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Exhibit 99.3
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The following is management's discussion and analysis ("MD&A") of DragonWave Inc.'s consolidated results of operations and financial condition for the
three and nine months ended November 30, 2013. This MD&A is dated January 13, 2014 and should be read in conjunction with our unaudited consolidated interim financial statements and
corresponding notes for the three and nine months ended November 30, 2013 and the Annual Information Form for the year ended February 28, 2013 (the "AIF") which is available at
www.sedar.com (SEDAR) and at www.sec.gov/edgar/searchedgar/companysearch.html (EDGAR) as an exhibit to our Annual Report on Form 40-F for the year ended February 28, 2013.
The
consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) and are reported in United States
dollars ("USD"). The information contained herein is dated as of January 13, 2014 and is current to that date, unless otherwise stated. Our fiscal year commences on March 1 of each year
and ends on the last day of February of the following year.
In
this document, unless the context requires otherwise, "we", "us", "our", the "Company" and "DragonWave" all refer to DragonWave Inc. collectively with its direct and indirect
subsidiaries. The content of this MD&A has been approved by our Board of Directors, on the recommendation of its Audit Committee.
Unless
otherwise indicated, all currency amounts referenced in this MD&A are denominated in USD.
Forward-Looking Statements
This MD&A contains "forward-looking information" and "forward-looking statements" within the meaning of applicable Canadian and US
securities laws. All statements in this MD&A, other than statements that are reporting results or statements of historical fact, are forward-looking statements which involve assumptions and describe
our future plans, strategies and expectations. Forward-looking statements are generally identifiable by use of the words "may", "will", "should", "continue", "expect", "anticipate", "estimate",
"believe", "intend", "plan" or "project" or the negative of these words or other variations of these words or comparable terminology. Forward-looking statements include, without limitation, statements
regarding: our strategic plans and objectives; growth strategy; customer diversification and expansion initiatives; our expectations with respect to the results of the acquisition by us of the
microwave transport business of Nokia Siemens Networks (now Nokia Solutions and Networks)("NSN"); our expectations with respect to end-customer demand for our products; our expectations
regarding the development of our target markets; and our plans, objectives and targets for operating cost reductions, revenue growth and margin performance. There can be no assurance that
forward-looking statements will prove to be accurate and actual results or outcomes
could differ materially from those expressed or implied in such statements. Important factors that could cause actual results or outcomes to differ materially from those discussed in the
forward-looking statements are discussed in this MD&A under the heading "Risks and Uncertainties". Forward-looking statements are provided to assist external stakeholders in understanding management's
expectations and plans relating to the future as of the date of this MD&A and may not be appropriate for other purposes. Readers are cautioned not to place undue reliance on forward-looking
statements. Forward-looking statements are made as of the date of this MD&A and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except to the extent expressly required by law.
1
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Risks and Uncertainties
There can be no assurance that forward-looking statements will prove to be accurate and actual results and outcomes could differ
materially from those expressed or implied in such statements. The following are some of the important factors that could cause actual results or outcomes to differ materially from those discussed in
the forward-looking statements:
- •
- our ability to successfully complete and integrate acquisitions of products or businesses, including the ongoing
integration of NSN's microwave transport business, into our existing product lines and businesses and other risks associated with acquisitions;
- •
- our reliance on NSN and our ability to maintain and grow our relationship as a preferred strategic supplier to NSN;
- •
- our reliance on a small number of customers for a large percentage of revenue;
- •
- our ability to implement our ongoing program of operating cost reductions;
- •
- our dependence on the development and growth of the market for high- capacity wireless communications services;
- •
- intense competition from several competitors;
- •
- competition from indirect competitors;
- •
- our history of losses;
- •
- our dependence on our ability to develop new products and enhance existing products;
- •
- our ability to successfully manage growth;
- •
- our dependence on establishing and maintaining relationships with channel partners;
- •
- our dependence on our ability to manage our workforce and recruit and retain management and other qualified personnel;
- •
- quarterly revenue and operating results that are difficult to predict and can fluctuate substantially;
- •
- the impact that general economic weakness and volatility may be having on our customers;
- •
- disruption resulting from economic and geopolitical uncertainty;
- •
- currency fluctuations;
- •
- our exposure to credit risk for accounts receivable;
- •
- pressure on our pricing models from existing and potential customers and as a result of competition;
- •
- the allocation of radio spectrum and regulatory approvals for our products;
- •
- the ability of our customers to secure a license for applicable radio spectrum;
2
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- changes in government regulation or industry standards that may limit the potential market for our products;
- •
- our reliance on suppliers, including outsourced manufacturing, third party component suppliers and suppliers of outsourced
services;
- •
- our ability to manage the risks related to increasingly complex engagements with channel partners and end-customers;
- •
- our ability to protect our own intellectual property and potential harm to our business if we infringe the intellectual
property rights of others;
- •
- risks associated with software licensed by us;
- •
- a change in our tax status or assessment by domestic or foreign tax authorities;
- •
- a lengthy and variable sales cycle;
- •
- exposure to risks resulting from our international sales and operations, including the requirement to comply with export
control and economic sanctions laws;
- •
- product defects, product liability claims, and health and safety risks relating to wireless products;
- •
- risks associated with possible loss of our foreign private issuer status; and
- •
- risks and expenses associated with our common shares and being a public company.
In
particular, forward-looking statements relating to the acquisition and integration by us of the microwave transport business of NSN and our renewed operational framework with NSN announced on
April 10, 2013 are based on certain assumptions including:
- •
- the successful implementation of our renewed framework, including sales growth from NSN as a result of the renewed
framework; and
- •
- our ability to obtain operating cost reductions through measures including consolidation and rationalization of the
business acquired from NSN, migration to new contract manufacturers, and optimization of our logistical framework to reduce overhead costs related to hardware sales.
Other
risks relating to NSN, identified by Nokia Corporation, its controlling parent, are set out in Nokia Corporation's annual report on Form 20-F for the fiscal year ended December 31,
2012 under item 3D "Risk Factors".
Also
see the discussion under "Liquidity and Capital Resources—Liquidity Discussion" in this MD&A, as well as the discussion under "Risk Factors" contained in our most
recently filed AIF. Although we have attempted to identify important factors that could cause our actual results to differ materially from expectations, intentions, estimates or forecasts, there may
be other factors that could cause our results to differ from what we currently anticipate, estimate or intend. Ongoing global economic uncertainty could impact forward-looking statements contained in
this MD&A in an unpredictable and possibly detrimental manner. In light of these risks, uncertainties and assumptions, the forward-looking events described in this MD&A might not occur or might not
occur when stated.
3
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
SELECTED FINANCIAL INFORMATION:
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Three Months Ended |
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Nine Months Ended |
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November 30,
2013 |
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November 30,
2012 |
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November 30,
2011 |
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November 30,
2013 |
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November 30,
2012 |
|
November 30,
2011 |
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REVENUE |
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22,169 |
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38,452 |
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11,830 |
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72,154 |
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95,583 |
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36,506 |
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| |
Cost of sales |
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19,709 |
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31,314 |
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6,992 |
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64,080 |
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77,569 |
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21,249 |
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| |
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Gross profit |
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2,460 |
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7,138 |
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4,838 |
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8,074 |
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18,014 |
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15,257 |
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| |
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11% |
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19% |
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41% |
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11.2% |
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18.8% |
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41.8% |
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EXPENSES |
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Research and development |
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5,000 |
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9,769 |
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5,380 |
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15,085 |
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26,307 |
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17,751 |
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Selling and marketing |
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3,479 |
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3,935 |
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3,793 |
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10,036 |
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11,950 |
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11,722 |
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General and administrative |
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4,144 |
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6,218 |
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4,985 |
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13,325 |
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20,001 |
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12,665 |
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| |
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12,623 |
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19,922 |
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13,893 |
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38,446 |
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58,258 |
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41,236 |
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Income (loss) before other items |
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(10,163 |
) |
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(12,784 |
) |
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(9,055 |
) |
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(30,372 |
) |
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(40,244 |
) |
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(25,979 |
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Amortization of intangible assets |
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(500 |
) |
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(1,162 |
) |
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(404 |
) |
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(1,496 |
) |
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(2,903 |
) |
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(1,613 |
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Accretion expense |
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(53 |
) |
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(16 |
) |
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(60 |
) |
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(174 |
) |
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(68 |
) |
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(612 |
) |
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Interest income/(expense) |
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(392 |
) |
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(500 |
) |
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144 |
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(1,310 |
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(1,211 |
) |
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375 |
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| |
Equity issuance expenses |
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(662 |
) |
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— |
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— |
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(662 |
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— |
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— |
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Gain on change in estimate |
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2,970 |
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5,416 |
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1,362 |
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3,312 |
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6,958 |
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14,523 |
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Gain on contact amendment |
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417 |
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— |
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— |
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5,702 |
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— |
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— |
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Gain on purchase of business |
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— |
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— |
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— |
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— |
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19,397 |
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— |
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Fair value adjustment—warrant liability |
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3,587 |
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— |
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— |
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3,587 |
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— |
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— |
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Foreign exchange gain (loss) |
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(724 |
) |
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419 |
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(202 |
) |
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(1,219 |
) |
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(122 |
) |
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(118 |
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Net Income (Loss) befire income taxes |
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(5,520 |
) |
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(13,873 |
) |
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(8,215 |
) |
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(22,632 |
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(28,254 |
) |
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(21,739 |
) |
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Income tax expense (recovery) |
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102 |
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63 |
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(157 |
) |
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270 |
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(509 |
) |
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(1,458 |
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Net Income (Loss) |
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(5,622 |
) |
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(13,936 |
) |
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(8,058 |
) |
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(22,902 |
) |
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(27,745 |
) |
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(20,281 |
) |
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Net Loss Attributable to Non-Controlling Interest |
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113 |
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69 |
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41 |
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259 |
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177 |
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168 |
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| |
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Net Income (Loss) applicable to shareholders |
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(5,509 |
) |
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(13,867 |
) |
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(8,017 |
) |
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(22,643 |
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(27,568 |
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(20,113 |
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Basic income (loss) per share |
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(0.12 |
) |
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(0.36 |
) |
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(0.23 |
) |
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(0.55 |
) |
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(0.74 |
) |
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(0.57 |
) |
Diluted income (loss) per share |
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(0.12 |
) |
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(0.36 |
) |
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(0.23 |
) |
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(0.55 |
) |
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(0.74 |
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(0.57 |
) |
Basic weighted average shares outstanding |
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47,329,275 |
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38,033,222 |
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35,542,247 |
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41,144,953 |
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37,313,926 |
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35,486,924 |
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Diluted weighted average shares outstanding |
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47,329,275 |
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38,033,222 |
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35,542,247 |
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41,144,953 |
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37,313,926 |
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35,486,924 |
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4
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The changes in the results between fiscal years 2014, 2013 and 2012 can be attributed to a number of factors including:
- 1)
- The
revenue growth between fiscal year 2014 and fiscal year 2012 is attributable to our strategic partnership with NSN and the related business volumes
resulting from this arrangement. However, between fiscal year 2013, when the strategic partnership began, and fiscal year 2014 the sales through the NSN sales channel have decreased by
$20.6 million.
- 2)
- Our
gross profit percentage was lower in fiscal year 2014 compared to fiscal year 2012 because of the predominance of Original Equipment Manufacturer (OEM)
related revenue, which includes revenue through the NSN channel, which has higher volume discounts and therefore lower prices than sales through other channels. The gross profit percentage in fiscal
year 2014 compared to fiscal year 2013 was impacted by scheduled pricing reductions to NSN which occurred without comparable cost reductions.
- 3)
- Operating
expenses have decreased relative to fiscal year 2013 because of both changes to our services agreements with NSN and internal restructuring.
Expenses have decreased relative to fiscal year 2012 primarily as a result of internal restructuring which saw the closure of our Israeli design centre and a reduction of staff in our Ottawa
headquarters.
Consolidated Balance Sheet Data:
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As at,
November 30
2013 |
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As at
February 28,
2013 |
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Assets: |
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Cash and cash equivalents |
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23,545 |
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22,959 |
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Trade receivables |
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19,009 |
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35,452 |
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Inventory |
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31,642 |
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32,722 |
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Contingent receivable |
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— |
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13,843 |
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Other Assets |
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4,989 |
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6,146 |
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Total Current Assets |
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79,185 |
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111,122 |
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Long Term Assets |
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18,928 |
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23,872 |
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Total Assets |
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98,113 |
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134,994 |
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Liabilities: |
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| |
Accounts Payable & Accrued Liabilities |
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26,484 |
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56,962 |
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Debt facility |
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— |
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15,000 |
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| |
Other Short Term Liabilities |
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2,699 |
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4,669 |
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Total Short Term Liabilities |
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29,183 |
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76,631 |
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Long Term Liabilities |
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17,885 |
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2,753 |
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Total Liabilities |
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47,068 |
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79,384 |
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Total Equity |
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51,045 |
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55,610 |
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Total Liabilities and Shareholder's equity |
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98,113 |
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134,994 |
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5
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
The following table sets out selected financial information for each of our most recently completed eight fiscal quarters. In the
opinion of management, this information has been prepared on the same basis as our audited consolidated financial statements, and all necessary adjustments have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in conjunction with our consolidated financial statements and related notes thereto.
Historically,
our operating results have fluctuated on a quarterly basis and we expect that quarterly financial results will continue to fluctuate in the future. The results of
operations for interim periods should not be relied upon as an indication of the results to be expected or achieved in any future period or any fiscal year as a whole. Fluctuations in results relate
to the project nature of the network installations of our end-customers including end-customers we supply through NSN. In addition, results may vary as a result of the timing of staffing,
infrastructure additions required to support growth, and material costs required to support design initiatives. Operating results may not follow past trends for other reasons, including the
repercussions of our strategic decisions with respect to, among other things, acquisitions of complementary products or businesses.
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FY12 |
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FY13 |
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FY14 |
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Feb 29
2012
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May 31
2012
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Aug 31
2012
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Nov 30
2012
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Feb 28
2013
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May 31
2013
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Aug 31
2013
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Nov 30
2013
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| |
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Revenue |
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9,150 |
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|
12,974 |
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|
44,157 |
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|
38,452 |
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|
28,294 |
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|
24,532 |
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|
25,453 |
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|
22,169 |
|
Gross Profit |
|
|
1,144 |
|
|
4,133 |
|
|
6,743 |
|
|
7,138 |
|
|
1,487 |
|
|
2,820 |
|
|
2,794 |
|
|
2,460 |
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| |
Gross Profit % |
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|
13% |
|
|
32% |
|
|
15% |
|
|
19% |
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|
5% |
|
|
11% |
|
|
11% |
|
|
11% |
|
Operating Expenses |
|
|
13,720 |
|
|
13,327 |
|
|
25,009 |
|
|
19,922 |
|
|
18,451 |
|
|
13,432 |
|
|
12,391 |
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|
12,623 |
|
Income (loss) before other items |
|
|
(12,576 |
) |
|
(9,194 |
) |
|
(18,266 |
) |
|
(12,784 |
) |
|
(16,964 |
) |
|
(10,612 |
) |
|
(9,597 |
) |
|
(10,163 |
) |
Net income (loss) for the period |
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|
(13,415 |
) |
|
(12,637 |
) |
|
(1,172 |
) |
|
(13,936 |
) |
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(27,262 |
) |
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(6,679 |
) |
|
(10,601 |
) |
|
(5,622 |
) |
Net income (loss) per share |
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| |
Basic |
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(0.38 |
) |
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(0.35 |
) |
|
(0.03 |
) |
|
(0.36 |
) |
|
(0.71 |
) |
|
(0.17 |
) |
|
(0.28 |
) |
|
(0.12 |
) |
| |
Diluted |
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(0.38 |
) |
|
(0.35 |
) |
|
(0.03 |
) |
|
(0.36 |
) |
|
(0.71 |
) |
|
(0.17 |
) |
|
(0.28 |
) |
|
(0.12 |
) |
Weighted average number of shares outstanding |
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| |
Basic |
|
|
35,573,810 |
|
|
35,931,347 |
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|
37,992,859 |
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|
38,033,222 |
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|
38,043,594 |
|
|
38,059,919 |
|
|
38,112,887 |
|
|
47,329,275 |
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| |
Diluted |
|
|
35,573,810 |
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|
35,931,347 |
|
|
37,992,859 |
|
|
38,033,222 |
|
|
38,043,594 |
|
|
38,059,919 |
|
|
38,112,887 |
|
|
47,329,275 |
|
Total Assets |
|
|
120,121 |
|
|
109,616 |
|
|
164,099 |
|
|
152,433 |
|
|
134,994 |
|
|
104,254 |
|
|
89,221 |
|
|
98,113 |
|
Overview
DragonWave is a leading provider of high-capacity packet microwave solutions that drive next-generation IP networks. DragonWave's
carrier-grade point- to-point packet microwave systems transmit broadband voice, video and data, enabling service providers, government agencies, enterprises and other organizations to meet their
increasing bandwidth requirements rapidly and affordably. The principal application of DragonWave's products is mobile network backhaul. Additional applications include leased line replacement, last
mile fiber extension and enterprise networks.
6
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Key
points on our results of operations for the third quarter ended November 30, 2013 when comparing those results to the same period in the previous fiscal year include
the following:
- •
- When compared to the same quarter in the previous fiscal year, revenue decreased by $16.3 million. The primary
factors contributing to the revenue changes are:
- •
- Sales through the NSN sales channel which have decreased by $16.2 million;
- •
- Increased sales to a European based integrator amounted to $1.2 million; and
- •
- Decreases in sales through a US distributor, the discontinuation of our Fusion product line, designed in our Israeli R&D
centre, and other more minor variances together amounted to a $1.3 million drop in revenue
- •
- Gross profit percentage decreased to 11% in the third quarter of fiscal year 2014 from 19% in the third quarter of the
previous fiscal year. The decrease is the result of the changes in product mix between the two fiscal periods, and reduced prices which have come in advance of achievable cost reductions in
certain areas.
- •
- Operating expenses decreased relative to the same three and nine month periods in the previous fiscal year as a result of
the following factors:
|
|
|
|
|
|
|
|
|
Changes in Operating Expenses (USD Millions)
|
|
Q3 |
|
Year to
Date |
|
FY2014 |
|
|
12.6 |
|
|
38.4 |
|
FY2013 |
|
|
19.9 |
|
|
58.3 |
|
| |
|
|
|
|
|
| |
Variance |
|
|
(7.3 |
) |
|
(19.9 |
) |
| |
|
|
|
|
|
Key Drivers: |
|
|
|
|
|
|
|
NSN Services agreements and Lease holiday amortization |
|
|
(5.7 |
) |
|
(13.6 |
) |
Compensation related spending (primarily related to decreases in staffing levels in Ottawa) |
|
|
(0.6 |
) |
|
(3.4 |
) |
Closure of the Israeli design centre |
|
|
(0.9 |
) |
|
(3.2 |
) |
Travel & Living costs; cost reduction programs introduced to reduce costs |
|
|
(0.1 |
) |
|
(1.1 |
) |
Variable compensation |
|
|
(0.2 |
) |
|
(1.0 |
) |
Chinese Government R&D incentive |
|
|
(0.2 |
) |
|
(0.2 |
) |
DragonWave HFCL increased spending |
|
|
0.2 |
|
|
0.2 |
|
Software relating spending |
|
|
0.1 |
|
|
0.2 |
|
Shanghai Design Centre—Operating for 3 quarters in FY2014; only 2 quarters in FY2013 |
|
|
0.1 |
|
|
2.2 |
|
| |
|
|
|
|
|
|
|
|
(7.3 |
) |
|
(19.9 |
) |
| |
|
|
|
|
|
- •
- In the three months and nine months ended November 30, 2013 the results also include a $3.0 million gain on
change in estimate associated with an accrued liability recorded at the time of
7
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Our Priorities
Our primary operational objective is to achieve cash flow break-even from operations. We plan to accomplish this objective largely by
focusing on the new revenue opportunities we are now working to close on and by continuing to decrease our costs of direct materials and overhead.
On September 23, 2013, pursuant to the Equity Offering of units we issued 11,910,000 common shares and
8,932,500 warrants for proceeds, before deducting fees and expenses, of approximately $25.0 million. After deducting fees and expenses, we realized net proceeds of $22.4 million.
The units were offered at a price of $2.10 per unit. Each unit consisted of one common share and three quarters of one warrant. Each whole warrant entitles the holder to purchase one common share at
an exercise price of $2.70 per share until September 23, 2018, subject to certain adjustments. As at September 23, 2013 we recognized a liability in the amount of $6.4 million for
the warrants.
The
terms of the warrants allow holders of the warrants to exercise the warrants on a cashless basis. A holder of may, in its sole discretion, exercise the warrant in whole or in part
and, in lieu of making the cash
8
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
payment
on account of the aggregate exercise price, elect instead to receive upon such exercise the net number of common shares determined according to the formula set forth in the form of warrant and
defined in the form of warrant as the "Net Number". The warrants also provide that holders may exercise on a cashless basis and receive 1331/3% of the common shares they would otherwise
be entitled to receive upon exercise of the warrants, if such exercise (1) occurs after November 12, 2013 and before the October 12, 2014, and (2) the "Market Price"
(as defined in the form of warrant) is less than $2.10 (as adjusted for stock splits, stock dividends, recapitalizations and similar events).
The
terms of the warrants also provide that in the event of a fundamental transaction we may be required to settle the warrants with a cash payment. ASC 815-40 states that if an
event that is not within the entity's control could require net cash settlement, then the contract shall be classified as a liability. As such we recognized a liability for $6.4 million which
represented the fair value of the liability as at September 23, 2013. As the liability is a derivative, it is required to be presented at its fair value as at
each Balance Sheet date. Increases or decreases in fair value of the warrants are included as a component of other income (expense) in the Consolidated Statement of Operations. As at
November 30, 2013, 7,112,500 warrants were outstanding and the liability for warrants was decreased to $2.3 million. In the three and nine months ended November 30, 2013 we
increased our common stock value by $0.6 million which represented the value of warrants exercised and realized a gain in the amount of $3.6 million in the Consolidated Statement of
Operations which represented the change in fair value of the remaining warrant liability.
Subsequent
to the Consolidated Balance Sheet date a further 3,329,000 warrants were exercised resulting in an issuance of 4,473,344 of our common shares.
On June 1, 2012 we announced the closing of the acquisition of NSN's microwave transport business, including its associated
operational support system (OSS) and related support functions. The acquisition was effected pursuant to the Amended and Restated Master Acquisition Agreement between DragonWave Inc., its
wholly-owned subsidiary DragonWave S.à r.l and NSN dated May 3, 2012.
The
results of operations for the nine months ended November 30, 2013 were impacted by changes announced on April 10, 2013 to our existing operational framework
with NSN.
The
original purchase price for the acquisition of NSN's microwave transport business included a contingent receivable based on business performance in the eighteen months following
closing. Under the terms of the renewed framework, NSN paid $13.8 million to us on April 12, 2013 which settled the balance of our contingent receivable.
NSN
also took on additional commitments and costs so that we can continue to develop and supply microwave products. The Italian services agreement, pursuant to which NSN provided
research & development and certain other services to DragonWave since June 1, 2012, was terminated. As a result, we were able to reduce our accounts payable by $13.3 million. We
also eliminated the capital assets and the corresponding capital lease obligation associated with the Italian operations. Finally, we recorded an estimated termination fee of $8.7 million to be
paid in several tranches. Finally, a liability recorded related to an Indian lease obligation was amended and a gain of $0.4 million was recognized.
9
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The
net impact of these items results in a gain of $5.7 million which was recognized in the statement of operations (three months ended November 30,
2013—$0.4 million; nine months ended November 30, 2013—$5.7 million).
Gain
on Contract Amendment Calculation:
|
|
|
|
|
|
|
YTD
FY2014 |
|
Revaluation of the Indian Lease Obligation (recognized in Q3 FY2014) |
|
|
(0.4 |
) |
Reduction in accounts payable balance |
|
|
(13.3 |
) |
Reduction in capital assets |
|
|
0.6 |
|
Elimination of the capital lease obligation |
|
|
(1.3 |
) |
Recognition of the termination fee |
|
|
8.7 |
|
| |
|
|
|
Gain on Contract Amendment |
|
|
(5.7 |
) |
| |
|
|
|
Overdue
balances recorded in accounts receivable and payable as at February 28, 2013 between the two companies were settled in the first quarter of fiscal 2014 in the amount of
$19.4 million and $13.8 million respectively.
We have established a long term credit facility with Comerica Bank and Export Development Canada. As at November 30, 2013, this
asset based credit facility was for a total of $20.0 million plus $2.5 million for letters of credit and foreign exchange facilities. As at November 30, 2013, we had drawn
$15.0 million on this facility.
During
the three and nine months ended November 30, 2013 the weighted average debt outstanding was $15.0 million (three and nine months ended November 31,
2012—$15.0 million and $16.4 million, respectively) and we recognized $0.4 million and $1.2 million respectively in interest expense related to the debt
facility (three and nine months ended November 30, 2012—$0.3 million and $0.8 million respectively).
As
at February 28, 2013, we were in breach of one of the covenants then in place on the facility. However, we obtained a waiver of the breach from our lenders for a period through
May 30, 2013, which eliminated any acceleration of repayment of our obligation.
On
January 6, 2014, we extended the credit facility which was set to mature on May 31, 2014. The revised line has been increased to $40.0 million plus
$4.0 million for letters of credit and foreign exchange facilities and will expire on June 1, 2016. The new terms of the credit facility include customary terms, conditions, covenants,
and representations and warranties, consistent with the facility which was already in place. Credit availability is subject to ongoing compliance with borrowing covenants and short term assets on
hand. We currently have $15 million USD drawn on this facility, and access to additional available funds is geared to future growth in accounts receivable. The credit facility is secured by a
first priority charge on all of our assets and principal direct and indirect subsidiaries. Borrowing options under the credit facility
10
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
include
US dollars, Canadian dollars and Euro loans. Interest rates vary with market rate fluctuations, with loans bearing interest in the range of 3% to 4% above the applicable base rates.
On January 22, 2013 we sold all of our shares of DragonWave Ltd ("DWL"), incorporated in Israel. The
shares were sold for a nominal amount. Under the share purchase agreement, we have a liability to pay certain future obligations. During the nine month period ended November 30, 2013 we reduced
the contingent liability by $0.3 million based on a change in circumstance and therefore, as at November 30, 2013, we have recorded a discounted liability of $50 thousand
(February 28, 2013—$0.8 million). The maximum potential liability to us, as at November 30, 2013 is $50 thousand as well (February 28,
2013—$1.3 million). Also, under the terms of a supply and services agreement, we have an opportunity to earn an additional $5.3 million (February 28,
2013—$5.3 million) based on business performance subsequent to the disposition for which we have recorded a receivable of $0.6 million (February 28,
2013—$0.6 million) which represents our estimate of the amounts to be collected based on the discounted forecasted future cash inflows.
In December, 2013 we announced the addition of Mr. Robert Pons to our Board of Directors. Mr. Pons is a veteran of the
telecommunications industry and is based in the United States. He brings a rich combination of senior operating and board governance experience to DragonWave including expertise in developing
and implementing Sales, Marketing and Distribution strategies.
We believe that revenue growth will be achieved through both strategic partnerships and direct customer relationships. Our strategic
partnerships include DragonWave-HFCL in India where we continue to be excited about near term opportunities. DragonWave is also successfully pursuing direct customer opportunities around the world.
For example, we recently announced an agreement with Saab, a defense and security company, to work collaboratively on the expansion and enhancement of a national security communication network in
Sweden, Norway, Finland, Denmark and Iceland.
We
are also working very hard with key customers in the United States, to define our role in certain network expansions in that country.
Non-GAAP Performances Measures
This MD&A contains certain information that is not consistent with financial measures prescribed under GAAP. We use earnings before
interest, taxes, depreciation and amortization ("EBITDA") as this measure allows management to evaluate our operational performance and the performance of our assets. EBITDA does not have any
standardized meaning prescribed by GAAP, and is not designed to replace other measures of financial performance or the statement of cash flows as an indicator of liquid assets. This measure should not
be considered in isolation or as a substitute for other measures of performance calculated according to GAAP. We use this non-GAAP measure because it provides additional information on our existing
and active commercial operations performance.
11
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Adjusted
EBITDA corresponds to EBITDA as defined above less elements that are non-cash in nature. We believe that this metric is necessary in order to isolate the commercial operations
from certain non-cash costs. Consistent improvement in adjusted EBITDA is one of management's primary objectives. These measures are used by us because we believe they provide useful information
regarding performance. The definitions of the measures that we adopted may differ from those of other businesses. We calculate EBITDA and adjusted EBITDA consistently over each fiscal period.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30, 2013 |
|
Nine Months Ended
November 30, 2013 |
|
Summarized US GAAP Income Statement |
|
|
|
|
|
|
|
Revenue |
|
|
22,169 |
|
|
72,154 |
|
Cost of Sales |
|
|
19,709 |
|
|
64,080 |
|
| |
|
|
|
|
|
Gross Margin |
|
|
2,460 |
|
|
8,074 |
|
Operating Expenses |
|
|
12,623 |
|
|
38,446 |
|
Other Gains/Losses |
|
|
(4,541 |
) |
|
(7,470 |
) |
| |
|
|
|
|
|
Net Income (loss) |
|
|
(5,622 |
) |
|
(22,902 |
) |
Reconciliation to Non-GAAP Measures |
|
|
|
|
|
|
|
Net Income, under US GAAP |
|
|
(5,622 |
) |
|
(22,902 |
) |
| |
Interest expense |
|
|
392 |
|
|
1,310 |
|
| |
Tax expense |
|
|
102 |
|
|
270 |
|
| |
Depreciation of fixed assets |
|
|
1,072 |
|
|
3,868 |
|
| |
Amortization of intangible assets |
|
|
500 |
|
|
1,496 |
|
| |
|
|
|
|
|
EBITDA |
|
|
(3,556 |
) |
|
(15,958 |
) |
Non-Cash and Normalizing Adjustments: |
|
|
|
|
|
|
|
| |
Stock option expenses |
|
|
312 |
|
|
954 |
|
| |
Equity issuance costs |
|
|
662 |
|
|
662 |
|
| |
Fair value adjustments |
|
|
(3,587 |
) |
|
(3,587 |
) |
| |
Gain on contract amendment |
|
|
(417 |
) |
|
(5,702 |
) |
| |
Gain on change in estimate |
|
|
(2,970 |
) |
|
(3,312 |
) |
| |
Accretion expense |
|
|
53 |
|
|
174 |
|
| |
Inventory provision |
|
|
389 |
|
|
552 |
|
| |
|
|
|
|
|
Adjusted EBITDA |
|
|
(9,114 |
) |
|
(26,217 |
) |
| |
|
|
|
|
|
12
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Revenue and Expenses
We continue to have one reportable segment, broadband wireless backhaul equipment. The vast majority of our sales come from the
shipment of equipment (as opposed to services or software) either through direct sales, sales to distributors, or through OEMs.
We
also analyze our sales according to geographic region and target product development and sales strategies to meet the special requirements of each region. North America and Europe,
the Middle East and Africa remain the largest regions for us, but we have increasingly been achieving wins, and shipping product to other regions including Asia. Recently we have been excited by
increased customer interest in Central and Latin America as well. It remains difficult for us to determine an accurate geographic breakdown for shipments to NSN outside of India because our products
are primarily shipped to an NSN warehouse in the Netherlands and not directly to customer sites.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
November 30, 2013 |
|
November 30, 2012 |
|
North America |
|
|
6,526 |
|
|
30% |
|
|
8,850 |
|
|
23% |
|
Europe, Middle East and Africa |
|
|
3,778 |
|
|
17% |
|
|
2,415 |
|
|
6% |
|
NSN (through India) |
|
|
3,435 |
|
|
15% |
|
|
6,294 |
|
|
17% |
|
NSN (through Asia) |
|
|
1,925 |
|
|
9% |
|
|
1,201 |
|
|
3% |
|
NSN (Rest of World) |
|
|
5,991 |
|
|
27% |
|
|
19,289 |
|
|
50% |
|
Other Customers (Rest of World) |
|
|
514 |
|
|
2% |
|
|
403 |
|
|
1% |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
|
22,169 |
|
|
100% |
|
|
38,452 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
November 30, 2013 |
|
November 30, 2012 |
|
North America |
|
|
20,571 |
|
|
28% |
|
|
27,566 |
|
|
29% |
|
Europe, Middle East and Africa |
|
|
9,429 |
|
|
13% |
|
|
5,257 |
|
|
5% |
|
NSN (through India) |
|
|
7,113 |
|
|
10% |
|
|
12,471 |
|
|
13% |
|
NSN (through Asia) |
|
|
3,549 |
|
|
5% |
|
|
3,589 |
|
|
4% |
|
NSN (Rest of World) |
|
|
30,196 |
|
|
42% |
|
|
45,411 |
|
|
48% |
|
Other Customers (Rest of World) |
|
|
1,296 |
|
|
2% |
|
|
1,289 |
|
|
1% |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
|
72,154 |
|
|
100% |
|
|
95,583 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
13
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
A large component of our cost of sales is the cost of product purchased from outsourced manufacturers. Final test and assembly for the
links sold by us is carried on both at
our premises and at the premises of our contract manufacturers. Additional costs for logistics and warranty activities are included in cost of sales. We use the services of a number of outsourced
contract manufacturers with locations in Germany, China and Malaysia.
Research
and development ("R&D") costs relate mainly to the compensation of our engineering group and the material consumption associated with prototyping activities.
Selling
and marketing ("S&M") expenses include the remuneration of sales staff, travel and trade show activities and customer support services.
General
and administrative ("G&A") expenses relate to the remuneration of related personnel, professional fees associated with tax, accounting and legal advice, and insurance costs.
Occupancy
and information systems costs are related to our leasing costs and communications networks and are accumulated and allocated, based on headcount, to all functional areas in our
business. We continue to lease premises from a real estate company controlled by an individual who was a member of the Board of Directors until June 12, 2012. On June 12, 2012, following
our Annual General Meeting of shareholders, that director ceased to be a member of the Board but our lease continues to remain in effect. Our management believes the terms of the lease reflect fair
market terms and payment provisions.
Comparison of the three months ended November 30, 2013 and November 30, 2012
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
22,169 |
|
|
38,452 |
|
|
(16,283 |
) |
|
72,154 |
|
|
95,583 |
|
|
(23,429 |
) |
The
business we acquired from NSN began to generate revenue for us in the second quarter of fiscal 2013. Consistent with the variance descriptions in previous quarters in fiscal 2014,
decreases in sales through the NSN sales channel are the largest single driver for the change in revenue in the three months ended November 30, 2013 compared to the same period in the previous
fiscal year. We also saw both
14
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
positive
and negative variances related to project based deployments to resellers located in Europe and the United States.
|
|
|
|
|
|
Variance for three months ended November 30, 2013
|
|
|
|
Revenue—Three months ended November 30, 2012 |
|
|
38,452 |
|
Variances: |
|
|
|
|
| |
New Global NSN Strategic Relationship |
|
|
(13,298 |
) |
| |
Sales in India through NSN |
|
|
(2,859 |
) |
| |
US Based distribution |
|
|
(596 |
) |
| |
Sales of our Fusion based product line |
|
|
(297 |
) |
| |
European based integrators |
|
|
1,162 |
|
| |
Tier 1 Operator located in US serviced through OEM & direct |
|
|
(938 |
) |
| |
Other |
|
|
543 |
|
| |
|
|
|
Revenue—Three months ended November 30, 2013 |
|
|
22,169 |
|
| |
|
|
|
|
|
|
|
|
|
Variance for the nine months ended November 30, 2013
|
|
|
|
Revenue—Nine months ended November 30, 2012 |
|
|
95,583 |
|
Variances: |
|
|
|
|
| |
New Global NSN Strategic Relationship |
|
|
(15,215 |
) |
| |
Sales in India through NSN |
|
|
(5,358 |
) |
| |
US Based distribution |
|
|
(5,460 |
) |
| |
Sales of our Fusion based product line |
|
|
(1,478 |
) |
| |
European based integrator |
|
|
3,101 |
|
| |
Tier 1 Operator located in US serviced through OEM & direct |
|
|
(380 |
) |
| |
Other |
|
|
1,361 |
|
| |
|
|
|
Revenue—Nine months ended November 30, 2013 |
|
|
72,154 |
|
| |
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
2,460 |
|
|
7,138 |
|
|
(4,678 |
) |
|
8,074 |
|
|
18,014 |
|
|
(9,940 |
) |
|
11% |
|
|
19% |
|
|
(7% |
) |
|
11% |
|
|
19% |
|
|
(8% |
) |
The
lower gross profit percentage in the third quarter of fiscal 2014 compared to the same period in the previous year relates to a number of factors including a shift in the sales mix
through our OEM channel, and reduced sales volumes. Reduced sales volumes place downward pressure on the gross margin
15
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
percentage
as semi-variable and fixed costs need to be absorbed over fewer sales dollars and volume based material purchasing is challenged. Our initiative to close our warehouse in the Netherlands
and open less expensive warehouses closer to our customer base was successfully completed in the third quarter, with the result that freight costs, for example, decreased by 46% over the same period
in the previous fiscal year. We continue to work toward negotiating more favorable pricing with component suppliers and contract manufacturers.
Expenses
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
5,000 |
|
|
9,769 |
|
|
(4,769 |
) |
|
15,085 |
|
|
26,307 |
|
|
(11,222 |
) |
The
R&D expenses were impacted by changes announced on April 10, 2013 to our existing operational framework with NSN. The termination of the Italian services agreement, in
particular, resulted in a significant reduction to our expense profile. In addition, substantial cost reduction actions including the closure of our Israeli design centre and the reduction in staff
levels primarily in Canada further reduced expenses.
Changes to R&D Expense in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q3 FY2014
vs.
Q3 FY2013 |
|
YTD FY2014
vs.
YTD FY2013 |
|
NSN Italian services agreement |
|
|
(3.0 |
) |
|
(7.7 |
) |
Lease holiday—amortization of asset recognized on business combination |
|
|
(1.0 |
) |
|
(1.9 |
) |
Depreciation—assets acquired primarily through NSN Acquisition |
|
|
(0.6 |
) |
|
— |
|
Israeli location; R&D resources no longer employed in Israel |
|
|
(0.3 |
) |
|
(1.8 |
) |
Canadian compensation—reduced staff year over year |
|
|
(0.2 |
) |
|
(1.5 |
) |
Government assistance—China |
|
|
(0.2 |
) |
|
(0.2 |
) |
Material and software spending |
|
|
0.3 |
|
|
(0.3 |
) |
Contracted services and other |
|
|
0.2 |
|
|
0.1 |
|
Shanghai office—nine months of activity in FY2014 vs. six months in FY2013 |
|
|
— |
|
|
2.1 |
|
| |
|
|
|
|
|
|
|
|
(4.8 |
) |
|
(11.2 |
) |
| |
|
|
|
|
|
16
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
3,479 |
|
|
3,935 |
|
|
(456 |
) |
|
10,036 |
|
|
11,950 |
|
|
(1,914 |
) |
Similar
to the factors described for R&D, the termination of the Italian services agreement impacted the expense base for S&M. In addition, reductions in staff levels globally further
reduced spending for the sales and marketing organizations.
Changes to S&M expense in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q3 FY2014
vs.
Q3 FY2013 |
|
YTD FY2014
vs.
YTD FY2013 |
|
NSN Italian services agreement |
|
|
(0.3 |
) |
|
(0.8 |
) |
Lower variable compensation |
|
|
(0.1 |
) |
|
(0.5 |
) |
Compensation related spending—reductions in staff |
|
|
(0.2 |
) |
|
(0.4 |
) |
Israeli location; resources no longer employed in Israel |
|
|
(0.1 |
) |
|
(0.3 |
) |
Professional fees, contract costs & Other |
|
|
0.2 |
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
(0.5 |
) |
|
(1.9 |
) |
| |
|
|
|
|
|
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
4,144 |
|
|
6,218 |
|
|
(2,074 |
) |
|
13,325 |
|
|
20,001 |
|
|
(6,676 |
) |
G&A
expenses have decreased relative to the same three and nine month periods in the previous year. Once again the changes relate predominantly to the NSN services agreements and the
restructuring efforts that took place in fiscal year 2013.
17
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Changes to G&A Expenses in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q3 FY2014
vs.
Q3 FY2013 |
|
YTD FY2014
vs.
YTD FY2013 |
|
NSN transitional services agreement and Italian services contract |
|
|
(1.5 |
) |
|
(3.2 |
) |
Compensation related spending—reductions in staff |
|
|
(0.4 |
) |
|
(1.5 |
) |
Closure of the DragonWave Israeli subsidiary |
|
|
— |
|
|
(1.2 |
) |
Lower travel costs and other |
|
|
(0.2 |
) |
|
(0.6 |
) |
Professional fees and contractors including legal fees which have decreased |
|
|
(0.2 |
) |
|
(0.5 |
) |
Lower variable compensation |
|
|
— |
|
|
(0.4 |
) |
Higher costs incurred at DragonWave HFCL |
|
|
0.2 |
|
|
0.2 |
|
Warehousing costs—portion not in Margin—(nine months in FY2014 vs. six months in FY2013) |
|
|
— |
|
|
0.5 |
|
| |
|
|
|
|
|
|
|
|
(2.1 |
) |
|
(6.7 |
) |
| |
|
|
|
|
|
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
Amortization of Axerra Technology & Customer Relationships |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(451 |
) |
|
451 |
|
Amortization of NSN related balances (Technology, Customer Relationships & Favourable AR terms) |
|
|
(204 |
) |
|
(891 |
) |
|
687 |
|
|
(598 |
) |
|
(1,628 |
) |
|
1,030 |
|
Amortization of computer software & infrastructure software |
|
|
(296 |
) |
|
(271 |
) |
|
(25 |
) |
|
(898 |
) |
|
(824 |
) |
|
(74 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
(1,162 |
) |
|
662 |
|
|
(1,496 |
) |
|
(2,903 |
) |
|
1,407 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amortization of technology and customer relationships acquired as part of our acquisition of DragonWave Ltd. (formerly known as Axerra Networks Ltd.) and the related
Office of the Chief Scientist of the Ministry of Industry and Trade in Israel ("OCS") liability ended with the write off of DragonWave Ltd. Acquisition-related intangibles on August 31,
2012. As a result, there were no expenses associated with the amortization of these balances in fiscal year 2014. The only remaining intangible asset associated with the acquisition of the NSN
microwave transport business is the asset associated with the favourable accounts receivable terms negotiated in the contract. Amortization of computer software and infrastructure software has grown
modestly over the past year with new software purchases.
18
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Accretion (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(53 |
) |
|
(16 |
) |
|
(37 |
) |
|
(174 |
) |
|
(68 |
) |
|
(106 |
) |
The
accretion expense in the prior fiscal year related primarily to the accretion of the Israeli OCS liability. The value of the OCS liability was reduced to zero at August 31,
2012. A small accretion expense was recognized in the three months ended November 30, 2013 associated with balances which arose on the acquisition of the NSN microwave transport business
related balances.
Restructuring Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| — |
|
|
(839 |
) |
|
839 |
|
|
— |
|
|
(1,637 |
) |
|
1,637 |
|
The
restructuring expenses in fiscal year 2013 related to the announcements in that year of the elimination of positions across all functional areas of the business, which were primarily
borne in Canada and Israel.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(392 |
) |
|
(500 |
) |
|
108 |
|
|
(1,310 |
) |
|
(1,211 |
) |
|
(99 |
) |
On
June 4, 2012, we borrowed against our credit facility with Comerica Bank and Export Development Canada. As discussed above, on January 6, 2014 the line of credit was
increased and extended. The revised line has been increased to $40.0 million plus $4.0 million for letters of credit and foreign exchange facilities and will expire on
June 1, 2016.
As
of the date of this MD&A, $15.0 million is outstanding on the line. Interest rates vary with market rate fluctuations, with loans bearing interest in the range of 3% to 4%
above the applicable base rates. The terms of the credit facility include other customary terms, conditions, covenants, and representations and warranties.
19
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Impairment of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| — |
|
|
(4,407 |
) |
|
4,407 |
|
|
— |
|
|
(8,424 |
) |
|
8,424 |
|
During
the previous fiscal year, in the three months ended August 31, 2012, we performed an analysis of our intangible assets in order to determine whether the carrying value of
those assets exceeded the estimated future cash flows expected to result from their use or disposition. Based upon this analysis, we wrote the assets down to their fair value and recorded a
corresponding impairment charge as outlined in the table above in fiscal year 2013.
Equity Issuance Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(662 |
) |
|
0 |
|
|
(662 |
) |
|
(662 |
) |
|
0 |
|
|
(662 |
) |
The
total costs associated with the Equity Offering in September, 2013, including fees and expenses approximated $2.6 million. Because of the existence of the warrant liability, a
prorated portion of the total fees and expenses was reported on the Statement of Operations for the three month period ended November 30, 2013. The remainder of the total fees and expenses
impacted equity directly.
Gain on Change in Estimate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
2,970 |
|
|
5,416 |
|
|
(2,446 |
) |
|
3,312 |
|
|
6,958 |
|
|
(3,646 |
) |
There
are three factors contributing to the gain on change in estimate during the three months and nine months ended November 30, 2013
- •
- We adjusted the value of accrued liabilities estimated at the time of the acquisition of the NSN microwave transport
business which we no longer feel are likely to occur ($2.7 million); this impacted the third quarter of fiscal 2014
- •
- We adjusted the termination liability for the Italian services agreement ($0.3 million); this impacted the third
quarter of fiscal 2014
20
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- We changed the estimate of our Israeli lease liability ($0.3 million); this impacted the nine months ended
November 30, 2013
Impacting
the nine months ended November 30, 2012 was the change in estimate made related to the contingent liability estimated on the of sale of DragonWave Ltd. The
reduction in the liability resulted in a corresponding gain.
Gain on Contract Amendment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
417 |
|
|
— |
|
|
417 |
|
|
5,702 |
|
|
— |
|
|
5,702 |
|
As
described in the section entitled "Acquisition of NSN's Microwave Transport Business", a number of factors make up the Gain on Contract Amendment as follows:
|
|
|
|
|
|
|
YTD
FY2014 |
|
Revaluation of the Indian Lease Obligation (recognized in Q3 FY2014) |
|
|
(0.4 |
) |
Reduction in accounts payable balance |
|
|
(13.3 |
) |
Reduction in capital assets |
|
|
0.6 |
|
Elimination of the capital lease obligation |
|
|
(1.3 |
) |
Recognition of the termination fee |
|
|
8.7 |
|
| |
|
|
|
Gain on Contract Amendment |
|
|
(5.7 |
) |
| |
|
|
|
Gain on Purchase of Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| — |
|
|
— |
|
|
— |
|
|
— |
|
|
19,397 |
|
|
(19,397 |
) |
We
recognized a one-time gain of $19.4 million in the three and nine months ended November 30, 2012 due to the difference between the cumulative tangible and intangible net
assets and the purchase price of the acquisition of NSN's microwave transport business.
21
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Fair Value Adjustment—Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
3,587 |
|
|
0 |
|
|
3,587 |
|
|
3,587 |
|
|
0 |
|
|
3,587 |
|
As
the warrant liability is a derivative, it is required to be presented at its estimated fair value as at each Balance Sheet date. Increases or decreases in fair value of the warrants
are included as a component of other income (expense) in the Consolidated Statement of Operations.
|
|
|
|
|
|
|
|
Q3 |
|
Warrant liability estimated at September 23, 2013 |
|
|
6.4 |
|
Exercises of warrants in Q3 FY2014 |
|
|
(0.6 |
) |
| |
|
|
|
| |
Warranty liability before quarter end revaluation |
|
|
5.8 |
|
Less: Estimated warrant liability at November 30, 2013 (warrants outstanding multipled by value per warrant) |
|
|
2.3 |
|
| |
|
|
|
Fair value adjustment—warrant liability on the Statement of Operations |
|
|
3.6 |
|
| |
|
|
|
Subsequent
November 30, 2013, 3,329,000 warrants were exercised resulting in an issuance of 4,473,344 of the Company's common shares.
Foreign Exchange Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(724 |
) |
|
419 |
|
|
(1,143 |
) |
|
(1,219 |
) |
|
(122 |
) |
|
(1,097 |
) |
The
foreign exchange balance for the three and nine months ended November 30, 2013 is driven by the valuation of our foreign denominated monetary balances, primarily the valuation
of the EUR relative to the USD during this nine month period. We do participate from time to time in forward exchange contracts which help to mitigate our exposure to these fluctuations. Included in
the $0.7 million loss in the three months ended November 30, 2013 is a small gain of $14 thousand on the contracts in place at November 30, 2013.
22
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Income Taxes Expense (Recovery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
November 30,
2013 |
|
November 30,
2012 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
102 |
|
|
63 |
|
|
39 |
|
|
270 |
|
|
(509 |
) |
|
779 |
|
The
year-over-year change in income tax expense relates primarily to the write down of the deferred tax assets associated with the impairment of certain DragonWave Ltd. (Israeli
entity) related balance sheet items. The expense in fiscal year 2014 relates to the anticipated payment of taxes in entities that provide either R&D or sales and customer support services to the rest
of DragonWave and have no tax losses available.
As
at February 28, 2013, we had cumulative operating tax loss-carry forwards in the following jurisdictions: Canada—$72.3 million,
United States—$8.8 million, Luxembourg—$33.0 million. We also had capital loss carry forwards in the following jurisdictions:
Canada—$16.3 million, United States—$36.5 million. In addition, we had $14.6 million of investment tax credits available to reduce future federal
Canadian income taxes payable and $2.3 million available to reduce future provincial income taxes payable.
Liquidity and Capital Resources
The following table sets out some of the key balance sheet metrics:
|
|
|
|
|
|
|
|
|
|
|
As at
November 30,
2013 |
|
As at
February 28,
2013 |
|
Key Balance Sheet Amounts and Ratios: |
|
|
|
|
|
|
|
| |
Cash and Cash Equivalents |
|
|
23,545 |
|
|
22,959 |
|
| |
Working Capital |
|
|
50,002 |
|
|
34,491 |
|
| |
Long Term Assets |
|
|
18,928 |
|
|
23,872 |
|
| |
Long Term Liabilities |
|
|
17,885 |
|
|
2,753 |
|
| |
Working Capital Ratio |
|
|
2.7 : 1 |
|
|
1.5 : 1 |
|
| |
Days Sales Outstanding in accounts receivable |
|
|
57 days |
|
|
107 days |
|
| |
Inventory Turnover |
|
|
1.8 times |
|
|
0.2 times |
|
Cash and Cash Equivalents, Restricted Cash and Short Term Investments
As at November 30, 2013, we had $23.5 million in Cash and Cash Equivalents ("Cash"), representing a $0.6 million
increase from the Cash balance at February 28, 2013.
The
following table explains the change in Cash in the three and nine months ended November 30, 2013.
23
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
FY2014 |
|
YTD
FY2014 |
|
Beginning Cash Balance |
|
|
9,826 |
|
|
22,959 |
|
Net Income adjusted for Non-Cash Items |
|
|
(9,513 |
) |
|
(26,901 |
) |
| |
Change in inventory |
|
|
886 |
|
|
528 |
|
| |
Change in accounts receivable, NSN contingent receivable and other current assets |
|
|
2,178 |
|
|
30,637 |
|
| |
Change in accounts payable and other liabilities |
|
|
(1,612 |
) |
|
(23,127 |
) |
| |
|
|
|
|
|
Working capital changes |
|
|
1,452 |
|
|
8,038 |
|
| |
|
|
|
|
|
| |
Capital asset acquisitions |
|
|
(558 |
) |
|
(1,334 |
) |
| |
Principal payments on capital lease obligations |
|
|
(280 |
) |
|
(1,206 |
) |
| |
|
|
|
|
|
Non-working capital cash changes |
|
|
(838 |
) |
|
(2,540 |
) |
| |
|
|
|
|
|
Other (including foreign exchange on bank accounts) |
|
|
184 |
|
|
(445 |
) |
| |
|
|
|
|
|
Cash Outflow before Equity Offering |
|
|
(8,715 |
) |
|
(21,848 |
) |
| |
|
|
|
|
|
Net proceeds on Equity Offering |
|
|
22,434 |
|
|
22,434 |
|
| |
|
|
|
|
|
Ending Cash Balance |
|
|
23,545 |
|
|
23,545 |
|
| |
|
|
|
|
|
Operating
losses were once again a significant driver in the use of Cash in the three and nine months ended November 30, 2013
In
the third quarter of fiscal 2013 the Equity Offering increased cash resources by $22.4 million
Many
of the other significant changes in the nine months ended November 30, 2013 relate to the renewed framework with NSN, announced on
April 10, 2013:
- •
- We collected $13.8 million related to the contingent receivable from NSN in the first quarter of
fiscal 2014.
- •
- We collected $19.4 million in accounts receivable. Offsetting this cash inflow was our payment to NSN for
outstanding accounts payable in the amount of $13.9 million.
Inventory
decreased in size relative to the balance at August 31, 2013 and decreased as well relative to the balance at February 28, 2013 thereby minimizing the cash
resources required for its procurement.
24
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Working Capital
|
|
|
|
|
|
|
February 28, 2013
to
November 30, 2013 |
|
Changes in working capital |
|
|
|
|
Beginning working capital balance |
|
|
34,491 |
|
Cash and cash equivalents, restricted cash, and short term investments |
|
|
586 |
|
Trade receivables |
|
|
(16,443 |
) |
Inventory |
|
|
(1,080 |
) |
Other current assets |
|
|
(1,157 |
) |
Contingent receivable |
|
|
(13,843 |
) |
Future income tax asset |
|
|
0 |
|
Accounts payable and accrued liabilities |
|
|
30,478 |
|
Debt facility |
|
|
15,000 |
|
Deferred revenue |
|
|
499 |
|
Capital lease obligation |
|
|
1,266 |
|
Contingent royalty |
|
|
205 |
|
| |
|
|
|
Net change in working capital |
|
|
15,511 |
|
| |
|
|
|
Ending working capital balance |
|
|
50,002 |
|
| |
|
|
|
The trade receivables balance decreased by $16.4 million between February 28, 2013 and November 30, 2013 due
primarily to the payment by NSN of $19.4 million in receivables outstanding. The days sales outstanding fell from 107 days at February 28, 2013 to 57 days sales outstanding
at November 30, 2013 which also contributed to a lower accounts receivable balance.
Our
allowance for doubtful accounts continues to represent a small percentage of our total trade receivables outstanding (November 30, 2013—2.0%;
February 28, 2013—0.7%).
As
at November 30, 2013, one customer exceeded 10% of the total receivable balance. This customer represented 41% of the trade receivables balance (February 28,
2013—one customer represented 67% of the trade receivables balance).
Included
in G&A expenses is an expense of $0.2 million related to bad debt expense for the three months ended November 30, 2013 and $0.5 million related to bad debt
expenses for the nine months
ended November 30, 2013 (three and nine months ended November 30, 2012—recovery of $ 0.2 million and $0.1 million).
25
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The inventory balance decreased by $1.1 million relative to the closing balance at February 28, 2013. By product category
the decreases and increases in inventory may be described as follows:
|
|
|
|
|
Closing inventory February 28, 2013 |
|
|
32.7 |
|
| |
|
|
|
Flexipacket/Harmony product line increases |
|
|
1.2 |
|
Horizon Compact and Quantum products |
|
|
(2.9 |
) |
Horizon Compact Plus |
|
|
1.9 |
|
Antennas, peripherals and other |
|
|
(1.3 |
) |
| |
|
|
|
Ending inventory at November 30, 2013 |
|
|
31.6 |
|
| |
|
|
|
The accounts payable and accrued liabilities balance decreased by $30.5 million between February 28, 2013 and
November 30, 2013. The primary driver for the decrease related to the renewed operational framework with NSN which resulted in our payment to NSN of outstanding accounts payable in the amount
of $13.9 million, and the reduction in the payable balance to NSN associated with the termination of the Italian services agreement of $13.3 million. Offsetting these reductions was the
recognition of an estimated termination fee, currently valued at $8.9 million, relating to the termination of the Italian services agreement. The amount recorded is an estimate subject to
measurement uncertainty as to the timing and amount that could have a material impact on our financial statements should actual results differ from those estimated.
It should be noted that the debt facility is included in the working capital table above because it moved from short term at
February 28, 2013 to long term at November 30, 2013.
Use of Proceeds
Our net proceeds from the Equity Offering, after payment of the underwriters' fee and deducting the expenses of the Equity Offering
were $22.4 million.
We
intend to use the net proceeds we received from the Equity Offering as follows: approximately $15.0 million to strengthen our balance sheet, approximately $5.0 million
to fund working capital and approximately $2.4 million for general corporate purposes. In our industry, a strong balance sheet (in the sense of a cushion of available cash) is attractive
to customers as it demonstrates the capacity to ramp up and support higher production levels. In some longer term and larger deployments, a certain amount of cash on the balance sheet is a
pre-condition to qualifying to supply products. To the extent we are successful in winning more business funds allocated to strengthening our balance sheet may be re-allocated to supporting higher
levels of production, including purchases of component inventory to support our supply chain. Any amounts for general working capital remain unallocated and will be expended at the discretion
of management.
26
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Although
we intend to use the net proceeds from the Equity Offering for the purposes set forth above, we reserve the right to use such net proceeds for other purposes to the extent that
circumstances, including unforeseen events and other sound business reasons, make such use necessary or prudent.
Reconciliation of Use of Proceeds
The following table sets out a comparison of the intended and actual use of proceeds from the Equity Offering (other than working
capital), along with an explanation of the variances and the impact of the variances on our ability to achieve our business objectives and milestones:
|
|
|
|
|
|
|
|
|
|
|
|
Intended Use of
Proceeds
|
|
Estimated
Amount |
|
Actual Use of
Proceeds |
|
Actual
Amount |
|
Variances |
| |
Strengthen our balance sheet |
|
$ |
15.0 million |
|
Strengthen our balance sheet |
|
$ |
15.0 million |
|
No variance. |
| |
General corporate purposes |
|
$ |
2.5 million |
|
General corporate purposes |
|
$ |
2.4 million |
|
This minor variance can be explained by additional expenses related to the Equity Offering. This variance will not have an impact on the Company's ability to achieve its business objectives and milestones. |
Liquidity Discussion
Our consolidated financial statements for the three and nine month periods November 30, 2013 have been prepared assuming that we
will continue as a going concern, which contemplates the realization of assets and the disbursement of liabilities in the normal course of business. We have consumed a significant amount of cash
resources during the past two and a half years, mainly attributable to expense base reductions that lagged reductions in sales volumes, and our acquisition and integration of the NSN microwave
transport business.
As
stated in our MD&A dated May 8, 2013 for the fiscal year ended February 28, 2013, we have formulated a plan to return to cash flow break-even and to continue to operate
as a going concern. Some of the significant assumptions and associated risks that were considered in our planning process as well as some of the steps we have taken to implement our
plan included:
- •
- Establishing a renewed operational framework with NSN
- •
- On April 10, 2013 we announced our renewed operational framework with NSN.
- •
- Obtaining operating expense reductions from the ongoing consolidation and rationalization of our legacy business and the
business acquired from NSN.
- •
- We were able to reduce our operating expenses by 33% in the third quarter of fiscal year 2014 versus the three months
ended February 28, 2013. We will continue to look for opportunities to further streamline and reduce our cost base.
- •
- Continuing to have access to debt under arrangements with our current lenders.
27
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- On January 6, 2014, we extended the line of credit. The revised line has been increased to $40.0 million
plus $4.0 million for letters of credit and foreign exchange facilities and will expire on June 1, 2016. The new terms of the credit facility include other customary terms, conditions,
covenants, and representations and warranties, consistent with the facility previously in place.
We
continue to seek growth in sales levels both to NSN and other direct customers, as well as improvements in our gross margins through various ongoing initiatives. While we believe that
our plans and assumptions are reasonable, actual events or circumstances may cause the assumptions to be incorrect and actual results may differ materially from the plan.
Commitments as at November 30, 2013
Future minimum operating lease payments as at November 30, 2013 per fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
(Figures are in thousands of U.S. Dollars) |
|
Contractual Obligations
|
|
Total |
|
Less than
1 year |
|
1-3 years |
|
3-5 years |
|
More than
5 years |
|
Operating Lease Obligations |
|
$ |
4,566 |
|
$ |
517 |
|
$ |
4,049 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,566 |
|
$ |
517 |
|
$ |
4,049 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
In
the normal course of our business activities, we are subject to claims and legal actions. We recognize a provision for estimated loss contingencies when it is probable that a
liability has been incurred and the amount of the loss can be reasonably estimated. In management's opinion, adequate provisions have been made for all current and future claims.
Outstanding Share Data
Our common shares are listed on the Toronto Stock Exchange under the symbol DWI and on the NASDAQ under the symbol DRWI.
|
|
|
|
|
|
Balance at August 31, 2013 |
|
|
38,123,880 |
|
| |
|
|
|
| |
Public offering |
|
|
11,910,000 |
|
| |
Exercise of warrants |
|
|
2,779,742 |
|
| |
Other |
|
|
9,742 |
|
| |
|
|
|
Balance at November 30, 2013 |
|
|
52,823,364 |
|
| |
|
|
|
28
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The
following is a summary of stock option activity:
|
|
|
|
|
|
|
|
|
|
Three months ended
November 30, 2013 |
|
|
|
Options |
|
Weighted
Average Price
(CAD) |
|
Opening Balance |
|
|
2,800,115 |
|
$ |
4.26 |
|
Granted |
|
|
941,600 |
|
$ |
1.59 |
|
Exercised |
|
|
— |
|
$ |
— |
|
Forfeited |
|
|
(277,683 |
) |
$ |
4.16 |
|
| |
|
|
|
|
|
Closing Balance |
|
|
3,464,032 |
|
$ |
3.54 |
|
| |
|
|
|
|
|
As
at November 30, 2013, there were 52,823,364 common shares issued and outstanding, options to purchase 3,464,032 common shares granted under our stock option plan,
and 7,144,062 warrants exercisable for common shares, with the number of common shares issuable upon exercise subject to adjustment in accordance with terms of the warrants.
As
of January 8, 2014 there were 57,300,155 common shares issued and outstanding, options to purchase 3,455,447 common shares outstanding under our stock option
plan, and 3,815,062 warrants exercisable for common shares, with the number of common shares issuable upon exercise subject to adjustment in accordance with terms of the warrants. See "Our
Priorities—Equity Offering".
Restricted Shares & Employee Share Purchase Plan
We launched an Employee Share Purchase Plan ("ESPP") on October 20, 2008. The plan includes provisions to allow employees to
purchase common shares. We will match the employees' contribution at a rate of 25%. During the three months ended November 30, 2013 a total of 7,794 common shares were purchased by
employees at fair market value, while we issued 1,948 common shares as our matching contribution. During the nine months ended November 30, 2013 a total of 20,316 common shares
were purchased by employees at fair market value, while we issued 5,078 common shares as our matching contribution. The shares contributed by us will vest 12 months
after issuance.
The
fair value of the unearned ESPP shares as at November 30, 2013 was $13 thousand (February 28, 2013—$23 thousand). The number of shares held
for release, and still restricted under the ESPP at November 30, 2013 was 6,391 (February 28, 2013—7,760). The total fair value of the shares earned during the three and nine
months ended November 30, 2013 was $4 thousand and $20 thousand, respectively (three and nine months ended November 30, 2012—$12 thousand and
$38 thousand, respectively).
29
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Off-Balance Sheet Arrangements
(Actual Dollars)
|
|
|
|
|
|
|
|
|
|
|
City
|
|
Country
|
|
Lessor
|
|
Lease Expiry
|
|
Cost per
Month |
|
Roswell, Georgia |
|
United States |
|
A-COLONIAL 100/200 OWNER, LLC |
|
March, 2014 |
|
$ |
5,000 |
|
Luxembourg City |
|
Luxembourg |
|
FPS Offïce Center S.A.R.L. |
|
Month to Month |
|
$ |
1,500 |
|
Singapore |
|
Singapore |
|
APBC Pte Ltd |
|
August, 2014 |
|
$ |
3,200 |
|
Ottawa (Warehouse & Operations at Terry Fox Drive + Office Space at 411 Legget Drive) |
|
Canada |
|
Kanata Research Park |
|
November, 2016 |
|
$ |
125,000 |
|
Shanghai |
|
China |
|
Caike Property (Shanghai) Co., Ltd |
|
January, 2015 |
|
$ |
55,404 |
|
Herzlyia |
|
Israel |
|
Margalin Holdings Ltd. |
|
Nov 30, 2013 |
|
$ |
2,289 |
|
The leases listed above are arranged at market pricing levels in all jurisdictions and the lease periods listed above represent a commitment for
the time period indicated. We are actively seeking sub-lease arrangements in a number of locations as part of our efforts to reduce costs. There can be no assurance that we will secure sub-leases or
that sub-lease terms will be favourable.
We
use an outsourced manufacturing model in which most of the component acquisition and assembly of our products is executed by third parties. Generally, we provide the supplier with a
purchase order 90 days in advance of expected delivery. We are responsible for the financial impact of any changes to the product requirements within this period. In some cases when a product
has been purchased by a contract manufacturer but not pulled on for a build after a certain amount of time, we provide a deposit against that inventory, but do not take ownership of it.
Our
contract manufacturers currently have inventory intended for use in the production of our products, and we have purchase orders in place for raw materials and manufactured products
with these contract manufacturers as well. All of this material is considered to be part of the normal production process and is expected to be fully used based on current forecasts and projections.
As mentioned previously, we would generally be responsible for the cost of the material approved to be purchased on our behalf by our contract manufacturers should those forecasts or projections
change.
Financial Instruments
Financial instruments are classified into one of the following categories: held-for-trading, held-to-maturity, available-for-sale,
loans and receivables, and other financial liabilities.
30
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Fair Value
The following table summarizes the carrying values of our financial instruments:
|
|
|
|
|
|
|
|
|
|
November 30,
2013 |
|
February 28,
2013 |
|
Held-for-trading(1) |
|
|
23,742 |
|
|
22,959 |
|
Loans and receivables(2) |
|
|
21,550 |
|
|
51,362 |
|
Other financial liabilities(3) |
|
|
47,095 |
|
|
75,690 |
|
- (1)
- Includes
cash, cash equivalents, restricted cash and forward contracts
- (2)
- Includes
trade receivables, contingent receivables and other receivables which are financial in nature
- (3)
- Includes
accounts payable, accrued liabilities, debt facility, contingent liabilities, warrant liability and lease obligations which are financial
in nature
Cash
and cash equivalents, restricted cash, trade receivables, other receivables, accounts payable, accrued liabilities, debt facility, contingent liabilities and lease obligations are
short term financial instruments whose fair value approximates the carrying amount. As at the consolidated balance sheet
dates, there are no significant differences between the carrying values of these items and their estimated fair values. All financial instruments have been measured using Level 1 inputs with
the exception of our contingent receivable and contingent liabilities which have been measured using a Level 3 input, a discounted cash flow model that values the underlying assets and
liabilities based on expected timing of payments and receipts. Our warrant liability has been measured using a Monte Carlo simulation that used Level 3 inputs including risk free rates
and market volatilities.
Interest rate risk
Cash and cash equivalents and our debt facility which has interest rates with market rate fluctuations expose us to interest rate risk
on these financial instruments. Net interest expense of $0.4 million and $1.3 million respectively, was recognized during three and nine months ended November 30, 2013 on our
cash, cash equivalents, and debt facility (three and nine months ended November 30, 2012—income of $0.5 million and $1.2 million respectively).
Credit risk
In addition to trade receivables and other receivables, we are exposed to credit risk on our cash and cash equivalents, and restricted
cash in the event that our counterparties do not meet their obligations. We do not use credit derivatives or similar instruments to mitigate this risk and, as such, the maximum exposure is the full
carrying value or fair value of the financial instrument. We minimize credit risk on cash and cash equivalents by transacting with only reputable financial institutions and customers.
31
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Foreign exchange risk
Foreign exchange risk arises because of fluctuations in exchange rates. To mitigate exchange risk, we utilize forward contracts to
secure exchange rates with the objective of offsetting fluctuations in our operating expenses incurred in foreign currencies with gains or losses on
the forward contracts. Our foreign exchange forward contracts mature at various dates through January 2014 and have an aggregate notional amount of $1.0 million. During the three months
ended November 30, 2013 we recorded approximately $14 thousand in gains related to these foreign exchange forward contracts. Our foreign exchange forward contracts are over-the-counter
instruments. There is an active market for this instrument and, therefore, it is classified as Level 1 in the fair value hierarchy. All foreign currency gains and losses related to forward
contracts are included in Foreign exchange gain (loss) in the Consolidated Statements of Operations.
As
of November 30, 2013, if the US dollar had appreciated 1% against all foreign currencies, with all other variables held constant, the impact of this foreign currency change on
our foreign denominated financial instruments would have resulted in a decrease in after-tax net income (loss) of $0.1 million for the three and nine months ended November 30, 2013
(three and nine months ended November 30, 2012—decrease of $0.2 million), with an equal and opposite effect if the US dollar had depreciated 1% against all foreign currencies
at November 30, 2013.
Economic Dependence
We were dependent on one key customer with respect to revenue in the three months ended November 30, 2013. This customer
represented approximately 51% of sales for the three months ended November 30, 2013 (three months ended November 30, 2012—one customer representing 70%).
We
were dependent on two key customers with respect to revenue in the nine months ended November 30, 2013. These customers represented approximately 66% of sales for the nine
months ended November 30, 2013 (nine months ended November 30, 2012—one customer representing 63%).
Controls and Procedures
At the end of the period covered by this MD&A (such period being the three month and nine months ended November 30, 2013), an
evaluation was carried out under the supervision of, and with the participation of, our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, which are our
principal executive officer and principal financial officer, respectively, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon that evaluation, our CEO and CFO have concluded that our disclosure controls and
procedures were effective as at November 30, 2013 to give reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange
Act and/or applicable Canadian securities legislation is (i) recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange
Commission's as well as in accordance with applicable Canadian securities legislation rules and forms, and (ii) accumulated and communicated to management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
32
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Our
management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
and 15d-15(f) as well as National Instrument 52-109 of the Canadian Securities Administrators. These controls are designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes. Under the supervision and with the participation of our management, including our principal executive officer,
our CEO, and principal financial officer, our CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of November 30, 2013.
Ernst &
Young LLP, the independent registered public accounting firm that audited our consolidated financial statements filed on SEDAR on May 8, 2013, has also
audited the effectiveness of our internal control over financial reporting as of February 28, 2013, as stated in their report which is included in the annual audited financial statements.
Changes in Internal Control over Financial Reporting
During the period covered by this report, no changes occurred in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Critical Accounting Policies and Estimates
Inventory
Inventory is valued at the lower of cost and net realizable value ("NRV"). The cost of inventory is calculated on a standard cost
basis, which approximates average actual cost. NRV is determined as the market value for finished goods, replacement cost for raw materials, and finished goods market value less cost to complete for
work in progress inventory. Indirect manufacturing costs and direct labour expenses are allocated systematically to the total production inventory.
Revenue recognition
We derive revenue from the sale of broadband wireless backhaul equipment which includes embedded software and a license to use said
software and extended product warranties. Software is considered to be incidental to the product. Services range from installation and training to basic consulting. Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred and there are no significant remaining vendor obligations, collection of receivables is reasonably assured and the fee is fixed and
determinable. Where final acceptance of the product is specified by the customer, revenue is deferred until acceptance criteria have been met.
Our
business agreements may also contain multiple elements. Accordingly, we are required to determine the appropriate accounting, including whether the deliverables specified in a
multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, the fair
33
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
value
of these separate units of accounting and when to recognize revenue for each element. For arrangements involving multiple elements, we allocate revenues to each element based on a selling price
hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE") if available, third party evidence ("TPE") if VSOE is not available, or estimated selling
price ("ESP") if neither VSOE nor TPE is available. In multiple element arrangements, revenues are
allocated to each separate unit of accounting for each of the deliverables using the relative estimated selling prices of each of the deliverables in the arrangement based on the aforementioned
selling price hierarchy. We have determined the selling price for the undelivered items using VSOE and the delivered items using ESP.
We
generate revenue through direct sales and sales to distributors. We defer the recognition of a portion of sales to distributors based estimated sale returns and stock rotation granted
to customers on products in the same period the related revenues are recorded. These estimates are based on historical sales returns; stock rotations and other known factors. During the previous
fiscal year we determined that there was sufficient history on which to base our estimates and, adapted our policy accordingly.
Revenue
associated with extended warranty and advanced replacement warranty is recognized ratably over the life of the contracted service.
Revenue
from engineering services or development agreements is recognized according to the specific terms and acceptance criteria as services are rendered.
We
accrue estimated potential product liability as warranty costs when revenue on the sale of equipment is recognized. Warranty costs are calculated on a percentage of revenue per month
based on current actual warranty costs and return experience.
Shipping
and handling costs borne by us are recorded in cost of sales. Shipping and handling costs charged to customers are recorded as revenue, if billed at the time of shipment. Costs
charged to customers after delivery are recorded in cost of sales.
We
generate revenue through royalty agreements as a result of the use of our intellectual property. Royalty revenue is recognized as it is earned.
Advanced
replacement and extended warranty contracts are services offered by us to our customers as an option to purchase either at the time the goods are
shipped or at any time after shipment takes place. Many customers wait to purchase extended warranty coverage until their standard warranty period ends.
Advanced
replacement is a service we sell which provides to customers the benefit of having a replacement radio or modem shipped to them when a unit they own has been confirmed by us to
be malfunctioning. When the customer receives the replacement radio or modem, they ship the malfunctioning unit back to us. We repair and keep the returned unit.
Our
standard warranty for customers generally varies between 12 and 39 months. Our extended warranty programs enable customers to continue to have repairs and customer support
guidance beyond the standard warranty period.
34
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
We
earn a minimal portion of our total revenue from the sale of training services primarily to installation companies. Only in rare circumstances do we provide
or sub-contract installation services (see below), as the customers to whom we sell microwave equipment outsource the installation to specialized companies. As a result, installation training
revenue is generally not sold as a bundled service because it is sold to a different customer base. Further, any training that is provided is not essential to the functionality of our product
offerings, and is thus considered an insignificant deliverable to the overall arrangement and not considered a separate unit of accounting.
We
do not offer installation services. Periodically, a customer may request that we arrange for the installation of the equipment through a third party service
provider as a condition of the sale. In this case, a separate services agreement is created between us and the end-user of our equipment, and we sub—contract the installation to a
qualified installer. Evidence that the revenue associated with the installation service represents the fair value of the offering is provided by the sub-contracted value of the installation.
The
revenue recognition concepts highlighted above have not changed as a result of our acquisition of the NSN microwave transport business. Shipping terms through the NSN OEM sales
channel follow the Incoterms used by our other customers and do not include acceptance criteria.
Research and development
Our research costs are expensed as incurred. Our development costs other than property and equipment are expensed as incurred unless
they meet generally accepted accounting criteria for deferral and amortization. Development costs incurred prior to establishment of technological feasibility do not meet these criteria, and are
expensed as incurred.
Income taxes
Income taxes are accounted for using the liability method of accounting for income taxes. Under this method, deferred income tax assets
and liabilities are determined based on differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years
for tax purposes that are more likely than not to be realized. Deferred income tax assets and liabilities are measured using enacted tax rates that apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. We provide a valuation allowance against its deferred tax assets when it believes that it is more likely than not that the assets will
not be realized.
We
determine whether it is more likely than not that an uncertain tax position will be sustained upon examination by the tax authorities. The tax benefit of any uncertain tax position
that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon successful resolution. To the extent a full benefit is
not expected to be realized, an income tax liability is effectively established. We recognize accrued interest and penalties on unrecognized tax benefits as interest expense.
35
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2013
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
We
periodically review our provision for income taxes and valuation allowance to determine whether the overall tax estimates are reasonable. When we perform our quarterly assessments of
the provision
and valuation allowance, it may be determined that an adjustment is required. This adjustment may have a material impact on our financial position and results of operations.
ACCOUNTING POLICIES ADOPTED IN THE CURRENT FISCAL YEAR
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued ASU 2011-11, "Disclosures about Offsetting Assets and Liabilities," which creates new
disclosure requirements about the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are
effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The new disclosures are designed to make
financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards. The adoption did not have an impact on our
consolidated financial statements.
Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting
Assets and Liabilities" ("ASU 2013-01"), which clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with ASU Topic 815, Derivatives and Hedging,
including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance
with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The adoption did not have an impact on our consolidated
financial statements.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued ASU 2013-02, Topic 220—Comprehensive Income: Reporting of Amounts Reclassified out
of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 changes the presentation requirements of significant reclassifications out of accumulated other comprehensive
income in their entirety and their corresponding effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires the company to
cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on March 1, 2013. The adoption did not have an impact on our consolidated financial
statements.
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