6-K 1 bbry-20150530x6k.htm 6-K BBRY-2015.05.30-6K


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 6-K
_________________________________________________________________
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of, June 2015
_________________________________________________________________  
Commission File Number 000-29898
_________________________________________________________________  
BlackBerry Limited
(Translation of registrant’s name into English)
_________________________________________________________________ 
2200 University Avenue East, Waterloo, Ontario, Canada N2K 0A7
(Address of principal executive offices)
_________________________________________________________________ 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40F:
Form 20-F  ¨            Form 40-F  x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨





DOCUMENTS INCLUDED AS PART OF THIS REPORT
Document
1.    Consolidated Financial Statements for the Three Months Ended May 30, 2015.
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended May 30, 2015.
3.
Canadian Forms 52-109F2 - Certification of Interim Filings
This Report on Form 6-K is incorporated by reference into the Registration Statements on Form S-8 of the Registrant, which were originally filed with the Securities and Exchange Commission on March 28, 2002 (File No. 333-85294), October 21, 2002 (File No. 333-100684), April 28, 2008 (File No. 333-150470), October 3, 2011 (File No. 333-177149), July 10, 2013 (File No. 333-189880), December 20, 2013 (File Nos. 333-192986 and 333-192987) and on July 25, 2014 (File No. 333-197636).







BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions)(unaudited)
Consolidated Balance Sheets
 
As at
 
May 30, 2015
 
February 28, 2015
Assets
 
 
 
Current
 
 
 
Cash and cash equivalents
$
1,165

 
$
1,233

Short-term investments
1,799

 
1,658

Accounts receivable, net
470

 
503

Other receivables
93

 
97

Inventories
133

 
122

Income taxes receivable
16

 
169

Other current assets
258

 
375

Deferred income tax asset
8

 
10

 
3,942

 
4,167

Long-term investments
293

 
316

Restricted cash
59

 
59

Property, plant and equipment, net
519

 
556

Goodwill
96

 
76

Intangible assets, net
1,281

 
1,375

 
$
6,190

 
$
6,549

Liabilities
 
 
 
Current
 
 
 
Accounts payable
$
149

 
$
235

Accrued liabilities
466

 
658

Deferred revenue
464

 
470

 
1,079

 
1,363

Long-term debt
1,550

 
1,707

Deferred income tax liability
48

 
48

 
2,677

 
3,118

Shareholders’ Equity
 
 
 
Capital stock and additional paid-in capital
 
 
 
Preferred shares: authorized unlimited number of non-voting, cumulative, redeemable and retractable

 

Common shares: authorized unlimited number of non-voting, redeemable, retractable Class A common shares and unlimited number of voting common shares
 
 
 
Issued - 529,484,618 voting common shares (February 28, 2015 - 528,802,322)
2,459

 
2,444

Retained earnings
1,078

 
1,010

Accumulated other comprehensive loss
(24
)
 
(23
)
 
3,513

 
3,431

 
$
6,190

 
$
6,549

See notes to consolidated financial statements.
On behalf of the Board:
 
 
 
John S. Chen
              Barbara Stymiest
Director
Director


BlackBerry Limited
(United States dollars, in millions)(unaudited)

Consolidated Statements of Shareholders’ Equity
 
 
Capital Stock
and Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Total
Balance as at February 28, 2015
$
2,444

 
$
1,010

 
$
(23
)
 
$
3,431

Net income

 
68

 

 
68

Other comprehensive loss

 

 
(1
)
 
(1
)
Shares issued:
 
 
 
 
 
 
 
Stock-based compensation
14

 

 

 
14

Exercise of stock options
1

 

 

 
1

Balance as at May 30, 2015
$
2,459

 
$
1,078

 
$
(24
)
 
$
3,513

See notes to consolidated financial statements.






BlackBerry Limited
(United States dollars, in millions, except per share data)(unaudited)

Consolidated Statements of Operations
 
 
Three Months Ended
 
May 30, 2015
 
May 31, 2014
Revenue
$
658

 
$
966

Cost of sales
 
 
 
Cost of sales
329

 
502

Inventory write-down
21

 
23

Supply commitment recovery
(2
)
 
(10
)
 
348

 
515

Gross margin
310

 
451

Operating expenses
 
 
 
Research and development
139

 
237

Selling, marketing and administration
174

 
400

Amortization
65

 
81

Debentures fair value adjustment
(157
)
 
(287
)
 
221

 
431

Operating income
89

 
20

Investment loss, net
(16
)
 
(26
)
Income (loss) before income taxes
73

 
(6
)
Provision for (recovery of) income taxes
5

 
(29
)
Net income
$
68

 
$
23

Earnings (loss) per share
 
 
 
Basic
$
0.13

 
$
0.04

Diluted
$
(0.10
)
 
$
(0.37
)
See notes to consolidated financial statements.


BlackBerry Limited
(United States dollars, in millions)(unaudited)

Consolidated Statements of Comprehensive Income (Loss)
 
Three Months Ended
 
May 30, 2015
 
May 31, 2014
Net income
$
68


$
23

Other comprehensive income (loss)
 
 
 
Net change in unrealized losses on available-for-sale investments
(1
)
 

Net change in fair value of derivatives designated as cash flow hedges during the period, net of income tax recovery of $3 million (May 31, 2014 - income tax recovery of $2 million)
5

 
4

Amounts reclassified to net income during the period for derivatives designated as cash flow hedges during the period, net of income tax recovery of $3 million (May 31, 2014 - income tax recovery of $1 million)
7

 
5

Foreign currency translation adjustment
(12
)
 

Other comprehensive income (loss)
(1
)
 
9

Comprehensive income
$
67

 
$
32

See notes to consolidated financial statements.


BlackBerry Limited
(United States dollars, in millions)(unaudited)

Consolidated Statements of Cash Flows
 
 
Three Months Ended
 
May 30, 2015
 
May 31, 2014
Cash flows from operating activities
 
 
 
Net income
$
68

 
$
23

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization
164

 
191

Deferred income taxes
2

 
25

Stock-based compensation
14

 
14

Loss on disposal of property, plant and equipment
12

 
108

Debentures fair value adjustment
(157
)
 
(287
)
Other
16

 
6

Net changes in working capital items:
 
 
 
Accounts receivable, net
35

 
227

Other receivables
4

 
(73
)
Inventories
(11
)
 
137

Income tax receivable, net
153

 
298

Other current assets
124

 
104

Accounts payable
(86
)
 
(213
)
Accrued liabilities
(191
)
 
(190
)
Deferred revenue
(13
)
 
(68
)
Net cash provided by operating activities
134

 
302

Cash flows from investing activities
 
 
 
Acquisition of long-term investments
(77
)
 
(215
)
Proceeds on sale or maturity of long-term investments
1

 
11

Acquisition of property, plant and equipment
(11
)
 
(26
)
Proceeds on sale of property, plant and equipment

 
292

Acquisition of intangible assets
(11
)
 
(142
)
Business acquisitions, net of cash acquired
(53
)
 

Acquisition of short-term investments
(574
)
 
(824
)
Proceeds on sale or maturity of short-term investments
532

 
799

Net cash used in investing activities
(193
)
 
(105
)
Cash flows from financing activities
 
 
 
Issuance of common shares
1

 
2

Transfer to restricted cash

 
(69
)
Net cash provided by (used in) financing activities
1

 
(67
)
Effect of foreign exchange gain (loss) on cash and cash equivalents
(10
)
 
1

Net increase (decrease) in cash and cash equivalents during the period
(68
)
 
131

Cash and cash equivalents, beginning of period
1,233

 
1,579

Cash and cash equivalents, end of period
$
1,165

 
$
1,710

See notes to consolidated financial statements.


BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)






1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
Basis of Presentation and Preparation
These interim consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (“U.S. GAAP”). They do not include all of the disclosures required by U.S. GAAP for annual financial statements and should be read in conjunction with the audited consolidated financial statements of BlackBerry Limited (the “Company”) for the year ended February 28, 2015 (the “Annual Financial Statements”), which have been prepared in accordance with U.S. GAAP. In the opinion of management, all normal recurring adjustments considered necessary for fair presentation have been included in these interim consolidated financial statements. Operating results for the three months ended May 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending February 27, 2016.
The Company’s fiscal year end date is the 52 or 53 weeks ending on the last Saturday of February, or the first Saturday of March. Most fiscal years, including the fiscal years ending February 27, 2016 and February 28, 2015, comprise 52 weeks. However, if the date that is 52 weeks following the most recent fiscal year end is earlier than the last Saturday of February, then such fiscal year comprises 53 weeks. Certain of the comparable figures have been reclassified to conform to the current period’s presentation.
Significant Accounting Policies and Critical Accounting Estimates
There have been no material changes to the Company’s accounting policies or critical accounting estimates from those described in the Annual Financial Statements, except for the accounting policy related to foreign currency translation as noted below. The Company has also provided additional disclosure below relating to the application of its revenue recognition policy.
Revenue Recognition
The Company recognizes revenue as earned when the following four criteria have been met: (i) when persuasive evidence of an arrangement exists, (ii) the product has been delivered to a customer and title has been transferred or the services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collection is reasonably assured. In addition to this general policy, the following paragraphs describe the specific revenue recognition policies for each of the Company’s major categories of revenue.
Hardware
Revenue for hardware products is recognized when the four criteria noted above are met. The determination of when the price is fixed or determinable can affect the timing of revenue recognition, as discussed further below.
The Company records reductions to revenue for estimated commitments related to price protection, rights of return and customer incentive programs. Price protection is accrued as a reduction to revenue provided that (i) the future price reduction can be reliably estimated or based on contractual caps, (ii) the Company has not granted refunds in excess of those caps, and (iii) all other revenue recognition criteria have been met. If refunds cannot be reliably estimated or the contractual cap is no longer valid, revenue is not recognized until reliable estimates can be made or the price protection period lapses. The Company also records reductions to revenue for rights of return based on contractual terms and conditions as it relates to quality defects only and, if the expected product returns can be reasonably and reliably estimated, based on historical experience. Where a right of return cannot be reasonably and reliably estimated, the Company recognizes revenue when the product sells through to an end user or the return period lapses. The estimated cost of customer incentive programs is accrued as a reduction to revenue and is recognized at the later of the date at which the Company has recognized the revenue or the date at which the program is offered. If historical experience cannot support a breakage rate, the maximum rebate amount is accrued and adjusted when the incentive programs end. The Company considers several factors in determining whether it can reliably estimate future refunds or customer incentives such as levels of channel inventory, new competitor introductions, the stage of a product in the product life cycle, and potential cannibalization by future product offerings. If there is a risk of future pricing concessions and a reliable estimate cannot be made at the time of shipment, the Company recognizes the related revenue and costs of goods sold when its products are sold through to an end user.
For shipments where the Company recognizes revenue when the product is sold through to an end user, the Company determines the point at which that happens based upon internally generated reporting indicating when the devices are activated on the Company’s relay infrastructure.

1

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





Significant judgment is applied by the Company to determine whether shipments of devices have met the Company’s revenue recognition criteria, as the analysis is dependent on many facts and circumstances. Commencing in fiscal 2016, the Company was able to conclude that the price was fixed or determinable on shipment in certain cases and therefore, the four criteria for revenue recognition were met upon shipment. As such, sales of the Company's latest BlackBerry 10 devices to wireless carriers in certain regions, and BlackBerry 7 devices in certain regions, are recognized as revenue at the time of shipment. Other shipments of BlackBerry 10 and BlackBerry 7 devices are recognized as revenue when the devices sell through to end users.
Services
Revenue from services is recognized rateably on a monthly basis when the service is provided. In instances where the Company bills the customer prior to performing the service, the prebilling is recorded as deferred revenue. Service revenue also includes the recognition of previously deferred revenue related to multi-element arrangements for non-software services and software upgrade rights related to BlackBerry 10 devices.
Software and Technology Licensing
Revenue from licensed software and value added services is recognized upon delivery or rateably over the license or subscription term and in accordance with industry-specific software revenue recognition accounting guidance. When the fair value of a delivered element has not been established, the Company uses the residual method to recognize revenue if the fair value of undelivered elements is determinable. Revenue from software maintenance, unspecified upgrades and technical support contracts is recognized over the period that such items are delivered or those services are provided.
As part of the Company's announced business strategy related to technology and patent licensing, the Company began to monetize its patent portfolio.
The Company's outbound patent licensing agreements provide for license fees that may be a single upfront payment or multiple payments representing all or a majority of the licensing revenue that will be payable to the Company. These agreements grant (i) a limited non-exclusive, non-transferable license to certain of the Company’s patents, (ii) a covenant not to enforce patent rights against the licensee, and (iii) the release of the licensee from certain claims. Revenue from patent licensing agreements is recorded when the four major criteria of revenue recognition noted above are met. These criteria are generally fulfilled upon mutual signing of the license agreement.
From time to time the Company may sell patents, which are typically non-strategic to the Company’s product and patent portfolio. These patent sales are a part of the technology and patent licensing strategy, and therefore represent a component of the Company's major or central operations. Revenue from patent sales is recorded when the four major criteria of revenue recognition noted above are met. These criteria are generally fulfilled upon closing of the patent sale transaction.
Foreign Currency Translation
The U.S. dollar is the functional and reporting currency of the Company and substantially all of the Company's subsidiaries.
Foreign currency denominated assets and liabilities of the Company and its U.S. dollar functional currency subsidiaries are translated into U.S. dollars. Accordingly, monetary assets and liabilities are translated using the exchange rates in effect at the consolidated balance sheet dates, and revenues and expenses are translated at the rates of exchange prevailing when the transactions occurred. Remeasurement adjustments are included in income. Non-monetary assets and liabilities are translated at historical exchange rates.
Foreign currency denominated assets and liabilities of the Company's non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at the exchange rates in effect on the consolidated balance sheet dates. Revenues and expenses are translated using monthly average exchange rates. Exchange gains or losses arising from translation of foreign currency denominated assets and liabilities are included as a currency translation adjustment within accumulated other comprehensive income (loss) (“AOCI”).
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard on the topic of revenue contracts, which replaces the existing revenue recognition standard. The new standard amends a number of requirements that an entity must consider in recognizing revenue and requires improved disclosures to help readers of financial statements better understand the nature, amount, timing and uncertainty of revenue recognized. For public entities, the new standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company will adopt this guidance in the first

2

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





quarter of fiscal 2018 and is currently evaluating the impact that the adoption will have on its results of operations, financial position and disclosures.
In April 2015, the FASB issued a new accounting standards update on the topic of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company will adopt this guidance in the first quarter of fiscal 2017 and is currently evaluating the impact that the adoption will have on its financial position and disclosures.
In April 2015, the FASB issued a new accounting standards update on the topic of internal-use software. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. The amendments are effective for annual reporting periods beginning after December 16, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company will adopt this guidance in the first quarter of fiscal 2017 and is currently evaluating the impact that the adoption will have on its results of operations, financial position and disclosures.
In June 2015, the FASB issued a new accounting standards update for technical corrections and improvements that affect a wide variety of topics in the codification. The amendments in this update correct unintended application of guidance, make minor improvements and provide clarification to the codification. The amendments that require transition guidance are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company will adopt this guidance in the first quarter of fiscal 2017 and is currently evaluating the impact that the adoption will have on its results of operations, financial position and disclosures.
2.
CASH, CASH EQUIVALENTS AND INVESTMENTS

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use in pricing the asset or liability such as inherent risk, non-performance risk and credit risk. The Company applies the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value into three levels:
Level 1 - Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.


3

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The components of cash, cash equivalents and investments by fair value level as at May 30, 2015 were as follows:
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Other-than-
temporary
Impairment
 
Fair Value
 
Cash and
Cash
Equivalents
 
Short-term
Investments
 
Long-term
Investments
 
Restricted Cash
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
796

 
$

 
$

 
$

 
$
796

 
$
796

 
$

 
$

 
$

Other investments
68

 

 

 

 
68

 

 

 
68

 

 
864

 

 

 

 
864

 
796

 

 
68

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1

 

 

 

 
1

 
1

 

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term deposits, certificates of deposits, and GICs
144

 

 

 

 
144

 

 
85

 

 
59

Bankers’ acceptances/Bearer deposit notes
20

 

 

 

 
20

 
20

 

 

 

Commercial paper
233

 

 

 

 
233

 
56

 
177

 

 

Non-U.S. promissory notes
287

 

 

 

 
287

 
101

 
186

 

 

Non-U.S. treasury bills/notes
548

 

 

 

 
548

 
191

 
357

 

 

U.S. treasury bills/notes
744

 
1

 

 

 
745

 

 
560

 
185

 

U.S. government sponsored enterprise notes
274

 

 

 

 
274

 

 
274

 

 

Non-U.S. government sponsored enterprise notes
161

 

 
(1
)
 

 
160

 

 
160

 

 

 
2,411

 
1

 
(1
)
 

 
2,411

 
368

 
1,799

 
185

 
59

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
3

 

 

 

 
3

 

 

 
3

 

Auction rate securities
41

 
2

 

 
(6
)
 
37

 

 

 
37

 

 
44

 
2

 

 
(6
)
 
40

 

 

 
40

 

 
$
3,320

 
$
3

 
$
(1
)
 
$
(6
)
 
$
3,316

 
$
1,165

 
$
1,799

 
$
293

 
$
59


4

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The components of cash, cash equivalents and investments by fair value level as at February 28, 2015 were as follows:
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Other-than-
temporary
Impairment
 
Fair Value
 
Cash and
Cash
Equivalents
 
Short-term
Investments
 
Long-term
Investments
 
Restricted Cash
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
765

 
$

 
$

 
$

 
$
765

 
$
765

 
$

 
$

 
$

Other investments
66

 

 

 

 
66

 

 

 
66

 

 
831

 

 

 

 
831

 
765

 

 
66

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1

 

 

 

 
1

 
1

 

 

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term deposits, certificates of deposits, and GICs
218

 
1

 

 

 
219

 
76

 
84

 

 
59

Commercial paper
710

 

 

 

 
710

 
240

 
470

 

 

Non-U.S. promissory notes
100

 

 

 

 
100

 

 
100

 

 

U.S. treasury bills/notes
915

 

 

 

 
915

 

 
705

 
210

 

Non-U.S. treasury bills/notes
244

 

 

 

 
244

 
151

 
93

 

 

Non-U.S. government sponsored enterprise notes
49

 

 

 

 
49

 

 
49

 

 

U.S. government sponsored enterprise notes
149

 

 

 

 
149

 

 
149

 

 

Corporate notes/bonds
8

 

 

 

 
8

 

 
8

 

 

 
2,393

 
1

 

 

 
2,394

 
467

 
1,658

 
210

 
59

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
3

 

 

 

 
3

 

 

 
3

 

Auction rate securities
41

 
2

 

 
(6
)
 
37

 

 

 
37

 

 
44

 
2

 

 
(6
)
 
40

 

 

 
40

 

 
$
3,269

 
$
3

 
$

 
$
(6
)
 
$
3,266

 
$
1,233

 
$
1,658

 
$
316

 
$
59

As at May 30, 2015, the Company’s other investments consisted of cost method investments of $54 million (February 28, 2015 - $52 million) and equity method investments of $14 million (February 28, 2015 - $14 million).
There were no realized gains or losses on available-for-sale securities for the three months ended May 30, 2015 or the three months ended May 31, 2014.
The Company has restricted cash, consisting of cash and securities pledged as collateral to major banking partners in support of the Company's requirements for letters of credit. These letters of credit support certain leasing arrangements entered into in the ordinary course of business, for terms ranging from one month to nine years. The Company is legally restricted from accessing these funds during the term of the leases for which the letters of credit have been issued; however, the Company can continue to invest the funds and receive investment income thereon.

5

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The contractual maturities of available-for-sale investments as at May 30, 2015 were as follows:
 
As At
 
May 30, 2015
 
February 28, 2015
 
Cost Basis
 
Fair Value
 
Cost Basis
 
Fair Value
Due in one year or less
$
2,167

 
$
2,167

 
$
2,124

 
$
2,125

Due in one to five years
188

 
188

 
213

 
213

Due after five years
94

 
96

 
94

 
96

No fixed maturity
1

 
1

 
1

 
1

 
$
2,450

 
$
2,452

 
$
2,432

 
$
2,435

As at May 30, 2015 and February 28, 2015, the Company had no investments with continuous unrealized losses.
The Company engages in limited securities lending to generate fee income. Collateral which exceeds the market value of the loaned securities is retained by the Company until the underlying security has been returned to the Company. As at May 30, 2015, the Company had no loaned securities (February 28, 2015 - loaned securities with a market value of $85 million). The Company held collateral with a market value that exceeds the value of securities lent, consisting of U.S. treasury bills/notes.
In valuing the auction rate securities, the Company used a multi-year investment horizon and considered the underlying risk of the securities and the current market interest rate environment. The Company has the ability and intent to hold these securities until such time that market liquidity returns to normal levels, and does not consider the principal or interest amounts on these securities to be materially at risk. As there is uncertainty as to when market liquidity for auction rate securities will return to normal, the Company has classified the auction rate securities as long-term investments on the consolidated balance sheets as at May 30, 2015 and February 28, 2015.
3.
FAIR VALUE MEASUREMENTS
For a description of the fair value hierarchy, please see Note 2.
Recurring Fair Value Measurements
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, other receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.
In determining the fair value of investments held (other than those classified as Level 3), the Company primarily relies on an independent third party valuator for the fair valuation of securities. Pricing inputs used by the independent third party valuator are generally received from two primary vendors and are reviewed for completeness and accuracy, within a set tolerance level, on a daily basis by the independent third party valuator. The Company also reviews and understands the inputs used in the valuation process and assesses the pricing of the securities for reasonableness after conducting its own internal collection of quoted prices from brokers. Fair values for all investment categories provided by the independent third party valuator that differ by greater than 0.5% from the fair values determined by the Company are communicated to the independent third party valuator for consideration of reasonableness. The independent third party valuator considers the information provided by the Company before determining whether a change in the original pricing is warranted.
The Company's investments (other than those classified as Level 3) largely consist of securities issued by major corporate and banking organizations, the provincial and federal governments of Canada and the United States Department of the Treasury, and are all investment grade.
The following table summarizes the changes in fair value of the Company’s Level 3 assets for the three months ended May 30, 2015 and May 31, 2014:
 
Three Months Ended
 
May 30, 2015
 
May 31, 2014
Balance, beginning of period
$
40

 
$
40

Principal repayments

 
(1
)
Balance, end of period
$
40

 
$
39


6

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The Company recognizes transfers in and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurred. There were no significant transfers in or out of Level 3 assets during the three months ended May 30, 2015 and May 31, 2014.
The Company’s Level 3 assets measured on a recurring basis include auction rate securities as well as corporate notes/bonds consisting of securities received in a payment-in-kind distribution from a former structured investment vehicle.
The auction rate securities are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the estimated weighted-average life of each security based on its contractual details and expected paydown schedule based upon the underlying collateral, the value of the underlying collateral which would be realized in the event of a waterfall event, an estimate of the likelihood of a waterfall event and an estimate of the likelihood of a permanent auction suspension. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the probability of a waterfall event is accompanied by a directionally opposite change in the assumption used for the probability of a permanent auction suspension. A waterfall event occurs if the funded reserves of the securities become insufficient to make the interest payments, resulting in the disbursement of the securities’ underlying collateral to the security holders.
The corporate notes/bonds are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the anticipated future monthly principal and interest payments, an estimated rate of decrease of those payments, the value of the underlying collateral, the number of securities currently in technical default as grouped by the underlying collateral, an estimated average recovery rate of those securities and assumptions surrounding additional defaults. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the anticipated monthly payments is accompanied by a directionally similar change in the average recovery rate and a directionally opposite change in the yearly decrease in payments and additional defaults assumptions.
The following table presents the significant unobservable inputs used in the fair value measurement of the above Level 3 assets, as well as the impact on the fair value measurement resulting from a significant increase or decrease in each input in isolation:
As at May 30, 2015
 
Fair
Value
 
Valuation
Technique
 
Unobservable Input
 
Range (Weighted Average)
 
Effect of Significant
Increase/(Decrease) in
Input on Fair Value
Auction rate securities
 
$
37

 
Discounted cash flow
 
Weighted-average life
 
7 - 18 years (13 years)
 
(Decrease)/increase
 
 
 
 
 
 
Collateral value (as a % of fair value)
 
99% - 144% (115%)
 
Increase/(decrease)
 
 
 
 
 
 
Probability of waterfall event
 
10%
 
Increase/(decrease)
 
 
 
 
 
 
Probability of permanent suspension of auction
 
5%
 
(Decrease)/increase
Corporate bonds/notes
 
$
3

 
Discounted cash flow
 
Anticipated monthly principal and interest payments
 
$0.1 million
 
Increase/(decrease)
 
 
 
 
 
 
Yearly decrease in payments
 
10%
 
(Decrease)/increase
 
 
 
 
 
 
Collateral value (as a % of fair value)
 
138%
 
Increase/(decrease)
 
 
 
 
 
 
Current securities in technical default, by collateral grouping
 
0 - 100% (13%)
 
(Decrease)/increase
 
 
 
 
 
 
Average recovery rate of securities in technical default
 
30%
 
Increase/(decrease)
 
 
 
 
 
 
Additional defaults assumption
 
0 - 44% (18%)
 
(Decrease)/increase


7

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





4.
DERIVATIVE FINANCIAL INSTRUMENTS
The notional amounts and fair values of financial instruments outstanding were as follows:
 
As at May 30, 2015
  
Balance Sheet Location
 
Fair Value of Derivatives Designated as Cash Flow Hedges
 
Fair Value of Derivatives Not Designated as Cash Flow Hedges
 
Fair Value of Derivatives Not Subject to Hedge Accounting
 
Total Estimated Fair Value
 
Notional
Amount
Derivative Assets(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Other current assets
 
$

 
$

 
$
20

 
$
20

 
$
829

Currency option contracts
Other current assets
 

 

 

 

 
17

Total
 
 
$

 
$

 
$
20

 
$
20

 
$
846

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Accrued liabilities
 
$
(9
)
 
$

 
$
(7
)
 
$
(16
)
 
$
595

Currency option contracts
Accrued liabilities
 
(4
)
 

 

 
(4
)
 
71

Total
 
 
$
(13
)
 
$

 
$
(7
)
 
$
(20
)
 
$
666

 
 
 
 
 
 
 
 
 
 
 
 
Currency option contracts - premiums
Accumulated other comprehensive loss
 
$
(1
)
 
$

 
$

 
$
(1
)
 
$

______________________________ 
(1) The fair values of derivative assets and liabilities are measured using Level 2 fair value inputs.

 
As at February 28, 2015
  
Balance Sheet Location
 
Fair Value of Derivatives Designated as Cash Flow Hedges
 
Fair Value of Derivatives Not Designated as Cash Flow Hedges
 
Fair Value of Derivatives Not Subject to Hedge Accounting
 
Total Estimated Fair Value
 
Notional
Amount
Derivative Assets(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Other current assets
 
$

 
$
19

 
$
61

 
$
80

 
$
1,171

Currency option contracts
Other current assets
 

 
11

 

 
11

 
112

Total
 
 
$

 
$
30

 
$
61

 
$
91

 
$
1,283

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities(1):
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
Accrued liabilities
 
$
(13
)
 
$
(4
)
 
$
(4
)
 
$
(21
)
 
$
654

Currency option contracts
Accrued liabilities
 
(13
)
 
(1
)
 

 
(14
)
 
134

Total
 
 
$
(26
)
 
$
(5
)
 
$
(4
)
 
$
(35
)
 
$
788

______________________________ 
(1) The fair values of derivative assets and liabilities are measured using Level 2 fair value inputs.

Foreign Exchange
For a description of the Company's usage of derivatives and related accounting policy for these instruments, see the Annual Financial Statements.
The Company enters into forward and option contracts to hedge exposures relating to anticipated foreign currency transactions. These contracts have been designated as cash flow hedges, with the effective portion of the change in fair value initially recorded in AOCI and subsequently reclassified to income in the period in which the cash flows from the

8

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





associated hedged transactions affect income. Any ineffective portion of the change in fair value of the cash flow hedge is recognized in current period income. For each of the three months ended May 30, 2015 and May 31, 2014, there were no realized losses on forward and option contracts which were ineffective upon maturity. As at May 30, 2015 and May 31, 2014, the outstanding derivatives designated as cash flow hedges were considered to be fully effective. The maturity dates of these instruments range from June 2015 to February 2016. As at May 30, 2015, the net unrealized loss on these forward and option contracts (including option premiums paid) was $14 million (February 28, 2015 - net unrealized loss of $26 million). Unrealized gains associated with these contracts were recorded in other current assets and AOCI. Unrealized losses were recorded in accrued liabilities and AOCI. Option premiums were recorded in AOCI. As at May 30, 2015, the Company estimates that approximately $14 million of net unrealized losses, including option premiums on these forward and option contracts, will be reclassified into income within the next twelve months.
The following table shows the impact of derivative instruments designated as cash flow hedges on the consolidated statement of operations and the consolidated statement of comprehensive income (loss) for the three months ended May 30, 2015:    
 
Amount of Gain (Loss)
Recognized in Other Comprehensive Income on
Derivative Instruments
(Effective Portion)
 
Location of Gain (Loss) Reclassified
from AOCI into Income
(Effective Portion)
 
Amount of Gain  (Loss)
Reclassified from AOCI into
Income (Effective Portion)
 
Currency forward contracts
$
(2
)
 
Cost of sales
 
$

 
Currency option contracts
(1
)
 
Cost of sales
 

 
Currency forward contracts
(2
)
 
Selling, marketing and administration
 
(4
)
 
Currency option contracts
(1
)
 
Selling, marketing and administration
 
(6
)
 
Currency forward contracts
(5
)
 
Research and development
 

 
Currency option contracts
(3
)
 
Research and development
 

 
The following table shows the impact of derivative instruments designated as cash flow hedges on the consolidated statement of operations and the consolidated statement of comprehensive income (loss) for the three months ended May 31, 2014:    
 
Amount of Gain (Loss)
Recognized in Other Comprehensive Income on
Derivative Instruments
(Effective Portion)
 
Location of Gain (Loss) Reclassified
from AOCI into Income
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)
 
Currency forward contracts

 
Cost of sales
 
(1
)
 
Currency forward contracts

 
Selling, marketing and administration
 
(1
)
 
Currency forward contracts

 
Research and development
 
(4
)
 
The Company has also entered into other forward and option contracts hedging anticipated foreign currency transactions which it did not designate as cash flow hedges. Any realized and unrealized gains and losses on these contracts are recognized in income each period. The maturity dates of these instruments range from June 2015 to October 2015. As at May 30, 2015, there were unrealized losses (net of premium paid) of nil recorded in respect of these instruments (February 28, 2015 - unrealized gains of $25 million). Unrealized gains associated with these contracts were recorded in other current assets and selling, marketing and administration expenses. Unrealized losses were recorded in accrued liabilities and selling, marketing and administration expenses.
As part of its currency risk management strategy, the Company may maintain net monetary asset and/or liability balances in foreign currencies. The Company enters into foreign exchange forward contracts to hedge certain monetary assets and liabilities that are exposed to foreign currency risk. The principal currencies hedged include the Canadian dollar, Euro, and British Pound. These contracts are not subject to hedge accounting, and any realized and unrealized gains or losses are recognized in income each period, offsetting the change in the U.S. dollar value of the asset or liability. The maturity dates of these instruments range from June 2015 to November 2015. As at May 30, 2015, there were unrealized gains (net of premium paid) of $13 million recorded in respect of these instruments (February 28, 2015 - net unrealized gains of $57 million). Unrealized gains associated with these contracts were recorded in other current assets and selling,

9

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





marketing and administration expenses. Unrealized losses were recorded in accrued liabilities and selling, marketing and administration expenses.
The following table shows the impact of derivative instruments that are not subject to hedge accounting on the consolidated statement of operations for the three months ended May 30, 2015 and May 31, 2014:    
 
 
 
Three Months Ended
 
 
 
May 30, 2015
 
May 31, 2014
 
Location of Gain (Loss) Recognized in
Income on Derivative Instruments
 
Amount of Gain (Loss) in Income on
Derivative Instruments
Currency forward contracts
Selling, marketing and administration
 
$
8

 
$
(22
)
Currency option contracts
Selling, marketing and administration
 
(4
)
 

Selling, marketing and administration expense for the three months ended May 30, 2015 included $4 million in losses with respect to foreign exchange net of balance sheet revaluation (three months ended May 31, 2014 - losses of $11 million).
Credit Risk
The Company is exposed to credit risk on derivative financial instruments arising from the potential for counterparties to default on their contractual obligations. The Company mitigates this risk by limiting counterparties to highly rated financial institutions and by continuously monitoring their creditworthiness. The Company’s exposure to credit loss and market risk will vary over time as a function of currency exchange rates. The Company measures its counterparty credit exposure as a percentage of the total fair value of the applicable derivative instruments. Where the net fair value of derivative instruments with any counterparty is negative, the Company deems the credit exposure to that counterparty to be nil. As at May 30, 2015, the maximum credit exposure to a single counterparty, measured as a percentage of the total fair value of derivative instruments with net unrealized gains, was 73% (February 28, 2015 - 47%). As at May 30, 2015, the Company had a total credit risk exposure across all counterparties with outstanding or unsettled foreign exchange derivative instruments of $9 million on a notional value of $918 million (February 28, 2015 - $56 million total risk exposure on a notional value of $2.1 billion).
The Company maintains Credit Support Annexes (“CSAs”) with several of its counterparties. These CSAs require the outstanding net position of all contracts to be made whole by the paying or receiving of collateral to or from the counterparties on a daily basis, subject to exposure and transfer thresholds. As at May 30, 2015, the Company had posted $4 million of collateral to counterparties, which approximated the fair value of those contracts. As with the derivatives recorded in an unrealized loss position, this amount is recorded in other current liabilities.
The Company is exposed to market and credit risk on its investment portfolio. The Company reduces this risk by investing in liquid, investment grade securities and by limiting exposure to any one entity or group of related entities. As at May 30, 2015, no single issuer represented more than 22% of the total cash, cash equivalents and investments (February 28, 2015 - no single issuer represented more than 28% of the total cash, cash equivalents and investments), and that issuer was the United States Department of the Treasury.
Interest Rate Risk
Cash and cash equivalents and investments are invested in certain instruments of varying maturities. Consequently, the Company is exposed to interest rate risk as a result of holding investments of varying maturities. The fair value of investments, as well as the investment income derived from the investment portfolio, will fluctuate with changes in prevailing interest rates. The Company has also issued unsecured convertible debentures due in 2020 (the “Debentures”) with a fixed interest rate. Consequently, the Company is exposed to interest rate risk as a result of the long term of the Debentures. The fair value of the Debentures will fluctuate with changes in prevailing interest rates. The Company does not currently utilize interest rate derivative instruments to hedge its investment portfolio.

5.
CONSOLIDATED BALANCE SHEETS DETAILS
Accounts receivable, net
The allowance for doubtful accounts as at May 30, 2015 was $10 million (February 28, 2015 - $10 million).
There was one customer that comprised 14% of accounts receivable as at May 30, 2015 (February 28, 2015 - no customers that comprised more than 10%).

10

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





Inventories
Inventories were comprised of the following:
 
As at
 
May 30, 2015
 
February 28, 2015
Raw materials
$
20

 
$
11

Work in process
68

 
62

Finished goods
45

 
49

 
$
133

 
$
122

For the three months ended May 30, 2015, the Company recorded non-cash, pre-tax charges of $21 million relating to the write down of certain inventories and $2 million recovery in supply commitments (three months ended May 31, 2014 - $23 million in inventory write down and $10 million recovery in supply commitments).

Other current assets
As at May 30, 2015, other current assets included $149 million in deferred cost of sales (February 28, 2015 - $199 million), as well as derivative instruments, among other items, none of which were greater than 5% of the current assets balance.

Property, plant and equipment, net
Property, plant and equipment were comprised of the following:
 
As at
 
May 30, 2015
 
February 28, 2015
Cost
 
 
 
Land
$
26

 
$
26

Buildings, leasehold improvements and other
404

 
423

BlackBerry operations and other information technology
1,244

 
1,236

Manufacturing equipment, research and development equipment and tooling
205

 
211

Furniture and fixtures
18

 
20

 
1,897

 
1,916

Accumulated amortization
1,378

 
1,360

Net book value
$
519

 
$
556

Intangible assets, net
Intangible assets were comprised of the following:
 
As at May 30, 2015
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
502

 
$
338

 
$
164

Intellectual property
2,516

 
1,399

 
1,117

 
$
3,018

 
$
1,737

 
$
1,281

 
As at February 28, 2015
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
473

 
$
329

 
$
144

Intellectual property
2,545

 
1,314

 
1,231

 
$
3,018

 
$
1,643

 
$
1,375


11

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





During the first quarter of fiscal 2016, the additions to intangible assets primarily consisted of payments relating to amended or renewed licensing agreements, acquired technology from business acquisitions, as well as patent registration fees.
Based on the carrying value of the identified intangible assets as at May 30, 2015 and assuming no subsequent impairment of the underlying assets, the annual amortization expense for the remainder of fiscal 2016 and each of the four succeeding years is expected to be as follows: 2016 - $251 million; 2017 - $222 million; 2018 - $180 million; 2019 - $144 million; and 2020 - $113 million.
Goodwill
Changes to the carrying amount of goodwill were as follows:
 
Carrying Amount
Balance as at March 1, 2014
$

Goodwill acquired through business combinations during the year
76

Balance as at February 28, 2015
76

Effect of foreign exchange on non-U.S. dollar denominated goodwill
(8
)
Goodwill acquired through business combinations during the year (1)
28

Balance as at May 30, 2015
$
96

(1) See Note 6 for details on the goodwill acquired through business acquisitions in fiscal 2016.
Accrued liabilities
As at May 30, 2015, other accrued liabilities included $97 million in accrued warranty obligations (February 28, 2015 - $123 million), as well as vendor inventory liabilities, royalties, carrier liabilities, accrued salaries and payroll withholding taxes, among other items, none of which were greater than 5% of the current assets balance.
Product warranty
The changes in the Company’s warranty expense and actual warranty experience for the three months ended May 30, 2015, as well as the accrued warranty obligations as at May 30, 2015, are set forth in the following table:    
 
 
Accrued warranty obligations as at February 28, 2015
$
123

Warranty costs incurred for the three months ended May 30, 2015
(17
)
Warranty provision for the three months ended May 30, 2015
6

Adjustments for changes in estimate for the three months ended May 30, 2015
(15
)
Accrued warranty obligations as at May 30, 2015
$
97


6.
BUSINESS ACQUISITIONS
On May 7, 2015, the Company acquired all of the issued and outstanding shares of WatchDox Ltd. (WatchDox), a data security company offering secure enterprise file-sync-and-share solutions, for $59 million in cash. The acquisition enhances the Company's commitment to allow organizations to securely connect employees and corporate information across all mobile and desktop platforms. WatchDox's technology will be offered independently and as a value-added service through BES12 that complements the Company's enterprise mobility management portfolio.


12

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





The following table summarizes the preliminary fair value allocations of the acquisition price of the assets acquired and liabilities assumed during the three months ended May 30, 2015:
Assets purchased
 
Current assets
$
3

Intangible assets
34

Goodwill(1)
28

 
65

Liabilities assumed
 
Current liabilities
3

Deferred revenue
7

 
10

Net non-cash assets acquired
55

Cash acquired
4

Net assets acquired
$
59

 
 
Total consideration
$
59

______________________________ 
(1) Goodwill represents the excess of the acquisition price over the fair value of net assets acquired, which is not expected to be deductible for tax purposes when goodwill results from share purchases.
The weighted-average amortization period of the acquired intangible assets related to the business acquisitions completed during the three months ended May 30, 2015 is approximately 9 years.

7.
RESTRUCTURING PROGRAMS
Resource Alignment Program (“RAP”)
During the three months ended May 30, 2015, the Company commenced a resource alignment program for its device software, hardware and applications business with the objectives of reallocating resources to capitalize on growth opportunities, provide the operational ability to better leverage contract research and development services relating to its handheld devices, and reaching sustainable profitability. During the three months ended May 30, 2015, the Company incurred approximately $52 million in total pre-tax charges related to this program for employee termination benefits, facilities and manufacturing network simplification costs. Other charges and cash costs may occur as programs are implemented or changes are completed.
The following table sets forth the activity in the Company’s RAP liability for the three months ended May 30, 2015:
 
Employee
Termination
Benefits
 
Facilities
Costs
 
Total
Charges incurred
$
16

 
$
8

 
$
24

Cash payments made

 

 

Balance as at May 30, 2015
$
16

 
$
8

 
$
24

    
The RAP charges, including non-cash charges incurred in the three months ended May 30, 2015 were as follows:
Cost of sales
 
$
21

Research and development
 
13

Selling, marketing and administration
 
18

Total RAP charges
 
$
52




13

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





Cost Optimization and Resource Efficiency (“CORE”) Program
In fiscal 2013, the Company commenced the CORE program with the objective of improving the Company’s operations and increasing efficiency. The Company incurred approximately $226 million in pre-tax charges during the three months ended May 31, 2014 and $322 million in total pre-tax charges related to the CORE Program in fiscal 2015. All of the pre-tax charges were related to employee termination benefits, facilities, and manufacturing network simplification costs. During the three months ended May 30, 2015, the Company made cash payments of $16 million related to the CORE program, as shown in the table below. No further charges are expected to be incurred under the CORE program.
The following table sets forth the activity in the Company’s CORE program liability for the three months ended May 30, 2015:
 
Employee
Termination
Benefits
 
Facilities
Costs
 
Manufacturing
Costs and Foreign Exchange
 
Total
Balance as at February 28, 2015
$
3

 
$
30

 
$
2

 
$
35

Charges incurred

 
6

 
(6
)
 

Cash payments made
(2
)
 
(14
)
 

 
(16
)
Balance as at May 30, 2015
$
1

 
$
22

 
$
(4
)
 
$
19


The CORE program charges, including non-cash charges incurred in the three months ended May 30, 2015 and May 31, 2014 were as follows:
 
 
Three Months Ended
 
 
May 30, 2015
 
May 31, 2014
Cost of sales
 
$

 
$
12

Research and development
 
2

 
41

Selling, marketing and administration
 
7

 
173

Total CORE program charges
 
$
9

 
$
226

For the three months ended May 30, 2015, the $9 million of CORE program charges incurred relate to a reconciliation of estimated accruals to actual costs incurred and do not represent charges for any activities during the quarter.
As part of the CORE program, the Company decided to sell certain redundant assets and discontinue certain operations to drive cost savings and efficiencies in the Company. The Company recorded losses of approximately nil for the three months ended May 30, 2015 (three months ended May 31, 2014 - $9 million) related to the write-down to fair value less costs to sell of the assets held for sale. All losses on disposal or on write-down to fair value less costs to sell have been included in the selling, marketing and administration expenses on the Company’s consolidated statements of operations and included in the total CORE program charges in fiscal 2015 and prior periods.

8.
INCOME TAXES
For the three months ended May 30, 2015, the Company’s net effective income tax expense rate was approximately 7% compared to a net effective income tax recovery rate of 483% for the three months ended May 31, 2014. The Company’s income tax rate reflects the fact that the Company has a significant valuation allowance against its deferred tax assets, and in particular, the gain from the change in fair value of the Debentures, amongst other items was offset by a corresponding adjustment of the valuation allowance. The Company’s net effective income tax rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates.
The Company’s total unrecognized income tax benefits as at May 30, 2015 was $7 million (February 28, 2015 - $11 million). The unrecognized income tax benefits have been netted against deferred income tax assets on the Company’s consolidated balance sheets.
The Company is subject to ongoing examination by tax authorities in certain jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes as well as the provisions for indirect and other taxes and related penalties and interest. While the final resolution of audits is uncertain, the Company believes the ultimate resolution of these audits will not have a material adverse effect on its consolidated financial position, liquidity or results of operations.

14

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





9.
LONG-TERM DEBT
Convertible Debentures
In fiscal 2014, Fairfax Financial Holdings Limited (“Fairfax”) and other institutional investors invested in the Company through a $1.25 billion private placement of the Debentures.
Interest on the Debentures is payable quarterly in arrears at a rate of 6% per annum.  The Debentures have a term of seven years and each $1,000 of Debentures are convertible at any time into 100 common shares of the Company for a total of 125 million common shares at a price of $10.00 per share for all Debentures, subject to adjustments.
The Company has the option to redeem the Debentures after November 13, 2016 at specified redemption prices in specified periods. Covenants associated with the Debentures include limitations on the Company’s total indebtedness.
Under specified events of default, the outstanding principal and any accrued interest on the Debentures become immediately due and payable upon request of holders holding not less than 25% of the principal amount of the Debentures then outstanding. During an event of default the interest rate rises to 10% per annum.
The Debentures are subject to a change of control provision whereby the Company would be required to make an offer to repurchase the Debentures at 115% of par value if a person or group (not affiliated with Fairfax) acquires 35% of the Company’s outstanding common shares, acquires all or substantially all of its assets, or if the Company merges with another entity and the Company’s existing shareholders hold less than 50% of the common shares of the surviving entity.
Due to the possible volatility through the Company’s statement of operations resulting from fluctuation in the fair value of the embedded conversion option as well as the number of other embedded derivatives within the Debentures, the Company has elected to record the Debentures, including the debt itself and all embedded derivatives, at fair value and present the Debentures as a hybrid financial instrument. No portion of the fair value of the Debentures has been recorded as equity, nor would be if each component was freestanding. As of May 30, 2015, the fair value of the Company's Debentures was $1.55 billion. The difference between the fair value of the Debentures and the unpaid principal balance of $1.25 billion is $300 million.  The fair value of the Debentures is measured using Level 2 fair value inputs.
The Company recorded non-cash income associated with the change in the fair value of the Debentures of $157 million in the first quarter of fiscal 2016 (the “Q1 Fiscal 2016 Debentures Fair Value Adjustment”) (first quarter of fiscal 2015 - income adjustment of $287 million). This income is presented on a separate line in the Company's statement of operations. The fair value adjustment does not impact the key terms of the Debentures such as the face value, the redemption features or the conversion price.
During the first quarter of fiscal 2016, the Company recorded interest expense related to the Debentures of $19 million, which has been included in investment loss on the Company’s statement of operations (first quarter of fiscal 2015 - $19 million). The Company is required to make quarterly interest-only payments of approximately $19 million during the seven years the Debentures are outstanding.

10.
STOCK-BASED COMPENSATION
Stock Options
The Company recorded compensation expense with respect to stock options of approximately $1 million for the three months ended May 30, 2015 ($1 million for the three months ended May 31, 2014) in relation to stock-based compensation expense.

15

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





A summary of option activity since February 28, 2015 is shown below:    
 
Options Outstanding
 
Number
(in 000’s)
 
Weighted-
Average
Exercise
Price
 
Average
Remaining
Contractual
Life in Years
 
Aggregate
Intrinsic
Value
(millions)
Balance as at February 28, 2015
1,486

 
$
9.34

 
 
 
 
Exercises during the period
(105
)
 
6.55

 
 
 
 
Forfeited/canceled/expired during the period
(161
)
 
23.52

 
 
 
 
Balance as at May 30, 2015
1,220

 
$
7.75

 
3.03

 
$
3

Vested and expected to vest as at May 30, 2015
1,176

 
$
7.74

 
3.02

 
$
2

Exercisable as at May 30, 2015
379

 
$
6.82

 
2.35

 
$
1

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common shares on May 30, 2015 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on May 30, 2015. The intrinsic value of stock options exercised during the three months ended May 30, 2015, calculated using the average market price during the quarter, was approximately $6.55 per share.
As at May 30, 2015, there was $3 million of unrecognized stock-based compensation expense related to unvested stock options which will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 1.33 years. The total fair value of stock options vested during the three months ended May 30, 2015 was $1 million.
Cash received from the stock options exercised for the three months ended May 30, 2015 was $1 million (May 31, 2014 - $2 million).
There were no stock options granted during the three months ended May 30, 2015 or May 31, 2014.
Restricted Share Units
The Company recorded compensation expense with respect to restricted share units (“RSUs”) of approximately $13 million for the three months ended May 30, 2015 ($13 million for the three months ended May 31, 2014).
A summary of RSU activity since February 28, 2015 is shown below:    
 
RSUs Outstanding
 
Number
(000’s)
 
Weighted-
Average
Grant Date
Fair Value
 
Average
Remaining
Contractual
Life in Years
 
Aggregate
Intrinsic
Value
(millions)
Balance as at February 28, 2015
26,001

 
$
7.84

 
 
 
 
Granted during the period
1,041

 
9.73

 
 
 
 
Vested during the period
(577
)
 
8.40

 
 
 
 
Forfeited/canceled during the period
(814
)
 
9.07

 
 
 
 
Balance as at May 30, 2015
25,651

 
$
7.87

 
2.13

 
$
251

Expected to vest as at May 30, 2015
24,685

 
$
7.66

 
2.16

 
$
242

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate closing share price of the Company’s common shares on May 30, 2015) that would have been received by RSU holders if all RSUs had vested on May 30, 2015.
As at May 30, 2015, there was $141 million of unrecognized compensation expense related to RSUs that will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 1.76 years.
During the three months ended May 30, 2015, there were 1,041,048 RSUs granted (May 31, 2014 - 1,859,817), all of which will be settled upon vesting by the issuance of new common shares.

16

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





11.
CAPITAL STOCK
The following details the changes in issued and outstanding common shares for the three months ended May 30, 2015:
 
Capital Stock and  Additional
Paid-In Capital
 
Stock
Outstanding
(000’s)
 
Amount
Common shares outstanding as at February 28, 2015
528,802

 
$
2,444

Stock-based compensation

 
14

Exercise of stock options
105

 
1

Common shares issued for RSU settlements
577

 

Common shares outstanding as at May 30, 2015
529,484

 
$
2,459

The Company had 529 million common shares, 1 million options to purchase common shares, 26 million RSUs and 0.3 million deferred share units outstanding as at June 17, 2015. In addition, 125 million common shares are issuable upon conversion in full of the Debentures.
12.
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:    
 
Three Months Ended
 
May 30, 2015
 
May 31, 2014
Net income for basic earnings per share available to common shareholders
$
68

 
$
23

Less: Debentures fair value adjustment
(157
)
 
(287
)
Add: Interest expense on Debentures
19

 
19

Net loss for diluted loss per share available to common shareholders
$
(70
)
 
$
(245
)
 
 
 
 
Weighted-average number of shares outstanding (000’s) - basic
529,235

 
526,742

Effect of dilutive securities (000’s)
 
 
 
Stock-based compensation (1)
16,304

 
6,486

Conversion of Debentures (2)
125,000

 
125,000

Weighted-average number of shares and assumed conversions (000’s) - diluted
670,539

 
658,228

Earnings (loss) per share - reported
 
 
 
Basic
$
0.13

 
$
0.04

Diluted
$
(0.10
)
 
$
(0.37
)
______________________________ 
(1) The Company has presented the dilutive effect of in-the-money options or RSUs that will be settled upon vesting by the issuance of new common shares in the calculation of loss per share for the three months ended May 30, 2015. As at May 30, 2015, there were 750,544 options and 23,324,646 RSUs outstanding that were in-the-money and may have a dilutive effect on earnings (loss) per share in future periods.
(2) The Company has presented the dilutive effect of the Debentures using the if-converted method, assuming conversion at the beginning of the first quarter of fiscal 2016. Accordingly, to calculate diluted loss per share, the Company adjusted net income by eliminating the Q1 Fiscal 2016 Debentures Fair Value Adjustment and interest expense incurred on the Debentures in the first quarter of fiscal 2016 and added the number of shares that would have been issued upon conversion to the diluted weighted average number of shares outstanding. See Note 9 for details on the Debentures.




17

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





13.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in AOCI by component, net of tax, for the three months ended May 30, 2015 were as follows:
 
 
Foreign Currency Translation Adjustment
 
Unrealized Gains
(Losses) on
Cash Flow  Hedges
 
Unrealized Gains
on Available-for-Sale
Securities
 
Total
AOCI as at February 28, 2015
 
$

 
$
(26
)
 
$
3

 
$
(23
)
Other comprehensive income before reclassifications
 
(12
)
 
2

 
(1
)
 
(11
)
Amounts reclassified from AOCI into income
 

 
10

 

 
10

Other comprehensive income for the period
 
(12
)
 
12

 
(1
)
 
(1
)
AOCI as at May 30, 2015
 
$
(12
)
 
$
(14
)
 
$
2

 
$
(24
)

The effects on net income of amounts reclassified from AOCI into income by component for the three months ended May 30, 2015 were as follows:
Location of loss reclassified from AOCI into income
 
Gains and Losses on
Cash Flow Hedges
 
Gains and Losses on
Available-for-Sale
Securities
 
Total
Selling, marketing and administration
 
$
(10
)
 
$

 
$
(10
)
Recovery of income taxes
 
3

 

 
3

Total amount reclassified into income, net of tax
 
$
(7
)
 
$

 
$
(7
)
 
14.
COMMITMENTS AND CONTINGENCIES
(a)
Credit facility and letters of credit
The Company has $58 million in collateralized outstanding letters of credit in support of certain leasing arrangements entered into in the ordinary course of business. See the discussion of restricted cash in Note 2.
(b)
Contingencies
Litigation
The Company is involved in litigation in the normal course of its business, both as a defendant and as a plaintiff. The Company is subject to a variety of claims (including claims related to patent infringement, purported class actions and other claims in the normal course of business) and may be subject to additional claims either directly or through indemnities against claims that it provides to certain of its partners and customers. In particular, the industry in which the Company competes has many participants that own, or claim to own, intellectual property, including participants that have been issued patents and may have filed patent applications or may obtain additional patents and proprietary rights for technologies similar to those used by the Company in its products. The Company has received, and may receive in the future, assertions and claims from third parties that the Company’s products infringe on their patents or other intellectual property rights. Litigation has been, and will likely continue to be, necessary to determine the scope, enforceability and validity of third-party proprietary rights or to establish the Company’s proprietary rights. Regardless of whether claims against the Company have merit, those claims could be time consuming to evaluate and defend, result in costly litigation, divert management’s attention and resources, subject the Company to significant liabilities and could have the other effects that are described in greater detail under “Risk Factors” in the Company’s unaudited Annual Information Form for the fiscal year ended February 28, 2015, which is included in the Company’s Annual Report on Form 40-F, including the risk factors entitled “The Company is subject to general commercial litigation, class action and other litigation claims as part of its operations, and it could suffer significant litigation expenses in defending these claims and could be subject to significant damage awards or other remedies”, “The Company is subject to potential litigation claims arising from the Company's disclosure practices”, and “The Company may infringe on the intellectual property rights of others”.
Management reviews all of the relevant facts for each claim and applies judgment in evaluating the likelihood and, if applicable, the amount of any potential loss. Where a potential loss is considered probable and the amount is reasonably estimable, provisions for loss are made based on management’s assessment of the likely outcome. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum amount in the range. The Company does not provide for claims for which the outcome is not determinable or claims for which the amount of

18

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable.
As of May 30, 2015, there are no claims outstanding for which the Company has assessed the potential loss as both probable to result and reasonably estimable, therefore no accrual has been made. Further, there are claims outstanding for which the Company has assessed the potential loss as reasonably possible to result, however an estimate of the amount of loss cannot reasonably be made. There are many reasons that the Company cannot make these assessments, including, among others, one or more of the following: the early stages of a proceeding does not require the claimant to specifically identify the patent that has allegedly been infringed; damages sought are unspecified, unsupportable, unexplained or uncertain; discovery has not been started or is incomplete; the facts that are in dispute are highly complex (e.g., once a patent is identified, the analysis of the patent and a comparison to the activities of the Company is a labour-intensive and highly technical process); the difficulty of assessing novel claims; the parties have not engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and the often slow pace of patent litigation.
Though they do not meet the test for accrual described above, the Company has included the following summaries of certain of its legal proceedings that it believes may be of interest to its investors.
Between October and December 2013, several purported class action lawsuits and one individual lawsuit were filed against the Company and certain of its former officers in various jurisdictions alleging that during the period from September 27, 2012 through September 20, 2013, the Company and certain of its officers made materially false and misleading statements regarding the Company’s financial condition and business prospects and that certain of the Company’s financial statements contain material misstatements. The individual lawsuit was voluntarily dismissed. In respect of the U.S. class actions, four motions for the appointment of lead plaintiff were filed. On March 14, 2014, the Judge consolidated the proceedings in the U.S. District Court for the Southern District of New York. On May 27, 2014, the Consolidated Amended Class Action Complaint was filed. The Company filed a motion to dismiss the complaint. On March 13, 2015, the court issued an order granting the Company's motion to dismiss. The plaintiffs have filed a motion for reconsideration and for leave to file an amended complaint. The proceeding is ongoing.
On June 1, 2015, the Company announced that it had settled its outstanding legal disputes with Typo Products LLC, Typo Innovations LLC, Show Media LLC, Hallier Investments LLC, and Laurence Hallier, including BlackBerry Limited v. Typo Products LLC et al. (Case No. 3:14-cv-00023-WHO) and BlackBerry Limited v. Typo Products LLC et al. (Case No. 3:15-cv-00715-WHO). The litigation has been dismissed. The terms of the settlement are confidential.
(c)
Concentrations in certain areas of the Company’s business
The Company attempts to ensure that most components essential to the Company’s business are generally available from multiple sources; however, certain components are currently obtained from limited sources within a competitive market, which subjects the Company to significant supply, availability and pricing risks. Many components are at times subject to industry-wide shortages and significant commodity pricing fluctuations including those that are available from multiple sources. In addition, the Company has entered into various agreements for the supply of components, the manufacturing of its products and agreements that allow the Company to use intellectual property owned by other companies; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages, intellectual property litigation risk as well as potential price increases that can materially adversely affect its financial condition and operating results.
The Company also uses some custom components that are not common to the rest of the industry, and new products introduced by the Company often utilize custom components available from only one source for a period of time. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased. If the Company’s supply of components for a new or existing product were delayed or constrained, the Company’s financial condition and operating results could be materially adversely affected. Further, if the Company was not able to find an alternative source for the necessary quantities, the Company’s business and financial performance could also be materially adversely affected. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers concentrate on the production of common components instead of components customized to meet the Company’s requirements.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia or Mexico. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners. Although the Company works closely with its outsourcing partners on manufacturing schedules,

19

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





the Company’s operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments.
(d)
Indemnifications
The Company enters into certain agreements that contain indemnification provisions under which the Company could be subject to costs and damages, including in the event of an infringement claim against the Company or an indemnified third party. Such intellectual property infringement indemnification clauses are generally not subject to any dollar limits and remain in effect for the term of the Company’s agreements. To date, the Company has not encountered material costs as a result of such indemnifications.
The Company has entered into indemnification agreements with its current and former directors and executive officers. Under these agreements, the Company agreed, subject to applicable law, to indemnify its directors and executive officers against all costs, charges and expenses reasonably incurred by such individuals in respect of any civil, criminal or administrative action which could arise by reason of their status as directors or officers. The Company maintains liability insurance coverage for the benefit of its directors and current and former executive officers. The Company has not encountered material costs as a result of such indemnifications in the current year. See the Company’s Management Information Circular for fiscal 2015 for additional information regarding the Company’s indemnification agreements with its directors and current and former executive officers.

15.
SEGMENT DISCLOSURES
The Company is organized and managed as a single reportable operating segment. The Company currently sells an integrated BlackBerry wireless communications platform solution, which includes the sale of BlackBerry handheld devices and the provision of data communication, compression and security infrastructure services, which enable BlackBerry handheld wireless devices to send and receive wireless messages and data. For enterprise customers, the Company currently sells an integrated BlackBerry Enterprise Server software solution that gives corporate and government customers the ability to set and enforce specific information technology policies to manage their BlackBerry handheld wireless devices when the data services pass through BlackBerry’s relay and provisioning infrastructure.
     
Revenue, classified by major geographic segments in which the Company’s customers are located, was as follows:    
 
Three Months Ended
 
May 30, 2015
 
 
May 31, 2014
North America
 
 
 
 
 
 
 
 
Canada
$
69

 
10.5
%
 
 
$
56

 
5.8
%
United States
216

 
32.8
%
 
 
220

 
22.8
%
 
285

 
43.3
%
 
 
276

 
28.6
%
Europe, Middle East and Africa
245

 
37.2
%
 
 
414

 
42.9
%
Latin America
42

 
6.4
%
 
 
125

 
12.9
%
Asia Pacific
86

 
13.1
%
 
 
151

 
15.6
%
Total
$
658

 
100.0
%
 
 
$
966

 
100.0
%

Revenue, classified by revenue categories, was as follows:    
 
Three Months Ended
 
May 30, 2015
 
May 31, 2014
Revenue mix
 
 
 
Hardware
$
263

 
$
379

Service
252

 
519

Software and Technology Licensing
137

 
54

Other
6

 
14

 
$
658

 
$
966



20

BlackBerry Limited
Notes to the Consolidated Financial Statements
In millions of United States dollars, except share and per share data, and except as otherwise indicated (unaudited)





Property, plant and equipment and intangible assets, classified by geographic segments in which the Company’s assets are located, was as follows:
 
As at
 
May 30, 2015
 
February 28, 2015
 
Property, plant and equipment and intangible assets
 
Total assets
 
Property, plant and equipment and intangible assets
 
Total assets
Canada
$
1,481

 
$
2,375

 
$
1,628

 
$