Quarterhill Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2020 and 2019
March 11, 2021
CONTENTS
Introduction
Year ended 2020 Business Highlights
Cautionary Note Regarding Forward-Looking Statements
Description of Our Business
Business Combinations
Overall Performance
Segmented Results
Selected Consolidated Annual Results
Capital and Liquidity
Outstanding Common Share Data
Off-Balance Sheet Arrangements
Related Party Transactions
Proposed Transactions
Critical Estimates
Conversion to International Financial Reporting Standards (IFRS)
Risks and Uncertainties
Disclosure Controls and Procedures and Internal Control over Financial Reporting
MD&A
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MD&A
INTRODUCTION
This Management’s Discussion and Analysis of Quarterhill Inc. (this “MD&A”) is dated March 11, 2021. 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 and references to “Common Shares” in this MD&A
refer to common shares in the capital of Quarterhill.
The Common Shares are listed under the symbol “QTRH” on the Toronto Stock Exchange (the “TSX”). On
December 3, 2019 we announced that our Board of Directors (our “Board”) had approved the delisting of the
Common Shares from the Nasdaq Global Select Market and to terminate the registration of the Common Share
under the U.S. Securities Exchange Act of 1934, as amended. To continue to support our shareholders in the
United States, we listed our Common Shares on the United States OTCQX Best Market (the “OTCQX”) under the
symbol “QTRHF” which became effective December 23, 2019.
Quarterhill is a Canadian company in the Intelligent Transportation System (“ITS”) and Intellectual Property (“IP”)
industries. Our goal is to pursue an investment strategy that capitalizes on attractive market trends in both ITS
and its adjacent markets.
Our business model is to build a consistently profitable company through the acquisition, management and
growth of companies in our dedicated technology areas, with an emphasis on seeking out acquisition
opportunities that provide a foundation for profitable growth. We will focus on opportunities that have a
strategic fit with opportunities for synergies, attractive valuations, recurring revenues, strong gross profits,
predictable cash flows, deep customer relationships and dedicated management teams among other
considerations. In appropriate circumstances, we may also divest certain assets if favourable conditions for
such a divestiture are presented.
This MD&A provides information for the three and twelve month periods ended December 31, 2020 and up to
and including March 10, 2021. This MD&A should be read in conjunction with Quarterhill’s consolidated financial
statements and the notes thereto for the year ended December 31, 2020 and December 31, 2019, which have
been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”).
Unless otherwise indicated, all financial information in this MD&A is reported in thousands of Canadian dollars,
except for share and earnings per share data which is reported in number of shares and Canadian dollars
respectively. The tables and charts included in this document form an integral part of this MD&A.
Up until December 31, 2019, we prepared our consolidated financial statements in accordance with U.S.
Generally Accepted Accounting Principles and in U.S. dollars. Since the current year’s consolidated financial
statements represent our first presentation of our results and financial position under IFRS, they were prepared
in accordance with International Accounting Standards (“IAS”) 1, “Presentation of Financial Statements” and IFRS
1, “First-Time Adoption of IFRS.” Subject to certain transition elections, we have consistently applied the same
accounting policies in our opening IFRS statement of financial position at January 1, 2019, and throughout all
periods presented as if these policies had always been in effect.
This MD&A has been prepared with reference to National Instrument 51-102 - Continuous Disclosure
Obligations of the Canadian Securities Administrators. 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, 2019 (our “AIF”), is available on-line at www.sedar.com and also on our website at
www.Quarterhill.com.
Our management is responsible for establishing appropriate information systems, procedures and controls to
ensure that all financial information disclosed externally, including in 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’s Audit Committee (the “Audit Committee”) and, finally, by our Board as a whole.
Year ended December 31, 2020
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MD&A
YEAR ENDED 2020 BUSINESS HIGHLIGHTS
Strong Performance from Both Business Units
Our Intelligent Transportation Systems (“ITS”) business segment, International Road Dynamics (“IRD”), enjoyed
strong results in 2020. IRD’s revenues for the three months and year ended December 31, 2020 of $17,618 and
$66,266, respectively, were both among the highest in its history. As a result, IRD’s Adjusted EBITDA for the
three months and year ended December 31, 2020, were $3,648 and $13,823, respectively, as compared to
$3,102 and $8,278 in the respective prior year periods.
IRD also announced several new contracts signed during 2020 further adding to its order backlog. IRD received
a contract for the design, supply, installation, service, and integration of two Weigh-in-Motion (“WIM”) systems
in the Republic of Paraguay. IRD was also awarded contracts to provide services for five WIM systems located
in New York State, commercial vehicle enforcement systems in Ukraine, WIM Systems with the U.S. Federal
Highway Administration Office, and Virtual Weigh Station systems with the Oklahoma Department of
Transportation.
WiLAN’s solid performance in 2020 resulted from the execution of several new patent license agreements
during the year with United Microelectronics Corporation, Kingston Technology Corporation, Konica Minolta,
Inc. and Intel Corporation. WiLAN also acquired additional patent portfolios from International Business
Machines Corporation ("IBM") and MediaTek Inc. related to technologies in semiconductor manufacturing
process, power management, embedded and NFC microcontrollers, as well as image processors.
We were also pleased to report that during 2020, WiLAN won a jury verdict for final judgment in favor of WiLAN
related to patent infringement against Apple. The total award in the final judgment stands at US $108.98
million, including interest up to the date of the final judgment, and WiLAN is entitled to post-judgment interest
from June 16, 2020 until the date that the final judgment is satisfied. Finally, as indicated in the court's final
judgment, there are additional royalties for products which Apple released during the pendency of the
litigation that will be accounted for separately.
Please refer to the Segmented Results section of this MD&A for further details of the three months and year
ended December 31, 2020 financial performance of IRD and WiLAN.
New Executive Appointments
We were pleased to make several executive appointments during 2020. Effective June 1, 2020, Paul Hill was
appointed Chief Executive Officer. Mr. Hill is an executive with extensive experience in managing technology
and diversified software companies and in completing acquisitions of technology companies. Also, on June 1,
2020, as part of planned succession, Rish Malholtra was appointed President and Chief Executive Officer of IRD.
Rish Malhotra is a Professional Engineer (P.Eng.) and also holds an MBA in Technology and International
Business Management. Rish has been with IRD for the past 12 years progressing through various roles including
Vice President, International Business and most recently as the Executive VP and COO.
On August 31, 2020 we announced the appointment of Mr. John Rim as Chief Financial Officer of Quarterhill,
effective October 1, 2020. Mr. Rim is an executive with 25 years' experience in varied finance and leadership
roles across multiple industries, including the technology sector. Mr. Rim is responsible for all aspects of
financial planning and reporting, treasury, financing, internal controls, governance, and capital markets and will
play a key role in the execution of Quarterhill’s strategic plans.
Return of Capital
In July 2020, we completed a Substantial Issuer Bid (“SIB”) resulting in the repurchase for cancellation of
2,687,981 Common Shares at an average purchase price of $2.15 per share, plus transaction costs of $0.5
million, for a total of $6.3 million. In addition, pursuant to a Normal Course Issuer Bid (“NCIB”) approved by the
Toronto Stock Exchange, we repurchased 2,206,636 Common Shares at an average price of $1.95 per share
totaling $4.3 million as at December 31, 2020. In total, the Company repurchased 4,894,617 Common Shares for
$10.6 million under both SIB and NCIB as at the end of 2020. See further details in Capital and Liquidity section
below.
Year ended December 31, 2020
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MD&A
Sale of VIZIYA
In May 2020, we completed the sale of VIZIYA Corporation for cash proceeds of $49.4 million to Prometheus
Group, based in Raleigh, North Carolina.
Originally acquired by Quarterhill in May 2017, VIZIYA is a software and services provider that helps companies
optimize their asset performance and uptime. The sale of VIZIYA served to further strengthen our balance
sheet providing capital to fund our growth and return some capital to shareholders. The sale of VIZIYA
delivered a strong internal rate of return on our initial investment in VIZIYA.
COVID - 19 Pandemic Update
As the COVID-19 Pandemic continues to affect the global economy, we have continued to take active steps in
each of our business segments to protect our employees and business operations as further described below.
Protecting our Employees, Customers, and Communities
The health and safety of our stakeholders remains critical to Quarterhill. During the past year, we have
continued to employ proactive measures such as providing for work from home, eliminating travel and closely
following the guidelines issued by applicable health and regulatory authorities. During this time, our human
resource policies have evolved to respond to questions or concerns from our employees while continuing to
explore opportunities to return to an “in office” work environment.
Operations
To date, our portfolio companies remain in full operation, and continue to execute on the delivery of existing
customer mandates, while also working to build and sustain business pipelines and advance new opportunities
through their respective sales cycles. As expected, the enhanced precautions being taken, and the broader
dynamic of the current business environment, has resulted in some delay in the delivery of certain ongoing
services, but fundamentally, the operating prospects for all portfolio companies remain sound and are backed
by Quarterhill's strong balance sheet.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements and forward-looking information within the meaning of
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.
Year ended December 31, 2020
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MD&A
CAUTIONARY NOTE REGARDING USE OF NON-IFRS MEASURES
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 our management, to any decision-making based on Quarterhill’s
performance. This section defines, quantifies and analyzes the key performance indicators used by our
management and referred to elsewhere in this MD&A, which are not recognized under IFRS and have no
standardized meaning prescribed by IFRS. 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-IFRS term “Adjusted EBITDA” to mean net income (loss) from continuing
operations adjusted for: (i) income taxes; (ii) finance expense or income; (iii) amortization and impairment of
intangibles; (iv) special charges and other one-time items; (v) depreciation of right-of-use assets and property,
plant and equipment; (vi) stock-based compensation; (vii) foreign exchange (gain) loss; and (viii) equity in
earnings and dividends from joint ventures. Adjusted EBITDA is used by our 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. Adjusted EBITDA should not be interpreted as an alternative to net income and cash flows
from operations as determined in accordance with IFRS or as a measure of liquidity.
DESCRIPTION OF OUR BUSINESS
Quarterhill is a disciplined acquirer and manager of established technology companies operating alongside our
existing patent monetization business. Our goal is to pursue an investment strategy that capitalizes on
attractive market trends in the ITS industry and its adjacent markets. Additionally, in appropriate circumstances,
we may also divest certain assets if favourable conditions for such a divestiture are presented.
Strategy
We are focusing our business on the acquisition, management and growth of companies in the ITS industry and
its adjacent markets, with an emphasis on seeking out acquisition opportunities that provide a foundation for
profitable growth and that have reasonable valuations, recurring revenues, predictable cash flows and gross
profit,
teams among other material
considerations.
relationships and dedicated management
intimate customer
We believe that if we increase the share of our revenue derived from sources such as annual maintenance and
long term contracts, we will also increase our cash flows and predictability of our revenues. This will allow us
to better scale our operations to ensure we meet our strategic mandate of operating profitably regardless of
the prevailing economic market conditions as we grow both organically and through acquisitions.
Our existing businesses are fully described in more detail in our AIF. As a result of the disposition of VIZIYA,
which was the only investment in our Enterprise Software segment, we now operate in two business segments
providing technology licensing and ITS as we currently review our operating results, assess our performance,
make decisions about resources and generate discrete financial information for each of these segments. We
have called these segments Licensing and Intelligent Transportation Systems.
Licensing Segment
Our Licensing segment focuses on technology licensing as its principal business activity. We have an
investment in WiLAN, a leading patent licensing company, based in Ottawa, Canada with offices in California
and Texas. 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.
Both directly and through its wholly owned subsidiaries, WiLAN partners with its customers and other third
parties to unlock the value of intellectual property through various patent monetization models. WiLAN’s
partnership model with large, global industry leaders allows WiLAN to maintain and grow its pipeline of
valuable patent portfolios with no up-front costs while its contingency fee arrangement with legal partners
allows WiLAN to predictably manage its costs.
Year ended December 31, 2020
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MD&A
in a variety of markets
WiLAN operates
Internet, medical,
semiconductor and wireless communications technologies. WiLAN’s patent licensing agreements 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.
including automotive, digital television,
WiLAN’s proven track record, business and technical expertise, as well as its strong reputation in the IP
licensing industry has allowed it to continue to be successful. WiLAN continues to access valuable patent
portfolios through strategic partnerships with some of the world’s largest companies seeking to monetize and
protect their patents.
Intelligent Transportation Systems Segment
Our Intelligent Transportation Systems segment includes companies providing systems and services focused
on the interconnection of devices for mobile applications. Our first investment in this segment is IRD.
Headquartered in Saskatoon, Canada, IRD is 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 safety, increasing 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 collection and highway toll collection systems.
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 ITS services, systems and products. IRD’s 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.
BUSINESS COMBINATIONS
As a result of the impact of COVID-19 on the global economy, the underlying uncertainty concerning valuations,
the importance of preserving cash and vacancies in some key corporate executive positions in the past twelve
months, we had temporarily paused our M&A strategy to focus on our existing businesses. Throughout this
period, however, we maintained our M&A ecosystem, to build a growing pipeline of opportunities.
On January 5, 2021, we acquired all of the issued and outstanding shares of Sensor Line GmbH (“Sensor Line”), a
German-based ITS provider of fiber optic traffic sensors for road and rail markets for cash consideration of €3.8
million (approximately $6.0 million). Sensor Line will be integrated into Quarterhill’s wholly owned subsidiary,
IRD. Please refer to Note 26 - Subsequent Events of the notes to the consolidated financial statements for more
information on the acquisition of Sensor Line.
We remain focused on building robust cash flows and controlling expenses throughout all our businesses to
maintain a healthy and sustainable balance sheet capable of supporting both our organic and acquisitive
growth opportunities. With our management team now fully in place, a strong balance sheet, and the strength
and progress in our portfolio companies, we are well positioned to execute our M&A growth strategy and we
are actively pursuing targets in the ITS industry that are synergistic and accretive to Quarterhill.
Year ended December 31, 2020
5
OVERALL PERFORMANCE
Consolidated Statements of Income
(in thousands of Canadian dollars, except share and per share amounts)
MD&A
Three months ended December 31,
2020
2019
Revenues
Licensing
Intelligent Transportation Systems
Direct cost of revenues
Licensing
Intelligent Transportation Systems
Gross profit
Operating expenses
Depreciation of right-of-use assets
Depreciation of property, plant and equipment
Amortization of intangibles
Selling, general and administrative expenses
Research and development expenses
Impairment losses on intangibles
Special charges
Results from operations
Finance income
Finance expense
Foreign exchange loss
Other income
(Loss) income before taxes
Current income tax expense
Deferred income tax (recovery) expense
Income tax (recovery) expense
Net (loss) income from continuing operations
Net loss from discontinued operations
Net (loss) income
Net (loss) income per share
From continuing operations
From discontinued operations
Net (loss) income per share - Basic
From continuing operations
From discontinued operations
Net (loss) income per share - Diluted
$
$
$
$
$
474
17,618
18,092
5,338
11,091
16,429
1,663
241
248
4,539
8,323
468
—
355
14,174
(12,511)
(45)
92
425
(488)
(12,495)
368
(2,662)
(2,294)
(10,201)
—
(10,201) $
(0.09)
—
(0.09) $
(0.09)
—
(0.09) $
30,591
17,708
48,299
11,398
10,539
21,937
26,362
249
210
5,617
7,491
645
115
1,046
15,373
10,989
(508)
131
169
(373)
11,570
2,320
611
2,931
8,639
(2,266)
6,373
0.07
(0.02)
0.05
0.07
(0.02)
0.05
Year ended December 31, 2020
6
Consolidated Statements of Income
(in thousands of Canadian dollars, except share and per share amounts)
Revenues
Licensing
Intelligent Transportation Systems
Direct cost of revenues
Licensing
Intelligent Transportation Systems
Gross profit
Operating expenses
Depreciation of right-of-use assets
Depreciation of property, plant and equipment
Amortization of intangibles
Selling, general and administrative expenses
Research and development expenses
Impairment losses on intangibles
Special charges
Results from operations
Finance income
Finance expense
Foreign exchange (gain) loss
Other income
Income before taxes
Current income tax expense
Deferred income tax expense
Income tax expense
Net income from continuing operations
Net income from discontinued operations
Net income
Net income per share
From continuing operations
From discontinued operations
Net income per share - Basic
From continuing operations
From discontinued operations
Net income per share - Diluted
MD&A
Year ended December 31,
2020
2019
$
$
78,260
66,266
144,526
106,052
66,873
172,925
46,205
39,463
85,668
58,858
979
969
18,855
26,868
2,282
295
1,227
51,475
7,383
(573)
459
(88)
(1,680)
9,265
2,037
2,800
4,837
4,428
14,255
18,683
0.04
0.12
0.16
0.04
0.12
0.16
$
$
$
53,130
42,887
96,017
76,908
1,305
1,296
23,305
26,719
2,874
115
2,448
58,062
18,846
(1,665)
740
324
(869)
20,316
8,117
1,106
9,223
11,093
1,569
12,662
0.09
0.01
0.10
0.09
0.01
0.10
$
$
$
Consolidated revenues for the three months and year ended December 31, 2020 were $18,092 and $144,526 as
compared to $48,299 and $172,925 in the comparative prior period. The decrease in the current year primarily
relates to our Licensing segment where revenues decreased $27,792 over the prior year comparative period
due to limited license activity in Q4 2020.
Year ended December 31, 2020
7
The components of our revenue are as noted below:
MD&A
Licensing
Licensing revenues includes all revenues associated with technology licenses, perpetual software
licenses and other revenues characterized as one-time licenses.
Intelligent
Transportation
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.
For the year ended December 31, 2020 Licensing revenues were $78,260 and Intelligent Transportation
Systems revenues were $66,266, compared to $106,052 and $66,873, respectively, for the year ended
December 31, 2019. The decrease in revenue for the Licensing segment of $27,792 is due to a larger number of
significant contracts being closed in the prior year as licensing revenues are one-time in nature. Revenues for
the Intelligent Transportation Systems segment for the year ended December 31, 2020 were consistent with
the prior year comparative period.
Gross profit, calculated as revenues less direct cost of revenues for the three months and year ended
December 31, 2020 was $1,663 or 9% and $58,858 or 41% compared to $26,362 or 55% and $76,908 or 44% for
the prior year respective periods. For the current quarter and fiscal year, our licensing segment generated
$(4,864) and $32,055 in gross profit compared to $19,193 and $52,922 in the respective comparative prior
periods. The decrease in gross profit for the three months and year ended December 31, 2020 as compared to
the three months and year ended December 31, 2019 is due to the closure of a number of large licensing
contracts in the three months ended December 31, 2019 compared to the current three months ended
December 31, 2020 wherein WiLAN did not finalize any significant contracts. Our intelligent transportation
systems segment generated $6,527 and $26,803 in gross margin compared to $7,169 and $23,986 in the
respective comparative prior periods.
Direct cost of revenues includes: (i) for our Licensing segment, patent licensing expenses which include royalty
obligations, cost of patents if purchased from brokers, employee costs, costs incurred in conducting license
negotiations, contingent partner and legal fee payments and other licensing and litigation expenses as well as
all costs associated with the ownership, maintenance and management of the related patents; and (ii) for our
Intelligent Transportation Systems segment, all costs of delivering on a project including employee costs,
inventory consumption costs, subcontractor costs and costs related to any maintenance and warranty work
completed.
Consolidated operating expenses are comprised of depreciation, amortization of intangible assets, selling,
general and administrative costs, research and development costs, impairment losses on intangibles, and
special charges. Total operating expenses for the three months and year ended December 31, 2020 were
$14,174 and $51,475 as compared to $15,373 and $58,062 in the respective comparative prior periods. The
lower operating costs in the year ended December 31, 2020 were primarily driven by a decrease in amortization
of intangibles, and depreciation of right-of-use assets, depreciation of property, plant, and equipment, and a
reduction of research and development
Selling, general and administrative costs are primarily comprised of management, sales and administrative
personnel costs, sales and marketing expenses, occupancy costs, and professional advisory and regulatory
fees. Research and development (“R&D”) costs are primarily composed of salary and materials costs associated
with our various R&D activities, net of government grants and investment tax credits. Selling, general and
administrative and research and development expenses for the three months and year ended December 31,
2020 totaled $8,791 and $29,150 as compared to $8,136 and $29,593 for the respective comparative prior
periods.
Special charges include costs and recoveries that relate to certain restructuring initiatives undertaken from
time to time, acquisition-related costs and recoveries and other charges. Special charges for the three months
and year ended December 31, 2020 were $355 and $1,227 as compared to of $1,046 and $2,448 for the
respective comparative prior periods.
Year ended December 31, 2020
8
During Q2 2020 we completed the disposition of VIZIYA Corp. (“VIZIYA”), a portfolio company in Quarterhill’s
previously reported Enterprise Software segment, for total cash proceeds of $49.4 million, resulting in a pre-tax
gain on disposition of $17,713 less applicable deferred taxes of $1,559, plus the net loss from this segment’s
operations of $1,800 up to the date of sale on May 15, 2020. Net income from discontinued operations for the
year ended December 31, 2019 was $1,570.
MD&A
Reconciliation of Net Income to Adjusted EBITDA
We consider Adjusted EBITDA, a non-IFRS measure, to be a good indicator for the business to capture financial
performance in a given period related to the operations of Quarterhill and each of our reporting segments.
We reported Adjusted EBITDA of $(6,080) and $31,200 for the three months and year ended December 31, 2020
compared to $18,687 and $48,520 for the respective comparative prior periods. The reduction in EBITDA for the
three months and year ended December 31, 2020 as compared to the respective prior year periods are due to
the changes in revenue and expenses as previously explained. With the creation of Quarterhill and the adoption
of a growth oriented strategy anchored in acquisitions of technology businesses in 2017, we began tracking
expenses related to the acquisitions. Special charges generally consist of advisor fees, accounting and
valuation fees, due diligence related expenses and legal fees, restructuring charges, and other one-time items.
Although these expenses may recur as we complete additional acquisitions, they are not fundamental to the
actual operations of our businesses 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,
impairment loss on intangibles, stock-based compensation, equity earnings and dividends from joint venture,
other acquisition related accounting items and other one-time charges.
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 requires us to make estimates and assumptions. We have
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. 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 amortize customer related intangible assets over a period of seven years and
developed software related intangible assets over five years.
Year ended December 31, 2020
9
Reconciliations of Net income to Adjusted EBITDA
(in thousands of Canadian dollars, except share and per share amounts)
Net (loss) income from continuing operations
$
(10,201) $
(0.09) $
8,639 $
0.07
Three months ended December 31,
2020
2019
$
Per Share
$
Per Share
MD&A
Adjusted for:
Income tax (recovery) expense
Foreign exchange loss
Finance expense (income), net
Special charges
Impairment losses on intangible assets
Depreciation and amortization
Stock based compensation expense
Dividend from joint venture
Other income
Adjusted EBITDA
(2,294)
(0.02)
425
47
355
—
5,028
571
477
(488)
—
—
—
—
0.05
0.01
—
—
2,931
169
(377)
1,046
115
6,076
(52)
513
(373)
0.02
—
—
0.01
—
0.05
—
—
—
$
(6,080) $
(0.05) $
18,687 $
0.16
Weighted average number of Common Shares
Basic
114,137,754
118,817,466
Net income from continuing operations
$
4,428 $
0.04 $
11,093 $
0.09
Year ended December 31,
2020
2019
$
Per Share
$
Per Share
Adjusted for:
Income tax expense
Foreign exchange (gain) loss
Finance income, net
Special charges
Impairment losses on intangible assets
Depreciation and amortization
Stock based compensation expense
Dividend from joint venture
Other income
Adjusted EBITDA
4,837
(88)
(114)
1,227
295
20,803
1,015
477
(1,680)
0.04
—
—
0.01
—
—
—
—
(0.01)
9,223
324
(925)
2,448
115
25,906
692
513
(869)
$
31,200 $
0.27 $
48,520 $
0.08
—
—
0.02
—
0.22
0.01
—
(0.01)
0.41
Weighted average number of Common Shares
Basic
116,939,833
118,817,466
Year ended December 31, 2020
10
MD&A
SEGMENTED RESULTS
Segmented results of operations for the three months ended December 31, 2020 and 2019 are included in this
MD&A. Following the disposition of VIZIYA in the quarter ended June 30, 2020, Quarterhill now operates in two
distinct segments.
For the three months ended December 31, 2020
CONTINUING OPERATIONS
Licensing
Intelligent
Transportation
Systems
Corporate
Total
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Special charges
Results from operations
Finance expense (income), net
Foreign exchange (gain) loss
Other income
(Loss) Income before taxes
Income tax (recovery) expense
$
474
$
17,618
$
5,338
(4,864)
3,345
800
—
—
(9,009)
1
(669)
—
(8,341)
(3,204)
11,091
6,527
1,628
2,969
468
224
1,238
55
651
(488)
1,020
1,134
$
—
—
—
55
4,554
—
131
(4,740)
(9)
443
—
(5,174)
(224)
18,092
16,429
1,663
5,028
8,323
468
355
(12,511)
47
425
(488)
(12,495)
(2,294)
Net loss from continuing operations
$
(5,137) $
(114) $
(4,950) $
(10,201)
CONTINUING OPERATIONS
Licensing
For the year ended December 31, 2020
Intelligent
Transportation
Systems
Corporate
Total
$
144,526
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Impairment losses of intangible assets
Special charges
Results from operations
Finance (income) expense, net
Foreign exchange loss (gain)
Other income
Income (loss) before taxes
Income tax expense
$
78,260
$
66,266
$
46,205
32,055
14,082
3,386
—
295
—
14,292
(61)
647
—
13,706
(325)
39,463
26,803
6,605
11,393
2,282
—
883
5,640
283
27
(1,680)
7,010
1,864
—
—
—
116
12,089
—
—
344
(12,549)
(336)
(762)
—
(11,451)
3,298
Net income (loss) from continuing operations
$
14,031
$
5,146
$
(14,749) $
Year ended December 31, 2020
85,668
58,858
20,803
26,868
2,282
295
1,227
7,383
(114)
(88)
(1,680)
9,265
4,837
4,428
11
For the three months ended December 31, 2019
MD&A
CONTINUING OPERATIONS
Licensing
Intelligent
Transportation
Systems
Corporate
Total
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Impairment losses on intangibles
Special charges
Results from operations
Finance (income) expense, net
Foreign exchange (gain) loss
Other expense (income)
Income (loss) before taxes
Income tax expense (recovery)
$
30,591 $
17,708 $
— $
11,398
19,193
4,431
1,307
—
115
20
13,320
(136)
(628)
8
14,076
2,906
10,539
7,169
1,625
3,961
645
—
509
429
98
239
(381)
473
(158)
—
—
20
2,223
—
—
517
(2,760)
(339)
558
—
(2,979)
183
Net income (loss) from continuing operations
$
11,170 $
631 $
(3,162) $
48,299
21,937
26,362
6,076
7,491
645
115
1,046
10,989
(377)
169
(373)
11,570
2,931
8,639
CONTINUING OPERATIONS
Licensing
For the year ended December 31, 2019
Intelligent
Transportation
Systems
Corporate
Total
$
106,052 $
66,873 $
— $
172,925
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Impairment losses on intangibles
Special charges
Results from operations
Finance (income) expense, net
Foreign exchange (gain) loss
Other expense (income)
Income (loss) before taxes
Income tax expense (recovery)
53,130
52,922
18,932
2,849
—
115
2,464
28,562
(364)
(968)
4
29,890
10,558
42,887
23,986
6,894
—
—
80
13,477 —
10,393
2,874
—
509
232
634
276
(873)
195
(1,171)
—
—
(525)
(9,948)
(1,195)
1,016
—
(9,769)
(164)
96,017
76,908
25,906
26,719
2,874
115
2,448
18,846
(925)
324
(869)
20,316
9,223
11,093
Net income (loss) from continuing operations
$
19,332 $
1,366 $
(9,605) $
Year ended December 31, 2020
12
Licensing Segment
Our Licensing segment presently is comprised of the operations of WiLAN.
MD&A
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Impairment losses of intangible assets
Special charges
Results from operations
Finance expense (income), net
Foreign exchange (gain) loss
Other expense
(Loss) income before taxes
Income tax (recovery) expense
Net (loss) income from continuing operations
Adjusted EBITDA
Other reconciling items:
Stock-based compensation
For the three months ended
December 31,
For the Twelve months ended
December 31,
2020
2019
2020
2019
$
474 $
30,591 $
78,260 $
106,052
5,338
(4,864)
3,345
800
—
—
11,398
19,193
4,431
1,307
115
20
46,205
32,055
14,082
3,386
295
—
53,130
52,922
18,932
2,849
115
2,464
(9,009)
13,320
14,292
28,562
1
(669)
—
(8,341)
(3,204)
(136)
(628)
8
14,076
2,906
(61)
647
—
13,706
(325)
(5,137) $
11,170 $
14,031 $
(364)
(968)
4
29,890
10,558
19,332
(5,588) $
17,899 $
28,837 $
50,085
76 $
13 $
246 $
12
$
$
$
For the three months and year ended December 31, 2020, revenues were $474 and $78,260 as compared to
$30,591 and $106,052 in the respective comparative prior year periods. The decline in revenues for the current
quarter and year to date is largely due to the one-time nature of WiLAN’s licenses. Accordingly, significant
fluctuations in revenue, gross profit, and Adjusted EBITDA will result when volume or dollar value of licenses
change from one period to the next. The decrease in revenues in the current quarter is directly related to the
closure of a number of large licensing contracts in the comparative prior year period in contrast to the current
period wherein WiLAN did not finalize any significant contracts. The decrease in revenues for the year ended
December 31, 2020 in comparison to the prior year ended December 31, 2019 is due to a larger number of
significant contracts being closed in the prior year. With the onset of the COVID-19 Pandemic, WiLAN
experienced some delay in completing business, particularly in the second quarter of the year ended
December 31, 2020, as a function of travel constraints, changes in court schedules, and licensee access which
ultimately had some impact on the revenues for the year ended December 31, 2020 as a whole. WiLAN’s
patent portfolio assets continue to retain their value.
Patent licenses are considered a promise to provide the right to use intellectual property (“IP”) and revenue is
recognized when the patent right is effective. An exception to this guidance is related to revenue generated
from sales or usage-based royalties promised in exchange for an intellectual property license. Customers
generally report their royalty obligations one quarter in arrears and accordingly, we will estimate the expected
royalties to be reported for a particular accounting period, with a true up to the actual royalties reported in the
following financial reporting period.
Direct cost of revenues for the three months and year ended December 31, 2020 were $5,338 and $46,205 as
compared to $11,398 and $53,130 for the respective comparative prior year periods. The variability in direct cost
of revenues on the quarter is principally a result of a large decrease in contingent litigation and contingent
partner expenses. The decrease in contingent litigation and contingent partner expenses for the three months
ended December 31, 2020 was directly related to large licensing contracts concluded in the fourth quarter of
Year ended December 31, 2020
13
MD&A
2019 for which these expenses were incurred. The decrease in direct cost of revenues for the year ended
December 31, 2020 in comparison to the year ended December 31, 2019 was primarily related to reduced
revenues between the comparative period and their corresponding impact on contingent litigation and
contingent partner expenses. Litigation payments will fluctuate from quarter to quarter depending on the
specific actions underway at that time.
Operating expenses are generally considered selling, general and administration type expenses and include all
overheads for WiLAN operations in addition to depreciation, amortization expense and any loss on disposal or
impairment losses. For the three months and year ended December 31, 2019, operating expenses also included
special charges related to the segment restructuring activities. For the three months ended December 31, 2020,
operating expenses within this segment were $4,145 as compared to $5,873 in the comparative year prior
period. This decrease in costs is primarily related to lower amortization of intangibles. For the year ended
December 31, 2020, operating expenses within this segment were $17,763 as compared to $24,360 in the
comparative year prior period. This decrease in costs is primarily related to lower amortization of intangibles,
and a reduction in special charges related to the segment restructuring activities undertaken in the prior year
comparative period.
Income tax recovery and expense for the three months and year ended December 31, 2020 were $3,204 and
$(325), respectively, compared to expenses of $2,906 and $10,558 in the comparative prior year periods. The
change in tax expense is largely due to positive income in the prior year’s quarter as compared to the three
months ended December 31, 2020 wherein losses were incurred. For the year ended December 31, 2020,
income tax expenses decreased from the prior year as a result of decreased revenue. Current income tax
expense for all reported periods consists primarily of foreign taxes withheld on payments received from
licensees in foreign tax jurisdictions for which there is no treaty relief.
As at December 31, 2020, the deferred tax asset of $18.2 million has not been recognized for all of its U.S.
subsidiaries, since management believes it is more likely than not that WiLAN will be unable to utilize these
assets to offset future taxes. We expect WiLAN to continue to utilize previously recognized Canadian tax loss
carryforwards which will result in deferred income tax expense. Until such time as WiLAN’s licensing programs
in its U.S. subsidiaries generate sufficient taxable income, we expect to continue to not recognize these
deferred tax assets for these U.S. subsidiaries.
Year ended December 31, 2020
14
Intelligent Transportation Systems Segment
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization, net
Selling, general and administrative expenses
Research and development expenses
Special charges
Results from operations
Finance expense, net
Foreign exchange loss
Other income
Income before taxes
Income tax expense (recovery)
Net (loss) income from continuing operations
Adjusted EBITDA
Other reconciling items:
Stock-based compensation
$
$
$
MD&A
For the three months ended
December 31,
For the Twelve months ended
December 31,
2020
2019
2020
2019
$
17,618 $
17,708 $
66,266 $
11,091
10,539
6,527
1,628
2,969
468
224
1,238
55
651
(488)
1,020
1,134
(114) $
7,169
1,625
3,961
645
509
429
98
239
39,463
26,803
6,605
11,393
2,282
883
5,640
283
27
(381)
473
(158)
631 $
(1,680)
7,010
1,864
5,146 $
66,873
42,887
23,986
6,894
13,477
2,874
509
232
634
276
(873)
195
(1,171)
1,366
3,648 $
3,102 $
13,823 $
8,278
81 $
26 $
144 $
131
Our Intelligent Transportation Systems segment consists of IRD’s operations, which includes each of IRD’s
wholly-owned subsidiary businesses. IRD’s revenue streams include revenues earned on contracted projects,
generally recognized over time, proprietary and OEM products sales, which are distributed directly and through
its network of distributor/agency relationships, data solutions services, and service and maintenance contracts.
Service and maintenance contracts generally range from one to five year terms and revenues are recognized
either over time or on a time and material basis, depending on contract terms. Revenues will routinely vary
significantly depending on the timing and nature of projects underway in each reporting period.
Segment revenue for the three months and year ended December 31, 2020 were $17,618 and $66,266 as
compared to $17,708 and $66,873 for the respective comparative prior year periods. Revenues were
substantially unchanged over the comparative prior year periods as increased revenues in the United States
market were largely offset by a reduction in international markets due to the COVID-19 effect which delayed or
deferred certain sales opportunities.
IRD’s gross profit as a value and as a percentage of revenues are subject to significant variance in each
reporting period due to the nature and type of contract and service works currently in process, currency
volatility and competitive factors. In addition, seasonal weather effects, primarily in IRD’s North American
business will generally reduce the value of gross profit because of the effect of fixed capacity expenses which
are a component of cost of revenues. For the three months and year ended December 31, 2020, IRD gross
margin as a percentage of revenue was 37% and 40% as compared to 40% and 36% for the respective
comparative prior year periods. This improvement was the result of $2.1 million CEWS benefits earned in the
year and significant margins earned on certain projects worked on during the year.
As noted below in the Risk and Uncertainties section, many countries remain in COVID-19-related restrictions
on non-essential business activities. The ITS industry has been less affected than many others as IRD has been
deemed “essential” in many of the jurisdictions where they operate allowing the majority of IRD’s contract work
to continue throughout the year. However, IRD is not immune to the impacts of the COVID-19 Pandemic as it
Year ended December 31, 2020
15
MD&A
has experienced delay and deferral of certain project opportunities, particularly in international markets due
mainly to changes in customer priorities and various work and travel restrictions throughout the year.
Total operating expenses are comprised of selling, general and administrative costs, research and
development costs, depreciation, amortization of intangible assets and special charges. Total operating
expenses for the three months and year ended December 31, 2020 were $5,289 and $21,163 as compared to
$6,740 and $23,754 in the respective comparative prior year periods. The decline in period over period costs,
reflects reductions in both selling, general and administrative expenses as well as research and development
expenses due to $2.7 million in earned CEWS benefits.
IRD is committed to continual investments in research and development to enhance its current products and
advance the availability of new products. For the year ended December 31, 2020, net research and
development spending levels were 3% of segment revenue. Current investments reflect the priority of ensuring
full development of the Vectorsense sensor and its related applications as well as several other new product
developments and enhancements. Total R&D expenses have been offset, in part, by accrued CEWS benefits
and other government grant recoveries that have enabled IRD to maintain staffing levels to accelerate its R&D
activities in the area of data analytics and new non-intrusive sensor technologies.
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 North America, Latin America and
Mexico markets. IRD has exposure to the U.S. dollar, Indian rupee, Chilean peso, Mexican peso, Euro and
Chinese yuan as more fully described in the Financial Instruments and Other Risks section below.
For the three months and year ended December 31, 2020, IRD recorded foreign exchange losses of $651 and
$27 as compared to $239 and $276 for the respective comparative prior year periods. Foreign currency gains
and losses reflect the changes in the value of the U.S. dollar relative to the Canadian dollar and Chilean peso,
which will increase or decrease the carrying value of U.S. dollar net assets. Foreign exchange translation gains
or losses arising on consolidation of IRD’s subsidiaries in Chile, Mexico and Belgium and its joint venture in
China are recorded as accumulated other comprehensive income, which is a component of shareholders’
equity.
Other income is comprised of 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. For the three months and year ended December 31, 2020, IRD’s share
of XPCT’s income was $488 and $1,680 as compared to $381 and $873 for the respective comparative prior
year periods. The improved performance over the prior year periods is primarily due to the continued strong
performance in XPCT’s construction equipment division.
As at December 31, 2020, deferred tax assets of $2.4 million have not been recognized for its international
subsidiaries, since management believes it is more likely than not that IRD will be unable to utilize these assets
to offset future taxes. We expect IRD to continue to utilize previously recognized Canadian tax loss
carryforwards which will result in deferred income tax expense. Until such time as these IRD subsidiaries
generate sufficient taxable income, we expect to continue to not recognize these deferred tax assets for these
subsidiaries. IRD’s effective tax rate can vary from the Canadian statutory tax rate of approximately 26.5%
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 December 31, 2020, 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.
Year ended December 31, 2020
16
MD&A
Former Enterprise Software Segment
On May 15, 2020, we disposed of our investment in VIZIYA, which represented our single investment in our
Enterprise Software segment, for total cash proceeds of $49.4 million. Net income from the discontinued
operations of this segment for the year ended December 31, 2020 was $14,255, comprised of the net loss from
operations up to the date of sale of $1,899 and a gain on sale of $17,713 less applicable deferred taxes of
$1,559. Net income for the year ended December 31, 2019 was $1,569.
This sale has generated significant cash proceeds to Quarterhill and delivered a strong internal rate of return on
our initial investment. Proceeds from the transaction has allowed us to return some capital to shareholders and
provide further support for our growth initiatives. Please see additional discussion in Capital and Liquidity
section below.
SELECTED CONSOLIDATED ANNUAL RESULTS
(in thousands of Canadian dollars, except per share amounts)
2020
2019
2018 (unaudited)
Year ended December 31,
Revenue
Net income (loss) from continuing operations
Net income from discontinued operations
Net income (loss)
Income (loss) per share, basic and diluted
Dividends declared per share
Total assets
Non-current liabilities
144,526
4,428
14,255
18,683
0.16
0.05
303,809
5,398
172,925
11,093
1,569
12,662
0.10
0.05
324,022
8,631
85,752
(64,327)
486
(63,841)
(0.54)
0.05
326,924
10,699
In 2020 our company transitioned from U.S. GAAP to IFRS with a transition date of January 1, 2019. Amounts
presented for 2020 and 2019 are prepared in accordance with IFRS as are the total assets and total long-term
financial liabilities as at December 31, 2018. Annual revenue, net loss from continuing operations and net
income from discontinued operations were prepared in accordance with U.S. GAAP for 2018. Additionally, all
revenue amounts exclude discontinued operations. In 2020, we completed the sale of VIZYA Corporation which
represented our Enterprise Software Segment. Virtually all of the licensing revenues from our Licensing
segment are one-time in nature and accordingly significant fluctuations in revenue and net income will result
when volume or dollar value of licenses change from one year to the next. The increase in revenues in 2020
and 2019 are directly related to the closure of large licensing contracts compared to 2018 wherein no similarly
sized contracts were closed.
Year ended December 31, 2020
17
Revenues
Net income (loss)
Net income (loss) per
share (basic)
Adjusted
EBITDA *
MD&A
Adjusted
EBITDA per
share
*(basic)
Cont. Ops
Disc. Ops.
Cont. Ops
Disc. Ops.
Cont. Ops Disc. Ops.
Cont. Ops.
Quarter ended
$ 000's
$ 000's
$ 000's
$ 000's
$
$
$ 000's
$
December 31, 2020
18,092
September 30, 2020
87,997
—
—
(10,201)
24,528
—
—
June 30, 2020
March 31, 2020
16,824
1,723
(4,987)
14,455
21,613
4,409
(4,912)
(200)
December 31, 2019
48,299
3,389
8,639
(2,266)
September 30, 2019
21,943
11,554
7,348
4,927
June 30, 2019
March 31, 2019
52,878
3,782
(5,632)
49,806
3,158
738
(306)
(786)
(0.09)
0.21
(0.04)
(0.04)
0.07
0.06
(0.05)
0.01
—
—
(6,080)
39,035
0.12
(1,992)
—
217
(0.02)
18,687
(0.05)
0.34
(0.02)
0.00
0.16
0.04
(4,388)
(0.04)
—
17,082
(0.01)
17,138
0.14
0.14
Adjusted EBITDA and the respective per share amounts are non-IFRS measures, please refer to "Non-IFRS Disclosures" and
"Reconciliation of Adjusted EBITDA" sections of this MD&A
Historically, our operating results have fluctuated on a quarterly basis and we expect that quarterly results will
continue to fluctuate in the future. 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 risk
factors affecting our revenue and results, many of which are outside of our control, include those set out in our
AIF.
Total assets by segment are as follows:
As at
Licensing
Intelligent Transportation Systems
Total segment assets
Total corporate assets
Total assets
December 31, 2020
December 31, 2019
107,852
65,888
173,740
130,069
303,809
103,658
60,852
164,510
159,512
324,022
Dividends declared for the years ended December 31, 2020 and 2019 were as follows:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
December 31, 2020
December 31, 2019
Per Share
Total
Per Share
Total
$ 0.0125
$
1,481
$ 0.0125 $
0.0125
0.0125
0.0125
1,462
1,498
1,383
0.0125
0.0125
0.0125
$ 0.0500
$
5,824
$ 0.0500 $
1,500
1,473
1,475
1,489
5,937
Year ended December 31, 2020
18
MD&A
CAPITAL AND LIQUIDITY
The Company’s capital management objectives are to maintain financial flexibility in order to pursue its
strategy of organic acquisitional growth, pay dividends, and, from time to time, return capital to shareholders,
while maintaining an adequate return for shareholders. The Company defines its capital as cash, the aggregate
of cash and cash equivalents, short-term investments, restricted short-term investments, bank indebtedness,
current and long-term debt, and shareholder’s equity. The Company manages its capital structure in
accordance with changes in economic conditions. To maintain or adjust its capital structure, the Company may
purchase shares for cancellation pursuant to an NCIB or SIB, issue new shares, or raise or retire the debt. In the
current year, the Company took advantage of its surplus of cash by settling all of its long-term debt and bank
indebtedness to reduce interest expense.
Our cash, cash equivalents and short-term investments, inclusive of any restricted amounts, totaled $141,250 at
December 31, 2020 as compared to $89,420 at December 31, 2019 representing an increase of $51,830. At
December 31, 2020, we had working capital of $159,661 as compared to $112,179 as at December 31, 2019 to
cover long-term obligations of $5,398. Our cash position remains very strong, however, due to the nature of our
business segment activities, operating cash flows may vary significantly between periods due to changes in
working capital balances.
Quarterhill has a revolving credit facility through Canadian Imperial Bank of Commerce (“CIBC”) available in the
amount of $8,000 (or the equivalent in U.S. dollars) for general corporate purposes and a further $2,000 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 as may be applicable. 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 quarter ended December 31, 2020, we had no borrowings under this facility.
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 $9,500 or by way of U.S. dollar advances to a
maximum of US$7,033. Borrowings on this facility are restricted to the lesser of $9,500 or US$7,033 and the
margin total on the following IRD assets: 90% of secured and government accounts receivable less than 120
days, 75% of good quality Canadian or US domiciled accounts receivable less accounts 90 days and over, 90%
of foreign accounts receivable backed by letters of credit and 50% of inventory and 25% of works in process
inventory to a maximum of $3,000. As at December 31, 2020 $nil of approximately $7,656 available was drawn
on this facility.
IRD’s credit facility and demand term loans with HSBC are secured by a general security agreement on IRD’s
assets held in Canada having a carrying value at December 31, 2020 of $28.6 million. In addition, IRD’s
subsidiaries in the U.S, Chile and India have provided corporate guarantees as security.
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 monthly); debt to tangible net worth less than 2.5 to 1 (tested monthly); and debt service
coverage ratio greater than 1.25 to 1 (tested annually) based on IRD’s financial results. At December 31, 2020,
IRD is in compliance with these covenants.
Our cash resources are generally used to fund our operations, provide incremental financing to any of our
subsidiaries if needed and to acquire additional businesses. 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.
In July 2020, we completed an SIB resulting in the repurchase for cancellation of 2,687,981 Common Shares at
an average purchase price of $2.15 per share, plus transaction costs of $0.5 million, for a total of $6.3 million. In
addition, pursuant to a Normal Course Issuer Bid (“NCIB”) approved by the Toronto Stock Exchange, we
repurchased 2,206,636 Common Shares at an average price of $1.95 per share totaling $4.3 million as at
December 31, 2020. In total, the Company repurchased 4,894,617 Common Shares for $10.6 million under both
SIB and NCIB as at the end of 2020.
Year ended December 31, 2020
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CONTRACTUAL OBLIGATIONS
Contractual obligations relating to bank indebtedness, accounts payable and accrued liabilities, long-term
debt, and lease liabilities as at December 31, 2020 are as follows:
Total
Less than 1 year
2 - 3 years
4 - 5 years
Thereafter
Accounts payable and accrued
liabilities
20,038
20,038
—
Lease liabilities
3,759
1,010
1,473
—
455
$
23,797 $
21,048 $
1,473 $
455 $
—
821
821
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
December 31, 2020, there were 114,322,032 Common Shares and no special or preferred shares issued and
outstanding. We also maintain the Quarterhill Inc. 2018 Equity Incentive Plan (the “Plan”). Under the Plan, we can
issue a maximum of 10% of our issued and outstanding Common Shares from time to time which was, as at
December 31, 2020, 11,432,203 Common Shares combined. As at December 31, 2020, we had options granted to
purchase up to 6,810,789 Common Shares. During the year ended December 31, 2020, Company repurchased
4,894,617 Common Shares for $10.6 million under both SIB and NCIB as at the end of 2020.
OFF-BALANCE SHEET ARRANGEMENTS
As at December 31, 2020, IRD has an outstanding 100% joint and several liability guarantee to XPCT, for a loan in
the amount of 15.0 million yuan or $2.9 million (2019 - $2.8 million); however, IRD can seek recourse against its
joint venture partner for any amount greater than IRD’s proportionate share of the liability. The amount owing
represents the maximum amount available to be drawn under this facility.
RELATED PARTY TRANSACTIONS
Subsidiaries
The consolidated financial statements include the accounts of Quarterhill Inc. and its wholly-owned
subsidiaries. Balances and transactions between the Company and its subsidiaries, which are related parties,
have been eliminated on consolidation and are not disclosed in this section.
Investment in Joint Venture
Investment in Joint Venture comprises a 50% interest, held by the Company’s IRD subsidiary, in XPCT, an ITS
products and manufacturing service provider in China. IRD had sales of $nil during the year ended December
31, 2020 (2019 - $38). At December 31, 2020, IRD had amounts owing to XPCT of $48. As at December 31, 2019
accounts receivable from XPCT was $33.
Key management personnel
Key management personnel are Quarterhill Inc.’s President & Chief Executive Officer, Chief Financial Officer and
Senior Vice-President, General Counsel & Corporate Secretary and the Chief Executive Officers of each of
International Road Dynamics Inc. and Wi-LAN Inc. Other related parties are close family members of the key
management personnel and entities controlled by key management personnel. Key management personnel
compensation expense for the three months and year ended December 31, 2020 was $1,301, and $3,976 (2019 -
$1,046 and $4,015).
PROPOSED TRANSACTIONS
There are no proposed transactions.
Year ended December 31, 2020
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CRITICAL ESTIMATES
Key areas involving estimation, uncertainty and critical judgments include the following:
Revenue recognition
Contract revenue, contract costs, contract liabilities and contract assets relating to the Intelligent Systems
segment are based on estimates and judgments used in determining the progress of a contract. Estimates
include amounts derived to measure the progress of the contract. Progress towards completion is measured
by comparing the actual costs incurred to the total estimated costs for the contract. In determining the
estimated costs to complete the contracts, assumptions and estimates are required to evaluate issues related
to schedule, material and labour costs, changes in contract scope and subcontractor costs. Due to the nature
of project contracts, estimates may change significantly between accounting periods. Changes in estimates
are reflected in the period in which the circumstances that gave rise to the change became known and affect
our revenue, contracts assets, and contract liabilities.
Leases
Management uses judgment in determining whether a contract contains a lease, the interest used to discount
the present value of fixed payments in accounting for the lease liability and corresponding right-of-use asset,
and in determining whether it is likely that a lease term will be extended.
Asset Impairments and Impairment Reversals
Quarterhill’s estimate of the recoverable amount for the purpose of impairment testing requires management
to make assumptions regarding estimates of the present value of future cash flows including growth
opportunities, economic risk, and the discount rate. These same assumptions are also used when assessing
recoverability of impairments previously recognized.
Income taxes and deferred taxes
The Company is subject to income taxes in Canada and other foreign jurisdictions. The calculation of income
taxes in many cases, however, requires significant judgment in interpreting tax rules and regulations. The
Company's tax filings are subject to audits which could materially change the amount of current and deferred
income taxes and liabilities. Additionally, estimation of the income tax provision includes evaluating the
recoverability of deferred tax assets based on the assessment of the Company's ability to use the underlying
future tax deductions before they expire against future taxable income. The assessment is based on existing
tax laws, estimates of future profitability and tax planning strategies. If the future taxable results of the
Company differ significantly from those expected, the Company would be required to increase or decrease the
carrying value of the deferred tax assets with a potentially material impact on the Company's consolidated
statements of financial position and consolidated statements of comprehensive income. The carrying amount
of deferred tax assets is reassessed at each reporting period and reduced to the extent that it is no longer
probable that sufficient taxable income will be available to utilize all or part of the deferred tax assets.
Unrecognized deferred tax assets are recognized to the extent that it is more likely than not that taxable
income will be available against which deferred tax assets can be utilized.
Financial assets
Assessments about the recoverability of financial assets, including accounts receivable and unbilled revenue,
require judgment as to whether a loss event has occurred and estimate of the amounts and timing of future
cash flows.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
As a result of the de-listing of the Common Shares from the Nasdaq, Quarterhill’s financial statements are now
prepared in accordance with IFRS as issued by the IASB. Since the current year’s consolidated financial
statements represent our first presentation of its results and financial position under IFRS, they were prepared
in accordance with IFRS 1, “First-Time Adoption of IFRS.” Subject to certain transition elections, we have
consistently applied the same accounting policies in our opening IFRS statement of financial position at
January 1, 2019, and throughout all periods presented as if these policies had always been in effect.
Year ended December 31, 2020
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Future accounting Pronouncements
Listed below are the standard, amendments, and interpretations that we reasonably expect to be applicable to
Quarterhill at a future date and that we intend to adopt when they become effective.
Classification of Liabilities as Current or Non-current (Amendments to IAS 1)
In January 2020, the IASB issued amendments to IAS 1, Presentation of Financial Statements to clarify that the
classification of liabilities as current or non-current should be based on rights that are in existence at the end of
the reporting period and is unaffected by expectations about whether or not an entity will exercise their right to
defer settlement of a liability. The amendments further clarify requirements for classifying liabilities an entity
will or may settle by issuing its own equity instruments. These amendments are effective for annual reporting
periods beginning on or after January 1, 2023, with earlier application permitted. The adoption of these
amendments is not expected to have a significant impact on the consolidated financial statements.
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37)
IAS 37 Provisions, Contingent Liabilities and Contingent Assets has been revised to incorporate amendments
issued by the IASB in May 2020. The amendments specify which costs an entity includes in determining the
costs of fulfilling a contract for the purpose of assessing whether the contract is onerous. The amendments
are effective for annual reporting periods beginning on or after January 1, 2022. Earlier application is permitted.
The Company is currently assessing the impact of these amendments.
Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 30, IFRS 7, IFRS 4 and IFRS 16)
IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Disclosure, IFRS 4 Insurance Contracts and IFRS 16
Leases have been revised to incorporate amendments issued by the IASB in August 2020. The amendments
provide relief to accounting for the modifications required by the interest rate benchmark reform and hedge
accounting. In addition, the amendments to IFRS 7 require additional disclosure related to interest rate
benchmark reform. The amendments are effective for annual periods beginning on or after January 1, 2021.
Earlier application is permitted. The Company is currently assessing the impact of these amendments.
RISKS AND UNCERTAINTIES
Quarterhill and its operating subsidiaries operate in ever-changing business and competitive economic
environments that expose it to a number of risks and uncertainties. This MD&A is qualified in its entirety by the
risk factors described in our AIF. The risks and uncertainties discussed in greater detail under the heading “Risk
Factors” in our AIF 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.
In addition to items identified in the AIF, we may be exposed to other risks as follows:
Credit Risk
Credit risk is the risk of financial loss to Quarterhill if a licensee or counter-party to a financial instrument fails to
meet its contractual obligations. Financial instruments that potentially subject us to concentrations of credit risk
consist primarily of cash and cash equivalents, short-term investments, accounts receivable, and foreign
exchange forward contracts.
Our cash and cash equivalents and short-term investments consist primarily of deposit investments that are
held primarily with Canadian chartered banks. Management does not expect any counter-parties to fail to meet
their obligations.
We recognize a loss allowance provision using the simplified approach based on lifetime expected credit
losses. Our exposure to credit risk with our accounts receivable from customers is influenced mainly by the
individual characteristics of each customer. Quarterhill’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 our customers. Prior to entering into transactions with new
customers, we assess the risk of default associated with the particular customer. In addition, on an ongoing
Year ended December 31, 2020
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MD&A
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. We have had no significant bad debts for any periods presented.
None of the amounts outstanding have been challenged by the respective counterparties and we continue to
conduct business with them on an ongoing basis. Accordingly, management has no reason to believe that
these balances are not fully collectable in the future.
Quarterhill 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 past due, contact is
made with the respective customer to determine the reason for the delay in payment and to establish an
agreement to rectify the breach of contractual terms.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. Our objective
in managing liquidity risk is to ensure that we have sufficient liquidity available to meet our liabilities when due.
We manage our liquidity needs through various sources including cash generated through operations, cash
reserves, various revolving credit facilities, and the issuance of Common Shares. At December 31, 2020, we had
cash and cash equivalents and short-term investments of $141,250.
Currency Risk
Portions of Quarterhill’s portfolio companies’ respective revenues and operating expenses are denominated in
Canadian dollars, Indian rupees, Chilean pesos, Euros, and Chinese Yuan. Because Quarterhill’s functional
currency is in US dollars, our operating results are subject to changes in the exchange rate of the foreign
currencies (primarily Canadian dollar) relative to the US dollar. Any decrease in the value of the Canadian dollar
relative to the US dollar has an unfavorable impact on Canadian dollar denominated revenues and a favorable
impact on Canadian dollar denominated operating expenses. Approximately 5.2% of our 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 US dollar.
We 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 Quarterhill
engages in risk management activities related to foreign exchange rates, we may be subject to credit risks
associated with the counterparties with whom we contract.
Quarterhill’s objective in obtaining foreign exchange forward contracts is to manage our risk and exposure to
currency rate fluctuations related primarily to future cash inflows and outflows of Canadian dollars. We do not
use foreign exchange forward contracts for speculative or trading purposes. For the three months and year
ended December 31, 2020 we did not hold any foreign exchange forward contracts.
The COVID-19 Pandemic
Since the onset of the COVID-19 Pandemic and the impacts of this crisis on the global economy, our businesses
continue to evolve as we adapt to manage, operate, and sustain these businesses during these uncertain times.
Many countries in which we operate remain in COVID-19-related lockdowns of some degree and/or have
imposed restrictions on non-essential business activities. As a result, each of our business segments has
undertaken a number of steps to protect their employees while continuing their respective business
operations. Throughout the past year, we have continued to employ proactive measures including closing
offices, making provision for employees working from home, eliminating travel and closely following the
guidelines issued by health and regulatory authorities. Over the past year, our human resource policies have
evolved to respond to questions or concerns from our employees while continuing to explore opportunities to
return to “in office” work environments. As a result of our proactive measures, our portfolio companies remain
in full operation and continue to execute on the delivery of existing customer mandates, while also working to
build and sustain business pipelines and advance new opportunities through their respective sales cycles.
While we are not immune to the impacts of the COVID-19 Pandemic, it appears that our businesses may have
been less affected than other companies. The majority of the work within each portfolio company remains
ongoing, and in the case of the Intelligent Transportation Systems business segment, certain of IRD’s work has
Year ended December 31, 2020
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been deemed “essential” by applicable governing authorities. There remains some risk, however, that certain
project work or license sales will be deferred or restricted and new orders delayed, particularly in jurisdictions
outside of Canada and the United States. In addition, we are experiencing some work inefficiencies due mainly
to travel restrictions and also some delay in supply chain deliveries.
Diversification is central to Quarterhill’s business model and, as such, revenues are not highly concentrated
within any geography, business, or client base. During this period of uncertainty, we are prudently managing
costs and safeguarding the strength of our balance sheet to support the resiliency of our business.
All risk factors should be considered carefully and readers should not place undue reliance on our forward-
looking statements and forward-looking information. 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.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Our Chief Executive Officer and Chief Financial Officer have designed or caused to be designed under their
supervision, disclosure controls and procedures which provide reasonable assurance that material information
regarding Quarterhill is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer in a timely manner.
In addition, our Chief Executive Officer and Chief Financial Officer have designed or caused to be designed
under their supervision internal controls over financial reporting (“ICFR”) to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements. The control
framework used to design our ICFR is the “Internal Control - Integrated Framework (2013)” published by the
Committee of Sponsoring Organizations of the Treadway Commission.
Our Chief Executive Officer and Chief Financial Officer have evaluated, or caused to be evaluated under their
supervision, whether or not there were changes to our ICFR during the period ended December 31, 2020 that
have materially affected, or that are reasonably likely to materially affect our ICFR. No such changes were
identified through their evaluation.
There were no changes to our ICFR during the year ended December 31, 2020 that have materially affected, or
are reasonably likely to materially affect, our ICFR.
A control system, no matter how well designed, can provide only reasonable, not absolute, assurance that its
objectives are met. Due to inherent limitations in all such systems, no evaluations of controls can provide
absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our
disclosure controls and procedures and our internal controls over financial reporting are effective in providing
reasonable, not absolute, assurance that the objectives of our control systems have been met.
Year ended December 31, 2020
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Quarterhill Inc.
25 King St W Suite 1101
Toronto, ON Canada
M5L 2A1
www.quarterhill.com