QUARTERHILL INC.
2022 Annual Report
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Table of Contents
1
30
31
35
39
88
89
Management’s Discussion & Analysis
Management’s Report
Auditor’s Report
Consolidated Financial Statements
Notes to Financial Statements
Directors and Officers
Corporate Information
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Management’s Discussion and Analysis
For the three months and year ended December 31, 2022 and 2021
March 21, 2023
Quarterhill Inc.
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Contents
INTRODUCTION ...................................................................................................................................................................... (cid:22)
FISCAL YEAR 2022 HIGHLIGHTS ............................................................................................................................................(cid:23)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ............................................................................ (cid:24)
DESCRIPTION OF OUR BUSINESS ......................................................................................................................................... (cid:26)
OVERALL PERFORMANCE .................................................................................................................................................... (cid:20)(cid:19)
SEGMENTED RESULTS .......................................................................................................................................................... (cid:20)(cid:23)
CAPITAL AND LIQUIDITY ...................................................................................................................................................... (cid:21)(cid:20)
CONTRACTUAL OBLIGATIONS ............................................................................................................................................ (cid:21)(cid:21)
OUTSTANDING COMMON SHARE DATA............................................................................................................................ (cid:21)(cid:21)
OFF-BALANCE SHEET ARRANGEMENTS ............................................................................................................................. (cid:21)(cid:22)
RELATED PARTY TRANSACTIONS ........................................................................................................................................ (cid:21)(cid:22)
PROPOSED TRANSACTIONS ................................................................................................................................................ (cid:21)(cid:22)
CRITICAL ESTIMATES ............................................................................................................................................................ (cid:21)(cid:23)
FUTURE ACCOUNTING PRONOUNCEMENTS .................................................................................................................... (cid:21)(cid:24)
RISKS AND UNCERTAINTIES ................................................................................................................................................ (cid:21)(cid:25)
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING ................. (cid:21)(cid:27)
2
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INTRODUCTION
MD&A
This Management’s Discussion and Analysis of Quarterhill Inc. (this “MD&A”) is dated March 21, 2023. References
in this MD&A to “Quarterhill”, “the Company”, “we”, “us” and “our” refer to Quarterhill Inc. and its consolidated
subsidiaries during the periods presented, unless the context requires otherwise. References to “Common
Shares” in this MD&A refer to common shares in the capital of Quarterhill. References to “Convertible Debentures”
in this MD&A refer to Quarterhill’s 6.0% Convertible Unsecured Subordinated Debentures due October 30, 2026.
The Common Shares and Convertible Debentures are listed under the symbols “QTRH” and “QTRH.DB”
respectively on the Toronto Stock Exchange (the “TSX”) and the Common Shares are listed on the United States
OTCQX Best Market (the “OTCQX”) under the symbol “QTRHF”.
Quarterhill is a growth-oriented Canadian company operating in the intelligent transportation system (“ITS”) and
intellectual property licensing industries. We are a global leader in ITS that acquires and manages attractive
technology companies in the intelligent transportation systems industry and its adjacent markets.
We seek out acquisition opportunities in the ITS industry that provide a foundation for growth and that have
reasonable valuations, recurring revenues, predictable cashflows and gross profit,
intimate 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 months and year ended December 31, 2022 and up to and including
March 21, 2023. This MD&A should be read in conjunction with Quarterhill’s consolidated financial statements
(“financial statements”) and the notes thereto for the year ended December 31, 2022, 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 Common Share and earnings per share data which is reported in number of Common Shares and
Canadian dollars respectively. The tables and charts included in this document form an integral part of this MD&A.
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 years ended
December 31, 2022 and 2021 (our “AIF”), is available online at www.sedar.com and also on our website at
www.Quarterhill.com.
Quarterhill and our operating subsidiaries operate in ever-changing business and competitive economic
environments that expose us to a number of risks and uncertainties, many of which are discussed under the
heading “Risks and Uncertainties” in this MD&A and/or under the heading “Risk Factors” in each of our AIF and
the October 22, 2021 supplement to our October 19, 2021 short form base shelf prospectus (the “Prospectus
Supplement”). A copy of the Prospectus Supplement is available online at www.sedar.com.
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MD&A
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 the Audit
Committee of our Board of Directors (the “Board”) and, finally, by our Board as a whole.
FISCAL YEAR 2022 HIGHLIGHTS
Business Performance and Future Business Developments
Revenues for the three months and year ended December 31, 2022 were $50,873 and $305,690 compared to
$51,161 and $125,695 in the comparative prior year periods, respectively. The growth in revenue is primarily
driven by acquisition related growth and a significantly large licensing agreement.
During the year, our ITS segment, through our wholly owned subsidiaries, announced that they have won new
long-term customer contracts worth approximately $218 million in lifetime contract value to provide a variety of
ITS products, solutions and services to several US government agencies. The initial term of these contracts
currently range from two to five years with renewal options to extend services.
Our Licensing segment’s revenues for the three months and year ended December 31, 2022 were $10,731 and
$146,356 compared to $4,708 and $25,722 in the comparative prior year periods, respectively. The change in year
over year growth is due to a significantly large licensing agreement being closed in the current year.
Please refer to the Segmented Results section of this MD&A for further details of the financial performance of our
ITS and Licensing segments for the three months and year ended December 31, 2022.
Strategic Review of WiLAN
The Company is currently continuing its strategic review of its Wi-LAN Inc. subsidiary ("WiLAN") and has hired
Stout as its financial advisor. Stout's IP industry expertise includes structuring numerous IP transactions between
technology and licensing companies such as WiLAN as well as the strategic review of licensing programs and large
patent portfolio transactions for leading technology companies. Strategic alternatives to be considered may
include changes to the corporate structure of WiLAN, the acquisition or disposition of assets, a going private
transaction, joint ventures, the sale of WiLAN and alternative operating models, among other potential
alternatives. There can be no assurance that this strategic review process will result in the completion of any
transaction or other alternative.
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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
Canadian securities laws, including such statements relating to:
•(cid:3)
assumptions and expectations described in our critical accounting policies and estimates;
•(cid:3) our expectation regarding the adoption and impact of certain accounting pronouncements;
•(cid:3) our expectation regarding the growth rates of our subsidiaries’ businesses;
•(cid:3) our estimates regarding our effective tax rate;
•(cid:3) our expectations regarding our ability to acquire additional businesses to further our growth; and
•(cid:3) 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”, “could”, 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-IFRS FINANCIAL MEASURES AND NON-IFRS RATIOS
Non-IFRS Financial Measures and Non-IFRS Ratios
Quarterhill uses both IFRS and certain non-IFRS financial measures to assess performance. Non-IFRS financial
measures are financial measures disclosed by a company that (a) depict historical or expected future financial
performance, financial position or cash flow of a company, (b) with respect to their composition, exclude amounts
that are included in, or include amounts that are excluded from the composition of the most directly comparable
financial measure disclosed in the primary financial statements of the company, (c) are not disclosed in the
financial statements of the company and (d) are not a ratio, fraction, percentage or similar representation. Non-
IFRS ratios are financial measures disclosed by a company that are in the form of a ratio, fraction, percentage or
similar representation that has a non-IFRS financial measure as one or more of its components, and that are not
disclosed in the financial statements of the Company.
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MD&A
These non-IFRS financial measures and non-IFRS ratios are not standardized financial measures under IFRS, and,
therefore, are unlikely to be comparable to similar financial measures presented by other companies.
Management believes these non-IFRS financial measures and non-IFRS ratios provide transparent and useful
supplemental information to help investors evaluate our financial performance, financial condition, and liquidity
using the same measures as management. These non-IFRS financial measures and non-IFRS ratios should not be
considered as a substitute for, or superior to, measures of financial performance prepared in accordance with
IFRS.
Adjusted EBITDA - Non-IFRS Financial Measures
In this MD&A, we use the non-IFRS financial measure “Adjusted EBITDA” to mean net (loss) income adjusted for
(i) income taxes, (ii) finance expense or income; (iii) amortization and impairment of intangibles; (iv) other charges
and other on-time items; (v) depreciation of right-of-use assets and property, plant and equipment; (vi) stock-
based compensation; (vii) foreign exchange (gain) loss; (viii) other income which includes equity in earnings from
joint ventures; and (ix) dividends received 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 loss and cash flows
from operations as determined in accordance with IFRS or as a measure of liquidity. The most directly comparable
IFRS financial measure is Net (loss) income. See the Reconciliation of Net (Loss) Income to Adjusted EBITDA within
the Overall Performance section of this MD&A.
Adjusted EBITDA per share – Non-IFRS ratio
Adjusted EBITDA per share is calculated as Adjusted EBITDA divided by the basic weighted average of Common
Shares. Adjusted EBITDA per share is used by our management and investors to analyze cash generated by
Quarterhill on a per share basis. The most comparable IFRS measure is earnings per share.
Supplementary Financial Measures
Supplementary financial measures are financial measures disclosed by a company that (a) are, or are intended to
be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial
position or cash flow of a company (b) are not disclosed in the financial statements of the company, (c) are not
non-IFRS financial measures, and (d) are not non-IFRS ratios.
Key supplementary measures disclosed in this MD&A are as follows:
Gross margin %
Calculated as gross profit as a percentage of revenue.
Working capital
Calculated as total current assets minus total current liabilities.
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MD&A
DESCRIPTION OF OUR BUSINESS
Quarterhill is a disciplined acquirer and manager of established ITS companies operating alongside our existing
licensing 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 building a consistently profitable company through the acquisition, management
and growth of companies in the ITS industry and its adjacent markets, with an emphasis on seeking acquisition
opportunities in the ITS industry that provide a foundation for growth and that have reasonable valuations,
recurring revenues, predictable cashflows and gross profit, intimate customer relationships and dedicated
management teams among other considerations.
We believe that if we increase the share of our revenue derived from recurring sources we will also increase the
predictability of our revenues and cash flows. 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. In appropriate circumstances, we may also divest certain assets if
favourable conditions for such a divestiture are presented.
Our existing businesses are fully described in more detail in our AIF. We operate in two business segments 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 ITS and Licensing.
Intelligent Transportation Systems Segment
Our businesses are focused on enhancing safety, mobility, efficiency and environment performance across road
and rail transportation infrastructure by providing intelligent transportation systems, products, solutions and
services. Based on market research, we believe the global ITS industry is expected to exceed US$90 billion by
2025, influenced by major driving factors such as infrastructure spending, public safety, traffic congestion, smart
city development and environmental impact. We believe that we are well positioned to capitalize on these trends.
Our businesses are leading providers of essential ITS products, solutions and services with more than 60 years of
combined experience in areas such as commercial vehicle enforcement and tolling. Our customers include
government transportation and tolling agencies, traffic engineering operators and industrial, mining and
transportation service companies worldwide.
We have predictable and recurring revenue streams derived from selling ITS systems, products and solutions
through long-term customer relationships and renewable service contracts. Our businesses offer a portfolio of
integrated hardware and software to detect, measure and analyze a variety of transportation metrics which
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MD&A
produces a valuable source of analytics and telematics for users. With a variety of product and service offerings
throughout our operations in North America, Europe and Latin America, we believe there is an abundance of
opportunity to create scale and efficiencies.
Licensing Segment(cid:3)
Our Licensing segment focuses on technology licensing as its principal business activity. We have a wholly owned
subsidiary, 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 additional patents that it believes hold great value from other inventors.
Both directly and through its wholly owned subsidiaries, WiLAN develops, acquires and commercializes innovative
patented technologies that it believes hold value and also works with third party partners to monetize such
patents in various ways which often involve sharing revenues and the financial risk associated with licensing these
patents with third party partners. From time to time, WiLAN also sells selected patents as an alternative means
of monetization.
Current WiLAN patent portfolios include patents relating to memory interface technologies, semiconductor
manufacturing and packaging technologies, automotive applications, computer gaming, intelligent personal
assistant technologies, enhanced image processing, streaming video technologies, non-volatile Flash memory,
DRAM and other memory technologies as well as semiconductor analog circuitry technologies. WiLAN’s license
agreements generally grant rights to patents that are relevant to a licensee’s products and services as well as
granting releases for past sales of relevant products and services. Related license consideration payments may
be one-time lump-sum payments, a series of set payments based on fixed-prices made over a specified period or
running royalties based on a price per-unit and/or a percentage of product sales or service revenues reported by
licensees. The consideration for a license may vary significantly with different licensees because there are many
factors that may make different rates and other terms appropriate. Although WiLAN prefers to negotiate license
agreements without litigation, to ensure it receives fair consideration for the use of its patented technologies,
WiLAN may, in appropriate circumstances, rely on litigation to enforce its patent rights against appropriate
infringers with the ultimate goal of signing license agreements.
WiLAN’s proven track record, business and technical expertise, as well as its strong reputation in the intellectual
property 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.
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BUSINESS COMBINATIONS
MD&A
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
strategies. With a strong balance sheet, the securitization of funds through debt financing and issuing convertible
debentures along with the contribution of our business units, 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.
On January 5, 2021, we acquired all of the issued and outstanding shares of Sensor Line – Gesellschaft für
Optoelektronische Sensoren mbH (“Sensor Line”), a German ITS provider of fiber optic traffic sensors for road and
rail markets for cash consideration of $5,933 (€3,800). Sensor Line has been integrated into IRD.
On April 28, 2021, we acquired all of the issued and outstanding shares of VDS Verkehrstechnik GmbH (“VDS”), a
German ITS provider of high precision traffic monitoring devices for cash consideration of $2,780 (€1,837). VDS
has been integrated into IRD.
On September 1, 2021, we completed the acquisition of ETC by acquiring all of the issued and outstanding shares
of its parent holding companies for cash consideration of $151,313 (US$120,023). ETC provides tolling and
mobility systems to tolling authorities across the United States. The purchase price and acquisition costs were
financed by the Company’s cash reserves and by newly established syndicated credit facilities.
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(cid:3)
OVERALL PERFORMANCE
Consolidated Statements of (Loss) Income
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 intangible assets
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance income
Finance expense
Foreign exchange gain
Other income
(Loss) income before taxes
Current income tax expense
Deferred income tax expense (recovery)
Income tax expense (recovery)
(cid:3)
Net (loss) income
MD&A
Three months ended December 31, Year ended December 31,
2022
2021
2022
2021
$10,731
40,142
50,873
10,160
29,976
40,136
10,737
801
649
6,248
13,398
586
4,285
25,967
(15,230)
(412)
2,639
(883)
333
(16,907)
(298)
3,480
3,182
$4,708
$146,356
46,453
159,334
$25,722
99,973
51,161
305,690
125,695
5,768
66,629
33,318
121,525
39,086
188,154
12,075
117,536
567
771
6,234
11,097
671
2,085
2,535
2,268
24,809
53,515
2,539
20,893
21,425
106,559
(9,350)
(54)
1,804
(561)
(160)
(10,379)
262
(1,124)
10,977
(1,083)
10,024
(2,689)
(9,094)
13,819
1,171
9,882
(862)
11,053
21,809
66,451
88,260
37,435
1,568
1,583
20,228
33,339
2,372
6,133
65,223
(27,788)
(164)
2,328
(1,216)
(2,007)
(26,729)
1,306
(5,852)
(4,546)
(20,089)
(9,517)
2,766
(22,183)
Other comprehensive loss that may be reclassified
subsequently to net (loss) income:
Foreign currency translation adjustment
Comprehensive (loss) income
(1,451)
($21,540)
(1,030)
16,313
(3,437)
($10,547)
$19,079
($25,620)
(Loss) income per share - Basic
($0.18)
($0.08)
$0.02
($0.19)
(Loss) income per share - Diluted
($0.18)
($0.08)
$0.02
($0.19)
The components of our revenue are as noted below:
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Intelligent
ITS revenues include revenues earned on contracted projects, generally recognized on a percentage of
Transportation
Systems
completion basis, service and maintenance contracts, hardware and software system implementations
and proprietary and OEM products sales.
Licensing
Licensing revenues includes all revenues associated with technology licenses, perpetual software licenses
and other revenues characterized as one-time licenses.
MD&A
(cid:3)
(cid:3)
Consolidated revenues for the three months and year ended December 31, 2022 were $50,873 and $305,690
compared to $51,161 and $125,695 in the comparative prior year periods, respectively. The primary reason for
the increase in consolidated revenue was due to the size and timing of completion of licensing agreements in the
first quarter, as well as acquisitions that were not present in the entire prior year periods. Licensing revenues for
the three months and year ended December 31, 2022 were $10,731 and $146,356, compared to $4,708 and
$25,722 in the comparative prior year periods, respectively. Licensing revenues are generally one-time in nature
which can result in significant fluctuations in revenue, gross profit and Adjusted EBITDA when the volume or dollar
value of licenses changes from one period to the next. For the three months and year ended December 31, 2022
our ITS revenues were $40,142 and $159,334 compared to $46,453 and $99,973 in the comparative prior year
periods, respectively. The increase in revenue for the year ended December 31, 2022 was a result of the expansion
of our ITS segment with the addition of VDS Verkehrstechnik GmbH (“VDS”) in April 2021 and ETC in September
2021.
Gross profit, calculated as revenues less direct cost of revenues for the three months and year ended December
31, 2022 was $10,737, or 21% and $117,536, or 38% (please refer to the Supplementary Financial Measures section
of this MD&A), compared to $12,075, or 24%, and $37,435, or 30%, for the comparative prior year periods,
respectively. For the current quarter, our Licensing segment generated $571 in gross profit compared to $(1,060)
in the comparative prior year period. The increase in gross profit for the three months ended December 31, 2022
compared to the prior year period is due to the closing of slightly larger contracts in the current period. For year
ended December 31, 2022, Licensing gross margin was significantly higher due to the closing of one significant
agreement in the current year. For three months and year ended December 31, 2022, our ITS segment generated
$10,166 and $37,809 in gross margin as compared to $13,135 and $33,503 in the comparative prior year periods,
respectively. The decrease in the three months ended December 31, 2022 is primarily due to the number of
projects currently in the implementation phases, which historically have lower margins. The increase for the year
ended December 31, 2022 is primarily due to the acquisitions of VDS and ETC being encompassed by a full year
of financial results. Margins can vary depending on the particular projects underway and level of product sales
delivered in a particular period.
Direct cost of revenues includes: (i) for our Licensing segment, patent licensing expenses which include royalty
obligations, cost of patents if purchased from third parties, 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 ITS
segment, costs related to inventory solutions and all costs of delivering on a project or service including employee
costs, inventory consumption costs, subcontractor costs and costs related to any maintenance and warranty work
completed.
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MD&A
Consolidated operating expenses are comprised of depreciation, amortization of intangible assets, selling,
general and administrative costs, research and development costs (“R&D”) and other charges. Total operating
expenses for the three months and year ended December 31, 2022 were $25,967 and $106,559, compared to
$21,425 and $65,223 in the comparative prior year periods, respectively. The increase in operating expenses in
the three months ended December 31, 2022 was primarily driven by cost reduction initiatives leading to one-time
charges. The increase in operating expenses for the year ended December 31, 2022 was primarily driven by the
acquisitions of VDS and ETC.
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.
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 R&D expenses for the
three months and year ended December 31, 2022 was $13,984 and $56,054 compared to $11,768 and $35,711
for the comparative prior year periods, respectively. The variance is primarily attributable to the additional costs
from the acquisitions.
Reconciliation of Net (Loss) Income to Adjusted EBITDA
Management considers Adjusted EBITDA, a non-IFRS financial measure, to be a useful 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 $(2,340) and $64,647 for the three months and year ended December 31, 2022,
compared to $878 and $5,027 for the comparative prior year periods. The decrease in Adjusted EBITDA for the
three months ended December 31, 2022, compared to the prior year period is due to the changes in revenue and
direct costs of revenue in both of our segments as previously explained. The increase in Adjusted EBITDA for the
year ended December 31, 2022 was primarily driven by a significant licensing agreement closed in our licensing
segment in the current year. 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. Other 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 relate to finance
income or expense, depreciation and amortization, impairment loss on intangibles, non-cash stock-based
compensation, equity earnings and dividends received from joint venture, other acquisition related accounting
items and other one-time charges.
From time to time, we may 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
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MD&A
identifiable intangible assets other than goodwill in our purchase price allocations including, but not limited to,
backlog, trade name, non-competition agreements, customer and developed software related intangible assets.
To the extent we ascribe values to identifiable intangible assets that have finite lives, we amortize those values
over the estimated useful lives of the assets.
Reconciliation of Net (Loss) Income to Adjusted EBITDA
Net (loss) income from continuing operations
($20,089)
($0.18)
($9,517)
($0.08)
Three months ended December 31,
2022
2021
$
Per Share
$
Per Share
Adjusted for:
Income tax e(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(recovery)
Foreign exchange (gain) loss
Finance expense, net
Other charges
Depreciation and amortization
Stock based compensation expense
Dividends received from joint venture
Other income
Adjusted EBITDA[1]
Weighted average number of Common Shares
Basic
3,182
(883)
2,227
4,285
7,698
335
572
333
0.03
(0.01)
0.02
0.04
0.07
-
(862)
(0.01)
(561)
-
1,750
2,085
7,572
571
0.02
0.02
0.05
0.01
0.01
-
-
-
(160)
-
($2,340)
($0.02)
$878
$0.01
________________ ________________ ________________ ________________
114,639,700
113,834,597
Year ended December 31,
2022
2021
$
Per Share
$
Per Share
Net (loss) income from continuing operations
$2,766
$0.02
($22,183)
($0.19)
Adjusted for:
Income tax e(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(recovery)
Foreign exchange (gain) loss
Finance expense, net
Other charges
Depreciation and amortization
Stock based compensation expense
Dividends received from joint venture
Other income
Adjusted EBITDA[1]
11,053
(2,689)
8,941
20,893
29,612
1,875
1,290
(9,094)
$64,647
0.10
(0.02)
0.08
0.18
0.26
0.02
0.01
(0.08)
$0.57
(4,546)
(1,216)
2,164
6,133
23,379
1,955
1,348
(2,007)
$5,027
(0.04)
(0.01)
0.02
0.05
0.20
0.02
0.01
(0.02)
$0.04
________________ ________________ ________________ ________________
Weighted average number of Common Shares
Basic
114,389,608
114,013,610
[1] Refer to Adjusted EBITDA - Non-IFRS Financial Measures
[2] Refer to Adjusted EBITDA per share – Non-IFRS ratios
QH_2022_AR_V4.indd 13
2023-03-29 2:32:05 PM
Three and twelve months ended December 31, 2022
13
(cid:3)
SEGMENTED RESULTS
MD&A
Segmented results of operations for the three months and year ended December 31, 2022 and 2021 are included
in this MD&A.
Three months ended December 31, 2022
Licensing
Intelligent
Transportation
Systems
Corporate
Total
$10,731
10,160
571
3,474
1,471
-
-
(4,374)
(219)
(736)
-
(3,419)
(2,275)
$40,142
$ - $50,873
29,976 -
40,136
10,166 -
10,737
4,178
9,443
46
7,698
2,484
13,398
586 -
586
4,036
(8,077)
760
(1,005)
733
(8,565)
5,302
249
4,285
(2,779)
1,686
(15,230)
2,227
858
(400)
(883)
333
(4,923)
(16,907)
155
3,182
($1,144)
($13,867)
($5,078) ($20,089)
Three months ended December 31, 2021
Licensing
Intelligent
Transportation
Systems
Corporate
Total
$4,708
$46,453
$ - $51,161
5,768
(1,060)
3,232
568
-
-
(4,860)
63
(37)
-
(4,886)
(1,984)
($2,902)
33,318 -
39,086
13,135 -
44
4,296
12,075
7,572
8,599
1,930
11,097
671 -
671
(104)
(327)
757
(232)
(189)
(663)
247
2,189
2,085
(4,163)
930
(9,350)
1,750
(292)
29
(561)
(160)
(4,830)
(10,379)
875
(862)
($910)
($5,705)
($9,517)
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance expense, net
Foreign exchange (gain) loss
Other expense (income)
Loss before taxes
Income tax (recovery) expense
Net loss
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance expense, net
Foreign exchange gain
Other (income) expense
Loss before taxes
Income tax (recovery) expense
Net loss
(cid:3)
(cid:3)
14
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 14
2023-03-29 2:32:06 PM
(cid:3)
MD&A
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Year ended December 31, 2022
Licensing
Intelligent
Transportation
Systems
Corporate
Total
$146,356
$159,334
$ - $305,690
66,629
79,727
13,431
4,899
121,525 -
188,154
37,809 -
117,536
16,000
38,396
181
29,612
10,220
53,515
Research and development expenses
-
2,539 -
2,539
Other charges
Results from operations
Finance expense, net
Foreign exchange loss (gain)
Other income
Income (loss) before taxes
Income tax expense
Net income (loss)
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance expense, net
Foreign exchange gain
Other (income) expense
Loss before taxes
Income tax (recovery) expense
Net loss
601
60,796
(432)
127
-
4,038
(23,164)
3,307
(357)
(706)
16,254
20,893
(26,655)
10,977
6,066
(2,459)
(8,388)
8,941
(2,689)
(9,094)
61,101
4,184
(25,408)
(21,874)
13,819
1,658
5,211
11,053
$56,917
($27,066)
($27,085)
$2,766
Year ended December 31, 2021
Licensing
Intelligent
Transportation
Systems
Corporate
Total
$25,722
$99,973
$ - $125,695
21,809
3,913
12,550
3,544
66,451 -
88,260
33,522 -
37,435
10,629
20,237
200
23,379
9,558
33,339
2,372 -
2,503
2,372
6,133
-
-
(12,181)
118
(119)
-
(12,180)
(4,971)
($7,209)
3,630
(3,346)
1,151
(692)
(2,039)
(1,766)
(885)
($881)
(12,261)
(27,788)
895
(405)
2,164
(1,216)
32
(2,007)
(12,783)
(26,729)
1,310
(4,546)
($14,093)
($22,183)
QH_2022_AR_V4.indd 15
2023-03-29 2:32:06 PM
Three and twelve months ended December 31, 2022
15
(cid:3)
Intelligent Transportation Systems
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance expense, net
Foreign exchange gain
Other expense (income)
Loss before taxes
Current income tax (recovery) expense
Deferred income tax expense (recovery)
Income tax expense
Net loss
Adjusted EBITDA
(cid:3)
Other reconciling Iitems
Stock based compensation expense
Dividend from joint venture
MD&A
Three months ended December 31,
Year ended December 31,
2022
2021
2022
2021
$40,142
29,976
10,166
4,178
9,443
586
4,036
(8,077)
760
(1,005)
733
(8,565)
(713)
6,015
5,302
$46,453
33,318
13,135
4,296
8,599
671
(104)
(327)
757
(232)
(189)
(663)
260
(13)
247
$159,334
121,525
37,809
16,000
38,396
2,539
4,038
(23,164)
3,307
(357)
(706)
(25,408)
276
1,382
1,658
($13,867)
($910)
($27,066)
$99,973
66,470
33,503
10,629
20,218
2,372
3,629
(3,345)
1,151
(692)
(2,039)
(1,765)
754
(1,639)
(885)
($880)
$777
$4,074
($1,300)
$12,657
(cid:3)
(cid:3)
_________________ _________________ _________________ _________________
396
536
(cid:3)
(cid:3)
209
68
572
-
1,290
1,348
The ITS segment’s revenues for the three months and year ended December 31, 2022 were $40,142 and $159,334
compared to $46,453 and $99,973 in the prior year comparative periods, respectively. The decrease in revenue
for the three months ended December 31, 2022 was primarily driven by a lower margin project mix in our tolling
revenue as a result of a larger number of projects in the implementation phase. The increase for the year ended
December 31, 2022 primarily due to the expansion of our ITS segment with the acquisitions of VDS and ETC being
captured throughout the full fiscal year this year as well as the subsiding of effects from project delays
experienced in previous quarters and periods.
Our ITS revenue streams consist of revenues earned on contracted projects, which are generally recognized over
time, product sales, hardware and software system implementations, and service and maintenance contracts.
Service and maintenance projects generally range from one to five year terms but can be renewed with some
contracts that could reach up to ten years or more. For project based work, revenues will routinely vary
significantly depending on the timing and nature of the specific projects underway in each reporting period.
16
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 16
2023-03-29 2:32:06 PM
(cid:3)
MD&A
The ITS segment’s gross profit as a value and as a percentage of revenues may be subject to significant variance
in each reporting period due to the nature and type of contract and service work currently in process, currency
volatility and competitive factors, among other things.
Total operating expenses are comprised of selling, general and administrative costs, R&D costs, depreciation,
amortization of intangible assets and other charges. Total operating expenses for the three months and year
ended December 31, 2022 were $18,243 and $60,973 compared to $13,462 and $36,868 in the prior year
comparative periods, respectively. The increase in the three months ended December 31, 2022 is mainly
attributed to the cost reduction initiatives deployed by the Company, which resulted in one-time severance and
other charges. The increase in operating expenses for the year ended December 31, 2022 compared to the prior
period generally reflects the addition to the operating expenses of our new acquisitions.
We are committed to continual investments in R&D to enhance our current products and advance the availability
of new products within the ITS industry. For three months and year ended December 31, 2022, net R&D spending
levels were approximately 1.5% and 1.6% of segment revenue, respectively. R&D expenses compared to the prior
year comparative periods have remained relatively consistent.
Income tax expense for the three months and year ended December 31, 2022 were $5,302 and $1,658 compared
to an expense of $247 and recovery of $885 for the comparative prior year periods. The increase in the three
months and year ended December 31, 2022 was caused primarily by write-off of deferred tax assets as a result
of historical operating losses.
Our ITS segment is exposed to foreign exchange risk primarily relating to its revenue, operating and capital
expenditures, net assets held in foreign currencies, and embedded derivative portions of unearned revenue on
certain U.S. dollar denominated sales contracts in its North America and Latin America markets. This is more fully
described in the Risks and Uncertainties section.
Other income includes IRD’s share of income in its joint venture, Xuzhou-PAT Control Technologies Limited
(“XPCT”). XPCT has two business divisions that provide products and services to the ITS industry and construction
equipment manufacturers. For the three months and year ended December 31, 2022, IRD’s share of XPCT’s
income was $523 and $1,806 compared to $150 and $1,924 for the comparative prior year period.
QH_2022_AR_V4.indd 17
2023-03-29 2:32:07 PM
Three and twelve months ended December 31, 2022
17
(cid:3)
Licensing
Revenues
Direct cost of revenues
Gross profit
Depreciation and amortization
Selling, general and administrative expenses
Other charges
Results from operations
Finance expense, net
Foreign exchange (gain) loss
(Loss) income before taxes
Current income tax expense
Deferred income tax (recovery) expense
Income tax (recovery) expense
Net (loss) income
Adjusted EBITDA
(cid:3)
Other reconciling items
Stock based compensation expense
MD&A
Three months ended December 31,
Year ended December 31,
2022
2021
2022
2021
$10,731
10,160
571
3,474
1,471
$4,708
5,768
(1,060)
3,232
568
$146,356
$25,722
66,629
79,727
13,431
4,899
21,809
3,913
12,550
3,544
-
-
601
-
(4,374)
(219)
(736)
(3,419)
415
(2,690)
(2,275)
(4,860)
63
(37)
(4,886)
2
(1,986)
(1,984)
60,796
(12,181)
(432)
127
118
(119)
61,101
(12,180)
895
3,289
4,184
552
(5,523)
(4,971)
($1,144)
($2,902)
$56,917
($7,209)
($849)
($1,545)
$75,114
$1,159
(cid:3)
(cid:3)
_________________ _________________ _________________ _________________
790
286
(cid:3)
(cid:3)
51
83
For the three months and year ended December 31, 2022, Licensing segment revenues were $10,731 and
$146,356 compared to $4,708 and $25,722 in the comparative prior year periods, respectively. The increase in
revenues for the three months ended December 31, 2022 is largely due to the general one-time nature of WiLAN’s
licenses. Accordingly, significant fluctuations in revenue, gross profit, and Adjusted EBITDA will occur when
volume or dollar value of licenses change from one period to the next. The increase in revenue in the year ended
December 31, 2022 was directly attributable to the closure of a significantly large licensing contract in the first
quarter of 2022.
Patent licenses are considered a promise to provide the right to use patented technologies 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 a patent license. In these circumstances, 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, 2022 were $10,160 and $66,629
compared to $5,768 and $21,809 for the prior year comparative periods, respectively. The increase in direct costs
of revenues for the three months ended December 31, 2022 was primarily attributable to the timing of litigation
expenses within the current period. For the year ended December 31, 2022 revenue significantly increased
18
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 18
2023-03-29 2:32:07 PM
(cid:3)
MD&A
compared to the prior year periods resulting in a significant increase in the related contingent expenses incurred.
Contingent litigation and contingent partner expenses can vary based on the arrangements negotiated with each
contingent partner for each specific contract licensed in a quarter as well as the extent of licensing in a period.
Operating expenses are generally considered selling, general and administration type expenses and include all
overheads for WiLAN operations in addition to depreciation and amortization expense and any loss on disposal
of assets or impairment losses. For the three months and year ended December 31, 2022, operating expenses
were $4,945 and $18,931 as compared to $3,800 and $16,094 in the comparative prior year period primarily driven
by an increase in amortization from net additions to intangible assets and other charges as a result of non-
recurring termination costs in addition to increased costs related to a significant improvement in the segment’s
performance on a year-over-year basis.
Income tax recovery for the three months ended December 31, 2022 was $2,275 as compared to an income tax
recovery of $1,984 for the comparative prior year period. The increase was due to the nature of operating losses
in comparison to the prior year quarter. For year ended December 31, 2022, income tax increased from an income
tax recovery in the prior period primarily from the significant revenue and profitability increases over the same
comparative period. Current income tax expenses for the reported periods consist of deferred income tax
expenses and current tax expenses which consist of accrued corporate tax expenses as well as foreign taxes
withheld on payments received from licensees in foreign tax jurisdictions for which there is no treaty relief.
SELECTED CONSOLIDATED ANNUAL AND QUARTERLY RESULTS
Selected Annual Results
(in thousands of Canadian dollars, except per share amounts)
2022
2021
2020
Year ended December 31,
Revenue
Net income (loss) from continuing operations
Net income from discontinued operations
Net income (loss)
Income (loss) per share, basic
Income (loss) per share, diluted
Dividends declared per share
Total assets
Total liabilities
$305,690
$125,695 $144,526
2,766
(22,183)
4,428
- -
14,255
$2,766
$(22,183)
$18,683
$0.02
$0.02
$0.05
$(0.19)
$0.16
$(0.19)
$0.16
$0.05
$0.05
$411,944
$427,195 $309,953
$154,284
$186,079
$38,023
In 2022, our consolidated revenue and net income saw a year-over-year increase as a direct result of a significantly
large licensing agreement being entered into in the first quarter. In 2021, we completed three acquisitions,
resulting in significant growth in our ITS segment, however, revenues year over year decreased as a result of the
closing of significantly fewer and smaller contracts in our Licensing segment. All revenue amounts exclude
discontinued operations.
QH_2022_AR_V4.indd 19
2023-03-29 2:32:07 PM
Three and twelve months ended December 31, 2022
19
(cid:3)
Selected Quarterly Results
Quarter ended
December 31, 2022
September 30, 2022
June 30, 2022
March 31, 2022
December 31, 2021
September 30, 2021
June 30, 2021
March 31, 2021
MD&A
Revenues
Net income
(loss)
Net income
(loss) per share
(basic)
Adjusted
EBITDA *
Adjusted
EBITDA per
share *(basic)
$ 000's
$ 000's
$
$ 000's
$
50,873
42,433
43,879
168,505
51,161
36,343
18,875
19,316
(20,089)
(9,714)
(24,332)
56,901
(9,517)
(2,003)
(6,376)
(4,287)
(0.18)
(0.08)
(0.21)
0.49
(0.08)
(0.02)
(0.06)
(0.04)
(2,340)
(2,657)
(9,454)
79,098
878
7,576
(3,019)
(408)
(0.02)
(0.02)
(0.07)
0.69
0.01
0.06
(0.03)
(0.00)
* Adjusted EBITDA and the respective per share amounts are non-IFRS measures; please refer to "Non-IFRS Financial Measures and Non-IFRS
Ratios" 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 due to the portion of consolidated revenues derived from the general one-time
nature of WiLAN’s licenses as well as the fluctuation occurring in the ITS business due to varying project phases
and seasonality. 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 under the heading “Risk Factors” in
each of our AIF and the Prospectus Supplement.
Total assets by segment are as follows:
As at
Licensing
Intelligent Transportation Systems
Total segment assets
Total corporate assets
Total assets
December 31, 2022 December 31, 2021
$87,687
279,220
366,907
45,037
$86,468
263,622
350,090
77,105
$411,944
$427,195
Dividends declared for the years ended December 31, 2022 and 2021 were as follows:
2022
2021
Per Share
Total
Per Share
Total
1st quarter
2nd quarter
3rd quarter
4th quarter
$0.0125
$0.0125
$0.0125
$0.0125
$1,408
$0.0125
1,432
1,420
1,433
$0.0125
$0.0125
$0.0125
$0.0500
$1,432
1,422
1,420
1,415
$5,689
$0.0500
$5,693
20
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 20
2023-03-29 2:32:08 PM
(cid:3)
CAPITAL AND LIQUIDITY
MD&A
The Company’s capital management objectives are to maintain financial flexibility in order to pursue its strategy
of organic and acquisitive growth, and, from time to time, pay dividends and, from time to time, return capital to
shareholders. The Company defines our capital as cash, the aggregate of cash and cash equivalents, short-term
investments, restricted short-term investments, long-term debt, convertible debentures and shareholders’ 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 Common Shares for cancellation pursuant to one or more
normal course issuer bids and/or substantial issuer bids, issue new Common Shares, issue convertible
debentures or raise or retire our debts.
Our cash, cash equivalents and short-term investments, exclusive of any restricted amounts, totaled $67,907 as
at December 31, 2022 compared to $72,597 as at December 31, 2021, representing a decrease of $4,690 primarily
due to debt repayment, legal fees and severance charges, among other working capital fluctuations. At
December 31, 2022, we had sufficient working capital of $71,509 to cover short and long-term obligations. As at
the date of this MD&A our cash balance was approximately $54,000, 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.
Our cash resources are generally used to fund our operations, provide working capital 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.
We have a revolving credit facility through Canadian Imperial Bank of Commerce available in the amount of $8,000
(or the equivalent in US dollars) for general corporate purposes and a further $2,000 for a foreign exchange
facility. Canadian dollar or US 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 US 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 of the Quarterhill holding company and
the Licensing segment. As at and during the quarter ended December 31, 2022, we had no borrowings under this
facility.
In 2021, generally to finance the ETC acquisition, we entered into a credit agreement to receive senior secured
credit facilities from HSBC Bank Canada and Royal Bank of Canada consisting of a revolving credit facility in the
maximum amount of $19,090 (US$15,000) and a term credit facility of $62,826 (US$50,000). These facilities
replaced all existing credit facilities we had with HSBC Bank Canada. The interest rate as at December 31, 2022
was 6.91% and both facilities have a maturity date of August 31, 2026 with a general security agreement over all
of the assets in North America of IRD, ETC and its parent holding company, Quarterhill USA, Inc. The carrying value
QH_2022_AR_V4.indd 21
2023-03-29 2:32:08 PM
Three and twelve months ended December 31, 2022
21
(cid:3)
MD&A
of these assets as at December 31, 2022 was $261,348. As at and during the year ended December 31, 2022, we
repaid $36,128 of the term loan and had no borrowings or repayments on the revolving credit facility.
The Company was not in compliance with the Fixed Charge Coverage Ratio and Senior Leverage Ratio covenants
of the credit agreement as of December 31, 2022. Following year end, the credit agreement was amended to
provide that the Company did meet such covenants at December 31, 2022. Because this amendment was agreed
to following year-end, for financial reporting purposes under IFRS, the Company did not have the unconditional
right to defer the repayment of the debt beyond twelve months and, as such, the outstanding balance is presented
as a current liability as at December 31, 2022.
The Company also has incurred a revolving demand facility through WiLAN to support letters of credit and/or
letters of guarantee with Royal Bank of Canada for which restricted short-term investments are held as collateral.
As at December 31, 2022 a $5,669 (US$4,178) letter of credit is outstanding against the revolving demand facility.
CONTRACTUAL OBLIGATIONS
Contractual obligations relating to accounts payable and accrued liabilities, long-term debt, convertible
debentures and lease liabilities as at December 31, 2022 are as follows:
Accounts payable and accrued liabilities
$47,063
$47,063
$ -
$ -
$ -
Total
Less than 1 year 2 - 3 years
4 - 5 years
Thereafter
Long-term debt
Convertible debentures
Lease liabilities
29,292
57,500
13,919
29,292 - - -
-
-
57,500 -
3,007
5,512
3,715
1,685
$147,774
$79,362
$5,512
$61,215
$1,685
OUTSTANDING COMMON SHARE DATA
(cid:3)
We are authorized to issue an unlimited number of Common Shares, 6,351 special preferred, redeemable,
retractable, non-voting shares and an unlimited number of preferred shares, issuable in series. As at
December 31, 2022, there were 114,639,700 Common Shares and no special or preferred shares issued and
outstanding. We also maintain the Quarterhill Inc. 2018 Equity Incentive Plan (the “Equity Plan”). Under the Equity
Plan, we can issue a maximum of 9.5% of our issued and outstanding Common Shares from time to time which
was, as at December 31, 2022, up to 10,890,772 Common Shares. As at December 31, 2022, we had options
granted to purchase up to 8,669,951 Common Shares.
Pursuant to the Equity Plan, the Company has also granted restricted stock units (“RSUs”) to certain employees in
May and June 2022. Pursuant to the Equity Plan, these RSUs are settled in Common Shares issued from treasury
on a one-to-one basis in six tranches, with the first tranche vested at the grant dates of May 13, 2022 and June 6,
2022 and each subsequent tranche vesting upon the Company coming out of its regular quarterly blackout for
22
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 22
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MD&A
the fiscal quarters ending June 30 and December 31, in 2022, 2023 and 2024. The Company granted 196,417 RSUs
on May 13, 2022, valued using the most recent TSX closing price for the Common Shares on the grant date of
$2.14 for a total of $420. The Company granted 150,000 RSUs on June 6, 2022, valued using the most recent TSX
closing price for the Common Shares on the grant date of $2.09 for a total of $316. For the year ended
December 31, 2022, the Company has recognized $597, respectively, in stock-based compensation expense as a
result.
OFF-BALANCE SHEET ARRANGEMENTS
As at December 31, 2022, IRD has an outstanding 100% guarantee to XPCT, for a loan in the amount of 15,000
yuan or $2,945 (December 31, 2021 - $3,008); however, IRD has the right to 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 $125 (2021- $150) during the year ended
December 31, 2022. At December 31, 2022, XPCT had no amounts owing to IRD (2021- $1).
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 ETC, IRD
and WiLAN. 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 year
ended December 31, 2022 was $3,937 (2021- $6,020).
PROPOSED TRANSACTIONS
There are no proposed transactions.
QH_2022_AR_V4.indd 23
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Three and twelve months ended December 31, 2022
23
MD&A
(cid:38)(cid:53)(cid:918)(cid:55)(cid:918)(cid:38)(cid:36)(cid:47)(cid:3)(cid:40)(cid:54)(cid:55)(cid:918)(cid:48)(cid:36)(cid:55)(cid:40)(cid:54)(cid:3)
Key areas involving estimation, uncertainty and critical judgments include the following:
Business combinations
Purchase prices related to business combinations are allocated to the underlying acquired assets and liabilities
based on their estimated fair value at the time of acquisition. The determination of fair value requires the
Company to make assumptions, estimates and judgments regarding cash flow projects, valuation techniques,
economic risk, weighted average cost of capital and future events. Significant judgments, estimates and
assumptions are also required by management in estimating the amount of contingent consideration payable.
As a result, the purchase price allocation impacts the Company’s reported assets and liabilities, including the
amounts allocated to intangible assets and goodwill, and future earnings due to the impacts of amortization
expense and impairment testing.
Revenue recognition
Contract revenue, contract costs, contract liabilities and contract assets relating to the Intelligent Transportation
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 the
Company’s revenue, contract assets, and contract liabilities.
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
Quarterhill 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
24
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 24
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(cid:3)
MD&A
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.
FUTURE ACCOUNTING PRONOUNCEMENTS
(cid:3)
Amendments to IAS 1 and IFRS Practice Statement 2 – Disclosure of Accounting Policies
In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2, “Making Materiality
Judgements”, in which it provides guidance and examples to help entities apply materiality judgments to
accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that
are more useful by replacing the requirement for entities to disclose their "significant" accounting policies with a
requirement to disclose their material accounting policies and adding guidance on how entities apply the concept
of materiality in making decisions about accounting policy disclosures. The amendments are applicable for annual
reporting periods beginning on or after January 1, 2023, with early adoption permitted. Since the amendments to
the IFRS Practice Statement 2 provide non-mandatory guidance on the application of the definition of material to
accounting policy information, an effective date for these amendments is not necessary.
Amendments to IAS 8, Definition of Accounting Estimate – Changes to Accounting Estimates and Errors
In February 2021, the IASB issued amendments to IAS 8, in which it introduces a definition of ‘accounting
estimates’. The amendments clarify the distinction between changes in accounting estimates and changes in
accounting policies and the correction of errors. Also, they clarify how entities use measurement techniques and
inputs to develop accounting estimates. The amendments are effective for annual periods beginning on or after
January 1, 2023, with early adoption permitted.
Amendments to IAS 1, Presentation of Financial Statements - Classification of Liabilities as Current or
Non-Current
In January 2020 and October 2022, the IASB issued amendments to paragraphs 69 - 76 of IAS 1 to clarify the
requirements for classifying liabilities as current or non-current. The amendments specify that the conditions
which exist at the end of a reporting period are those which will be used to determine if a right to defer settlement
of a liability exists. The amendments also clarify the situations that are considered a settlement of a liability. The
amendments are effective for annual periods on or after January 1, 2024, with early adoption permitted. The
amendments are to be applied retrospectively.
Management is currently assessing the impact of these amendments.
QH_2022_AR_V4.indd 25
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Three and twelve months ended December 31, 2022
25
(cid:3)
RISKS AND UNCERTAINTIES
MD&A
Quarterhill and its operating subsidiaries operate in dynamic 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 under the heading “Risk Factors” in each of our AIF and Prospectus Supplement. 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 and Prospectus Supplement, we may be exposed to other risks as follows:
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 us to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments, restricted short-term investments
and accounts receivable.
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. Our operating subsidiaries’ 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 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 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 material 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.
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.
26
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 26
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(cid:3)
Liquidity Risk
MD&A
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, long-term debt, convertible debentures and the issuance of Common Shares.
Market Risk
Market risk is the risk that the fair value of future cash flows from our financial instruments will fluctuate due to
changes in interest rates and foreign currency exchange rates.
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 that 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 or decrease in interest rates would not have resulted in a material increase or decrease in interest
income or expense during the year ended December 31, 2022.
Currency Risk
Portions of the Company’s revenues and operating expenses are denominated in U.S. dollars, Chilean pesos,
Mexican pesos, Euros and Chinese yuan. Because these financial statements are reported in Canadian dollars,
the Company’s operating results are subject to changes in the exchange rate of the foreign currencies (primarily
U.S. dollars) relative to the Canadian dollar. For instance, a decrease in the value of the US dollar relative to the
Canadian dollar has an unfavourable impact on US dollar denominated revenues and a favourable impact on U.S.
dollar denominated direct cost of revenues and operating expenses. Approximately 79% of the Company’s cash
and cash equivalents and short-term investments are denominated in US dollars and are subject to changes in
the exchange rate of the Canadian dollar relative to the U.S. dollar.
(cid:3)
QH_2022_AR_V4.indd 27
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Three and twelve months ended December 31, 2022
27
(cid:3)
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.
As of December 31, 2022, an evaluation was performed on the effectiveness of ICFR to provide reasonable
assurance regarding the reliability of financial reporting and financial statement compliance with IFRS. Based on
the evaluation performed at that time, the Chief Executive Officer and Chief Financial Officer concluded they were
able to certify that the design and operating effectiveness of ICFR were effective.
There were no changes to our ICFR during the year ended December 31, 2022 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.
(cid:3)
(cid:3)
28
Three and twelve months ended December 31, 2022
QH_2022_AR_V4.indd 28
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(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Quarterhill Inc.
2022 Annual Consolidated Financial Statements
(cid:3)
(cid:3)
QH_2022_AR_V4.indd 29
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(cid:48)(cid:36)(cid:49)(cid:36)(cid:42)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:519)(cid:54)(cid:3)(cid:53)(cid:40)(cid:54)(cid:51)(cid:50)(cid:49)(cid:54)(cid:918)(cid:37)(cid:918)(cid:47)(cid:918)(cid:55)(cid:60)(cid:3)(cid:41)(cid:50)(cid:53)(cid:3)(cid:41)(cid:918)(cid:49)(cid:36)(cid:49)(cid:38)(cid:918)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:918)(cid:49)(cid:42)(cid:3)
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(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)
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(cid:72)(cid:81)(cid:74)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:16)(cid:68)(cid:83)(cid:83)(cid:82)(cid:76)(cid:81)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:17)(cid:3)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:40)(cid:85)(cid:81)(cid:86)(cid:87)(cid:3)(cid:9)(cid:3)(cid:60)(cid:82)(cid:88)(cid:81)(cid:74)(cid:3)(cid:47)(cid:47)(cid:51)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)
(cid:82)(cid:81)(cid:3)(cid:69)(cid:72)(cid:75)(cid:68)(cid:79)(cid:73)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)(cid:40)(cid:85)(cid:81)(cid:86)(cid:87)(cid:3)(cid:9)(cid:3)(cid:60)(cid:82)(cid:88)(cid:81)(cid:74)(cid:3)(cid:47)(cid:47)(cid:51)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:73)(cid:88)(cid:79)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:85)(cid:72)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:17)(cid:3)
(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:21)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:22)(cid:3)
(cid:18)(cid:86)(cid:18)(cid:3) (cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:42)(cid:76)(cid:79)(cid:79)(cid:69)(cid:72)(cid:85)(cid:85)(cid:92)(cid:3)
(cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:42)(cid:76)(cid:79)(cid:79)(cid:69)(cid:72)(cid:85)(cid:85)(cid:92)(cid:3)
(cid:918)(cid:81)(cid:87)(cid:72)(cid:85)(cid:76)(cid:80)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)
(cid:18)(cid:86)(cid:18)(cid:3) (cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:46)(cid:68)(cid:85)(cid:81)(cid:72)(cid:86)(cid:3)
(cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:46)(cid:68)(cid:85)(cid:81)(cid:72)(cid:86)
Chief Financial Officer
30
QH_2022_AR_V4.indd 30
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Independent auditor’s report
To the Shareholders of
Quarterhill Inc.
Opinion
We have audited the consolidated financial statements of Quarterhill Inc. and its subsidiaries [the “Company”], which
comprise the consolidated statements of financial position as at December 31, 2022 and 2021, and the consolidated
statements of income (loss) and comprehensive income (loss), consolidated statements of shareholders’ equity and
consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including
a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Company as at December 31, 2022 and 2021 and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards [“IFRS”].
Basis for opinion
We conducted our audit in accordance with Canadian general accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section
of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit
of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with
these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the
consolidated financial statements of the current period. These matters were addressed in the context of the audit of the
consolidated financial statements as a whole, and in forming the auditor’s opinion thereon, and we do not provide a separate
opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that
context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial
statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of
procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial
statements. The results of our audit procedures, including the procedures performed to address the matters below, provide
the basis for our audit opinion on the accompanying consolidated financial statements.
(cid:3)
(cid:3)
QH_2022_AR_V4.indd 31
31
2023-03-29 2:32:11 PM
Key Audit Matter
Goodwill impairment
As at December 31, 2022, the Company has $56,385
thousand of goodwill as disclosed in note 13 to the
consolidated financial statements. The Company performed
its annual impairment analysis as at December 31, 2022
and estimated the recoverable amount for each of its group
of cash generating units [“CGUs”], Intelligent Transportation
Systems (“ITS”) and Licensing, using a discounted cash
flow model. The Company recognized no impairment during
the year ended December 31, 2022.
Auditing the Company’s annual goodwill impairment tests
was complex given the degree of judgement and subjectivity
in evaluating the estimates and assumptions used to
calculate the recoverable amount for each of the CGUs.
Significant assumptions included revenue projections and
taxes, and
growth
depreciation and amortization (“EBITDA”) margins, terminal
growth rates and discount rates, which are affected by
expectations about future market and economic conditions.
rates, earnings before
interest,
How our audit addressed the key audit matter
To test the estimated recoverable amount for each of the
CGUs, with the assistance of our valuation specialists,
we performed the following procedures, among others:
(cid:120) Evaluated the Company’s discounted cash flow model
and valuation methodology;
(cid:120) Assessed the appropriateness of the Company’s
revenue projections and growth rates and EBITDA
margins by comparing projections to actual and
historical performance, and/or current industry, market
and economic trends;
(cid:120) Evaluated the terminal growth rates by comparing
assumptions to long-term inflation expectations;
(cid:120) Evaluated the discount rates by assessing comparable
market data and considering specific risk premiums;
(cid:120) Performed sensitivity analysis on discount rates,
revenue projections and EBITDA margins to evaluate
changes in the recoverable amount of the CGUs; and
(cid:120) Assessed the adequacy of the Company’s disclosures
included in note 13 to the consolidated financial
statements.
Estimate to complete for long-term fixed price
contracts
How our audit addressed the key audit matter
for
these
involve
the contract using
integrated systems with distinct
The Company sells
performance obligations which
the design,
manufacturing, installation, maintenance and warranty of
long-term projects that can span over periods beyond one
year. Revenues
fixed price contracts are
recognized over time based on the progress towards
completion of
the percentage of
completion method. This method is measured by reference
to costs incurred relative to the total estimated costs. The
Company’s policy for revenue recognition together with the
related significant accounting estimates and assumptions is
described in note 2 of the consolidated financial statements.
For the year ended December 31, 2022, the Company
recorded $140,034 thousand of revenue recognized over
time.
We determined that revenue recognition for open contracts
for the Company is a matter of significance to the audit due
to the significant judgement made by management in
determining the estimated costs to complete for long-term
fixed priced contracts and, where applicable, the estimation
of any loss on a project. Assessing the appropriateness of
the remaining costs to complete for each project is
subjective and requires significant auditor judgement
(cid:3)
(cid:3)
32
QH_2022_AR_V4.indd 32
To test the estimate to complete we performed the
following procedures, amongst others, for a sample of
open, long-term fixed price contracts as at December 31,
2022:
(cid:120)
(cid:120)
Inspected contractual arrangements including pricing
and billing terms, change orders and terms and
conditions impacting revenue recognition;
Inquired and evaluated the consistency of responses
obtained from operational and finance personnel
regarding risks and uncertainties with respect to fixed
price contracts, as well as the nature of the work yet to
be completed and estimated costs to complete such
work;
(cid:120) Compared estimated costs to complete, on a sample
basis, to vendor quotes, purchase orders, contractual
labour rates, or actual costs for similar completed
projects;
(cid:120) Performed a look back analysis comparing the current
gross margin for projects to the initial gross margin
and/or to other similar completed projects; and
(cid:120) Considered subsequent events after December 31,
2022 to corroborate estimates made.
2023-03-29 2:32:11 PM
Other information
Management is responsible for the other information. The other information comprises:
(cid:120) Management’s Discussion and Analysis
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form
of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and
in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or
our knowledge obtained in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have
performed, we conclude that there is material misstatement of this other information, we are required to report that fact in
this auditor’s report. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance
with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis
of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic
alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
(cid:3)
(cid:3)
(cid:3)
QH_2022_AR_V4.indd 33
33
2023-03-29 2:32:11 PM
As part of an audit in accordance with Canadian general accepted auditing standards, we exercise professional judgment
and maintain professional skepticism throughout the audit. We also:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant
doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we
are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements
or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue
as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the
disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities
within the Company to express an opinion on the consolidated financial statements. We are responsible for the
direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the
audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought
to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the
adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such
communication.
The engagement partner on the audit resulting in this independent auditor’s report is Kwan-Ho Song.
Toronto, Canada
March 21, 2023
(cid:3)
(cid:3)
34
QH_2022_AR_V4.indd 34
2023-03-29 2:32:11 PM
Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss)
(in thousands and in 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 intangible assets
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance income
Finance expense
Foreign exchange gain
Other income
Income (loss) before taxes
Current income tax expense
Deferred income tax expense (recovery)
Income tax expense (recovery)
x
Net income (loss)
x
Other comprehensive income (loss) that may be reclassified
subsequently to net income (loss):
Foreign currency translation adjustment
Comprehensive income (loss)
x
Income (loss) per share - Basic
Income (loss) per share - Diluted
Year ended December 31,
2022
2021
Note
6, 21
$146,356
159,334
305,690
66,629
121,525
188,154
117,536
2,535
2,268
24,809
53,515
2,539
20,893
106,559
10,977
(1,083)
10,024
(2,689)
(9,094)
13,819
1,171
9,882
11,053
$25,722
99,973
125,695
21,809
66,451
88,260
37,435
1,568
1,583
20,228
33,339
2,372
6,133
65,223
(27,788)
(164)
2,328
(1,216)
(2,007)
(26,729)
1,306
(5,852)
(4,546)
2,766
(22,183)
16,313
$19,079
$0.02
$0.0(cid:21)
(3,437)
($25,620)
($0.19)
($0.19)
22
22
8
9
10
19
23
23
20
20
See accompanying notes to these consolidated financial statements.
QH_2022_AR_V4.indd 35
2023-03-29 2:32:11 PM
2022 Annual Financial Results
35
Consolidated Statements of Financial Position
(in thousands and in Canadian dollars)
As at
Current assets
Cash and cash equivalents
Short-term investments
Restricted short-term investments
Accounts receivable, net
Unbilled revenue
Income taxes receivable
Inventories (net of obsolescence)
Prepaid expenses and deposits
Non-current assets
Accounts and other long-term receivables
Long-term prepaid expenses and deposits
Right-of-use assets, net
Property, plant and equipment, net
Intangible assets, net
Investment in joint venture
Deferred compensation asset
Deferred income tax assets
Goodwill
TOTAL ASSETS
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Current portion of lease liabilities
Current portion of deferred revenue
Current portion of long-term debt
Non-current liabilities
Deferred revenue
Long-term lease liabilities
Long-term debt
Convertible debentures
Derivative liability
Deferred compensation liabilities
Deferred income tax liabilities
TOTAL LIABILITIES
Shareholders’ equity
Capital stock
Contributed surplus
Accumulated other comprehensive income
Deficit
24
6
7
24
8
9
10
11
12
23
13
14
8
6
15
6
8
15
16
16
12
23
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes to these consolidated financial statements.
(cid:50)(cid:81)(cid:3)(cid:69)(cid:72)(cid:75)(cid:68)(cid:79)(cid:73)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:29)
(cid:18)(cid:86)(cid:18)(cid:3)(cid:53)(cid:82)(cid:91)(cid:68)(cid:81)(cid:81)(cid:72)(cid:3)(cid:36)(cid:81)(cid:71)(cid:72)(cid:85)(cid:86)(cid:82)(cid:81)
(cid:53)(cid:82)(cid:91)(cid:68)(cid:81)(cid:81)(cid:72)(cid:3)(cid:36)(cid:81)(cid:71)(cid:72)(cid:85)(cid:86)(cid:82)(cid:81)
(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:15)(cid:3)(cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)
(cid:18)(cid:86)(cid:18)(cid:3)(cid:51)(cid:68)(cid:80)(cid:72)(cid:79)(cid:68)(cid:3)(cid:54)(cid:87)(cid:72)(cid:72)(cid:85)
(cid:51)(cid:68)(cid:80)(cid:72)(cid:79)(cid:68)(cid:3)(cid:54)(cid:87)(cid:72)(cid:72)(cid:85)
(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)
36
2022 Annual Financial Results
Note December 31, 2022 December 31, 2021
$66,357
1,550
6,529
23,277
41,423
340
13,671
6,852
159,999
539
1,705
10,312
6,926
141,335
7,751
1,344
25,648
56,385
251,945
$70,746
1,851
3,095
30,176
35,926
385
13,731
5,192
161,102
505
945
7,761
5,694
151,355
7,458
1,524
37,786
53,065
266,093
$411,944
$427,195
$47,063
982
2,611
8,542
29,292
88,490
2,744
9,655
-
48,379
1,786
1,169
2,061
65,794
154,284
546,482
50,958
16,457
(356,237)
257,660
$411,944
$42,008
700
2,166
7,989
3,181
56,044
2,839
5,626
58,968
45,959
9,441
1,350
5,852
130,035
186,079
544,345
49,937
144
(353,310)
241,116
$427,195
QH_2022_AR_V4.indd 36
2023-03-29 2:32:12 PM
Consolidated Statements of Cash Flows
(in thousands and in Canadian dollars)
(cid:3)
(cid:3)
Cash generated from (used in) operating activities
Net income (loss)
Add (deduct) non-cash items:
Stock-based compensation expense
Depreciation of right-of-use assets
Depreciation and amortization
Foreign exchange gain
Other income, net of change in derivative liability fair value
Loss (gain) on disposal of assets
Deferred income tax expense (recovery)
Embedded derivatives
Change in fair value of derivative liability
Non-cash interest expense
Net change in non-cash working capital balances
Cash generated from (used in) operating activities
Financing activities:
Dividends paid
Advances from revolving credit facilities
Repayment of revolving credit facilities
Net proceeds from long-term debt
Proceeds from convertible debentures
Payment of lease liabilities
Repayment of long-term debt
Repurchase of shares for cancellation
Common shares issued for cash on the exercise of options
Cash (used in) generated from financing activities
Investing activities:
Proceeds from restricted short-term investments
Proceeds from short-term investments
Purchase of restricted short-term investments
Proceeds from sale of property, plant and equipment
Purchase of property, plant and equipment
Acquisition of business, VDS
Acquisition of business, ETC
Dividend received from joint venture
Purchase of intangible assets
Cash used in investing activities
Foreign exchange on cash held in foreign currencies
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of
Cash and cash equivalents, end of
Year ended December 31,
Note
2022
2021
$2,766
($22,183)
8
16
27
15
16
8
11
1,875
2,535
27,077
(2,689)
(1,540)
101
9,882
657
(7,655)
1,955
1,568
21,811
(1,216)
(1,924)
(77)
(5,852)
54
(92)
2,412
-
4,192
39,613
(5,693)
-
-
-
-
(2,216)
(36,128)
-
1,149
(42,888)
(7,384)
(13,340)
(5,648)
12,727
(12,727)
62,926
55,024
(1,659)
(776)
(2,065)
461
108,263
3,294
-
301
(6,728)
234
(2,943)
-
-
1,290
(5,746)
(10,298)
9,184
(4,389)
70,746
$66,357
4,000
(3,025)
117
(1,149)
(2,780)
(151,168)
1,348
(5,434)
(158,091)
(1,786)
(64,954)
135,700
$70,746
See accompanying notes to these consolidated financial statements.
QH_2022_AR_V4.indd 37
2023-03-29 2:32:12 PM
2022 Annual Financial Results
37
Consolidated Statements of Shareholders’ Equity
(in thousands and in Canadian dollars)
(cid:3)
(cid:3)
Capital
Stock
Contributed
Surplus
Note
Accumulated
Other
Comprehensive
Income
Total
Shareholders'
Equity
Deficit
Balance, January 1, 2021
$547,537
$46,250
$3,581
($325,438)
$271,930
Net loss
-
-
-
(22,183)
(22,183)
Repurchase of shares for cancellation
(4,027)
1,962
- -
Other comprehensive loss
-
-
(3,437) -
Stock-based compensation expense
-
Exercise of stock options
Common shares issued from restricted
stock units
Common shares issued from
performance stock units
18
667
156
12
1,955
(206)
- -
- -
(12)
- -
(12)
- -
-
Dividends declared
18
-
-
-
(5,689)
(5,689)
Balance, December 31, 2021
$544,345
$49,937
$144
($353,310)
$241,116
Balance, January 1, 2022
$544,345
$49,937
$144
($353,310)
$241,116
Net income
-
-
-
2,766
Other comprehensive income
-
-
16,313 -
Stock-based compensation expense
Exercise of stock options
Common shares issued from restricted
stock units
Common shares issued from
performance stock units
-
1,778
1,875
(629)
- -
- -
18
313
(179)
- -
134
46
(46)
- -
-
Dividends declared
18
-
-
-
(5,693)
(5,693)
Balance, December 31, 2022
$546,482
$50,958
$16,457
($356,237)
$257,660
(2,065)
(3,437)
1,955
461
144
2,766
16,313
1,875
1,149
See accompanying notes to these consolidated financial statements
(cid:3)
38
2022 Annual Financial Results
QH_2022_AR_V4.indd 38
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
1. NATURE OF BUSINESS
Quarterhill Inc. ("Quarterhill" or the "Company"), formerly “Wi-LAN Inc.” is a Canadian company incorporated and
domiciled in Canada. The address of the Company's registered office is 25 King St. W Suite 1101, Toronto, Ontario,
M5L 2A1. The Company's shares are listed under the symbol “QTRH” on the Toronto Stock Exchange (the “TSX”)
and on the United States OTCQX Best Market under the symbol “QTRHF”. Quarterhill is focused on the acquisition,
management and growth of companies in the intelligent transportation systems ("ITS") and innovation and
licensing industries (“Licensing”), which correspond with the Company’s operating segments identified as
Intelligent Transportation Systems and Licensing.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements of the Company were prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements were authorized for issue by the Board of Directors on March 21, 2023.
Basis of measurement
These consolidated financial statements have been prepared on a historical cost basis, except for certain financial
instruments that are measured at fair value on a recurring basis, as explained in the accounting policies below.
Basis of consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
The Company 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 and includes only the
Company’s net investment and equity in earnings of the joint venture. Consolidation of a subsidiary begins when
the Company obtains control over the subsidiary and ceases when the Company ceases to control the subsidiary.
All intercompany transactions and balances have been eliminated in these consolidated financial statements.
Functional and presentation currency
The consolidated financial statements are presented in Canadian dollars, which differs from the functional
currency of the Company which is US dollars.
The Company follows the requirements as prescribed in IAS 21, "The Effects of Changes in Foreign Exchange
Rates" to translate to the presentation currency. The assets and liabilities of the consolidated entity are
translated to Canadian dollars at the exchange rate as at the reporting date and the income and expenses are
QH_2022_AR_V4.indd 39
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2022 Annual Financial Results
39
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
translated to Canadian dollars at the monthly average exchange rates of the reporting period. Foreign currency
differences arising from the translation are recognized in other comprehensive income ("OCI"). Exchange
differences on monetary items forming part of net investment of the Company in its foreign subsidiaries is
recognized initially in other comprehensive income (loss) and reclassified from equity to profit or loss on disposal
of the net investment in accordance with IAS 21, "The Effects of Changes in Foreign Exchange Rates".
Estimates, assumptions, and judgments
The preparation of these consolidated financial statements in conformity with IFRS requires management to make
judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities
and the disclosure of contingent assets and liabilities at the reporting date. Uncertainty about these assumptions
and estimates could result in adjustments to the carrying amount of an asset or liability or the reported amount
of revenues and expenses in future periods. Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in
any future periods affected.
(cid:3)
(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:69)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)
Purchase prices related to business combinations are allocated to the underlying acquired assets and liabilities
based on their estimated fair value at the time of acquisition. The determination of fair value requires the
Company to make assumptions, estimates and judgments regarding cash flow projects, valuation techniques,
economic risk, weighted average cost of capital and future events. Significant judgments, estimates and
assumptions are also required by management in estimating the amount of contingent consideration payable.
As a result, the purchase price allocation impacts the Company’s reported assets and liabilities, including the
amounts allocated to intangible assets and goodwill, and future earnings due to the impacts of amortization
expense and impairment testing.
(cid:53)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
Contract revenue, contract costs, contract liabilities and contract assets relating to the ITS 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 the Company’s revenue, contract assets,
and contract liabilities.
40
2022 Annual Financial Results
QH_2022_AR_V4.indd 40
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(cid:3)
(cid:916)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:85)(cid:86)(cid:68)(cid:79)(cid:86)(cid:3)
The Company’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.
(cid:916)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3)
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 income and 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.
Business combinations
The Company uses the acquisition method of accounting for business combinations. The cost of an acquisition
is measured as the consideration transferred at fair value at the acquisition date. The determination of fair values
for the acquired intangible assets involves the use of discounted cash flow analyses. Any contingent consideration
to be transferred by the Company is recognized at fair value at the acquisition date. The Company determines
that a pre-acquisition contingency is probable in nature and estimable as of the acquisition date and records its
best estimate for the contingency as part of the purchase price allocation. The Company continues to gather
information and evaluates any pre-acquisition contingencies throughout the measurement period and makes
adjustments as necessary to the purchase price allocation. Changes in fair value of contingent consideration
outside of the measurement period are measured at fair value, with changes in fair value recognized in profit or
loss. Acquisition-related costs are expensed as incurred. Any excess of the fair value of the consideration
transferred over the fair value of identifiable net assets acquired, at the acquisition date, is recorded as goodwill.
QH_2022_AR_V4.indd 41
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2022 Annual Financial Results
41
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 consolidated statements of financial position dates.
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 statements of
income (loss).
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 three months or less. As at December 31, 2022, cash equivalents were $nil.
Short-term investments
Short-term investments are 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. As at December 31, 2022, the Company had a letter of
credit of $5,669 (2021- $997) outstanding against the credit facility.
Unbilled revenue
Unbilled revenue includes unbilled amounts typically resulting from sales under long-term contracts when the
cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the
customer accounted for under IFRS 15, "Revenue from Contracts with Customers" ("IFRS 15"). At any given period-
end, a large portion of the balance in this account represents the accumulation of labour, materials and other
costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings is
administratively billed in subsequent months. Also included in the 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.
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 comprises all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition.
42
2022 Annual Financial Results
QH_2022_AR_V4.indd 42
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment
Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment
losses, if any. Cost includes the purchase price and the directly attributable costs required to bring the asset to
the condition necessary for the asset to be capable of operating in the manner intended by management. When
components of an item of property, plant and equipment have different useful lives, they are accounted for as
separate items of property, plant and equipment and depreciated accordingly. The cost of replacing or repairing
a component of an item of property, plant and equipment is recognized in the carrying amount of the item if it is
probable that future economic benefits will occur and the cost can be measured reliably. The costs of routine
maintenance are recognized in profit or loss as incurred. Depreciation is calculated on the straight-line basis over
the estimated useful lives of the assets as follows:
(cid:3)
Leasehold improvements
Computer equipment and software
Furniture and fixtures
Machinery and equipment
Building
term of the lease
3 years
5 years
4-7 years
20 years
The Company reviews the residual value, useful lives and depreciation methods used on an annual basis and,
where revisions are required, the Company applies such changes in estimates on a prospective basis.
Intangible assets
Intangible assets consist of finite lived patents, developed software, customer relationships, non-competition
agreements, trade name and backlog.
Patents include patents and patent rights (hereinafter, collectively “patents”), are purchased separately, and are
carried at cost less accumulated amortization and impairments.
Developed software, customer relationships, and trade name were acquired through business acquisitions and
are recognized at fair value as determined on the acquisition date less accumulated amortization and
impairments. Fair value of the developed software and brand is determined based on the present value of
expected future cash flows. Customer relationships represent acquired customer relationships with customers
that are 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 intangible assets as
follows:
QH_2022_AR_V4.indd 43
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2022 Annual Financial Results
43
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Patents
Developed software
Customer relationships and backlog
Trade name
up to 20 years
5-15 years
7-15 years
7-12 years
Non-competition agreements
term of agreement
The Company continually evaluates the remaining estimated useful lives of its finite intangible assets to determine
whether events and circumstances warrant a revision to the remaining period of amortization and are accounted
for prospectively from the date of the change.
Impairment of non-financial assets
The carrying amounts of non-financial assets, excluding inventories, deferred income tax assets and contract
assets, are reviewed for impairment at each reporting date, or whenever events or changes in circumstances
indicate the carrying amounts may not be recoverable. If there are indicators of impairment, a review is
undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. Goodwill is
tested at least annually, at year-end, for impairment. For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest group of assets that generates cash inflows, the
cash-generating unit ("CGU"), from continuing use that are largely independent of the cash inflows of other assets
or groups of assets.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell.
The value in use is determined by the cash flows expected to arise from the CGU discounted using a pre-tax
discount rate that reflects the current market assessments of the time value of money and asset-specific risk.
In determining fair value less costs of disposal, an appropriate valuation model is used. These calculations are
corroborated by the use of valuation multiples, quoted share prices and other available fair value indicators. An
impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable
amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs
are allocated first to reduce the carrying amount of any goodwill allocated to the CGUs, and then to reduce the
carrying amount of the other assets in the CGUs.
For non-financial assets that have been previously impaired, excluding goodwill, an assessment is made at each
reporting date as to whether there is any indication that previous impairment losses may no longer exist or may
have decreased. If such an indication exists, the Company estimates the recoverable amount of the asset or CGU.
A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to
determine the asset’s recoverable amount since the impairment loss was recognized. The impairment loss to be
reversed in the consolidated statements of income (loss) and comprehensive income (loss) is limited to the
44
2022 Annual Financial Results
QH_2022_AR_V4.indd 44
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
recoverable amount, but not beyond the carrying amount, net of depreciation or amortization, that would have
arisen if the prior impairment loss had not been recognized.
Investment in joint venture
The Company’s joint arrangement has been determined to be a joint venture based on the Company's assessment
of its contractual rights and obligations. Joint ventures are accounted for using the equity method whereby the
investments are initially recorded at cost. The investment is increased or decreased to reflect the Company’s
proportionate share of the post-acquisition earnings or losses and equity movements of the investee, after
adjustments to align the accounting policies with those of the Company. When the Company’s share of losses
exceeds its interest in an equity-accounted investee, the carrying amount of that interest, including any long-term
investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that the
Company has an obligation or has made payments on behalf of the investee.
Deferred compensation asset and liability
The Company recognizes a deferred compensation plan that enables upper level management and executives to
defer compensation until retirement. The Company funds these deferred compensation liabilities by making
contributions to a trust invested in various mutual funds, presented as deferred compensation assets on the
financial statements.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net
identifiable assets of the acquired business at the date of acquisition. Goodwill is presented separately on the
consolidated statements of financial position and is subsequently measured at cost less any accumulated
impairment losses.
Revenue recognition
The Company recognizes revenue, at an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services, when control of the promised goods or services is transferred
to the customer. Revenue represents the amount that the Company expects to receive for products and services
in its contracts with customers, net of sales taxes. 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. The Company reports revenue as either Licensing or Intelligent Transportation Systems, which
corresponds with its operating segments. The following paragraphs describe the specific revenue recognition
policies for each of the Company’s significant types of revenue by segment.
QH_2022_AR_V4.indd 45
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2022 Annual Financial Results
45
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)(cid:3)
(cid:3)
(cid:47)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
Right-to-use
Patent licenses are considered a promise to provide the right to use specific intellectual property to the customer.
Revenue from contracts containing no sales or usage-based royalties is recognized when the patent right is
effective, with the exception of certain instances where licensing rights applicable to future portfolio licenses are
granted. In these arrangements, revenue on these specific rights would be recognized over the term of the
applicable rights. Payment is generally either due immediately or within 30 days.
Patent license revenue earned in the Licensing segment is considered a promise to provide the right to use
patented technologies, is recognized when the patent right is effective, and is generally one-time in nature, which
may result in significant fluctuations in revenue, gross profit and net income or loss on a year over year basis.
Sales or usage-based royalty
Revenue from contracts containing a sales or usage-based royalty is recognized only when the associated sale or
usage occurs or the performance obligation to which the royalty has been allocated has been satisfied. Customers
generally report their royalty obligations one quarter in arrears and, accordingly, the Company estimates the
expected royalties to be reported for an accounting period, with an adjustment for actual royalties reported in
the following financial reporting period. Payment is due upon submission of the royalty report.
(cid:916)(cid:81)(cid:87)(cid:72)(cid:79)(cid:79)(cid:76)(cid:74)(cid:72)(cid:81)(cid:87)(cid:3)(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:83)(cid:82)(cid:85)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:54)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3)(cid:86)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
Contracted projects(cid:3)
The majority of sales of integrated systems are delivered as contracted projects with contract terms of less than
one year to more than five years, and the Company typically transfers control of goods or services, and satisfies
performance obligations over time and therefore recognizes revenue over time as these performance obligations
are satisfied. This continuous transfer of control to the customer is often supported by the customer’s physical
possession or legal title to the work in process, contractual clauses that provide the Company with a present right
to payment for work performed to date plus a reasonable profit in the event a customer unilaterally terminates
the contract for convenience, and as the customer simultaneously receives and consumes the benefits provided
by the Company’s performance. The Company’s contract types include fixed price and time and materials
contracts. The transaction price includes amounts expected to be received in exchange for the goods or services
plus any contract amendments that are expected to be received. Payment terms are based on completion of
milestones throughout the project life for fixed price contracts and monthly for time and materials projects.
Many of these projects have distinct performance obligations typically encompassing one or more of installation,
maintenance and warranty. A contract’s transaction price is allocated to each distinct performance obligation
46
2022 Annual Financial Results
QH_2022_AR_V4.indd 46
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
using the best estimate of the standalone selling price of each distinct good or service in the contract. The primary
method used to estimate standalone selling price is the expected cost plus margin approach.
Installations
Revenue for the installation obligations of fixed price contracts is recognized over time using the input method
based on costs incurred relative to the total expected costs to complete each project. Control is transferred to the
customer over time as the customer gains physical possession or legal title to the work in process, as well as
contractual clauses that provide the Company with a present right to payment for work performed to date plus a
reasonable profit in the event a customer unilaterally terminates the contract for convenience and accordingly,
revenue earned from the contract is recognized over time based on the extent of progress towards completion
of the performance obligation based on costs incurred relative to the total expected costs to complete each
project. The Company reviews and updates the contract-related estimates regularly. Determining the contract
costs and estimates to complete requires significant judgment. Adjustments are recognized in profit on contracts
under the cumulative catch-up method in the period the adjustment is identified. If the Company anticipates the
estimated remaining costs to completion will exceed the value allocated to the performance obligation, the
resulting loss is recognized immediately.
Maintenance
The maintenance obligation of contracts with multiple performance obligations is recognized over the term of the
contract as control is transferred to the customer as the customer simultaneously receives and consumes the
benefits provided by the Company’s performance. Stand-alone maintenance service contracts are typically time
and materials, but some are fixed price, for which revenue is recognized in the same manner as fixed price
installations, over time using the input method based on costs incurred relative to the total expected costs to
complete each project. For time and materials contracts, labour and material rates are established within the
contract. Revenues from time and materials contracts are recognized as control is transferred to the customer
based on cost plus margin. These services are billed on a monthly basis and collected shortly thereafter.
Warranty
Revenue from warranty obligations is recognized over time based on time lapsed as this best represents the value
transferred to the customer.
Product sales
Product sales revenue is recognized when control transfers under the term of the enforceable contract.
Customers are billed when transfer of control occurs and payments are typically due within 30 days.
QH_2022_AR_V4.indd 47
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2022 Annual Financial Results
47
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments
(cid:53)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
Financial assets and liabilities, with the exception of accounts receivable and unbilled revenues that do not have
a significant financing component, are initially recognized at fair value plus or minus directly attributable
transaction costs as appropriate, except for financial assets at fair value through profit and loss ("FVTPL"), for
which transaction costs are expensed. Accounts receivable and unbilled revenue that does not have a significant
financing component are initially measured at the transaction price determined in accordance with IFRS 15.
Accounts receivable are recognized on the date that they originate, and all other financial instruments are
recognized when the Company becomes a party to the contractual provisions of the instrument. The Company
considers whether a contract contains an embedded derivative when the Company first becomes party to it.
Embedded derivatives are separately accounted for from the host contract if the host contract is not measured
at FVTPL and when the economic characteristics and risks are not closely related to those of the host contract.
Reassessment of the fair value of derivatives occurs each reporting period, with the changes in fair value
recognized through profit or loss.
(cid:3)
Financial assets
The classification of financial assets depends on the business model for managing the financial assets and the
associated contractual cash flows. A financial asset is measured at amortized cost if it is held within a business
model whose objective is to hold assets to collect contractual cash flows, and its contractual terms give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal amount
outstanding.
The Company’s financial assets consist of cash and cash equivalents, short-term investments, restricted short-
term investments, accounts receivable, unbilled revenue, and deferred compensation asset, all of which are
classified at amortized cost.
Financial liabilities
The Company determines the classification of its financial liabilities at initial recognition. The Company’s financial
liabilities consist of accounts payable and accrued liabilities, convertible debentures, long-term debt and deferred
compensation liabilities, which are classified at amortized cost.
Subsequent measurement(cid:3)(cid:3)
Subsequent to initial recognition, financial assets and liabilities classified at amortized cost are measured using
the effective interest method, less, in the case of financial assets, any impairment. Interest income and expense,
foreign exchange gains and losses, impairment and any gain or loss on derecognition are recognized in profit and
48
2022 Annual Financial Results
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
loss. Contingent liabilities are reported at fair value and the gain or loss recognized in profit and loss as an other
charge.
Derecognition
The Company derecognizes a financial asset when the rights to receive cash flows from the financial asset have
expired or have been transferred and the Company has transferred substantially all risks and rewards of
ownership. The Company derecognizes a financial liability when the contractual obligations are discharged,
cancelled or expired.
Derivative instruments
The Company may use 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. Embedded derivatives are separated from the host contract and accounted
for separately if the host contract is not a financial asset or liability and certain criteria are met. Derivative assets
and liabilities are remeasured at each subsequent reporting period with any gains or losses arising from changes
in fair value recorded within profit or loss.
The Company has elected not to apply hedge accounting to derivative contracts; as such, these derivative financial
instruments are recorded at fair value upon recognition and on a recurring basis, with subsequent changes in fair
value recorded in profit or loss during the period of change. Derivatives are reported as other current assets when
they have a positive fair value and as other current liabilities when they have a negative fair value.
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 Company’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The
three levels of the fair value hierarchy are as follows:
Level 1 – Inputs are based on quoted prices (unadjusted) in active markets that are accessible at the reporting
date for identical assets or liabilities;
Level 2 – Inputs are based on quoted prices included in Level 1 that are observable for the asset or liability either
directly (i.e., prices) or indirectly (i.e., derived from prices); and
QH_2022_AR_V4.indd 49
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2022 Annual Financial Results
49
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Level 3 – Inputs are based on prices or valuation techniques that are both unobservable and significant to the
overall fair value measurement.
The following methods and assumptions were used to estimate the fair values of each class of financial
instruments for which it is practicable to estimate that value.
(cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
The fair value of sales contract 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. The fair value of derivative liabilities related to the convertible debentures
is measured using the Black-Scholes option pricing model.
(cid:3)
(cid:38)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:72)(cid:81)(cid:87)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)
Contingent liabilities are carried at fair value, which is calculated using management’s estimates or, where
appropriate, a Monte Carlo simulation model.
The carrying amount of the Company’s other financial assets and liabilities, including cash and cash equivalents,
short-term investments, restricted short-term investments, accounts receivable, unbilled revenue, and accounts
payable and accrued liabilities approximate their fair value due to their short-term maturity. The fair value of the
bank indebtedness and long-term debt approximates the carrying amount since these debt instruments have
floating interest rates. The fair value of convertible debentures is initially recognized at fair value, and
subsequently measured at amortized cost using the effective interest rate method.
Impairment of non-derivative financial assets
The Company applies the IFRS 9, "Financial Instruments" simplified approach to measuring expected credit losses,
which uses a lifetime expected loss allowance for all accounts receivable and contract assets. Lifetime expected
credit losses are estimated based on factors such as the Company’s past experience of collecting payments,
observable changes in national or local economic conditions that correlate with default on receivables, and
financial condition of the borrower. Financial assets are written off when there is no reasonable expectation of
recovery.
Research and development
Research costs are included in the consolidated statements of income (loss) and comprehensive income (loss) in
the periods in which they are incurred, net of earned investment tax credits. Software development costs are
deferred and amortized when technological feasibility has been established, or otherwise are expensed as
incurred.
50
2022 Annual Financial Results
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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
obligations are 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, 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 are
recognized in the reporting period when such revisions are made.
Financing costs
Financing costs are comprised of borrowing costs related to short- and long-term debt and the unwinding of the
discount on provisions.
Leases
At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the
contract conveys the right to control the use of an identified asset for a period of time in exchange for
consideration. The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease
commencement date, which is the date the leased asset is available for use. The Company has elected not to
separate lease and non-lease components and instead treats them all as lease payments and a single lease
component.
The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily
determined, the Company’s incremental borrowing rate. The incremental borrowing rate is the rate that the
Company would have to pay to borrow the funds necessary to obtain an asset of similar value to the ROU asset
in a similar economic environment with similar terms, security and conditions. The lease term includes periods
covered by an option to extend if the Company is reasonably certain to exercise that option. The lease liability is
measured at amortized cost using the effective interest method. The lease liability is remeasured when there is a
change in future lease payments arising from a change in the Company’s estimate of the amount expected to be
payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a
purchase, extension or termination option. When the lease liability is remeasured, a corresponding adjustment
QH_2022_AR_V4.indd 51
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2022 Annual Financial Results
51
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
is made to the carrying amount of the ROU asset unless it has been reduced to zero. Any further reduction in the
lease liability is then recognized in profit or loss.
The ROU asset is initially measured based on the initial lease liability adjusted for any lease payments made at or
before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and
remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease
incentives received. The ROU assets are depreciated over the shorter of the lease term and the useful life of the
underlying asset using the straight-line method as this most closely reflects the expected pattern of the
consumption of the future economic benefits. In addition, the ROU asset can be periodically reduced by
impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
A lease modification will be accounted for as a separate lease if the modification increases the scope of the lease
and if the consideration for the lease increases by an amount commensurate with the stand-alone price for the
increase in scope. For a modification that is not a separate lease or where the increase in consideration is not
commensurate, at the effective date of the lease modification, the Company will remeasure the lease liability
using the Company’s incremental borrowing rate on the date of modification, when the rate implicit to the lease
is not readily available, with a corresponding adjustment to the ROU asset.
The lease payments associated with short-term and low-value leases are recognized as an expense on a straight-
line basis over the lease term as the Company has elected the relevant practical expedients. Short-term leases
are those with a lease term of 12 months or less. Low-value asset leases are those leases where the asset being
leased when new has a value of less than US$5.
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision-maker ("CODM"). The CODM is the person or persons who are responsible for allocating
resources and assessing performance of the operating segments. The CODM has been identified as the Chief
Executive Officer.
Income taxes, deferred taxes and investment tax credits
Income taxes comprise current and deferred income taxes. Income taxes are recognized in the consolidated
statements of income (loss) and comprehensive income (loss), except to the extent that they relate to items
recognized directly in equity or in OCI, in which case the income taxes are also recognized in equity or in OCI.
52
2022 Annual Financial Results
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Current income taxes are the expected taxes payable on the taxable income for the year, using income tax rates
enacted or substantively enacted, at the end of the reporting period, and any adjustment to income taxes payable
in respect of previous years.
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. 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 carrying amount of deferred tax assets is reviewed at each reporting date and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part
of the deferred tax asset to be used. Unrecognized deferred tax assets are reassessed at each reporting date and
are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax
assets to be recovered.
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 these investment tax credits reported as assets based
on its estimations of amounts and timing of future taxable income and future cash flows in the related jurisdiction.
Government grants
The Company recognizes government grants when there is reasonable assurance that the Company will comply
with the corresponding conditions attached to the grant and that the grant will be received.
Government grants are recognized in the consolidated statements of income (loss) and comprehensive income
(loss) on a systematic basis over the periods in which the Company recognizes as expenses the related costs for
which the grants are intended to compensate and are deducted from the related expense.
QH_2022_AR_V4.indd 53
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2022 Annual Financial Results
53
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
3. FUTURE ACCOUNTING PRONOUNCEMENTS
Listed below are the standards, amendments and interpretations that the Company reasonably expects to be
applicable at a future date and intends to adopt when they become effective.
Amendments to IAS 1 and IFRS Practice Statement 2 – Disclosure of Accounting Policies
In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2, “Making Materiality
Judgements”, in which it provides guidance and examples to help entities apply materiality judgments to
accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that
are more useful by replacing the requirement for entities to disclose their "significant" accounting policies with a
requirement to disclose their material accounting policies and adding guidance on how entities apply the concept
of materiality in making decisions about accounting policy disclosures. The amendments are applicable for annual
reporting periods beginning on or after January 1, 2023, with early adoption permitted. Since the amendments to
the IFRS Practice Statement 2 provide non-mandatory guidance on the application of the definition of material to
accounting policy information, an effective date for these amendments is not necessary.
Amendments to IAS 8, Definition of Accounting Estimate – Changes to Accounting Estimates and Errors
In February 2021, the IASB issued amendments to IAS 8, in which it introduces a definition of ‘accounting
estimates’. The amendments clarify the distinction between changes in accounting estimates and changes in
accounting policies and the correction of errors. Also, they clarify how entities use measurement techniques and
inputs to develop accounting estimates. The amendments are effective for annual periods beginning on or after
January 1, 2023, with early adoption permitted.
Amendments to IAS 1, Presentation of Financial Statements - Classification of Liabilities as Current or
Non-Current
In January 2020 and October 2022, the IASB issued amendments to paragraphs 69 - 76 of IAS 1 to clarify the
requirements for classifying liabilities as current or non-current. The amendments specify that the conditions
which exist at the end of a reporting period are those which will be used to determine if a right to defer settlement
of a liability exists. The amendments also clarify the situations that are considered a settlement of a liability. The
amendments are effective for annual periods on or after January 1, 2024, with early adoption permitted. The
amendments are to be applied retrospectively.
Management is currently assessing the impact of these amendments.
54
2022 Annual Financial Results
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
4. BUSINESS COMBINATIONS
Acquisitions are accounted for using the acquisition method of accounting and the financial statements include
the acquisition results since the respective acquisition dates.
On January 5, 2021, the Company’s wholly owned subsidiary, International Road Dynamics Inc. (“IRD”), acquired
100% of the issued and outstanding shares of Sensor Line – Gesellschaft für Optoelektronische Sensoren mbH
(“Sensor Line”), a German ITS provider of highly regarded fiber optic traffic sensors for road and rail markets. On
April 28, 2021, IRD acquired 100% of the issued and outstanding shares of VDS Verkehrstechnik GmbH (“VDS”), a
German ITS provider of high-precision monitoring devices. Both Sensor Line and VDS have been integrated into
IRD and form part of the ITS segment. On September 1, 2021, the Company acquired 100% of the issued and
outstanding equity of Richardson, Texas-based Electronic Transaction Consultants, LLC ("ETC") by acquiring all the
issued and outstanding shares of its parent holding companies. ETC is a leader in providing tolling and mobility
systems to tolling authorities across the United States. The purchase of these acquisitions broadens the
Company’s product and services suite in the ITS industry and expands its geographic footprint further into the
European and North American markets. The transactions, valued at $5,933 (€3,800), $2,780 (€1,837) and $151,313
(USD $120,023) for Sensor Line, VDS and ETC, respectively, were financed through the Company’s cash reserves
and debt financing.
The following tables summarize the fair value allocations of identifiable assets acquired and liabilities assumed
as part of the acquisitions on each closing date:
Sensor Line:
Cash consideration paid
Identifiable net assets acquired at fair value:
Accounts receivable
Inventories
Prepaid expenses and deposits
Property, plant and equipment
Intangible assets
Customer relationships
Developed software
Goodwill
Deferred income tax assets
Bank indebtedness
Accounts payable and accrued liabilities
Income taxes payable
Deferred income tax liabilities
Total identifiable net assets at fair value
$5,933
$793
547
103
151
2,322
854
2,563
36
(142)
(295)
(46)
(953)
$5,933
QH_2022_AR_V4.indd 55
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2022 Annual Financial Results
55
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
4. BUSINESS COMBINATIONS (continued)
VDS:
Cash consideration paid
Identifiable net assets acquired at fair value:
Accounts receivable
Inventories
Prepaid expenses and deposits
Right-of-use assets
Property, plant and equipment
Intangible assets
Customer relationships
Developed software
Goodwill
Accounts payable and accrued liabilities
Lease liabilities
Deferred income tax liabilities
Total identifiable net assets at fair value
$2,780
$154
674
16
600
271
746
640
995
(316)
(600)
(400)
$2,780
56
2022 Annual Financial Results
QH_2022_AR_V4.indd 56
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
4. BUSINESS COMBINATIONS (continued)
ETC:
Cash consideration paid
Identifiable net assets acquired at fair value:
Cash and cash equivalents
Accounts receivable
Unbilled revenue
Prepaid expenses and deposits
Accounts and other long-term receivables
Deferred compensation asset
Right-of-use assets
Property, plant and equipment
Intangible assets
Customer relationships
Developed software
Trade name and other
Non-competition agreement
Goodwill
Accounts payable and accrued liabilities
Deferred revenue
Lease liabilities
Deferred compensation liability
Deferred income tax liabilities
Total identifiable net assets at fair value
$151,313
$145
9,589
9,715
2,665
218
1,413
4,201
2,974
50,680
34,039
16,137
1,135
33,379
(8,452)
(291)
(4,202)
(1,257)
(775)
$151,313
The goodwill recognized is attributable to intangible assets that do not qualify for separate recognition and may
include expected synergies arising from the combined operations and the Company’s other existing businesses
within the ITS segment, expected growth in the markets that they serve, and the strength of the assembled
workforce in each. Only the goodwill from the ETC acquisition is deductible for tax purposes.
For the year ended December 31, 2021, sales and net loss relating to the Sensor Line acquisition were $3,539 and
$25. Due to the timing of the acquisition of Sensor Line, these amounts are the same as if the acquisition had
occurred at the beginning of the year. Sales and net income relating to the VDS acquisition were $2,314 and $98
for the year ended December 31, 2021. If the acquisition of VDS had been completed as of January 1, 2021, the
Company estimates that this subsidiary’s revenue would have been $2,899 and its net loss would have been $178
for the year ended December 31, 2021. The sales and net income of ETC for the year ended December 31, 2021
were $36,446 and $162. Had the acquisition of ETC occurred on January 1, 2021, sales and net loss are estimated
to have been $91,440 and $5,473 for the year ended December 31, 2021.
QH_2022_AR_V4.indd 57
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2022 Annual Financial Results
57
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
5. FINANCIAL INSTRUMENTS
Derivatives include the embedded derivative portion of the unearned revenue of US dollar denominated sales
contracts in the Company’s Canadian, Chilean and Mexican subsidiaries. The fair value of sales contract
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. Derivatives
also include the derivative liability portion of convertible debentures and are measured using the Black-Scholes
option pricing model. The fair value of convertible debentures and long-term debt approximates carrying value
as these instruments bear interest at market rates. The carrying amount of the Company’s other financial assets
and liabilities, including cash and cash equivalents, short-term investments, restricted short-term investments,
accounts receivable, unbilled revenue and accounts payable and accrued liabilities, approximates their fair values
due to the short-term maturity of these items.
Inputs used to calculate the fair value of derivative and convertible debentures financial instruments are classified
as Level 2 inputs, inputs used to calculate contingent liabilities are classified as Level 3 inputs, and inputs for all
other financial instruments for which fair value approximates carrying value are classified as Level 1 inputs.
6. UNBILLED REVENUE AND DEFERRED REVENUE
Significant changes in unbilled revenue and deferred revenue balances during the year ended December 31, 2022
are as follows:
As at
Unbilled revenue
Deferred revenue - current
Deferred revenue - non-current
Net contract assets
December 31, 2022
December 31, 2021
$ Change
$41,423
(8,542)
(2,744)
$30,137
$35,926
(7,989)
(2,839)
$25,098
$5,497
(553)
95
$5,039
Revenue recognized for the year ended December 31, 2022 that was included in deferred revenue at the
beginning of the year was $6,834 (2021- $3,129).
58
2022 Annual Financial Results
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
7. INVENTORIES
As at
Raw materials
Original equipment manufacturer materials
Work in process
Finished goods
December 31, 2022 December 31, 2021
$2,101
6,517
1,642
3,411
$2,150
5,528
1,564
4,489
$13,671
$13,731
During the year, inventories expensed within direct cost of revenues were $21,200 (2021- $24,230). Write-downs
of inventory that were included in direct cost of revenues for the year were $105 (2021- $230). Reversals of write-
downs recognized during the year were $127 (2021- $125).(cid:3)
8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company has leases for corporate offices, production facilities, vehicles and equipment used in operations.
These leases have remaining lease terms ranging from 3 months to 10 years, some of which include options to
extend the leases for up to 14 years or to terminate the lease with notice periods of 120 days to 6 months or at
predetermined dates as specified within the lease contract. The Company has classified the assets related to
these leases as right-of-use assets and the liabilities associated with the future lease payments under these leases
as lease liabilities. The following table provides details of changes in the Company's right-of-use assets:
QH_2022_AR_V4.indd 59
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2022 Annual Financial Results
59
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (continued)
Note
Buildings
Vehicles and
Operations
Equipment
Total
Cost
Balance, January 1, 2021
Additions
Acquisitions through business combinations
4
Disposals
Foreign currency translation
Balance, December 31, 2021
Additions
Disposals
Impairment
Foreign currency translation
Balance, December 31, 2022
Accumulated Depreciation
Balance, January 1, 2021
Depreciation
Foreign currency translation
Balance, December 31, 2021
Depreciation
Disposals
Foreign currency translation
Balance, December 31, 2022
Net Book Value
Balance, January 1, 2021
Balance, December 31, 2021
Balance, December 31, 2022
$5,899
$31
$5,930
909
-
4,375
(131)
(118)
10,934
6,304
426
-
(20)
437
63
(46)
-
(1,778)
-
731
$16,145
$2,123
1,441
(107)
3,457
2,371
(46)
230
$6,012
$3,776
$7,477
$10,133
(2)
$498
$27
127
(1)
153
164
-
2
$319
$4
$284
$179
909
4,801
(131)
(138)
11,371
6,367
(46)
(1,778)
729
$16,643
$2,150
1,568
(108)
3,610
2,535
(46)
232
$6,331
$3,780
$7,761
$10,312
60
2022 Annual Financial Results
QH_2022_AR_V4.indd 60
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (continued)
The following table provides details of changes in the Company's lease liabilities:
(cid:3)
Balance, January 1, 2021
Additions
Acquisitions through business combinations
4
Disposals
Interest
Payments
Foreign currency translation
Balance, December 31, 2021
Additions
Interest
Payments
Foreign currency translation
Balance, December 31, 2022
(cid:3)
As at
Maturities of lease liabilities:
2023
2024
2025
2026
2027
Thereafter
Total lease payments
Less imputed interest
Total
Comprised of:
Current portion of lease liabilities
Long-term lease liabilities
Lease liabilities as of December 31, 2022
(cid:3)
(cid:3)
Note
$3,759
909
4,802
(131)
245
(1,659)
(133)
7,792
6,367
329
(2,545)
323
$12,266
December 31, 2022
$3,007
2,884
2,628
2,133
1,582
1,685
13,919
1,653
$12,266
$2,611
9,655
$12,266
QH_2022_AR_V4.indd 61
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2022 Annual Financial Results
61
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
9. PROPERTY, PLANT AND EQUIPMENT
(cid:3)
Cost
Balance, January 1, 2021
Additions
Acquisitions through business
combinations
Disposals
Foreign currency translation
Balance, December 31, 2021
Additions
Disposals
Foreign currency translation
Balance, December 31, 2022
Accumulated Depreciation
Balance, January 1, 2021
Depreciation
Disposals
Balance, December 31, 2021
Depreciation
Disposals
Foreign currency translation
Balance, December 31, 2022
Net Book Value
Balance, January 1, 2021
Balance, December 31, 2021
Balance, December 31, 2022
(cid:3)
Leasehold
Improvements
Computer
Equipment &
Software
Furniture &
Fixtures
Machinery &
Equipment
Land &
Building
Total
$438
$3,936
$680
$2,295
$704
$8,053
610 -
1,149
34
158
8
1,979
- -
(3)
477
26
(58)
6,015
508
347
676
(44)
(13)
1,646
781
704
29
(381) -
(158)
3,070
2,072
(32)
701
7
- - -
(624) -
-
9
3
15
503
6,532
2,430
4,533
167
43
3,318
633
627
207
1,097
701
24
732
61
(1)
- - -
(385) -
(57)
3,894
487
(7)
827
787
(180)
1,233
925
(9)
51
19
210
50
- - -
(622) -
-
(18)
(24)
(14)
260
4,363
1,590
1,522
(1)
69
3,396
(425)
(264)
11,909
3,394
(624)
51
14,730
5,270
1,583
(385)
(253)
6,215
2,268
(622)
(57)
7,804
$271
$618
$53
$1,198
$643
$2,783
$267
$2,121
$819
$1,837
$650
$5,694
$243
$2,169
$840
$3,011
$663
$6,926
Foreign currency translation
-
The Company recognized no impairment during the year ended December 31, 2022 (2021- $nil).
(cid:3)
(cid:3)
62
2022 Annual Financial Results
QH_2022_AR_V4.indd 62
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
10. INTANGIBLE ASSETS
Customer
Relationships,
Trade Name,
Non-
competition
Agreements
and Backlog
Total
Patents
Developed
Software
$398,731
$10,322
$21,004 $430,057
4,663
771 -
5,434
Cost
Balance, January 1, 2021
Additions
Acquisitions through business combinations
-
35,533
71,020 106,553
Disposals
Foreign currency translation
Balance, December 31, 2021
Additions
Foreign currency translation
Balance, December 31, 2022
Accumulated Amortization
Balance, January 1, 2021
Amortization
Disposals
Foreign currency translation
Balance, December 31, 2021
Amortization
Foreign currency translation
Balance, December 31, 2022
Net Book Value:
Balance, January 1, 2021
Balance, December 31, 2021
Balance, December 31, 2022
(81) - -
(826)
402,487
320
46,946
(81)
(112)
394
92,418 541,851
-
5,714 -
5,714
26,654
429,141
2,618
55,278
4,730
34,002
97,148 581,567
352,756
12,589
7,292
2,836
10,748 370,796
4,803
20,228
(27) - -
(457)
364,861
13,496
24,674
403,031
9
10,137
6,576
309
17,022
(27)
(501)
(53)
15,498 390,496
4,737
24,809
(56)
24,927
20,179 440,232
$45,975
$3,030
$10,256 $59,261
$37,626
$36,809
$76,920 $151,355
$26,110
$38,256
$76,969 $141,335
QH_2022_AR_V4.indd 63
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2022 Annual Financial Results
63
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
11. INVESTMENT IN JOINT VENTURE
Balance, beginning of the year
Currency (loss) gain on financial statement translation
Company's share of earnings
Dividend received
Balance, as at
December 31, 2022 December 31, 2021
$7,458
(223)
1,806
(1,290)
$7,751
$6,704
178
1,924
(1,348)
$7,458
XPCT is a joint venture in China in which the Company’s subsidiary IRD holds a 50% interest. XPCT has two business
divisions providing products and services to both the ITS industry and construction equipment manufacturers.
As a distributor for the Company's ITS manufactured goods, XPCT provides a strategic advantage to the Company
to increase sales in the Chinese market.
IRD had sales to XPCT of $125 during the year ended December 31, 2022 (2021- $150). As at December 31, 2022,
XPCT had no amounts owing to IRD (2021- $1).
As at December 31, 2022, IRD has an outstanding 100% joint and several liability guarantee to XPCT, for a loan in
the amount of 15,000 yuan, or $2,945 (2021- $3,008); 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.
The Company's ownership interest comprises a 50% share of net assets and net earnings of XPCT as well as
purchase price adjustments to allocate fair values assigned to certain assets and liabilities at the time of
acquisition. Summary financial information for XPCT is as follows:
As at
Cash
Other current assets
Non-current assets
Current liabilities
Accounts payable and accrued liabilities
Short-term loans
Non-current liabilities
Net assets - 100%
Net assets attributable to the Company - 50%
(cid:3)
(cid:3)
(cid:3)
December 31, 2022 December 31, 2021
$446
40,532
902
(14,590)
(9,844)
(1,944)
$15,502
$7,751
$1,942
38,888
1,456
(14,630)
(10,753)
(1,987)
$14,916
$7,458
64
2022 Annual Financial Results
QH_2022_AR_V4.indd 64
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
11. INVESTMENT IN JOINT VENTURE (continued)
(cid:3)
(cid:3)
Revenues
Direct cost of revenues
Depreciation and amortization
Finance expense
Other expenses
Income before income taxes
Income tax expense
Net income - 100%
Net income attributable to the Company - 50%
12. DEFERRED COMPENSATION
Year ended December 31,
2022
2021
$43,943
(35,915)
(1,499)
(962)
(1,322)
4,245
633
$3,612
$1,806
$53,722
(44,698)
(1,428)
(980)
(2,082)
4,534
686
$3,848
$1,924
Within the Company's ITS segment, its subsidiary, ETC, provides a deferred compensation plan that enables upper
level management and executives to defer compensation until retirement. ETC funds these deferred
compensation liabilities by making contributions to a trust invested in various mutual funds, presented as a
deferred compensation asset on the financial statements.
13. GOODWILL
The changes in the carrying amount of goodwill by segment are presented in the table below:
Balance, January 1, 2021
Acquisitions
Foreign currency translation
Balance, December 31, 2021
Foreign currency translation
Balance, December 31, 2022
Note
Licensing
Intelligent
Transportation
Systems
Total
$16,093
$0 $16,093
4
-
36,937 36,937
(32)
16,061
1,065
67
35
37,004 53,065
2,255
3,320
$17,126
$39,259 $56,385
(cid:3)
In accordance with the IFRS guidance related to goodwill, 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 tests goodwill for impairment annually at year-end
using data as of December 31 of that year at the level of the group of CGUs to which the goodwill is allocated,
which corresponds with the corresponding operating segment.
QH_2022_AR_V4.indd 65
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2022 Annual Financial Results
65
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
13. GOODWILL (continued)
The recoverable amount of the CGU to which the goodwill belongs is determined based on a value-in-use
calculation that discounts the present value of estimated future cash flows at an appropriate risk-adjusted rate.
The Company uses its internal forecasts to estimate future cash flows and includes an estimate of long-term
future growth rates based on its most recent views of the long-term outlook for each business for a period of five
years and did not use terminal growth rate. Actual results may differ from those assumed in these forecasts. The
Company derives its discount rates using a capital asset pricing model and by analyzing published rates for
industries relevant to its reporting units to estimate the cost of equity financing. The Company uses discount rates
that are commensurate with the risks and uncertainty inherent in the respective businesses and in its internally
developed forecasts. The discount rates used in the licensing and ITS segment valuations as at December 31, 2022
were 14% and 12%, respectively (2021- 12% and 8%, respectively).
The results of the assessments performed as at December 31, 2022 and December 31, 2021 indicated that the
recoverable amount of these operating segments exceeded their carrying values, and management believes that
no reasonably possible change in any of the above key assumptions would have caused the carrying amount to
exceed its recoverable amount.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based
on a number of factors including actual operating results. It is reasonably possible that the judgments and
estimates described above could change in future periods.
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
(cid:3)
As at
Trade payables
Accrued compensation
Accrued contingent partner payments & legal fees
Dividends payable
Accrued litigation costs
Accrued project losses
Other current liabilities
(cid:3)
(cid:3)
(cid:3)
December 31, 2022 December 31, 2021
$21,376
10,781
1,146
1,433
6,473
4,228
1,626
$25,448
7,325
3,156
1,424
1,161
1,471
2,023
$47,063
$42,008
66
2022 Annual Financial Results
QH_2022_AR_V4.indd 66
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
15. LONG-TERM DEBT
(cid:3)
As at
Senior term credit facility:
US$50,000, due August 31, 2026
Less: current portion of long-term debt
Debt issuance costs, net of amortization
Total long-term debt
December 31, 2022 December 31, 2021
$29,681
(29,292)
(389)
$ -
$62,826
(3,181)
(677)
$58,968
During the year ended December 31, 2021, Quarterhill ITS, the parent company of the ITS segment and wholly
owned subsidiary of Quarterhill Inc., entered into a credit agreement to receive senior secured credit facilities
from HSBC Bank Canada and Royal Bank of Canada consisting of a revolving credit facility in the maximum
amount of US$15,000 and a term credit facility of US$50,000. These credit facilities replaced all existing facilities
the Company had with HSBC Bank Canada. The interest rate for the facilities as at December 31, 2022 was 6.91%.
Both the facilities have a maturity date of August 31, 2026 with a general security agreement over all of the assets
in North America of IRD, ETC and its parent holding company, Quarterhill USA Inc. The carrying value of these
assets as at December 31, 2022 was $261,348.
During the year ended December 31, 2022, no amounts were drawn from the revolving credit facility.
Repayments, if any amounts are drawn, on the revolving credit facility are ultimately due on the maturity date.
The repayment of principal on the term credit facility is structured as quarterly payments based on 1.25% principal
repayment per quarter in the first two years and 2.5% per quarter thereafter until the maturity date, upon which
the remaining balance is due.
The credit agreement includes covenants, restrictions and events of default usually present in credit facilities of
this nature, including requirements to meet certain financial tests periodically and restrictions on additional
indebtedness and encumbrances. The financial covenants the Company must maintain are as follows:
–(cid:3) a Fixed Charge Coverage Ratio of at least 1.20 to 1.00 on a rolling four-quarter basis; and
–(cid:3) a Senior Leverage Ratio of not more than 3.50 to 1.00 as at September 1, 2021 and thereafter up to and
including the fiscal quarter ending March 31, 2023 and 3.00 to 1.00 from April 1, 2023 and at all times
thereafter, up to and including the maturity date. This ratio may increase by 0.50 to 1.00 for the next two
fiscal quarters immediately following an acquisition if the aggregate purchase price is equal to or greater
than US$20,000.
The Company was not in compliance with the Fixed Charge Coverage Ratio and Senior Leverage Ratio covenants
of the credit agreement as of December 31, 2022. Following year end, the credit agreement was amended to
provide that the Company did meet such covenants at December 31, 2022. Because this amendment was agreed
to following year-end, for financial reporting purposes under IFRS, the Company did not have the unconditional
right to defer the repayment of the debt beyond twelve months and, as such, the outstanding balance is presented
as a current liability as at December 31, 2022.
QH_2022_AR_V4.indd 67
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2022 Annual Financial Results
67
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
15. LONG-TERM DEBT (continued)
Scheduled principal repayments on long-term debt are as follows:
To December 31, 2023
To December 31, 2024
To December 31, 2025
To August 31, 2026
Principal
$4,240
6,784
6,784
11,873
$29,681
The Company also has incurred a revolving demand facility through its Wi-LAN Inc. ("WiLAN") subsidiary to
support letters of credit and/or letters of guarantee with Royal Bank of Canada for which restricted short-term
investments are held as collateral. As at December 31, 2022, a $5,669 (US$4,178) letter of credit is outstanding
against the revolving demand facility.
In addition, the Company has a revolving credit facility available with the Canadian Imperial Bank of Commerce
in the amount of $8,000 or the equivalent in US dollars for general corporate purposes and a further US$2,000
for a foreign exchange facility. Canadian dollar or US 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 US 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
December 31, 2022 and during the year ended December 31, 2022, the Company had no borrowings under this
facility (2021 – $nil).
16. CONVERTIBLE DEBENTURES AND DERIVATIVE LIABILITY
The following table illustrates the allocation of the gross proceeds of the Debentures between debt and equity at
issuance and subsequent remeasurement:
Convertible Unsecured Subordinated Debentures:
Gross proceeds
Convertible debentures, host debt component
Debt issuance costs, net of amortization
Convertible debentures
Convertible debentures, derivative liability component, opening
Change in fair value of derivative liability
Derivative liability, ending
December 31, 2022 December 31, 2021
$57,500
$57,500
$50,003
(1,624)
$48,379
$9,441
(7,655)
$1,786
$47,967
(2,008)
$45,959
$9,533
(92)
$9,441
68
2022 Annual Financial Results
QH_2022_AR_V4.indd 68
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
16. CONVERTIBLE DEBENTURES AND DERIVATIVE LIABILITY (continued)
On October 27, 2021, the Company completed a brokered financing of $57,500 by way of the issuance of
unsecured subordinated convertible debentures (the “Debentures”), which includes the full exercise of a $7,500
over allotment option by the underwriters. The Debentures are traded on the TSX under the symbol “QTRH.DB”.
The Debentures have a coupon rate of 6%, payable semi-annually, with a maturity date of October 30, 2026 and
an initial conversion price into common shares of $3.80. Each Debenture is convertible into common shares of
the Company at the option of the holder at any time prior to the close of business on the earlier of the last
business day immediately preceding the date of maturity of October 30, 2026 (the "Maturity Date"). Holders
converting their Debentures will, in addition to the applicable number of common shares to be received on
conversion, receive accrued and unpaid interest, if any, thereon for the period from the last interest payment
date on their Debentures up to, but excluding, the date of conversion. Except in certain circumstances involving
a “Change of Control”, the Debentures will not be redeemable at the option of the Company before October 31,
2024. On or after October 31, 2024 and prior to October 31, 2025, the Debentures may be redeemed in whole or
in part at the option of the Company on not more than 60 days’ and not less than 30 days’ prior notice at a price
equal to the principal amount plus accrued and unpaid interest, provided that the volume weighted average
trading price of the common shares on the TSX for 20 consecutive trading days ending on the fifth trading day
preceding the date on which the notice of redemption is given is not less than 125% of the then conversion price.
On or after October 31, 2025 and prior to the Maturity Date, the Debentures may be redeemed in whole or in
part at the option of the Company on not more than 60 days’ and not less than 30 days’ prior notice at a price
equal to their principal amount plus accrued and unpaid interest.
Assuming the conversion of all of the Debentures, the Company will issue 15,131,579 common shares. The initial
fair value of the conversion option was estimated at $9,533. The conversion option is considered a derivative
because the exercise price is in Canadian dollars whereas the Company's functional currency is US dollars.
Accordingly, the Company recognizes the conversion option as a liability at fair value with changes in fair value
recognized through profit or loss. The fair value of the conversion option is calculated using the Black-Scholes
option pricing model with the following weighted average assumptions:
As at
Risk-free rate
Expected life (in years)
Expected volatility
Expected dividend yield
Share price
December 31, 2022 December 31, 2021
3.89%
3.80
38%
1.95%
$1.58
1.00%
4.80
46%
1.95%
$2.70
Debt issuance costs incurred in 2021 associated with the issuance of the Debentures were $2,476 and were
allocated between the host debt and the conversion option on a relative fair value basis.
QH_2022_AR_V4.indd 69
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2022 Annual Financial Results
69
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
17. CONTINGENT LIABILITIES
In connection with Quarterhill’s original acquisition of VIZIYA Corp. (“VIZIYA”) in 2017, the Company agreed to pay
VIZIYA’s former shareholders up to an additional US$11,900 in cash and common shares pursuant to the terms
of the acquisition agreement if VIZIYA achieved certain targets for its earnings before interest, taxes and
amortization (“Eligible Earnings”) between at least US$6,750 and US$11,850 for the period from April 1, 2017 to
July 31, 2019. Additionally, if VIZIYA achieved cumulative Eligible Earnings during that period exceeding US$11,850,
the Company would be required to pay 50% of the amount of those excess Eligible Earnings as additional
contingent consideration until that cumulative Eligible Earnings reached a cap of US$23,700. In 2019, Quarterhill
determined that VIZIYA did not achieve the minimum amount of cumulative Eligible Earnings for its former
shareholders to be paid any additional amounts. In 2019, VIZIYA’s former shareholders initiated arbitration of the
Eligible Earnings and additional payment calculations pursuant to the terms of the acquisition agreement. This
arbitration and a related litigation matter were fully and finally settled in July 2022 including by way of Quarterhill
making a $14,600 (approximately US$11,300) payment in cash; all other details of this settlement are confidential.
The Company has recognized this payment through “Other charges”.
18. SHARE CAPITAL
(cid:3)
The share capital of the Company consists of the following:
a. common shares, with no par value
unlimited
114,639,700
113,880,853
b. special preferred, redeemable, retractable, non-voting shares
6,350.90
c. preferred shares, issuable in series
unlimited
Nil
Nil
Nil
Nil
Issued and Outstanding
Authorized December 31, 2022 December 31, 2021
(cid:3)
(cid:3)
January 1, 2021
Issuance of common shares upon vesting of restricted stock units
Issuance of common shares upon vesting of performance stock units
Shares repurchased under normal course issuer bid for cancellation
Exercise of stock options
December 31, 2021
Issuance of common shares upon vesting of restricted stock units
Issuance of common shares upon vesting of performance stock units
Exercise of stock options
December 31, 2022
Number
114,322,032
106,887
41,312
(841,300)
251,922
113,880,853
131,316
19,196
608,335
114,639,700
70
2022 Annual Financial Results
QH_2022_AR_V4.indd 70
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
18. SHARE CAPITAL (continued)
NCIB
On August 6, 2020, the Company received approval from TSX on its notice of intention to make a normal course
issuer bid to purchase for cancellation up to 11,303,777 of its outstanding common shares (the "NCIB"). During
the year ended December 31, 2021, the Company repurchased for cancellation 841,300 common shares at an
average purchase price of $2.45 per share totaling $2,065 under the NCIB. Since the commencement of the NCIB
on August 10, 2020, the Company has repurchased a total of 3,047,936 shares for $6,363. The NCIB expired on
August 9, 2021.
The Company paid quarterly cash dividends as follows:
1st quarter
2nd quarter
3rd quarter
4th quarter
(cid:3)
2022
2021
Per Share
Total
Per Share
Total
$0.0125
$0.0125
$0.0125
$0.0125
$0.0500
$1,408
1,432
1,420
1,433
$5,693
$0.0125
$0.0125
$0.0125
$0.0125
$0.0500
$1,432
1,422
1,420
1,415
$5,689
Stock-Based Compensation
At the annual and special meeting of shareholders held on April 18, 2018, Quarterhill’s shareholders approved
the adoption of the Company’s 2018 Equity Incentive Plan (the “Equity Plan”). As at December 31, 2022, the
Company had options to purchase up to 8,669,951 common shares outstanding. Upon adoption of the Equity
Plan, all options outstanding under the Option Plan are now governed by the Equity Plan.
During the year ended December 31, 2022, the Company granted options to purchase 1,963,824 common shares
at exercise prices ranging from $2.08 to $2.17. The Company used the Black-Scholes model for estimating the
fair value of options granted with the following weighted average assumptions for the options granted in 2022.
Risk free rate
Volatility
Expected option life (in years)
Expected dividend yield
Forfeiture rate
(cid:3)
2022
2.72%
42.53%
3.70
1.95%
22.12%
QH_2022_AR_V4.indd 71
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2022 Annual Financial Results
71
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
18. SHARE CAPITAL (continued)
The table below illustrates the options activity for the years ending December 31, 2022 and 2021:
(cid:3)
Options Outstanding
Exercisable Options
Number of
Options
Price Range
Weighted Average
Exercise Price
January 1, 2021
6,810,789
$1.33 — $4.23
$2.02
Number
1,570,308
Weighted Average
Exercise Price
$2.04
Granted
Forfeited
Expired
Exercised
2,322,887
2.39 — 2.70
(267,482)
1.81 — 2.16
(70,001)
1.89 — 2.14
(251,922)
1.33 — 2.16
December 31, 2021
8,544,271
$1.33 — $4.23
Granted
Forfeited
Expired
Exercised
1,963,824
$2.08 — $2.17
(703,331)
1.81 — 2.84
(526,478)
1.81 — 2.84
(608,335)
1.81 — 2.17
2.64
1.94
2.01
1.87
$2.02
$2.12
2.53
2.68
1.96
2,978,725
$2.04
December 31, 2022 8,669,951
$1.81 — $2.84
$2.13
4,136,055
$2.02
The weighted average fair value per option granted during the year ended December 31, 2022 was $0.84 (2021 –
$0.64).
The intrinsic value of the exercisable options was $97 as at December 31, 2022 (2021 - $1,384). The total fair value
of options vested was $1,511 for the year ended December 31, 2022 (2021 - $1,775).
As at December 31, 2022, there was $2,031 of total unrecognized stock-based compensation cost, net of expected
forfeitures, related to unvested stock-based compensation arrangements granted under the stock option plan.
This cost is expected to be recognized over a weighted average period of 4.11 years. Details of the outstanding
options at December 31, 2022 are as follows:
(cid:3)
Range of Exercise
Prices
Outstanding
Options at
December 31,
2022
$1.33 — $1.49
383,880
1.50 —
1.99
2,734,496
2.00 —
2.49
3,711,575
2.50 —
2.99
1,840,000
$ 1.89
$ 4.37
8,669,951
Remaining Term
of Options in
Years
Weighted
Average Exercise
Price
2.18
3.40
4.36
4.87
4.07
$1.33
1.89
2.16
2.68
$2.15
(cid:3)
Exercisable
Options at
December 31,
2022
383,880
1,830,589
5,427,636
630,005
8,272,110
Weighted
Average Exercise
Price
$1.33
1.87
2.04
2.68
2.02
72
2022 Annual Financial Results
QH_2022_AR_V4.indd 72
2023-03-29 2:32:20 PM
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
18. SHARE CAPITAL (continued)
Restricted Stock Units (cid:3)
Pursuant to the Equity Plan, the Company has also granted restricted stock units (“RSUs”) to certain employees
in May and June 2022. Pursuant to the Equity Plan, these RSUs are settled in common shares issued from
treasury on a one-to-one basis in six tranches, with the first tranche vested at the grant dates of May 13, 2022
and June 6, 2022 and each subsequent tranche vesting upon the Company coming out of its regular quarterly
blackout for the fiscal quarters ending June 30 and December 31, in 2022, 2023 and 2024. The Company granted
196,417 RSUs on May 13, 2022, valued using the most recent TSX closing price for the common shares on the
grant date of $2.14 for a total of $420. The Company granted 150,000 RSUs on June 6, 2022, valued using the
most recent TSX closing price for the common shares on the grant date of $2.09 for a total of $316. For the year
ended December 31, 2022, the Company has recognized $597, respectively, in stock-based compensation
expense as a result.
RSU activity for the years ended December 31, 2022 and 2021 was as follows:
January 1, 2021
Granted
Settled
Forfeited
December 31, 2021
Granted
Settled
Forfeited
December 31, 2022
19. OTHER CHARGES
Number
177,118
556,721
(328,457)
(10,125)
395,257
390,264
(313,045)
(49,613)
422,863
Other charges within the consolidated statements of income (loss) and comprehensive income (loss) include costs
and recoveries that relate to certain cost reduction initiatives that the Company has undertaken from time to
time, acquisition-related costs and recoveries and other charges. During the year ended December 31, 2022, the
Company recognized other charges of $20,893 (2021- $6,133).
QH_2022_AR_V4.indd 73
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2022 Annual Financial Results
73
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
19. OTHER CHARGES (continued)
Other charges for the years ended December 31, 2022 and December 31, 2021 were as follows:
VIZIYA settlement
VIZIYA-related arbitration fees
Termination costs
Severance costs
Impairment of leased asset
Acquisition costs
Total other charges
20. INCOME (LOSS) PER SHARE
Note
16
Year ended December 31,
2022
2021
$14,600
$ -
1,405
-
603
2,507
1,778
-
$20,893
117
1,442
-
4,574
$6,133
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during the year. Diluted (loss) income per share is calculated by dividing net income
(loss) by the adjusted weighted average number of common shares outstanding to assume conversion of all
potential dilutive stock options to common shares.
(cid:3)
Numerator:
Net income (loss)
Denominator:
Weighted average number of common shares outstanding for basic income
(loss) per share
Adjustment for stock options
Weighted average number of common shares outstanding for diluted income
(loss) per share
Basic income (loss) per share
Diluted income (loss) per share
Year ended December 31,
2022
2021
$2,766
($22,183)
114,389,608
114,013,610
505,192
-
114,894,800
114,013,610
$0.02
$0.02
($0.19)
($0.19)
74
2022 Annual Financial Results
QH_2022_AR_V4.indd 74
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
21. SEGMENT REPORTING
An operating segment is a component of the Company that engages in business activities from which it may earn
revenues and incur expenses, including revenues and expenses that relate to transactions with any of the
Company's other components, and for which discrete financial information is available. The operating results of
all operating segments are reviewed regularly by the Company's CODM to make decisions about resources to be
allocated to the segment and assess their performance. The Company's CODM is the Chief Executive Officer. The
Company’s operating segments are organized on the basis of products and services provided and also represent
its reportable segments. The Company’s reportable segments, identified as Licensing and ITS, follow the same
accounting policies as those described in these consolidated financial statements and are further described
below.
Intelligent Transportation Systems – This segment includes companies that provide integrated, tolling and
mobility systems and solutions to the ITS industry as well as its adjacent markets. The ITS industry is focused on
enhancing the safety, increasing the efficiency and reducing the environmental impact of highway and roadway
transportation systems.
Licensing – This segment includes companies that count licensing as their principal business activity. The
Company's investment in this segment consists of WiLAN and its wholly owned subsidiaries. Current patent
portfolios include patents relating to memory interface technologies, semiconductor manufacturing and
packaging technologies, automotive applications, computer gaming, intelligent personal assistant technologies,
enhanced image processing, streaming video technologies, non-volatile Flash memory, DRAM and other memory
technologies as well as semiconductor analog circuitry technologies.
QH_2022_AR_V4.indd 75
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2022 Annual Financial Results
75
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
21. SEGMENT REPORTING (continued)
Segmented information for the years ended December 31, 2022 and 2021 on the consolidated statements of
income (loss) and comprehensive income (loss) are:
Year ended December 31, 2022
Revenues
Direct cost of revenues
Gross profit
Depreciation of right-of-use assets
Depreciation of property, plant and equipment
Amortization of intangible assets
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance income
Finance expense
Foreign exchange loss (gain)
Other income
Income (loss) before taxes
Current income tax expense
Deferred income tax expense
Income tax expense
Net income (loss)
Intelligent
Transportation
Systems
Corporate
Total
$159,334 $ - $305,690
- 188,154
121,525
- 117,536
2,535
149
Licensing
$146,356
66,629
79,727
208
34
13,189
4,899
-
601
37,809
2,178
2,202
11,620
38,396
2,539
4,038
32
-
10,220
-
16,254
(26,655)
(389)
6,455
(2,459)
(8,388)
(21,874)
60,796
(23,164)
(693)
261
127
-
(1)
3,308
(357)
(706)
61,101
(25,408)
895
3,289
4,184
276
-
1,382
1,658
5,211
5,211
$56,917
($27,066)
($27,085)
2,268
24,809
53,515
2,539
20,893
10,977
(1,083)
10,024
(2,689)
(9,094)
13,819
1,171
9,882
11,053
$2,766
76
2022 Annual Financial Results
QH_2022_AR_V4.indd 76
2023-03-29 2:32:21 PM
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
21. SEGMENT REPORTING (continued)
(cid:3)
Revenues
Direct cost of revenues
Gross profit
Depreciation of right-of-use assets
Depreciation of property, plant and equipment
Amortization of intangible assets
Selling, general and administrative expenses
Research and development expenses
Other charges
Results from operations
Finance income
Finance expense
Foreign exchange gain
Other (income) expense
Loss before taxes
Current income tax expense
Deferred income tax (recovery) expense
Income tax (recovery) expense
Net loss
Year ended December 31, 2021
Intelligent
Transportation
Systems
Licensing
Corporate
Total
$25,722
$99,973 $ - $125,695
21,809
3,913
200
44
12,306
3,544
66,451
-
88,260
33,522
-
37,435
1,194
1,513
174
26
1,568
1,583
7,922
-
20,228
20,237
9,558
33,339
-
2,372
-
-
(12,181)
(47)
165
(119)
-
(12,180)
552
(5,523)
(4,971)
($7,209)
3,630
(3,346)
(4)
1,155
(692)
(2,039)
(1,766)
2,503
2,372
6,133
(12,261)
(27,788)
(113)
(164)
1,008
2,328
(405)
(1,216)
32
(2,007)
(12,783)
(26,729)
754
-
1,306
(1,639)
(885)
($881)
1,310
(5,852)
1,310
(4,546)
($14,093)
($22,183)
The following table includes revenue by contracts disaggregated by the timing of revenue recognition:
(cid:3)
Revenue recognized at a point in time
Revenue recognized over time
Total revenues
(cid:3)
(cid:3)
Year ended December 31,
2022
2021
$165,656
140,034
$305,690
$24,902
100,793
$125,695
QH_2022_AR_V4.indd 77
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2022 Annual Financial Results
77
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
21. SEGMENT REPORTING (continued)
Revenues by geography for the years ended December 31, 2022 and 2021 are as follows:
(cid:3)
United States
Canada
Chile
China
Korea
Ukraine
Taiwan
Thailand
Japan
Belgium
Germany
Rest of the world
Total revenues
(cid:3)
Year ended December 31,
2022
2021
$266,536
$87,310
3,552
4,444
1,378
2,462
401
5,439
2,441
2,936
3,193
1,164
4,932
1,477
6,019
3,306
3,760
-
1,063
6,156
8,058
1,042
6,135
8,181
$305,690
$125,695
Segment assets as at December 31, 2022 and December 31, 2021 are as follows:
(cid:3)
As at
Licensing
Intelligent Transportation Systems
Total segment assets
Total corporate assets
Total assets
December 31, 2022 December 31, 2021
$87,687
279,220
366,907
45,037
$86,468
263,622
350,090
77,105
$411,944
$427,195
Total of property, plant and equipment, right-of-use assets, intangible assets, and goodwill by geography are as
(cid:3)
follows:
As at
United States
Canada
Belgium
Chile
Germany
Total
December 31, 2022 December 31, 2021
$173,391
33,143
220
244
7,960
$160,592
47,468
339
841
8,635
$214,958
$217,875
78
2022 Annual Financial Results
QH_2022_AR_V4.indd 78
2023-03-29 2:32:22 PM
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
21. SEGMENT REPORTING (continued)
Major Customers
A major customer is defined as an external customer whose transactions within a segment of the Company
amount to approximately 10% or greater of the respective segment's revenue. Two major customers of the
Licensing segment represented $133,020 of total revenues for this segment for the year ended December 31,
2022, whereas for the year ended December 31, 2021, five major customers represented $22,777 of the
segment's total revenues. There were two major customers of the ITS segment totaling $54,432 for the year ended
December 31, 2022, whereas for the year ended December 31, 2021, there was one major customer that
accounted for $10,941 of the segment's total revenues.
Remaining Performance Obligations
As at December 31, 2022, the amount of transaction price allocated to remaining performance obligations was
$138,424. The Company expects to recognize approximately 55% of this revenue in 2023, 20% in 2024, and 25%
thereafter.
22. EXPENSE BY NATURE
Personnel costs
Subcontractor fees
Direct and indirect materials costs
Litigation and licensing costs
Professional, patent and outside services
Communications and information technology
Facilities
Travel and entertainment
Other administrative expenses
Depreciation of right-of-use assets
Depreciation of property, plant and equipment
Amortization of intangible assets
Other charges
Year ended December 31,
2022
2021
$82,361
$46,632
22,795
31,003
56,391
31,293
13,862
3,528
2,093
882
2,535
2,268
24,809
20,893
15,175
23,911
13,698
16,018
4,783
2,294
834
626
1,568
1,583
20,228
6,133
Total direct cost of revenues and operating expenses
$294,713
$153,483
Salaries and wages
Employee benefits
Stock-based compensation
Bonuses
Other personnel costs
Government grants earned
Total personnel costs
$62,781
11,691
1,875
4,229
1,785
-
$82,361
$39,388
6,352
1,955
1,921
690
(3,674)
$46,632
2022 Annual Financial Results
79
QH_2022_AR_V4.indd 79
2023-03-29 2:32:22 PM
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
23. TAXES
The reconciliation of the expected provision for income tax expense (recovery) to the actual provision for
income tax expense (recovery) reported in the consolidated statements of operations and comprehensive
earnings for the year ended December 31, 2022 is as follows:
(cid:3)
Net income (loss) before income taxes
Canadian statutory income tax rate
Expected income tax expense (recovery)
Permanent differences
Foreign withholding taxes paid
Foreign rate differential
Return to provision
Change in benefit of tax assets not recognized
Other
Income tax expense (recovery)
(cid:3)
The income tax expense (recovery) is as follows:
Current income tax expense
Current period
Adjustment in respect of prior periods
Deferred income tax expense (recovery)
Current period
Adjustment in respect of prior periods
(cid:3)
Year ended December 31,
2022
2021
$13,819
26.50%
$3,662
1,574
-
(86)
382
5,585
(64)
$(26,729)
26.50%
$(7,083)
521
66
67
545
1,151
187
$11,053
$(4,546)
Year ended December 31,
2022
2021
$1,184
(13)
1,171
9,487
395
9,882
$1,245
61
1,306
(6,337)
485
(5,852)
$11,053
$(4,546)
80
2022 Annual Financial Results
QH_2022_AR_V4.indd 80
2023-03-29 2:32:22 PM
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
23. TAXES (continued)
The effect of temporary differences, tax losses, and tax credits that give rise to significant components of the
Company’s deferred income tax assets and liabilities, which have been recognized during the year ended
December 31, 2022 are as follows:
(cid:3)
As at
Deferred income tax assets
Tax loss carryforwards
Capital assets
Scientific research and experimental development ("SR&ED") carryforwards
Lease liabilities
Other temporary differences
Deferred income tax assets
Deferred income tax liabilities
Right of use lease asset
Capital assets
Investments
Deferred revenue, unbilled revenue & prepaid accounts
Deferred income tax liabilities
Deferred income tax assets, net
(cid:3)
December 31, 2022 December 31, 2021
$16,378
$23,741
5,464
7,732
428
529
30,531
(394)
(4,058)
(436)
(2,056)
(6,944)
2,151
8,023
1,991
1,880
37,786
(1,974)
(2,811)
(256)
(811)
(5,852)
$23,587
$31,934
The Company is required to assess whether it is probable that it will realize the benefits of its deferred tax
assets based on consideration of all available evidence. The factors the Company uses to assess the likelihood
of realization are its history of losses, forecasts of future pre-tax income, and tax planning strategies that could
be implemented to realize the deferred tax assets. Accordingly, available deferred income tax assets in the
amount of $28,320 were not recognized as it is not probable that future taxable income will be available to the
Company to utilize the benefits.
The amount of deductible temporary differences, unused tax losses, and unused tax credits for which no
deferred tax asset is recognized in the statement of financial position for the year ended December 31, 2022 is
as follows:
(cid:3)
As at
Tax loss carryforwards
Fixed assets
Tax credits
Other deductible temporary differences
December 31, 2022 December 31, 2021
$53,238
22,136
8,201
18,579
$51,769
18,300
6,642
265
$102,154
$76,976
QH_2022_AR_V4.indd 81
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2022 Annual Financial Results
81
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
23. TAXES (continued)
As at December 31, 2022, the Company had unused non-capital tax losses of approximately $110,879 (2021 -
$140,214) that are due to expire as follows:
Expiry
SR&ED pool
Canadian Tax Losses
US Tax Losses
Other
Jurisdictions
Consolidated Tax
Losses
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- -
-
- -
-
5,336 -
-
-
-
-
-
-
-
-
-
-
-
5,336
- -
- -
-
-
-
-
-
-
1,002
5,636
1,593
11,261
5,886
4,094
8,400
-
387
-
5,882
-
17,560
3,804
5,729 -
1,002
5,636
7,479
15,355
8,400
387
5,882
21,364
5,729
34,310
$110,879
Indefinite
32,289
-
$32,289
$53,273
31,526
$54,822
2,784
$2,784
(cid:3)
The Company has investment tax credits of $1,412 that expire in various amounts from 2023 to 2042.
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 also has unused foreign tax credits of approximately $5,445 that expire in
various amounts from 2026 to 2031.
As at December 31, 2022, the Company had temporary differences of $5,059 (2021 - $4,458) associated with
investments in subsidiaries for which no deferred tax liabilities have been recognized, as the Company is able to
control the timing of the reversal of these temporary differences and it is not probable that these differences will
reverse in the foreseeable future.
82
2022 Annual Financial Results
QH_2022_AR_V4.indd 82
2023-03-29 2:32:23 PM
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
24. FINANCIAL RISK MANAGEMENT
Credit Risk
Credit risk is the risk of financial loss to the Company if a licensee or counterparty 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, restricted short-term
investments, accounts receivable and unbilled revenue. The Company recognizes a loss allowance provision using
the simplified approach based on lifetime expected credit losses ("ECLs"). The Company’s exposure to credit risk
with its accounts receivable from customers is 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.
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.
As at
Current
1 - 30 days
31 - 60 days
61 - 90 days
91 days and over
Less expected credit loss
Accounts receivable
Long-term accounts receivable
Total accounts receivable
December 31, 2022 December 31, 2021
$8,978
5,628
1,995
2,844
4,392
(560)
23,277
539
$23,816
$5,542
13,241
4,123
3,141
5,065
(936)
30,176
505
$30,681
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 these balances are not fully collectable in the future.
The Company reviews financial assets on an ongoing basis with the objective of identifying potential matters that
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.
QH_2022_AR_V4.indd 83
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2022 Annual Financial Results
83
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
24. FINANCIAL RISK MANAGEMENT (continued)
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. The Company manages its liquidity needs through various sources including cash generated
through operations, cash reserves, various revolving credit facilities, and the issuance of common shares. The
Company’s cash and cash equivalents, short-term investments, and restricted short-term investments consist
primarily of deposit investments that are held primarily with Canadian chartered banks. Management does not
expect any counterparties to fail to meet their obligations. Though the Company has reclassified its long-term
debt as current as a result of breaching its financial covenants, there is sufficient working capital to cover such a
repayment.
The table below presents a maturity analysis of the Company's financial liabilities:
(cid:3)
Accounts payable and accrued liabilities
Current portion of long-term debt
$47,063
29,292
$47,063
$ -
$ -
$ -
29,292 - - -
Total
Less than 1 year
2 - 3 years
4 - 5 years
Thereafter
Convertible debentures
Lease liabilities
57,500
-
-
57,500 -
13,919
3,007
5,512
3,715
1,685
$147,774
$79,362
$5,512
$61,215
$1,685
See Note 8 for maturity of lease liabilities. (cid:3)
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 from foreign currency transactions.
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 that 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 1% increase
or decrease in interest rates would not have resulted in a material increase or decrease in interest income or
expense during the year ended December 31, 2022.
84
2022 Annual Financial Results
QH_2022_AR_V4.indd 84
2023-03-29 2:32:23 PM
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
24. FINANCIAL RISK MANAGEMENT (continued)
Currency Risk
Portions of the Company’s revenues and operating expenses are denominated in US dollars, Indian rupees,
Chilean pesos, Mexican pesos, Euros and Chinese yuan. Because these financial statements are reported in
Canadian dollars, the Company’s operating results are subject to changes in the exchange rate of the foreign
currencies (primarily US dollars) relative to the Canadian dollar. For instance, a decrease in the value of the US
dollar relative to the Canadian dollar has an unfavourable impact on US dollar denominated revenues and a
favourable impact on US dollar denominated direct cost of revenue and operating expenses. Approximately 37%
of the Company’s cash and cash equivalents and short-term investments are denominated in US dollars and are
subject to changes in the exchange rate of the Canadian dollar relative to the US dollar.
Foreign exchange risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due
to changes in foreign exchange rates. Foreign exchange gains or losses in net income (loss) arise on the translation
of foreign currency-denominated assets and liabilities held in the Company's North American operations and
foreign subsidiaries. As the parent company's functional currency is in US dollars, it is subject to changes in the
exchange rate of foreign currencies, primarily the Canadian dollar, relative to the US dollar while subsidiary
companies with a functional currency not in US dollars are subject primarily to changes in the exchange rate of
foreign currencies, primarily the US dollar. As at December 31, 2022, the Company’s sensitivity to a 5%
strengthening (weakening) of the US dollar relative to the Canadian dollar and all other currencies for which the
functional currency of the subsidiary company differs from the Canadian dollar would result in approximately
$2,194 of pre-tax income (loss) to the consolidated statement of income (loss).
25. RELATED-PARTY TRANSACTIONS
These 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 note. Transactions and balances with XPCT, a joint
venture in China in which the Company's subsidiary IRD holds a 50% interest, which is also a related party, are
disclosed in Note 11.
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 IRD,
WiLAN and ETC. Other related parties are close family members of the key management personnel and entities
controlled by key management personnel.
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2022 Annual Financial Results
85
Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
25. RELATED-PARTY TRANSACTIONS (continued)
The executive compensation expense to the five key management personnel is as follows:
(cid:3)
Salaries and benefits
Stock-based compensation
(cid:3)
26. CAPITAL MANAGEMENT
Year ended December 31,
2022
2021
$2,219
975
$3,194
$4,485
1,229
$5,714
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, long-term debt, convertible
debentures and shareholders' equity.
Current portion of long-term debt
Non-current portion of long-term debt
Convertible debentures
Long-term debt and convertible debentures, net of debt issuance costs
Less:
Cash and cash equivalents
Short-term investments
Restricted short-term investments
Net debt
Shareholders' equity
Total capital management
December 31, 2022 December 31, 2021
$29,292
-
48,379
77,671
(66,357)
(1,550)
(6,529)
3,235
257,660
$338,566
$3,181
58,968
45,959
108,108
(70,746)
(1,851)
(3,095)
32,416
241,116
$381,640
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 debt. In the current year, the Company took advantage of its surplus of cash by
settling all of its bank indebtedness to reduce interest expense and maintain a healthy buffer for financial
covenants. The Company is subject to covenants and restrictions related to its credit facilities as further described
in Note 15, Long-term Debt.
86
2022 Annual Financial Results
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Notes to Consolidated Financial Statements
Years ended December 31, 2022 and 2021
(in thousands and in Canadian dollars, except share and per share amounts, unless otherwise stated)
(cid:3)
27. CHANGES IN NON-CASH WORKING CAPITAL BALANCES
(cid:3)
Year ended December 31,
2022
2021
$6,208
(5,497)
45
60
(2,420)
458
(180)
181
5,055
282
$4,192
($7,414)
(10,785)
(121)
(5,210)
(180)
3,258
(111)
(93)
13,203
69
($7,384)
Year ended December 31,
2022
2021
$1,839
$707
$84
$785
Accounts receivable
Unbilled revenue
Income taxes receivable
Inventories
Prepaid expenses and deposits
Deferred revenue
Deferred compensation asset
Deferred compensation liability
Accounts payable and accrued liabilities
Income taxes payable
(cid:3)
Supplemental Cash Flow Information
Net interest paid in cash, included in operations
Taxes paid
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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2022 Annual Financial Results
87
DIRECTORS
NAMED EXECUTIVE OFFICERS
Roxanne Anderson (3)
Chair of the Audit Committee
John Gillberry
Interim Chief Executive Officer
Dr. Michel Tewfik Fattouche (1,4)
John Gillberry
Chair of the Board
Will not stand for re-election at the AGM on May 8, 2023
Rusty Lewis (1,2)
Chair of the Nominating Committee
James Skippen (1)
Vice-Chairperson of the Board
Will not stand for re-election at the AGM on May 8, 2023
Pamela Steer (3)
Kim Stevenson (2,4)
Chair of the ESG Committee
Will not stand for re-election at the AGM on May 8, 2023
Anna Tosto (3,4)
John Karnes
Chief Financial Officer
Prashant Watchmaker
Senior Vice President, General Counsel &
Corporate Secretary
Kevin Holbert
President & Chief Executive Officer,
Electronic Transaction Consultants
Rish Malhotra
President & Chief Executive Officer,
International Road Dynamics Inc.
Andrew Parolin
President & Chief Executive Officer,
WiLAN Inc.
Member of (1) Compensation Committee, (2) Nominating
Committee, (3) Audit Committee, (4) ESG Committee
On May 9, the Governance committee and ESG committee are
to be combined.
88
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STOCK EXCHANGE LISTINGS
Toronto Stock Exchange, Symbol: QTRH
OTCQX Best Market, Symbol: QTRHF
TRANSFER AGENT
Computershare Investor Services Inc.
PUBLIC FILINGS – SEDAR
Quarterhill’s publicly filed documents are available at www.sedar.com
AUDITORS
EY Canada
INVESTOR RELATIONS
Dave Mason
Tel: 1.416.247.9652
ir@quarterhill.com
HEAD OFFICE
25 King Street West, Suite 1101
Toronto, ON Canada
M5L 2A1
WEBSITE
www.quarterhill.com
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25 King Street West, Suite 1101
Toronto, ON Canada M5L 2A1
www.quarterhill.com
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