10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

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  ☒   No  ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☒

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

The number of shares of common stock outstanding as of October 31, 2016: 12,452,144

BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2016

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	16
Item 3	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4	Controls and Procedures	22
	PART II. OTHER INFORMATION
Item 1A	Risk Factors	23
Item 5	Other Information	23
Item 6	Exhibits	23
	Signatures	23
	Index to Exhibits	24

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BSQUARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	September 30, 2016			December 31, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,346		$	16,443
Short-term investments		19,231			13,280
Accounts receivable, net of allowance for doubtful    accounts of $50 at September 30, 2016    and $62 December 31, 2015		19,808			19,009
Prepaid expenses and other current assets		459			580
Total current assets		51,844			49,312
Equipment, furniture and leasehold improvements, net		1,194			1,167
Restricted cash equivalents		—			250
Deferred tax assets		32			145
Intangible assets, net		493			594
Goodwill		3,738			3,738
Other non-current assets		54			52
Total assets	$	57,355		$	55,258
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Third-party software fees payable	$	11,068		$	11,789
Accounts payable		284			188
Accrued compensation		1,924			2,390
Other accrued expenses		741			1,277
Deferred rent, current portion		315			298
Deferred revenue		1,170			1,135
Total current liabilities		15,502			17,077
Deferred tax liability		85			97
Deferred rent		937			1,177
Deferred revenue		2,041			—
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; 12,415,775 shares issued and    outstanding at September 30, 2016 and 12,092,598    shares issued and outstanding at December 31,    2015		135,043			133,331
Accumulated other comprehensive loss		(907	)		(869	)
Accumulated deficit		(95,346	)		(95,555	)
Total shareholders’ equity		38,790			36,907
Total liabilities and shareholders’ equity	$	57,355		$	55,258

See notes to condensed consolidated financial statements.

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BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue:
Software	$	19,216		$	21,215		$	58,118		$	66,679
Service		3,251			5,220			12,526			14,894
Total revenue		22,467			26,435			70,644			81,573
Cost of revenue:
Software		15,281			17,698			47,901			54,732
Service		3,509			3,864			10,877			11,287
Total cost of revenue		18,790			21,562			58,778			66,019
Gross profit		3,677			4,873			11,866			15,554
Operating expenses:
Selling, general and administrative		3,283			3,174			9,693			9,120
Research and development		809			312			2,024			1,300
Total operating expenses		4,092			3,486			11,717			10,420
Income (loss) from operations		(415	)		1,387			149			5,134
Other income, net		128			32			204			124
Income (loss) before income taxes		(287	)		1,419			353			5,258
Income tax benefit (expense)		181			(174	)		(144	)		(305	)
Net income (loss)	$	(106	)	$	1,245		$	209		$	4,953
Basic income (loss) per share	$	(0.01	)	$	0.10		$	0.02		$	0.42
Diluted income (loss) per share	$	(0.01	)	$	0.10		$	0.02		$	0.40
Shares used in calculation of income (loss) per share:
Basic		12,310			11,959			12,189			11,867
Diluted		12,310			12,466			12,576			12,294
Comprehensive income (loss):
Net income (loss)	$	(106	)	$	1,245		$	209		$	4,953
Other comprehensive income (loss):
Foreign currency translation, net of tax		(78	)		3			(44	)		20
Change in unrealized gains (losses) on investments, net of tax		29			1			6			(3	)
Total other comprehensive income (loss)		(49	)		4			(38	)		17
Comprehensive income (loss)	$	(155	)	$	1,249		$	171		$	4,970

See notes to condensed consolidated financial statements.

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BSQUARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	209		$	4,953
Adjustments to reconcile net income to net    cash provided by operating activities:
Depreciation and amortization		442			425
Stock-based compensation		908			1,022
Changes in operating assets and liabilities:
Accounts receivable, net		(799	)		(1,934	)
Prepaid expenses and other assets		220			203
Third-party software fees payable		(721	)		(2,063	)
Accounts payable and accrued expenses		(906	)		224
Deferred revenue		2,076			(7	)
Deferred rent		(223	)		(203	)
Net cash provided by operating activities		1,206			2,620
Cash flows from investing activities:
Purchases of equipment and furniture		(368	)		(225	)
Proceeds from maturities of short-term investments		18,200			14,253
Purchases of short-term investments		(24,159	)		(16,906	)
Reduction of restricted cash equivalents		250			—
Net cash used in investing activities		(6,077	)		(2,878	)
Cash flows provided by financing activities—proceeds    from exercise of stock options		832			508
Effect of exchange rate changes on cash		(58	)		8
Net increase (decrease) in cash and cash equivalents		(4,097	)		258
Cash and cash equivalents, beginning of period		16,443			13,127
Cash and cash equivalents, end of period	$	12,346		$	13,385

See notes to condensed consolidated financial statements.

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BSQUARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(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, 2016, our operating results for the three and nine months ended September 30, 2016 and 2015 and our cash flows for the nine months ended September 30, 2016 and 2015. The accompanying financial information as of December 31, 2015 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, 2015. 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 and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred income taxes. The amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. We adopted the new guidance retrospectively beginning with the year ended December 31, 2014, and applied such guidance consistently beginning with the year ended December 31, 2015.

In February 2016, the FASB issued ASU No. 2016-2, “Leases,” to make leasing activities more transparent and comparable, requiring most leases be recognized by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-2 is effective for public business entities for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

In March 2016, the FASB amended the existing accounting standards for stock-based compensation, ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendments impact several aspects of accounting for share-based payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We are required to adopt the amendments in the first quarter of 2017, with early adoption permitted. If early adoption is elected, all amendments must be adopted in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

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In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments,” adding or clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

Income (Loss) Per Share

Basic income (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 (loss) per share is computed using the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

We excluded an aggregate of 1,545,512 and 627,778 options for the three and nine months ended September 30, 2016, respectively, from diluted income (loss) per share because their effect was anti-dilutive. For the three months ended September 30, 2016, this included common stock equivalent shares of 952,858 calculated using the treasury stock method that would have been included in diluted income (loss) per share had we been in a net income position. In a period where we are in a loss position, diluted loss per share is computed using the basic share count. We excluded an aggregate of 282,276 and 201,091 options for the three and nine months ended September 30, 2015, respectively, from diluted income per share because their effect was anti-dilutive.

2. Cash, Cash Equivalents and Investments

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

	September 30, 2016		December 31, 2015
Cash	$	11,470	$	7,270
Cash equivalents:
Money market funds		876		1,500
Corporate commercial paper		—		5,404
Corporate debt securities		—		2,269
Total cash equivalents		876		9,173
Total cash and cash equivalents		12,346		16,443
Short-term investments:
Corporate commercial paper		13,701		6,245
Treasury bonds		—		1,007
Corporate debt securities		5,530		6,028
Total short-term investments		19,231		13,280
Restricted cash equivalents—money market fund		—		250
Total cash, cash equivalents and short-term investments	$	31,577	$	29,973

Gross unrealized gains and losses on our short-term investments were not material as of September 30, 2016 and December 31, 2015. The balance in restricted cash equivalents at December 31, 2015 related to a letter of credit securing the lease of our corporate headquarters. The restricted cash was released in September 2016.

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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, 2016 and December 31, 2015 are summarized below (in thousands):

	September 30, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	876	$	—	$	876
Total cash equivalents		876		—		876
Short-term investments:
Corporate commercial paper		—		13,701		13,701
Corporate debt securities		—		5,530		5,530
Total short-term investments		—		19,231		19,231
Total assets measured at fair value	$	876	$	19,231	$	20,107

	December 31, 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	$	5,404	$	—	$	5,404
Corporate commercial paper		—		1,500		1,500
Corporate debt securities		—		2,269		2,269
Total cash equivalents		5,404		3,769		9,173
Short-term investments:
Corporate commercial paper		—		6,245		6,245
Treasury bonds		—		1,007		1,007
Corporate debt securities		—		6,028		6,028
Total short-term investments		—		13,280		13,280
Restricted cash equivalents—money market fund		250		—		250
Total assets measured at fair value	$	5,654	$	17,049	$	22,703

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4. Goodwill and Intangible Assets

Goodwill relates to the 2011 acquisition of MPC Data, Ltd. (renamed BSQUARE EMEA in 2015), 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 BSQUARE EMEA falls within that reporting unit. There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2016.

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 is as follows (in thousands):

	September 30, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(782	)	$	493

	December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(681	)	$	594

Amortization expense was $33,000 and $101,000 for the three and nine months ended September 30, 2016, respectively, and $33,000 and $101,000 for the three and nine months ended September 30, 2015, respectively. Amortization in future periods is expected to be as follows (in thousands):

Remainder of 2016	$	30
2017		98
2018		98
2019		98
2020		98
2021		71
Total	$	493

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, 2016. On September 29, 2016, the Credit Agreement was modified to extend the final due date an additional year to September 22, 2018.

There were no amounts outstanding under the Credit Agreement as of September 30, 2016 or December 31, 2015. In September 2016 we entered into a new letter of credit agreement for $250,000 secured by the Credit Agreement in connection with the lease of our corporate headquarters.  Accordingly, the principal amount available under the Credit Agreement has been reduced from $12 million to $11.75 million.

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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 to purchase shares of our common stock may be granted with a fixed exercise price that is equal to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, RSAs and unrestricted stock awards, and RSUs. Expense is recorded for performance options over the requisite service periods when achievement of related performance targets are considered to be probable.

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,
	2016			2015			2016			2015
Dividend yield		0	%		0	%		0	%		0	%
Expected life	3.3 years			3.3 years			3.4 years			3.3 years
Expected volatility		55	%		53	%		55	%		52	%
Risk-free interest rate		1.0	%		1.3	%		1.1	%		1.2	%

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016		2015
Cost of revenue — service	$	(4	)	$	133	$	169	$	351
Selling, general and administrative		262			298		618		616
Research and development		22			23		121		55
Total stock-based compensation expense	$	280		$	454	$	908	$	1,022
Per diluted share	$	0.02		$	0.04	$	0.07	$	0.08

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Stock Option Activity

The following table summarizes stock option activity under the Plans for the nine-month period ended September 30, 2016:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2016		1,778,697		$	4.43
Granted		307,700			5.48
Exercised		(273,320	)		3.19
Forfeited		(380,472	)		5.31
Expired		(51,367	)		6.13
Balance at September 30, 2016		1,381,238		$	4.61		7.31	$	1,176,876
Vested and expected to vest at September 30, 2016		1,305,619		$	4.55		7.21	$	1,165,259
Exercisable at September 30, 2016		773,084		$	4.02		6.24	$	948,542

At September 30, 2016, total compensation cost related to stock options granted but not yet recognized was $731,527, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.32 years. The following table summarizes certain information about stock options:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Weighted-average grant-date fair value of option    grants for the period	$	2.53	$	3.16	$	2.83	$	3.10
Options in-the-money at period end		766,101		1,762,893		766,101		1,762,893
Aggregate intrinsic value of options exercised	$	226,430	$	265,641	$	568,516	$	616,417

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, 2016:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at January 1, 2016		104,463		$	5.97
Granted		54,870			5.65
Vested		(56,081	)		5.94
Forfeited		(15,969	)		5.77
Unvested at September 30, 2016		87,283		$	5.83
Expected to vest after September 30, 2016		78,781		$	5.81

At September 30, 2016, total compensation cost related to RSUs granted but not yet recognized was $268,388, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 1.02 years.

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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, 2016:

Stock options outstanding	1,381,238
RSUs outstanding	87,283
Stock awards available for future grant	1,105,715
Common stock reserved for future issuance	2,574,236

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.

Rent expense was $262,000 and $781,000 for the three and nine months ended September 30, 2016, respectively, and $268,000 and $789,000 for the three and nine months ended September 30, 2015, respectively.

As of December 31, 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 was classified as restricted cash at December 31, 2015. In September 2016 the restriction on this cash was removed as we entered into a new letter of credit secured by our Credit Agreement with the Bank.

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

Remainder of 2016	$	330
2017		1,185
2018		1,094
2019		1,038
2020		436
Total commitments	$	4,083

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.

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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, 2016 or December 31, 2015.  

In late 2015, Microsoft implemented significant pricing changes for its embedded products, including ending its design registration pricing discounts and its OVRP and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016. In December 2015, we renewed the majority of our Microsoft licensing customer agreements for 2016 retaining 2015 pricing. As a result, the price changes implemented by Microsoft may not have a significant impact until 2017.

8. Information about Geographic Areas and Operating Segments

Our chief operating decision-makers (i.e., our Chief Executive Officer and certain direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by our chief operating decision-makers, or anyone else, for operations, operating results, or planning for levels or components below the consolidated unit level. We operate within a single industry segment of computer software and services. We have two major product lines, software and professional engineering services, each of which we consider to be an operating and reportable segment. Software includes third-party software and proprietary software sales, and professional engineering services includes consulting, programming and software implementation revenue. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements. We do not produce asset information by reportable segment and it is not presented here.  

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Software
Revenue	$	19,216		$	21,215		$	58,118		$	66,679
Cost of revenue		15,281			17,698			47,901			54,732
Gross profit		3,935			3,517			10,217			11,947
Professional Engineering Services
Revenue		3,251			5,220			12,526			14,894
Cost of revenue		3,509			3,864			10,877			11,287
Gross profit (loss)		(258	)		1,356			1,649			3,607
Total gross profit		3,677			4,873			11,866			15,554
Operating expenses		4,092			3,486			11,717			10,420
Other income, net		128			32			204			124
Income tax benefit (expense)		181			(174	)		(144	)		(305	)
Net income (loss)	$	(106	)	$	1,245		$	209		$	4,953

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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,
	2016		2015		2016		2015
Total revenue:
North America	$	20,917	$	23,654	$	66,275	$	74,415
Asia		1,018		1,055		1,847		3,043
Europe		532		1,726		2,522		4,115
Total revenue	$	22,467	$	26,435	$	70,644	$	81,573

	September 30, 2016		December 31, 2015
Long-lived assets:
North America	$	981	$	1,353
Asia		264		247
Europe		4,266		4,345
Total long-lived assets	$	5,511	$	5,945

9. Significant Risk Concentrations

Significant Customer

One customer, Honeywell International, Inc. and affiliated entities (“Honeywell”), accounted for $1.5 million, or 7%, and $9.2 million, or 13%, of total revenue for the three and nine months ended September 30, 2016, respectively. Honeywell accounted for $2.8 million, or 11%, and $13.5 million, or 17%, of total revenue for the three and nine months ended September 30, 2015, respectively. No other customers accounted for more than 10% of our revenue for any of the periods noted above.

Honeywell had total accounts receivable balances of $6.8 million, or approximately 34% of total accounts receivable, at September 30, 2016 and $6.1 million, or 32% of total accounts receivable, at December 31, 2015. No other customers had accounts receivable balances that were 10% or more of the total accounts receivable at September 30, 2016 or December 31, 2015.

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, 2017. 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, 2017.

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 $78,000 and $287,000 during the three and nine months ended September 30, 2016, respectively, compared to $91,000 and $257,000 during the three and nine months ended September 30, 2015, respectively. These rebates were treated as reductions in cost of sales. Additionally, during the three and nine months ended September 30, 2016, we qualified for $181,000 and $670,000, respectively, in rebate credits, compared to $212,000  and $599,000 for the three and nine months ended September 30, 2015, respectively. These are accounted for as reductions in marketing expense if and when qualified program expenditures are made.

Microsoft has implemented significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OVRP and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016. In December 2015 we renewed the majority of our Microsoft licensing customer agreements for 2016 retaining 2015 pricing. As a result, the price changes implemented by Microsoft may not have a significant impact until 2017.

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10. Restructuring

On July 28, 2016, our board of directors approved a restructuring plan that included a workforce reduction in our professional engineering services group. The workforce reduction impacted 33 personnel, comprised of both employees and consultants, representing approximately 17% of our pre-reduction headcount, and is intended to reduce expenses and to better align our organizational structure with our increasing strategic focus on our DataV software and services.

We incurred pre-tax restructuring charges of approximately $807,000 in the third quarter of 2016, representing one-time cash employee termination benefits including severance, accrued paid-time off and other employment obligations. The restructuring costs have been included in the results of operations for the three months ended September 30, 2016 with $17,000 included in selling, general and administrative expenses and $790,000 in cost of service revenue. We paid $619,000 of the $807,000 during the third quarter of 2016, and the remaining $188,000 is included in accrued compensation at September 30, 2016. We anticipate incurring an additional $192,000 of restructuring charges in the fourth quarter of 2016. The staff reductions from this restructuring were completed in October 2016.

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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, 2015 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 corporate enterprises (“Enterprises”), as well as silicon vendors 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 which 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 focus of our business, increasingly we are focusing on developing and offering our own products such as DataV 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, 2015.

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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,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Revenue:
Software		86	%		80	%		82	%		82	%
Service		14	%		20	%		18	%		18	%
Total revenue		100	%		100	%		100	%		100	%
Cost of revenue:
Software		68	%		67	%		68	%		67	%
Service		16	%		15	%		15	%		14	%
Total cost of revenue		84	%		82	%		83	%		81	%
Gross profit		16	%		18	%		17	%		19	%
Operating expenses:
Selling, general and administrative		14	%		12	%		14	%		11	%
Research and development		4	%		1	%		3	%		2	%
Total operating expenses		18	%		13	%		17	%		13	%
Income (loss) from operations		(2	)%		5	%		0	%		6	%
Other income (expense), net		1	%		0	%		0	%		0	%
Income (loss) before income taxes		(1	)%		5	%		0	%		6	%
Income tax benefit (expense)		1	%		(1	)%		0	%		0	%
Net income (loss)		0	%		4	%		0	%		6	%

Revenue

Our revenue is generated from the sale of software, primarily third-party software and our own proprietary software, and the sale of professional engineering services. Total revenue decreased by $4.0 million, or 15%, to approximately $22.5 million for the three months ended September 30, 2016, from approximately $26.4 million in the year-ago period, and by $10.9 million, or 13%, to approximately $70.6 million for the nine months ended September 30 2016, from approximately $81.6 million in the year-ago period. These decreases were due to lower sales of third-party and proprietary software and lower sales of professional engineering services compared to the prior year period.

Revenue from customers outside of North America decreased $1.2 million, or 44%, to $1.6 million for the three months ended September 30, 2016 compared to $2.8 million in the year-ago period due primarily to lower professional engineering services revenue in Europe. Revenue from customers outside of North America decreased $2.8 million, or 39%, to $4.4 million for the nine months ended September 30, 2016 compared to $7.2 million in the year-ago period due to lower sales of third-party software in Europe and Asia and lower professional engineering services revenue in Europe.

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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 was as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Software revenue:
Third-party software	$	18,226		$	20,790		$	56,480		$	63,914
Proprietary software		990			425			1,638			2,765
Total software revenue	$	19,216		$	21,215		$	58,118		$	66,679
Software revenue as a percentage of total revenue		86	%		80	%		82	%		82	%
Third-party software revenue as a percentage of total    software revenue		95	%		98	%		97	%		96	%

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 decreased $2.6 million, or 12%, to $18.2 million for the three months ended September 30, 2016, from $20.8 million in the year-ago period. The decrease was primarily due to a $2.6 million decrease in sales of Windows Mobile operating systems driven by the timing of customer purchases. For the nine months ended September 30, 2016, third-party software revenue decreased $7.4 million, or 12%, to $56.5 million from $63.9 million in the year-ago period. This decrease was primarily due to a $1.6 million decrease in sales of Windows Embedded operating systems and a $4.8 million decrease in sales of Window Mobile operating systems, again associated with the timing of customer purchases.

In late 2015, Microsoft implemented significant pricing changes for its embedded products, including ending its design registration pricing discounts, terminating its 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 in 2016 and beyond. However, during December 2015, we entered into transition OVRP agreements with Microsoft and a majority of our customers that extended the 2015 pricing for all of 2016. The sale of Microsoft operating systems represented approximately 80% and 78% of our total revenue, and approximately 77% and 71% of our total gross margin for the three and nine months ended September 30, 2016, respectively; and 79% and 76% of our total revenue, and 73% and 56% of our total gross margin for the three and nine months ended September 2015, respectively.

Proprietary software revenue increased approximately $565,000, or 133%, to $1.0 million for the three months ended September 30, 2016, from $425,000 in the year-ago period. Proprietary software revenue decreased $1.1 million, or 41%, to $1.6 million for the nine months ended September 30, 2016, from $2.8 million in the year-ago period, primarily driven by two large purchases of our legacy products during the first nine months of 2015.

Service revenue

Service revenue was as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Service revenue	$	3,251		$	5,220		$	12,526		$	14,894
Service revenue as a percentage of total revenue		14	%		20	%		18	%		18	%

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Service revenue decreased $2.0 million, or 38%, for the three months ended September 30, 2016, from the year-ago period. The decrease was due to the completion of some large North American engagements. Service revenue decreased $2.4 million, or 16%, for the nine months ended September 30, 2016, from the year-ago period, primarily as a result of a reduced number of professional engineering services projects in the second quarter of 2016. As a result of the reduced level of revenue generated by our professional engineering services, on July 28, 2016, our board of directors approved a restructuring plan that included a workforce reduction in our professional engineering services group. The workforce reduction impacted 33 personnel, comprised of both employees and consultants, representing approximately 17% of our pre-reduction headcount, and is intended to reduce expenses and better align our organizational structure with our increasing strategic focus on our DataV software and services.

We incurred pre-tax restructuring charges of approximately $0.8 million in the third quarter of 2016, representing one-time cash employee termination benefits including severance, accrued paid-time off and other employment obligations, and anticipate incurring an additional $0.2 million of restructuring charges in the fourth quarter of 2016. The staff reductions were completed in October 2016.

We began working on the MyFord Touch, a project we began with Ford, during the second quarter of 2008. Later, we conducted the substantial portion of these services through an agreement with Microsoft and, as of 2014, an agreement with Elektrobit Automotive. During the initial project with Ford, we provided hardware design and implementation, platform level software development, application level software development, quality assurance services and systems integration services. The project has transitioned since the initial project such that we are now primarily focused on maintenance and support for the MyFord Touch platform. Service revenue from the MyFord Touch program was $0.1 million and $0.8 million for the three and nine months ended September 30, 2016, respectively, and $0.8 million and $2.2 million for the three and nine months ended September 30, 2015, respectively. In December 2014, Ford introduced Sync 3, the current generation MyFord Touch program, for which we are not providing services. We expect our role on MyFord Touch will continue to diminish or be eliminated because of the transition to the next generation Sync 3, and our revenue and resulting gross profit will decline accordingly. Specifically, our Elektrobit assignment concluded in the second quarter of 2016, and we also anticipate a substantial decline in our related Microsoft service contract. This adversely impacted our revenues and utilization rates in the second and third quarters of 2016.

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 $78,000 and $287,000 during the three and nine months ended September 30, 2016, respectively, compared to $91,000 and $257,000 during the three and nine months ended September 30, 2015, respectively. These rebates were treated as reductions in cost of sales. Additionally, during the three and nine months ended September 30, 2016, we qualified for $181,000 and $670,000, respectively, in rebate credits, compared to $212,000 and $599,000 for the three and nine months ended September 30, 2015, respectively. These are accounted for as reductions in marketing expense if and when qualified program expenditures are made.

Gross profit and related gross margin were as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Software gross profit	$	3,935		$	3,517		$	10,217		$	11,947
Software gross margin		20	%		17	%		18	%		18	%
Service gross profit	$	(258	)	$	1,356		$	1,649		$	3,607
Service gross margin		(8	%)		26	%		13	%		24	%
Total gross profit	$	3,677		$	4,873		$	11,866		$	15,554
Total gross margin		16	%		18	%		17	%		19	%

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Software gross profit and gross margin

Software gross profit increased $418,000, or 12%, for the three months ended September 30, 2016, from the year-ago period. Our software gross margin increased by three percentage points to 20% for the three months ended September 30, 2016 compared to the year-ago period. The increase in software gross profit was driven by increased sales of our proprietary software products which carry a higher margin. Software gross profit decreased by $1.7 million, or 14%, and software gross margin was essentially flat at 18% for the nine months ended September 30, 2016, in each case compared to the year-ago period. These year-to-date changes were driven by lower proprietary software sales in the current period compared to the prior year period, with a relatively fixed cost base.

Third-party software gross margin increased to 16% for the three months ended September 30, 2016 compared to 15% for the year-ago period due to a blend of products sold during the current year period with slightly higher margins. Third-party software gross margin was 16% for the nine months ended September 30, 2016 compared to 15% for the year-ago period.

Proprietary software gross margin was 96% for the three months ended September 30, 2016, compared to 74% in the year-ago period, with the increase due to higher revenue from sales of our proprietary software combined with a relatively fixed cost base. Proprietary software gross margin was 83% for the nine months ended September 30, 2016 compared to 87% in the year-ago period, with the decrease due to lower revenue from sales of our proprietary software during the current year period combined with a relatively fixed cost base.

Service gross profit and gross margin

Service gross profit decreased by $1.6 million, or 119%, for the three months ended September 30, 2016 from the year-ago period, and service gross margin decreased by 34 percentage points to -8% for the three months ended September 30, 2016 compared to the year-ago period. The decrease in service gross profit was driven by the $2.0 million decrease in service revenue for the three months ended September 30, 2016 compared to the prior year period, the recognition of approximately $0.8 million in restructuring costs in the current period, as well as lower utilization rates and decreased average realized rates per hour for the current year period compared to the prior year period.

Service gross profit decreased by $2.0 million, or 54%, for the nine months ended September 30, 2016 from the year-ago period and service gross margin decreased by eleven percentage points to 13% for the nine months ended September 30, 2016 compared to the year-ago period. The decrease in service gross profit was driven by the $2.4 million decrease in service revenue for the nine months ended September 30, 2016 compared to the prior year period, the recognition of approximately $0.8 million in restructuring costs in the current period, as well as lower utilization rates and decreased realized rates per hour for the current year period compared to the prior year period.

Operating expenses

Selling, general and administrative

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and related benefits, commissions for our sales teams, marketing and administrative personnel and related facilities and depreciation costs, as well as professional services fees (e.g., consulting, legal, tax and audit). SG&A expenses increased by approximately $0.1 million, or 3%, to $3.3 million for the three months ended September 30, 2016, from $3.2 million in the year-ago period, and by approximately $0.6 million, or 6%, to $9.7 million for the nine months ended September 30, 2016, from $9.1 million in the year-ago period. These increases were primarily driven by our increased investment in sales and marketing for our new DataV products. SG&A expenses represented 14% of our total revenue for each of the three and nine months ended September 30, 2016, and 12% and 11% for the three and nine months ended September 30, 2015, respectively.

Research and development

Research and development (“R&D”) expenses 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 increased by $497,000, or 159%, to $809,000 for the three months ended September 30, 2016, from $312,000 in the year-ago period, and by $724,000, or 56%, to $2.0 million for the nine months ended September 30, 2016, from $1.3 million in the year-ago period, in each case due to increased investment in our new DataV products. R&D expenses represented 4% and 3% of our total revenue for the three and nine months ended September 30, 2016, respectively, and 1% and 2% of our total revenue for the three and nine months ended September 30, 2015, respectively.

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Other income, net

Net other income consists primarily 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, net, increased by $96,000 to $128,000 for the three months ended September 30, 2016, compared to $32,000 in the year-ago period. Other income, net, increased by $80,000 to $204,000 for the nine months ended September 30, 2016 from $124,000 in the year-ago period. The changes were primarily due the receipt of a state business tax refund in the third quarter of 2016 and higher interest income in the current year periods resulting from higher prevailing interest rates.

Income tax expense

Income tax benefit was $181,000 for the three months ended September 30, 2016, compared to income tax expense of $174,000 in the year-ago period, a change of $355,000. Income tax expense was $144,000 for the nine months ended September 30, 2016, compared to $305,000 in the year-ago period. The changes were primarily due to losses recorded in the second and third quarters of 2016 and an increase in the valuation allowance related to deferred tax assets in Japan, as a result of new tax legislation limiting the utilization of net operating loss carryforwards. The 2015 expenses were primarily comprised of U.S. alternative minimum tax obligations not offset by net operating loss carryforwards and U.K. tax expense.

The effective tax rate for the nine months ended September 30, 2016 was approximately 41% due primarily to an increase in Japanese valuation allowances, resulting in current year rates being higher than the U.S. statutory rate of 34%.

Liquidity and Capital Resources

As of September 30, 2016, we had $31.6 million of cash, cash equivalents, investments and restricted cash equivalents, compared to $30.0 million at December 31, 2015.

Net cash provided by operating activities was $1.2 million for the nine months ended September 30, 2016 as a result of changes in working capital, primarily a $2.1 million increase in deferred revenue, a $0.8 million increase in accounts receivable and a $0.7 million decrease in third party software fees payable. Net cash provided by operating activities was $2.6 million for the nine months ended September 30, 2015, driven primarily by net income of $5.0 million, offset by a $2.1 million decrease in third party software fees payable and a $1.9 million increase in net accounts receivable.

Investing activities used cash of $6.1 million for the nine months ended September 30, 2016, due to a net increase in short-term investments of $6.0 million, capital expenditures of $368,000 and a $250,000 reduction in restricted cash due to the termination of our cash-secured letter of credit supporting our headquarters lease.  Investing activities used cash of $2.9 million for the nine months ended September 30, 2015 due to a $2.7 million net increase in short-term investments and capital expenditures of $225,000.

Financing activities generated $832,000 during the nine months ended September 30, 2016, and $508,000 during the nine months ended September 30, 2015, 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. Our accounts receivable balance has increased over the past twelve months as a result of extended payment terms we have agreed to with a highly credit-worthy 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. On September 29, 2016, the Credit Agreement was modified to extend the final due date an additional year to September 22, 2018. No amounts were drawn or were outstanding as of September 30, 2016 or December 31, 2015, however, in September 2016 we secured a letter of credit with the landlord of our headquarters office lease with this Credit Agreement so the amount available at September 30, 2016 is $11.75 million. See Item 1, Financial Statements, Note 5, Credit Agreement in this Quarterly Report on Form 10-Q for more information on this agreement.

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 2016, $1.2 million in 2017, $1.1 million in 2018, $1.0 million in 2019 and $0.4 million in 2020; and

21

• In conjunction with our activities under our ODAs with Microsoft, we enter 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 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 in the current or future periods.

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 (or Acting Principal Financial Officer, as the case may be), 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 Acting Principal 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 Acting Principal 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, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22

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, 2015.

Item 5. Other Information

Our Board of Directors has authorized Jerry D. Chase, our President and Chief Executive Officer, to also serve as our “Acting Principal Financial Officer” solely in connection with the review, execution and certification of our filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

Item 6. Exhibits

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

SIGNATURES

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

	BSQUARE CORPORATION (Registrant)
Date: November 10, 2016	By:	/s/ Jerry D. Chase
		Jerry D. Chase
		President, Chief Executive Officer and Acting Principal Financial Officer

23

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	First Note Modification Agreement dated as of September 29, 2016 between JPMorgan Chase Bank, N.A. 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 Acting Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934	X
32.1	Certification of Chief Executive Officer and Acting Principal 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

24

EX-10.1

Exhibit 10.1

First Note Modification Agreement

This agreement is dated as of September 29, 2016 (the "Agreement Date"), by and between BSQUARE CORPORATION (the "Borrower") and JPMORGAN CHASE BANK, N.A. (together with its successors and assigns, the "Bank").  The provisions of this agreement are effective on the date that this agreement has been executed by all of the signers and delivered to the Bank (the "Effective Date").

WHEREAS, the Borrower executed a Line of Credit Note dated as of September 22, 2015 in the original principal amount of Twelve Million and 00/100 Dollars ($12,000,000.00), (as same may have been amended or modified from time to time, the "Note") as evidence of an extension of credit from the Bank to the Borrower, which Note has at all times been, and is now, continuously and without interruption outstanding in favor of the Bank; and,

WHEREAS, the Borrower has requested and the Bank has agreed that the Note be modified to the limited extent as hereinafter set forth in this agreement;

NOW THEREFORE, in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows:

1.ACCURACY OF RECITALS.  The Borrower acknowledges the accuracy of the Recitals stated above.

2.DEFINITIONS.  Capitalized terms used in this agreement shall have the same meanings as in the Note, unless otherwise defined in this agreement.

3.MODIFICATION OF NOTE.

3.1The paragraph entitled “Promise to Pay” is amended in its entirety to state:

Promise to Pay.  On or before September 22, 2018, 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.

3.2The paragraph entitled “Principal Payments” is amended in its entirety to state:

Principal Payments.  All outstanding principal and interest is due and payable in full on September 22, 2018, which is defined herein as the "Principal Payment Date".

3.3The following Interest Rate Definitions are amended and restated in their entirety, to read as follows:

"Adjusted One Month LIBOR Rate" means, with respect to a CB Floating Rate Advance for any day, an interest rate Per Annum equal to the sum of (i) 2.50% plus (ii) the quotient of (a) the LIBOR Screen 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 (provided that if the LIBOR Screen Rate at any such time shall be less than zero, such rate shall be deemed to be zero for purposes of this Note) 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.

"LIBOR Rate" means with respect to any LIBOR Rate Advance for any Interest Period, the London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate for Dollars) for a period equal in length to such Interest Period as displayed on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate (or, in the event such rate does not appear on a Reuters page or screen, on any successor or substitute page on such screen that displays such rate, or on the appropriate page of such other information service that publishes such rate from time to time as shall be selected by the Bank in its reasonable discretion (the “Page”); in each case, the “LIBOR Screen Rate”) at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period;

provided that, if any LIBOR Screen Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Note.  If no LIBOR Screen 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.

3.4Each reference in the Related Documents to the “Note” or “Notes” shall refer to the Note as modified by this agreement.  As used in this agreement, the "Related Documents" shall include the Note and all applications for letters of credit, loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, or any other instrument or document executed in connection with the Note or in connection with any other obligations of the Borrower to the Bank.

4.RATIFICATION OF RELATED DOCUMENTS AND COLLATERAL.  The Related Documents are ratified and reaffirmed by the Borrower and shall remain in full force and effect as they may be modified by this agreement.  All property described as security in the Related Documents shall remain as security for the Note, as modified by this agreement, and the Liabilities under the other Related Documents.

5.CONDITIONS PRECEDENT.  Before the first extension of credit governed by the Note as amended by this agreement, the Borrower shall deliver to the Bank, in form and substance satisfactory to the Bank, all of the items described in Section 3.1 of the Credit Agreement.

6.BORROWER REPRESENTATIONS AND WARRANTIES.  The Borrower represents and warrants to the Bank that each of the representations and warranties made in the Note and the other Related Documents and each of the following representations and warranties are true and correct as of the date hereof:

6.1No default, Event of Default or event that would constitute an Event of Default but for the giving of notice, the lapse of time or both, has occurred and is continuing under any provision of the Note, as modified by this agreement, or any other Related Document.

6.2No event has occurred which may in any one case or in the aggregate 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.

6.3The Note, as modified by this agreement, and the other Related Documents are the legal, valid, and binding obligations of the Borrower and the other parties, enforceable against the Borrower and other parties in accordance with 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.

6.4The Borrower is validly existing under the laws of the State of its incorporation.  The Borrower has the requisite power and authority to execute and deliver this agreement and to perform the obligations described in the Related Documents as modified herein.  The execution and delivery of this agreement and the performance of the obligations described in the Related Documents as modified herein have been duly authorized by all requisite action by or on behalf of the Borrower.  This agreement has been duly executed and delivered by or on behalf of the Borrower.

7.FURTHER BORROWER AGREEMENTS.  The Borrower hereby agrees:

7.1The Borrower fully, finally, and forever releases and discharges the Bank, its successors, and assigns and their respective directors, officers, employees, agents, and representatives (each a "Bank Party") from any and all causes of action, claims, debts, demands, and liabilities, of whatever kind or nature, in law or equity, of the Borrower, whether now known or unknown to the Borrower, (i) in respect of the loan evidenced by the Note and the Related Documents, or of the actions or omissions of any Bank Party in any manner related to the loan evidenced by the Note or the Related Documents and (ii) arising from events occurring prior to the date of this agreement ("Claims"); provided, however, that the foregoing RELEASE SHALL INCLUDE ALL CLAIMS ARISING OUT OF THE NEGLIGENCE OF ANY BANK PARTY, but not the gross negligence or willful misconduct of any Bank Party.

7.2This agreement shall be subject to Section 8.13 of the Credit Agreement regarding payment of all reasonable and documented costs and expenses of every kind incurred (or charged by internal allocation) in connection with the negotiation, preparation, execution, amendment, modification, supplementing and waiver of the Note and this agreement.

8.INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.  The Note, as modified by this agreement, and the other Related Documents contain the complete understanding and agreement of the Borrower and the Bank in respect of any Liabilities evidenced by the Note and supersede all prior understandings, and negotiations.  If any one or more of the obligations of the Borrower under this agreement or the Note, as modified by this Agreement, is invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower 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 the obligations of the Borrower under this agreement, the Note as modified by this agreement and the other Related Documents in any other jurisdiction.  No provision of the Note, as modified by this agreement, or any other Related Documents may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the party against whom it is being enforced.

9.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 the Note or 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.  This agreement binds the Borrower and its successors, and benefits the Bank, its successors and assigns.  The Borrower shall not, however, have the right to assign the Borrower's rights under this agreement or any interest therein, without the prior written consent of the Bank.

10.COUNTERPART EXECUTION.  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.

11.NOT A NOVATION.  This agreement is a modification only and not a novation.  In addition to all amounts hereafter due under the Note, as modified by this agreement, and the other Related Documents, all accrued interest evidenced by the Note being modified by this agreement and all accrued amounts due and payable under the Related Documents shall continue to be due and payable until paid.  Except for the modification(s) set forth in this agreement, the Note, the other Related Documents and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein.  This agreement is to be considered attached to the Note and made a part thereof.  This agreement shall not release or affect the liability of any guarantor, surety or endorser of the Note or release any owner of collateral securing the Note.  The validity, priority and enforceability of the Note shall not be impaired hereby.  References to the Related Documents and to other agreements shall not affect or impair the absolute and unconditional obligation of the Borrower to pay the principal and interest on the Note when due.  The Bank reserves all rights against all parties to the Note and the other Related Documents.

12.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.

THIS AGREEMENT AND THE OTHER RELATED DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[REMAINDER OF PAGE INTENTIONALLY BLANK]

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

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 29, 2016
		By:	/s/ Bruce R. York
			Bruce R. York		Corporate Controller
			Printed Name		Title
		Date Signed:		September 29, 2016

BANK’S ACCEPTANCE

The foregoing agreement is hereby agreed to and acknowledged.

Bank:
JPMorgan Chase Bank, N.A.
By:	/s/ Jessalynn Nagy
	Jessalynn Nagy		Authorized Officer
	Printed Name		Title
Date Signed:		September 29, 2016

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 10, 2016	/s/ Jerry D. Chase
	Jerry D. Chase President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF ACTING PRINCIPAL FINANCIAL 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 10, 2016	/s/ Jerry D. Chase
	Jerry D. Chase Acting Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND ACTING 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, Jerry D. Chase, President and Chief Executive Officer and Acting Principal Financial Officer, certify that:

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

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

Dated: November 10, 2016	/s/ Jerry D. Chase
	Jerry D. Chase
	President, Chief Executive Officer and Acting Principal Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Oct. 31, 2016
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2016
Document Fiscal Year Focus	2016
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		12,452,144

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 12,346	$ 16,443
Short-term investments	19,231	13,280
Accounts receivable, net of allowance for doubtful accounts of $50 at September 30, 2016 and $62 December 31, 2015	19,808	19,009
Prepaid expenses and other current assets	459	580
Total current assets	51,844	49,312
Equipment, furniture and leasehold improvements, net	1,194	1,167
Restricted cash equivalents		250
Deferred tax assets	32	145
Intangible assets, net	493	594
Goodwill	3,738	3,738
Other non-current assets	54	52
Total assets	57,355	55,258
Current liabilities:
Third-party software fees payable	11,068	11,789
Accounts payable	284	188
Accrued compensation	1,924	2,390
Other accrued expenses	741	1,277
Deferred rent, current portion	315	298
Deferred revenue	1,170	1,135
Total current liabilities	15,502	17,077
Deferred tax liability	85	97
Deferred rent	937	1,177
Deferred revenue	2,041
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; 12,415,775 shares issued and outstanding at September 30, 2016 and 12,092,598 shares issued and outstanding at December 31, 2015	135,043	133,331
Accumulated other comprehensive loss	(907)	(869)
Accumulated deficit	(95,346)	(95,555)
Total shareholders’ equity	38,790	36,907
Total liabilities and shareholders’ equity	$ 57,355	$ 55,258

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Statement Of Financial Position [Abstract]
Allowance for doubtful accounts receivable	$ 50	$ 62
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	12,415,775	12,092,598
Common stock, shares outstanding	12,415,775	12,092,598

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Revenue:
Software	$ 19,216	$ 21,215	$ 58,118	$ 66,679
Service	3,251	5,220	12,526	14,894
Total revenue	22,467	26,435	70,644	81,573
Cost of revenue:
Software	15,281	17,698	47,901	54,732
Service	3,509	3,864	10,877	11,287
Total cost of revenue	18,790	21,562	58,778	66,019
Gross profit	3,677	4,873	11,866	15,554
Operating expenses:
Selling, general and administrative	3,283	3,174	9,693	9,120
Research and development	809	312	2,024	1,300
Total operating expenses	4,092	3,486	11,717	10,420
Income (loss) from operations	(415)	1,387	149	5,134
Other income, net	128	32	204	124
Income (loss) before income taxes	(287)	1,419	353	5,258
Income tax benefit (expense)	181	(174)	(144)	(305)
Net income (loss)	$ (106)	$ 1,245	$ 209	$ 4,953
Basic income (loss) per share	$ (0.01)	$ 0.10	$ 0.02	$ 0.42
Diluted income (loss) per share	$ (0.01)	$ 0.10	$ 0.02	$ 0.40
Shares used in calculation of income (loss) per share:
Basic	12,310	11,959	12,189	11,867
Diluted	12,310	12,466	12,576	12,294
Comprehensive income (loss):
Net income (loss)	$ (106)	$ 1,245	$ 209	$ 4,953
Other comprehensive income (loss):
Foreign currency translation, net of tax	(78)	3	(44)	20
Change in unrealized gains (losses) on investments, net of tax	29	1	6	(3)
Total other comprehensive income (loss)	(49)	4	(38)	17
Comprehensive income (loss)	$ (155)	$ 1,249	$ 171	$ 4,970

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Cash flows from operating activities:
Net income	$ 209	$ 4,953
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	442	425
Stock-based compensation	908	1,022
Changes in operating assets and liabilities:
Accounts receivable, net	(799)	(1,934)
Prepaid expenses and other assets	220	203
Third-party software fees payable	(721)	(2,063)
Accounts payable and accrued expenses	(906)	224
Deferred revenue	2,076	(7)
Deferred rent	(223)	(203)
Net cash provided by operating activities	1,206	2,620
Cash flows from investing activities:
Purchases of equipment and furniture	(368)	(225)
Proceeds from maturities of short-term investments	18,200	14,253
Purchases of short-term investments	(24,159)	(16,906)
Reduction of restricted cash equivalents	250
Net cash used in investing activities	(6,077)	(2,878)
Cash flows provided by financing activities:
Proceeds from exercise of stock options	832	508
Effect of exchange rate changes on cash	(58)	8
Net increase (decrease) in cash and cash equivalents	(4,097)	258
Cash and cash equivalents, beginning of period	16,443	13,127
Cash and cash equivalents, end of period	$ 12,346	$ 13,385

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2016

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, 2016, our operating results for the three and nine months ended September 30, 2016 and 2015 and our cash flows for the nine months ended September 30, 2016 and 2015. The accompanying financial information as of December 31, 2015 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, 2015. 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 and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred income taxes. The amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. We adopted the new guidance retrospectively beginning with the year ended December 31, 2014, and applied such guidance consistently beginning with the year ended December 31, 2015.

In February 2016, the FASB issued ASU No. 2016-2, “Leases,” to make leasing activities more transparent and comparable, requiring most leases be recognized by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-2 is effective for public business entities for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

In March 2016, the FASB amended the existing accounting standards for stock-based compensation, ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendments impact several aspects of accounting for share-based payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We are required to adopt the amendments in the first quarter of 2017, with early adoption permitted. If early adoption is elected, all amendments must be adopted in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments,” adding or clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

Income (Loss) Per Share

Basic income (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 (loss) per share is computed using the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

We excluded an aggregate of 1,545,512 and 627,778 options for the three and nine months ended September 30, 2016, respectively, from diluted income (loss) per share because their effect was anti-dilutive. For the three months ended September 30, 2016, this included common stock equivalent shares of 952,858 calculated using the treasury stock method that would have been included in diluted income (loss) per share had we been in a net income position. In a period where we are in a loss position, diluted loss per share is computed using the basic share count. We excluded an aggregate of 282,276 and 201,091 options for the three and nine months ended September 30, 2015, respectively, from diluted income per share because their effect was anti-dilutive.

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Cash, Cash Equivalents and Investments

9 Months Ended

Sep. 30, 2016

Cash And Cash Equivalents [Abstract]

Cash, Cash Equivalents and Investments

2. Cash, Cash Equivalents and Investments

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

	September 30, 2016		December 31, 2015
Cash	$	11,470	$	7,270
Cash equivalents:
Money market funds		876		1,500
Corporate commercial paper		—		5,404
Corporate debt securities		—		2,269
Total cash equivalents		876		9,173
Total cash and cash equivalents		12,346		16,443
Short-term investments:
Corporate commercial paper		13,701		6,245
Treasury bonds		—		1,007
Corporate debt securities		5,530		6,028
Total short-term investments		19,231		13,280
Restricted cash equivalents—money market fund		—		250
Total cash, cash equivalents and short-term investments	$	31,577	$	29,973

Gross unrealized gains and losses on our short-term investments were not material as of September 30, 2016 and December 31, 2015. The balance in restricted cash equivalents at December 31, 2015 related to a letter of credit securing the lease of our corporate headquarters. The restricted cash was released in September 2016.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2016

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, 2016 and December 31, 2015 are summarized below (in thousands):

	September 30, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	876	$	—	$	876
Total cash equivalents		876		—		876
Short-term investments:
Corporate commercial paper		—		13,701		13,701
Corporate debt securities		—		5,530		5,530
Total short-term investments		—		19,231		19,231
Total assets measured at fair value	$	876	$	19,231	$	20,107

	December 31, 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	$	5,404	$	—	$	5,404
Corporate commercial paper		—		1,500		1,500
Corporate debt securities		—		2,269		2,269
Total cash equivalents		5,404		3,769		9,173
Short-term investments:
Corporate commercial paper		—		6,245		6,245
Treasury bonds		—		1,007		1,007
Corporate debt securities		—		6,028		6,028
Total short-term investments		—		13,280		13,280
Restricted cash equivalents—money market fund		250		—		250
Total assets measured at fair value	$	5,654	$	17,049	$	22,703

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Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2016

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. (renamed BSQUARE EMEA in 2015), 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 BSQUARE EMEA falls within that reporting unit. There were no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2016.

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 is as follows (in thousands):

	September 30, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(782	)	$	493

	December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(681	)	$	594

Amortization expense was $33,000 and $101,000 for the three and nine months ended September 30, 2016, respectively, and $33,000 and $101,000 for the three and nine months ended September 30, 2015, respectively. Amortization in future periods is expected to be as follows (in thousands):

Remainder of 2016	$	30
2017		98
2018		98
2019		98
2020		98
2021		71
Total	$	493

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Credit Agreement

9 Months Ended

Sep. 30, 2016

Debt Disclosure [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, 2016. On September 29, 2016, the Credit Agreement was modified to extend the final due date an additional year to September 22, 2018.

There were no amounts outstanding under the Credit Agreement as of September 30, 2016 or December 31, 2015. In September 2016 we entered into a new letter of credit agreement for $250,000 secured by the Credit Agreement in connection with the lease of our corporate headquarters.  Accordingly, the principal amount available under the Credit Agreement has been reduced from $12 million to $11.75 million.

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Shareholders' Equity

9 Months Ended

Sep. 30, 2016

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 to purchase shares of our common stock may be granted with a fixed exercise price that is equal to the fair market value of our common stock on the date of grant. These options have a term of up to 10 years and vest over a predetermined period, generally four years. Incentive stock options granted under the Stock Plan may only be granted to our employees. The Plans also allow for awards of non-qualified stock options, stock appreciation rights, RSAs and unrestricted stock awards, and RSUs. Expense is recorded for performance options over the requisite service periods when achievement of related performance targets are considered to be probable.

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,
	2016			2015			2016			2015
Dividend yield		0	%		0	%		0	%		0	%
Expected life	3.3 years			3.3 years			3.4 years			3.3 years
Expected volatility		55	%		53	%		55	%		52	%
Risk-free interest rate		1.0	%		1.3	%		1.1	%		1.2	%

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016		2015
Cost of revenue — service	$	(4	)	$	133	$	169	$	351
Selling, general and administrative		262			298		618		616
Research and development		22			23		121		55
Total stock-based compensation expense	$	280		$	454	$	908	$	1,022
Per diluted share	$	0.02		$	0.04	$	0.07	$	0.08

Stock Option Activity

The following table summarizes stock option activity under the Plans for the nine-month period ended September 30, 2016:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2016		1,778,697		$	4.43
Granted		307,700			5.48
Exercised		(273,320	)		3.19
Forfeited		(380,472	)		5.31
Expired		(51,367	)		6.13
Balance at September 30, 2016		1,381,238		$	4.61		7.31	$	1,176,876
Vested and expected to vest at September 30, 2016		1,305,619		$	4.55		7.21	$	1,165,259
Exercisable at September 30, 2016		773,084		$	4.02		6.24	$	948,542

At September 30, 2016, total compensation cost related to stock options granted but not yet recognized was $731,527, net of estimated forfeitures. This cost will be amortized on the straight-line method over a weighted-average period of approximately 1.32 years. The following table summarizes certain information about stock options:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Weighted-average grant-date fair value of option    grants for the period	$	2.53	$	3.16	$	2.83	$	3.10
Options in-the-money at period end		766,101		1,762,893		766,101		1,762,893
Aggregate intrinsic value of options exercised	$	226,430	$	265,641	$	568,516	$	616,417

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, 2016:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at January 1, 2016		104,463		$	5.97
Granted		54,870			5.65
Vested		(56,081	)		5.94
Forfeited		(15,969	)		5.77
Unvested at September 30, 2016		87,283		$	5.83
Expected to vest after September 30, 2016		78,781		$	5.81

At September 30, 2016, total compensation cost related to RSUs granted but not yet recognized was $268,388, net of estimated forfeitures. This cost will be amortized on the straight-line method over a period of approximately 1.02 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, 2016:

Stock options outstanding	1,381,238
RSUs outstanding	87,283
Stock awards available for future grant	1,105,715
Common stock reserved for future issuance	2,574,236

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

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.

Rent expense was $262,000 and $781,000 for the three and nine months ended September 30, 2016, respectively, and $268,000 and $789,000 for the three and nine months ended September 30, 2015, respectively.

As of December 31, 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 was classified as restricted cash at December 31, 2015. In September 2016 the restriction on this cash was removed as we entered into a new letter of credit secured by our Credit Agreement with the Bank.

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

Remainder of 2016	$	330
2017		1,185
2018		1,094
2019		1,038
2020		436
Total commitments	$	4,083

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, 2016 or December 31, 2015.

In late 2015, Microsoft implemented significant pricing changes for its embedded products, including ending its design registration pricing discounts and its OVRP and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016. In December 2015, we renewed the majority of our Microsoft licensing customer agreements for 2016 retaining 2015 pricing. As a result, the price changes implemented by Microsoft may not have a significant impact until 2017.

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Information about Geographic Areas and Operating Segments

9 Months Ended

Sep. 30, 2016

Segment Reporting [Abstract]

Information about Geographic Areas and Operating Segments

8. Information about Geographic Areas and Operating Segments

Our chief operating decision-makers (i.e., our Chief Executive Officer and certain direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by our chief operating decision-makers, or anyone else, for operations, operating results, or planning for levels or components below the consolidated unit level. We operate within a single industry segment of computer software and services. We have two major product lines, software and professional engineering services, each of which we consider to be an operating and reportable segment. Software includes third-party software and proprietary software sales, and professional engineering services includes consulting, programming and software implementation revenue. We do not allocate costs other than direct cost of goods sold to the segments or produce segment income statements. We do not produce asset information by reportable segment and it is not presented here.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Software
Revenue	$	19,216		$	21,215		$	58,118		$	66,679
Cost of revenue		15,281			17,698			47,901			54,732
Gross profit		3,935			3,517			10,217			11,947
Professional Engineering Services
Revenue		3,251			5,220			12,526			14,894
Cost of revenue		3,509			3,864			10,877			11,287
Gross profit (loss)		(258	)		1,356			1,649			3,607
Total gross profit		3,677			4,873			11,866			15,554
Operating expenses		4,092			3,486			11,717			10,420
Other income, net		128			32			204			124
Income tax benefit (expense)		181			(174	)		(144	)		(305	)
Net income (loss)	$	(106	)	$	1,245		$	209		$	4,953

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,
	2016		2015		2016		2015
Total revenue:
North America	$	20,917	$	23,654	$	66,275	$	74,415
Asia		1,018		1,055		1,847		3,043
Europe		532		1,726		2,522		4,115
Total revenue	$	22,467	$	26,435	$	70,644	$	81,573

	September 30, 2016		December 31, 2015
Long-lived assets:
North America	$	981	$	1,353
Asia		264		247
Europe		4,266		4,345
Total long-lived assets	$	5,511	$	5,945

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Significant Risk Concentrations

9 Months Ended

Sep. 30, 2016

Risks And Uncertainties [Abstract]

Significant Risk Concentrations

9. Significant Risk Concentrations

Significant Customer

One customer, Honeywell International, Inc. and affiliated entities (“Honeywell”), accounted for $1.5 million, or 7%, and $9.2 million, or 13%, of total revenue for the three and nine months ended September 30, 2016, respectively. Honeywell accounted for $2.8 million, or 11%, and $13.5 million, or 17%, of total revenue for the three and nine months ended September 30, 2015, respectively. No other customers accounted for more than 10% of our revenue for any of the periods noted above.

Honeywell had total accounts receivable balances of $6.8 million, or approximately 34% of total accounts receivable, at September 30, 2016 and $6.1 million, or 32% of total accounts receivable, at December 31, 2015. No other customers had accounts receivable balances that were 10% or more of the total accounts receivable at September 30, 2016 or December 31, 2015.

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, 2017. 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, 2017.

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 $78,000 and $287,000 during the three and nine months ended September 30, 2016, respectively, compared to $91,000 and $257,000 during the three and nine months ended September 30, 2015, respectively. These rebates were treated as reductions in cost of sales. Additionally, during the three and nine months ended September 30, 2016, we qualified for $181,000 and $670,000, respectively, in rebate credits, compared to $212,000  and $599,000 for the three and nine months ended September 30, 2015, respectively. These are accounted for as reductions in marketing expense if and when qualified program expenditures are made.

Microsoft has implemented significant pricing changes for its embedded products, including ending its design registration pricing discounts, its OVRP and changing the aggregate volume price structure and product royalties for existing embedded Windows products effective January 1, 2016. In December 2015 we renewed the majority of our Microsoft licensing customer agreements for 2016 retaining 2015 pricing. As a result, the price changes implemented by Microsoft may not have a significant impact until 2017.

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Restructuring

9 Months Ended

Sep. 30, 2016

Restructuring And Related Activities [Abstract]

Restructuring

10. Restructuring

On July 28, 2016, our board of directors approved a restructuring plan that included a workforce reduction in our professional engineering services group. The workforce reduction impacted 33 personnel, comprised of both employees and consultants, representing approximately 17% of our pre-reduction headcount, and is intended to reduce expenses and to better align our organizational structure with our increasing strategic focus on our DataV software and services.

We incurred pre-tax restructuring charges of approximately $807,000 in the third quarter of 2016, representing one-time cash employee termination benefits including severance, accrued paid-time off and other employment obligations. The restructuring costs have been included in the results of operations for the three months ended September 30, 2016 with $17,000 included in selling, general and administrative expenses and $790,000 in cost of service revenue. We paid $619,000 of the $807,000 during the third quarter of 2016, and the remaining $188,000 is included in accrued compensation at September 30, 2016. We anticipate incurring an additional $192,000 of restructuring charges in the fourth quarter of 2016. The staff reductions from this restructuring were completed in October 2016.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2016

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, 2016, our operating results for the three and nine months ended September 30, 2016 and 2015 and our cash flows for the nine months ended September 30, 2016 and 2015. The accompanying financial information as of December 31, 2015 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, 2015. 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 and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred income taxes. The amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. We adopted the new guidance retrospectively beginning with the year ended December 31, 2014, and applied such guidance consistently beginning with the year ended December 31, 2015.

In February 2016, the FASB issued ASU No. 2016-2, “Leases,” to make leasing activities more transparent and comparable, requiring most leases be recognized by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-2 is effective for public business entities for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

In March 2016, the FASB amended the existing accounting standards for stock-based compensation, ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendments impact several aspects of accounting for share-based payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We are required to adopt the amendments in the first quarter of 2017, with early adoption permitted. If early adoption is elected, all amendments must be adopted in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments,” adding or clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact this ASU may have on our consolidated financial statements and related disclosures.

Income (Loss) Per Share

Income (Loss) Per Share

Basic income (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 (loss) per share is computed using the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

We excluded an aggregate of 1,545,512 and 627,778 options for the three and nine months ended September 30, 2016, respectively, from diluted income (loss) per share because their effect was anti-dilutive. For the three months ended September 30, 2016, this included common stock equivalent shares of 952,858 calculated using the treasury stock method that would have been included in diluted income (loss) per share had we been in a net income position. In a period where we are in a loss position, diluted loss per share is computed using the basic share count. We excluded an aggregate of 282,276 and 201,091 options for the three and nine months ended September 30, 2015, respectively, from diluted income per share because their effect was anti-dilutive.

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Cash, Cash Equivalents and Investments (Tables)

9 Months Ended

Sep. 30, 2016

Cash And Cash Equivalents [Abstract]

Cash, Cash Equivalents and Short-Term Investments

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

	September 30, 2016		December 31, 2015
Cash	$	11,470	$	7,270
Cash equivalents:
Money market funds		876		1,500
Corporate commercial paper		—		5,404
Corporate debt securities		—		2,269
Total cash equivalents		876		9,173
Total cash and cash equivalents		12,346		16,443
Short-term investments:
Corporate commercial paper		13,701		6,245
Treasury bonds		—		1,007
Corporate debt securities		5,530		6,028
Total short-term investments		19,231		13,280
Restricted cash equivalents—money market fund		—		250
Total cash, cash equivalents and short-term investments	$	31,577	$	29,973

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2016

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, 2016 and December 31, 2015 are summarized below (in thousands):

	September 30, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Direct or Indirect Observable Inputs (Level 2)		Total
Assets
Cash equivalents:
Money market funds	$	876	$	—	$	876
Total cash equivalents		876		—		876
Short-term investments:
Corporate commercial paper		—		13,701		13,701
Corporate debt securities		—		5,530		5,530
Total short-term investments		—		19,231		19,231
Total assets measured at fair value	$	876	$	19,231	$	20,107

	December 31, 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	$	5,404	$	—	$	5,404
Corporate commercial paper		—		1,500		1,500
Corporate debt securities		—		2,269		2,269
Total cash equivalents		5,404		3,769		9,173
Short-term investments:
Corporate commercial paper		—		6,245		6,245
Treasury bonds		—		1,007		1,007
Corporate debt securities		—		6,028		6,028
Total short-term investments		—		13,280		13,280
Restricted cash equivalents—money market fund		250		—		250
Total assets measured at fair value	$	5,654	$	17,049	$	22,703

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Goodwill and Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2016

Goodwill And Intangible Assets Disclosure [Abstract]

Information Regarding Intangible Assets

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

	September 30, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(782	)	$	493

	December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Customer relationships	$	1,275	$	(681	)	$	594

Expected Amortization Expense for Future Period

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

Remainder of 2016	$	30
2017		98
2018		98
2019		98
2020		98
2021		71
Total	$	493

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Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2016

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,
	2016			2015			2016			2015
Dividend yield		0	%		0	%		0	%		0	%
Expected life	3.3 years			3.3 years			3.4 years			3.3 years
Expected volatility		55	%		53	%		55	%		52	%
Risk-free interest rate		1.0	%		1.3	%		1.1	%		1.2	%

Stock-Based Compensation Expense

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016		2015
Cost of revenue — service	$	(4	)	$	133	$	169	$	351
Selling, general and administrative		262			298		618		616
Research and development		22			23		121		55
Total stock-based compensation expense	$	280		$	454	$	908	$	1,022
Per diluted share	$	0.02		$	0.04	$	0.07	$	0.08

Summary of Stock Option Activity

The following table summarizes stock option activity under the Plans for the nine-month period ended September 30, 2016:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2016		1,778,697		$	4.43
Granted		307,700			5.48
Exercised		(273,320	)		3.19
Forfeited		(380,472	)		5.31
Expired		(51,367	)		6.13
Balance at September 30, 2016		1,381,238		$	4.61		7.31	$	1,176,876
Vested and expected to vest at September 30, 2016		1,305,619		$	4.55		7.21	$	1,165,259
Exercisable at September 30, 2016		773,084		$	4.02		6.24	$	948,542

Summary of Certain Information about Stock Options

The following table summarizes certain information about stock options:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Weighted-average grant-date fair value of option    grants for the period	$	2.53	$	3.16	$	2.83	$	3.10
Options in-the-money at period end		766,101		1,762,893		766,101		1,762,893
Aggregate intrinsic value of options exercised	$	226,430	$	265,641	$	568,516	$	616,417

Summary of Restricted Stock Unit Activity

The following table summarizes RSU activity for the nine-month period ended September 30, 2016:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at January 1, 2016		104,463		$	5.97
Granted		54,870			5.65
Vested		(56,081	)		5.94
Forfeited		(15,969	)		5.77
Unvested at September 30, 2016		87,283		$	5.83
Expected to vest after September 30, 2016		78,781		$	5.81

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, 2016:

Stock options outstanding	1,381,238
RSUs outstanding	87,283
Stock awards available for future grant	1,105,715
Common stock reserved for future issuance	2,574,236

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2016

Commitments And Contingencies Disclosure [Abstract]

Future Operating Lease Commitments

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

Remainder of 2016	$	330
2017		1,185
2018		1,094
2019		1,038
2020		436
Total commitments	$	4,083

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Information about Geographic Areas and Operating Segments (Tables)

9 Months Ended

Sep. 30, 2016

Segment Reporting [Abstract]

Summarized Financial Information of Operating and Reportable Segment

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Software
Revenue	$	19,216		$	21,215		$	58,118		$	66,679
Cost of revenue		15,281			17,698			47,901			54,732
Gross profit		3,935			3,517			10,217			11,947
Professional Engineering Services
Revenue		3,251			5,220			12,526			14,894
Cost of revenue		3,509			3,864			10,877			11,287
Gross profit (loss)		(258	)		1,356			1,649			3,607
Total gross profit		3,677			4,873			11,866			15,554
Operating expenses		4,092			3,486			11,717			10,420
Other income, net		128			32			204			124
Income tax benefit (expense)		181			(174	)		(144	)		(305	)
Net income (loss)	$	(106	)	$	1,245		$	209		$	4,953

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,
	2016		2015		2016		2015
Total revenue:
North America	$	20,917	$	23,654	$	66,275	$	74,415
Asia		1,018		1,055		1,847		3,043
Europe		532		1,726		2,522		4,115
Total revenue	$	22,467	$	26,435	$	70,644	$	81,573

	September 30, 2016		December 31, 2015
Long-lived assets:
North America	$	981	$	1,353
Asia		264		247
Europe		4,266		4,345
Total long-lived assets	$	5,511	$	5,945

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Summary of Significant Accounting Policies - Additional Information (Detail) - Options [Member] - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Summary Of Accounting Policies [Line Items]
Shares excluded from computations of diluted income (loss) per share	1,545,512	282,276	627,778	201,091
Dilutive effect of common stock equivalent shares using treasury stock method	952,858

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Cash, Cash Equivalents and Investments - Cash, Cash Equivalents and Short-Term Investments (Detail) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Dec. 31, 2014
Investment Holdings [Line Items]
Cash	$ 11,470	$ 7,270
Cash equivalents:
Total cash equivalents	876	9,173
Total cash and cash equivalents	12,346	16,443	$ 13,385	$ 13,127
Short-term investments:
Total short-term investments	19,231	13,280
Restricted cash equivalents—money market fund		250
Total cash, cash equivalents and short-term investments	31,577	29,973
Corporate commercial paper [Member]
Cash equivalents:
Total cash equivalents		5,404
Short-term investments:
Total short-term investments	13,701	6,245
Corporate debt securities [Member]
Cash equivalents:
Total cash equivalents		2,269
Short-term investments:
Total short-term investments	5,530	6,028
Treasury bonds [Member]
Short-term investments:
Total short-term investments		1,007
Money market funds [Member]
Cash equivalents:
Total cash equivalents	$ 876	$ 1,500

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Fair Value Measurements - Assets and Liabilities Measured at Fair Value on Recurring Basis (Detail) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Short-term investments:
Total short-term investments	$ 19,231	$ 13,280
Restricted cash equivalents—money market fund		250
Recurring basis [Member]
Cash equivalents:
Total cash equivalents	876	9,173
Short-term investments:
Total short-term investments	19,231	13,280
Restricted cash equivalents—money market fund		250
Total assets measured at fair value	20,107	22,703
Corporate commercial paper [Member]
Short-term investments:
Total short-term investments	13,701	6,245
Corporate commercial paper [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents		1,500
Short-term investments:
Total short-term investments	13,701	6,245
Corporate debt securities [Member]
Short-term investments:
Total short-term investments	5,530	6,028
Corporate debt securities [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents		2,269
Short-term investments:
Total short-term investments	5,530	6,028
Treasury bonds [Member]
Short-term investments:
Total short-term investments		1,007
Treasury bonds [Member] | Recurring basis [Member]
Short-term investments:
Total short-term investments		1,007
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	876	5,404
Short-term investments:
Restricted cash equivalents—money market fund		250
Total assets measured at fair value	876	5,654
Direct or Indirect Observable Inputs (Level 2) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents		3,769
Short-term investments:
Total short-term investments	19,231	13,280
Total assets measured at fair value	19,231	17,049
Direct or Indirect Observable Inputs (Level 2) [Member] | Corporate commercial paper [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents		1,500
Short-term investments:
Total short-term investments	13,701	6,245
Direct or Indirect Observable Inputs (Level 2) [Member] | Corporate debt securities [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents		2,269
Short-term investments:
Total short-term investments	5,530	6,028
Direct or Indirect Observable Inputs (Level 2) [Member] | Treasury bonds [Member] | Recurring basis [Member]
Short-term investments:
Total short-term investments		1,007
Money market funds [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	876	5,404
Money market funds [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Recurring basis [Member]
Cash equivalents:
Total cash equivalents	$ 876	$ 5,404

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Goodwill and Intangible Assets - Additional Information (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Goodwill And Intangible Assets Disclosure [Abstract]
Change in carrying amount of goodwill	$ 0		$ 0
Amortization expense	$ 33,000	$ 33,000	$ 101,000	$ 101,000

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Goodwill and Intangible Assets - Information Regarding Intangible Assets (Detail) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Acquired Finite-Lived Intangible Assets [Line Items]
Net Carrying Value	$ 493	$ 594
Customer relationships [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	1,275	1,275
Accumulated Amortization	(782)	(681)
Net Carrying Value	$ 493	$ 594

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Goodwill and Intangible Assets - Expected Amortization Expense for Future Period (Detail) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Goodwill And Intangible Assets Disclosure [Abstract]
Remainder of 2016	$ 30
2017	98
2018	98
2019	98
2020	98
2021	71
Net Carrying Value	$ 493	$ 594

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Credit Agreement - Additional Information (Detail) - Credit Agreement [Member] - USD ($)			9 Months Ended
	Sep. 29, 2016	Sep. 22, 2015	Sep. 30, 2016	Dec. 31, 2015
Line Of Credit Facility [Line Items]
Letter of credit, agreement amount			$ 250,000
Unsecured Line of Credit Agreement [Member]
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, final due date	Sep. 22, 2018
Line of credit, amount outstanding			$ 0	$ 0
Unsecured Line of Credit Agreement [Member] | Prime Rate [Member] | Minimum [Member]
Line Of Credit Facility [Line Items]
Line of credit, interest rate, basis spread on variable rate			1.50%
Unsecured Line of Credit Agreement [Member] | LIBOR Rate [Member] | Maximum [Member]
Line Of Credit Facility [Line Items]
Line of credit, interest rate, basis spread on variable rate			1.50%
Unsecured Line of Credit Agreement [Member] | 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	$ 11,750,000

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Shareholders' Equity - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2016 USD ($)
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	$ 731,527
Amortization cost, weighted-average period	1 year 3 months 26 days
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 7 days
Compensation cost related to restricted stock units granted but not yet recognized, net of estimated forfeitures	$ 268,388

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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, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
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 4 months 24 days	3 years 3 months 18 days
Expected volatility	55.00%	53.00%	55.00%	52.00%
Risk-free interest rate	1.00%	1.30%	1.10%	1.20%

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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, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 280	$ 454	$ 908	$ 1,022
Per diluted share	$ 0.02	$ 0.04	$ 0.07	$ 0.08
Cost of revenue-service [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ (4)	$ 133	$ 169	$ 351
Selling, general and administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	262	298	618	616
Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 22	$ 23	$ 121	$ 55

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Shareholders' Equity - Summary of Stock Option Activity (Detail)	9 Months Ended
	Sep. 30, 2016 USD ($) $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award Options Outstanding Roll Forward
Number of Shares, Beginning Balance | shares	1,778,697
Granted, Number of Shares | shares	307,700
Exercised, Number of Shares | shares	(273,320)
Forfeited, Number of Shares | shares	(380,472)
Expired, Number of Shares | shares	(51,367)
Number of Shares, Ending Balance | shares	1,381,238
Vested and expected to vest, Number of Shares, Ending Balance | shares	1,305,619
Exercisable, Number of Shares, Ending Balance | shares	773,084
Weighted Average Exercise Price, Beginning Balance | $ / shares	$ 4.43
Granted, Weighted Average Exercise Price | $ / shares	5.48
Exercised, Weighted Average Exercise Price | $ / shares	3.19
Forfeited, Weighted Average Exercise Price | $ / shares	5.31
Expired, Weighted Average Exercise Price | $ / shares	6.13
Weighted Average Exercise Price, Ending Balance | $ / shares	4.61
Vested and expected to vest, Weighted Average Exercise Price, Ending Balance | $ / shares	4.55
Exercisable, Weighted Average Exercise Price, Ending Balance | $ / shares	$ 4.02
Weighted Average Remaining Contractual Life (in years)	7 years 3 months 22 days
Vested and expected to vest, Weighted Average Remaining Contractual Life (in years)	7 years 2 months 16 days
Exercisable, Weighted Average Remaining Contractual Life (in years)	6 years 2 months 27 days
Aggregate Intrinsic Value | $	$ 1,176,876
Vested and expected to vest, Aggregate Intrinsic Value | $	1,165,259
Exercisable, Aggregate Intrinsic Value | $	$ 948,542

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Shareholders' Equity - Summary of Certain Information about Stock Options (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Weighted-average grant-date fair value of option grants for the period	$ 2.53	$ 3.16	$ 2.83	$ 3.10
Options in-the-money at period end	766,101	1,762,893	766,101	1,762,893
Aggregate intrinsic value of options exercised	$ 226,430	$ 265,641	$ 568,516	$ 616,417

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Shareholders' Equity - Summary of Restricted Stock Unit Activity (Detail)	9 Months Ended
	Sep. 30, 2016 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unvested, Number of Shares, Ending Balance	87,283
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unvested, Number of Shares, Beginning Balance	104,463
Granted, Number of Shares	54,870
Vested, Number of Shares	(56,081)
Forfeited, Number of Shares	(15,969)
Unvested, Number of Shares, Ending Balance	87,283
Expected to vest, Number of Shares, Ending Balance	78,781
Unvested, Weighted Average Grant Date Fair Value, Beginning Balance | $ / shares	$ 5.97
Granted, Weighted Average Grant Date Fair Value | $ / shares	5.65
Vested, Weighted Average Grant Date Fair Value | $ / shares	5.94
Forfeited, Weighted Average Grant Date Fair Value | $ / shares	5.77
Unvested, Weighted Average Grant Date Fair Value, Ending Balance | $ / shares	5.83
Expected to vest, Weighted Average Grant Date Fair Value, Ending Balance | $ / shares	$ 5.81

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Shareholders' Equity - Summary of Shares of Common Stock Reserved for Future Issuance under Plans (Detail) - shares	Sep. 30, 2016	Dec. 31, 2015
Common Stock Number Of Shares Par Value And Other Disclosures [Abstract]
Stock options outstanding	1,381,238	1,778,697
RSUs outstanding	87,283
Stock awards available for future grant	1,105,715
Common stock reserved for future issuance	2,574,236

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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, 2016	Sep. 30, 2015	Mar. 31, 2015	Jun. 30, 2014	Dec. 31, 2013	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Other Commitments [Line Items]
Operating leases, expiration year							2020
Rent expense		$ 262,000	$ 268,000				$ 781,000	$ 789,000
Restricted cash equivalents									$ 250,000
Third party software vendor licensed lost					$ 934,000
Accrued contingent liability		$ 0			$ 100,000		$ 0		$ 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]
Expiration date of operating lease	2014-08
Extended expiration date of operating lease	2020-05
Cash lease payments made						$ 0
Leasehold improvements and furniture provided by the landlord	$ 1,128,000

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Commitments and Contingencies - Future Operating Lease Commitments (Detail) $ in Thousands	Sep. 30, 2016 USD ($)
Operating Leases Future Minimum Payments Due [Abstract]
Remainder of 2016	$ 330
2017	1,185
2018	1,094
2019	1,038
2020	436
Total commitments	$ 4,083

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Information about Geographic Areas and Operating Segments - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2016 Segment
Segment Reporting [Abstract]
Number of reportable segment	2
Number of operating segment	2

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Information about Geographic Areas and Operating Segments - Summarized Financial Information of Operating and Reportable Segment (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Segment Reporting Information [Line Items]
Revenue	$ 22,467	$ 26,435	$ 70,644	$ 81,573
Cost of revenue	18,790	21,562	58,778	66,019
Gross profit (loss)	3,677	4,873	11,866	15,554
Operating expenses	4,092	3,486	11,717	10,420
Other income, net	128	32	204	124
Income tax benefit (expense)	181	(174)	(144)	(305)
Net income (loss)	(106)	1,245	209	4,953
Software [Member]
Segment Reporting Information [Line Items]
Revenue	19,216	21,215	58,118	66,679
Cost of revenue	15,281	17,698	47,901	54,732
Gross profit (loss)	3,935	3,517	10,217	11,947
Professional Engineering Services [Member]
Segment Reporting Information [Line Items]
Revenue	3,251	5,220	12,526	14,894
Cost of revenue	3,509	3,864	10,877	11,287
Gross profit (loss)	$ (258)	$ 1,356	$ 1,649	$ 3,607

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Information about Geographic Areas and Operating Segments - Revenue and Long-Lived Assets by Geographic Area (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Total revenue:
Total revenue	$ 22,467	$ 26,435	$ 70,644	$ 81,573
Long-lived assets:
Total long-lived assets	5,511		5,511		$ 5,945
North America [Member]
Total revenue:
Total revenue	20,917	23,654	66,275	74,415
Long-lived assets:
Total long-lived assets	981		981		1,353
Asia [Member]
Total revenue:
Total revenue	1,018	1,055	1,847	3,043
Long-lived assets:
Total long-lived assets	264		264		247
Europe [Member]
Total revenue:
Total revenue	532	$ 1,726	2,522	$ 4,115
Long-lived assets:
Total long-lived assets	$ 4,266		$ 4,266		$ 4,345

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Significant Risk Concentrations - Additional Information (Detail)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016 USD ($) Customer	Sep. 30, 2015 USD ($) Customer	Sep. 30, 2016 USD ($) Customer Agreement	Sep. 30, 2015 USD ($) Customer	Dec. 31, 2015 USD ($) Customer
Concentration Risk [Line Items]
Total revenue	$ 22,467,000	$ 26,435,000	$ 70,644,000	$ 81,573,000
Accounts receivable	19,808,000		$ 19,808,000		$ 19,009,000
Expiration date one of OEM Distribution agreements for embedded operating systems			Jun. 30, 2017
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, 2017
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	78,000	91,000	$ 287,000	257,000
Reduction in marketing expense [Member]
Concentration Risk [Line Items]
Earnings under the rebate program	181,000	212,000	670,000	599,000
Honeywell International Inc and affiliated entities [Member] | Customer Concentration Risk [Member]
Concentration Risk [Line Items]
Total revenue	1,500,000	$ 2,800,000	9,200,000	$ 13,500,000
Honeywell International Inc and affiliated entities [Member] | Credit Concentration Risk [Member]
Concentration Risk [Line Items]
Accounts receivable	$ 6,800,000		$ 6,800,000		$ 6,100,000
Revenue [Member] | Honeywell International Inc and affiliated entities [Member] | Customer Concentration Risk [Member]
Concentration Risk [Line Items]
Number of customer account as major customer | Customer	1	1	1	1
Concentration risk, percentage	7.00%	11.00%	13.00%	17.00%
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] | Honeywell International Inc and affiliated entities [Member] | Credit Concentration Risk [Member]
Concentration Risk [Line Items]
Concentration risk, percentage			34.00%		32.00%
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			0		0

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Restructuring - Additional Information (Detail)		3 Months Ended		9 Months Ended
	Jul. 28, 2016 Employee	Dec. 31, 2016 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2016 USD ($)
Restructuring costs and Reserve [Line Items]
Effective date of restructuring				Jul. 28, 2016
Number of employees impacted by workforce reduction | Employee	33
Percentage of pre-reduction headcount impacted by workforce reduction	17.00%
Pre-tax restructuring charges			$ 807,000
Payments of restructuring charges			619,000
Selling, general and administrative expenses [Member]
Restructuring costs and Reserve [Line Items]
Pre-tax restructuring charges			17,000
Cost of service revenue [Member]
Restructuring costs and Reserve [Line Items]
Pre-tax restructuring charges			790,000
Scenario, Forecast [Member]
Restructuring costs and Reserve [Line Items]
Pre-tax restructuring charges		$ 192,000
Accrued compensation [Member]
Restructuring costs and Reserve [Line Items]
Restructuring reserve			$ 188,000	$ 188,000