Quarterhill (QTRHF) 6-K Management’s Discussion and Analysis of Financial Condition and Results of Operations

Exhibit 99.2

Quarterhill Inc.

2019 Second Quarter

Unaudited Condensed Consolidated
Interim Financial Statements

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Statements of Operations

(Unaudited)

(In thousands of United States dollars, except share and per share amounts)

	Three months ended June 30,						Six months ended June 30,
		2019			2018			2019			2018
Revenues
License	$	25,581		$	5,643		$	53,561		$	8,136
Systems		10,492			7,179			16,094			11,872
Services		547			727			1,193			1,380
Recurring		5,736			6,848			11,346			11,018
		42,356			20,397			82,194			32,406
Cost of revenues (excluding depreciation and amortization)
License		11,987			8,069			24,793			14,000
Systems		6,863			4,645			10,656			8,111
Services		356			385			646			690
Recurring		2,625			3,440			5,529			5,472
		21,831			16,539			41,624			28,273
		20,525			3,858			40,570			4,133
Operating expenses
Depreciation of property, plant and equipment		362			388			740			783
Amortization of intangibles		5,213			6,442			10,444			13,193
Selling, general and administrative expenses		6,650			7,036			13,237			14,089
Research and development expenses		1,237			853			2,416			1,792
Special charges (Note 11)		11,180			-			12,477			-
		24,642			14,719			39,314			29,857
Results from operations		(4,117	)		(10,861	)		1,256			(25,724	)
Finance income		(291	)		(191	)		(493	)		(382	)
Finance expense		235			40			279			79
Foreign exchange loss (gain)		80			(35	)		322			(165	)
Other income		(180	)		(579	)		(254	)		(906	)
Income (loss) before taxes		(3,961	)		(10,096	)		1,402			(24,350	)
Current income tax expense (recovery)  (Note 12)		(8	)		217			4,033			(104	)
Deferred income tax expense (recovery) (Note 12)		517			(2,448	)		1,810			(4,336	)
Income tax expense (recovery)		509			(2,231	)		5,843			(4,440	)
Net loss	$	(4,470	)	$	(7,865	)	$	(4,441	)	$	(19,910	)
Net loss per share
Basic	$	(0.04	)	$	(0.07	)	$	(0.04	)	$	(0.17	)
Diluted	$	(0.04	)	$	(0.07	)	$	(0.04	)	$	(0.17	)
Weighted average number of common shares
Basic		118,817,466			118,779,445			118,817,466			118,719,182
Diluted		118,817,466			118,779,445			118,817,466			118,719,182

See accompanying notes to these unaudited condensed consolidated interim financial statements

2019 Second Quarter Financial Results 2

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Statements of Comprehensive Loss

(Unaudited)

(In thousands of United States dollars)

	Three months ended June 30,						Six months ended June 30,
		2019			2018			2019			2018
Net loss	$	(4,470	)	$	(7,865	)	$	(4,441	)	$	(19,910	)
Other comprehensive income (loss):
Foreign currency translation adjustment		158			(1,481	)		757			(2,271	)
Comprehensive loss	$	(4,312	)	$	(9,346	)	$	(3,684	)	$	(22,181	)

See accompanying notes to these unaudited condensed consolidated interim financial statements

2019 Second Quarter Financial Results 3

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Balance Sheets

(Unaudited)

(In thousands of United States dollars)

As at	June 30, 2019			December 31, 2018
Current assets
Cash and cash equivalents	$	84,634		$	63,929
Short-term investments		1,181			1,139
Restricted short-term investments		2,200			2,200
Accounts receivable (net of allowance for doubtful accounts)		9,786			10,812
Other current assets		-			91
Unbilled revenue		6,638			3,990
Income taxes receivable		52			198
Inventories (net of obsolescence) (Note 6)		6,100			5,960
Prepaid expenses and deposits		2,368			2,332
		112,959			90,651
Non-current assets
Accounts receivable		333			415
Right-of-use assets (Note 7)		3,895			-
Property, plant and equipment		1,886			2,655
Intangible assets		77,669			87,425
Investment in joint venture (Note 8)		4,057			3,822
Deferred income tax assets (Note 12)		23,918			27,141
Goodwill		25,302			25,303
		137,060			146,761
TOTAL ASSETS	$	250,019		$	237,412
Liabilities
Current liabilities
Bank indebtedness	$	4,514		$	2,598
Accounts payable and accrued liabilities		21,612			18,103
Income taxes payable		37			-
Current portion of right-of-use lease liabilities (Note 7)		699			-
Current portion of deferred revenue		4,840			4,670
Current portion of long-term debt		61			299
Contingent consideration (Note 10)		11,577			929
		43,340			26,599
Non-current liabilities
Deferred revenue		1,144			1,435
Right-of-use lease liabilities (Note 7)		3,059			-
Long-term debt		175			173
Deferred income tax liabilities (Note 12)		2,939			4,337
		7,317			5,945
TOTAL LIABILITIES		50,657			32,544
Shareholders’ equity
Capital stock (Note 9)		419,111			419,111
Additional paid-in capital		23,366			22,957
Accumulated other comprehensive income		17,000			16,243
Deficit		(260,115	)		(253,443	)
		199,362			204,868
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	250,019		$	237,412

See accompanying notes to these unaudited condensed consolidated interim financial statements

2019 Second Quarter Financial Results 4

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Statements of Cash Flows

(Unaudited)

(In thousands of United States dollars)

	Three months ended June 30,						Six months ended June 30,
		2019			2018			2019			2018
Cash generated from (used in):
Operations
Net loss	$	(4,470	)	$	(7,865	)	$	(4,441	)	$	(19,910	)
Non-cash items
Stock-based compensation		228			(2	)		409			154
Depreciation and amortization		5,575			6,830			11,184			13,976
Foreign exchange loss (gain)		(34	)		84			(96	)		162
Equity in earnings from joint venture		(177	)		(388	)		(251	)		(638	)
Loss on disposal of assets		587			-			587			1
Deferred income tax expense (recovery)		517			(2,448	)		1,810			(4,336	)
Embedded derivatives		29			(3	)		99			(1	)
Contingent consideration adjustment		10,648			-			10,648			-
Changes in non-cash working capital balances
Accounts receivable		28,099			226			1,037			4,166
Unbilled revenue		(2,263	)		297			(2,622	)		1,994
Income taxes receivable		(54	)		(57	)		147			(57	)
Inventories		(159	)		(565	)		(138	)		(749	)
Prepaid expenses and deposits		(284	)		515			(171	)		954
Deferred revenue		(941	)		(527	)		(118	)		251
Accounts payable and accrued liabilities		(3,248	)		1,479			3,514			(4,337	)
Income taxes payable		(26	)		(6	)		37			(599	)
Cash generated from (used in) operations		34,027			(2,430	)		21,635			(8,969	)
Financing
Long-term accounts receivable (net)		18			-			82			-
Dividends paid (Note 9)		(1,101	)		(1,155	)		(2,231	)		(2,326	)
Bank indebtedness		1,844			3,170			1,916			1,113
Repayment of long-term debt		(212	)		(60	)		(236	)		(75	)
Common shares issued for cash from Employee Share Purchase Plan		-			27			-			27
Cash generated from (used in) financing		549			1,982			(469	)		(1,261	)
Investing
Proceeds from sale of property, plant and equipment		-			-			-			11
Purchase of property and equipment		(308	)		(43	)		(466	)		(166	)
Repayment of patent finance obligations		-			(1,389	)		-			(2,778	)
Purchase of intangibles		(73	)		(48	)		(93	)		(89	)
Cash used in investing		(381	)		(1,480	)		(559	)		(3,022	)
Foreign exchange gain (loss) on cash held in foreign currency		33			(76	)		98			(151	)
Net increase (decrease) in cash and cash equivalents		34,228			(2,004	)		20,705			(13,403	)
Cash and cash equivalents, beginning of period		50,406			70,419			63,929			81,818
Cash and cash equivalents, end of period	$	84,634		$	68,415		$	84,634		$	68,415

See accompanying notes to these unaudited condensed consolidated interim financial statements

2019 Second Quarter Financial Results 5

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Statements of Shareholders’ Equity

(Unaudited)

(In thousands of United States dollars)

	Capital Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income			Deficit			Total Equity
Balance - January 1, 2018	$	418,873	$	22,489		$	20,111		$	(199,718	)	$	261,755
For the three months ended March 31, 2018									��
Net loss		-		-			-			(12,045	)		(12,045	)
Other comprehensive loss		-		-			(790	)		-			(790	)
Stock-based compensation expense		-		156			-			-			156
Dividends declared (Note 9)		-		-			-			(1,171	)		(1,171	)
Balance March 31, 2018		418,873		22,645			19,321			(212,934	)		247,905
For the three months ended June 30, 2018
Net loss		-		-			-			(7,865	)		(7,865	)
Other comprehensive loss		-		-			(1,481	)		-			(1,481	)
Stock-based compensation expense		-		(2	)		-			-			(2	)
Conversion of deferred stock units to common shares		211		-			-			-			211
Shares issued under Employee Share Purchase Plan		27		-			-			-			27
Dividends declared (Note 9)		-		-			-			(1,155	)		(1,155	)
Balance - June 30, 2018	$	419,111	$	22,643		$	17,840		$	(221,954	)	$	237,640
Balance - January 1, 2019	$	419,111	$	22,957		$	16,243		$	(253,443	)	$	204,868
For the three months ended March 31, 2019
Net income		-		-			-			29			29
Other comprehensive income		-		-			599			-			599
Stock-based compensation expense		-		181			-			-			181
Dividends declared (Note 9)		-		-			-			(1,130	)		(1,130	)
Balance - March 31, 2019	$	419,111	$	23,138		$	16,842		$	(254,544	)	$	204,547
For the three months ended June 30, 2019
Net loss		-		-			-			(4,470	)		(4,470	)
Other comprehensive income		-		-			158			-			158
Stock-based compensation expense		-		228			-			-			228
Dividends declared (Note 9)		-		-			-			(1,101	)		(1,101	)
Balance - June 30, 2019	$	419,111	$	23,366		$	17,000		$	(260,115	)	$	199,362

See accompanying notes to these unaudited condensed consolidated interim financial statements

2019 Second Quarter Financial Results 6

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

1.  NATURE OF BUSINESS

Quarterhill Inc. (“Quarterhill” or the “Company”), formerly “Wi-LAN Inc.”, is a Canadian company with its shares listed under the symbol “QTRH” on each of the Toronto Stock Exchange (the “TSX”) and the Nasdaq Global Select Market.  Quarterhill is focused on the disciplined acquisition, management and growth of companies in dedicated technology areas including vertical market software and solutions, intelligent industrial systems, and innovation and licensing.

2.  BASIS OF PRESENTATION

These unaudited condensed consolidated interim financial statements include the accounts of Quarterhill and its wholly owned subsidiaries.  Quarterhill also holds, through one of its subsidiaries, a 50% joint venture ownership interest in Xuzhou-PAT Control Technologies Limited (“XPCT”) which is accounted for using the equity method.  These unaudited condensed consolidated interim financial statements include only the Company’s net investment and equity in earnings of the joint venture.  

These unaudited condensed consolidated interim financial statements are presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information, including all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position, operations and cash flows for the interim period.  As the interim financial statements do not contain all the disclosures required in annual financial statements, they should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2018 together with the accompanying notes.  All inter-company transactions and balances have been eliminated.

3.   SIGNIFICANT ACCOUNTING POLICIES

These unaudited condensed consolidated interim financial statements have been prepared following the same accounting policies disclosed in Note 2 of the Company’s audited consolidated financial statements for the year ended December 31, 2018 except for the adoption of accounting standards more fully described below.

Adoption of Accounting Standards

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02) “Leases” (ASC 842) to increase transparency and comparability among organizations by requiring the recognition of Right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASC 842 using the modified retrospective method applied to leases that were in effect on January 1, 2019.  Results for reporting periods beginning after January 1, 2019 are presented under topic ASC 842 while leases in existence at the prior period are not adjusted and continue to be

2019 Second Quarter Financial Results 7

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

reported in accordance with our historic accounting under ASC 840.  The Company elected to not recognize right-of-use assets and right-of-use lease liabilities arising from short term leases, not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases.  The Company also elected to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets.

The standard had a material impact on the condensed consolidated interim balance sheet with the recognition of right-of-use assets and liabilities but did not have an impact on the condensed consolidated interim statement of operations.

The cumulative effect of the changes made to the Company’s consolidated January 1, 2019 balance sheet, by segment, for the adoption of ASU 2016-02 were as follows:

			Adjustments arising from implementation of ASU 2016-02
	Balances as at December 31, 2018		Licensing			Intelligent Systems			Enterprise Software		Corporate		Balances as at January 1, 2019
Assets
Prepaid expenses and deposits	$	2,332	$	(69	)	$	(113	)	$	-	$	-	$	2,150
Right-of-use assets		-		323			2,133			246		216		2,918
Liabilities
Right-of-use lease liabilities, current		-		230			470			84		39		823
Right-of-use lease liabilities, long-term		-		24			1,550			162		177		1,913

The following table discloses the impact of adoption, by segment, on the Company’s condensed consolidated interim balance sheet as at June 30, 2019

			Adjustments arising from implementation of ASU 2016-02
	As reported		Licensing			Intelligent Systems			Enterprise Software			Corporate			Without adoption of ASU 2016-02
Assets
Prepaid expenses and deposits	$	2,368	$	36		$	113		$	-		$	-		$	2,517
Right-of-use assets		3,895		(1,533	)		(1,958	)		(207	)		(197	)		-
Liabilities
Right-of-use lease liabilities, current		699		(84	)		(487	)		(88	)		(40	)		-
Right-of-use lease liabilities, long-term		3,059		(1,429	)		(1,354	)		(119	)		(157	)		-

2019 Second Quarter Financial Results 8

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

Significant changes to the accounting policies as a result of adopting ASU 2016-02 are discussed below.

The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use assets and right-of-use lease liabilities in the consolidated balance sheets. The Company currently does not have any finance leases.

ROU assets represent the Company’s right to use an underlying asset for the lease term and right-of-use lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease and when it is reasonably certain that the Company will exercise that option, the effects of that exercise are considered in determining the ROU asset and lease liabilities.  Lease expense is recognized on a straight-line basis over the lease term.

Management uses judgment in determining whether a contract contains a lease, the interest used to discount the present value of fixed payments in accounting for the lease liability and corresponding right-of-use asset, and in determining whether it is likely that a lease term will be extended.

The Company has elected to account for lease and non-lease components embedded in its leases as a single lease component.

Future Accounting Pronouncements

Credit Losses on Financial Instruments

In June 2016, FASB issued Accounting Standards Update (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company in the first quarter of its fiscal year ending December 31, 2021, with earlier adoption permitted beginning in the first quarter of its fiscal year ending December 31, 2020. The Company is currently assessing the impact of this new standard.

Fair Value Measurement

In August 2018 the FASB issued Accounting Standards Update 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” that has been issued as part of the FASB’s disclosure framework project.   The amendments in this update modify the disclosure requirements on fair value measurement based on concepts in the FASB Concept Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements and are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  The Company is currently assessing the impact of this new standard.  

2019 Second Quarter Financial Results 9

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

Intangibles – Goodwill and Other- Internal-Use Software

In August 2018 the FASB issued Accounting Standards Update 2018-15 – Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract that provides guidance on a customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor, i.e. a service contract.  Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license.   The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense and requires additional quantitative and qualitative disclosures.  The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  The Company is currently assessing the impact of this new standard.

4.  FINANCIAL INSTRUMENTS

The following table presents the fair values of financial instruments recorded at fair value across the levels of the fair value hierarchy. The table does not include assets and liabilities that are not considered financial instruments.

			As at June 30, 2019						As at December 31, 2018
	Hierarchy Level		Carrying Amount			Fair Value			Carrying Amount		Fair Value
Cash and cash equivalents		1	$	84,634		$	84,634		$	63,929	$	63,929
Short-term investments		1		1,181			1,181			1,139		1,139
Restricted short-term investments		1		2,200			2,200			2,200		2,200
Derivative financial instrument		2		(8	)		(8	)		91		91
Long-term debt		2		236			236			472		472
Contingent consideration		3		11,577			11,577			929		929

Derivative financial instrument consists of the embedded derivative portion of the unearned revenue of U.S. dollar denominated sales contracts in its Canadian, Chilean and Mexican subsidiaries and foreign exchange forward contracts. The fair value of embedded derivatives is measured using a market approach, based on the difference between quoted forward exchange rates as of the contract date and quoted forward exchange rates as of the reporting date. The fair value of forward exchange contracts is determined using quoted forward exchange rates at the reporting date. Contingent consideration was adjusted to fair value at December 31, 2018  and June 30, 2019 using management’s best estimates of performance to calculate fair value as at the reporting date. Accounts receivable, unbilled revenue, accounts payable and accrued liabilities also approximate fair value due to the short term maturity of these items.

2019 Second Quarter Financial Results 10

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

5.  UNBILLED REVENUE AND DEFERRED REVENUE

Significant changes in unbilled revenue and deferred revenue balances during the six months ended June 30, 2019 are as follows:

	June 30, 2019			December 31, 2018			$ Change			% Change
Unbilled revenue	$	6,638		$	3,990		$	2,648			66	%
Deferred revenue - current		(4,840	)		(4,670	)		(170	)		4	%
Deferred revenue - non-current		(1,144	)		(1,435	)		291			-20	%
Net contract assets (liabilities)	$	654		$	(2,115	)	$	2,769			-131	%

The net change in unbilled revenues of $2,648 consists of amounts earned but not yet billed to customers and the foreign currency effect of contracts not transacted in U.S. dollars.

Revenue recognized for the six months ended June 30, 2019 that was included in deferred revenue at the beginning of the period was $1,870 (six months ended June 30, 2018 – $2,919).

6.  INVENTORIES

Inventories consist of the following at June 30, 2019:

As at	June 30, 2019		December 31, 2018
Raw materials	$	725	$	729
Original equipment manufacturer materials		2,958		3,128
Work in process		789		814
Finished goods		1,628		1,289
	$	6,100	$	5,960

For the three and six months ended June 30, 2019, the Company recorded non-cash, pretax charges of $nil and $46 respectively (2018 - $nil and $nil) relating to the write down of inventory.

2019 Second Quarter Financial Results 11

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

7.  RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

The Company has operating leases for corporate offices, production facilities, and certain equipment.  These leases have remaining lease terms of 3 months to 10 years, some of which include options to extend the leases for up to 10 years or to terminate the lease with notice periods of 90 days to 6 months.  The Company has classified the assets related to these operating leases as right-of-use assets and the liabilities associated with the future lease payments under these operating leases as right-of-use lease liabilities.

	For the three  months ended March 31, 2019		For the three months ended June 30, 2019			For the six months ended June 30, 2019
Operating lease expense	$	326	$	328		$	654
Operating cash flows from operating leases	$	362	$	242		$	604
			As at June 30, 2019			As at January 1, 2019
Right-of-use assets			$	3,895		$	2,918
Right-of-use lease liabilities
Current			$	699		$	823
Long-term				3,059			1,913
			$	3,758		$	2,736
Weighted average remaining lease term			6.0 years			3.7 years
Weighted average discount rate applied				5.45	%		5.45	%
Maturities of right-of-use lease liabilities:
Remainder of 2019			$	445		$	955
2020				919			704
2021				885			668
2022				789			574
2023				312			113
Thereafter				1,090			18
Total lease payments				4,440			3,032
Less imputed interest				682			(296	)
Total			$	3,758		$	2,736

2019 Second Quarter Financial Results 12

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

8.  INVESTMENT IN JOINT VENTURE

XPCT is a joint venture in China in which the Company’s subsidiary IRD holds a 50% interest. XPCT has two business divisions providing products and services to both the ITS industry and construction equipment manufacturers.

IRD had sales to XPCT of $42 in the three and six months ended June 30, 2019 (2018 - $nil). At June 30, 2019 accounts receivable from XPCT was $55 (December 31, 2018 - $17).

	June 30, 2019			December 31, 2018
Carrying value, beginning of the period	$	3,822		$	3,383
Currency gain on financial statement translation		(16	)		(186	)
Company's share of earnings		251			942
Dividend received		-			(317	)
Carrying value, end of the period	$	4,057		$	3,822

The Company’s ownership interest comprises a 50% share of net assets and net earnings of XPCT as well as purchase price adjustments to allocate fair values assigned to certain assets and liabilities at the time of acquisition.

As at June 30, 2019, IRD has an outstanding loan guarantee in the amount of 7.5 million yuan (approximately $1.1 million) (December 31, 2018 – 7.5 million yuan or $1.1 million) for 50% of a bank loan to XPCT representing IRD’s proportionate interest in this entity.

9. SHARE CAPITAL

The Company paid quarterly cash dividends as follows:

	2019						2018
		Per Share			Total			Per Share			Total
1st Quarter	Cdn	$	0.0125	US	$	1,130	Cdn	$	0.0125	US	$	1,171
2nd Quarter	Cdn	$	0.0125	US	$	1,101	Cdn	$	0.0125	US	$	1,155
	Cdn	$	0.0250	US	$	2,231	Cdn	$	0.0250	US	$	2,326

The Company declared quarterly dividends as follows:

	2019			2018
1st Quarter	Cdn	$	0.0125	Cdn	$	0.0125
2nd Quarter	Cdn	$	0.0125	Cdn	$	0.0125

2019 Second Quarter Financial Results 13

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

The weighted average number of common shares outstanding used in the basic and diluted earnings per share (“EPS”) computation was:

	Three months ended June 30,			Six months ended June 30,
		2019	2018		2019	2018
Basic weighted average common shares outstanding		118,817,466	118,779,445		118,817,466	118,719,182
Effect of stock options		-	-		-	-
		118,817,466	118,779,445		118,817,466	118,719,182

For the three and six months ended June 30, 2019, the effect of stock options totaling 1,146,319 and 1,425,365 were anti-dilutive (2018 – 6,400,549 and 6,907,187 respectively were anti-dilutive).

10.  CONTINGENT CONSIDERATION

In connection with the acquisition of VIZIYA on May 4, 2017, subject to the terms of the acquisition agreement, the Company agreed to pay the former owners of VIZIYA up to an additional $11,900 upon VIZIYA achieving certain earnings before interest, taxes and amortization (“Eligible Earnings”) targets for the period from April 1, 2017 to July 31, 2019. This amount consists of cash consideration of up to $6,000 and the issuance of up to 3,647,417 additional Common Shares. In addition, subject to the terms of the acquisition agreement, if VIZIYA achieves cumulative Eligible Earnings during that period exceeding $11,900, then the Company will pay 50% of that excess as additional contingent consideration until that cumulative Eligible Earnings reaches $24,000.  The liability associated with the expected payment of the contingent consideration obligation was preliminarily valued at $6,450 at the acquisition date. This estimate was calculated using the Monte Carlo simulations model. The Company had subsequently revalued this contingent liability downward to $929 based on actual results to March 31, 2019 and management’s estimate of expected Eligible Earnings through to July 31, 2019.

In the month of July 2019, VIZIYA signed significant perpetual software licenses which, subject to the acquisition agreement, may generate significant enough Eligible Earnings to enable VIZIYA to achieve a full earn out.  As a result, the Company has revalued the estimated liability to $11,577 with the increase of $10,648 charged to Special charges.  This liability will be retired no later than October 31, 2019, subject to the terms of the acquisition agreement, through the issuance of 3,647,417 Common Shares and cash consideration in the amount of $7,126.  The Eligible Earnings and the associated contingent consideration remain subject to detailed review by the Company and the estimated fair value of contingent consideration may change prior to the final payment.  Any further changes to be made to the estimated fair value of contingent consideration in future periods will be included in Special charges in the consolidated statements of operations.

2019 Second Quarter Financial Results 14

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

11.SPECIAL CHARGES

During the three and six months ended June 30, 2019, one of the Company’s operating subsidiaries continued its restructuring initiatives and concluded an additional workforce reduction in its Canadian operations and significantly reduced its operating lease facilities.  These activities resulted in an additional charge of $532 during the three months ended June 30, 2019. A reconciliation of the components of expense and accrued liabilities related to these restructuring efforts is as noted below:

	Licensing		Intelligent Systems		Corporate		Total
Six months ended June 30, 2019
Fiscal 2018 Restructuring Program	$	1,829	$	-	$	-	$	1,829
Contingent consideration adjustment (Note 10)		-		-		10,648		10,648
Special charges, net	$	1,829	$	-	$	10,648	$	12,477
Fiscal 2018 Restructuring Program
Restructuring accrual as at January 1, 2019	$	1,762	$	151	$	1,300	$	3,213
Workforce reduction		967		-		-		967
Facilities costs		862		-		-		862
Total accruals and costs		3,591		151		1,300		5,042
Less amounts paid or assets written off to date		3,113		123		1,300		4,536
Restructuring accrual as at June 30, 2019	$	478	$	28	$	-	$	506

12.INCOME TAXES

The reconciliation of the expected provision for income tax expense to the actual provision for income tax expense reported in the condensed consolidated interim statements of operations for the three and six months ended June 30, 2019 and June 30, 2018 is as follows:

	June 30,			June 30,
	2019			2018
Income (loss) before income taxes	$	1,402		$	(24,350	)
Expected income tax expense at Canadian statutory income tax rate of 26.5% (2018 - 26.5%)		372			(6,453	)
Permanent differences		2,931			(81	)
Foreign withholding taxes paid		3,867			53
Foreign rate differential		(55	)		104
Change in valuation allowance		(64	)		2,067
Other		(1,208	)		(130	)
Income tax expense (recovery)	$	5,843		$	(4,440	)

2019 Second Quarter Financial Results 15

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

	June 30,			June 30,
	2019			2018
Income (loss) before income taxes:
Canadian		797			(9,144	)
Foreign		605			(15,206	)
Current income tax expense (recovery)
Canadian		596			-
Foreign		3,437			(104	)
Deferred income tax expense (recovery)
Canadian		1,836			-
Foreign		(26	)		(4,336	)

The significant components of the Company’s deferred income tax assets and liabilities are as follows:

	June 30,			December 31,
	2019			2018
Deferred tax assets
Difference between tax and book value of capital and intangible assets		8,539			8,834
Tax loss carryforwards		25,399			29,003
Scientific research and experimental development ("SR&ED") carryforwards		6,524			6,376
Investment tax credits		3,296			3,028
Unbilled revenue and prepaid accounts		578			359
Accounts payable and accrued liabilities		273			338
Investments		-			126
Difference between tax and book value of loan receivable		3			3
Deferred tax assets, gross		44,612			48,067
Valuation allowance		(14,947	)		(15,146	)
Deferred tax assets, net		29,665			32,921
Deferred tax liabilities
Difference between tax and book value of capital and intangible assets		(8,518	)		(9,851	)
Unbilled revenue and prepaid accounts		(109	)		(266	)
Investments		(59	)		-
Deferred tax liabilities		(8,686	)		(10,117	)
Total deferred tax assets, net	$	20,979		$	22,804

2019 Second Quarter Financial Results 16

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

13.SEGMENT REPORTING

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by the chief operating decision maker (“CODM”) for making decisions and assessing performance as a source of the Company’s reportable operating segments. During the three and six months ended June 30, 2019, the Chief Executive Officer of the Company made decisions and assessed the performance of the Company using three operating segments or reporting units described below.

Licensing – The Licensing segment includes companies that count licensing as their principal business activity. Current patent portfolios held by this segment include patents relating to 3D television technologies, automotive headlight assemblies, phased loop semiconductor Licensing, microcontrollers applicable to safety-critical aerospace, semiconductor manufacturing and packaging technologies, medical, industrial and automotive applications, computer gaming, medical stent technologies, intelligent personal assistant technologies, CMOS image sensors, enhanced image processing, streaming video technologies, building automation, non-volatile Flash memory, other memory technologies, semiconductor clocking technologies, smart meter monitoring, LED lighting technologies and many other technologies.

Intelligent systems – The Intelligent systems segment includes companies providing systems and services focused on the interconnection of devices for mobile applications. The first investment in this segment is IRD, one of the world’s leading providers of integrated systems and solutions for the global ITS industry. The ITS industry is focused on improving the Intelligent systems, enhancing the safety, increasing the efficiency and reducing the environmental impact of highway and roadway transportation systems. IRD has a network of direct and independent operations and relationships in strategic geographic regions to identify and pursue ITS opportunities around the world.

Enterprise software – The Company considers businesses focused on operations optimization, predictive maintenance, inventory optimization and health and safety in production environments as operating in a “Enterprise software” environment and classifies its related investments in the Enterprise software segment. The Company’s first investment in this segment is VIZIYA based in Hamilton, Ontario, Canada, a software company providing Enterprise Asset Management software solutions to asset intensive industries worldwide through its presence in Australia, Europe, the Middle East and South Africa. VIZIYA has created software solutions that enhance each step of a customer’s work management process, to help customers measure the results of their initiatives, particularly focused on asset criticality, urgency and compliance to ensure customers implement their asset strategies.

2019 Second Quarter Financial Results 17

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

The following table reconciles the Adjusted EBITDA measure which is used in the evaluation of the performance of each segment to net loss:

	Three months ended June 30,						Six months ended June 30,
		2019			2018			2019			2018
Segment Adjusted EBITDA:
Licensing	$	12,302		$	(4,641	)	$	27,057		$	(9,404	)
Intelligent Systems		2,124			1,486			1,698			449
Enterprise Software		422			1,276			342			1,943
Total		14,848			(1,879	)		29,097			(7,012	)
Unallocated corporate expenses		1,982			2,072			3,771			4,276
Fair value purchase price adjustments		-			82			-			306
Stock-based compensation expense		228			(2	)		409			154
Depreciation of property, plant and equipment		362			388			740			783
Special charges		11,180			-			12,477			-
Amortization of intangibles		5,213			6,442			10,444			13,193
Results from operations		(4,117	)		(10,861	)		1,256			(25,724	)
Finance income		(291	)		(191	)		(493	)		(382	)
Finance expense		235			40			279			79
Foreign exchange loss (gain)		80			(35	)		322			(165	)
Other income		(180	)		(579	)		(254	)		(906	)
Income (loss) before taxes		(3,961	)		(10,096	)		1,402			(24,350	)
Current income tax expense (recovery)		(8	)		217			4,033			(104	)
Deferred income tax expense (recovery)		517			(2,448	)		1,810			(4,336	)
Income tax expense (recovery)		509			(2,231	)		5,843			(4,440	)
Net loss	$	(4,470	)	$	(7,865	)	$	(4,441	)	$	(19,910	)

Segment assets as at June 30, 2019 and December 31, 2018 are as follows:

As at	June 30, 2019		December 31, 2018
Licensing	$	114,788	$	93,225
Intelligent Systems		46,986		45,453
Enterprise Software		30,212		30,901
Total segment assets		191,986		169,579
Total corporate assets		58,033		67,833
Total assets	$	250,019	$	237,412

2019 Second Quarter Financial Results 18

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

Segment revenue by category for the three and six months ended June 30, 2019 and 2018 are as follows:

	For the three months ended June 30, 2019
	Licensing		Intelligent Systems		Enterprise Software		Total
License	$	24,525	$	-	$	1,056	$	25,581
Systems		-		10,492		-		10,492
Services		-		-		547		547
Recurring		218		4,294		1,224		5,736
Total revenue	$	24,743	$	14,786	$	2,827	$	42,356
	For the three months ended June 30, 2018
	Licensing		Intelligent Systems		Enterprise Software		Total
License	$	3,721	$	-	$	1,922	$	5,643
Systems		-		7,179		-		7,179
Services		-		-		727		727
Recurring		255		5,480		1,113		6,848
Total revenue	$	3,976	$	12,659	$	3,762	$	20,397

	For the six months ended June 30, 2019
	Licensing		Intelligent Systems		Enterprise Software		Total
License	$	52,145	$	-	$	1,416	$	53,561
Systems		-		16,094		-		16,094
Services		-		-		1,193		1,193
Recurring		723		8,030		2,593		11,346
Total revenue	$	52,868	$	24,124	$	5,202	$	82,194
	For the six months ended June 30, 2018
	Licensing		Intelligent Systems		Enterprise Software		Total
License	$	4,978	$	-	$	3,158	$	8,136
Systems		-		11,872		-		11,872
Services		-		-		1,380		1,380
Recurring		765		8,199		2,054		11,018
Total revenue	$	5,743	$	20,071	$	6,592	$	32,406

2019 Second Quarter Financial Results 19

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

Revenue by geography for the three and six months ended June 30, 2019 and 2018 are as follows:

	Three months ended June 30,					Six months ended June 30,
	2019			2018		2019		2018
Revenues
United States	$	35,550		$	16,255	$	43,243	$	22,426
Korea		423			131		27,423		228
Canada		1,219			1,264		2,330		1,764
Chile		732			495		1,399		890
Australia		984			690		1,198		690
Taiwan		-			229		621		331
Thailand		494			36		548		421
Finland		300			6		356		896
Germany		90			-		118		511
China		(118	)		40		44		498
Japan		-			-		-		911
Rest of the world		2,682			1,251		4,914		2,840
Total revenue	$	42,356		$	20,397	$	82,194	$	32,406

Non-current assets by geography as at June 30, 2019 and December 31, 2018 are as follows:

As at	June 30, 2019		December 31, 2018
Non-current assets
United States	$	15,316	$	17,615
Canada		117,743		127,450
Ireland		2,038		-
Chile		1,034		897
Belgium		915		707
Mexico		14		92
Total non-current assets	$	137,060	$	146,761

Major Customers

A major customer is defined as an external customer whose transactions with the Company amount to 10% or more of the Company’s annual revenues. During the three and six months ended June 30, 2019, there were two major customers identified (three and six months ended June 30, 2018 – none).

Remaining Performance Obligations

As at June 30, 2019 the amount of transaction price allocated to remaining performance obligations was $32,813. The Company expects to recognize approximately 54% of this balance as revenue in the remainder of 2019, 31% in 2020 and 15% thereafter.

2019 Second Quarter Financial Results 20

Quarterhill Inc.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended June 30, 2019 and 2018

(Unaudited)

(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)

14.  RELATED-PARTY TRANSACTION

As part of the iCOMS acquisition, the Company acquired a loan payable to the general manager of the iCOMS division in the amount of $186 (December 31, 2018 – $189) with no fixed repayment terms.  The loan was repaid in May 2019 and no amount is outstanding as at June 30, 2019.

2019 Second Quarter Financial Results 21