6-K 1 bb-20180531x6k.htm 6-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 6-K
_________________________________________________________________
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For the month of, June 2018
_________________________________________________________________  
Commission File Number 1-38232
_________________________________________________________________  
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 31, 2018.
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended May 31, 2018.
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 No. 333-192986 and 333-192987), July 25, 2014 (File No. 333-197636), August 20, 2015 (File No. 333-206480), February 12, 2016 (File No. 333-209525), and on August 24, 2017 (File No. 333-220153).







BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions) (unaudited)
Consolidated Balance Sheets
 
As at
 
May 31, 2018

February 28, 2018
Assets
 
 
 
Current
 
 
 
Cash and cash equivalents
$
520

 
$
816

Short-term investments
1,725

 
1,443

Accounts receivable, net
126

 
151

Other receivables
63

 
71

Income taxes receivable
17

 
26

Other current assets
56

 
38

 
2,507

 
2,545

Restricted cash and cash equivalents
35


39

Long-term investments
55


55

Other long-term assets
30

 
28

Deferred income tax assets
2

 
3

Property, plant and equipment, net
64


64

Goodwill
566


569

Intangible assets, net
447


477

 
$
3,706

 
$
3,780

Liabilities
 
 
 
Current
 
 
 
Accounts payable
$
37


$
46

Accrued liabilities
162


205

Income taxes payable
19


18

Deferred revenue, current
166


142

 
384

 
411

Deferred revenue, non-current
111

 
53

Other long-term liabilities
20

 
23

Long-term debt
810


782

Deferred income tax liabilities
5


6

 
1,330

 
1,275

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 - 537,111,645 voting common shares (February 28, 2018 - 536,733,733)
2,580


2,560

Deficit
(185
)

(45
)
Accumulated other comprehensive loss
(19
)

(10
)
 
2,376

 
2,505

 
$
3,706

 
$
3,780

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
 
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as at February 28, 2018
$
2,560

 
$
(45
)
 
$
(10
)
 
$
2,505

Net loss

 
(60
)
 

 
(60
)
Other comprehensive loss

 

 
(3
)
 
(3
)
Shares issued:
 
 
 
 
 
 
 
Stock-based compensation
18

 

 

 
18

Employee share purchase plan
2

 

 

 
2

Cumulative impact of adoption of ASC 606

 
(86
)
 

 
(86
)
Cumulative impact of adoption of ASU 2016-01

 
6

 
(6
)
 

Balance as at May 31, 2018
$
2,580

 
$
(185
)
 
$
(19
)
 
$
2,376

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 31, 2018
 
May 31, 2017
Revenue
$
213

 
$
235

Cost of sales
52

 
85

Gross margin
161

 
150

Operating expenses
 
 
 
Research and development
61

 
61

Selling, marketing and administration
100

 
110

Amortization
37

 
40

Debentures fair value adjustment
28

 
218

Qualcomm arbitration award

 
(815
)
 
226

 
(386
)
Operating income (loss)
(65
)
 
536

Investment income, net
6

 
136

Income (loss) before income taxes
(59
)
 
672

Provision for income taxes
1

 
1

Net income (loss)
$
(60
)
 
$
671

Earnings (loss) per share
 
 
 
Basic
$
(0.11
)
 
$
1.26

Diluted
$
(0.11
)
 
$
1.23

See notes to consolidated financial statements.



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

Consolidated Statements of Comprehensive Income (Loss)
 
Three Months Ended
 
May 31, 2018
 
May 31, 2017
Net income (loss)
$
(60
)
 
$
671

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

 
(3
)
Foreign currency translation adjustment
(4
)
 
4

Actuarial losses associated with other post-employment benefit obligations

 
(1
)
Other comprehensive loss
(3
)
 

Comprehensive income (loss)
$
(63
)
 
$
671

See notes to consolidated financial statements.



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

Consolidated Statements of Cash Flows
 
Three Months Ended
 
May 31, 2018
 
May 31, 2017
Cash flows from operating activities
 
 
 
Net income (loss)
$
(60
)
 
$
671

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 
 
Amortization
41

 
51

Stock-based compensation
18

 
13

Debentures fair value adjustment
28

 
218

Other
2

 
1

Net changes in working capital items:


 
 
Accounts receivable, net
25

 
35

Other receivables
8

 
1

Income taxes receivable
9

 
(2
)
Other assets
(10
)
 
21

Accounts payable
(9
)
 
(59
)
Income taxes payable
1

 
1

Accrued liabilities
(42
)
 
(50
)
Deferred revenue
(15
)
 
(36
)
Other long-term liabilities
(3
)
 
(2
)
Net cash provided by (used in) operating activities
(7
)
 
863

Cash flows from investing activities

 
 
Acquisition of long-term investments

 
(25
)
Acquisition of property, plant and equipment
(5
)
 
(3
)
Proceeds on sale of property, plant and equipment

 
1

Acquisition of intangible assets
(7
)
 
(7
)
Acquisition of short-term investments
(1,011
)
 
(1,015
)
Proceeds on sale or maturity of short-term investments
730

 
378

Net cash used in investing activities
(293
)
 
(671
)
Cash flows from financing activities

 
 
Issuance of common shares
2

 
3

Net cash provided by financing activities
2

 
3

Effect of foreign exchange gain (loss) on cash, cash equivalents, restricted cash, and restricted cash equivalents
(2
)
 
1

Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents during the period
(300
)
 
196

Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period
855

 
785

Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
$
555

 
$
981

 
 
 
 
As at
May 31, 2018
 
February 28, 2018
Cash and cash equivalents
$
520

 
$
816

Restricted cash and cash equivalents
35

 
39

 
$
555

 
$
855

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, 2018 (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 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending February 28, 2019.
Certain comparative figures have been reclassified to conform to the current period’s presentation.
The Company operates as a single reportable segment. For additional information concerning the Company’s segment reporting, see Note 13.
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 as described below.
Revenue Recognition
Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”)
On March 1, 2018, the Company adopted ASC 606 using the modified retrospective method. This method was applied to all contracts in effect at the date of initial application. The Company recognizes revenue, when control of the promised products or services are transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those products and services. Revenue is recognized through the application of the following steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when, or as the Company satisfies a performance obligation.
A contract exists with a customer when both parties have approved the contract, commitments to performance and rights of each party (including payment terms) are identified, the contract has commercial substance and collection of substantially all consideration is probable for goods and services that are transferred.
Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other promises in the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation.
The transaction price is determined based on the consideration the Company expects to be entitled to in exchange for transferring promised goods and services to the customer, excluding amounts collected on behalf of third parties such as sales taxes. Determining the transaction price requires significant judgment. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”). The Company’s method for allocation of consideration to be received and its method of estimation of SSP are described below under “Significant judgments”.
For each of the Company’s major categories of revenue, the following paragraphs describe the applicable specific revenue recognition policy, and when the Company satisfies its performance obligations.

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)





Nature of products and services
Enterprise software and services
Enterprise software and services includes revenues from the Company’s security, productivity, collaboration and end-point management solutions through the BlackBerry Secure platform, which includes BlackBerry Unified Endpoint Manager (UEM), BlackBerry Dynamics, BlackBerry Workspaces and BBM Enterprise, among other products and applications, as well as revenues from the sale of the Company’s AtHoc Alert secure networked crisis communications solution, its Secusmart SecuSUITE secure voice and text solution, and professional services from BlackBerry Cybersecurity Services.
The Company generates software license revenue from both term subscription and perpetual license contracts, both of which are often bundled with other products and services including technical support, unspecified updates and upgrades, and access to the Company’s proprietary secure network infrastructure.
If the licensed software in a contract requires access to the Company’s proprietary secure network infrastructure in order to function, revenue from term subscription contracts is recognized over time, ratably over the term, and revenue from perpetual license contracts is recognized over time, ratably over the expected customer life, which in most cases, the Company has estimated to be four years. If access to the Company’s proprietary network infrastructure is not required for the software to function, revenue associated with both term subscription and perpetual licenses contracts is recognized at a point in time upon delivery of the software. Generally, most of the Company’s enterprise software products sold require access to the Company’s proprietary secure network infrastructure in order to function, and therefore the associated revenue is recognized over time, ratably over either the subscription term or expected customer life as described above.
Revenue from technical support is recognized over the support period.
BlackBerry Technology Solutions
BlackBerry Technology Solutions (“BTS”) includes revenues from the Company’s QNX CAR Platform and Neutrino Operating System, among other BlackBerry QNX products, as well as revenues from the Company’s BlackBerry Radar asset tracking solution, Paratek antenna tuning technology, and Certicom cryptography and key management products. These are often bundled with other products and services including maintenance services and professional services.
Software license revenue from both term subscription and perpetual contracts is recognized at a point in time when the software is made available to the customer for use, as the software has standalone functionality and the license is distinct in the context of the contract. BTS also sells licenses for certain software embedded into hardware such as automotive infotainment systems; these licenses are sold as a sales-based royalty where intellectual property is the predominant item to which the royalty relates, and are recognized based on actual volumes and underlying sales by the customer of the hardware with the embedded software.
Revenue from software maintenance services is recognized over the length of the maintenance period, with an average term of one year.
Revenue from professional services is recognized over the term of the contract, as the customer simultaneously receives and consumes the benefits provided by the Company’s performance as the services are provided.
Licensing, IP and other
Licensing, IP and other includes revenues from the Company’s mobility licensing software arrangements, including revenue from licensed hardware sales and intellectual property licensing, and from the Company’s BBM Consumer licensing arrangement.
In fiscal 2017 and fiscal 2018, the Company entered into multiple license agreements under which the Company has licensed its security software and service suite and, in many cases, related brand assets to third parties who design, manufacture, sell and provide customer support for BlackBerry-branded and white-label handsets. Mobility license revenue for licensees whose sales exceed contractual sales minimums is recognized when licensed products are sold as reported by the Company’s licensees. For licensees whose sales do not exceed contractual sales minimums, revenue is recognized over time, ratably over the license term based on contractual minimum amounts due to the performance obligation to provide engineering services to the licensees.

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)





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 may be perpetual or term in nature and 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.
The Company examines intellectual property agreements on a case-by-case basis to determine whether the intellectual property has standalone functionality. Revenue from patent licensing agreements is often recognized for the transaction price either when the license has been transferred to the customer, or based upon subsequent sales by the customer in the case of sales-based royalty licenses where the license of intellectual property is the predominant item to which the royalty relates.
Handheld devices
Prior to fiscal 2019, handheld devices previously included revenues from the sale of the DTEK60 and all prior BlackBerry smartphone models to carriers and distributors, accessories and repair services of handheld devices. As the Company has sold all of its inventory of handheld devices, any revenue currently recognized is now solely associated with the release of previously accrued amounts when the Company determines it has no further obligation.
SAF
SAF includes revenues associated with the Company’s legacy SAF business, relating to subscribers utilizing the Company’s legacy BlackBerry 7 and prior operating systems, as well as revenues relating to unspecified future software upgrade rights for devices sold by the Company.
SAF revenue is recognized over time as the monthly service is provided. In instances where the Company bills the customer prior to performing the service, the pre-billing is recorded as deferred revenue.
See Note 13 for further information, including revenue by major product and service types.
Significant judgments
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. Any estimates, including any constraints on variable consideration, are evaluated at each reporting period.
Judgment is required to determine the SSP for each distinct performance obligation. The Company’s products and services often have observable SSP when the Company sells a promised product or service separately to similar customers. A contractually stated price or list price for a good or service may be the SSP of that good or service. However, in instances where SSP is not directly observable, the Company determines the SSP by maximizing observable inputs and using an adjusted market assessment approach using information that may include market conditions and other observable inputs from the Company’s pricing team, including historical SSP.
Judgment is required to determine the estimated customer life used in perpetual license contracts that require access to the Company’s proprietary secure network infrastructure to function. The Company uses historical experience regarding the length of the technology upgrade cycle and the expected life of the product to draw this conclusion.
Revenue contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets are generated when contractual billing schedules differ from revenue recognition timing. A receivable is recorded in instances when revenue is recognized prior to invoicing, and amounts collected in advance of services being provided are recorded as deferred revenue.
Certain sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. The Company’s capitalized commissions are recorded as other current assets and other long-term assets and are amortized based on the satisfaction of the related performance obligations, and are included in selling, marketing and administration. See Note 13 for further information on the Company’s contract balances.

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)





Payment terms and conditions vary by contract type, although standard billing terms are that payment is due upon receipt of invoice, payable within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that contracts generally do not include a significant financing component if the period between when the Company transfers the promised goods or services to the customer will be one year or less.
For details about the Company’s revenue recognition policy prior to the adoption of ASC 606, refer to the Company’s Annual Financial Statements.
Recently Adopted Accounting Pronouncements
ASC 606
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASC 606, a new accounting standard on the topic of revenue contracts, which replaces the existing revenue recognition standard. The new standard amended 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 was effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
The most significant impact of adopting the new standard relates to timing of revenue recognized on software licenses in Enterprise software and services contracts. Prior to the adoption of ASC 606, where vendor-specific objective evidence could not be determined, the Company recognized term licensed software ratably over the longest contract deliverable, with certain perpetual contracts recognized upon delivery. Under the new standard, on the software licensing component of enterprise software offerings, the Company recognizes revenue over the subscription term for term subscription contracts, and over the expected customer life for perpetual license contracts, which in most cases, is estimated to be four years. Given this, the adoption of ASC 606 has resulted in Enterprise software and services revenues previously recognized for certain perpetual licenses being reversed as a cumulative adjustment from deficit to deferred revenue to be recognized ratably over the remaining period of performance. Professional services revenues that otherwise would have been recognized over time have now been recognized at adoption as a cumulative adjustment to deficit, and such revenues will be recognized when the performance obligation has been fulfilled. There were no significant changes to any of the Company’s other revenue streams and there was no tax impact this quarter due to the Company’s valuation allowance.
ASC 606 requires the capitalization of all the incremental costs to acquire a contract, and for these costs to be amortized into income proportionate to the recognition of the associated revenue. The Company previously capitalized and deferred some, but not all, of its incremental costs to acquire a contract and amortized that cost into income ratably over the term of the contract. As a result, the adoption of ASC 606 resulted in certain costs incurred in acquiring a contract previously expensed being reversed through a cumulative adjustment from deficit to other current assets, and recognized over time on a systematic basis consistent with the transfer of the products or services to which the asset relates.
On March 1, 2018, the Company adopted ASC 606 and all related amendments using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. In adopting the guidance, the Company applied the guidance to all contracts and used multiple practical expedients including the assessment of contracts with similar terms and conditions on a portfolio basis, and has made no adjustment to the promised amount of consideration for the effects of a significant financing component.

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 cumulative effect of the changes made to the Company’s March 1, 2018 consolidated statement of financial position for the adoption of ASC 606 was as follows:
Consolidated Balance Sheets
Balance as at February 28, 2018
 
ASC 606 Adjustments
 
Balance as at March 1, 2018
Assets
 
 
 
 
 
Other assets
$
66

 
$
11

 
$
77

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Deferred revenue
$
195

 
$
97

 
$
292

 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
Deficit
$
(45
)
 
$
(86
)
 
$
(131
)
The impact of the adoption of ASC 606 on the Company’s condensed financial statements during the three months ended May 31, 2018 was as follows:
 
As at May 31, 2018
Consolidated Balance Sheets
Balances Without Adoption of ASC 606
 
ASC 606 Adjustments
 
As Reported
Assets
 
 
 
 
 
Other assets
$
85

 
$
1

 
$
86

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Deferred revenue
$
177

 
$
100

 
$
277

 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
Deficit
$
(86
)
 
$
(99
)
 
$
(185
)
 
Three Months Ended May 31, 2018
Consolidated Statements of Operations
Balances Without Adoption of ASC 606
 
ASC 606 Adjustments
 
As Reported
Revenue
$
208

 
$
5

 
$
213

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Selling, marketing and administration
$
99

 
$
1

 
$
100

 
 
 
 
 
 
Net income (loss)
$
(64
)
 
$
4

 
$
(60
)
Loss per share
 
 
 
 
 
Basic
$
(0.12
)
 
$
0.01

 
$
(0.11
)
Diluted
$
(0.12
)
 
$
0.01

 
$
(0.11
)
Other Accounting Standards Updates (“ASU”)
In January 2016, the FASB issued ASU 2016-01 on the topic of financial instruments. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the guidance clarifies that an entity should evaluate the need for a valuation allowance on a deferred income tax asset related to available-for-sale securities.

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 guidance is effective for interim and annual periods beginning after December 15, 2017. The Company adopted this guidance in the first quarter of fiscal 2019. As a result of the adoption of ASU 2016-01, the Company recognized approximately $8 million in unrecognized losses on equity securities that had previously been recorded to other comprehensive income (loss), through a cumulative addition to deficit in the consolidated balance sheet as of March 1, 2018. The Company recognized approximately $14 million on the change in fair value from instrument-specific credit risk that had previously been recorded to deficit, through a cumulative decrease to accumulated other comprehensive loss (“AOCI”) in the consolidated balance sheet as of March 1, 2018. The Company will also account for equity investments without a readily determinable fair value using the practicability exception. The investments will be measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
In November 2016, the FASB issued ASU 2016-18 on the topic of the statement of cash flows. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017. The Company adopted this guidance in the first quarter of fiscal 2019.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued a new accounting standard on the topic of leases. The new standard requires companies to include lease obligations in their balance sheets, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (“ROU”) asset and a corresponding lease liability. For finance leases, the lessee will recognize interest expense and amortization of the ROU asset, and for operating leases, the lessee will recognize a straight-line total lease expense. The guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company expects to adopt this guidance in the first quarter of fiscal 2020 and is currently evaluating the impact that the adoption will have on its results of operations, financial position and disclosures. The Company established a cross-functional coordinated team to conduct the implementation of the lease standard, which will be responsible for identifying and implementing the appropriate changes to the Company’s relevant business processes, systems and controls to support any required accounting and disclosure changes.
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 that 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.

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 components of cash, cash equivalents and investments by fair value level as at May 31, 2018 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 and Cash Equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
144

 
$

 
$

 
$

 
$
144

 
$
144

 
$

 
$

 
$

Other investments
35

 

 

 

 
35

 

 

 
35

 

 
179

 

 

 

 
179

 
144

 

 
35

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
10

 

 
(8
)
 

 
2

 

 
2

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term deposits, certificates of deposits and GICs
258

 

 

 

 
258

 

 
223

 

 
35

Bankers’ acceptances/bearer deposit notes
226

 

 

 

 
226

 
187

 
39

 

 

Commercial paper
491

 

 

 

 
491

 
33

 
458

 

 

Non-U.S. promissory notes
192

 

 

 

 
192

 
38

 
154

 

 

Non-U.S. government sponsored enterprise notes
300

 

 

 

 
300

 
18

 
282

 

 

Non-U.S. treasury bills/notes
296

 

 

 

 
296

 
100

 
196

 

 

U.S. treasury bills/notes
371

 

 

 

 
371

 

 
371

 

 

 
2,134

 

 

 

 
2,134

 
376

 
1,723

 

 
35

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
1

 

 

 

 
1

 

 

 
1

 

Auction rate securities
20

 
2

 

 
(3
)
 
19

 

 

 
19

 

 
21

 
2

 

 
(3
)
 
20

 

 

 
20

 

 
$
2,344

 
$
2

 
$
(8
)
 
$
(3
)
 
$
2,335

 
$
520

 
$
1,725

 
$
55

 
$
35


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)





The components of cash, cash equivalents and investments by fair value level as at February 28, 2018 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 and Cash Equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank balances
$
169

 
$

 
$

 
$

 
$
169

 
$
169

 
$

 
$

 
$

Other investments
35

 

 

 

 
35

 

 

 
35

 

 
204

 

 

 

 
204

 
169

 

 
35

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
10

 

 
(8
)
 

 
2

 

 
2

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term deposits, certificates of deposits and GICs
332

 

 

 

 
332

 

 
293

 

 
39

Bankers’ acceptances
211

 

 

 

 
211

 
211

 

 

 

Commercial paper
426

 

 

 

 
426

 
231

 
195

 

 

Non-U.S. promissory notes
227

 

 

 

 
227

 
102

 
125

 

 

Non-U.S. government sponsored enterprise notes
200

 

 

 

 
200

 
15

 
185

 

 

Non-U.S. treasury bills/notes
284

 

 

 

 
284

 
50

 
234

 

 

U.S. treasury bills/notes
448

 

 
(1
)
 

 
447

 
38

 
409

 

 

 
2,128

 

 
(1
)
 

 
2,127

 
647

 
1,441

 

 
39

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate notes/bonds
1

 

 

 

 
1

 

 

 
1

 

Auction rate securities
20

 
2

 

 
(3
)
 
19

 

 

 
19

 

 
21

 
2

 

 
(3
)
 
20

 

 

 
20

 

 
$
2,363

 
$
2

 
$
(9
)
 
$
(3
)
 
$
2,353

 
$
816

 
$
1,443

 
$
55

 
$
39

As at May 31, 2018, the Company had equity investments without readily determinable fair value of $35 million (February 28, 2018 - $35 million). There were no other-than-temporary impairment charges during the three months ended May 31, 2018 or the three months ended May 31, 2017.
There were no realized gains or losses on available-for-sale securities for the three months ended May 31, 2018 or the three months ended May 31, 2017.
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 seven years. The Company is 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.

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)





The contractual maturities of available-for-sale investments as at May 31, 2018 and February 28, 2018 were as follows:
 
As at
 
May 31, 2018
 
February 28, 2018
 
Cost Basis
 
Fair Value
 
Cost Basis
 
Fair Value
Due in one year or less
$
2,134

 
$
2,134

 
$
2,128

 
$
2,127

Due in one to five years
1

 
1

 
1

 
1

Due after five years
17

 
19

 
17

 
19

No fixed maturity
10

 
2

 
10

 
2

 
$
2,162

 
$
2,156

 
$
2,156

 
$
2,149

As at May 31, 2018, the Company had investments with continuous unrealized losses totaling $8 million, consisting of unrealized losses on equity securities (February 28, 2018 - continuous unrealized losses totaling $9 million).
As a result of the adoption of ASU 2016-01, the Company now records changes in fair value of equity securities through investment income, and has reclassified $8 million in unrealized losses on equity securities through a cumulative adjustment to deficit. For a full description of how the Company assesses its investments for other-than-temporary impairment, see the “Investments” accounting policy in Note 1 to the Annual Financial Statements. For a description of the impact upon the adoption of ASU 2016-01 on the unrealized losses on equity securities, see Note 1.
3.    FAIR VALUE MEASUREMENTS
For a description of the fair value hierarchy, 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 their fair values 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 a single primary vendor. The pricing inputs 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 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 are in excess of 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, international government banking organizations and the United States Department of the Treasury, and are all investment grade. The Company also holds a limited amount of equity securities following the initial public offering by the issuer of a previous cost-based investment.
For a description of how the fair values of currency forward contracts and currency option contracts, the fair value of the Debentures (as defined in Note 8) and the fair value of certain stock-based compensation awards have been determined, see the “Derivative financial instruments” and “Convertible debentures” accounting policies in Note 1 to the Annual Financial Statements and Note 9.
There were no changes in the fair value of the Company’s Level 3 assets for the three months ended May 31, 2018 or May 31, 2017. 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 31, 2018 or May 31, 2017.
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. For a detailed description of the Company’s valuation of auction rate securities, see Note 4 to the Annual Financial Statements.

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)





4.
DERIVATIVE FINANCIAL INSTRUMENTS
The notional amounts and fair values of derivative financial instruments outstanding were as follows:
 
Derivative Assets (1)(2)
 
Derivative Liabilities (1)(3)
  
As at May 31, 2018
 
As at February 28, 2018
 
As at May 31, 2018
 
As at February 28, 2018
Foreign exchange contracts
 
 
 
 
 
 
 
Fair value of derivatives designated as cash flow hedges
$

 
$

 
$
(1
)
 
$
(1
)
Fair value of derivatives not subject to hedge accounting
4

 
1

 
(1
)
 
(1
)
Total estimated fair value
$
4

 
$
1

 
$
(2
)
 
$
(2
)
 
 
 
 
 
 
 
 
Notional amount
$
149

 
$
123

 
$
82

 
$
161

(1) The fair values of derivative assets and liabilities are measured using Level 2 fair value inputs.
(2) Derivative assets are included in other current assets.
(3) Derivative liabilities are included in accrued liabilities.
Foreign Exchange
For a description of the Company’s usage of derivatives and related accounting policy for these instruments, see Note 1 to the Annual Financial Statements.
The Company enters into forward and option contracts to hedge exposures relating to anticipated foreign currency transactions consisting of Canadian dollar payroll costs. 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 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 (loss). As at May 31, 2018 and May 31, 2017, the outstanding derivatives designated as cash flow hedges were considered to be fully effective. The maturity dates of these instruments range from June 2018 to April 2019. As at May 31, 2018, the net unrealized loss on these forward and option contracts (including option premiums paid) was $1 million (February 28, 2018 - net unrealized loss of $1 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 31, 2018, the Company estimates that approximately $1 million of net unrealized losses including option premiums on these forward and option contracts will be reclassified into income (loss) within the next 12 months.
For the three months ended May 31, 2018, a loss of $1 million relating to the effective portion was recognized in other comprehensive income (loss) (May 31, 2017 - nil). For the three months ended May 31, 2018 and May 31, 2017, no gain or loss was reclassified from AOCI into income relating to the effective portion.
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 economically 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 2018 to August 2018. As at May 31, 2018, there were unrealized gains of $3 million recorded in respect of these instruments (February 28, 2018 - nil). 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.

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)





The following table shows the impact of derivative instruments that are not subject to hedge accounting on the consolidated statements of operations for the three months ended May 31, 2018 and May 31, 2017:    
 
 
 
Amount of Gain (Loss) in Income on
Derivative Instruments
 
 
 
Three Months Ended
 
Location of Gain (Loss) Recognized in
Income on Derivative Instruments
 
May 31, 2018
 
May 31, 2017
Foreign exchange contracts
Selling, marketing and administration
 
$
3

 
$
(4
)
Total
 
 
$
3

 
$
(4
)
Selling, marketing and administration expense for the three months ended May 31, 2018 included $2 million in gains with respect to foreign exchange net of balance sheet revaluation (three months ended May 31, 2017 - gains of $1 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 31, 2018, 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 100% (February 28, 2018 - nil). As at May 31, 2018, the Company had a total credit risk exposure across all counterparties with outstanding or unsettled foreign exchange derivative instruments of $2 million on a notional value of $136 million (February 28, 2018 - total credit risk exposure of nil on a notional value of nil).
The Company maintains Credit Support Annexes (“CSAs”) with several of its counterparties. These CSAs require the outstanding net position of all contracts 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 31, 2018, the Company had nil in collateral posted to counterparties (February 28, 2018 - $1 million in collateral posted or held).
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 31, 2018, no single issuer represented more than 16% of the total cash, cash equivalents and investments (February 28, 2018 - no single issuer represented more than 19% of the total cash, cash equivalents and investments), and the largest single issuer was the U.S. 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 the Debentures (as defined in Note 8) with a fixed 3.75% interest rate. The fair value of the Debentures will fluctuate with changes in prevailing interest rates. Consequently, the Company is exposed to interest rate risk as a result of the long-term nature of the Debentures. The Company does not currently utilize interest rate derivative instruments to hedge its investment portfolio or changes in market value of the Debentures.
5.
CONSOLIDATED BALANCE SHEETS DETAILS
Accounts receivable, net
The allowance for doubtful accounts as at May 31, 2018 was $24 million (February 28, 2018 - $24 million).
There were two customers that individually comprised more than 10% of accounts receivable as at May 31, 2018 (February 28, 2018 - no customer comprised more than 10%).

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)





Other current assets
As at May 31, 2018, other current assets include items such as inventories of finished goods, deferred commissions, and prepaid expenses, among other items, none of which were greater than 5% of the current assets balance in all periods presented.
Property, plant and equipment, net
Property, plant and equipment comprised the following:
 
As at
 
May 31, 2018
 
February 28, 2018
Cost
 
 
 
Buildings, leasehold improvements and other
$
84

 
$
85

BlackBerry operations and other information technology
847

 
987

Manufacturing, repair and research and development equipment
73

 
75

Furniture and fixtures
10

 
10

 
1,014

 
1,157

Accumulated amortization
950

 
1,093

Net book value
$
64

 
$
64

Intangible assets, net
Intangible assets comprised the following:
 
As at May 31, 2018
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
680

 
$
527

 
$
153

Intellectual property
418

 
225

 
193

Other acquired intangibles
197

 
96

 
101

 
$
1,295

 
$
848

 
$
447

 
As at February 28, 2018
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Acquired technology
$
682

 
$
512

 
$
170

Intellectual property
411

 
212

 
199

Other acquired intangibles
197

 
89

 
108

 
$
1,290

 
$
813

 
$
477

Other acquired intangibles include items such as customer relationships and brand.
For the three months ended May 31, 2018, amortization expense related to intangible assets amounted to $36 million (three months ended May 31, 2017 - $39 million). During the three months ended May 31, 2018, additions to intangible assets primarily consisted of payments for intellectual property relating to patent registration, licenses and maintenance fees.
Based on the carrying value of the identified intangible assets as at May 31, 2018 and assuming no subsequent impairment of the underlying assets, the annual amortization expense for the remainder of fiscal 2019 and each of the four succeeding years is expected to be as follows: 2019 - $101 million; 2020 - $93 million; 2021 - $73 million; 2022 - $55 million; and 2023 - $22 million.

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)





Goodwill
Changes to the carrying amount of goodwill were as follows:
 
Carrying Amount
Carrying amount as at February 28, 2018
$
569

Effect of foreign exchange on non-U.S. dollar denominated goodwill
(3
)
Carrying amount as at May 31, 2018
$
566

Other long-term assets
The Company’s other long-term assets comprised the following:
 
As at
 
May 31, 2018
 
February 28, 2018
Long-term intellectual property licensing receivable
$
25

 
$
25

Deferred commissions, non-current
5

 
3

 
$
30

 
$
28

The Company has a long-term intellectual property licensing receivable comprising a series of future amounts owing from a single licensee. As the amounts of the receivable are long-term in nature, the Company initially measured the payments at present value using an effective interest rate of 4.5%, and will record interest income over time to arrive at the total face value of the remaining payments of $27 million.
Accrued liabilities
Accrued liabilities comprised the following:
 
As at
 
May 31, 2018
 
February 28, 2018
Variable incentive accrual
$
14

 
$
40

Other
148

 
165

 
$
162

 
$
205

Other accrued liabilities include, among other items, accrued royalties, current Resource Alignment Program (“RAP”) liability, accrued vendor liabilities, accrued carrier liabilities and payroll withholding taxes, none of which were greater than 5% of the current liabilities balance.
Other long-term liabilities
Other long-term liabilities consists of the present value of accrued future lease payments associated with the
RAP as described in Note 6.
6.
RESTRUCTURING AND INTEGRATION
Resource Alignment Program
In fiscal 2016, the Company commenced the RAP for its device software, hardware and applications business with the objectives of reallocating Company resources to capitalize on growth opportunities, providing the operational ability to better leverage contract research and development services relating to its handheld devices, and reaching sustainable profitability. Other charges and cash costs may occur as programs are implemented or changes are completed.

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)





The following table sets forth the activity in the Company’s RAP liability for the three months ended May 31, 2018:
 
Employee
Termination
Benefits
 
Facilities
Costs
 
Other Charges(1)
 
Total
Balance as at February 28, 2018
$
1

 
$
39

 
$
2

 
$
42

Charges incurred
3

 
1

 

 
4

Cash payments made
(3
)
 
(6
)
 
(2
)
 
(11
)
Balance as at May 31, 2018
$
1

 
$
34

 
$

 
$
35

 
 
 
 
 
 
 
 
Current portion
$
1

 
$
14

 
$

 
$
15

Long-term portion

 
20

 

 
20

 
$
1

 
$
34

 
$

 
$
35

(1) Other charges consist of costs associated with redundant systems from acquisitions that are being integrated into a single solution, and the effect of foreign exchange.
The RAP charges included employee termination benefits, facilities and manufacturing network simplification costs as well as integration costs related to the transition and alignment of facilities and systems to the Company’s focus on its enterprise software business. Total charges, including non-cash charges incurred in the three months ended May 31, 2018 and May 31, 2017, were as follows:
 
 
Three Months Ended
 
 
May 31, 2018
 
May 31, 2017
Cost of sales
 
$

 
$
3

Research and development
 
2

 
3

Selling, marketing and administration
 
2

 
11

Total RAP charges
 
$
4

 
$
17

7.
INCOME TAXES
For the three months ended May 31, 2018, the Company’s net effective income tax expense rate was approximately 2% compared to a net effective income tax rate of 0% for the three months ended May 31, 2017. The Company’s income tax rate reflects the fact that the Company has a significant valuation allowance against its deferred income tax assets, and in particular, the change in fair value of the Debentures, amongst other items, is 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 31, 2018 were $81 million (February 28, 2018 - $73 million). As at May 31, 2018, $66 million of the unrecognized income tax benefits have been netted against deferred income tax assets and $15 million has been recorded within income taxes payable on the Company’s consolidated balance sheets.
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (the “Tax Act”). During the first quarter of 2019, the Company monitored provisional amounts recorded under the Tax Act against actual and potential guidance and interpretation issued by the U.S. Internal Revenue Service and state taxing authorities. No significant changes were made to these calculations in the period ended May 31, 2018. The Company expects to account for any changes in estimates for its previously recorded Tax Act provisions on a prospective basis.
While the Company’s U.S. activities are subject to a U.S. federal tax rate of 21%, effective January 1, 2018, the Company also continues to assess other areas of the Tax Act for significant impacts on its estimated average annual effective tax rate and accounting policies, such as the base erosion anti-abuse tax. As at May 31, 2018, the Company has incorporated the relevant Tax Act items that became effective on January 1, 2018 into its quarterly provision calculation.
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

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)





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.
8.
LONG-TERM DEBT
3.75% Convertible Debentures
On September 7, 2016, Fairfax Financial Holdings Limited (“Fairfax”) and other institutional investors invested in the Company through a private placement of new debentures in an aggregate amount of $605 million (the “Debentures”).
Interest on the Debentures is payable quarterly in arrears at a rate of 3.75% per annum. The Debentures mature on November 13, 2020, and each $1,000 of Debentures is convertible at any time into 100 common shares of the Company for a total of 60.5 million common shares at a price of $10.00 per share for all Debentures, subject to adjustments. 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 7.75% 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.
As at May 31, 2018, the fair value of the Debentures was determined to be $810 million. The difference between the fair value of the Debentures and the unpaid principal balance of $605 million is $205 million.  The fair value of the Debentures is measured using Level 2 fair value inputs.
As a result of the adoption of ASU 2016-01, the Company recognized the cumulative change in fair value from instrument-specific credit risk as of March 1, 2018 of approximately $14 million, through a cumulative decrease to AOCI, as described in Note 1.
In the first quarter of fiscal 2019, the change in fair value of the Debentures was $28 million (three months ended May 31, 2017 - charges of $218 million). The Company recorded a non-cash charge relating to changes in fair value from instrument-specific credit risk of nil in AOCI and a non-cash charge relating to changes in fair value from non-credit components of $28 million (the “Q1 Fiscal 2019 Debentures Fair Value Adjustment”) in the Company’s consolidated statements of operations.
For the three months ended May 31, 2018, the Company recorded interest expense related to the Debentures of $6 million, which has been included in investment income in the Company’s consolidated statements of operations (three months ended May 31, 2017 - $6 million).
Fairfax, a related party under U.S. GAAP, owns a $500 million principal amount of the Debentures. As such, the payment of interest on the Debentures represents a related-party transaction. Fairfax receives interest at the same rate as other Debenture holders.

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)





9.
CAPITAL STOCK
(a)
Capital stock
The following details the changes in issued and outstanding common shares for the three months ended May 31, 2018:
 
Capital Stock and Additional
Paid-in Capital
 
Stock
Outstanding
(000’s)
 
Amount
Common shares outstanding as at February 28, 2018
536,734

 
$
2,560

Stock-based compensation

 
18

Exercise of stock options
16

 

Common shares issued for restricted share units settlements
171

 

Common shares issued for employee share purchase plan
191

 
2

Common shares outstanding as at May 31, 2018
537,112

 
$
2,580

The Company had 537 million common shares, 1 million options to purchase common shares, 25 million RSUs and 0.7 million deferred share units outstanding as at June 19, 2018. In addition, 60.5 million common shares are issuable upon conversion in full of the Debentures as described in Note 8.
On June 23, 2017, the Company announced that it received acceptance from the Toronto Stock Exchange with respect to a normal course issuer bid to purchase for cancellation up to 31 million common shares of the Company, or approximately 6.4% of the outstanding public float at May 31, 2017. During the three months ended May 31, 2018, the Company did not repurchase any common shares.
(b)
Stock-based compensation
Restricted Share Units
The Company recorded compensation expense with respect to restricted share units (“RSUs”) of approximately $18 million for the three months ended May 31, 2018 (three months ended May 31, 2017 - $13 million).
A summary of RSU activity since February 28, 2018 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, 2018
14,932

 
$
7.87

 
 
 
 
Granted during the period
10,094

 
9.19

 
 
 
 
Vested during the period
(171
)
 
7.64

 
 
 
 
Forfeited/canceled during the period
(253
)
 
8.25

 
 
 
 
Balance as at May 31, 2018
24,602

 
$
8.40

 
1.65

 
$
291,041

Expected to vest as at May 31, 2018
23,761

 
$
8.38

 
1.65

 
$
281,091

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 31, 2018) that would have been received by RSU holders if all RSUs had vested on May 31, 2018.
As at May 31, 2018, there was $133 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 2.10 years.
During the three months ended May 31, 2018, there were 10,094,338 RSUs granted (three months ended May 31, 2017 - 323,242), 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)





2019 Executive Chair Incentive Grant
In the first quarter of fiscal 2019, the Board approved an agreement to grant a time-based equity award, a long-term market performance-based equity award and a contingent cash award (together, the “2019 Executive Chair Grant”) to the Company’s Executive Chair and CEO as an incentive to remain as Executive Chair until November 3, 2023. The expense associated with the 2019 Executive Chair Grant is included in the compensation expense noted above. The equity and liability components of the agreement are summarized below:
Time-Based Equity Award
The time-based equity award consists of five million time-based RSUs that will vest annually in five equal tranches beginning on November 3, 2019.
Market Performance-Based Equity Award
The market performance-based equity award consists of five tranches, each of one million market-condition RSUs that will become earned and vested in increments of 1,000,000 RSUs when the 10-day average closing price of the Company’s common shares on the New York Stock Exchange reaches $16, $17, $18, $19 and $20, respectively. The grant date fair value and the derived service period for each of the market condition equity awards was determined through the use of a Monte Carlo simulation model. Should the target price of an award be reached prior to the derived service date, the remaining unrecognized compensation cost for the award will be accelerated and recorded at that time. Any market-condition RSUs that have not been earned before November 3, 2023 will terminate on such date.
Contingent Cash Award
The contingent cash award consists of a cash amount of $90 million that becomes payable should the 10-day average closing price of the Company’s common shares on the New York Stock Exchange reach $30. As the award is triggered by the Company’s share price, it is considered stock-based compensation and accounted for as a share-based liability award, the fair value of which is determined at each reporting period end utilizing an option pricing model and the associated compensation expense for the reporting period recorded. If unearned, the contingent cash award will terminate on November 3, 2023. See also the discussion under “Other contingencies” in Note 12.

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)





10.
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended
 
May 31, 2018
 
May 31, 2017
Net income (loss) for basic earnings (loss) per share available to common shareholders
$
(60
)
 
$
671

Less: Debentures fair value adjustment (1)

 

Add: Interest expense on Debentures (1)

 

Net income (loss) for diluted earnings (loss) per share available to common shareholders
$
(60
)
 
$
671

 
 
 
 
Weighted average number of shares outstanding (000’s) - basic
536,964

 
531,096

Effect of dilutive securities (000’s) (2)(3)
 
 
 
Stock-based compensation (2)(3)

 
12,981

Conversion of Debentures (1)

 

Weighted average number of shares and assumed conversions (000’s) - diluted
536,964

 
544,077

Earnings (loss) per share - reported
 
 
 
Basic
$
(0.11
)
 
$
1.26

Diluted
$
(0.11
)
 
$
1.23

(1) The Company has not presented the dilutive effect of the Debentures using the if-converted method in the calculation of earnings (loss) per share for the three months ended May 31, 2018 and May 31, 2017, as to do so would be antidilutive. See Note 8 for details on the Debentures.
(2) The Company has not presented the dilutive effect of in-the-money options and RSUs that will be settled upon vesting by the issuance of new common shares in the calculation of earnings (loss) per share for the three months ended May 31, 2018, as to do so would be antidilutive.
(3) The Company has presented the dilutive effect of in-the-money options and RSUs that will be settled upon vesting by the issuance of new common shares in the calculation of earnings (loss) per share for the three months ended May 31, 2017.
11.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in AOCI by component, net of tax, for the three months ended May 31, 2018 were as follows: 
 
 
Foreign Currency Cumulative Translation Adjustment
 
Accumulated Net Unrealized  Losses on
Cash Flow Hedges
 
Other Post-Employment Benefit Obligations
 
Accumulated Net Unrealized Gains (Losses) on Available-for-Sale Investments
 
Change in fair value from instrument-specific credit risk on Debentures
 
Total
AOCI as at February 28, 2018
 
$
(1
)
 
$
(1
)
 
$
(1
)
 
$
(7
)
 
$

 
$
(10
)
Cumulative impact of adoption of ASU 2016-01
 

 

 

 
8

 
(14
)
 
(6
)
Other comprehensive income (loss) before reclassifications
 
(4
)
 

 

 
1

 

 
(3
)
Other comprehensive income (loss) for the period
 
(4
)
 

 

 
9

 
(14
)
 
(9
)
AOCI as at May 31, 2018
 
$
(5
)
 
$
(1
)
 
$
(1
)
 
$
2

 
$
(14
)
 
$
(19
)
During the three months ended May 31, 2018, nil in gains (pre-tax and post-tax) associated with cash flow hedges was reclassified from AOCI into selling, marketing and administration costs.
12.
COMMITMENTS AND CONTINGENCIES
(a)
Letters of credit
The Company had $32 million in collateralized outstanding letters of credit in support of certain leasing arrangements entered into in the ordinary course of business as of May 31, 2018. See the discussion of restricted cash in Note 2.

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)





(b)
Qualcomm arbitration award
On April 20, 2016, the Company and Qualcomm Incorporated (“Qualcomm”) entered into an agreement to arbitrate a dispute regarding whether Qualcomm’s agreement to cap certain royalties applied to payments made by the Company under a license between the parties. The binding arbitration hearing was held from February 27, 2017 to March 3, 2017 under the Judicial Arbitration and Mediation Services rules in San Diego, California. On April 11, 2017, the arbitration panel issued an interim decision, finding in favour of the Company. Subsequently, the Company reached an agreement with Qualcomm resolving all amounts payable in connection with the interim arbitration decision. Following a joint stipulation by the parties, the arbitration panel issued a final award on May 26, 2017 providing for the payment by Qualcomm to the Company of a total amount of $940 million including interest and attorneys’ fees, which was net of $22 million in certain royalties owed by the Company to Qualcomm for calendar 2016 and the first quarter of calendar 2017 previously recorded within accrued liabilities on the consolidated balance sheets.
Approximately $815 million of the arbitration award represents the return of royalty overpayments. This amount was recorded within Qualcomm arbitration award on the consolidated statements of operations in the first quarter of fiscal 2018. In the first quarter of fiscal 2018, the Company also recorded on the consolidated statements of operations, recoveries of legal expenses of approximately $8 million included in selling, marketing and administration, and $139 million of interest income within investment income, net, for a total gain associated with the award of $962 million.
(c)
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, 2018, which is included in the Company’s Annual Report on Form 40-F, including the risk factors entitled “Litigation against the Company may result in adverse outcomes” and “The Company could be found to have infringed 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 the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable.
As of May 31, 2018, with the exception noted below relating to the GTC Lawsuit (as defined below), 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 litigation.

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)





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 in the U.S. and Canada alleging that 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.
On March 14, 2014, the four putative U.S. class actions were consolidated in the U.S. District Court for the Southern District of New York, and on May 27, 2014, a consolidated amended class action complaint was filed. On March 13, 2015, the Court issued an order granting the Company’s motion to dismiss. The Court denied the plaintiffs’ motion for reconsideration and for leave to file an amended complaint on November 13, 2015. On August 24, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the District Court order dismissing the complaint, but vacated the order denying leave to amend and remanded to the District Court for further proceedings in connection with the plaintiffs’ request for leave to amend. The Court granted the plaintiffs’ motion for leave to amend on September 13, 2017. On September 29, 2017, the plaintiffs filed a second consolidated amended class action complaint (the “Second Amended Complaint”), which added the Company’s Chief Legal Officer as a defendant. The Court denied the motion to dismiss the Second Amended Complaint on March 19, 2018.
On July 23, 2014, the plaintiffs in the putative Ontario class action filed a motion for certification and leave to pursue statutory misrepresentation claims. On November 16, 2015, the Ontario Superior Court of Justice issued an order granting the plaintiffs’ motion for leave to file a statutory claim for misrepresentation. On December 2, 2015, the Company filed a notice of motion seeking leave to appeal this ruling. On January 22, 2016, the court postponed the hearing on the plaintiffs’ certification motion to an undetermined date after asking the Company to file a motion to dismiss the claims of the U.S. plaintiffs for forum non conveniens. Briefing is complete and the parties are waiting for a hearing date from the Court. Trial court proceedings are on hold until all appeals related to the order granting the plaintiffs’ motion for leave to amended are exhausted.
On October 12, 2015, a group of Good Technology Corporation’s (“Good’s”) institutional investors filed a putative class action lawsuit on behalf of Good’s common shareholders against members of Good’s former board of directors (the “GTC Directors”) related to the Company’s acquisition of Good (the “GTC Lawsuit”). The plaintiffs allege that the GTC Directors breached their fiduciary duty by engaging in a self-interested transaction that benefited the preferred shareholders at the expense of the common shareholders. The plaintiffs are seeking monetary damages, as well as rescission of the merger agreement between Good and the Company. While neither Good nor the Company are parties to the GTC Lawsuit, Good has certain obligations to indemnify some of the defendants and is providing a defense. On October 29, 2015, Good filed a complaint alleging that the plaintiffs breached their contractual obligations under a voting agreement providing that, in the event of a sale transaction that was approved by both the GTC Directors and a majority of the Good preferred shareholders, the plaintiffs were required to vote their shares in favour of the transaction and refrain from exercising any appraisal or dissent rights (the “Voting Rights Lawsuit”). Good alleges that the filing of the GTC Lawsuit was a breach of the voting agreement. On December 31, 2015, several Good shareholders filed a petition seeking appraisal against Good (the “Appraisal Lawsuit”). On August 25, 2016, the Court granted the plaintiff’s motion for leave to file an amended complaint in the GTC Lawsuit naming additional defendants, including JP Morgan Chase and various venture capital funds whose designees were Good directors (the “Fund Defendants”). Good and the Company are not named in the amended complaint. On May 23, 2017, the plaintiffs reached a tentative settlement with the GTC Directors and Fund Defendants of the GTC Lawsuit. On May 31, 2017, the plaintiffs and JP Morgan Chase reached a tentative settlement of the GTC Lawsuit. On July 24, 2017, Good, the petitioners in the Appraisal Lawsuit and the defendants in the Voting Rights Lawsuit entered into an Agreement of Settlement, Dismissal, and Release and filed same with the court. On August 8, 2017, the Court issued an order granting the parties’ settlement terms. On August 18, 2017, the Company and JP Morgan Chase entered into a Settlement Funding Agreement, by which the Company agreed to fund JP Morgan Chase’s settlement with the plaintiffs. On August 22, 2017, JP Morgan Chase and the plaintiffs filed a Stipulation and Agreement of Compromise and Settlement with the Court. The Court approved the settlement between plaintiffs and JP Morgan Chase and entered a Final Judgment on April 5, 2018. On November 9, 2017, the Company filed a demand for arbitration seeking the release of funds from an escrow fund account established when the Company acquired Good to indemnify the Company for certain costs incurred in connection with the defense and settlement of the GTC Lawsuit and the Appraisal Lawsuit. The arbitration hearing is scheduled for September 10-12, 2018.
The GTC Lawsuit is stayed pending court approval of all tentative settlements. During the first quarter of fiscal 2018, the Company accrued $10 million for legal costs related to litigation arising out of its acquisition of Good.

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)





Other contingencies
In the first quarter of fiscal 2019, the Board approved the 2019 Executive Chair Grant. As part of the agreement, the Company’s Executive Chair and CEO is entitled to receive a contingent performance-based cash award in the amount of $90 million that will become earned and payable should the 10-day average closing price of the Company’s common shares on the New York Stock Exchange reach $30 before November 3, 2023. As the award is triggered by the Company’s share price, it is considered stock-based compensation and accounted for as a share-based liability award. See further discussion under “Contingent Cash Award” in Note 9.
(d)
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. The Company has also 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 risks of supply shortages and intellectual property litigation risk.
(e)
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 current and former directors and executive officers against all costs, charges and expenses reasonably incurred by such individuals in respect of any civil, criminal or administrative action that could arise by reason of their status as directors or officers. The Company maintains liability insurance coverage for the benefit of its current and former directors and executive officers. The Company has not encountered material costs as a result of such indemnifications in the current period. See the Company’s Management Information Circular for fiscal 2018 for additional information regarding the Company’s indemnification agreements with its current and former directors and executive officers.

21

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.
REVENUE AND SEGMENT DISCLOSURES
Revenue
The Company disaggregates revenue from contracts with customers based on geographical regions, timing of revenue recognition, and the major product and service types as described in Note 1. The Company’s revenue, classified by major geographic region in which the Company’s customers are located, was as follows:
 
Three Months Ended
 
May 31, 2018 (1)
 
May 31, 2017 (2)
North America (3)
$
139

 
65.3
%
 
$
127

 
54.0
%
Europe, Middle East and Africa
52

 
24.4
%
 
70

 
29.8
%
Other regions
22

 
10.3
%
 
38

 
16.2
%
Total
$
213

 
100.0
%
 
$
235

 
100.0
%
(1) As reported under the new revenue recognition standard, ASC 606.
(2) Comparative information has not been restated and continues to be reported under the accounting standards in effect for previous periods.
(3) North America includes all revenue from the Company’s intellectual property arrangements, due to the global applicability of the patent portfolio and licensing arrangements thereof.
Total revenues, classified by product and service type, were as follows:
 
Three Months Ended
 
May 31, 2018 (1)
 
May 31, 2017 (2)
Enterprise software and services
$
79

 
$
92

BlackBerry Technology Solutions
47

 
36

Licensing, IP and other
63

 
32

Handheld devices
8

 
37

SAF
16

 
38

Total
$
213

 
$
235

(1) As reported under the new revenue recognition standard, ASC 606.
(2) Comparative information has not been restated and continues to be reported under the accounting standards in effect for previous periods.

Revenues, classified by timing of recognition, were as follows:
 
Three Months Ended
 
May 31, 2018
Products and services transferred over time
$
124

Products and services transferred at a point in time
89

Total
$
213


22

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)





Revenue contract balances
The Company’s revenue contract balances were as follows:
 
Accounts Receivable
 
Deferred Revenue
 
Deferred Commissions
Opening balance as at March 1, 2018 (as adjusted for ASC 606)
$
151

 
$
292

 
$
21

Increase due to invoicing of new or existing contracts, or other
152

 
129

 
7

Decrease due to payment, fulfillment of performance obligations, or other
(177
)
 
(144
)
 
(8
)
Decrease, net
(25
)
 
(15
)
 
(1
)
Closing balance as at May 31, 2018
$
126

 
$
277

 
$
20

Transaction price allocated to the remaining performance obligations
The table below discloses the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied, or partially unsatisfied as at May 31, 2018 and the time frame in which the Company expects to recognize this revenue. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property.
 
As at May 31, 2018
 
Less than 12 Months
 
12 to 24 Months
 
Thereafter
 
Total
Remaining performance obligations
$
270

 
$
139

 
$
149

 
$
558

Revenue recognized for performance obligations satisfied in prior periods
For the three months ended May 31, 2018, $6 million in revenue was recognized for performance obligations satisfied in previous periods.
Segment disclosures
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by the CODM for making decisions and assessing performance as a source of the Company’s reportable operating segments. The CODM, who is the Executive Chair and CEO, reviews financial information, makes decisions and assesses the performance of the Company as a single operating segment.
Geographical distribution of assets
Property, plant and equipment and intangible assets and goodwill, classified by geographic regions in which the Company’s assets are located, were as follows:
 
As at
 
May 31, 2018
 
February 28, 2018
 
Property, Plant and Equipment, Intangible Assets and Goodwill
 
Total Assets
 
Property, Plant and Equipment, Intangible Assets and Goodwill
 
Total Assets
Canada
$
404

 
$
610

 
$
425

 
$
640

United States
620

 
2,909

 
627

 
2,922

Other
53

 
187

 
58

 
218

 
$
1,077

 
$
3,706

 
$
1,110

 
$
3,780

Information about major customers
There was one customer that comprised more than 10% of revenue during the three months ended May 31, 2018 (three months ended May 31, 2017 - no customer comprised more than 10% of revenue).

23



BLACKBERRY LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2018
June 22, 2018
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the unaudited interim consolidated financial statements and the accompanying notes (the “Consolidated Financial Statements”) of BlackBerry Limited (the “Company” or “BlackBerry”) for the three months ended May 31, 2018, as well as the Company’s audited consolidated financial statements and accompanying notes, and MD&A for the fiscal year ended February 28, 2018 (the “Annual MD&A”). The Consolidated Financial Statements are presented in U.S. dollars and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). All financial information in this MD&A is presented in U.S. dollars, unless otherwise indicated.
The Company has prepared this MD&A with reference to National Instrument 51-102 “Continuous Disclosure Obligations” of the Canadian Securities Administrators. Under the U.S./Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of Canada, which are different from those of the United States. This MD&A provides information for the three months ended May 31, 2018 and up to and including June 22, 2018.
Additional information about the Company, including the Company’s Annual Information Form for the fiscal year ended February 28, 2018 (the “AIF”), which is included in the Company’s Annual Report on Form 40-F for the fiscal year ended February 28, 2018 (the “Annual Report”), can be found on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission’s website at www.sec.gov.
Cautionary Note Regarding Forward-Looking Statements
This MD&A contains forward-looking statements within the meaning of certain securities laws, including under the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including statements relating to:
the Company’s plans, strategies and objectives, including the anticipated benefits of its strategic initiatives and its intentions to grow revenue and increase and enhance its product and service offerings;
the Company’s expectations regarding its free cash flow, recurring revenue, total software and services revenue growth, total software and services billings growth, BTS revenue growth, intellectual property (“IP”) revenue, BTS billings growth, Licensing, IP and other billings growth, non-GAAP gross margin and non-GAAP earnings per share for fiscal 2019;
the Company’s estimates of purchase obligations and other contractual commitments; and
the Company’s expectations with respect to the sufficiency of its financial resources.
The words “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “could”, “intend”, “believe”, “target”, “plan” and similar expressions are intended to identify forward-looking statements in this MD&A, including in the sections entitled “Business Overview”, “Business Overview -Strategy ”, First Quarter Fiscal 2019 Summary Results of Operations - Financial Highlights - Free Cash Flow, “Results of Operations – Three months ended May 31, 2018 compared to three months ended May 31, 2017 – Consolidated Gross Margin”, “Results of Operations – Three months ended May 31, 2018 compared to three months ended May 31, 2017 - Consolidated Revenue”, “Results of Operations – Three months ended May 31, 2018 compared to three months ended May 31, 2017Net Income (loss)”, and “Financial ConditionDebenture Financing and Other Funding Sources”. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience, historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate in the circumstances. Many factors could cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the factors discussed in the “Risk Factors” section of the AIF and the following:
the Company’s ability to enhance, develop, introduce or monetize products and services for the enterprise market in a timely manner with competitive pricing, features and performance;
the Company’s ability to maintain or expand its customer base for its software and services offerings to grow revenue or achieve sustained profitability;

1

BlackBerry Limited
Management’s Discussion and Analysis of Financial Condition and Results of Operations


the intense competition faced by the Company;
the occurrence or perception of a breach of the Company’s network or product security measures, or an inappropriate disclosure of confidential or personal information;
risks related to the Company’s continuing ability to attract new personnel, retain existing key personnel and manage its staffing effectively;
the Company’s dependence on its relationships with resellers and distributors;
the risk that network disruptions or other business interruptions could have a material adverse effect on the Company’s business and harm its reputation; and
risks related to acquisitions, divestitures, investments and other business initiatives, which may negatively affect the Company’s results of operations.
All of these factors should be considered carefully, and readers should not place undue reliance on the Company’s forward-looking statements. Any statements that are forward-looking statements are intended to enable the Company’s shareholders to view the anticipated performance and prospects of the Company from management’s perspective at the time such statements are made, and they are subject to the risks that are inherent in all forward-looking statements, as described above, as well as difficulties in forecasting the Company’s financial results and performance for future periods, particularly over longer periods, given the ongoing transition in the Company’s business strategy and the rapid technological changes, evolving industry standards, intense competition and short product life cycles that characterize the industries in which the Company operates. See “Business Overview - Strategy, Products and Services” in this MD&A, as well as the “Narrative Description of the Business - Strategy” section in the AIF.
The Company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
Business Overview
The Company is an enterprise software and services company focused on securing and managing Internet of Things (“IoT”) endpoints. Based in Waterloo, Ontario, the Company was founded in 1984 and operates in North America, Europe, Asia, Middle East, Latin America and Africa. The Company’s common shares trade under the ticker symbol “BB” on the Toronto Stock Exchange and the New York Stock Exchange.
Strategy
The Company is widely recognized for productivity and security innovations, and the Company believes that it delivers the most secure end-to-end mobile enterprise solutions in the market. With these core strengths, the Company’s broad portfolio of products and services is focused on serving enterprise customers, particularly in regulated industries.
The Company is focused on delivering an end-to-end software and services platform for the Enterprise of Things. The Company defines the Enterprise of Things as the network of devices, computers, vehicles, sensors, equipment and other connected endpoints within the enterprise that communicate with each other to enable smart business processes. The Company leverages many elements of its extensive technology portfolio to extend best-in-class security and reliability to its solutions for the Enterprise of Things, including UEM, embedded systems, crisis communications, enterprise applications, and related services, with hosting available on the Company’s global, scalable, secure network, as well as on public clouds.
The Company intends to continue to increase and enhance its product and service offerings through both strategic acquisitions and organic investments. The Company’s goal is to maintain its market leadership in the enterprise mobility segment by continuing to extend the functionality of its platform for the Enterprise of Things and, on top of this extensive foundation, deliver software and embedded solutions focused on strategic industry verticals.
Products and Services
The Company’s core software and services offering is the BlackBerry Secure platform, which integrates a broad portfolio of enterprise communication technologies and safety-certified embedded solutions, including BlackBerry UEM, BlackBerry Dynamics, the QNX CAR Platform and Neutrino Operating System, AtHoc Alert, AtHoc Account, SecuSUITE, and BlackBerry Workspaces. BlackBerry UEM offers a “single pane of glass”, or unified console view, for managing and securing devices, applications, identity, content, and IoT endpoints across all leading operating systems. BlackBerry Dynamics offers a best-in-class development platform and secure container for mobile applications, including the Company’s own enterprise applications such as BlackBerry Work and BlackBerry Connect for secure collaboration. BlackBerry AtHoc provides secure, networked crisis communications solutions, and Secusmart provides secure voice and text messaging solutions with advanced encryption and anti-eavesdropping capabilities.

2

BlackBerry Limited
Management’s Discussion and Analysis of Financial Condition and Results of Operations


The BlackBerry QNX unit is a global provider of real-time operating systems, middleware, development tools, and professional services for connected embedded systems, primarily in the automotive, medical and industrial automation markets. A leader in software for automotive electronics, BlackBerry QNX offers a growing portfolio of certified safety-critical modules and platform solutions and is focusing on achieving design wins with automotive original equipment manufacturers, Tier 1 vendors and automotive semiconductor suppliers.
The Company also offers its BlackBerry Radar asset tracking solution, Paratek antenna tuning technology, Certicom cryptography and key management products, and its BlackBerry Messenger (“BBM”) Enterprise service, together with the BBM Enterprise SDK for the Communications Platform as a Service market.
The Company is also engaged in the development and licensing of the Company’s secure device software and the outsourcing to partners of all design, manufacturing, sales and customer support for BlackBerry-branded, and white label handsets. The Company intends to expand its security software and brand licensing program, under which the BlackBerry KEY2, BlackBerry KEYone, BlackBerry Aurora, and BlackBerry Motion smartphones have been launched to date, to include a broader set of devices and non-smartphone endpoints. The Company also licenses its other intellectual property assets, including certain of its patents as well as assets related to the BBM Consumer service.
In addition, the Company continues to generate service access fees (“SAF”) charged to subscribers using the Company’s legacy BlackBerry 7 and prior BlackBerry operating systems, and an allocation of revenue relating to service obligations and unspecified future software upgrades associated with BlackBerry 10 devices.
Please also see the “Narrative Description of the Business - Strategy” section in the AIF, which is included in the Annual Report.
Recent Developments
The Company continues to execute on its strategy in fiscal 2019 and announced the following achievements:
Launched three new automotive software products certified to ISO 26262, the automotive industry’s functional safety standard: BlackBerry’s QNX Hypervisor for Safety, QNX Platform for ADAS 2.0, and QNX OS for Safety 2.0, enabling automakers to accelerate development timelines and reduce cost;
Announced that BlackBerry QNX software is embedded in the advanced driver assistance system, digital instrument clusters, connectivity modules, handsfree systems or infotainment systems of more than 120 million cars on the road;
Entered into a strategic partnership with Microsoft Corp. to offer enterprises BlackBerry Enterprise Bridge, a solution that integrates BlackBerry’s expertise in mobility and security with Microsoft’s cloud and productivity products;
Entered into a multi-year agreement with Jaguar Land Rover to collaborate and develop technology for the automotive manufacturer’s next-generation vehicles;
Collaborated with the Government of Canada to modernize their operations centers during G7 ministerial meetings and the 2018 G7 Summit;
Joined the OmniAir Consortium as an executive member to help advance the testing, certification, and deployment of technologies for connected vehicles and intelligent transportation systems;
Signed a technology and brand licensing deal for BlackBerry Secure with Swiss consumer electronics maker Punkt Tronics AG;
Entered into a licensing agreement with Bullitt Group to embed BlackBerry cybersecurity technology into a range of highly-secure, rugged Caterpillar- and Land Rover-branded connected devices to be certified as “BlackBerry Secure”;
Announced that electric vehicle maker BYTON will license BlackBerry QNX technologies for the in-car experience within its first series of production vehicles; and
Announced a multi-year strategic relationship with Samsung Electronics Co. Ltd. to collaborate on integrated solutions to accelerate the digital transformation of their shared enterprise customers.
2019 Executive Chair Incentive Grant
In the first quarter of fiscal 2019, the Company granted a time-based equity award, a long-term market performance-based equity award and a contingent cash award to the Company’s Executive Chair and CEO as an incentive to remain as Executive Chair until November 3, 2023.

3

BlackBerry Limited
Management’s Discussion and Analysis of Financial Condition and Results of Operations


The time-based equity award consists of five million time-based RSUs that will vest annually in five equal tranches beginning on November 3, 2019. The market performance-based equity award consists of five tranches, each of one million market-condition RSUs that will become earned and vested when the 10-day average closing price of the Company’s common shares on the New York Stock Exchange reaches $16, $17, $18, $19 and $20, respectively. Any market-condition RSUs that have not been earned before November 3, 2023 will terminate on such date. The contingent cash award consists of a cash amount of $90 million that will become payable when the 10-day average closing price of the Company’s common shares on the New York Stock Exchange reaches $30. If unearned, the contingent cash award will terminate on November 3, 2023.
Normal Course Issuer Bid
On June 23, 2017, the Company announced that it received acceptance from the Toronto Stock Exchange (the “TSX”) with respect to a normal course issuer bid to purchase for cancellation up to 31,000,000 BlackBerry common shares, representing approximately 6.4% of the outstanding public float as of May 31, 2017. The share repurchase program will remain in place until June 26, 2018, or such earlier time as the purchases are completed or the program is terminated by the Company.
The Company may purchase the common shares over the TSX or other markets, including the New York Stock Exchange. The price the Company will pay for any shares under the share repurchase program will be the prevailing market price at the time of purchase. The share repurchase program will be effected in accordance with Rule 10b-18 under the U.S. Securities Exchange Act of 1934 and the TSX’s normal course issuer bid rules, which contain restrictions on the number of shares that may be purchased on a single day, subject to certain exceptions for block purchases, based on the average daily trading volumes of the Company’s common shares on the applicable exchange.
The actual number of shares to be purchased and the timing and pricing of any purchases under the share repurchase program will depend on future market conditions and upon potential alternative uses for cash resources. The Company may elect to modify, suspend or discontinue the program at any time without prior notice.
During the three months ended May 31, 2018, the Company did not repurchase any common shares.
Non-GAAP Financial Measures
The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, and information contained in this MD&A is presented on that basis unless otherwise noted. On June 22, 2018, the Company announced financial results for the three months ended May 31, 2018, which included certain non-GAAP financial measures, including adjusted revenue, adjusted gross margin, adjusted gross margin percentage, adjusted EBITDA, adjusted EBITDA margin, adjusted income (loss) before income taxes, adjusted net income (loss) and adjusted earnings (loss) per share. The Company believes the presentation of these non-GAAP measures provides management and shareholders with important information regarding the Company’s financial performance due to the financial statement impact of the Company’s transformation from a hardware-focused handset manufacturer to an enterprise software and services company with recurring revenue streams.
For the three months ended May 31, 2018, these measures were adjusted for the following (collectively, the “Q1 Fiscal 2019 Non-GAAP Adjustments”) (all items pre-tax and after-tax):
the Q1 Fiscal 2019 Debentures Fair Value Adjustment (as defined below under “First Quarter Fiscal 2019 Summary Results of Operations – Financial Highlights – Debentures Fair Value Adjustment”) of approximately $28 million;
Resource Allocation Program (“RAP”) charges consisting of amounts associated with employee termination benefits, facilities, and certain other costs of approximately $4 million;
software deferred revenue acquired but not recognized due to business combination accounting rules of approximately $4 million;
stock compensation expense of approximately $18 million;
amortization of intangible assets acquired through business combinations of approximately $22 million; and
business acquisition and integration costs resulting from business combinations of approximately $1 million.

4

BlackBerry Limited
Management’s Discussion and Analysis of Financial Condition and Results of Operations


The Company believes that presenting non-GAAP financial measures that exclude the impact of those items enables it and its shareholders to assess the Company’s operating performance relative to its consolidated financial results in prior and future periods on a more comparable basis. Readers are cautioned that adjusted revenue, adjusted gross margin, adjusted gross margin percentage, adjusted EBITDA, adjusted EBITDA margin, adjusted income (loss) before income taxes, adjusted net income (loss), adjusted earnings (loss) per share and similar measures do not have any standardized meaning prescribed by U.S. GAAP and therefore might not be comparable to similarly titled measures reported by other companies. These non-GAAP financial measures should be considered in the context of the U.S. GAAP results, which are presented in the Consolidated Financial Statements and are described in this MD&A. A reconciliation from the most directly comparable U.S. GAAP measures to these non-GAAP financial measures for the three months ended May 31, 2018 was included in the Company’s press release dated June 22, 2018, and is reflected in the table below:
Q1 Fiscal 2019 Non-GAAP Adjustments
 
For the Three Months Ended May 31, 2018
(in millions, except for per share amounts)
 
Income statement location
 
Revenue
 
Gross margin (before taxes)
 
Gross margin % (before taxes)
 
Income (loss) before income taxes
 
Net income (loss)
 
Basic earnings (loss) per share
As reported
 
 
$
213

 
$
161

 
75.6
%
 
$
(59
)
 
$
(60
)
 
$
(0.11
)
Debentures fair value adjustment (1)
Debentures fair value adjustment
 

 

 
%
 
28

 
28

 
 
RAP charges (2)
Research and development