Quarterhill Announces Q2 2017 Financial Results

Shift in strategy driving revenue growth

OTTAWA, Aug. 10, 2017 /CNW/ - Quarterhill Inc. ("Quarterhill" or the "Company") (TSX:QTRH) (NASDAQ:QTRH), announces its financial results for the three- and six-month periods ended June 30, 2017. All financial information in this press release is reported in U.S. dollars, unless otherwise indicated.

Second Quarter Highlights

• Revenue of $18.6 million
• Adjusted EBITDA* of $4.8 million
• Net income of $3.6 million, or $0.03 per share
• Cash from operations of $3.1 million
• Announced a new acquisition-oriented growth strategy and changed the name of the public company to Quarterhill
• Acquired International Road Dynamics ("IRD"), a highway traffic management technology company specializing in supplying products and systems to the global Intelligent Transportation Systems industry, on June 1, 2017
• Acquired VIZIYA Corp ("VIZIYA"), a software and services provider that helps companies optimize their asset performance, on May 4, 2017
• Completed the first tuck-in acquisition – iCOMS Detections S.A

"Q2 was a significant period for the Company as we launched a major shift in our growth strategy by transitioning our public parent company into a diversified investment holding firm focused on acquiring companies in the Industrial Internet of Things market," said Shaun McEwan, Interim CEO of Quarterhill. "We quickly began executing on our new plan and completed the acquisitions of IRD and VIZIYA in the quarter. As part of the new strategy, we renamed the public company Quarterhill, and kept the WiLAN name with our patent license business, which will continue to operate as one of the Company's investments."

"Our new strategy reflects our belief that the best path to grow the business and shareholder value is to acquire promising growth companies and support them while they build their businesses. This diversification strategy will add additional lines of business to the overall public Company, which will open-up new revenue and cash flow streams, and mitigate the lumpiness that we had experienced in the past. This is evident already; even though the acquired businesses had only a partial contribution to our Q2 financials, we are already seeing the positive impact they can have on our revenue and margins."

Approval of Eligible Dividend
The Board of Directors has declared an eligible quarterly dividend of CDN $0.0125 per common share payable on October 5, 2017, to shareholders of record on September 15, 2017.

Business Strategy and Segments
Quarterhill is developing a portfolio of established businesses having histories of generating cash flows from their operations in the "Technology", "Mobility", "Factory" and "City" vertical segments of the Industrial "Internet of Things" market. As of June 30, 2017, the Company had investments in three of its four targeted vertical segments: Technology (WiLAN), Mobility (IRD), and Factory (VIZIYA).

Quarterhill's goal is to build a consistently profitable company with a diversified investment base and global market presence within its vertical segments to increase shareholder value by emphasizing the importance of recurring revenue streams and the predictability of operating results. The Company intends to achieve these objectives through a combination of organic growth and acquisitions.

Q2 and Year-to-Date 2017 Consolidated Financial Review
Quarterhill's consolidated financial results for Q2 2017 include contributions from its wholly owned subsidiaries; WiLAN, IRD and VIZIYA. Included in these consolidated financial results are IRD's results from operations for the period from June 1 to June 30, 2017, VIZIYA's results from operations for the period from May 4 to June 30, 2017, and WiLAN's results from operations for the entire quarter. The 2016 comparative period information presented represents solely WiLAN's results for the specified period.  Certain comparative information has been restated to conform to the new basis of presentation.

Consolidated revenues for the three-months ended June 30, 2017 were $18.6 million, compared to $16.0 million in the same period last year, which represents an increase of $2.6 million or 16%. The increase was due to the partial contribution in Q2 2017 from the acquired IRD and VIZIYA businesses. Consolidated revenues for the six-months ended June 30, 2017 were $26.2 million, compared to $46.1 million in the same period last year.

Gross margin for the three-months ended June 30, 2017 was $9.0 million, or 48.8%, compared to $9.8 million, or 61%, in the same period last year. Gross margin for the six-months ended June 30, 2017 was $9.3 million, or 35%, compared to $31.9 million, or 69%, in the same period last year. Gross margin for the three- and six-month periods ended June 30, 2017 reflects contribution across all three vertical segments, compared to the same periods last year, which reflect only the operations of what is now the Company's Technology segment.

Operating expenses for the three-months ended June 30, 2017 were $12.4 million, compared to $12.6 million in the same period last year. Operating expenses include selling, general and administrative costs, research and development costs, and depreciation and amortization. The acquisitions this quarter resulted in an incremental $1.3 million in acquisition related expenses ad and an incremental $0.7 million in amortization related to acquired intangible assets.  Operating expenses for the six-months ended June 30, 2017 were $20.2 million compared to $25.3 million in the same period last year.

Adjusted EBITDA for the three-months ended June 30, 2017 was $4.8 million, or $0.04 per basic Common Share, compared to $7.0 million, or $0.06 per basic Common Share, in the same period last year. The difference primarily reflects the lower adjusted EBITDA performance of our Technology segment due to its lower revenues, which was partially offset by the addition of adjusted EBITDA from each of our acquired businesses. For the six-months ended June 30, 2017, adjusted EBITDA was $2.6 million, or $0.02 per basic Common Share, compared to $26.7 million, or $0.22 per basic Common Share, in the same period last year, which reflects the significantly lower revenues generated in our Technology segment year-over-year.

Net income for three-months ended June 30, 2017 was $3.6 million, or $0.03 per basic and diluted Common Share, compared to a net loss of ($3.2) million or ($0.03) per basic and diluted Common Share in the same period last year. For the six-months ended June 30, 2017, net loss was ($3.6) million, or ($0.03) per basic and diluted Common Share, compared to net income of $1.8 million, or $0.01 per basic and diluted Common Share, in the same period last year.

Cash generated from operations for three-months ended June 30, 2017 was $3.1 million, compared to $8.3 million in the same period last year. Cash generated from operations for six-months ended June 30, 2017 was $11.5 million compared to $23.1 million in the same period last year.

Cash and cash equivalents and short-term investments amounted to $49.0 million at June 30, 2017, compared to $107.7 million at December 31, 2016. The decrease is primarily attributable to $66.3 million spent on the acquisitions of IRD and VIZIYA, which was partially offset by cash generated from operations of $11.5 million in the six-month period.

The table below highlights financial performance for the Company's Technology, Mobility and Factory segments. For detailed results and discussion related to these segments, please refer to the Management's Discussion and Analysis ("MD&A") document, which will be filed on Sedar and at www.quarterhill.com in the investor section.

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

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

Conference Call and Webcast
WiLAN will conduct a conference call to discuss its financial results today at 10:00 AM Eastern Time.

Call Information
The live audio webcast will be available at http://event.on24.com/wcc/r/1465983-1/476A2A33D8B4F83D6332197F41AF0594

• To access the call from Canada and U.S., dial 1.888.231.8191 (Toll Free)
• To access the call from other locations, dial 1.647.427.7450 (International)

Replay Information
A webcast of the call will be available at http://event.on24.com/wcc/r/1465983-1/476A2A33D8B4F83D6332197F41AF0594
A telephone replay will be available from 1:00 PM ET on August 10, 2017 until 11:59 PM ET on August 17, 2017 at: 1.855.859.2056 (Toll Free) or 1.416.849.0833 (International).
Conference ID #: 54032419

Non-GAAP Disclosure*
Quarterhill follows U.S. GAAP in preparing its interim and annual financial statements. We use the term "Adjusted EBITDA" to mean net income from continuing operations before: (i) income taxes; (ii) finance expense or income; (iii) amortization of intangibles; (iv) special charges; (v) depreciation of property, plant and equipment; (vi) effects of deleted deferred revenue; (vii) the effects of fair value step up in inventory acquired, and (viii) stock based compensation. Adjusted EBITDA is used by Quarterhill management to assess our normalized cash generated on a consolidated basis and in our operating segments. Adjusted EBITDA is also a performance measure that may be used by investors to analyze the cash generated by Quarterhill and our operating segments. ADJUSTED EBITDA IS NOT A MEASURE OF FINANCIAL PERFORMANCE UNDER U.S. GAAP. IT DOES NOT HAVE ANY STANDARDIZED MEANING PRESCRIBED BY U.S. GAAP AND IS THEREFORE UNLIKELY TO BE COMPARABLE TO SIMILARLY TITLED MEASURES USED BY OTHER COMPANIES. EBITDA SHOULD NOT BE INTERPRETED AS AN ALTERNATIVE TO NET EARNINGS AND CASH FLOWS FROM OPERATIONS AS DETERMINED IN ACCORDANCE WITH U.S. GAAP OR AS A MEASURE OF LIQUIDITY.

About Quarterhill
Quarterhill is a diversified investment holding company focused on growing its business by acquiring technology companies in the Industrial Internet of Things ("IIoT") segment across multiple verticals. Quarterhill targets companies with a broad range of products and services that capture, analyze and interpret data, and that have strong financial performance, excellent management teams, strong intellectual property underpinnings and significant opportunities to develop long-term recurring and growing revenue streams. Quarterhill is listed on the TSX and NASDAQ under the symbol QTRH. For more information: www.quarterhill.com.

Forward-looking Information
This news release contains forward-looking statements and forward-looking information within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and other United States and Canadian securities laws.  Forward-looking statements and forward-looking information are based on estimates and assumptions made by Quarterhill in light of its experience and its perception of historical trends, current conditions, expected future developments and the expected effects of new business strategies, as well as other factors that Quarterhill believes are appropriate in the circumstances. Many factors could cause Quarterhill's actual performance or achievements to differ materially from those expressed or implied by the forward-looking statements or forward-looking information. Such factors include, without limitation, the risks described in its February 10, 2017 annual information form for the year ended December 31, 2016 (the "AIF"). Copies of the AIF may be obtained at www.sedar.com or www.sec.gov. Quarterhill recommends that readers review and consider all of these risk factors and notes that readers should not place undue reliance on any of Quarterhill's forward-looking statements. Quarterhill has no intention, and undertakes 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.

All trademarks and brands mentioned in this release are the property of their respective owners.

Quarterhill Inc.
Condensed Consolidated Interim Statements of Operations
(in thousands of United States dollars, except share and per share amounts) (unaudited)

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

Quarterhill Inc.
Supplemental Condensed Consolidated Interim Statement of Operations Information
(in thousands of United States dollars, except share and per share amounts) (unaudited)

		For the three months ended,						For the six months ended,
		June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Revenues
	Licenses	$	12,842		$	15,961		$	20,420		$	46,121
	Systems		3,067			-			3,067			-
	Services		714			-			714			-
	Recurring		1,988			-			1,988			-
Total Revenues		$	18,611		$	15,961		$	26,189		$	46,121
Cost of revenues (excluding depreciation and amortization)
	License	$	6,448		$	6,293		$	13,842		$	14,263
	Systems		1,898			-			1,898			-
	Services		321			-			321			-
	Recurring		854			-			854			-
Total cost of revenues		$	9,521		$	6,293		$	16,915		$	14,263

Quarterhill Inc.
Condensed Consolidated Interim Statements of Comprehensive Income
(in thousands of United States dollars, except share and per share amounts) (unaudited)

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

Quarterhill Inc.
Condensed Consolidated Interim Balance Sheets
(in thousands of United States dollars, except share and per share amounts) (unaudited)

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

Quarterhill Inc.
Condensed Consolidated Interim Statements of Cash Flows
(in thousands of United States dollars, except share and per share amounts) (unaudited)

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

Quarterhill Inc.
Condensed Consolidated Statements of Shareholders' Equity
(in thousands of United States dollars, except share and per share amounts) (unaudited)

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

Quarterhill Inc.
Reconciliations of GAAP Net Income (Loss) to Adjusted EBITDA
(in thousands of United States dollars, except share and per share amounts) (unaudited)

			For the three months ended,					For the six months ended,
Adjusted EBITDA			June 30, 2017		June 30, 2016			June 30, 2017			June 30, 2016
Net Income (Loss)		$	3,609		$	(3,152)		$	(3,620)		$	1,768
Adjusted for:
	Income tax expense		(6,178)			452			(6,058)			5,334
	Foreign exchange (gain) loss		(426)			(114)			(711)			(277)
	Finance expense		14			-			14			-
	Finance (income)		(234)			(120)			(452)			(238)
	Special charges		1,294			-			1,294			-
	Amortization of intangibles		6,028			9,850			11,331			19,872
	Depreciation of property, plant and equipment		170			106			261			213
	Effect of deleted deferred revenue		267			-			267			-
	Increased costs from inventory step-up		137			-			137			-
	Stock based compensation		148			-			179			-
	Other expense (income)		(69)			-			(69)			-
Adjusted EBITDA		$	4,760		$	7,022		$	2,573		$	26,672
			For the three months ended,					For the six months ended,
Adjusted EBITDA per share			June 30, 2017		June 30, 2016			June 30, 2017			June 30, 2016
Net Income (Loss)		$	0.03		$	(0.03)		$	(0.03)		$	0.01
Adjusted for:
	Income tax expense		(0.05)			-			(0.05)			0.04
	Foreign exchange		-			-			(0.01)			-
	Finance expense		-			-			-			-
	Finance income		-			-			-			-
	Special charges		0.01			-			0.01			-
	Amortization of intangibles		0.05			0.08			0.10			0.17
	Depreciation of property, plant and equipment		-			-			-			-
	Effect of deleted deferred revenue		-			-			-			-
	Increased costs from inventory step-up		-			-			-			-
	Stock based compensation		-			-			-			-
	Other expense (income)		-			-			-			-
Adjusted EBITDA per share		$	0.04		$	0.06		$	0.02		$	0.22
Weighted average number of Common Shares
	Basic		118,587,106			119,255,090			118,579,684			119,768,540

SOURCE Quarterhill Inc.

For media and investor inquiries, please contact: Shaun McEwan, Interim CEO, T: 613.688.4898, E: [email protected]; Dave Mason, Investor Relations, T: 613.688.1693, E: [email protected]

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