The company is literally trading bonds now instead of selling phones.

The BlackBerry (NASDAQ:BBRY) business model has all but collapsed in the last few years. Its most recent convertible bond deal, which is values at $1.25 billion, has steadied the company’s business for now. However, the financing of its debt should not be mistaken for improved performance, and will certainly not last much longer.

In 2008, on June 19^th, the BlackBerry stock reached an all time record high of $147.55 per share, which valued the company at a total of just under $85 billion in market capitalization. During that time, BlackBerry had used its reputation for strong engineering and solid security features to its advantage, and gained control of approximately 50 percent of the smartphone market.

By August of 2014, BlackBerry’s shares had dropped to a measly $10, totaling out to about $5 billion in market capitalization. In an effort to set the company right again, the management board for the company has plowed through more than $80 billion in shareholder funds over the course of 6 years.

At the company’s financial performance levels today, conservative investors should view BlackBerry as a trap that should be avoided. Recent improvements at the company have occurred mostly as a result of moving around the structuring of investment and financial transactions; the company did not see any real operational improvement. Since then, a convertible bond deal totaling $1.25 billion has been responsible in keeping BlackBerry’s head above the water.

BlackBerry’s Turnaround Plans Have Hit A Road Block

At the beginning of August, the research firm comScore released its report of the United States Smartphone Subscriber Market of June 2014. The report highlighted the dominant presence of Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s Android system and Apple Inc (NASDAQ:AAPL)’s iOS system. Together, they have a duopoly in the mobile market. Android systems hold about 51.9 percent and iOS controls 42.1 percent, and together the two companies operate 94 percent of the United States smartphone through the first half of the 2014 year. On the other hand, BlackBerry reports during this same time frame revealed that the company only hung onto a measly 2.4 percent of the market, after the company had lost 30 basis points in the share through the second quarter of the 2014 fiscal year.

In February of 2013, analyst David Cotriss suggested that BlackBerry would still be able to take advantage of its brand appeal to make and sell cheaper phones in the world’s developing countries. Before this statement, however, BlackBerry had already discussed and agreed to a five year deal with Foxconn (OTC:FXCOF) to allocate its hardware manufacturing and inventory management to the company, which is based in Taiwan. This deal with Foxconn will undoubtedly place ceilings on the potential of the company’s upside of operating business in the very same developing markets that have been identified as BlackBerry’s saving grace.

BlackBerry did release its Z3 in Jakarta on May 14^th in 2014. The Z3 was the first device designed and manufactured from the partnership with Foxconn. The Z3 Jakarta phone was, of course, designed specifically for the market in Indonesia and featured local artwork that surrounded a search application for halal food that was pre-programmed and built into the phone.

Beyond Indonesia, BlackBerry also released its Z3 entry level device in Philippines, Malaysia, India, and certain African markets. The launch of the Z3, however, seemed to have had little effect, if any at all, on the company’s bottom line results. BlackBerry’s revenue continued to decline from $976 to $966 million between the fourth quarter of 2014 and the first quarter of 2015. For BlackBerry, the end of the first quarter of 2015 was May 31^st, 2014, which was two weeks after the release fo the Z3.

Dependence On Convertible Debentures

On November 4^th of last year, the company made a statement in a press release that it was granted an investment of $1 billion from a consortium of institutional investors led by Fairfax Financial. In exchange for these funds, BlackBerry sold $1 billion worth of convertible bonds and promised to pay an interest of 6 percent on the debt. The terms of the agreement gave bondholders a time period of seven years to exchange the bonds for BlackBerry shares at $10 a piece. Last January, Fairfax made the decision to take out another $250 million in these convertible debentures. Total, the deal could add 125 million shares of a BlackBerry financial statement that, as of May 31^st 2014, only contained 526.7 million shares of common stock outstanding. The shareholders of BlackBerry are now vulnerable to a degree of ownership dilution of 23.7 percent.

It is important to note that FairFax Financial was in fact the most powerful shareholder of BlackBerry. With an ownership stake of just under 10 percent at the time of the closuring of the debenture deal, FairFax certainly has authoritative say in the company. Analysts have been speculating that Fairfax had manipulated a deal for itself, after discussions regarding the sale of BlackBerry fell through. The convertible bond arrangement, which seemed to be the best of both worlds, was simply an attempt to reduce the embarrassment and to save face, according to some analysts. As an investor, FairFax Financial would retain its asset claims above those of the company’s shareholders should the company declare bankruptcy. The financial company literally shot itself to the top of the company with the mere scratch of a pen.

The company’s balance sheet in the first quarter of 2015 reported $2.7 billion in cash and $3.1 billion in total liabilities. These liabilities took into account the $512 million in deferred revenue and the $1.3 billion in long term debt. The deferred revenue will appear on the income statement in the end, of course. If the company did not receive the cash increase of $1.25 from the deal with convertible bonds, BlackBerry may have gone into the second quarter of 2015 with cash amounts totaling just $1.45 billion and short term investments above $1.3 billion in current accounts payable and liabilities.

Conclusion

The convertible debentures were 100 percent a lifeline to save BlackBerry from inevitable demise. Looking towards the future, investors may see massive write downs on inventory and property, especially if the company cannot turn real assets into profits. While BlackBerry did draw attention to its report for the first quarter of 2015, which showed that the company finally got back to GAAP profitability. Overall, the company reported a net income of $23 million from $966 million in sales during the first quarter fo the 2015 fiscal year. The quarter before this, BlackBerry reported losses of $423 million after revenues of $976. In order to compare, BlackBerry reported losses of $84 million after $3.1 billion in revenues during the first quarter of 2014. The revenues of BlackBerry has unfortunately dropped sharply due to the near extinction of the company’s poor business model.

Interestingly enough, the $1.25 billion convertible bond deal was also primarily responsible for the profitability for BlackBerry. The company did gain from a $669 million rise in debentures fair values modifications during the last quarter. This adjustment mostly aided the company in reducing its operating costs from $1.1 billion to $431 million before the fourth quarter of 2014 and the first quarter of 2015. The significantly lower operating costs meant that the small net profit of $23 million in the first quarter of 2015 was actually good news for the telecommunications company.

The profitability of the bottom line was mostly due to the improved financial and investment activities, and should not be mistakenly taken for any form of substantial and sustained business improvement. Additionally, the company’s operational cash flow for each quarter was cut in half over the past year, from $630 million to $302 million.

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