Exhibit 99.2 |
Quarterhill Inc.
2019 Third Quarter
Unaudited Condensed Consolidated
Interim Financial Statements
FINANCIAL STATEMENTS |
Condensed Consolidated Interim Statements of Operations
(Unaudited)
(In thousands of United States dollars, except share and per share amounts)
Three months ended September 30, |
|
| Nine months ended September 30, |
| |||||||||||
|
| 2019 |
|
|
| 2018 |
|
|
| 2019 |
|
|
| 2018 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License | $ | 10,542 |
|
| $ | 4,762 |
|
| $ | 64,103 |
|
| $ | 12,898 |
|
Systems |
| 9,532 |
|
|
| 7,885 |
|
|
| 25,626 |
|
|
| 19,757 |
|
Services |
| 610 |
|
|
| 660 |
|
|
| 1,803 |
|
|
| 2,040 |
|
Recurring |
| 4,685 |
|
|
| 6,272 |
|
|
| 16,031 |
|
|
| 17,290 |
|
|
| 25,369 |
|
|
| 19,579 |
|
|
| 107,563 |
|
|
| 51,985 |
|
Cost of revenues (excluding depreciation and amortization) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License |
| 6,584 |
|
|
| 5,927 |
|
|
| 31,377 |
|
|
| 19,927 |
|
Systems |
| 5,678 |
|
|
| 5,281 |
|
|
| 16,334 |
|
|
| 13,392 |
|
Services |
| 372 |
|
|
| 305 |
|
|
| 1,018 |
|
|
| 995 |
|
Recurring |
| 2,465 |
|
|
| 2,927 |
|
|
| 7,994 |
|
|
| 8,399 |
|
|
| 15,099 |
|
|
| 14,440 |
|
|
| 56,723 |
|
|
| 42,713 |
|
|
| 10,270 |
|
|
| 5,139 |
|
|
| 50,840 |
|
|
| 9,272 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
| 181 |
|
|
| 372 |
|
|
| 921 |
|
|
| 1,155 |
|
Amortization of intangibles |
| 5,134 |
|
|
| 6,298 |
|
|
| 15,578 |
|
|
| 19,491 |
|
Selling, general and administrative expenses |
| 7,186 |
|
|
| 6,871 |
|
|
| 20,423 |
|
|
| 20,960 |
|
Research and development expenses |
| 1,229 |
|
|
| 902 |
|
|
| 3,645 |
|
|
| 2,694 |
|
Special charges (Note 11) |
| (11,570 | ) |
|
| 2,320 |
|
|
| 907 |
|
|
| 2,320 |
|
|
| 2,160 |
|
|
| 16,763 |
|
|
| 41,474 |
|
|
| 46,620 |
|
Results from operations |
| 8,110 |
|
|
| (11,624 | ) |
|
| 9,366 |
|
|
| (37,348 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income |
| (378 | ) |
|
| (140 | ) |
|
| (871 | ) |
|
| (522 | ) |
Finance expense |
| 62 |
|
|
| 78 |
|
|
| 341 |
|
|
| 157 |
|
Foreign exchange loss (gain) |
| (172 | ) |
|
| 91 |
|
|
| 150 |
|
|
| (74 | ) |
Other income |
| (119 | ) |
|
| (247 | ) |
|
| (373 | ) |
|
| (1,153 | ) |
Income (loss) before taxes |
| 8,717 |
|
|
| (11,406 | ) |
|
| 10,119 |
|
|
| (35,756 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense (Note 12) |
| 1,275 |
|
|
| 755 |
|
|
| 5,308 |
|
|
| 651 |
|
Deferred income tax recovery (Note 12) |
| (1,893 | ) |
|
| (2,880 | ) |
|
| (83 | ) |
|
| (7,216 | ) |
Income tax expense (recovery) |
| (618 | ) |
|
| (2,125 | ) |
|
| 5,225 |
|
|
| (6,565 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 9,335 |
|
| $ | (9,281 | ) |
| $ | 4,894 |
|
| $ | (29,191 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.08 |
|
| $ | (0.08 | ) |
| $ | 0.04 |
|
| $ | (0.25 | ) |
Diluted | $ | 0.08 |
|
| $ | (0.08 | ) |
| $ | 0.04 |
|
| $ | (0.25 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,752,303 |
|
Diluted |
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,752,303 |
|
See accompanying notes to these unaudited condensed consolidated interim financial statements
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 2 |
FINANCIAL STATEMENTS |
Condensed Consolidated Interim Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands of United States dollars)
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2019 |
|
|
| 2018 |
|
|
| 2019 |
|
|
| 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 9,335 |
|
| $ | (9,281 | ) |
| $ | 4,894 |
|
| $ | (29,191 | ) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
| (546 | ) |
|
| 424 |
|
|
| 211 |
|
|
| (1,847 | ) |
Comprehensive income (loss) | $ | 8,789 |
|
| $ | (8,857 | ) |
| $ | 5,105 |
|
| $ | (31,038 | ) |
See accompanying notes to these unaudited condensed consolidated interim financial statements
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 3 |
FINANCIAL STATEMENTS |
Condensed Consolidated Interim Balance Sheets
(Unaudited)
(In thousands of United States dollars)
As at | September 30, 2019 |
|
| December 31, 2018 |
| ||
|
|
|
|
|
|
| |
Cash and cash equivalents | $ | 68,846 |
|
| $ | 63,929 |
|
Short-term investments |
| 1,171 |
|
|
| 1,139 |
|
Restricted short-term investments |
| 2,100 |
|
|
| 2,200 |
|
Accounts receivable (net of allowance for doubtful accounts) |
| 16,324 |
|
|
| 10,812 |
|
Other current assets |
| 72 |
|
|
| 91 |
|
Unbilled revenue |
| 7,234 |
|
|
| 3,990 |
|
Income taxes receivable |
| 19 |
|
|
| 198 |
|
Inventories (net of obsolescence) (Note 6) |
| 6,583 |
|
|
| 5,960 |
|
Prepaid expenses and deposits |
| 1,993 |
|
|
| 2,332 |
|
|
| 104,342 |
|
|
| 90,651 |
|
Non-current assets |
|
|
|
|
|
|
|
Accounts receivable |
| 2,926 |
|
|
| 415 |
|
Right-of-use assets (Note 7) |
| 3,714 |
|
|
| - |
|
Property, plant and equipment |
| 1,963 |
|
|
| 2,655 |
|
Intangible assets |
| 73,722 |
|
|
| 87,425 |
|
Investment in joint venture (Note 8) |
| 4,037 |
|
|
| 3,822 |
|
Deferred income tax assets (Note 12) |
| 25,600 |
|
|
| 27,141 |
|
Goodwill |
| 25,303 |
|
|
| 25,303 |
|
|
| 137,265 |
|
|
| 146,761 |
|
TOTAL ASSETS | $ | 241,607 |
|
| $ | 237,412 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Bank indebtedness | $ | 3,753 |
|
| $ | 2,598 |
|
Accounts payable and accrued liabilities |
| 16,080 |
|
|
| 18,103 |
|
Income taxes payable |
| 1,089 |
|
|
| - |
|
Current portion of right-of-use lease liabilities (Note 7) |
| 732 |
|
|
| - |
|
Current portion of deferred revenue |
| 5,550 |
|
|
| 4,670 |
|
Current portion of long-term debt |
| 43 |
|
|
| 299 |
|
Contingent consideration (Note 10) |
| - |
|
|
| 929 |
|
|
| 27,247 |
|
|
| 26,599 |
|
Non-current liabilities |
|
|
|
|
|
|
|
Deferred revenue |
| 1,128 |
|
|
| 1,435 |
|
Right-of-use lease liabilities (Note 7) |
| 2,897 |
|
|
| - |
|
Long-term debt |
| 168 |
|
|
| 173 |
|
Deferred income tax liabilities (Note 12) |
| 2,939 |
|
|
| 4,337 |
|
|
| 7,132 |
|
|
| 5,945 |
|
TOTAL LIABILITIES |
| 34,379 |
|
|
| 32,544 |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
Capital stock (Note 9) |
| 419,111 |
|
|
| 419,111 |
|
Additional paid-in capital |
| 23,560 |
|
|
| 22,957 |
|
Accumulated other comprehensive income |
| 16,454 |
|
|
| 16,243 |
|
Deficit |
| (251,897 | ) |
|
| (253,443 | ) |
|
| 207,228 |
|
|
| 204,868 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 241,607 |
|
| $ | 237,412 |
|
See accompanying notes to these unaudited condensed consolidated interim financial statements
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 4 |
FINANCIAL STATEMENTS |
Condensed Consolidated Interim Statements of Cash Flows
(Unaudited)
(In thousands of United States dollars)
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2019 |
|
|
| 2018 |
|
|
| 2019 |
|
|
| 2018 |
|
Cash generated from (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 9,335 |
|
| $ | (9,281 | ) |
| $ | 4,894 |
|
| $ | (29,191 | ) |
Non-cash items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
| 194 |
|
|
| 114 |
|
|
| 603 |
|
|
| 268 |
|
Depreciation and amortization |
| 5,315 |
|
|
| 6,671 |
|
|
| 16,499 |
|
|
| 20,647 |
|
Foreign exchange loss (gain) |
| 35 |
|
|
| (51 | ) |
|
| (61 | ) |
|
| 111 |
|
Equity in earnings from joint venture |
| (119 | ) |
|
| (246 | ) |
|
| (370 | ) |
|
| (884 | ) |
Loss (gain) on disposal of assets |
| (20 | ) |
|
| (26 | ) |
|
| 567 |
|
|
| (25 | ) |
Deferred income tax recovery |
| (1,893 | ) |
|
| (2,880 | ) |
|
| (83 | ) |
|
| (7,216 | ) |
Embedded derivatives |
| (80 | ) |
|
| (2 | ) |
|
| 19 |
|
|
| (3 | ) |
Contingent consideration (Note 10) |
| (11,577 | ) |
|
| - |
|
|
| (929 | ) |
|
| - |
|
Changes in non-cash working capital balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
| (6,544 | ) |
|
| (1,400 | ) |
|
| (5,507 | ) |
|
| 2,766 |
|
Unbilled revenue |
| (616 | ) |
|
| 71 |
|
|
| (3,238 | ) |
|
| 2,065 |
|
Income taxes receivable |
| 33 |
|
|
| (45 | ) |
|
| 180 |
|
|
| (102 | ) |
Inventories |
| (484 | ) |
|
| (286 | ) |
|
| (622 | ) |
|
| (1,035 | ) |
Prepaid expenses and deposits |
| 374 |
|
|
| (240 | ) |
|
| 203 |
|
|
| 714 |
|
Deferred revenue |
| 690 |
|
|
| (519 | ) |
|
| 572 |
|
|
| (268 | ) |
Accounts payable and accrued liabilities |
| (5,481 | ) |
|
| (883 | ) |
|
| (1,967 | ) |
|
| (5,220 | ) |
Income taxes payable |
| 1,052 |
|
|
| 29 |
|
|
| 1,089 |
|
|
| (570 | ) |
Cash generated from (used in) operations |
| (9,786 | ) |
|
| (8,974 | ) |
|
| 11,849 |
|
|
| (17,943 | ) |
Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term accounts receivable (net) |
| (2,593 | ) |
|
| - |
|
|
| (2,511 | ) |
|
| - |
|
Dividends paid (Note 9) |
| (1,117 | ) |
|
| (1,143 | ) |
|
| (3,348 | ) |
|
| (3,469 | ) |
Bank indebtedness |
| (761 | ) |
|
| 993 |
|
|
| 1,155 |
|
|
| 2,106 |
|
Repayment of long-term debt |
| (25 | ) |
|
| (17 | ) |
|
| (261 | ) |
|
| (92 | ) |
Common shares issued for cash from Employee Share Purchase Plan |
| - |
|
| - |
|
|
| - |
|
|
| 27 |
| |
Cash used in financing |
| (4,496 | ) |
|
| (167 | ) |
|
| (4,965 | ) |
|
| (1,428 | ) |
Investing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of restricted short-term investments |
| 100 |
|
|
| - |
|
|
| 100 |
|
|
| - |
|
Proceeds from sale of property, plant and equipment |
| 23 |
|
|
| 43 |
|
|
| 23 |
|
|
| 54 |
|
Purchase of property and equipment |
| (264 | ) |
|
| (253 | ) |
|
| (730 | ) |
|
| (419 | ) |
Repayment of patent finance obligations |
| - |
|
|
| (1,389 | ) |
|
| - |
|
|
| (4,167 | ) |
Purchase of intangibles |
| (1,332 | ) |
|
| (25 | ) |
|
| (1,425 | ) |
|
| (114 | ) |
Cash used in investing |
| (1,473 | ) |
|
| (1,624 | ) |
|
| (2,032 | ) |
|
| (4,646 | ) |
Foreign exchange gain (loss) on cash held in foreign currency |
| (33 | ) |
|
| 48 |
|
|
| 65 |
|
|
| (103 | ) |
Net increase (decrease) in cash and cash equivalents |
| (15,788 | ) |
|
| (10,717 | ) |
|
| 4,917 |
|
|
| (24,120 | ) |
Cash and cash equivalents, beginning of period |
| 84,634 |
|
|
| 68,415 |
|
|
| 63,929 |
|
|
| 81,818 |
|
Cash and cash equivalents, end of period | $ | 68,846 |
|
| $ | 57,698 |
|
| $ | 68,846 |
|
| $ | 57,698 |
|
See accompanying notes to these unaudited condensed consolidated interim financial statements
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 5 |
FINANCIAL STATEMENTS |
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, 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 |
|
For the three months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| - |
|
|
| - |
|
|
| - |
|
|
| 9,335 |
|
|
| 9,335 |
|
Other comprehensive loss |
| - |
|
|
| - |
|
|
| (546 | ) |
|
| - |
|
|
| (546 | ) |
Stock-based compensation expense |
| - |
|
|
| 194 |
|
|
| - |
|
|
| - |
|
|
| 194 |
|
Dividends declared (Note 9) |
| - |
|
|
| - |
|
|
| - |
|
|
| (1,117 | ) |
|
| (1,117 | ) |
Balance - September 30, 2019 | $ | 419,111 |
|
| $ | 23,560 |
|
| $ | 16,454 |
|
| $ | (251,897 | ) |
| $ | 207,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
For the three months ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| - |
|
|
| - |
|
|
| - |
|
|
| (9,281 | ) |
|
| (9,281 | ) |
Other comprehensive income |
| - |
|
|
| - |
|
|
| 424 |
|
|
| - |
|
|
| 424 |
|
Stock-based compensation expense |
| - |
|
|
| 114 |
|
|
| - |
|
|
| - |
|
|
| 114 |
|
Conversion of deferred stock units to common shares |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Shares issued under Employee Share Purchase Plan |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Dividends declared (Note 9) |
| - |
|
|
| - |
|
|
| - |
|
|
| (1,143 | ) |
|
| (1,143 | ) |
Balance - September 30, 2018 | $ | 419,111 |
|
| $ | 22,757 |
|
| $ | 18,264 |
|
| $ | (232,378 | ) |
| $ | 227,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited condensed consolidated interim financial statements
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 6 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
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.
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
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 Third Quarter Financial Results |
| 7 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 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 |
|
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 assets and lease liabilities. Lease expense is recognized on a straight-line basis over the lease term.
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 8 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
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.
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.
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 9 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
The following table presents the fair values of financial instruments recorded at fair value across the levels of the fair value hierarchy.
|
|
|
|
|
| As at September 30, 2019 |
|
| As at December 31, 2018 |
| ||||||||||
|
| Hierarchy Level |
|
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
| |||||
Cash and cash equivalents |
|
| 1 |
|
| $ | 68,846 |
|
| $ | 68,846 |
|
| $ | 63,929 |
|
| $ | 63,929 |
|
Short-term investments |
|
| 1 |
|
|
| 1,171 |
|
|
| 1,171 |
|
|
| 1,139 |
|
|
| 1,139 |
|
Restricted short-term investments |
|
| 1 |
|
|
| 2,100 |
|
|
| 2,100 |
|
|
| 2,200 |
|
|
| 2,200 |
|
Derivative financial instrument |
|
| 2 |
|
|
| (8 | ) |
|
| (8 | ) |
|
| 91 |
|
|
| 91 |
|
Long-term debt |
|
| 2 |
|
|
| 211 |
|
|
| 211 |
|
|
| 472 |
|
|
| 472 |
|
Contingent consideration |
|
| 3 |
|
|
| - |
|
|
| - |
|
|
| 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 September 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 Third Quarter Financial Results |
| 10 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 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 nine months ended September 30, 2019 are as follows:
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
|
| $ Change |
|
| % Change |
| ||||
Unbilled revenue |
|
|
| $ | 7,234 |
|
| $ | 3,990 |
|
| $ | 3,244 |
|
|
| 81 | % |
Deferred revenue - current |
|
|
|
| (5,550 | ) |
|
| (4,670 | ) |
|
| (880 | ) |
|
| 19 | % |
Deferred revenue - non-current |
|
|
|
| (1,128 | ) |
|
| (1,435 | ) |
|
| 307 |
|
|
| -21 | % |
Net contract assets (liabilities) |
|
|
| $ | 556 |
|
| $ | (2,115 | ) |
| $ | 2,671 |
|
|
| -126 | % |
The net change in unbilled revenues of $3,244 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 nine months ended September 30, 2019 that was included in deferred revenue at the beginning of the period was $3,662 (nine months ended September 30, 2018 – $4,199).
6. INVENTORIES
Inventories consist of the following at September 30, 2019:
|
|
|
|
|
|
| |
As at | September 30, 2019 |
|
| December 31, 2018 |
| ||
Raw materials | $ | 796 |
|
| $ | 729 |
|
Original equipment manufacturer materials |
| 3,183 |
|
|
| 3,128 |
|
Work in process |
| 906 |
|
|
| 814 |
|
Finished goods |
| 1,698 |
|
|
| 1,289 |
|
| $ | 6,583 |
|
| $ | 5,960 |
|
For the three and nine months ended September 30, 2019, the Company recorded non-cash, pretax charges of $47 and $93 respectively (2018 - $26 and $26) relating to inventory obsolescence.
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 11 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 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 5 months to 9.7 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 or at predetermined dates as specified within the lease contract. 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 three months ended September 30, 2019 |
|
| For the nine months ended September 30, 2019 |
| ||||
$ | 326 |
|
| $ | 328 |
|
| $ | 268 |
|
| $ | 922 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases | $ | 362 |
|
| $ | 242 |
|
| $ | 181 |
|
| $ | 785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As at September 30, 2019 |
|
| As at January 1, 2019 |
| ||
Right-of-use assets |
|
|
|
|
|
|
|
| $ | 3,714 |
|
| $ | 2,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
| $ | 732 |
|
| $ | 823 |
|
Long-term |
|
|
|
|
|
|
|
|
| 2,897 |
|
|
| 1,913 |
|
|
|
|
|
|
|
|
|
| $ | 3,629 |
|
| $ | 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 |
|
|
|
|
|
|
|
| $ | 231 |
|
| $ | 955 |
|
2020 |
|
|
|
|
|
|
|
|
| 909 |
|
|
| 704 |
|
2021 |
|
|
|
|
|
|
|
|
| 874 |
|
|
| 668 |
|
2022 |
|
|
|
|
|
|
|
|
| 781 |
|
|
| 574 |
|
2023 |
|
|
|
|
|
|
|
|
| 310 |
|
|
| 113 |
|
Thereafter |
|
|
|
|
|
|
|
|
| 1,184 |
|
|
| 18 |
|
Total lease payments |
|
|
|
|
|
|
|
|
| 4,289 |
|
|
| 3,032 |
|
Less imputed interest |
|
|
|
|
|
|
|
|
| 660 |
|
|
| (296 | ) |
Total |
|
|
|
|
|
|
|
| $ | 3,629 |
|
| $ | 2,736 |
|
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 12 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 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 $nil and $42 in the three and nine months ended September 30, 2019, respectively (2018 - $nil and $nil). At September 30, 2019 accounts receivable from XPCT was $2 (December 31, 2018 - $17).
| September 30, 2019 |
|
| December 31, 2018 |
| ||
Carrying value, beginning of the period | $ | 3,822 |
|
| $ | 3,383 |
|
Currency gain on financial statement translation |
| (155 | ) |
|
| (186 | ) |
Company's share of earnings |
| 370 |
|
|
| 942 |
|
Dividend received |
| - |
|
|
| (317 | ) |
Carrying value, end of the period | $ | 4,037 |
|
| $ | 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 September 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 |
|
3nd Quarter | Cdn | $ | 0.0125 |
|
| US | $ | 1,117 |
|
| Cdn | $ | 0.0125 |
|
| US | $ | 1,143 |
|
| Cdn | $ | 0.0375 |
|
| US | $ | 3,348 |
|
| Cdn | $ | 0.0375 |
|
| US | $ | 3,469 |
|
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 |
|
3nd Quarter | Cdn | $ | 0.0125 |
|
| Cdn | $ | 0.0125 |
|
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 13 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 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 September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2019 |
|
|
| 2018 |
|
|
| 2019 |
|
|
| 2018 |
|
Basic weighted average common shares outstanding |
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,752,303 |
|
Effect of stock options |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,817,466 |
|
|
| 118,752,303 |
|
For the three and nine months ended September 30, 2019, the effect of stock options totaling 1,610,682 and 1,427,455 were anti-dilutive (2018 – 7,029,141 and 7,029,141 respectively were anti-dilutive).
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 if VIZIYA achieved certain earnings before interest, taxes and amortization (“Eligible Earnings”) targets for the period from April 1, 2017 to July 31, 2019. This amount would have consisted of cash consideration of up to $6,000 and the issuance of up to 3,647,417 additional Common Shares. Additionally, subject to the terms of the acquisition agreement, if VIZIYA achieved cumulative Eligible Earnings during that period exceeding $11,900, then the Company would be required to pay 50% of that excess Eligible Earnings as additional contingent consideration until that cumulative Eligible Earnings reached a cap of $24,000. The liability associated with the anticipated 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 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.
On July 31, 2019, VIZIYA management represented to the Company that it had entered into two agreements for the sale of perpetual software licenses which may have qualified as Eligible Earnings pursuant to the acquisition agreement for purposes of the contingent consideration earn-out payment. As these revenue contracts were entered into subsequent to June 30, 2019 but prior to the issuance of the second quarter interim financial statements, management was required to consider these contracts in estimating the fair value of the contingent consideration liability and recognized a liability of $11,577 with a corresponding acquisition-related compensation expense of $10,648 within “Special charges”.
During the quarter ended September 30, 2019, however, management determined that revenue under the contracts could not be recognized as at July 31, 2019 and that VIZIYA did not achieve the minimum amount of cumulative Eligible Earnings required as at July 31, 2019. As such, the Company has reversed its total accrual for contingent consideration recognizing a gain in the three months ended September 30, 2019 of $11,577.
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 14 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
The former shareholders of VIZIYA may not agree with the Company's determination of Eligible Earnings and they may require arbitration of that calculation as permitted pursuant to the terms of the acquisition agreement. The results of any arbitration may, or may not, result in a determination that the former shareholders may be entitled to be paid some or all of the earn out under the acquisition agreement.
11. SPECIAL CHARGES
During the nine months ended September 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 $7 and $539 during the three and nine months ended September 30, 2019, respectively.
The Company recorded a recovery on the contingent consideration (see Note 10) during the three months ended September 30, 2019 in the amount of $11,577 resulting in a net recovery of $929 for the nine months ended September 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 |
| ||||
Nine months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018 Restructuring Program | $ | 1,836 |
|
| $ | - |
|
| $ | - |
|
| $ | 1,836 |
|
Contingent consideration adjustment (Note 10) |
| - |
|
|
| - |
|
|
| (929 | ) |
|
| (929 | ) |
Special charges, net | $ | 1,836 |
|
| $ | - |
|
| $ | (929 | ) |
| $ | 907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018 Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual as at January 1, 2019 | $ | 1,762 |
|
| $ | 151 |
|
| $ | 1,300 |
|
| $ | 3,213 |
|
Workforce reduction |
| 967 |
|
|
| - |
|
|
| - |
|
|
| 967 |
|
Facilities costs |
| 869 |
|
|
| - |
|
|
| - |
|
|
| 869 |
|
Total accruals and costs |
| 3,598 |
|
|
| 151 |
|
|
| 1,300 |
|
|
| 5,049 |
|
Less amounts paid or assets written off to date |
| 3,598 |
|
|
| 151 |
|
|
| 1,300 |
|
|
| 5,049 |
|
Restructuring accrual as at September 30, 2019 | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 15 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
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 nine months ended September 30, 2019 and September 30, 2018 is as follows:
| September 30, |
|
| September 30, |
| ||
2019 |
|
| 2018 |
| |||
Income (loss) before income taxes | $ | 10,119 |
|
| $ | (35,756 | ) |
Expected income tax expense (recovery) at Canadian statutory income tax rate of 26.5% (2018 - 26.5%) |
| 2,682 |
|
|
| (9,475 | ) |
Permanent differences |
| (151 | ) |
|
| (102 | ) |
Foreign withholding taxes paid |
| 562 |
|
|
| 104 |
|
Foreign rate differential |
| (25 | ) |
|
| (193 | ) |
Change in valuation allowance |
| 3,443 |
|
|
| 4,388 |
|
Other |
| (1,286 | ) |
|
| (1,287 | ) |
Income tax expense (recovery) | $ | 5,225 |
|
| $ | (6,565 | ) |
| September 30, |
|
| September 30, |
| ||
2019 |
|
| 2018 |
| |||
Income (loss) before income taxes: |
|
|
|
|
|
|
|
Canadian |
| 10,441 |
|
|
| (23,472 | ) |
Foreign |
| (322 | ) |
|
| (12,138 | ) |
|
|
|
|
|
|
|
|
Current income tax expense |
|
|
|
|
|
|
|
Canadian |
| 1,787 |
|
|
| 452 |
|
Foreign |
| 3,521 |
|
|
| 199 |
|
|
|
|
|
|
|
|
|
Deferred income tax recovery |
|
|
|
|
|
|
|
Canadian |
| (57 | ) |
|
| (7,068 | ) |
Foreign |
| (26 | ) |
|
| (148 | ) |
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 16 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
The significant components of the Company’s deferred income tax assets and liabilities are as follows:
| September 30, |
|
| December 31, |
| ||
| 2019 |
|
| 2018 |
| ||
Deferred tax assets |
|
|
|
|
|
|
|
Difference between tax and book value of capital and intangible assets |
| 8,239 |
|
|
| 8,834 |
|
Tax loss carryforwards |
| 26,950 |
|
|
| 29,003 |
|
Scientific research and experimental development ("SR&ED") carryforwards |
| 6,434 |
|
|
| 6,376 |
|
Investment tax credits |
| 6,827 |
|
|
| 3,028 |
|
Unbilled revenue and prepaid accounts |
| 584 |
|
|
| 359 |
|
Accounts payable and accrued liabilities |
| 335 |
|
|
| 338 |
|
Investments |
| - |
|
|
| 126 |
|
Difference between tax and book value of loan receivable |
| 3 |
|
|
| 3 |
|
Deferred tax assets, gross |
| 49,372 |
|
|
| 48,067 |
|
Valuation allowance |
| (18,706 | ) |
|
| (15,146 | ) |
Deferred tax assets, net |
| 30,666 |
|
|
| 32,921 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
Difference between tax and book value of capital and intangible assets |
| (7,856 | ) |
|
| (9,851 | ) |
Unbilled revenue and prepaid accounts |
| (81 | ) |
|
| (266 | ) |
Investments |
| (68 | ) |
|
| - |
|
Deferred tax liabilities |
| (8,005 | ) |
|
| (10,117 | ) |
Total deferred tax assets, net | $ | 22,661 |
|
| $ | 22,804 |
|
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 September 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
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 17 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
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.
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 September 30, |
|
| Nine months ended September 30, |
| ||||||||||
| 2019 |
|
|
| 2018 |
|
|
| 2019 |
|
|
| 2018 |
| |
Segment Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing | $ | (3,291 | ) |
| $ | (2,178 | ) |
| $ | 23,766 |
|
| $ | (11,582 | ) |
Intelligent Systems |
| 1,648 |
|
|
| 1,442 |
|
|
| 3,346 |
|
|
| 1,891 |
|
Enterprise Software |
| 5,622 |
|
|
| 158 |
|
|
| 5,964 |
|
|
| 2,101 |
|
Total |
| 3,979 |
|
|
| (578 | ) |
|
| 33,076 |
|
|
| (7,590 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses |
| 1,930 |
|
|
| 1,934 |
|
|
| 5,701 |
|
|
| 6,210 |
|
Fair value purchase price adjustments |
| - |
|
|
| 8 |
|
|
| - |
|
|
| 314 |
|
Stock-based compensation expense |
| 194 |
|
|
| 114 |
|
|
| 603 |
|
|
| 268 |
|
Depreciation of property, plant and equipment |
| 181 |
|
|
| 372 |
|
|
| 921 |
|
|
| 1,155 |
|
Special charges |
| (11,570 | ) |
|
| 2,320 |
|
|
| 907 |
|
|
| 2,320 |
|
Amortization of intangibles |
| 5,134 |
|
|
| 6,298 |
|
|
| 15,578 |
|
|
| 19,491 |
|
Results from operations |
| 8,110 |
|
|
| (11,624 | ) |
|
| 9,366 |
|
|
| (37,348 | ) |
Finance income |
| (378 | ) |
|
| (140 | ) |
|
| (871 | ) |
|
| (522 | ) |
Finance expense |
| 62 |
|
|
| 78 |
|
|
| 341 |
|
|
| 157 |
|
Foreign exchange loss (gain) |
| (172 | ) |
|
| 91 |
|
|
| 150 |
|
|
| (74 | ) |
Other income |
| (119 | ) |
|
| (247 | ) |
|
| (373 | ) |
|
| (1,153 | ) |
Income (loss) before taxes |
| 8,717 |
|
|
| (11,406 | ) |
|
| 10,119 |
|
|
| (35,756 | ) |
Current income tax expense |
| 1,275 |
|
|
| 755 |
|
|
| 5,308 |
|
|
| 651 |
|
Deferred income tax recovery |
| (1,893 | ) |
|
| (2,880 | ) |
|
| (83 | ) |
|
| (7,216 | ) |
Income tax expense (recovery) |
| (618 | ) |
|
| (2,125 | ) |
|
| 5,225 |
|
|
| (6,565 | ) |
Net income (loss) | $ | 9,335 |
|
| $ | (9,281 | ) |
| $ | 4,894 |
|
| $ | (29,191 | ) |
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 18 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
Segment assets as at September 30, 2019 and December 31, 2018 are as follows:
As at |
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||
Licensing |
|
|
|
| $ | 68,448 |
|
| $ | 93,225 |
|
Intelligent Systems |
|
|
|
|
| 46,160 |
|
|
| 45,453 |
|
Enterprise Software |
|
|
|
|
| 11,434 |
|
|
| 30,901 |
|
Total segment assets |
|
|
|
|
| 126,042 |
|
|
| 169,579 |
|
Total corporate assets |
|
|
|
|
| 115,565 |
|
|
| 67,833 |
|
Total assets |
|
|
|
| $ | 241,607 |
|
| $ | 237,412 |
|
Segment revenue by category for the three and nine months ended September 30, 2019 and 2018 are as follows:
|
| For the three months ended September 30, 2019 |
| |||||||||||||
|
| Licensing |
|
| Intelligent Systems |
|
| Enterprise Software |
|
| Total |
| ||||
License |
| $ | 3,660 |
|
| $ | - |
|
| $ | 6,882 |
|
| $ | 10,542 |
|
Systems |
|
| - |
|
|
| 9,532 |
|
|
| - |
|
|
| 9,532 |
|
Services |
|
| - |
|
|
| - |
|
|
| 610 |
|
|
| 610 |
|
Recurring |
|
| 105 |
|
|
| 3,321 |
|
|
| 1,259 |
|
|
| 4,685 |
|
Total revenue |
| $ | 3,765 |
|
| $ | 12,853 |
|
| $ | 8,751 |
|
| $ | 25,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2018 |
| |||||||||||||
|
| Licensing |
|
| Intelligent Systems |
|
| Enterprise Software |
|
| Total |
| ||||
License |
| $ | 3,902 |
|
| $ | - |
|
| $ | 860 |
|
| $ | 4,762 |
|
Systems |
|
| - |
|
|
| 7,885 |
|
|
| - |
|
|
| 7,885 |
|
Services |
|
| - |
|
|
| - |
|
|
| 660 |
|
|
| 660 |
|
Recurring |
|
| 543 |
|
|
| 4,554 |
|
|
| 1,175 |
|
|
| 6,272 |
|
Total revenue |
| $ | 4,445 |
|
| $ | 12,439 |
|
| $ | 2,695 |
|
| $ | 19,579 |
|
| For the nine months ended September 30, 2019 |
| ||||||||||||||
|
| Licensing |
|
| Intelligent Systems |
|
| Enterprise Software |
|
| Total |
| ||||
License |
| $ | 55,805 |
|
| $ | - |
|
| $ | 8,298 |
|
| $ | 64,103 |
|
Systems |
|
| - |
|
|
| 25,626 |
|
|
| - |
|
|
| 25,626 |
|
Services |
|
| - |
|
|
| - |
|
|
| 1,803 |
|
|
| 1,803 |
|
Recurring |
|
| 828 |
|
|
| 11,351 |
|
|
| 3,852 |
|
|
| 16,031 |
|
Total revenue |
| $ | 56,633 |
|
| $ | 36,977 |
|
| $ | 13,953 |
|
| $ | 107,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2018 |
| |||||||||||||
|
| Licensing |
|
| Intelligent Systems |
|
| Enterprise Software |
|
| Total |
| ||||
License |
| $ | 8,880 |
|
| $ | - |
|
| $ | 4,018 |
|
| $ | 12,898 |
|
Systems |
|
| - |
|
|
| 19,757 |
|
|
| - |
|
|
| 19,757 |
|
Services |
|
| - |
|
|
| - |
|
|
| 2,040 |
|
|
| 2,040 |
|
Recurring |
|
| 1,308 |
|
|
| 12,753 |
|
|
| 3,229 |
|
|
| 17,290 |
|
Total revenue |
| $ | 10,188 |
|
| $ | 32,510 |
|
| $ | 9,287 |
|
| $ | 51,985 |
|
Revenue by geography for the three and nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 19 |
|
|
Quarterhill Inc.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2019 and 2018
(Unaudited)
(In thousands of United States dollars, except share and per share amounts, unless otherwise stated)
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | $ | 10,080 |
|
| $ | 10,610 |
|
| $ | 53,323 |
|
| $ | 33,036 |
|
Korea |
| 2 |
|
|
| 101 |
|
|
| 27,425 |
|
|
| 329 |
|
South Africa |
| 6,294 |
|
|
| - |
|
|
| 6,294 |
|
|
| - |
|
Taiwan |
| 3,675 |
|
|
| 3,805 |
|
|
| 4,296 |
|
|
| 4,136 |
|
Canada |
| 881 |
|
|
| 1,455 |
|
|
| 3,211 |
|
|
| 3,219 |
|
Chile |
| 411 |
|
|
| 922 |
|
|
| 1,810 |
|
|
| 1,812 |
|
Australia |
| 577 |
|
|
| 542 |
|
|
| 1,775 |
|
|
| 1,232 |
|
Ukraine |
| 1,736 |
|
|
| - |
|
|
| 1,736 |
|
|
| - |
|
Thailand |
| 261 |
|
|
| 31 |
|
|
| 809 |
|
|
| 452 |
|
Finland |
| 134 |
|
|
| 18 |
|
|
| 490 |
|
|
| 914 |
|
Germany |
| 64 |
|
|
| 94 |
|
|
| 182 |
|
|
| 605 |
|
China |
| 118 |
|
|
| 330 |
|
|
| 162 |
|
|
| 828 |
|
Japan |
| - |
|
|
| - |
|
|
| - |
|
|
| 911 |
|
Rest of the world |
| 1,136 |
|
|
| 1,671 |
|
|
| 6,050 |
|
|
| 4,511 |
|
Total revenue | $ | 25,369 |
|
| $ | 19,579 |
|
| $ | 107,563 |
|
| $ | 51,985 |
|
Non-current assets by geography as at September 30, 2019 and December 31, 2018 are as follows:
As at |
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||
|
|
|
|
|
|
|
|
|
|
| |
United States |
|
|
|
| $ | 15,088 |
|
| $ | 17,615 |
|
Canada |
|
|
|
|
| 120,271 |
|
|
| 127,450 |
|
Chile |
|
|
|
|
| 892 |
|
|
| 897 |
|
Belgium |
|
|
|
|
| 990 |
|
|
| 707 |
|
Mexico |
|
|
|
|
| 24 |
|
|
| 92 |
|
Total non-current assets |
|
|
|
| $ | 137,265 |
|
| $ | 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 nine months ended September 30, 2019, there were nil and two major customers identified, respectively (three and nine months ended September 30, 2018 – nil).
Remaining Performance Obligations
As at September 30, 2019 the amount of transaction price allocated to remaining performance obligations was $33,347. The Company expects to recognize approximately 30% of this balance as revenue in the remainder of 2019, 48% in 2020 and 22% thereafter.
|
|
|
|
|
|
|
|
|
2019 Third Quarter Financial Results |
| 20 |