What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-09-24 compared with 2020-06-25 · 473 added, 240 removed, 411 unchanged (63% of the section changed)

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 unaudited interim consolidated financial statements and the accompanying notes (the “Consolidated Financial Statements”) of BlackBerry Limited for the three months ended May 31, 2020, included in Part I, Item 1 of this Form 10-Q, as well as the Company’s audited consolidated financial statements and accompanying notes and MD&A for the fiscal year ended February 29, 2020 (the “Annual MD&A”).

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the unaudited interim consolidated financial statements and the accompanying notes (the “Consolidated Financial Statements”) of BlackBerry Limited for the three and six months ended August 31, 2020, included in Part I, Item 1 of this Form 10-Q, as well as the Company’s audited consolidated financial statements and accompanying notes and MD&A for the fiscal year ended February 29, 2020 (the “Annual MD&A”).

The Consolidated Financial Statements are presented in U.S.

dollars and have been prepared in accordance with U.S.

dollars and have been prepared in accordance with United States generally accepted accounting principles (“U.S.

All financial information in this MD&A is presented in U.S.

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• the Company’s plans, strategies and objectives, including its intentions to achieve long-term profitable revenue growth and increase and enhance its product and service offerings;

• the Company’s expectations with respect to its revenue, profitability and free cash flow in fiscal 2021;

• the Company’s expectations with respect to its revenue in fiscal 2021 and fiscal 2022;

• the Company’s estimates of purchase obligations and other contractual commitments;

• the Company’s expectations with respect to the sufficiency of its financial resources.

The words “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “could”, “intend”, “believe”, “target”, “plan” and similar expressions are intended to identify forward-looking statements in this MD&A, including in the sections entitled “Business Overview - Strategy”, “Business Overview - COVID-19”, “Non-GAAP Financial Measures - Key Metrics - Free Cash Flow”, “Results of Operations - Three months ended May 31, 2020 compared to the three months ended May 31, 2019 - Revenue - Revenue by Product and Service”, “Results of Operations - Three months ended May 31, 2020 compared to the three months ended May 31, 2019 - Net Loss” and “Financial Condition - Debenture Financing and Other Funding Sources ”.

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, competition, and the Company’s expectations regarding its financial performance.

The words “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “could”, “intend”, “believe”, “target”, “plan” and similar expressions are intended to identify forward-looking statements in this MD&A, including in the sections entitled “Business Overview - Strategy”, “Business Overview - COVID-19”, “Results of Operations - Three months ended August 31, 2020 compared to the three months ended August 31, 2019 - Revenue - Revenue by Product and Service”, “Financial Condition - Debenture Financing and Other Funding Sources”, and in Part III of this Form 10-Q “Quantitative and Qualitative Disclosures About Market Risk - Credit and Customer Concentration”.

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 particularly in light of COVID-19, 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 the Annual Report.

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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 management, encryption, and embedded systems.

The Company is widely recognized for its intelligent security software and services, and believes that it delivers the broadest set of security capabilities and visibility in the market, covering users, devices, networks, apps and data.

The Company is widely recognized for its intelligent security software and services, and believes that it delivers the broadest set of security capabilities in the market to connect, secure and manage every endpoint in the Internet of Things (IoT).

The Company leverages its extensive technology portfolio to offer best-in-class security, safety and reliability to enterprise customers in growing segments of the IoT, cybersecurity, connected transportation, healthcare, financial services and government markets.

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The Company’s go-to-market strategy focuses principally on generating revenue from enterprise software, services and licensing.

The Company continues to build its developer and channel partner programs to bolster its direct sales and marketing efforts and promote the growth of an IoT ecosystem.

The Company continues to build its channel partner and developer programs to bolster its direct sales and marketing efforts and promote the growth of an IoT ecosystem.

Products and Services

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The Company is currently executing on a robust schedule of product launches for BlackBerry Spark to deliver a comprehensive security approach operating on one agent across all endpoints, administered from one console, leveraging one crowd-sourced threat data repository and managed in one cloud environment.

The BlackBerry Spark platform includes a suite of security software products and services, including BlackBerry Cylance, BlackBerry® UEM, BlackBerry® Dynamics™ and BlackBerry® Workspaces.

The Company also offers the BlackBerry® Spark SDK to promote the evolution of a platform ecosystem by enabling enterprise and independent software vendor (“ISV”) developers to integrate the security features of BlackBerry Spark into their own mobile and web applications.

BlackBerry Cylance offers leading AI and machine learning-based cybersecurity solutions, including:

The BlackBerry Spark platform is a comprehensive offering of security software products and services, including the BlackBerry Spark® Unified Endpoint Security Suite, BlackBerry® UEM, BlackBerry® Dynamics™ and BlackBerry® Workspaces.

These solutions are offered primarily through BlackBerry Spark® Suites, a range of tailored cybersecurity and endpoint management options.

The BlackBerry Spark UES Suite offers leading AI and machine learning-based cybersecurity solutions, including:

BlackBerry® Protect, an EPP solution that uses machine learning to prevent suspicious behavior and the execution of malicious code on an endpoint;

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and BlackBerry® Guard, a managed detection and response solution that provides continuous threat hunting and monitoring.

BlackBerry Cylance also offers incident response, compromised assessment and containment services to assist clients with forensic analysis, state of existing systems and remediation of attacks.

The Company also offers incident response, compromised assessment and containment services to assist clients with forensic analysis, state of existing systems and remediation of attacks.

BlackBerry UEM is a central software component of the Company’s secure communications platform, offering a “single pane of glass”, or unified console view, for managing and securing devices, applications, identity, content and endpoints across all leading operating systems.

BlackBerry Dynamics offers a best-in-class development platform and secure container for mobile applications, including the Company’s own enterprise applications such as BlackBerry® Work and BlackBerry® Connect for secure collaboration.

BlackBerry IoT Solutions

The BlackBerry IoT Solutions business includes BlackBerry® QNX®, BlackBerry® AtHoc®, SecuSUITE, BlackBerry Certicom®, BlackBerry Radar®, and other IoT applications.

BlackBerry QNX is a global provider of real-time operating systems, middleware, development tools, and professional services for connected embedded systems in the automotive, medical, industrial automation and other markets.

The BlackBerry IoT Solutions business consists of BlackBerry Technology Solutions (“BTS”), BlackBerry® AtHoc® and SecuSUITE.

The principal component of BTS is BlackBerry QNX, a global provider of real-time operating systems, middleware, development tools, and professional services for connected embedded systems in the automotive, medical, industrial automation and other markets.

A recognized leader in automotive software, BlackBerry QNX offers a growing portfolio of safety-certified, secure and reliable platform solutions and is focused on achieving design wins with automotive original equipment manufacturers (“OEMs”), Tier 1 vendors and automotive semiconductor suppliers.

These solutions include the Neutrino® operating system and the BlackBerry QNX® CAR

platform, the most advanced embedded software platform for the autonomous vehicle market, as well as other products designed to alleviate the challenges of compliance with ISO 26262, the automotive industry’s functional safety standard.

These solutions include the Neutrino® real-time operating system and the BlackBerry QNX® CAR platform, the most advanced embedded software platform for the autonomous vehicle market, as well as other products designed to alleviate the challenges of compliance with ISO 26262, the automotive industry’s functional safety standard.

Additionally, the Company’s secure automotive over-the-air software update management service allows OEMs to manage the life cycle of the software and security in their vehicles.

The Company is developing a concept system to integrate BlackBerry Spark capabilities, including AI and machine learning technologies, with BlackBerry QNX automotive solutions.

BlackBerry AtHoc is a secure, networked crisis communications software platform that enables people, devices and organizations to exchange critical information in real time during business continuity and life safety operations.

In addition to BlackBerry QNX, BTS includes the BlackBerry Radar® asset tracking solution, BlackBerry Certicom® cryptography and key management products, and BlackBerry Messenger (BBM®) Enterprise service.

BlackBerry AtHoc is a secure critical event management platform that enables people, devices and organizations to exchange critical information in real time during business continuity and life safety operations.

The platform securely connects with a diverse set of endpoints to distribute emergency mass notifications, improve personnel accountability and facilitate the bidirectional collection and sharing of data within and between organizations.

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SecuSUITE® for Government is a certified, multi-OS voice and text messaging solution with advanced encryption and anti-eavesdropping capabilities providing a maximum level of security on the individual device level for public authorities and businesses.

The Company’s IoT Solutions offerings also include its BlackBerry Radar asset tracking solution, BlackBerry Certicom cryptography and key management products, BlackBerry Jarvis™ code security testing platform, and BlackBerry Messenger (BBM®) Enterprise service.

The BlackBerry Spark and BlackBerry IoT Solutions businesses are both complemented by the enterprise and cybersecurity consulting services offered by the Company’s BlackBerry® Professional Services business.

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The Company owns rights to an array of patented and patent pending technologies which include, but are not limited to, operating systems, networking infrastructure, acoustics, messaging, enterprise software, automotive subsystems, cybersecurity, cryptography and wireless communications.

In addition, in recent years, the Company licensed its device security software and service suite and related brand assets to outsourcing partners who designed, manufactured, marketed and continue to provide customer support for BlackBerry-branded handsets featuring the Company’s secure Android™ software.

In addition, in recent years, the Company has licensed its device security software and service suite and related brand assets to outsourcing partners who design, manufacture, market and provide customer support for BlackBerry-branded handsets featuring the Company’s secure Android™ software.

The Company also entered into licensing arrangements with manufacturers of other devices with embedded BlackBerry cybersecurity technology.

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• Announced that BlackBerry QNX software is embedded in more than 175 million cars on the road;

• Announced that BlackBerry® Unified Endpoint Security (UES) was validated by MITRE ATT&CK APT29, which examines the ability to detect sophisticated tactics and techniques used by APT29, a group that cybersecurity experts believe operates on behalf of the Russian government;

• Announced that BlackBerry UEM achieved National Information Assurance Partnership (NIAP) and U.S.

Department of Defense Information Network (DoDIN) approvals;

• Announced that BlackBerry® UES was validated by MITRE ATT&CK APT29, which examines the ability to detect sophisticated tactics and techniques used by APT29, a group that cybersecurity experts believe operates on behalf of the Russian government;

• Introduced AtHoc Managed Service to enable organizations of any size to maintain crisis communications capability;

• Announced the launch of BlackBerry AtHoc Public Safety Edition to support local governments and universities with critical event management programs;

• Announced dedicated European Union market version of the BlackBerry AtHoc service to comply with data residency mandates;

• Announced that BlackBerry is making available PE Tree, a free open-source tool for cybersecurity professionals that significantly reduces the time and effort required to reverse engineer malware;

• Announced a collaboration with Intel to deliver a new release of BlackBerry Optics to stop cryptojacking malware;

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• Partnered with Bell to become Bell’s preferred mobile threat defense solution provider, delivering BlackBerry Protect to Canadian enterprise customers;

• Announced expanded partnerships with Vodafone and TELUS to offer BlackBerry AtHoc as their secure critical event management and crisis communications solution;

• Announced that the BlackBerry Enterprise Partner Program and the BlackBerry Cylance Partner Program both received a 5-Star rating from CRN for the fourth consecutive year;

• Announced that the BlackBerry® Government Mobility Suite has achieved Federal Risk and Authorization Management Program (FedRAMP) authorization;

• Announced that the U.S.

Air Force chose BlackBerry Spark for secure productivity;

• Expanded the leadership position of the BlackBerry AtHoc crisis communication system within the U.S.

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• Announced that the German Development Agency chose BlackBerry AtHoc as its emergency mass notification system;

• Announced that StradVision will utilize the QNX® Software Development Platform within a number of next generation advanced driver assistance systems (ADAS) and autonomous vehicles from South Korean automakers;

• Announced that the Neutrino operating system will power ADAS systems in Canoo’s next generation electric vehicles;

• Announced the development of an autonomous driving domain controller with Desay SV Automotive for the Xpeng P7 intelligent electric sports sedan;

• Entered into a partnership with Dedrone, a market and technology leader in airspace security, to deliver advanced counter-drone technology to secure the world’s most critical sites;

• Announced that Sliced Tech will host SecuSUITE for Government for Australian government and enterprise customers;

• Announced that BlackBerry Radar added more than 12 new channel partners in the past six months including two within Mexico, expanding the company’s asset monitoring solutions outside of the U.S.

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• Expanded the Company’s commitment to the United Nations Global Compact Sustainable Development Goals;

• Extended the Company’s partnership with the American Red Cross by donating BlackBerry AtHoc software to support community safety and resilience;

• Appointed Thomas Eacobacci as President;

• Appointed Marjorie Dickman as Chief Government Affairs and Public Policy Officer.

Debt Redemption and New Issuance

On September 1, 2020, the Company redeemed its outstanding 3.75% unsecured convertible debentures (the “3.75% Debentures”) for a redemption amount of approximately $615 million (the “Redemption Amount”), which settled all outstanding obligations of the Company in respect of the 3.75% Debentures.

On September 1, 2020, the Company issued an aggregate of $365 million principal amount of new 1.75% unsecured convertible debentures maturing on November 13, 2023 (the “1.75% Debentures”) to Fairfax and another institutional investor on a private placement basis.

Fairfax agreed to acquire $330 million principal amount of the 1.75% Debentures and receives interest at the same rate as the other holder of the 1.75% Debentures.

The 1.75% Debentures have terms that are substantially identical to those of the 3.75% Debentures except that the 1.75% Debentures are convertible into common shares at a price of $6.00 per common share, bear a lower rate of interest at 1.75% per annum, are subject to a higher approval threshold for extraordinary resolutions and mature in 2023.

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.

Quarterly and annual interest expense on the 1.75% Debentures will be approximately $2 million and $6 million, respectively.

In March 2020, the World Health Organization characterized the novel coronavirus (“COVID-19”) as a global pandemic and extraordinary actions have been taken by international, federal, state, provincial and local governmental authorities to contain and combat the spread of COVID-19 in regions throughout the world.

The COVID-19 outbreak and related public health measures, including orders to shelter-in-place, travel restrictions and mandated business closures, have adversely affected workforces, organizations, consumers, economies, and financial markets globally, leading to an economic downturn and increased market volatility.

It has also disrupted the normal operations of the Company and the businesses of many of the Company’s customers, suppliers and distribution partners.

The pandemic has also disrupted the normal operations of the Company and the businesses of many of the Company’s customers, suppliers and distribution partners.

To protect the health and safety of the Company’s employees, contractors, customers and visitors, the Company responded rapidly to COVID-19 by proactively mandating remote working, utilizing virtual meetings and suspending employee travel.

All of the Company’s currently planned customer, industry and other stakeholder events have been shifted to virtual-only experiences, and the Company may deem it advisable to similarly alter, postpone, or cancel entirely, additional events in the future.

As public health protocols begin to accommodate returning to work at the Company’s facilities, the Company is implementing additional safety measures at all of its facilities, including increased frequency in cleaning and disinfecting as well as hygiene and social distancing practices.

To the extent that public health protocols have accommodated returning to work at certain of the Company’s facilities, the Company has implemented additional safety measures at its facilities, including increased frequency in cleaning and disinfecting as well as hygiene and social distancing practices.

The Company has a limited history of having a remote workforce and the long-term impact on, and the resulting types of continuing investments for, the Company’s employee base is uncertain.

In response to certain anticipated impacts from the COVID-19 pandemic, the Company has also implemented a series of temporary cost reduction measures to further preserve financial flexibility.

These actions include the postponement of certain discretionary spending and capital expenditures, taking advantage of the broad-based employer relief provided by governments

in Canada, the United States and other jurisdictions, temporarily suspending certain company matching contributions to employee retirement savings plans and deferring increases in the base salaries of many employees and executives.

The economic downturn and uncertainty caused by the COVID-19 outbreak and the measures undertaken to contain its spread have already negatively affected the Company’s QNX automotive software business and will likely cause volatility in demand for the Company’s products and services, adversely affect the ability of the Company’s sales and professional services teams to meet with customers and provide service, negatively impact expected spending from new customers and increase sales cycle times.

The Company continues to evaluate the current and potential impact of the COVID-19 outbreak on its business, results of operations and consolidated financial statements, including the impairment of goodwill and indefinite-lived intangible assets and the collectability of receivables.

The ultimate impact of the COVID-19 pandemic will depend on, among other things, the duration and severity of the pandemic, the governmental restrictions that have been, and may continue to be, imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the outbreak, and global economic conditions.

In light of the changing nature of the COVID-19 pandemic and uncertainty regarding the duration, severity, and possible resurgence of the pandemic in future periods, the long-term impact on the Company’s business is currently unclear.

Although the effects of the pandemic may not be fully reflected in the Company’s business until future periods, the Company believes that the COVID-19 pandemic could have a material adverse impact on the Company’s consolidated business, results of operations and financial condition in fiscal 2021.

In response to certain anticipated and ongoing impacts from the COVID-19 pandemic, the Company has also implemented a series of temporary cost reduction measures to further preserve financial flexibility.

These actions include the postponement of certain discretionary spending and capital expenditures, taking advantage of the broad-based employer relief provided by governments in Canada, the United States and other jurisdictions, temporarily suspending certain company matching contributions to employee retirement savings plans and deferring increases in the base salaries of many employees and executives.

The economic downturn and uncertainty caused by the COVID-19 outbreak and the measures undertaken to contain its spread are expected to continue to negatively affect the Company’s QNX automotive software business and have caused volatility in demand for the Company’s 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 sequential revenue growth and observed a partial recovery in global automotive production volumes in the second quarter of fiscal 2021, the Company believes that the COVID-19 pandemic has had and may continue to have a material adverse impact on the Company’s consolidated business, results of operations and financial condition in fiscal 2021.

The Company does not expect the COVID-19 pandemic and its related economic impact to materially adversely affect its liquidity position.

As the COVID-19 pandemic evolves, the Company will continue 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.

First Quarter Fiscal 2021 Summary Results of Operations

The following table sets forth certain unaudited consolidated statements of operations data for the quarter ended May 31, 2020 compared to the quarter ended May 31, 2019 under U.S.

In light of the changing nature of the COVID-19 pandemic and uncertainty regarding the duration, severity, and possible resurgence of the pandemic and government actions in response thereto, the long-term impact on the Company’s business may not be fully reflected until future periods.

long-lived assets and the collectability of receivables.

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.

Second Quarter Fiscal 2021 Summary Results of Operations

The following table sets forth certain unaudited consolidated statements of operations data for the quarter ended August 31, 2020 compared to the quarter ended August 31, 2019 under U.S.

For the Three Months Ended

(in millions, except for share and per share amounts)

May 31, 2020 May 31, 2019 Change

August 31, 2020 August 31, 2019 Change

Revenue $ 259 $ 244 $ 15

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Operating expenses 221 219 2

Investment income, net — 3 (3)

Investment loss, net (5) — (5)

Loss before income taxes (27) (43) 16

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Weighted-average number of shares outstanding (000’s)

Basic 557,839 551,845

558,882 552,343

558,882 612,843

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(1) Basic loss per share on a U.S.

GAAP basis for second quarter of fiscal 2021 includes 2,802,067 common shares remaining to be issued in equal installments on the next two anniversary dates of the Cylance acquisition, in consideration for the acquisition.

Basic loss per share on a U.S.

GAAP basis for the second quarter of fiscal 2020 includes 4,182,189 common shares to be issued in equal installments on the three anniversary dates of the Cylance acquisition, in consideration for the acquisition.

There are no service or other requirements associated with the issuance of these shares.

(2) Diluted loss per share on a U.S.

GAAP basis for the first quarter of fiscal 2021 does not include the dilutive effect of the Debentures (defined below) as to do so would be anti-dilutive.

GAAP basis for the second quarter of fiscal 2021 does not include the dilutive effect of the 3.75% Debentures as to do so would be anti-dilutive.

Diluted loss per share on a U.S.

GAAP basis for the first quarter of fiscal 2021 and 2020 does not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive.

GAAP basis for the second quarter of fiscal 2021 and 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 Company’s calculation of the diluted weighted average number of shares outstanding.

Financial Highlights

The Company had approximately $955 million in cash, cash equivalents and investments as of May 31, 2020.

In the first quarter of fiscal 2021, the Company recognized revenue of $206 million and incurred a net loss of $636 million, or $1.14 basic and diluted loss per share on a U.S.

The Company recognized adjusted revenue of $214 million and adjusted net income of $12 million, and adjusted earnings of $0.02 per share, on a non-GAAP basis in the first quarter of fiscal 2021.

The Company had approximately $977 million in cash, cash equivalents and investments as of August 31, 2020 and $990 million in cash, cash equivalents and investments as of February 29, 2020.

In the second quarter of fiscal 2021, the Company recognized revenue of $259 million and incurred a net loss of $23 million, or $0.04 basic and diluted loss per share on a U.S.

In the second quarter of fiscal 2020, the Company recognized revenue of $244 million and incurred a net loss of $44 million, or $0.08 basic and $0.10 diluted loss per share on a U.S.

The Company recognized adjusted revenue of $266 million and adjusted net income of $62 million, and adjusted earnings of $0.11 per share, in the second quarter of fiscal 2021.

The Company recognized adjusted revenue of $261 million and adjusted net income of $1 million, and adjusted earnings of nil per share, in the second quarter of fiscal 2020.

See “Non-GAAP Financial Measures” below.

Debentures Fair Value Adjustment

As previously disclosed, the Company elected the fair value option to account for the 3.75% unsecured convertible debentures (the “Debentures”);

As previously disclosed, the Company elected the fair value option to account for the 3.75% Debentures;

therefore, periodic revaluation has been and continues to be required under U.S.

The fair value adjustment does not impact the terms of the 3.75% Debentures such as the face value, the redemption features or the conversion price.

In the first quarter of fiscal 2021, the fair value of the Debentures decreased by approximately $7 million.

For the three months ended May 31, 2020, the Company recorded non-cash income relating to changes in fair value from instrument specific credit risk of $8 million in Accumulated Other Comprehensive Loss and a non-cash charge relating to changes in fair value from non-credit components of $1 million (pre-tax and after tax) (the “Q1 Fiscal 2021 Debentures Fair Value Adjustment”) in the Company’s consolidated statements of operations.

The fair value as at August 31, 2020

was determined to be the Redemption Amount established in connection with the announced redemption of the 3.75% Debentures, as described above in “Business Overview - Debt Redemption and New Issuance”.

In the second quarter of fiscal 2021, the fair value of the 3.75% Debentures increased by approximately $11 million.

For the three months ended August 31, 2020, the Company recorded non-cash income relating to changes in fair value from instrument specific credit risk of $7 million in Other Comprehensive Income (Loss) (“OCI”) and a non-cash charge relating to changes in fair value from non-credit components of $18 million (pre-tax and after tax) (the “Q2 Fiscal 2021 Debentures Fair Value Adjustment”) in the Company’s consolidated statements of operations.

For the six months ended August 31, 2020, the Company recorded non-cash income relating to changes in fair value from instrument specific credit risk of $15 million in OCI and a non-cash charge relating to changes in fair value from non-credit components of $19 million (pre-tax and after tax) (the “Fiscal 2021 Debentures Fair Value Adjustment”) in the Company’s consolidated statements of operations.

Non-GAAP Financial Measures

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GAAP, and information contained in this MD&A is presented on that basis.

On June 24, 2020, the Company announced financial results for the three months ended May 31, 2020, which included certain non-GAAP financial measures, including adjusted revenue, adjusted gross margin (before taxes), adjusted gross margin percentage (before taxes), adjusted operating expense, adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage, adjusted EBITDA margin percentage, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense and free cash flow.

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 the items below from the Company’s financial results.

The Company believes that excluding the below items provides readers of the Company’s financial statements with a more consistent basis for comparison across accounting periods and is more useful in helping readers understand the Company’s operating results and underlying operational trends.

On September 24, 2020, the Company announced financial results for the three and six months ended August 31, 2020, which included certain non-GAAP financial measures, including adjusted revenue, adjusted gross margin, adjusted gross margin percentage, adjusted operating expense, adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage, adjusted EBITDA margin percentage, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense and free cash flow.

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 measures provide readers of the Company’s financial statements with a consistent basis for comparison across accounting periods and is useful in helping readers understand the Company’s operating results and underlying operational trends.

• Debentures fair value adjustment .

The Company has elected to measure its outstanding 3.75% Debentures at fair value in accordance with the fair value option under U.S.

Each period, the fair value of the Debentures is recalculated and resulting non-cash gains and losses from the change in fair value from non-credit components of the Debentures are recognized in income.

Each period, the fair value of the 3.75% Debentures is recalculated and resulting non-cash income and charges from the change in fair value from non-credit components of the 3.75% Debentures are recognized in income.

The amount can vary each period depending on changes to the Company’s share price.

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Therefore, U.S.

GAAP commission expense after the acquisitions will not reflect commission expense that would have

been reported if the acquired deferred commissions were not written down to fair value.

GAAP commission expense after the acquisitions will not reflect commission expense that would have been reported if the acquired deferred commissions were not written down to fair value.

The Company believes that reversing the acquisition-related deferred commission write-downs (so that the full amount of commission expense is included) provides a more appropriate representation of commission expense in a given period and, therefore, provides readers of the Company’s financial statements with a more consistent basis for comparison across accounting periods.

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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 GAAP based measures for the three months ended May 31, 2020 and May 31, 2019

Readers are cautioned that adjusted revenue, adjusted gross margin (before taxes), adjusted gross margin percentage (before taxes), adjusted operating expense, adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage, adjusted EBITDA margin percentage, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense and free cash flow and similar measures do not have any standardized meaning prescribed by U.S.

Reconciliation of non-GAAP based measures with most directly comparable U.S.

GAAP based measures for the three months ended August 31, 2020 and August 31, 2019

Readers are cautioned that adjusted revenue, adjusted gross margin, adjusted gross margin percentage, adjusted operating expense, adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage, adjusted EBITDA margin percentage, adjusted net income (loss), adjusted income (loss) per share, adjusted research and development expense, adjusted selling, marketing and administrative expense, adjusted amortization expense and free cash flow 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.

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A reconciliation of the most directly comparable U.S.

GAAP financial measures for the three months ended May 31, 2020 and May 31, 2019 to adjusted financial measures is reflected in the tables below:

For the Three Months Ended (in millions) May 31, 2020 May 31, 2019

GAAP financial measures for the three months ended August 31, 2020 and August 31, 2019 to adjusted financial measures is reflected in the tables below:

For the Three Months Ended (in millions) August 31, 2020 August 31, 2019

Revenue $ 259 $ 244

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GAAP Software and Services revenue to adjusted Software and Services revenue

Reconciliation of operating expense for the three months ended May 31, 2020, February 29, 2020 and May 31, 2019 to adjusted operating expense is reflected in the tables below:

For the Three Months Ended (in millions) May 31, 2020 February 29, 2020 May 31, 2019

Reconciliation of operating expense for the three months ended August 31, 2020, May 31, 2020 and August 31, 2019 to adjusted operating expense is reflected in the tables below:

For the Three Months Ended (in millions) August 31, 2020 May 31, 2020 August 31, 2019

Operating expense $ 221 $ 788 $ 219

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______________________________

(1) See “First Quarter Fiscal 2021 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment”

Reconciliation of GAAP net loss and GAAP basic loss per share for the three months ended May 31, 2020 and May 31, 2019 to adjusted net income and adjusted basic earnings per share is reflected in the tables below:

For the Three Months Ended (in millions, except per share amounts) May 31, 2020 May 31, 2019

Basic earnings per share Basic earnings per share

(1) See “Second Quarter Fiscal 2021 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment”

Reconciliation of U.S.

GAAP net loss and U.S.

GAAP basic loss per share for the three months ended August 31, 2020 and August 31, 2019 to adjusted net income and adjusted basic earnings per share is reflected in the tables below:

For the Three Months Ended (in millions, except per share amounts) August 31, 2020 August 31, 2019

Basic earnings (loss) per share Basic earnings (loss) per share

Net loss $ (23) $(0.04) $ (44) $(0.08)

6 unchanged sentences

Business acquisition and integration costs — 2

LLA impairment charge 21 2

Adjusted net income $ 62 $0.11 $ 1 $0.00

Reconciliation of U.S.

GAAP Software and Services revenue for the three months ended August 31, 2020 and August 31, 2019 to adjusted Software and Services revenue is reflected in the tables below:

For the Three Months Ended (in millions) August 31, 2020 August 31, 2019

Software and Services Revenue $ 151 $ 168

Software deferred revenue acquired 7 17

Adjusted Software and Services revenue $ 158 $ 185

Reconciliation of U.S.

GAAP research and development, selling, marketing and administration, and amortization expense for the three months ended August 31, 2020 and August 31, 2019 to adjusted research and development, selling, marketing and administration, and amortization expense is reflected in the tables below:

For the Three Months Ended (in millions) August 31, 2020 August 31, 2019

Research and development $ 57 $ 62

Stock compensation expense 2 3

Adjusted research and development $ 55 $ 59

Selling, marketing and administration $ 79 $ 130

Restructuring charges 1 —

Software deferred commission expense acquired (3) (4)

Stock compensation expense 6 10

Business acquisition and integration costs — 2

Adjusted selling, marketing and administration $ 75 $ 122

Amortization $ 46 $ 48

Acquired intangibles amortization 32 36

Adjusted amortization $ 14 $ 12

Adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage and adjusted EBITDA margin percentage for the three months ended August 31, 2020 and August 31, 2019 are reflected in the table below.

For the Three Months Ended (in millions) August 31, 2020 August 31, 2019

Operating loss $ (22) $ (43)

Non-GAAP adjustments to operating loss

Software deferred revenue acquired 7 17

Restructuring charges 1 1

Stock compensation expense 9 14

Debenture fair value adjustment 18 (23)

Software deferred commission expense acquired (3) (4)

Acquired intangibles amortization 32 36

Business acquisition and integration costs — 2

LLA impairment charge 21 2

Total non-GAAP adjustments to operating loss 85 45

Adjusted operating income 63 2

Amortization 50 54

Acquired intangibles amortization (32) (36)

Adjusted EBITDA $ 81 $ 20

Adjusted revenue (per above) $ 266 $ 261

Adjusted operating income margin % (1)

Adjusted EBITDA margin % (2)

______________________________

(1) Adjusted operating income margin % is calculated by dividing adjusted operating income by adjusted revenue

(2) Adjusted EBITDA margin % is calculated by dividing adjusted EBITDA by adjusted revenue

Reconciliation of non-GAAP based measures with most directly comparable U.S.

GAAP based measures for the six months ended August 31, 2020 and August 31, 2019.

A reconciliation of the most directly comparable U.S.

GAAP financial measures for the six months ended August 31, 2020 and August 31, 2019 to adjusted financial measures is reflected in the tables below:

For the six months ended (in millions) August 31, 2020 August 31, 2019

Revenue $ 465 $ 491

Software deferred revenue acquired (1)

Adjusted revenue $ 480 $ 528

Gross margin $ 342 $ 353

Software deferred revenue acquired (1)

Restructuring charges — 2

Stock compensation expense 3 2

Adjusted gross margin $ 360 $ 394

Gross margin % 73.5 % 71.9 %

Software deferred revenue acquired (1)

Restructuring charges — % 0.4 %

Stock compensation expense 0.6 % 0.4 %

Adjusted gross margin % 75.0 % 74.6 %

Operating expense $ 1,009 $ 432

Restructuring charges 2 —

Stock compensation expense 20 29

Debenture fair value adjustment (2)

Software deferred commission expense acquired (6) (9)

Acquired intangibles amortization 65 71

Business acquisition and integration costs — 3

Goodwill impairment charge 594 —

LLA impairment charge 21 2

Adjusted operating expense $ 294 $ 387

______________________________

(1) See Reconciliation of U.S.

GAAP Software and Services revenue to adjusted Software and Service revenue

(2) See “Second Quarter Fiscal 2021 Summary Results of Operations - Financial Highlights - Debentures Fair Value Adjustment”

Reconciliation of U.S.

GAAP net loss and U.S.

GAAP basic loss per share for the six months ended August 31, 2020 and August 31, 2019 to the adjusted net income and adjusted basic earnings per share is reflected in the tables below:

For the six months ended (in millions, except per share amounts) August 31, 2020 August 31, 2019

Basic earnings (loss) per share Basic earnings (loss) per share

Net loss $ (659) $ (1.18) $ (79) $ (0.14)

Software deferred revenue acquired 15 37

Restructuring charges 2 2

Stock compensation expense 23 31

Debenture fair value adjustment 19 (51)

Software deferred commission expense acquired (6) (9)

Acquired intangibles amortization 65 71

Business acquisition and integration costs — 3

Goodwill impairment charge 594 —

LLA impairment charge 21 2

Acquisition valuation allowance — (1)

Adjusted net income $ 74 $0.13 $ 6 $0.01

Reconciliation of U.S GAAP Software and Services revenue for the three months ended May 31, 2020 and May 31, 2019 to adjusted Software and Services revenue is reflected in the tables below:

For the Three Months Ended (in millions) May 31, 2020 May 31, 2019

Reconciliation of U.S.

GAAP Software and Services revenue for the six months ended August 31, 2020 and August 31, 2019 to adjusted Software and Services revenue is reflected in the tables below:

For the six months ended (in millions) August 31, 2020 August 31, 2019

Software and Services Revenue $ 299 $ 336

1 unchanged sentence

Adjusted Software and Services Revenue $ 314 $ 373

Reconciliation of U.S GAAP research and development, selling, marketing and administration, and amortization expense for the three months ended May 31, 2020 and May 31, 2019 to adjusted research and development, selling, marketing and administration, and amortization expense is reflected in the tables below:

For the Three Months Ended (in millions) May 31, 2020 May 31, 2019

Reconciliation of U.S.

GAAP research and development, selling, marketing and administration, and amortization expense for the six months ended August 31, 2020 and August 31, 2019 to adjusted research and development, selling, marketing and administration, and amortization expense is reflected in the tables below:

For the six months ended (in millions) August 31, 2020 August 31, 2019

Research and development $ 114 $ 133

10 unchanged sentences

Adjusted amortization $ 27 $ 26

Adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage and adjusted EBITDA margin percentage for the three months ended May 31, 2020 and May 31, 2019 are reflected in the table below.

For the Three Months Ended (in millions) May 31, 2020 May 31, 2019

Adjusted operating income, adjusted EBITDA, adjusted operating income margin percentage and adjusted EBITDA margin percentage for the six months ended August 31, 2020 and August 31, 2019 are reflected in the table below.

For the six months ended (in millions) August 31, 2020 August 31, 2019

Operating loss $ (667) $ (79)

8 unchanged sentences

Goodwill impairment charge 594 —

LLA impairment charge 21 2

Total non-GAAP adjustments to operating loss 733 86

10 unchanged sentences

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 estimate future performance.

Readers are cautioned that billings, recurring revenue percentage, annual recurring revenue (“ARR”), dollar-based net retention rate (“DBNRR”), QNX royalty revenue backlog, net customer churn rate and free cash flow do not have any standardized meaning prescribed by U.S.

Readers are cautioned that billings, recurring revenue percentage, annual recurring revenue (“ARR”), dollar-based net retention rate (“DBNRR”), net customer churn rate and free cash flow 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.

1 unchanged sentence

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 declined in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 due to the impact of the COVID-19 pandemic.

The rate of decline in billings was lower than the rate of decline in revenue in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020.

Total Company billings increased in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and compared to the first quarter of fiscal 2021.

Total Software and Services billings increased 23% in the second quarter of fiscal 2021 compared to the first quarter of fiscal 2021.

Recurring Software Product Revenue

2 unchanged sentences

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 adjusted software and services revenue, excluding IP licensing and professional services, was greater than 90% recurring in the first quarter of fiscal 2021 and the first quarter of fiscal 2020.

uses recurring software product revenue percentage to provide visibility into the revenue expected to be recognized in the current and future periods.

Total adjusted Software and Services product revenue, excluding professional services, was approximately 90% recurring in the second quarter of fiscal 2021 and greater than 90% recurring in the second quarter of fiscal 2020.

Annual Recurring Revenue

1 unchanged sentence

The Company uses ARR as an indicator of business momentum for software and services.

Software and Services ARR was approximately $500 million in the first quarter of fiscal 2021.

Software and Services ARR was approximately $486 million in the second quarter of fiscal 2021.

Dollar-Based Net Retention Rate

2 unchanged sentences

The Company then divides the Current Period ARR by the Prior Period ARR to calculate the DBNRR.

Software and Services DBNRR was 93% in the first quarter of fiscal 2021.

QNX Royalty Revenue Backlog

The Company defines the royalty revenue backlog of its QNX business as estimated future revenue from variable forecasted royalties related to the QNX business.

The estimation of forecasted royalties is based on QNX’s royalty rates and on customer projections of anticipated volumes over the lifetime of a design, in each case as of when the design win was awarded.

The QNX royalty revenue backlog is not based on current projections of volumes and may not be indicative of actual future revenue.

The revenue that the Company will recognize is subject to several factors, including actual volumes and potential terminations or modifications to customer contracts.

The Company’s QNX royalty revenue backlog was approximately $450 million at the beginning of the first quarter of fiscal 2021.

Software and Services DBNRR was 92% in the second quarter of fiscal 2021.

Net Customer Churn Rate

1 unchanged sentence

The Company uses net customer churn rate to evaluate the rate the Company is obtaining new customers to offset customers lost due to account cancellations or non-renewal of subscriptions.

Net customer churn rate was approximately zero percent in the first quarter of fiscal 2021, consistent with the first quarter of fiscal 2020.

Net customer churn rate was approximately 3% in the second quarter of fiscal 2021.

Free Cash Flow

4 unchanged sentences

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.

For the three months ended May 31, 2020, the Company’s net cash flow used in operating activities was $31 million and capital expenditures were $1 million, resulting in the Company reporting negative free cash flow of $32 million.

The Company expects to generate positive free cash flow in fiscal 2021.

Results of Operations - Three months ended May 31, 2020 compared to the three months ended May 31, 2019

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 May 31, 2020 and May 31, 2019:

For the three months ended August 31, 2020, the Company’s net cash flow provided by operating activities was $31 million and capital expenditures were $2 million, resulting in the Company reporting free cash flow of $29 million.

Results of Operations - Three months ended August 31, 2020 compared to the three months ended August 31, 2019

Revenue by Product and Service

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)

August 31, 2020 August 31, 2019 Change

Revenue by Product and Service

Software and Services $ 151 $ 168 $ (17)

Licensing and Other 108 76 32

$ 259 $ 244 $ 15

% Revenue by Product and Service

Software and Services 58.3 % 68.9 %

Licensing and Other 41.7 % 31.1 %

100.0 % 100.0 %

Software and Services

Software and Services revenue was $151 million, or 58.3% of revenue, in the second quarter of fiscal 2021, a decrease of $17 million compared to $168 million, or 68.9% of revenue, in the second quarter of fiscal 2020.

The decrease in Software and Services revenue of $17 million was primarily due to a decrease of $21 million in recurring royalties in BlackBerry QNX, due to the slowdown in the automotive market related to the COVID-19 pandemic and the conversion in the prior fiscal year of certain existing royalty-bearing licenses to fixed pricing from volume-based pricing, a decrease of $4 million in renewal billings in BlackBerry AtHoc, a decrease of $4 million relating to professional services and a decrease of $4 million relating to non-automotive OEM business, partially offset by an increase of $15 million related to sales of products and services in BlackBerry Spark.

Adjusted Software and Services revenue was $158 million in the second quarter of fiscal 2021, a decrease of $27 million compared to $185 million in the second quarter of fiscal 2020.

Adjusted Software and Services revenue decreased due to the reasons described above on a U.S.

GAAP basis and due to a decrease of $10 million in the non-GAAP adjustment of deferred software revenue acquired to $7 million in the second quarter of fiscal 2021 from $17 million in the second quarter of fiscal 2020.

The Company expects Software and Services, excluding BTS, to have a slight U.S.

GAAP and adjusted revenue growth in the second half of fiscal 2021.

The Company expects sequential BTS revenue growth in the third quarter and fourth quarter of fiscal 2021, returning to a revenue run rate of approximately $50 million per quarter in early fiscal 2022.

Licensing and Other

Licensing and Other revenue was $108 million, or 41.7% of revenue, in the second quarter of fiscal 2021, an increase of $32 million compared to $76 million, or 31.1% of revenue, in the second quarter of fiscal 2020.

The increase in Licensing and Other revenue of $32 million was primarily due to an increase in revenue from the Company’s patent licensing agreement with Teletry, partially offset by a decrease in direct licensing arrangements.

SAF revenue, which is generated from users of BlackBerry 7 and prior BlackBerry operating systems, also decreased by $2 million, primarily due to a lower number of BlackBerry 7 users and lower revenue from those users compared to the second quarter of fiscal 2020.

The Company previously stated that it expected total Company adjusted revenue to be higher in the second quarter of fiscal 2021 than in the first quarter of fiscal 2021.

The Company’s total adjusted revenue was higher in the second quarter of fiscal 2021 than in the first quarter of fiscal 2021.

The Company previously stated that it expected the rate of sequential adjusted revenue growth to be higher for the Licensing and Other group than for the Software and Services group.

The Company’s rate of sequential adjusted revenue growth was higher for the Licensing and Other group than for the Software and Services group.

The Company expects Licensing revenue to be modestly above $250 million in fiscal 2021.

The Company previously stated that it expected Licensing revenue to be approximately $250 million in fiscal 2021.

GAAP Revenue by Geography

Comparative breakdowns of the geographic regions are set forth in the following table:

For the Three Months Ended

(in millions)

August 31, 2020 August 31, 2019 Change

Revenue by Geography

North America $ 195 $ 179 $ 16

Europe, Middle East and Africa 48 47 1

Other regions 16 18 (2)

$ 259 $ 244 $ 15

% Revenue by Geography

North America 75.3 % 73.4 %

Europe, Middle East and Africa 18.5 % 19.3 %

Other regions 6.2 % 7.3 %

100.0 % 100.0 %

North America Revenue

Revenue in North America was $195 million, or 75.3% of revenue, in the second quarter of fiscal 2021, reflecting an increase of $16 million compared to $179 million, or 73.4% of revenue, in the second quarter of fiscal 2020.

Revenue in North America increased compared to the second quarter of fiscal 2020 primarily due to an increase of $34 million in Licensing and Other revenue, partially offset by a decrease of $16 million in BlackBerry QNX revenue due to the reasons discussed above in “Revenue by Product and Service” and a decrease of $4 million in renewal billings in BlackBerry AtHoc.

Europe, Middle East and Africa Revenue

Revenue in Europe, Middle East and Africa was $48 million or 18.5% of revenue in the second quarter of fiscal 2021, reflecting an increase of $1 million compared to $47 million or 19.3% of revenue in the second quarter of fiscal 2020.

The increase in revenue is primarily due to an increase of $4 million in BlackBerry Spark revenue due to the reasons discussed above in “Revenue by Product and Service”, partially offset by a decrease of $3 million in BlackBerry QNX revenue due to the reasons discussed above in “Revenue by Product and Service”.

Other Regions Revenue

Revenue in other regions was $16 million or 6.2% of revenue in the second quarter of fiscal 2021, reflecting a decrease of $2 million compared to $18 million or 7.3% of revenue in the second quarter of fiscal 2020.

The decrease in revenue is primarily due to a $3 million decrease in BlackBerry QNX revenue due to the reasons discussed above in “Revenue by Product and Service”, partially offset by an increase of $2 million in BlackBerry Spark revenue due to the reasons discussed above in “Revenue by Product and Service”.

Consolidated Gross Margin

Consolidated gross margin increased by $23 million to approximately $199 million in the second quarter of fiscal 2021 from $176 million in the second quarter of fiscal 2020.

The increase was primarily due to an increase in revenue from Licensing and Other and BlackBerry Spark, partially offset by a decrease in gross margin in BlackBerry QNX due to the reasons discussed above in “Revenue by Product and Service”, as the Company’s cost of sales does not significantly fluctuate based on business volume.

Consolidated Gross Margin Percentage

Consolidated gross margin percentage increased by 4.7% to approximately 76.8% of consolidated revenue in the second quarter of fiscal 2021 from 72.1% of consolidated revenue in the second quarter of fiscal 2020.

The increase was primarily due to a higher gross margin percentage associated with Licensing and Other, partially offset by a lower gross margin percentage associated with BlackBerry QNX due to the reasons discussed above in “Revenue by Product and Service”.

Operating Expenses

The table below presents a comparison of research and development, selling, marketing and administration, and amortization expenses for the quarter ended August 31, 2020, compared to the quarter ended May 31, 2020 and the quarter ended August 31, 2019.

The Company believes it is meaningful to provide a sequential comparison between the second quarter of fiscal 2021 and the first quarter of fiscal 2021.

For the Three Months Ended

(in millions)

August 31, 2020 May 31, 2020 August 31, 2019

Revenue $ 259 $ 206 $ 244

Operating expenses

Research and development 57 57 62

Selling, marketing and administration 79 90 130

Amortization 46 46 48

Impairment of long-lived assets 21 — 2

Impairment of goodwill — 594 —

Debentures fair value adjustment 18 1 (23)

Total $ 221 $ 788 $ 219

Operating Expenses as % of Revenue

Research and development 22.0 % 27.7 % 25.4 %

Selling, marketing and administration 30.5 % 43.7 % 53.3 %

Amortization 17.8 % 22.3 % 19.7 %

Impairment of long-lived assets 8.1 % — % 0.8 %

Impairment of goodwill — % 288.3 % — %

Debentures fair value adjustment 6.9 % 0.5 % (9.4) %

Total 85.3 % 382.5 % 89.8 %

See “Non-GAAP Financial Measures” for a reconciliation of selected U.S.

GAAP-based measures to adjusted measures for the three months ended August 31, 2020, May 31, 2020 and August 31, 2019.

GAAP Operating Expenses

Operating expenses decreased by $567 million, or 72.0%, to $221 million, or 85.3% of revenue, in the second quarter of fiscal 2021, compared to $788 million, or 382.5% of revenue, in the first quarter of fiscal 2021.

The decrease was primarily attributable to goodwill impairment of $594 million in the first quarter of fiscal 2021 which did not recur, an increase of $9 million in government subsidies resulting from claims filed for the Canada Emergency Wage Subsidy (“CEWS”) program to support the business through the COVID-19 pandemic, and a decrease of $5 million in stock compensation expense, partially offset by a $21 million increase in long-lived asset impairment, the difference between the Q2 Fiscal 2021 Debentures Fair Value Adjustment and Q1 fiscal 2021 debentures fair value adjustment of $17 million, and an increase of $5 million in legal expenses.

Operating expenses increased by $2 million, or 0.9%, to $221 million, or 85.3% of revenue, in the second quarter of fiscal 2021, compared to $219 million, or 89.8% of revenue, in the second quarter of fiscal 2020.

The increase was primarily attributable to the difference between the Q2 Fiscal 2021 Debentures Fair Value Adjustment and Q2 fiscal 2020 debentures fair value adjustment of $41 million and an increase of $19 million in impairment of long-lived assets, partially offset by the benefit of $18 million in CEWS funding, costs associated with a direct intellectual property (“IP”) licensing arrangements of $18 million in the second quarter of fiscal 2020 which did not recur, a decrease of $8 million in salaries and benefits expenses and a decrease of $5 million in travel expenses.

Adjusted Operating Expenses

Adjusted operating expenses decreased by $6 million, or 4.0%, to $144 million in the second quarter of fiscal 2021 compared to $150 million in the first quarter of fiscal 2021.

The decrease was primarily attributable to an increase of $9 million in CEWS funding and a foreign exchange benefit of $3 million, partially offset by an increase of $5 million in legal expenses and a

decrease of $1 million in claims filed with the Ministry of Innovation, Science and Economic Development Canada relating to its Strategic Innovation Fund program’s investment in BlackBerry QNX (“SIF”).

Adjusted operating expenses decreased by $49 million, or 25.4%, to $144 million in the second quarter of fiscal 2021, compared to $193 million in the second quarter of fiscal 2020.

The decrease was primarily attributable to the benefit of $18 million in CEWS funding, costs associated with direct IP licensing arrangements of $18 million in the second quarter of fiscal 2020 which did not recur, a decrease of $9 million in salaries and benefits expenses, and a decrease of $5 million in travel expenses.

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 $5 million, or 8.1%, to $57 million in the second quarter of fiscal 2021 compared to $62 million in the second quarter of fiscal 2020.

The decrease was primarily attributable to a decrease of $5 million in salaries and benefits expenses and a decrease of $2 million in consulting fees, partially offset by a decrease of $3 million in SIF claims.

Adjusted research and development expenses decreased by $4 million, or 6.8%, to $55 million in the second quarter of fiscal 2021 compared to $59 million in the second quarter of fiscal 2020.

The decrease was due to the reasons described above on a U.S.

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 $51 million, or 39.2%, to $79 million in the second quarter of fiscal 2021 compared to $130 million in the second quarter of fiscal 2020.

This decrease was primarily attributable to the benefit of $18 million in CEWS funding, costs associated with direct IP licensing arrangements of $18 million in the second quarter of fiscal 2020 which did not recur, a decrease of $4 million in travel expenses, a decrease of $4 million in stock compensation expense, and a decrease of $4 million in marketing and advertising expenses, partially offset by an increase of $2 million in variable incentive plan costs.

Adjusted selling, marketing and administration expenses decreased by $47 million, or 38.5%, to $75 million in the second quarter of fiscal 2021 compared to $122 million in the second quarter of fiscal 2020.

This decrease was primarily attributable to the benefit of $18 million in CEWS funding, costs associated with direct IP licensing arrangements of $18 million in the second quarter of fiscal 2020 which did not recur, a decrease of $4 million in travel expenses, a decrease of $4 million in marketing and advertising expenses and a decrease of $3 million in salaries and benefits expenses, partially offset by an increase of $2 million in variable incentive plan costs.

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 August 31, 2020 compared to the quarter ended August 31, 2019.

Intangible assets are comprised of patents, licenses and acquired technology.

For the Three Months Ended

(in millions)

Included in Operating Expense

August 31, 2020 August 31, 2019 Change

Property, plant and equipment $ 5 $ 4 $ 1

Intangible assets 41 44 (3)

Total $ 46 $ 48 $ (2)

Included in Cost of Sales

August 31, 2020 August 31, 2019 Change

Property, plant and equipment $ 1 $ 2 $ (1)

Intangible assets 3 4 (1)

Total $ 4 $ 6 $ (2)

Amortization included in Operating Expense

Amortization expense relating to property, plant and equipment and certain intangible assets decreased by $2 million to $46 million for the second quarter of fiscal 2021 compared to $48 million for the second quarter of fiscal 2020.

The decrease in amortization expense was due to the lower cost base of assets.

Adjusted amortization increased by $2 million to $14 million in the second quarter of fiscal 2021 compared to $12 million in the second quarter of fiscal 2020 due to an increase in intangible assets.

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 $4 million in the second quarter of fiscal 2021 compared to $6 million in the second quarter of fiscal 2020.

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 3.75% Debentures, decreased by $5 million to investment loss of $5 million in the second quarter of fiscal 2021, compared to income of nil in the second quarter of fiscal 2020.

The decrease in investment income was due to a lower yield on cash and investments in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020.

For the second quarter of fiscal 2021, the Company’s net effective income tax recovery rate was approximately 15%, compared to an effective income tax expense rate of approximately 2% 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 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 3.75% Debentures, amongst other items, was offset by a corresponding adjustment of the valuation allowance.

The Company’s net effective income tax rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates.

The Company’s net loss for the second quarter of fiscal 2021 was $23 million, or $0.04 basic and diluted loss per share on a U.S.

GAAP basis, reflecting a decrease in net loss of $21 million compared to a net loss of $44 million, or $0.08 basic loss per share and $0.10 diluted loss per share, in the second quarter of fiscal 2020.

The decrease in net loss of $21 million was primarily due to an increase in revenue, as described above in “Revenue by Product and Service” and an increase in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”, partially offset by to an increase in operating expenses, as described above in “Operating Expenses”.

Adjusted net income was $62 million in the second quarter of fiscal 2021 compared to $1 million in the second quarter of fiscal 2020, reflecting an increase in adjusted net income of $61 million primarily due to a decrease in operating expenses as described above in “Operating Expenses”, an increase in revenue as described above in “Revenue by Product and Service” and an increase in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”.

The weighted average number of shares outstanding was 559 million common shares for basic and diluted loss per share for the second quarter of fiscal 2021.

The weighted average number of shares outstanding was 552 million common shares for basic loss per share and 613 million common shares for diluted loss per share for the second quarter of fiscal 2020.

Results of Operations - Six months ended August 31, 2020 compared to the six months ended August 31, 2019

The following section sets forth certain 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 six months ended August 31, 2020 and August 31, 2019:

For the six months ended

(in millions, except for share and per share amounts)

May 31, 2020 May 31, 2019 Change

August 31, 2020 August 31, 2019 Change

Revenue $ 465 $ 491 $ (26)

1 unchanged sentence

Operating expenses 1,009 432 577

Investment income, net — 3 (3)

Investment income (loss), net (5) 3 (8)

Loss before income taxes (672) (76) (596)

3 unchanged sentences

Basic $ (1.18) $ (0.14) $ (1.04)

$ (1.14) $ (0.09) $ (1.05)

Diluted $ (1.18) $ (0.19) $ (0.99)

Weighted-average number of shares outstanding (000’s)

Basic 557,839 551,845

558,365 552,096

558,365 612,596

______________________________

(1) Basic loss per share on a U.S.

GAAP basis for the first six months of fiscal 2021 includes approximately 2,802,067 common shares remaining to be issued in equal installments on the next two anniversary dates of the Cylance acquisition, in consideration for the acquisition.

Basic loss per share on a U.S.

GAAP basis for the first six months of fiscal 2020 includes approximately 4,182,189 common shares to be issued in equal installments on the three anniversary dates of the Cylance acquisition, in consideration for the acquisition.

There are no service or other requirements associated with the issuance of these shares.

(2) Diluted loss per share on a U.S.

GAAP basis in the first quarter of fiscal 2021 does not include the dilutive effect of the Debentures as to do so would be anti-dilutive.

GAAP basis for the first six months of fiscal 2021 does not include the dilutive effect of the 3.75% Debentures as to do so would be anti-dilutive.

Diluted loss per share on a U.S.

GAAP basis in the first quarter of fiscal 2021 and fiscal 2020 do not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive.

GAAP basis for the first six months of fiscal 2021 and fiscal 2020 do not include the dilutive effect of stock-based compensation as to do so would be anti-dilutive.

Revenue by Product and Service

1 unchanged sentence

GAAP basis are set forth below.

For the Three Months Ended

For the six months ended

(in millions)

May 31, 2020 May 31, 2019 Change

August 31, 2020 August 31, 2019 Change

Revenue by Product and Service

7 unchanged sentences

Software and Services

Software and Services revenue was $148 million, or 71.8% of revenue, in the first quarter of fiscal 2021, a decrease of $20 million compared to $168 million, or 68.0% of revenue, in the first quarter of fiscal 2020.

The decrease in Software and Services revenue of $20 million was primarily due to a decrease of $20 million in recurring royalties in BlackBerry QNX, due to the slowdown in the automotive market related to the COVID-19 pandemic and the conversion in the prior fiscal year of certain existing royalty-bearing licenses to fixed pricing from volume-based pricing, and to a decrease of $4 million in professional services, partially offset by an increase of $2 million in hardware sales in Secusmart.

Adjusted Software and Services revenue was $156 million in the first quarter of fiscal 2021, a decrease of $32 million compared to $188 million in the first quarter of fiscal 2020.

Adjusted Software and Services revenue decreased due to the reasons described above on a U.S.

GAAP basis and due to a decrease of $12 million in the non-GAAP adjustment of deferred software revenue acquired to $8 million in the first quarter of fiscal 2021 from $20 million in the first quarter of fiscal 2020.

Software and Services revenue was $299 million, or 64.3% of revenue in the first six months of fiscal 2021, a decrease of $37 million compared to $336 million, or 68.4% of revenue in the first six months of fiscal 2020.

The decrease in Software and Services revenue of $37 million was primarily due to a decrease of $40 million in recurring royalties in BlackBerry QNX, due to the slowdown in the automotive market related to the COVID-19 pandemic and the conversion in the prior fiscal year of certain existing royalty-bearing licenses to fixed pricing from volume-based pricing, a decrease of $8 million relating to professional services and a decrease of $7 million relating to non-automotive OEM business, partially offset by an increase of $21 million related to sales of products and services in BlackBerry Spark.

Adjusted Software and Services revenue was $314 million in the first six months of fiscal 2021 compared to $373 million in the first six months of fiscal 2020, representing a decrease of $59 million.

The $59 million decrease in adjusted Software and Services revenue was primarily attributable to the same reasons described above on a U.S.

GAAP basis and due to a decrease of $22 million in the non-GAAP adjustment of deferred software revenue acquired to $15 million in the first six months of fiscal 2021 from $37 million in the first six months of fiscal 2020.

Licensing and Other

Licensing and Other revenue was $58 million, or 28.2% of revenue, in the first quarter of fiscal 2021, a decrease of $21 million compared to $79 million, or 32.0% of revenue, in the first quarter of fiscal 2020.

The decrease in Licensing and Other revenue of $21 million was primarily due to a decrease of $23 million in revenue from the BBM Consumer licensing arrangement and a decrease of $8 million from mobility licensing arrangements, partially offset by an increase of $14 million in revenue from the Company’s patent licensing agreement with Teletry.

SAF revenue, which is generated from users of BlackBerry 7 and prior BlackBerry operating systems, also decreased by $4 million, primarily due to a lower number of BlackBerry 7 users and lower revenue from those users compared to the first quarter of fiscal 2020.

The Company expects total Company adjusted revenue to be higher in the second quarter of fiscal 2021 than in the first quarter of fiscal 2021.

The Company expects the rate of sequential adjusted revenue growth to be higher for the Licensing and Other group than for the Software and Services group.

The Company expects to generate total Company adjusted revenue of approximately $950 to $965 million in fiscal 2021, assuming a gradual re-opening of the global economy as the measures undertaken to contain the COVID-19 pandemic are reduced.

Licensing and Other revenue was $166 million, or 35.7% of revenue in the first six months of fiscal 2021, an increase of $11 million compared to $155 million, or 31.6% of revenue in the first six months of fiscal 2020.

The increase in Licensing and Other revenue of $11 million was primarily due to a $49 million increase in revenue from the Company’s patent licensing agreement with Teletry, partially offset by a decrease in direct licensing arrangements, a decrease of $23 million in revenue from the BBM Consumer licensing arrangement and a decrease of $8 million from mobility licensing arrangements.

SAF revenue, which is generated from users of BlackBerry 7 and prior BlackBerry operating systems, also decreased by $6 million, primarily due to a lower number of BlackBerry 7 users and lower revenue from those users compared to the first six months of fiscal 2020.

GAAP Revenue by Geography

Comparative breakdowns of the geographic regions are set forth in the following table:

For the Three Months Ended

Comparative breakdowns of the geographic regions on a U.S.

GAAP basis are set forth in the following table:

For the six months ended

(in millions)

May 31, 2020 May 31, 2019 Change

August 31, 2020 August 31, 2019 Change

Revenue by Geography

9 unchanged sentences

North America Revenue

Revenue in North America was $150 million, or 72.8% of revenue, in the first quarter of fiscal 2021, reflecting a decrease of $10 million compared to $160 million, or 64.8% of revenue, in the first quarter of fiscal 2020.

Revenue in North America decreased compared to the first quarter of fiscal 2020 primarily due to a decrease of $10 million in Licensing and Other revenue and a decrease of $7 million in BlackBerry QNX revenue due to the reasons discussed above in “Revenue by Product and Service”, partially offset by an increase of $6 million in BlackBerry Spark revenue primarily due to a write-down of deferred revenue related the Cylance acquisition in the fourth quarter of fiscal 2019, which resulted in lower recognized revenue in the first quarter of fiscal 2020.

Revenue in North America was $345 million, or 74.2% of revenue, in the first six months of fiscal 2021, reflecting an increase of $6 million compared to $339 million, or 69.0% of revenue in the first six months of fiscal 2020.

The increase in North American revenue is primarily due to an increase of $49 million in Licensing and Other revenue and $9 million in BlackBerry Spark revenue, partially offset by a decrease of $24 million in BlackBerry QNX revenue, due to the reasons discussed above in “Revenue by Product and Service” and a decrease of $23 million in revenue from the BBM Consumer licensing arrangement.

Europe, Middle East and Africa Revenue

Revenue in Europe, Middle East and Africa was $41 million or 19.9% of revenue in the first quarter of fiscal 2021, reflecting a decrease of $20 million compared to $61 million or 24.7% of revenue in the first quarter of fiscal 2020.

The decrease in revenue is primarily due to a decrease of $14 million in BlackBerry QNX revenue due to the reasons discussed above in “Revenue by Product and Service”, a decrease of $4 million in BlackBerry Spark revenue due to a decrease in subscription licenses sold and a decrease of $3 million in SAF revenue due to the reasons discussed above in “Revenue by Product and Service”, partially offset by an increase of $2 million in hardware sales in Secusmart.

Revenue in Europe, Middle East and Africa was $89 million, or 19.1% of revenue, in the first six months of fiscal 2021, reflecting a decrease of $19 million compared to $108 million, or 22.0% of revenue, in the first six months of fiscal 2020.

The decrease in revenue is primarily due to decreases of $13 million in BlackBerry QNX revenue and $4 million in SAF revenue, due to the reasons discussed above in “Revenue by Product and Service”, partially offset by an increase of $4 million in hardware sales in Secusmart.

Other Regions Revenue

Revenue in other regions was $15 million or 7.3% of revenue in the first quarter of fiscal 2021, reflecting a decrease of $11 million compared to $26 million or 10.5% of revenue in the first quarter of fiscal 2020.

The decrease in revenue is primarily due to a $8 million decrease in Licensing and Other revenue due to a decrease in revenue from mobility licensing arrangements and a $4 million decrease in BlackBerry QNX revenue due to the reasons discussed above in “Revenue by Product and Service”.

Revenue in other regions was $31 million, or 6.7% of revenue, in the first six months of fiscal 2021, reflecting a decrease of $13 million compared to $44 million, or 9.0% of revenue, in the first six months of fiscal 2020.

The decrease in revenue is primarily due to a decrease of $8 million from mobility licensing arrangements and a decrease of $4 million in BlackBerry QNX revenue, due to the reasons discussed above in “Revenue by Product and Service”, partially offset by an increase of $3 million in BlackBerry Spark revenue due to the reasons discussed above in “Revenue by Product and Service”.

Consolidated Gross Margin

Consolidated gross margin decreased by $34 million to approximately $143 million in the first quarter of fiscal 2021 from $177 million in the first quarter of fiscal 2020.

The decrease was primarily due to decreases in gross margin in BlackBerry QNX and Licensing due to the decreases in revenue discussed above in “Revenue by Product and Service”.

Consolidated gross margin decreased by $11 million to approximately $342 million in the first six months of fiscal 2021 from $353 million in the first six months of fiscal 2020.

The decrease was primarily due to a decrease in gross margin in BlackBerry QNX, partially offset by increases in revenue in Licensing and Other and BlackBerry Spark, due to the reasons discussed above in “Revenue by Product and Service”.

Consolidated Gross Margin Percentage

Consolidated gross margin percentage decreased by 2.3%, to approximately 69.4% of consolidated revenue in the first quarter of fiscal 2021 from 71.7% of consolidated revenue in the first quarter of fiscal 2020.

The decrease was primarily due to lower gross margin percentage associated with BlackBerry QNX due to the decreases in revenue discussed above in “Revenue by Product and Service”.

Consolidated gross margin percentage increased by 1.6%, to approximately 73.5% of consolidated revenue in the first six months of fiscal 2021 from 71.9% of consolidated revenue in the first six months of fiscal 2020.

Operating Expenses

The table below presents a comparison of research and development, selling, marketing and administration, and amortization expenses for the quarter ended May 31, 2020, compared to the quarter ended February 29, 2020 and the quarter ended May 31, 2019.

The Company believes it is meaningful to provide a sequential comparison between the first quarter of fiscal 2021 and the fourth quarter of fiscal 2020.

For the Three Months Ended

The table below presents a comparison of research and development, selling, marketing and administration, and amortization expense for the six months ended August 31, 2020, compared to the six months ended August 31, 2019.

For the six months ended

(in millions)

May 31, 2020 February 29, 2020 May 31, 2019

August 31, 2020 August 31, 2019 Change

Revenue $ 465 $ 491 $ (26)

3 unchanged sentences

Amortization 92 97 (5)

Impairment of long-lived assets — 5 —

Impairment of goodwill 594 — 594

Impairment of long-lived assets 21 2 19

Debentures fair value adjustment 19 (51) 70

Arbitration awards and settlements, net — — —

Total $ 1,009 $ 432 $ 577

Operating Expenses as % of Revenue

Operating Expense as % of Revenue

Research and development 24.5 % 27.1 %

1 unchanged sentence

Amortization 19.8 % 19.8 %

Impairment of long-lived assets — % 1.8 % — %

Impairment of goodwill 127.7 % — %

Impairment of long-lived assets 4.5 % 0.4 %

Debentures fair value adjustment 4.1 % (10.4) %

Arbitration awards and settlements, net — % — %

Total 217.0 % 87.9 %

See “Non-GAAP Financial Measures” for a reconciliation of selected GAAP-based measures to adjusted measures for the three months ended May 31, 2020, February 29, 2020 and May 31, 2019.

See “Non-GAAP Financial Measures” for a reconciliation of selected U.S.

GAAP-based measures to adjusted measures for the six months ended August 31, 2020 and August 31, 2019.

GAAP Operating Expenses

Operating expenses increased by $535 million, or 211.5%, to $788 million, or 382.5% of revenue, in the first quarter of fiscal 2021, compared to $253 million, or 89.7% of revenue, in the fourth quarter of fiscal 2020.

The increase was primarily attributable to an increase of $572 million in goodwill impairment, partially offset by $9 million in government subsidies resulting from claims filed for the Canada Emergency Wage Subsidy (“CEWS”) program to support the business through the COVID-19 pandemic in the first quarter of fiscal 2021, a decrease of $4 million in legal expenses, a difference between the Q1 Fiscal 2021 Debentures Fair Value Adjustment and Q4 fiscal 2020 debentures fair value adjustment of $4 million, a decrease of $4 million in long-lived asset impairment, and a decrease of $4 million in travel expenses.

Operating expenses increased by $575 million, or 270.0%, to $788 million, or 382.5% of revenue, in the first quarter of fiscal 2021, compared to $213 million, or 86.2% of revenue, in the first quarter of fiscal 2020.

The increase was primarily attributable to a $594 million goodwill impairment and a difference between the Q1 Fiscal 2021 Debentures Fair Value Adjustment and Q1 Fiscal 2020 Debentures Fair Value Adjustment of $29 million, partially offset by a decrease of $13 million in salaries and benefits expenses, $9 million in CEWS funding, a decrease of $7 million in variable incentive plan costs, a decrease of $6 million in travel expenses, and a decrease of $4 million in consulting fees.

Operating expenses increased by $577 million, or 133.6%, to $1,009 million, or 217.0% of revenue in the first six months of fiscal 2021, compared to $432 million, or 87.9% of revenue, in the first six months of fiscal 2020.

The increase was primarily attributable to an increase of $594 million in goodwill impairment, the difference between the Fiscal 2021 Debentures Fair Value Adjustment and fiscal 2020 debentures fair value adjustment of $70 million, and an increase of $19 million in impairment of long-lived assets, partially offset by the benefit of $27 million in CEWS funding, costs associated with direct IP licensing arrangements of $18 million in the first six months of fiscal 2020 which did not recur, a decrease of $21 million in salaries and benefits expense, a decrease of $10 million in travel expense and a decrease of $8 million in stock compensation expense.

Adjusted Operating Expenses

Adjusted operating expenses decreased by $22 million, or 12.8%, to $150 million in the first quarter of fiscal 2021 compared to $172 million in the fourth quarter of fiscal 2020.

The decrease was primarily attributable to $9 million in CEWS funding, a decrease of $4 million in legal expenses, a decrease of $4 million in travel expenses, a decrease of $3 million in marketing and advertising expense and a decrease of $3 million in sales incentive plan costs.

Adjusted operating expenses decreased by $44 million, or 22.7%, to $150 million in the first quarter of fiscal 2021, compared to $194 million in the first quarter of fiscal 2020.

The decrease was primarily attributable to a decrease of $11 million in salaries

and benefits expenses, $9 million in CEWS funding, a decrease of $9 million in variable incentive plan costs, a decrease of $6 million in travel expenses, and a decrease of $4 million in consulting costs.

Adjusted operating expenses decreased by $93 million, or 24.0%, to $294 million in the first six months of fiscal 2021, compared to $387 million in the first six months of 2020.

The decrease was primarily attributable to the benefit of $27 million in CEWS funding, costs associated with direct IP licensing arrangements of $18 million in the first six months of 2020 which did not recur, a decrease of $21 million in salaries and benefits expense, a decrease of $10 million in travel expense and a decrease of $8 million in marketing and advertising expense.

Research and Development Expenses

Research and development expenses decreased by $14 million, or 19.7%, to $57 million in the first quarter of fiscal 2021 compared to $71 million in the first quarter of fiscal 2020.

The decrease was primarily attributable to a decrease of $8 million in salaries and benefits expenses, a decrease of $3 million in variable incentive plan costs, and a decrease of $2 million in consulting fees.

Adjusted research and development expenses decreased by $14 million, or 20.6%, to $54 million in the first quarter of fiscal 2021 compared to $68 million in the first quarter of fiscal 2020.

The decrease was due to the reasons described above on a U.S.

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 decreased by $19 million, or 14.3%, to $114 million, or 24.5% of revenue, in the first six months of fiscal 2021, compared to $133 million, or 27.1% of revenue, in the first six months of fiscal 2020.

The decrease was primarily attributable to a decrease of $13 million in salaries and benefits expense, a decrease of $3 million in consulting fees and a decrease of $1 million in variable incentive plan costs, partially offset by a decrease of $3 million in SIF claims.

Adjusted research and development expenses decreased by $18 million, or 14.2% to $109 million in the first six months of fiscal 2021 compared to $127 million in the first six months of fiscal 2020.

The decrease was primarily due to the same reasons described above on a U.S.

Selling, Marketing and Administration Expenses

Selling, marketing and administration expenses decreased by $31 million, or 25.6%, to $90 million in the first quarter of fiscal 2021 compared to $121 million in the first quarter of fiscal 2020.

This decrease was primarily attributable to the benefit of $9 million in CEWS funding, a decrease of $5 million in salaries and benefits expenses, a decrease of $5 million in travel expenses, a decrease of $4 million in variable incentive plan costs, and a decrease of $4 million in marketing and advertising expenses.

Adjusted selling, marketing and administration expenses decreased by $29 million, or 25.9%, to $83 million in the first quarter of fiscal 2021 compared to $112 million in the first quarter of fiscal 2020.

This decrease was primarily attributable $9 million in CEWS funding, a decrease of $5 million in variable incentive plan expenses, a decrease of $5 million in travel expenses, a decrease of $4 million in salaries and benefits expenses, and a decrease of $4 million in marketing and advertising expenses.

Selling, marketing and administration expenses decreased by $82 million, or 32.7%, to $169 million, or 36.3% of revenue, in the first six months of fiscal 2021 compared to $251 million in the first six months of fiscal 2020, or 51.1% of revenue.

The decrease was primarily attributable to the benefit of $27 million in CEWS funding, costs associated with direct IP licensing arrangements of $18 million in the first six months of 2020 which did not recur, a decrease of $9 million in travel expense, a decrease of $8 million salaries and benefits expense and a decrease of $8 million in stock compensation expense.

Adjusted selling, marketing and administration expenses decreased by $76 million, or 32.5%, to $158 million in the first six months of fiscal 2021 compared to $234 million in the first six months of fiscal 2020.

The decrease was primarily attributable to the benefit of $27 million in CEWS funding, costs associated with direct IP licensing arrangements of $18 million in the first six months of 2020 which did not recur, a decrease of $9 million in travel expense due to the impact of COVID-19, a decrease of $8 million salaries and benefits expense and a decrease of $7 million in marketing and advertising expense.

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 May 31, 2020 compared to the quarter ended May 31, 2019.

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 six months ended August 31, 2020 compared to the six months ended August 31, 2019.

Intangible assets are comprised of patents, licenses and acquired technology.

For the Three Months Ended

For the six months ended

(in millions)

Included in Operating Expense

May 31, 2020 May 31, 2019 Change

August 31, 2020 August 31, 2019 Change

Property, plant and equipment $ 9 $ 9 $ —

2 unchanged sentences

Included in Cost of Sales

May 31, 2020 May 31, 2019 Change

August 31, 2020 August 31, 2019 Change

Property, plant and equipment $ 2 $ 3 $ (1)

2 unchanged sentences

Amortization included in Operating Expense

Amortization expense relating to property, plant and equipment and certain intangible assets decreased by $3 million to $46 million for the first quarter of fiscal 2021 compared to $49 million for the first quarter of fiscal 2020.

Amortization expense relating to certain property, plant and equipment and intangible assets decreased by $5 million to $92 million in the first six months of fiscal 2021, compared to $97 million in the first six months of fiscal 2020.

The decrease in amortization expense was due to the lower cost base of assets.

Adjusted amortization decreased by $1 million to $13 million in the first quarter of fiscal 2021 compared to $14 million in the first quarter of fiscal 2020.

Adjusted amortization expense increased by $1 million to $27 million in the first six months of fiscal 2021 compared to $26 million in the first six months of fiscal 2020 due to the increase in intangible assets.

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 was $4 million in the first quarter of fiscal 2021, consistent with $4 million for the first quarter of fiscal 2020.

Investment Income, Net

Investment income, net, which includes the interest expense from the Debentures, decreased by $3 million to nil in the first quarter of fiscal 2021, compared to income of $3 million in the first quarter of fiscal 2020.

The decrease in investment income was due to a lower yield on cash and investments in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020.

For the first quarter of fiscal 2021, the Company’s net effective income tax recovery rate was approximately 1%, compared to an effective income tax expense rate of approximately 6% for the same period in the prior fiscal year.

Amortization expense relating to certain property, plant and equipment and intangible assets employed in the Company’s service operations decreased by $2 million to $8 million in the first six months of fiscal 2021, compared to $10 million in the first six months of fiscal 2020.

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 3.75% Debentures, decreased by $8 million to investment loss of $5 million in the first six months of fiscal 2021, from investment income of $3 million in the first six months of fiscal 2020.

The decrease in investment income was due to a lower yield on cash and investments in the first six months of fiscal 2021 compared to the first six months of fiscal 2020.

For the first six months of fiscal 2021, the Company’s net effective income tax recovery rate was approximately 2%, compared to a net effective income tax expense of approximately 4% for the same period in the prior fiscal year.

The Company’s net effective income tax rate also reflects the geographic mix of earnings in jurisdictions with different income tax rates.

The Company’s adjusted net effective income tax recovery rate was approximately 300%, compared to a net effective income tax expense rate of approximately 38% for the same period in the prior fiscal year.

The change was due to current year recoveries that do not have a corresponding tax carry forward offset.

The Company’s net loss for the first quarter of fiscal 2021 was $636 million, or $1.14 basic and diluted loss per share on a U.S.

GAAP basis, reflecting an increase in net loss of $601 million compared to a net loss of $35 million, or $0.06 basic loss per share and $0.09 diluted loss per share, in the first quarter of fiscal 2020.

The increase in net loss of $601 million was primarily due to an increase in operating expenses due to the goodwill impairment, as described above in “Operating Expenses”, a decrease in revenue, as described above in “Revenue by Product and Service” and a decrease in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”.

Adjusted net income was $12 million in the first quarter of fiscal 2021 compared to $5 million in the first quarter of fiscal 2020, reflecting an increase in adjusted net income of $7 million primarily due to a decrease in operating expenses as described above in “Operating Expenses”, partially offset by a decrease in revenue as described above in “Revenue by Product and Service” and a decrease in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”.

The Company expects to be profitable on a non-GAAP basis in fiscal 2021.

The Company previously stated that it expected its financial performance in the first quarter of fiscal 2021 to be below that of the fourth quarter of fiscal 2020 due to the COVID-19 pandemic.

The Company’s financial performance in the first quarter of fiscal 2021 was below that of the fourth quarter of fiscal 2020.

The weighted average number of shares outstanding was 558 million common shares for basic and diluted loss per share for the first quarter of fiscal 2021.

The weighted average number of shares outstanding was 552 million common shares for basic loss per share and 612 million common shares for diluted loss per share for the first quarter of fiscal 2020.

The Company’s adjusted net effective income tax recovery rate was approximately 21%, compared to an adjusted net effective income tax expense of approximately 40% for the same period in the prior fiscal year.

The change is due to prior years taxable items that could not be offset with carried forward tax attributes such as tax losses.

The Company’s net loss for the first six months of fiscal 2021 was $659 million, reflecting an increase in net loss of $580 million compared to net loss of $79 million in the first six months of fiscal 2020, primarily due to an increase in operating expenses due to the goodwill impairment, as described above in “Operating Expenses” and a decrease in revenue as described above in “Revenue by Product and Service”, partially offset by an increase in gross margin percentage, as described above in “Consolidated Gross Margin Percentage”.

Adjusted net income in the first six months of fiscal 2021 was $74 million compared to $6 million in the first six months of fiscal 2020, reflecting an increase in adjusted net income of $68 million, primarily due to a decrease in operating expenditures as described above in “Operating Expenses”, partially offset by a decrease in revenue as described above in “Revenue by Product and Service”.

Basic and diluted loss per share on a U.S.

GAAP basis was $1.18 in the first six months of fiscal 2021, an increase in basic and diluted loss per share of $1.04 and $0.99, respectively, compared to basic loss per share on a U.S.

GAAP basis of $0.14 and diluted loss per share on a U.S.

GAAP basis of $0.19 in the first six months of fiscal 2020.

The weighted average number of shares outstanding was 558 million for basic and diluted loss per share for the first six months of August 31, 2020.

The weighted average number of shares outstanding was 552 million and 613 million for basic and diluted loss per share, respectively, for the first six months of August 31, 2019.

Common Shares Outstanding

On September 21, 2020, there were 557 million voting common shares, options to purchase 4 million voting common shares, 24 million restricted share units and 1 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.

Selected Quarterly Financial Data

The following table sets forth the Company’s unaudited quarterly consolidated results of operations data for each of the eight most recent quarters, including the quarter ended May 31, 2020.

The following table sets forth the Company’s unaudited quarterly consolidated results of operations data for each of the eight most recent quarters, including the quarter ended August 31, 2020.

The information in the table below has been derived from the Company’s unaudited interim consolidated financial statements that, in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements of the Company and include all adjustments necessary for a fair presentation of information when read in conjunction with the audited consolidated financial statements of the Company.

3 unchanged sentences

Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019

Quarter First

Quarter Fourth

4 unchanged sentences

Quarter Third

Quarter Second

Revenue $ 259 $ 206 $ 282 $ 267 $ 244 $ 247 $ 255 $ 226

9 unchanged sentences

Liquidity and Capital Resources

Cash, cash equivalents, and investments decreased by $35 million to $955 million as at May 31, 2020 from $990 million as at February 29, 2020, primarily as a result of changes in working capital.

Cash, cash equivalents, and investments decreased by $13 million to $977 million as at August 31, 2020 from $990 million as at February 29, 2020, primarily due to the acquisition of intangible assets.

The majority of the Company’s cash, cash equivalents, and investments were denominated in U.S.

dollars as at May 31, 2020.

dollars as at August 31, 2020.

A comparative summary of cash, cash equivalents, and investments is set out below:

(in millions)

May 31, 2020 February 29, 2020 Change

August 31, 2020 February 29, 2020 Change

Cash and cash equivalents $ 837 $ 377 $ 460

5 unchanged sentences

(in millions)

May 31, 2020 February 29, 2020 Change

August 31, 2020 February 29, 2020 Change

Current assets $ 1,219 $ 1,196 $ 23

2 unchanged sentences

Current Assets

The decrease in current assets of $24 million at the end of the first quarter of 2021 from the end of fourth quarter of fiscal 2020 was primarily due to a decrease in cash and cash equivalents of $65 million and accounts receivable, net of $5 million, partially offset by an increase in short term investments of $30 million, other current assets of $8 million, other receivables of $6 million and income taxes receivable of $2 million.

At May 31, 2020, accounts receivable was $210 million, a decrease of $5 million from February 29, 2020.

The decrease was primarily due lower revenue recognized over the three months ended May 31, 2020 and an increase in the allowance for credit losses from the adoption of ASC 326, partially offset by an increase in days sales outstanding to 95 days at the end of the first quarter of fiscal 2021 from 70 days at the end of the fourth quarter of fiscal 2020 due to an increase in Licensing receivables which have longer net payment terms than Software and Services receivables and due to an increase in overdue balances as a result of COVID-19.

At May 31, 2020, other current assets was $60 million, an increase of $8 million from February 29, 2020.

The increase was primarily due to an increase in prepaid maintenance of $5 million and an increase in prepaid insurance of $2 million.

At May 31, 2020, other receivables increased by $6 million to $20 million compared to $14 million as at February 29, 2020.

The increase was primarily due to an increase of $4 million relating to the CEWS program and $1 million relating to the Strategic Innovation Fund program.

At May 31, 2020, income taxes receivable was $8 million, an increase of $2 million from February 29, 2020.

The increase in current assets of $23 million at the end of the second quarter of fiscal 2021 from the end of fourth quarter of fiscal 2020 was primarily due to increases in cash and cash equivalents of $460 million, accounts receivable, net of $25 million, other receivables of $11 million and income taxes receivable of $3 million, partially offset by decreases in short term investments of $474 million and other current assets of $2 million.

The Company’s cash and cash equivalents increased significantly due to liquidation of investments in anticipation of the redemption of the 3.75% Debentures on September 1, 2020 as described above in “Business Overview - Debt Redemption and New Issuance”.

At August 31, 2020, accounts receivable was $240 million, an increase of $25 million from February 29, 2020.

The increase was primarily due an increase in days sales outstanding to 80 days at the end of the second quarter of fiscal 2021 from 70 days at the end of the fourth quarter of fiscal 2020 due to an increase in IP licensing receivables which have longer net payment terms than Software and Services receivables and due to an increase in overdue balances as a result of COVID-19, partially offset by lower revenue recognized over the three months ended August 31, 2020 and an increase in the allowance for credit losses from the adoption of ASC 326.

At August 31, 2020, other receivables increased by $11 million to $25 million compared to $14 million as at February 29, 2020.

The increase was primarily due to an increase of $9 million relating to the CEWS program.

At August 31, 2020, income taxes receivable was $9 million, an increase of $3 million from February 29, 2020.

The increase was primarily due to the U.S.

CARES Act resulting in an increase in taxes receivable from tax loss carry backs.

At August 31, 2020, other current assets was $50 million, a decrease of $2 million from February 29, 2020.

The decrease was primarily due to a decrease in prepaid rent and utilities of $5 million and deferred commission of $2 million, partially offset by an increase in derivative asset of $3 million and prepaid software maintenance of $2 million.

Current Liabilities

The decrease in current liabilities of $30 million at the end of the first quarter of 2021 from the end of the fourth quarter of 2020 was primarily due to a decrease in accrued liabilities of $17 million and a decrease in deferred revenue of $15 million, partially offset by an increase in accounts payable of $15 million.

Accrued liabilities were $185 million, reflecting a decrease of $17 million compared to February 29, 2020, which was primarily attributable to a $8 million decrease in payroll accruals and a $8 million decrease in vendor liabilities.

Deferred revenue, current was $249 million, which reflects a decrease of $15 million compared to February 29, 2020 that was attributable to a $10 million decrease in deferred revenue, current related to BlackBerry Spark and $3 million related to AtHoc.

As at May 31, 2020, accounts payable were $46 million, reflecting an increase of $15 million from February 29, 2020, which was primarily attributable to invoices related to maintenance and telecom expenses and computer supplies.

Cash flows for the three months ended May 31, 2020 compared to the three months ended May 31, 2019 were as follows:

For the three months ended

May 31, 2020 May 31, 2019 Change

The decrease in current liabilities of $65 million at the end of the second quarter of 2021 from the end of the fourth quarter of fiscal 2020 was primarily due to a decrease in deferred revenue of $35 million, a decrease in accrued liabilities of $23 million, a decrease in income taxes payable of $9 million and a decrease in accounts payable of $2 million, partially offset by an increase of $4 million in the amounts payable in respect of the 3.75% Debentures.

Deferred revenue, current was $229 million, which reflects a decrease of $35 million compared to February 29, 2020 that was attributable to a $29 million decrease in deferred revenue, current related to BlackBerry Spark and $10 million related to IP licensing, partially offset by a $2 million increase in deferred revenue, current related to BlackBerry AtHoc.

Accrued liabilities were $179 million, reflecting a decrease of $23 million compared to February 29, 2020, which was primarily attributable to a $17 million decrease in variable incentive plan costs.

Income taxes payable were $18 million, reflecting a decrease of $9 million compared to February 29, 2020, which was primarily attributable to the reversal of uncertain tax positions.

Accounts payable were $29 million, reflecting a decrease of $2 million from February 29, 2020, which was primarily attributable to payments of accounts payable.

Cash flows for the six months ended August 31, 2020 compared to the six months ended August 31, 2019 were as follows:

For the six months ended

August 31, 2020 August 31, 2019 Change

Net cash flows provided by (used in):

2 unchanged sentences

Financing activities 5 2 3

Effect of foreign exchange loss on cash and cash equivalents — (1) 1

Net decrease in cash and cash equivalents $ (66) $ (191) $ 125

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

Net increase (decrease) in cash and cash equivalents $ 460 $ (88) $ 548

Operating Activities

1 unchanged sentence

Investing Activities

During the three months ended May 31, 2020, cash flows used in investing activities were $39 million and included cash 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 $30 million, intangible asset additions of $8 million, and acquisitions of property, plant and equipment of $1 million.

For the same period in the prior fiscal year, cash flows used in investing activities were $129 million and included cash 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 $122 million, intangible asset additions of $7 million, and acquisitions of property, plant and equipment of $2 million, offset by proceeds expected from the decrease in consideration paid for the Cylance acquisition.

During the six months ended August 31, 2020, cash flows provided by investing activities were $454 million and included cash provided by transactions involving the acquisitions of short-term and long-term investments, net of the proceeds on sale or maturity in the amount of $473 million, offset by cash used in the acquisition of intangible assets of $16 million, and the acquisition of property, plant and equipment of $3 million.

For the same period in the prior fiscal year, cash flows used in investing activities were $42 million and included cash 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 $16 million, and acquisitions of property, plant and equipment of $6 million, offset by proceeds from the decrease in consideration paid for the Cylance acquisition.

Financing Activities

The increase in cash flows provided by financing activities was $1 million for the first three months of fiscal 2021 due to an increase in common shares issued.

The increase in cash flows provided by financing activities was $3 million for the first six months of fiscal 2021 due to an increase in common shares issued for stock options exercised and employee share purchase plan.

Aggregate Contractual Obligations

The following table sets out aggregate information about the Company’s contractual obligations and the periods in which payments are due as at May 31, 2020:

The following table sets out aggregate information about the Company’s contractual obligations and the periods in which payments are due as at August 31, 2020:

(in millions)

6 unchanged sentences

Total $ 955 $ 764 $ 125 $ 47 $ 19

Purchase obligations and commitments amounted to approximately $969 million as at May 31, 2020, including future principal and interest payments of $615 million on the Debentures and operating lease obligations of $158 million.

Purchase obligations and commitments amounted to approximately $955 million as at August 31, 2020, including the Redemption Amount and operating lease obligations of $148 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 May 31, 2020 decreased by approximately $44 million as compared to the February 29, 2020 balance of approximately $1,013 million, which was attributable to a decrease in purchase obligations and commitments, a decrease in operating lease obligations and a decrease in interest payments on the Debentures.

Total aggregate contractual obligations as at August 31, 2020 decreased by approximately $58 million as compared to the February 29, 2020 balance of approximately $1,013 million, which was attributable to a decrease in purchase obligations and commitments and a decrease in operating lease obligations.

As noted in "Business Overview - Debt Redemption and New Issuance", the Company announced on July 22, 2020 that it would redeem the 3.75% Debentures and issue the 1.75% Debentures.

These events occurred after the end of the second quarter of fiscal 2021.

If these subsequent events are included as at August 31, 2020, the Company’s future debt interest would include an additional $20 million plus the principal payment of $365 million due in one to three years.

Debenture Financing and Other Funding Sources

See Note 6 to the Consolidated Financial Statements for a description of the 3.75% Debentures.

As discussed above in “Business Overview - Debt Redemption and New Issuance”, the 3.75% Debentures were redeemed on September 1, 2020 and the 1.75% Debentures issued.

The Company has $49 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.

Cash, cash equivalents, and investments were approximately $955 million as at May 31, 2020.

Cash, cash equivalents, and investments were approximately $977 million as at August 31, 2020.

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.

The Company expects to repay all of its obligations under the Debentures at maturity.

Had the refinancing of the 3.75% Debentures been completed on August 31, 2020 instead of September 1, 2020, the Company’s cash, cash equivalents and investments would have been $727 million on August 31, 2020.

The Company does not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Exchange Act, or under applicable Canadian securities laws.

Accounting Policies and Critical Accounting Estimates

There have been no changes to the Company’s accounting policies or critical accounting estimates from those described under

“Accounting Policies and Critical Accounting Estimates” in the Annual MD&A, with the exception of those noted below.

The following policies have been updated to reflect the adoption of the new standard in accounting for credit losses on financial instruments and 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.

The Company’s impairment test is carried out in one step.

The carrying amount 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, the market-based approach, 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 amount of the Company’s assets was assigned to reporting units using reasonable methodologies based on the asset type.

When the carrying amount 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.

Accounts receivable, net

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 network carriers 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.

The Company’s cash equivalents and investments, other than publicly issued equity securities and private 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 related income taxes, are recorded in Accumulated Other Comprehensive Loss (“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 private equity investments without readily determinable fair value at cost minus impairment, as 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 private 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 or investments that the Company does not intend to sell are classified as long-term investments.

Allowance for Credit Losses on Available-for-sales Debt Securities

The Company accounts for credit losses on available-for-sale debt securities in accordance with ASC 326.

The Company adopted ASC 326 on March 1, 2020, 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.

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.

See Note 1 to the Consolidated Financial Statements for policies updated to reflect the adoption of the new standard in accounting for credit losses on financial instruments and goodwill.

See Note 2 to the Consolidated Financial Statements for accounting pronouncements not yet adopted.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis