BSQR BSQUARE Corporation

This Amendment No. 1 (“Amendment No. 1”) amends Items 3, 4, 5 and 8 in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by Bsquare Corporation, a Washington corporation (the “Company” or “BSQR”), with the Securities and Exchange Commission (the “SEC”) on October 24, 2023 (as amended and supplemented from time to time, and including the documents annexed thereto or incorporated therein the “Schedule 14D-9”). The Schedule 14D-9 relates to a tender offer by Kontron Merger Sub, Inc., a Delaware corporation (“Merger Sub”), a wholly-owned subsidiary of Kontron America, Incorporated, a Delaware corporation (“Kontron” or “Parent”), to purchase all of the outstanding Shares of BSQR for $1.90 per Share, net to the seller in cash (the “Offer Price”), without interest and less any applicable withholding taxes, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated October 24, 2023 (as amended or supplemented from time to time, the “Offer to Purchase”), and in the related Letter of Transmittal (as amended or supplemented from time to time, the “Letter of Transmittal,” which, together with the Offer to Purchase, constitute the “Offer”). The Offer is described in a Tender Offer Statement on Schedule TO (as amended or supplemented from time to time, and together with the exhibits thereto, the “Schedule TO”), filed by Parent and Merger Sub with the SEC on October 24, 2023. Capitalized terms used in this Amendment No. 1 have the meanings ascribed to them in the Schedule 14D-9.

On November 1, 2023, plaintiff Sal Carbone, a purported shareholder of the Company, filed a complaint against the Company and its directors (collectively, the “Defendants”) in the U.S. District Court for the Southern District of New York (the “Carbone Complaint”). The Carbone Complaint challenges statements in the Schedule 14D-9 and asserts claims under §§ 14(e), 14(d) and 20(a) of the Exchange Act. On November 7, 2023, plaintiff William Johnson, a purported shareholder of the Company, filed a putative class complaint against the Company and the Defendants in the King County Superior Court in the State of Washington (the “Johnson Complaint,” together with the Carbone Complaint, the “Complaints”). The Johnson Complaint challenges statements in the Schedule 14D-9 and asserts they give rise to a single claim for breach of fiduciary duty. The Complaints seek fees, costs, and an injunction of the Transaction, but they do not assert a specific monetary demand. The Company has also received several demand letters from purported shareholders challenging various disclosures in the Schedule 14D-9 (the “Letters,” and together with the Complaints, the “Claims”).

The Company believes that the Claims lack merit and that no supplemental disclosure is required or necessary under applicable laws. The Claims allege the Company should disclose additional information regarding a number of highly technical and generally irrelevant matters, such as requesting substantial additional information regarding the DCF methodology used by TeleHill, the Company’s financial advisor. As previously noted in the Schedule 14D-9, a DCF methodology results in the lowest valuation of all methodologies considered, reflecting a negative implied enterprise value primarily because, as the Company has disclosed for several quarters, the Company’s PS business (which has historically generated a substantial majority of its revenue) has been contracting for several years and is expected to continue to do so. Other Claims relate to the liquidation methodology, which by any approach results in a distribution per share far below the Offer Price. And other Claims request disclosure about non-existent facts, such as alleged discussions regarding post-closing employment or standstill provisions that prohibit requesting a waiver. Against the backdrop of a months-long marketing process, the Company believes the Offer Price provides the best value reasonably available to the Company’s shareholders and that the disclosure in the Schedule 14D-9 adequately equips investors to make informed decisions about whether to tender their Shares.

While the Company believes that the disclosures set forth in the Schedule 14D-9 comply fully with applicable law, to moot certain of the Claims, and to avoid nuisance, potential expense and delay, the Company has determined to voluntarily amend and supplement the Schedule 14D-9 as described in this Amendment No. 1. Nothing in these supplemental disclosures shall be deemed an admission of the legal necessity or materiality under applicable law of any of the disclosures set forth herein. The Company denies that it has violated any laws or breached any duties to the Company’s shareholders, and it believes that the additional information in this Amendment No. 1 is immaterial.

Except as otherwise set forth below, the information set forth in the Schedule 14D-9 remains unchanged and is incorporated herein by reference as relevant to items in this Amendment No. 1. This Amendment No. 1 should be read together with the Schedule 14D-9. If additional demands or complaints are filed or submitted, absent new or different allegations that are material, the Company, Parent and/or Merger Sub will not necessarily announce such additional demands or complaints.

The text below that is bolded and underlined is new language that has been added to the Schedule 14D-9 by this Amendment No. 1 (except that tables introduced by such text are not bold or underlined for presentational convenience), and deleted text is highlighted with bolded and crossed-out text.

Item 3 of the Schedule 14D-9 is hereby amended and supplemented by replacing the section “Future Arrangements” on page 7 in its entirety with the following:

It is possible that Continuing Employees, including the executive officers, will enter into new compensation arrangements with Kontron or its affiliates. Such arrangements may include agreements regarding future terms of employment, the right to receive equity or equity-based awards of Kontron or retention awards. The Merger Agreement provides that during the Continuation Period, (i) the base salary or wage rate to be received by each Continuing Employee shall be no less than what the Continuing Employee received immediately prior to the Effective Time and (ii) cash incentive compensation opportunities (excluding equity based compensation and any retention or other special or non-recurring bonus or incentive award) that are substantially comparable, in the aggregate, to either (x) those provided to such Continuing Employee by the Company immediately prior to the Effective Time or (y) those provided by Kontron or its affiliates to similarly situated employees, and (iii) other compensation and employee benefits (other than equity-based benefits, individual employment agreements and any retention or other special or non-recurring bonus or incentive awards) that are substantially comparable, in the aggregate, to either (x) those provided to such Continuing Employee by the Company immediately prior to the Effective Time or (y) those provided by Kontron or its affiliates to similarly situated employees. As of the date of this Schedule 14D-9, no compensation arrangements between such persons and Kontron and/or its affiliates have been established. Any such arrangements with BSQR’s executive officers are currently expected to be entered into after the completion of the Offer and will not become effective until after the Merger is consummated, if at all. Additionally, to the extent requested by Kontron, the Merger Agreement contemplates that the Company shall cause each of the directors and officers to submit a letter of resignation or otherwise be removed effective upon Closing. Following the Closing, we expect Ms. Wynne to continue to provide services to the Company and we do not expect any of the directors to continue to provide any services to the Company (except that Mr. Derrickson may provide transitional support if requested).

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the seventh paragraph on page 10 under the section “Background of the Transaction” in its entirety with the following:

In parallel with efforts to grow organically, in March 2022, the Board formed an M&A Committee (the “Committee”) composed of Ryan Vardeman, Robert Chamberlain, and Ralph Derrickson. This Committee was formed because the Board recognized the challenges of successfully launching a new product and believed it prudent to consider opportunities for inorganic growth. The formation of the Committee was for administrative convenience and was not prompted by any potential conflict on the Board. The Committee, which has not been disbanded, was not granted the power to approve or disapprove of any transaction and the members of the Committee were not specifically compensated for their role on the Committee. The Board originally tasked the Committee with identifying The Committee began a search for potential investment banks to assist the Committee with the exploration of strategic alternatives and to evaluate the Company’s internal entrepreneurial initiatives. Management presented to two investment banks, who advised the Company not to sell the business at that time, each encouraging the Company to pursue the SquareOne initiative and revisit selling the Company based on the results of those efforts. The BSQR Board opted not to further consider a sale of the Company at that time. Subsequently the Board discussed strategic opportunities it would consider pursuing and directed the Committee to continue to explore potential strategic options and to report back with respect to any such options for consideration by the Board. Throughout the second and third quarters of 2022, the Committee sourced and evaluated a number of options, but none progressed because the counterparty never proposed terms or the Board chose not to proceed.

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the twelfth paragraph on page 10 under the section “Background of the Transaction” in its entirety with the following:

On May 4, 2023, an investment bank working with a private entity referred to as “Company A” approached Ryan Vardeman, Chairman of the BSQR Board, about the potential of a reverse take-over (“RTO”) that would allow Company A to go public. On May 10 and 11, 2023, Mr. Vardeman met with Company A’s management, and on May 20, 2023, Company A proposed an RTO transaction. Based on feedback from the Committee, Company A presented a revised proposal on May 23, 2023. The Committee evaluated the revised proposal and presented it to the Board, which determined there were too many uncertainties in the transaction and that investing the Company’s cash in the business of Company A was not in the best interest of the Company’s shareholders.

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by adding a new sixteenth paragraph on page 11 under the section “Background of the Transaction” in its entirety with the following:

Item 4 of Schedule 14D-9 is hereby amended and supplemented by replacing the twenty-sixth paragraph on page 11 under the section “Background of the Transaction” in its entirety with the following:

In early August 2023, following an inbound inquiry, Mr. Vardeman met with “Company C” to discuss a potential strategic transaction. Mr. Vardeman had no previous relationship with Company C.

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the thirty-fifth paragraph on page 12 under the section “Background of the Transaction” in its entirety with the following:

On September 1, 2023, Company C presented a non-binding indication of interest. The Board rejected the indication because it would have required equity exposure to shareholders in Company C’s business and it would lower the potential for cash distributions to shareholders. The Board considered, among other factors, that Company C is a microcap company and that Company C’s indication would have required the Company to accept an implied valuation per share that was more than twice Company C’s prevailing trading price per share.

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the forty-third paragraph on page 13 under the section “Background of the Transaction” in its entirety with the following:

Also on September 20, 2023, video conferences were held between Mr. Niederhauser and Mr. Derrickson and between Mr. Billek and Ms. Wynne. The parties to these two calls discussed the timeline and process for the Transactions, as well as the potential future role of Mr. Derrickson and Ms. Wynne at the combined company after the Merger, but there was no discussion of post-closing compensation. Though no specific agreements were reached, Mr. Niederhauser conveyed to Mr. Derrickson that Kontron does not currently have a CEO position and Mr. Billek conveyed to Ms. Wynne that her employment would likely continue in some form. No other communications related to post-transaction employment directorships, equity ownership or other material relationships occurred.

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the table titled “Management Projections” on page 17 under the section titled “Certain Financial Projections” with the full table of management projections and corresponding supplemental disclosure:

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by adding the following disclosures after the first paragraph on page 19 under the section “Material Financial Analysis”:

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by adding the following disclosures and supplemental table immediately following the final table titled “Key Statistics for Full Public Comparable Group” on pages 19-20:

In determining the comparable companies, TeleHill referred to studies and conferred with BSQR management to include companies previously identified as comparable in BSQR commentary and filings. TeleHill specifically focused on Information Technology (“IT”) Distributors as well as lines of business. See the tables below for the full universe of comparable public companies and for the select group of most comparable companies chosen.

E/V Rev multiples were discounted by 25% to reflect BSQR’s relatively small market capitalization and lack of trading liquidity versus the selected comparable companies, as evidenced by its extremely thin share trading volume, float and market capitalization versus the comparable companies used in the valuation analysis (see table above). Numerous studies over the past several decades have indicated illiquidity discounts of up to 50% to reflect an asset’s reduced marketability. As a general rule of thumb, the liquidity discounts for both private companies and thinly traded public companies is 20-30%, although recent studies indicate that illiquidity discounts in practice may be much higher.

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by adding the following disclosure on page 20 immediately prior to the section “Discounted Cash Flow Analysis (DCF)”:

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the third paragraph in the section “Discounted Cash Flow Analysis (DCF)” on page 20 in its entirety with the following:

The projected unlevered free cash flows and terminal values were discounted using a rate of 26.4%, which reflected the risk-adjusted weighted average after-tax cost of debt and equity capital associated with executing

the Company’s business plan. The negative unlevered free cash flows based on the Projections result in a range of negative present enterprise values. The resulting range of present enterprise values was adjusted by the Company’s current cash, cash equivalents and short-term investments of $33.4 million to arrive at a range of present equity values. TeleHill conducted a sensitivity analysis using a range of discount rates and terminal values to calculate a range of per share values of $1.37 to $1.55 from the DCF based on fully diluted shares outstanding of 19.8 million.

Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the section “Liquidation Analysis” on pages 20-21 in its entirety with the following:

Liquidation Analysis. TeleHill calculated the value of BSQR assuming a winding down of the business on December 31, 2023. The analysis reflects BSQR management’s estimated liquidated value of assets less liabilities and administrative costs, including employee severance, lease terminations and customer contractual obligations, and TeleHill’s estimate for the potential value of the Company’s net operating losses and public company entity. The Liquidation Analysis indicated a range of $1.51 to $1.66 per share based on fully diluted shares outstanding of 19.8 million. Details of this analysis including key assumptions are provided below.

Item 5 of the Schedule 14D-9 is hereby amended and supplemented by replacing the first paragraph on page 21 in its entirety with the following:

TeleHill was engaged as financial advisor to the Company in connection with a potential strategic transaction involving the Company. Under the terms of its engagement, TeleHill provided the Company with financial advisory services and the Board with an opinion regarding fairness from a financial point of view, described under the section entitled “— Opinion of BSQR’s Financial Advisor” and attached as Annex I, in connection with the offer and the Transactions, and the Company paid TeleHill a fairness opinion fee of $175,000 upon delivery of its opinion. The Company will also pay TeleHill the Transaction Fee, against which the Retainer Fees will be credited. The Company also agreed to reimburse TeleHill for its expenses incurred in connection with its services, including the fees and expenses of its counsel, and will indemnify TeleHill against certain liabilities arising out of its engagement. The fee structure of TeleHill’s engagement letter is customary for investment banks and transactions of this type and the Board does not believe that the contingent nature of the Transaction Fee created a conflict of interest that interfered with TeleHill’s services or the delivery of its Opinion.

Item 8 of the Schedule 14D-9 is hereby amended and supplemented by restating the section titled “Legal Proceedings” in its entirety as follows:

After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.