STRATEGIC PROCESS ENDS WITHOUT A SALE

WiLAN recently concluded a review of strategic alternatives kicked off in October. Despite

an indication of interest from potential acquirers, the company’s Board of Directors

decided that the offers fell short of valuing the company appropriately. As stated in the

press release first announcing the strategic review, the "strategic alternatives to be

considered may include changes to the company's dividend policy or other forms of return

of capital to shareholders, the acquisition or disposition of assets, joint ventures, the sale of

the company, alternative operating models or continuing with the current business plan,

among other potential alternatives."

NEW STRATEGIC DIMENSIONS

WiLAN identified four specific business strategies designed to enhance value as an

outcome of its strategic review:

1. Shift to a larger number of smaller licensing deals. WiLAN will shift efforts from

licensing its entire patent portfolio numbering ~4,500 towards more targeted licensing.

Basically, WiLAN will offer licenses to smaller buckets of patents that are more

relevant to the licensee need. This is hoped to increase the perceived value to the

licensee and perhaps expedite the process which in turn reduces litigation and related

cost. This frees WiLAN to increase the number and frequency of license signings. We

believe some of the benefit will likely be absorbed by volume of negotiations (albeit

individually smaller) and administration spent on more deals. An additional benefit is

the ability to carve out and sell patent portfolios with revenue given they are separated

into buckets.

2. De-risking the business through the sharing of licensing risk and reward with

partners. WiLAN will increase its own patent licensing deals with owners who are

seeking licensing partners rather than buyers. This shift will limit the outright

purchase of patent portfolios where WiLAN has focused in the past and it will help to

diversify outside of WiLAN’s traditional wireless and television patent pools. It will also

help to access more valuable patents which owners prefer not to sell, particularly at

low valuation. WiLAN currently has licensing programs with partners in several

verticals including semiconductors, automotive and irrigation and is actively working

on new partnership deals. Management sees “hundreds of large operating companies

with great patent portfolios” and believes WiLAN’s expertise is valuable given the

small number of similar firms. This is not a completely new strategy. In fact, WiLAN

currently has ~20 partnerships of this type developed since the beginning of the

strategic review and with Gladios.

3. Reduce litigation costs. WiLAN will launch fewer litigations but when it is forced to go

to court, it will choose a law firm with the requisite skills AND the willingness to share

risk of success or failure with contingent fees. As a shift in focus, WiLAN will raise its

internal bar for pursuing litigation. WiLAN noted that McKool Smith is now on a fixed

monthly retainer with escalation on successful outcomes. Some firms are willing to

work on 100% contingency. We believe this is a very positive indicator of the quality of

WiLAN’s patents and licensing potential. While this does de-risk the costs of litigation,

it also reduces the rewards of a successful outcome. As well, with US regulations

contemplating a lower threshold for award of defendant legal and court expenses in a

Daily Letter | 3 22 May 2014

patent case, there is no indication of how this adverse event would be managed. While

the bulk of WiLAN's revenues historically have been generated without litigation, the

threat of litigation is a strong incentive. If WiLAN will not be carrying a big stick, it

may see potential licensees delay the process.

 Sell non-core patents. WiLAN will also generate brokerage revenue through the

divestiture of a significant number of non-core patent portfolios. WiLAN indicated this

could number as many as 2,000 out of the existing portfolio of 4,500. This could drive

a cash inflow but conservatively, we suspect many will not sell and will simply not be

renewed. Either way (we look at the potential cash inflow below), this reduction will

focus the portfolio on a smaller number of more valuable patents and free cycles to

pursue partner licensing. It will also reduce patent maintenance cost which is

significant. Patent maintenance fees to the USPTO are due at 3.5, 7.5 and 11.5 years

after issuance. Large entities such as WiLAN are charged $1,150 at 3.5 years, 2,900

at 7.5 years and $4,810 at 11.5 years. Assuming a 20-year patent life and even

distribution, this is a $500,000 cost quarterly. On top of this there are additional

administrative charges for tracking the patents and periodic value assessment. WiLAN

will also maintain its internal R&D engine dedicated to generating unique intellectual

property which helps build the patent portfolio and also benefits from a PR standpoint.

2018 TARGETS IMPLY GROWTH WHILE CLARIFIED CASH

DISTRIBUTION PROMISES UPSIDE FOR SHAREHOLDERS

To assure investors of its longer-term opportunity set, WiLAN has established a roadmap

to double its revenue and increase GAAP earnings to above $0.30 per share by 2018.

Longer-term growth targets are typically discounted by investors. WiLAN management is

basically painting a picture of longer-term viability driven by revenue growth in addition to

operating leverage. WiLAN does have a large $300 million backlog of previously

negotiated licenses but this on its own cannot drive the business to the target. To do this,

WiLAN must sign incremental licensing deals of which existing programs could generate

$200-300 million in additional revenue over the next five years.

The growth profile of revenue and EPS to this rough guidance was not supplied and is not

expected to be linear given expectations of 5-10% growth in the current year. A rough

CAGR of 15% is required from the $88.2 million in revenue in 2013 or 17% from $93.3

million consensus in 2014. This growth profile is relatively in line with the 3-year CAGR of

20% ending in 2013. Reduced operating expense driven by reduced litigation and patent

administration costs are expected to drive operating leverage.

WiLAN reiterated its previous cash distribution targets with an intent to increase its

dividend on a regular basis (at least once annually) starting with a 25% increase from the

quarterly dividend of $0.04 per share in Q1 to $0.05 per share in Q2. WiLAN management

has an excellent record of dividend increases historically. In addition, WiLAN has

announced the intention to run an NCIB for cancelation of up to 10% of shares

outstanding. In the past WiLAN has suggested that it needs $100M on the balance sheet to

reinforce the ability to enforce patent rights when necessary.

REGULATORY ENVIRONMENT REMAINS CLOUDY

The recent legislative climate has been increasingly hostile toward patent trolls. The

Obama administration has been outspoken in its attempts to rein in patent assertion

entities or so called patent trolls. We have contended that WiLAN is not strictly speaking a

“patent troll” given the quality of its patent portfolio, much of it developed in house. In the

absence of a lobbying effort, companies like WiLAN are at the mercy of public opinion,

particularly against well regarded brands such as Apple. We believe that WiLAN and

others are taking steps to form a lobbying/PR effort and we believe that patent reform is a

difficult problem for lawmakers which may yield small incremental change. Furthermore,

we believe that changes which improve patent quality or increase the cost of failed

litigation will serve to reduce the prevalence of lower quality patent assertion. In fact,

patent assertion entities may increasingly be seen as an important intermediary for liquid

trade in patent assets.

Yesterday, some relief for companies like WiLAN came in the form of Senate Judiciary

Committee Chairman Patrick Leahy’s decision to remove patent reform legislation from the

agenda. Leahy highlighted a lack of "sufficient support” and “no agreement on how to

combat the scourge of patent trolls on our economy without burdening the companies and

universities who rely on the patent system every day to protect their inventions." A full

statement can be found at the following link.

PATENT SALE PROCEEDS?

WiLAN has a very large portfolio of 4,500 patents and is now preparing to reduce that

number. Management indicates it could sell up to 2,000 patents. Management noted that

a special dividend is possible to distribute the proceeds of a patent sale.

We believe it is fair to assume the portfolio has already been split into great, good and bad

with only the latter patents being sold. As such, this will have the effect of increasing

average patent value of WiLAN’s portfolio. In the past the company has indicated the bulk

of the value is related to ~400 key patents and that the portfolio includes ~250 standard

Daily Letter | 5 22 May 2014

essential patents. With this in mind, contemplating 2,000 patents for sale could be a first

salvo. The expected cash inflow would be low relative to average patent value assessments

(which admittedly are limited in value but are the best tool available). In the past we have

highlighted a number of transactions which value patents anywhere from $100,000 to as

high as $1 million on average. While patent values have declined, we believe that there is

strategic value for WiLAN’s wireless and display patents as companies target entry into

those two markets.

 Lenovo – In April, 2014, Lenovo acquired a portfolio of ~3,800 3G, 4G and smartphone

feature patents from NEC. Lenovo also acquired a patent portfolio of 142 patents (21

patent families comprising 104 issued patents and 38 pending applications) owned by

Unwired Planet (previously Openwave) which cover 4G technologies. The patent

acquisition and a license agreement was worth $100 million together.

 BlackBerry – Various sources pegged the value at $1-3 billion or $100-300k/patent

when a portfolio of ~9,268 granted patents and applications considered to be available

for sale.

 Kodak – A distressed sale of 1,100 Kodak patents to a group of companies including

Apple, Google and Facebook attracted $525 million ($500k/patent).

 InterDigital – A sale of 1,700 wireless patents to Intel for $375 million implied

$220k/patent in June 2012.

 Nortel – The purchase of a portfolio of ~4,000 patents from Nortel by a consortium

(Rockstar Bidco) for ~$4.5 billion broke $1 million per patent. While we do not think

that this is a relevant transaction, it shows the potential value of a portfolio of patents.

With some law firms quoting $10,000-$20,000 to prepare and file a patent application

followed by one or more rounds of amendments which can cost $2,000-5,000 individually,

a baseline value of a patent is $10,000-30,000. More complex or valuable patents or a

higher value firm would cost more to prepare. Because of WiLAN’s expertise, we expect

the average value of patent to be at the high end of this range which suggests a sale of

2,000 patents could be worth $20-60 million and potentially more if sold in buckets as

patent families typically attract higher valuations than single patents.

UPDATING THE BACKLOG

WiLAN reported an updated backlog of ~$300 million based on current license deals,

which is a decline from the $325-350 million reported on October 24. At the time, WiLAN

indicated the bulk of the backlog was expected over the next four years; however, the full

backlog was expected to extend over seven years. The delta is below the $52.2 million in

revenue reported in the December and March quarter and roughly 50% of the June quarter

which suggests WiLAN is adding to the backlog but at a lower rate than it is being

converted to revenue. Admittedly, backlog increase can be lumpy and deal timing

dependent.

WiLAN further estimates that it would be able to generate additional revenue of $200-300

million from the current LTE (handset and infrastructure), digital display and network

management portfolios over the next five years. Some of this will be related to renewal of

agreements signed in 2011 with 5-7 year durations. We expect these renewals to be

Daily Letter | 6 22 May 2014

incrementally larger given the broadening of WiLAN’s patent assets since those

agreements were signed.

The remaining growth will come from new patent partnerships currently signed and those

which WiLAN will target for the future. Management provided some broad guidance on the

potential impact to the backlog from 20 partnerships potentially worth an aggregate of

$380-390 million before partner payments. Assuming a similar deal to that signed

between Unwired Planet and Ericsson, which had an escalating payment to Ericsson from

20% to 50% to 70%, we could see WiLAN receiving ~50% of total proceeds.

 Panasonic – A partnership announced in December 2013 with Panasonic related to

900 patents covering various semiconductor technologies including CMOS image

sensors, microcontrollers and semiconductors used in optical drives. WiLAN

highlighted broad opportunities from CMOS image sensor patents which it believes

consumer, automotive and other camera applications are infringing on. This

partnership is expected to generate incremental ~$100 million licensing revenue over

its lifetime. Panasonic has a much larger patent portfolio and a clear intention to

improve the monetization and management of its intellectual property assets could

drive an expansion in this partnership over time.

 British Telecom – A partnership deal with BT signed in January 2013 related to Digital

Rights Management (DRM) technology which WiLAN estimates is worth over $100

million in incremental licensing revenue.

 Turbine and other video game – Multiple partnerships, including one with Turbine

announced in November 2013 and at least one other entity involving technology used

in video games including the creation of avatars is estimated to be worth ~$50 million

in incremental revenue.

 Automotive patents – Two automotive patent portfolio partnerships related to

technology used in headlights and diagnostic tools worth an incremental $30-40

million.

 All the rest – WiLAN management reported an additional 14 partnerships with an

estimated incremental revenue of over $100 million over their lifetime.

UPDATING ESTIMATES

On April 30, WiLAN provided Q2 guidance for revenue of $19.4 million and operating

expenses of $9.0-10.2 million which includes litigation costs of $1.4-2.5 million. Adjusted

earnings are expected to fall in the range of $9.4-10.5 million. Typically, Q2 is a weaker

quarter given it does not benefit as much from unit-driven display revenue.

WiLAN has recently shifted its reporting schedule to earlier in the quarter and is based on

the signed deals and received royalty payments at that point. Given the guidance was

provided only 30 days into the quarter or approximately one week earlier than last year,

we expect revenue to be higher than this. In 2013, Q2 guidance of $17.5 million was $2.4

million lighter than actual reported revenue. However, WiLAN also announced deals with

Telrad and Dell in May subsequent to the guidance and Samsung and DoroAB in June. In

2012, Q2 revenue was $1 million higher than guidance. Our updated estimates are shown

in the income statement provided at the end of this report with summary below

Figure 2: Estimate update

Q2/F14E

(New)

F2014E

(New)

F2015E

(New)

CG forecast

Revenues (000's) $ 21,000 $ 92,285 $ 102,610

Operating margins 7.9% 15.9% 21.3%

EBITDA $ 10,954 $ 52,493 $ 57,624

EBITDA margin 52% 57% 56%

GAAP EPS - diluted $ 0.01 $ 0.09 $ 0.15

Adjusted EPS - diluted $ 0.09 $ 0.44 $ 0.48

Consensus forecast

Revenues (000's) $ 21,975 $ 93,275 $ 104,033

EBITDA $ 12,900 $ 51,733 $ 56,000

EBITDA margin 58.7% 55.5% 53.8%

GAAP EPS $ 0.03 $ 0.11 $ 0.15

Adjusted EPS $ 0.11 $ 0.45 $ 0.50

Source: Canaccord Genuity estimates, Bloomberg

BACKLOG PROVIDES SUPPORT FOR OUR VALUATION BUT

GROWTH IS STILL REQUIRED TO HIT OUR TARGET

We base our valuation on comparables. Our target price is based on an EV of 7x C2015E

EBITDA and our estimate of liquidation sum of parts valuation. Currently, WiLAN's stock is

significantly undervalued at 4.2x C2014E EV/EBITDA and 3.8x C2015 EV/EBITDA versus

peers at an average of 7.3x. On a P/E basis, WiLAN trades at 6.8x and 6.3x C2015E

adjusted EPS versus peers at 18x. This discount reflects the recent difficulty WiLAN has

had in the courts and uncertainty around WiLAN’s next cycle of patent licensing.

WiLAN’s current backlog (last updated on May 14) is ~$300 million. We calculate present

value based on a 12% discount rate of this backlog, which is $115 million or ~$1.00/

share. Cash at quarter end (March) was $142 million or $1.18/share. This suggests the

backlog and cash alone is worth $2.17/share, which does not include the value of the

patent portfolio. Adding $0.97/share to reflect a conservative valuation of the patent

portfolio leads us to a liquidation sum of parts value of ~$3.14 per share. This ignores all

future growth from new signings, renewals and other new business generation.

Although we expect the residual patent portfolio to be more valuable on average, we have

assumed no change to our previous average value of $100k per patent. Reducing this to

$50k would reduce our sum of parts by ~$0.50.

We have also assumed no proceeds from a sale of 2,000 non-core patents. Assuming a

$20-60 million inflow as calculated above, this could add a further $0.17-0.50 for a total

baseline value of $3.64.