Quarterhill Inc. — Capital/Financing Update 2021

Oct 21, 2021

QUARTERHILL INC.

BOUGHT DEAL PUBLIC OFFERING OF CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES

Not for General Distribution in the United States

October 20, 2021

All amounts in C$, unless otherwise indicated.

A final base shelf prospectus containing important information relating to the securities described in this document hast been filed with the securities regulatory authorities in each of the provinces and territories of Canada (other than Quebec).

A copy of the final base shelf prospectus, any amendment to the final base shelf prospectus and any applicable shelf prospectus supplement that has been filed is required to be delivered with this document. This document does not provide full disclosure of all material facts relating to the securities offered. Investors should read the final base shelf prospectus, any amendment and any applicable shelf prospectus supplement for disclosure of those facts, especially risk factors relating to the securities offered, before making an investment decision.

ISSUER:

OFFERING:

ISSUE AMOUNT:

ISSUE PRICE:

OVER-ALLOTMENT OPTION:

COUPON:

Quarterhill Inc. (the “Issuer” or “Company")

Treasury offering ("Offering") of Convertible Unsecured Subordinated Debentures (collectively, the "Debentures").

$50,000,000 aggregate principal amount of Debentures

$1,000 per Debenture

The Underwriters (as defined below) will have the option (the "OverAllotment Option") to purchase from the Company up to an additional 15% of the Debentures offered, exercisable, in whole or in part, at any time up to 30 days following the Closing Date (as defined below) to cover over-allotments, if any.

6.0% per annum payable semi-annually on April 30 and October 31 in each year commencing April 30, 2022. The initial coupon payment will represent accrued interest for the period from the Closing Date to but excluding April 30, 2022.

Unless an event of default has occurred and is continuing, the Company may elect, from time to time, subject to applicable regulatory approval, including of the Toronto Stock Exchange (the "TSX"), to satisfy its obligation to pay interest on the Debentures on the date it is payable under the trust indenture governing the Debentures (the “Indenture”) by delivering freely tradeable common shares of the Company ("Shares") in an amount equal to the interest payable based on the prevailing market price of the Shares on the TSX to the trustee under the Indenture for sale, in which event holders of the Debentures will be entitled to receive a cash payment equal to the interest owed from the proceeds of the sale of the requisite number of Shares by the trustee.

Neither the Company’s making of such election nor the consummation of sales of Shares will: (a) result in the holders of Debentures not being entitled to receive the full amount of interest due on any interest payment date; or (b) entitle such holders to receive any Shares in satisfaction of the Company’s obligation to pay interest on the Debentures.

MATURITY DATE:

The Debentures will mature on October 30, 2026 (the "Maturity Date").

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USE OF PROCEEDS:

CONVERSION:

The net proceeds of the Offering will be used to support growth through potential acquisitions and to provide additional working capital to support the continued operations of the business.

The Debentures will be convertible at the holder’s option into fullypaid, non-assessable and freely tradable Shares at any time prior to the earlier of the last business day immediately preceding the Maturity Date and the last business day immediately preceding the date fixed for redemption by the Company at a conversion price of $3.80 per Share (the "Conversion Price"), being a ratio of approximately 263 Shares per $1,000 principal amount of Debentures, subject to adjustment in certain events. The Conversion Price represents a conversion premium of approximately 35% to a reference price of $2.82 per Share .

If a holder elects to convert its Debentures in connection with, and prior to completion of, a Change of Control (as defined below) that occurs prior to the Maturity Date, the holder will be entitled to receive additional Shares on conversion in certain circumstances as provided below under Change of Control.

DIVIDEND ADJUSTMENT AND ANTI-DILUTION

Anti-Dilution: The Conversion Price will be subject to standard antidilution adjustments upon, inter alia, share consolidations, share splits, spin-off events, rights issues and reorganizations.

Dividends: The Conversion Price will be subject to adjustments for distributions of securities or assets to shareholders of the Company in certain circumstances and the declaration of regular cash dividends above $0.0125 per quarter.

The Indenture will provide such other adjustments as are standard for unsecured convertible debenture offerings.

REDEMPTION:

Except as set out below, the Debentures will not be redeemable 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 their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the Shares on the TSX for the 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 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.

SHARE PAYMENT OPTION ON REDEMPTION OR MATURITY:

Subject to any required regulatory approval and provided no event of default has occurred and is continuing, the Company has the option (the “Share Payment Option”) to satisfy its obligation to repay the principal amount of the Debentures, in whole or in part, due upon redemption or at maturity on not more than 60 days’ and not less than 40 days’ prior notice, by delivering that number of freely tradable Shares obtained by dividing the principal amount of the Debentures to be redeemed or which have matured by 95% of the Current Market Price (as defined below) on the date of redemption or maturity, as applicable.

RESTRICTION ON SHARE PAYMENT OPTION

The Company shall not, directly or indirectly (through a subsidiary or otherwise) undertake or announce any rights offering, issuance of securities, subdivision of its common shares, dividend or other distribution on such shares or any other securities, capital reorganization, reclassification or any similar type of transaction in which:

(a) the number of securities to be issued;

(b) the price at which securities are to be issued, converted or exchanged; or

(c) any property or cash that is to be distributed or allocated,

is in whole or in part based upon, determined in reference to, related to or a function of, directly or indirectly, (i) the exercise or potential exercise of the Share Payment Option on redemption or maturity, or (ii) the Current Market Price determined in connection with the exercise or potential exercise of the Share Payment Option on redemption or maturity.

CURRENT MARKET PRICE

DEBENTURE RANKING:

Current Market Price is defined as the volume weighted average trading price of the Shares on the TSX for the 20 consecutive trading days ending on the fifth trading day prior to the applicable date.

The Debentures will be unsecured obligations of the Company and shall rank subordinate in right of payment of principal and interest to all existing and future senior indebtedness of the Company and pari passu in right of payment of principal and interest with all other unsecured indebtedness of the Company.

CHANGE OF CONTROL:

A "Change of Control" shall be deemed to occur upon (i) the acquisition by any person or group of persons acting jointly and in concert of voting control or direction of an aggregate of 50% or more of the outstanding Common Shares or (ii) the sale of all or substantially all of the Company’s assets, but shall not include a sale, merger, reorganization, arrangement, combination or other similar transaction if the previous holders of Common Shares hold at least 50% of the voting control or direction of such merged, reorganized, arranged, combined or other continuing entity (and in the case of a sale of all or substantially all of the assets, in the entity which has acquired such assets) immediately following the completion of such transaction.

Upon the occurrence of a Change of Control, the Company will be required to make an offer to purchase, within 30 days following the giving of notice to holders of Debentures of the Change of Control, all of the Debentures at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest.

If a Change of Control occurs in which 10% or more of the consideration for the Common Shares in the transaction or transactions constituting a Change of Control consists of (i) cash, (ii) equity securities that are not traded or intended to be traded immediately following such transactions on a stock exchange, or (iii) other property that is not traded or intended to be traded immediately following such transactions on a stock exchange (a "Cash Change of Control"), then, subject to regulatory approval, during the period beginning on the 10[th] trading day before the anticipated date on which the Cash Change of Control becomes effective (the “Cash Change of Control Effective Date”) and ending on the 30[th] day after the change of control purchase offer is delivered, holders of Debentures will be entitled to convert their Debentures at a new conversion price and receive, in addition to the number of Shares they otherwise would have been entitled to under " Conversion", an additional number of Shares not exceeding the specified amount of Shares per $1,000 of Debentures determined by a Cash Change of Control Conversion Price (as defined below), provided that the Cash Change of Control Conversion Price is not less than any regulatory permitted discounts to market price, in which case the Cash Change of Control Conversion Price shall be deemed to be that implied by the maximum permitted discounts to market price.

The "Cash Change of Control Conversion Price" shall be calculated as follows:

CCOCCP = ECP / (1 + (CP x (c/t)))

where:

CCOCCP = Cash Change of Control Conversion Price;

ECP = Conversion Price in effect on the Cash Change of Control Effective Date;

CP = 34.7%

c = the number of days from and including the Cash Change of Control Effective Date to but excluding October 31, 2025; and

t = the number of days from and including the Closing Date to but excluding October 31, 2025.

If an offer is made for Debentures which would be a take-over bid for Debentures within the meaning of Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids, if the Debentures were considered equity securities, and not less than 90% of the aggregate principal amount of the Debentures (other than Debentures held at the date of the take-over bid by or on behalf of the offeror or associates or affiliates of the offeror) are taken up and paid for by the offeror, the offeror will be entitled to acquire the Debentures held by those who did not accept the offer on the terms offered by the offeror.

PURCHASE FOR CANCELLATION:

FORM OF OFFERING:

The Company may purchase Debentures for cancellation in the market or by tender or private contract at any time subject to regulatory requirements.

The Debentures will be offered for sale on a bought deal, public offering basis in each of the provinces and territories of Canada, except Quebec. The Debentures may also be sold (i) in the United States on a private placement basis pursuant

to an exemption from the registration requirements of the United States Securities Act of 1933, as amended, and (ii) in such jurisdictions outside of Canada and the United States as may be agreed upon by the Underwriters and the Company, in each case in accordance with all applicable laws provided that no prospectus, registration statement or similar document is required to be filed in such jurisdiction.

FORM OF UNDERWRITING:

LISTING:

ELIGIBILITY:

SOLE BOOKRUNNER: UNDERWRITING FEE: CLOSING DATE:

Bought deal, subject to a mutually acceptable underwriting agreement containing “disaster out”, “regulatory out”, “compliance with conditions out”, “material adverse change out” and other termination rights in favour of the Underwriters in a form customarily found in underwriting agreements for a bought deal.

The Company will apply to list the Debentures and the Shares issuable on the conversion, redemption or maturity of the Debentures on the TSX, and closing of the Offering will be subject to TSX conditional approval thereof. Listing will be subject to the Company fulfilling all of the listing requirements of the TSX. The Shares are listed on the TSX under the symbol "QTRH".

Eligible for Canadian RRSPs, RRIFs, RDSPs, DPSPs, RESPs and TFSAs.

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