	$	(0.29	)	$	(0.20	)	$	(0.48	)	$	(0.19	)
Diluted loss per share	$	(0.29	)	$	(0.20	)	$	(0.48	)	$	(0.19	)
Shares used in per share calculations:
Basic		12,697			12,577			12,685			12,563
Diluted		12,697			12,577			12,685			12,563

Net loss	$	(3,683	)	$	(2,560	)	$	(6,117	)	$	(2,358	)
Other comprehensive income
Foreign currency translation, net of tax		21			14			10			22
Unrealized gain (loss) on investments, net of tax		(8	)		(2	)		2			3
Total other comprehensive income		13			12			12			25
Comprehensive loss	$	(3,670	)	$	(2,548	)	$	(6,105	)	$	(2,333	)

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(6,117	)	$	(2,358	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		305			320
Stock-based compensation		315			810
Changes in operating assets and liabilities:
Accounts receivable, net		1,795			2,879
Contract assets		(136	)		450
Prepaid expenses and other assets		70			(331	)
Third-party software fees payable		(928	)		(5,748	)
Accounts payable and accrued expenses		(319	)		(261	)
Deferred revenue		(1,219	)		(1,378	)
Deferred rent		(168	)		(155	)
Net cash used in operating activities		(6,402	)		(5,772	)
Cash flows from investing activities:
Purchases of equipment and furniture		(488	)		(264	)
Proceeds from maturities of short-term investments		10,875			19,699
Purchases of short-term investments		(6,607	)		(18,641	)
Net cash provided by investing activities		3,780			794
Cash flows from financing activities—proceeds from exercise of stock options		17			118
Effect of exchange rate changes on cash and cash equivalents		(16	)		16
Net decrease in cash and cash equivalents		(2,621	)		(4,844	)
Cash and cash equivalents, beginning of period		12,859			14,312
Cash and cash equivalents, end of period	$	10,238		$	9,468

See notes to condensed consolidated financial statements.

BSQUARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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. In the Condensed Consolidated Statements of Operations and Comprehensive Loss, prior period software revenue has been separately presented as third-party software and proprietary software to conform to current period presentation. 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, 2018, our operating results for the three and six months ended June 30, 2018 and 2017 and our cash flows for the six months ended June 30, 2018. The accompanying financial information as of December 31, 2017 is derived from audited financial statements as of that date. 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, 2017, as filed with the SEC on February 22, 2018. All intercompany balances have been eliminated.

Recently Issued Accounting Standard

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”), to make leasing activities more transparent and comparable, requiring most leases to be recognized by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-02 is effective for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. There are additional optional practical expedients that an entity may elect to apply. We plan to adopt this ASU beginning on January 1, 2019 and expect to elect certain available transitional practical expedients. We are continuing to evaluate the full impact of adoption and expect this ASU will have a material impact on our consolidated financial statements, primarily to our consolidated balance sheets and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), simplifying how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. ASU 2017-04 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted on testing dates after January 1, 2017. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

Loss Per Share

We compute basic loss per share using the weighted average number of common shares outstanding during the period and exclude any dilutive effects of common stock equivalent shares, such as options and restricted stock units (“RSUs”). We consider RSUs as outstanding common shares and include them in the computation of basic loss per share only when vested. We compute diluted loss per share using the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. We exclude common stock equivalent shares from the computation if their effect is anti-dilutive.

The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Stock options		1,478,347		1,406,504		1,502,275		1,413,608
Restricted stock units		60,788		43,382		61,130		45,947

2. Revenue Recognition

On January 1, 2017, we adopted ASU 2014-09, “Revenue from Contracts with Customers” (“Topic 606”), applying the modified retrospective method to all contracts that were not completed as of that date. Results for reporting periods beginning after January 1, 2017 are presented under Topic 606, while prior period results are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded an increase to opening equity of $404,000 as of January 1, 2017 due to the cumulative impact of adopting Topic 606.

Disaggregation of revenue

The following table provides information about disaggregated revenue by primary geographical market and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):

	Three Months Ended June 30, 2018								Three Months Ended June 30, 2017
	Third-Party Software		Proprietary Software		Professional Engineering Service		Total		Third-Party Software		Proprietary Software		Professional Engineering Service		Total
Primary geographical markets:
North America	$	16,281	$	265	$	1,633	$	18,179	$	14,956	$	473	$	2,299	$	17,728
Europe		702		5		182		889		435		—		379		814
Asia		9		11		115		135		114		8		184		306
Total	$	16,992	$	281	$	1,930	$	19,203	$	15,505	$	481	$	2,862	$	18,848

	Six Months Ended June 30, 2018								Six Months Ended June 30, 2017
	Third-Party Software		Proprietary Software		Professional Engineering Service		Total		Third-Party Software		Proprietary Software		Professional Engineering Service		Total
Primary geographical markets:
North America	$	31,400	$	1,948	$	4,120	$	37,468	$	31,252	$	3,118	$	5,128	$	39,498
Europe		1,295		105		428		1,828		859		—		777		1,636
Asia		361		23		201		585		191		17		347		555
Total	$	33,056	$	2,076	$	4,749	$	39,881	$	32,302	$	3,135	$	6,252	$	41,689

Contract balances

We receive payments from customers based upon contractual billing schedules; accounts receivable is recorded when the right to consideration becomes unconditional. Contract assets include amounts related to our contractual right to consideration for completed performance objectives not yet invoiced and deferred contract acquisition costs, which are amortized over time as the associated revenue is recognized. Contract liabilities, presented as deferred revenue on our condensed consolidated balance sheets, include payments received in advance of performance under the contract and are realized when the associated revenue is recognized under the contract. We had no asset impairment charges related to contract assets for each of the three and six months ended June 30, 2018 and 2017.

Significant changes in the contract assets and the deferred revenue balances during the six months ended June 30, 2018 were as follows (in thousands):

	Six Months Ended June 30, 2018
	Contract Assets		Deferred Revenue
Revenue recognized that was included in deferred revenue at December 31, 2017	$	—	$	2,681
Transferred to receivables from contract assets recognized at December 31, 2017		238		—

Contract acquisition costs

We capitalize contract acquisition costs for contracts with a term exceeding one year, as is more common with our DataV software bookings. A mortization of contract acquisition costs was $7,000 for each of the three months ended June 30, 2018 and 2017 and was $86,000 and $148,000 for the six months ended June 30, 2018 and 2017, respectively. There were no asset impairment charges for contract acquisitions costs for any of the periods noted above.

For contracts that have a duration of less than one year, we apply a practical expedient and fully expense these costs as incurred.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands). The estimated revenue does not include contracts with original durations of one year or less, amounts of variable consideration attributable to royalties, or contract renewals that are unexercised as of June 30, 2018:

	Remainder of 2018		2019		2020		2021
Third-party software	$	55	$	50	$	14	$	—
Proprietary software		1,028		1,699		1,615		445
Professional engineering services		230		—		—		—

Practical expedients and exemptions

We generally expense sales commissions when incurred because the amortization period is less than one year. We record these costs within selling, general and administrative expenses.

3. Cash, Cash Equivalents and Short-Term Investments

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

	June 30, 2018		December 31, 2017
Cash	$	7,238	$	6,340
Cash equivalents (see detail in Note 4)		3,000		6,519
Total cash and cash equivalents		10,238		12,859

Short-term investments (see detail in Note 4)		7,623		11,895

Total cash, cash equivalents and short-term investments	$	17,861	$	24,754

4. Fair Value Measurements

We measure our cash equivalents and short-term investments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1:

Quoted prices in active markets for identical assets or liabilities.

Level 2:

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

Level 3:

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

We classify our cash equivalents and short-term investments within Level 1 or Level 2 because our cash equivalents and short-term investments are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

Assets measured at fair value on a recurring basis as of June 30, 2018 and Dece mber 31, 2017 are summarized below (in thousands):

	June 30, 2018						December 31, 2017
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	1,717	$	—	$	1,717	$	2,274	$	—	$	2,274
Corporate commercial paper		—		500		500		—		3,245		3,245
Corporate debt		—		783		783		—		1,000		1,000
Total cash equivalents		1,717		1,283		3,000		2,274		4,245		6,519
Short-term investments:
Corporate commercial paper		—		3,729		3,729		—		5,480		5,480
Corporate debt		—		3,894		3,894		—		6,415		6,415
Total short-term investments		—		7,623		7,623		—		11,895		11,895
Total assets measured at fair value	$	1,717	$	8,906	$	10,623	$	2,274	$	16,140	$	18,414

As of each of June 30, 2018 and December 31, 2017, contractual maturities of our short-term investments were less than one year, and gross unrealized gains and losses on those investments were not material.

5. Goodwill and Intangible Assets

Goodwill was originally recorded in connection with the September 2011 acquisition of MPC Data, Ltd. (renamed BSQUARE EMEA, Ltd. in 2015), a United Kingdom based provider of software engineering services. The excess of the acquisition consideration over the fair value of net assets acquired was recorded as goodwill. There were no changes in the carrying amount of goodwill during the three and six months ended June 30, 2018.

Intangible assets are related to customer relationships that we acquired from TestQuest, Inc. in November 2008 and from the acquisition of BSQUARE EMEA, Ltd. in September 2011.

Information regarding our intangible assets is as follows (in thousands):

	June 30, 2018							December 31, 2017
	Gross Carrying					Net Book		Gross Carrying					Net Book
	Amount		Amortization			Value		Amount		Amortization			Value
Customer relationships:	$	1,275	$	(959	)	$	316	$	1,275	$	(910	)	$	365

Amortization expense was $24,000 for each of the three months ended June 30, 2018 and 2017, and $49,000 for each of the six months ended June 30, 2018 and 2017. Amortization in future periods is expected to be as follows (in thousands):

Remainder of 2018	$	49
2019		98
2020		98
2021		71
Total	$	316

6. Credit Agreement

Line of Credit

On September 22, 2015, we entered into a two-year unsecured line of credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Bank”) in the principal amount of up to $12.0 million. On September 29, 2016, the Credit Agreement was modified to extend the final due date for an additional year to September 22, 2018. At our election, advances under the Credit Agreement shall bear interest at either (1) a rate per annum equal to 1.5% below the bank’s applicable prime rate or (2) 1.5% above the Bank’s applicable LIBOR rate, in each case as defined in the Credit Agreement. The Credit Agreement contains customary affirmative and negative covenants, including compliance with financial ratios and metrics, as well as limitations on our ability to pay distributions or dividends while there is an ongoing event of default or to the extent such distribution causes an event of default. We are required to maintain certain minimum interest coverage ratios, liquidity levels and asset coverage ratios as defined in the Credit Agreement. While we were in compliance with all covenants under the Credit Agreement as of June 30, 2018, the required interest coverage ratio would not permit us to borrow under the Credit Agreement.

There were no amounts outstanding under the Credit Agreement as of June 30, 2018 or December 31, 2017. In September 2016, we entered into a letter of credit agreement for $250,000, secured by the Credit Agreement in connection with the lease of our corporate headquarters. Accordingly, the maximum principal amount available, if we were eligible to borrow under the Credit Agreement, was reduced to $11.75 million.

7. Shareholders’ Equity

Equity Compensation Plans

We have a stock plan (the “Stock Plan”) and an inducement stock plan for newly hired employees (together with the Stock Plan, the “Plans”). Under the Plans, stock options to purchase shares of our common stock may be granted with a fixed exercise price that is equal to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and RSUs.

Stock-Based Compensation

The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We estimate forfeitures based on historical experience and expected future activity. The fair value of RSUs is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The fair value of stock option awards is estimated at the grant date based on the fair value of each vesting tranche as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair values of our stock option grants were estimated with the following weighted average assumptions:

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Dividend yield		0	%		0	%		0	%		0	%
Expected life	5.2 years			3.3 years			5.3 years			3.3 years
Expected volatility		55	%		52	%		54	%		53	%
Risk-free interest rate		2.7	%		1.6	%		2.5	%		1.7	%

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018		2017
Cost of revenue — professional engineering service	$	8		$	20	$	19	$	85
Selling, general and administrative		(80	)		320		184		604
Research and development		56			71		112		121
Total stock-based compensation expense	$	(16	)	$	411	$	315	$	810
Per diluted share	$	(0.00	)	$	0.03	$	0.02	$	0.06

Stock Option Activity

The following table summarizes stock option activity under the Plans:

						Weighted Average
						Remaining
				Weighted Average		Contractual Life		Aggregate
	Number of Shares			Exercise Price		(in years)		Intrinsic Value
Balance at December 31, 2017		1,912,161		$	4.88		7.61	$	781,735
Granted		256,643			3.95
Exercised		(2,422	)		3.59
Forfeited		(265,697	)		4.90
Expired		(22,605	)		5.72
Balance at June 30, 2018		1,878,080		$	4.74		6.28	$	5,080
Vested and expected to vest at June 30, 2018		1,784,268		$	4.73		6.14	$	5,080
Exercisable at June 30, 2018		1,181,163		$	4.60		4.80	$	5,080

At June 30, 2018, total compensation cost related to stock options granted but not yet recognized was $745,000, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.4 years. The following table summarizes certain information about stock options:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Weighted average grant-date fair value of options granted during the period	$	1.77	$	2.64	$	1.98	$	2.80
Options in-the-money (in shares)		19,550		1,755,762		19,550		1,755,762
Aggregate intrinsic value of options exercised during the period	$	1,578	$	17,412	$	1,853	$	57,833

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 exercised during the period. We issue new shares of common stock upon exercise of stock options.

Restricted Stock Unit Activity

The following table summarizes RSU activity under the Plans:

	Number of			Weighted Average
	Shares			Award Price
Unvested at December 31, 2017		116,968		$	5.33
Granted		136,505			3.21
Vested		(46,764	)		5.14
Forfeited		(26,312	)		5.31
Unvested at June 30, 2018		180,397		$	3.78
Expected to vest after June 30, 2018		165,730		$	3.75

At June 30, 2018, total compensation cost related to RSUs granted but not yet recognized was $433,000, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 0.8 years.

Common Stock Reserved for Future Issuance

The following table summarizes our shares of common stock reserved for future issuance under the Plans as of June 30, 2018:

	June 30, 2018
Stock options outstanding		1,878,080
Restricted stock units outstanding		180,397
Stock options available for future grant		1,110,722
Common stock reserved for future issuance		3,169,199

8. Commitments and Contingencies

Lease and rent obligations

Our commitments include obligations outstanding under operating leases, which expire through 2021. We have lease commitments for office space in Bellevue, Washington; Boston, Massachusetts; Taipei, Taiwan; and Trowbridge, UK. We also lease office space on a month-to-month basis in Akron, Ohio.

In August 2013, we amended the lease agreement for our Bellevue, Washington headquarters, and extended the term of the original lease that was scheduled to expire in August 2014 to May 2020.

Rent expense was $220,000 and $273,000 for the three months ended June 30, 2018 and 2017, respectively, and $484,000 and $533,000 for the six months ended June 30, 2018 and 2017, respectively.

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

	June 30, 2018
Remainder of 2018	$	581
2019		1,128
2020		527
2021		15
Total commitments	$	2,251

Loss Contingencies

From time to time, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. We defend ourselves vigorously against any such claims. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals on the best information available at the time, which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.

9. Information about Geographic Areas and Operating Segments

Our chief operating decision-makers (i.e. our 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. We operate within a single industry segment of computer software and services. We have three major product lines – third-party software, proprietary software and professional engineering service – each of which we consider to be operating and reportable segments. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements, and we do not produce asset information by reportable segment. The following table sets forth profit and loss information about our segments (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Third-party software:
Revenue	$	16,992		$	15,505		$	33,056		$	32,302
Cost of revenue		14,480			13,103			27,834			27,185
Gross profit		2,512			2,402			5,222			5,117
Proprietary software:
Revenue		281			481			2,076			3,135
Cost of revenue		100			39			141			71
Gross profit		181			442			1,935			3,064
Professional Engineering Service:
Revenue		1,930			2,862			4,749			6,252
Cost of revenue		1,362			1,833			3,445			4,307
Gross profit		568			1,029			1,304			1,945
Total gross profit		3,261			3,873			8,461			10,126
Operating expenses		6,979			6,492			14,657			12,704
Other income, net		47			59			91			114
Income tax benefit (expense)		(12	)		—			(12	)		106
Net loss	$	(3,683	)	$	(2,560	)	$	(6,117	)	$	(2,358	)

Revenue by geography is based on the sales region of the customer. The following tables set forth total revenue and long-lived assets by geographic area (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Total revenue:
North America	$	18,179	$	17,728	$	37,468	$	39,498
Asia		135		306		585		555
Europe		889		814		1,828		1,636
Total revenue	$	19,203	$	18,848	$	39,881	$	41,689

	June 30, 2018		December 31, 2017
Long-lived assets:
North America	$	1,285	$	991
Asia		113		76
Europe		4,081		4,114
Total long-lived assets	$	5,479	$	5,181

10. Significant Risk Concentrations

Significant Customer

Honeywell International, Inc. and affiliated entities (“Honeywell”) accounted for $4.1 million, or 10% of total revenue, for the six months ended June 30, 2018. No customers accounted for 10% or more of total revenue for the three months ended June 30, 2018. Honeywell accounted for $3.0 million, or 16% of total revenue, for the three months ended June 30, 2017 and $6.3 million, or 15% of total revenue for the six months ended June 30, 2017. No other customers accounted for 10% or more of total revenue for the periods noted above.

Honeywell had accounts receivable balances of $7.6 million, or approximately 47% of total accounts receivable, at June 30, 2018, and $8.7 million, or approximately 48% of total accounts receivable, at December 31, 2017. No other customer accounted for 10% or more of the total accounts receivable at June 30, 2018 or December 31, 2017.

Significant Supplier

We have OEM Distribution Agreements (“ODAs”) with Microsoft Corporation (“Microsoft”) which enable us to sell Microsoft Windows Embedded operating systems on a non-exclusive basis to our customers in the United States, Canada, Argentina, Brazil, Chile, Columbia, Mexico, Peru, Puerto Rico, the Caribbean (excluding Cuba), the European Union, the European Free Trade Association, Turkey and Africa, which have been extended through February 28, 2019. We also have ODAs with Microsoft which allow us to sell Microsoft Windows Mobile operating systems in the Americas (excluding Cuba), Japan, Taiwan, Europe, the Middle East, and Africa, which expire on April 30, 2022.

Software sales under these agreements constitute a significant portion of our software revenue and total revenue. These agreements are typically renewed bi-annually, 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. In accordance with Microsoft rebate program rules, we allocate 30% of rebate values to reduce cost of sales and the remaining 70% to offset qualified marketing expenses in the period the expenditures are incurred.

Under this rebate program, we recorded rebate credits as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Reductions to cost of revenue	$	158	$	87	$	418	$	197
Reductions to marketing expense	$	113	$	219	$	379	$	374

There was a balance of approximately $369,000 in qualified outstanding rebate credits at June 30, 2018, which will be accounted for as a reduction in marketing expense in the period in which qualified program expenditures are made.

I tem 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, 2017 entitled “Risk Factors,” similar discussions in subsequently filed Quarterly Reports on Form 10-Q, including this Form 10-Q, as applicable, and 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

Since our inception, our business has largely been focused on providing software solutions (historically, including reselling software from Microsoft Corporation (“Microsoft”)) and related engineering services to businesses that develop, market and sell dedicated-purpose standalone intelligent systems. Examples of dedicated-purpose standalone intelligent systems include smart, connected computing devices such as smart phones, set-top boxes, point-of-sale terminals, kiosks, tablets and handheld data collection devices, as well as smart vending machines, ATM machines, digital signs and in-vehicle telematics and entertainment devices. We focus on systems that utilize various Microsoft Windows Embedded operating systems as well as devices running other popular operating systems such as Android, Linux, and QNX, and that are usually connected to a network via a wired or wireless connection. Our customers include world-class original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), corporate enterprises (“Enterprises”), silicon vendors (“SVs”) and peripheral vendors. A significant portion of our business historically has also been focused on reselling software from Microsoft, from which a majority of our revenue currently continues to be derived.

Beginning in early 2014, we initiated development efforts focused on new proprietary software products addressing the Industrial Internet of Things (“IIoT”) market, by interconnecting of uniquely identifiable devices, extracting data from those devices and applying advanced analytics and machine learning to the data in order to derive meaningful and actionable insights. While IIoT is a relatively new market, we believe the work we have engaged in since our inception—namely adding intelligence and connectivity to discrete standalone devices and systems—embodies much of what is central to the core functionality of IIoT. These software development efforts have driven a new business initiative for BSQUARE, which we refer to as DataV™. Our DataV solution includes software products, applications and services that are designed to turn raw IIoT device data into meaningful and actionable data for our customers.

We launched DataV late in the first quarter of 2016 and announced our first three major customer bookings later that year. These bookings are comprised of software licensing, software maintenance and related systems integration services and are, we believe, indicative of the potential customer demand for DataV. During the first half of 2018, we entered into a multi-year DataV Software-as-a-Service (“SaaS”) contract with an engineering service contract with a Fortune 100 firm to deliver IIoT device and content management to IIoT devices across North America and Europe.

We believe that DataV presents significant opportunities in an expanding and evolving market, at substantially higher gross margins as compared to our traditional business. Developing, selling and implementing DataV has become our primary focus, representing a transition away from dependence on resale software and professional engineering services toward increased reliance on our own proprietary software and related systems integration services. We intend to continue to run our legacy software resale business to maximize cash flow for the foreseeable future. Our legacy professional engineering services business is now managed as a part of our overall services business, which increasingly serves DataV customers and prospects.

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 our critical accounting judgments, policies and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2017.

Results of Operations

The following table presents our summarized results of operations 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,
(In thousands, except percentages)	2018			2017			$ Change			% Change			2018			2017			$ Change			% Change
Revenue	$	19,203		$	18,848		$	355			2	%	$	39,881		$	41,689		$	(1,808	)		(4	)%
Cost of revenue		15,942			14,975			967			6	%		31,420			31,563			(143	)		(—	)%
Gross profit		3,261			3,873			(612	)		(16	)%		8,461			10,126			(1,665	)		(16	)%
Operating expenses		6,979			6,492			487			8	%		14,657			12,704			1,953			15	%
Loss from operations		(3,718	)		(2,619	)		(1,099	)		42	%		(6,196	)		(2,578	)		(3,618	)		140	%
Other income, net		47			59			(12	)		(20	)%		91			114			(23	)		(20	)%
Loss before income taxes		(3,671	)		(2,560	)		(1,111	)		43	%		(6,105	)		(2,464	)		(3,641	)		148	%
Income tax benefit (expense)		(12	)		—			(12	)	n.m.				(12	)		106			(118	)		(111	)%
Net loss	$	(3,683	)	$	(2,560	)	$	(1,123	)		44	%	$	(6,117	)	$	(2,358	)	$	(3,759	)		159	%

Revenue

We generate revenue from the sale of software, both third-party software that we resell and our own proprietary software, and the sale of professional engineering services. Total revenue increased for the quarterly period ended June 30, 2018 compared to the prior year period, primarily due to higher sales of Microsoft Windows Embedded operating systems. This increase was partially offset by lower professional engineering service revenue, predominantly in North America.

Total revenue decreased for the year-to-date period ended June 30, 2018 due to lower sales of Microsoft Windows Mobile operating systems, as well as lower professional engineering service and proprietary software revenue. These decreases were partially offset by higher sales of Microsoft Windows Embedded operating systems.

Additional revenue details are as follows:

	Three Months Ended June 30,												Six Months Ended June 30,
(In thousands, except percentages)	2018			2017			$ Change			% Change			2018			2017			$ Change			% Change
Revenue
Third-party software	$	16,992		$	15,505		$	1,487			10	%	$	33,056		$	32,302		$	754			2	%
Proprietary software		281			481			(200	)		(42	)%		2,076			3,135			(1,059	)		(34	)%
Professional engineering service		1,930			2,862			(932	)		(33	)%		4,749			6,252			(1,503	)		(24	)%
Total revenue	$	19,203		$	18,848		$	355					$	39,881		$	41,689		$	(1,808	)
As a percentage of total revenue:
Third-party software		89	%		82	%								83	%		77	%
Proprietary software		1	%		3	%								5	%		8	%
Professional engineering service		10	%		15	%								12	%		15	%

Third-party software revenue

Third-party software revenue increased for the quarterly period ended June 30, 2018, primarily due to higher sales of Microsoft Windows Embedded operating systems as the result of timing of buying activities of our large customers, partially offset by lower sales to Honeywell. The third-party software revenue increased for the year-to-date period ended June 30, 2018 primarily due to the higher sales of Microsoft Windows Embedded operating systems, partially offset by lower sales of Microsoft Windows Mobil e operating systems and lower sales to Honeywell. During the first quarter of 2018, we decided not to compete for sales in intense price competitive situations in an effort to maintain a certain gross margin level and therefore decided not to pursue sales opportunities with Honeywell in Europe. As a result, we anticipate that sales to Honeywell will decrease between $1.2 million to $1.5 million in revenue per quarter for the remainder of 2018.

Sales of Microsoft operating systems represented approximately 86% and 80% of our total revenue and 73% and 56% of our total gross margin for the three and six months ended June 30, 2018, respectively; and approximately 81% and 76% of our total revenue and 59% and 47% of our total gross margin for the three and six months ended June 30, 2017, respectively.

Proprietary software revenue

Proprietary software revenue decreased for the quarterly period ended June 30, 2018, primarily due to lower sales of other proprietary software in the current quarterly period compared to the prior year period. Proprietary software revenue decreased for the year-to-date period ended June 30, 2018, primarily due to timing of DataV software revenue recognition. Specifically, a greater portion of DataV software license fees from PACCAR was recognized in the prior year period compared to DataV software license fees from Itron that were recognized in the current year period. We expect revenue from both DataV and our other proprietary software will continue to fluctuate in timing and amount in future periods. We anticipate that our DataV revenue will grow over time, but that sales of other proprietary software products will decline over time as they approach the end of their life cycles.

Professional engineering service revenue

Professional engineering service revenue decreased for the quarterly and year-to-date periods ended June 30, 2018, largely due to a decrease in service revenue in North America with the completion in 2017 of several existing customer projects. We expect that professional engineering service revenue will vary in timing and amount in future periods as we continue to align our organizational structure with our increasing strategic focus on DataV.

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 and gross margin were as follows:

	Three Months Ended June 30,												Six Months Ended June 30,
(In thousands, except percentages)	2018			2017			$ Change			% Change			2018			2017			$ Change			% Change
Third-party software gross profit	$	2,512		$	2,402		$	110			5	%	$	5,222		$	5,117		$	105			2	%
Third-party software gross margin		15	%		15	%					(—	)%		16	%		16	%					(—	)%
Proprietary software gross profit		181			442			(261	)		(59	)%		1,935			3,064			(1,129	)		(37	)%
Proprietary software gross margin		64	%		92	%					(28	)%		93	%		98	%					(5	)%
Professional engineering service gross profit		568			1,029			(461	)		(45	)%		1,304			1,945			(641	)		(33	)%
Professional engineering service gross margin		29	%		36	%					(7	)%		27	%		31	%					(4	)%
Total gross profit	$	3,261		$	3,873		$	(612	)		(16	)%	$	8,461		$	10,126		$	(1,665	)		(16	)%
Total gross margin		17	%		21	%					(4	)%		21	%		24	%					(3	)%

Third-party software gross profit and gross margin

Third-party software gross profit increased for each of the quarterly and year-to-date periods ended June 30, 2018 due to higher sales of third-party software. Third-party software gross margin remained relatively constant for the quarterly and year-to-date periods ended June 30, 2018.

Gross profit on third-party software is positively impacted by rebate credits that we receive from Microsoft for the sale of Windows Embedded operating systems earned through the achievement of defined objectives. Under the Microsoft rebate program , we recognized $158,000 and $418,000 of rebate credits during the three and six months ended June 30, 2018, respectively, compared to $87,000 and $197,000 during the three and six months ended June 30, 2017, respectively, all of which were accounted for as reductions in cost of revenue.

Proprietary software gross profit and gross margin

Proprietary software gross profit decreased for the quarterly period ended June 30, 2018 primarily due to lower sales of other proprietary software. Proprietary software gross profit decreased for the year-to-date period ended June 30, 2018, primarily due to the timing of DataV software revenue recognition.

Proprietary software gross margin decreases for each of the quarterly and year-to-date periods ended June 30, 2018 were largely due to higher cost of sales related to maintenance and support activities for DataV.

Professional engineering service gross profit and gross margin

Professional engineering service gross profit decreased for each of the quarterly and year-to-date periods ended June 30, 2018 primarily due to lower professional engineering service revenue.

Professional engineering service gross margin decreased for each of the quarterly and year-to-date periods ended June 30, 2018 primarily due to a higher utilization of engineering services in the prior year periods.

Operating expenses

The following table presents our operating expenses for the periods indicated:

	Three Months Ended June 30,												Six Months Ended June 30,
(In thousands, except percentages)	2018			2017			$ Change			% Change			2018			2017			$ Change		% Change
Operating expenses:
Selling, general and administrative	$	4,901		$	5,046		$	(145	)		(3	)%	$	10,349		$	9,911		$	438		4	%
Research and development		2,078			1,446			632			44	%		4,308			2,793			1,515		54	%
Total operating expenses	$	6,979		$	6,492		$	487			8	%		14,657			12,704			1,953		15	%
As a percentage of total revenue:
Selling, general and administrative		26	%		27	%								26	%		24	%
Research and development		11	%		8	%								11	%		7	%

Selling, general and administrative

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related benefits, commissions and bonuses for our sales, marketing and administrative personnel and related facilities and depreciation costs, as well as professional services fees (e.g., consulting, legal, audit and tax). SG&A expenses decreased for the quarterly period ended June 30, 2018, primarily due to lower stock compensation expense resulting from the departures of certain management team members and lower recruiting fees. These decreases were partially offset by higher severance costs from those departures and spending reduction efforts made in the second quarter of fiscal 2018.

SG&A expenses increased for the year-to-date period ended June 30, 2018 primarily due to higher salaries and related benefits resulting from the strengthening of our sales team that occurred throughout 2017 as well as higher severance costs. This increase for the year-to-date period was partially offset by lower stock compensation expense and lower recruiting fees.

Research and development

Research and development (“R&D”) expenses consist primarily of salaries and related benefits for software development and quality assurance personnel, contractor and consultant costs, and related facilities and depreciation costs. R&D expenses increased for each of the quarterly and year-to-date periods ended June 30, 2018, due to increased spending for continued development of our DataV product line.

Other income, net

Other income, net consists primarily of interest income on our cash and investments, gains and losses we may recognize on our investments, and gains and losses on foreign exchange transactions and other items. We had an immaterial change in other income, net for each of the quarterly and year-to-date periods ended June 30, 2018.

Income taxes

Income taxes increased for the year-to-date period ended June 30, 2018, primarily due to the tax benefit recorded in the prior year period which was not repeated in the current period. The tax benefit in the prior year period was related to non-recurring discrete items, including U.K. stock compensation tax benefits, a U.K. net operating loss carryback and an international tax reserve release.

Liquidity and Capital Resources

As of June 30, 2018, we had $17.9 million of cash, cash equivalents and investments, compared to $24.8 million at December 31, 2017, reflecting a net use of approximately $6.9 million in cash, cash equivalents and investments during the six months ended June 30, 2018. We generally invest our excess cash in high quality marketable investments. These investments generally include corporate notes and bonds, commercial paper and money market funds, although specific holdings can vary from period to period depending upon our cash requirements. Our investments held at June 30, 2018 had minimal default risk and short-term maturities.

Cash Flows from Operating Activities

Operating activities used cash of approximately $6.4 million for the six months ended June 30, 2018, which included a working capital usage of approximately $0.9 million and our net loss (offset by non-cash adjustments) of $5.5 million. The working capital usage included cash outflows of $1.2 million related to deferred revenue, primarily on DataV contracts, and $0.9 million related to third-party software fees payable, partially offset by $1.8 million of cash inflows related to accounts receivable, primarily from lower sales to Honeywell in Europe.

Operating activities used cash of approximately $5.8 million for the six months ended June 30, 2017, which included a working capital usage of approximately $4.6 million and our net loss (offset by non-cash adjustments) of $1.2 million. The working capital usage included cash outflows of $5.7 million related to third-party software fees payable, partially offset by $2.9 million of cash inflows related to accounts receivable.

Cash Flows from Investing Activities

Investing activities provided cash of approximately $3.8 million for the six months ended June 30, 2018, due to net cash inflows on short-term investments of $4.3 million, partially offset by $0.5 million in purchases of equipment and furniture, primarily related to capitalized software development costs.

Investing activities provided cash of approximately $0.8 million for the six months ended June 30, 2017, primarily due to net cash inflows on short-term investments of $1.1 million.

Cash Flows from Financing Activities

Financing activities provided cash of approximately $17,000 and $118,000 during the six months ended June 30, 2018 and 2017, respectively, generated from the 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.

On September 22, 2015, we entered into a two-year unsecured line of credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Bank”) in the principal amount of up to $12.0 million. On September 29, 2016, t he Credit Agreement was modified to extend the final due date for an additional year to September 22, 2018 (the “Expiration Date”). We do not plan to renew the Credit Agreement with the Bank beyond the Expiration Date. There were no amounts outstanding under the Credit Agreement as of June 30, 2018 or December 31, 2017. In September 2016, we entered into a letter of credit agreement for $250,000 secured by the Credit Agreement in connection with the lease of our corporate headquarters. Accordingly, the maximum principal amount available, if we were eligible to borrow under the Credit Agreement, was reduced to $11.75 million. While we were in compliance with all covenants under the Credit Agreement as of June 30, 2018, the required interest coverage ratio would not permit us to borrow under the Credit Agreement. See Note 6, “Credit Agreement” in the Notes to Condensed Consolidated Financial Statements in Item 1 for more information regarding the Credit Agreement.

Cash Commitments

We have the following future or potential cash commitments:

•

Minimum rents payable under operating leases total $0.6 million for the remainder of 2018, $1.1 million in 2019, $0.5 million in 2020 and thereafter.

Recently Issued Accounting Standards

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

I tem 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

I tem 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 in our internal controls over financial reporting during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1A.

Risk Factors

There have been no material changes 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, 2017.

Item 5.

Other Information

None.

Item 6.

Exhibits

Incorporated by Reference

Filed or Furnished Herewith

Form

Filing Date

Exhibit

File No.

Exhibit

Number

Description

3.1

Amended and Restated Articles of Incorporation

S-1

August 17, 1999

3.1

(a)

333-85351

3.1(a)

Articles of Amendment to Amended and Restated Articles of Incorporation

10-Q

August 7, 2000

3.1

000-27687

3.1(b)

Articles of Amendment to Amended and Restated Articles of Incorporation

8-K

October 11, 2005

3.1

000-27687

3.2

Bylaws and all amendments thereto

10-K

March 19, 2003

3.2

000-27687

10.1 ⁽¹⁾

Separation and Release Agreement with Jerry D. Chase effective May 9, 2018

10.2 ⁽¹⁾

Employment letter agreement with Kevin T. Walsh dated June 26, 2015

10.3 ⁽¹⁾

Employment letter agreement with Giles Frith dated August 31, 2016

10.4 ⁽¹⁾

Amendment to employment letter agreement with Giles Frith dated June 5, 2018

10.5 ⁽¹⁾

Employment letter agreement with David Wagstaff dated August 31, 2016

10.6 ⁽¹⁾

Amendment to employment letter agreement with David Wagstaff dated June 5, 2018

31.1

Certification of Acting 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 Acting 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.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

⁽¹⁾ Indicates a management contract or compensatory plan or arrangement.

SIGNA TURES

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 13, 2018	By:	/s/ Peter J. Biere
		Peter J. Biere
		Chief Financial Officer, Assistant Secretary and Treasurer

Exhibit 10.1

SEPARATION AND RELEASE AGREEMENT

THIS SEPARATION AND RELEASE AGREEMENT (“Agreement”) is made between Jerry D. Chase (“Employee”) and BSQUARE CORPORATION (“Employer” or “BSQUARE”), and is in consideration of their mutual undertakings as set forth in this Agreement.

Employer no longer has a need for Employee’s services effective May 9, 2018 (“Termination Date”). In Employee’s employment letter agreement dated February 24, 2014, Employee is entitled to certain post-termination benefits provided that Employee enter into a seperatation and release agreement that is satisfactory to Employer. Therefore, the parties agree as follows :

1. Nonadmission of Liability : This Agreement shall not be construed as an admission by Employer that it acted wrongfully with respect to Employee. Additionally, this Agreement shall not be construed as an admission by Employee of any misconduct.

2. Severance Pay and Benefits through Termination Date :

2.1 Severance : Employee will be paid Employee ’ s regular salary , including payment for all company holidays (excluding floating holidays), for twelve (12) months following the Termination Date per Employer’s normal bi-weekly payroll cycle, less applicable taxes and withholdings. For clarity, Employee will be paid Employee’s regular salary through May 9, 2019 .

2.2 PTO Pay : Any accrued Employee Paid Time Off (“PTO”) remaining as of the Termination Date will be paid on the June 1, 2018 payroll, less applicable taxes and withholdings.

2.3 Bonus : Employee will not be entitled to receive a bonus for 2018 under Employer’s Annual Bonus Program.

2.4 Benefits . Employee will continue to accrue PTO through the Termination Date. Employee will be paid the balance of Employee’s accrued PTO per Section 2.2 above. Employee will continue to be entitled to other fringe benefits that he is currently entitled to through the Termination Date. Employee’s company-paid medical benefits, if any, will continue in full through the end of the month of the Termination Date. Employee’s stock options and other stock awards will vest through the Termination Date , after which Employee will have three (3) months to exercise any vested stock awards . For clarity , Employee will have through August 9, 2018 to exercise any vested stock awards.

3. Post-Termination Benefits Continuation : Effective May 10 , 2018, Employee and/or Employee’s covered spouse and dependents may elect a temporary extension of medical, dental and vision plan coverage at group rates (called “COBRA continuation coverage”). Employee and/or Employee’s covered spouse must pay all applicable premiums for that COBRA continuation coverage. Employer will provide Employee and Employee’s covered spouse with a separate notice summarizing their COBRA continuation coverage rights and obligations, as well as an election form . So long as Employee continues to elect COBRA, Employer will subsidize Employee’s monthly COBRA cost to the same extent Employer subsidizes other employees of Employer with similar benefit elections provided that: a) Employer’s subsidization shall cease effective May 10 , 2019; and b) Employer’s subsidization may change effective January 1, 2019 in conjunction with the annual benefits renewal cycle.

4. No Other Compensation : Employee acknowledges that he has been paid all other compensation or benefits which he might have been owed by Employer, and that Employer is not obligated in any event to pay or provide Employee with any further compensation or benefits of any nature .

5. Unemployment Compensation : If Employee files for unemployment compensation benefits, Employer will not contest Employee’s eligibility for unemployment compensation .

6. Confidentiality : Employee agrees not to disclose the terms of this Agreement to anyone or to acknowledge its existence to anyone; provided, that Employee may disclose the terms of this Agreement to Employee’s immediate family, Employee’s attorney (if any), and Employee’s accountant or other similar advisor, and Employee shall direct each such person to maintain the confidentiality of the Agreement ; and provided further , that this Section 6 shall not apply to information that is already in the public domain through no fault of Employee .

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6.1 In recognition of the significant value that BSQUARE places on its Confidential Information , Employee signed an Employee Proprietary Rights Agreement dated February 26, 2014 (“PRA”) when Employee began employment with BSQUARE . In the PRA, Employee made some important commitments which remain in effect even after Employee’s departure from BSQUARE, including, without limitation:

•

Employee agreed to preserve the confidentiality of BSQUARE’s “Confidential Information” and to use it only for BSQUARE’s benefit. Confidential Information includes information related to any aspect of BSQUARE’s business (business, technical or otherwise) that is either proprietary (meaning that BSQUARE developed it and owns it) or that is not known by actual or potential competitors. ( see Paragraph 1 and sub-parts of the PRA, “Confidentiality Obligations”) .

•

Employee agreed not to disclose BSQUARE’s Confidential Information, without permission, and to protect it even from “inadvertent disclosure” ( see Paragraph 1 . 1 of the PRA, “Safeguard of Confidential Information”).

•

Employee agreed that, during Employee’s employment and for a period of one year from the separation of Employee’s employment, Employee would not directly or indirectly attempt to induce customers or employees of BSQUARE to cease their relationship with BSQUARE ( see Paragraph 5.1 of the PRA, “Nonsolicitation”), or compete with BSQUARE or develop, sell or distribute products with similar functionality as BSQUARE products (which Employee hereby acknowledges and agrees includes, without limitation, BSQUARE’s DataV products and services ( see Paragraph 5.2 of the PRA, “Noncompetition”).

6.2 If it comes to BSQUARE’s attention that Employee discloses Confidential Information, violates Employee’s non-solicitation obligation, etc ., there are legal claims that BSQUARE could assert against Employee . The scope of relief could include a temporary restraining order/permanent injunction preventing Employee from disclosing information, money damages, and reimbursement for our attorneys’ fees and costs . Those claims include:

•

Breach of the PRA .

•

Tortious interference with a business expectancy .

•

Violation of the Uniform Trade Secrets Act.

BSQUARE fully reserves its rights under the contractual arrangements between Employee and BSQUARE as well as any and all common law protections that may be available to BSQUARE .

7. Release of Cla i ms : In exchange for the consideration and other benefits contained in this Agreement, which Employee is not otherwise entitled to receive, Employee and Employee’s successors and assigns forever release and discharge Employer, any of Employer’s parent, subsidiary or related companies, any Employer sponsored employee benefit plans in which Employee participates, and all of their respective officers, directors, trustees, shareholders, agents , employees, employees’ spouses, and all of their successors and assigns (collectively “Releasees”) from any and all claims, actions, causes of action, rights, or damages related in any way to Employee ’ s employment by Employer or the termination of such employment, including costs and attorneys’ fees (collectively “Claims”) whether known, unknown, or later discovered, arising from any acts or omissions that occurred prior to the date Employee signs this Agreement.

This release includes but is not limited to : (i) any Claims under any local, state, or federal laws regulating employment, including without limitation, the Age Discrimination in Employment Act, the Civil Rights Acts , the Americans with Disabilities Act, and the Washington Law Against Discrimination (RCW 49.60 et seq.); (ii) Claims under the Employee Retirement Income Security Act; (iii) Claims under any local, state, or federal wage and hour laws; (iv) Claims alleging any legal restriction on Employer’s right to terminate its employees; (v) Claims under express or implied contracts; or (vi) Claims alleging personal injury , including without limitation defamation, tortious interference with business expectancy, black listing, or infliction of emotional distress .

8. No Claims : Employee represents that he has not filed any Claim with any court or agency against Employer or Releasees concerning Claims released in this Agreement; provided, however, that this will not limit Employee from filing an action to enforce the terms of this Agreement. Employee further represents that he has not transferred or assigned, or purported to assign, to any person or entity any claim, or any portion thereof or interest therein, related in any way to Employer, its officers, employees, or agents Employee waives any right he may have to recover any damages or any other relief in any claim or suit brought by the Equal Employment Opportunity Commission or anyone else.

Page 2

9. No Representations : Employee warrants that, except as expressly set forth herein, no representations of any kind or character have been made to Employee by Employer or by any of their agents, representatives, or attorneys to induce the execution of this Agreement.

10. Voluntary Agreement : Employee understands and acknowledges the significance and consequences of this Agreement, that it is voluntary, that it has not been given as a result of any coercion or duress, and expressly confirms that it is to be given full force and effect according to all of its terms, including those relating to unknown Claims. Employee acknowledges that Employer advised Employee to consult with legal counsel regarding any and all aspects of this Agreement, and that he has availed himself of that opportunity to the extent desired. Employee acknowledges that Employee has carefully read and fully understands all of the provisions of this Agreement and has signed this Agreement only after full reflection and analysis .

11. Employer Property Ut ili zed or He l d by E mployee : At Employee ’ s option, Employee may retain any personal work equipment owned by Employee (“Personal Equipment”). Notwithstanding the foregoing, Employee acknowledges that, on or before Employee’s Termination Date, and except as otherwise agreed in writing between Employer and Employee with respect to any future services to be provided by Employee to Employer, Employee will return to Employer (to Peter Biere at BSQUARE’s Bellevue office) all company and customer owned property in Employee’s possession, specifically including all keys and keycard badges, all company and customerowned equipment (including any laptops, desktop computers and related hardware, customer devices etc.), and all company and customer documents, including computer-stored or transmitted information, specifically including all trade secrets, and/or confidential company and customer information other than the Personal Equipment.

12. Non-Disparagement : Employee agrees to refrain from any disparagement, defamation, libel, or slander of any of the Releasees, and agrees to refrain from any tortious interference with the contracts and relationships of any of the Releasees . Employer agrees that all management-level employees shall refrain from any disparagement, defamation, libel or slander of Employee, and agrees to refrain from any tortious interference with the contracts and relationships of Employee. This paragraph shall not in any way prohibit either party from making truthful statements in a legal or administrative proceeding, or as otherwise required by law or legal process.

13. Section 409A : The parties acknowledge and agree that the termination of Employee’s employment contemplated hereunder constitutes a “separation from service ” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) . If Employer determines that any cash severance benefits, health continuation coverage, or additional benefits provided under this Agreement shall fail to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Code as a result of Section 409A(a)(2)(B)(i) of the Code, the payment of such benefit shall be accelerated to the minimum extent necessary so that the benefit is not subject to the provisions of Section 409(a)(1) of the Code. It is the intention of the preceding sentence to apply the short-term deferral provisions of Section 409A of the Code, and the regulations and other guidance thereunder, to such payments, and the payment schedule as revised after the application of the preceding sentence shall be referred to as the “Revised Payment Schedule . ” However, if there is no Revised Payment Schedule that would avoid the application of Section 409A(a)(1) of the Code, the payment of such benefits shall not be paid pursuant to a Revised Payment Schedule and instead shall be delayed to the minimum extent necessary so that such benefits are not subject to the provisions of section 409A(a)(1) of the Code. Employer may attach conditions to or adjust the amounts paid pursuant to this paragraph to preserve, as closely as possible, the economic consequences that would have applied in the absence of this paragraph; provided , however, that no such condition or adjustment shall result in the payments being subject to Section 409A(a)(1) of the Code .

14. Considerat i on Period: Employee acknowledges that he was advised that he has the right to have an attorney review this agreement before signing it and that he has been given 21 calendar days in which to consider this Agreement and was given the option to sign the Agreement in fewer than 21 calendar days if he desired.

15. Revocation Period : Employee understands that this Agreement will not be effective for 7 calendar days after it is signed by Employer and Employee, and that he can revoke this Agreement at any time during that 7 calendar-day period . Employer shall make no payments under this Agreement prior to expiration of this 7 calendarday period.

16. Entire Agreement : This Agreement contains the entire understanding between the Employer and Employee regarding Employee’s separation of employment. This Agreement may not be modified except through another written agreement signed by Employee and Employer .

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17. Miscellaneous : If any of the provisions of this Agreement are held to be invalid or unenforceable, the remaining provisions will nevertheless continue to be valid and enforceable.

17.1 This Agreement sets forth the entire understanding between the parties in connection with its subject matter and supersedes all prior written or oral agreements or understandings concerning the subject matter of this Agreement. This Agreement shall not supercede or limit the PRA previously executed by Employee, the terms of which shall remain in full force and effect. Employee acknowledges that in signing this Agreement, he as not relied upon any representation or statement not set forth in this Agreement made by Employer or any of its representatives .

17.2 This Agreement is made and shall be construed and performed under the laws of the State of Washington. Language of this Agreement shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against either party.

17.3 This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

BSQUARE Corporation		Jerry D. Chase

By :	/s/ Peter Biere	/s/ Jerry D. Chase
	Peter Biere
	Chief Financial Officer

	Dated: May 9, 2018	Dated: May 9, 2018

Page 4

Exhibit 10.2

June 26, 2015

Kevin Walsh

22 Woodhaven Dr.

Laguna Niguel, CA 92677

Dear Kevin,

BSQUARE Corporation (the “Company”) is pleased to extend to you an offer of employment as the Company’s Vice President of Marketing. You will report to the CEO and will be paid bi-weekly at a rate equivalent to an annual salary of $212,000 (the “Base Salary”), subject to review annually. Your principal place of employment will be at our headquarters in Bellevue, Washington, with business travel as n e eded to meet the responsibilities of your role. This offer is based on a start date of July 13 , 2015 , unless you and the Company decide on a different mutuallyacceptable start date (the “Start Date”).

Bonus Plan

In addition to the Base Salary, you will be eligible to participate in our Annual Bonus Plan (“ABP”). Your 2015 annual bonu s potential will be 35% of your Base Salary at 100% achievement. The ABP is structured such that no bonuses are paid until the Company achieves certain financial targets and you achieve individual objectives that you and our CEO will agree upon. Bonuses are paid annually, in the first quarter following the close of our fiscal year, and are payable at the sole discretion of the Compensation Committee of the Company’s Board of Directors (the “Board”). You must remain continuously employed by the Company through the end of the calendar year to be eligible to receive any bonus payout for that calendar year, except as otherwise specifically set out below.

Benefits, Perquisites, and Equity

You will be eligible to participate in the employee benefit plans and programs generally available to our employees. These plans and programs are subject to the Company’s policies in effect from time to time, as well as the eligibility and other terms of these plans and programs. Currently they include group medical, dental, vision, life insurance and disability benefits; a 401(k) retirement plan with Company matching contributions; and paid time off according to the Company’s standard policy. The Company reserves the right to modify or terminate any of its benefit plans or programs at any time and for any reason.

Subject to approval by the Compensation Committee of the Board (or of the full Board, i n cluding a majority of the independent directors) , you will receive the one-time equity awards described below this paragraph. The grant date in each case will be the later of (i) your Start Date or (ii) the date of the approval referred to in the preceding sentence. These awards will be subject to the terms of an award agreement, and the Company’s 2011 Inducement Award Plan, as amended from time to time. You acknowledge that these awards are a material inducement in your decision whether to accept this offer of employment.

1. An option to purchase up to 80,000 shares of the Company’s common stock. These options will be NonQualified Stock Options that is, not intend e d t o qualify as incentive stock options under the Code (as defined belo w ). The options will vest as follows: 33% will vest on the first anni v ersary of the grant date, and the balance will vest in equal quarterly installments for two years thereafter. The exercise price will be the closing price of the Company’s common stock on the grant date.

110 110th Ave. NE., Suite 300, Bellevue, Washington 98004 Toll Free: 868.820.4500 Main: +1425.519.5900 Fal(: +1 425.5-19.5999

2. A grant of 5,000 restricted stock units for shares of the Company ’ s com mon stock. These RSUs will vest as follows: 33% will vest on the first anniversary of the grant date, and the balance wi l1 vest in equal annual installments for two years thereafter.

We will reimburse your actual relocation expenses incurred, not to exceed $35,000 , to be paid upon presentation of appropriate receipts within 12 months of the Start Date. In the unl i kely event that you leave BSQUARE Corporation within 12 months of your Start Date, you will be responsible for reimbursing the Company for the entire amount of relocation expenses we reimbursed, from any final pay you are otherwise eligible to receive upon termination of employment.

Termination and Change of Control Benefits

Except as provided in the next paragraph, if your employment is terminated by the Company when neither “cause” nor “long term disability” exists, and provided that you release the Company and its agents from any and all employment-related claims in a signed, written release satisfactory in form and substance to the Company, (i) you will be entitled to receive severance equal to 6 months of your then annual Base Salary, (ii) you shall be eligible for continued COBRA coverage at our expense for a period of 6 months following your termination date, and (iii) any ABP bonus to which you would have otherwise been entitled as determined at the sole discretion of the Compensation Committee of the Board shall be payable pro rata based on your termination date. The foregoing severance payments shall be paid out on regular payroll days post termination, subject to legally required and any individually agreed upon payroll deductions. During the period subsequent to your termination date in which you are being paid such severance amounts, you would not be considered an employee and would therefore receive no Paid Time Off accrual, nor would you be entitled to benefits under the Company’s health and welfare plans or retirement savings plan as an active employee, except as otherwise provided herein.

Immediately prior to consummation of a Change of Control, all of your unvested stock options and restricted stock units shall become fully vested and immediately exercisable. In addition, if your employment is terminated by the Company or any successor thereto within 9 months following a Change of Control when neither “cause” nor “long term disability” exists or if you terminate your employment for “good reason,” and provided that you release the Company and any successor thereto and its respective agents from any and all employment-related claims in a signed, written release satisfactory in form and substance to the Company or any successor thereto, you will be entitled to receive a one-time lump sum severance payment equal to (i) 9 months of your then-effective annual Base Salary plus (ii) your then-effective target ABP bonus prorated to nine months, and you shall be eligible for continued COBRA coverage at the Company’s expense for a period of 9 months following your termination date. The foregoing severance payments shall be in lieu of the severance payments described in the preceding paragraph, and after expiration of the 9-month period following a Change of Control, you shall continue to be entitled to receive the severance payments described in the preceding paragraph on the terms and conditions set forth therein.

For purposes hereof, “cause,” “good reason” and “Change of Control” are defined on Attachment A hereto, and “long term disability” is defined in the Company’s sponsored Long Term Disability group insurance plan.

No severance shall be payable hereunder unless the release described herein has been signed and become effective within 60 days from the date of termination (the “Release Deadline”). Upon the release becoming effective, any severance payable hereunder will be payable commencing on or as soon as administratively practicable after the Release Deadline.

Tax Matters

In the event the termination occurs at a time during the calendar year when the release could become effective in the calendar year following the calendar year in which your termination occurs, then any payments hereunder that would be considered deferred compensation under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder (“Section 409A”) will be paid commencing on the first payroll date to occur during the calendar year following the calendar year in which such termination occurs, or, if later, the Release Deadline.

Notwithstanding any other provision of this Letter Agreement, if at the time of the termination of your employment, you are a “specified employee,” determined in accordance with Section 409A, any payments and benefits provided hereunder that constitute “nonqualified deferred compensation” subject to Section 409A that are provided on account of separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of your termination date (the “Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date without interest, and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule.

The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. You and the Company agree to work together in good faith to consider amendments to this Letter Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to you under Section 409A.

Furthermore, notwithstanding any other provision of this Letter Agreement or any other plan, arrangement or agreement to the contrary, if any of the payments or benefits provided or to be provided by the Company or any successor to you or for your benefit pursuant to the terms of this Letter Agreement or otherwise (“Covered Payments”) would constitute parachute payments within the meaning of Section 280G of the Code and be subject to the excise tax imposed under Secti o n 4999 of the Code (or any successor provision thereto) or any interest or penalties with respect to such excise tax (collectively, the “Excise Tax”), then the Covered Payments shall be reduced (but not below zero) to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax. Any determination required under this paragraph, including whether any payments or benefits are Parachute Payments and whether and the extent to which any reduction in the Covered Payments is required, shall be made by the Company in its sole discretion consistent with the requirements of Section 409A, shall be made by the Company in its sole discretion. You shall provide the Company with such information and documents as the Company may reasonably request in order to mak e a determination under this paragraph. The Company’s determinations shall be final and binding on the Company and you.

At-Will Employment

Your employment with the Company will be for no specific period of time. Rather, your employment will be at will, meaning that you or the Company may terminate the employment relationship at any time, with or without cause, and with or without notice and for any reason or no particular reason . Although your compensation and benefits may change from time to time , the at-will nature of your e mployment may only be changed by an express written agreement signed by an authorized officer of the Company.

Representations

By accepting this offer, you represent that you are able to accept this job and carry out the work that it would involve without breaching any legal restrictions on your activities, such as non-competition, non-solicitation or other work-related restrictions imposed by a current or former employer. You also represen t that you will inform the Company about any such restrictions and provide the Company with as much information about them as possible , including any agreements between you and your current or former employer describing such restrictions on your activities. You further confirm that you will not remove or take any documents or proprietary data or materials of any kind, electronic or otherwise, with you from your current or former employer to the Company without written authorization from your current or former employer, nor will you use or disclose any such confidential information during the course and scope of your employment with the Company. If you have any questions about the ownership of particular documents or other information, you should discuss those questions with your former employer before removing or copying the documents or information.

Contingent Offer

This offer is contingent upon the terms and conditions set out in this letter, as well as the following:

(a) your execution of the Company’s Proprietary Rights Agreement;

(b) verification of your right to work in the United States, as demonstrated by your completion of an I-9 form upon hire, and your submission of acceptable documentation as noted on the I-9 form within three days of your Start Date; and

(b) satisfactory completion of reference checks and, if requested by us, a background investigation.

We are excited at the pro s pe ct of your joining our team. If you have any questions about the above details, please call me immediately. If you wish to accept this position, please sign below and return this letter to me.

We look forward to hearing from you

Sincerely

BSQUARE CORPORATION		Acknowledged and agreed:

By:	/s/ Jerry Chase	/s/ Kevin Walsh
	Jerry Chase	Kevin Walsh
	President and CEO

ATTACHMENT A

For purposes of this Letter Agreement, “cause” means and is limited to dishonesty, fraud, commission of a felony or of a crime involving moral turpitude, destruction or theft of Company property, physical attack to a fellow employee, intoxication at work, use of controlled substances or alcohol to an extent that materially impairs your performance of your duties, willful malfeasance or gross negligence in the performance of your duties, violation of law in the course of employment that has a material adverse impact on the Company or its employees, your failure or refusal to perform your duties, your failure or refusal to follow reasonable instructions or directions, misconduct materially injurious to the Company, neglect of duty, poor job performance, or any material breach of your duties or obligations to the Company that results in material harm to the Company.

For purposes hereof, “neglect of duty” means and is limited to the following circumstances: (i) you have, in one or more material respects, failed or refused to perform your job duties in a reasonable and appropriate manner (including failure to follow reasonable directives), (ii) the Board, or a duly appointed representative of the Board, has counseled you in writing about the neglect of duty and given you a reasonable opportunity to improve, and (iii) you neglect of duty either has continued at a material level after a reasonable opportunity to improve or has reoccurred at a material level within one year after you were last counseled.

For purposes hereof, “poor job performance” means and is limited to the following circumstances: (i) you have, in one or more material respects, failed to perform your job duties in a reasonable and appropriate manner, (ii) the Board, or a duly appointed representative of the Board, has counseled you in writing about the performance problems and given you a reasonable opportunity to improve, and (iii) your performance problems either have continued at a material level after a reasonable opportunity to improve or the same or similar performance problems have reoccurred at a material level within one year after you were last counseled.

For purposes of this Letter Agreement, “good reason” shall mean the occurrence of any of the following, in each case without your written consent:

(i)

a material reduction in your Base Salary other than a general reduction in Base Salary that affects all similarly situated executives in substantially the same proportions;

(ii)

a material reduction in your ABP bonus target; or

(iii)

a material, adverse change in your title, authority, duties or responsibilities (other than as required by applicable law).

You cannot terminate your employment for good reason unless you have provided written notice to the Company of the existence of the circumstances providing grounds for termination for good reason within thirty (30) days of the initial existence of such grounds and the Company has had at least thirty (30) days from the date on which such notice is provided to cure such circumstances. If you do not terminate your employment for good reason within ninety (90) days after the first occurrence of the applicable grounds, then you will be deemed to have waived your right to terminate for good reason with respect to such grounds.

Further, for purposes of this Letter Agreement, a “Change of Control” shall mean:

(i)

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; or

(ii)

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.

Exhibit 10.3

August 31, 2016

Giles Frith

6927 39 ^th Ave SW

Seattle, WA 98136

Dear Giles:

It is with great pleasure that Bsquare Corporation offers you the position of Vice President Customer Solutions. We look forward to working with you and to the contributions you will make at Bsquare.

You will be reporting to Jerry Chase, Chief Executive Officer. Your start date is scheduled for September 30, 2016, or another mutually agreeable date, and you will be working from our Bellevue office. Your job classification is Executive Exempt; as an exempt employee you will not be entitled to overtime. Your duties and responsibilities will be as designated by Bsquare. Your offer includes the following compensation & benefits package:

•

Base pay of $8,269.23 biweekly, which when annualized is equivalent to $215,000.00 per year; paid bi-weekly consistent with the Company’s payroll practices;

•

Monthly cell phone stipend of $150.00. The stipend is a taxable benefit and will be disbursed in the first payroll of the month via payroll;

•

You will be eligible to participate in the Company’s Annual Bonus Program (“ ABP” ). Your annual bonus potential will be 35% of your base salary at 100% achi evement. The Company’s ABP is structured such that no bonuses are paid until the Company achieves certain financial targets and you achieve individual objectives that you and the CEO will agree upon. Bonuses are paid annua lly, by March 15 following the close of the Company’s fiscal year, and are payable at the sole discretion of the Compensation Committee of the Boar d. You must be employed by the Company at the end of the calendar year to be eligible to receive any bonus payout for that calendar year;

•

Signing bonus of $40,000.00. This bonus will be paid in two equal installments. The first installment will be paid on your first regular scheduled pay date following your date of hire. The second installment will be paid on the June 2, 2017 paydate. The signing bonus is taxable, and all regular payroll taxes will be withheld. In the unlikely event that you leave Bsquare Corporation within 12 months of your date of hire, you will be responsible for reimbursing the company for the entire signing bonus. By your signature on this employment agreement, you authorize the company to withhold this amount ($40,000.00) from any severance and other final pay you receive upon termination of employment;

•

Subject to approval and grant by the Bsquare Compensation Committee an option to purchase 80,000 shares of company common stock. Such shares shall be Nonqualified Stock Options, which vest, while you remain actively employed and subject to the Company’s stock option plan, in four equal installments, 25% of granted shares per year, on the anniversary date of the grant. The strike price shall be the closing price of Bsquare stock on the date of grant. The stock options shall expire after 10 years;

•

Subject to approval and grant by the Bsquare Compensation Committee to the extent necessary, a grant of 5,000 RSU’s of company common stock. The RSU’s will vest, while you remain actively employed and subject to the Company’s stock option plan, in four equal installments, 25% of granted shares per year, on the anniversary date of the grant;

110 110 ^t ^h Ave. NE., Suite 300, Bellevue, Washington 98004 Toll Free: 888.820.4500 Main: +1 425.519.5900 Fax: +1 425.519.5999

•

Health, vision and dental coverage, a 401(k) pension plan and flexible spending accounts, subject to plan terms and eligibility;

•

Life insurance and short- and long-term disability, subject to applicable waiting periods and eligibility;

•

Participation in the Bsquare Employee Assistance Program and Emergency Travel Assistance programs;

•

Bsquare will automatically contribute on an annual basis to your Section 125 Unreimbursed Medical account;

•

Paid Time Off (PTO) to be initially accrued at 4.62 hours per pay period which is equivalent to 15 days per year; and

•

Eight (8) Company-paid holidays and two (2) floating holidays per year.

Except as provided in the next paragraph, if your employment is terminated by the Company when neither “cause” nor “long term disability’’ exists, and provided that you release the Company and its agents from any and all employment-related claims in a signed, written release satisfactory in form and substance to the Company, (i) you will be entitled to receive severance equal to 6 months of your then annual Base Salary; (ii) you shall be eligible for continued COBRA coverage at the Company’s expense for a period of 6 months following your termination date, and (iii) any ABP bonus to which you would have otherwise been entitled as determined at the sole discretion of the Compensation Committee of the Board shall be payable on a pro rata basis as of your termination date. The foregoing severance payments shall be paid out on regular payroll days post termination, subject to legally required and any individually agreed upon payroll deductions. During the period subsequent to your termination date in which you are being paid such severance amounts, you would not be considered an employee and would therefore receive no Paid Time Off accrual, nor would you be entitled to benefits under the Company’s health and welfare plans or retirement savings plan as an active employee, except as otherwise provided herein.

Immediately prior to consummation of a Change of Control, all of your unvested stock options and restricted stock units shall become fully vested and immediately exercisable. In addition, if your employment is terminated by the Company or any successor thereto within 9 months following a Change of Control when neither “cause” nor “long term disability” exists or if you terminate your employment for “good reason,” and provided that you release the Company and any successor thereto and its respective agents from any and all employment-related claims in a signed, written release satisfactory in form and substance to the Company or any successor thereto, you will be entitled to receive a one-time lump sum severance payment equal to (i) 9 months of your then annual Base Salary plus (ii) 66% of your target ABP bonus as may be modified from time to time by the Compensation Committee of the Board (provided the applicable percentage shall be 66% for 2016), and you shall be eligible for continued COBRA coverage at the Company’s expense for a period of 9 months following your termination date . The foregoing severance payments shall be in lieu of the severance payments described in the preceding paragraph, and after expiration of the 6-month period following a Change of Control, you shall continue to be entitled to receive the severance payments described in the preceding paragraph on the terms and conditions set forth therein.

Bsquare Confidential

the termination occurs at a time during the calendar year when the release could become effective in the calendar year following the calendar year in which your termination occurs, then any payments hereunder that would be considered deferred compensation under Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ” ), and the regulations promulgated thereunder ( “ Section 409A ” ) will be paid commencing on the first payroll date to occur during the calendar year following the calendar year in which such termination occurs, or, if later, the Release Deadline.

Notwithstanding any other provision of this L etter Agreement, if at the time of the termination of your employment, you are a “specified employee,” determined in accordance with Section 409A, any payments and benefits provided hereunder that constitute “nonqualified deferred compensation” subject to Section 409A that are provided on account of separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of your termination date (the “Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date without interest, and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule.

Furthermore, notwithstanding any other provision of this Letter Agreement or any other plan, arrangement or agreement to the contrary, if any of the payments or benefits provided or to be provided by the Company or any successor to you or for your benefit pursuant to the terms of this Letter Agreement or otherwise (“Covered Payments”) constitute parachute payments (“Parachute Payments”) within the meaning of Section 280G of the Code and will be subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or any interest or penalties with respect to such excise tax (collectively, the “Excise Tax”), then the Company shall pay to you, no later than the time the Excise Tax is required to be paid by you or withheld by the Company, an additional amount (the “Gross-up Payment”) equal to the sum of the Excise Tax payable by you, plus the amount necessary to put you in the same after-tax position (taking into account any and all applicable federal, state, local and foreign income, employment and excise taxes (including the Excise Tax and any income and employment taxes imposed on the Gross-up Payment)) that you would have been in if you had not incurred any tax liability under Section 4999 of the Code . Any determination required under this paragraph, including whether any payments or benefits are Parachute Payments, shall be made by the Company in its sole discretion. You shall provide the Company with such information and documents as the Company may reasonably request in order to make a determination under this paragraph. The Company’s determinations shall be final and binding on the Company and you.

On your first day, you will participate in an orientation given by Human Resources, which will include completing employment forms, reviewing benefits, and touring the premises. Please bring appropriate documentation for the completion of your new hire forms, including proof that you are presently eligible to work in the United States for 1-9 purposes. Failure to provide appropriate documentation within 3 days of hire will result in immediate termination of employment in accordance with the terms of the Immigration Reform and Control Act. Your employment is at-will and accordingly, you or Bsquare Corporation may terminate this employment relationship at any time with or without notice or cause. In addition, this offer is contingent upon completion of successful reference checks.

Bsquare Confidential

Also enclosed with this offer letter is a Benefits Summary that provides detailed information concerning our benefits program in effect as of your expected start date. If you have any questions concerning the benefits for which you will be eligible, please feel free to contact HR, at 425-519-5920 or marijab@bsquare.co m.

We look forward to you joining our team and your future contributions to Bsquare.

Sincerely,

By:	/s/ Jerry Chase
	Jerry Chase
	Chief Executive Officer

The provisions of this offer of employment have been read, are understood, and the offer is herewith accepted. I understand that my employment is contingent upon execution of a mutually acceptable Employee Proprietary Rights Agreement.

This offer shall remain open until September 7, 2016. Any acceptance postmarked after this date will be considered invalid.


Date:	9/6/2016
Signature:	/s/ Giles Frith

Bsquare Confidential

AT T ACHMENT A

For purposes hereof, “neglect of duty” means and is limited to the following circumstances: (i) you have, in one or more material respects, failed or refused to perform your job duties in a reasonable and appropriate manner (including failure to follow reasonable directives), (ii) the Board, or a duly appointed representative of the Board, has counseled you in writing about the neglect of duty and given you a reasonable opportunity to improve, and (iii) your neglect of duty either has continued at a material level after a reasonable opportunity to improve or has reoccurred at a material level within one year after you were last counseled.

For purposes of this Letter Agreement, “good reason” shall mean the occurrence of any of the following, in each case without your written consent:

(i)

a material reduction in you Base Salary other than a general reduction in Base Salary that affects all similarly situated executives in substantially the same proportions;

(ii)

a material reduction in your ABP bonus target; or

(iii)

a material, adverse change in your title, authority, duties or responsibilities (other than as required by applicable law).

Further, for purposes of this Letter Agreement, a “Change of Control” shall mean:

(i)

(ii)

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.

Bsquare Confidential

Exhibit 10.4

AMENDMENT TO EMPLOYMENT LETTER AGREEMENT

This AMENDMENT TO EMPLOYMENT LETTER AGREEMENT (this “Amendment”) is made and entered into effective as of June 5, 2018 by and between BSQUARE CORPORATION, a Washington corporation (the “Company”), and GILES FRITH (“Employee”).

RECITALS

WHEREAS, the Company and Employee entered into an employment letter agreement dated August 31, 2016 (the “Agreement”); and

WHEREAS, the Company and Employee wish to amend the Agreement as provided herein.

AGREEMENT

NOW, THEREFORE, in consideration of the premises, the mutual covenants of the parties hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Agreement as follows:

Effective May 31, 2018, Employee's title shall be Chief Operating Officer.

Effective May 31, 2018, Employee's annual base salary shall be $250,000.

The ninth (9 ^th ) paragraph of the Agreement is hereby amended and restated in its entirety as follows:

“Furthermore, notwithstanding any other provision of this letter agreement or any other plan, arrangement or agreement to the contrary, if any of the payments or benefits provided or to be provided by the company or any successor to you or for your benefit pursuant to the terms of this letter agreement or otherwise (“Covered Payments”) would constitute parachute payments within the meaning of Section 280G of the Code and be subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or any interest or penalties with respect to such excise tax (collectively, the “Excise Tax”), then the Covered Payments shall be reduced (but not below zero) to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax. Any determination required under this paragraph, including whether any payments or benefits are parachute payments and whether and the extent to which any reduction in the Covered Payments is required, shall be made by the company in its sole discretion consistent with the requirements of Section 409A. You shall provide the company with such information and documents as the company may reasonably request in order to make a determination under this paragraph. The company's determinations shall be final and binding on the company and you.”

IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.

BSQUARE CORPORATION		EMPLOYEE

By:	/s/ Peter Biere	/s/ Giles Frith
Its:	CFO	Giles Frith

Exhibit 10.5

August 31, 2016

Dear Wagstaff

123 121 ^th Ave. NE, #131

Bellevue, WA 98004

Dear Dave:

Bsquare is pleased to confirm and memorialize the revised terms of your employment as the company's Chief Technical Officer. This letter agreement supersedes all previous employment letter agreements between you and the company.

You will continue reporting to Jerry Chase, Chief Executive Officer. Your start date for this new role was May 23, 2016. Your job classification is Executive; as an exempt employee you will not be entitled to overtime. You are now a Section 16 officer, subject to certain Bsquare stock trading restrictions and SEC reporting requirements (see attached memorandum for details). Your duties and responsibilities will be as designated by Bsquare.

Your offer includes the following compensation & benefits package:

•

Base pay of $9,230.76 biweekly, which when annualized is equivalent to $240,000.00 per year; paid biweekly consistent with the company's payroll practices;

•

Monthly cell phone stipend of $150.00. The stipend is a taxable benefit and will be dispursed in the first payroll of the month via payroll;

•

You will be eligible to participate in the company's Annual Bonus Plan (“ABP”). Your 2016 annual bonus potential will be 50% of your base salary at 100% achievement. The company's executive bonus plan is structured such that no bonuses are paid until the company achieves certain financial targets and you achieve individual objectives that you and your manager will agree upon. Bonuses are paid annually, in the first quarter following the close of the company's fiscal year, and are payable at the sole discretion of the Compensation Committee of the company's Board of Directors (the ‘Board”). You must be employed by the company at the end of the calendar year to be eligible to receive any bonus payout for that calendar year, except as otherwise specifically set out below;

•

You will continue to be eligible to participate in any benefit plans and programs in effect from time to time (such as paid time off, group medical and life insurance, and disability benefits) that are made available to Bsquare employees generally, subject to the eligibility requirements and other terms of those plans and programs.

Except as provided in the next paragraph, if your employment is terminated by the company when neither "cause" nor "long term disability " exists, and provided that you release the company and its agents from any and all employment-related claims in a signed, written release satisfactory in form and substance to the company, (i) you will be entitled to receive severance equal to 6 months of your then-current annual base salary; (ii) your stock options and restricted stock units will continue to vest for 4 months from the termination date, (iii) you shall be eligible for continued COBRA coverage at the company's expense for a period of 6 months following your termination date, and (iv) any ABP bonus to which you would have otherwise been entitled as determined at the sole discretion of the Compensation Committee of the Board shall be payable on a pro rata basis as of your termination date.

110 110 ^th Ave. NE., Suite 300, Bellevue, Washington 98004 Toll Free: 888.820.4500 Main: +1425.519.5900 Fax: +1425.519.5999

Bsquare Confidential

The foregoing severance payments shall be paid out on regular payroll days post termination, subject to legally required and any individually agreed upon payroll deductions. During the period subsequent to your termination date in which you are being paid such severance amounts , you would not be considered an employee and would therefore receive no paid time off accrual, nor would you be entitled to benefits under the company's health and welfare plans or retirement savings plan as an active employee, except as otherwise provided herein.

Immediately prior to consummation of a “ change of control, ” all of your unvested stock options and restricted stock units shall become fully vested and immediately exercisable. In addition, if your employment is terminated by the company or any successor thereto within 9 months following a change of control when neither " cause " nor " long term disability " exists or if you terminate your employment for " good reason, " and provided that you release the company and any successor thereto and its respective agents from any and all employment-related claims in a signed, written release satisfactory in form and substance to the company or any successor thereto, you will be entitled to receive a one-time lump sum severance payment equal to (i) 9 months of your thencurrent annual base salary plus (ii) 75% of your target ABP bonus as may be modified from time to time by the Compensation Committee of the Board (provided the applicable percentage shall be 75% for 2016), and (iii) you shall be eligible for continued COBRA coverage at the company's expense for a period of 9 months following your termination date. The foregoing severance payments shall be in lieu of the severance payments described in the preceding paragraph, and after expiration of the 9-month period following a change of control, you shall continue to be entitled to receive the severance payments described in the preceding paragraph on the terms and conditions set forth therein.

For purposes of this letter agreement, " cause, " " good reason " and " change of control " are defined on Attachment A hereto, and "long term disability" is defined in the company-sponsored long term disability group insurance plan.

No severance shall be payable hereunder unless the release described herein has been signed and become effective within sixty (60) days from the date of termination (the “Release Deadline”). Upon the release becoming effective, any severance payable hereunder will be payable commencing on or as soon as administratively practicable after the Release Deadline. In the event the termination occurs at a time during the calendar year when the release could become effective in the calendar year following the calendar year in which your termination occurs, then any payments hereunder that would be considered deferred compensation under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder (“Section 409A”) will be paid commencing on the first payroll date to occur during the calendar year following the calendar year in which such termination occurs, or, if later, the Release Deadline.

Notwithstanding any other provision of this letter agreement , if at the time of the termination of your employment, you are a "specified employee," determined in accordance with Section 409A, any payments and benefits provided hereunder that constitute "nonqualified deferred compensation" subject to Section 409A that are provided on account of separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of your termination date (the “Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date without interest, and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule.

The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. You and the company agree to work together in good faith to consider amendments to this letter agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to you under Section 409A.

Bsquare Confidential

Furt hermore , notwithstanding any other provision of this letter agreement or any other plan, arrangement or agreement to the contrary, if any of the payments or benefits provided or to be provided by the company or any successor to you or for your benefit pursuant to the terms of this Letter Agreement or otherwise (“ Covered Payments ” ) constitute parachute payments (“ Parachute Payments ” ) within the meaning of Section 280G of the Code and will be subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or any interest or penalties with respect to such excise tax (collectively, the “Excise Tax” ), then the company shall pay to you, no later than the time the Excise Tax is required to be paid by you or withheld by the company, an additional amount (the “ Gross-up Payment ” ) equal to the sum of the Excise Tax payable by you, plus the amount necessary to put you in the same after-tax position (taking into account any and all applicable federal, state, local and foreign income, employment and excise taxes (including the Excise Tax and any income and employment taxes imposed on the Gross-up Payment)) that you would have been in if you had not incurred any tax liability under Section 4999 of the Code. Any determination required under this paragraph, including whether any payments or benefits are Parachute Payments, shall be made by the company in its sole discretion. You shall provide the company with such information and documents as the company may reasonably request in order to make a determinatio n under this paragraph. The company' s determinations shall be final and binding on the company and you.

YOUR EMPLOYMENT IS AT-WILL AND ACCORDINGLY, YOU OR THE COMPANY MAY TERMINATE THIS EMPLOYMENT RELATIONSHIP AT ANY TIME WITH OR WITHOUT NOTICE OR CAUSE.

Please indicate your acceptance by signing and returning a copy of this letter agreement.

Thank you for your continued efforts to support the success of our team and Bsquare!

Sincerely,

/s/ Jerry Chase

Jerry Chase

Chief Executive Officer

I understand and agree to the terms of this letter agreement.

Signature:	/s/ David Wagstaff

Name:	David Wagstaff

Date:	9/2/2016

Bsquare Confidential

ATTACHMENT A

This attachment sets out definitions for certain of the terms used in this letter agreement:

• “cause” means and is limited to dishonesty, fraud, commission of a felony or of a crime involving moral turpitude, destruction or theft of company property, physical attack to a fellow employee, intoxication at work, use of controlled substance s or alcohol to an extent that materially impairs your performance of your duties, willful malfeasance or gross negligence in the performance of your duties, violation of law in the course of employment that has a material adverse impact on the company or its employees, your failure or refusal to perform your duties, your failure or refusal to follow reasonable instructions or directions, misconduct materially injurious to the company, neglect of duty, poor job performance, or any material breach of your duties or obligations to the company that results in material harm to the company.

• “neglect of duty” means and is limited to the following circumstances : (i) you have, in one or more material respects, failed or refused to perform your job duties in a reasonable and appropriate manner (including failure to follow reasonable directives,) (ii) the Board, or a duly appointed representative of the Board, has counseled you in writing about the neglect of duty and given you a reasonable opportunity to improve, and (iii) your neglect of duty either has continued at a material level after a reasonable opportunity to improve or has reoccurred at a material level within one year after you were last counseled.

• “poor job performance” means and is limited to the following circumstances: (i) you have, in one or more material respects, failed to perform your job duties in a reasonable and appropriate manner, (ii) the Board, or a duly appointed representative of the Board, has counseled you in writing about the performance problems and given you a reasonable opportunity to improve, and (iii) your performance problems either have continued at a material level after a reasonable opportunity to improve or the same or similar performance problems have reoccurred at a material level within one year after you were last counseled.

• “good reason” means the occurrence of any of the following , in each case without your written consent:

(i)

a material reduction in you base salary other than a general reduction in base salary that affects all similarly situated executives in substantially the same pro portions;

(ii)

a material reduction in your AEBP bonus target; or

(iii)

a material, adverse change in your title, authority , duties or responsibilities (other than as required by applicable law).

You cannot terminate your employment for good reason unless you have provided written notice to the company of the existence of the circumstances providing grounds for termination for good reason within thirty (30) days of the initial existence of such grounds and the company has had at least thirty (30) days from the date on which such notice is provided to cure such circumstances. If you do not terminate your employment for good reason within ninety (90) days after the first occurrence of the applicable grounds, then you will be deemed to have waived your right to terminate for good reason with respect to such grounds.

• “change of control” means:

(i)

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; or

(ii)

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.

• the “company” and “Bsquare” mean BSQUARE Corporation.

Bsquare Confidential

Exhibit 10.6

AMENDMENT TO EMPLOYMENT LETTER AGREEMENT

RECITALS

WHEREAS, the Company and Employee entered into an employment letter agreement dated August 31, 2016 (the “ Agreement”); and

WHEREAS, the Company and Employee wish to amend the Agreement as provided herein.

AGREEMENT

IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.

BSQUARE CORPORATION		EMPLOYEE:

By:	/s/ Peter Biere	/s/ David Wagstaff
		David Wagstaff
Its:	CFO

Exhibit 31.1

CERTIFICATION OF ACTING CHIEF EXECUTIVE OFFICER PURSUANT TO

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

I, Kevin T. Walsh, certify that:

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

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

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

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

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

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

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

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

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

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

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

Dated: August 13, 2018

/s/ Kevin T. Walsh

Kevin T. Walsh

Acting Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

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

I, Peter J. Biere, certify that:

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

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

Dated: August 13, 2018

/s/ Peter J. Biere

Peter J. Biere

Chief Financial Officer, Assistant Secretary and Treasurer

Exhibit 32.1

CERTIFICATION OF ACTING 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, Kevin T. Walsh, Acting Chief Executive Officer, certify that:

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

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

Dated: August 13, 2018		/s/ Kevin T. Walsh
		Kevin T. Walsh
		Acting Chief Executive Officer

Exhibit 32.2

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

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

I, Peter J. Biere, Chief Financial Officer, Assistant Secretary and Treasurer, certify that:

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

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

Dated: August 13, 2018		/s/ Peter J. Biere
		Peter J. Biere
		Chief Financial Officer, Assistant Secretary and Treasurer