qtrh-ex992

	Three months ended June 30,						Six months ended June 30,
		2018			2017			2018			2017
Revenues
License	$	5,643		$	12,321		$	8,136		$	19,312
Systems		7,179			3,067			11,872			3,067
Services		727			714			1,380			714
Recurring		6,848			2,509			11,018			3,096
		20,397			18,611			32,406			26,189
Cost of revenues (excluding depreciation and amortization)
License		8,069			6,448			14,000			13,842
Systems		4,645			1,898			8,111			1,898
Services		385			321			690			321
Recurring		3,440			854			5,472			854
		16,539			9,521			28,273			16,915
		3,858			9,090			4,133			9,274
Operating expenses
Depreciation of property, plant and equipment		388			170			783			261
Amortization of intangibles		6,442			6,028			13,193			11,331
Selling, general and administrative expenses		7,036			4,214			14,089			6,616
Research and development expenses		853			668			1,792			668
Special charges		-			1,294			-			1,294
		14,719			12,374			29,857			20,170
Results from operations		(10,861	)		(3,284	)		(25,724	)		(10,896	)

Finance income		(191	)		(234	)		(382	)		(452	)
Finance expense		40			14			79			14
Foreign exchange gain		(35	)		(426	)		(165	)		(711	)
Other income		(579	)		(69	)		(906	)		(69	)
Loss before taxes		(10,096	)		(2,569	)		(24,350	)		(9,678	)

Current income tax expense (recovery)		217			831			(104	)		1,574
Deferred income tax recovery		(2,448	)		(7,009	)		(4,336	)		(7,632	)
Income tax recovery		(2,231	)		(6,178	)		(4,440	)		(6,058	)

Net earnings (loss)	$	(7,865	)	$	3,609		$	(19,910	)	$	(3,620	)

Net earnings (loss) per share
Basic	$	(0.07	)	$	0.03		$	(0.17	)	$	(0.03	)
Diluted	$	(0.07	)	$	0.03		$	(0.17	)	$	(0.03	)

Weighted average number of common shares
Basic		118,779,445			118,587,106			118,719,182			118,579,684
Diluted		118,779,445			118,587,106			118,719,182			118,579,684

See accompanying notes to these unaudited condensed consolidated interim financial statements

As at	June 30, 2018			December 31, 2017
Current assets
Cash and cash equivalents	$	68,415		$	81,818
Short-term investments		1,177			1,236
Restricted short-term investments		3,500			3,500
Accounts receivable (net of allowance for doubtful accounts)		15,043			19,298
Other current assets		14			13
Unbilled revenue		6,782			3,045
Income taxes receivable		198			144
Inventories (net of obsolescence) (Note 6)		5,801			5,083
Prepaid expenses and deposits		3,146			4,129
		104,076			118,266
Non-current assets
Property, plant and equipment		3,059			3,801
Intangible assets		100,898			114,944
Investment in joint venture (Note 7)		3,998			3,383
Deferred income tax assets		25,227			20,195
Goodwill		41,774			42,587
		174,956			184,910
TOTAL ASSETS	$	279,032		$	303,176

Liabilities
Current liabilities
Bank indebtedness	$	4,681		$	3,568
Accounts payable and accrued liabilities		15,944			20,487
Income taxes payable		-			599
Patent finance obligation		1,379			4,090
Current portion of deferred revenue		6,145			6,733
Current portion of long-term debt		86			115
		28,235			35,592
Non-current liabilities
Contingent consideration (Note 9)		4,474			4,474
Deferred revenue		1,736			884
Long-term debt		355			401
Deferred income tax liabilities		6,592			7,291
		13,157			13,050
TOTAL LIABILITIES		41,392			48,642

Shareholders’ equity
Capital stock (Note 8)		419,111			418,873
Additional paid-in capital		22,643			22,489
Accumulated other comprehensive income		17,840			20,111
Deficit		(221,954	)		(206,939	)
		237,640			254,534
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	279,032		$	303,176

See accompanying notes to these unaudited condensed consolidated interim financial statements

	Three months ended June 30,						Six months ended June 30,
		2018			2017			2018			2017
Cash generated from (used in):
Operations
Net earnings (loss)	$	(7,865	)	$	3,609		$	(19,910	)	$	(3,620	)
Non-cash items
Stock-based compensation		(2	)		147			154			179
Depreciation and amortization		6,830			6,197			13,976			11,592
Foreign exchange loss (gain)		84			(99	)		162			(146	)
Equity in earnings from joint venture		(388	)		(69	)		(638	)		(69	)
Loss on disposal of assets		-			-			1			-
Deferred income tax recovery		(2,448	)		(7,011	)		(4,336	)		(7,632	)
Accrued investment income		-			(74	)		-			(150	)
Embedded derivatives		(3	)		10			(1	)		10
Changes in non-cash working capital balances
Accounts receivable		226			(1,399	)		4,166			18,818
Unbilled revenue		297			862			1,994			862
Income taxes receivable		(57	)		-			(57	)		-
Inventories		(565	)		686			(749	)		686
Prepaid expenses and deposits		515			(395	)		954			(436	)
Deferred revenue		(527	)		591			251			591
Payments associated with success fee obligation		-			(47	)		-			(492	)
Accounts payable and accrued liabilities		1,479			(431	)		(4,337	)		(9,236	)
Income taxes payable		(6	)		525			(599	)		525
Cash generated (used) from operations		(2,430	)		3,102			(8,969	)		11,482
Financing
Dividends paid (Note 8)		(1,155	)		(1,099	)		(2,326	)		(2,228	)
Bank indebtedness		3,170			1,523			1,113			1,523
Repayment of long-term debt		(60	)		(24	)		(75	)		(24	)
Common shares repurchased under normal course issuer bid		-			(552	)		-			(552	)
Common shares issued for cash from Employee Share Purchase Plan		27			33			27			33
Cash generated (used) in financing		1,982			(119	)		(1,261	)		(1,248	)
Investing
Business acquisitions, net of cash acquired		-			(66,303	)		-			(66,303	)
Purchase of restricted short-term investments		-			-			-			(3,500	)
Proceeds from sale of property, plant and equipment		-			-			11			-
Purchase of property and equipment		(43	)		(107	)		(166	)		(114	)
Repayment of patent finance obligations		(1,389	)		(1,389	)		(2,778	)		(2,778	)
Purchase of intangibles		(48	)		(4	)		(89	)		(4	)
Cash used in investing		(1,480	)		(67,803	)		(3,022	)		(72,699	)
Foreign exchange gain (loss) on cash held in foreign currency		(76	)		192			(151	)		227
Net decrease in cash and cash equivalents		(2,004	)		(64,628	)		(13,403	)		(62,238	)
Cash and cash equivalents, beginning of period		70,419			108,943			81,818			106,553
Cash and cash equivalents, end of period	$	68,415		$	44,315		$	68,415		$	44,315

See accompanying notes to these unaudited condensed consolidated interim financial statements

	Capital Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income			Deficit			Total Equity

Balance - January 1, 2017	$	419,485		$	21,036	$	16,225		$	(212,602	)	$	244,144

Comprehensive loss:
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 (Note 8)		-			-		-			(2,228	)		(2,228	)
Balance - June 30, 2017	$	418,838		$	22,005	$	16,758		$	(218,450	)	$	239,151

Balance - December 31, 2017	$	418,873		$	22,489	$	20,111		$	(206,939	)	$	254,534
Adoption of ASU 2014-09 (Note 3)		-			-		-			4,272			4,272
Adoption of ASU 2016-16 (Note 3)		-			-		-			2,949			2,949
Balance - January 1, 2018		418,873			22,489		20,111			(199,718	)		261,755
													-
Comprehensive loss:
Net loss		-			-		-			(19,910	)		(19,910	)
Other comprehensive loss		-			-		(2,271	)		-			(2,271	)
Shares and options issued:
Stock-based compensation expense		-			154		-			-			154
Conversion of deferred stock units to common shares		211											211
Shares issued under Employee Share Purchase Plan		27											27
Dividends declared (Note 8)		-			-		-			(2,326	)		(2,326	)
Balance - June 30, 2018	$	419,111		$	22,643	$	17,840		$	(221,954	)	$	237,640

See accompanying notes to these unaudited condensed consolidated interim financial statements

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

Quarterhill Inc. (“Quarterhill” or the “Company”), formerly “Wi-LAN Inc.”, is a Canadian company with its shares listed under the symbol “QTRH” on each of the Toronto Stock Exchange (the “TSX”) and the Nasdaq Global Select Market. Quarterhill is focused on the disciplined acquisition, management and growth of companies in dedicated technology areas including vertical market software and solutions, intelligent industrial systems, and innovation and licensing. Quarterhill’s emphasis is on seeking out acquisition opportunities at reasonable valuations that provide a foundation for recurring revenues, predictable cash flows and margins, profitable growth, intimate customer relationships and dedicated management teams.

These unaudited condensed consolidated interim financial statements include the accounts of Quarterhill and its wholly owned subsidiaries. Quarterhill also holds, through one of its subsidiaries, a 50% joint venture ownership interest in Xuzhou-PAT Control Technologies Limited (“XPCT”) which is accounted for using the equity method. These unaudited condensed consolidated interim financial statements include only the Company’s net investment and equity in earnings of the joint venture. These unaudited condensed consolidated interim financial statements are presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information, including all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position, operations and cash flows for the interim period. As the interim financial statements do not contain all the disclosures required in annual financial statements, they should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2017 together with the accompanying notes. All inter-company transactions and balances have been eliminated.

These unaudited condensed consolidated interim financial statements have been prepared following the same accounting policies disclosed in Note 2 of the Company’s audited consolidated financial statements for the year ended December 31, 2017 except for the adoption of accounting standards more fully described below.

In October 2016, the FASB issued ASU 2016-16 “Income taxes on intra-entity transfers of assets other than inventory” to improve the accounting on income taxes on intra-entity transfers. The ASU requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than defer the income tax effect under previous guidance. The Company adopted this ASU on a modified retrospective basis in the first quarter of 2018. The cumulative effect of the adoption is an increase to shareholders’ equity of $2.9 million due to the adjustment to the accumulated deficit.

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

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers” (ASC 606). ASC 606 supersedes the revenue recognition requirements in ASC 605 “Revenue Recognition,” and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.

The Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not yet complete as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.

With respect to its Technology segment, under the Topic 605, licensing companies report revenue to the Company from per-unit royalty-based arrangements one quarter in arrears, resulting in revenue being recognized on the same basis. Under the new guidance, the Company estimates the per-unit royalty-based revenue each period. The new standard also significantly impacts the timing of revenue recognition associated with its fixed fee “right to use” arrangements where under the new standard the Company recognizes license revenues at the time of signing a license agreement (upfront) rather than recognizing revenue over the term of the arrangement.

With respect to its Mobility segment, for the majority of its long-term contracts, the Company recognizes revenue and earnings over time as the work progresses because of the continuous transfer of control to the customer. The adoption of this standard has impacted revenue recognition in relation to the allocation of contract revenues between installations, maintenance agreements, and warranty on some long-term fixed price contracts.

The adoption of ASC 606 does not have a significant impact on how revenue is recognized within the Factory segment.

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

The cumulative effect of the changes made to the Company’s consolidated January 1, 2018 balance sheet for the adoption of ASU 2016-16 and ASU 2014-09 were as follows:

						Adjustments arising from implementation of ASU 2014-09
	Balances as at December 31, 2017			ASU 2016-16		Technology		Mobility			Balances as at January 1, 2018
Assets
Unbilled revenue	$	3,045		$	-	$	6,376	$	(565	)	$	8,856
Deferred income tax assets		20,195			2,949		-		150			23,294

Liabilities
Deferred income tax liabilities		7,291			-		1,689		-			8,980

Equity
Deficit		(206,939	)		2,949		4,687		(415	)		(199,718	)

The following tables disclose the impact of adoption, by segment, on the Company’s condensed consolidated interim statement of operations for the three and six months ended June 30, 2018:

	For the three months ended June 30, 2018
				Adjustments arising from implementation of ASU 2014-09
	As reported			Technology			Mobility			Balances without ASU 2014-09
Revenues
License	$	5,643		$	1,854		$	-		$	7,497
Systems		7,179			-			(20	)		7,159
Services		727			-			-			727
Recurring		6,848			(46	)		(96	)		6,706

Costs and expenses
Deferred income tax expense (recovery)		(2,448	)		479			(31	)		(2,000	)

Net loss		(7,865	)		1,329			(85	)		(6,621	)

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

	For the six months ended June 30, 2018
				Adjustments arising from implementation of ASU 2014-09
	As reported			Technology		Mobility			Balances without ASU 2014-09
Revenues
License	$	8,136		$	3,685	$	-		$	11,821
Systems		11,872			-		(200	)		11,672
Services		1,380			-		-			1,380
Recurring		11,018			258		(80	)		11,196

Costs and expenses
Deferred income tax expense (recovery)		(4,336	)		1,045		(74	)		(3,365	)

Net loss		(19,910	)		2,898		(206	)		(17,218	)

The following table discloses the impact of adoption, by segment, on the Company’s condensed consolidated interim balance sheet as at June 30, 2018:

				Adjustments arising from implementation of ASU 2014-09
	As reported			Technology			Mobility			Balances without ASU 2014-09
Assets
Unbilled revenue	$	6,782		$	(2,434	)	$	284		$	4,632
Deferred income tax assets		25,227			-			(75	)	$	25,152

Liabilities
Deferred income tax liabilities		6,592			(645	)		-			5,947

Equity
Deficit		(221,954	)		(1,789	)		209			(223,534	)

During the first quarter the Company also adopted ASU 2016-01 Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-15 Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, ASU 2017-01 Business Combinations (Topic 805) – Clarifying the Definition of a Business and ASU 2017-04 – Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment. The adoption of these standards did not have a material impact on the condensed consolidated interim financial statements or the related note disclosures. There were no new accounting standards adopted during the second quarter.

Significant changes to our accounting policies as a result of adopting ASU 2014-09 are discussed below:

The Company recognizes revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The following paragraphs describe the specific revenue recognition policies for each of the Company’s significant types of revenue by segment.

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

Under ASC 606, patent licenses will be considered licenses to functional intellectual property. The standard specifically outlines that patents, underlying highly functional items, are considered functional intellectual property (“IP”). Licenses to functional IP are considered satisfied at a point in time (i.e. when the license becomes effective) and all the revenue is recognized at that point in time. Payment is either due immediately or within 30 days. The one exception to this guidance is related to revenue generated from sales or usage-based royalties promised in exchange for a license of IP. 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 a true up to the actual royalties reported in the following financial reporting period. Payment is due upon submission of the royalty report.

The majority of sales of integrated systems are delivered as contracted projects that span a time period of less than 1 year to more than 5 years. The governments and private enterprises control all of the work in progress as the ITS systems are being developed and installed. The Company’s contract types include fixed price and time and materials contracts. Contract revenue includes amounts expected to be received in exchange for the good 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 the following: installation, maintenance, and warranty. A contract’s transaction price is allocated to each distinct performance obligation 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. Revenue is recognized when or as the performance obligation is satisfied.

Revenue for fixed price contracts is recognized over time using the cost-to-cost input method. Because control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The company reviews and updates the contract related estimates regularly. Determining the contract costs and estimates to complete requires significant judgement. 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 will be recognized immediately.

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

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

Services revenue from the mobility segment are considered recurring revenues. These service contracts are typically time and materials but some are fixed price. Revenues are earned similar to contracted projects discussed above. Services are billed on a monthly basis and collected shortly thereafter.

Product sales revenue is recognized when control transfers to the customer which depends on the individual terms which can vary between when the product leaves the Company’s warehouse and when it is received at the customer’s warehouse. For some international shipments, when the buyer has no right of return, transfer occurs upon loading the goods onto the relevant carrier at the port of the seller. Customers are billed when transfer of control occurs and payments are typically due within 30 days.

The factory segment provides bolt-on software products to enhance ERP-based asset maintenance systems. These software licenses contain up to five separate performance obligations the license, implementation services, training services, post-contract customer support (“PCS”), and customization of software. Customers obtain access to licenses through online software and each additional component is added incrementally at the stand-alone market price which represents the price allocated to each performance obligation. Payment for licenses and services is received prior to delivery of product code for software or software keys for PCS.

When selling the licensed software, the Company is providing the customer with the right to use its intellectual property and does not provide significant modifications or updates therefore revenue is recognized at the point in time when the customer gains control of the license, typically at contract inception.

Implementation and training services, PCS, and customization of software are recognized over time based on time lapsed as this best represents the value transferred to the customer based on the specifications for each within the contract.

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 ASC 606. At any given period-end, a large portion of the balance in this account represents the accumulation of labor, materials and other costs that have not billed due to timing, whereby the accumulation of each month’s costs and earnings are 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.

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

Deferred revenue is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition, including billings in excess of costs and estimated earning on uncompleted contracts accounted for under ASC 606. The Company records provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects of revisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties and adjustments for contract closeout settlements.

In February 2016, the FASB issued ASU 2016-2, “Leases”. The amendments in this update would require companies and other organizations to include lease obligations in their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (“ROU”) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset, and for operating leases, the lessee would recognize a straight-line total lease expense. In January 2018, the FASB issued ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842” which allows entities the option to apply the new guidance at the effective date without adjusting comparative periods presented. The FASB also voted to simplify the reporting and disclosures for certain lessors that also provide related services. The guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact of this new standard.

In June 2016, FASB issued Accounting Standards Update (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company in the first quarter of its fiscal year ending December 31, 2021, with earlier adoption permitted beginning in the first quarter of its fiscal year ending December 31, 2020. The Company is currently assessing the impact of this new standard.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018 ASB issued ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220)” that gives companies the option to reclassify stranded tax effects resulting from the newly enacted Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive income (AOCI) to retained earnings. A company will need to disclose if it elects not to adopt the ASU. The ASU will be effective for fiscal years beginning after December 15, 2018 and interim periods within the fiscal year. Early adoption will be permitted, including adoption in any interim period, for financial statements that have not yet been issued or made available for issuance. Entities will have the option to apply the amendments retrospectively or to record the reclassification as of the beginning of the period of adoption. The Company is currently assessing the impact of this new standard.

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

In June 2018, the FASB issued ASU 2018-07 – Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance largely aligns the accounting for share-based payment awards issued to employees and non-employees. Under previous GAAP, the accounting for non-employee share-based payments differed from that applied to employee awards, particularly with regard to the measurement date and the impact of performance conditions. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently assessing the impact of this new standard.

The following table presents the fair values of financial instruments recorded at fair value across the levels of the fair value hierarchy. The table does not include assets and liabilities that are not considered financial instruments.

			As at June 30, 2018				As at December 31, 2017
	Hierarchy Level		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents		1	$	68,415	$	68,415	$	81,818	$	81,818
Short-term investments		1		1,177		1,177		1,236		1,236
Restricted short-term investments		1		3,500		3,500		3,500		3,500
Derivative financial instrument		2		14		14		13		13
Long-term debt		2		441		441		516		516
Contingent considerations		3		4,474		4,474		4,474		4,474
Patent finance obligations		3		1,379		1,379		4,090		4,090

Derivatives consists of the embedded derivative portion of the unearned revenue of U.S. dollar denominated sales contracts in its Chilean and Mexican subsidiaries and foreign exchange forward contracts. The fair value of embedded derivatives is measured using a market approach, based on the difference between quoted forward exchange rates as of the contract date and quoted forward exchange rates as of the reporting date. The fair value of forward exchange contracts is determined using quoted forward exchange rates at the reporting date. Contingent consideration was adjusted to fair value at December 31, 2017 using the Monte Carlo simulations model for which no inputs used to calculate fair value have changed as at the reporting date. Accounts receivable, unbilled revenue, accounts payable and accrued liabilities also approximate fair value due to the short term maturity of these items.

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

Significant changes in unbilled revenue and deferred revenue balances during the six months ended June 30, 2018 are as follows:

The net change in unbilled revenues of $3,737 consists of the balance of the adjustment made on January 1, 2018 from the adoption of ASU 2014-09, revenues recognized on contracted projects and estimated royalties, amounts billed to customers and the foreign currency effect of contracts not transacted in U.S. dollars.

Revenue recognized for the three and six months ended June 30, 2018 that was included in deferred revenue at the beginning of the period was $1,904 and $2,919, respectively.

For the three and six months ended June 30, 2018, the Company recorded non-cash, pretax charges of $nil (three and six months ended June 30, 2017 - $nil) relating to the write down of inventory.

XPCT is a joint venture in China in which the Company’s subsidiary IRD holds a 50% interest. XPCT has two business divisions providing products and services to both the ITS industry and construction equipment manufacturers.

IRD had sales to XPCT of $nil during the six months ended June 30, 2018 (2017 - $nil). At June 30, 2018 accounts receivable from XPCT was $nil (December 31, 2017 - $11).

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

The Company’s ownership interest comprises a 50% share of net assets and net earnings of XPCT as well as purchase price adjustments to allocate fair values assigned to certain assets and liabilities at the time of acquisition.

As at June 30, 2018, IRD has an outstanding loan guarantee in the amount of 7.5 million yuan (approximately $1.1 million) (December 31, 2017 – 7.5 million yuan or $1.2 million) for 50% of a bank loan to XPCT representing IRD’s proportionate interest in this entity.

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

For the three and six months ended June 30, 2018, the effect of stock options totaling 6,400,549 and 6,907,187, respectively were anti-dilutive (three and six months ended June 30, 2017 – 5,987,893 and 5,372,242, respectively).

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

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 Incentive Plan”) and the related terminations of the Company’s “2001 Share Option Plan” (the “Option Plan”) and “Deferred Stock Unit Plan for Directors and Designated Employees” (the “DSU Plan”). As at June 30, 2018, the Company had options to purchase up to 6,907,187 Common Shares outstanding. Upon adoption of the Equity Incentive Plan, all options outstanding under the Option Plan are now governed by the Equity Incentive Plan and all deferred stock units outstanding under the DSU Plan were exercised for Common Shares on April 18, 2018 so no deferred stock units remain outstanding.

In connection with the acquisition of VIZIYA on May 4, 2017, the Company has agreed to future additional payments to the former owners of VIZIYA, based on future earnings targets (as defined in the purchase agreements) generated as a result of operations of VIZIYA. An estimated fair value of the contingent consideration was determined at $6,450 using the most current information available as at May 4, 2017. The estimate was calculated using the Monte Carlo simulations model. On December 31, 2017, the Company updated its estimate, using the same model, with the most current information available. As a result, the contingent consideration decreased by $1,976 to a revised estimate of $4,474. As at June 30, 2018, management has determined that there has been no change in the underlying information used in the determination of the estimated fair value of the contingent consideration therefore no change in the carrying value was recorded in the period. Changes, if any, made to the estimated fair value of contingent consideration in future periods will be included in Special charges in the consolidated statements of operations.

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by the chief operating decision maker (“CODM”) for making decisions and assessing performance as a source of the Company’s reportable operating segments. During the three months ended June 30, 2017, the CODM began making decisions and assessing the performance of the Company using three operating segments comprised of these reporting units, whereas the Company was previously a single operating segment.

Technology – The Technology segment includes companies that count technology licensing as their principal business activity. Current patent portfolios held by this segment include patents relating to 3D television technologies, automotive headlight assemblies, phased loop semiconductor technology, microcontrollers applicable to safety-critical aerospace, semiconductor manufacturing and packaging technologies, medical, industrial and automotive applications, computer gaming, medical stent technologies, intelligent personal assistant technologies, CMOS image sensors, enhanced image processing, streaming video technologies, building automation, non-volatile Flash memory, other memory technologies, semiconductor clocking technologies, smart meter monitoring, LED lighting technologies and many other technologies.

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

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

increasing the efficiency and reducing the environmental impact of highway and roadway transportation systems. IRD has a network of direct and independent operations and relationships in strategic geographic regions to identify and pursue ITS opportunities around the world.

Factory – The Company considers businesses focused on operations optimization, predictive maintenance, inventory optimization and health and safety in production environments as operating in a “factory” environment and classifies its related investments in the Factory segment. The Company’s first investment in this segment is VIZIYA based in Hamilton, Canada, a software company providing Enterprise Asset Management (“EAM”) software solutions to asset intensive industries worldwide through its presence in Australia, Europe, the Middle East and South Africa. VIZIYA has created software solutions that enhance each step of a customer’s work management process, to help customers measure the results of their initiatives, particularly focused on asset criticality, urgency, and compliance to ensure customers implement their asset strategies.

The following table reconciles the Adjusted EBITDA measure which is used in the evaluation of the performance of each segment to Net earnings (loss). The Company began using Adjusted EBITDA as its principal performance measure during the year ended December 31, 2017.

	Three months ended June 30,						Six months ended June 30,
		2018			2017			2018			2017
Segment Adjusted EBITDA:
Technology	$	(4,641	)	$	3,934		$	(9,404	)	$	1,747
Mobility		1,486			810			449			810
Factory		1,276			520			1,943			520
Total		(1,879	)		5,264			(7,012	)		3,077

Unallocated corporate expenses		2,072			504			4,276			504
Fair value purchase price adjustments		82			404			306			404
Stock-based compensation expense		(2	)		148			154			179
Special charges		-			1,294			-			1,294
Depreciation of property, plant and equipment		388			170			783			261
Amortization of intangibles		6,442			6,028			13,193			11,331
Results from operations		(10,861	)		(3,284	)		(25,724	)		(10,896	)
Finance income		(191	)		(234	)		(382	)		(452	)
Finance expense		40			14			79			14
Foreign exchange		(35	)		(426	)		(165	)		(711	)
Other income		(579	)		(69	)		(906	)		(69	)
Loss before taxes		(10,096	)		(2,569	)		(24,350	)		(9,678	)
Current income tax expense (recovery)		217			831			(104	)		1,574
Deferred income tax recovery		(2,448	)		(7,009	)		(4,336	)		(7,632	)
Income tax recovery		(2,231	)		(6,178	)		(4,440	)		(6,058	)
Net earnings (loss)	$	(7,865	)	$	3,609		$	(19,910	)	$	(3,620	)

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

Segment revenue by category for the three and six months ended June 30, 2018 and June 30, 2017 are as follows:

	For the three months ended June 30, 2018
	Technology		Mobility		Factory		Total
License	$	3,721	$	-	$	1,922	$	5,643
Systems		-		7,179		-		7,179
Services		-		-		727		727
Recurring		255		5,480		1,113		6,848
Total revenue	$	3,976	$	12,659	$	3,762	$	20,397

	For the three months ended June 30, 2017
	Technology		Mobility		Factory		Total
License	$	11,527	$	-	$	794	$	12,321
Systems		-		3,067		-		3,067
Services		-		-		714		714
Recurring		521		1,581		407		2,509
Total revenue	$	12,048	$	4,648	$	1,915	$	18,611

	For the six months ended June 30, 2018
	Technology		Mobility		Factory		Total
License	$	4,978	$	-	$	3,158	$	8,136
Systems		-		11,872		-		11,872
Services		-		-		1,380		1,380
Recurring		765		8,199		2,054		11,018
Total revenue	$	5,743	$	20,071	$	6,592	$	32,406

	For the six months ended June 30, 2017
	Technology		Mobility		Factory		Total
License	$	18,518	$	-	$	794	$	19,312
Systems		-		3,067		-		3,067
Services		-		-		714		714
Recurring		1,108		1,581		407		3,096
Total revenue	$	19,626	$	4,648	$	1,915	$	26,189

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

Revenue by geography for the three and six months ended June 30, 2018 and June 30, 2017 are as follows:

	Three months ended,				Six months ended,
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Revenues
United States	$	16,255	$	13,523	$	22,426	$	15,198
Canada		1,264		243		1,764		243
Japan		-		-		911		-
Finland		6		-		896		-
Chile		495		321		890		321
Australia		690		-		690		-
Germany		-		-		511		-
China		40		-		498		-
Thailand		36		-		421		-
Taiwan		229		513		331		2,725
Korea		131		2,625		228		5,250
United Kingdom		-		501		-		1,002
Rest of the world		1,251		885		2,840		1,450
Total revenue	$	20,397	$	18,611	$	32,406	$	26,189

Non-current assets by geography as at June 30, 2018 and December 31, 2017 are as follows:

A major customer is defined as an external customer whose transactions with the Company amount to 10% or more of the Company’s annual revenues. During the three and six months ended June 30, 2018, there were no major customers identified (three and six months ended June 30, 2017 – none, and 3 respectively).

As at June 30, 2018 the amount of transaction price allocated to remaining performance obligations was $25,164. The Company expects to recognize approximately 47% of this balance as revenue in the remainder of 2018, 36% in 2019 and 17% thereafter.

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

As part of the iCOMS acquisition, the Company acquired a loan payable to the general manager of the iCOMS division in the amount of $193 (December 31, 2017 – $199) with no fixed repayment terms. No payment has been made on the loan. The loan has been classified as long-term.

	June 30, 2018			December 31, 2017			$ Change			% Change
Unbilled revenue	$	6,782		$	3,045		$	3,737			123	%
Deferred revenue - current		(6,145	)		(6,733	)		588			-9	%
Deferred revenue - non-current		(1,736	)		(884	)		(852	)		96	%
Net contract assets (liabilities)	$	(1,099	)	$	(4,572	)	$	3,473			-76	%


As at	June 30, 2018		December 31, 2017
Raw materials	$	592	$	492
Original equipment manufacturer materials		3,083		2,536
Work in process		809		900
Finished goods		1,317		1,155
	$	5,801	$	5,083

	2018						2017
		Per Share			Total			Per Share			Total
1st Quarter	Cdn	$	0.0125	US	$	1,171	Cdn	$	0.0125	US	$	1,129
2nd Quarter			0.0125			1,155			0.0125			1,099
	Cdn	$	0.0250	US	$	2,326	Cdn	$	0.0250	US	$	2,228

	2018			2017
1st Quarter	Cdn	$	0.0125	Cdn	$	0.0125
2nd Quarter	Cdn	$	0.0125	Cdn	$	0.0125

As at	June 30, 2018		December 31, 2017
Technology	$	95,190	$	170,631
Mobility		66,103		69,832
Factory		34,115		33,163
Total segment assets		195,408		273,626
Total corporate assets		83,624		29,550
Total assets	$	279,032	$	303,176


	Exhibit 99.2


	FINANCIAL STATEMENTS


	FINANCIAL STATEMENTS


	FINANCIAL STATEMENTS