6-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________

FORM 6-K 

__________________________

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

August 11, 2017
Commission File Number: 001-35152

__________________________

QUARTERHILL INC.

(Translation of registrant’s name into English)

__________________________

303 Terry Fox Drive
Suite 300
Ottawa, Ontario K2K 3J1
Canada
(Address of principal executive office)

__________________________

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F   ☐             Form 40-F   ☑

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐

EXHIBIT LIST

Exhibit	Description
99.1	Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months ended June 30, 2017 and 2016
99.2	Condensed Consolidated Interim Financial Statements for the Three and Six Months ended June 30, 2017
99.3	Certification of the Chief Executive Officer - Form 52-109F2 Certification of Interim Filings Full Certificate
99.4	Certification of the Chief Financial Officer  -  Form 52-109F2 Certification of Interim Filings Full Certificate

SIGNATURES

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

	QUARTERHILL INC.
Date: August 11, 2017	By:	/s/ Prashant R. Watchmaker
		Name: Prashant R. Watchmaker  Title: Senior Vice-President & Corporate Secretary

EX-99.1

Exhibit 99.1

Management’s Discussion and Analysis of Financial Condition and Results of Operations

For the three and six months ended June 30, 2017 and 2016

August 9, 2017

	MD&A

CONTENTS

Introduction	1
Cautionary Note Regarding Forward-Looking Statements	2
Non-GAAP Disclosures	2
Description of Our Business	3
Risks and Uncertainties	5
Business Combinations	17
Overall Performance	20
Segmented Results	25
Selected Consolidated Quarterly Results	32
Capital and Liquidity	33
Outstanding Common Share Data	34
Off-Balance Sheet Arrangements	34
Proposed Transactions	34
Critical Accounting Policies, Including Initial Adoption of Policies, and Critical Estimates	34
Disclosure Controls and Procedures	39
Management’s Report on Internal Controls Over Financial Reporting	39
Changes in Internal Controls	40

Second Quarter 2017

	MD&A

Introduction

This Management’s Discussion and Analysis of Quarterhill Inc. (this “MD&A”) is dated August 9, 2017.

On April 17, 2017, Wi-LAN Inc. announced that our Board of Directors had approved a plan to transform the company into a growth-oriented diversified holding company by acquiring businesses in the Industrial “Internet of Things” market that will operate alongside our existing intellectual property licensing operations. As part of this transformation, Wi-LAN Inc. changed its name to Quarterhill Inc. on June 1, 2017 and began trading under the symbol “QTRH” on both the Toronto Stock Exchange (the “TSX”) and the Nasdaq Global Select Market (the “Nasdaq”) on June 5, 2017.

References in this MD&A to “Quarterhill”, “we”, “us” and “our” refer to Quarterhill Inc. and its consolidated subsidiaries during the periods presented unless the context requires otherwise.

Quarterhill’s growth strategy focuses on acquiring technology companies in the Industrial Internet of Things market across multiple verticals.

This MD&A should be read in conjunction with Quarterhill’s unaudited condensed consolidated interim financial statements and the notes thereto for the three and six-month period ended June 30, 2017 as well as with Wi-LAN Inc.’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2016, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable United States Securities and Exchange Commission (“SEC”) regulations for interim and annual financial information as applicable.

Unless otherwise indicated, all financial information in this MD&A is reported in thousands of United States dollars, except for share and earnings per share data which is reported in number of shares and U.S. dollars respectively. The tables and charts included in this document form an integral part of this MD&A.

We have prepared this MD&A with reference to National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators. Under the U.S./Canada Multijurisdictional Disclosure System, we are permitted to prepare this MD&A in accordance with Canadian disclosure requirements which may differ from U.S. disclosure requirements. This MD&A provides information for the three and six-month periods ended June 30, 2017 and up to and including August 8, 2017. Additional information filed by us with the Canadian Securities Administrators, including quarterly reports, annual reports and our Annual Information Form for the year ended December 31, 2016, is available on-line at www.sedar.com and also on our website at www.Quarterhill.com. Our Form 40-F can be found on the SEC’s EDGAR website at www.sec.gov.

Our management is responsible for establishing appropriate information systems, procedures and controls to ensure that all financial information disclosed externally, including this MD&A, and used internally by us, is complete and reliable. These procedures include the review and approval of our financial statements and associated information, including this MD&A, first by our management’s Disclosure Committee, then by our Board of Directors’ Audit Committee (the “Audit Committee”) and, finally, by our Board of Directors as a whole (the “Board”).

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	MD&A

Cautionary Note Regarding Forward-Looking Statements

This MD&A contains forward-looking statements and forward-looking information within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other applicable United States and Canadian securities laws, including such statements relating to:

• assumptions and expectations described in our critical accounting policies and estimates;

• our expectation regarding the adoption and impact of certain accounting pronouncements;

• our expectation regarding the growth rates of our subsidiaries’ businesses;

• our estimates regarding our effective tax rate;

• our expectations regarding ability to acquire additional businesses to further our growth; and

• our expectations with respect to the sufficiency of our financial resources.

The words “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “would”, “intend”, “believe”, “plan”, “continue”, “project”, the negatives of these words or other variations on these words, comparable terms and similar expressions are intended to identify forward-looking statements and forward-looking information. Forward-looking statements and forward-looking information are based on estimates and assumptions made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate in the circumstances.

We provide forward-looking statements and forward-looking information to assist external stakeholders in understanding our management’s expectations and plans relating to the future as of the date of this MD&A and such statements and information may not be appropriate for any other purposes. The forward-looking statements and forward-looking information in this MD&A are made as of the date of this MD&A only. We have no intention and undertake no obligation to update or revise any forward-looking statements or forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

Non-GAAP Disclosures

Quarterhill has historically used a set of metrics when evaluating our operational and financial performance. We continually monitor, evaluate and update these metrics as required to ensure they provide information considered most useful, in the opinion of Quarterhill management, to any decision-making based on Quarterhill’s performance. This section defines, quantifies and analyzes the key performance indicators used, or to be used, by Quarterhill management and referred to elsewhere in this MD&A, which are not recognized under GAAP and have no standardized meaning prescribed by GAAP. These indicators and measures are therefore unlikely to be comparable to similar measures presented by other issuers.

In this MD&A, we use the Non-GAAP term “Adjusted EBITDA” to mean net income from continuing operations before: (i) income taxes; (ii) finance expense or income; (iii) amortization of intangibles; (iv) special charges; (v) depreciation of property, plant and equipment; (vi) effects of deleted deferred revenue; (vii) the effects of fair value step up in inventory acquired, and (viii) stock based compensation. Adjusted EBITDA is used by Quarterhill management to assess our normalized cash generated on a consolidated basis and in our operating segments. Adjusted EBITDA is also a performance measure that may be used by investors to analyze the cash generated by Quarterhill and our operating segments.

Second Quarter 2017 2

	MD&A

Description of Our Business

Quarterhill is a Canadian company with its common shares (“Common Shares”) listed under the symbol “QTRH” on each of the TSX and the Nasdaq.

We are developing a portfolio primarily consisting of established businesses having histories of generating cash flows from their operations in the “Technology”, “Mobility”, and “Factory” vertical segments of the Industrial “Internet of Things” market, all as more fully discussed below in this MD&A.  We are also targeting a fourth Internet of Things vertical which we are calling “City” and which would represent companies that operate in such industries as building controls, emergency response, waste water treatment and other similar businesses. Our aim is to build a consistently profitable company with a diversified investment base and global market presence within our vertical segments to increase shareholder value by emphasizing the importance of recurring revenue streams and the predictability of operating results. We intend to achieve these objectives through a combination of organic growth and acquisitions.

Together with the management teams of our operating subsidiaries, we are working to identify acquisitions to facilitate our entry into new markets or to increase our existing product or service offerings within our vertical segments. We are actively looking to acquire businesses that operate within the Industrial “Internet of Things” market in our vertical segments, focusing on businesses that have:

• a broad range of products and services focused on capturing, analyzing and interpreting data;

• a demonstrated history of growing sustainable cash flow;

• a capable and experienced, growth-oriented management team;

• a significant market share in their business areas with strong customer relationships;

• a sustainable competitive advantage; and

• an ability to grow organically and through additional acquisitions.

“Internet of Things”

The “Internet of Things” has been described as the “third wave” of the Internet age, or the “ubiquitous computing” age.

The “first wave” of the Internet age was born in the desktop computing era and characterized by static web pages that were revolutionary in connecting people around the world and disseminating information. Successful business platforms of the first wave created and leveraged the “connectivity” of the Internet (such as Cisco, AOL and Microsoft).

The “second wave” of the Internet era moved from building connectivity in the first wave to empowering users to access that connectivity. This second wave also witnessed the move from desktop to mobile computing (mobile phones, tablets), enabling real-time social networking platforms such as Facebook, Twitter, YouTube, Instagram, etc., and the first Cloud-based business applications accessible across a multitude of mobile and stationary devices such as Salesforce.

The “third wave” of the Internet era, the Internet of Things, utilizes many of the technologies from the first two waves (infrastructure, connectivity, Cloud) to create the “ubiquitous computing” age. This third wave is witnessing the interconnection of devices without human intervention, particularly devices with sensors, or even standalone sensors, monitoring specific data points. These “intelligent” devices (such as modern automobile tires) perform traditional functions, but also allow for the communication of data (such as by way of RFID tags embedded in automobile tires).

Within the Internet of Things, data will be available between devices via the Internet or in the Cloud to anyone who can develop platforms to exploit this data, such as parking space management, traffic monitoring, maintenance monitoring, collision avoidance, inventory control, optimized energy consumption, etc. The practically infinite possibilities, limited only by our imaginations, are being realized today and will be the focus of business for the next several decades.

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	MD&A

Operating subsidiaries in our Technology, Mobility, and Factory vertical segments are working to bring together intelligent devices, data collection, data analytics and people in networks that can and will monitor, collect, exchange, analyze and deliver valuable information to drive smarter, faster, more efficient and better business decisions for individuals and enterprises all over the world.

At the date of this MD&A, we have investments in three of our four targeted vertical segments.

Technology Segment

Our Technology segment includes companies that count technology licensing as their principal business activity. We have an investment in Wi-LAN Inc. (“WiLAN”), a leading patent licensing company, based in Ottawa, Canada with offices in Orange County and Carlsbad, California. WiLAN has developed and patented inventions that have proven of great value to third-parties and has a history of acquiring patents that it believes hold great value from other inventors. WiLAN also works with patent inventors and owners to unlock the value trapped in patents that their inventors or owners have been unable to obtain, by developing and licensing their patents while sharing with those inventors and assignees both any revenues generated by these patents and much of the financial risk associated with licensing these patents.

Current patent portfolios held by WiLAN include patents relating to 3D television technologies, automotive headlight assemblies, phased loop semiconductor technology, 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.

WiLAN’s agreements licensing its patents generally take into consideration license rights and releases for past infringement. Related payments may be lump-sum, fixed-price with set payments made over a specified duration or running royalty-based depending on a price per-unit and/or a percentage of product sales or service revenues enjoyed by licensees. Running royalty-based licensees generally provide WiLAN with quarterly or semi-annual royalty reports which are typically received after the period in which the underlying sales occurred.

WiLAN’s employees have unique skill sets and proven abilities to conclude license agreements. This is important because the strength of asserted patents is only part of what is needed to derive substantial revenues from them; human expertise in the relevant markets, in patent portfolio development, and in patent licensing and litigation are as crucial as strong patents.

Mobility Segment

Our Mobility segment includes companies providing systems and services focused on the interconnection of devices for mobile applications. Our first investment in this segment is International Road Dynamics Inc. (“IRD”) headquartered in Saskatoon, Canada, one of the world’s leading providers of integrated systems and solutions for the global Intelligent Transportation Systems (“ITS”) industry. The ITS industry is focused on improving the mobility, 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.

IRD’s core strengths are its national and international sales networks and installed base of systems, its intellectual property (trade names, patents, trademarks and other proprietary knowledge), and its ability to utilize a variety of patented and proprietary and original equipment manufacturer technologies, including IRD’s proprietary “Weigh-In-Motion” and vehicle measurement technologies, to detect, classify and weigh vehicles at highway speeds. IRD delivers automated systems for commercial vehicle operations at truck weigh stations, border crossings, highway traffic data

Second Quarter 2017 4

	MD&A

collection, highway toll collection systems, as well as for vehicle fleet management systems around the world. IRD is a leading provider of “Weigh-In-Motion” systems worldwide.

IRD’s customers include government transportation agencies, traffic engineering consultants and operators, city and municipal agencies, concessionaires and industrial, mining and transportation service companies worldwide.

IRD’s revenue is derived from selling integrated transportation systems, services and products. Integrated systems are made up of a combination of proprietary electronics, software technology, “Weigh-In-Motion” and vehicle measurement products and installation and commissioning services. Service contracts are typically multi-year, renewable arrangements for IRD to maintain and service its installed systems and products for its customers. In addition, IRD enters into recurring revenue service contracts under which they own the equipment providing customer services such as delivery of real time and statistical traffic information and truck weigh station bypass services. IRD also sells, integrates and maintains “off-the-shelf” products, typically equipment such as machine vision for vehicle identification, automated number plate recognition, automatic vehicle identification readers and transponders and other ITS technologies.

Factory Segment

We consider companies focused on business operations optimization, predictive maintenance, inventory optimization and health and safety in production environments as operating in a “factory” environment and we classify our related investments in our Factory segment. Our first investment in this segment is VIZIYA Corp. (“VIZIYA”) based in Hamilton, Canada, a software company providing Enterprise Asset Management (“EAM”) 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.

VIZIYA was formed in 2007 by industry veterans with both maintenance and software expertise and its first product – the WorkAlign Scheduler – was designed as a collaborative partnership with Barrick Gold. Through its 2013 acquisition of Global PTM, a leading U.S. EAM consultant, VIZIYA has built a portfolio of EAM products and services purpose-built for maintenance professionals. VIZIYA’s standard accessory maintenance solutions are integrated with all major enterprise resource planning systems including Oracle E-Business, Oracle JDE, SAP, IBM Maximo and Infor.

Risks and Uncertainties

Quarterhill and our operating subsidiaries operate in ever-changing business and competitive economic environments that expose us to a number of risks and uncertainties, including the risk factors described below. The risks and uncertainties described below are not, however, the only risks we face. We may also be subject to additional risks and uncertainties that are currently unknown or not currently deemed material to our respective business operations. If any of the risks or uncertainties we and our operating subsidiaries face were to occur, they could materially affect our future operating results and could cause actual events to differ materially from those which we expect or that we have described in our forward-looking statements.

Any of the matters described under this “Risks and Uncertainties” section could have a material adverse effect on our businesses, results of operations and financial condition, in which case the trading price of the Common Shares could decline and a holder of Common Shares could lose all or a part of their investment. Please also refer to the “Cautionary Note Regarding Forward-Looking Statements” section of this MD&A.

This MD&A is qualified in its entirety by the risk factors described below.

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	MD&A

We may not be able to execute our corporate strategy.

Our strategic priorities are generally described on page 3 of this MD&A and have recently changed with our transition into a growth-oriented diversified holding company acquiring businesses in the Industrial “Internet of Things” market operating alongside our existing intellectual property licensing operations. As with any undertaking like Quarterhill and our transition, there is inherent risk associated with the successful implementation and execution of our strategic priorities. If we are unable to successfully implement and execute our strategic priorities, there could be a material and adverse effect on our businesses, results of operations and financial condition.

We may not be able to sustain profitability in the future. If we do not maintain profits our share price may decline.

As we continue to grow our businesses, our operating expenses and capital expenditures may increase, and as a result, we will need to generate additional revenue to maintain profitability. If our revenues decline we may not be able to sustain profitability because many of our expenses are fixed in the short term and cannot be easily or quickly reduced. A failure to maintain profitability could materially and adversely affect our businesses.

We may engage in acquisitions or other strategic transactions or make investments that could result in significant changes or management disruption and fail to enhance shareholder value.

As part of our strategy, we have sought and will continue to seek acquisition candidates relating to, or complementary to, our current strategic focus.Ultimately, any acquisitions would be accompanied by risks.

We cannot be certain that we will be able to identify suitable acquisition candidates that are available for purchase at reasonable prices and we may fail to select appropriate acquisition targets. Even if we can identify appropriate acquisition candidates, we may be unable to consummate an acquisition on suitable terms. We have and will likely continue to have competition for acquisition candidates from other parties including those that have greater resources or are willing to pay higher purchase prices. When evaluating an acquisition opportunity, we may not correctly identify the risks and costs inherent in the business that we are acquiring. If we were to proceed with one or more significant future acquisitions in which the consideration consisted of cash, a substantial portion of our available cash resources may be used or we may have to seek additional financing to complete such acquisitions.

We may have difficulty integrating and assimilating the operations and personnel of any acquired companies, realizing anticipated synergies and maximizing the financial and strategic position of the combined enterprise, and maintaining uniform standards, policies and controls across the organization. Any integration of the acquired business or assets may disrupt our ongoing businesses and our relationships with employees, suppliers, contractors and other stakeholders. The diversion of management’s time and attention during the transaction and subsequent integration may be significant.

If we choose to raise debt capital to finance any acquisition, our leverage will be increased. If we choose to use equity as consideration for any acquisition, existing shareholders may suffer dilution. Alternatively, we may choose to finance any acquisition with our existing resources.

As a part of our acquisition strategy, we may also utilize a strategy where a portion of the purchase price is paid at closing, while the remaining portion of the purchase price is subject to the target successfully completing performance metrics within an earn-out period after the closing of the acquisition. These potential earn-out payments are contingent payments and while we believe we will have the required funds to satisfy these contingent payments, if earned, there can be no assurance that we will have the required funds at the applicable point in time. If we are unable to satisfy these contingent payments, this may have a material adverse impact on us and we may be exposed to litigation.

We cannot assure that any acquisitions or business arrangements completed will ultimately benefit our business. Furthermore, there can be no assurance that we would be successful in overcoming the risks identified above or any other problems encountered in connection with such acquisitions.

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	MD&A

Future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of such company and the risk that such historical financial statements may be based on assumptions, which are incorrect or inconsistent with our assumptions or approach to accounting policies. We may not be able to manage such expansion effectively and any failure to do so could lead to a disruption in our business, a loss of customers and revenue, and increased expenses.

We may acquire contingent liabilities through acquisitions that could adversely affect our operating results.

We may acquire contingent liabilities in connection with acquisitions we have completed, which may be material. Although management uses its best efforts to estimate the risks associated with these contingent liabilities and the likelihood that they will materialize, their estimates could differ materially from the liabilities actually incurred.

Our operating structure may expose us to unique risks.

We are a holding company that conducts operations through Canadian and foreign subsidiaries, and a significant portion of our assets are held in such entities. Accordingly, any limitation on the transfer of cash or other assets between the parent corporation and such entities, or among such entities, could restrict our ability to fund our operations efficiently. Any such limitations, or the perception that such limitations may exist now or in the future, could have an adverse impact on our valuation and stock price.

We need qualified personnel to manage and operate our various businesses.

In our decentralized business model, we need qualified and competent management to direct day-to-day business activities of our operating subsidiaries. Our operating subsidiaries also need qualified and competent personnel in executing their business plans and serving their customers, suppliers and other stakeholders. Changes in demographics, training requirements and the unavailability of qualified personnel could negatively impact one or more of our operating subsidiaries’ abilities to meet demands of customers to supply goods and services. Recruiting and retaining qualified personnel is important to all our operations. Although we believe we have adequate personnel for our current business environment, unpredictable increases in demand for goods and services may exacerbate the risk of not having sufficient numbers of trained personnel, which could have a negative impact on our operating results, financial condition and liquidity.

Our ability to recruit and retain management and other qualified personnel is crucial to our business operations.

Our future success depends on the continued efforts and abilities of our senior management team. Their skills, experience and industry contacts significantly benefit us. Although we have employment and non-competition agreements with members of our senior management team, they or our other key employees may not choose to remain employed by us. If we lose the services of one or more of these individuals, or if one or more of them decide to join a competitor or otherwise compete directly or indirectly with us, our business, operating results, and financial condition could be harmed.

Our success is also highly dependent on our continuing ability to identify, hire, train, motivate and retain highly qualified management personnel. Competition for such personnel can be intense and we cannot provide assurance that we will be able to attract or retain highly qualified personnel in the future.

Stock options can comprise an important component of our compensation of key employees, and if the market price of the Common Shares declines, it may be difficult to recruit and retain key employees due to the related decline in value of any options to purchase Common Shares. In addition, pursuant to the rules of the TSX, our unallocated options require periodic approval from shareholders to continue to be available for grant under our Share Option Plan. TSX rules and/or the size of our option pool may limit our ability to use equity incentives to recruit and retain key employees.

Another important component of our compensation of our key employees is restricted stock units, which are rights granted to employees and Board members that, upon vesting over 3 years, pay out the cash market value of Common

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Shares equal to the number of vested restricted stock units on the date of vesting. Because the value of restricted stock units is tied to the market price of Common Shares, as the market price of Common Shares declines, restricted stock units hold less and less value. Consequently, the attractiveness of restricted stock units to current or prospective employees may also be significantly reduced if the market price of Common Shares declines.

Our inability to attract and retain the necessary management personnel may adversely affect our future growth and profitability. We may need to increase the level of compensation paid to existing or new employees to a degree that our operating expenses could be materially increased. We do not currently maintain corporate life insurance policies on key employees.

Increased pressures on our existing personnel may create risk to our organization.

As we transition into our new strategic priorities, the growth and implementation of our new business plan has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to continue to further expand our overall businesses, headcount and operations. Operating a North American organization and managing a geographically dispersed workforce will require substantial management effort and may require significant additional investment in our infrastructure. We will be required to continue to improve our operational, financial and management controls and our reporting procedures, which we may not be able to do effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross profit or operating expenses in any particular period.

We may suffer from reputational risk.

Damage to our reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether true or not. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views relating to us, our operating subsidiaries and our respective activities, whether true or not. Reputation loss may result in decreased customer confidence and an impediment to our and our operating subsidiaries’ overall abilities to advance our respective products and services with customers, thereby having a material adverse impact on our businesses, financial performance, financial condition, cash flows and growth prospects.

Competition and technology may erode our operating businesses and result in lower earnings.

Each of our operating businesses faces intense competitive pressures within the markets in which they operate. While we manage our businesses with the objective of achieving long-term sustainable growth by developing and strengthening competitive advantages, many factors, including market and technology changes, may erode or prevent the strengthening of competitive advantages. Accordingly, future operating results will depend to some degree on whether our operating subsidiaries are successful in protecting or enhancing their competitive advantages. If our operating businesses are unsuccessful in these efforts, our periodic operating results in the future may decline.

Deterioration of general economic conditions may significantly reduce our operating earnings and impair our ability to access capital markets at a reasonable cost.

Our operating subsidiaries are subject to normal economic cycles affecting the economy in general or the industries in which they operate. If the economy deteriorates for a prolonged period, one or more of our significant operations could be materially harmed. In addition, we may utilize debt as a component of our or our operating subsidiaries’ respective capital structures. This will depend on having access to borrowed funds through the capital markets at reasonable rates. If access to the capital markets is restricted or the cost of funding increases, these operations could be adversely affected.

Our operating subsidiaries may be faced with intellectual property claims.

Certain third parties have been issued patents and may have filed patent applications or may obtain additional patents and proprietary rights for technologies similar to those used by our operating subsidiaries in their respective products,

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services and technologies. Some of these patents may grant very broad protection to their owners. We cannot determine with certainty whether any existing third-party patents or the issuance of any third party patents would require any of our operating subsidiaries to alter their respective technologies, obtain licenses or cease certain activities. We or our operating subsidiaries may become subject to claims by third parties alleging our respective technologies infringe their property rights. In addition, certain of our operating subsidiaries may provide their customers with qualified indemnities against the infringement of third party intellectual property rights which may expose these subsidiaries to vicarious liabilities from any claims made against their customers.

Misappropriation of our operating subsidiaries’ intellectual property could place them at a competitive disadvantage.

Our operating subsidiaries’ intellectual property is important to their and our success. Our operating subsidiaries rely on a combination of patent protection, copyrights, trademarks, trade secrets, license agreements, non-disclosure agreements and other contractual agreements to protect their intellectual property. Third parties may attempt to copy aspects of our operating subsidiaries’ products, services and technology or obtain information our operating subsidiaries regard as proprietary without their authorization. If our operating subsidiaries are unable to protect their intellectual property against unauthorized use by others, it could have an adverse effect on their competitive position, businesses and results of operations. In addition, our operating businesses could be required to spend significant funds and management resources could be diverted to defend their rights, which could significantly disrupt their operations.

We may be faced with litigation risks from time to time.

We and our operating subsidiaries are, from time to time, involved in various claims, legal proceedings and complaints arising in the ordinary course of business, including, but not limited to, intellectual property disputes. We cannot reasonably predict the likelihood or outcome of these actions. Adverse outcomes in some or any of these claims may result in significant monetary damages or injunctive relief that could adversely affect our or our operating subsidiaries’ ability to conduct our respective businesses. Further, if we are unable to resolve these disputes favourably, it may have a material adverse impact on our financial performance, cash flow and results of operations.

Our information technology faces cyber security and other information technology-related risks.

We rely on information technology in virtually all aspects of our businesses. A significant disruption or failure of our information technology systems could result in service interruptions, safety failures, security violations, regulatory compliance failures, an inability to protect information and assets against intruders, and other operational difficulties. Attacks perpetrated against our information systems could result in loss of assets and critical information and exposes us to remediation costs and reputational damage.

Although we have taken reasonable steps intended to mitigate these risks, a significant disruption or cyber intrusion could lead to misappropriation of assets or data corruption and could adversely affect our results of operations, financial condition and liquidity. Additionally, if we are unable to acquire or implement new technology, we may suffer a competitive disadvantage, which could also have an adverse effect on our results of operations, financial condition and liquidity.

Cyber attacks could further adversely affect our ability to operate facilities, information technology and business systems, or compromise confidential customer and employee information. Political, economic, social or financial market instability or damage to or interference with our operating assets, or our customers or suppliers may result in business interruptions, lost revenue, unstable markets, increased security and repair or other costs, any of which may materially adversely affect us in ways that cannot be predicted. Any of these risks could materially affect our consolidated financial results. Furthermore, instability in the financial markets resulting from terrorism, sustained or significant cyber attacks, or war could also materially adversely affect our ability to raise capital.

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Our operating subsidiaries are subject to additional risks and uncertainties.

In addition to the risks and uncertainties to which we and our business are subject, our operating subsidiaries are also subject to additional risks and uncertainties that are unique to their specific industries and/or businesses, any of which could have a material adverse effect on our businesses, results of operations and financial condition.

As a non-exhaustive list of examples relating to our current operating subsidiaries:

• with respect to WiLAN:

• licensing patents can take an extremely long time and WiLAN is reliant on royalty payments under such licenses to generate revenues, the failure to generate which could adversely affect its operating results and cash flows;

• WiLAN may be required to establish the enforceability of its patents in court or through administrative proceedings to obtain material licensing revenues, which may result in certain patents being limited in scope, found to be invalid, unenforceable and/or not infringed by any specific third party, any of which could result in the loss of specific patent assets and delays in generating revenues;

• WiLAN’s industry is subject to increased regulatory scrutiny, political commentary and related governmental proceedings, often resulting in changes to patent or other applicable laws or in the interpretation or application of those laws, which could cause delays and difficulties in entering into license agreements and generating revenues; and

• WiLAN needs to acquire new patents to grow its business but may not be able to compete against others to acquire any specific patents and any such acquisition can be time consuming, complex and costly, all of which could adversely affect WiLAN’s operating results;

• with respect to IRD:

• IRD’s trade receivables and unbilled revenues from government and private industry customers are subject to credit and non-payment risk with all private industry accounts subject to internal credit review and approval to minimize risk of non-payment and, where invoiced amounts are not secured by letter of credit, IRD generally insures these amounts through Export Development Canada to the extent of 90% of the invoiced amount;

• erroneous assumptions and/or estimates of project costs in the submission of tenders may result in an incorrect assessment of risks associated with any specific contract undertaken by IRD, which could result in a loss of or lower than anticipated gross margin for any such contract;

• unsatisfactory performance by subcontractors engaged to complete various components of a contract could result in reduced profits on that contract and result in reputational risk to IRD; and

• during economic recessions and/or as governments adjust their spending priorities for political reasons, transportation agencies around the world often reduce their spending to address the traffic monitoring and management issues for which IRD’s products and services act as solutions, which could adversely affect IRD’s operating results; and

• with respect to VIZIYA:

• VIZIYA’s products and services are highly technical and may contain undetected design flaws, errors, defects, security vulnerabilities and/or software bugs which could result in reputational risk to VIZIYA, lost revenue, diverted development resources and increased service costs, warranty claims and, potentially, litigation;

• an inability to successfully and quickly develop, introduce and implement new products and services or to compete with new, disruptive product or service alternatives could reduce VIZIYA’s market share and competitive position and could reduce its revenues; and

• some of VIZIYA’s products and services rely on or are implemented through third party technologies and if integration or incompatibility issues arise with these technologies, or access to these technologies becomes

Second Quarter 2017 10

	MD&A

unavailable for any reason, VIZIYA’s product and service development may be delayed, adversely affecting its market share, competitive position and revenues.

As noted, these examples of risks and uncertainties to which these operating subsidiaries may be subject is not intended to be exhaustive, but may provide readers of this MD&A with information that could influence their decision to purchase or sell Common Shares.

Fluctuations in foreign exchange rates impact and may continue to impact our operating expenses, potentially adversely affecting financial results.

Our functional currency is the U.S. dollar and we report our financial performance in U.S. dollars. Our operating results are subject to changes in the exchange rate of the U.S. dollar relative to the Canadian dollar. Any decrease in the value of the U.S. dollar relative to the Canadian dollar will have an unfavourable impact on Canadian denominated operating expenses. We may manage the risk associated with foreign exchange rate fluctuations by, from time to time, entering into forward foreign exchange contracts and engaging in other hedging strategies. If we engage in risk management activities related to foreign exchange rates, we may be subject to credit risks associated with the counterparties with whom we contract.

Our quarterly revenue and operating results can be difficult to predict and can fluctuate substantially.

Our revenue is difficult to forecast, is likely to fluctuate significantly and may not be indicative of our future performance from quarter to quarter. In addition, our operating results may not follow any past trends. The factors affecting our revenue and results, many of which are outside our control, include:

• competitive conditions in the various industries in which we and our operating subsidiaries conduct our respective businesses;

• the discretionary nature of purchase and budget cycles of our operating subsidiaries’ customers and changes in their budgets for, and timing of, purchases;

• strategic decisions, such as mergers, acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy; and

• general weakening of the economy resulting in a decrease in the overall demand for products and services or otherwise affecting capital investment levels of our operating subsidiaries’ customers.

Our goodwill and intangible assets are valued at an amount that is high relative to our total assets, and a write-off of our intangible assets would negatively affect our results of operations and total capitalization.

Our total assets reflect substantial intangible assets, primarily patents, acquired intangible assets and goodwill. At June 30, 2017, acquired intangible assets and goodwill totaled $80.4 million compared to $239 million of shareholders’ equity, and represented 26.5% of our total assets of $301 million. The fair value of acquired intangibles will be systematically amortized to earnings over specified periods. The goodwill results from our acquisitions, representing the excess of cost over the fair value of the net assets we have acquired. We assess at least annually whether there has been an impairment in the value of our goodwill. If future operating performance at one or more of our operating subsidiaries were to fall significantly below current levels, if competing or alternative technologies emerge, if interest rates rise or if business valuations decline, we could incur a non-cash charge to operating earnings. Any determination requiring the write-off of a significant portion of goodwill or unamortized intangible assets would negatively affect our results of operations and total capitalization, the effect of which could be material.

There can be no assurance as to the payment of future dividends.

On June 3, 2009, we announced the Board had declared a cash dividend of CDN$0.0125 per Common Share payable on August 5, 2009 to holders of record of Common Shares at the close of business on June 29, 2009. Similar dividends have been declared by the Board and paid each fiscal quarter since that date with the most recent such dividend declared in

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	MD&A

the amount of CDN$0.0125 per Common Share on August 9, 2017 and payable on October 5, 2017 to holders of record of Common Shares at the close of business on September 15, 2017.

Future dividend payments will be subject to an ongoing evaluation and approval by the Board on a quarterly basis. The decision as to the amount and timing of future dividends, if any, will be made by the Board considering our financial condition, capital requirements and growth plans, as well as other factors the Board may deem relevant, and there can be no assurance as to whether any such future dividends will be declared or, if declared, as to the amount and timing of the payment of any such future dividends.

Our businesses could be negatively affected because of actions of activist shareholders.

Publicly-traded companies have increasingly become subject to campaigns by investors seeking to advocate certain governance changes or corporate actions such as financial restructuring, special dividends, share repurchases or even sales of assets or the entire company. We could be subject to such shareholder activity or demands. Given the challenges we have encountered in our businesses in the past few years, recent changes to our governance and strategic focus may not satisfy such shareholders who may attempt to promote or effect further changes, or acquire control over us. Responding to proxy contests, media campaigns and other actions by activist shareholders, if required, will be costly and time-consuming, will disrupt our operations and would divert the attention of the Board and senior management from the pursuit of our business strategies, which could adversely affect our results of operations, financial condition and/or prospects. If individuals are elected to the Board with a specific agenda to increase short-term shareholder value, it may adversely affect or undermine our ability to effectively implement our plans. Perceived uncertainties as to our future direction resulting from shareholder activism could also result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners, to our detriment.

The trading price of the Common Shares has been, and may continue to be, subject to large fluctuations.

The Common Shares are listed on both the TSX and the Nasdaq. The trading price of the Common Shares has been, and may continue to be, subject to large fluctuations notwithstanding our potential success in creating revenues, cash flows or earnings and, therefore, the value of the Common Shares may also fluctuate significantly, which may result in losses to investors who have acquired or may acquire Common Shares.

The trading price of the Common Shares may increase or decrease in response to many events and factors, including:

• low trading volumes;

• actual or anticipated fluctuations in our results of operations;

• changes in estimates of our future results of operations by us or by securities analysts;

• announcements of material information; and

• other events and factors, including but not limited to the risk factors identified in this MD&A.

In addition, different liquidity levels, volume of trading, currencies and market conditions on the TSX and Nasdaq may result in different prevailing trading prices between these stock exchanges.

Because of any of these factors, the market price of the Common Shares at any time may not accurately reflect our long-term value.

Securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management’s attention and resources, which could adversely affect our businesses. Any adverse determination in litigation against us could also subject us to significant liabilities.

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	MD&A

Our share repurchase program could increase the price volatility of the Common Shares and may be limited or terminated at any time which could result in a decline in the trading price of the Common Shares.

On February 9, 2017, we announced that the Board had approved the adoption of a share repurchase program to purchase up to a maximum of 4,000,000 Common Shares (representing approximately 3.37% of the Common Shares outstanding at January 31, 2017) between February 13, 2017 and February 12, 2018 through a normal course issuer bid over the TSX. Under our previous normal course issuer bid, we repurchased 2,398,500 Common Shares for cancellation between February 11, 2016 and February 10, 2017.

The number of purchases of Common Shares under our normal course issuer bid will vary from time to time and are generally subject to management discretion, whether directly or under an automated share purchase plan established by us. The timing of repurchases under this program could affect the trading price of the Common Shares and their volatility. There can be no assurance that any repurchases will enhance shareholder value because the trading price of the Common Shares may decline below the prices at which we effected repurchases. Any failure to repurchase Common Shares may negatively impact our reputation and investor confidence, which may negatively impact the trading price of the Common Shares. Furthermore, we may engage in transactions that could result in repurchases under the program being reduced or suspended for a period of time and/or from time to time.

As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, resulting in different information publicly available to our shareholders.

We are a “foreign private issuer” under applicable U.S. federal securities laws and, as such, we are not required to comply with all periodic disclosure and current reporting requirements of the U.S. Securities Exchange Act of 1934 and related rules and regulations. As a result, shareholders may not have the same information provided to shareholders of companies that are not foreign private issuers. For example, we do not file the same reports that U.S. domestic issuers file with the SEC, although we must file or furnish to the SEC the continuous disclosure documents we are required to file in Canada under Canadian securities laws. In addition, our officers and directors are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the U.S. Securities Exchange Act of 1934. Therefore, shareholders may not know on as timely a basis when our officers and directors purchase or sell their Common Shares and other securities, as the reporting deadlines under corresponding Canadian insider reporting requirements may be different. In addition, as a foreign private issuer, we are exempt from the proxy rules under the U.S. Securities Exchange Act of 1934.

We could lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

We could lose our foreign private issuer status in the future if a majority of the Common Shares are held in the U.S. and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly more than the costs incurred as a Canadian foreign private issuer eligible to use the multijurisdictional disclosure system adopted by the U.S. and Canada. If we cease to be a foreign private issuer, we would not be eligible to use the multijurisdictional disclosure system or applicable foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. In addition, we could lose the ability to rely upon exemptions from Nasdaq corporate governance requirements that are available to foreign private issuers.

The financial reporting obligations of being a public company in the U.S. are expensive and time consuming, and place significant additional demands on management.

The obligations of being a public company in the U.S. including, in particular, Section 404 of the U.S. Sarbanes-Oxley Act and the SEC rules and regulations implementing Section 404, to all of which we will be subject from our 2017 fiscal year onwards, require significant expenditures and place significant demands on our management. From the current fiscal year onwards, we will require an annual evaluation of our internal controls over financial reporting to be attested to by an independent auditing firm. If an independent auditing firm is unable to provide us with an attestation and an

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	MD&A

unqualified report as to the effectiveness of our internal controls, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of the Common Shares.

Compliance with changing regulation of corporate governance may result in additional expenses.

Changing laws, regulations, and standards relating to corporate governance and public disclosure can create uncertainty for public companies. The costs required to comply with such evolving laws are difficult to predict. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards. This investment may result in an unforeseen increase in general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities, which may harm our operating results.

Changes in financial accounting or taxation standards, rules, practices or interpretation may cause adverse unexpected revenue and expense fluctuations which may impact our reported results of operations.

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles. These principles are subject to interpretations by the SEC and various accounting bodies. We are also subject to various taxation rules in many jurisdictions which are generally complex, frequently changing and often ambiguous. Changes to taxation rules, changes to financial accounting standards such as the proposed convergence to international financial reporting standards, or any changes to the interpretations of these standards or rules may adversely affect our reported financial results or the way in which we conduct business. Recent accounting pronouncements and their estimated potential impact on our business are addressed in Note 2 - “Significant Accounting Policies” in the notes to our unaudited condensed consolidated interim financial statements for period ended June 30, 2017.

Failure to maintain an effective system of internal controls may result in Quarterhill not being able to accurately report financial results or to prevent fraud.

We require effective internal controls to provide reliable financial reporting and effectively prevent fraud. Any system of internal control over financial reporting, regardless of how well designed, operated and evaluated, can only provide reasonable, not absolute, assurance that its objectives have been, are being or will be met. We cannot be certain that material weaknesses or significant deficiencies in internal controls may not exist or can be discovered now or in the future. Although unlikely, any such weaknesses or deficiencies could result in misstatements of our financial statements, an inability to file timely periodic reports, a decline in share price and investor confidence, or other material impacts to our businesses, reputation, results of operations, financial condition or liquidity.

An investor may be unable to bring actions or enforce judgments against us and certain of our directors and officers.

Quarterhill is incorporated under the laws of Canada and our principal executive offices are located in Canada. A majority of our directors and officers and our independent public accounting firm reside principally outside the U.S. and all or a substantial portion of our assets and the assets of these persons are located outside the U.S. Consequently, it may not be possible for an investor to effect service of process within the U.S. on us or those persons. Furthermore, it may not be possible for an investor to enforce judgments obtained in U.S. courts based upon the civil liability provisions of U.S. federal securities laws or other laws of the U.S. against us or those persons.

Our actual financial results may vary from our publicly disclosed forecasts.

Our actual financial results are likely to vary from any publicly disclosed forecasts and these variations could be material and adverse. We may periodically provide guidance on future financial results which reflect numerous assumptions concerning expected performance, as well as other factors that are beyond our control and which may not turn out to be correct. Although we believe the assumptions underlying any such guidance and other forward-looking statements are reasonable when they are made, actual results could be materially different. Our financial results are subject to numerous risks and uncertainties, including those identified throughout these risk factors. Please also refer to the “Cautionary Note Regarding Forward-Looking Statements” section of this MD&A.

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	MD&A

If our actual results vary from any announced guidance, the price of the Common Shares may decline, and such a decline could be substantial. Except as required under applicable securities legislation, we do not undertake to update any guidance or other forward-looking information we may provide, whether as a result of new information, future events or otherwise.

Changes to our tax assets or liabilities could have an adverse effect on our consolidated financial condition or results of operations.

The calculation of tax assets and liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. We are subject to examinations by the Canada Revenue Agency, the U.S. Internal Revenue Service and other taxing jurisdictions on various tax matters, including challenges to various positions adopted in our filings and foreign tax liability and withholding. We generally recognize tax contingencies when they are determined to be more likely than not to occur. Although we believe we have adequately recorded tax assets and accrued for tax contingencies that meet this criterion, we may not fully recover recorded tax assets or may be required to pay taxes in excess of accrued amounts, each of which could have an adverse effect on our consolidated financial condition or results of operations.

If we are, at any time, classified as a “passive foreign investment company” under U.S. tax laws, U.S. holders of Common Shares may be subject to adverse tax consequences.

A non-U.S. corporation would be classified as a passive foreign investment company (a “PFIC”), for U.S. federal income tax purposes, in any taxable year in which, after applying relevant “look-through” rules with respect to the income and assets of its subsidiaries, either at least 75% of the composition of its gross income is “passive income” or, on average, at least 50% of the gross value of the composition of its assets is attributable to assets that produce passive income or are held for the production of passive income.

Based on current operations and financial projections, we believe we will not be a PFIC for U.S. federal income tax purposes for our 2017 fiscal year. Annual determinations, however, must be made as to whether we are a PFIC based on the types of income we earn and the types and value of our assets from time to time, all of which are subject to change. We cannot, therefore, provide any assurance that we will not be a PFIC for our current taxable year or any future taxable year. If we were to be treated as a PFIC for any taxable year, certain adverse U.S. federal income tax consequences could apply to U.S. shareholders.

U.S. holders of Common Shares are urged to consult their tax advisors with respect to the U.S. federal, state and local tax consequences of the acquisition, ownership, and disposition of their Common Shares if we were determined to be a PFIC in any taxable year as may be applicable to their particular circumstances.

The acquisition of, investment in and disposition of Common Shares has tax consequences.

Investors should be aware that the acquisition, holding and/or disposition of Common Shares has tax consequences both in the U.S. and Canada that are not described in this MD&A. Holders of Common Shares should consult their own tax advisors with respect to the tax consequences of the acquisition, ownership and disposition of Common Shares as may be applicable to their particular circumstances.

Substantial future sales of Common Shares by existing shareholders, or the perception that such sales may occur, could cause the market price of the Common Shares to decline, even if our business is doing well.

If our existing shareholders, including any of our directors or executive officers, sell substantial amounts of Common Shares in the public market, or are perceived by the public market as intending to sell substantial amounts of Common Shares, the trading price of the Common Shares could decline. At June 30, 2017, 118,627,249 Common Shares were outstanding, all of which are freely tradable, without restriction, in the public market, subject to blackout periods and applicable laws relating to insider trading, of which nearly 2,720,000 Common Shares were held or controlled, directly or indirectly, by our directors and executive officers.

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	MD&A

In addition, fully vested options to purchase nearly 2,800,000 Common Shares were held by our directors and executive officers at June 30, 2017, and additional options to purchase Common Shares continue to vest in accordance with the terms of those options. It must be noted, however, that all such vested options had exercise prices higher than the market price of the Common Shares on June 30, 2017. Any Common Shares issued upon the exercise of such options would be freely tradable upon issue, without restriction, in the public market, subject to blackout periods and applicable laws relating to insider trading.

If any of these Common Shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of the Common Shares could decline.

We may require additional capital in the future and no assurance can be given that such capital will be available at all or available on terms acceptable to us.

We may need to raise additional funds through public or private debt or equity financings to:

• fund ongoing operations;

• take advantage of opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses;

• develop new products or services; or

• respond to competitive pressures.

Any additional capital raised through the sale of equity will dilute the percentage ownership of each shareholder in the Common Shares and such dilution may be significant. Capital raised through debt financing would require us to make periodic interest payments and may impose restrictive covenants on the conduct of our businesses. Furthermore, additional financing may not be available on favourable terms, or at all. A failure to obtain additional financing could prevent us from making expenditures that may be required to grow or maintain our operations.

Certain Canadian laws could delay or deter a change of control.

The Investment Canada Act (Canada) subjects an acquisition of control of Quarterhill by a non-Canadian to government review if the value of our assets as calculated pursuant to the legislation exceeds a certain threshold amount. A reviewable acquisition may not proceed unless the relevant Canadian federal government minister is satisfied that the investment is likely to be a net benefit to Canada. This could prevent or delay a change of control and may eliminate or limit strategic opportunities for shareholders to sell their Common Shares.

Our authorized capital permits our directors to issue preferred shares which may prevent a takeover by a third-party.

Quarterhill’s authorized share capital consists of an unlimited number of Common Shares, 6,350.9 special preferred shares and an unlimited number of preferred shares, issuable in series. There are no special preferred shares or preferred shares outstanding. The Board has the authority to issue preferred shares and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including dividend rights, of these shares without any further vote or action by shareholders. The rights of the holders of Common Shares will be subject to, and may be adversely affected by, the rights of holders of any preferred shares that may be issued in the future. Our ability to issue preferred shares could make it more difficult for a third-party to acquire a majority of the outstanding Common Shares, the effect of which may be to deprive our shareholders of a control premium that might otherwise be realized in an acquisition.

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	MD&A

BUSINESS COMBINATIONS

Quarterhill completed two acquisitions during the second quarter ended June 30, 2017.

On April 17, 2017, we announced the acquisition of 100% of the issued and outstanding common shares of IRD for aggregate consideration of approximately $47.8 million. This acquisition closed on June 1, 2017; accordingly, our financial results for the three months ended June 30, 2017 include IRD’s results for the month of June 2017. The recognized amounts of identifiable assets acquired and liabilities assumed, based on their estimated fair values as at May 31, 2017 are as follows:

Acquisition of International Road Dynamics Inc.
Current assets	$	21,358
Non-current tangible assets		7,739
Customer related intangible assets		8,100
Technology related intangible assets		7,400
Brand related intangible assets		5,900
Backlog related intangible assets		1,300
Deferred income tax liabilities		(6,117	)
Other liabilities assumed		(13,718	)
Total identifiable net assets		31,962
Goodwill		15,820
Net assets acquired	$	47,782
Purchase price reconciliation
Cash purchase price	$	49,860
Less cash acquired		2,078
Net purchase price	$	47,782

Included in net tangible assets is acquired deferred revenue which represents advance payments from customers related to various revenue contracts. We estimated our obligation related to the deferred revenue using the cost build-up approach which determines fair value by estimating the costs relating to supporting the obligation plus an assumed profit. The sum of the costs and assumed profit approximates, in theory, the amount that we would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for various revenue contracts. As a result, we recorded an adjustment to reduce IRD’s carrying value of deferred revenue by $380, which represents our estimate of the fair value of the contractual obligations assumed based on an external valuation. The net deferred revenue included in the liabilities assumed above is $5.4 million, after the impact of this adjustment. Also included within net tangible assets are certain contract assets which represent revenue earned by IRD on long-term projects for which billings had not yet occurred as of May 31, 2017. As these long-term projects have now been inherited by Quarterhill, we will be responsible for billing and collecting cash on these projects at the appropriate time, but we will not recognize revenue for these billings. The fair value assigned to these contract assets as of May 31, 2017 was $4.0 million. The carrying value of inventory was increased by a fair value increment of $642. This “step-up” in inventory value will result in increased costs of revenues until such time as the inventory is fully consumed.

Acquisition-related costs for IRD included in “Special Charges” in the condensed consolidated interim statements of operations for the three and six months ended June 30, 2017 were $0.7 Million.

Goodwill recorded in connection with the IRD acquisition is primarily attributable to our expected future earnings potential as a result of the enhanced opportunity to expand Quarterhill’s addressable market and drive overall growth.

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	MD&A

The goodwill recognized in connection with this acquisition has been allocated to our Mobility segment and will be evaluated for impairment (along with the indefinite-lived intangible assets) in the fourth quarter of each fiscal year consistent with our existing impairment policy.

On May 4, 2017, we announced that we had acquired 100% of the issued and outstanding shares of VIZIYA and its related companies for an aggregate consideration of up to $30.0 million. In certain circumstances, based on an earn-out formula (discussed below) the aggregate consideration could be greater than $30.0 million. The results of VIZIYA and its related companies for the months of May and June 2017 have been included in our financial results for the three months ended June 30, 2017. The recognized amounts of identifiable assets acquired and liabilities assumed, based on their estimated fair values on May 3, 2017 are as follows:

Acquisition of VIZIYA Corp.
Current assets	$	2,955
Non-current tangible assets		305
Customer related intangible assets		5,800
Technology related intangible assets		10,000
Brand related intangible assets		1,400
Deferred income tax liabilities		(4,796	)
Other liabilities assumed		(2,711	)
Total identifiable net assets		12,953
Goodwill		12,680
Net assets acquired	$	25,633
Purchase price reconciliation
Cash purchase price	$	17,675
Less cash acquired		56
Common shares issued		662
Fair value of contingent share consideration		2,650
Fair value of contingent cash consideration		3,800
Shareholder loan repaid		902
Net purchase price	$	25,633

Included in net tangible assets is acquired deferred revenue which represents advance payments from customers related to various revenue contracts. We estimated our obligation related to the deferred revenue using the cost build-up approach which determines fair value by estimating the costs related to supporting the obligation plus an assumed profit. The sum of the costs and assumed profit approximates, in theory, the amount that we would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for various revenue contracts. As a result, we recorded an adjustment to reduce VIZIYA’s carrying value of deferred revenue by $0.9 million, which represents our estimate of the fair value of the contractual obligations assumed based on an independent valuation. The net deferred revenues included in the liabilities assumed above are $1.6 million, after the impact of this adjustment.

Acquisition-related costs for VIZIYA included in “Special Charges” in the condensed consolidated interim statements of operations for the three and six months ended June 30, 2017 were $0.6 Million.

In connection with this acquisition, we agreed to pay the former owners of VIZIYA up to an additional $11.85 million upon VIZIYA achieving certain EBITDA targets for the period from April 1, 2017 to July 31, 2019. This amount consists of cash consideration of up to $6.0 million and the issuance of up to 3,647,417 additional Common Shares. In addition, if VIZIYA achieves cumulative EBITDA during that period exceeding $11.85 million, then we will pay 50% of that excess as additional contingent consideration until that cumulative EBITDA reaches $24.0 million.

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	MD&A

The liability associated with the expected payment of the contingent consideration obligation was preliminarily valued at $6.45 million at the acquisition date, consisting of $3.8 million reflecting the fair value of the contingent cash consideration and $2.65 million reflecting the fair value of the contingent share consideration. We will reevaluate the fair value of both contingent consideration elements on a periodic basis which may result in an increase or decrease in the liability recorded. Adjustments to the liability amount will be recorded as a “Special Charge” within our Factory segment when incurred. The fair values of both contingent consideration elements have been determined using a Monte Carlo simulation.

Goodwill recorded in connection with the acquisition is primarily attributable to our expected future earnings potential as a result of the enhanced opportunity to expand Quarterhill’s addressable market and drive overall growth. The goodwill recognized in connection with the acquisition has been allocated to the Factory segment and will be evaluated for impairment (along with the indefinite-lived intangible assets) in the fourth quarter of each fiscal year consistent with our existing impairment policy.

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	MD&A

Overall Performance

The results of IRD’s operations for the period from June 1 to June 30, 2017 are included in these consolidated results, and the results of VIZIYA’s operations were included for the period from May 4 to June 30, 2017 as well. These are in addition to WiLAN’s results for the entire quarter. The comparative period information presented represents solely WiLAN’s results for the specified period.

Consolidated revenues for the quarter ended June 30, 2017 were $18.6 million as compared to $16.0 million representing an increase of $2.6 million or 16%. With the addition of the IRD and VIZIYA businesses, the composition of revenues, cost of revenues (excluding depreciation and amortization)s and other operating expenses has changed significantly and we have modified our financial statement presentation to reflect the overall business of Quarterhill. The components of our revenue are as noted below:

Licenses	Licenses revenues includes all revenues associated with technology licenses, perpetual software licenses and other revenues characterized as one-time licenses.
Systems	Systems revenues includes revenues earned on contracted projects, generally recognized on a percentage completion basis plus proprietary and OEM products sales, which are distributed directly and through a network of distributor/agency relationships. These projects generally result in the delivery of a complete system to the customer.
Services	Services revenues includes revenues generated from the provision of professional services sold on a time and material consulting basis.
Recurring	Recurring revenues represents revenues realized under service and maintenance contracts, software maintenance contracts, hosted “software as a service” applications, and data analytics services. The underlying contracts included in this category generally range from one to five years. Recurring revenues are recognized on either a percentage completion basis, time and material basis, or ratably over the duration of the contract, depending on contract terms.

For this quarter: (1) Licenses revenues were $12.8 million, reflecting $12.0 million in technology licenses granted and $0.8 million in software licenses (please refer to the “Segmented Results” section of this MD&A); (2) Systems revenues generated within our Mobility segment were $3.1 million; (3) Services revenues were $0.7 million; and (4) Recurring revenues, on a consolidated basis, were $2.0 million. There is no comparative information for the Systems, Services and Recurring revenues figures because they relate to business acquisitions completed within the quarter.

Recurring revenues are a key element in our growth strategy; we expect to acquire companies that have, or will have post acquisition, growing recurring revenue streams.

Gross margin, revenues less cost of revenues (excluding depreciation and amortization) for the quarter was $9.1 million or 48.8% and reflects the overall gross margin across all our vertical segments. Comparatively, for the same period last year, we reported gross margin of $9.7 million or 61%, all of which was related to what is now our Technology segment.

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	MD&A

	For the three months ended,						For the six months ended,
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Revenues
Licenses	$	12,842		$	15,961		$	20,420		$	46,121
Systems		3,067			-			3,067			-
Services		714			-			714			-
Recurring		1,988			-			1,988			-
		18,611			15,961			26,189			46,121
Cost of revenues
License		6,448			6,293			13,842			14,263
Systems		1,898			-			1,898			-
Services		321			-			321			-
Recurring		854			-			854			-
		9,521			6,293			16,915			14,263
		9,090			9,668			9,274			31,858
Operating expenses
Selling, general and administrative		4,214			2,646			6,616			5,186
Research and development		668			-			668			-
Depreciation of property, plant and equipment		170			106			261			213
Amortization of intangibles		6,028			9,850			11,331			19,872
Special charges		1,294			-			1,294			-
		12,374			12,602			20,170			25,271
Results from operations		(3,284	)		(2,934	)		(10,896	)		6,587
Finance (income)		(234	)		(120	)		(452	)		(238	)
Finance expenses		14			-			14			-
Foreign exchange (gain) loss		(426	)		(114	)		(711	)		(277	)
Other expense (income)		(69	)		-			(69	)		-
Income before taxes		(2,569	)		(2,700	)		(9,678	)		7,102
Current income tax expense (recovery)		831			837			1,574			3,860
Deferred income tax expense (recovery)		(7,009	)		(385	)		(7,632	)		1,474
Income tax expense (recovery)		(6,178	)		452			(6,058	)		5,334
Net income (loss)	$	3,609		$	(3,152	)	$	(3,620	)	$	1,768
Net Income (loss) per share
Basic	$	0.03		$	(0.03	)	$	(0.03	)	$	0.01
Fully diluted	$	0.03		$	(0.03	)	$	(0.03	)	$	0.01
Weighted average number of common shares
Basic		118,587,106			119,255,090			118,579,684			119,768,540
Fully Diluted		118,587,106			119,255,090			118,579,684			119,768,540

Second Quarter 2017 21

	MD&A

Our cost of revenues includes: (i) for our Technology segment, all costs of conducting licensing programs including staffing, litigation, patent ownership related costs, and contingent litigation and partner payments; (ii) for our Mobility segment, all costs of delivering on a project including staff costs, inventory consumption costs, subcontractor costs, and costs related to any maintenance and warranty work completed; and (iii) for our Factory segment, all staff costs necessary for the delivery of consulting services. Cost of revenues excludes depreciation and amortization.

Our operating expenses at $12.4 million for the quarter include selling, general and administrative costs, research and development costs, and depreciation and amortization of tangible and intangible assets. We have also included special charges within the category of operations expenses. On a comparative basis, operating expenses for the same period last year were $12.6 million and included only the costs associated with what is now our Technology segment. Amortization of intangibles has declined year over year from $9.9 million to $6.0 million as a result of the completion of the expected useful life of a number of patent assets through the last half of fiscal 2016 offset by increased amortization of acquired intangible assets ($707). In addition, the comparative period contains all corporate level costs (i.e. the costs that would now be attributable to Quarterhill’s operations) because there was only one segment during that period. In the current quarter, operating expenses increased $3.3 million as a result of the acquisitions completed. We expect operating expenses to increase over the balance of this year from the inclusion of the newly acquired businesses for the full reporting period.

Special charges are those expenses incurred in the completion of any acquisitions including costs of financial, legal and accounting advisor fees, due diligence advice, and other costs that are of a one-time nature. We do not expect these costs to recur unless there are additional acquisition activities undertaken. We do expect to charge any changes in fair value of acquired assets to this expense item should they arise because these non-cash expenses will directly relate to any completed acquisitions.

Foreign exchange gains in the quarter arose largely as a result of converting and holding significant Canadian dollars to complete the IRD acquisition during a period in which the Canadian dollar significantly appreciated; this resulted in $653 in foreign exchange gain for the quarter. The remainder of the businesses combined for a foreign exchange loss of $227 resulting from translation of activities from a foreign currency to the reporting currency of our various businesses (please refer to the “Segmented Disclosures” section of this MD&A).

Finance income principally represents interest earned on cash balances held. To the extent we have a much lower cash balance at the end of the current quarter as compared to previous quarters, the expected interest income will be reduced from comparative levels. Finance expense represents interest expense on debt carried within one of our subsidiaries. Both IRD and VIZIYA have bank debt and, as a result, will have finance expense on a normal basis. We plan to finance part of our growth through the issuance of long-term debt which will have a finance expense component. To the extent we arrange for and draw upon such debt, finance expense can be expected to increase in the periods following the current quarter.

Other expense (income) captures all other expenses or income items not otherwise accounted for elsewhere in our condensed consolidated interim statement of operations. For the second quarter, this represents IRD’s proportionate share in the profits of its joint venture Xuzhou PAT Control Technology Co., Ltd. an ITS products and manufacturing service provider in China (“XPCT”) (please refer to the “Mobility Segment” section of this MD&A).

Income tax expense for the second quarter was an overall recovery of $6.2 million, comprised of $0.8 million in current income tax expense, the majority of which is related to foreign income taxes withheld by customers within our Technology segment, and $7.0 million of deferred income tax recoveries. The creation of Quarterhill through a corporate amalgamation and subsequent reorganization resulted in the recovery of certain deferred income tax assets against which we previously carried a valuation allowance. In addition, the acquisitions completed in the quarter increased certain deferred tax assets and created deferred tax liabilities; acquired intangibles will have amortization for accounting

Second Quarter 2017 22

	MD&A

purposes which will not be deductible for income tax purposes therefore giving rise to a deferred tax liability.

We have assigned probabilities to our expected future taxable income based on significant risk factors, sensitivity analysis and timing of non-capital tax losses. The amount of the deferred income tax asset considered realizable could change materially in the near term, based on future taxable income during the carryforward period. The valuation allowance consists of $2,709 in Canada, $14,059 in the US and $1,654 in other jurisdictions.

Generally, our practice and intention is to reinvest the earnings of our foreign subsidiaries in those operations. As of June 30, 2017, we have not made a provision for Canadian or additional foreign withholding taxes on approximately $4,500 of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Such amounts generally become subject to Canadian taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

We reported net income for the quarter of $3.6 million or $0.03 per basic and diluted Common Share. This compares to a net loss of $3.2 million or $0.03 per basic and diluted Common Share for the same period in 2016. For the six months ended June 30, 2017, we recorded a net loss of $3.6 million of $0.03 per basic and diluted Common Share as compared to a net income of $1.8 million or $0.01 per basic and diluted Common Share for the same period in 2016.

	As at June 30,		As at December 31,
Selected Balance Sheet Data	2017		2016
Cash and cash equivalents		44,315		106,553
Short-term investments, including restricted amounts		4,694		1,154
Total assets		300,731		282,983
Bank debt		3,827		-
Long-term debt		383		-
Dividend declared per Common Share	C$0.0125		C$0.0125

As at June 30, 2017, we held cash, cash equivalents, short-term investments, and restricted short-term investments totalling $49 million representing 16% of our total assets. We will use this cash to fund our operations, complete additional corporate acquisitions, and service our existing bank and long-term debt.

Reconciliation of Adjusted EBITDA to Net Income (Loss)

We consider Adjusted EBITDA, a non-GAAP measure, to be a good indicator of performance for the business as it more accurately captures financial performance in a given period related to the operations of Quarterhill and each of our reporting segments.

We reported Adjusted EBITDA of $4.8 million or 26% of revenues for the second quarter. With the creation of Quarterhill and the adoption of a growth oriented strategy anchored in acquisitions of businesses operating in the Industrial Internet of Things market, we began tracking expenses related to the acquisitions and separately classified them in our unaudited condensed consolidated interim statements of operations. Special charges generally consist of advisor fees, accounting and valuation fees, due diligence related expenses, and legal fees. Although these expenses will recur as we complete additional acquisitions, they are not related to the actual operations of the business and, therefore, have been excluded in the calculation of Adjusted EBITDA. The remaining adjustments we have made relate to finance income or expense, depreciation and amortization, stock based compensation and other acquisition related accounting items.

Second Quarter 2017 23

	MD&A

	For the three months ended,						For the six months ended,
Adjusted EBITDA	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Net Income (Loss)	$	3,609		$	(3,152	)	$	(3,620	)	$	1,768
Adjusted for:
Income tax expense		(6,178	)		452			(6,058	)		5,334
Foreign exchange (gain) loss		(426	)		(114	)		(711	)		(277	)
Finance expense		14			-			14			-
Finance (income)		(234	)		(120	)		(452	)		(238	)
Special charges		1,294			-			1,294			-
Amortization of intangibles		6,028			9,850			11,331			19,872
Depreciation of property, plant and equipment		170			106			261			213
Effect of deleted deferred revenue		267			-			267			-
Increased costs from inventory step-up		137			-			137			-
Stock based compensation		148			-			179			-
Other expense (income)		(69	)		-			(69	)		-
Adjusted EBITDA	$	4,760		$	7,022		$	2,573		$	26,672

	For the three months ended,						For the six months ended,
Adjusted EBITDA per share	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Net Income (Loss)	$	0.03		$	(0.03	)	$	(0.03	)	$	0.01
Adjusted for:
Income tax expense		(0.05	)		-			(0.05	)		0.04
Foreign exchange		-			-			(0.01	)		-
Finance expense		-			-			-			-
Finance income		-			-			-			-
Special charges		0.01			-			0.01			-
Amortization of intangibles		0.05			0.08			0.10			0.17
Depreciation of property, plant and equipment		-			-			-			-
Effect of deleted deferred revenue		-			-			-			-
Increased costs from inventory step-up		-			-			-			-
Stock based compensation		-			-			-			-
Other expense (income)		-			-			-			-
Adjusted EBITDA per share	$	0.04		$	0.06		$	0.02		$	0.22
Weighted average number of Common Shares
Basic		118,587,106			119,255,090			118,579,684			119,768,540

From time to time, we acquire businesses in purchase transactions that typically result in the recognition of goodwill and other identifiable intangible assets. Acquired goodwill is not amortized but is subject to impairment testing at least annually and as other events and circumstances dictate. Other identifiable intangible assets are typically subject to amortization and therefore will likely increase future expenses. The determination of the value of such intangible assets

Second Quarter 2017 24

	MD&A

requires us to make estimates and assumptions. We have preliminarily ascribed value to identifiable intangible assets other than goodwill in our purchase price allocations including but not limited to backlog, brand, and customer and technology related intangible assets (please refer to the “Acquisitions” section of this MD&A). To the extent we ascribe value to identifiable intangible assets that have finite lives, we amortize those values over the estimated useful lives of the assets. We are amortizing customer related intangible assets over a period of 7 years and technology related intangible assets over 5 years.

Deferred revenue is a key metric of our business because it indicates a level of sales already made that will be recognized as revenue in the future. The companies that we acquired in this second quarter had a combined $7.7 million in deferred revenue immediately prior to the completion of our acquisition. As required by GAAP, in determining the fair value of the liabilities assumed under purchase accounting, the acquired deferred revenue is to be recorded at fair value to the extent it represents an assumed legal obligation. The estimated fair value of the deferred revenue was determined to be $6.5 million resulting in an adjustment reducing the consolidated deferred revenue by $1.2 million. To better evaluate the performance of our acquired businesses, we will add back this deleted revenue in the calculation of Adjusted EBITDA to indicate the overall results of the business had an acquisition not occurred.

In determining the fair value of assets acquired, we recorded a step-up in the value of inventory acquired in the IRD acquisition to reflect the value that we would have had to pay for that inventory if we had purchased it separately outside of a corporate acquisition. This step up increased inventory by approximately $0.6 million which amount will increase cost of goods sold within our Mobility segment as that inventory is consumed in the operations. We view this increased cost of goods sold as solely related to the acquisition and not reflective of the underlying economics of the acquired business. Accordingly, we will deduct this amount in the determination of the Adjusted EBITDA to better indicate the performance of the business segment had an acquisition not been undertaken.

Adjusted EBITDA of $4.8 million, or $0.04 per basic Common Share, compares to $7.0 million or $0.06 per basic Common Share which reflects the lower Adjusted EBITDA performance of our Technology segment as a result of lower revenues, offset by the addition of Adjusted EBITDA from each of our acquired businesses. For the six months ended June 30, 2017, Adjusted EBITDA was $2.6 million or $0.02 per basic Common Share as compared to $26.7 million or $0.22 per basic Common Share which reflects the significantly lower revenues generated in our Technology segment year over year.

Segmented Results

Segmented results of operations for the three and six months ended June 30, 2017 as compared to the three and six month periods ended June 30, 2016 (where applicable) are included in this MD&A. Prior to June 1, 2017 we operated in a single segment, technology licensing (formerly WiLAN). With the creation of Quarterhill and the acquisitions of IRD and VIZIYA, we now consider that we operate in three distinct segments (please also refer to the “Description of Our Business” section of this MD&A).

Second Quarter 2017 25

	MD&A

For the three months ended June 30, 2017, Quarterhill generated $18.6 million in revenue and Adjusted EBITDA of $4.8 million. Each of our individual segments is discussed more fully below.

	For the three months ended June 30, 2017
	Technology			Mobility			Factory			Corporate			Total
Revenues	$	12,048		$	4,648		$	1,915		$	-		$	18,611
Cost of revenues (excluding depreciation and amortization)		6,368			2,752			401			-			9,521
		5,680			1,896			1,514			-			9,090
Selling, general and administrative		1,772			972			876			594			4,214
Research and development		-			308			360			-			668
Depreciation of property, plant and equipment		88			48			34			-			170
Amortization of intangibles		5,321			236			471			-			6,028
Special charges		-			-			-			1,294			1,294
Results from operations		(1,501	)		332			(227	)		(1,888	)		(3,284	)
Finance income		(173	)		-			-			(61	)		(234	)
Finance expense		-			11			3			-			14
Foreign exchange loss (gain)		(100	)		286			41			(653	)		(426	)
Other expense (income)		-			(69	)		-			-			(69	)
Income before taxes		(1,228	)		104			(271	)		(1,174	)		(2,569	)
Current income tax expense (recovery)		691			101			39			-			831
Deferred income tax expense (recovery)		(1,877	)		(62	)		(194	)		(4,876	)		(7,009	)
Income tax expense (recovery)		(1,186	)		39			(155	)		(4,876	)		(6,178	)
Net income (loss)	$	(42	)	$	65		$	(116	)	$	3,702		$	3,609
Adjusted EBITDA		3,934			810			520			(504	)		4,760
Other reconciling items:
Effect of deleted deferred revenue		-			25			242			-			267
Increased costs from inventory step-up		-			137			-			-			137
Stock based compensation		26			32			-			90			148

	For the six months ended June 30, 2017
	Technology			Mobility			Factory			Corporate			Total
Revenues	$	19,626		$	4,648		$	1,915		$	-		$	26,189
Cost of revenues (excluding depreciation and amortization)		13,762			2,752			401			-			16,915
		5,864			1,896			1,514			-			9,274
Selling, general and administrative		4,174			972			876			594			6,616
Research and development		-			308			360			-			668
Depreciation of property, plant and equipment		179			48			34			-			261
Amortization of intangibles		10,624			236			471			-			11,331
Special charges		-			-			-			1,294			1,294
Results from operations		(9,113	)		332			(227	)		(1,888	)		(10,896	)
Finance income		(391	)		-			-			(61	)		(452	)
Finance expense		-			11			3			-			14
Foreign exchange loss (gain)		(385	)		286			41			(653	)		(711	)
Other expense (income)		-			(69	)		-			-			(69	)
Income before taxes		(8,337	)		104			(271	)		(1,174	)		(9,678	)
Current income tax expense (recovery)		1,434			101			39			-			1,574
Deferred income tax expense (recovery)		(2,500	)		(62	)		(194	)		(4,876	)		(7,632	)
Income tax expense (recovery)		(1,066	)		39			(155	)		(4,876	)		(6,058	)
Net income (loss)	$	(7,271	)	$	65		$	(116	)	$	3,702		$	(3,620	)
Adjusted EBITDA		1,747			810			520			(504	)		2,573
Other reconciling items:
Effect of deleted deferred revenue		-			25			242			-			267
Increased costs from inventory step-up		-			137			-			-			137
Stock based compensation		57			32			-			90			179

Second Quarter 2017 26

	MD&A

Technology Segment

Our Technology segment presently comprises the operations of WiLAN.

Technology Segment	For the three months ended,						For the six months ended,
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Revenues	$	12,048		$	15,961		$	19,626		$	46,121
Cost of revenues (excluding depreciation and amortization)		6,368			6,293			13,762			14,263
		5,680			9,668			5,864			31,858
Selling, general and administrative		1,772			2,646			4,174			5,186
Depreciation of property, plant and equipment		88			106			179			213
Amortization of intangibles		5,321			9,850			10,624			19,872
Results from operations		(1,501	)		(2,934	)		(9,113	)		6,587
Finance income		(173	)		(120	)		(391	)		(238	)
Finance expense		-			-			-			-
Foreign exchange loss (gain)		(100	)		(114	)		(385	)		(277	)
Income before taxes		(1,228	)		(2,700	)		(8,337	)		7,102
Current income tax expense (recovery)		691			837			1,434			3,860
Deferred income tax expense (recovery)		(1,877	)		(385	)		(2,500	)		1,474
Income tax expense (recovery)		(1,186	)		452			(1,066	)		5,334
Net income (loss)	$	(42	)	$	(3,152	)	$	(7,271	)	$	1,768
Adjusted EBITDA	$	3,934		$	7,022		$	1,747		$	26,672

For the three months ended June 30, 2017 revenues were $12.0 million representing a sequential increase from the last quarter of $4.4 million or approximately 59%. Although we did not have multiple segments in the fiscal 2016 year, the financial results in the same period last year were exclusively those of the WiLAN business, so we have considered the consolidated results last year as effectively the comparative for our Technology segment. Accordingly, revenues of $12.0 million compare to $16.0 million from the comparative period last year representing a decline of $4.0 million or 25%.

Revenues in this segment are derived from five principal sources: (i) running royalty agreements pursuant to which licensees pay WiLAN royalties based on either a percentage of the net selling price of licensed products or a fixed fee per licensed product sold; (ii) fixed fee royalties consisting of a set quarterly or annual amount for all licensed products sold by licensees; (iii) one-time lump sum fees to cover the sale of all licensed products by a particular licensee, subject to certain limitations; (iv) licensing patents on behalf of WiLAN’s partners; or (v) brokerage which provides the acquirer exclusive rights to the technology. License agreements are generally for a five to eight year period but can be significantly longer or covering the entire life of the underlying licensed patents. Revenue is considered to be earned when there is persuasive evidence of an arrangement, all obligations that need to be performed have been fulfilled in accordance with the terms of the license agreement, including delivery and acceptance, the revenue amount is fixed or determinable and collection is reasonably assured.

Revenues can vary significantly from quarter to quarter depending upon the type of royalty arrangement with licensees, the timing of royalty reporting by licensees, the cyclical nature of licensees’ markets and fluctuations in foreign currency and other factors. Revenues can fluctuate based on individual licensees’ growth and success rates in their respective markets, and other market factors on their respective businesses and other factors outside of our control.

Historically, a significant portion of licensing revenues has been generated by license agreements having fixed periodic payments, however we expect that an increasing portion of WiLAN’s revenues will be generated by license agreements having one-time lump sum payments and therefore this segment’s revenue is expected to fluctuate from period to period.

Cost of revenues (excluding depreciation and amortization) is comprised of patent licensing expenses which includes royalty obligations, cost of patents sold through brokerage activities (if any), employee-related costs and other costs

Second Quarter 2017 27

	MD&A

incurred in conducting license negotiations, contingent partner and legal fee payment and other litigation expenses as well as all costs associated with the ownership and management of WiLAN’s patent portfolio. Many of these costs are directly related to the size and breadth of the patent portfolio and, therefore, as WiLAN adds or reduces patents, these costs would be expected to increase or decrease accordingly.

Cost of revenues (excluding depreciation and amortization) for the three months ended June 30, 2017 was $6.4 million or 53% of revenues as compared to $7.4 million or 97% of revenues for the first quarter of 2017 representing a sequential decline of $1.0 million. This decline relates primarily to lower engineering and patent ownership costs. For the comparable period last year, the cost of revenues (excluding depreciation and amortization) was $6.3 million, which is consistent year over year. The majority of these expenses, at this level, are semi-fixed and will not vary significantly from period to period. Litigation expenses, and all contingent payments would be expected to vary from period to period depending on the overall number of litigations conducted by WiLAN and the amount of revenues recorded that have a contingent component associated with them.

Operating expenses are generally considered marketing, general and administration type expenses and include all overheads for WiLAN operations in addition to depreciation and amortization expense for assets utilized in the business. For the three months ended June 30, 2017 operating expenses within this segment were $7.2 million which included $5.3 million in patent amortization and $88 in depreciation leaving cash operating expenses of $1.8 million for the quarter. For the first five months of fiscal 2017, all corporate costs, now attributable to Quarterhill, were included within our Technology segment. For the month of June, the corporate costs of $0.6 million applicable to Quarterhill have been allocated to the Corporate segment. As a result, there is approximately $1.0 million of corporate expenses included within the second quarter operating expenses of our Technology segment that would normally be attributable to Quarterhill. Cash operating expenses in the first quarter were $2.1 million including approximately $1.3 million of expenses that would normally be considered corporate. We would anticipate the cash operating expenses for our Technology segment will be less than $1.0 million per quarter for the balance of fiscal 2017.

Foreign exchange gains during the quarter were $0.1 million which is not significant. We cannot accurately predict foreign exchange movements and as such, cannot accurately predict future gains and losses related to unhedged transactions denominated in currencies other than U.S. dollars.

Finance income for the three months ended June 30, 2017 was $0.2 million and $0.4 million for this six months ended June 30, 2017. This income arises from interest earned on cash deposits during the period. Since June 1, 2017 our Technology segment has not carried significant cash balances, nor is it expected that it will as all excess cash in any subsidiary is returned to Quarterhill. Accordingly, finance income should be minimal on a go forward basis.

Income tax recovery for the second quarter was $1.2 million and was comprised of current taxes of $0.7 million and a deferred income tax recovery of $1.9 million. Current income tax expense for all reported periods consisted of foreign taxes withheld on licensing revenues received from licensees in foreign tax jurisdictions for which there is no treaty relief and current income taxes for which there are no carryforwards, partially offset by loss carrybacks generated in 2016. As a result of the corporate transactions undertaken effective June 1, a number of the tax assets formerly held within our Technology segment have been absorbed by Quarterhill and accordingly, there is a deferred income tax recovery in the current quarter.

There is a valuation allowance of $14.0 million as at June 30, 2017 against deferred tax assets for certain of WiLAN’s Canadian and all of its U.S. subsidiaries. A valuation allowance is established for any portion of deferred tax assets for which management believes it is more likely than not that WiLAN will be unable to utilize the assets to offset future taxes. We expect WiLAN to continue to utilize certain previously recognized Canadian loss carryforwards which will result in deferred income tax expense. Until such time as WiLAN’s licensing programs in certain of its Canadian and U.S. subsidiaries generate sufficient taxable income, we expect to continue to maintain a full valuation allowance against

Second Quarter 2017 28

	MD&A

deferred tax assets for these Canadian and U.S. subsidiaries. As a result, we expect the provision for deferred income tax expense to be disproportionately higher when compared to our estimated average annual rate or other operating segments of Quarterhill.

Mobility Segment

Our Mobility segment, at the time of writing this MD&A, consists solely of IRD for the month of June 2017 following our June 1, 2017 acquisition of IRD.

Mobility Segment	For the three and six months ended,
	June 30, 2017
Revenues		4,648
Cost of revenues (excluding depreciation and amortization)		2,752
		1,896
Selling, general and administrative		972
Research and development		308
Depreciation of property, plant and equipment		48
Amortization of intangibles		236
Results from operations		332
Finance expense		11
Foreign exchange loss (gain)		286
Other expense (income)		(69	)
Income before taxes		104
Current income tax expense (recovery)		101
Deferred income tax expense (recovery)		(62	)
Income tax expense (recovery)		39
Net income (loss)	$	65
Adjusted EBITDA	$	810

IRD revenue streams are categorized as either Systems or Recurring. Systems revenues comprises revenues earned on contracted projects, generally recognized on a percentage completion basis plus proprietary and OEM products sales, which are distributed directly and through its network of distributor/agency relationships. Recurring revenues represent revenue realized under service and maintenance contracts and generally ranges from one to five year terms. Recurring revenues are recognized on either a percentage completion basis or time and material basis, depending on contract terms.

For the period June 1 to June 30, 2017, IRD delivered systems revenues of approximately $3.1 million and gross margins of approximately 38% reflecting superior returns across several significant projects primarily in the United States. Gross margin in this period was negatively affected as a result of the step-up in fair market value of inventory upon the acquisition of IRD which increased cost of sales by $137. Were it not for this adjustment, gross margin and ultimately the profitability of our Mobility segment would have been better. Recurring revenue for this period, in the amount of $1.6 million and associated gross margin of approximately 46% reflects expected levels of performance based on current open contracts. Although this revenue was affected negatively as a result of the reduction in deferred revenue recorded upon the acquisition of IRD, this amount was not significant.

Gross margin and gross margin as a percentage of revenue realized in the period were above historic levels due mainly to positive changes in product mix and increased margins earned on specific projects. Gross margins are subject to significant variance each reporting period due to factors such as changes in product mix, currency volatility and competitive factors. Over a full fiscal year, gross margins percentages generally will approximate 30 to 32%.

Operating expenses, consisting of research and development expenses and selling, general and administrative expenses,

Second Quarter 2017 29

	MD&A

for the month are generally within expectations, however, they do represent slightly higher business development costs than in past periods. These expenses are generally expected to remain relatively consistent quarter over quarter for the balance of fiscal 2017.

IRD is committed to continual investments in research and development to enhance its current products and advance the availability of new products. For the period June 1 to June 30, 2017, net R&D spending levels were 6.6% of segment revenue. Spending for the period and year to date is above historical levels due to investments in third party contract services to advance the availability of new products, including VectorSense® Tire Sensor Suite and the related Vehicle Information-In-Motion™ (VI²M™) Traffic Intelligence system. Total R&D expenses are reduced by government grants and estimated investment tax credits on eligible scientific research expenditures in Canadian operations. The value of accrued investment tax credits will vary from period to period based on the estimated portion of R&D costs considered eligible scientific research expenditures under Canadian tax rules.

Selling, general and administrative expenses comprise the operating costs of IRD and its subsidiary businesses in support of its selling, marketing and administrative activities. Costs incurred for the period June 1 to June 30, 2017 are within expectations, but reflect added business development costs plus costs incurred related to our acquisition of IRD.

IRD is exposed to foreign exchange risk primarily relating to sales revenue, operating and capital expenditures, net assets held in foreign currencies, forward exchange contracts, and embedded derivative portions of unearned revenue on certain U.S. dollar denominated sales contracts in its Latin America and Mexico segment. IRD has exposure to the U.S. dollar, Indian rupee, Chilean peso, Mexican peso, and Chinese yuan as more fully described in the Financial Instruments and Other Risks section below.

For the month of June 2017, IRD recorded foreign exchange losses of $286 primarily reflecting the decline in the value of the U.S. dollar relative to the Canadian dollar and Chilean peso, which reduced the carrying value of U.S. dollar net assets. As at June 30, 2017, the fair value of embedded derivative assets on the contracts discussed above was $45 on unearned revenue of $0.25 million. As revenue is recognized on these contracts or the future value of the U.S. dollar changes compared to the Chilean and Mexican pesos, earnings will be affected.

IRD partially reduces its exposure to the U.S. dollar foreign exchange volatility relative to the Canadian dollar by maintaining a portion of its bank indebtedness in U.S. funds. In addition, from time to time, IRD enters into forward exchange contracts to sell U.S. dollars to fix its net accounts receivable denominated in this currency. The term of these forward contracts is of a short-term nature with the objective of matching the expected payments from customers. At June 30, 2017 IRD had two forward exchange contracts of $500 each to sell U.S. dollars, maturing over a two-month period from July 17, 2017 to August 15, 2017 at an average exchange rate of 1.324 resulting in a positive fair value of approximately $20.

Foreign exchange translation gains or losses arising on consolidation of IRD’s subsidiaries in Chile and India and its joint venture in China are recorded as accumulated other comprehensive income, which is a component of shareholders’ equity.

Finance costs are comprised of interest charges on bank indebtedness and long-term debt. Interest costs will vary from month to month depending on the level of bank indebtedness and changes in interest rates.

Other expenses (income) is comprised of sundry non-operating receipts and IRD’s share of income in its joint venture, XPCT, of which IRD owns a 50% joint venture interest. XPCT has two business divisions providing products and services to both the ITS industry and construction equipment manufacturers. As a distributor for IRD’s ITS manufactured goods, XPCT provides a strategic advantage to IRD to increase sales in the Chinese market.

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For the period June 1 to June 30, 2017, IRD recorded its share of XPCT’s income of $69 due mainly to strong performance of XPCT’s wire harness division. The carrying value of the investment was revalued upon acquisition to $3.2 million from $5.1 million.

The effective tax rate can vary from the Canadian statutory tax rate of approximately 26% applied to earnings before income taxes because of different rates of tax on foreign income, XPCT net earnings, and foreign currency translation gains or losses on consolidation of foreign subsidiaries. As a result, the consolidated effective tax rate is not representative of income tax rates effective in the jurisdictions in which IRD operates.

As at June 30, 2017, IRD has recorded estimated income taxes payable or receivable in each of the Canada, United States and Chile entities based on statutory rates applicable to those jurisdictions, adjusted for non-taxable or non-deductible items and net of applied investment tax credit balances available to offset income taxes otherwise payable in the Canadian corporate entity. No income tax recovery is recorded in IRD’s India subsidiary due to uncertainty that sufficient future earnings will be generated to offset current and prior years’ available tax losses prior to their expiry date.

Factory Segment

Factory Segment	For the three and six months ended,
	June 30, 2017
Revenues		1,915
Cost of revenues (excluding depreciation and amortization)		401
		1,514
Selling, general and administrative		876
Research and development		360
Depreciation of property, plant and equipment		34
Amortization of intangibles		471
Results from operations		(227	)
Finance expense		3
Foreign exchange loss (gain)		41
Income before taxes		(271	)
Current income tax expense (recovery)		39
Deferred income tax expense (recovery)		(194	)
Income tax expense (recovery)		(155	)
Net income (loss)	$	(116	)
Adjusted EBITDA	$	520

Our Factory segment comprises VIZIYA’s operations. Revenues recorded in this segment were $1.9 million for the period from May 4 to June 30, 2017 and consisted of $0.8 million in software licenses, $0.7 million in Services revenues and $0.4 million in software maintenance revenues. As noted in the “Reconciliation of Adjusted EBITDA” section of this MD&A, the determination of the fair value of deferred revenue as at May 4, 2017 resulted in the deletion of $0.9 million of revenue that VIZIYA would have recognized in its normal course of operations if we did not acquire it. Consequently, for this two-month period, revenues were reduced by $0.2 million. VIZIYA has approximately $1.9 million of deferred revenue remaining at the end of the quarter which will be recognized as revenue over approximately the next 12 months. We also expect to continuously replenish and grow the deferred revenue on an annual basis and, as such, we anticipate increasing Recurring revenues beginning in 2018.

VIZIYA’s product sales are generally to asset intensive industries including in the oil & gas, mining and heavy metals industries. These industries have generally been depressed over the past five to eight years which has made them more hesitant to make capital investments in new technologies such as those VIZIYA sells. Despite these economic difficulties,

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VIZIYA has been able to generate new product licenses, incremental services revenues and increased related recurring maintenance revenue streams. VIZIYA is also seeing increased interest from their customers for the provision of their software through a subscription model which, when adopted, is expected to increase recurring revenue streams as we have defined them.

Cost of revenues (excluding depreciation and amortization) principally relates to the services revenues recorded and consists principally of employee costs for those employed in the provision of professional services. Operating expenses include research and development expenses of approximately $0.4 million which is principally employee costs, and $0.9 million in selling, general and administrative costs. Based on current business expectations, this level of spending is expected to remain relatively flat for the duration of the current fiscal year.

Amortization of intangibles, amounting to $0.5 million in the quarter, relate to the customer, brand, and technology identified intangible assets arising on the acquisition of VIZIYA (please refer to the “Acquisitions” section of this MD&A). We add these expenses back in the determination of the Adjusted EBITDA as they relate solely to the acquisition and would not normally have been incurred in the operation of this software business. Adjusted EBITDA, as a result, is $0.5 million for the current reporting period.

selected Consolidated Quarterly Results

(Unaudited)

	Revenues		Net Income			Net income (loss) per share (Basic)			Adjusted EBITDA *			Adjusted EBITDA per share * (basic)
Quarter ended	$ 000's		$ 000's			$			$ 000's			$
June 30, 2017		18,611		3,609			0.03			4,760			0.04
March 31, 2017		7,578		(7,229	)		(0.06	)		(2,187	)		(0.02	)
December 31, 2016		30,186		8,627			0.07			17,580			0.14
September 30, 2016		16,569		657			0.01			9,369			0.09
June 30, 2016		15,961		(3,152	)		(0.03	)		7,022			0.05
March 31, 2016		30,160		4,920			0.04			19,650			0.16
December 31, 2015		26,017		3,007			0.02			12,958			0.10
September 30, 2015		21,438		829			0.01			12,582			0.10
Adjusted EBITDA and the respective per share amounts are non-GAAP measures,
please refer to "Non GAAP Disclosures" and "Reconciliation of Adjusted EBITDA" sections of this MD&A

Historically, our quarterly revenues were affected by the amount and timing of fixed payment based licenses, the amount of running royalty based licenses, and any new lump sum payment based licenses signed in a quarter. Given these factors, quarterly revenues have fluctuated and have been difficult to predict. As a result of the creation of Quarterhill as a diversified investment holding firm, we now report a number of revenue streams. We believe this diversification may assist in mitigating the variability in our previous quarterly revenues. We do not have sufficient operating history in this diversified business to be able to identify any significant trends; however, with only one month of operations in our Mobility segment and two months in our Factory segment included in this quarter’s results, it is reasonable to expect that revenues from these two segments should increase in the next quarter.

Historically, our operating results have fluctuated on a quarterly basis and we expect that quarterly results will continue to fluctuate in the future. The operating results for interim periods should not be relied upon as an indication of the results to be expected or achieved in any future period or any fiscal year as a whole. The factors affecting our revenue and results, many of which are outside of our control, include the factors set out in the “Risks and Uncertainties” section of this MD&A.

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Capital and Liquidity

Cash and cash equivalents and short-term investments amounted to $49.0 million at June 30, 2017, representing a decrease of $58.7 million from the $107.7 million held at December 31, 2016. The decrease is primarily attributable to $66 million spent on the acquisitions of IRD and VIZIYA offset by cash generated from operations of $11.5 million.

At June 30, 2017, we had working capital of $47.6 million, contingent consideration payable of $6.4 million, long-term debt of $0.4 million, and long-term patent finance obligations of $15.2 million, which relate to deferred payment terms on patents and patent rights which WiLAN had acquired in fiscal 2014 or earlier. These patent finance obligations are non-interest bearing and are financed by the same counterparty that signed an intellectual property license at the same time and presently owes WiLAN at least the same amount in future payments. For this reason, we do not consider the deferred patent finance obligations (current or long-term) as debt.

Quarterhill has a revolving credit facility available in the amount of CDN$8.0 million or the equivalent in U.S. dollars for general corporate purposes and a further CDN$2.0 million for foreign exchange facility. Canadian dollar or U.S. dollar amounts advanced under this credit facility are payable on demand and bear interest at the bank’s Canadian prime rate plus 1.0% per annum or U.S. base rate plus 1.0% per annum. Borrowings under this facility are collateralized by a general security agreement over our cash and cash equivalents, receivables and present and future personal property. As at and during the twelve months ended June 30, 2017, we had no borrowings under this facility.

The following bank indebtedness amounts were acquired as a result of the acquisition of IRD and VIZIYA:

	June 30, 2017		December 31, 2016
Revolving credit facility of $9.5 million authorized and secured by a general security agreement:
HSBC Bank Canada - Borrowing in Canadian dollars with interest at bank prime plus 1.5%	$	3,542	$	-
TD Canada Trust Borrowing in Canadian dollars with interest at bank prime plus 2.0%		285		-
Total contractual obligations	$	3,827	$	-

	June 30, 2017		December 31, 2016
HSBC Bank Canada term loan, repayable in quarterly installments of $24 with interest at bank prime plus 0.5%.
Due September 30, 2021	$	421	$	-
Less current portion		99		-
		322		-
Finance lease		61		-
TD Canada Trust - Borrowing in Canadian dollars with interest at bank prime plus 2.0%	$	383	$	-

IRD has a credit facility through HSBC Bank Canada (“HSBC”) which may be borrowed against by way of banker’s acceptances at prevailing market rates to a maximum of CDN$9.5 million or by way of U.S. dollar advances to a maximum of U.S. $7.0 million. Borrowings on this facility are restricted to the lesser of $7.0 million and the margin total on the following assets in Canada and the U.S., 90% of secured and government accounts receivable less than 120 days and 50% of inventory to a maximum of $2.3 million. As at June 30, 2017 approximately $3.5million was available to be drawn.

IRD’s demand facility and long-term debt with HSBC are secured by a general security agreement on IRD’s assets held in Canada having a carrying value at June 30, 2017 of $28.1million. In addition, IRD’s subsidiaries in the United States, Chile and India have provided corporate guarantees as security.

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IRD is subject to covenants on its credit facility and long-term debt with HSBC as follows: current ratio greater than 1.2 to 1 (tested quarterly); debt to tangible net worth less than 2.5 to 1 (tested quarterly); and debt service coverage ratio greater than 1.25 to 1 (tested annually) based on IRD’s financial results. At June 30, 2017, IRD is in compliance with these covenants.

VIZIYA has a credit facility through TD Canada Trust (“TD”) in the form of an operating line of credit in the amount of CDN $0.5 million. This facility is secured by a general security agreement over VIZIYA and a floating charge on accounts receivable of VIZIYA, and is renewed annually. This facility bears interest at TD’s prime rate plus 2.00%, as well as a standby charge for any undrawn funds.

We plan to use our cash resources to fund our operations, provide incremental financing to any of our subsidiaries if needed, and to acquire additional businesses. Operating cash flows may vary significantly between periods due to changes in working capital balances. We may also fund our ongoing cash requirements through the use of additional short-term and long-term debt and, if desirable based on market conditions, by selling Common Shares and debt securities to the public.

Outstanding Common Share Data

We are authorized to issue an unlimited number of Common Shares, 6,350.9 special preferred, redeemable, retractable, non-voting shares and an unlimited number of preferred shares, issuable in series. As at June 30, 2017, there were 118,627,249 Common Shares and no special or preferred shares issued and outstanding. We also maintain a Share Option Plan, an Employee Share Purchase Plan and a Deferred Stock Unit Plan. Under the Share Option Plan, we can issue a maximum of 10% of our issued and outstanding Common Shares from time to time which was, as at June 30, 2017, 11,862,724 Common Shares combined. The Common Shares authorized for issuance under the Employee Share Purchase Plan and the Deferred Stock Option Plan are limited to 800,000 and 430,000, respectively. As at June 30, 2017, we had options to purchase up to 5,987,893 Common Shares outstanding, 206,508 deferred stock units outstanding and have issued 636,100 Common Shares under our Employee Share Purchase Plan.

Off-Balance Sheet Arrangements

As at June 30, 2017, IRD has identified the following off balance sheet arrangement: a loan guarantee in the amount of 15.0 million yuan (approximately $2.2 million) for 50% of a bank loan to XPCT representing IRD’s proportionate interest in this entity.

XPCT’s Board of Directors has amended its articles of association to increase XPCT’s total registered capital by 45.0 million yuan or $6.8 million. Unless otherwise amended, the term for contributing this increased capital of 22.5 million yuan or $3.4 million per shareholder is by December 31, 2046. XPCT’s Board of Directors may increase, decrease, or transfer XPCT’s registered capital at any time.

Proposed Transactions

There are no proposed transactions.

Critical Accounting Policies, Including Initial Adoption of Policies, and Critical Estimates

Our management is required to make judgments, assumptions and estimates in applying our accounting policies and

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practices which have a significant impact on our financial results. The following outlines the accounting policies and practices involving the use of professional judgment and estimates that are critical to determining our financial results.

Revenue recognition

We recognize revenue as earned when the following four criteria have been met: (i) when persuasive evidence of an arrangement exists, (ii) the product or license has been delivered to a customer and title has been transferred or the services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collection is reasonably assured. In addition to this general policy, the following paragraphs describe the specific revenue recognition policies for each of our significant types of revenue arrangements.

Software and related service

Revenue from perpetual licenses is recognized either upon delivery or over the estimated customer life, depending on whether we have obtained Vendor Specific Objective Evidence (“VSOE”) of fair value for the associated undelivered products bundled with the perpetual license. All of the deliverables under these licenses are accounted for in accordance with ASC Topic 985-605, “Software Revenue Recognition”.

When the VSOE of fair value has not been established for both delivered and undelivered elements, we use the residual method to recognize revenue if VSOE of fair value of undelivered elements is determinable. Revenue from software maintenance, unspecified upgrades and technical support contracts is recognized over the period that such items are delivered or those services are provided. Software revenue is recognized as license revenues on the statement of operations.

Revenue from renewals of support and maintenance contracts is recognized ratably over the contract term. Renewal and support revenue is recognized as recurring revenues on the statement of operations.

Royalties

Revenue from royalties is recorded when the four major criteria of revenue recognition noted above are met.

Revenues from running royalty arrangements can be based on either a percentage of sales or number of units sold for which we earn revenues at the time licensees’ sales occur. Licensees are obligated to provide us with quarterly or semi-annual royalty reports and these reports are typically received subsequent to the period in which the licensees’ underlying sales occurred. Our licensees do not, however, report and pay royalties owed for sales in any given reporting period until after the conclusion of that reporting period. As we are unable to estimate licensees’ sales in any given reporting period to determine royalties due to them, we recognize running royalty revenues based on royalties reported by licensees during the quarter and when other revenue recognition criteria are met. We monitor the receipt of royalty reports to ensure that there is not a disproportionate number of months of revenue in any given fiscal year.

Revenues from fixed fee royalty arrangements may consist of one or more installments of cash. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Where agreements include multiple elements, we assess if the deliverables have standalone value upon delivery, and if so, we account for each deliverable separately. When multiple-deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on its best estimate of selling price (“BESP”). We determine BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include discounting practices, the size and volume of transactions, the customer demographic, the geographic area covered by licenses, price lists, licensing strategy, historical standalone licenses and contracted royalty rates. The determination of BESP is made through consultation with and approval by management, taking into consideration the licensing strategy.

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As part of the partnering agreements with third parties, we are able to recover certain out-of-pocket expenses and legal costs. These amounts are included in revenue in the years which the aforementioned revenue criteria are met and the amounts become reimbursable.

Revenue arrangements with extended payment terms, where fees are fixed in one or more installments of cash and which contain terms that could impact the amounts ultimately collected, are generally recognized as collection becomes assured.

Contracted Projects

The majority of sales of integrated systems are delivered as contracted projects. We recognize contract revenue in accordance with ASC Topic 605-35, “Construction-Type and Production-Type Contracts”. Our contract types include fixed price and time and materials contracts. Contract revenue includes the initial amount agreed in the contract plus any amendments in contract work to the extent that it is probable they will result in revenue and can be reliably measured.

For fixed price contracts, when circumstances exist allowing us to make reasonably dependable estimates of contract revenues, contract costs and the progress of the contract to completion, we account for revenue under such long-term contracts using the percentage-of-completion (“POC”) method of accounting. Under the POC method, progress towards completion of the contract is measured based upon input measures. We measure progress towards completion based upon the cost incurred compared to the total estimated cost to complete. We will review the total estimated remaining costs to completion for each of these contracts and apply the impact of any changes on the POC prospectively. If, at any time, we anticipate the estimated remaining costs to completion will exceed the value of the contract, the resulting loss will be recognized immediately.

For time and materials contracts, labor and material rates are established within the contract. Revenues from time and materials contracts are recognized progressively on the basis of costs incurred during the period plus the estimated margin earned.

Contract costs include expenses that relate directly to fulfilling the requirements of a specific contract including materials costs, subcontractor costs, equipment rentals, engineering and project management labor, design and technical support labor, warranty costs, insurance and bond premiums. Contract costs are recognized in the period in which they are incurred unless they result in an asset related to future contract activity.

Unbilled revenue represents the excess of contract costs incurred and estimated gross profits recognized over billings to date. If progress billings received exceed costs incurred plus recognized gross profits, then the difference is presented as deferred revenue in the condensed consolidated interim statement of financial position. Project revenue is recognized as system revenues in the condensed consolidated interim statement of operations.

Product sales

We recognize product sales in accordance with ASC Topic 605-15, “products”. Revenue from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable. Revenue for products is recognized when the four revenue recognition criteria noted above are met.

The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale. For sales of products, transfer usually occurs when the product is received at the customer’s warehouse. For some international shipments, when the buyer has no right of return, transfer occurs upon loading the goods onto the relevant carrier at the port of the seller. Product revenue is recognized as system revenues on the statement of operations.

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	MD&A

Services Revenue

We recognize service revenue in accordance with ASC Topic 605-20, “Services”. The scope of services is set forth in the contractual arrangements. These service contracts can be time and materials based contracts that range from one year to five years in length. Revenues from these services are recognized at the time such services are performed. We also enter into contracts that are primarily fixed fee arrangement. In such cases, the proportional performance method is applied to recognize revenues.

Multiple-element arrangements

We enter into revenue arrangements that may consist of multiple deliverables of its product and service offerings. Our typical multiple-element arrangements involve: (i) software with maintenance services, and (ii) projects with maintenance service and extended warranties.

For our arrangements involving multiple deliverables, the consideration from the arrangement is allocated to each respective element based on its relative selling price, using VSOE. In certain limited instances when we are unable to establish the selling price using VSOE, we attempt to establish the selling price of each element based on acceptable third-party evidence of selling price (“TPE”); however, we are generally unable to reliably determine the selling prices of similar competitor products and services on a stand-alone basis. In these instances, we use BESP in our allocation of arrangement consideration, where permitted. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis.

If we are unable to determine VSOE for all of the deliverables of the arrangement, but can obtain VSOE for all undelivered elements, revenue is allocated using the residual method. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration, less the aggregate fair value of any undelivered elements.

If VSOE of any undelivered software element does not exist, revenue from the entire arrangement is deferred and recognized at the earlier of: (i) delivery of those elements for which VSOE did not exist; or (ii) when VSOE can be established.

We determine BESP for a product or service by considering multiple factors including, but not limited to, historical pricing practices for similar offerings, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The determination of BESP is made through consultation with, and formal approval by, our management, taking into consideration our marketing strategy. We regularly review VSOE, TPE and BESP.

Investment Tax Credits

At June 30, 2017, we have approximately $6,552 (December 31, 2016 - $5,647) of non-refundable investment tax credits carried forward, relating primarily to past R&D. These credits can be applied against future income taxes payable and are subject to a 20-year carry-forward period. Judgment is required in determining the amount of unutilized investment tax credits to record as an asset. In assessing the potential utilization of investment tax credits, we have considered whether it is more likely than not that some portion or all of the unutilized investment tax credits will be realized based upon estimates of our anticipated income tax position in future periods. We will continue to evaluate our future income tax position quarterly and record any adjustment necessary in that period.

Valuation of Deferred Income Tax Assets and Deferred Income Tax Expense/Recovery

As at June 30, 2017, our subsidiaries had accumulated $19,599 of unused R&D expenditures for income tax purposes. These deductions are available without expiry to reduce future year’s taxable income. Including the unused R&D expenditures and investment tax credits noted above, we had approximately $109.3 million of temporary differences and tax losses available for carry forward. As a result, as at June 30, 2017, we have a deferred income tax asset of $31.9 million of which $13.5 million (net) has been recorded. Judgment is required in determining the amounts of deferred

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	MD&A

income tax assets and liabilities and the related valuation allowance recorded against the net deferred income tax assets. In assessing the potential realization of deferred income tax assets, we consider all available evidence, both positive and negative. The realization of deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. Our forecasted future operating results are highly influenced by, among other factors, assumptions regarding (1) our ability to achieve forecasted revenue, (2) our ability to effectively manage our expenses relative to our forecasted revenue and (3) market conditions in the segments in which we operate. We considered both positive and negative evidence and based on revenue from existing contracts and spending managed to the revenue levels determined future taxable income will be sufficient to utilize existing tax attributes in each of our subsidiaries.

We assess the probability that deferred income tax assets will be recovered from future taxable income, and whether a valuation allowance is required to reflect any uncertainty at each reporting period within each subsidiary. We will continue to evaluate our deferred income tax position quarterly and record any adjustment necessary in that period. As at June 30, 2017, we had a valuation allowance of $18.4 million primarily related to net operating losses and capital losses in certain operating subsidiaries which we have assessed as more likely than not that these losses will not be utilized.

Patents

We have acquired patents and patent rights (collectively, “patents”) directly or through business acquisitions. In determining the fair value of these patents, we make estimates and judgments about the future income-producing capabilities of these assets and related future cash flows. We also make estimates about the useful lives of these assets based on assessment of the legal and economic lives of the patents and potential future licensing revenues achievable from our patent portfolios. Our patent portfolios as at June 30, 2017 are being amortized on a straight-line basis over the remaining useful lives of the patents which range from approximately one to nine years. If our basis for assessing the useful lives of the intangibles and potential future licensing revenues achievable from our patent portfolio is adversely affected by future events or circumstances, we will record write-downs of patents, write-down of other intangible assets, or changes in the estimated useful lives of these assets, which would result in changes to amortization expense in the future. Such changes would not affect cash flows.

The carrying value of patents is reviewed for impairment when events or circumstances indicate that the carrying amount may not be recoverable. Impairments are determined by comparing the carrying value to the estimated undiscounted future cash flows to be generated by those assets. If this assessment indicates that the carrying value of the patents is not recoverable, the carrying value is then compared with the estimated fair value of the assets, and the carrying value is written down to the estimated fair value.

Goodwill

Goodwill is subject to annual impairment tests or on a more frequent basis if events or conditions indicate that goodwill may be impaired. As noted elsewhere in this MD&A, we consider that we now operate in three reportable segments. We carry goodwill in each of these segments.

Estimation uncertainty

Critical accounting policies and estimates utilized in the normal course of preparing our consolidated financial statements require the determination of the best estimate of selling price, future cash flows utilized in assessing net recoverable amounts and net realizable values, determination of discount rates, amortization, allowance for bad debts, legal contingency estimate, useful lives of property, equipment and intangible assets, valuation of intangibles, valuation of debt securities, determination of indicators of impairment assessments and related impairment assessments, assumptions used in determining the fair value of stock options granted, timing of payments related to patent finance obligations and measurement of deferred taxes. In making estimates, management relies on external information and observable conditions where possible, supplemented by internal analysis where required.

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	MD&A

These estimates have been applied in a manner consistent with that in the prior periods and there are no known trends, commitments, events or uncertainties that we believe will materially affect the methodology or assumptions utilized in the consolidated financial statements. The estimates are impacted by many factors, some of which are highly uncertain. The interrelated nature of these factors prevents us from quantifying the overall impact of these movements on our financial statements in a meaningful way. These sources of estimation uncertainty relate in varying degrees to virtually all asset and liability account balances.

Critical accounting estimates are defined as estimates that are very important to the portrayal of our financial position and operating results and require management to make judgments based on underlying assumptions about future events and their effects.

These underlying assumptions are based on historical experience and other factors that we believe to be reasonable under the circumstances and are subject to change as events occur, as additional information is obtained and as the environment in which we operate changes.

Critical accounting estimates and accounting policies are reviewed annually or more often if needed, by the Audit Committee.

Recent accounting pronouncements

See Note 2, “Significant Accounting Policies”, of Notes to Unaudited condensed consolidated interim financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

Disclosure Controls and Procedures

In conformance with National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators, we have filed certificates signed by our Interim Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO”) that, among other things, deal with the matter of disclosure controls and procedures.

Disclosure controls and procedures have been designed under the supervision of our CEO and CFO, with the participation of other management, to provide reasonable assurance that all relevant information we are required to disclose is recorded, processed, summarized and reported on a timely basis to senior management, as appropriate, to allow timely decisions regarding required public disclosure.

An evaluation of the effectiveness of our disclosure controls and procedures was carried out under the direction of our CEO and CFO. Based on this evaluation, our CEO and the CFO concluded that the design and operation of these disclosure controls and procedures were effective. This evaluation considered our disclosure policy, a certification process implemented with our subsidiaries and the functioning of Quarterhill’s Disclosure Committee.

Management’s Report on Internal Controls Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, however, internal control over financial reporting may not prevent or detect misstatements on a timely basis.

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	MD&A

Our management evaluated, under the supervision of our CEO and CFO, the effectiveness of our internal control over financial reporting as at June 30, 2017. We based our evaluation on criteria established in “Internal Control over Financial Reporting – 2013” issued by the Committee of Sponsoring Organizations of the Treadway Commission and, based on that evaluation, we have concluded that, as of June 30, 2017, our internal control over financial reporting is effective.

Changes in Internal Controls

There have been no changes in our “internal control over financial reporting” that occurred during the six months ended June 30, 2017 which have materially affected or are reasonably likely to materially affect the internal control over financial reporting.

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Quarterhill Inc.

303 Terry Fox Drive, Suite 300

Ottawa, ON Canada

K2K 3J1

Tel:	1.613.688.1688
Fax:	1.613.688.4894
	www.quarterhill.com

EX-99.2

Exhibit 99.2

Quarterhill Inc.

2017 Second Quarter

Unaudited Condensed Consolidated

Interim Financial Statements

FINANCIAL STATEMENTS

Condensed Consolidated Interim Statements of Operations

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

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
		2017			2016			2017			2016
Revenues
License	$	12,842		$	15,961		$	20,420		$	46,121
Systems		3,067			-			3,067			-
Services		714			-			714			-
Recurring		1,988			-			1,988			-
		18,611			15,961			26,189			46,121
Cost of revenues (excluding depreciation and amortization)
License		6,448			6,293			13,842			14,263
Systems		1,898			-			1,898			-
Services		321			-			321			-
Recurring		854			-			854			-
		9,521			6,293			16,915			14,263
		9,090			9,668			9,274			31,858
Operating expenses
Selling, general and administrative expenses		4,214			2,646			6,616			5,186
Research and development expenses		668			-			668			-
Depreciation of property, plant and equipment (Note 8)		170			106			261			213
Amortization of intangibles (Note 9)		6,028			9,850			11,331			19,872
Special charges		1,294			-			1,294			-
		12,374			12,602			20,170			25,271
Results from operations		(3,284	)		(2,934	)		(10,896	)		6,587
Finance income		(234	)		(120	)		(452	)		(238	)
Finance expense		14			-			14			-
Foreign exchange (gain) loss		(426	)		(114	)		(711	)		(277	)
Other expense (income)		(69	)		-			(69	)		-
Income (loss) before taxes		(2,569	)		(2,700	)		(9,678	)		7,102
Current income tax expense (Note 17)		831			837			1,574			3,860
Deferred income tax expense (recovery) (Note 17)		(7,009	)		(385	)		(7,632	)		1,474
Income tax expense (recovery)		(6,178	)		452			(6,058	)		5,334
Net income (loss)	$	3,609		$	(3,152	)	$	(3,620	)	$	1,768
Net income (loss) per share (Note 15)
Basic	$	0.03		$	(0.03	)	$	(0.03	)	$	0.01
Diluted	$	0.03		$	(0.03	)	$	(0.03	)	$	0.01
Weighted average number of common shares (Note 15)
Basic		118,587,106			119,255,090			118,579,684			119,768,540
Diluted		118,587,106			119,255,090			118,579,684			119,768,540

See accompanying notes to these condensed consolidated interim financial statements

1

FINANCIAL STATEMENTS

Condensed Consolidated Interim Statements of Comprehensive Income

(In thousands of United States dollars)

(Unaudited)

	Three months ended					Six months ended
	June 30,					June 30,
		2017		2016			2017			2016
Net income (loss)	$	3,609	$	(3,152	)	$	(3,620	)	$	1,768
Other comprehensive income (loss):
Foreign currency translation adjustment		533		-			533			-
Comprehensive income	$	4,142	$	(3,152	)	$	(3,087	)	$	1,768

See accompanying notes to these condensed consolidated interim financial statements

2

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Balance Sheets

(In thousands of United States dollars)

As at	June 30, 2017			December 31, 2016
Current assets	(Unaudited)
Cash and cash equivalents	$	44,315		$	106,553
Short-term investments		1,194			1,154
Restricted short-term investments		3,500			-
Accounts receivable (net of allowance for doubtful accounts)		13,001			20,357
Other current assets		45			-
Unbilled revenue		4,011			-
Income taxes receivable		171			-
Inventories (net of obsolescence) (Note 5)		5,391			-
Loan receivable (Note 7)		1,918			1,766
Prepaid expenses and deposits		4,013			1,293
		77,559			131,123
Non-current assets
Property, plant and equipment (Note 8)		4,153			1,240
Intangible assets (Note 9)		152,126			123,351
Investment in joint venture (Note 6)		3,179			-
Deferred income tax assets (Note 17)		22,591			14,646
Goodwill (Note 10)		41,123			12,623
		223,172			151,860
TOTAL ASSETS	$	300,731		$	282,983
Liabilities
Current liabilities
Bank indebtedness (Note 13)	$	3,827		$	-
Accounts payable and accrued liabilities (Note 12)		13,297			15,645
Income taxes payable (Note 17)		646			-
Current portion of patent finance obligation (Note 11)		5,362			10,372
Current portion of deferred revenue		6,722			-
Current portion of long-term debt (Note 14)		99
		29,953			26,017
Non-current liabilities
Contingent considerations (Note 3)		6,450			-
Patent finance obligation (Note 11)		15,195			12,775
Success fee obligation		-			47
Deferred revenue		475			-
Long-term debt (Note 14)		383			-
Deferred income tax liabilities		9,124			-
		31,627			12,822
TOTAL LIABILITIES		61,580			38,839
Shareholders’ equity
Capital stock (Note 15)		418,838			419,485
Additional paid-in capital		22,005			21,036
Accumulated other comprehensive income		16,758			16,225
Deficit		(218,450	)		(212,602	)
		239,151			244,144
TOTAL LIABILITIES AND SHAREHOLDER'S' EQUITY	$	300,731		$	282,983

See accompanying notes to these condensed consolidated interim financial statements

3

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Statements of Cash Flow

(In thousands of United States dollars)

(Unaudited)

	Six months ended
	June 30, 2017			June 30, 2016
Cash generated from (used in):
Operations
Net income (loss)	$	(3,620	)	$	1,768
Non-cash items
Stock-based compensation		179			154
Depreciation and amortization		11,592			20,086
Foreign exchange (gain) loss		(146	)		(390	)
Equity in earnings from joint venture		(69	)		-
Gain (Loss) on disposal of assets		-			13
Deferred income tax expense (recovery)		(7,632	)		1,474
Accrued investment income		(150	)		(128	)
Embedded Derivatives		10			-
Changes in non-cash working capital balances
Accounts receivable		18,818			824
Unbilled revenue		862			-
Inventories		686			-
Prepaid expenses and deposits		(436	)		140
Deferred Revenue		591			-
Payments associated with success fee obligation		(492	)		(1,732	)
Accounts payable and accrued liabilities		(9,236	)		853
Income taxes payable		525			-
Cash generated from operations		11,482			23,062
Financing
Dividends paid		(2,228	)		(2,242	)
Bank indebtedness		1,523			-
Long Term debt		(24	)		-
Common shares repurchased under normal course issuer bid		(552	)		(3,123	)
Common shares issued for cash on the exercise of options		-			11
Common shares issued for cash from Employee Share Purchase Plan		33			35
Cash used in financing		(1,248	)		(5,319	)
Investing
Acquisition of Viziya, net of cash acquired (note 3)		(18,521	)		-
Acquisition of IRD, net of cash acquired (note 3)		(47,782	)		-
Purchase of short-term investment		(3,500	)		-
Purchase of property and equipment		(114	)		(39	)
Repayment of patent finance obligations		(2,778	)		(2,777	)
Purchase of intangibles		(4	)		(6,150	)
Cash used in investing		(72,699	)		(8,966	)
Foreign exchange loss (gain) on cash held in foreign currency		227			310
Net increase (decrease) in cash and cash equivalents		(62,238	)		9,087
Cash and cash equivalents, beginning of period		106,553			93,431
Cash and cash equivalents, end of period	$	44,315		$	102,518

See accompanying notes to these condensed consolidated interim financial statements

4

FINANCIAL STATEMENTS

Quarterhill Inc.

Condensed Consolidated Interim Statements of Shareholders’ Equity

(In thousands of United States dollars)

(Unaudited)

	Capital Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income		Deficit			Total Equity
Balance - December 31, 2015	$	427,781		$	16,549		$	16,225	$	(219,177	)	$	241,378
Comprehensive earnings:
Net income		-			-			-		1,768			1,768
Other Comprehensive Income		-			-			-		-			-
Shares and options issued:
Stock-based compensation expense		-			154			-		-			154
Conversion of deferred stock units to common shares		116			-			-		-			116
Exercise of stock options		17			(6	)		-		-			11
Sale of shares under Employee Share Purchase Plan		35			-			-		-			35
Shares repurchased under normal course issuer bid		(6,274	)		3,151			-		-			(3,123	)
Dividends declared		-			-			-		(2,245	)		(2,245	)
Balance - June 30, 2016	$	421,675		$	19,848		$	16,225	$	(219,654	)	$	238,094
Balance - December 31, 2016	$	419,485		$	21,036		$	16,225	$	(212,602	)	$	244,144
Comprehensive earnings:
Net loss		-			-			-		(3,620	)		(3,620	)
Other Comprehensive Income		-			-		533			-			533
Shares and options issued:
Stock-based compensation expense		-			179			-		-			179
Shares issued upon acquisition (Note 15 (c))		662			-			-		-			662
Sale of shares under Employee Share Purchase Plan (Note 15 (c))		33			-			-		-			33
Shares repurchased under normal course issuer bid (Note 15 (c))		(1,342	)		790			-		-			(552	)
Dividends declared (Note 15 (c))		-			-			-		(2,228	)		(2,228	)
Balance - June 30, 2017	$	418,838		$	22,005		$	16,758	$	(218,450	)	$	239,151

See accompanying notes to these condensed consolidated interim financial statements

5

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(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.   On May 4, 2017, the Company acquired VIZIYA Corp. and its related entities (collectively, “VIZIYA”).  On June 1, 2017, the Company acquired International Road Dynamics Inc. (“IRD”). Immediately following the acquisition of IRD on June 1, 2017, the Company (then named “Wi-LAN Inc.”) amalgamated with seven of its subsidiaries under the Canada Business Corporations Act, with the resulting amalgamated corporation named “Quarterhill Inc.” Immediately following this amalgamation, the Company transferred all of its assets and liabilities relating to its former intellectual property licensing business to a wholly-owned subsidiary whose name was then changed to “Wi-LAN Inc.” Quarterhill owns a 100% interest in Wi-LAN Inc. ("WiLAN").

Through these acquisitions, the Company has changed its business model from being solely an intellectual property licensing company, which developed, acquired, licensed patented technologies, to a company owning and acquiring a portfolio of established businesses operating in the “Technology”, “Mobility”, and “Factory” vertical segments of the “Industrial Internet of Things” market. Refer to Note 3 to these unaudited condensed consolidated interim financial statements for a detailed description of Quarterhill’s recent business combinations.  

2.   SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated interim financial statements (“interim 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 periods.   As the interim 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, 2016 and the accompanying notes.  These interim statements include certain relevant significant accounting policies and note disclosures adopted as a result of the business acquisitions completed within this quarter.

The interim statements were prepared on a going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value on a recurring basis, as explained in the accounting policies below. Historical cost is measured as the fair value of the consideration provided in exchange for goods and services on the date of the transaction. All financial information is presented in thousands of U.S. dollars, except as otherwise indicated.

Basis of Consolidation

The interim 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 interim statements include only the Company’s net investment and equity in earnings of the joint venture.  All inter-company transactions and balances have been eliminated in the interim statements.

6

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The significant accounting policies are summarized below:

Estimates and Assumptions

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the years. Actual results could differ from those estimates. The significant accounting policies contained herein include estimates and assumptions with respect to the determination of fair values of tangible and intangible assets acquired in business combinations, best estimate of stage of completion of contracted projects, value of separable elements in contracts with multiple deliverables, recoverability of financial assets and equity investments, selling price, determination of discount rates, income tax and the recoverability of deferred tax assets, determination of indicators of impairment and related impairment assessments, initial estimate of risk of concessions, timing of payments related to patent finance obligations, and the assumptions used in determining the fair value of stock options granted.

Business Combinations

The Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, in the accounting for its acquisitions. This requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities at their fair values, including contingent consideration where applicable, these estimates are inherently uncertain and subject to refinement, particularly since these assumptions and estimates are based in part on historical experience and information obtained from the management of the acquired companies. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill in the period identified.

Furthermore, when valuing certain intangible assets that the Company has acquired, critical estimates may be made relating to, but not limited to: (i) future expected cash flows from customer relationships, software license sales, support agreements, consulting agreements and other customer contracts, (ii) the acquired entity’s brand and competitive position, as well as assumptions about the period of time that the acquired brand will continue to be used in the combined Company’s product portfolio, and (iii) discount rates. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments would be recorded to the Company’s consolidated statements of operations, on a cumulative basis, in the period in which the adjustment is determined.

For a given acquisition, the Company identifies certain pre-acquisition contingencies as of the acquisition date and may extend its review and evaluation of these pre-acquisition contingencies throughout the measurement period to obtain sufficient information to assess whether the Company includes these contingencies as a part of the purchase price allocation and, if so, to determine the estimated amounts. If the Company determines that a pre-acquisition contingency (non-income tax related) is probable in nature and estimable as of the acquisition date, then it will record its best estimate for such a contingency

7

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

as a part of the preliminary purchase price allocation. The Company continues to gather information and evaluates any pre-acquisition contingencies throughout the measurement period and makes adjustments as necessary either directly through the purchase price allocation or in its results of operations.

Uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. The Company reviews these items during the measurement period as the Company continues to actively seek and collect information relating to facts and circumstances that existed at the acquisition date. Changes to these uncertain tax positions and tax related valuation allowances made subsequent to the measurement period, or if they relate to facts and circumstances that did not exist at the acquisition date, are recorded in the Company’s provision for income taxes in the consolidated statements of operations.

Fair Value Measurement of financial Instruments

The Company uses various valuation techniques and assumptions when measuring fair value of its financial assets and financial liabilities. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. The accounting standard establishes a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:

Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.

Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.

Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the Company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Patent finance obligations: The fair values are estimated based on the quoted market prices for those or similar instruments or on the current rates offered to the Company for debt of similar terms.

Loan receivable: The fair value is estimated based on currently available market interest rates for instruments with similar terms.

8

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Derivative financial instruments: The fair value of embedded derivatives is measured using a market approach, based on the difference between the quoted forward exchange rate as of the contract date and quoted forward exchange rate as of the reporting date. The fair value of forward exchange contracts is determined using the quoted forward exchange rates at the reporting date.

Contingent considerations: Contingent consideration is carried at fair value which is calculated using a Monte Carlo simulation model.

Long-term debt: The fair value is estimated based on the quoted market prices for those or similar instruments or on the current rates offered to the Company for debt of similar terms.

The carrying amount of the Company’s other financial assets and liabilities, including cash, accounts receivable, unbilled revenue and accounts payable and accrued liabilities approximate their fair value due to the short-term maturity of these items. The fair value of the bank indebtedness and long-term debt approximate the carrying amount since these debt instruments all have floating interest rates.

Derivatives

The Company uses derivative financial instruments to reduce exposure to fluctuation in foreign currency exchange rates. The Company may enter into foreign exchange contracts to hedge anticipated cash flows denominated in a foreign currency.

The Company has elected not to apply hedge accounting to derivative contracts; as such, these derivative financial instruments are recorded at fair market value on a reoccurring basis, with subsequent changes in fair value recorded in other income (expense) during the period of change.

Derivatives are carried at fair value and are reported as assets when they have a positive fair value and as liabilities when they have a negative fair value. Derivatives may also be embedded in other financial instruments. Derivatives embedded in other financial instruments are valued as separate derivatives if they meet the bifurcation criteria of an embedded derivative. Such criteria include that the entire instrument is not marked to market through earnings, the economic characteristics and risks of the embedded contract terms are not clearly and closely related to those of the host contract and the embedded contract terms would meet the definition of a derivative on a stand-alone basis.

Foreign Currency

Foreign Currency Transactions

Monetary assets and liabilities denominated in foreign currencies are translated into the applicable functional currency of the entity at exchange rates prevailing at the balance sheet date. Revenue and expenses are translated at the average rate for the period. The gains and losses from foreign currency denominated transactions are included in foreign exchange gain/loss in the consolidated statement of operations.

Foreign Currency Translation

The interim statements are presented in U.S. dollars. The functional currency of each subsidiary is the currency of the primary economic environment in which the subsidiary operates.  For each subsidiary, assets and liabilities denominated in this functional currency are translated into U.S.

9

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

dollars at the exchange rates in effect at the balance sheet dates and revenues and expenses are translated at the average exchange rates prevailing during the month of the respective transactions. The effect of foreign currency translation adjustments not affecting net income are included in Shareholders’ equity under the “Cumulative translation adjustment” account as a component of “Accumulated other comprehensive income”.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and highly liquid investments with original terms to maturity at the date of acquisition of less than three months.

Short-Term Investments

Short-term investments are designated as “held to maturity” and accounted for at amortized cost using the effective interest rate method. Short-term investments comprise guaranteed investment certificates with original maturities of one-year or less at the date of investment and their carrying value approximates their fair value.

Restricted Short-Term Investments

Restricted short-term investments are amounts held specifically as collateral for bank guarantees that the Company has entered into for security against potential procedural costs pursuant to a court order regarding patent infringement whereby the Company is the plaintiff. The bank guarantees total 2,940,000 Euros and are valid until March 28, 2018. They shall automatically be extended by periods of one year unless either party informs the other party at least sixty days before the current expiry date that they elect not to extend the bank guarantee. The restricted short-term investment acts as collateral should this renewal not take place and/or the requirement for the security and hence, the restricted short-term investments, is no longer required by the court.

Accounts Receivable, Net

The accounts receivable balance reflects invoices and is presented net of an allowance for doubtful accounts. The allowance for doubtful accounts represents the Company’s best estimate of probable losses that may result from the inability of its customers to make required payments. Reserves are established and maintained against estimated losses based upon historical loss experience, past due accounts, and specific account analysis. The Company regularly reviews the level of allowances for doubtful accounts and adjusts the level of allowances as needed. Consideration is given to accounts past due as well as other risks in the current portion of the accounts.

Unbilled Revenue

Unbilled accounts receivable in the accompanying condensed consolidated interim balance sheets represent unbilled amounts earned and reimbursable under services sales arrangements, including approximate costs and estimated earnings in excess of billings on uncompleted contracts accounted for under ASC Topic 605-35, Construction-Type and Production-Type Contracts. At any given period-end, a large portion of the balance in this account represents the accumulation of labor, materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billed until the subsequent month. Also included in this account are amounts that will become billable according to contract terms, which usually require the consideration of the passage of time, achievement of milestones or completion of the project.

10

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Inventories

Inventories are measured at the lower of cost or net realizable value. The cost of inventories is determined on the weighted average basis. Cost includes the cost of acquired material plus, in the case of manufactured inventories, direct labor applied to the product and the applicable share of manufacturing overhead, including rent expense and depreciation based on normal operating capacity.  

Property Plant and Equipment

Property plant and equipment is carried at cost less accumulated depreciation and impairment. Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets as follows:

Leasehold improvements	term of the lease
Computer equipment and software	3 years
Furniture and fixtures	5 years
Machinery and equipment	35 years
Building	20 years

Intangibles

Intangibles consist of patents, technology, customer relationships and brand associated with various acquisitions.

Patents include patents and patent rights (hereinafter, collectively “patents”) and are carried at cost less accumulated amortization and impairments.

Acquired technology is initially recorded at fair value based on the present value of the estimated net future income-producing capabilities of software products acquired on acquisitions.

Brand is initially recorded at fair value based on the present value of the estimated net future income-producing capabilities of the asset.

Customer relationships represent acquired customer relationships with customers of the acquired companies and are either based upon contractual or legal rights or are considered separable; that is, capable of being separated from the acquired entity and being sold, transferred, licensed, rented or exchanged. These customer relationships are initially recorded at their fair value based on the present value of expected future cash flows.

Amortization is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Patents	up to 20 years
Technology	5 years
Customer relationship and backlog	7 years
Brand	7 years

The Company continually evaluates the remaining estimated useful life of its intangible assets being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization.

11

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Impairment of Long-Lived Assets

The Company reviews long-lived assets (“LLA”) such as property and equipment and intangible asset groups for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. These events and circumstances may include significant decreases in the market price of an asset or asset group, significant changes in the extent or manner in which an asset or asset group is being used by the Company or in its physical condition, a significant change in legal factors or in the business climate, a history or forecast of future operating or cash flow losses, significant disposal activity, a significant decline in the Company’s share price, a significant decline in revenues or adverse changes in the economic environment.

When indicators of impairment exist, LLA impairment is tested using a two step process. The Company performs a cash flow recoverability test as the first step, which involves comparing the estimated undiscounted future cash flows for the asset group to the carrying amount of the asset group. If the net cash flows of the asset group exceed its carrying amount, the asset group is not considered to be impaired. If the carrying amount of the asset group exceeds the net cash flows, there is an indication of potential impairment and the second step of the LLA impairment test is performed to measure the impairment amount. The second step involves determining the fair value of the asset group. Fair value is determined using valuation techniques that are in accordance with U.S. GAAP, including the market approach, income approach and cost approach. If the carrying amount of the asset group exceeds its fair value, then the excess represents the maximum amount of potential impairment that will be allocated to the asset group, with the limitation that the carrying value of each asset cannot be reduced to a value lower than that of its fair value. The total impairment amount allocated is recognized as a non-cash impairment loss.

Investment in Joint Venture

The equity method is used to account for investments in joint ventures and certain other non-controlled entities when the Company has the ability to exercise significant influence over operating and financial policies of the investee, even though the investor holds 50% (joint control) or less of the voting common shares.  Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the affiliate as they occur, with losses limited to the extent of the Company’s investment in, advances to, and commitments to the investee.

Goodwill

Goodwill is recorded as at the date of the business combination and represents the excess of the purchase price of acquired businesses over the fair value assigned to identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but is tested for impairment at year end or more frequently if events or changes in circumstances indicate the reporting unit might be impaired.

The impairment test is carried out in two steps. In the first step, the carrying value of the reporting unit including goodwill is compared with its fair value. When the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not to be impaired and the second step is unnecessary. The Company has three reporting units.

In the event the fair value of the reporting unit, including goodwill, is less than the carrying value, the implied fair value of the reporting unit’s goodwill is compared with its carrying value to measure the

12

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

amount of any impairment loss. When the carrying value of goodwill in the reporting unit exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

Deferred Revenue

Deferred revenue in the accompanying condensed consolidated interim balance sheets is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition, estimated losses on uncompleted contracts, project-related legal liabilities and other project-related reserves, including billings in excess of costs and estimated earnings on uncompleted contracts accounted for under ASC Topic 605-35 and ASC Topic 985-605. The unearned amounts are expected to be earned within the next twelve months.

The Company records provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects of revisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties and adjustments for contract closeout settlements.

Patent Finance Obligations

Patent finance obligations have maturities beyond one year. Patent finance obligations, at inception, are recorded at their fair value using an estimated risk-adjusted discount rate and the carrying value is at amortized cost using the effective interest rate method.

Revenue Recognition

The Company recognizes revenue as earned when the following four criteria have been met: (i) when persuasive evidence of an arrangement exists, (ii) the product or license has been delivered to a customer and title has been transferred or the services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collection is reasonably assured. In addition to this general policy, the following paragraphs describe the specific revenue recognition policies for each of the Company’s significant types of revenue arrangements.

i) Software and Related Service

Revenue from perpetual licenses is recognized either upon delivery or over the estimated customer life, depending on whether the Company has obtained Vendor Specific Objective Evidence (“VSOE”) of fair value for the associated undelivered products bundled with the perpetual license. All of the deliverables under these licenses are accounted for in accordance with ASC Topic 985-605, “Software Revenue Recognition”.

When the VSOE of fair value has not been established for both delivered and undelivered elements, the Company uses the residual method to recognize revenue if VSOE of fair value of undelivered elements is determinable. Revenue from software maintenance, unspecified upgrades and technical support contracts is recognized over the period that such items are delivered or those services are provided. Software revenue is recognized as license revenues on the statement of operations.

Revenue from renewals of support and maintenance contracts is recognized ratably over the contract term. Renewal and support revenue is recognized as recurring revenues on the statement of operations.

13

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

ii) Royalties

Revenue from royalties is recorded when the four major criteria of revenue recognition noted above are met.

Revenues from running royalty arrangements can be based on either a percentage of sales or number of units sold for which the Company earns revenues at the time the licensees’ sales occur. The licensees are obligated to provide the Company with quarterly or semi-annual royalty reports and these reports are typically received subsequent to the period in which the licensees underlying sales occurred. The Company’s licensees do not, however, report and pay royalties owed for sales in any given reporting period until after the conclusion of that reporting period. As the Company is unable to estimate the licensees’ sales in any given reporting period to determine the royalties due to it, the Company recognizes running royalty revenues based on royalties reported by the licensees during the quarter and when other revenue recognition criteria are met. The Company monitors the receipt of royalty reports to ensure that there is not a disproportionate number of months of revenue in any given fiscal year.

Revenues from fixed fee royalty arrangements may consist of one or more installments of cash. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Where agreements include multiple elements, the Company assesses if the deliverables have standalone value upon delivery, and if so, accounts for each deliverable separately. When multiple-deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its best estimate of selling price (“BESP”). The Company determines BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include discounting practices, the size and volume of transactions, the customer demographic, the geographic area covered by licenses, price lists, licensing strategy, historical standalone licenses and contracted royalty rates. The determination of BESP is made through consultation with and approval by management, taking into consideration the licensing strategy.

As part of the partnering agreements with third parties, the Company is able to recover certain out-of-pocket expenses and legal costs. These amounts are included in revenue in the years which the aforementioned revenue criteria are met and the amounts become reimbursable.

Revenue arrangements with extended payment terms, where fees are fixed in one or more installments of cash and which contain terms that could impact the amounts ultimately collected, are generally recognized as collection becomes assured.

iii) Contracted Projects

The majority of sales of integrated systems are delivered as contracted projects. The Company recognizes contract revenue in accordance with ASC Topic 605-35, “Construction-Type and Production-Type Contracts”. The Company’s contract types include fixed price and time and materials contracts. Contract revenue includes the initial amount agreed in the contract plus any amendments in contract work to the extent that it is probable they will result in revenue and can be reliably measured.

For fixed price contracts, when circumstances exist allowing the Company to make reasonably dependable estimates of contract revenues, contract costs and the progress of the contract to completion,

14

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

the Company accounts for revenue under such long-term contracts using the percentage-of-completion (“POC”) method of accounting. Under the POC method, progress towards completion of the contract is measured based upon input measures. The Company measures progress towards completion based upon the cost incurred compared to the total estimated cost to complete. The Company will review the total estimated remaining costs to completion for each of these contracts and apply the impact of any changes on the POC prospectively. If, at any time, the Company anticipates the estimated remaining costs to completion will exceed the value of the contract, the resulting loss will be recognized immediately.

For time and materials contracts, labor and material rates are established within the contract. Revenues from time and materials contracts are recognized progressively on the basis of costs incurred during the period plus the estimated margin earned.

Contract costs include expenses that relate directly to fulfilling the requirements of a specific contract including materials costs, subcontractor costs, equipment rentals, engineering and project management labor, design and technical support labor, warranty costs, insurance and bond premiums. Contract costs are recognized in the period in which they are incurred unless they result in an asset related to future contract activity.

Unbilled revenue represents the excess of contract costs incurred and estimated gross profits recognized over billings to date. If progress billings received exceed costs incurred plus recognized gross profits, then the difference is presented as deferred revenue in the condensed consolidated interim statement of financial position. Project revenue is recognized as system revenues in the condensed consolidated interim statement of operations.

iv) Product Sales

The Company recognizes product sales in accordance with ASC Topic 605-15, “Products”.  Revenue from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable. Revenue for products is recognized when the four revenue recognition criteria noted above are met.

The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale. For sales of products, transfer usually occurs when the product is received at the customer’s warehouse. For some international shipments, when the buyer has no right of return, transfer occurs upon loading the goods onto the relevant carrier at the port of the seller. Product revenue is recognized as system revenues on the statement of operations.

v) Services Revenue

The Company recognizes service revenue in accordance with ASC Topic 605-20, “Services”.  The scope of services is set forth in the contractual arrangements.  These service contracts can be time and materials based contracts that range from one year to five years in length. Revenues from these services are recognized at the time such services are performed. The Company also enters into contracts that are primarily fixed fee arrangement. In such cases, the proportional performance method is applied to recognize revenues.

15

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Multiple-Element Arrangements

The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings. The Company’s typical multiple-element arrangements involve: (i) software with maintenance services, and (ii) projects with maintenance service and extended warranties.

For the Company’s arrangements involving multiple deliverables, the consideration from the arrangement is allocated to each respective element based on its relative selling price, using VSOE. In certain limited instances when the Company is unable to establish the selling price using VSOE, the Company attempts to establish the selling price of each element based on acceptable third-party evidence of selling price (“TPE”); however, the Company is generally unable to reliably determine the selling prices of similar competitor products and services on a stand-alone basis. In these instances, the Company uses BESP in its allocation of arrangement consideration, where permitted. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a stand-alone basis.

If the Company is not able to determine VSOE for all of the deliverables of the arrangement, but is able to obtain VSOE for all undelivered elements, revenue is allocated using the residual method. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration, less the aggregate fair value of any undelivered elements.

If VSOE of any undelivered software element does not exist, revenue from the entire arrangement is deferred and recognized at the earlier of: (i) delivery of those elements for which VSOE did not exist; or (ii) when VSOE can be established.

The Company determines BESP for a product or service by considering multiple factors including, but not limited to, historical pricing practices for similar offerings, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The determination of BESP is made through consultation with, and formal approval by, the Company’s management, taking into consideration the Company’s marketing strategy. The Company regularly reviews VSOE, TPE and BESP.

Research and Development (“R&D”)

Research costs are charged to expense in the periods in which they are incurred. Software development costs are deferred and amortized when technological feasibility has been established, or otherwise are expensed as incurred.

Warranties

The Company records the estimated costs of product warranties at the time revenue is recognized. Warranty obligation arises from the Company having to replace goods and/or services that have failed to meet required customer specifications due to breakdown or error related to product or workmanship. The Company’s warranty obligation is affected by product failure rates, differences in warranty periods, regulatory developments with respect to warranty obligations in the countries in which the Company carries on business, freight expense, and material usage and other related repair costs.

The Company’s estimates of costs are based upon historical experience and expectations of future return rates and unit warranty repair costs. If the Company experiences increased or decreased warranty activity, or increased or decreased costs associated with servicing those obligations, revisions to the estimated warranty liability would be recognized in the reporting period when such revisions are made.

16

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Advertising Costs

The Company expenses all advertising costs as incurred. These costs are included in selling, general and administrative costs.

Financing Costs

Financing costs are comprised of borrowing cost to the extent applicable, foreign currency gains and losses on the translation of foreign-denominated borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets and financial liabilities at fair value through profit or loss, gains and losses on hedging instruments recognized through profit and loss, if any.

Leases

Operating lease payments are recognized as selling, general and administrative expenses on a straight‑line basis over the lease term.

If lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight‑line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Computation of Earnings (Loss) Per Share

Basic earnings/loss per share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings/loss per share are computed using the treasury stock method.

Business Segment Information

ASC Topic 280, “Segment Reporting” (Topic 280), establishes standards for reporting, by public business enterprises, information about operating segments, products and services, geographic areas, and major customers. The method of determining what information, under Topic 280, to report is based on the way that an entity organizes operating segments for making operational decisions and how the entity’s management and chief operating decision maker assess an entity’s financial performance.

Income Taxes, Deferred Taxes and Investment Tax Credits

The Company uses the liability method of accounting for income taxes. Deferred income tax assets and liabilities are determined based on the difference between the accounting and tax bases of the assets and liabilities and measured using the enacted tax rates that are expected to be in effect when the differences are estimated to be reversed. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of deferred income tax assets is dependent upon the generation of sufficient future taxable income during the periods prior to the expiration of the associated tax attributes.

The Company is also engaged in scientific research and experimental development giving rise to investment tax credits that may be available to reduce future taxes payable in certain jurisdictions. In calculating income taxes and investment tax credits, consideration is given to factors such as current and future tax rates in the different jurisdictions, non-deductible expenses, qualifying expenditures and changes in tax law. In addition, management makes judgments on the ability of the Company to realize deferred taxes and investment tax credits reported as assets based on their estimations of amounts and timing of future taxable income and future cash flows in the related jurisdiction.

17

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Future Accounting Pronouncements

Revenue Recognition

In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers” and in August 2015 issued an update which defers the effective date of this new standard to fiscal years beginning after December 15, 2017, with early adoption permitted. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company anticipates this standard will have a material impact on its consolidated financial statements.

While the Company is continuing to assess all potential impacts of the standard, it currently believes the most significant impact relates to the Company’s accounting for fixed fee arrangement license agreements, generally accounted for in its Technology segment, that contain periodic payments that may be over a period shorter than or equal to the intellectual property license term. The Company expects to recognize license revenue at the time of signing a license agreement rather than over the period of periodic payments. Due to the complexity of certain of these license agreements, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms, and may vary in some instances from recognition at the time of billing. The Company is also further evaluating the income tax impact of these changes in revenue recognition.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company currently anticipates adopting the standard using the full retrospective method to restate each prior reporting period presented.

Financial Instruments

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments - Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). This update requires that all equity investments be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). This update also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, this update eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for certain requirements. The Company is currently assessing the impact of this new standard.

18

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Leases

In February 2016, the FASB issued ASU 2016-2, “Leases”. The amendments in this update would require companies and other organizations to include lease obligations in their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (“ROU”) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact of this new standard.

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 June 30, 2021, with earlier adoption permitted beginning in the first quarter of its fiscal year ending June 30, 2020. The Company is currently assessing the impact of this new standard.

Statement of Cash Flows

In August 2016, FASB issued Accounting Standard Update 2016-15, “Statement of Cash Flows (Topic 230)”, a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently assessing the impact of this new standard.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04 “Intangibles-Goodwill and Other-Simplifying the Test for Goodwill Impairment” to simplify how an entity is required to test for goodwill impairment. As a result, an entity will perform its goodwill impairment test by comparing the carrying value of a reporting unit against the fair value and will record an impairment for the amount that the carrying value of a reporting unit exceeds the fair value. The ASU is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted on January 1, 2017. The Company is currently assessing the impact of this new standard.

Business Combinations

In January 2017, the FASB issued a new accounting standard update on the topic of business combinations. The amendments in this update clarify the definition of a business with the object of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact of this new standard.

19

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

3.  BUSINESS COMBINATIONS

The Company’s acquisitions have been accounted for using the purchase method of accounting and the acquired companies’ results have been included in the accompanying interim statements from the dates of the acquisitions.

Acquisition of VIZIYA

On May 4, 2017, the Company acquired 100% of the outstanding shares of VIZIYA and its related entities, a privately-held software and services provider to multi-national companies. VIZIYA develops enterprise asset management software solutions to enhance enterprise resource planning-based asset maintenance systems. The Company incurred transaction costs of $596 in connection with this acquisition which is recorded in Special charges.

The purchase price was $25,633, net of cash acquired which included contingent consideration of $6,450. The contingent consideration relates to share and cash payments which will be made if certain earning targets are met by 2019. The fair value estimate for contingent considerations was determined using a Monte Carlo simulation based on the contractual terms of the instruments and risk-neutral valuation framework. 10,000 Monte Carlo simulations were used for the analysis and the fair value of the payout is the average of these simulation outcomes.

In connection with this acquisition, the Company issued 405,268 common shares with an aggregate value of $662 as of the closing date as partial consideration.  The remainder of the purchase price was funded with the Company’s cash reserves.

20

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The following table summarizes the preliminary fair value allocations of assets acquired and liabilities assumed as a part of this acquisition:

	Fair Value
Cash	$	56
Property, plant and equipment		305
Prepaid expenses		234
Trade and other receivables		2,721
Intangible assets
Developed software		10,000
Customer Relationships		5,800
Brand		1,400
Goodwill		12,680
Accounts Payable		(286	)
Accrued Liabilities and other		(555	)
Income taxes payable		(216	)
Deferred revenue		(1,573	)
HST/ GST Payable		(18	)
Long-term debt		(63	)
Deferred Tax Liabilities		(4,796	)
Net assets acquired	$	25,689
Cash paid on closing	$	17,675
Shares Issued		662
Fair value of contingent share considerations		2,650
Fair value of contingent cash considerations		3,800
Shareholder loan repaid		902
Total considerations transferred	$	25,689

The intangible assets resulting from this transaction are $10,000 of technology, $5,800 of customer relationships, and $1,400 of brand, of which technology is amortized over 5 years and customer relationships and brand are amortized over a 7 year period.

Expected future amortization is as follows:

	Customer and
	Brand		Technology		Total
Balance of 2017	$	547	$	1,000	$	1,547
2018		1,095		2,000		3,095
2019		1,095		2,000		3,095
2020		1,095		2,000		3,095
2021		1,095		2,000		3,095
2020		1,095		667		1,762
Thereafter		1,042				1,042
	$	7,062	$	9,667	$	16,729

Goodwill of $12,680 was recognized as a result of this acquisition, which is not deductible for tax purposes. The goodwill is due to expected synergies from combining the businesses.

21

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The total revenue from this acquisition since the date of this acquisition has been $1,915 and total net loss has been $116 post-acquisition.

If this acquisition had been completed as of January 1, 2017, the Company’s incremental pro forma revenue for the three and six months ended June 30, 2017 would have been $2,410 and $5,730 respectively (June 30, 2016 – $2,589 and $5,442) and incremental pro forma net loss for the three and six months ended June 30, 2017 would have been $1,101 and $561 respectively (June 30, 2016 – net loss of $228 and net income of $130).

Acquisition of IRD

On June 1, 2017, the Company acquired 100% of the outstanding shares of IRD, a publicly-held provider of highway traffic management services, operating internationally in the Intelligent Transportation Systems (“ITS”) industry. IRD specializes in advanced traffic control, weight enforcement, bridge protection, and toll management technologies. The Company incurred transaction costs of $698 in connection with this acquisition which is recorded in Special charges.

The purchase price was $47,782 net of cash acquired, and was funded with the Company’s cash reserves.

22

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The following table summarizes the preliminary fair value allocations of assets acquired and liabilities assumed as a part of this acquisition:

	Fair Value
Cash	$	2,078
Accounts receivable and other receivables		8,447
Embedded derivatives		52
Work in progress - unbilled revenue		4,711
Income taxes receivables		288
Inventory		5,883
Prepaid and other assets		1,977
Investment tax credits		670
Deferred tax asset		1,361
Property, Plant and equipment		2,672
Intangible assets
Customer relationships		8,100
Technology		7,400
Brand		5,900
Backlog		1,300
Goodwill		15,820
Investment - XPCT		3,036
Bank indebtedness		(2,182	)
Current portion of Long term debt		(95	)
Long term debt		(333	)
Accounts payable and accrued liabilities		(6,277	)
Deferred Revenue - Short term		(4,337	)
Deferred Revenue - Long term		(465	)
Income taxes		(29	)
Deferred tax liability		(6,117	)
Net assets acquired	$	49,860
Cash paid on closing	$	47,209
Cash out considerations		2,651
Total considerations transferred	$	49,860

The intangible assets resulting from this transaction are $9,400 of customer relationships and backlog, $5,900 of brand, and $7,400 of technology. Customer relationships, brand and backlog are amortized over a period of 7 years and technology over 5 years.

23

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Expected future amortization related to this business acquisition is as follows:

	Customer, brand and
	Backlog		Technology		Total
Balance of 2017	$	1,163	$	740	$	1,903
2018		2,326		1,480		3,806
2019		2,326		1,480		3,806
2020		2,326		1,480		3,806
2021		2,326		1,480		3,806
2020		2,326		619		2,945
Thereafter		2,394				2,394
	$	15,185	$	7,279	$	22,464

Goodwill of $15,820 was recognized as a result of this acquisition, which is not deductible for tax purposes. The goodwill is due to expected synergies from combining the businesses.

The total revenue from this acquisition has been $4,648 and total net income has been $65 post-acquisition.

If this acquisition had been completed as of January 1, 2017, the Company’s incremental pro forma revenue for the three and six months ended June 30, 2017 would have been $9,417 and $21,002 respectively (June 30, 2016 –$11,555 and $23,555) and incremental pro forma net loss for the three and six months ended June 30, 2017 would have been $108 and $263 respectively (June 30, 2016 – net income of $349 and $654).

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, 2017				As at December 31, 2016
	Hierarchy Level		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents		1	$	44,315	$	44,315	$	106,553	$	106,553
Short-term investments		1		1,194		1,194		1,154		1,154
Restricted short-term investments		1		3,500		3,500		-		-
Loan receivable		2		1,918		1,918		1,766		1,766
Derivative financial instrument		2		45		45		-		-
Long-term debt		2		383		383		-		-
Contingent considerations		3		6,450		6,450		-		-
Patent finance obligations		3		20,557		20,557		23,147		23,147

Derivatives consists of the embedded derivative portion of the unearned revenue of U.S. dollar denominated sales contracts in its Chilean and Mexican subsidiaries and foreign exchange forward

24

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

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.

5.  INVENTORIES

Inventories were acquired in the current year through the acquisition of IRD on June 1, 2017 and consist of the following at June 30, 2017:

	June 30,		December 31,
As at	2017		2016
Raw materials	$	161	$	-
Original equipment manufacturer materials		2,755		-
Work in process		1,171		-
Finished goods		1,304		-
	$	5,391	$	-

For the three and six months ended June 30, 2017, the Company recorded non-cash, pretax charges of $nil relating to the write down of inventory.

6.  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 ITS industry and construction equipment manufacturers.

IRD had sales to XPCT of $nil during the three and six months ended June 30, 2017. At June 30, 2017 accounts receivable from XPCT was $12.

	As at June 30,
	2017
Balance, beginning of the year	$	-
Acquisition through business combination (Note 3)		3,036
Currency gain (loss) on financial statement translation		74
Company's share of earnings		69
Dividend received		-
Balance, end of period	$	3,179

25

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The Company’s ownership interest comprises a 50% share of net assets and net earnings of XPCT as well as purchase price adjustment to allocate fair values assigned to certain assets and liabilities at the time of acquisition. Summary financial information for XPCT is as follows:

	As at June 30, 2017
Cash	$	2,050
Other current assets		5,356
Non-current assets		1,752
Current liabilities
Trade and other		(1,992	)
Short term loans		(1,911	)
Fair value adjustment to net assets upon acquisition		(2,076	)
Net assets	$	3,179
Revenue	$	489
Cost of sales		343
Depreciation and amortization	3
Finance costs		21
Administrative expenses	44
Earnings before income taxes		78
Income taxes	9
	$	69

As at June 30, 2017, IRD has an outstanding loan guarantee in the amount of 15.0 million yuan (approximately $2.2 million) for 50% of a bank loan to XPCT representing IRD’s proportionate interest in this entity.

7.  LOAN RECEIVABLE

On October 19, 2012, the Company advanced a term loan facility in the amount of $1,000 to Montebello Technologies LLC. The loan bears interest at 15% per annum, compounded annually with a maturity date of October 18, 2017 at which time the outstanding principal and accrued interest is to be fully repaid. The term loan facility is collateralized by a general security agreement.

In accordance with the terms and conditions of the loan agreement, the use of the funds is solely and exclusively for the purchase and monetization of patents and for the period commencing on the Closing Date to and including the tenth anniversary of the Closing Date, the Company will be entitled to receive (a) 15% of the first $10 million in gross revenue and (b) 10% of all gross revenue over the first $10 million realized by Montebello Technologies LLC from any patents acquired utilizing the term loan facility.

To estimate the fair value, at inception, the Company considered the estimated future cash flow projections using an effective interest rate of 18%.

26

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The carrying value of the term loan facility is as follows:

	June 30,			December 31,
As at	2017			2016
15% Term loan facility	$	1,000		$	1,000
Unamortized discount		(14	)		(36	)
Accrued interest		932			802
Net carrying amount	$	1,918		$	1,766

8.  PROPERTY PLANT AND EQUIPMENT

	Leasehold improvements			Computer equipment and software			Furniture and Fixture			Machinery & Equipment			Land and building			Total
Cost
Balance, December 31, 2016	$	1,373		$	2,102		$	496		$	-		$	-		$	3,971
Acquisition through business combination (note 3)		188			357			72			1,824			536			2,977
Additions		4			92			8			10			-			114
Disposals		-			-			-			(7	)		-			(7	)
Foreign currency translation		2			11			3			43			4			63
Balance, June 30, 2017	$	1,567		$	2,562		$	579		$	1,870		$	540		$	7,118
Accumulated Depreciation
Balance, December 31, 2016	$	461		$	1,882		$	388		$	-		$	-		$	2,731
Depreciation		74			119			32			34			2			261
Disposals		-			-			-			(7	)		-			(7	)
Foreign currency translation		-			(6	)		(8	)		(6	)		-			(20	)
Balance, June 30, 2017	$	535		$	1,995		$	412		$	21		$	2		$	2,965
Net Book Value
Balance, December 31, 2016	$	912		$	220		$	108		$	-		$	-		$	1,240
Acquisition through business combination (note 3)		188			357			72			1,824			536			2,977
Additions		4			92			8			10			-			114
Depreciation		(74	)		(119	)		(32	)		(34	)		(2	)		(261	)
Foreign currency translation		2			17			11			49			4			83
Balance, June 30, 2017	$	1,032		$	567		$	167		$	1,849		$	538		$	4,153

27

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Property, plant and equipment cost and accumulated depreciation have been reduced for assets that have been retired during the six months ended June 30, 2017. No impairment was recognized during the three and six months ended June 30, 2017 (three and six months ended June 30, 2016 - $nil).

9. INTANGIBLES

	Patents			Developed software			Customer relationship, Brand and Backlog			Total
Cost
Balance, December 31, 2016	$	345,603		$	-		$	-		$	345,603
Acquisition through business combination (note 3)		-			17,400			22,500			39,900
Additions		-			4			-			4
Foreign currency translation		-			15			19			34
Balance, June 30, 2017	$	345,603		$	17,419		$	22,519		$	385,541
Accumulated Amortization
Balance, December 31, 2016	$	222,252		$	-		$	-		$	222,252
Amortization		10,436			454			253			11,143
Foreign currency translation		-			11			9			20
Balance, June 30, 2017	$	232,688		$	465		$	262		$	233,415
Net Book Value
Balance, December 31, 2016	$	123,351		$	-		$	-		$	123,351
Acquisition through business combination (note 3)		-			17,400			22,500			39,900
Additions		-			4			-			4
Amortization		(10,436	)		(454	)		(253	)		(11,143	)
Foreign currency translation		-			4			10			14
Balance, June 30, 2017	$	112,915		$	16,954		$	22,257		$	152,126

The estimated future amortization expense of intangibles as at June 30, 2017 is as follows:

	Patents		Acquired
Balance of 2017	$	10,436	$	3,450
2018		17,941		6,900
2019		16,354		6,900
2020		15,302		6,900
2021		14,566		6,900
	$	74,599	$	31,050

28

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

10. GOODWILL

The changes in the carrying amount of goodwill by reporting units are presented in the table below:

	Technology		Mobility		Factory		Total
Balance at December 31, 2016	$	12,623	$	-	$	-	$	12,623
Business acquisitions (Note 3)				15,820		12,680		28,500
Balance at June 30, 2017	$	12,623	$	15,820	$	12,680	$	41,123

Goodwill recognized during the six months ended June 30, 2017 totaled $28.5million and related to the IRD and VIZIYA acquisitions. Goodwill acquired during the six months ended June 30, 2016 was $nil. See Note 3, Business Combinations.

In accordance with the FASB guidance related to goodwill and other intangible assets, the Company is required to assess the carrying amount of its goodwill for potential impairment annually or more frequently if events or a change in circumstances indicate that impairment may have occurred. The Company conducts its annual impairment test as at December 31 of each fiscal year. The reportable segments are also representative of the reporting units for purposes of its goodwill impairment testing.

11. PATENT FINANCE OBLIGATIONS

On June 18, 2014, the Company acquired the right to license certain patents, the consideration for which is to be fully paid on or before June 18, 2023; however; the timing of the payments is subject to the Company entering into certain future license agreements with third-parties. The Company has set up the liability based on its expected payment schedule using a discount rate of 6.0%. The discount rate is an estimate of a risk-adjusted rate giving consideration to rates for revolving debt with no fixed payments. As at June 30, 2017 the current and long-term portions of this obligation are $ nil and $13,816, respectively.

On September 13, 2014, the Company acquired certain patents and entered into a licensing agreement with the same counter-party. The obligation was based on the quarterly payment stream of $1,389 using a discount rate of 4.5%. The discount rate is an estimate of a risk-adjusted rate giving consideration to rates for secured term debt with fixed payments over a five-year term.  As at June 30, 2017 the current and long-term portions of this obligation are $5,362 and $1,378 respectively.

29

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The current and long-term portions of these obligations are reflected as follows:

	Gross		Unamortized Discount			Net Carrying Amount
As at June 30, 2017
Patent rights finance obligation, due    June 18, 2023	$	14,000	$	(185	)	$	13,815
Patent finance obligation, due    August 18, 2018		6,944		(202	)		6,742
Long term portion		20,944		(387	)		20,557
Current portion							(5,362	)
						$	15,195
	Gross		Unamortized Discount			Net Carrying Amount
As at December 31, 2016
Patent rights finance obligation, due    June 18, 2023	$	14,000	$	(185	)	$	13,815
Patent finance obligation, due    August 18, 2018		9,722		(390	)		9,332
Long term portion		23,722		(575	)		23,147
Current portion							(10,372	)
						$	12,775

Payments are expected to be as follows:

Principal repayments:
2017	$	2,778
2018		4,166
2019		7,000
2020		7,000
	$	20,944

30

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	June 30,		December 31,
	2017		2016
Trade payables	$	2,605	$	913
Accrued compensation		4,130		6,099
Accrued litigation costs		687		151
Dividends		1,146		1,102
Success fee obligation - current portion		140		585
Accrued contingent partner payments & legal fees		1,053		4,077
Patent acquisition liability		-		1,000
Project losses		458		-
Accrued other		3,078		1,718
	$	13,297	$	15,645

13. BANK INDEBTEDNESS

The following bank indebtedness was acquired as a result of the acquisitions of IRD and VIZIYA, see Note 3 for details:

	June 30,		December 31,
As at	2017		2016
Revolving credit facility of $7.0 million authorized and secured by a general security agreement:
HSBC Bank Canada - Borrowing in Canadian dollars with interest at bank prime plus 1.5%	$	3,542	$	-
TD Canada Trust - Borrowing in Canadian dollars with interest at bank prime plus 2.0%		285		-
	$	3,827	$	-

The TD Canada Trust credit facility is a revolving credit facility in the amount of CDN $0.5 million with TD Canada Trust. The facility is secured by a general security agreement and bears interest at the Canadian prime rate plus 2.00%.

The HSBC Bank Canada credit facility may be borrowed by way of banker’s acceptances at prevailing market rates to a maximum of CDN $9.5 million or by way of U.S. dollar advances to a maximum of $7.0 million. Borrowings on this facility are restricted to the lesser of $7.0 million and the margin total on the following assets in Canada and the U.S., 90% of secured and government accounts receivable less than 120 days and 50% of inventory to a maximum of $2.3 million. As at June 30, 2017 approximately $3.5million was available to be drawn.

The Company’s demand facility and long-term debt with HSBC Bank Canada are secured by a general security agreement on the assets of IRD held in Canada with a carrying value at June 30, 2017 of $28.1million. In addition, IRD’s subsidiaries in the United States, Chile and India have provided corporate guarantees as security.

31

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

IRD is subject to covenants on its credit facility and long-term debt with HSBC Bank Canada as follows: current ratio greater than 1.2 to 1 (tested quarterly), debt to tangible net worth less than 2.5 to 1 (tested quarterly) and debt service coverage ratio greater than 1.25 to 1 (tested annually) based on IRD’s financial results. At June 30, 2017, IRD is in compliance with these covenants.

IRD’s Chilean subsidiary also maintains a secured line of credit to support performance guarantees required for selected projects. As at June 30, 2017 the dollar value of these performance guarantees totaled $237. IRD has also provided a guarantee, proportionate to its shareholding in XPCT, in the amount of 7.5 million yuan or $1.1 million for 50% of a bank loan to the joint venture.

The Company also has a revolving credit facility available in the amount of CDN$8 million or the equivalent in U.S. dollars for general corporate purposes and a further CDN$2 million for foreign exchange facility. Canadian dollar or U.S. dollar amounts advanced under this credit facility are payable on demand and bear interest at the bank’s Canadian prime rate plus 1.0% per annum or U.S. base rate plus 1.0% per annum. Borrowings under this facility are collateralized by a general security agreement over the Company’s cash and cash equivalents, accounts receivable and present and future personal property. As at and during the three and six months ended June 30, 2017, the Company had no borrowings under this facility (2016 –nil).

14. LONG-TERM DEBT

The following long-term debt was acquired as a result of the acquisitions of IRD and VIZIYA, see Note 3 for details:

	June 30,		December 31,
As at	2017		2016
HSBC Bank Canada term loan, repayable in quarterly installments of $32,143 with interest at bank prime plus 0.5%.
Due September 30, 2021	$	421	$	-
Less current portion		99		-
		322		-
Finance Lease		61		-
	$	383	$	-

The HSBC Bank Canada term loan is secured by a general security agreement on the assets of IRD in Canada and is guaranteed by Export Development Canada (“EDC”). As described in Note 13, the Company is in compliance with the covenants under the terms of its credit facilities with HSBC Bank Canada.

32

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

15. SHARE CAPITAL

a)   Authorized

Unlimited number of common shares.

6,350.9 special preferred, redeemable, retractable, non-voting shares.

An unlimited number of preferred shares, issuable in series.

b)   Issued and Outstanding

The issued and outstanding common shares of Quarterhill, along with equity instruments convertible into common shares, are as follows:

	June 30,		December31,
As at	2017		2016
Common shares		118,627,249		118,572,181
Securities convertible into common shares
Stock options		5,987,893		5,985,454
Deferred stock units (DSUs)		206,508		197,367
		124,821,650		124,755,002

As at June 30, 2017, no preferred shares or special preferred shares were issued or outstanding (December 31, 2016 – nil).

c)   Common Shares

	Number			Amount
December 31, 2015		120,842,448		$	427,781
Issued on exercise of stock options		4,333			11
Transfer from additional paid-in capital on exercise of options		-			6
Issued on sale of shares under Employee Share Purchase Plan		38,900			35
Conversion of DSUs to common shares		53,300			116
Repurchased under normal course issuer bid		(1,770,300	)		(6,274	)
June 30, 2016		119,168,681		$	421,675
December 31, 2016		118,572,181		$	419,485
Issued as purchase consideration in Viziya acquisition		405,268			662
Issued on sale of shares under Employee Share Purchase Plan		29,500			33
Conversion of deferred stock units to common shares
Repurchased under normal course issuer bid		(379,700	)		(1,342	)
June 30, 2017		118,627,249		$	418,838

33

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The Company paid quarterly cash dividends as follows:

	2017						2016
		Per Share			Total			Per Share			Total
1st Quarter	Cdn	$	0.0125	US	$	1,129	Cdn	$	0.0125	US	$	1,091
2nd Quarter			0.0125			1,099			0.0125			1,151
	Cdn	$	0.0250	US		2,228	Cdn	$	0.0250	US	$	2,242

The Company declared quarterly dividends as follows:

	2017			2016
1st Quarter	Cdn	$	0.0125	Cdn	$	0.0125
2nd Quarter	Cdn	$	0.0125	Cdn	$	0.0125

On February 10, 2016, the Company received regulatory approval to make a normal course issuer bid (the “2016 NCIB”) through the facilities of the TSX. Under the 2016 NCIB, the Company is permitted to purchase up to 11,762,446 common shares. The NCIB commenced on February 12, 2016 and expired on February 11, 2017. The Company repurchased 1,770,300 common shares under the 2016 NCIB during the six months ended June 30, 2016, for a total cost of $3,123.

On February 10, 2017, the Company received regulatory approval to make a normal course issuer bid (the “2017 NCIB”) through the facilities of the TSX. Under the 2017 NCIB, the Company is permitted to purchase up to 4,000,000 common shares. The NCIB commenced on February 13, 2017 and will be completed on or before February 12, 2018. The Company repurchased 379,700 common shares under the 2017 NCIB during the six months ended June 30, 2017, for a total cost of $552.

The Company records share repurchases as a reduction to shareholders’ equity. A portion of the purchase price of the repurchased shares is recorded as a decrease to additional paid-in capital when the price of the shares repurchased exceeds the average original price per share received from the issuance of Common Stock or an increase to additional paid-in capital when the prices of the shares repurchased is less than the average original price per share received from the issuance of Common Stock. During the three and six months ended June 30, 2017, the cumulative price of the shares repurchased was less than the proceeds received from the issuance of the same number of shares. For the three and six months ended June 30, 2017, $790 and $790 was recorded as an increase to additional paid-in capital respectively. During the three and six months ended June 30, 2016, the cumulative price of the shares repurchased was less than the proceeds received from the issuance of the same number of shares. For the three and six months ended June 30, 2016, $353 and $3,149 was recorded as an increase to additional paid-in capital respectively.

d)   Stock-Based Compensation

Quarterhill maintains an Option Plan, a Deferred Stock Unit (“DSU”) Plan, an Employee Stock Purchase Plan (“ESPP”) and a Restricted Share Unit (“RSU”) Plan for its directors, employees and consultants. The current RSU Plan calls for settlement only in cash. The Option Plan, the DSU Plan and the ESPP are considered “security based compensation arrangements” for the purposes of the TSX. The Company is authorized to issue up to an aggregate of 10% of its outstanding common shares under these “security based compensation arrangements”, with the common shares authorized for issuance under the DSU Plan limited to 430,000 and under the ESPP limited to 800,000. The options vest at various times ranging

34

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

from immediate vesting on grant to vesting over a three to four year period. Options generally have a six year life.

During the six months ended June 30, 2017, the company granted two sets of performance-based options with grant date at fair value of CDN $1.060 and CDN $1.0175, respectively. These performance-based options will vest, if at all, over a three year period. Each tranche of options will vest if at any time after the first, second and third years, certain specified share price targets are achieved for a period of at least 30 consecutive days.

The Company estimates the fair value of the performance based options using a Monte Carlo simulation model. The following assumptions were used during the six months ended June 30:

		May Grant				June Grant
Number of options granted				1,498,982				650,000
Stock price	CDN		$	2.11			$	1.90
Implied volatility				55	%			60	%
Risk free rate				1.43	%			1.40	%

e)   Per Share Amounts

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

	June 30,		December31,
As at	2017		2016
Basic weighted average common shares outstanding		118,579,684		119,768,540
Effect of options		-		-
Diluted weighted average common shares outstanding		118,579,684		119,768,540

For the three and six months ended June 30, 2017, the effect of stock options totaling 5,372,242 and 5,987,893 were anti-dilutive (three and six months ended June 30, 2016 – 7,045,654 and 6,937,321, respectively).

16.  COMMITMENTS AND CONTINGENCIES

a)   Operating Lease

The Company has lease agreements for office space and equipment with terms extending to 2023. The aggregate minimum annual lease payments under these agreements are as follows:

	Amount
Balance of 2017	$	603
2018		1,121
2019		1,053
2020		921
2021		895
2022		817
2023 and thereafter		499
	$	5,909

35

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

b)   Contingent Considerations

In connection with the acquisition of VIZIYA on May 4, 2017, the Company has agreed to future additional payments to the former owners of VIZIYA, based on future earnings targets (as defined in the purchase agreements) generated as a result of operations of VIZIYA. An estimated fair value of the contingent consideration is determined at $6,450 using the most recent information as at May 4, 2017. The estimate has been calculated using the Monte Carlo simulations model. Changes made to the estimated fair value of contingent consideration in future periods will be included in special charges in the consolidated statements of operations.

17. 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 quarters ended June 30, 2017 is as follows:

	June 30,			December31,
As at	2017			2016
Income (loss) before income taxes	$	(9,678	)	$	7,102
Expected income tax expense at Canadian statutory income tax rate of 26.5% (2016 - 26.5%)		(2,564	)		1,881
Permanent differences		(224	)		51
Foreign withholding taxes paid		262			1,902
Foreign rate differential		(350	)		(563	)
Change in valuation allowance		(3,150	)		2,214
Other		(32	)		(151	)
Income tax expense (recovery)	$	(6,058	)	$	5,334

	June 30,			December31,
As at	2017			2016
Income (loss) from continuing operations before income taxes:
Canadian		(918	)		12,663
Foreign		(8,760	)		(5,561	)
Current income tax expense
Canadian		1,366			1,925
Foreign		209			1,935
Deferred income tax expense (recovery)
Canadian		(7,675	)		1,474
Foreign		42			-

36

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(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:

	June 30,			December31,
As at	2017			2016
Deferred tax assets
Difference between tax and book value of capital and intangible assets	$	5,351		$	306
Investments		227			-
Tax loss carryforwards		25,146			24,096
Difference between tax and book value of loan receivable		5			14
Accrued liabilities and reserves		283			489
Scientific research and experimental development ("SR&ED") carryforwards		5,552			5,051
Investment tax credits		4,759			4,151
Unrealized foreign exchange loss		382			-
Other		12			-
Deferred tax assets, gross		41,717			34,107
Valuation allowance		(18,421	)		(19,308	)
Deferred tax assets, net		23,296			14,799
Deferred tax liabilities
Difference between tax and book value of capital and intangible assets		(9,726	)		-
Difference between tax and book value of patent finance obligations		(103	)		(153	)
Deferred tax liabilities		(9,829	)		(153	)
Total deferred tax assets, net	$	13,467		$	14,646

Management has assigned probabilities to the Company’s expected future taxable income based on significant risk factors, sensitivity analysis and timing of non-capital tax losses. The amount of the deferred income tax asset considered realizable could change materially in the near term, based on future taxable income during the carryforward period. The valuation allowance consists of $2,709 in Canada, $14,059 in the U.S. and $1,654 in other jurisdictions.

37

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

As at June 30, 2017, the Company had unused non-capital tax losses of approximately $83,150 (2016 - $71,999) that are due to expire as follows:

Expiry	SRED pool		Canadian tax losses		US tax losses		Other jurisdictions		Consolidated tax losses
2019	$	-	$	-	$	-	$	69	$	69
2020		-		-		-		2,696		2,696
2021		-		-		-		290		290
2022		-		-		-		338		338
2023		-		-		-		33		33
2024		-		-		-		264		264
2025		-		-		-		224		224
2026		-		-		-		-		-
2027		-		-		-		-		-
2028		-		-		-		-		-
2029		-		-		-		-		-
2030		-		1,146		-		-		1,146
2031		-		2,442		601		-		3,043
2032		-		5,213		2,084		-		7,296
2033		-		30,139		4,902		-		35,041
2034		-		4,019		7,629		-		11,648
2035		-		1,889		4,397		-		6,286
2036		-		1,679		357		-		2,036
2037		-		909		9,148		2,683		12,740
Indefinite		19,599		-		-		-		-
	$	19,599	$	47,436	$	29,118	$	6,597	$	83,150

The Company also has investment tax credits of $6,552 that expire in various amounts from 2017 to 2032. Investment tax credits, which are earned as a result of qualifying SR&ED expenditures, are recognized and applied to reduce income tax expense in the year in which the expenditures are made and their realization is reasonably assured.

The Company had no uncertain income tax positions for the quarter ended June 30, 2017

19.  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 six months ended June 30, 2017, the Company acquired two new businesses and, as a result, the CODM, who is the Interim Chief Executive Officer of the Company, began making decisions and assessing the performance of the Company using three operating segments comprised of these reporting units, whereas the Company was previously a single operating segment.

Technology – The Technology segment includes companies that count technology 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 technology,

38

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

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.

Mobility – The Mobility 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 mobility, 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.

Factory – The Company considers businesses focused on operations optimization, predictive maintenance, inventory optimization and health and safety in production environments as operating in a “factory” environment and classifies its related investments in the Factory segment. The Company’s first investment in this segment is VIZIYA based in Hamilton, Canada, a software company providing Enterprise Asset Management (“EAM”) 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.

Segment revenues and profitability for the six months ended June 30, 2017 are as follows. The eliminations include inter-segment eliminations, including management fees and other fees.

	For the six months ended June 30, 2017
	Technology			Mobility			Factory			Corporate			Total
Revenues	$	19,626		$	4,648		$	1,915		$	-		$	26,189
Cost of revenues (excluding depreciation and amortization)		13,762			2,752			401			-			16,915
		5,864			1,896			1,514			-			9,274
Selling, general and administrative		4,174			972			876			594			6,616
Research and development		-			308			360			-			668
Depreciation of property, plant and equipment (Note 8)		179			48			34			-			261
Amortization of intangibles (Note 9)		10,624			236			471			-			11,331
Special charges		-			-			-			1,294			1,294
Results from operations		(9,113	)		332			(227	)		(1,888	)		(10,896	)
Finance income		(391	)		-			-			(61	)		(452	)
Finance expense		-			11			3			-			14
Foreign exchange loss (gain)		(385	)		286			41			(653	)		(711	)
Other expense (income)		-			(69	)		-			-			(69	)
Income before taxes		(8,337	)		104			(271	)		(1,174	)		(9,678	)
Current income tax expense (recovery)		1,434			101			39			-			1,574
Deferred income tax expense (recovery)		(2,500	)		(62	)		(194	)		(4,876	)		(7,632	)
Income tax expense (recovery)		(1,066	)		39			(155	)		(4,876	)		(6,058	)
Net income (loss)	$	(7,271	)	$	65		$	(116	)	$	3,702		$	(3,620	)

39

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Segment revenues and profitability for the six months ended June 30, 2016 are as follows. The Company was previously a single operating segment.

	For the six months ended,
	June 30, 2016
Revenues	$	46,121
Cost of revenues (excluding depreciation and amortization)		14,263
		31,858
Selling, general and administrative		5,186
Depreciation of property, plant and equipment (Note 8)		213
Amortization of intangibles (Note 9)		19,872
Results from operations		6,587
Finance income		(238	)
Foreign exchange loss (gain)		(277	)
Income before taxes		7,102
Current income tax expense (recovery)		3,860
Deferred income tax expense (recovery)		1,474
Income tax expense (recovery)		5,334
Net income (loss)	$	1,768

Segment revenues and profitability for the three months ended June 30, 2017 are as follows. The eliminations include inter-segment eliminations, including management fees and other fees.

	For the three months ended June 30, 2017
	Technology			Mobility			Factory			Corporate			Total
Revenues	$	12,048		$	4,648		$	1,915		$	-		$	18,611
Cost of revenues (excluding depreciation and amortization)		6,368			2,752			401			-			9,521
		5,680			1,896			1,514			-			9,090
Selling, general and administrative		1,772			972			876			594			4,214
Research and development		-			308			360			-			668
Depreciation of property, plant and equipment (Note 8)		88			48			34			-			170
Amortization of intangibles (Note 9)		5,321			236			471			-			6,028
Special charges		-			-			-			1,294			1,294
Results from operations		(1,501	)		332			(227	)		(1,888	)		(3,284	)
Finance income		(173	)		-			-			(61	)		(234	)
Finance expense		-			11			3			-			14
Foreign exchange loss (gain)		(100	)		286			41			(653	)		(426	)
Other expense (income)		-			(69	)		-			-			(69	)
Income before taxes		(1,228	)		104			(271	)		(1,174	)		(2,569	)
Current income tax expense (recovery)		691			101			39			-			831
Deferred income tax expense (recovery)		(1,877	)		(62	)		(194	)		(4,876	)		(7,009	)
Income tax expense (recovery)		(1,186	)		39			(155	)		(4,876	)		(6,178	)
Net income (loss)	$	(42	)	$	65		$	(116	)	$	3,702		$	3,609

40

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Segment revenues and profitability for the three months ended June 30, 2016 are as follows. The Company was previously a single operating segment.

	For the three months ended,
	June 30, 2016
Revenues	$	15,961
Cost of revenues (excluding depreciation and amortization)		6,293
		9,668
Selling, general and administrative		2,646
Depreciation of property, plant and equipment (Note 8)		106
Amortization of intangibles (Note 9)		9,850
Results from operations		(2,934	)
Finance income		(120	)
Foreign exchange loss (gain)		(114	)
Income before taxes		(2,700	)
Current income tax expense (recovery)		837
Deferred income tax expense (recovery)		(385	)
Income tax expense (recovery)		452
Net income (loss)	$	(3,152	)

Segment assets as at June 30, 2017 and December 31, 2016 are as follows:

As at	June 30, 2017		December 31, 2016
Technology	$	151,915	$	268,337
Mobility		69,025		-
Factory		33,325		-
Total segment assets		254,265		268,337
Total corporate assets		46,466		14,646
Total assets	$	300,731	$	282,983

Revenue by Service

	Three months ended, June 30, 2017		Three months ended, June 30, 2016		Six months ended, June 30, 2017		Six months ended, June 30, 2016
License	$	12,842	$	15,961	$	20,420	$	46,121
Systems		3,067		-		3,067		-
Services		714		-		714		-
Recurring		1,988		-		1,988		-
Total Revenue	$	18,611	$	15,961	$	26,189	$	46,121

41

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

Geographic Information

United Kingdom and Sweden represent the revenues in the continent of Europe. China, Hong Kong, Japan, Korea, Singapore and Taiwan represent the revenues in the continent of Asia.

	Three months ended, June 30, 2017		Three months ended, June 30, 2016		Six months ended, June 30, 2017		Six months ended, June 30, 2016
Revenues
United States	$	13,523	$	8,022	$	15,198	$	15,677
Canada		243		3		243		7
Europe		501		776		1,408		1,914
India		18		-		18		-
Mexico		17		-		17		-
Chile		321		-		321		-
Asia		3,622		7,149		8,609		23,500
Cayman Islands		-		-		-		5,000
Rest of the world		366		11		375		23
Total Revenue	$	18,611	$	15,961	$	26,189	$	46,121

As at	June 30, 2017		December 31, 2016
Non-current assets
United States	$	39,130	$	41,146
Canada		183,842		110,714
Europe		-		-
India		-		-
Mexico		1		-
Chile		199		-
Asia		-		-
Rest of the world		-		-
Total non-current assets	$	223,172	$	151,860

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 six months ended June 30, 2017, there were three major customers identified (2016: none).

20.  FINANCIAL RISK MANAGEMENT

Credit Risk

Credit risk is the risk of financial loss to the Company if a licensee or counter-party to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, accounts receivable, loan receivable, and foreign exchange forward contracts.

42

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The Company’s cash and cash equivalents, and short-term investments consist primarily of deposit investments that are held only with Canadian chartered banks. Management does not expect any counter-parties to fail to meet their obligations.

The Company’s loan receivable is a term loan facility which is collateralized by a general security agreement. Management does not expect the borrower to fail to meet its obligations.

The Company’s exposure to credit risk with its accounts receivable from customers are influenced mainly by the individual characteristics of each customer. The Company’s customers are for the most part, large multinational companies or government organizations which do not have a history of non-payment. Credit risk from accounts receivable encompasses the default risk of the Company’s customers. Prior to entering into transactions with new customers the Company assesses the risk of default associated with the particular customer. In addition, on an ongoing basis, management monitors the level of accounts receivable attributable to each customer and the length of time taken for amounts to be settled and where necessary, takes appropriate action to follow up on those balances considered overdue. The Company has had no significant bad debts for any periods presented.

Three customers individually accounted for 20.1%, 19.1% and 10.6%, respectively of revenues for the six months ended June 30, 2017 (for the six months ended June 30, 2016 – three customers individually accounted for 20.6%, 13.7% and 11.4 %, respectively). Management does not believe that there is significant credit risk arising from any of the Company’s customers for which revenue has been recognized. However, should one of the Company’s major customers be unable to settle amounts due, there would be an impact on the results of the Company. The maximum exposure to loss arising from accounts receivable is equal to their total carrying amounts. At June 30, 2017, no customer individually accounted for more than 10% of the account receivable balance outstanding.

The following table provides an aging analysis of trade accounts receivable. The age of an invoice does not necessarily indicate an account is past due as many contracts for system revenue require the successful completion of system testing and acceptance.

	June 30,			December31,
As at	2017			2016
Current	$	8,048		$	20,311
1 - 30 days		1,569			19
31 - 60 days		1,062			7
61 - 90 days		438			-
91 days and over		2,022			158
Less allowance for doubtful accounts		(138	)		(138	)
	$	13,001		$	20,357

None of the amounts outstanding have been challenged by the respective counterparties and the Company continues to conduct business with them on an ongoing basis. Accordingly, management has no reason to believe that this balance is not fully collectable in the future.

The Company reviews financial assets on an ongoing basis with the objective of identifying potential matters which could delay the collection of funds at an early stage. Once items are identified as being

43

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

past due, contact is made with the respective Company to determine the reason for the delay in payment and to establish an agreement to rectify the breach of contractual terms. At June 30, 2017, the Company had a provision for doubtful accounts of 138(December 31, 2016 - $138) which was made against accounts receivable where collection efforts to date have been unsuccessful.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s objective in managing liquidity risk is to ensure that it has sufficient liquidity available to meet its liabilities when due.

At June 30, 2017, the Company had cash and cash equivalents and short-term investments of $45,509, accounts receivable of $13,001 and various credit facilities as outlined in note 13 available to meet its obligations. In addition, EDC has provided a guarantee to IRD’s additional credit facility of $2 million for the support of performance guarantees provided by IRD’s subsidiaries. At June 30, 2017 performance guarantees totaling $67 were outstanding under this credit facility.

Market Risk

Market risk is the risk to the Company that the fair value of future cash flows from its financial instruments will fluctuate due to changes in interest rates and foreign currency exchange rates. Market risk arises as a result of the Company generating revenues in foreign currencies.

Interest Rate Risk

The financial instruments that expose the Company to interest rate risk are its cash and cash equivalents, short-term investments, bank indebtedness and long term debt. The Company’s objectives of managing its cash and cash equivalents and short-term investments are to ensure sufficient funds are maintained on hand at all times to meet day to day requirements and to place any amounts which are considered in excess of day to day requirements on short-term deposit with the Company’s banks so that they earn interest. When placing amounts of cash and cash equivalents into short-term investments, the Company only places investments with Canadian chartered banks and ensures that access to the amounts placed can be obtained on short-notice. A one percent increase/decrease in interest rates would not have resulted in a material increase/ decrease in interest income/ expense during three and six months ended June 30, 2017.

Currency Risk

A portion of Quarterhill’s revenues and operating expenses are denominated in Canadian dollars, Indian rupee, Chilean peso, Mexican peso and Chinese Yuan. Because the Company reports its results of operations in U.S. dollars, Quarterhill’s operating results are subject to changes in the exchange rate of the foreign currencies (primarily Canadian dollar) relative to the U.S. dollar. Any decrease in the value of the Canadian dollar relative to the U.S. dollar has an unfavorable impact on Canadian dollar denominated revenues and a favorable impact on Canadian dollar denominated operating expenses. Approximately 8% of the Company’s cash and cash equivalents and short-term investments are denominated in Canadian dollars and are subject to changes in the exchange rate of the Canadian dollar relative to the U.S. dollar.

44

Quarterhill Inc.

NOTES TO Condensed CONSOLIDATED Interim FINANCIAL STATEMENTS

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

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

The following table illustrates the Company’s exposure to exchange risk and the pre-tax effects on earnings and other comprehensive income (OCI) of a 5% decrease in the U.S. dollar in comparison to other relevant foreign currency. This analysis assumes all other variables remain constant.

	Foreign Currency Exposure			Foreign Currency exchange risk 5% decrease in USD
	30-Jun-17			Income		OCI
Net asset:
Canadian dollar		(6,491	)		-		(326	)
Indian rupee		1,235			9		53
Mexican Peso		36			-		2
Chilean peso		364			-		18
Chinese Yuan		6,819			-		341

The Company may manage the risk associated with foreign exchange rate fluctuations by, from time to time, entering into foreign exchange forward contracts and engaging in other hedging strategies. To the extent that Quarterhill engages in risk management activities related to foreign exchange rates, it may be subject to credit risks associated with the counterparties with whom it contracts.

The Company’s objective in obtaining foreign exchange forward contracts is to manage its risk and exposure to currency rate fluctuations related primarily to future cash inflows and outflows of Canadian dollars. The Company does not use foreign exchange forward contracts for speculative or trading purposes.

21.  SUBSEQUENT EVENT

On July 18, 2017, the Company acquired all the issued and outstanding shares of iCOMS Detections S.A. (“iCOMS”) for cash of $1.1 million or €1.0 million. iCOMS is located in Brussels, Belgium and specializes in the design and manufacture of radar microwave detectors and equipment for the ITS market. The acquired entity will be integrated into the Company’s wholly-owned subsidiary, IRD.

45

EX-99.3

Exhibit 99.3

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Shaun McEwan, Interim Chief Executive Officer of Quarterhill Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Quarterhill Inc. (the “issuer”) for the interim period ended June 30, 2017.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared: and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework – 2013 (COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR - material weakness relating to design: N/A

5.3 Limitation on scope of design: N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2017 and ended on June 30, 2017 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: August 11, 2017

/s/ Shaun McEwan

Shaun McEwan

Interim Chief Executive Officer

EX-99.4

Exhibit 99.4

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Stephen Thompson, Interim Chief Financial Officer of Quarterhill Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Quarterhill Inc. (the “issuer”) for the interim period ended June 30, 2017.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared: and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework – 2013 (COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR - material weakness relating to design: N/A

5.3 Limitation on scope of design: N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2017 and ended on June 30, 2017 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: August 11, 2017

/s/ Stephen Thompson

Stephen Thompson

Interim Chief Financial Officer