ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the audited consolidated financial statements and the accompanying notes (the “Consolidated Financial Statements”) of BlackBerry Limited, for the fiscal year ended February 28, 2022. The Consolidated Financial Statements are presented in U.S. dollars and have been prepared in accordance with U.S. GAAP. All financial information in this MD&A is presented in U.S. dollars, unless otherwise indicated.
Readers should carefully review Part I, Item 1A “Risk Factors” and other documents filed from time to time with the Securities and Exchange Commission (“SEC”) and other securities regulators. A number of factors may materially affect our business, financial condition, operating results and prospects. These factors include but are not limited to those set forth in Part I, Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Any one of these factors, and other factors that we are unaware of, or currently deem immaterial, may cause our actual results to differ materially from recent results or from our anticipated future results. Please refer to our MD&A included in our Annual Report on 10-K for the fiscal year ended February 28, 2021 for a comparative discussion of our fiscal 2021 financial results as compared to our fiscal 2020, which is incorporated herein by reference. Additional information about the Company, which is included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2022 (the “Annual Report”), can be found on SEDAR at www.sedar.com and on the SEC’s website at www.sec.gov.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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 its intentions to increase and enhance its product and service offerings, to patent new innovations, to increase staffing in its Cybersecurity and IoT businesses, and to implement changes to its remote and virtual operations;
•the Company’s expectations with respect to the impact of the COVID-19 pandemic or the Company’s response to Russia’s invasion of Ukraine on its results of operations and financial condition on a consolidated basis, including its liquidity position;
•the Company’s expectations with respect to its revenue and billings in fiscal 2023 and with respect to installations of the BlackBerry IVY™ platform;
•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 Annual Report on Form 10-K, including in the sections in Part I, Item 1 “Business” entitled “Products and Services - IoT”, “Products and Services - Licensing and Other”, “Intellectual Property”, and “Human Capital”, and in the sections of this MD&A entitled “Business Overview - COVID-19”, “Business Overview - Russia Ukraine Conflict”, “Non-GAAP Financial Measures - Key Metrics - Billings”, “Results of
Operations - Fiscal year ended February 28, 2022 compared to fiscal year ended February 28, 2021 - Revenue - Revenue by Segment”, “Results of Operations - Three months ended February 28, 2022 compared to the three months ended February 28, 2021 - Revenue - Revenue by Segment” and “Financial Condition - Contractual and Other Obligations”. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate in the circumstances, including but not limited to, the Company’s expectations regarding its business, strategy, opportunities and prospects, the launch of new products and services, general economic conditions, the ongoing COVID-19 pandemic, the Russia Ukraine conflict, competition, and the Company’s expectations regarding its financial performance. 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 risk factors discussed in Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K.
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 changes in technology and the Company’s business strategy, evolving industry standards, intense competition and short product life cycles that characterize the industries in which the Company operates. See the “Strategy” subsection in Part I, Item 1 “Business” of this Annual Report on Form 10-K.
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 provides intelligent security software and services to enterprises and governments around the world. The Company secures more than 500 million endpoints including more than 195 million vehicles. Based in Waterloo, Ontario, the Company leverages artificial intelligence and machine learning to deliver innovative solutions in the areas of cybersecurity, safety and data privacy, and is a leader in the areas of endpoint security, endpoint management, encryption, and embedded systems. The Company’s common shares trade under the ticker symbol “BB” on the New York Stock Exchange and the Toronto Stock Exchange. The Company was incorporated under the Business Corporations Act (Ontario) (“OBCA”) on March 7, 1984.
The Company continued to execute on its strategy in fiscal 2022 and announced the following achievements:
Products and Innovation:
•Launched BlackBerry® Optics 3.0, the Company’s next-generation cloud-based EDR solution and BlackBerry Gateway, the Company’s first AI-empowered zero trust network access (ZTNA) product;
•Released an early access version of BlackBerry IVY™;
•Launched an update to the BlackBerry® Guard managed detection and response service to provide a managed extended detection and response (XDR) service through a partnership with Exabeam;
•Announced an expansion of products covered by the BlackBerry Guard to include ZTNA, mobile threat defense (MTD) and user behavior risk analytics (UEBA);
•Announced that the Company was awarded the highest AAA Rating in SE Labs’ Breach Response Test for BlackBerry® Protect and BlackBerry Optics;
•Announced that Frost & Sullivan named BlackBerry an innovator in its US Healthcare Cybersecurity Market report;
•Announced that the Company was recognized by SE Labs as offering the best new endpoint protection solution of 2021;
•Announced conformance to the OpenChain ISO/IEC 5230:2020 standard for open source license compliance across the Company’s entire product portfolio;
•Launched BlackBerry® Jarvis® 2.0, the Company’s updated software composition analysis tool;
•Announced that Frost & Sullivan named BlackBerry IVY an industry-leading cloud software platform for automakers and smart cities;
•Launched an autonomous flood risk and clean water monitoring solution based on BlackBerry® AtHoc®;
•Announced that BlackBerry AtHoc won the Frost & Sullivan 2021 Technology Innovation Leadership Award for safe city solutions;
•Launched updated BlackBerry® SecuSUITE® capabilities to further secure group phone calls and messages;
•Announced that BlackBerry SecuSUITE for Government offering now provides certified end-to-end encryption of all group phone calls and instant messages; and
•Released the 2022 BlackBerry Annual Threat Report;
Customers and Partners:
•Announced that BlackBerry entered into a patent sale agreement with Catapult IP Innovations, Inc. (“Catapult”), pursuant to which BlackBerry has agreed to sell substantially all of its non-core patent assets to Catapult for total consideration of $600 million;
•Announced that the Company has design wins with 24 of the world’s leading 25 Electric Vehicle (EV) automakers, increasing from 23 of the top 25 in the third quarter of fiscal 2022;
•Announced that BlackBerry® QNX® software is embedded in over 195 million vehicles;
•Announced first BlackBerry IVY proof-of-concept pilot with PATEO, a leading Chinese tier 1 supplier, and a Chinese electric vehicle automaker to integrate BlackBerry IVY into a digital cockpit;
•Announced that the Company demonstrated BlackBerry IVY running on auto-grade hardware at CES 2022, with partner integrations from Amazon Web Services, HERE Technologies, Car IQ and Electra Vehicles;
•Announced that BlackBerry IVY will provide secure vehicle-based payment capability through a partnership with financial technology solution provider Car IQ;
•Announced a collaboration with Ridecell Inc. to bring a next generation fleet operations and ADAS data platform to automotive OEMs via BlackBerry IVY;
•Launched the BlackBerry IVY Advisory Council to help shape and advise the BlackBerry IVY application development community and drive use case generation;
•Announced that BMW Group has entered into a multi-year agreement to use BlackBerry QNX technology to develop SAE Level 2/2+ driving automation functions in multiple makes and models across the BMW group;
•Announced that Volvo Group has selected BlackBerry QNX for its Dynamic Software Platform;
•Announced the availability of a QNX cockpit reference design powered by Google and Qualcomm technologies that reduces development time for digital cockpit architectures;
•Announced that the Company and Visteon will expand efforts to accelerate the deployment of digital cockpit solutions for automakers and their suppliers;
•Announced an expanded collaboration with Marelli in China to deploy an integrated cockpit domain controller;
•Announced that Mahindra & Mahindra Ltd. selected BlackBerry QNX technologies to power the cockpit domain controller for their next-generation SUV;
•Announced that WM Motor has chosen BlackBerry QNX technologies to power its W6 all-electric SUV;
•Announced that the QNX Neutrino® operating system has been adopted in a new digital LCD cluster jointly developed with BiTech Automotive (Wuhu) Co., Ltd. for Changan Automobile’s new SUV, the UNI-K;
•Announced that Nobo Technologies selected QNX Neutrino as the foundation for the advanced Digital Cockpit Controller in Great Wall Motors’ Haval H6S, the next generation of China’s leading SUV;
•Announced that BlackBerry QNX technology was selected by Critical Software to help drive safety improvements for Portugal’s national rail network.
•Announced that sTraffic has chosen the BlackBerry QNX® OS for Safety as the foundation for its Communications-based Train Control System (CBTC);
•Announced that BlackBerry Jarvis was enhanced to include standardized reporting that enables compliance with the U.S. government’s recent Executive Order relating to software bills of materials;
•Announced that 13 Asia Pacific channel partners will offer BlackBerry Jarvis to customers in the region;
•Announced that Deloitte will leverage BlackBerry Jarvis to help manufacturers to secure their software supply chains;
•Announced the integration of BlackBerry Radar with the ISAAC Open Platform to help trucking companies improve asset utilization and fleet visibility;
•Announced that the Region of Niagara selected BlackBerry AtHoc as its critical event management platform;
•Announced the integration of BlackBerry UEM with Microsoft 365;
•Announced a technology integration between Okta and BlackBerry® UEM to deliver seamless identity and access capabilities;
•Announced Okta, Mimecast, Stellar Cyber and XM Cyber as new partners in BlackBerry’s XDR ecosystem;
•Announced that the Government of Canada has selected BlackBerry for its secure productivity and secure communications needs;
•Announced that the Company and IBM Canada have established a new partnership to bring the Company’s industry leading BlackBerry Spark platform to organizations across Canada;
•Announced BlackBerry QNX and Carleton University have joined forces in a $21 million partnership to train the next generation of software engineers;
•Announced that the Company and the University of Waterloo have expanded their partnership to create a new joint innovation program; and
•Announced that the Company and L-SPARK launched a third cohort of their accelerator program to advance Canadian connected vehicle technology innovation.
Environmental, Sustainability and Corporate Governance:
•Announced that Michael Daniels has been appointed as Chair of the Compensation, Nomination and Governance Committee of the Company’s Board of Directors and that Lisa Disbrow has been appointed as Chair of the Audit and Risk Management Committee of the Board of Directors;
•Appointed John Giamatteo as President of Cybersecurity effective October 4, 2021;
•Announced the resignation of Tom Eacobacci as President and Chief Operating Officer effective October 29, 2021;
•Appointed Mattias Eriksson as President and General Manager of IoT effective May 3, 2021;
•Announced that the Company achieved carbon neutrality across Scope 1, Scope 2 and material Scope 3 emissions;
•Announced that the Company was named one of Canada’s Greenest Employers for sixth year in a row;
•Announced that the Company was named to Newsweek’s list of the Most Loved Workplaces for 2021; and
•Announced that the Company partnered with the Water Institute at the University of Waterloo to address global water-related challenges.
Segment Reporting
As disclosed in Note 12 to the Consolidated Financial Statements, the Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by the chief operating decision maker (“CODM”) for making decisions and assessing performance as a source of the Company’s reportable operating segments. In the first quarter of fiscal 2022, the Company internally reorganized and, as a result, the CODM, who is the Executive Chair and CEO of the Company, began making decisions and assessing the performance of the Company using three operating segments, whereas the Company was previously a single operating segment.
COVID-19
The novel coronavirus (“COVID-19”) pandemic prompted extraordinary actions by governmental authorities throughout the world and resulted in significant market volatility, uncertainty and economic disruption.
To protect the health and safety of the Company’s employees, contractors, customers and visitors, during fiscal 2022 and throughout most of fiscal 2021, the Company mandated remote working, utilizing virtual meetings and suspending most employee travel. The Company also shifted customer, industry and other stakeholder events to virtual-only experiences, and may similarly alter, postpone or cancel other events in the future. The Company expects to implement changes to this fully remote and virtual model during fiscal 2023.
The Company also implemented a series of temporary cost reduction measures to further preserve financial flexibility during the COVID-19 pandemic. In fiscal 2022, these actions included taking advantage of the broad-based employer relief provided by governments in Canada and the postponement of certain discretionary spending. The savings from temporary cost reduction measures and governmental assistance related to the pandemic were lower in fiscal 2022 compared to fiscal 2021.
In fiscal 2022 and fiscal 2021, the economic challenges and uncertainty caused by the COVID-19 pandemic and the measures undertaken to contain its spread have negatively affected the Company’s QNX automotive software business, caused volatility in demand for many of the Company’s other products and services, adversely affected the ability of the Company’s sales and professional services teams to meet with customers and provide service, negatively impacted expected spending from new customers and increased sales cycle times.
Although the Company experienced higher Software & Services revenue in fiscal 2022 compared to fiscal 2021, when the COVID-19 pandemic first materially negatively impacted the Company’s operations, and observed a partial recovery in both automotive design activities and production volumes during fiscal 2022 compared to fiscal 2021, the COVID-19 pandemic and related global chip shortage have had and, in fiscal 2023, may continue to have a material adverse impact on the Company’s QNX automotive software business in particular and on the Company’s business, results of operations and financial condition on a consolidated basis. The COVID-19 pandemic and its related economic impact have not, and the Company does not expect them to, materially adversely affect the Company’s liquidity position.
The ultimate impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on, among other things, the pandemic’s duration and severity, including resurgences in some geographic areas as a result of new strains and variants, the governmental restrictions that may be sustained or imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the pandemic (including the distribution, efficacy and acceptance of vaccines, particularly against emergent viral variants), the impact of the global chip shortage and other supply chain constraints. The long-term impact of the COVID-19 pandemic on the Company’s business may not be fully reflected until future periods.
The Company continues to evaluate the current and potential impact of the pandemic on its business, results of operations and consolidated financial statements, including potential asset impairment. The Company also continues to actively monitor developments and business conditions that may cause it to take further actions that alter business operations as may be required
by applicable authorities or that the Company determines are in the best interests of its employees, customers, suppliers and stockholders.
Russia Ukraine Conflict
In February 2022, Russian military forces invaded Ukraine. In response, Ukrainian military personnel and civilians are actively resisting the invasion. The outcome of the conflict is uncertain and is likely to have wide-ranging consequences on the peace and stability of the region. Strict financial and trade sanctions against Russia that have been imposed by Canada, the United States and other countries may have far-reaching effects on the global economy. The long-term impacts of the conflict and the sanctions imposed on Russia remain uncertain and will depend on future developments, and the Company continues to monitor the evolving situation.
The conflict and sanctions against Russia could negatively impact automotive production and sales, increase the ongoing disruption of supply chains, worsen the current semiconductor chip shortage since Russia and Ukraine are critical suppliers of neon gas and palladium used in chip production, exacerbate energy shortages and high energy prices, and increase cybersecurity threats. These impacts could have a material adverse effect on the Company’s operations, sales and profitability; in particular, the negative impact on automotive production could have an adverse impact on production-based royalties for the Company’s QNX business. However, the heightened level of cybersecurity threats could have a positive impact on demand for the Company’s cybersecurity products.
In response to Russia’s invasion of Ukraine, shortly after the end of fiscal 2022, the Company announced that it would cease all business activities in Russia with immediate effect. The Company does not expect this decision to have a material adverse effect on its business, results of operations or financial condition.
Fiscal 2022 Summary Results of Operations
The following table sets forth certain consolidated statements of operations data, as well as certain consolidated balance sheet data, as at and for the fiscal years ended February 28, 2022, February 28, 2021, and February 29, 2020:
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| As at and for the Fiscal Years Ended (in millions, except for share and per share amounts) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Revenue | $ | 718 | | | $ | 893 | | | $ | (175) | | | $ | 1,040 | | | $ | (147) | |
Gross margin | 467 | | | 643 | | | (176) | | | 763 | | | (120) | |
Operating expenses | 469 | | | 1,750 | | | (1,281) | | | 912 | | | 838 | |
Investment income (loss), net | 21 | | | (6) | | | 27 | | | 1 | | | (7) | |
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Income (loss) before income taxes | 19 | | | (1,113) | | | 1,132 | | | (148) | | | (965) | |
Provision for (recovery of) income taxes | 7 | | | (9) | | | 16 | | | 4 | | | (13) | |
Net income (loss) | $ | 12 | | | $ | (1,104) | | | $ | 1,116 | | | $ | (152) | | | $ | (952) | |
Earnings (loss) per share - reported | | | | | | | | | |
Basic | $ | 0.02 | | | $ | (1.97) | | | | | $ | (0.27) | | | |
Diluted | $ | (0.31) | | | $ | (1.97) | | | | | $ | (0.32) | | | |
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Weighted-average number of shares outstanding (000’s) | | | | | | | | | |
Basic | 570,607 | | | 561,305 | | | | | 553,861 | | | |
Diluted (1) | 631,440 | | | 561,305 | | | | | 614,361 | | | |
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(1)Diluted loss per share on a U.S. GAAP basis for fiscal 2021 does not include the dilutive effect of the Debentures (as defined below) as to do so would be anti-dilutive. Diluted loss per share on a U.S. GAAP basis for fiscal 2022, fiscal 2021 and fiscal 2020 does not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive. See Note 8 to the Consolidated Financial Statements for the fiscal year ended February 28, 2022 for calculation of the diluted weighted average number of shares outstanding.
The following tables show information by operating segment for the three months and year ended February 28, 2022 and February 28, 2021. The Company reports segment information in accordance with U.S. GAAP Accounting Standards Codification Section 280 based on the “management” approach. The management approach designates the internal reporting used by the CODM for making decisions and assessing performance of the Company’s reportable operating segments. See
“Business Overview - Segment Reporting” for a description of the Company’s operating segments, as well as Note 12 to the Consolidated Financial Statements.
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| For the Three Months Ended (in millions) |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | | | |
| February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | | | |
| 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | | |
Segment revenue | $ | 122 | | | $ | 122 | | | $ | — | | | $ | 52 | | | $ | 38 | | | $ | 14 | | | $ | 11 | | | $ | 50 | | | $ | (39) | | | $ | 185 | | | $ | 210 | | | $ | (25) | | | | | |
Segment cost of sales | 47 | | | 46 | | | 1 | | | 8 | | | 5 | | | 3 | | | 5 | | | 6 | | | (1) | | | 60 | | | 57 | | | 3 | | | | | |
Segment gross margin | $ | 75 | | | $ | 76 | | | $ | (1) | | | $ | 44 | | | $ | 33 | | | $ | 11 | | | $ | 6 | | | $ | 44 | | | $ | (38) | | | $ | 125 | | | $ | 153 | | | $ | (28) | | | | | |
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| For the Year Ended | | | | |
| (in millions) |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | | | |
| February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | | | |
| 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | | |
Segment revenue | $ | 477 | | $ | 491 | | $ | (14) | | $ | 178 | | $ | 130 | | $ | 48 | | $ | 63 | | $ | 272 | | $ | (209) | | $ | 718 | | $ | 893 | | $ | (175) | | | | | |
Segment cost of sales | 194 | | 192 | | 2 | | 30 | | 23 | | 7 | | 23 | | 30 | | (7) | | 247 | | 245 | | 2 | | | | |
Segment gross margin | $ | 283 | | $ | 299 | | $ | (16) | | $ | 148 | | $ | 107 | | $ | 41 | | $ | 40 | | $ | 242 | | $ | (202) | | $ | 471 | | $ | 648 | | $ | (177) | | | | | |
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The following tables reconcile the Company’s segment results for the three months and year ended February 28, 2022 to consolidated U.S. GAAP results:
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| For the Three Months Ended February 28, 2022 |
| (in millions) | | | | |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | Reconciling Items | | Consolidated U.S. GAAP | | | | |
Revenue | $ | 122 | | | $ | 52 | | | $ | 11 | | | $ | 185 | | | $ | — | | | $ | 185 | | | | | |
Cost of sales (1) | 47 | | | 8 | | | 5 | | | 60 | | | 1 | | | 61 | | | | | |
Gross margin | $ | 75 | | | $ | 44 | | | $ | 6 | | | $ | 125 | | | $ | (1) | | | $ | 124 | | | | | |
Operating expenses | | | | | | | | | (22) | | | (22) | | | | | |
Investment loss, net | | | | | | | | | 1 | | | 1 | | | | | |
Income before income taxes | | | | | | | | | | | $ | 145 | | | | | |
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| For the Year Ended February 28, 2022 |
| (in millions) | | | | |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | Reconciling Items | | Consolidated U.S. GAAP | | | | |
Revenue | $ | 477 | | | $ | 178 | | | $ | 63 | | | $ | 718 | | | $ | — | | | $ | 718 | | | | | |
Cost of sales (1) | 194 | | | 30 | | | 23 | | | 247 | | | 4 | | | 251 | | | | | |
Gross margin | $ | 283 | | | $ | 148 | | | $ | 40 | | | $ | 471 | | | $ | (4) | | | $ | 467 | | | | | |
Operating expenses | | | | | | | | | 469 | | | 469 | | | | | |
Investment income, net | | | | | | | | | (21) | | | (21) | | | | | |
Income before income taxes | | | | | | | | | | | $ | 19 | | | | | |
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(1) See “Non-GAAP Financial Measures” for a reconciliation of selected U.S. GAAP-based measures to adjusted measures for the three months and year ended February 28, 2022.
The following tables reconcile the Company’s segment results for the three months and year ended February 28, 2021 to consolidated U.S. GAAP results:
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| For the Three Months Ended February 28, 2021 |
| (in millions) | | | | |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | Reconciling Items | | Consolidated U.S. GAAP | | | | |
Revenue | $ | 122 | | | $ | 38 | | | $ | 50 | | | $ | 210 | | | $ | — | | | $ | 210 | | | | | |
Cost of sales (1) | 46 | | | 5 | | | 6 | | | 57 | | | 1 | | | 58 | | | | | |
Gross margin | $ | 76 | | | $ | 33 | | | $ | 44 | | | $ | 153 | | | $ | (1) | | | $ | 152 | | | | | |
Operating expenses | | | | | | | | | 465 | | | 465 | | | | | |
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Loss before income taxes | | | | | | | | | | | $ | (313) | | | | | |
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| For the Year Ended February 28, 2021 |
| (in millions) | | | | |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | Reconciling Items | | Consolidated U.S. GAAP | | | | |
Revenue | $ | 491 | | | $ | 130 | | | $ | 272 | | | $ | 893 | | | $ | — | | | $ | 893 | | | | | |
Cost of sales (1) | 192 | | | 23 | | | 30 | | | 245 | | | 5 | | | 250 | | | | | |
Gross margin | $ | 299 | | | $ | 107 | | | $ | 242 | | | $ | 648 | | | $ | (5) | | | $ | 643 | | | | | |
Operating expenses | | | | | | | | | 1,750 | | | 1,750 | | | | | |
Investment loss, net | | | | | | | | | 6 | | | 6 | | | | | |
Loss before income taxes | | | | | | | | | | | $ | (1,113) | | | | | |
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(1) See “Non-GAAP Financial Measures” for a reconciliation of selected U.S. GAAP-based measures to adjusted measures for the three months and year ended February 28, 2021.
Financial Highlights
The Company had approximately $770 million in cash, cash equivalents and investments as of February 28, 2022 (Fiscal 2021 - $804 million).
In fiscal 2022, the Company recognized revenue of $718 million and net income of $12 million, or $0.02 basic earnings per share and $0.31 diluted loss per share on a U.S. GAAP basis (Fiscal 2021 - revenue of $893 million and net loss of $1,104 million, or $1.97 basic and diluted loss per share).
The Company recognized adjusted net loss of $55 million, or adjusted loss of $0.10 per share, on a non-GAAP basis in fiscal 2022 (Fiscal 2021 - adjusted net income of $88 million and adjusted earnings of $0.16 per share). See “Non-GAAP Financial Measures” below.
Debentures Fair Value Adjustment
As previously disclosed, the Company elected the fair value option to account for its outstanding 1.75% unsecured convertible debentures (the “1.75% Debentures”) and its previously outstanding 3.75% outstanding convertible debentures (the “3.75% Debentures” and collectively, the “Debentures”); therefore, periodic revaluation has been and continues to be required under U.S. GAAP. The fair value adjustment does not impact the terms of the Debentures such as the face value, the redemption features or the conversion price.
As of February 28, 2022, the fair value of the 1.75% Debentures was approximately $507 million versus the principal value of $365 million. For the three months ended February 28, 2022, the Company recorded non-cash income relating to changes in fair value from instrument specific credit risk of $1 million in other comprehensive income (loss) (“OCI”) and non-cash income relating to changes in fair value from non-credit components of $165 million (pre-tax and after tax) (the “Q4 Fiscal 2022 Debentures Fair Value Adjustment”) in the Company’s consolidated statements of operations. In fiscal 2022, the Company recorded non-cash income relating to changes in fair value from instrument-specific credit risk of $1 million in OCI and non-cash income relating to changes in fair value from non-credit components of $212 million (pre-tax and after tax) (the “Fiscal 2022 Debentures Fair Value Adjustment”) in the Company’s consolidated statements of operations. See Note 6 to the Consolidated Financial Statements for further details on the Debentures.
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. On March 31, 2022, the Company announced financial results for the three months and fiscal year ended February 28, 2022, which included certain non-GAAP financial measures and non-GAAP ratios, including adjusted gross margin, adjusted gross margin percentage, adjusted operating expense, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense, adjusted operating income (loss), adjusted EBITDA, adjusted operating income (loss) margin percentage, adjusted EBITDA margin percentage and free cash flow (usage).
In the Company’s internal reports, management evaluates the performance of the Company’s business on a non-GAAP basis by excluding the impact of certain items below from the Company’s U.S. GAAP financial results. The Company believes that these non-GAAP financial measures and non-GAAP ratios provide management, as well as readers of the Company’s financial statements with a consistent basis for comparison across accounting periods and is useful in helping management and readers understand the Company’s operating results and underlying operational trends. In the first quarter of fiscal 2022, the Company discontinued its use of software deferred revenue acquired and software deferred commission expense acquired adjustments in its non-GAAP financial measures due to the quantitative decline in the adjustments over time. For purposes of comparability, the Company’s non-GAAP financial measures for the three months ended and years ended February 28, 2021 and February 29, 2020 have been updated to conform to the current year’s presentation.
•Debentures fair value adjustment. The Company has elected to measure its outstanding Debentures at fair value in accordance with the fair value option under U.S. GAAP. Each period, the fair value of the Debentures is recalculated and resulting non-cash income and charges from the change in fair value from non-credit components of the Debentures are recognized in income. The amount can vary each period depending on changes to the Company’s share price, share price volatility and credit indices. This is not indicative of the Company’s core operating performance and may not be meaningful in comparison to the Company’s past operating performance.
•Restructuring charges. The Company believes that restructuring costs relating to employee termination benefits and facilities pursuant to the Resource Allocation Program (“RAP”) entered into in order to transition the Company from a legacy hardware manufacturer to a licensing driven software business do not reflect expected future operating expenses, are not indicative of the Company’s core operating performance, and may not be meaningful in comparison to the Company’s past operating performance.
•Stock compensation expenses. Equity compensation is a non-cash expense and does not impact the ongoing operating decisions taken by the Company’s management.
•Amortization of acquired intangible assets. When the Company acquires intangible assets through business combinations, the assets are recorded as part of purchase accounting and contribute to revenue generation. Such acquired intangible assets depreciate over time and the related amortization will recur in future periods until the assets have been fully amortized. This is not indicative of the Company’s core operating performance and may not be meaningful in comparison to the Company’s past operating performance.
•Business acquisition and integration costs. The Company incurs costs associated with business acquisitions, including legal costs, audit and accounting fees, and other acquisition and integration expenses. These expenditures do not relate to the ongoing operation of the business and they tend to vary significantly based on the circumstances of each transaction. This is not indicative of the Company’s core operating performance and may not be meaningful in comparison to the Company’s past operating performance.
•Acquisition valuation allowance. The Company records an income tax valuation allowance associated with business acquisitions. This is not indicative of the Company’s core operating performance and may not be meaningful in comparison to the Company’s past operating performance.
•Long-lived asset impairment charge. The Company believes that long-lived asset impairment charges do not reflect expected future operating expenses, are not indicative of the Company’s core operating performance and may not be meaningful in comparison to the Company’s past operating performance.
•Goodwill impairment charge. The Company believes that goodwill impairment charges do not reflect expected future operating expenses, are not indicative of the Company’s core operating performance, and may not be meaningful in comparison to the Company’s past operating performance.
On a U.S. GAAP basis, the impacts of these items are reflected in the Company’s income statement. However, the Company believes that the provision of supplemental non-GAAP measures allows investors to evaluate the financial performance of the Company’s business using the same evaluation measures that management uses and is therefore a useful indication of the Company’s performance or expected performance of future operations and facilitates period-to-period comparison of operating
performance. As a result, the Company considers it appropriate and reasonable to provide, in addition to U.S. GAAP measures, supplementary non-GAAP financial measures that exclude certain items from the presentation of its financial results.
Reconciliation of non-GAAP based measures with most directly comparable U.S. GAAP based measures for the three months ended February 28, 2022, February 28, 2021 and February 29, 2020
Readers are cautioned that adjusted gross margin, adjusted gross margin percentage, adjusted operating expense, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense, adjusted operating income (loss), adjusted EBITDA, adjusted operating income (loss) margin percentage, adjusted EBITDA margin percentage and free cash flow (usage) and similar measures do not have any standardized meaning prescribed by U.S. GAAP and are therefore unlikely to 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 described in this MD&A and presented in the Consolidated Financial Statements.
A reconciliation of the most directly comparable U.S. GAAP financial measures for the three months ended February 28, 2022, February 28, 2021 and February 29, 2020 to adjusted financial measures is reflected in the table below:
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For the Three Months Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
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Gross margin | | $ | 124 | | | $ | 152 | | | $ | 212 | |
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Stock compensation expense | | 1 | | | 1 | | | 2 | |
Adjusted gross margin | | $ | 125 | | | $ | 153 | | | $ | 214 | |
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Gross margin % | | 67.0 | % | | 72.4 | % | | 75.2 | % |
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Stock compensation expense | | 0.6 | % | | 0.5 | % | | 0.7 | % |
Adjusted gross margin % | | 67.6 | % | | 72.9 | % | | 75.9 | % |
Reconciliation of U.S. GAAP operating expense (income) for the three months ended February 28, 2022, November 30, 2021, February 28, 2021 and February 29, 2020 to adjusted operating expense is reflected in the table below:
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For the Three Months Ended (in millions) | | February 28, 2022 | | November 30, 2021 | | February 28, 2021 | | February 29, 2020 |
Operating expense (income) | | $ | (22) | | | $ | 66 | | | $ | 465 | | | $ | 253 | |
Restructuring charges | | — | | | — | | | — | | | 1 | |
Stock compensation expense | | 4 | | | 5 | | | 16 | | | 15 | |
Debentures fair value adjustment (1) | | (165) | | | (110) | | | 258 | | | 5 | |
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Acquired intangibles amortization | | 22 | | | 29 | | | 32 | | | 35 | |
Business acquisition and integration costs | | — | | | — | | | — | | | 1 | |
Goodwill impairment charge | | — | | | — | | | — | | | 22 | |
LLA impairment charge | | — | | | — | | | 22 | | | 5 | |
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Adjusted operating expense | | $ | 117 | | | $ | 142 | | | $ | 137 | | | $ | 169 | |
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(1) See “Fiscal 2022 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment”.
Reconciliation of U.S. GAAP net income (loss) and U.S. GAAP basic earnings (loss) per share for the three months ended February 28, 2022, February 28, 2021 and February 29, 2020 to adjusted net income and adjusted basic earnings per share is reflected in the table below:
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For the Three Months Ended (in millions, except per share amounts) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
| | | | Basic earnings per share | | | | Basic earnings (loss) per share | | | | Basic earnings (loss) per share |
Net income (loss) | | $ | 144 | | | $0.25 | | $ | (315) | | | $(0.56) | | $ | (41) | | | $(0.07) |
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Restructuring charges | | — | | | | | — | | | | | 1 | | | |
Stock compensation expense | | 5 | | | | | 17 | | | | | 17 | | | |
Debentures fair value adjustment | | (165) | | | | | 258 | | | | | 5 | | | |
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Acquired intangibles amortization | | 22 | | | | | 32 | | | | | 35 | | | |
Business acquisition and integration costs | | — | | | | | — | | | | | 1 | | | |
Goodwill impairment charge | | — | | | | | — | | | | | 22 | | | |
LLA impairment charge | | — | | | | | 22 | | | | | 5 | | | |
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Adjusted net income | | $ | 6 | | | $0.01 | | $ | 14 | | | $0.02 | | $ | 45 | | | $0.08 |
Reconciliation of U.S. GAAP research and development, selling, marketing and administration, and amortization expense for the three months ended February 28, 2022, February 28, 2021 and February 29, 2020 to adjusted research and development, selling, marketing and administration, and amortization expense is reflected in the table below:
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For the Three Months Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Research and development | | $ | 47 | | | $ | 48 | | | $ | 60 | |
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Stock compensation expense | | 2 | | | 3 | | | 3 | |
Adjusted research and development | | $ | 45 | | | $ | 45 | | | $ | 57 | |
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Selling, marketing and administration | | $ | 64 | | | $ | 92 | | | $ | 113 | |
Restructuring charges | | — | | | — | | | 1 | |
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Stock compensation expense | | 2 | | | 13 | | | 12 | |
Business acquisition and integration costs | | — | | | — | | | 1 | |
Adjusted selling, marketing and administration | | $ | 62 | | | $ | 79 | | | $ | 99 | |
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Amortization | | $ | 32 | | | $ | 45 | | | $ | 48 | |
Acquired intangibles amortization | | 22 | | | 32 | | | 35 | |
Adjusted amortization | | $ | 10 | | | $ | 13 | | | $ | 13 | |
Reconciliation of selected non-GAAP based measures with most directly comparable U.S. GAAP measures for the years ended February 28, 2022, February 28, 2021 and February 29, 2020
A reconciliation of the most directly comparable U.S. GAAP financial measures for the years ended February 28, 2022, February 28, 2021 and February 29, 2020 to adjusted financial measures is reflected in the table below:
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For the Fiscal Years Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
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Gross margin | | $ | 467 | | | $ | 643 | | | $ | 763 | |
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Restructuring charges | | — | | | — | | | 5 | |
Stock compensation expense | | 4 | | | 5 | | | 5 | |
Adjusted gross margin | | $ | 471 | | | $ | 648 | | | $ | 773 | |
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Gross margin % | | 65.0 | % | | 72.0 | % | | 73.4 | % |
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Restructuring charges | | — | % | | — | % | | 0.5 | % |
Stock compensation expense | | 0.6 | % | | 0.6 | % | | 0.4 | % |
Adjusted gross margin % | | 65.6 | % | | 72.6 | % | | 74.3 | % |
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Operating expense | | $ | 469 | | | $ | 1,750 | | | $ | 912 | |
Restructuring charges | | — | | | 2 | | | 5 | |
Stock compensation expense | | 26 | | | 47 | | | 58 | |
Debentures fair value adjustment (1) | | (212) | | | 372 | | | (66) | |
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Acquired intangibles amortization | | 115 | | | 129 | | | 141 | |
Business acquisition and integration costs | | — | | | — | | | 4 | |
Goodwill impairment charge | | — | | | 594 | | | 22 | |
LLA impairment charge | | — | | | 43 | | | 10 | |
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Adjusted operating expense | | $ | 540 | | | $ | 563 | | | $ | 738 | |
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______________________________
(1) See “Fiscal 2022 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment”.
Reconciliation of U.S. GAAP net income (loss) and U.S. GAAP basic earnings (loss) per share for the years ended February 28, 2022, February 28, 2021 and February 29, 2020 to the adjusted net income (loss) and adjusted basic earnings (loss) per share is reflected in the table below:
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For the Fiscal Years Ended (in millions, except per share amounts) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
| | | | Basic earnings (loss) per share | | | | Basic earnings (loss) per share | | | | Basic earnings (loss) per share |
Net income (loss) | | $ | 12 | | | $ | 0.02 | | | $ | (1,104) | | | $ | (1.97) | | | $ | (152) | | | $ | (0.27) | |
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Restructuring charges | | — | | | | | 2 | | | | | 10 | | | |
Stock compensation expense | | 30 | | | | | 52 | | | | | 63 | | | |
Debentures fair value adjustment | | (212) | | | | | 372 | | | | | (66) | | | |
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Acquired intangibles amortization | | 115 | | | | | 129 | | | | | 141 | | | |
Business acquisition and integration costs | | — | | | | | — | | | | | 4 | | | |
Goodwill impairment charge | | — | | | | | 594 | | | | | 22 | | | |
LLA impairment charge | | — | | | | | 43 | | | | | 10 | | | |
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Acquisition valuation allowance | | — | | | | | — | | | | | (1) | | | |
Adjusted net income (loss) | | $ | (55) | | | $(0.10) | | $ | 88 | | | $0.16 | | $ | 31 | | | $0.06 |
Reconciliation of U.S GAAP research and development, selling, marketing and administration, and amortization expense for the years ended February 28, 2022, February 28, 2021 and February 29, 2020 to adjusted research and development, selling, marketing and administration, and amortization expense is reflected in the table below:
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For the Fiscal Years Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Research and development | | $ | 219 | | | $ | 215 | | | $ | 259 | |
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Stock compensation expense | | 8 | | | 11 | | | 13 | |
Adjusted research and development | | $ | 211 | | | $ | 204 | | | $ | 246 | |
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Selling, marketing and administration | | $ | 297 | | | $ | 344 | | | $ | 493 | |
Restructuring charges | | — | | | 2 | | | 5 | |
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Stock compensation expense | | 18 | | | 36 | | | 45 | |
Business acquisition and integration costs | | — | | | — | | | 4 | |
Adjusted selling, marketing and administration | | $ | 279 | | | $ | 306 | | | $ | 439 | |
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Amortization | | $ | 165 | | | $ | 182 | | | $ | 194 | |
Acquired intangibles amortization | | 115 | | | 129 | | | 141 | |
Adjusted amortization | | $ | 50 | | | $ | 53 | | | $ | 53 | |
Adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage and adjusted EBITDA margin percentage for the three months ended February 28, 2022, February 28, 2021 and February 29, 2020 are reflected in the table below. These are non-GAAP financial measures and non-GAAP ratios that do not have any standardized meaning as prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.
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For the Three Months Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Operating income (loss) | | $ | 146 | | | $ | (313) | | | $ | (41) | |
Non-GAAP adjustments to operating income (loss) | | | | | | |
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Restructuring charges | | — | | | — | | | 1 | |
Stock compensation expense | | 5 | | | 17 | | | 17 | |
Debentures fair value adjustment | | (165) | | | 258 | | | 5 | |
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Acquired intangibles amortization | | 22 | | | 32 | | | 35 | |
Business acquisition and integration costs | | — | | | — | | | 1 | |
Goodwill impairment charge | | — | | | — | | | 22 | |
LLA impairment charge | | — | | | 22 | | | 5 | |
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Total non-GAAP adjustments to operating income (loss) | | (138) | | | 329 | | | 86 | |
Adjusted operating income | | 8 | | | 16 | | | 45 | |
Amortization | | 34 | | | 49 | | | 52 | |
Acquired intangibles amortization | | (22) | | | (32) | | | (35) | |
Adjusted EBITDA | | $ | 20 | | | $ | 33 | | | $ | 62 | |
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Revenue | | $ | 185 | | | $ | 210 | | | $ | 282 | |
Adjusted operating income margin % (1) | | 4% | | 8% | | 16% |
Adjusted EBITDA margin % (2) | | 11% | | 16% | | 22% |
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(1) Adjusted operating income margin % is calculated by dividing adjusted operating income by revenue.
(2) Adjusted EBITDA margin % is calculated by dividing adjusted EBITDA by revenue.
Adjusted operating income (loss), adjusted EBITDA, adjusted operating income (loss) margin percentage and adjusted EBITDA margin percentage for the fiscal years ended February 28, 2022, February 28, 2021 and February 29, 2020 are reflected in the table below.
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For the Fiscal Years Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Operating loss | | $ | (2) | | | $ | (1,107) | | | $ | (149) | |
Non-GAAP adjustments to operating loss | | | | | | |
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Restructuring charges | | — | | | 2 | | | 10 | |
Stock compensation expense | | 30 | | | 52 | | | 63 | |
Debentures fair value adjustment | | (212) | | | 372 | | | (66) | |
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Acquired intangibles amortization | | 115 | | | 129 | | | 141 | |
Business acquisition and integration costs | | — | | | — | | | 4 | |
Goodwill impairment charge | | — | | | 594 | | | 22 | |
LLA impairment charge | | — | | | 43 | | | 10 | |
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Total non-GAAP adjustments to operating loss | | (67) | | | 1,192 | | | 184 | |
Adjusted operating income (loss) | | (69) | | | 85 | | | 35 | |
Amortization | | 176 | | | 198 | | | 212 | |
Acquired intangibles amortization | | (115) | | | (129) | | | (141) | |
Adjusted EBITDA | | $ | (8) | | | $ | 154 | | | $ | 106 | |
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Revenue | | $ | 718 | | | $ | 893 | | | $ | 1,040 | |
Adjusted operating income (loss) margin % (1) | | (10 | %) | | 10 | % | | 3 | % |
Adjusted EBITDA margin % (2) | | (1 | %) | | 17 | % | | 10 | % |
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(1) Adjusted operating income (loss) margin % is calculated by dividing adjusted operating income (loss) by revenue.
(2) Adjusted EBITDA margin % is calculated by dividing adjusted EBITDA by revenue.
The Company uses free cash flow when assessing its sources of liquidity, capital resources, and quality of earnings. The Company believes that free cash flow is helpful in understanding the Company’s capital requirements and provides an additional means to reflect the cash flow trends in the Company’s business.
Reconciliation of U.S. GAAP net cash provided by operating activities for the three months ended February 28, 2022, February 28, 2021 and February 29, 2020 to free cash flow is reflected in the table below:
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For the Three Months Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Net cash provided by operating activities | | $ | 10 | | | $ | 51 | | | $ | 35 | |
Acquisition of property, plant and equipment | | (2) | | | (3) | | | $ | (3) | |
Free cash flow | | $ | 8 | | | $ | 48 | | | $ | 32 | |
Reconciliation of U.S. GAAP net cash provided by (used in) operating activities for the years ended February 28, 2022, February 28, 2021 and February 29, 2020 to free cash flow (usage) is reflected in the table below:
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For the Fiscal Years Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Net cash provided by (used in) operating activities | | $ | (28) | | | $ | 82 | | | $ | 26 | |
Acquisition of property, plant and equipment | | (8) | | | (8) | | | (12) | |
Free cash flow (usage) | | $ | (36) | | | $ | 74 | | | $ | 14 | |
Key Metrics
The Company regularly monitors a number of financial and operating metrics, including the following key metrics, in order to measure the Company’s current performance and estimated future performance. Readers are cautioned that annual recurring revenue (“ARR”), dollar-based net retention rate (“DBNRR”), billings and recurring revenue percentage do not have any standardized meaning and are unlikely to be comparable to similarly titled measures reported by other companies. In the first
quarter of fiscal 2022, the Company discontinued its use of software deferred revenue acquired in its key metrics as the Company no longer reports non-GAAP revenue. For purposes of comparability, the Company’s key metrics for the three months ended February 28, 2021 have been updated to conform to the current year’s presentation.
Comparative breakdowns of certain key metrics for the three months ended February 28, 2022 and February 28, 2021 are set forth below.
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For the Three Months Ended (in millions) | | February 28, 2022 | | February 28, 2021 | | Change |
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Annual Recurring Revenue | | | | | | |
Cybersecurity | | $ | 347 | | | $ | 369 | | | $ | (22) | |
IoT | | $ | 93 | | | $ | 84 | | | $ | 9 | |
Dollar-Based Net Retention Rate | | | | | | |
Cybersecurity | | 91 | % | | 95 | % | | (4 | %) |
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Recurring Software Product Revenue | | ~ 80 % | | ~ 90 % | | ~ (10%) |
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Annual Recurring Revenue
The Company defines ARR as the annualized value of all subscription, term, maintenance, services, and royalty contracts that generate recurring revenue as of the end of the reporting period. The Company uses ARR as an indicator of business momentum for software and services.
Cybersecurity ARR was approximately $347 million in the fourth quarter of fiscal 2022 and decreased compared to $358 million in the third quarter of fiscal 2022 and decreased compared to $369 million in the fourth quarter of fiscal 2021.
IoT ARR was approximately $93 million in the fourth quarter of fiscal 2022 and increased compared to $91 million in the third quarter of fiscal 2022 and increased compared to $84 million in the fourth quarter of fiscal 2021.
Dollar-Based Net Retention Rate
The Company calculates the DBNRR as of period end by first calculating the ARR from the customer base as at 12 months prior to the current period end (“Prior Period ARR”). The Company then calculates the ARR for the same cohort of customers as at the current period end (“Current Period ARR”). The Company then divides the Current Period ARR by the Prior Period ARR to calculate the DBNRR.
Cybersecurity DBNRR was 91% in the fourth quarter of fiscal 2022 and decreased compared to 95% in the third quarter of fiscal 2022 and the fourth quarter of fiscal 2021.
Billings
The Company defines billings as amounts invoiced less credits issued. The Company considers billings to be a useful metric because billings drive deferred revenue, which is an important indicator of the health and visibility of the business and represents a significant percentage of future revenue.
Total Company billings increased in the fourth quarter of fiscal 2022 compared to the third quarter of fiscal 2022 and decreased compared to the fourth quarter of fiscal 2021 due to a decrease in billings from Licensing and Other.
The Company previously stated that it expected sequential billings growth for Cybersecurity in the fourth quarter of fiscal 2022. In the fourth quarter of fiscal 2022, Cybersecurity billings increased sequentially compared to the third quarter of fiscal 2022.
The Company previously stated that it expected IoT billings to grow by a double-digit percentage for fiscal 2022. In fiscal 2022, IoT billings grew by a double-digit percentage compared to fiscal 2021.
The Company expects Cybersecurity billings growth of between 8 to 12% in fiscal 2023 compared to fiscal 2022. The Company also expects quarterly year-over-year Cybersecurity billings growth throughout fiscal 2023 when compared to the same quarter in the prior year.
Recurring Software Product Revenue
The Company defines recurring software product revenue percentage as recurring software product revenue divided by total software and services revenue. Recurring software product revenue is comprised of subscription and term licenses, maintenance arrangements, royalty arrangements and perpetual licenses recognized ratably under ASC 606. Total software and services revenue is comprised of recurring product revenue, non-recurring product revenue and professional services. The Company
uses recurring software product revenue percentage to provide visibility into the revenue expected to be recognized in the current and future periods.
Total Software and Services product revenue, excluding professional services, was approximately 80% recurring in the fourth quarter of fiscal 2022 consistent with approximately 80% recurring in the third quarter of fiscal 2022 and decreased from approximately 90% recurring in the fourth quarter of fiscal 2021 due to product mix.
Results of Operations - Fiscal year ended February 28, 2022 compared to fiscal year ended February 28, 2021
Revenue
Revenue by Segment
Comparative breakdowns of revenue by product and service on a U.S. GAAP basis are set forth below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Years Ended (in millions) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Revenue by Product and Service | | | | | | | | | | | | | |
Cybersecurity | $ | 477 | | | $ | 491 | | | $ | (14) | | | | | $ | 475 | | | $ | 16 | | | |
IoT | 178 | | | 130 | | | 48 | | | | | 216 | | | (86) | | | |
Licensing and Other | 63 | | | 272 | | | (209) | | | | | 349 | | | (77) | | | |
| | | | | | | | | | | | | |
| $ | 718 | | | $ | 893 | | | $ | (175) | | | | | $ | 1,040 | | | $ | (147) | | | |
| | | | | | | | | | | | | |
% Revenue by Product and Service | | | | | | | | | | | | | |
Cybersecurity | 66.4 | % | | 55.0 | % | | | | | | 45.7 | % | | | | |
IoT | 24.8 | % | | 14.5 | % | | | | | | 20.7 | % | | | | |
Licensing and Other | 8.8 | % | | 30.5 | % | | | | | | 33.6 | % | | | | |
| | | | | | | | | | | | | |
| 100.0 | % | | 100.0 | % | | | | | | 100.0 | % | | | | |
Cybersecurity
Cybersecurity revenue was $477 million, or 66.4% of revenue in fiscal 2022, a decrease of $14 million compared to $491 million, or 55.0% of revenue in fiscal 2021. The decrease in Cybersecurity revenue of $14 million was primarily due to a decrease of $25 million relating to product revenue in BlackBerry Spark, a decrease of $9 million relating to professional services and a decrease of $4 million relating to non-automotive OEM business, offset by an increase of $29 million related to the sale of Secusmart solutions.
The Company previously stated that it expected Cybersecurity revenue to be higher in the second half of the year than in the first half of the year for fiscal 2022. In fiscal 2022, Cybersecurity revenue was higher in the second half of the year than in the first half of the year.
The Company expects Cybersecurity revenue in fiscal 2023 to be broadly consistent with fiscal 2022.
IoT
IoT revenue was $178 million, or 24.8% of revenue in fiscal 2022, an increase of $48 million compared to $130 million, or 14.6% of revenue in fiscal 2021. The increase in IoT revenue of $48 million was primarily due to an increase of $20 million in BlackBerry QNX royalty revenue due to the partial recovery of the automotive market from the slowdown related to the COVID-19 pandemic in fiscal 2021, an increase of $16 million in development seat revenue, an increase of $8 million in professional service revenue and an increase of $3 million related to sales in BlackBerry Radar.
The Company previously stated that it expected IoT revenue to be between $180 million and $200 million for fiscal 2022 as a whole. In fiscal 2022, IoT revenue was $178 million primarily due to the impact of disruption in automotive supply chains on production-based royalties.
The Company previously stated that it expected IoT revenue to be higher in the second half of the year than in the first half of the year in fiscal 2022. In fiscal 2022, IoT revenue was higher in the second half of the year than in the first half of the year.
The Company expects IoT revenue to be between $200 million and $210 million in fiscal 2023.
Licensing and Other
Licensing and Other revenue was $63 million, or 8.8% of revenue in fiscal 2022, a decrease of $209 million compared to $272 million, or 30.5% of revenue in fiscal 2021. The decrease in Licensing and Other revenue of $209 million was primarily due to a decrease of $201 million in revenue from the Company’s intellectual property licensing arrangements due to the ongoing patent sale process in fiscal 2022, and associated restrictions on monetization activity. SAF revenue, which was generated from users of BlackBerry 7 and prior BlackBerry operating systems, also decreased by $5 million, primarily due to a lower number of BlackBerry 7 users and lower revenue from those users compared to fiscal 2021, and to the decommissioning of service for these legacy systems as of January 4, 2022.
The Company previously stated that it expected Licensing and Other revenue to be approximately $60 million in fiscal 2022. In fiscal 2022, Licensing and Other revenue was $63 million.
U.S. GAAP Revenue by Geography
Comparative breakdowns of the geographic regions on a U.S. GAAP basis are set forth in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Years Ended (in millions) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Revenue by Geography | | | | | | | | | | | | | |
North America | $ | 413 | | | $ | 633 | | | $ | (220) | | | | | $ | 743 | | | $ | (110) | | | |
Europe, Middle East and Africa | 234 | | | 197 | | | 37 | | | | | 221 | | | (24) | | | |
Other regions | 71 | | | 63 | | | 8 | | | | | 76 | | | (13) | | | |
| $ | 718 | | | $ | 893 | | | $ | (175) | | | | | $ | 1,040 | | | $ | (147) | | | |
| | | | | | | | | | | | | |
% Revenue by Geography | | | | | | | | | | | | | |
North America | 57.5 | % | | 70.9 | % | | | | | | 71.4 | % | | | | |
Europe, Middle East and Africa | 32.6 | % | | 22.1 | % | | | | | | 21.3 | % | | | | |
Other regions | 9.9 | % | | 7.0 | % | | | | | | 7.3 | % | | | | |
| 100.0 | % | | 100.0 | % | | | | | | 100.0 | % | | | | |
| | | | | | | | | | | | | |
North America Revenue
Revenue in North America was $413 million, or 57.5% of revenue, in fiscal 2022, reflecting a decrease of $220 million compared to $633 million, or 70.9% of revenue in fiscal 2021. The decrease in North American revenue was primarily due to a decrease of $201 million in Licensing and Other revenue due to the reasons discussed above in “Revenue by Segment”, a decrease of $24 million in product revenue in BlackBerry Spark and a decrease of $7 million in professional services, partially offset by an increase of $13 million in BlackBerry QNX royalty revenue due to the reasons discussed above in “Revenue by Segment”.
Europe, Middle East and Africa Revenue
Revenue in Europe, Middle East and Africa was $234 million, or 32.6% of revenue, in fiscal 2022, reflecting an increase of $37 million compared to $197 million, or 22.1% of revenue, in fiscal 2021. The increase was primarily due to an increase of $29 million related to the sale of Secusmart solutions, an increase of $6 million in development seat revenue, an increase of $6 million in professional services due to the reasons discussed above in “Revenue by Segment”, partially offset by a decrease of $2 million in product revenue in BlackBerry Spark.
Other Regions Revenue
Revenue in other regions was $71 million, or 9.9% of revenue, in fiscal 2022, reflecting an increase of $8 million compared to $63 million, or 7.0% of revenue, in fiscal 2021. The increase in revenue is primarily due to an increase of $5 million in development seat revenue and an increase of $4 million in BlackBerry QNX royalty revenue due to the reasons discussed above in “Revenue by Segment”, partially offset by a decrease of $3 million in SAF revenue.
Gross Margin
Consolidated Gross Margin
Consolidated gross margin decreased by $176 million to approximately $467 million in fiscal 2022 from $643 million in fiscal 2021. The decrease was primarily due to a decrease in revenue from Licensing and Other and BlackBerry Spark, partially offset by an increase in revenue from BlackBerry QNX and Secusmart due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
Consolidated Gross Margin Percentage
Consolidated gross margin percentage decreased by 7.0%, to approximately 65.0% of consolidated revenue in fiscal 2022 from 72.0% of consolidated revenue in fiscal 2021. The decrease was primarily due to a lower gross margin contribution from Licensing and Other due to the reasons discussed above in “Revenue by Segment”, partially offset by a higher gross margin contribution from BlackBerry QNX and Secusmart due to the reasons discussed above in “Revenue by Segment”.
Gross Margin by Segment
See “Business Overview” and “Fiscal 2022 Summary Results of Operations” for information about the Company’s operating segments and the basis of operating segment results.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended | | | | |
| (in millions) |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | | | |
| February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | | | |
| 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | | |
Segment revenue | $ | 477 | | $ | 491 | | $ | (14) | | $ | 178 | | $ | 130 | | $ | 48 | | $ | 63 | | $ | 272 | | $ | (209) | | $ | 718 | | $ | 893 | | $ | (175) | | | | |
Segment cost of sales | 194 | | 192 | | 2 | | 30 | | 23 | | 7 | | 23 | | 30 | | (7) | | 247 | | 245 | | 2 | | | | |
Segment gross margin | $ | 283 | | $ | 299 | | $ | (16) | | $ | 148 | | $ | 107 | | $ | 41 | | $ | 40 | | $ | 242 | | $ | (202) | | $ | 471 | | $ | 648 | | $ | (177) | | | | |
Segment gross margin % | 59 | % | | 61 | % | | (2 | %) | | 83 | % | | 82 | % | | 1 | % | | 63 | % | | 89 | % | | (26 | %) | | 66 | % | | 73 | % | | (7 | %) | | | | |
Cybersecurity
Cybersecurity gross margin decreased by $16 million to approximately $283 million in fiscal 2022 from $299 million in fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
Cybersecurity gross margin percentage decreased by 2% to approximately 59% of Cybersecurity revenue in fiscal 2022 from 61% of Cybersecurity revenue in fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”.
IoT
IoT gross margin increased by $41 million to approximately $148 million in fiscal 2022 from $107 million in fiscal 2021. The increase was primarily due to the reasons discussed above in “Revenue by Segment”, partially offset by an increase in cost of sales related to professional services.
IoT gross margin percentage increased by 1% to approximately 83% of IoT revenue in fiscal 2022 from 82% of IoT revenue in fiscal 2021. The increase was primarily due an increase in BlackBerry QNX royalty revenue, which has a higher relative gross margin percentage, due to the reasons discussed above in “Revenue by Segment”, partially offset by an increase in professional services revenue, which has a lower relative gross margin percentage.
Licensing and Other
Licensing and Other gross margin decreased by $202 million to approximately $40 million in fiscal 2022 from $242 million in fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
Licensing and Other gross margin percentage decreased by 26% to approximately 63% of Licensing and Other revenue in fiscal 2022 from 89% of Licensing and Other revenue in fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”.
Operating Expenses
The table below presents a comparison of research and development, selling, marketing and administration, and amortization expense for fiscal 2022 compared to fiscal 2021 and fiscal 2021 compared to fiscal 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Years Ended (in millions) |
| February 28, 2022 | | | | February 28, 2021 | | | | Change | | | February 29, 2020 | | Change |
Revenue | $ | 718 | | | | | $ | 893 | | | | | $ | (175) | | | | $ | 1,040 | | | $ | (147) | |
Operating expenses | | | | | | | | | | | | | | |
Research and development | 219 | | | | | 215 | | | | | 4 | | | | 259 | | | (44) | |
Selling, marketing and administration | 297 | | | | | 344 | | | | | (47) | | | | 493 | | | (149) | |
Amortization | 165 | | | | | 182 | | | | | (17) | | | | 194 | | | (12) | |
Impairment of goodwill | — | | | | | 594 | | | | | (594) | | | | 22 | | | 572 | |
Impairment of long-lived assets | — | | | | | 43 | | | | | (43) | | | | 10 | | | 33 | |
| | | | | | | | | | | | | | |
Debentures fair value adjustment | (212) | | | | | 372 | | | | | (584) | | | | (66) | | | 438 | |
| | | | | | | | | | | | | | |
Total | $ | 469 | | | | | $ | 1,750 | | | | | $ | (1,281) | | | | $ | 912 | | | $ | 838 | |
| | | | | | | | | | | | | | |
Operating Expense as % of Revenue | | | | | | | | | | | | | | |
Research and development | 30.5 | % | | | | 24.1 | % | | | | | | | 24.9 | % | | |
Selling, marketing and administration | 41.4 | % | | | | 38.5 | % | | | | | | | 47.4 | % | | |
Amortization | 23.0 | % | | | | 20.4 | % | | | | | | | 18.7 | % | | |
Impairment of goodwill | — | % | | | | 66.5 | % | | | | | | | 2.1 | % | | |
Impairment of long-lived assets | — | % | | | | 4.8 | % | | | | | | | 1.0 | % | | |
| | | | | | | | | | | | | | |
Debentures fair value adjustment | (29.5 | %) | | | | 41.7 | % | | | | | | | (6.3 | %) | | |
| | | | | | | | | | | | | | |
Total | 65.3 | % | | | | 196.0 | % | | | | | | | 87.7 | % | | |
See “Non-GAAP Financial Measures” for a reconciliation of selected U.S. GAAP-based measures to adjusted measures for the years ended February 28, 2022, February 28, 2021 and February 29, 2020.
U.S. GAAP Operating Expenses
Operating expenses decreased by $1,281 million, or 73.2%, to $469 million, or 65.3% of revenue in fiscal 2022, compared to $1,750 million, or 196.0% of revenue, in fiscal 2021. The decrease was primarily attributable to a goodwill impairment of $594 million in fiscal 2021 which did not recur, the difference between the Fiscal 2022 Debentures Fair Value Adjustment and the fair value adjustment related to the Debentures incurred in fiscal 2021 of $584 million, an impairment of long-lived assets of $43 million in fiscal 2021 which did not recur and a decrease of $20 million in stock compensation expense, partially offset by a decrease in benefits of $10 million in government subsidies such as claims filed for the Canada Emergency Wage Subsidy (“CEWS”) and Hardest-Hit Business Recovery Program (“HHBRP”) programs to support the business through the COVID-19 pandemic and an increase of $7 million in variable incentive plan costs.
Adjusted Operating Expenses
Adjusted operating expenses decreased by $23 million, or 4.1%, to $540 million in fiscal 2022, compared to $563 million in fiscal 2021. The decrease was primarily attributable to a decrease of $13 million in legal expenses, a decrease of $11 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price and a decrease of $10 million in salaries and benefits expense, partially offset by a decrease in benefits of $10 million in government subsidies such as CEWS and HHBRP funding and an increase of $7 million in variable incentive plan costs.
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits for technical personnel, new product development costs, travel, office and building costs, infrastructure costs and other employee costs.
Research and development expenses increased by $4 million, or 1.9%, to $219 million, or 30.5% of revenue, in fiscal 2022, compared to $215 million, or 24.1% of revenue, in fiscal 2021. The increase was primarily attributable to an increase of $4 million in variable incentive plan costs and a decrease in benefits of $3 million in claims filed with the Ministry of Innovation, Science and Economic Development Canada relating to its Strategic Innovation Fund (“SIF”) program’s investment in BlackBerry QNX, partially offset by a decrease of $2 million in stock compensation expense.
Adjusted research and development expenses increased by $7 million, or 3.4% to $211 million in fiscal 2022 compared to $204 million in fiscal 2021. The increase was primarily due an increase of $4 million in variable incentive plan costs and a decrease in benefits of $3 million in SIF claims filed.
Selling, Marketing and Administration Expenses
Selling, marketing and administration expenses consist primarily of marketing, advertising and promotion, salaries and benefits, external advisory fees, information technology costs, office and related staffing infrastructure costs and travel expenses.
Selling, marketing and administration expenses decreased by $47 million, or 13.7%, to $297 million, or 41.4% of revenue, in fiscal 2022 compared to $344 million, or 38.5% of revenue, in fiscal 2021. The decrease was primarily attributable to a decrease of $19 million in stock compensation expense, a decrease of $13 million in legal expenses and a decrease of $11 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price, partially offset by a decrease in benefits of $10 million in government subsidies such as CEWS and HHBRP funding.
Adjusted selling, marketing and administration expenses decreased by $27 million, or 8.8%, to $279 million in fiscal 2022 compared to $306 million in fiscal 2021. The decrease was primarily due to a decrease of $13 million in legal expenses, a decrease of $11 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price and a decrease of $10 million in salaries and benefits expenses, partially offset by a decrease in benefits of $10 million in government subsidies such as CEWS and HHBRP funding.
Amortization Expense
The table below presents a comparison of amortization expense relating to property, plant and equipment and intangible assets recorded as amortization or cost of sales for fiscal 2022 compared to fiscal 2021 and fiscal 2021 compared to fiscal 2020. Intangible assets are comprised of patents, licenses and acquired technology.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Years Ended (in millions) |
| Included in Operating Expense |
| February 28, 2022 | | February 28, 2021 | | Change | | | | February 29, 2020 | | Change |
Property, plant and equipment | $ | 12 | | | $ | 17 | | | $ | (5) | | | | | $ | 18 | | | $ | (1) | |
Intangible assets | 153 | | | 165 | | | (12) | | | | | 176 | | | (11) | |
Total | $ | 165 | | | $ | 182 | | | $ | (17) | | | | | $ | 194 | | | $ | (12) | |
| | | | | | | | | | | |
| Included in Cost of Sales |
| February 28, 2022 | | February 28, 2021 | | Change | | | | February 29, 2020 | | Change |
Property, plant and equipment | $ | 3 | | | $ | 4 | | | $ | (1) | | | | | $ | 6 | | | $ | (2) | |
Intangible assets | 8 | | | 12 | | | (4) | | | | | 12 | | | — | |
Total | $ | 11 | | | $ | 16 | | | $ | (5) | | | | | $ | 18 | | | $ | (2) | |
| | | | | | | | | | | |
Amortization included in Operating Expense
Amortization expense relating to certain property, plant and equipment and intangible assets decreased by $17 million to $165 million for fiscal 2022, compared to $182 million for fiscal 2021. The decrease in amortization expense was due to the lower cost base of assets.
Adjusted amortization expense decreased by $3 million to $50 million in fiscal 2022 compared to $53 million in fiscal 2021 due to the reasons described above on a U.S. GAAP basis.
Amortization included in Cost of Sales
Amortization expense relating to certain property, plant and equipment and intangible assets employed in the Company’s service operations decreased by $5 million to $11 million for fiscal 2022, compared to $16 million for fiscal 2021. The decrease in amortization expense was due to the lower cost base of assets.
Investment Income (Loss), Net
Investment income (loss), net, which includes the interest expense from the Debentures, increased by $27 million to investment income, net of $21 million in fiscal 2022, from investment loss, net of $6 million in fiscal 2021. The increase in investment income (loss), net was primarily due to gains recognized from a return of capital from a non-marketable equity investment, observable price changes on non-marketable equity investments without readily determinable fair value and a decrease in interest expense from the Debentures as a result of the redemption of the 3.75% Debentures and issuance of the 1.75% Debentures in fiscal 2021, partially offset by a lower yield on cash and investments and lower average cash and investments balances in fiscal 2022 compared to fiscal 2021.
Income Taxes
For fiscal 2022, the Company’s net effective income tax expense rate was approximately 37%, compared to a net effective income tax recovery of approximately 1% for the prior fiscal year. The Company’s net effective income tax rate reflects the change in unrecognized income tax benefits, if any, and the fact that the Company has a significant valuation allowance against its deferred tax assets, and in particular, the change in fair value of the Debentures, amongst other items, was offset by a corresponding adjustment of the valuation allowance. The Company’s net effective income tax rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates.
Net Income (Loss)
The Company’s net income for fiscal 2022 was $12 million, or $0.02 basic earnings per share and $0.31 diluted loss per share on a U.S. GAAP basis, reflecting a decrease in net loss of $1,116 million compared to net loss of $1,104 million, or $1.97 basic and diluted loss per share in fiscal 2021. The decrease was primarily due to a decrease in operating expenses due to the goodwill impairment in fiscal 2021 that did not recur and a decrease in Debentures fair value adjustment, as described above in “Operating Expenses”, partially offset by a decrease in revenue as described above in “Revenue by Segment” and a decrease in gross margin percentage, as describe above in “Consolidated Gross Margin Percentage.
Adjusted net loss for fiscal 2022 was $55 million compared to adjusted net income of $88 million in fiscal 2021, reflecting a decrease in adjusted net income of $143 million, primarily due to a decrease in revenue as described above in “Revenue by Segment” and a decrease in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”, partially offset by a decrease in operating expenditures as described above in “Operating Expenses”.
The weighted average number of shares outstanding was 571 million common shares for basic earnings per share and 631 million common shares for diluted loss per share for the fiscal year ended February 28, 2022. The weighted average number of shares outstanding was 561 million common shares for basic and diluted loss per share for the fiscal year ended February 28, 2021.
Common Shares Outstanding
On March 29, 2022, there were 576 million voting common shares, options to purchase 1 million voting common shares, 15 million restricted share units and 2 million deferred share units outstanding. In addition, 60.8 million common shares are issuable upon conversion in full of the 1.75% Debentures, as described in Note 6 to the Consolidated Financial Statements.
The Company has not paid any cash dividends during the last three fiscal years.
Results of Operations - Three months ended February 28, 2022 compared to the three months ended February 28, 2021
The following section sets forth certain unaudited consolidated statements of operations data, which is expressed in millions of dollars, except for share and per share amounts and as a percentage of revenue, for the three months ended February 28, 2022, February 28, 2021 and February 29, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended (in millions, except for share and per share amounts) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Revenue | $ | 185 | | | | | $ | 210 | | | | | $ | (25) | | | $ | 282 | | | $ | (72) | |
Gross margin | 124 | | | | | 152 | | | | | (28) | | | 212 | | | (60) | |
Operating expenses | (22) | | | | | 465 | | | | | (487) | | | 253 | | | 212 | |
Investment loss, net | (1) | | | | | — | | | | | (1) | | | (1) | | | 1 | |
| | | | | | | | | | | | | |
Income (loss) before income taxes | 145 | | | | | (313) | | | | | 458 | | | (42) | | | (271) | |
Provision for (recovery of) income taxes | 1 | | | | | 2 | | | | | (1) | | | (1) | | | 3 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income (loss) | $ | 144 | | | | | $ | (315) | | | | | $ | 459 | | | $ | (41) | | | $ | (274) | |
Earnings (loss) per share - reported | | | | | | | | | | | | | |
Basic | $ | 0.25 | | | | | $ | (0.56) | | | | | $ | 0.81 | | | $ | (0.07) | | | $ | (0.49) | |
Diluted (1) | $ | (0.03) | | | | | $ | (0.56) | | | | | $ | 0.53 | | | $ | (0.07) | | | $ | (0.49) | |
| | | | | | | | | | | | | |
Weighted-average number of shares outstanding (000’s) | | | | | | | | | | | | | |
Basic | 575,883 | | | | | 566,089 | | | | | | | 556,668 | | | |
Diluted (1) | 636,716 | | | | | 566,089 | | | | | | | 556,668 | | | |
______________________________
(1)Diluted loss per share on a U.S. GAAP basis in the fourth quarter of 2021 and 2020 do not include the dilutive effect of the Debentures as to do so would be anti-dilutive. Diluted loss per share on a U.S. GAAP basis in the fourth quarter of 2022, 2021 and 2020 do not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive.
Revenue
Revenue by Segment
Comparative breakdowns of revenue by product and service on a U.S. GAAP basis are set forth below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended (in millions) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Revenue by Product and Service | | | | | | | | | | | | | |
Cybersecurity | $ | 122 | | | $ | 122 | | | $ | — | | | | | $ | 124 | | | $ | (2) | | | |
IoT | 52 | | | 38 | | | 14 | | | | | 46 | | | (8) | | | |
Licensing and Other | 11 | | | 50 | | | (39) | | | | | 112 | | | (62) | | | |
| | | | | | | | | | | | | |
| $ | 185 | | | $ | 210 | | | $ | (25) | | | | | $ | 282 | | | $ | (72) | | | |
| | | | | | | | | | | | | |
% Revenue by Product and Service | | | | | | | | | | | | | |
Cybersecurity | 65.9 | % | | 58.1 | % | | | | | | 44.0 | % | | | | |
IoT | 28.1 | % | | 18.1 | % | | | | | | 16.3 | % | | | | |
Licensing and Other | 6.0 | % | | 23.8 | % | | | | | | 39.7 | % | | | | |
| | | | | | | | | | | | | |
| 100.0 | % | | 100.0 | % | | | | | | 100.0 | % | | | | |
Cybersecurity
Cybersecurity revenue was $122 million, or 65.9% of revenue, in the fourth quarter of fiscal 2022, consistent with $122 million, or 58.1% of revenue, in the fourth quarter of fiscal 2021. An increase of $15 million related to the sale of Secusmart solutions was partially offset by a decrease of $9 million relating to product revenue in BlackBerry Spark and a decrease of $3 million relating to professional services.
The Company previously stated that it expected Cybersecurity revenue to be between $125 million and $135 million in the fourth quarter of fiscal 2022. Cybersecurity revenue was $122 million in the fourth quarter of fiscal 2022, below expectations primarily due to higher than expected churn in smaller-sized UEM customers.
The Company previously stated that it expected modest sequential Cybersecurity revenue growth for the remainder of fiscal 2022. In the fourth quarter of fiscal 2022, Cybersecurity revenue decreased compared to the third quarter of fiscal 2022 due to the reason described above.
IoT
IoT revenue was $52 million, or 28.1% of revenue, in the fourth quarter of fiscal 2022, an increase of $14 million compared to $38 million, or 18.1% of revenue, in the fourth quarter of fiscal 2021. The increase in IoT revenue of $14 million was primarily due to an increase of $5 million relating to professional services, an increase of $4 million in BlackBerry QNX royalty revenue due to the partial recovery of the automotive market from the slowdown related to the COVID-19 pandemic in the fourth quarter of fiscal 2021 and an increase of $3 million in development seat revenue.
The Company previously stated that it expected sequential IoT revenue growth in the fourth quarter of fiscal 2022. In the fourth quarter of fiscal 2022, IoT revenue grew sequentially compared to the third quarter of fiscal 2022.
The Company previously stated that it expected IoT revenue to be between $50 million and $55 million in the fourth quarter of fiscal 2022. In the fourth quarter of fiscal 2022, IoT revenue was $52 million.
Licensing and Other
Licensing and Other revenue was $11 million, or 6.0% of revenue, in the fourth quarter of fiscal 2022, a decrease of $39 million compared to $50 million, or 23.8% of revenue, in the fourth quarter of fiscal 2021. The decrease in Licensing and Other revenue of $39 million was primarily due to a decrease of $36 million in revenue from the Company’s intellectual property licensing arrangements due to the ongoing patent sale process in the fourth quarter of 2022, and associated restrictions on monetization activity and a decrease of $2 million in SAF revenue.
The Company previously stated that it expected to enter into a definitive agreement with respect to a sale of a portion of the Company’s patent portfolio in the fourth quarter of fiscal 2022, in which event the Company expects that Licensing and Other revenue in the quarter will be nominal. In the fourth quarter of fiscal 2022, the Company entered into a definitive agreement with respect to a sale of a portion of the Company’s patent portfolio. The Company expects Licensing and Other revenue to be minimal in fiscal 2023, aside from any Licensing and Other revenue that may be recognized in connection with a closing of the patent portfolio sale transaction.
U.S. GAAP Revenue by Geography
Comparative breakdowns of the geographic regions are set forth in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended (in millions) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Revenue by Geography | | | | | | | | | | | |
North America | $ | 100 | | | $ | 141 | | | $ | (41) | | | | | $ | 213 | | | $ | (72) | |
Europe, Middle East and Africa | 66 | | | 53 | | | 13 | | | | | 53 | | | — | |
Other regions | 19 | | | 16 | | | 3 | | | | | 16 | | | — | |
| $ | 185 | | | $ | 210 | | | $ | (25) | | | | | $ | 282 | | | $ | (72) | |
| | | | | | | | | | | |
% Revenue by Geography | | | | | | | | | | | |
North America | 54.0 | % | | 67.1 | % | | | | | | 75.5 | % | | |
Europe, Middle East and Africa | 35.7 | % | | 25.2 | % | | | | | | 18.8 | % | | |
Other regions | 10.3 | % | | 7.7 | % | | | | | | 5.7 | % | | |
| 100.0 | % | | 100.0 | % | | | | | | 100.0 | % | | |
North America Revenue
Revenue in North America was $100 million, or 54.0% of revenue, in the fourth quarter of fiscal 2022, reflecting a decrease of $41 million compared to $141 million, or 67.1% of revenue, in the fourth quarter of fiscal 2021. Revenue in North America decreased compared to the fourth quarter of fiscal 2021 primarily due to a decrease of $36 million in Licensing and Other revenue due to the reasons discussed above in “Revenue by Segment” and a decrease of $8 million in product revenue in BlackBerry Spark, partially offset by an increase of $3 million in BlackBerry QNX royalty revenue due to the reasons discussed above in “Revenue by Segment”.
Europe, Middle East and Africa Revenue
Revenue in Europe, Middle East and Africa was $66 million or 35.7% of revenue in the fourth quarter of fiscal 2022, reflecting an increase of $13 million compared to $53 million or 25.2% of revenue in the fourth quarter of fiscal 2021. The increase in revenue is primarily due to an increase of $15 million related to the sale of Secusmart solutions partially offset by a decrease of $2 million in product revenue in BlackBerry Spark.
Other Regions Revenue
Revenue in other regions was $19 million or 10.3% of revenue in the fourth quarter of fiscal 2022, reflecting an increase of $3 million compared to $16 million or 7.7% of revenue in the fourth quarter of fiscal 2021. The increase in revenue is primarily due to an increase of $1 million in development seat revenue, an increase of $1 million in product revenue in BlackBerry Spark and an increase of $1 million in BlackBerry QNX royalty revenue due to the reasons discussed above in “Revenue by Segment”.
Gross Margin
Consolidated Gross Margin
Consolidated gross margin decreased by $28 million to approximately $124 million in the fourth quarter of fiscal 2022 from $152 million in the fourth quarter of fiscal 2021. The decrease was primarily due to a decrease in revenue from Licensing and Other and BlackBerry Spark, partially offset by an increase in revenue from BlackBerry QNX and Secusmart due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
Consolidated Gross Margin Percentage
Consolidated gross margin percentage decreased by 5.4%, to approximately 67.0% of consolidated revenue in the fourth quarter of fiscal 2022 from 72.4% of consolidated revenue in the fourth quarter of fiscal 2021. The decrease was primarily due to a lower gross margin contribution from Licensing and Other due to the reasons discussed above in “Revenue by Segment”, partially offset by a higher gross margin contribution from BlackBerry QNX and Secusmart due to the reasons discussed above in “Revenue by Segment”.
Gross Margin by Segment
See “Business Overview - Segment Reporting” and “Fiscal 2022 Summary Results of Operations” for information about the Company’s operating segments and the basis of operating segment results.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended (in millions) |
| Cybersecurity | | IoT | | Licensing and Other | | Segment Totals | | | | |
| February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | February 28, | | Change | | | | |
| 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | 2022 | | 2021 | | | | |
Segment revenue | $ | 122 | | $ | 122 | | $ | — | | $ | 52 | | $ | 38 | | $ | 14 | | $ | 11 | | $ | 50 | | $ | (39) | | $ | 185 | | $ | 210 | | $ | (25) | | | | |
Segment cost of sales | 47 | | 46 | | 1 | | 8 | | 5 | | 3 | | 5 | | 6 | | (1) | | 60 | | 57 | | 3 | | | | |
Segment gross margin | $ | 75 | | $ | 76 | | $ | (1) | | $ | 44 | | $ | 33 | | $ | 11 | | $ | 6 | | $ | 44 | | $ | (38) | | $ | 125 | | $ | 153 | | $ | (28) | | | | |
Segment gross margin % | 61 | % | | 62 | % | | (1 | %) | | 85 | % | | 87 | % | | (2 | %) | | 55 | % | | 88 | % | | (33 | %) | | 68 | % | | 73 | % | | (5 | %) | | | | |
Cybersecurity
Cybersecurity gross margin decreased by $1 million to approximately $75 million in the fourth quarter of fiscal 2022 from $76 million in the fourth quarter of fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
Cybersecurity gross margin percentage decreased by 1% to approximately 61% of Cybersecurity revenue in the fourth quarter of fiscal 2022 from 62% of Cybersecurity revenue in the fourth quarter of fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
IoT
IoT gross margin increased by $11 million to approximately $44 million in the fourth quarter of fiscal 2022 from $33 million in the fourth quarter of fiscal 2021. The increase was primarily due to the reasons discussed above in “Revenue by Segment”, partially offset by an increase in cost of sales related to professional services.
IoT gross margin percentage decreased by 2% to approximately 85% of IoT revenue in the fourth quarter of fiscal 2022 from 87% of IoT revenue in the fourth quarter of fiscal 2021. The decrease was primarily due an increase in professional services revenue, which has a lower relative gross margin percentage, partially offset by an increase in BlackBerry QNX royalty revenue, which has a higher relative gross margin percentage, due to the reasons discussed above in “Revenue by Segment”.
Licensing and Other
Licensing and Other gross margin decreased by $38 million to approximately $6 million in the fourth quarter of fiscal 2022 from $44 million in the fourth quarter of fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”, as the Company’s cost of sales does not significantly fluctuate based on business volume.
Licensing and Other gross margin percentage decreased by 33% to approximately 55% of Licensing and Other revenue in the fourth quarter of fiscal 2022 from 88% of Licensing and Other revenue in the fourth quarter of fiscal 2021. The decrease was primarily due to the reasons discussed above in “Revenue by Segment”.
Operating Expenses
The table below presents a comparison of research and development, selling, marketing and administration, and amortization expenses for the quarter ended February 28, 2022, compared to the quarter ended November 30, 2021 and the quarter ended February 28, 2021. The Company believes it is also meaningful to provide a sequential comparison between the fourth quarter of fiscal 2022 and the third quarter of fiscal 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended (in millions) |
| February 28, 2022 | | | | November 30, 2021 | | | | February 28, 2021 | | | February 29, 2020 |
Revenue | $ | 185 | | | | | $ | 184 | | | | | $ | 210 | | | | $ | 282 | |
Operating expenses | | | | | | | | | | | | |
Research and development | 47 | | | | | 57 | | | | | 48 | | | | 60 | |
Selling, marketing and administration | 64 | | | | | 77 | | | | | 92 | | | | 113 | |
Amortization | 32 | | | | | 42 | | | | | 45 | | | | 48 | |
Impairment of long-lived assets | — | | | | | — | | | | | 22 | | | | 5 | |
Impairment of goodwill | — | | | | | — | | | | | — | | | | 22 | |
| | | | | | | | | | | | |
Debentures fair value adjustment | (165) | | | | | (110) | | | | | 258 | | | | 5 | |
| | | | | | | | | | | | |
Total | $ | (22) | | | | | $ | 66 | | | | | $ | 465 | | | | $ | 253 | |
| | | | | | | | | | | | |
Operating Expense as % of Revenue | | | | | | | | | | | | |
Research and development | 25.4 | % | | | | 31.0 | % | | | | 22.9 | % | | | 21.3 | % |
Selling, marketing and administration | 34.6 | % | | | | 41.8 | % | | | | 43.8 | % | | | 40.1 | % |
Amortization | 17.3 | % | | | | 22.8 | % | | | | 21.4 | % | | | 17.0 | % |
Impairment of long-lived assets | — | % | | | | — | % | | | | 10.5 | % | | | 1.8 | % |
Impairment of goodwill | — | % | | | | — | % | | | | — | % | | | 7.8 | % |
| | | | | | | | | | | | |
Debentures fair value adjustment | (89.2 | %) | | | | (59.8 | %) | | | | 122.9 | % | | | 1.8 | % |
| | | | | | | | | | | | |
Total | (11.9 | %) | | | | 35.9 | % | | | | 221.4 | % | | | 89.7 | % |
See “Non-GAAP Financial Measures” for a reconciliation of selected U.S. GAAP-based measures to adjusted measures for the three months ended February 28, 2022, November 30, 2021, February 28, 2021 and February 29, 2020.
U.S. GAAP Operating Expenses
Operating expenses decreased by $88 million, or 133.3%, to $(22) million, or (11.9%) of revenue, in the fourth quarter of fiscal 2022, compared to $66 million, or 35.9% of revenue, in the third quarter of fiscal 2022. The decrease was primarily attributable to the difference between the Q4 Fiscal 2022 Debentures Fair Value Adjustment and the fair value adjustment related to the Debentures incurred in the third quarter of fiscal 2022 of $55 million, a benefit of $10 million in HHBRP funding, a decrease of $10 million in amortization expense and a decrease of $9 million in variable incentive plan costs.
Operating expenses decreased by $487 million, or 104.7%, to $(22) million, or (11.9%) of revenue, in the fourth quarter of fiscal 2022, compared to $465 million, or 221.4% of revenue, in the fourth quarter of fiscal 2021. The decrease was primarily attributable to the difference between the Q4 Fiscal 2022 Debentures Fair Value Adjustment and the fair value adjustment related to the Debentures incurred in the fourth quarter of fiscal 2021 of $423 million, an impairment of long-lived assets of $22 million in the fourth quarter of fiscal 2021 which did not recur, a decrease of $13 million in amortization expense, a decrease of $12 million in stock compensation expense and a decrease of $9 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price.
Adjusted Operating Expenses
Adjusted operating expenses decreased by $25 million, or 17.6%, to $117 million in the fourth quarter of fiscal 2022 compared to $142 million in the third quarter of fiscal 2022. The decrease was primarily attributable to a benefit of $10 million in HHBRP funding, a decrease of $9 million in variable incentive plan costs, a decrease of $3 million in amortization expense and a decrease of $2 million in salaries and benefits expenses.
Adjusted operating expenses decreased by $20 million, or 14.6%, to $117 million in the fourth quarter of fiscal 2022, compared to $137 million in the fourth quarter of fiscal 2021. The decrease was primarily attributable to a decrease of $9 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price, a decrease of $6 million in legal expenses, a decrease of $4 million in consulting fees and a decrease of $3 million in amortization expense.
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits costs for technical personnel, new product development costs, travel expenses, office and building costs, infrastructure costs and other employee costs.
Research and development expenses decreased by $1 million, or 2.1%, to $47 million in the fourth quarter of fiscal 2022 compared to $48 million in the fourth quarter of fiscal 2021. The decrease was primarily attributable to a decrease of $2 million in salaries and benefits expense and a decrease of $1 million in facilities costs, partially offset by an increase of $3 million in variable incentive plan costs.
Adjusted research and development expenses were $45 million in the fourth quarter of fiscal 2022, consistent with $45 million in the fourth quarter of fiscal 2021.
Selling, Marketing and Administration Expenses
Selling, marketing and administration expenses consist primarily of marketing, advertising and promotion, salaries and benefits, external advisory fees, information technology costs, office and related staffing infrastructure costs and travel expenses.
Selling, marketing and administration expenses decreased by $28 million, or 30.4%, to $64 million in the fourth quarter of fiscal 2022 compared to $92 million in the fourth quarter of fiscal 2021. This decrease was primarily attributable to a decrease of $11 million in stock compensation expense, a decrease of $9 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price and a decrease of $6 million in legal expenses.
Adjusted selling, marketing and administration expenses decreased by $17 million, or 21.5%, to $62 million in the fourth quarter of fiscal 2022 compared to $79 million in the fourth quarter of fiscal 2021. This decrease was primarily due a decrease of $9 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price, a decrease of $6 million in legal expenses and a decrease of $4 million on consulting fees.
Amortization Expense
The table below presents a comparison of amortization expense relating to property, plant and equipment and intangible assets recorded as amortization or cost of sales for the quarter ended February 28, 2022 compared to the quarter ended February 28, 2021 and for the quarter ended February 28, 2021 compared to the quarter ended February 29, 2020. Intangible assets are comprised of patents, licenses and acquired technology.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended (in millions) |
| Included in Operating Expense |
| February 28, 2022 | | February 28, 2021 | | Change | | | | February 29, 2020 | | Change |
Property, plant and equipment | $ | 2 | | | $ | 4 | | | $ | (2) | | | | | $ | 4 | | | $ | — | |
Intangible assets | 30 | | | 41 | | | (11) | | | | | 44 | | | (3) | |
Total | $ | 32 | | | $ | 45 | | | $ | (13) | | | | | $ | 48 | | | $ | (3) | |
| | | | | | | | | | | |
| Included in Cost of Sales |
| February 28, 2022 | | February 28, 2021 | | Change | | | | February 29, 2020 | | Change |
Property, plant and equipment | $ | 1 | | | $ | 1 | | | $ | — | | | | | $ | 2 | | | $ | (1) | |
Intangible assets | 1 | | | 3 | | | (2) | | | | | 2 | | | 1 | |
Total | $ | 2 | | | $ | 4 | | | $ | (2) | | | | | $ | 4 | | | $ | — | |
Amortization included in Operating Expense
Amortization expense relating to certain property, plant and equipment and certain intangible assets decreased by $13 million to $32 million for the fourth quarter of fiscal 2022 compared to $45 million for the fourth quarter of fiscal 2021. The decrease in amortization expense was due to the lower cost base of assets.
Adjusted amortization expense decreased by $3 million to $10 million in the fourth quarter of fiscal 2022 compared to $13 million in the fourth quarter of fiscal 2021 due to the reasons described above on a U.S. GAAP basis.
Amortization included in Cost of Sales
Amortization expense relating to certain property, plant and equipment and certain intangible assets employed in the Company’s service operations decreased by $2 million to $2 million in the fourth quarter of fiscal 2022 compared to $4 million in the fourth quarter of fiscal 2021 due to the lower cost base of assets.
Investment Income (Loss), Net
Investment income (loss), net decreased by $1 million to investment loss, net of $1 million in the fourth quarter of fiscal 2022, compared to investment income, net of nil in the fourth quarter of fiscal 2021. The decrease is primarily due to a decrease in unrealized gains on public equity securities in the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021.
Income Taxes
For the fourth quarter of fiscal 2022, the Company’s net effective income tax expense rate was approximately 1%, compared to a net effective income tax expense rate of approximately 1% for the same period in the prior fiscal year. The Company’s net effective income tax rate reflects the change in unrecognized income tax benefits, if any, and the fact that the Company has a significant valuation allowance against its deferred tax assets, and in particular, the change in fair value of the Debentures, amongst other items, was offset by a corresponding adjustment of the valuation allowance. The Company’s net effective income tax rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates.
Net Income (Loss)
The Company’s net income for the fourth quarter of fiscal 2022 was $144 million, or $0.25 basic earnings per share and $0.03 diluted loss per share on a U.S. GAAP basis, reflecting an increase in net income of $459 million compared to a net loss of $315 million, or $0.56 basic and diluted loss per share, in the fourth quarter of fiscal 2021. The increase in net income of $459 million was primarily due to a decrease in operating expenses due to the decrease in Debentures fair value adjustment and impairment of long-lived assets in the fourth quarter of fiscal 2021 that did not recur, as described above in “Operating Expenses”, partially offset by a decrease in revenue as described above in “Revenue by Segment” and a decrease in gross margin percentage as described above in “Consolidated Gross Margin Percentage”.
Adjusted net income was $6 million in the fourth quarter of fiscal 2022 compared to $14 million in the fourth quarter of fiscal 2021, reflecting a decrease in adjusted net income of $8 million primarily due to a decrease in revenue as described above in “Revenue by Segment” and a decrease in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”, partially offset by a decrease in operating expenses, as described above in “Operating Expenses”.
The weighted average number of shares outstanding was 576 million common shares for basic earnings per share and 637 million common shares for diluted loss per share for the fourth quarter of fiscal 2022. The weighted average number of shares outstanding was 566 million common shares for basic and diluted loss per share for the fourth quarter of fiscal 2021.
Financial Condition
Liquidity and Capital Resources
Cash, cash equivalents, and investments decreased by $34 million to $770 million as at February 28, 2022 from $804 million as at February 28, 2021, primarily as a result of changes in working capital, partially offset by investment gains from non-marketable securities. The majority of the Company’s cash, cash equivalents, and investments are denominated in U.S. dollars as at February 28, 2022.
A comparative summary of cash, cash equivalents, and investments is set out below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As at (in millions) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Cash and cash equivalents | $ | 378 | | | $ | 214 | | | $ | 164 | | | $ | 377 | | | $ | (163) | |
Restricted cash equivalents and restricted short-term investments | 28 | | | 28 | | | — | | | 49 | | | (21) | |
Short-term investments | 334 | | | 525 | | | (191) | | | 532 | | | (7) | |
Long-term investments | 30 | | | 37 | | | (7) | | | 32 | | | 5 | |
Cash, cash equivalents, and investments | $ | 770 | | | $ | 804 | | | $ | (34) | | | $ | 990 | | | $ | (186) | |
The table below summarizes the current assets, current liabilities, and working capital of the Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As at (in millions) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Current assets | $ | 1,043 | | | $ | 1,006 | | | $ | 37 | | | $ | 1,196 | | | $ | (190) | |
Current liabilities | 397 | | | 429 | | | (32) | | | 1,121 | | | (692) | |
Working capital | $ | 646 | | | $ | 577 | | | $ | 69 | | | $ | 75 | | | $ | 502 | |
Current Assets
The increase in current assets of $37 million at the end of fiscal 2022 from the end of fiscal 2021 was primarily due to an increase in cash and cash equivalents of $164 million and an increase in other current assets of $109 million, partially offset by decreases in short term investments of $191 million, accounts receivable, net of allowance of $44 million and income taxes receivable of $1 million.
At February 28, 2022, other current assets was $159 million, an increase of $109 million from February 28, 2021. The increase is primarily due to intellectual property relating to the patent sale agreement of $118 million, partially offset by a decrease in prepaid maintenance of $3 million and decrease in deferred commissions of $3 million.
At February 28, 2022, accounts receivable, net of allowance was $138 million, a decrease of $44 million from February 28, 2021. The decrease was primarily due to lower revenue recognized over the three months ended February 28, 2022 compared to the three months ended February 29, 2020 and a decrease in days sales outstanding to 67 days at the end of the fourth quarter of fiscal 2022 from 85 days at the end of the fourth quarter of fiscal 2021.
At February 28, 2022, other receivables was $25 million, consistent with $25 million as at February 28, 2021. The increase in SIF claims of $2 million was offset by a decrease in CEWS program of $2 million.
At February 28, 2022, income taxes receivable was $9 million, a decrease of $1 million from February 28, 2021. The decrease was primarily due to the refund received from tax loss carry backs.
Current Liabilities
The decrease in current liabilities of $32 million at the end of fiscal 2022 from the end of fiscal 2021 was primarily due to a decrease in accrued liabilities of $21 million, a decrease in deferred revenue, current of $18 million, partially offset by an increase in income taxes payable of $5 million and an increase in accounts payable of $2 million.
Accrued liabilities was $157 million, reflecting a decrease of $21 million compared to February 28, 2021, which was primarily attributable to a decrease of $6 million in the liability associated with the CEO contingent cash award, a decrease of $5 million in current operating lease liabilities, a decrease of $3 million in the Company’s deferred share unit liability due to a decrease in the Company’s stock price, partially offset by an increase of $4 million in variable incentive plan costs.
Deferred revenue, current was $207 million, which reflects a decrease of $18 million compared to February 28, 2021 that was attributable to a $29 million decrease in deferred revenue, current related to BlackBerry Spark partially offset by a $12 million increase in deferred revenue, current related to BlackBerry QNX.
Income taxes payable was $11 million, reflecting an increase of $5 million compared to February 28, 2021, which was primarily due to income earned in taxable jurisdictions.
As at February 28, 2022, accounts payable were $22 million, reflecting an increase of $2 million from February 28, 2021, which was primarily due to timing of payments of accounts payable.
Cash flows for the fiscal year ended February 28, 2022 compared to the fiscal year ended February 28, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Years Ended (in millions) |
| February 28, 2022 | | February 28, 2021 | | Change | | February 29, 2020 | | Change |
Net cash flows provided by (used in): | | | | | | | | | |
Operating activities | $ | (28) | | | $ | 82 | | | $ | (110) | | | $ | 26 | | | $ | 56 | |
Investing activities | 207 | | | (65) | | | 272 | | | (188) | | | 123 | |
Financing activities | 10 | | | (227) | | | 237 | | | 7 | | | (234) | |
Effect of foreign exchange gain (loss) on cash and cash equivalents | (1) | | | 2 | | | (3) | | | (1) | | | 3 | |
Net increase (decrease) in cash and cash equivalents | $ | 188 | | | $ | (208) | | | $ | 396 | | | $ | (156) | | | $ | (52) | |
Operating Activities
The decrease in net cash flows provided by operating activities of $110 million primarily reflects the decrease in revenue and net changes in working capital.
Investing Activities
During the fiscal year ended February 28, 2022, cash flows provided by investing activities were $207 million and included cash provided by transactions involving the acquisitions of restricted short-term, short-term and long-term investments, net of the proceeds on sale or maturity in the amount of $211 million and a distribution from a non-marketable equity investment without readily determinable fair value in the amount of $35 million, partially offset by intangible asset additions of $31 million, and acquisitions of property, plant and equipment of $8 million. During fiscal 2021, cash flows used in investing activities were $65 million and included cash flows used in transactions involving the acquisitions of short-term and long-term investments, net of the proceeds on sale or maturity in the amount of $21 million, intangible asset additions of $36 million, and acquisitions of property, plant and equipment of $8 million.
Financing Activities
The increase in cash flows provided by financing activities was $237 million for fiscal 2022 due to the redemption of the 3.75% Debentures and issuance of the 1.75% Debentures in fiscal 2021, partially offset by a decrease in common shares issued for stock options exercised.
Debenture Financing and Other Funding Sources
See Note 6 to the Consolidated Financial Statements for a description of the Debentures.
The Company has $27 million in collateralized outstanding letters of credit in support of certain leasing arrangements entered into in the ordinary course of business. See Note 3 to the Consolidated Financial Statements for further information concerning the Company’s restricted cash and restricted short-term investments.
Cash, cash equivalents, and investments were approximately $770 million as at February 28, 2022. The Company’s management remains focused on maintaining appropriate cash balances, efficiently managing working capital balances and managing the liquidity needs of the business. Based on its current financial projections, the Company believes its financial resources, together with expected future operating cash generating and operating expense reduction activities and access to other potential financing arrangements, should be sufficient to meet funding requirements for current financial commitments and future operating expenditures not yet committed, and should provide the necessary financial capacity for the foreseeable future.
Contractual and Other Obligations
The following table sets out aggregate information about the Company’s contractual and other obligations and the periods in which payments are due as at February 28, 2022:
| | | | | | | | | | | | | | | | | | | | | |
| (in millions) |
| | | | | | | |
| Total | | Short-term (next 12 months) | | Long-term (>12 months) | | | | |
Operating lease obligations | $ | 101 | | | $ | 31 | | | $ | 70 | | | | | |
Purchase obligations and commitments | 125 | | | 85 | | | 40 | | | | | |
Debt interest and principal payments | 377 | | | 6 | | | 371 | | | | | |
Total | $ | 603 | | | $ | 122 | | | $ | 481 | | | | | |
Contractual and other obligations amounted to approximately $603 million as at February 28, 2022, including future principal and interest payments of $377 million on the 1.75% Debentures and operating lease obligations of $101 million. The remaining balance consists of purchase orders for goods and services utilized in the operations of the Company. Total aggregate contractual obligations as at February 28, 2022 decreased by approximately $73 million as compared to the February 28, 2021 balance of approximately $676 million, which was attributable to decreases in operating lease obligations and purchase obligations and commitments.
The Company does not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or under applicable Canadian securities laws.
Accounting Policies and Critical Accounting Estimates
Accounting Policies
See Note 1 to the Consolidated Financial Statements for a description of the Company’s significant accounting policies and the adoption of the new standard in accounting for income taxes.
See Note 2 to the Consolidated Financial Statements for accounting pronouncements issued but not yet adopted.
Critical Accounting Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates relate to revenue-related estimates including variable consideration, standalone selling price (“SSP”), estimated customer life, if control of licenses to intellectual property has transferred, the value of non-cash consideration, right of return and customer incentive commitments, fair value of reporting units in relation to actual or potential goodwill impairment, fair value of the Debentures, fair value of share-based liability award, fair value of long-lived assets in relation to actual or potential impairment, the Company’s long-lived asset groupings, useful lives of property, plant and equipment and intangible assets, provision for income taxes, realization of deferred income tax assets and the related components of the valuation allowance, allowance for credit losses, incremental borrowing rate in determining the present value of lease liabilities and the determination of reserves for various litigation claims. Actual results could differ from these estimates, which were based upon circumstances that existed as of the date of the consolidated financial statements, February 28, 2022.
The Company’s critical accounting estimates have been reviewed and discussed with the Company’s Audit & Risk Management Committee and are set out below. Except as noted, there have not been any changes to the critical accounting estimates made by the Company, during the past three fiscal years.
Valuation of Long-Lived Assets
The LLA impairment test prescribed by U.S. GAAP requires the Company to identify its asset groups and test impairment of each asset group separately. To conduct the LLA impairment test, the asset group is tested for recoverability using undiscounted cash flows over the remaining useful life of the primary asset. If forecasted net cash flows are less than the carrying value of the asset group, an impairment charge is measured by comparing the fair value of the asset group to its carrying value. Determining the Company’s asset groups and related primary assets requires significant judgment by management. Different judgments could yield different results.
The Company’s determination of its asset groups, its primary asset and its remaining useful life, and estimated cash flows are significant factors in assessing the recoverability of the Company’s assets for the purposes of LLA impairment testing. The Company’s share price can be affected by, among other things, changes in industry or market conditions, including the effect of competition, changes in the Company’s results of operations, changes in the Company’s forecasts or market expectations
relating to future results, and the Company’s strategic initiatives and the market’s assessment of any such factors. See Part 1, Item 1A “Risk Factors - The market price of the Company’s common shares is volatile”. The current macroeconomic environment and competitive dynamics continue to be challenging to the Company’s business and the Company cannot be certain of the duration of these conditions and their potential impact on the Company’s future financial results and cash flows. A decline in the Company’s performance, the Company’s market capitalization and future changes to the Company’s assumptions and estimates used in the LLA impairment test, particularly the expected future cash flows, remaining useful life of the primary asset and terminal value of the asset group, may result in further impairment charges in future periods of some or all of the assets on the Company’s balance sheet. Although it does not affect the Company’s cash flow, an impairment charge to earnings has the effect of decreasing the Company’s earnings or increasing the Company’s losses, as the case may be. The Company’s share price could also be adversely affected by the Company’s recorded LLA impairment charges.
The Company used various valuation techniques to determine the fair values of its assets to measure and allocate impairment. Techniques related to capital equipment and intangible assets included the direct capitalization method, market comparable transactions, the replacement cost method, discounted cash flow analysis, as well as the relief from royalty and excess earnings valuation methods. Determining valuations using these valuation techniques requires significant judgment and assumptions by management. Different judgments could yield different results.
Valuation of Goodwill Reporting Units
Goodwill represents the excess of the acquisition price in a business combination over the fair value of identifiable net assets acquired. Goodwill is allocated at the date of the business combination. Goodwill is not amortized but is tested for impairment annually on December 31 or more frequently if events or changes in circumstances indicate the asset may be impaired. These events and circumstances may include a significant change in legal factors or in the business climate, a significant decline in the Company’s share price, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant disposal activity and the testing of recoverability for a significant asset group.
On March 1, 2020, the Company adopted Accounting Standards Update 2017-04 on the topic of Intangibles - Goodwill and Other (ASC 350) (“ASU 2017-40”). ASU 2017-04 simplifies the subsequent measurement of goodwill, enabling the Company to carry out its goodwill impairment test in one step, instead of two steps. In the test, the carrying value of the reporting unit, including goodwill, was compared with its fair value. The estimated fair value was determined utilizing multiple approaches based on the nature of the reporting units being valued. In its analysis, the Company utilized multiple valuation techniques, including the income approach using a discounted future cash flow model, market-based approaches, and the asset value approach. The analysis requires significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rates of revenue growth for the Company’s reporting units, estimation of the useful life over which cash flows will occur, terminal growth rates, profitability measures, and determination of the discount rates for the reporting units. The carrying value of the Company’s assets was assigned to reporting units using reasonable methodologies based on the asset type. When the carrying value of a reporting unit exceeds its fair value, goodwill of the reporting unit is considered to be impaired and written down to its fair value. Different judgments could yield different results. Events and circumstances resulted in an additional goodwill impairment test being conducted as at May 31, 2020, in addition to the Company’s annual impairment test.
Prior to the adoption of ASU 2017-04, the Company’s annual impairment test was carried out in two steps. In the first step, the carrying value of the reporting unit, including goodwill, was compared with its fair value. The estimated fair value was determined utilizing multiple approaches based on the nature of the reporting units being valued. In its analysis, the Company utilized multiple valuation techniques, including the income approach, discounted future cash flows, market-based approaches, and the asset value approach. The analysis requires significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of revenue growth for our reporting units, estimation of the useful life over which cash flows will occur, terminal growth rate, profitability measures, and determination of the discount rates for the reporting units. The carrying value of the Company’s assets was assigned to reporting units using reasonable methodologies based on the asset type. When the carrying value of a reporting unit exceeded its fair value, goodwill of the reporting unit was considered to be impaired and the second step was necessary. Different judgments could have yielded different results. In fiscal 2020, the Company disaggregated one reporting unit and goodwill was assigned to the disaggregated reporting units based upon the relative fair value allocation approach.
In the second step, the implied fair value of the reporting unit’s goodwill was compared with its carrying value to measure the amount of the impairment loss, if any. The second step involved significant judgment in the selection of assumptions necessary to arrive at an implied fair value of goodwill. Different judgments could have yielded different results.
Valuation Allowance Against Deferred Tax Assets
The Company regularly assesses the need for a valuation allowance against its deferred tax assets. A valuation allowance is required for deferred tax assets if it is more likely than not that all or some portion of the asset will not be realized. All available evidence, both positive and negative, that may affect the realization of deferred tax assets must be identified and considered in
determining the appropriate amount of the valuation allowance. Additionally, for interim periods, the estimated annual effective tax rate should include the valuation allowance for current year changes in temporary differences and losses or income arising during the year. For interim periods, the Company needs to consider the valuation allowance that it expects to recognize at the end of the fiscal year as part of the estimated annual effective tax rate. During interim quarters, the Company uses estimates including pre-tax results and ending position of temporary differences as at the end of the fiscal year to estimate the valuation allowance that it expects to recognize at the end of the fiscal year. This accounting treatment has no effect on the Company’s actual ability to utilize deferred tax assets to reduce future cash tax payments. Different judgments could yield different results. See “Results of Operations - Fiscal year ended February 28, 2022 compared to fiscal year ended February 28, 2021 - Income Taxes” and “Results of Operations - Three months ended February 28, 2022 compared to three months ended February 28, 2021 - Income Taxes”.
Revenue Recognition
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 fair value of non-cash consideration at contract inception. The Company uses an independent third-party valuator for the fair value of non-cash consideration.
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 in certain agreements if the Company is the principal or agent in the arrangement. The Company considers factors such as, but not limited to, which party can direct the usage of the product or service, which party obtains substantially all the remaining benefits and which party has the ability to establish the selling price.
Significant 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| | | | | | | | | | | | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
| | | Page No. |
Report of Independent Registered Public Accounting Firm | (PCAOB ID 271) | | |
| | | | |
Report of Independent Registered Public Accounting Firm | (PCAOB ID 1263) | | |
| | | | |
Consolidated Balance Sheets | | | |
| For the Years Ended February 28, 2022 and February 28, 2021 | | |
| | | | |
Consolidated Statements of Shareholders’ Equity | | | |
| For the Years Ended February 28, 2022, February 28, 2021 and February 29, 2020 | | |
| | | | |
Consolidated Statements of Operations | | | |
| For the Years Ended February 28, 2022, February 28, 2021 and February 29, 2020 | | |
| | | | |
Consolidated Statements of Comprehensive Income (Loss) | | | |
| For the Years Ended February 28, 2022, February 28, 2021 and February 29, 2020 | | |
| | | | |
Consolidated Statements of Cash Flows | | | |
| For the Years Ended February 28, 2022, February 28, 2021 and February 29, 2020 | | |
| | | | |
Notes to the Consolidated Financial Statements | | | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of BlackBerry Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of BlackBerry Limited and its subsidiaries (together, the Company) as of February 28, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of February 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for the allowance for credit losses as of March 1, 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill impairment test for the selected reporting units using the income approach
As described in Notes 1, 3 and 4 to the consolidated financial statements, the Company’s goodwill balance was $844 million as of February 28, 2022. A significant portion of the goodwill balance related to certain reporting units for which the income approach was used as the primary basis for determining fair value (the Selected Reporting Units). Management conducts a goodwill impairment test as of December 31 of each year, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test is performed in one step by comparing the fair value of a reporting unit to its carrying value, including goodwill. When the carrying value of a reporting unit exceeds its fair value, goodwill of the reporting unit is considered to be impaired and written down to its fair value. The estimated fair values of reporting units were determined utilizing multiple valuation techniques, which included the income approach using a discounted future cash flow model, market-based approaches, and the asset value approach. Estimating the fair values of reporting units using discounted future cash flow models requires significant judgment by management, including estimation of future cash flows, which is dependent on estimation of the long-term rates of revenue growth, terminal growth rates, profitability measures, and determination of the discount rates. Based on the result of the annual impairment test, management’s estimates indicated the fair values of all the reporting units substantially exceeded their carrying values and no goodwill impairment charge needed to be recorded.
The principal considerations for our determination that performing procedures relating to the goodwill impairment test for the Selected Reporting Units using the income approach is a critical audit matter are (i) the significant judgment by management when determining the fair values of the Selected Reporting Units using the income approach; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to long-term rates of revenue growth, terminal growth rates, profitability measures, and the discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including controls over the determination of the fair values of the Company’s reporting units. These procedures over the determination of the fair values of the Selected Reporting Units also included, among others, (i) testing management’s process for determining the fair values; (ii) testing the completeness and accuracy of underlying data used in the discounted future cash flow models; (iii) evaluating the appropriateness of the discounted future cash flow models; and (iv) evaluating the reasonableness of the significant assumptions used by management related to long-term rates of revenue growth, terminal growth rates, profitability measures and the discount rates. Evaluating management’s assumptions related to long-term rates of revenue growth and profitability measures involved assessing whether the assumptions used by management were reasonable considering consistency with (i) current and past performance of the Selected
Reporting Units; (ii) external market and industry data; and (iii) evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the (i) appropriateness of the Company’s discounted future cash flow models; and (ii) reasonableness of the discount rates and terminal growth rates.
Revenue recognition – Intellectual property licensing
As described in Notes 1 and 12 to the consolidated financial statements, $63 million of the Company’s total revenues for the year ended February 28, 2022 was generated from Licensing and Other, which includes revenue from intellectual property licensing arrangements. Management examines intellectual property agreements on a case-by-case basis to determine whether they contain distinct performance obligations with standalone functionality and whether the Company is the principal or agent in the transaction. As disclosed by management, significant judgment is applied in assessing contractual terms which could impact the timing and amount of revenue recognition.
The principal considerations for our determination that performing procedures relating to the Revenue recognition – Intellectual property licensing is a critical audit matter are (i) significant judgment by management in assessing contractual terms which could impact the timing and amount of revenue recognition; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to the timing and amount of revenue recognition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the assessment of contractual terms in the intellectual property agreements which impact the timing and amount of revenue recognition. These procedures also included, among others, (i) testing the completeness and accuracy of management’s identification of contractual terms by examining intellectual property agreements on a sample basis; and (ii) testing management's process for determining the appropriate amount and timing of revenue recognition based on the contractual terms identified in the intellectual property agreements on a sample basis.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
April 1, 2022
We have served as the Company's auditor since 2020.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of BlackBerry Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of BlackBerry Limited (the “Company”) as of February 29, 2020, comprised of the consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year ended February 29, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated results of operations and cash flows of the Company for the year ended February 29, 2020, in conformity with United States generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/Ernst & Young LLP
Chartered Professional Accountants
We served as the Company's auditor from 1997 to 2020.
Waterloo, Canada
April 6, 2020, except for note 12 which is as of April 1, 2022
BlackBerry Limited
Incorporated under the Laws of Ontario
(United States dollars, in millions)
Consolidated Balance Sheets | | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 |
Assets | | | |
Current | | | |
Cash and cash equivalents (note 3) | $ | 378 | | | $ | 214 | |
Short-term investments (note 3) | 334 | | | 525 | |
Accounts receivable, net of allowance of $4 and $10, respectively (note 4) | 138 | | | 182 | |
Other receivables (note 4) | 25 | | | 25 | |
| | | |
Income taxes receivable | 9 | | | 10 | |
Other current assets (note 4) | 159 | | | 50 | |
| | | |
| 1,043 | | | 1,006 | |
Restricted cash equivalents and restricted short-term investments (note 3) | 28 | | | 28 | |
Long-term investments (note 3) | 30 | | | 37 | |
Other long-term assets (note 4) | 9 | | | 16 | |
| | | |
Operating lease right-of-use assets, net (note 11) | 50 | | | 63 | |
Property, plant and equipment, net (note 4) | 41 | | | 48 | |
Goodwill (note 4) | 844 | | | 849 | |
Intangible assets, net (note 4) | 522 | | | 771 | |
| | | |
| $ | 2,567 | | | $ | 2,818 | |
Liabilities | | | |
Current | | | |
Accounts payable | $ | 22 | | | $ | 20 | |
Accrued liabilities (note 4) | 157 | | | 178 | |
Income taxes payable (note 5) | 11 | | | 6 | |
| | | |
Deferred revenue, current (note 12) | 207 | | | 225 | |
| 397 | | | 429 | |
Deferred revenue, non-current (note 12) | 37 | | | 69 | |
Operating lease liabilities (note 11) | 66 | | | 90 | |
Other long-term liabilities | 4 | | | 6 | |
Long-term debentures (note 6) | 507 | | | 720 | |
| | | |
| | | |
| 1,011 | | | 1,314 | |
Commitments and contingencies (note 10) | | | |
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 - 576,227,898 voting common shares (February 28, 2021 - 565,505,328) | 2,869 | | | 2,823 | |
Deficit | (1,294) | | | (1,306) | |
Accumulated other comprehensive loss (note 9) | (19) | | | (13) | |
| 1,556 | | | 1,504 | |
| $ | 2,567 | | | $ | 2,818 | |
See notes to consolidated financial statements.
On behalf of the Board: | | | | | |
John S. Chen | Lisa Disbrow |
Director | Director |
BlackBerry Limited
(United States dollars, in millions)
Consolidated Statements of Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | |
| Capital Stock and Additional Paid-in Capital | | Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance as at February 28, 2019 | $ | 2,688 | | | $ | (32) | | | $ | (20) | | | $ | 2,636 | |
Net loss | — | | | (152) | | | — | | | (152) | |
Other comprehensive loss | — | | | — | | | (13) | | | (13) | |
Cumulative impact of adoption of ASC 842 | — | | | (14) | | | — | | | (14) | |
Stock-based compensation (note 7) | 63 | | | — | | | — | | | 63 | |
| | | | | | | |
| | | | | | | |
Shares issued: | | | | | | | |
Exercise of stock options (note 7) | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
Employee share purchase plan (note 7) | 6 | | | — | | | — | | | 6 | |
Balance as at February 29, 2020 | 2,760 | | | (198) | | | (33) | | | 2,529 | |
Net loss | — | | | (1,104) | | | — | | | (1,104) | |
Other comprehensive income | — | | | — | | | 20 | | | 20 | |
Cumulative impact of adoption of ASC 326 | — | | | (4) | | | — | | | (4) | |
Stock-based compensation (note 7) | 44 | | | — | | | — | | | 44 | |
Shares issued: | | | | | | | |
Exercise of stock options (note 7) | 12 | | | — | | | — | | | 12 | |
| | | | | | | |
| | | | | | | |
Employee share purchase plan (note 7) | 7 | | | — | | | — | | | 7 | |
Balance as at February 28, 2021 | 2,823 | | | (1,306) | | | (13) | | | 1,504 | |
Net income | — | | | 12 | | | — | | | 12 | |
Other comprehensive loss | — | | | — | | | (6) | | | (6) | |
| | | | | | | |
Stock-based compensation (note 7) | 36 | | | — | | | — | | | 36 | |
Shares issued: | | | | | | | |
Exercise of stock options (note 7) | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
Employee share purchase plan (note 7) | 7 | | | — | | | — | | | 7 | |
Balance as at February 28, 2022 | $ | 2,869 | | | $ | (1,294) | | | $ | (19) | | | $ | 1,556 | |
See notes to consolidated financial statements.
BlackBerry Limited
(United States dollars, in millions, except per share data)
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Revenue (note 12) | $ | 718 | | | $ | 893 | | | $ | 1,040 | |
Cost of sales | 251 | | | 250 | | | 277 | |
| | | | | |
Gross margin | 467 | | | 643 | | | 763 | |
| | | | | |
Operating expenses | | | | | |
Research and development | 219 | | | 215 | | | 259 | |
Selling, marketing and administration | 297 | | | 344 | | | 493 | |
Amortization | 165 | | | 182 | | | 194 | |
Impairment of goodwill (note 3) | — | | | 594 | | | 22 | |
Impairment of long-lived assets (note 3) | — | | | 43 | | | 10 | |
| | | | | |
Debentures fair value adjustment (note 6) | (212) | | | 372 | | | (66) | |
| | | | | |
| 469 | | | 1,750 | | | 912 | |
Operating loss | (2) | | | (1,107) | | | (149) | |
Investment income (loss), net (note 3 and note 6) | 21 | | | (6) | | | 1 | |
| | | | | |
Income (loss) before income taxes | 19 | | | (1,113) | | | (148) | |
Provision for (recovery of) income taxes (note 5) | 7 | | | (9) | | | 4 | |
| | | | | |
| | | | | |
Net income (loss) | $ | 12 | | | $ | (1,104) | | | $ | (152) | |
Earnings (loss) per share (note 8) | | | | | |
Basic | $ | 0.02 | | | $ | (1.97) | | | $ | (0.27) | |
Diluted | $ | (0.31) | | | $ | (1.97) | | | $ | (0.32) | |
| | | | | |
| | | | | |
See notes to consolidated financial statements.
BlackBerry Limited
(United States dollars, in millions)
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Net income (loss) | $ | 12 | | | $ | (1,104) | | | $ | (152) | |
Other comprehensive income (loss) | | | | | |
Net change in unrealized losses on available-for-sale investments (note 9) | — | | | — | | | (2) | |
Net change in fair value and amounts reclassified to net income (loss) from derivatives designated as cash flow hedges during the year (note 9) | (1) | | | 2 | | | (1) | |
| | | | | |
Foreign currency translation adjustment | (6) | | | 5 | | | (3) | |
| | | | | |
Net change in fair value from instrument-specific credit risk on the Debentures during the year (note 6) | 1 | | | 13 | | | (7) | |
| | | | | |
Other comprehensive income (loss) | (6) | | | 20 | | | (13) | |
Comprehensive income (loss) | $ | 6 | | | $ | (1,084) | | | $ | (165) | |
See notes to consolidated financial statements.
BlackBerry Limited
(United States dollars, in millions)
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Cash flows from operating activities | | | | | |
| | | | | |
| | | | | |
Net income (loss) | $ | 12 | | | $ | (1,104) | | | $ | (152) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
Amortization | 176 | | | 198 | | | 212 | |
| | | | | |
Stock-based compensation | 36 | | | 44 | | | 63 | |
Gain on sale of investment (note 3) | (22) | | | — | | | — | |
Impairment of goodwill (note 3) | — | | | 594 | | | 22 | |
Impairment of long-lived assets (note 3) | — | | | 43 | | | 10 | |
| | | | | |
Non-cash consideration received from contracts with customers | — | | | — | | | (8) | |
| | | | | |
Debentures fair value adjustment (note 6) | (212) | | | 372 | | | (66) | |
| | | | | |
| | | | | |
Operating leases | (16) | | | (4) | | | (9) | |
Other | (3) | | | (5) | | | 12 | |
Net changes in working capital items | | | | | |
Accounts receivable, net of allowance | 44 | | | 29 | | | 18 | |
Other receivables | — | | | (11) | | | 5 | |
| | | | | |
Income taxes receivable | 1 | | | (4) | | | 3 | |
Other assets | 15 | | | 55 | | | (35) | |
Accounts payable | 2 | | | (11) | | | (17) | |
Accrued liabilities | (16) | | | (20) | | | (15) | |
Income taxes payable | 5 | | | (15) | | | 1 | |
Deferred revenue | (50) | | | (79) | | | (18) | |
Net cash provided by (used in) operating activities | (28) | | | 82 | | | 26 | |
Cash flows from investing activities | | | | | |
Acquisition of long-term investments | (1) | | | (5) | | | (1) | |
Proceeds on sale, maturity or distribution from long-term investments | 35 | | | — | | | 19 | |
Acquisition of property, plant and equipment | (8) | | | (8) | | | (12) | |
| | | | | |
Acquisition of intangible assets | (31) | | | (36) | | | (32) | |
Business acquisitions, net of cash acquired | — | | | — | | | 1 | |
Acquisition of short-term investments | (916) | | | (1,039) | | | (1,180) | |
Acquisition of restricted short-term investments | — | | | (24) | | | — | |
Proceeds on sale or maturity of restricted short-term investments | 24 | | | — | | | — | |
Proceeds on sale or maturity of short-term investments | 1,104 | | | 1,047 | | | 1,017 | |
| | | | | |
| | | | | |
Net cash provided by (used in) investing activities | 207 | | | (65) | | | (188) | |
Cash flows from financing activities | | | | | |
Issuance of common shares | 10 | | | 19 | | | 9 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Payment of finance lease liability | — | | | (1) | | | (2) | |
Repurchase of 3.75% Debentures | — | | | (610) | | | — | |
Issuance of 1.75% Debentures | — | | | 365 | | | — | |
| | | | | |
Net cash provided by (used in) financing activities | 10 | | | (227) | | | 7 | |
Effect of foreign exchange gain (loss) on cash, cash equivalents, restricted cash, and restricted cash equivalents | (1) | | | 2 | | | (1) | |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents during the period | 188 | | | (208) | | | (156) | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | 218 | | | 426 | | | 582 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | $ | 406 | | | $ | 218 | | | $ | 426 | |
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
1. BLACKBERRY LIMITED AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
BlackBerry Limited (the “Company”) provides intelligent security software and services to enterprises and governments around the world. The Company secures more than 500 million endpoints including more than 195 million vehicles. Based in Waterloo, Ontario, the Company leverages artificial intelligence and machine learning to deliver innovative solutions in the areas of cybersecurity, safety and data privacy, and is a leader in the areas of endpoint security, endpoint management, encryption, and embedded systems. The Company’s common shares trade under the ticker symbol “BB” on the New York Stock Exchange and the Toronto Stock Exchange.
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of all subsidiaries of the Company with intercompany transactions and balances eliminated on consolidation. All of the Company’s subsidiaries are wholly owned. These consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (“U.S. GAAP”) on a basis consistent for all periods presented, except as described in Note 2.
Certain of the comparative figures have been reclassified to conform to the current year’s presentation.
In the first quarter of fiscal 2022, the Chief Operating Decision Maker (“CODM”), who is the Executive Chair and Chief Executive Officer (“CEO”) of the Company, began making decisions and assessing the performance of the Company using three operating segments, whereas the CODM previously made decisions and assessed the performance of the Company as a single operating segment. As a result of the internal reporting reorganization, the Company is now organized and managed as three reportable operating segments: Cybersecurity, IoT (collectively, “Software & Services”), and Licensing and Other, as further discussed in Note 12.
Risks and Uncertainties
In fiscal 2022 and fiscal 2021, the economic downturn and uncertainty caused by the novel coronavirus (“COVID-19”) resulted in the Company making significant judgments related to its estimates and assumptions concerning the impairment of goodwill, indefinite-lived intangible assets, certain operating lease right-of-use (“ROU”) assets and associated property, plant and equipment, and concerning the collectability of receivables.
As of the date of issuance of the financial statements, the Company is not aware of any additional events or circumstances which would require it to update its estimates, judgments, or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and such changes will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from these estimates and any such differences may be material to the Company’s financial statements.
Accounting Policies and Critical Accounting Estimates
Use of estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates relate to revenue-related estimates including variable consideration, standalone selling price (“SSP”), estimated customer life, if control of licenses to intellectual property has transferred, the value of non-cash consideration, right of return and customer incentive commitments, fair value of reporting units in relation to actual or potential goodwill impairment, fair value of the Debentures (as defined in Note 6), fair value of share-based liability award, fair value of long-lived assets in relation to actual or potential impairment, the Company’s long-lived asset groupings, useful lives of property, plant and equipment and intangible assets, provision for income taxes, realization of deferred income tax assets and the related components of the valuation allowance, allowance for credit losses, incremental borrowing rate in determining the present value of lease liabilities and the determination of reserves for various litigation claims. Actual results could differ from these estimates, which were based upon circumstances that existed as of the date of the consolidated financial statements, February 28, 2022.
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
The significant accounting policies used in these U.S. GAAP consolidated financial statements are as follows:
Foreign currency translation
The U.S. dollar is the functional and reporting currency of the Company and substantially all of the Company’s subsidiaries.
Foreign currency denominated assets and liabilities of the Company and its U.S. dollar functional currency subsidiaries are translated into U.S. dollars. Accordingly, monetary assets and liabilities are translated using the exchange rates in effect as at the consolidated balance sheet dates, and revenue and expenses are translated at the rates of exchange prevailing when the transactions occurred. Remeasurement adjustments are included in income. Non-monetary assets and liabilities are translated at historical exchange rates.
Foreign currency denominated assets and liabilities of the Company’s non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at the exchange rates in effect as at the consolidated balance sheet dates. Revenue and expenses are translated using daily exchange rates. Exchange gains or losses arising from translation of foreign currency denominated assets and liabilities are included as a currency translation adjustment within accumulated other comprehensive loss (“AOCL”).
Cash and cash equivalents
Cash and cash equivalents consist of balances with banks and liquid investments with maturities of three months or less at the date of acquisition.
Accounts receivable, net of allowance
Accounting Standards Codification 326, Financial Instruments - Credit Losses (“ASC 326”)
On March 1, 2020, the Company adopted ASC 326 using the modified retrospective method. The accounts receivable balance reflects invoiced and accrued revenue and is presented net of an allowance for credit losses. The Company expects the majority of its accounts receivable balances to continue to come from large customers as it sells the majority of its software products and services through resellers and other distribution partners, rather than directly. The Company establishes current expected credit losses (“CECL”) for pools of assets with similar risk characteristics by evaluating historical levels of credit losses, current economic conditions that may affect a customer’s ability to pay, and creditworthiness of significant customers. When specific customers are identified as no longer sharing the same risk profile as their current pool, they are removed from the pool and evaluated separately. The Company, in the normal course of business, monitors the financial condition of its customers and reviews the credit history of each new customer. When the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company (such as in the case of bankruptcy filings or material deterioration in the customer’s operating results or financial position, and payment experiences), the Company records a specific credit loss provision to reduce the customer’s related accounts receivable to its estimated net realizable value. If circumstances related to specific customers change, the Company’s estimates of the recoverability of accounts receivable balances could be further adjusted
For the year prior to adoption of ASC 326, the accounts receivable balance reflects invoiced and accrued revenue and is presented net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects estimates of probable losses in the accounts receivable balance. The Company expected the majority of its accounts receivable balances to continue to come from large customers as it has sold and continues to sell, the majority of its software products and services through resellers and other distribution partners, rather than directly. The Company evaluated the collectability of its accounts receivable balance based upon a combination of factors on a periodic basis such as specific credit risk of its customers, historical trends and economic circumstances. The Company, in the normal course of business, monitored the financial condition of its customers and reviewed the credit history of each new customer. When the Company became aware of a specific customer’s inability to meet its financial obligations to the Company (such as in the case of bankruptcy filings or material deterioration in the customer’s operating results or financial position, and payment experiences), the Company recorded a specific bad debt provision to reduce the customer’s related accounts receivable to its estimated net realizable value. If circumstances related to specific customers changed, the Company’s estimates of the recoverability of accounts receivable balances may have been further adjusted.
Investments
The Company’s cash equivalents and investments, other than publicly issued equity securities and non-marketable equity investments without readily determinable fair value, consist of money market and other debt securities, which are classified as available-for-sale for accounting purposes and are carried at fair value. Unrealized gains and losses, net of
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
related income taxes, are recorded in AOCL until such investments mature or are sold. The Company uses the specific identification method of determining the cost basis in computing realized gains or losses on available-for-sale investments, which are recorded in investment income. The Company does not exercise significant influence with respect to any of these investments. Publicly issued equity securities are recorded at fair value and revalued at each reporting period with changes in fair value recorded through investment income. The Company elects to record non-marketable equity investments without readily determinable fair value at cost minus impairment, and adjusted for any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company reassesses each reporting period that its non-marketable equity investments without readily determinable fair value continue to qualify for this treatment.
Investments with maturities at the time of purchase of three months or less are classified as cash equivalents. Investments with maturities of one year or less (but which are not cash equivalents), public equity investments and any investments that the Company intends to hold for less than one year are classified as short-term investments. Investments with maturities in excess of one year, non-marketable equity investments without readily determinable fair value and investments that the Company does not intend to sell are classified as long-term investments.
Allowance for Credit Losses on Available-for-sale Debt Securities
On March 1, 2020, the Company adopted ASC 326 on a modified retrospective basis. Under ASC 326, at each reporting period, the Company evaluates its available-for-sale debt securities at the individual security level to determine whether there is a decline in the fair value below its amortized cost basis (an impairment). In circumstances where the Company intends to sell, or is more likely than not required to sell, the security before it recovers its amortized cost basis, the difference between fair value and amortized cost is recognized as a loss in the consolidated statement of operations, with a corresponding write-down of the security’s amortized cost. In circumstances where neither condition exists, the Company then evaluates whether a decline is due to credit-related factors. The factors considered in determining whether a credit loss exists can include the extent to which fair value is less than the amortized cost basis, changes in the credit quality of the underlying issuer, credit ratings actions, as well as other factors. To determine the portion of a decline in fair value that is credit-related, the Company compares the present value of the expected cash flows of the security discounted at the security’s effective interest rate to the amortized cost basis of the security. A credit-related impairment is limited to the difference between fair value and amortized cost, and recognized as an allowance for credit loss on the consolidated balance sheet with a corresponding adjustment to net income. Any remaining decline in fair value that is non-credit related is recognized in other comprehensive income (loss), net of tax. Improvements in expected cash flows due to improvements in credit are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss.
Prior to the adoption of ASC 326, the Company assessed individual investments that were in an unrealized loss position to determine whether the unrealized loss was other-than-temporary. The Company made this assessment by considering available evidence, including changes in general market conditions, specific industry and individual company data, the length of time and the extent to which the fair value had been less than cost, the financial condition, the near-term prospects of the individual investment and the Company’s intent and ability to hold the investment. In the event that a decline in the fair value of an investment occurred and that decline in value was considered to be other-than-temporary, an impairment charge was recorded in investment income equal to the difference between the cost basis and the fair value of the individual investment as at the consolidated balance sheet date of the reporting period for which the assessment was made. The fair value of the investment then became the new cost basis of the investment.
If a debt security’s market value was below its amortized cost and either the Company intended to sell the security or it was more likely than not that the Company would be required to sell the security before its anticipated recovery, the Company recorded an other-than-temporary impairment charge to investment income for the entire amount of the impairment. For other-than-temporary impairments on debt securities that the Company did not intend to sell and it was not more likely than not that the entity would be required to sell the security before its anticipated recovery, the Company separated the other-than-temporary impairment into the amount representing the credit loss and the amount related to all other factors. The Company recorded the other-than-temporary impairment related to the credit loss as a charge to investment income, and the remaining other-than-temporary impairment was recorded as a component of AOCL.
Derivative financial instruments
The Company uses derivative financial instruments, including forward contracts and options, to hedge certain foreign currency exposures. The Company does not use derivative financial instruments for speculative purposes.
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
The Company records all derivative instruments at fair value on the consolidated balance sheets. The fair value of these instruments is calculated based on notional and exercise values, transaction rates, market quoted currency spot rates, forward points, volatilities and interest rate yield curves. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative instrument and the resulting designation.
For derivative instruments designated as cash flow hedges, the derivative’s gain or loss is initially reported as a component of AOCL, net of tax, and subsequently reclassified into income in the same period or periods in which the hedged item affects income. In order for the Company to receive hedge accounting treatment, the cash flow hedge must be highly effective in offsetting changes in the fair value of the hedged item and the relationship between the hedging instrument and the associated hedged item must be formally documented at the inception of the hedge relationship. Hedge effectiveness is formally assessed, both at hedge inception and on an ongoing basis, to determine whether the derivatives used in hedging transactions are highly effective in offsetting changes in the value of the hedged items and whether they are expected to continue to be highly effective in future periods.
The Company formally documents relationships between hedging instruments and associated hedged items. This documentation includes: identification of the specific foreign currency asset, liability or forecasted transaction being hedged; the nature of the risk being hedged; the hedge objective; and the method of assessing hedge effectiveness. If an anticipated transaction is deemed no longer likely to occur, the corresponding derivative instrument is de-designated as a hedge and any associated unrealized gains and losses in AOCL are recognized in income at that time. Any future changes in the fair value of the instrument are recognized in current income.
For any derivative instruments that do not meet the requirements for hedge accounting, or for any derivative instruments for which hedge accounting is not elected, the changes in fair value of the instruments are recognized in income in the current period and will generally offset the impact to income as a result of changes in the U.S. dollar value of the associated asset, liability or forecasted transaction.
Property, plant and equipment, net
Property, plant and equipment are stated at cost, less accumulated amortization. Amortization is provided using the following rates and methods:
| | | | | | | | |
Leasehold improvements and other | | Straight-line over terms between 5 and 15 years |
BlackBerry operations and other information technology | | Straight-line over terms between 3 and 5 years |
Manufacturing, repair and research and development equipment | | Straight-line over terms between 1 and 5 years |
Furniture and fixtures | | Declining balance at 30% per annum |
For amortization on ROU assets, see the Company’s accounting policy on leases below and Note 11 for the remaining lease terms of leases.
Leases
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of the Company’s leases do not provide an implicit discount rate, the Company primarily uses its incremental borrowing rate, based on the information available at the commencement date of the lease, in determining the present value of future payments. The Company’s incremental borrowing rate requires significant judgment and is determined based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment. The operating lease ROU asset includes any lease payments made, lease incentives and initial direct costs incurred. The lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. In some cases, the Company has index-based variable lease payments for which an estimated rate is applied to the initial lease payment to determine future lease payment amounts.
The Company has building, car and data center lease agreements with lease and non-lease components that are accounted for separately. For lease terms of 12 months or less on the commencement date, the Company does not apply the Accounting Standards Codification 842 recognition requirements and recognizes the lease payments as lease cost on a straight-line basis over the lease term.
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
See Note 11 for additional information related to the Company’s leases.
Goodwill
Goodwill represents the excess of the acquisition price in a business combination over the fair value of identifiable net assets acquired. Goodwill is allocated at the date of the business combination. Goodwill is not amortized but is tested for impairment annually on December 31 or more frequently if events or changes in circumstances indicate the asset may be impaired. These events and circumstances may include a significant change in legal factors or in the business climate, a significant decline in the Company’s share price, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant disposal activity and the testing of recoverability for a significant asset group.
On March 1, 2020, the Company adopted Accounting Standards Update 2017-04 on the topic of Intangibles - Goodwill and Other (ASC 350) (“ASU 2017-40”). ASU 2017-04 simplifies the subsequent measurement of goodwill, enabling the Company to carry out its goodwill impairment test in one step, instead of two steps. In the test, the carrying value of the reporting unit, including goodwill, was compared with its fair value. The estimated fair value was determined utilizing multiple approaches based on the nature of the reporting units being valued. In its analysis, the Company utilized multiple valuation techniques, including the income approach using a discounted future cash flow model, market-based approaches, and the asset value approach. The analysis requires significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rates of revenue growth for the Company’s reporting units, estimation of the useful life over which cash flows will occur, terminal growth rates, profitability measures, and determination of the discount rates for the reporting units. The carrying value of the Company’s assets was assigned to reporting units using reasonable methodologies based on the asset type. When the carrying value of a reporting unit exceeds its fair value, goodwill of the reporting unit is considered to be impaired and written down to its fair value. Different judgments could yield different results. Events and circumstances resulted in an additional goodwill impairment test being conducted as at May 31, 2020, in addition to the Company’s annual impairment test; see Note 3.
Prior to the adoption of ASU 2017-04, the Company’s annual impairment test was carried out in two steps. In the first step, the carrying value of the reporting unit, including goodwill, was compared with its fair value. The estimated fair value was determined utilizing multiple approaches based on the nature of the reporting units being valued. In its analysis, the Company utilized multiple valuation techniques, including the income approach, discounted future cash flows, market-based approaches, and the asset value approach. The analysis requires significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of revenue growth for our reporting units, estimation of the useful life over which cash flows will occur, terminal growth rate, profitability measures, and determination of the discount rates for the reporting units. The carrying value of the Company’s assets was assigned to reporting units using reasonable methodologies based on the asset type. When the carrying value of a reporting unit exceeded its fair value, goodwill of the reporting unit was considered to be impaired and the second step was necessary. Different judgments could have yielded different results. In fiscal 2020, the Company disaggregated one reporting unit and goodwill was assigned to the disaggregated reporting units based upon the relative fair value allocation approach.
In the second step, the implied fair value of the reporting unit’s goodwill was compared with its carrying value to measure the amount of the impairment loss, if any. The second step involved significant judgment in the selection of assumptions necessary to arrive at an implied fair value of goodwill. Different judgments could have yielded different results.
Using the impaired reporting units’ fair value determined in step one as the acquisition prices in hypothetical acquisitions of the reporting units, the implied fair values of goodwill were calculated as the residual amount of the acquisition price after allocations made to the fair values of net assets, including working capital, property, plant and equipment and both recognized and unrecognized intangible assets.
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
Intangible assets
Intangible assets with definite lives are stated at cost, less accumulated amortization. Amortization is provided on a straight-line basis over the following terms:
| | | | | | | | |
Acquired technology | | Between 3 and 10 years |
Intellectual property | | Between 1 and 20 years |
Other acquired intangibles | | Between 2 and 10 years |
Acquired technology consists of intangible assets acquired through business acquisitions. Intellectual property consists of patents (including purchased and internally generated patents and maintenance fees). Other acquired intangibles include items such as customer relationships and brand. The useful lives of intangible assets are evaluated at least annually to determine if events or circumstances warrant a revision to their remaining period of amortization. Legal, regulatory and contractual factors, the effects of obsolescence, demand, competition and other economic factors are potential indicators that the useful life of an intangible asset may be revised.
Impairment of long-lived assets
The Company reviews long-lived assets (“LLA”) such as property, plant and equipment, intangible assets with finite useful lives and ROU assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset or asset group may not be recoverable. These events and circumstances may include significant decreases in the market price of an asset or asset group, significant changes in the extent or manner in which an asset or asset group is being used by the Company or in its physical condition, a significant change in legal factors or in the business climate, a history or forecast of future operating or cash flow losses, significant disposal activity, a significant decline in the Company’s share price, a significant decline in revenue or adverse changes in the economic environment.
The LLA impairment test requires the Company to identify its asset groups and test impairment of each asset group separately. Determining the Company’s asset groups and related primary assets requires significant judgment by management. Different judgments could yield different results. The Company’s determination of its asset groups, its primary asset and its remaining useful life, and estimated cash flows are significant factors in assessing the recoverability of the Company’s assets for the purposes of LLA impairment testing. The Company’s share price can be affected by, among other things, changes in industry or market conditions, including the effect of competition, changes in the Company’s results of operations, changes in the Company’s forecasts or market expectations relating to future results, and the Company’s strategic initiatives and the market’s assessment of any such factors.
When indicators of impairment exist, LLA impairment is tested using a two-step process. The Company performs a cash flow recoverability test as the first step, which involves comparing the asset group’s estimated undiscounted future cash flows to the carrying value of its net assets. If the net cash flows of the asset group exceed the carrying value of its net assets, LLA are not considered to be impaired. If the carrying value exceeds the net cash flows, there is an indication of potential impairment and the second step of the LLA impairment test is performed to measure the impairment amount. The second step involves determining the fair value of the asset group. Fair values are determined using valuation techniques that are in accordance with U.S. GAAP, including the market approach, income approach and cost approach. If the carrying value of the asset group’s net assets exceeds the fair value of the Company, then the excess represents the maximum amount of potential impairment that will be allocated to the asset group, with the limitation that the carrying value of each separable asset cannot be reduced to a value lower than its individual fair value. The total impairment amount allocated is recognized as a non-cash impairment loss.
The Company reviews any changes in events and circumstances that have occurred on a quarterly basis to determine if indicators of LLA impairment exist.
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
Royalties
The Company recognizes its liability for royalties in accordance with the terms of existing license agreements. Where license agreements are not yet finalized, the Company recognizes its current estimates of the obligation in accrued liabilities in the consolidated financial statements. When the license agreements are subsequently finalized, the estimate is revised accordingly. Management’s estimates of royalty rates are based on the Company’s historical licensing activities, royalty payment experience, and forward-looking expectations.
Convertible debentures
The Company elected to measure its outstanding convertible debentures (collectively, the “Debentures”, as defined in Note 6) at fair value in accordance with the fair value option. Each period, the fair value of the Debentures is recalculated and resulting gains and losses from the change in fair value of the Debentures associated with non-credit components are recognized in income, while the change in fair value associated with credit components is recognized in AOCL.
1.75% Debentures
The fair value of the 1.75% Debentures (as defined in Note 6) has been determined using the significant inputs of principal value, interest rate spreads and curves, any observable trades of the Debentures that occurred during the period, the market price and volatility of the Company’s listed common shares, and the significant Level 3 inputs related to credit spread and the implied discount of the 1.75% Debentures at issuance.
3.75% Debentures
The fair value of the 3.75% Debentures (as defined in Note 6) was determined using the significant inputs of principal value, interest rate spreads and curves, embedded call option prices, observable trades of the Debentures, the market price and volatility of the Company’s listed common shares and the Company’s implicit credit spread.
Revenue recognition
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. Non-cash consideration received is measured at fair value at contract inception. The estimated fair value is determined utilizing multiple valuation techniques, including the discounted future cash flows and the market-based approach.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative 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.
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
Nature of products and services
The Company is organized and managed as three operating segments. The Company has multiple products and services from which it derives revenue, which are structured in three groups: Cybersecurity, IoT and Licensing and Other.
Cybersecurity
Cybersecurity includes revenue from the Company’s BlackBerry Spark® software platform, BlackBerry® AtHoc®, BlackBerry® Alert, BlackBerry® SecuSUITE® and BlackBerry Messenger (BBM®) Enterprise. Cybersecurity revenue is generated predominantly through software licenses, commonly bundled with support, maintenance and professional services.
BlackBerry Spark
The BlackBerry Spark platform is a comprehensive offering of security software products and services, including the BlackBerry® Cyber Suite and the BlackBerry Spark® Unified Endpoint Management Suite, which are also marketed together as the BlackBerry Spark® Suite, offering the Company’s broadest range of tailored cybersecurity and endpoint management options.
The BlackBerry Spark Cyber Suite includes revenue from the Company’s Cylance® artificial intelligence and machine learning-based platform consisting of BlackBerry® Protect, BlackBerry® Optics, BlackBerry® Persona, BlackBerry® Gateway, BlackBerry® Guard managed services and other cybersecurity applications. The Company generates software license revenue from term subscription products, which includes technical support, and any updates and upgrades. The BlackBerry Cyber Suite natively integrates with BlackBerry® UEM and also works with UEM solutions from other vendors.
The Company recognizes the license revenue over the term of the contract beginning on the commencement date of each contract, the date that services are made available to customers. The Company’s software license and updates, to the extent made available, are not distinct in the context of the contract as they are critical to the ongoing usability of the solution and so fulfill a single promise to the customer in the contract. The typical subscription term is one to three years. The technical support is recognized over the support period, which will normally be the same term as the software license.
Revenue for hourly rate professional services arrangements is recognized as services are performed and revenue for fixed fee professional services is recognized on a proportional performance basis as the services are performed.
The BlackBerry Spark® UEM Suite includes the Company’s BlackBerry® UEM, BlackBerry® Dynamics™ and BlackBerry® Workspaces solutions. The Company generates software license revenue from both term subscription and perpetual license contracts, both of which are commonly bundled with support, maintenance and professional services.
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.
BlackBerry AtHoc and BlackBerry Alert
BlackBerry AtHoc and BlackBerry Alert generate revenue from networked critical event management solutions through term subscriptions which include technical support and associated professional services. The Company recognizes the license revenue over the term of the contract beginning on the commencement date of each contract, the date that services are made available to customers.
BlackBerry SecuSUITE
SecuSUITE revenue is generated from software license products associated with secure messaging and the associated hardware. Similar to the BlackBerry Spark products, if the licensed software requires access to the Company’s proprietary secure network infrastructure, revenue from the contract is recognized over time, ratably over the expected term or over the customer life, if licensed on a perpetual basis. If access to the Company’s proprietary network infrastructure is not required, revenue associated with the license is recognized at a point in time upon delivery of the software. Revenue from
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
the hardware is recognized once title and the significant risks and rewards of ownership of the products are transferred to the customer, which occurs after the product has shipped.
IoT
IoT consists of BlackBerry Technology Solutions and BlackBerry IVY™. BlackBerry Technology Solutions includes revenue from BlackBerry® QNX®, BlackBerry Certicom®, BlackBerry Radar® and other IoT applications. IoT revenue is generated predominantly through software licenses, commonly bundled with support, maintenance and professional services.
BlackBerry® QNX® 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. The licenses for certain software embedded into hardware such as automotive infotainment systems and advanced driver-assistance systems 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 except in cases where the customer makes a non-refundable prepayment related to its future royalties, in which case consideration is fixed and recognized immediately.
Revenue from technical support is recognized over the support period. Revenue from professional services is recognized as the customer simultaneously receives and consumes the benefits provided by the Company’s performance as the services are provided. This can be on a proportional performance basis, or over the term of the contract. Revenue from software maintenance services is recognized over the length of the maintenance period, with an average term of one year.
Licensing and Other
Licensing and Other includes revenue from the Company’s intellectual property licensing arrangements, BBM Consumer licensing arrangement, settlement awards and mobility licensing software arrangements, which include revenue from licensed hardware sales. Other revenue consists of revenue associated with the Company’s legacy service access fees (“SAF”) business.
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 contains distinct performance obligations with standalone functionality and whether the Company is the principal or agent in the transaction. Significant judgment is applied in assessing contractual terms which could impact the timing and amount of revenue recognition. 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. The transaction price may include non-monetary consideration in the form of patents transferred to the Company, which is recorded at fair value as determined by a combination of market and income-based valuation approaches. As part of these agreements the Company may also recognize revenue relating to the sale and assignment of patents.
The Company recognizes revenue related to consideration that may result from a negotiated agreement with a licensee that utilized the Company’s IP prior to signing a patent license agreement with the Company or from the resolution of a disagreement or arbitration with a licensee over the specific terms of an existing license agreement. The Company may also recognize revenue related to consideration for past patent royalties in connection with the settlement of patent litigation where there was no prior patent license agreement.
The Company’s BBM Consumer licensing arrangement was a multi-year agreement where the license was not previously separately identifiable from the requirement to maintain interoperability between the licensed BBM Consumer product and the BBM Enterprise product sold by the Company. During fiscal 2020, the licensed BBM Consumer product was shut down by the licensee, removing any requirement for the Company to maintain interoperability and thus all performance obligations were completed. As a result, the Company estimated the amount for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and recognized that amount as revenue during fiscal 2020.
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
In fiscal 2017 and fiscal 2018, the Company entered into multiple multi-year license agreements under which the Company licensed its security software and services 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 exceeded contractual sales minimums was recognized when licensed products were sold as reported by the Company’s licensees. For licensees whose sales did not exceed contractual sales minimums, revenue was recognized over time, ratably over the license term based on contractual minimum amounts due to the promise to provide engineering services to the licensees.
Other includes revenue associated with the Company’s legacy SAF business, relating to subscribers utilizing the Company’s legacy BlackBerry 7 and prior operating systems, which are no longer supported or maintained by the Company as of January 4, 2022. SAF revenue was recognized over time as the monthly service was provided. In instances where the Company invoiced the SAF customer prior to performing the service, the pre-billing was recorded as deferred revenue.
See Note 12 for further information, including revenue by major product and service types.
Significant judgments in revenue recognition
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 fair value of non-cash consideration at contract inception. The Company uses an independent third-party valuator for the fair value of non-cash consideration.
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 in certain agreements if the Company is the principal or agent in the arrangement. The Company considers factors such as, but not limited to, which party can direct the usage of the product or service, which party obtains substantially all the remaining benefits and which party has the ability to establish the selling price.
Significant 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. An unbilled 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 recognized immediately or amortized proportionally, based on the satisfaction of the related performance obligations, and are included in selling, marketing and administration expenses. The Company has applied the practical expedient to expense sales commission as incurred if the amortization period would have been for one year or less. The practical expedient was applied to sales commissions allocated to professional services, as these contracts are generally for one year or less. See Note 12 for further information on the Company’s contract balances.
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
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
period between when the payment is received and when the Company transfers the promised goods or services to the customer will be one year or less.
Income taxes
The Company uses the liability method of income tax allocation to account for income taxes. Deferred income tax assets and liabilities are recognized based upon temporary differences between the financial reporting and income tax bases of assets and liabilities and measured using enacted income tax rates and tax laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred income tax assets to the amount that is more likely than not to be realized. The Company considers both positive evidence and negative evidence, to determine whether, based upon the weight of that evidence, a valuation allowance is required. Judgment is required in considering the relative impact of negative and positive evidence.
Significant judgment is also required in evaluating the Company’s uncertain income tax positions and provisions for income taxes. Liabilities for uncertain income tax positions are recognized based on a two-step approach. The first step is to evaluate whether an income tax position has met the recognition threshold by determining if the weight of available evidence indicates that it is more likely than not to be sustained upon examination. The second step is to measure the income tax position that has met the recognition threshold as the largest amount that is more than 50% likely of being realized upon settlement. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provisions, income taxes payable and deferred income taxes in the period in which the facts that give rise to a revision become known. The Company recognizes interest and penalties related to uncertain income tax positions as interest expense, which is then netted and reported within investment income.
The Company uses the flow-through method to account for investment tax credits (“ITCs”) earned on eligible scientific research and experimental development expenditures. Under this method, the ITCs are recognized as a reduction to income tax expense.
Research and development
Research costs are expensed as incurred. Development costs for licensed software to be sold, leased or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. The Company’s products are generally released soon after technological feasibility has been established and therefore costs incurred subsequent to achievement of technological feasibility are not significant and have been expensed as incurred. The Company does not currently have any capitalized research and development costs other than those identified through business combinations as in-process research and development included within intangible assets, net, which were recorded at their fair values and began amortizing when the related technology became available for general release to customers.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in net assets of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. The Company’s reportable items of comprehensive income (loss) are the cumulative translation adjustment resulting from non-U.S. dollar functional currency subsidiaries as described under the foreign currency translation policy above, cash flow hedges as described above in derivative financial instruments, changes in the fair value of available-for-sale investments as described in Note 3, changes in fair value from instrument-specific credit risk on the Debentures as described in Note 6 and Note 9, and actuarial gains or losses associated with certain other post-employment benefit obligations. Realized gains or losses on available-for-sale investments are reclassified into investment income using the specific identification basis.
Earnings (loss) per share
Earnings (loss) per share is calculated based on the weighted average number of common shares outstanding during the fiscal year. The treasury stock method is used for the calculation of the dilutive effect of stock options. The if-converted method is used for the calculation of the dilutive effect of the Debentures.
Stock-based compensation plans
The Company has stock-based compensation plans. Awards granted under the plans are detailed in Note 7(b).
The Equity Incentive Plan (the “Equity Plan”) was adopted during fiscal 2014. The Equity Plan provides for grants of incentive stock options and restricted share units (“RSUs”) to officers and employees of the Company or its subsidiaries. RSUs may be either time-based (“TBRSUs”) or time- and performance-based (“PBRSUs”). The number of common
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
shares authorized for awards under the Equity Plan is 45,875,000 common shares. Any shares that are subject to options granted under the Equity Plan are counted against this limit as 0.625 shares for every one option granted, any shares that are subject to TBRSUs granted under the Equity Plan are counted against this limit as one share for every TBRSU, and any shares that are subject to PBRSUs granted under the Equity Plan are counted against this limit at the maximum performance attainment (which is generally 1.5 shares for every PBRSU). Awards previously granted under the Equity Plan that expire or are forfeited, or settled in cash, are added to the shares available under the Equity Plan. Options forfeited will be counted as 0.625 shares to the shares available under the Equity Plan. Shares issued as awards other than options that expire or are forfeited (i.e., RSUs), settled in cash or sold to cover withholding tax requirements are counted as one share added to the shares available under the Equity Plan. There are approximately 19 million shares in the equity pool available for future grants under the Equity Plan as at February 28, 2022.
In connection with the Cylance Inc. (“Cylance”) acquisition in fiscal 2019, the Company adopted the BlackBerry-Cylance Stock Plan (the “Cylance Stock Plan”). The Cylance Stock Plan provides for the grant of replacement awards in connection with unvested Cylance employee equity awards, all of which were canceled upon the closing of the transaction. The number of common shares authorized for awards under the Cylance Stock Plan is 9,144,176 common shares, which is equal to the amount of replacement awards granted. As at February 28, 2019, there were no shares remaining in the Cylance Stock Plan for future grants. In addition, no shares may be reissued under the Cylance Stock Plan in respect of shares that expire, are forfeited, or are settled in cash.
The Company measures stock-based compensation expense for options at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (“BSM”) option pricing model for stock options, and the expense is recognized ratably over the vesting period. Options granted under the Cylance Stock Plan generally vest over a four-year period with 25% vesting on the first anniversary date, and the remainder vesting in equal monthly installments. The BSM model requires various judgmental assumptions including volatility and expected option life. In addition, judgment is also applied in estimating the number of stock-based awards that are expected to be forfeited, and if actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations would be impacted.
Any consideration paid by employees on exercise of stock options, plus any recorded stock-based compensation within additional paid-in capital related to that stock option, is credited to capital stock.
RSUs are redeemed for common shares issued by the Company or the cash equivalent on the vesting dates established by the Board or the Compensation, Nomination and Governance Committee of the Board. The RSUs granted under the Equity Plan generally vest over a three-year period, either in equal annual installments or on the third anniversary date. For PBRSUs, the Company estimates its achievement against the performance goals, which are based on the Company’s business plan approved by the Board. The estimated achievement is updated for the Company’s outlook for the fiscal year as at the end of each fiscal quarter. Compensation cost will only be recognized to the extent that performance goals are achieved. The Company classifies RSUs as equity instruments as the Company has the ability and intent to settle the awards in common shares. The compensation expense for standard RSUs is calculated based on the fair value of each RSU as determined by the closing value of the Company’s common shares on the business day of the grant date. The Company recognizes compensation expense over the vesting period of the RSU. The Company expects to settle RSUs, upon vesting, through the issuance of new common shares from treasury.
The Company has a Deferred Share Unit Plan (the “DSU Plan”), originally approved by the Board on December 20, 2007, under which each independent director is credited with Deferred Share Units (“DSUs”) in satisfaction of all or a portion of the cash fees otherwise payable to them for serving as a director of the Company. Each independent director’s annual retainer will be entirely satisfied in the form of DSUs. Within a specified period after a director ceases to be a member of the Board, DSUs will be redeemed for cash with the redemption value of each DSU equal to the weighted average trading price of the Company’s shares over the five trading days preceding the redemption date. Alternatively, the Company may elect to redeem DSUs by way of shares purchased on the open market or issued by the Company.
DSUs are accounted for as liability-classified awards and are awarded on a quarterly basis. These awards are measured at their fair value on the date of issuance and remeasured at each reporting period until settlement.
Advertising costs
The Company expenses all advertising costs as incurred. These costs are included in selling, marketing and administration expenses.
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
Government subsidies
The Company recognizes government subsidies as a reduction to operating expenses in the consolidated statement of operations when there is reasonable assurance the Company will receive the amount and has complied with the conditions, if any, attached to the government subsidies.
2. ADOPTION OF ACCOUNTING POLICIES
Accounting Standards Adopted During Fiscal 2022
ASC 740, Income Taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) released ASU 2019-12 on the topic of simplifying the accounting for income taxes, as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. The amendments in this update remove certain exceptions from Topic 740, Income Taxes, including: (i) the exception to the incremental approach for intra-period tax allocation; (ii) the exception to accounting for basis differences when there are ownership changes in foreign investments; and (iii) the exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The update also simplifies U.S. GAAP in several other areas of Topic 740 such as: (i) franchise taxes and other taxes partially based on income; (ii) transactions with a government that result in a step up in the tax basis of goodwill; (iii) separate financial statements of entities not subject to tax; and (iv) enacted changes in tax laws in interim periods.
The guidance was effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The only aspect of ASU 2019-12 that impacts the Company is the removal of the exception related to intra-period tax allocation. As a result of its adoption of the new standard, the Company determines the tax attributable to continuing operations without regard to the tax effect of other items included in other comprehensive income. The Company adopted this guidance in the first quarter of fiscal 2022 and it did not have a material impact on the Company’s results of operations, financial position and disclosures.
Accounting Pronouncements Issued But Not Yet Adopted
In August 2020, the FASB issued a new accounting standard on the topic of debt with conversion and other options, ASU 2020-06. The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning after December 15, 2021. The Company will adopt this guidance in the first quarter of fiscal 2023 and does not expect the adoption to have a material impact on its results of operations, financial position and disclosures as the fair value option accounting model used by the Company is not impacted by this ASU and the Company already utilizes the if-converted method in its calculation of diluted earnings per share relating to the Debentures (as defined in Note 6).
In October 2021, the FASB issued a new accounting standard on the topic of business combinations, accounting for contract assets and contract liabilities from contracts with customers, ASU 2021-08. The amendment in this update improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. This update requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. The guidance is effective for interim and annual periods beginning after December 15, 2022 and requires entities to prospectively apply business combinations occurring on or after the effective date of the amendments. The Company will early adopt this guidance in the first quarter of fiscal 2023, and apply it prospectively to any business acquisitions subsequent to the date of adoption. Should the Company complete business acquisitions subsequent to adoption, the impact in future periods compared to current accounting standards will depend on any contract assets and contract liabilities acquired.
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
In November 2021, the FASB issued a new accounting standard on the topic of government assistance, ASU 2021-10. The standard requires additional disclosures for transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including: (i) information about the nature of the transactions and related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement affected by these transactions including amounts applicable to each line; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. The update also requires entities that omit any of the information because it is legally prohibited from being disclosed to include a statement to that effect. The guidance is effective for annual periods beginning after December 15, 2021. The Company will adopt this guidance in the first quarter of fiscal 2023 and does not expect the adoption to have a material impact on its disclosures.
3. FAIR VALUE MEASUREMENTS, CASH, CASH EQUIVALENTS AND INVESTMENTS
Fair Value
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.
Recurring Fair Value Measurements
The Company’s cash and cash equivalents, accounts receivable, other receivables, accounts payable and accrued liabilities are measured at an amount that approximates their fair values (Level 2 measurement) due to their short maturities.
In determining the fair value of investments held, the Company primarily relies on an independent third-party valuator for the fair valuation of securities. 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 their original pricing is warranted.
The Company’s investments largely consist of debt 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 certain public equity securities obtained through an initial public offering of a previously held non-marketable equity investment.
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 years ended February 28, 2022 or February 28, 2021. The Company realized nil in gains on previously held auction rate securities classified as Level 3 assets for the years ended February 28, 2022 and February 28, 2021 (February 29, 2020 - $3 million).
For a description of how the fair values of the Debentures (as defined in Note 6) were determined, see the “Convertible debentures” accounting policies in Note 1. The 3.75% Debentures (as defined in Note 6) were classified as Level 2 and the 1.75% Debentures (as defined in Note 6) are classified as Level 3. For a description of how the fair value of the CEO Contingent Cash Award (as defined in Note 7) was determined, see the “2019 Executive Chair Incentive Grant” section of Note 7(b).
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
Non-Recurring Fair Value Measurements
Upon the occurrence of certain events, the Company re-measures the fair value of non-marketable equity investments for which it utilizes the measurement alternative, and long-lived assets, including property, plant and equipment, operating lease ROU assets, intangible assets and goodwill if an impairment or observable price adjustment is recognized in the current period.
Non-Marketable Equity Investments Measured Using the Measurement Alternative
Non-marketable equity investments measured using the measurement alternative include investments in privately held companies without readily determinable fair values in which the Company does not own a controlling interest or have significant influence. The estimation of fair value used in the fair value measurements required the use of significant unobservable inputs, and as a result, the fair value measurements were classified as Level 3.
Goodwill Impairment
During the year ended February 28, 2022, there were no goodwill impairment charges. In its annual goodwill impairment test in the fourth quarter of fiscal 2022, the Company’s estimates indicated the fair values of all its reporting units substantially exceeded their carrying values, such carrying values were expected to be recovered, and there was no goodwill impairment. In the fourth quarter of fiscal 2022, the Company announced that it has agreed to the sale of a significant amount of patent assets to Catapult IP Innovations, Inc. (“Catapult”) subject to the satisfaction of closing conditions. The completion of the sale would accelerate the timing of estimated cash flows for the Intellectual Property reporting unit and, based upon changes in the estimates to future cash flows following the sale, could potentially result in impacts that would be material to the consolidated financial statements in relation to the fair value of the goodwill of that reporting unit.
During the year ended February 28, 2021, as a result of the deterioration in economic conditions caused by the global COVID-19 pandemic and its impact on the Company’s reporting units, and the decline of the trading value of the Company’s capital stock below the Company’s consolidated carrying value, the Company determined that it was more likely than not that the fair value of at least one of its reporting units was lower than its carrying value after including goodwill. As a result, the Company completed an analysis of the fair value of its reporting units to compare against their respective carrying values as of May 31, 2020. Based on the results of the goodwill impairment test, it was concluded that the carrying value of one reporting unit exceeded its fair value, necessitating an impairment charge for the amount of excess and reducing the carrying value of goodwill. Consequently, the Company recorded total non-cash goodwill impairment charges of $594 million in the BlackBerry Spark reporting unit. The estimated fair values of the Company’s other reporting units substantially exceeded their carrying values at May 31, 2020.
During the year ended February 29, 2020, the Company recorded a goodwill impairment charge of $22 million relating to its BBM Consumer reporting unit.
Impairment of Long-Lived Assets (“LLA”)
During the year ended February 28, 2022, there were no LLA impairment charges.
During the year ended February 28, 2021, the Company recorded a non-cash, pre-tax and after-tax impairment charge of $46 million consisting of $37 million related to operating lease ROU assets for certain facilities and $9 million related to property, plant and equipment associated with those facilities. In addition, the Company also recorded a decrease to its lease liabilities of $3 million associated with certain leased facilities with an early termination option, which has been included as a partial offset in impairment of long-lived assets on the Company’s consolidated statements of operations. The Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate as new or updated information becomes available.
During the year ended February 29, 2020, the Company recorded a non-cash, pre-tax and after-tax impairment charge of $10 million consisting of $8 million related to operating lease ROU assets for certain facilities that have been exited and $2 million related to property, plant and equipment associated with those facilities.
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
Cash, Cash Equivalents and Investments
The components of cash, cash equivalents and investments by fair value level as at February 28, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost Basis (1) | | Unrealized Gains | | Unrealized Losses | | | | Fair Value | | Cash and Cash Equivalents | | Short-term Investments | | Long-term Investments | | Restricted Cash Equivalents | | |
Bank balances | $ | 105 | | | $ | — | | | $ | — | | | | | $ | 105 | | | $ | 104 | | | $ | — | | | $ | — | | | $ | 1 | | | |
Other investments | 8 | | | — | | | — | | | | | 8 | | | — | | | — | | | 8 | | | — | | | |
| 113 | | | — | | | — | | | | | 113 | | | 104 | | | — | | | 8 | | | 1 | | | |
Level 1: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Equity securities | 10 | | | — | | | (9) | | | | | 1 | | | — | | | 1 | | | — | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Level 2: | | | | | | | | | | | | | | | | | | | |
Term deposits, certificates of deposits, and GIC's | 157 | | | — | | | — | | | | | 157 | | | 65 | | | 65 | | | — | | | 27 | | | |
Bankers’ acceptances/bearer deposit notes | 58 | | | — | | | — | | | | | 58 | | | 58 | | | — | | | — | | | — | | | |
Commercial paper | 247 | | | — | | | — | | | | | 247 | | | 62 | | | 185 | | | — | | | — | | | |
Non-U.S. promissory notes | 71 | | | — | | | — | | | | | 71 | | | 46 | | | 25 | | | — | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
Non-U.S. government sponsored enterprise notes | 58 | | | — | | | — | | | | | 58 | | | — | | | 58 | | | — | | | — | | | |
Non-U.S. treasury bills/notes | 43 | | | — | | | — | | | | | 43 | | | 43 | | | — | | | — | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| 634 | | | — | | | — | | | | | 634 | | | 274 | | | 333 | | | — | | | 27 | | | |
| | | | | | | | | | | | | | | | | | | |
Level 3: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Other investments | 17 | | | 5 | | | — | | | | | 22 | | | — | | | — | | | 22 | | | — | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 774 | | | $ | 5 | | | $ | (9) | | | | | $ | 770 | | | $ | 378 | | | $ | 334 | | | $ | 30 | | | $ | 28 | | | |
______________________________
(1) Cost basis for other investments includes the effect of returns of capital.
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
The components of cash, cash equivalents and investments by fair value level as at February 28, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost Basis | | | | Unrealized Losses | | | | Fair Value | | Cash and Cash Equivalents | | Short-term Investments | | Long-term Investments | | Restricted Cash Equivalents | | Restricted Short-term Investments |
Bank balances | $ | 165 | | | | | $ | — | | | | | $ | 165 | | | $ | 165 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other investments | 37 | | | | | — | | | | | 37 | | | — | | | — | | | 37 | | | — | | | — | |
| 202 | | | | | — | | | | | 202 | | | 165 | | | — | | | 37 | | | — | | | — | |
Level 1: | | | | | | | | | | | | | | | | | | | |
Equity securities | 10 | | | | | (7) | | | | | 3 | | | — | | | 3 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
Level 2: | | | | | | | | | | | | | | | | | | | |
Term deposits, certificates of deposits, and GICs | 138 | | | | | — | | | | | 138 | | | 7 | | | 103 | | | — | | | 4 | | | 24 | |
Bearer deposit notes | 40 | | | | | — | | | | | 40 | | | — | | | 40 | | | — | | | — | | | — | |
Commercial paper | 162 | | | | | — | | | | | 162 | | | 15 | | | 147 | | | — | | | — | | | — | |
Non-U.S. promissory notes | 55 | | | | | — | | | | | 55 | | | 26 | | | 29 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
Non-U.S. government sponsored enterprise notes | 154 | | | | | — | | | | | 154 | | | 1 | | | 153 | | | — | | | — | | | — | |
Non-U.S. treasury bills/notes | 25 | | | | | — | | | | | 25 | | | — | | | 25 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
Corporate notes/bonds | 25 | | | | | — | | | | | 25 | | | — | | | 25 | | | — | | | — | | | |
| 599 | | | | | — | | | | | 599 | | | 49 | | | 522 | | | — | | | 4 | | | 24 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 811 | | | | | $ | (7) | | | | | $ | 804 | | | $ | 214 | | | $ | 525 | | | $ | 37 | | | $ | 4 | | | $ | 24 | |
As at February 28, 2022, the Company had non-marketable equity investments without readily determinable fair value of $30 million (February 28, 2021 - $37 million). During the fiscal year ended February 28, 2022, the Company recorded an upward adjustment to the carrying value of certain non-marketable equity investments without readily determinable fair value of $5 million resulting from observable price changes in orderly transactions for identical or similar securities which have been included in investment income (loss), net on the Company’s consolidated statements of operations. The Company also received a distribution from a non-marketable equity investment without readily determinable fair value in the amount of $35 million, which for accounting purposes, consisted of a return of capital of $13 million and a realized gain of $22 million included in investment income (loss), net on the Company’s consolidated statements of operations.
During the year ended February 28, 2022, there was no impairment recognized relating to non-marketable equity investments without readily determinable fair value (February 28, 2021 - nil and February 29, 2020 - $3 million).
There were no realized gains or losses on available-for-sale securities for the year ended February 28, 2022 (February 28, 2021 and February 29, 2020 - nil).
The Company has restricted cash and cash equivalents and restricted short-term investments, 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. The letters of credit are for terms ranging from one month to four years. The Company is legally restricted from accessing these funds during the term of the leases for which the letters of credit have been issued; however, the Company can continue to invest the funds and receive investment income thereon.
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
The following table provides a reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents as at February 28, 2022, February 28, 2021 and February 29, 2020 from the consolidated balance sheets to the consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Cash and cash equivalents | $ | 378 | | | $ | 214 | | | $ | 377 | |
Restricted cash and cash equivalents | 28 | | | 4 | | | 49 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents presented in the consolidated statements of cash flows | $ | 406 | | | $ | 218 | | | $ | 426 | |
The contractual maturities of available-for-sale investments as at February 28, 2022 and February 28, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As at | | |
| February 28, 2022 | | | | February 28, 2021 | | |
| Cost Basis | | Fair Value | | | | Cost Basis | | Fair Value | | |
Due in one year or less | $ | 634 | | | $ | 634 | | | | | $ | 599 | | | $ | 599 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
No fixed maturity | 10 | | | 1 | | | | | 10 | | | 3 | | | |
| $ | 644 | | | $ | 635 | | | | | $ | 609 | | | $ | 602 | | | |
| | | | | | | | | | | |
As at February 28, 2022 and February 28, 2021, the Company had no available-for-sale debt securities with continuous unrealized losses.
4. CONSOLIDATED BALANCE SHEET DETAILS
Accounts Receivable, Net of Allowance
The allowance for credit losses as at February 28, 2022 was $4 million (February 28, 2021 - $10 million).
The Company recognizes current estimated credit losses (“CECL”) for accounts receivable. The CECL for accounts receivable are estimated based on days past due and region for each customer in relation to a representative pool of assets consisting of a large number of customers with similar risk characteristics that operate under similar economic environments. The Company determined the CECL by estimating historical credit loss experience based on the past due status and region of the customers, adjusted as appropriate to reflect current conditions and estimates of future economic conditions, inclusive of the effect of the COVID-19 pandemic on credit losses. When specific customers are identified as no longer sharing the same risk profile as their current pool, they are removed from the pool and evaluated separately. The Company also has long-term accounts receivable included in Other Long-term Assets. The CECL for long-term accounts receivable is estimated using the probability of default method and the default exposure due to limited historical information. The exposure of default is represented by the assets’ amortized carrying amount at the reporting date.
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
The following table sets forth the activity in the Company’s allowance for credit losses:
| | | | | | | |
| For the Year Ended | | |
| February 28, 2022 | | |
Beginning balance as of February 29, 2020 | $ | 9 | | | |
Impact of adopting ASC 326 | 4 | | | |
Prior period recovery for expected credit losses | (3) | | | |
Ending balance of the allowance for credit loss as at February 28, 2021 | 10 | | | |
| | | |
Current period recovery for expected credit losses | (2) | | | |
Write-offs charged against the allowance | $ | (4) | | | |
| | | |
Ending balance of the allowance for credit loss as at February 28, 2022 | $ | 4 | | | |
The allowance for credit losses as at February 28, 2022 consists of $2 million (February 28, 2021 - $3 million) relating to CECL estimated based on days past due and region and $2 million (February 28, 2021 - $7 million) relating to specific customers that were evaluated separately.
There was no customer that comprised more than 10% of accounts receivable as at February 28, 2022 (February 28, 2021 - one customer comprised more than 10%).
Other Receivables
As at February 28, 2022 and February 28, 2021, other receivables included items such as receivables from Hardest-Hit Business Recovery Program (“HHBRP”) and intellectual property licensing receivable, among other items, none of which were greater than 5% of the current assets balance in any of the periods presented.
Other Current Assets
Other current assets comprised the following:
| | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 |
| | | |
| | | |
Intellectual property | $ | 118 | | | $ | — | |
Other | 41 | | | 50 | |
| $ | 159 | | | $ | 50 | |
On January 29, 2022, the Company entered into a patent sale agreement with Catapult, pursuant to which the Company has agreed to sell substantially all of its non-core patent assets to Catapult for total transaction price of $600 million. Patents that are essential to the Company’s current core business operations are excluded from the transaction. The Company will receive a license back to the patents being sold, which relate primarily to mobile devices, messaging and wireless networking. Completion of the revenue transaction is subject to the satisfaction of closing conditions. For the year ended February 28, 2022, the Company reclassified $118 million of intellectual property that will be sold under this revenue arrangement as other current assets on the Company’s consolidated balance sheets relating to the patent sale agreement.
Other current assets also included items such as the current portion of deferred commissions and prepaid expenses, among other items, none of which were greater than 5% of the current assets balance in any of the periods presented.
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
Property, Plant and Equipment, Net
Property, plant and equipment comprised the following:
| | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 |
Cost | | | |
BlackBerry operations and other information technology | $ | 92 | | | $ | 110 | |
Leasehold improvements and other | 53 | | | 67 | |
Furniture and fixtures | 10 | | | 10 | |
Manufacturing, repair and research and development equipment | 1 | | | 72 | |
| 156 | | | 259 | |
Accumulated amortization | 115 | | | 211 | |
Net book value | $ | 41 | | | $ | 48 | |
For the year ended February 28, 2022, amortization expense related to property, plant and equipment amounted to $15 million (February 28, 2021 - $21 million; February 29, 2020 - $24 million).
Intangible Assets, Net
Intangible assets comprised the following: | | | | | | | | | | | | | | | | | |
| As at February 28, 2022 |
| Cost | | Accumulated Amortization | | Net Book Value |
Acquired technology | $ | 1,023 | | | $ | 776 | | | $ | 247 | |
Other acquired intangibles | 494 | | | 283 | | | 211 | |
Intellectual property | 117 | | | 53 | | | 64 | |
| $ | 1,634 | | | $ | 1,112 | | | $ | 522 | |
| | | | | | | | | | | | | | | | | |
| As at February 28, 2021 |
| Cost | | Accumulated Amortization | | Net Book Value |
Acquired technology | $ | 1,023 | | | $ | 712 | | | $ | 311 | |
Other acquired intangibles | 494 | | | 233 | | | 261 | |
Intellectual property | 498 | | | 299 | | | 199 | |
| $ | 2,015 | | | $ | 1,244 | | | $ | 771 | |
For the year ended February 28, 2022, amortization expense related to intangible assets amounted to $161 million (February 28, 2021 - $177 million; February 29, 2020 - $188 million).
Total additions to intangible assets in fiscal 2022 amounted to $31 million (fiscal 2021 - $36 million). During fiscal 2022, additions to intangible assets primarily consisted of payments for intellectual property relating to patent maintenance, registration and license fees.
Based on the carrying value of the identified intangible assets as at February 28, 2022, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for each of the succeeding years is expected to be as follows: fiscal 2023 - $99 million; fiscal 2024 - $94 million; fiscal 2025 - $90 million; fiscal 2026 - $85 million; and fiscal 2027 - $79 million.
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
The weighted average remaining useful lives of the intangible assets are as follows:
| | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 |
Acquired technology | 5.1 years | | 5.9 years |
Other acquired intangibles | 5.7 years | | 6.4 years |
Intellectual property | 7.5 years | | 6.4 years |
Goodwill
Changes to the carrying amount of goodwill during the fiscal years ended February 28, 2022, February 28, 2021 and February 29, 2020 were as follows:
| | | | | |
| Carrying Amount |
Carrying amount as at February 28, 2019 | $ | 1,463 | |
Measurement period adjustment (1) | (2) | |
Goodwill impairment charge (note 3) | (22) | |
Effect of foreign exchange on non-U.S. dollar denominated goodwill | (2) | |
| |
Carrying amount as at February 29, 2020 | 1,437 | |
| |
Goodwill impairment charge (note 3) | (594) | |
Effect of foreign exchange on non-U.S. dollar denominated goodwill | 6 | |
Carrying amount as at February 28, 2021 | 849 | |
Effect of foreign exchange on non-U.S. dollar denominated goodwill | (5) | |
| |
| |
Carrying amount as at February 28, 2022 | $ | 844 | |
______________________________
(1) The Company recorded a measurement period adjustment of $2 million in selling, general and administration expenses during the fiscal year ended February 29, 2020 related to the Cylance acquisition, as the amount would have been recognized in the prior fiscal year, if the adjustment to the provisional amounts had been recognized as of the acquisition date on February 21, 2019.
Other Long-term Assets
As at February 28, 2022 and February 28, 2021, other long-term assets included long-term portion of deferred commission and long-term receivables, among other items, none of which were greater than 5% of total assets in any of the periods presented.
Accrued Liabilities
Accrued liabilities comprised the following:
| | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 |
| | | |
| | | |
Accrued royalties | $ | 20 | | | $ | 20 | |
Operating lease liabilities, current (note 11) | 28 | | | 33 | |
Other | 109 | | | 125 | |
| $ | 157 | | | $ | 178 | |
Other accrued liabilities include variable incentive accrual, accrued director fees, accrued vendor liabilities, accrued carrier liabilities and payroll withholding taxes, among other items, none of which were greater than 5% of the current liabilities balance in any of the periods presented.
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
5. INCOME TAXES
The difference between the amount of the provision for (recovery of) income taxes and the amount computed by multiplying income (loss) before income taxes by the statutory Canadian tax rate is reconciled as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Statutory Canadian tax rate | 26.5 | % | | 26.5 | % | | 26.5 | % |
Expected provision for (recovery of) income taxes | $ | 5 | | | $ | (295) | | | $ | (39) | |
Differences in income taxes resulting from: | | | | | |
Valuation allowance | (9) | | | 205 | | | 41 | |
Investment tax credits | 7 | | | (41) | | | (10) | |
| | | | | |
Change in unrecognized income tax benefits | (2) | | | (48) | | | (12) | |
| | | | | |
Foreign tax rate differences | 3 | | | 3 | | | 3 | |
| | | | | |
Non-deductible permanent differences | 3 | | | 13 | | | 15 | |
Goodwill impairment | — | | | 158 | | | 6 | |
Other differences | — | | | (4) | | | 1 | |
| | | | | |
Withholding tax on unremitted earnings | — | | | — | | | (1) | |
| $ | 7 | | | $ | (9) | | | $ | 4 | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Income (loss) before income taxes: | | | | | |
Canadian | $ | 133 | | | $ | (383) | | | $ | 15 | |
Foreign | (114) | | | (730) | | | (163) | |
| $ | 19 | | | $ | (1,113) | | | $ | (148) | |
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
The provision for (recovery of) income taxes consists of the following:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Current | | | | | |
Canadian | $ | (1) | | | $ | (2) | | | $ | 2 | |
Foreign | 8 | | | (7) | | | 3 | |
Deferred | | | | | |
| | | | | |
Foreign | — | | | — | | | (1) | |
| $ | 7 | | | $ | (9) | | | $ | 4 | |
Deferred income tax assets and liabilities consist of the following temporary differences:
| | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 |
Assets | | | |
Property, plant, equipment and intangibles assets | $ | 262 | | | $ | 240 | |
Non-deductible reserves | 44 | | | 59 | |
Minimum taxes | 207 | | | 206 | |
Debentures (note 6) | 37 | | | 94 | |
Research and development | 379 | | | 390 | |
Tax loss carryforwards | 441 | | | 414 | |
Other | 104 | | | 82 | |
Deferred income tax assets | 1,474 | | | 1,485 | |
| | | |
Valuation allowance | 1,367 | | | 1,360 | |
Deferred income tax assets net of valuation allowance | 107 | | | 125 | |
| | | |
Liabilities | | | |
Property, plant, equipment and intangibles assets | (107) | | | (125) | |
| | | |
| | | |
Deferred income tax liabilities | (107) | | | (125) | |
Net deferred income tax asset (liability) | $ | — | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will be realized.
In evaluating the need for a valuation allowance, the Company noted that there had been three years of cumulative losses, including fiscal 2022. In fiscal 2022, the Company saw an increase in the deferred tax valuation allowance of $7 million (February 28, 2021 - increase of $137 million). As a result, the deferred tax valuation allowance had an ending balance of $1,367 million (February 28, 2021 - $1,360 million). This accounting treatment has no effect on the Company’s ability to utilize deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood that the deferred tax assets will be realizable at each reporting period and the valuation allowance will be adjusted accordingly.
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
The Company’s total unrecognized income tax benefits as at February 28, 2022 and February 28, 2021 were $20 million and $24 million, respectively. A reconciliation of the beginning and ending amount of unrecognized income tax benefits that, if recognized, would affect the Company’s effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Unrecognized income tax benefits, opening balance | $ | 24 | | | $ | 72 | | | $ | 84 | |
Increase for income tax positions of prior years | — | | | — | | | 2 | |
Increase for income tax positions of current year | — | | | 2 | | | 1 | |
Settlement of tax positions | (4) | | | (50) | | | (15) | |
| | | | | |
Unrecognized income tax benefits, ending balance | $ | 20 | | | $ | 24 | | | $ | 72 | |
As at February 28, 2022, $20 million of the unrecognized tax benefits have been netted against deferred income taxes and nil has been recorded within income taxes payable on the Company’s consolidated balance sheets.
A summary of open tax years by major jurisdiction is presented below:
| | | | | |
Jurisdiction |
Canada (1) | Fiscal 2016 - 2022 |
United States (2) | Fiscal 2019 - 2022 |
United Kingdom | Fiscal 2021 - 2022 |
______________________________
(1) Includes federal as well as provincial jurisdictions, as applicable.
(2) Pertains to federal tax years. Certain state jurisdictions remain open from fiscal 2018 through fiscal 2022.
The Company is subject to ongoing examination by tax authorities in the jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes, as well as the provisions for indirect and other taxes and related penalties and interest. The Company believes it is reasonably possible that approximately nil of its gross unrecognized income tax benefits will be realized in the next twelve months. While the final resolution of these 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.
The Company recognizes interest and penalties related to unrecognized income tax benefits as interest expense that is netted and reported within investment income, net. The amount of interest accrued as at February 28, 2022 was approximately $3 million (February 28, 2021 - approximately $3 million). The amount of penalties accrued as at February 28, 2022 was nil (February 28, 2021 - nil).
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
As at February 28, 2022, the Company has the following net operating loss carryforwards and tax credits, which are scheduled to expire in the following years:
| | | | | | | | | | | | | | | | | | | | | | |
Year of Expiry | | Net Operating Losses | | | | Research and Development Tax Credits (1) | | Minimum Taxes |
2029 | | $ | 10 | | | | | $ | — | | | $ | 1 | |
2030 | | — | | | | | — | | | 109 | |
2031 | | 1 | | | | | 12 | | | 72 | |
2032 | | 28 | | | | | 1 | | | 22 | |
2033 | | 88 | | | | | 133 | | | — | |
2034 | | 96 | | | | | 124 | | | — | |
2035 | | 92 | | | | | 52 | | | 3 | |
2036 | | 355 | | | | | 40 | | | — | |
2037 | | 492 | | | | | 23 | | | — | |
2038 | | 199 | | | | | 17 | | | — | |
2039 | | 13 | | | | | 14 | | | — | |
2040 | | — | | | | | 13 | | | — | |
2041 | | — | | | | | 8 | | | — | |
2042 | | 12 | | | | | 8 | | | — | |
Indefinite | | 321 | | | | | 21 | | | — | |
| | $ | 1,707 | | | | | $ | 466 | | | $ | 207 | |
______________________________
(1) Includes federal, provincial and state balances.
6. DEBENTURES
1.75% Convertible Debentures
On September 1, 2020, Hamblin Watsa Investment Counsel Ltd., in its capacity as investment manager of Fairfax Financial Holdings Limited (“Fairfax”), and another institutional investor invested in the Company through a $365 million private placement of new debentures (the “1.75% Debentures”), which replaced $605 million of debentures issued in a private placement on September 7, 2016 (the “3.75% Debentures”) as described below (collectively, the “Debentures”).
Interest on the 1.75% Debentures is payable quarterly in arrears at a rate of 1.75% per annum. The 1.75% Debentures mature on November 13, 2023 and each $1,000 of 1.75% Debentures is convertible at any time into 166.67 common shares of the Company, for a total of 60.8 million common shares at a price of $6.00 per share for all 1.75% Debentures, subject to adjustments. Covenants associated with the 1.75% Debentures include limitations on the Company’s total indebtedness.
Under specified events of default, the outstanding principal and any accrued interest on the 1.75% Debentures become immediately due and payable upon request of holders holding not less than 25% of the principal amount of the 1.75% Debentures then outstanding. During an event of default, the interest rate rises to 5.75% per annum.
The 1.75% Debentures are subject to a change of control provision whereby the Company would be required to make an offer to repurchase the 1.75% 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. Additionally, the 1.75% Debentures cannot be converted to the extent that, after giving effect to the conversion, the holder would beneficially own or exercise control or direction over more than 19.99% of the Company’s then issued and outstanding shares (the “Blocker Provision”).
Due to the conversion option and other embedded derivatives within the 1.75% Debentures, and consistent with the Company’s accounting for the 3.75% Debentures, the Company has elected to record the 1.75% Debentures, including the debt itself and all embedded derivatives, at fair value and present the 1.75% Debentures as a single hybrid financial
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
instrument. No portion of the fair value of the 1.75% Debentures has been recorded as equity, nor would be if the embedded derivatives were bifurcated from the host debt contract.
Each period, the fair value of the 1.75% Debentures is recalculated and resulting gains and losses from the change in fair value of the Debentures associated with non-credit components are recognized in income, while the change in fair value associated with credit components is recognized in AOCL. The fair value of the Debentures has been determined using the significant Level 2 inputs interest rate curves and any observable trades of the Debentures that may have occurred during the period, the market price and volatility of the Company’s listed common shares, and the significant Level 3 inputs related to credit spread and the implied discount of the 1.75% Debentures at issuance.
The Company originally determined its credit spread by calibrating to observable trades of the 3.75% Debentures and trending the calibrated spread to valuation dates utilizing an appropriate credit index. The Company’s credit spread was determined to be 7.90% as of the issuance date of the 1.75% Debentures and 6.58% as of February 28, 2022. An increase in credit spread will result in a decrease in the fair value of 1.75% Debentures and vice versa. The fair value of the 1.75% Debentures on September 1, 2020 was determined to be approximately $456 million and the implied discount approximately $91 million. The Company determined the implied discount on the 1.75% Debentures by calculating the fair value of the 1.75% Debentures on September 1, 2020 utilizing the above credit spread and other inputs described above.
The following table summarizes the change in fair value of the 1.75% Debentures for the fiscal year ended February 28, 2022, which also represents the total changes through earnings of items classified as Level 3 in the fair value hierarchy:
| | | | | | | | | |
| | As at |
| | February 28, 2022 | |
| | | |
| | | |
Balance as at Principal received as of September 1, 2020 | | $ | 365 | | |
Change in fair value of the Debentures | | 355 | | |
Balance as at February 28, 2021 | | 720 | | |
Change in fair value of the Debentures | | (213) | | |
Balance as at February 28, 2022 | | $ | 507 | | |
The difference between the fair value of the 1.75% Debentures and the unpaid principal balance of $365 million is $142 million.
The following table shows the impact of the changes in fair value of the 1.75% Debentures for the years ended February 28, 2022, February 28, 2021 and February 29, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Years Ended |
| | | | | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Income (charge) associated with the change in fair value from non-credit components recorded in the consolidated statements of operations | | | | | | $ | 212 | | | $ | (347) | | | $ | — | |
Income (charge) associated with the change in fair value from instrument-specific credit components recorded in AOCL | | | | | | 1 | | | (8) | | | — | |
Total decrease (increase) in the fair value of the 1.75% Debentures | | | | | | $ | 213 | | | $ | (355) | | | $ | — | |
For the year ended February 28, 2022, the Company recorded interest expense related to the Debentures of $6 million, which has been included in investment income (loss), net on the Company’s consolidated statements of operations (fiscal 2021 - $15 million; fiscal 2020 - $23 million). The Company is required to make quarterly interest-only payments of approximately $2 million during the remaining term the 1.75% Debentures are outstanding.
Fairfax, a related party under U.S. GAAP due to its beneficial ownership of common shares in the Company after taking into account potential conversion of the Debentures, owned $500 million principal amount of the 3.75% Debentures and purchased $330 million principal amount of the 1.75% Debentures. As such, the redemption of Fairfax’s portion of the 3.75% Debentures, the investment by Fairfax in the 1.75% Debentures and the payment of interest on the Debentures to Fairfax represent related party transactions. Fairfax receives interest at the same rate as other holders of the Debentures.
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
3.75% Convertible Debentures
On September 7, 2016, Fairfax and other institutional investors invested in the Company through a $605 million private placement of the 3.75% Debentures. The terms of the 3.75% Debentures were substantially similar to those of the 1.75% Debentures, except that the 3.75% Debentures had a higher interest rate, were convertible into common shares at a price of $10.00 per common share, were subject to a lower approval threshold for extraordinary resolutions, did not contain the Blocker Provision and had a maturity date of November 13, 2020.
On July 22, 2020, the Company announced that, with the required approval of the holders of the 3.75% Debentures, it would redeem the 3.75% Debentures for a redemption amount of approximately $615 million (the “Redemption Amount”), which would settle all outstanding obligations of the Company in respect of the 3.75% Debentures. The redemption was completed on September 1, 2020. As the Redemption Amount represented fair value at August 31, 2020 and the Company elected the fair value option for the 3.75% Debentures, the impact to the consolidated statements of operations of the redemption on the fair value was recorded in the second quarter of fiscal 2021. A portion of the fair value associated with changes in instrument-specific credit components in the amount of $6 million remained in OCI until redemption on September 1, 2020 at which point $6 million was discharged to the consolidated statement of operations and is included in the table below.
The following table shows the impact of the changes in fair value of the 3.75% Debentures for the years ended February 28, 2022, February 28, 2021 and February 29, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Years Ended |
| | | | | | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
| | | | | | | | | | |
Income (charge) associated with the change in fair value from non-credit components recorded in the consolidated statements of operations | | | | | | $ | — | | | $ | (19) | | | $ | 66 | |
Income (charge) associated with the change in fair value from instrument-specific credit components recorded in AOCL | | | | | | — | | | 15 | | | (7) | |
Realized charges associated with the change in fair value from credit components recorded in the consolidated statements of operations on redemption | | | | | | — | | | (6) | | | — | |
Realized charges associated with the change in fair value from credit components released from AOCL on redemption | | | | | | — | | | 6 | | | — | |
Total decrease (increase) in the fair value of the 3.75% Debentures | | | | | | $ | — | | | $ | (4) | | | $ | 59 | |
7. CAPITAL STOCK
(a)Capital Stock
The Company is authorized to issue an unlimited number of voting common shares, an unlimited number of non-voting, redeemable, retractable Class A common shares and an unlimited number of non-voting, cumulative, redeemable, retractable preferred shares. As at February 28, 2022 and February 28, 2021, there were no Class A common shares or preferred shares outstanding.
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
The following details the changes in issued and outstanding common shares for the years ended February 28, 2022, February 28, 2021 and February 29, 2020:
| | | | | | | | | | | |
| Capital Stock and Additional Paid-in Capital |
| Stock Outstanding (000s) | | Amount |
Common shares outstanding as at February 28, 2019 | 547,358 | | | $ | 2,688 | |
Exercise of stock options | 1,189 | | | 3 | |
Common shares issued for restricted share unit settlements | 3,361 | | | — | |
Stock-based compensation | — | | | 63 | |
| | | |
Common shares issued related to Exchange Shares | 1,380 | | | — | |
Common shares issued for employee share purchase plan | 911 | | | 6 | |
| | | |
Common shares outstanding as at February 29, 2020 | 554,199 | | | 2,760 | |
Exercise of stock options | 3,072 | | | 12 | |
Common shares issued for restricted share unit settlements | 5,330 | | | — | |
Stock-based compensation | — | | | 44 | |
Common shares issued related to Exchange Shares | 1,380 | | | — | |
| | | |
| | | |
Common shares issued for employee share purchase plan | 1,524 | | | 7 | |
| | | |
Common shares outstanding as at February 28, 2021 | 565,505 | | | 2,823 | |
Exercise of stock options | 555 | | | 3 | |
Common shares issued for restricted share unit settlements | 8,011 | | | — | |
Stock-based compensation | — | | | 36 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Common shares issued related to Exchange Shares | 1,422 | | | — | |
Common shares issued for employee share purchase plan | 735 | | | 7 | |
Common shares outstanding as at February 28, 2022 | 576,228 | | | $ | 2,869 | |
Common shares (the “Exchange Shares”) were issued in connection with the Cylance acquisition, which was completed on February 21, 2019. In lieu of cash, a portion of the consideration owed to certain Cylance shareholders was paid in equal installments of Exchange Shares on the first three anniversary dates of the closing.
The Company had 576 million voting common shares outstanding, 1 million options to purchase voting common shares, 15 million RSUs and 2 million DSUs outstanding as at March 29, 2022. In addition, 60.8 million common shares are issuable upon conversion in full of the 1.75% Debentures as described in Note 6.
(b)Stock-based Compensation
Stock options
The Company recorded a charge to income and a credit to paid-in capital of approximately $2 million in fiscal 2022 (fiscal 2021 - $6 million; fiscal 2020 - $5 million) in relation to stock option-based compensation expense.
Stock options previously granted under the Equity Plan generally vest over a period of three years, and are generally exercisable over a period of five years from the grant date. Replacement stock options granted under the Cylance Stock Plan generally vest between three months and four years and are generally exercisable over a period of five to ten years. The Company issues new shares to satisfy stock option exercises.
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
A summary of option activity for fiscal 2022 is shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding |
| Number (000’s) | | Weighted Average Exercise Price | | Average Remaining Contractual Life in Years | | Aggregate Intrinsic Value (millions) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance as at February 28, 2021 | 1,583 | | | $ | 4.92 | | | | | |
| | | | | | | |
Exercised during the year | (555) | | | 4.60 | | | | | |
Forfeited/canceled/expired during the year | (300) | | | 6.07 | | | | | |
Balance as at February 28, 2022 | 728 | | | $ | 4.70 | | | 5.78 | | $ | 2 | |
Vested and expected to vest as at February 28, 2022 | 718 | | | $ | 4.68 | | | 5.77 | | $ | 2 | |
Exercisable as at February 28, 2022 | 669 | | | $ | 4.55 | | | 5.70 | | $ | 2 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the option holders if all in-the-money options had been exercised on February 28, 2022. The intrinsic value of stock options exercised during fiscal 2022, calculated using the average market price during the year, was approximately $5.35 per share (February 28, 2021 - $2.22; February 29, 2020 - $4.30).
A summary of unvested stock options since February 28, 2022 is shown below:
| | | | | | | | | | | |
| Options Outstanding |
| Number (000’s) | | Weighted Average Grant Date Fair Value |
Balance as at February 28, 2021 | 548 | | | $ | 4.50 | |
| | | |
Vested during the year | (285) | | | 4.67 | |
Forfeited during the year | (204) | | | 4.33 | |
Balance as at February 28, 2022 | 59 | | | $ | 4.26 | |
As at February 28, 2022, there was a nominal amount of unrecognized stock-based compensation expense related to unvested stock options that will be expensed over the vesting period, which was approximately 0.27 years on a weighted average basis. The total fair value of stock options vested during the year ended February 28, 2022 amounted to $1 million (February 28, 2021 - $6 million; February 29, 2020 - $25 million).
Cash received from the stock options exercised for the year ended February 28, 2022 amounted to $3 million (February 28, 2021 - $12 million; February 29, 2020 - $3 million). There were no tax deficiencies incurred by the Company related to stock options exercised as at February 28, 2022 (February 28, 2021 - tax deficiency of nil; February 29, 2020 - tax deficiency of nil).
During the year ended February 28, 2022, there were no stock options granted (February 28, 2021 - nil; February 29, 2020 - nil).
Restricted share units
The Company recorded compensation expense with respect to RSUs of approximately $35 million in the year ended February 28, 2022 (February 28, 2021 - $38 million; February 29, 2020 - $57 million).
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
A summary of RSU activity during fiscal 2022 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, 2021 | 22,075 | | | $ | 7.88 | | | | | |
Granted during the year | 6,196 | | | 9.72 | | | | | |
Vested during the year | (8,011) | | | 8.63 | | | | | |
Forfeited/cancelled during the year | (4,642) | | | 6.01 | | | | | |
Balance as at February 28, 2022 | 15,618 | | | $ | 8.79 | | | 1.62 | | $ | 107 | |
Expected to vest February 28, 2022 | 13,324 | | | $ | 8.54 | | | 1.63 | | $ | 92 | |
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 February 28, 2022 that would have been received by RSU holders if all RSUs had been vested on February 28, 2022).
Tax deficiencies incurred by the Company related to the RSUs vested were nil for the year ended February 28, 2022 (February 28, 2021 - tax deficiency of nil; February 29, 2020 - tax deficiency of nil).
As at February 28, 2022, there was $73 million of unrecognized compensation expense related to RSUs that will be expensed over the vesting period, which, on a weighted average basis, results in a period of approximately 1.62 years.
During the year ended February 28, 2022, there were 6,195,827 RSUs granted (February 28, 2021 - 8,620,551), all of which will be settled upon vesting by the issuance of new common shares.
During the year ended February 28, 2022, the weighted average fair value for RSUs granted was $9.72 (February 28, 2021 - $5.54; February 29, 2020 - $7.19). During the year ended February 28, 2022, the fair value of RSUs that vested was $69 million (February 28, 2021 - $44 million; February 29, 2020 - $33 million).
Inducement awards
In the first quarter of fiscal 2020, the Board approved an agreement to grant performance-based equity awards (“Inducement Awards”) to the co-founders of Cylance covering up to 4,182,189 common shares. Up to 25%, 35% and 40% of the Inducement Awards may be earned at the end of the Company’s 2020, 2021 and 2022 fiscal years, respectively, if certain performance conditions are met, and any earned amounts will vest at the end of fiscal 2022. In fiscal 2020, 3,122,140 common shares subject to Inducement Awards were forfeited due to the departure of one of the co-founders of Cylance.
As at February 28, 2022, there were 666,432 common shares subject to Inducement Awards outstanding. The Company recorded a recovery to compensation expense with respect to the Inducement Awards of approximately $1 million for the year ended February 28, 2022 (February 28, 2021 - expense of $1 million; February 29, 2020 - expense of $3 million).
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 time-based equity award and market performance-based equity award is included in the compensation expense noted above.
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
Contingent cash award
The contingent cash award consists of a cash amount of $90 million that becomes payable should the 10-day volume weighted average closing price of the Company’s common shares on the New York Stock Exchange reach $30 (“CEO Contingent Cash Award”). 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 using Level 2 inputs and the associated compensation expense for the reporting period recorded. If unearned, the contingent cash award will terminate on November 3, 2023. The Company recorded a recovery to compensation expense with respect to the contingent cash award of approximately $6 million for the year ended February 28, 2022 (February 28, 2021 - expense of $8 million; February 29, 2020 - expense of $1 million). The liability recorded in respect to the award was $2 million as at February 28, 2022 and is included within accrued liabilities (February 28, 2021 - $8 million).
Deferred share units
The Company issued 192,400 DSUs in the year ended February 28, 2022. There were 1.6 million DSUs outstanding as at February 28, 2022 (February 28, 2021 - 1.4 million). The Company had a liability of $11 million in relation to the DSU Plan as at February 28, 2022 (February 28, 2021 - $14 million) included in accrued liabilities.
8. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Net income (loss) for basic earnings (loss) per share available to common shareholders | $ | 12 | | | $ | (1,104) | | | $ | (152) | |
Less: Debentures fair value adjustment (1) (2) | (212) | | | — | | | (66) | |
Add: interest expense on Debentures (1) (2) | 6 | | | — | | | 23 | |
Net loss for diluted loss per share available to common shareholders | $ | (194) | | | $ | (1,104) | | | $ | (195) | |
| | | | | |
Weighted average number of shares outstanding (000’s) - basic (3)(4) | 570,607 | | | 561,305 | | | 553,861 | |
Effect of dilutive securities (000’s) | | | | | |
| | | | | |
Conversion of Debentures (1) (2) | 60,833 | | | — | | | 60,500 | |
| | | | | |
Weighted average number of shares and assumed conversions (000’s) diluted | 631,440 | | | 561,305 | | | 614,361 | |
Earnings (loss) per share - reported | | | | | |
Basic | $ | 0.02 | | | $ | (1.97) | | | $ | (0.27) | |
Diluted | $ | (0.31) | | | $ | (1.97) | | | $ | (0.32) | |
______________________________
(1) The Company has not presented the dilutive effect of the Debentures using the if-converted method in the calculation of diluted loss per share for the year ended February 28, 2021, as to do so would be antidilutive. See Note 6 for details on the Debentures.
(2) The Company has presented the dilutive effect of the Debentures using the if-converted method, assuming conversion at the beginning of the fiscal year for the years ended February 28, 2022 and February 29, 2020. Accordingly, to calculate diluted loss per share, the Company adjusted net income (loss) by eliminating the fair value adjustment made to the Debentures and interest expense incurred on the Debentures in the years ended February 28, 2022 and February 29, 2020, and added the number of shares that would have been issued upon conversion to the diluted weighted average number of shares outstanding. See Note 6 for details on the Debentures.
(3) The year ended February 28, 2021, included approximately 1,421,945 Exchange Shares remaining to be issued on the third anniversary date of the Cylance acquisition. The year ended February 29, 2020, included approximately 2,802,067 Exchange Shares to be issued in equal installments on the two anniversary dates of the Cylance acquisition thereafter. There were no service or other requirements associated with the issuance of these shares.
(4) 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 diluted loss per share for the years ended February 28, 2022, February 28, 2021 and February 29, 2020 as to do so would be antidilutive.
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
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in AOCL by component net of tax, for the years ended February 28, 2022, February 28, 2021 and February 29, 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| As At |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Available-for-Sale Debt Securities | | | | | |
Balance, beginning of period | $ | — | | | $ | — | | | $ | 2 | |
Other comprehensive loss before reclassification | — | | | — | | | (2) | |
| | | | | |
Accumulated net unrealized gains on available-for-sale debt securities | $ | — | | | $ | — | | | $ | — | |
Cash Flow Hedges | | | | | |
Balance, beginning of period | $ | 1 | | | $ | (1) | | | $ | — | |
Other comprehensive income (loss) before reclassification | — | | | 2 | | | (1) | |
Amounts reclassified from AOCL into net income (loss) | (1) | | | — | | | — | |
Accumulated net unrealized gains (losses) on derivative instruments designated as cash flow hedges | $ | — | | | $ | 1 | | | $ | (1) | |
Foreign Currency Cumulative Translation Adjustment | | | | | |
Balance, beginning of period | $ | (4) | | | $ | (9) | | | $ | (7) | |
Other comprehensive income (loss) | (6) | | | 5 | | | (2) | |
Foreign currency cumulative translation adjustment | $ | (10) | | | $ | (4) | | | $ | (9) | |
Change in Fair Value From Instrument-Specific Credit Risk On Debentures | | | | | |
Balance, beginning of period | $ | (9) | | | $ | (22) | | | $ | (14) | |
Other comprehensive income (loss) before reclassification | 1 | | | 7 | | | (8) | |
Amounts reclassified from AOCL into net income (loss) | — | | | 6 | | | — | |
| | | | | |
Change in fair value from instruments-specific credit risk on Debentures | $ | (8) | | | $ | (9) | | | $ | (22) | |
Other Post-Employment Benefit Obligations | | | | | |
Actuarial losses associated with other post-employment benefit obligations | $ | (1) | | | $ | (1) | | | $ | (1) | |
Accumulated Other Comprehensive Loss, End of Period | $ | (19) | | | $ | (13) | | | $ | (33) | |
During the year ended February 28, 2022, $1 million in gains (pre-tax and post-tax) associated with cash flow hedges were reclassified from AOCL into selling, marketing and administration expenses (February 28, 2021 - nil gains or losses).
10. COMMITMENTS AND CONTINGENCIES
(a)Letters of Credit
The Company has $27 million in collateralized outstanding letters of credit in support of certain leasing arrangements entered into in the ordinary course of business as of February 28, 2022. See the discussion of restricted cash in Note 3.
(b) Contingencies
Litigation
The Company is involved in litigation in the normal course of its business, both as a defendant and as a plaintiff. The Company is subject to a variety of claims (including claims related to patent infringement, purported class actions and other claims in the normal course of business) and may be subject to additional claims either directly or through indemnities against claims that it provides to certain of its partners and customers. In particular, the industry in which the Company competes has many participants that own, or claim to own, intellectual property, including participants that have
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
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 and subject the Company to significant liabilities.
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 February 28, 2022, there are no material 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 claims that have allegedly been infringed or the products that are alleged to infringe; 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; 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.
The Company has included the following summaries of certain of its legal proceedings though they do not meet the test for accrual described above.
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 former Chief Legal Officer as a defendant. The Court denied the motion to dismiss the Second Amended Complaint on March 19, 2018. On August 2, 2019, the Magistrate Judge issued a Report and Recommendation that the Court grant the defendants’ motion for judgment on the pleadings dismissing the claims of additional plaintiffs Cho and Ulug. On September 24, 2019, the District Court Judge accepted the Magistrate Judge’s recommendation and dismissed the claims of Cho and Ulug against all defendants. On October 17, 2019, Cho and Ulug filed a Notice of Appeal. Plaintiffs filed a motion for class certification on June 8, 2020. On January 26, 2021, the District Court granted the plaintiffs’ motion for class certification. The class includes “all persons who purchased or otherwise acquired the common stock of BlackBerry Limited on the NASDAQ during the period from March 28, 2013, through and including September 20, 2013.” The class excludes (a) all persons and entities who purchased or otherwise acquired the Company’s common stock between March 28, 2013, and April 10, 2013, and who sold all their the Company common stock before April 11, 2013, and (b) the Defendants, officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors, or assigns, and any entity in which any of the Defendants have or had a controlling interest. On February 9, 2021, the defendants filed a Rule 23(f) petition for interlocutory review of the class certification order with the Second Circuit Court of Appeals. The Second Circuit Court of Appeals denied the Rule 23(f) petition on June 23, 2021. The Second Circuit Court of Appeals affirmed the District Court judgment
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
dismissing Cho and Ulug’s claims on March 11, 2021, and denied Cho and Ulug’s petition for panel rehearing and rehearing en banc on April 28, 2021. On April 19, 2021, Defendants filed a motion for summary judgment, and both parties filed Daubert motions to exclude the testimony of the oppositions’ marketing and accounting experts. On May 5, 2021, the parties participated in a mediation with the Hon. Layn Phillips (ret.), which did not result in an agreement. On August 13, 2021, Plaintiffs filed an unopposed motion for approval of a class notice plan. On September 10, 2021, the Court (i) granted in part and denied in part the parties’ Daubert motions and (ii) granted Plaintiffs’ unopposed motion for approval of the class notice plan. Postcard notice was mailed on October 8, 2021; publication notice was issued starting on October 18, 2021. On January 3, 2022, the Court granted Defendants’ motion for summary judgment with respect to seven statements, and otherwise denied Defendants’ motion. Trial is scheduled to begin on April 7, 2022.
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. Before that motion was heard, the parties agreed to limit the class to purchasers who reside in Canada or purchased on the Toronto Stock Exchange. On November 15, 2018, the Court denied the Company’s motion for leave to appeal the order granting the plaintiffs leave to file a statutory claim for misrepresentation. On February 5, 2019, the Court entered an order certifying a class comprised persons (a) who purchased BlackBerry common shares between March 28, 2013, and September 20, 2013, and still held at least some of those shares as of September 20, 2013, and (b) who acquired those shares on a Canadian stock exchange or acquired those shares on any other stock exchange and were a resident of Canada when the shares were acquired. Notice of class certification was published on March 6, 2019. The Company filed its Statement of Defence on April 1, 2019, and discovery is proceeding.
On February 15, 2017, a putative employment class action was filed against the Company in the Ontario Superior Court of Justice. The Statement of Claim alleges that actions the Company took when certain of its employees decided to accept offers of employment from Ford Motor Company of Canada amounted to a wrongful termination of the employees’ employment with the Company. The claim seeks (i) an unspecified quantum of statutory, contractual, or common law termination entitlements; (ii) punitive or breach of duty of good faith damages of CAD$20,000,000, or such other amount as the Court finds appropriate, (iii) pre- and post- judgment interest, (iv) attorneys’ fees and costs, and (v) such other relief as the Court deems just. The Court granted the plaintiffs’ motion to certify the class action on May 27, 2019. The Company commenced a motion for leave to appeal the certification order on June 11, 2019. The Court denied the motion for leave to appeal on September 17, 2019. The Company filed its Statement of Defence on December 19, 2019, and discovery is proceeding.
Other contingencies
As at February 28, 2022, the Company has recognized $17 million (February 28, 2021 - $15 million) in funds from claims filed with the Ministry of Innovation, Science and Economic Development Canada relating to its Strategic Innovation Fund (“SIF”) program’s investment in BlackBerry QNX. A portion of this amount may be repayable in the future under certain circumstances if certain terms and conditions are not met by the Company, which is not probable at this time.
(c) Concentrations in Certain Areas of the Company’s Business
The Company attempts to ensure that most components essential to the Company’s business are generally available from multiple sources; however, certain components are currently obtained from limited sources within a competitive market, which subjects the Company to supply, availability and pricing risks. The Company has also entered into various agreements for the supply of components, and the manufacturing of its products; 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.
(d) Indemnifications
The Company enters into certain agreements that contain indemnification provisions under which the Company could be subject to costs and damages, including in the event of an infringement claim against the Company or an indemnified third party. Such intellectual property infringement indemnification clauses are generally not subject to any dollar limits and remain in effect for the term of the Company’s agreements. To date, the Company has not encountered material costs as a result of such indemnifications.
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
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 the Company, and its current and former directors and executive officers. The Company has not encountered material costs as a result of such indemnifications in fiscal 2022. See the Company’s Management Information Circular for its 2021 annual meeting of shareholders for additional information regarding the Company’s indemnification agreements with its current and former directors and executive officers.
11. LEASES
The Company has operating and finance leases primarily for corporate offices, research and development facilities, data centers and certain equipment. The Company’s leases have remaining lease terms of between one year and seven years, some of which may include options to extend the lease for up to 10 years, and some of which may include options to terminate the lease within three months.
The components of lease expense were as follows: | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Operating lease cost, included in selling, marketing and administration | $ | 23 | | | $ | 30 | | | $ | 33 | |
| | | | | |
Finance lease cost | | | | | |
Amortization of ROU assets, included in amortization | $ | — | | | $ | 1 | | | $ | 2 | |
| | | | | |
Total finance lease cost | $ | — | | | $ | 1 | | | $ | 2 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Cash used in operating activities related to operating lease payments | $ | 37 | | | $ | 37 | | | $ | 40 | |
Cash used in financing activities related to finance lease payments | — | | | 1 | | | 2 | |
During the year ended February 28, 2022, the Company entered into $6 million (February 28, 2021 - $4 million) in lease obligations and recognized a corresponding ROU asset of $6 million (February 28, 2021 - $4 million).
During the year ended February 28, 2022, the Company incurred losses of nil (February 28, 2021 - $37 million; February 29, 2020 - $8 million) on LLA impairment of ROU assets, as described in Note 3. The Company also had sublease income during the year ended February 28, 2022 of $3 million (February 28, 2021 - $1 million; February 29, 2020 - $2 million) and incurred short-term lease costs of $2 million (February 28, 2021 - $2 million; February 29, 2020 - $2 million).
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
Supplemental consolidated balance sheet information related to leases was as follows:
| | | | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 | | |
Operating leases | | | | | |
Operating lease assets | | | | | |
Operating lease ROU assets | $ | 50 | | | $ | 63 | | | |
Operating lease liabilities | | | | | |
Accrued liabilities | $ | 28 | | | $ | 33 | | | |
Operating lease liabilities | 66 | | | 90 | | | |
Total operating lease liabilities | $ | 94 | | | $ | 123 | | | |
| | | | | |
Finance leases | | | | | |
Finance lease assets | | | | | |
Property, plant and equipment | $ | — | | | $ | 3 | | | |
Accumulated amortization | — | | | (3) | | | |
Total finance lease assets | $ | — | | | $ | — | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 | | |
Weighted average remaining lease term | | | | | |
Operating leases | 4.3 years | | 4.7 years | | |
| | | | | |
Weighted average discount rate | | | | | |
Operating lease | 3.4 | % | | 3.4 | % | | |
| | | | | |
Maturities of undiscounted lease liabilities were as follows:
| | | | | | | | | | |
| | As at |
| | February 28, 2022 |
| | Operating Leases | | |
Fiscal year 2023 | | $ | 31 | | | |
Fiscal year 2024 | | 23 | | | |
Fiscal year 2025 | | 17 | | | |
Fiscal year 2026 | | 13 | | | |
Fiscal year 2027 | | 9 | | | |
Thereafter | | 8 | | | |
Total future minimum lease payments | | 101 | | | |
Less: | | | | |
Imputed interest | | (7) | | | |
Total | | $ | 94 | | | |
12. REVENUE AND 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. In the first quarter of fiscal 2022, the CODM, who is the Executive Chair and CEO of the Company, began making decisions and assessing the performance of the Company using three operating segments,
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
whereas the CODM previously made decisions and assessed the performance of the Company as a single operating segment.
The CODM does not evaluate operating segments using discrete asset information. The Company does not specifically allocate assets to operating segments for internal reporting purposes.
Segment Disclosures
The Company is now organized and managed as three operating segments: Cybersecurity, IoT, and Licensing and Other. Prior year information has been restated to conform to the current year presentation of the Company’s segment information.
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 following table shows information by operating segment for the fiscal year ended February 28, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cybersecurity | | IoT | | | | Licensing and Other | | | | Segment Totals |
Segment revenue | $ | 477 | | | | | $ | 178 | | | | | $ | 63 | | | | | $ | 718 | |
Segment cost of sales | 194 | | | | | 30 | | | | | 23 | | | | | 247 | |
Segment gross margin (1) | $ | 283 | | | | | $ | 148 | | | | | $ | 40 | | | | | $ | 471 | |
______________________________
(1) A reconciliation of total segment gross margin to consolidated totals is set forth below.
The following table shows information by operating segment for the fiscal year ended February 28, 2021 and February 29, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended |
| February 28, 2021 | | | | February 29, 2020 |
| Cybersecurity | | IoT | | | | Licensing and Other | | Segment Totals | | | | Cybersecurity | | IoT | | | | Licensing and Other | | Segment Totals |
Segment revenue | $ | 491 | | | $ | 130 | | | | | $ | 272 | | | $ | 893 | | | | | $ | 475 | | | $ | 216 | | | | | $ | 349 | | | $ | 1,040 | |
Segment cost of sales | 192 | | | 23 | | | | | 30 | | | 245 | | | | | 185 | | | 29 | | | | | 53 | | | 267 | |
Segment gross margin (1) | $ | 299 | | | $ | 107 | | | | | $ | 242 | | | $ | 648 | | | | | $ | 290 | | | $ | 187 | | | | | $ | 296 | | | $ | 773 | |
______________________________
(1) A reconciliation of total segment gross margin to consolidated totals is set forth below.
Cybersecurity consists of the Company’s BlackBerry Spark software platform, BlackBerry AtHoc, BlackBerry Alert and BlackBerry SecuSUITE. The BlackBerry Spark platform is a comprehensive offering of security software products and services, including the BlackBerry Cyber Suite and the BlackBerry Spark Unified Endpoint Management Suite, which are also marketed together as the BlackBerry Spark Suite, offering the Company’s broadest range of tailored cybersecurity and endpoint management options. The BlackBerry Cyber Suite includes revenue from the Company’s Cylance artificial intelligence and machine learning-based platform consisting of BlackBerry Protect, BlackBerry Optics, BlackBerry Persona, BlackBerry Gateway, BlackBerry Guard managed services and other cybersecurity applications. The BlackBerry Spark UEM Suite includes the Company’s BlackBerry UEM, BlackBerry Dynamics, and BlackBerry Workspaces solutions. Cybersecurity revenue is generated predominantly through software licenses, commonly bundled with support, maintenance and professional services.
IoT consists of BlackBerry QNX, BlackBerry Certicom, BlackBerry Radar, BlackBerry IVY and other IoT applications. IoT revenue is generated predominantly through software licenses, commonly bundled with support, maintenance and professional services.
Licensing and Other consists of the Company’s intellectual property arrangements and settlement awards. Other consists of the Company’s legacy service access fees (“SAF”) business.
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
The following table reconciles total segment gross margin for the fiscal year ended February 28, 2022, February 28, 2021 and February 29, 2020 to the Company’s consolidated totals:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Total segment gross margin | 471 | | | $ | 648 | | | $ | 773 | |
Adjustments (1): | | | | | |
Less: Stock compensation | 4 | | | 5 | | | 5 | |
Less: Restructuring charges | — | | | — | | | 5 | |
Less: | | | | | |
Research & development | 219 | | | 215 | | | 259 | |
Selling, marketing and administration | 297 | | | 344 | | | 493 | |
Amortization | 165 | | | 182 | | | 194 | |
Impairment of long-lived assets | — | | | 43 | | | 10 |
Impairment of goodwill | — | | | 594 | | | 22 | |
Debentures fair value adjustment | (212) | | | 372 | | | (66) | |
Investment income (loss), net | (21) | | | 6 | | | (1) | |
Consolidated income (loss) before income taxes | $ | 19 | | | $ | (1,113) | | | $ | (148) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
______________________________
(1) The CODM reviews segment information on an adjusted basis, which excludes certain amounts as described below:
Stock compensation expenses - Equity compensation is a non-cash expense and does not impact the ongoing operating decisions taken by the Company’s management.
Restructuring charges - The Company believes that restructuring costs relating to employee termination benefits and facilities pursuant to the Resource Allocation Program (“RAP”) entered into in order to transition the Company from a legacy hardware manufacturer to a licensing driven software business do not reflect expected future operating expenses, are not indicative of the Company’s core operating performance, and may not be meaningful in comparison to the Company’s past operating performance.
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 discussed above in “Segment Disclosures”.
The Company’s revenue, classified by major geographic region in which the Company’s customers are located, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
North America (1) | $ | 413 | | | 57.5 | % | | $ | 633 | | | 70.9 | % | | $ | 743 | | | 71.4 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Europe, Middle East and Africa | 234 | | | 32.6 | % | | 197 | | | 22.1 | % | | 221 | | | 21.3 | % |
| | | | | | | | | | | |
Other regions | 71 | | | 9.9 | % | | 63 | | | 7.0 | % | | 76 | | | 7.3 | % |
| | | | | | | | | | | |
Total | $ | 718 | | | 100.0 | % | | $ | 893 | | | 100.0 | % | | $ | 1,040 | | | 100.0 | % |
______________________________
(1) 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.
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
Revenue, classified by timing of recognition, was as follows:
| | | | | | | | | | | | | | | | | |
| For the Year Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Products and services transferred over time | $ | 428 | | | $ | 476 | | | $ | 512 | |
Products and services transferred at a point in time | 290 | | | 417 | | | 528 | |
Total | $ | 718 | | | $ | 893 | | | $ | 1,040 | |
Revenue contract balances
The following table sets forth the activity in the Company’s revenue contract balances for the fiscal year ended February 28, 2022:
| | | | | | | | | | | | | | | | | |
| Accounts Receivable | | Deferred Revenue | | Deferred Commissions |
Opening balance as at February 28, 2021 | $ | 188 | | | $ | 294 | | | $ | 21 | |
Increases due to invoicing of new or existing contracts, associated contract acquisition costs, or other | 702 | | | 597 | | | 19 | |
Decrease due to payment, fulfillment of performance obligations, or other | (752) | | | (647) | | | (24) | |
| | | | | |
Decrease, net | (50) | | | (50) | | | (5) | |
Closing balance as at February 28, 2022 | $ | 138 | | | $ | 244 | | | $ | 16 | |
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 February 28, 2022 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 February 28, 2022 |
| Less than 12 Months | | 12 to 24 Months | | Thereafter | | Total |
Remaining performance obligations | $ | 211 | | | $ | 31 | | | $ | 12 | | | $ | 254 | |
Revenue recognized for performance obligations satisfied in prior periods
For the fiscal year ended February 28, 2022, $1 million in revenue was recognized relating to performance obligations satisfied in a prior period (fiscal year ended February 28, 2021 - $2 million; fiscal year ended February 29, 2020 - $1 million).
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
Property, plant and equipment, intangible assets, operating lease ROU assets and goodwill, classified by geographic region in which the Company’s assets are located, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As at |
| February 28, 2022 | | February 28, 2021 |
| Property, Plant and Equipment, Intangible Assets, Operating Lease ROU Assets and Goodwill | | Total Assets | | Property, Plant and Equipment, Intangible Assets, Operating Lease ROU Assets and Goodwill | | Total Assets |
Canada | $ | 117 | | | $ | 467 | | | $ | 289 | | | $ | 504 | |
United States | 1,313 | | | 1,789 | | | 1,411 | | | 1,963 | |
Other | 27 | | | 311 | | | 31 | | | 351 | |
| $ | 1,457 | | | $ | 2,567 | | | $ | 1,731 | | | $ | 2,818 | |
Information About Major Customers
There was one customer that comprised 11% of the Company’s revenue in fiscal 2022 (fiscal 2021 - one customer that comprised 22%; fiscal 2020 - one customer that comprised 13%).
13. CASH FLOW AND ADDITIONAL INFORMATION
(a) Certain consolidated statements of cash flow information related to interest and income taxes paid is summarized as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Interest paid during the year | $ | 6 | | | $ | 15 | | | $ | 23 | |
Income taxes paid during the year | 5 | | | 5 | | | 8 | |
Income tax refunds received during the year | 6 | | | 2 | | | 9 | |
(b) Additional Information
Advertising expense, which includes media, agency and promotional expenses totaling $25 million is included in selling, marketing and administration expenses for the fiscal year ended February 28, 2022. (February 28, 2021 - $24 million; February 29, 2020 - $39 million)
Selling, marketing and administration expenses for the fiscal year ended February 28, 2022 included $1 million with respect to foreign exchange gain, net of foreign exchange hedging (February 28, 2021 - $1 million; February 29, 2020 - nil).
Foreign exchange
The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency, the U.S. dollar. The majority of the Company’s revenue in fiscal 2022 was transacted in U.S. dollars. Portions of the revenue were denominated in Canadian dollars, euros and British pounds. Other expenses, consisting mainly of salaries and certain other operating costs, were incurred primarily in Canadian dollars, but were also incurred in U.S. dollars, euros and British pounds. At February 28, 2022, approximately 37% of cash and cash equivalents, 23% of accounts receivable and 30% of accounts payable were denominated in foreign currencies (February 28, 2021 – 20%, 25% and 34%, respectively). These foreign currencies primarily include the Canadian dollar, euro and British pound. As part of its risk management strategy, the Company maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign currency hedging activities using derivative financial instruments, including currency forward contracts and currency options. The Company does not use derivative instruments for speculative purposes.
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
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
prevailing interest rates. The Company has also issued Debentures with a fixed interest rate as described in Note 6. The fair value of the 1.75% Debentures will fluctuate with changes in prevailing interest rates. Consequently, the Company is exposed to interest rate risk as a result of the 1.75% Debentures. The Company does not currently utilize interest rate derivative instruments to hedge its investment portfolio or changes in the market value of the 1.75% Debentures.
Credit risk
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 February 28, 2022, no single issuer represented more than 10% of the total cash, cash equivalents and investments (February 28, 2021 - no single issuer represented more than 13% of the total cash, cash equivalents and investments), representing cash balances at one of the Company’s banking counterparties.
Liquidity risk
Cash, cash equivalents, and investments were approximately $770 million as at February 28, 2022. The Company’s management remains focused on efficiently managing working capital balances and managing the liquidity needs of the business. Based on its current financial projections, the Company believes its financial resources, together with expected future operating cash generating and operating expense reduction activities and access to other potential financing arrangements, should be sufficient to meet funding requirements for current financial commitments and future operating expenditures not yet committed, and should provide the necessary financial capacity for the foreseeable future.
Government subsidies
During fiscal 2021, the Government of Canada announced the Canada Emergency Wage Subsidy (“CEWS”) and the Canada Emergency Rent Subsidy (“CERS”) for Canadian employers whose businesses were affected by the COVID-19 pandemic. The CEWS program initially ran for a thirty-six week period between March and November 2020 and the CERS program for a period between September 2020 and July 2021. These programs were subsequently extended to October 2021. The CEWS program provided a subsidy of up to 75% of eligible employees’ employment insurable remuneration, subject to certain criteria. The extension also included a gradual decrease to the subsidy rate. CEWS received after June 5, 2021 may be repayable in the future under certain circumstances if certain terms and conditions are not met by the Company, which is not probable at this time. The CERS program provided a subsidy of up to 65% of eligible fixed property expenses. The base subsidy was determined based on the percentage revenue decline experienced by businesses affected by the COVID-19 pandemic. The CERS program gradually reduced the amount and availability of subsidies in the months leading up to the program’s final claim period.
During the third quarter of fiscal 2022, the Government of Canada announced the HHBRP to continue supporting businesses affected by the COVID-19 pandemic. The HHBRP provides a subsidy of up to 50% of eligible employees’ employment insurable remuneration, subject to certain criteria, and rent.
The Company applied for the CEWS, CERS and HHBRP to the extent it met the requirements to receive the subsidy and during the year ended February 28, 2022, recorded $46 million in government subsidies as a reduction to operating expenses in the consolidated statement of operations (February 28, 2021 - $53 million).