10-Q

I 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

OR

¨ 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 110th 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock outstanding as of October 31, 2015: 12,034,221

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2015

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	14
Item 3	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4	Controls and Procedures	19
	PART II. OTHER INFORMATION
Item 1A	Risk Factors	20
Item 5	Other Information	20
Item 6	Exhibits	20
	Signatures	20
	Index to Exhibits	21

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	September 30, 2015			December 31, 2014
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,385		$	13,127
Short-term investments		15,926			13,263
Accounts receivable, net of allowance for doubtful    accounts of $36 at September 30, 2015    and $125 at December 31, 2014		15,560			13,626
Deferred tax assets		10			10
Prepaid expenses and other current assets		514			717
Total current assets		45,395			40,743
Equipment, furniture and leasehold improvements, net		1,236			1,336
Restricted cash		250			250
Deferred tax assets		294			391
Intangible assets, net		628			729
Goodwill		3,738			3,738
Other non-current assets		52			54
Total assets	$	51,593		$	47,241
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Third-party software fees payable	$	10,184		$	12,247
Accounts payable		285			165
Accrued compensation		2,333			2,106
Other accrued expenses		1,320			1,539
Deferred rent, current portion		293			275
Deferred revenue		705			712
Total current liabilities		15,120			17,044
Deferred tax liability		141			144
Deferred rent		1,255			1,476
Shareholders’ equity:
Preferred stock, no par value: 10,000,000 shares    authorized; no shares issued and outstanding		—			—
Common stock, no par value: 37,500,000 shares    authorized; 12,012,358 shares issued and    outstanding at September 30, 2015 and 11,767,577    shares issued and outstanding at December 31,    2014		132,601			131,071
Accumulated other comprehensive loss		(829	)		(846	)
Accumulated deficit		(96,695	)		(101,648	)
Total shareholders’ equity		35,077			28,577
Total liabilities and shareholders’ equity	$	51,593		$	47,241

See notes to condensed consolidated financial statements.

3

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenue:
Software	$	21,215		$	19,768		$	66,679		$	55,631
Service		5,220			4,767			14,894			14,690
Total revenue		26,435			24,535			81,573			70,321
Cost of revenue:
Software		17,698			16,760			54,732			47,189
Service		3,864			3,812			11,287			11,369
Total cost of revenue		21,562			20,572			66,019			58,558
Gross profit		4,873			3,963			15,554			11,763
Operating expenses:
Selling, general and administrative		3,174			2,880			9,120			9,352
Research and development		312			360			1,300			1,215
Total operating expenses		3,486			3,240			10,420			10,567
Income from operations		1,387			723			5,134			1,196
Other income (expense), net		32			(16	)		124			(118	)
Income before income taxes		1,419			707			5,258			1,078
Income tax expense		(174	)		(16	)		(305	)		(129	)
Net income	$	1,245		$	691		$	4,953		$	949
Basic income per share	$	0.10		$	0.06		$	0.42		$	0.08
Diluted income per share	$	0.10		$	0.06		$	0.40		$	0.08
Shares used in calculation of income per share:
Basic		11,959			11,655			11,867			11,520
Diluted		12,466			11,832			12,294			11,732
Comprehensive income:
Net income	$	1,245		$	691		$	4,953		$	949
Other comprehensive income (loss):
Foreign currency translation, net of tax		3			(97	)		20			34
Change in unrealized gains (losses) on investments,   net of tax		1			—			(3	)		—
Total other comprehensive income (loss)		4			(97	)		17			34
Comprehensive income	$	1,249		$	594		$	4,970		$	983

See notes to condensed consolidated financial statements.

4

BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	4,953		$	949
Adjustments to reconcile net income to net    cash provided by operating activities:
Depreciation and amortization		425			479
Realized loss on disposal of assets		—			33
Stock-based compensation		1,022			691
Changes in operating assets and liabilities:
Accounts receivable, net		(1,934	)		4,144
Prepaid expenses and other assets		203			1,871
Third-party software fees payable		(2,063	)		(2,805	)
Accounts payable and accrued expenses		224			(645	)
Deferred revenue		(7	)		(673	)
Deferred rent		(203	)		20
Net cash provided by operating activities		2,620			4,064
Cash flows from investing activities:
Purchases of equipment and furniture		(225	)		(276	)
Proceeds from maturities of short-term investments		14,253			9,195
Purchases of short-term investments		(16,906	)		(14,547	)
Net cash used in investing    activities		(2,878	)		(5,628	)
Cash flows provided by financing activities—proceeds    from exercise of stock options		508			595
Effect of exchange rate changes on cash		8			34
Net increase (decrease) in cash and cash    equivalents		258			(935	)
Cash and cash equivalents, beginning of period		13,127			13,510
Cash and cash equivalents, end of period	$	13,385		$	12,575
	Nine Months Ended September 30,
	2015			2014
Supplemental disclosure of cash flow information:
Non-cash investing activity-leasehold improvements    and furniture funded by landlord	$	—		$	1,128

See notes to condensed consolidated financial statements.

5

BSQUARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“BSQUARE”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2015 and our operating results and cash flows for the three and nine months ended September 30, 2015 and 2014. The accompanying financial information as of December 31, 2014 is derived from audited financial statements. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. All intercompany balances have been eliminated.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance, as amended, is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for public companies effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact this ASU will have on our consolidated financial statements.

Income (Loss) Per Share

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

We excluded an aggregate of 282,276 and 201,091 options and RSUs for the three and nine month periods ended September 30, 2015, respectively, from diluted earnings per share because their effect was anti-dilutive. We excluded an aggregate of 882,490 and 868,767 options and RSUs for the three and nine month periods ended September 30, 2014, respectively, from diluted earnings per share because their effect was anti-dilutive.

6

2. Cash and Investments

Cash, cash equivalents, short-term investments, and restricted cash consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015		December 31, 2014
Cash	$	1,872	$	2,763
Cash equivalents:
Money market funds		10,192		9,362
Corporate commercial paper		1,000		—
Corporate debt securities		321		1,002
Total cash equivalents		11,513		10,364
Total cash and cash equivalents		13,385		13,127
Short-term investments:
Corporate commercial paper		2,496		550
Corporate debt securities		13,430		12,713
Total short-term investments		15,926		13,263
Restricted cash—money market fund		250		250
Total cash, cash equivalents, short-term investments    and restricted cash	$	29,561	$	26,640

Gross unrealized gains and losses on our short-term investments were not material as of September 30, 2015 and December 31, 2014. The restricted cash relates to a letter of credit securing the lease of our corporate headquarters.

3. 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.

7

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 are summarized below (in thousands):

	September 30, 2015
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	10,192	$	—	$	10,192
Corporate commercial paper		—		1,000		1,000
Corporate debt securities		—		321		321
Total cash equivalents		10,192		1,321		11,513
Short-term investments:
Corporate commercial paper		—		2,496		2,496
Corporate debt securities		—		13,430		13,430
Total short-term investments		—		15,926		15,926
Restricted cash—money market fund		250		—		250
Total assets measured at fair value	$	10,442	$	17,247	$	27,689

	December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	9,362	$	—	$	9,362
Corporate debt securities		—		1,002		1,002
Total cash equivalents		9,362		1,002		10,364
Short-term investments:
Corporate commercial paper		—		550		550
Corporate debt securities		—		12,713		12,713
Total short-term investments		—		13,263		13,263
Restricted cash—money market fund		250		—		250
Total assets measured at fair value	$	9,612	$	14,265	$	23,877

4. Goodwill and Intangible Assets

Goodwill relates to the 2011 acquisition of MPC Data, Ltd. (“MPC”), a United Kingdom based provider of embedded software engineering services. The excess of the acquisition consideration over the fair value of net assets acquired was recorded as goodwill. We operate as a single reporting unit, and MPC falls within that reporting unit. There were no changes in the carrying amount of goodwill during the three and nine month periods ended September 30, 2015.

Intangible assets relate to customer relationships acquired from TestQuest Inc. in 2008 and from the acquisition of MPC in 2011, the vast majority of which relates to the MPC acquisition.

Information regarding our intangible assets as of September 30, 2015 and December 31, 2014 is as follows (in thousands):

	September 30, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(647	)	$	628

	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(546	)	$	729

8

Amortization expense was $33,000and $101,000for the three and nine month periods ended September 30, 2015, respectively, and $34,000and $101,000for the three and nine month periods ended September 30, 2014, respectively. Amortization in future periods is expected to be as follows (in thousands):

Remainder of 2015	$	34
2016		130
2017		98
2018		98
2019		98
2020		98
2021		72
Total	$	628

5. 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 million. 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. We were in compliance with all such covenants as of September 30, 2015.

There were no amounts outstanding under the Credit Agreement as of September 30, 2015.

6. Shareholders’ Equity

Equity Compensation Plans

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

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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Dividend yield		0	%		0	%		0	%		0	%
Expected life	3.3 years			3.3 years			3.3 years			3.3 years
Expected volatility		53	%		57	%		52	%		59	%
Risk-free interest rate		1.3	%		1.4	%		1.2	%		1.3	%

9

The impact on our results of operations of stock-based compensation expense for the three and nine month periods ended September 30, 2015 and 2014 was as follows (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cost of revenue — service	$	133	$	69	$	351	$	146
Selling, general and administrative		298		144		616		510
Research and development		23		15		55		35
Total stock-based compensation expense	$	454	$	228	$	1,022	$	691
Per diluted share	$	0.04	$	0.02	$	0.08	$	0.06

Stock Option Activity

The following table summarizes stock option activity under the Plans for the nine month period ended September 30, 2015:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2015		1,553,360		$	3.50
Granted		556,350			6.33
Exercised		(187,350	)		2.99
Forfeited		(63,941	)		3.52
Expired		(7,001	)		2.66
Balance at September 30, 2015		1,851,418		$	4.40		7.66	$	4,131,502
Vested and expected to vest at September 30, 2015		1,702,830		$	4.32		7.51	$	3,945,697
Exercisable at September 30, 2015		714,893		$	3.62		5.53	$	2,155,288

At September 30, 2015, total compensation cost related to stock options granted but not yet recognized was $1,616,051, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.38 years. The following table summarizes certain information about stock options for the three and nine month periods ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Weighted-average grant-date fair value of option    grants for the period	$	3.16	$	1.74	$	3.10	$	1.71
Options in-the-money at period end		1,762,893		425,877		1,762,893		425,877
Aggregate intrinsic value of options exercised	$	265,641	$	171,558	$	616,417	$	412,781

10

The aggregate intrinsic value represents the difference between the exercise price of the underlying options and the quoted price of our common stock for the number of options that were in-the-money at period end or that were exercised during the period. We issue new shares of common stock upon exercise of stock options.

Restricted Stock Unit Activity

The following table summarizes RSU activity for the nine month period ended September 30, 2015:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2014		80,179		$	3.40
Granted		117,049			6.34
Vested		(63,614	)		3.92
Forfeited		(8,976	)		3.15
Unvested at September 30, 2015		124,638		$	5.91
Expected to vest after September 30, 2015		109,695		$	5.89

At September 30, 2015, total compensation cost related to RSUs granted but not yet recognized was $492,045, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 1.42 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 September 30, 2015:

Stock options outstanding	1,851,418
RSUs outstanding	124,638
Stock awards available for future grant	1,010,602
Common stock reserved for future issuance	2,986,658

In June 2015, our shareholders approved an amendment to the Stock Plan increasing the number of shares reserved and available for issuance by 750,000 shares, and our Board of Directors approved an increase in the number of shares reserved and available for issuance under the Inducement Plan by 200,000 shares. These additional shares reserved under both of the Plans are included in the “Stock awards available for future grant” total in the preceding table.

7. Commitments and Contingencies

Lease and rent obligations

Our commitments include obligations outstanding under operating leases, which expire through 2020. We have lease commitments for office space in Bellevue, Washington; San Diego, California; Boston, Massachusetts; Taipei, Taiwan; Tokyo, Japan; 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, which was initially scheduled to expire in August 2014, and extended the lease term to May 2020. The amendment to the headquarters lease provided that no cash lease payments were to be made for a seven-month period from June 1, 2013 to December 31, 2013. In conjunction with the amended lease agreement, the landlord provided lease incentives totaling $1,128,000 for leasehold improvements and furniture related to new space in the same building, which were capitalized and are reflected in the deferred rent liability. We are amortizing these assets over the shorter of their economic life or the lease term. We are recognizing rent expense, including the effect of the deferred rent, on the straight-line basis over the lease term.

Rent expense was $268,000 and $789,000 for the three and nine month periods ended September 30, 2015, respectively. Rent expense was $281,000 and $918,000 for the three and nine month periods ended September 30, 2014, respectively.

As of September 30, 2015, we had $250,000 pledged as collateral for a bank letter of credit under the terms of our headquarters facility lease. The pledged cash supporting the outstanding letter of credit is classified as restricted cash.

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

Remainder of 2015	$	326
2016		1,291
2017		1,185
2018		1,105
2019		1,038
2020		437
Total commitments	$	5,382

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 of these 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 made 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.

A third-party software vendor invoiced us a total of $934,000 for certain licensed software that was lost in transit by a common carrier during the second quarter of 2014. We accrued a liability of $100,000 in the second quarter of 2014 as an estimate of our potential liability for legal and insurance deductible expenses. During the first quarter of 2015, the vendor credited our account for the full $934,000 as the licenses had been deactivated and there was no indication of counterfeit use. Accordingly, we reversed approximately $85,000 of the accrual after payment of legal expenses in the first quarter of 2015.

Volume Pricing Agreements

In conjunction with our activities under our OEM Distribution Agreements (“ODAs”) with Microsoft Corporation (“Microsoft”), as further described in Note 9, we have entered into OEM Volume Royalty Pricing (“OVRP”) commitments with Microsoft. Under these OVRPs, we are provided with volume pricing on a customer-by-customer basis assuming certain minimum unit volumes are met. The OVRP terms are 12 months. In the event we do not meet the committed minimum unit volumes, we are obligated to pay the difference between the committed per-unit volume rate and the actual per-unit rate we achieved based upon actual units purchased. The OVRP arrangements do not equate to a minimum purchase commitment, but rather, the arrangements are a volume pricing arrangement based upon actual volume purchased. In substantially all significant instances, we have reciprocal agreements with our customers such that we will receive per-unit price adjustments, similar to the amounts we would subsequently owe to Microsoft if such OVRP volumes are not met. However, in the event a customer is unwilling or unable to pay us, we would be negatively impacted. Based upon the credit-worthiness of our customers, our historical OVRP experience with our customers and OVRP arrangements in general, we do not believe we will incur any material liability relating to active agreements, and, therefore, no provision or reserve has been recorded as of September 30, 2015.

Microsoft is in the process of implementing significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OEM Volume Royalty Program (OVRP) and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016.

8. Information about Geographic Areas

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. Accordingly, we consider ourselves to be in a single reporting segment and operating unit structure.

12

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Total revenue:
North America	$	23,654	$	22,456	$	74,415	$	62,955
Asia		1,055		830		3,043		3,581
Europe		1,726		1,249		4,115		3,785
Total revenue	$	26,435	$	24,535	$	81,573	$	70,321

	September 30, 2015		December 31, 2014
Long-lived assets:
North America	$	1,285	$	1,597
Asia		523		360
Europe		4,389		4,453
Total long-lived assets	$	6,197	$	6,410

9. Significant Risk Concentrations

Significant Customer

One customer accounted for $2.8 million, or 11%, of total revenue for the three months ended September 30, 2015 and for $13.5 million, or 17% of total revenue for the nine months ended September 30, 2015. Another customer accounted for 18% and 11% of our total revenue for the three and nine month periods ended September 30, 2014, respectively. No other customers accounted for more than 10% of our revenue for any of the periods noted above.

One customer had an accounts receivable balance of $3.5 million, or approximately 23% of total accounts receivable at September 30, 2015. No customers had accounts receivable balances greater than 10% of the total accounts receivable at December 31, 2014.

Significant Supplier

We have two ODAs with Microsoft which enable us to sell Microsoft Windows Embedded operating systems to our customers in the United States, Canada, Argentina, Brazil, Chile, Columbia, Mexico, Peru, Puerto Rico, the Caribbean, the European Union, the European Free Trade Association, Turkey and Africa, which expire on June 30, 2016. We also have four 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 also expire on June 30, 2016.

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. Under this rebate program, we recognized $91,000 and $257,000 during the three and nine month periods ended September 30, 2015, respectively, compared to $64,000 and $233,000 during the three and nine month periods ended September 30, 2014, respectively. These rebates were treated as reductions in cost of sales. Additionally, during the three and nine month periods ended September 30, 2015, we qualified for $212,000 and $599,000 in rebate credits, respectively, compared to $149,000 and $543,000 in rebate credits for the three and nine month periods ended September 30, 2014, respectively. These are accounted for as reductions in marketing expense if and when qualified program expenditures are made.

Microsoft is in the process of implementing significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OEM Volume Royalty Program (OVRP) and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016.

13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes. Some statements and information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are not historical facts but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, readers can identify forward- looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology, which when used are meant to signify the statement as forward-looking. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements that are not historical facts. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s actual results, to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014 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

We provide software solutions and related engineering services to companies that develop smart, connected systems. A smart, connected system is a dedicated purpose computing device that typically has a display, runs an operating system (e.g., Microsoft^® Windows^® Embedded Compact) and is usually connected to a network or data cloud via a wired or wireless connection. Examples of smart, connected systems include set-top boxes, home gateways, point-of-sale terminals, kiosks, voting machines, gaming platforms, tablets, handheld data collection devices, personal media players, smart phones, smart vending machines, in-vehicle telematics and entertainment devices. We primarily focus on smart, connected systems that utilize Microsoft Windows Embedded and Windows Mobile operating systems as well as devices running other popular operating systems such as Android, Linux and QNX.

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

Building on the traditional strengths of our business, increasingly we intend to focus on offering our own products, such as DataV^TM to address the emerging Internet of Things (“IoT”) market. DataV is an actionable data solution for the IoT market that includes software products, applications and services that turn raw device data into useful, meaningful and actionable data.

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, 2014.

14

Results of Operations

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Revenue:
Software		80	%		81	%		82	%		79	%
Service		20	%		19	%		18	%		21	%
Total revenue		100	%		100	%		100	%		100	%
Cost of revenue:
Software		67	%		68	%		67	%		67	%
Service		15	%		16	%		14	%		16	%
Total cost of revenue		82	%		84	%		81	%		83	%
Gross profit		18	%		16	%		19	%		17	%
Operating expenses:
Selling, general and administrative		12	%		12	%		11	%		13	%
Research and development		1	%		1	%		2	%		2	%
Total operating expenses		13	%		13	%		13	%		15	%
Income from operations		5	%		3	%		6	%		2	%
Other income (expense), net		0	%		0	%		0	%		(1	)%
Income before income taxes		5	%		3	%		6	%		1	%
Income tax expense		(1	)%		0	%		0	%		0	%
Net income		4	%		3	%		6	%		1	%

Revenue

Our revenue is generated from the sale of software, primarily third-party software that we resell and our own proprietary software, and the sale of engineering services. Total revenue increased $1.9 million, or 8%, to $26.4 million for the three months ended September 30, 2015, from $24.5 million in the year-ago period, and increased $11.3 million, or 16%, to $81.6 million for the nine months ended September 30, 2015, from $70.3 million in the year-ago period. The quarterly increase was primarily due to higher sales of third-party software combined with smaller increases in engineering services revenue. The year-to-date increase was primarily driven by higher sales of both third-party and proprietary software, with smaller increases in engineering services revenue.

Revenue from customers outside of North America increased $0.7 million, or 34%, to $2.8 million for the three months ended September 30, 2015 compared to $2.1 million in the year-ago period due primarily to an increase in third-party software licensing sales in the European Union. Revenue from customers outside of North America decreased $0.2 million, or 3%, to $7.2 million for the nine months ended September 30, 2015 compared to $7.4 million in the year-ago period, primarily due to the recognition of $0.5 million in revenue from the completion of a non-recurring handheld project in Japan in the second quarter of 2014.

Software revenue

Software revenue consists of sales of third-party software and revenue realized from our own proprietary software products, which include software license sales, royalties from our software products, and support and maintenance revenue. Software revenue for the three and nine month periods ended September 30, 2015 and 2014 was as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Software revenue:
Third-party software	$	20,790		$	19,217		$	63,914		$	53,877
Proprietary software		425			551			2,765			1,754
Total software revenue	$	21,215		$	19,768		$	66,679		$	55,631
Software revenue as a percentage of total revenue		80	%		81	%		82	%		79	%
Third-party software revenue as a percentage of total    software revenue		98	%		97	%		96	%		97	%

15

The vast majority of our third-party software revenue is comprised of sales of Microsoft Windows Embedded and Windows Mobile operating systems.

Third-party software revenue increased $1.6 million, or 8%, for the three months ended September 30, 2015, from the year-ago period. The increase was driven by a $3.2 million increase in Windows Embedded operating system sales, partially offset by a $1.5 million decrease in sales of Windows Mobile operating systems. The quarter-over-quarter changes were driven primarily by the timing of orders from existing customers. For the nine months ended September 30, 2015, third-party software revenue increased $10.0 million, or 19%, from the year-ago period. This increase was primarily due to a $5.4 million increase in sales of Windows Mobile operating systems sales as well as a $4.4 million increase in Windows Embedded operating systems sales. The increase in sales of Windows Mobile operating systems was driven by increased volume to an existing customer in the first and second quarters of 2015, and the increases in Windows Embedded operating systems sales were from a variety of customers.

Proprietary software revenue decreased $126,000, or 23%, to $425,000 for the three months ended September 30, 2015, from $551,000 in the year-ago period, driven by declines in sales of a number of our legacy products. Proprietary software revenue increased $1.0 million, or 58%, to $2.8 million for the nine months ended September 30, 2015, from $1.8 million in the year-ago period, primarily driven by larger than expected sales of our legacy products completed during the first quarter of 2015.

Service revenue

Service revenue for the three and nine month periods ended September 30, 2015 and 2014 was as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Service revenue	$	5,220		$	4,767		$	14,894		$	14,690
Service revenue as a percentage of total revenue		20	%		19	%		18	%		21	%

Service revenue increased $453,000, or 10%, for the three months ended September 30, 2015, from the year-ago period. Service revenue increased $204,000, or 1%, for the nine months ended September 30, 2015, from the year-ago period. The quarter over quarter increase was due to the addition of some large North American engagements. The year-to-date increase was primarily as a result of increased hours and billing rates on some large North American engagements, offset by service revenue generated in Asia as we completed a large handheld project in Japan in 2014.

We continued to work on the MyFord Touch program during the three and nine month periods ended September 30, 2015, a project we began with Ford Motor Company (“Ford”) during the second quarter of 2008 and which has been significant for us since its inception. We now perform these services through agreements with Ford, Microsoft and another customer. Service revenue from the MyFord Touch program was $845,000 and $2.2 million for the three and nine months ended September 30, 2015, respectively, and $655,000 and $2.1 million for the three and nine month periods ended September 30, 2014, respectively.

Gross profit and gross margin

Cost of software revenue consists primarily of the cost of third-party software products payable to third-party vendors and support costs associated with our proprietary software products. Cost of service revenue consists primarily of salaries and benefits, contractor costs and re-billable expenses, related facilities and depreciation costs, and amortization of certain intangible assets related to acquisitions. Gross profit on the sale of third-party software products is also positively affected by rebate credits we receive from Microsoft for the sale of Windows Embedded operating systems earned through the achievement of defined objectives.

Under this rebate program, we recognized $91,000 and $257,000 during the three and nine month periods ended September 30, 2015, respectively, compared to $64,000 and $233,000 during the three and nine month periods ended September 30, 2014, respectively. These rebates were treated as reductions in cost of sales. Additionally, during the three and nine month periods ended September 30, 2015, we qualified for $212,000 and $599,000 in rebate credits, respectively, compared to $149,000 and $543,000 in rebate credits for the three and nine month periods ended September 30, 2014, respectively. These are accounted for as reductions in marketing expense if and when qualified program expenditures are made.

16

Gross profit and related gross margin for the three and ninemonth periods ended September 30, 2015 and 2014 were as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Software gross profit	$	3,517		$	3,008		$	11,947		$	8,442
Software gross margin		17	%		15	%		18	%		15	%
Service gross profit	$	1,356		$	955		$	3,607		$	3,321
Service gross margin		26	%		20	%		24	%		23	%
Total gross profit	$	4,873		$	3,963		$	15,554		$	11,763
Total gross margin		18	%		16	%		19	%		17	%

Software gross profit and gross margin

Software gross profit increased by $0.5 million, or 17%, for the three months ended September 30, 2015, from the year-ago period and increased by $3.5 million, or 42%, for the nine months ended September 30, 2015, compared to the year-ago period. Our software gross margin increased by two percentage points to 17% for the three month period ended September 30, 2015 compared to the year-ago period, and increased by three percentage points to 18% for the nine month period ended September 30, 2015 compared to the year-ago period. The increases in software gross profit were driven by increases in proprietary software revenue compared to a relatively fixed cost base as well as increased revenue from sales of Microsoft software. Third-party software gross margin increased to 15% for the three months ended September 30, 2015 compared to 14% in the year-ago period, and to 15% for the nine months ended September 30, 2015, compared to 13% in the year-ago period. The quarterly increase was primarily due to increased sales of Windows Embedded operating systems combined with a favorable product mix and the timing of completion of customer contractual commitments. The year-to-year increase was driven by higher sales of Windows Embedded operating systems and increased sales of both Windows Mobile and Windows Embedded products to an existing customer with extended payment terms. Proprietary software gross margin was 74% for the three months and 87% for the nine months ended September 30, 2015, compared to 74% and 72% in the year-ago periods, respectively, with the increase year-to-date due to higher revenue on a relatively fixed cost base.

Service gross profit and gross margin

Service gross profit increased by $401,000, or 42%, for the three months ended September 30, 2015, and $286,000, or 9%, for the nine months ended September 30, 2015, from the respective year-ago periods. Service gross margin increased by six percentage points to 26% for the three months ended September 30, 2015 compared to the year-ago period and by one percentage point to 24% for the nine months ended September 30, 2015 compared to the year-ago period. The increases in service gross profit were driven by the $453,000 and $204,000 increases in service revenue for the three and nine month periods ended September 30, 2015, respectively, compared to the prior year periods and by increased realized hourly rates for both current year periods over the respective prior year periods.

Operating expenses

Selling, general and administrative

Selling, general and administrative expenses (“SG&A”) consist primarily of salaries and related benefits, commissions for our sales teams, marketing and administrative personnel and related facilities and depreciation costs, as well as professional services fees (e.g., consulting, legal, tax and audit). SG&A expenses increased by approximately $0.3 million, or 10%, to $3.2 million for the three months ended September 30, 2015, from $2.9 million in the year-ago period. SG&A expenses decreased approximately $0.2 million, or 2%, to $9.1 million for the nine months ended September 30, 2015, from $9.4 million in the year-ago period. The quarterly increase was driven by higher marketing spending and higher general and administrative expenses, including increased non-cash stock compensation expenses. The year-to-date decrease was driven primarily by lower spending and benefitted from the timing of reimbursement for marketing expenses, partially offset by higher bonus and commissions resulting from increased revenue and profitability and increased non-cash stock compensation expenses. SG&A expenses represented 12% and 11% of our total revenue for the three and nine month periods ended September 30, 2015, respectively, and 12% and 13% for the three and nine month periods ended September 30, 2014, respectively. The minor percentage change for the year-to-date period resulted from a combination of spending changes and higher revenue compared to the prior year period.

17

Research and development

Research and development expenses (“R&D”) consist primarily of salaries and benefits for software development and quality assurance personnel, contractor and consultant costs and related facilities and depreciation costs. R&D expenses decreased $48,000, or 13%, to $312,000 for the three months ended September 30, 2015, from $360,000 in the year-ago period due primarily to a reduction in spending on our MobileV product. R&D expenses increased $85,000, or 7%, to $1,300,000 for the nine months ended September 30, 2015, from $1,215,000 in the year-ago period due primarily to increased investments in our DataV product initiative. R&D expenses represented 1% and 2% of our total revenue for the three and nine month periods ended September 30, 2015, respectively, unchanged from the three and nine month periods ended September 30, 2014.

Other income (expense), net

Net other income (expense) consists of interest income on our cash, cash equivalents and investments, gains and/or losses recognized on our investments, as well as gains and losses on foreign exchange transactions. Other income (expense), net, increased by $48,000 to $32,000 in net other income for the three months ended September 30, 2015, compared to a net other expense of $16,000 in the year-ago period. Other income (expense), net, increased by $242,000 to $124,000 in net other income for the nine months ended September 30, 2015, compared to a net other expense of $118,000 in the year-ago period. The improved quarterly and year-to-date results were due primarily to a combination of increased interest income and a reduction in foreign currency transaction losses.

Income tax expense

Income tax expense was $174,000 for the three months ended September 30, 2015, compared to $16,000 in the year-ago period, an increase of $158,000. The 2015 expense was primarily comprised of alternative minimum tax obligations not offset by net operating loss carryforwards and an increase in the valuation allowance for deferred tax assets related to our Japanese subsidiary.

Income tax expense was $305,000 for the nine months ended September 30, 2015, compared to $129,000 in the year-ago period. The 2015 amount was primarily comprised of alternative minimum tax obligations not offset by net operating loss carryforwards and an increase in the valuation allowance for deferred tax assets related to our Japanese subsidiary. The 2014 amount primarily related to income taxes due related to the closure of our Taiwan subsidiary in the first quarter of 2014.

The effective tax rates for the three and nine months ended September 30, 2015 of 12% and 6%, respectively, werelower than the U.S. statutory rate of 34% primarily because of net operating loss carryforwards available to offset current year taxable income and a full valuationallowance on deferred tax assets, offset by alternative minimum tax accruals.

Liquidity and Capital Resources

As of September 30, 2015, we had $29.6 million of cash, cash equivalents, investments and restricted cash, compared to $26.6 million at December 31, 2014.

Net cash provided by operating activities was $2.6 million for the nine months ended September 30, 2015, driven primarily by net income, offset by a $1.9 million increase in net accounts receivable and a $2.1 million reduction in third-party software fees payable, combined with other non-cash expenses and working capital changes. Net cash provided by operating activities was $4.1 million for the nine months ended September 30, 2014, driven by positive net working capital changes.

Investing activities used cash of $2.9 million for the nine months ended September 30, 2015, due to a net increase in short-term investments of $2.7 million and capital expenditures of $225,000. Investing activities used cash of $5.6 million for the nine months ended September 30, 2014 due to a $5.4 million net increase in short-term investments and $276,000 of capital expenditures.

Financing activities generated $508,000 during the nine months ended September 30, 2015, and $595,000 during the nine months ended September 30, 2014, as a result of 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. We expect our accounts receivable balance to increase into early 2016 as a result of extended payment terms we have agreed to with a customer, with a commensurate decrease in cash and/or short-term investments balances. In September 2015 we entered into a two-year unsecured line of credit agreement in the principal amount of up to $12 million. No amounts were drawn or are outstanding as of September 30, 2015. See Item 1, Financial Statements, Note 5, Credit Agreement in this Quarterly Report on Form 10-Q for more information on this agreement.

18

Cash Commitments

We have the following future or potential cash commitments:

● Minimum rents payable under operating leases total $0.3 million for the remainder of 2015, $1.3 million in 2016, $1.2 million in 2017, $1.1 million in 2018, $1.0 million in 2019 and $0.4 million thereafter; and

● In conjunction with our activities under our ODAs with Microsoft, we have entered into OVRP commitments with Microsoft. Under these OVRPs, we are provided with volume pricing on a customer-by-customer basis assuming certain minimum unit volumes are met. The OVRP terms are 12 months. In the event we do not meet the committed minimum unit volumes, we are obligated to pay the difference between the committed per-unit volume rate and the actual per-unit rate we achieved based upon actual units purchased. The OVRP arrangements do not equate to a minimum purchase commitment but rather, the arrangements are a volume pricing arrangement based upon actual volume purchased. In substantially all significant instances, we have reciprocal agreements with our customers such that we will receive per-unit price adjustments, similar to the amounts we would subsequently owe to Microsoft if such OVRP volumes are not met. However, in the event a customer is unwilling or unable to pay us, we would be negatively impacted. Based upon the credit-worthiness of our customers, our historical OVRP experience with our customers and OVRP arrangements in general, we do not believe we will incur any material liability relating to active agreements. See Part II, Item 1A of this Quarterly Report on Form 10-Q for information regarding changes Microsoft is making to its OEM Volume Royalty Program effective January 1, 2016.

Recently Issued Accounting Standards

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

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

There were no changes in our internal control over financial reporting during the three month period ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

19

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, 2014, other than as listed below.

Our business and results of operations could be negatively impacted by changes Microsoft Corporation is implementing in its pricing of operating systems through its distributors.

Microsoft is in the process of implementing significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OEM Volume Royalty Program (OVRP) and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016. These changes to design registration pricing discounts will alter the competitive dynamics because the same pricing discounts will be available to all distributors of these Microsoft products. As a distributor of Microsoft products, this will impact both the sales prices we charge our customers and the cost of goods sold we incur for many of the Microsoft products we sell. At this time, the amount and impact of these upcoming changes to our revenue and gross profit are not determinable; however, they may negatively impact our operating results beginning in 2016. The sale of Microsoft operating systems represented approximately 77% and 76% of our total revenue and approximately 62% and 56% of our total gross margin for the three and nine months ended September 30, 2015, respectively.

Our common stock has experienced and may continue to experience price and volume fluctuations, which could lead to costly litigation for us and make an investment in us less appealing.

Stock markets are subject to significant price and volume fluctuations which may be unrelated to the operating performance of particular companies and the market price of our common stock may therefore frequently change as a result. In addition, the market price of our common stock has fluctuated and may continue to fluctuate substantially due to a variety of other factors, including quarterly fluctuations in our results of operations, announcements about technological innovations or new products or services by us or our competitors, market acceptance of new products and services offered by us, changes in our relationships with our suppliers or customers, our ability to meet analysts’ expectations, changes in the information technology environment, changes in earnings estimates by analysts, sales of our common stock by existing holders and the loss of key personnel. In the past, following periods of volatility in the market price of a company’s stock, class action securities litigation has often been instituted against such companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources which would materially adversely affect our business, financial condition and operating results.

Item 5. Other Information

None.

Item 6. Exhibits

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

SIGNATURES

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

	BSQUARE CORPORATION (Registrant)
Date: November 12, 2015	By:	/s/ Martin L. Heimbigner
		Martin L. Heimbigner
		Chief Financial Officer, Secretary and Treasurer

20

BSQUARE CORPORATION

INDEX TO EXHIBITS

Exhibit

Filed or Furnished

Incorporated by Reference

Number

Description

Herewith

Form

Filing Date

Exhibit

File No.

3.1

Amended and Restated Articles of Incorporation

S-1

8/17/1999

3.1

(a)

333-85351

3.1(a)

Articles of Amendment to Amended and Restated Articles of Incorporation

10-Q

8/7/2000

3.1

000-27687

3.1(b)

Articles of Amendment to Amended and Restated Articles of Incorporation

8-K

10/11/2005

3.1

000-27687

3.2

Bylaws and all amendments thereto

10-K

3/19/2003

3.2

000-27687

10.1

Credit Agreement dated as of September 22, 2015 between JPMorgan Chase Bank, N.A. as Bank and BSQUARE CORPORATION as Borrower

X

10.2

Line of Credit Note dated as of September 22, 2015 between JPMorgan Chase Bank, N.A. as Bank and BSQUARE CORPORATION as Borrower

X

31.1

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

X

31.2

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

X

32.1

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

X

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

X

101.INS

XBRL Instance Document

X

101.SCH

XBRL Taxonomy Extension Schema

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase

X

101.LAB

XBRL Taxonomy Extension Label Linkbase

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

X

21

EX-10.1

Exhibit 10.1

Credit Agreement

This Credit Agreement (“Agreement”) dated as of September 22, 2015 is between JPMorgan Chase Bank, N.A. (together with its successors and assigns, the “Bank”), whose address is 1301 2nd Ave, Seattle,WA98101, and BSQUARE CORPORATION (individually, the “Borrower” and if more than one, collectively, the “Borrowers”), whose address is 110 110th Ave NE, Bellevue, WA 98004.

1. Credit Facilities.

1.1 Scope. This agreement governs Facility A, and, unless otherwise agreed to in writing by the Bank and the Borrower or prohibited by any Legal Requirement, governs the Credit Facilities as defined below. Advances under any Credit Facilities shall be subject to the procedures established from time to time by the Bank. Any procedures agreed to by the Bank with respect to obtaining advances, including automatic loan sweeps, shall not vary the terms or conditions of this Agreement or the other Credit Facility Related Documents regarding the Credit Facilities.

1.2 Facility A (Line of Credit). The Bank has approved a credit facility to the Borrower in the principal sum not to exceed $12,000,000.00 in the aggregate at any one time outstanding (“Facility A”). Credit under Facility A shall be repayable as set forth in a Line of Credit Note executed concurrently with this Agreement, and any renewals, modifications, extensions, rearrangements, restatements thereof and replacements or substitutions therefor.

Letter of Credit Sub-Limit. At any time the Borrower is entitled to an advance under Facility A, the Bank agrees to issue letters of credit (all letters of credit issued for the account of the Borrower which are outstanding on the date of the Line of Credit Note and any letter of credit issued under this Agreement, together with any and all amendments, modifications, renewals, extensions, increases, restatements and rearrangements of and substitutions and replacements for, any of the foregoing, a “Letter of Credit” or “Letters of Credit”) for the account of the Borrower in an amount not in excess of the maximum advance that it would then be entitled to obtain under Facility A, provided that (a) the aggregate maximum amount which is drawn and remains unreimbursed under all Letters of Credit plus the aggregate maximum available amount which may be drawn under all Letters of Credit which are outstanding at any time (the “L/C Obligations”), shall not exceed $1,000,000.00, (b) the issuance of any Letter of Credit with an expiration date beyond the maturity date of the Line of Credit Note shall be subject to the approval of the Bank, (c) any Letter of Credit shall be a standby letter of credit and the form of the requested Letter of Credit shall be satisfactory to the Bank, and (d) the Borrower shall have executed an application and reimbursement agreement for any Letter of Credit in a form satisfactory to the Bank. While any Letter of Credit is outstanding, the maximum amount of advances that may be outstanding under the Line of Credit Note shall be automatically reduced by the L/C Obligations.The Borrower shall pay the Bank a fee for each standby letter of credit that is issued, calculated at the rate of 1.75% per annum (based on a year deemed to be comprised of 360 days, unless the calculation would result in a usurious interest rate, in which case interest will be calculated on the basis of a 365 or 366 day year, as the case may be) of the original maximum amount available of such standby Letter of Credit, with the fee being calculated on the basis of a 360-day year and the actual number of days in the period during which the standby Letter of Credit will be outstanding; provided, however, that such fee shall not be less than the Bank’s standard issuance fee for each Letter of Credit as in effect at the date of issuance of such Letter of Credit. No credit shall be given for fees paid due to early termination of any Letter of Credit. The Borrower shall also pay the Bank’s standard transaction fees with respect to any transactions occurring on account of any Letter of Credit. Each fee shall be payable when the related letter of credit is issued, and transaction fees shall be payable upon completion of the transaction as to which they are charged. All fees may be debited by the Bank to any deposit account of the Borrower with the Bank without further authority and, in any event, shall be paid by the Borrower within ten (10) days following billing. The Bank is authorized, but not obligated to make an advance under the Line of Credit Note without notice to the Borrower, to make payment on a drawing under any Letter of Credit. The aggregate principal amount of advances outstanding at any one time under the Line of Credit Note (and any and all renewals, modifications, extensions, rearrangements, restatements thereof and replacements or substitutions therefor) evidencing Facility A plus the aggregate amount of L/C Obligations outstanding at any time (the “Aggregate Outstanding Amount”) shall not exceed the maximum amount of Facility A. If the Aggregate Outstanding Amount still exceeds the maximum amount of Facility A after the Line of Credit Note balance is reduced to zero (that is, L/C Obligations exceed the maximum amount of Facility A), the Borrower shall provide cash collateral to the Bank for the L/C Obligations in an amount sufficient to eliminate the excess. References in this Agreement to the principal amount outstanding under the Credit Facilities shall include L/C Obligations.

2. Definitions and Interpretations. 

2.1 Definitions. As used in this Agreement, capitalized terms not otherwise defined herein shall have the meanings set forth below::

A.“Account” means a trade account, account receivable, other receivable, or other right to payment for goods sold or leased or services rendered.

B.“Affiliate” means any Person which, directly or indirectly Controls or is Controlled by or under common Control with, another Person, and any director or officer thereof. The Bank is under no circumstances to be deemed an Affiliate of the Borrower or any of its Subsidiaries.

C.“Anti-Corruption Laws” means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery or corruption.

D.“Authorizing Documents” means certificates of authority to transact business, certificates of good standing, borrowing resolutions, appointments, officer’s certificates, certificates of incumbency, and other documents which empower and authorize or evidence the power and authority of all Persons (other than the Bank) executing any Credit Facility Related Document or their representatives to execute and deliver the Credit Facility Related Documents and perform the Person’s obligations thereunder.

E.“Capitalized Leases” means, as to any Person, all leases of such Person of real or personal property that in accordance with GAAP are or should be capitalized on the balance sheet of such Persons.  The amount of any Capitalized Lease shall be the capitalized amount thereof as determined in accordance with GAAP.

F.“Collateral” means all Property, now or in the future subject to any Lien in favor of the Bank, securing or intending to secure, any of the Liabilities.

G.“Control” as used with respect to any Person, means the power to direct or cause the direction of, the management and policies of that Person, directly or indirectly, whether through the ownership of Equity Interests, by contract, or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

H.“Credit Facilities” means all extensions of credit from the Bank to the Borrower pursuant to this Agreement or the Credit Facility Related Documents, whether now existing or hereafter arising, as more fully described in Section 1, as the same may be modified, amended and/or restated from time to time.

I.“Credit Facility Indebtedness” means all indebtedness, liabilities and obligations of every kind and character of the Borrower to the Bank pursuant to this Agreement or the Credit Facility Related Documents, whether the obligations, indebtedness and liabilities are individual, joint and several, contingent or otherwise, now or hereafter existing, including, without limitation, all liabilities, interest, costs and fees, arising under or from, any monetary obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations, rearrangements, restatements, replacements or substitutions of any of the foregoing.

J.“Credit Facility Related Documents” means this Agreement, the Notes, Letters of Credit, applications for letters of credit, all loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, and any other instrument or document at any time executed in connection with this Agreement or with any of the Credit Facility Indebtedness.

K.“Default” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

L.“Distributions” means all dividends and other distributions made to any Equity Owners, other than salary, bonuses, and other compensation for services expended in the current accounting period.

M.“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such equity interest.

N.“Equity Owner” means a shareholder, partner, member, holder of a beneficial interest in a trust or other owner of any Equity Interests. 

O.“Event of Default” has the meaning assigned to such term in Section 7.1.

P.“GAAP” means generally accepted accounting principles in effect from time to time in the United States of America, consistently applied.

Q.“Governmental Authority” means the government of the United States, any other nation or any political subdivision thereof, whether state or local, and any agency, department, commission, board, bureau, authority, instrumentality, regulatory body, court or other tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

R.“Legal Requirement” means any law, ordinance, decree, requirement, order, judgment, rule, Sanctions, regulation (or interpretation of any of the foregoing by any Governmental Authority) of any foreign Governmental Authority, the United States of America, any state thereof, any political subdivision of any of the foregoing or any Governmental Authority having jurisdiction over the Bank, any Pledgor or any Obligor or any of its Subsidiaries or their respective Properties or any agreement by which any of them is bound.

S.“Liabilities” means all indebtedness, liabilities and obligations of every kind and character of the Borrower to the Bank, whether the obligations, indebtedness and liabilities are individual, joint and several, contingent or otherwise, now or hereafter existing, including, without limitation, all liabilities, interest, costs and fees, arising under or from any note, open account, overdraft, credit card, lease, Rate Management Transaction, letter of credit application, endorsement, surety agreement, guaranty, acceptance, foreign exchange contract or depository service contract, whether payable to the Bank or to a third party and subsequently acquired by the Bank, any monetary obligations (including interest) incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations, rearrangements, restatements, replacements or substitutions of any of the foregoing.

T.“Lien” means any mortgage, deed of trust, pledge, charge, encumbrance, security interest, collateral assignment or other lien or restriction of any kind.

U.“Notes” means all promissory notes, instruments and/or contracts now or hereafter evidencing the Credit Facilities.

V.“Obligor” means any Borrower, guarantor, surety, co-signer, endorser, general partner or other Person who may now or in the future be obligated to pay any of the Liabilities.

W.“Organizational Documents” means, with respect to any Person, certificates of existence or formation, documents establishing or governing the Person or evidencing or certifying that the Person is duly organized and validly existing in accordance with all applicable Legal Requirements, including all amendments, restatements, supplements or modifications to such certificates and documents as of the date of the Related Document referring to the Organizational Document and any and all future modifications thereto approved by the Bank.

X.“Permitted Encumbrances” means:  (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 4.2; (b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than thirty (30) days or are being contested in good faith and have been properly reflected on the applicable obligor’s books and, at the Bank’s request, such obligor has pledged or reserved adequate funds or security to insure payment; (c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) judgment Liens not otherwise constituting an Event of Default; (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower; (g) existing Liens not required to be released under Section 3.1.C below; (h) Liens created on assets at the time such assets are acquired, including through the use of Capitalized Leases; provided such asset is acquired in the ordinary course of the Borrower’s business and the Lien does not encumber any assets other than the assets subject to such Lien at the time such assets are acquired and does not

exceed the cost to the Borrower of the assets acquired; and (i) Liens to the Bank.  Notwithstanding the foregoing, the term “Permitted Encumbrances” shall in no event include any Lien on the Borrower’s Accounts. 

Y.“Permitted Investments” means (1) readily marketable direct obligations of the United States of America or any agency thereof with maturities of one year or less from the date of acquisition; (2) fully insured (if issued by a bank other than the Bank) certificates of deposit with maturities of one year or less from the date of acquisition issued by any commercial bank operating in the United States of America having capital and surplus in excess of $500,000,000.00; (3) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest rating categories of Standard and Poor’s Corporation or Moody’s Investors Service; and (4) to the extent not already included in subparts (1) through (3) above, investments of made under the Borrower’s investment policy as in existence as of the date of this Agreement consisting of (W) long-term bank obligations rated “A2/A” or better, (X) corporate obligations rated “A2/A” or better, (Y) short-term bank obligations rated “A1/P1” or better, and (Z) commercial paper rated “A1/P1” or better.

Z.“Person” means any individual, corporation, partnership, limited liability company, joint venture, joint stock association, association, bank, business trust, trust, unincorporated organization, any foreign Governmental Authority, the United States of America, any state of the United States and any political subdivision of any of the foregoing or any other form of entity.

AA.“Pledgor” means any Person providing Collateral.

BB.“Property” means any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible.

CC.“Rate Management Transaction” means any transaction (including an agreement with respect thereto) that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option, derivative transaction or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures.

DD.“Related Documents” means this Agreement the other Credit Facility Related Documents together with all loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, and any other instrument or document at any time executed in connection with this agreement or with any of the Liabilities.

EE.“Sanctions” means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State.

FF.“Sanctioned Country” means, at any time, a country or territory which is the subject or target of any Sanctions.

GG.“Sanctioned Person” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person controlled by any such Person.

HH.“Subsidiary” means, as to any particular Person (the “parent”), a Person the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of the date of determination, as well as any other Person of which fifty percent (50%) or more of the Equity Interests is at the time of determination directly or indirectly owned, Controlled or held, by the parent or by any Person or Persons Controlled by the parent, either alone or together with the parent.

2.2 Interpretations. Whenever possible, each provision of the Credit Facility Related Documents shall be interpreted in such manner as to be effective and valid under applicable Legal Requirements. If any provision of this Agreement cannot be enforced, the remaining portions of this Agreement shall continue in effect.In the event of any conflict or inconsistency between this Agreement and the provisions of any other Credit Facility Related Documents, the provisions of this Agreement shall control. Use of the term “including” does not imply any limitation on (but may expand) the antecedent reference. Any reference to a particular document includes all modifications, supplements,

replacements, renewals or extensions of that document, but this rule of construction does not authorize amendment of any document without the Bank’s consent. Section headings are for convenience of reference only and do not affect the interpretation of this Agreement. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP. Whenever the Bank’s determination, consent, approval or satisfaction is required under this Agreement or the other Credit Facility Related Documents or whenever the Bank may at its option take or refrain from taking any action under this Agreement or the other Credit Facility Related Documents, the decision as to whether or not the Bank makes the determination, consents, approves, is satisfied or takes or refrains from taking any action, shall be in the sole and exclusive discretion of the Bank, and the Bank’s decision shall be final and conclusive. 

3. Conditions Precedent to Extensions of Credit.

3.1 Conditions Precedent to Initial Extension of Credit under each of the Credit Facilities. Before the first extension of credit governed by this Agreement and any initial advance under any of the Credit Facilities, whether by disbursement of a loan, issuance of a letter of credit, or otherwise, the Borrower shall deliver to the Bank, in form and substance satisfactory to the Bank:

A.Loan Documents. The Notes, and as applicable, the letter of credit applications, reimbursement agreements and any other documents which the Bank may reasonably require to give effect to the transactions described in this Agreement or the other Credit Facility Related Documents;

B.Organizational and Authorizing Documents. The Organizational Documents and Authorizing Documents of the Borrower and any other Persons (other than the Bank) executing the Credit Facility Related Documents in form and substance reasonably satisfactory to the Bank that at a minimum: (i) document the due organization, valid existence and good standing of the Borrower and every other Person (other than the Bank) that is a party to this Agreement or any other Credit Facility Related Document; (ii) evidence that each Person (other than the Bank) which is a party to this Agreement or any other Credit Facility Related Document has the power and authority to enter into the transactions described therein; and (iii) evidence that the Person signing on behalf of each Person that is a party to the Credit Facility Related Documents (other than the Bank) is duly authorized to do so; and

C.Liens. (i) The termination of all Liens on the Borrower’s Accounts and (ii) the termination, assignment or subordination, as determined by the Bank, of all Liens on the Borrower’s inventory, general intangibles, equipment, investment property (as all of the foregoing terms are defined in the Uniform Commercial Code as adopted in the State of Washington) and all other personal property used in the Borrower’s business in favor of any secured party other than Permitted Encumbrances.

3.2 Conditions Precedent to Each Extension of Credit. Before any extension of credit governed by this Agreement, whether by disbursement of a loan, issuance of a letter of credit or otherwise, the following conditions must be satisfied:

A.Representations. The representations of the Borrower and any other parties, other than the Bank, in the Credit Facility Related Documents are true in all material respects (without duplication of materiality qualifiers) on and as of the date of the request for and funding of the extension of credit, except to the extent any such representation expressly speaks solely to an earlier date;

B.No Event of Default. No default, event of default or event that would constitute a default or event of default but for the giving of notice, the lapse of time or both, has occurred in any provision of this Agreement, the Notes or any other Credit Facility Related Documents and is continuing or would result from the extension of credit;

C.Additional Approvals, Opinions, and Documents. The Bank has received any other approvals, opinions and documents as it may reasonably request.  For purposes of clarity and not limitation of this provision, in the event and during such period as the Borrower is required to grant a perfected first lien security interest to the Bank as set out below, such security interest shall have been granted and perfected to the Bank’s satisfaction prior to any further extension of credit under this Agreement; and

D.No Prohibition or Onerous Conditions. The making of the extension of credit is not prohibited by and does not subject the Bank, any Obligor, or any Subsidiary of the Borrower to any penalty or onerous condition under, any Legal Requirement.

4. Affirmative Covenants. The Borrower agrees to do, and cause each of its Subsidiaries to do, each of the following:

4.1 Insurance. Maintain insurance with financially sound and reputable insurers, with such insurance and insurers to be reasonably satisfactory to the Bank, covering its Property and business against those casualties and contingencies and in the types and amounts as are in accordance with sound business and industry practices, and furnish to the Bank, upon request of the Bank, reports on each existing insurance policy showing such information as the Bank may reasonably request.

4.2 Existence. Maintain its existence and business operations as presently in effect in accordance with all applicable Legal Requirements, pay its debts and obligations when due under normal terms, and pay on or before their due date, all taxes, assessments, fees and other governmental monetary obligations, except as they may be contested in good faith if they have been properly reflected on its books and, at the Bank’s request, adequate funds or security has been pledged or reserved to insure payment.

4.3 Financial Records. Maintain proper books and records of account, in accordance with GAAP, and consistent with financial statements previously submitted to the Bank.

4.4 Inspection. Permit the Bank, its agents and designees to: (a) inspect and photograph its Property, to examine and copy files, books and records, and to discuss its business, operations, prospects, assets, affairs and financial condition with the Borrower’s or its Subsidiaries’ officers and accountants, at times and intervals as the Bank reasonably determines; (b) perform audits or other inspections of the Collateral, including the records and documents related to the Collateral; and (c) during the continuation of a Default or Event of Default, confirm with any Person any obligations and liabilities of the Person to the Borrower or its Subsidiaries. The Borrower will, and will cause its Subsidiaries to cooperate with any inspection or audit in a reasonable manner, and will work with the Bank to mitigate disruption to Borrower’s business operations. The Borrower will pay the Bank the reasonable costs and expenses of any audit or inspection of the Collateral (including fees and expenses charged internally by the Bank for asset reviews) promptly after receiving the invoice therefor; provided, however, that in the absence of a Default or an Event of Default, the Bank shall be permitted one inspection and/or Collateral audit per year at the Borrower’s expense; any additional inspections shall be at the Bank’s expense.  During the continuation of any Default or Event of Default, all inspections under this Section shall be at the Borrower’s expense.

4.5 Financial Reports. Furnish to the Bank whatever information, statements, books and records the Bank may from time to time reasonably request, including at a minimum:

A.Within forty-five (45) days after and as of the end of each of its fiscal quarters, the consolidated unaudited financial statements of the Borrower and its Subsidiaries prepared and presented in accordance with GAAP, including an unaudited balance sheet as of the end of that period, and unaudited income statement for that period, and, if requested at any time by the Bank, unaudited statements of cash flow and retained earnings for that period, all certified as correct by one of its authorized officers.

B.Within one hundred and twenty (120) days after and as of the end of each of its fiscal years, the consolidated financial statements of the Borrower and its Subsidiaries prepared and presented in accordance with GAAP, including a balance sheet and statements of income, cash flow and retained earnings, such financial statements to be audited by an independent certified public accountant of recognized standing satisfactory to the Bank.

C.Within forty-five (45) days after and as of the end of each fiscal quarter, a list of Accounts, aged from date of invoice and certified as correct by one of the Borrower’s authorized agents.

D.In connection with the delivery of financial statements pursuant to clauses 4.5(A) and 4.5(B), a Compliance Certificate in the form attached to this Agreement, certified and executed by Borrower’s chief financial officer, or other officer or an individual satisfactory to the Bank. In the event of a conflict between this Agreement and the Compliance Certificate, the terms of this Agreement shall control.

E.Promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Bank may reasonably request.

Documents required to be delivered pursuant to Sections 4.5A and 4.5B above (to the extent any such documents are included in materials otherwise filed with the Securities and Exchange Commission) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such

documents, or provides a link thereto on the Borrower’s website on the Internet at the website address listed on the Borrower’s most recent compliance certificate delivered in accordance with Section 4.5D above or otherwise provided in writing to the Bank; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which the Bank has access (whether a commercial, third‑party website or whether sponsored by the Bank); provided that: (x) the Borrower shall deliver paper copies of such documents to the Bank upon its request to the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Bank and (y) the Borrower shall notify the Bank (by telecopier or electronic mail) of the posting of any such documents and provide to the Bank by electronic mail electronic versions (i.e., soft copies) of such documents.  

4.6 Notices of Claims, Litigation, Defaults, Etc. Promptly inform the Bank in writing of: (1) all existing and all threatened litigation, claims, investigations, administrative proceedings and similar actions or changes in Legal Requirements affecting it which could reasonably be expected to materially affect its business, assets, affairs, prospects or financial condition; (2) the occurrence of any event which gives rise to the Bank’s option to terminate the Credit Facilities; (3) the institution of steps by it to withdraw from, or the institution of any steps to terminate, any employee benefit plan as to which it may have liability; (4) any reportable event or any prohibited transaction in connection with any employee benefit plan; (5) any additions to or changes in the locations of its businesses; and (6) any alleged breach by the Bank of any provision of this Agreement or of any other Credit Facility Related Document.

4.7 Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between it and any other Person, except to the extent any such noncompliance could not reasonably be expected to materially affect its business, assets, affairs, prospects or financial condition.

4.8 Title to Assets and Property. Maintain good and marketable title to all of its Properties, and defend them against all claims and demands of all Persons at any time claiming any interest in them; provided, however, that this provision shall not prohibit (i) dispositions of assets in the ordinary course of the Borrower’s and its Subsidiaries’ business, (ii) the sale of worn, obsolete or unused Properties, (iii) the sale of assets by a Subsidiary of the Borrower to the Borrower in an amount not exceeding $1,000,000 in any fiscal year or $5,000,000 over the life of this Agreement, and (iv) other asset sales not exceeding $1,000,000 in any fiscal year or $5 million over the life of this Agreement; provided that all such sales shall be made for fair value.

4.9 Grant of Lien; Additional Assurances.

A.In the event that the Borrower’s Liquidity (as defined below) falls below $12,000,000.00 at any time, promptly make, execute and deliver to the Bank such security agreements, pledge agreements, financing statements, subordination agreements and any other documents which the Bank may reasonably require for the Borrower to grant and to perfect a first lien security interest in favor of the Bank in all of the Borrower’s accounts, inventory, general intangibles, equipment, investment property (as all of the foregoing terms are defined in the Uniform Commercial Code as adopted in the State of Washington) and all other personal property used in the Borrower’s business, then owned or thereafter acquired or created.  Once granted, such security interest shall not be released during the term of the Credit Facilities notwithstanding the Borrower’s Liquidity rising above the threshold set out above except in the sole discretion of the Bank; if released, such Collateral may be required by the Bank at any future time the Borrower’s Liquidity (as defined below) falls below $12,000,000.00.

B.Notwithstanding anything to the contrary contained herein or in any Credit Facility Related Document, in the event the Borrower is required to grant a first lien security interest to the Bank pursuant to Section 4.9A, such Collateral shall not include (i) any rights or interest in any contract, lease, permit, license, charter or license agreement covering property of any nature of the Borrower if the grant of a security interest or lien therein is prohibited as a matter of law or under the terms of such contract, lease, permit, license, charter or license agreement and such prohibition has not been waived or the consent of the other party to such contract, lease, permit, license, charter or license agreement has not been obtained; provided, that, the foregoing exclusions of this clause (i) shall in no way be construed to limit, impair or otherwise affect the Bank’s continuing security interests in and liens upon any proceeds from the sale, license, lease, or other dispositions of any such contract, lease, permit, license, charter, license, or agreement); (ii) any “intent to use” application for a trademark if such application (or any registration issuing therefrom) would be deemed invalid, unenforceable, void, cancelled or abandoned due to the grant of a Lien thereon; provided that such exclusion shall not otherwise preclude a security interest in any trademark derived from such application; (iii) any equity or other ownership interests of the Borrower in any direct or indirect foreign subsidiary of the Borrower to the extent that such security interest is prohibited by law; and (iv) any equipment or goods that is subject to a “purchase money security interest” permitted pursuant to the definition of “Permitted Encumbrances” above.

C.Promptly make, execute and deliver any and all agreements, documents, instruments and other records that the Bank may request to evidence any of the Credit Facilities, cure any defect in the execution and delivery of any of the Credit Facility Related Documents, perfect any Lien, comply with any Legal Requirement applicable to the Bank or the Credit Facilities or describe more fully particular aspects of the agreements set forth or intended to be set forth in any of the Credit Facility Related Documents. 

4.10 Employee Benefit Plans. Maintain each employee benefit plan as to which it may have any liability, in compliance with all Legal Requirements.

4.11 Banking Relationship. Establish and maintain its primary banking depository and disbursement relationship with the Bank.

4.12 Compliance with Anti-Corruption Laws and Sanctions. Maintain in effect and enforce policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions.

5. Negative Covenants.

5.1 Unless otherwise noted, the financial requirements set forth in this section will be computed in accordance with GAAP applied on a basis consistent with financial statements previously submitted by the Borrower to the Bank.

5.2 Without the written consent of the Bank, the Borrower will not and no Subsidiary of the Borrower will:

A.Distributions.Redeem, retire, purchase or otherwise acquire, directly or indirectly, any of its Equity Interests, return any contribution to an Equity Owner or, other than stock dividends and dividends paid to the Borrower, declare or pay any Distributions; provided, however, that if there is no existing Default or Event of Default under this Agreement or any other Credit Facility Related Document and to do so will not cause a Default or Event of Default under this Agreement or any other Credit Facility Related Document, the Borrower may pay Distributions to its Equity Owners.

B.Other Debt. Incur, contract for, assume, or permit to remain outstanding, indebtedness for borrowed money, installment obligations, or obligations under Capitalized Leases or operating leases (including with regard to any guaranty of any of the foregoing), other than (1) unsecured trade debt incurred in the ordinary course of business, (2) indebtedness owing to the Bank, (3) indebtedness reflected in its latest financial statement furnished to the Bank prior to execution of this Agreement and that is not to be paid with proceeds of borrowings under the Credit Facilities, (4) indebtedness outstanding as of the date hereof that has been disclosed to the Bank in writing and that is not to be paid with proceeds of borrowings under the Credit Facilities, (5) intercompany indebtedness between the Borrower and its Subsidiaries in an amount not to exceed $1,000,000 in the aggregate at any one time outstanding, and (6) additional indebtedness for borrowed money, installment obligations and obligations under Capitalized Leases or purchase money indebtedness not to exceed $500,000 in the aggregate at any one time outstanding.  

C.Guaranties. Guarantee or otherwise become or remain secondarily liable on the undertaking of another, except for endorsement of drafts for deposit and collection in the ordinary course of business or to the extent otherwise permitted by Section 5.2B above.

D.Liens. Create or permit to exist any Lien on any of its Property other than Permitted Encumbrances.  

E.Use of Proceeds. Use, or permit any proceeds of the Credit Facilities to be used, directly or indirectly, for: (1) any personal, family or household purpose; (2) the purpose of “purchasing or carrying any margin stock” within the meaning of Federal Reserve Board Regulation U; or (3) to make loans or advances to or for the benefit of one or more Subsidiaries. At the Bank’s request, it will furnish a completed Federal Reserve Board Form U-1. Request any Credit Facility or use, or permit any proceeds of the Credit Facilities to be used, directly or indirectly, by the Borrower or any of its Subsidiaries or its or their respective directors, officers, employees and agents: (a) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws; (b) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country; or (c) in any manner that would result in the violation of any Sanctions applicable to any party hereto.

F.Continuity of Operations. (1) Engage in any business activities substantially different from those in which it is presently engaged; (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other Person, change its name, dissolve, or sell any assets out of the ordinary course of business; provided, however, that neither the merger of a Subsidiary into the Borrower nor distribution of all of a Subsidiary’s assets to the Borrower shall be a violation of this provision except to the extent it violates some other provision of this Agreement; (3) enter into any arrangement with any Person providing for the leasing by it of Property which has been sold or transferred by it to such Person; or (4) without 30 days prior written notice to the Bank,change its business organization, the jurisdiction under which its business organization is formed or organized, or its chief executive office, or any places of its businesses. 

G.Limitation on Negative Pledge Clauses. Enter into any agreement with any Person other than the Bank which prohibits or limits its ability to create or permit to exist any Lien on any of its Property, whether now owned or hereafter acquired.

H.Conflicting Agreements. Enter into any agreement the default of which could reasonably expected to materially affect the Borrower’s business, assets, affairs, prospects or financial condition containing any provision which would be violated or breached by the performance of its obligations under this Agreement or any of the other Related Documents.

I.Limitation on Loans, Advances to and Investments in Others and Receivables from Others. Purchase, hold or acquire any Equity Interest or evidence of indebtedness of, make or permit to exist any loans or advances to, permit to exist any receivable from, or make or permit to exist any investment or acquire any interest whatsoever in, any Person, except: (1) extensions of trade credit to customers in the ordinary course of business on ordinary terms; (2) Permitted Investments; and (3) loans, advances, investments and receivables existing as of the date of this Agreement that have been disclosed to and approved by the Bank in writing and that are not to be paid with proceeds of borrowings under the Credit Facilities; (4) investments existing on the date of this Agreement in Subsidiaries of the Borrower, (5) loans or advances to, or receivables from, any Subsidiary of the Borrower in an aggregate principal amount not to exceed an aggregate amount of $2,000,000 at any one time outstanding, and (6) other investments not permitted by the foregoing subparts or Section 5.2M not exceeding an aggregate of $500,000 at any one time in existence.

J.Organizational Documents. Without 30 days prior written notice to the Bank, alter, amend or modify any of its Organizational Documents.

K.Government Regulation. (1) Be or become subject at any time to any Legal Requirement or list of any government agency (including, without limitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits the Bank from making any advance or extension of credit to it or from otherwise conducting business with it, or (2) fail to provide documentary and other evidence of its identity as may be requested by the Bank at any time to enable the Bank to verify its identity or to comply with any applicable Legal Requirement, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.

L.Subsidiaries. Form, create or acquire any Subsidiary or Subsidiaries not in existence at the date of this Agreement requiring an investment or expenditure of $2,000,000 or more in the aggregate during the term of this Agreement.

5.3 Financial Covenants. Without the written consent of the Bank, the Borrower will not:

A.Interest Coverage.Permit its Interest Coverage Ratio as of the end of any Test Period to be less than 3.00 to 1.00. As used in this subsection, the term “Interest Coverage Ratio” means its ratio of (i) net income, before interest expense and cash income tax expense, to (ii) interest expense. As used in this subsection, the term “Test Period” means each period of four consecutive fiscal quarters.

B.Liquidity. Permit at any time its Liquidity to be less than $10,000,000.00. As used in this subsection, the term “Liquidity” means its total of cash and marketable securities.

C.Asset Coverage.  Permit at any time Asset Coverage to be less than $0.00.  For purposes of this calculation, “Asset Coverage” means the amount reflecting (i) 75% of the book value of all Accounts then outstanding and owed by account debtors which are residents of the United States plus (ii) 50% of the net book value of the Borrower’s fixed assets less (iii) the amount of Funded Debt.  As used in this subsection, the term“Funded Debt” means total liabilities for borrowed money (whether in the form of direct loans or Capitalized Leases) and purchase money

indebtedness and guarantees of such indebtedness excludingfor clarity’s sake (1) accounts arising from the purchase of goods and services in the ordinary course of business, (2) accrued expenses or losses, and (3) deferred revenues or gains, all computed as of the end of the relevant fiscal quarter. 

5.4 Financial Statement Calculations. The financial covenant(s) set forth in Section 5.3 entitled “Financial Covenants” or in any subsection thereof shall, except as may be otherwise expressly provided with respect to any particular financial covenant, be calculated on the basis of the Borrower’s financial statements prepared on a consolidated basis with its Subsidiaries in accordance with GAAP. Except as may be otherwise expressly provided with respect to any particular financial covenant, if any financial covenant states that it is to be tested with respect to any particular period of time (which may be referred to therein as a “Test Period”) ending on any test date (e.g., a fiscal month end, fiscal quarter end, or fiscal year end), then compliance with that covenant shall be required commencing with the period of time ending on the first test date that occurs after the date of this Agreement (or, if applicable, of the amendment to this Agreement which added or amended such financial covenant).

6. Representations.

6.1 Representations and Warranties by the Borrower. To induce the Bank to enter into this Agreement and to extend credit or other financial accommodations under the CreditFacilities, the Borrower represents and warrants as of the date of this Agreement and as of the date of each request for credit under the CreditFacilities that each of the following statements is true and correct: (a) its principal residence or chief executive office is at the address shown above, (b) its name as it appears in this Agreement is its exact name as it appears in its Organizational Documents, (c) the execution and delivery of this Agreement and the other Credit Facility Related Documents to which it is a party, and the performance of the obligations they impose, do not violate any Legal Requirement, conflict with any agreement by which it is bound, or require the consent or approval of any other Person, (d) this Agreement and the other Credit Facility Related Documents have been duly authorized, executed and delivered by all parties thereto (other than the Bank) and are valid and binding agreements of those Persons, enforceable according to their terms, except as may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors’ rights generally and by general principles of equity, (e) all balance sheets, profit and loss statements, and other financial statements and other information furnished to the Bank in connection with the Credit Facility Indebtedness are accurate and fairly reflect the financial condition of the Persons to which they apply on their effective dates in accordance with GAAP, including contingent liabilities of every type required to be reported on such financial statements, which financial condition has not changed materially and adversely since those dates, (f) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) is pending or threatened against it, and no other event has occurred which in any one case or in the aggregate could reasonably be expected to materially adversely affect it or any of its Subsidiaries’ financial condition, properties, business, affairs or operations, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by the Bank in writing, (g) all of its tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being contested by it in good faith and for which adequate reserves have been provided, (h) it is not an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended, (i) to the Borrower’s actual knowledge, there are no defenses or counterclaims, offsets or adverse claims, demands or actions of any kind, personal or otherwise, that it could assert with respect to this Agreement or the Credit Facilities, (j) it owns, or is licensed to use, all trademarks, trade names, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted, and (k) the execution and delivery of this Agreement and the other Credit Facility Related Documents to which it is a party and the performance of the obligations they impose, if the Borrower is other than a natural Person (i) are within its powers, (ii) have been duly authorized by all necessary action of its governing body, and (iii) do not contravene the terms of its Organizational Documents or other agreement or document governing its affairs.

6.2 Representations and Warranties Regarding Anti-Corruption Laws and Sanctions. The Borrower has implemented and maintains in effect policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and the Borrower, its Subsidiaries and their respective officers and employees and to the knowledge of the Borrower its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects.  None of (a) the Borrower, any Subsidiary or to the knowledge of the Borrower or such Subsidiary any of their respective directors, officers or employees, or (b) to the knowledge of the Borrower, any agent of the Borrower or any Subsidiary that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person.  No advance, letter of credit, use of proceeds or other transaction contemplated by the Credit Facilities will violate Anti-Corruption Laws or applicable Sanctions.

7. Default/Remedies. 

7.1 Events of Default/Acceleration. If any of the following events occurs (each, an “Event of Default”), the Notes shall become due immediately, without notice, at the Bank’s option:

A.Any Obligor fails to pay (i) within three (3) days of the due date therefor, any Credit Facility Indebtedness consisting of interest or fees; (ii) when due, any Credit Facility Indebtedness consisting of principal amounts, in each case under this Agreement, any Note, any other Credit Facility Related Document; or (iii) when due (taking into account any applicable contractual grace period then in effect) any other Liabilities or any other debt owed to the Bank or an Affiliate of the Bank, or any other amount payable with respect to any of the Liabilities, or under any other Related Document, or any agreement or instrument evidencing other debt to the Bank or any Affiliate of the Bank.

B.Any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with this Agreement or any other Credit Facility Related Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any other Credit Facility Related Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder, shall prove to have been materially incorrect when made or deemed made or shall become untrue in violation of Section 8.7 below;

C.The Borrower or any Subsidiary shall fail to observe or perform any covenant, condition or agreement contained in Section 4.2 [Existence] (with respect to such entity’s existence), 4.6(6) [notice of breach of Credit Facility Related Documents] or in Section 5 [Negative Covenants];

D.The Borrower or any Subsidiary shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Credit Facility Related Document (other than those specified in clauses A, B or C above), and such failure shall continue unremedied for a period of (i) 5 days after the earlier of Borrower’s or any Subsidiary’s knowledge of such breach or notice thereof from the Bank if such breach relates to terms or provisions of Section 4.1 [Insurance], 4.2 [Existence] (other than with respect to such entity’s existence), 4.3 [Financial Records], 4.5 [Financial Reports], 4.6 [Notices of Claims, Litigation, Defaults, Etc.] (other than Section 4.6(6)), 4.7 [Other Agreements], 4.9 [3.94.9Grant of Lien; Additional Assurances], or 4.12 [Compliance with Anti-Corruption Laws and Sanctions] of this Agreement or (ii) 15 days after the earlier of any Loan Party’s knowledge of such breach or notice thereof from the Lender if such breach relates to terms or provisions of any other Section of this Agreement or of any other Loan Document;

E.Except as described in Sections 7.1 A. through D. above, any Obligor or any Pledgor: (i) fails to observe or perform or otherwise violates any other term, covenant, condition or agreement of any of the Related Documents; (ii) makes any materially incorrect or misleading representation, warranty, or certificate to the Bank; (iii) makes any materially incorrect or misleading representation in any financial statement or other information delivered to the Bank; or (iv) defaults under the terms of any agreement or instrument relating to any debt for borrowed money (other than the debt evidenced by the Related Documents) and the effect of such default will allow the creditor to declare debt in an outstanding amount of greater than $100,000 in the aggregate due before its stated maturity.

F.In the event (i) any Obligor terminates or revokes or purports to terminate or revoke its guaranty of any of the Credit Facility Indebtedness or any Obligor’s guaranty of any of the Credit Facility Indebtedness becomes unenforceable in whole or in part, (ii) any Obligor fails to perform promptly under its guaranty of any of the Credit Facility Indebtedness, or (iii) any Obligor fails to comply with, or perform under any agreement, now or hereafter in effect, between the Obligor and the Bank, or any Affiliate of the Bank or their respective successors and assigns.

G.Any event occurs that would permit the Pension Benefit Guaranty Corporation to terminate any employee benefit plan of any Obligor or any Subsidiary of any Obligor.

H.An involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of any Obligor or any of its Subsidiaries or any Pledgor or its debts, or of a substantial part of its assets, under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Obligor or any of its Subsidiaries or any Pledgor or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for sixty (60) days or an order or decree approving or ordering any of the foregoing shall be entered.

I.Any Obligor or any of its Subsidiaries or any Pledgor shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause E of this Section, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for such Obligor or any of its Subsidiaries or any Pledgor or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) take any action for the purpose of effecting any of the foregoing or (vii) become unable, admit in writing its inability, or publicly declare its intention not to, or fail generally, to pay its debts as they become due. 

J.Any Obligor or any of its Subsidiaries, without the Bank’s written consent or as expressly permitted in this Agreement: (i) liquidates or is dissolved; (ii) merges or consolidates with any other Person; (iii) leases, sells or otherwise conveys a material part of its assets or business outside the ordinary course of its business; (iv) leases, purchases, or otherwise acquires a material part of the assets of any other Person, except in the ordinary course of its business; or (v) agrees to do any of the foregoing; provided, however, that any Subsidiary of an Obligor may merge or consolidate with any other Subsidiary of that Obligor, or with the Obligor, so long as the Obligor is the survivor.

K.(i) One or more judgments for the payment of money in an aggregate amount in excess of $1,000,000 shall be rendered against any Obligor, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of thirty (30) consecutive days during which execution shall not be effectively stayed, or (ii) any action shall be legally taken by a judgment creditor to attach or levy upon any assets of any Obligor or any Subsidiary to enforce any such judgment or any Obligor or any Subsidiary shall fail within thirty (30) days to discharge one or more non-monetary judgments or orders which, individually or in the aggregate, could reasonably be expected to have a materially adverse effect on its business, assets, affairs, prospects or financial condition, which judgments or orders, in any such case, are not stayed on appeal and being appropriately contested in good faith by proper proceedings diligently pursued or (iii) any attachment, seizure, sequestration, levy, or garnishment is issued against any Property of any Obligor or any of its Subsidiaries or of any Pledgor or any Collateral or Property which may be required to become Collateral pursuant to the terms of this Agreement.

L.Except as permitted by the terms of the relevant security agreement, (i) any security agreement shall for any reason fail to create a valid security interest in any Collateral purported to be covered thereby, or (ii) any Lien securing any Credit Facility Indebtedness at such time as they are required to be secured pursuant to this Agreement shall cease to be a perfected, first priority Lien.

M.Any material provision of any Credit Facility Related Document for any reason ceases to be valid, binding and enforceable in accordance with its terms (or any Obligor shall challenge the enforceability of any Credit Facility Related Document or shall assert in writing, or engage in any action or inaction that evidences its assertion, that any provision of any of the Credit Facility Related Documents has ceased to be or otherwise is not valid, binding and enforceable in accordance with its terms).

N.Any material adverse change occurs in: (i) the reputation, Property, financial condition, business, assets, affairs, prospects, liabilities, or operations of any Obligor or any of its Subsidiaries; (ii) any Obligor’s or Pledgor’s ability to perform its obligations under the Related Documents; or (iii) the Collateral or Property which may be required to become Collateral pursuant to the terms of this Agreement.

7.2 Remedies. At any time after the occurrence of a default (other than an Event of Default described in clauses E or F of Section 7.1), and at any time thereafter during the continuance of such event, the Bank may, by written notice to the Borrower, do one or more of the following: (a) cease permitting the Borrower to incur any Liabilities; (b) terminate any commitment of the Bank evidenced by any of the Notes, this Agreement; (c) declare any of the Notes to be immediately due and payable, without notice of acceleration, presentment and demand or protest or notice of any kind, all of which are hereby expressly waived; (d) exercise all rights of setoff that the Bank may have contractually, by law, in equity or otherwise; and (e) exercise any and all other rights pursuant to any of the Related Documents, at law, in equity or otherwise; and in the case of any event with respect to the Borrower described in clause E or F of Section 7.1, any commitment of the Bank evidenced by any of the Notes or this Agreement shall automatically terminate and the principal of the Credit Facilities then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.  Upon the occurrence and during the continuance of an Event of Default hereunder, the Bank may increase the rate of interest applicable to the Credit Facilities and other Credit Facility Indebtedness as set

forth in this Agreement and exercise any rights and remedies provided to the Bank under the Related Documents or at law or equity, including all remedies provided under the Uniform Commercial Code. 

A.Generally. The rights of the Bank under this Agreement and the other Related Documents are in addition to other rights (including without limitation, other rights of setoff) the Bank may have contractually, by law, in equity or otherwise, all of which are cumulative and hereby retained by the Bank. Each Obligor agrees to stand still with regard to the Bank’s enforcement of its rights, including taking no action to delay, impede or otherwise interfere with the Bank’s rights to realize on any Collateral.

B.Bank’s Right of Setoff. The Borrower grants to the Bank a security interest in the Deposits, and the Bank is authorized to setoff and apply, all Deposits, Securities and Other Property, and Bank Debt against any and all Liabilities. This right of setoff may be exercised at any time from time to time after the occurrence of any default, without prior notice to or demand on the Borrower and regardless of whether any Liabilities are contingent, unmatured or unliquidated. In this paragraph: (a) the term “Deposits” means any and all accounts and deposits of the Borrower (whether general, special, time, demand, provisional or final) at any time held by the Bank (including all Deposits held jointly with another, but excluding any IRA or Keogh Deposits, or any trust Deposits in which a security interest would be prohibited by any Legal Requirement); (b) the term “Securities and Other Property” means any and all securities and other personal Property of the Borrower in the custody, possession or control of the Bank, JPMorgan Chase & Co. or their respective Subsidiaries and Affiliates (other than Property held by the Bank in a fiduciary capacity); and (c) the term “Bank Debt” means all indebtedness at any time owing by the Bank, to or for the credit or account of the Borrower and any claim of the Borrower (whether individual, joint and several or otherwise) against the Bank now or hereafter existing.

8. Miscellaneous.

8.1 Notice. Any notices and demands under or related to this Agreement shall be in writing and delivered to the intended party at its address stated in this Agreement, and if to the Bank, at its main office if no other address of the Bank is specified in this Agreement, by one of the following means: (1) by hand; (2) by a nationally recognized overnight courier service; or (3) by certified mail, postage prepaid, with return receipt requested. Notice shall be deemed given: (a) upon receipt if delivered by hand; (b) on the Delivery Day after the day of deposit with a nationally recognized courier service; or (c) on the third Delivery Day after the notice is deposited in the mail. “Delivery Day” means a day other than a Saturday, a Sunday or any other day on which national banking associations are authorized to be closed. Any party may change its address for purposes of the receipt of notices and demands by giving notice of the change in the manner provided in this provision.

8.2 Statements. The Bank may from time to time provide the Borrower with account statements or invoices with respect to any of the Liabilities (“Statements”). The Bank is under no duty or obligation to provide Statements, which, if provided, will be solely for the Borrower’s convenience. Statements may contain estimates of the amounts owed during the relevant billing period, whether of principal, interest, fees or other Liabilities. If the Borrower pays the full amount indicated on a Statement on or before the due date indicated on such Statement, the Borrower shall not be in default of payment with respect to the billing period indicated on such Statement; provided, that acceptance by the Bank of any payment that is less than the total amount actually due at that time (including but not limited to any past due amounts) shall not constitute a waiver of the Bank’s right to receive payment in full at another time.

8.3 No Waiver. No delay on the part of the Bank in the exercise of any right or remedy waives that right or remedy. No single or partial exercise by the Bank of any right or remedy precludes any other future exercise of it or the exercise of any other right or remedy. The making of an advance during the existence of any default or subsequent to the occurrence of a default or when all conditions precedent have not been met shall not constitute a waiver of the default or condition precedent. No waiver or indulgence by the Bank of any default is effective unless it is in writing and signed by the Bank, nor shall a waiver on one occasion bar or waive that right on any future occasion.

8.4 Integration; Severability. This Agreement, the Notes, and the other Credit Facility Related Documents embody the entire agreement and understanding between the Borrower and the Bank and supersede all prior agreements and understandings relating to their subject matter. If any one or more of the obligations of the Borrower under this Agreement, the Notes, or the other Credit Facility Related Documents or any provision thereof is held to be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower and the remaining provisions shall not in any way be affected or impaired; and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of such obligations or provisions in any other jurisdiction.

8.5 Joint and Several Liability. Each party executing this Agreement as the Borrower is individually, jointly and severally liable under this Agreement.  

8.6 Governing Law and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under this Agreement may be brought by the Bank in any state or federal court located in the State of Washington, as the Bank in its sole discretion may elect. By the execution and delivery of this Agreement, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Washington is not a convenient forum or the proper venue for any such suit, action or proceeding.

8.7 Survival of Representations and Warranties. The Borrower understands and agrees that in extending the Credit Facilities, the Bank is relying on all representations, warranties, and covenants made by the Borrower in this Agreement or in any certificate or other instrument delivered by the Borrower to the Bank under this Agreement or in any of the other Credit Facility Related Documents. The Borrower further agrees that regardless of any investigation made by the Bank, all such representations, warranties and covenants will survive the making of the Credit Facilities and delivery to the Bank of this Agreement; all representations and warranties shall be continuing in nature at all times while the Credit Facilities or any amount thereunder remains outstanding.

8.8 Non-Liability of the Bank. The relationship between the Borrower on one hand and the Bank on the other hand shall be solely that of borrower and lender. The Bank shall have no fiduciary responsibilities to the Borrower. The Bank undertakes no responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower’s business or operations.

8.9 Indemnification of the Bank. The Borrower agrees to indemnify, defend and hold the Bank, its parent companies, Subsidiaries, Affiliates, their respective successors and assigns and each of their respective shareholders, directors, officers, employees and agents (collectively, the “Indemnified Persons”) harmless from any and against any and all documented loss, liability, obligation, damage, penalty, judgment, claim, deficiency, expense, interest, penalties, reasonable and documented attorneys’ fees (including the reasonable and documented fees and expenses of any attorneys engaged by the Indemnified Person) and amounts paid in settlement (“Claims”) to which any Indemnified Person may become subject arising out of or relating to the Credit Facilities, the Credit Facility Indebtedness under this Agreement or any other Credit Facility Related Documents or the Collateral, except to the limited extent that the Claims are proximately caused by the Indemnified Person’s gross negligence or willful misconduct. The indemnification provided for in this paragraph shall survive the termination of this Agreement and shall not be affected by the presence, absence or amount of or the payment or nonpayment of any claim under, any insurance.

8.10 Counterparts. This Agreement may be executed in multiple counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts, taken together, shall constitute one and the same agreement.

8.11 Advice of Counsel. The Borrower acknowledges that it has been advised by counsel, or had the opportunity to be advised by counsel, in the negotiation, execution and delivery of this Agreement and any other Credit Facility Related Documents.

8.12 Recovery of Additional Costs. If the imposition of or any change in any Legal Requirement, or the interpretation or application of any thereof by any court or administrative or Governmental Authority (including any request or policy not having the force of law) shall impose, modify, or make applicable any taxes (except federal, state, or local income or franchise taxes imposed on the Bank), reserve requirements, liquidity requirements, capital adequacy requirements, Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums or assessments, or other obligations which would (A) increase the cost to the Bank for extending, maintaining or funding the Credit Facilities, (B) reduce the amounts payable to the Bank under the Credit Facilities, or (C) reduce the rate of return on the Bank’s capital as a consequence of the Bank’s obligations with respect to the Credit Facilities, then the Borrower agrees to pay the Bank such additional amounts as will compensate the Bank therefor, within five (5) days after the Bank’s written demand for such payment. The Bank’s demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by the Borrower, which explanation and calculations shall be conclusive in the absence of manifest error.

8.13 Expenses.To the extent not prohibited by applicable Legal Requirements and whether or not the transactions contemplated by this Agreement are consummated, the Borrower is liable to the Bank and agrees to pay on demand all reasonable and documented costs and expenses of every kind incurred (or charged by internal allocation) in connection with the negotiation, preparation, execution, filing, recording, amendment, modification, supplementing

and waiver of this Agreement and the Credit Facility Related Documents, the making, servicing and collection of the Credit Facilities and the realization on any Collateral and any other amounts owed under this Agreement or the Credit Facility Related Documents, including without limitation reasonable and documented attorneys’ fees  and court costs. These costs and expenses include without limitation any costs or expenses incurred by the Bank in any bankruptcy, reorganization, insolvency or other similar proceeding involving any Obligor, Pledgor, or Property of any Obligor, Pledgor, or Collateral. The obligations of the Borrower under this section shall survive the termination of this Agreement. 

8.14 Reinstatement. The Borrower agrees that to the extent any payment or transfer is received by the Bank in connection with the Credit Facility Indebtedness, and all or any part of the payment or transfer is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid or transferred by the Bank or paid or transferred over to a trustee, receiver or any other entity, whether under any proceeding or otherwise (any of those payments or transfers is hereinafter referred to as a “Preferential Payment”), then this Agreement and the Notes shall continue to be effective or shall be reinstated, as the case may be, even if all the Credit Facility Indebtedness has been paid in full and whether or not the Bank is in possession of the Notes and whether any of the Notes has been marked, paid, released or cancelled, or returned to the Borrower and, to the extent of the payment, repayment or other transfer by the Bank, the Credit Facility Indebtedness or part intended to be satisfied by the Preferential Payment shall be revived and continued in full force and effect as if the Preferential Payment had not been made. The obligations of the Borrower under this section shall survive the termination of this Agreement.

8.15 Assignments. The Borrower agreesthat the Bank and its Affiliates may at any time work together and share any information about the Borrower and its Affiliates and their relationships with the Bank or any of its Affiliates or their successors, with and among the Bank or any of its Affiliates or their successors, or any purchaser or potential purchaser of any of the Notes or the other Liabilities, or any representative of any of the parties described in this sentence. The Borrower agrees that the Bank may at any time sell, assign or transfer one or more interests or participations in all or any part of its rights and obligations in the Notes to one or more purchasers whether or not related to the Bank.

8.16 Waivers. To the maximum extent not prohibited by applicable Legal Requirements, each Obligor waives (a) any right to receive notice of the following matters before the Bank enforces any of its rights: (i) any demand, diligence, presentment, dishonor and protest, or (ii) any action that the Bank takes regarding any Person, any Collateral, or any of the Liabilities, that it might be entitled to by law or under any other agreement; (b) any right to require the Bank to proceed against the Borrower, any other Obligor or any Collateral, or pursue any remedy in the Bank’s power to pursue; (c) any defense based on any claim that any Obligor’s obligations exceed or are more burdensome than those of the Borrower; (d) the benefit of any statute of limitations affecting liability of any Obligor or the enforcement hereof; (e) any defense arising by reason of any disability or other defense of the Borrower or by reason of the cessation from any cause whatsoever (other than payment in full) of the obligation of the Borrower for the Liabilities or any of them; and (f) any defense based on or arising out of any defense that the Borrower may have to the payment or performance of the Liabilities or any portion thereof. Each Obligor consents to any extension or postponement of time of its payment without limit as to the number or period, to any substitution, exchange or release of all or any part of any Collateral, to the addition of any other party, and to the release or discharge of, or suspension of any rights and remedies against, any Obligor. The Bank may waive or delay enforcing any of its rights without losing them. Any waiver affects only the specific terms and time period stated in the waiver. No modification or waiver of any provision of the Notes or any other Credit Facility Related Document is effective unless it is in writing and signed by the Person against whom it is being enforced.

8.17 Time is of the Essence. Time is of the essence under this Agreement and in the performance of every term, covenant and obligation contained herein.

8.18 Confidentiality. The Bank agrees that it will treat information provided by the Borrower or its representatives to the Bank (the “Information”) as confidential; provided, however, that the Bank may disclose the Information (a) to its Affiliates and its and its Affiliates’ directors, employees, officers, auditors, consultants, agents, counsel and advisors (such Affiliates and such Persons collectively, “Representatives”), it being understood that its Representatives shall be informed by the Bank of the confidential nature of such Information and be instructed to comply with the terms of this section to the same extent as is required of the Bank hereunder; (b) in response to a subpoena or other legal process, or as may otherwise be required by law, order or regulation, or upon the request or demand of any governmental or regulatory agency or authority having jurisdiction over the Bank or its Representatives or to defend or prosecute a claim brought against or by the Bank and/or its Representatives; (c) to actual and prospective assignees, actual and prospective participants, and actual and prospective swap counterparties, provided that all such participants, assignees or swap counterparties execute an agreement with the Bank containing provisions

substantially the same as those contained in this section; (d) to holders of Equity Interests in the Borrower, other than holders of any Equity Interest in a publicly traded company; (e) to any Obligor; and (f) with the Borrower’s consent. The restrictions contained in this section shall not apply to Information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Bank or its Representatives in breach of this section, or (ii) becomes available to the Bank or its Representatives from a source, other than the Borrower or one of its agents, who is not known to the Bank or its Representatives to be bound by any obligations of confidentiality to the Borrower, or (iii) was known to the Bank or its Representatives prior to its disclosure to the Bank or its Representatives by the Borrower or one of its agents or was independently developed by the Bank or its Representatives, or (iv) was or is, after the date hereof, disclosed (or required to be disclosed) by the Borrower to the Bank or any of its Representatives under or in connection with any existing financing relationship between the Borrower and the Bank or any of its Representatives, the disclosure of which shall be governed by the agreements executed in connection with such financing relationship. Any Person required to maintain the confidentiality of the Information as provided in this section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. 

9. USA PATRIOT ACT NOTIFICATION. The following notification is provided to the Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each Person that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. What this means for the Borrower: When the Borrower opens an account, if it is an individual the Bank will ask for its name, taxpayer identification number, residential address, date of birth, and other information that will allow the Bank to identify it, and, if it is not an individual the Bank will ask for its name, taxpayer identification number, business address, and other information that will allow the Bank to identify it. The Bank may also ask, if the Borrower is an individual, to see its driver’s license or other identifying documents, and if it is not an individual, to see its Organizational Documents or other identifying documents.

10. WAIVER OF SPECIAL DAMAGES. THE BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT THE UNDERSIGNED MAY HAVE TO CLAIM OR RECOVER FROM THE BANK IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

10.1 JURY WAIVER. TO THE MAXIMUM EXTENT NOT PROHIBITED BY APPLICABLE LAW, THE BORROWER AND THE BANK (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN THE BORROWER AND THE BANK ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE OTHER CREDIT FACILITY RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE BANK TO PROVIDE THE FINANCING DESCRIBED HEREIN.

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

Address(es) for Notices:		Borrower:
110 110th Ave NE Bellevue, WA 98004		BSQUARE CORPORATION
Attn:	Cy Hersch, Legal Counsel	By:	/s/ Jerry D. Chase
			Jerry D. Chase	CEO
			Printed Name	Title
		Date Signed:	September 22, 2015
		By:	/s/ Martin L. Heimbigner

	Martin L. Heimbigner	CFO
	Printed Name	Title
Date Signed:	September 22, 2015

Address for Notices:	Bank:
1301 2nd Ave Seattle,WA98101	JPMorgan Chase Bank, N.A.
Attn:	By:	/s/ Megan S. Ackaert
		Megan S. Ackaert	Vice President
		Printed Name	Title
	Date Signed:	September 22, 2015

COMPLIANCE CERTIFICATE

To: JPMorgan Chase Bank, N.A.

This Compliance Certificate (“Certificate”), for the period ended ________________ ______, 20______, is furnished pursuant to that certain Credit Agreement dated as of September 22, 2015 (as amended, modified, renewed or extended from time to time, the “Agreement”) among BSQUARE CORPORATION (the “Borrower”), and JPMorgan Chase Bank, N.A. (the “Bank”). Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement.

THE UNDERSIGNED HEREBY CERTIFIES, ON BEHALF OF THE BORROWER AND NOT IN ANY INDIVIDUAL CAPACITY, THAT:

1.I am the of the Borrower and I am authorized to deliver this Certificate on behalf of the Borrower and its Subsidiaries;

2.I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the compliance of the Borrower and its Subsidiaries with the Agreement during the accounting period covered by the attached financial statements (the “Relevant Period”);

3.The attached financial statements of the Borrower and, as applicable, its Subsidiaries and/or Affiliates for the Relevant Period: (a) have been prepared on an accounting basis (the “Accounting Method”) consistent with the requirements of the Agreement and, except as may have been otherwise expressly agreed to in the Agreement, in accordance with GAAP consistently applied, and (b) to the extent that the attached are not the Borrower’s annual fiscal year end statements, are subject to normal year-end audit adjustments and the absence of footnotes;

4.The examinations described in paragraph 2 did not disclose and after appropriate inquiry, I have no actual knowledge of, except as set forth below, (a) the existence of any condition or event which constitutes a default or an event of default under the Agreement or any other Credit Facility Related Document during or at the end of the Relevant Period or as of the date of this Certificate, or which would, subject to the giving of notice or the lapse of time or both, constitute a default or event of default under the Agreement or any other Credit Facility Related Document during or at the end of the Relevant Period or as of the date of this Certificate or (b) any change in the Accounting Method or in the application thereof that has occurred since the date of the annual financial statements delivered to the Bank in connection with the closing of the Agreement or subsequently delivered as required in the Agreement;

5.I hereby certify that, except as set forth below, no Obligor has, if applicable, changed its (i) name, (ii) chief executive office, (iii) principal place of business, (iv) the type of entity it is or (v) state of incorporation or organization;

6.Schedule I attached hereto sets forth financial data and computations evidencing the Borrower’s compliance with certain covenants of the Agreement, all of which data and computations are true, complete and correct within tolerances which would be permitted under GAAP; and

7.Described below are the exceptions, if any, referred to in paragraph 4 hereof by listing, in detail, the (i) nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event or (ii) change in the Accounting Method or the application thereof and the effect of such change on the attached financial statements:

The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this day of , .

BSQUARE CORPORATION

By:

Name:

Title:

Schedule I to Compliance Certificate for BSQUARE CORPORATION

Financial Covenants

Compliance as of _________________, 20___ (the “Compliance Test Date”) with

certain covenants contained in the Agreement and

supporting calculations attached hereto

4.9Grant of Lien

A. In the event that the Borrower’s Liquidity falls below $12,000,000.00, promptly grant and perfect Collateral.

As of the Compliance Test Date shown above, the Liquidity is $_____________________

Compliance as of the Compliance Test Date shown above:      [__] Yes     [__] No

5.3Financial Covenants. Without the written consent of the Bank, the Borrower will not:

A.Interest Coverage.Permit its Interest Coverage Ratio as of the end of any Test Period to be less than 3.00 to 1.00.

As of the Compliance Test Date shown above, the Interest Coverage Ratio is ______.___ to 1.00

Compliance as of the Compliance Test Date shown above:      [__] Yes     [__] No

B.Liquidity. Permit at any time its Liquidity to be less than $10,000,000.00.

As of the Compliance Test Date shown above, the Liquidity is $_____________________

Compliance as of the Compliance Test Date shown above:      [__] Yes     [__] No

C.Asset Coverage.  Permit at any time its Asset Coverage to be less than $0.00.

As of the Compliance Test Date shown above, the Asset Coverage is $________________

Compliance as of the Compliance Test Date shown above:      [__] Yes     [__] No

EX-10.2

Exhibit 10.2

Line of Credit Note
	$12,000,000.00
	Date: September 22, 2015

Promise to Pay. On or before September 22, 2017, for value received, BSQUARE CORPORATION (the "Borrower") promises to pay to JPMorgan Chase Bank, N.A., whose address is 1301 2nd Ave, Seattle,WA98101 (the "Bank") or order, in lawful money of the United States of America, the sum of Twelve Million and 00/100 Dollars ($12,000,000.00) or so much thereof as may be advanced and outstanding, plus interest on the unpaid principal balance as provided below.

Interest Rate Definitions. As used in this Note, the following terms have the following respective meanings:

"Adjusted LIBOR Rate" means, with respect to a LIBOR Rate Advance for the relevant Interest Period, the sum of (i) the Applicable Margin plus (ii) the quotient of (a) the LIBOR Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period.

"Adjusted One Month LIBOR Rate" means, with respect to a CB Floating Rate Advance for any day, the sum of (i) 2.50% Per Annum plus (ii) the quotient of (a) the interest rate determined by the Bank by reference to the Page to be the rate at approximately 11:00 a.m. London time, on such date or, if such date is not a Business Day, on the immediately preceding Business Day for dollar deposits with a maturity equal to one (1) month, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to dollar deposits in the London interbank market with a maturity equal to one (1) month.

"Advance" means a LIBOR Rate Advance or a CB Floating Rate Advance and "Advances" means all LIBOR Rate Advances and all CB Floating Rate Advances under this Note.

"Applicable Margin" means with respect to any CB Floating Rate Advance, -1.50% Per Annum and with respect to any LIBOR Rate Advance, 1.50% Per Annum.

"Business Day" means (i) with respect to the Adjusted One Month LIBOR Rate and any borrowing, payment or rate selection of LIBOR Rate Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Washington and/or New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed.

"CB Floating Rate" means the Prime Rate; provided that the CB Floating Rate shall, on any day, not be less than the Adjusted One Month LIBOR Rate.  The CB Floating Rate is a variable rate and any change in the CB Floating Rate due to any change in the Prime Rate or the Adjusted One Month LIBOR Rate is effective from and including the effective date of such change in the Prime Rate or the Adjusted One Month LIBOR Rate, respectively.

"CB Floating Rate Advance" means any borrowing under this Note when and to the extent that its interest rate is determined by reference to the CB Floating Rate.

"Interest Period" means, with respect to a LIBOR Rate Advance, a period of one (1), two (2) or three (3) month(s) commencing on a Business Day selected by the Borrower pursuant to this Note. Such Interest Period shall end on the day which corresponds numerically to such date one (1), two (2) or three (3) month(s) thereafter, as applicable, provided, however, that if there is no such numerically corresponding day in such first, second or third succeeding month(s), as applicable, such Interest Period shall end on the last Business Day of such first, second or third succeeding month(s), as applicable. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day.

"LIBOR Rate" means with respect to any LIBOR Rate Advance for any Interest Period, the interest rate determined by the Bank by reference to Reuters Screen LIBOR01, formerly known as Page 3750 of the Moneyline Telerate Service (together with any successor or substitute, the "Service") or any successor or substitute page of the Service, providing rate quotations comparable to those currently provided on such page of the Service, as determined by the Bank from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market (the "Page") to be the rate at approximately 11:00 a.m. London time, two Business Days prior to the commencement of the Interest Period for dollar deposits with a maturity equal to such Interest Period. If no LIBOR Rate is available to the Bank, the applicable LIBOR Rate for the relevant Interest Period shall instead be the rate determined by the Bank to be the rate at which the Bank offers to place U.S. dollar deposits having a maturity equal to such Interest

Period with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period.

"LIBOR Rate Advance" means any borrowing under this Note when and to the extent that its interest rate is determined by reference to the Adjusted LIBOR Rate.

"Prime Rate" means the rate of interest Per Annum announced from time to time by the Bank as its prime rate. The Prime Rate is a variable rate and each change in the Prime Rate is effective from and including the date the change is announced as being effective. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE THE BANK'S LOWEST RATE.

"Principal Payment Date" is defined in the paragraph entitled "Principal Payments" below.

"Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.

"Reserve Requirement" means the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D.

Interest Rates. The Advance(s) evidenced by this Note may be drawn down and remain outstanding as up to five (5) LIBOR Rate Advances and/or a CB Floating Rate Advance. The Borrower shall pay interest to the Bank on the outstanding and unpaid principal amount of each CB Floating Rate Advance at the CB Floating Rate plus the Applicable Margin and each LIBOR Rate Advance at the Adjusted LIBOR Rate. Interest shall be calculated on the basis of the actual number of days elapsed in a year of 360 days. In no event shall the interest rate applicable to any Advance exceed the maximum rate allowed by law. Any interest payment which would for any reason be deemed unlawful under applicable law shall be applied to principal.

Bank Records. The Bank shall, in the ordinary course of business, make notations in its records of the date, amount, interest rate and Interest Period of each Advance hereunder, the amount of each payment on the Advances, and other information. Such records shall, in the absence of manifest error, be conclusive as to the outstanding principal balance of and interest rate or rates applicable to this Note.

Notice and Manner of Electing Interest Rates on Advances. The Borrower shall give the Bank written notice (effective upon receipt) of the Borrower's intent to draw down an Advance under this Note no later than 2:00 p.m. Pacific time, on the date of disbursement, if the full amount of the drawn Advance is to be disbursed as a CB Floating Rate Advance and no later than 11:00 a.m. Pacific time three (3) Business Days before disbursement, if any part of such Advance is to be disbursed as a LIBOR Rate Advance. The Borrower's notice must specify: (a) the disbursement date, (b) the amount of each Advance, (c) the type of each Advance (CB Floating Rate Advance or LIBOR Rate Advance), and (d) for each LIBOR Rate Advance, the duration of the applicable Interest Period; provided, however, that the Borrower may not elect an Interest Period ending after the maturity date of this Note. Each LIBOR Rate Advance shall be in a minimum amount of One Hundred Thousand and 00/100 Dollars ($100,000.00). All notices under this paragraph are irrevocable. By the Bank's close of business on the disbursement date and upon fulfillment of the conditions set forth herein and in any other of the Related Documents, the Bank shall disburse the requested Advances in immediately available funds by crediting the amount of such Advances to the Borrower's account with the Bank.

Conversion and Renewals. The Borrower may elect from time to time to convert one type of Advance into another or to renew any Advance by giving the Bank written notice no later than 2:00 p.m. Pacific time, on the date of the conversion into or renewal of a CB Floating Rate Advance and 11:00 a.m. Pacific time three (3) Business Days before conversion into or renewal of a LIBOR Rate Advance, specifying: (a) the renewal or conversion date, (b) the amount of the Advance to be converted or renewed, (c) in the case of conversion, the type of Advance to be converted into (CB Floating Rate Advance or LIBOR Rate Advance), and (d) in the case of renewals of or conversion into a LIBOR Rate Advance, the applicable Interest Period, provided that (i) the minimum principal amount of each LIBOR Rate Advance outstanding after a renewal or conversion shall be One Hundred Thousand and 00/100 Dollars ($100,000.00); (ii) a LIBOR Rate Advance can only be converted on the last day of the Interest Period for the Advance; and (iii) the Borrower may not elect an Interest Period ending after the maturity date of this Note. All notices given under this paragraph are irrevocable. If the Borrower fails to give the Bank the notice specified above for the renewal or conversion of a LIBOR Rate Advance by 11:00 a.m. Pacific time three (3) Business Days before the end of the Interest Period for that Advance, the Advance shall automatically be converted to a CB Floating Rate Advance on the last day of the Interest Period for the Advance.

Interest Payments. Interest on the Advances shall be paid on the last day of each month, beginning with the first month following disbursement of the Advance, whether the Advance is a CB Floating Rate Advance or LIBOR Rate Advance.

Principal Payments. All outstanding principal and interest is due and payable in full on September 22, 2017, which is defined herein as the "Principal Payment Date".

Default Rate of Interest. After a default has occurred under this Note, whether or not the Bank elects to accelerate the maturity of this Note because of such default, all Advances outstanding under this Note, shall bear interest at a Per Annum rate equal to the interest rate being charged on each such Advance plus three percent (3.00%) from the date the Bank elects to impose such rate. Imposition of this rate shall not affect any limitations contained in this Note on the Borrower's right to repay principal on any LIBOR Rate Advance before the expiration of the Interest Period for each such Advance.

Prepayment/Funding Loss Indemnification. The Borrower may prepay all or any part of any CB Floating Rate Advance at any time without premium or penalty.

The Borrower shall pay the Bank amounts sufficient (in the Bank's reasonable opinion) to compensate the Bank for any loss, cost, or expense incurred as a result of:

A.Any payment of a LIBOR Rate Advance on a date other than the last day of the Interest Period for the Advance, including, without limitation, acceleration of the Advances by the Bank pursuant to this Note or the other Related Documents; or

B.Any failure by the Borrower to borrow or renew a LIBOR Rate Advance on the date specified in the relevant notice from the Borrower to the Bank.

Additional Costs. If any applicable domestic or foreign law, treaty, government rule or regulation now or later in effect (whether or not it now applies to the Bank) or the interpretation or administration thereof by a governmental authority charged with such interpretation or administration, or compliance by the Bank with any guideline, request or directive of such an authority (whether or not having the force of law), shall (a) affect the basis of taxation of payments to the Bank of any amounts payable by the Borrower under this Note or the other Related Documents (other than taxes imposed on the overall net income of the Bank by the jurisdiction or by any political subdivision or taxing authority of the jurisdiction in which the Bank has its principal office), or (b) impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, Federal Deposit Insurance Corporation deposit insurance premiums or assessments) against assets of, deposits with or for the account of, or credit extended by the Bank, or (c) impose any other condition with respect to this Note or the other Related Documents and the result of any of the foregoing is to increase the cost to the Bank of extending, maintaining or funding any LIBOR Rate Advance or to reduce the amount of any sum receivable by the Bank on any Advance, or (d) affect the amount of capital or liquidity required or expected to be maintained by the Bank (or any corporation controlling the Bank) and the Bank determines that the amount of such capital or liquidity is increased by or based upon the existence of the Bank's obligations under this Note or the other Related Documents and the increase has the effect of reducing the rate of return on the Bank's (or its controlling corporation's) capital as a consequence of the obligations under this Note or the other Related Documents to a level below that which the Bank (or its controlling corporation) could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then the Borrower shall pay to the Bank, from time to time, upon request by the Bank, additional amounts sufficient to compensate the Bank for the increased cost or reduced sum receivable. Whenever the Bank shall learn of circumstances described in this section which are likely to result in additional costs to the Borrower, the Bank shall give prompt written notice to the Borrower of the basis for and the estimated amount of any such anticipated additional costs. A statement as to the amount of the increased cost or reduced sum receivable, prepared in good faith and in reasonable detail by the Bank and submitted by the Bank to the Borrower, shall be conclusive and binding for all purposes absent manifest error in computation.

Illegality. If any applicable domestic or foreign law, treaty, rule or regulation now or later in effect (whether or not it now applies to the Bank) or the interpretation or administration thereof by a governmental authority charged with such interpretation or administration, or compliance by the Bank with any guideline, request or directive of such an authority (whether or not having the force of law), shall make it unlawful or impossible for the Bank to maintain or fund the LIBOR Rate Advances, then, upon notice to the Borrower by the Bank, the outstanding principal amount of the LIBOR Rate Advances, together with accrued interest and any other amounts payable to the Bank under this Note or the other Related Documents on account of the LIBOR Rate Advances shall be repaid (a) immediately upon the Bank's demand if such change or compliance with such requests, in the Bank's judgment, requires immediate repayment, or (b) at the expiration of the last Interest Period to expire before the effective date of any such change or request provided, however, that subject to the terms and conditions of this Note and the other Related Documents the Borrower shall be entitled to simultaneously replace the entire outstanding balance of any LIBOR Rate Advance repaid in accordance with this section with a CB Floating Rate Advance in the same amount.

Inability to Determine Interest Rate. If the Bank determines that (a) quotations of interest rates for the relevant deposits referred to in the definition of Adjusted LIBOR Rate are not being provided for purposes of determining the interest rate on a LIBOR Rate Advance as provided in this Note, or (b) the relevant interest rates referred to in the definition of Adjusted LIBOR Rate do not accurately cover the cost to the Bank of making, funding or maintaining LIBOR Rate Advances, then the Bank shall at the Bank's option, give notice of such circumstances to the Borrower, whereupon (i) the obligation of the Bank to make LIBOR Rate Advances shall be suspended until the Bank notifies the Borrower that the circumstances giving rise to the suspension no longer exists, and (ii) the Borrower shall repay in full the then outstanding principal amount of each LIBOR Rate Advance, together with accrued interest, on the last day of the then current Interest Period applicable to the LIBOR Rate Advance, provided, however, that, subject to the terms and conditions of this Note and the other Related Documents, the Borrower shall be entitled to simultaneously replace the

entire outstanding balance of any LIBOR Rate Advance repaid in accordance with this section with an Advance bearing interest at the CB Floating Rate plus the Applicable Margin for CB Floating Rate Advances in the same amount. If the Bank determines on any day that quotations of interest rates for the relevant deposits referred to in the definition of Adjusted One Month LIBOR Rate are not being provided for purposes of determining the interest rate on any CB Floating Rate Advance on any day, then each CB Floating Rate Advance shall bear interest at the Prime Rate plus the Applicable Margin for CB Floating Rate Advances until the Bank determines that quotations of interest rates for the relevant deposits referred to in the definition of Adjusted One Month LIBOR Rate are being provided.

Obligations Due on Non-Business Day. Whenever any payment under this Note becomes due and payable on a day that is not a Business Day, if no default then exists under this Note, the maturity of the payment shall be extended to the next succeeding Business Day, except, in the case of a LIBOR Rate Advance, if the result of the extension would be to extend the payment into another calendar month, the payment must be made on the immediately preceding Business Day.

Matters Regarding Payment. The Borrower will pay the Bank at the Bank's address shown above or at such other place as the Bank may designate. Payments shall be allocated among principal, interest and fees at the discretion of the Bank unless otherwise agreed or required by applicable law. Acceptance by the Bank of any payment which is less than the payment due at the time shall not constitute a waiver of the Bank's right to receive payment in full at that time or any other time.

Authorization for Direct Payments (ACH Debits). To effectuate any payment due under this Note or under any other Related Documents, the Borrower hereby authorizes the Bank to initiate debit entries to Account Number _________________________ at the Bank and to debit the same to such account. This authorization to initiate debit entries shall remain in full force and effect until the Bank has received written notification of its termination in such time and in such manner as to afford the Bank a reasonable opportunity to act on it. The Borrower represents that the Borrower is and will be the owner of all funds in such account. The Borrower acknowledges: (1) that such debit entries may cause an overdraft of such account which may result in the Bank’s refusal to honor items drawn on such account until adequate deposits are made to such account; (2) that the Bank is under no duty or obligation to initiate any debit entry for any purpose; and (3) that if a debit is not made because the above-referenced account does not have a sufficient available balance, or otherwise, the payment may be late or past due.

Late Fee. Any principal or interest which is not paid within 10 days after its due date (whether as stated, by acceleration or otherwise) shall be subject to a late payment charge of five percent (5.00%) of the total payment due, in addition to the payment of interest, up to the maximum amount of One Thousand Five Hundred and 00/100 Dollars ($1,500.00) per late charge. The Borrower agrees to pay and stipulates that five percent (5.00%) of the total payment due is a reasonable amount for a late payment charge. The Borrowershall pay the late payment charge upon demand by the Bank or, if billed, within the time specified.

Purpose of Loan. The Borrower acknowledges and agrees that this Note evidences a loan for a business, commercial, agricultural or similar commercial enterprise purpose, and that no advance shall be used for any personal, family or household purpose. The proceeds of the loan shall be used only for the Borrower's working capital purposes.

Credit Facility. The Bank has approved a credit facility to the Borrower in a principal amount not to exceed the face amount of this Note. The credit facility is in the form of advances made from time to time by the Bank to the Borrower. This Note evidences the Borrower's obligation to repay those advances. The aggregate principal amount of debt evidenced by this Note is the amount reflected from time to time in the records of the Bank. Until the earliest to occur of maturity, any default, event of default, or any event that would constitute a default or event of default but for the giving of notice, the lapse of time or both, the Borrower may borrow, pay down and reborrow under this Note subject to the terms of the Related Documents.

Per Annum. In this Note the term "Per Annum" means for a year deemed to be comprised of 360 days.

Miscellaneous. This Note binds the Borrower and its successors, and benefits the Bank, its successors and assigns. Any reference to the Bank includes any holder of this Note. This Note is subject to that certain Credit Agreement by and between the Borrower and the Bank, dated September 22, 2015, and all amendments, restatements and replacements thereof (the "Credit Agreement") to which reference is hereby made for a more complete statement of the terms and conditions under which the loan evidenced hereby is made and is to be repaid. The terms and provisions of the Credit Agreement are hereby incorporated and made a part hereof by this reference thereto with the same force and effect as if set forth at length herein. No reference to the Credit Agreement and no provisions of this Note or the Credit Agreement shall alter or impair the absolute and unconditional obligation of the Borrower to pay the principal and interest on this Note as herein prescribed. Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement.If any one or more of the obligations of the Borrower under this Note or any provision hereof is held to be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower and the remaining provisions shall not in any way be affected or impaired; and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of such obligations or provisions in any other jurisdiction. Time is of the essence under this Note and in the performance of every term, covenant and obligation contained herein.

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

		Borrower:
Address:	110 110th Ave NE Bellevue, WA 98004	BSQUARE CORPORATION
		By:	/s/ Jerry D. Chase
			Jerry D. Chase		CEO
			Printed Name		Title
		Date Signed:		September 22, 2015

By:	/s/ Martin L. Heimbigner
	Martin L. Heimbigner		CFO
	Printed Name		Title
Date Signed:		September 22, 2015

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

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

I, Jerry D. Chase, certify that:

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

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

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

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

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

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

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

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

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

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

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

Dated: November 12, 2015	/s/ Jerry D. Chase
	Jerry D. Chase President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

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

I, Martin L. Heimbigner, certify that:

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

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

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

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

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

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

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

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

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

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

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

Dated: November 12, 2015	/s/ Martin L. Heimbigner
	Martin L. Heimbigner Chief Financial Officer, Secretary and Treasurer

EX-32.1

Exhibit 32.1

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

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

I, Jerry D. Chase, President and Chief Executive Officer, certify that:

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

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

Dated: November 12, 2015	/s/ Jerry D. Chase
	Jerry D. Chase
	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL 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, Martin L. Heimbigner, Chief Financial Officer, 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: November 12, 2015	/s/ Martin L. Heimbigner
	Martin L. Heimbigner
	Chief Financial Officer, Secretary and Treasurer

XML

Information about Geographic Areas - Revenue and Long-Lived Assets by Geographic Area (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Total revenue:
Total revenue	$ 26,435	$ 24,535	$ 81,573	$ 70,321
Long-lived assets:
Total long-lived assets	6,197		6,197		$ 6,410
North America [Member]
Total revenue:
Total revenue	23,654	22,456	74,415	62,955
Long-lived assets:
Total long-lived assets	1,285		1,285		1,597
Asia [Member]
Total revenue:
Total revenue	1,055	830	3,043	3,581
Long-lived assets:
Total long-lived assets	523		523		360
Europe [Member]
Total revenue:
Total revenue	1,726	$ 1,249	4,115	$ 3,785
Long-lived assets:
Total long-lived assets	$ 4,389		$ 4,389		$ 4,453

XML

Shareholders' Equity - Summary of Certain Information about Stock Options (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Weighted-average grant-date fair value of option grants for the period	$ 3.16	$ 1.74	$ 3.10	$ 1.71
Options in-the-money at period end	1,762,893	425,877	1,762,893	425,877
Aggregate intrinsic value of options exercised	$ 265,641	$ 171,558	$ 616,417	$ 412,781

XML

Goodwill and Intangible Assets - Additional Information (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Goodwill And Intangible Assets Disclosure [Abstract]
Change in carrying amount of goodwill	$ 0		$ 0
Amortization expense	$ 33,000	$ 34,000	$ 101,000	$ 101,000

XML

Commitments and Contingencies - Operating Lease Commitments (Detail) $ in Thousands	Sep. 30, 2015 USD ($)
Operating Leases Future Minimum Payments Due [Abstract]
Remainder of 2015	$ 326
2016	1,291
2017	1,185
2018	1,105
2019	1,038
2020	437
Total commitments	$ 5,382

XML

Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2015

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

4. Goodwill and Intangible Assets

Goodwill relates to the 2011 acquisition of MPC Data, Ltd. (“MPC”), a United Kingdom based provider of embedded software engineering services. The excess of the acquisition consideration over the fair value of net assets acquired was recorded as goodwill. We operate as a single reporting unit, and MPC falls within that reporting unit. There were no changes in the carrying amount of goodwill during the three and nine month periods ended September 30, 2015.

Intangible assets relate to customer relationships acquired from TestQuest Inc. in 2008 and from the acquisition of MPC in 2011, the vast majority of which relates to the MPC acquisition.

Information regarding our intangible assets as of September 30, 2015 and December 31, 2014 is as follows (in thousands):

	September 30, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(647	)	$	628

	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(546	)	$	729

Amortization expense was $33,000 and $101,000 for the three and nine month periods ended September 30, 2015, respectively, and $34,000 and $101,000 for the three and nine month periods ended September 30, 2014, respectively. Amortization in future periods is expected to be as follows (in thousands):

Remainder of 2015	$	34
2016		130
2017		98
2018		98
2019		98
2020		98
2021		72
Total	$	628

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Shareholders' Equity - Additional Information (Detail) - USD ($)	9 Months Ended
	Sep. 30, 2015	Jun. 30, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Compensation cost related to stock options granted but not yet recognized, net of estimated forfeitures	$ 1,616,051
Amortization cost, weighted-average period	1 year 4 months 17 days
Stock Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Increase number of shares available for future grant		750,000
Inducement Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Increase number of shares available for future grant		200,000
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Term of stock options granted	10 years
Vesting of options granted	4 years
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Amortization cost, weighted-average period	1 year 5 months 1 day
Compensation cost related to restricted stock units granted but not yet recognized	$ 492,045

XML

Credit Agreement - Additional Information (Detail) - Credit Agreement [Member] - Unsecured Line of Credit Agreement [Member] - USD ($)		9 Months Ended
	Sep. 22, 2015	Sep. 30, 2015
Line Of Credit Facility [Line Items]
Line of credit, interest rate description		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.
Line of credit, amount outstanding		$ 0
Prime Rate [Member] | Minimum [Member]
Line Of Credit Facility [Line Items]
Line of credit, interest rate, basis spread on variable rate		1.50%
LIBOR Rate [Member] | Maximum [Member]
Line Of Credit Facility [Line Items]
Line of credit, interest rate, basis spread on variable rate		1.50%
JPMorgan Chase Bank, N.A. [Member]
Line Of Credit Facility [Line Items]
Line of credit, term	2 years
Line of credit, maximum borrowing capacity	$ 12,000,000

XML

Shareholders' Equity - Fair Values of Stock Option Grants Estimated with Weighted Average Assumptions (Detail) - Employee Stock Option [Member]	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected life	3 years 3 months 18 days	3 years 3 months 18 days	3 years 3 months 18 days	3 years 3 months 18 days
Expected volatility	53.00%	57.00%	52.00%	59.00%
Risk-free interest rate	1.30%	1.40%	1.20%	1.30%

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Shareholders' Equity - Stock-Based Compensation Expense (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 454	$ 228	$ 1,022	$ 691
Per diluted share	$ 0.04	$ 0.02	$ 0.08	$ 0.06
Cost of revenue-service [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 133	$ 69	$ 351	$ 146
Selling, general and administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	298	144	616	510
Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 23	$ 15	$ 55	$ 35

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Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. 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 and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 are summarized below (in thousands):

	September 30, 2015
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	10,192	$	—	$	10,192
Corporate commercial paper		—		1,000		1,000
Corporate debt securities		—		321		321
Total cash equivalents		10,192		1,321		11,513
Short-term investments:
Corporate commercial paper		—		2,496		2,496
Corporate debt securities		—		13,430		13,430
Total short-term investments		—		15,926		15,926
Restricted cash—money market fund		250		—		250
Total assets measured at fair value	$	10,442	$	17,247	$	27,689

	December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	9,362	$	—	$	9,362
Corporate debt securities		—		1,002		1,002
Total cash equivalents		9,362		1,002		10,364
Short-term investments:
Corporate commercial paper		—		550		550
Corporate debt securities		—		12,713		12,713
Total short-term investments		—		13,263		13,263
Restricted cash—money market fund		250		—		250
Total assets measured at fair value	$	9,612	$	14,265	$	23,877

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Shareholders' Equity - Summary of Stock Option Activity (Detail)	9 Months Ended
	Sep. 30, 2015 USD ($) $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award Options Outstanding Roll Forward
Number of Shares, Beginning Balance	1,553,360
Granted, Number of Shares	556,350
Exercised, Number of Shares	(187,350)
Forfeited, Number of Shares	(63,941)
Expired, Number of Shares	(7,001)
Number of Shares, Ending Balance	1,851,418
Vested and expected to vest, Number of Shares, Ending Balance	1,702,830
Exercisable, Number of Shares, Ending Balance	714,893
Weighted Average Exercise Price, Beginning Balance | $ / shares	$ 3.50
Granted, Weighted Average Exercise Price | $ / shares	6.33
Exercised, Weighted Average Exercise Price | $ / shares	2.99
Forfeited, Weighted Average Exercise Price | $ / shares	3.52
Expired, Weighted Average Exercise Price | $ / shares	2.66
Weighted Average Exercise Price, Ending Balance | $ / shares	4.40
Vested and expected to vest, Weighted Average Exercise Price, Ending Balance | $ / shares	4.32
Exercisable, Weighted Average Exercise Price, Ending Balance | $ / shares	$ 3.62
Weighted Average Remaining Contractual Life (in years)	7 years 7 months 28 days
Vested and expected to vest, Weighted Average Remaining Contractual Life (in years)	7 years 6 months 4 days
Exercisable, Weighted Average Remaining Contractual Life (in years)	5 years 6 months 11 days
Aggregate Intrinsic Value | $	$ 4,131,502
Vested and expected to vest, Aggregate Intrinsic Value | $	3,945,697
Exercisable, Aggregate Intrinsic Value | $	$ 2,155,288

XML

Significant Risk Concentrations - Additional Information (Detail)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015 USD ($) Customer	Sep. 30, 2014 USD ($) Customer	Sep. 30, 2015 USD ($) Customer Agreement	Sep. 30, 2014 USD ($) Customer	Dec. 31, 2014 USD ($) Customer
Concentration Risk [Line Items]
Total revenue	$ 26,435,000	$ 24,535,000	$ 81,573,000	$ 70,321,000
Accounts receivable	15,560,000		$ 15,560,000		$ 13,626,000
Expiration date one of OEM Distribution agreements for embedded operating systems			Jun. 30, 2016
Number of OEM Distribution agreements for embedded operating systems | Agreement			2
Expiration date of OEM Distribution agreements for mobile operating systems, non-EMEA			Jun. 30, 2016
Number of OEM Distribution agreements for mobile operating systems | Agreement			4
Cost of revenue-service [Member]
Concentration Risk [Line Items]
Earnings under the rebate program	91,000	64,000	$ 257,000	233,000
Reduction in marketing expense in the future [Member]
Concentration Risk [Line Items]
Earnings under the rebate program	212,000	$ 149,000	599,000	$ 543,000
Customer Concentration Risk [Member]
Concentration Risk [Line Items]
Total revenue	2,800,000		13,500,000
Credit Concentration Risk [Member]
Concentration Risk [Line Items]
Accounts receivable	$ 3,500,000		$ 3,500,000
Revenue [Member] | Customer Concentration Risk [Member]
Concentration Risk [Line Items]
Number of customer account as major customer | Customer	1	1	1	1
Concentration risk, percentage	11.00%	18.00%	17.00%	11.00%
Revenue [Member] | Customer accounted for 10% or more [Member] | Customer Concentration Risk [Member]
Concentration Risk [Line Items]
Number of customer account as major customer | Customer	0	0	0	0
Accounts receivable [Member] | Customer accounted for 10% or more [Member] | Credit Concentration Risk [Member]
Concentration Risk [Line Items]
Number of customer account as major customer | Customer			1		0
Concentration risk, percentage			23.00%

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 13,385	$ 13,127
Short-term investments	15,926	13,263
Accounts receivable, net of allowance for doubtful accounts of $36 at September 30, 2015 and $125 at December 31, 2014	15,560	13,626
Deferred tax assets	10	10
Prepaid expenses and other current assets	514	717
Total current assets	45,395	40,743
Equipment, furniture and leasehold improvements, net	1,236	1,336
Restricted cash	250	250
Deferred tax assets	294	391
Intangible assets, net	628	729
Goodwill	3,738	3,738
Other non-current assets	52	54
Total assets	51,593	47,241
Current liabilities:
Third-party software fees payable	10,184	12,247
Accounts payable	285	165
Accrued compensation	2,333	2,106
Other accrued expenses	1,320	1,539
Deferred rent, current portion	293	275
Deferred revenue	705	712
Total current liabilities	15,120	17,044
Deferred tax liability	141	144
Deferred rent	$ 1,255	$ 1,476
Shareholders’ equity:
Preferred stock, no par value: 10,000,000 shares authorized; no shares issued and outstanding
Common stock, no par value: 37,500,000 shares authorized; 12,012,358 shares issued and outstanding at September 30, 2015 and 11,767,577 shares issued and outstanding at December 31, 2014	$ 132,601	$ 131,071
Accumulated other comprehensive loss	(829)	(846)
Accumulated deficit	(96,695)	(101,648)
Total shareholders’ equity	35,077	28,577
Total liabilities and shareholders’ equity	$ 51,593	$ 47,241

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2015

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“BSQUARE”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2015 and our operating results and cash flows for the three and nine months ended September 30, 2015 and 2014. The accompanying financial information as of December 31, 2014 is derived from audited financial statements. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. All intercompany balances have been eliminated.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance, as amended, is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for public companies effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact this ASU will have on our consolidated financial statements.

Income (Loss) Per Share

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

We excluded an aggregate of 282,276 and 201,091 options and RSUs for the three and nine month periods ended September 30, 2015, respectively, from diluted earnings per share because their effect was anti-dilutive. We excluded an aggregate of 882,490 and 868,767 options and RSUs for the three and nine month periods ended September 30, 2014, respectively, from diluted earnings per share because their effect was anti-dilutive.

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Shareholders' Equity - Summary of Shares of Common Stock Reserved for Future Issuance under Plans (Detail) - shares	Sep. 30, 2015	Dec. 31, 2014
Common Stock Number Of Shares Par Value And Other Disclosures [Abstract]
Stock options outstanding	1,851,418	1,553,360
RSUs outstanding	124,638
Stock awards available for future grant	1,010,602
Common stock reserved for future issuance	2,986,658

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Summary of Significant Accounting Policies - Additional Information (Detail) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Options and RSUs [Member]
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Shares excluded from computations of diluted earnings per share	282,276	882,490	201,091	868,767

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Commitments and Contingencies - Additional Information (Detail) - USD ($)	1 Months Ended	3 Months Ended				7 Months Ended	9 Months Ended
	Aug. 31, 2013	Sep. 30, 2015	Mar. 31, 2015	Sep. 30, 2014	Jun. 30, 2014	Dec. 31, 2013	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Other Commitments [Line Items]
Operating leases, expiration year							2020
Rent expense		$ 268,000		$ 281,000			$ 789,000	$ 918,000
Restricted cash		250,000					250,000		$ 250,000
Third party software vendor licensed lost					$ 934,000
Accrued contingent liability		$ 0			$ 100,000		$ 0
Loss contingency receivable			$ 934,000
Payment of legal expenses			$ 85,000
Volume pricing agreements period of OVRP							12 months
Bellevue [Member] | Washington [Member]
Other Commitments [Line Items]
Cash lease payments made						$ 0
Leasehold improvements and furniture provided by the landlord	$ 1,128,000
Bellevue [Member] | Washington [Member] | Minimum [Member]
Other Commitments [Line Items]
Expiration date of operating lease	2014-08
Bellevue [Member] | Washington [Member] | Maximum [Member]
Other Commitments [Line Items]
Expiration date of operating lease	2020-05

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Fair Value Measurements - Assets and Liabilities Measured at Fair Value on Recurring Basis (Detail) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Short-term investments:
Total short-term investments	$ 15,926	$ 13,263
Restricted cash—money market fund	250	250
Recurring basis [Member]
Cash equivalents:
Total cash equivalents	11,513	10,364
Short-term investments:
Total short-term investments	15,926	13,263
Restricted cash—money market fund	250	250
Total assets measured at fair value	27,689	23,877
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	10,192	9,362
Short-term investments:
Restricted cash—money market fund	250	250
Total assets measured at fair value	10,442	9,612
Direct or Indirect Observable Inputs (Level 2) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	1,321	1,002
Short-term investments:
Total short-term investments	15,926	13,263
Total assets measured at fair value	17,247	14,265
Corporate commercial paper [Member]
Short-term investments:
Total short-term investments	2,496	550
Corporate commercial paper [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	1,000
Short-term investments:
Total short-term investments	2,496	550
Corporate commercial paper [Member] | Direct or Indirect Observable Inputs (Level 2) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	1,000
Short-term investments:
Total short-term investments	2,496	550
Corporate debt securities [Member]
Short-term investments:
Total short-term investments	13,430	12,713
Corporate debt securities [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	321	1,002
Short-term investments:
Total short-term investments	13,430	12,713
Corporate debt securities [Member] | Direct or Indirect Observable Inputs (Level 2) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	321	1,002
Short-term investments:
Total short-term investments	13,430	12,713
Money market funds [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	10,192	9,362
Money market funds [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	$ 10,192	$ 9,362

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Cash and Investments

9 Months Ended

Sep. 30, 2015

Cash And Cash Equivalents [Abstract]

Cash and Investments

2. Cash and Investments

Cash, cash equivalents, short-term investments, and restricted cash consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015		December 31, 2014
Cash	$	1,872	$	2,763
Cash equivalents:
Money market funds		10,192		9,362
Corporate commercial paper		1,000		—
Corporate debt securities		321		1,002
Total cash equivalents		11,513		10,364
Total cash and cash equivalents		13,385		13,127
Short-term investments:
Corporate commercial paper		2,496		550
Corporate debt securities		13,430		12,713
Total short-term investments		15,926		13,263
Restricted cash—money market fund		250		250
Total cash, cash equivalents, short-term investments    and restricted cash	$	29,561	$	26,640

Gross unrealized gains and losses on our short-term investments were not material as of September 30, 2015 and December 31, 2014. The restricted cash relates to a letter of credit securing the lease of our corporate headquarters.

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Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Statement Of Financial Position [Abstract]
Allowance for doubtful accounts receivable	$ 36	$ 125
Preferred stock, par value
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value
Common stock, shares authorized	37,500,000	37,500,000
Common stock, shares issued	12,012,358	11,767,577
Common stock, shares outstanding	12,012,358	11,767,577

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Assets and Liabilities Measured at Fair Value on Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 are summarized below (in thousands):

	September 30, 2015
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	10,192	$	—	$	10,192
Corporate commercial paper		—		1,000		1,000
Corporate debt securities		—		321		321
Total cash equivalents		10,192		1,321		11,513
Short-term investments:
Corporate commercial paper		—		2,496		2,496
Corporate debt securities		—		13,430		13,430
Total short-term investments		—		15,926		15,926
Restricted cash—money market fund		250		—		250
Total assets measured at fair value	$	10,442	$	17,247	$	27,689

	December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	9,362	$	—	$	9,362
Corporate debt securities		—		1,002		1,002
Total cash equivalents		9,362		1,002		10,364
Short-term investments:
Corporate commercial paper		—		550		550
Corporate debt securities		—		12,713		12,713
Total short-term investments		—		13,263		13,263
Restricted cash—money market fund		250		—		250
Total assets measured at fair value	$	9,612	$	14,265	$	23,877

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Oct. 31, 2015
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3
Trading Symbol	BSQR
Entity Registrant Name	BSQUARE CORP /WA
Entity Central Index Key	0001054721
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		12,034,221

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Goodwill and Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2015

Goodwill And Intangible Assets Disclosure [Abstract]

Information Regarding Intangible Assets

Information regarding our intangible assets as of September 30, 2015 and December 31, 2014 is as follows (in thousands):

	September 30, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(647	)	$	628

	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(546	)	$	729

Expected Amortization Expense for Future Period

Amortization in future periods is expected to be as follows (in thousands):

Remainder of 2015	$	34
2016		130
2017		98
2018		98
2019		98
2020		98
2021		72
Total	$	628

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Condensed Consolidated Statements of Income and Comprehensive Income - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Revenue:
Software	$ 21,215	$ 19,768	$ 66,679	$ 55,631
Service	5,220	4,767	14,894	14,690
Total revenue	26,435	24,535	81,573	70,321
Cost of revenue:
Software	17,698	16,760	54,732	47,189
Service	3,864	3,812	11,287	11,369
Total cost of revenue	21,562	20,572	66,019	58,558
Gross profit	4,873	3,963	15,554	11,763
Operating expenses:
Selling, general and administrative	3,174	2,880	9,120	9,352
Research and development	312	360	1,300	1,215
Total operating expenses	3,486	3,240	10,420	10,567
Income from operations	1,387	723	5,134	1,196
Other income (expense), net	32	(16)	124	(118)
Income before income taxes	1,419	707	5,258	1,078
Income tax expense	(174)	(16)	(305)	(129)
Net income	$ 1,245	$ 691	$ 4,953	$ 949
Basic income per share	$ 0.10	$ 0.06	$ 0.42	$ 0.08
Diluted income per share	$ 0.10	$ 0.06	$ 0.40	$ 0.08
Shares used in calculation of income per share:
Basic	11,959	11,655	11,867	11,520
Diluted	12,466	11,832	12,294	11,732
Comprehensive income:
Net income	$ 1,245	$ 691	$ 4,953	$ 949
Other comprehensive income (loss):
Foreign currency translation, net of tax	3	(97)	20	34
Change in unrealized gains (losses) on investments, net of tax	1		(3)
Total other comprehensive income (loss)	4	(97)	17	34
Comprehensive income	$ 1,249	$ 594	$ 4,970	$ 983

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2015

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

7. Commitments and Contingencies

Lease and rent obligations

Our commitments include obligations outstanding under operating leases, which expire through 2020. We have lease commitments for office space in Bellevue, Washington; San Diego, California; Boston, Massachusetts; Taipei, Taiwan; Tokyo, Japan; 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, which was initially scheduled to expire in August 2014, and extended the lease term to May 2020. The amendment to the headquarters lease provided that no cash lease payments were to be made for a seven-month period from June 1, 2013 to December 31, 2013. In conjunction with the amended lease agreement, the landlord provided lease incentives totaling $1,128,000 for leasehold improvements and furniture related to new space in the same building, which were capitalized and are reflected in the deferred rent liability. We are amortizing these assets over the shorter of their economic life or the lease term. We are recognizing rent expense, including the effect of the deferred rent, on the straight-line basis over the lease term.

Rent expense was $268,000 and $789,000 for the three and nine month periods ended September 30, 2015, respectively. Rent expense was $281,000 and $918,000 for the three and nine month periods ended September 30, 2014, respectively.

As of September 30, 2015, we had $250,000 pledged as collateral for a bank letter of credit under the terms of our headquarters facility lease. The pledged cash supporting the outstanding letter of credit is classified as restricted cash.

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

Remainder of 2015	$	326
2016		1,291
2017		1,185
2018		1,105
2019		1,038
2020		437
Total commitments	$	5,382

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 of these 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 made 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.

A third-party software vendor invoiced us a total of $934,000 for certain licensed software that was lost in transit by a common carrier during the second quarter of 2014. We accrued a liability of $100,000 in the second quarter of 2014 as an estimate of our potential liability for legal and insurance deductible expenses. During the first quarter of 2015, the vendor credited our account for the full $934,000 as the licenses had been deactivated and there was no indication of counterfeit use. Accordingly, we reversed approximately $85,000 of the accrual after payment of legal expenses in the first quarter of 2015.

Volume Pricing Agreements

In conjunction with our activities under our OEM Distribution Agreements (“ODAs”) with Microsoft Corporation (“Microsoft”), as further described in Note 9, we have entered into OEM Volume Royalty Pricing (“OVRP”) commitments with Microsoft. Under these OVRPs, we are provided with volume pricing on a customer-by-customer basis assuming certain minimum unit volumes are met. The OVRP terms are 12 months. In the event we do not meet the committed minimum unit volumes, we are obligated to pay the difference between the committed per-unit volume rate and the actual per-unit rate we achieved based upon actual units purchased. The OVRP arrangements do not equate to a minimum purchase commitment, but rather, the arrangements are a volume pricing arrangement based upon actual volume purchased. In substantially all significant instances, we have reciprocal agreements with our customers such that we will receive per-unit price adjustments, similar to the amounts we would subsequently owe to Microsoft if such OVRP volumes are not met. However, in the event a customer is unwilling or unable to pay us, we would be negatively impacted. Based upon the credit-worthiness of our customers, our historical OVRP experience with our customers and OVRP arrangements in general, we do not believe we will incur any material liability relating to active agreements, and, therefore, no provision or reserve has been recorded as of September 30, 2015.

Microsoft is in the process of implementing significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OEM Volume Royalty Program (OVRP) and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016.

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Shareholders' Equity

9 Months Ended

Sep. 30, 2015

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Shareholders' Equity

6. Shareholders’ Equity

Equity Compensation Plans

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

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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Dividend yield		0	%		0	%		0	%		0	%
Expected life	3.3 years			3.3 years			3.3 years			3.3 years
Expected volatility		53	%		57	%		52	%		59	%
Risk-free interest rate		1.3	%		1.4	%		1.2	%		1.3	%

The impact on our results of operations of stock-based compensation expense for the three and nine month periods ended September 30, 2015 and 2014 was as follows (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cost of revenue — service	$	133	$	69	$	351	$	146
Selling, general and administrative		298		144		616		510
Research and development		23		15		55		35
Total stock-based compensation expense	$	454	$	228	$	1,022	$	691
Per diluted share	$	0.04	$	0.02	$	0.08	$	0.06

Stock Option Activity

The following table summarizes stock option activity under the Plans for the nine month period ended September 30, 2015:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2015		1,553,360		$	3.50
Granted		556,350			6.33
Exercised		(187,350	)		2.99
Forfeited		(63,941	)		3.52
Expired		(7,001	)		2.66
Balance at September 30, 2015		1,851,418		$	4.40		7.66	$	4,131,502
Vested and expected to vest at September 30, 2015		1,702,830		$	4.32		7.51	$	3,945,697
Exercisable at September 30, 2015		714,893		$	3.62		5.53	$	2,155,288

At September 30, 2015, total compensation cost related to stock options granted but not yet recognized was $1,616,051, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.38 years. The following table summarizes certain information about stock options for the three and nine month periods ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Weighted-average grant-date fair value of option    grants for the period	$	3.16	$	1.74	$	3.10	$	1.71
Options in-the-money at period end		1,762,893		425,877		1,762,893		425,877
Aggregate intrinsic value of options exercised	$	265,641	$	171,558	$	616,417	$	412,781

The aggregate intrinsic value represents the difference between the exercise price of the underlying options and the quoted price of our common stock for the number of options that were in-the-money at period end or that were exercised during the period. We issue new shares of common stock upon exercise of stock options.

Restricted Stock Unit Activity

The following table summarizes RSU activity for the nine month period ended September 30, 2015:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2014		80,179		$	3.40
Granted		117,049			6.34
Vested		(63,614	)		3.92
Forfeited		(8,976	)		3.15
Unvested at September 30, 2015		124,638		$	5.91
Expected to vest after September 30, 2015		109,695		$	5.89

At September 30, 2015, total compensation cost related to RSUs granted but not yet recognized was $492,045, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 1.42 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 September 30, 2015:

Stock options outstanding	1,851,418
RSUs outstanding	124,638
Stock awards available for future grant	1,010,602
Common stock reserved for future issuance	2,986,658

In June 2015, our shareholders approved an amendment to the Stock Plan increasing the number of shares reserved and available for issuance by 750,000 shares, and our Board of Directors approved an increase in the number of shares reserved and available for issuance under the Inducement Plan by 200,000 shares. These additional shares reserved under both of the Plans are included in the “Stock awards available for future grant” total in the preceding table.

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Cash and Investments - Cash, Cash Equivalents, Short-Term Investments, and Restricted Cash (Detail) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014	Sep. 30, 2014	Dec. 31, 2013
Investment Holdings [Line Items]
Cash	$ 1,872	$ 2,763
Cash equivalents:
Total cash equivalents	11,513	10,364
Total cash and cash equivalents	13,385	13,127	$ 12,575	$ 13,510
Short-term investments:
Total short-term investments	15,926	13,263
Restricted cash—money market fund	250	250
Total cash, cash equivalents, short-term investments and restricted cash	29,561	26,640
Corporate commercial paper [Member]
Cash equivalents:
Total cash equivalents	1,000
Short-term investments:
Total short-term investments	2,496	550
Corporate debt securities [Member]
Cash equivalents:
Total cash equivalents	321	1,002
Short-term investments:
Total short-term investments	13,430	12,713
Money market funds [Member]
Cash equivalents:
Total cash equivalents	$ 10,192	$ 9,362

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Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2015

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Fair Values of Stock Option Grants Estimated with Weighted Average Assumptions

The fair values of our stock option grants were estimated with the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Dividend yield		0	%		0	%		0	%		0	%
Expected life	3.3 years			3.3 years			3.3 years			3.3 years
Expected volatility		53	%		57	%		52	%		59	%
Risk-free interest rate		1.3	%		1.4	%		1.2	%		1.3	%

Stock-Based Compensation Expense

The impact on our results of operations of stock-based compensation expense for the three and nine month periods ended September 30, 2015 and 2014 was as follows (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cost of revenue — service	$	133	$	69	$	351	$	146
Selling, general and administrative		298		144		616		510
Research and development		23		15		55		35
Total stock-based compensation expense	$	454	$	228	$	1,022	$	691
Per diluted share	$	0.04	$	0.02	$	0.08	$	0.06

Summary of Stock Option Activity

The following table summarizes stock option activity under the Plans for the nine month period ended September 30, 2015:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2015		1,553,360		$	3.50
Granted		556,350			6.33
Exercised		(187,350	)		2.99
Forfeited		(63,941	)		3.52
Expired		(7,001	)		2.66
Balance at September 30, 2015		1,851,418		$	4.40		7.66	$	4,131,502
Vested and expected to vest at September 30, 2015		1,702,830		$	4.32		7.51	$	3,945,697
Exercisable at September 30, 2015		714,893		$	3.62		5.53	$	2,155,288

Summary of Certain Information about Stock Options

The following table summarizes certain information about stock options for the three and nine month periods ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Weighted-average grant-date fair value of option    grants for the period	$	3.16	$	1.74	$	3.10	$	1.71
Options in-the-money at period end		1,762,893		425,877		1,762,893		425,877
Aggregate intrinsic value of options exercised	$	265,641	$	171,558	$	616,417	$	412,781

Summary of Restricted Stock Unit Activity

The following table summarizes RSU activity for the nine month period ended September 30, 2015:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2014		80,179		$	3.40
Granted		117,049			6.34
Vested		(63,614	)		3.92
Forfeited		(8,976	)		3.15
Unvested at September 30, 2015		124,638		$	5.91
Expected to vest after September 30, 2015		109,695		$	5.89

Summary of Shares of Common Stock Reserved for Future Issuance under Plans

The following table summarizes our shares of common stock reserved for future issuance under the Plans as of September 30, 2015:

Stock options outstanding	1,851,418
RSUs outstanding	124,638
Stock awards available for future grant	1,010,602
Common stock reserved for future issuance	2,986,658

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2015

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of BSQUARE Corporation (“BSQUARE”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting and include the accounts of BSQUARE and our wholly owned subsidiaries. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2015 and our operating results and cash flows for the three and nine months ended September 30, 2015 and 2014. The accompanying financial information as of December 31, 2014 is derived from audited financial statements. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for bad debts and income taxes, estimates of progress on professional engineering service arrangements and bonus accruals. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. All intercompany balances have been eliminated.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance, as amended, is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for public companies effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact this ASU will have on our consolidated financial statements.

Income (Loss) Per Share

Income (Loss) Per Share

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

We excluded an aggregate of 282,276 and 201,091 options and RSUs for the three and nine month periods ended September 30, 2015, respectively, from diluted earnings per share because their effect was anti-dilutive. We excluded an aggregate of 882,490 and 868,767 options and RSUs for the three and nine month periods ended September 30, 2014, respectively, from diluted earnings per share because their effect was anti-dilutive.

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Information about Geographic Areas

9 Months Ended

Sep. 30, 2015

Segment Reporting [Abstract]

Information about Geographic Areas

8. Information about Geographic Areas

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. Accordingly, we consider ourselves to be in a single reporting segment and operating unit structure.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Total revenue:
North America	$	23,654	$	22,456	$	74,415	$	62,955
Asia		1,055		830		3,043		3,581
Europe		1,726		1,249		4,115		3,785
Total revenue	$	26,435	$	24,535	$	81,573	$	70,321

	September 30, 2015		December 31, 2014
Long-lived assets:
North America	$	1,285	$	1,597
Asia		523		360
Europe		4,389		4,453
Total long-lived assets	$	6,197	$	6,410

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Significant Risk Concentrations

9 Months Ended

Sep. 30, 2015

Risks And Uncertainties [Abstract]

Significant Risk Concentrations

9. Significant Risk Concentrations

Significant Customer

One customer accounted for $2.8 million, or 11%, of total revenue for the three months ended September 30, 2015 and for $13.5 million, or 17% of total revenue for the nine months ended September 30, 2015. Another customer accounted for 18% and 11% of our total revenue for the three and nine month periods ended September 30, 2014, respectively. No other customers accounted for more than 10% of our revenue for any of the periods noted above.

One customer had an accounts receivable balance of $3.5 million, or approximately 23% of total accounts receivable at September 30, 2015. No customers had accounts receivable balances greater than 10% of the total accounts receivable at December 31, 2014.

Significant Supplier

We have two ODAs with Microsoft which enable us to sell Microsoft Windows Embedded operating systems to our customers in the United States, Canada, Argentina, Brazil, Chile, Columbia, Mexico, Peru, Puerto Rico, the Caribbean, the European Union, the European Free Trade Association, Turkey and Africa, which expire on June 30, 2016. We also have four 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 also expire on June 30, 2016.

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. Under this rebate program, we recognized $91,000 and $257,000 during the three and nine month periods ended September 30, 2015, respectively, compared to $64,000 and $233,000 during the three and nine month periods ended September 30, 2014, respectively. These rebates were treated as reductions in cost of sales. Additionally, during the three and nine month periods ended September 30, 2015, we qualified for $212,000 and $599,000 in rebate credits, respectively, compared to $149,000 and $543,000 in rebate credits for the three and nine month periods ended September 30, 2014, respectively. These are accounted for as reductions in marketing expense if and when qualified program expenditures are made.

Microsoft is in the process of implementing significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OEM Volume Royalty Program (OVRP) and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016.

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Cash and Investments (Tables)

9 Months Ended

Sep. 30, 2015

Cash And Cash Equivalents [Abstract]

Cash, Cash Equivalents, Short-Term Investments, and Restricted Cash

Cash, cash equivalents, short-term investments, and restricted cash consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015		December 31, 2014
Cash	$	1,872	$	2,763
Cash equivalents:
Money market funds		10,192		9,362
Corporate commercial paper		1,000		—
Corporate debt securities		321		1,002
Total cash equivalents		11,513		10,364
Total cash and cash equivalents		13,385		13,127
Short-term investments:
Corporate commercial paper		2,496		550
Corporate debt securities		13,430		12,713
Total short-term investments		15,926		13,263
Restricted cash—money market fund		250		250
Total cash, cash equivalents, short-term investments    and restricted cash	$	29,561	$	26,640

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Shareholders' Equity - Summary of Restricted Stock Unit Activity (Detail)	9 Months Ended
	Sep. 30, 2015 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unvested, Number of Shares, Ending Balance	124,638
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unvested, Number of Shares, Beginning Balance	80,179
Granted, Number of Shares	117,049
Vested, Number of Shares	(63,614)
Forfeited, Number of Shares	(8,976)
Unvested, Number of Shares, Ending Balance	124,638
Expected to vest, Number of Shares, Ending Balance	109,695
Unvested, Weighted Average Grant Date Fair Value, Beginning Balance | $ / shares	$ 3.40
Granted, Weighted Average Grant Date Fair Value | $ / shares	6.34
Vested, Weighted Average Grant Date Fair Value | $ / shares	3.92
Forfeited, Weighted Average Grant Date Fair Value | $ / shares	3.15
Unvested, Weighted Average Grant Date Fair Value, Ending Balance | $ / shares	5.91
Expected to vest, Weighted Average Grant Date Fair Value, Ending Balance | $ / shares	$ 5.89

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Information about Geographic Areas (Tables)

9 Months Ended

Sep. 30, 2015

Segment Reporting [Abstract]

Revenue and Long-Lived Assets by Geographic Area

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Total revenue:
North America	$	23,654	$	22,456	$	74,415	$	62,955
Asia		1,055		830		3,043		3,581
Europe		1,726		1,249		4,115		3,785
Total revenue	$	26,435	$	24,535	$	81,573	$	70,321

	September 30, 2015		December 31, 2014
Long-lived assets:
North America	$	1,285	$	1,597
Asia		523		360
Europe		4,389		4,453
Total long-lived assets	$	6,197	$	6,410

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Goodwill and Intangible Assets - Summary of Acquisition-Related Intangible Assets (Detail) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Acquired Finite-Lived Intangible Assets [Line Items]
Net Carrying Value	$ 628	$ 729
Customer relationships [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	1,275	1,275
Accumulated Amortization	(647)	(546)
Net Carrying Value	$ 628	$ 729

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Cash flows from operating activities:
Net income	$ 4,953	$ 949
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	425	479
Realized loss on disposal of assets		33
Stock-based compensation	1,022	691
Changes in operating assets and liabilities:
Accounts receivable, net	(1,934)	4,144
Prepaid expenses and other assets	203	1,871
Third-party software fees payable	(2,063)	(2,805)
Accounts payable and accrued expenses	224	(645)
Deferred revenue	(7)	(673)
Deferred rent	(203)	20
Net cash provided by operating activities	2,620	4,064
Cash flows from investing activities:
Purchases of equipment and furniture	(225)	(276)
Proceeds from maturities of short-term investments	14,253	9,195
Purchases of short-term investments	(16,906)	(14,547)
Net cash used in investing activities	(2,878)	(5,628)
Cash flows provided by financing activities:
Proceeds from exercise of stock options	508	595
Effect of exchange rate changes on cash	8	34
Net increase (decrease) in cash and cash equivalents	258	(935)
Cash and cash equivalents, beginning of period	13,127	13,510
Cash and cash equivalents, end of period	$ 13,385	12,575
Supplemental disclosure of cash flow information:
Non-cash investing activity-leasehold improvements and furniture funded by landlord		$ 1,128

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Credit Agreement

9 Months Ended

Sep. 30, 2015

Line Of Credit Facility [Abstract]

Credit Agreement

5. 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 million. 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. We were in compliance with all such covenants as of September 30, 2015.

There were no amounts outstanding under the Credit Agreement as of September 30, 2015.

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Goodwill and Intangible Assets - Expected Amortization Expense for Future Period (Detail) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Goodwill And Intangible Assets Disclosure [Abstract]
Remainder of 2015	$ 34
2016	130
2017	98
2018	98
2019	98
2020	98
2021	72
Net Carrying Value	$ 628	$ 729

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Information about Geographic Areas - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2015 Segment
Segment Reporting [Abstract]
Number of reportable segment	1
Number of operating segment	1

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2015

Commitments And Contingencies Disclosure [Abstract]

Future Operating Lease Commitments

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

Remainder of 2015	$	326
2016		1,291
2017		1,185
2018		1,105
2019		1,038
2020		437
Total commitments	$	5,382