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Exhibit 99.3
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
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, 2015. This MD&A should be read in conjunction with our unaudited consolidated interim financial statements and corresponding notes for the three and
nine months ended November 30, 2015 and our Annual Information Form for the year ended February 28, 2015 (the "AIF") filed on SEDAR at www.sedar.com (SEDAR) and on EDGAR at
www.sec.gov/edgar/searchedgar/companysearch.html (EDGAR). Our unaudited consolidated interim financial statements and corresponding notes for the three and nine months ended November 30, 2015
are available on SEDAR and EDGAR.
Our
unaudited consolidated interim 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 in this MD&A is dated as of January 13, 2016 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 contents of this MD&A have been approved by our Board of Directors, on the recommendation of its Audit Committee.
We
refer to both Nokia Solutions and Networks and its predecessor business Nokia Siemens Networks as "Nokia" in this MD&A. Nokia is a trademark of Nokia Corporation or
its affiliates.
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
U.S. 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 cash resources and liquidity; our strategic plans and objectives; growth strategy; customer diversification and expansion initiatives; our expectations with
respect to our relationships with channel partners; 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 set forth 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
1
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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.
Risks and Uncertainties
We are exposed to risks and uncertainties in our business, including the risk factors set
forth below:
- •
- limited cash resources and our dependence on our credit facilities and accommodations by our lenders and certain
suppliers;
- •
- our reliance on a small number of customers for a large percentage of revenue;
- •
- intense competition from several competitors;
- •
- competition from indirect competitors;
- •
- our history of losses;
- •
- our ability to implement our ongoing program of operating cost reductions;
- •
- our dependence on our ability to develop new products, enhance existing products and execute roll-outs on a basis that
meets customer requirements;
- •
- uncertainty with the size of any future revenue opportunities through the Nokia channel;
- •
- our exposure to product warranty claims, and inventory and account receivables exposure in relation to recent product
quality issues;
- •
- our ability to successfully manage our resources;
- •
- our dependence on our ability to manage our workforce and recruit and retain management and other qualified personnel;
- •
- quarterly and annual revenue and operating results that are difficult to predict and can fluctuate substantially;
- •
- a lengthy and variable sales cycle;
- •
- 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;
- •
- pressure on our pricing models from existing and potential customers and as a result of competition;
- •
- our exposure to credit risk for accounts receivable;
- •
- our dependence on the development and growth of the market for high-capacity wireless communications services;
2
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- the allocation of radio spectrum and regulatory approvals for our products;
- •
- the ability of our customers to secure a license for applicable radio spectrum;
- •
- changes in government regulation or industry standards that may limit the potential market for our products;
- •
- currency fluctuations;
- •
- 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;
- •
- 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;
- •
- the impact that general economic weakness and volatility may be having on our customers;
- •
- disruption resulting from economic and geopolitical uncertainty;
- •
- risks associated with our outstanding warrants and the impact that the terms of such warrants may have on our ability to
raise capital and undertake certain business transactions;
- •
- risks associated with possible loss of our foreign private issuer status; and
- •
- risks and expenses associated with our common shares, including large fluctuations in the trading price of our common
shares, and being a public company.
In
our most recent quarter ended on November 30, 2015, approximately 40% of our sales were through the Nokia channel. Recent developments within Nokia, including Nokia's
combination with Alcatel-Lucent, have increased uncertainty for the future of this channel. See "Relationship with Nokia".
Also
see the discussion under "Recent Developments-Liquidity Discussion" in this MD&A, as well as the discussion under "Risk Factors" contained in our most recently filed AIF.
Any
of the risks referred to above could cause actual results or outcomes to differ materially from those discussed in forward-looking statements. 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 and uncertainties, the forward-looking events described in this MD&A might not occur or might not occur when stated.
Non-GAAP Performances Measures
Readers are cautioned that this MD&A contains certain information that is not consistent with financial measures prescribed under GAAP.
See discussion below under "Use of Non-GAAP Performance Measures".
3
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
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,
2015 |
|
November 30,
2014 |
|
November 30,
2013 |
|
November 30,
2015 |
|
November 30,
2014 |
|
November 30,
2013 |
|
REVENUE |
|
|
20,997 |
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|
47,320 |
|
|
22,169 |
|
|
74,254 |
|
|
114,024 |
|
|
72,154 |
|
| |
Cost of sales–before inventory provisions |
|
|
15,853 |
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|
39,330 |
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|
19,320 |
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|
58,551 |
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|
92,942 |
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|
63,528 |
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| |
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|
|
|
|
|
Gross profit before inventory provisions (note 1) |
|
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5,144 |
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|
7,990 |
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|
2,849 |
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15,703 |
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21,082 |
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8,626 |
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| |
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24.5% |
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16.9% |
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12.9% |
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21.1% |
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18.5% |
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12.0% |
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| |
Inventory provisions |
|
|
210 |
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|
272 |
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|
389 |
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1,235 |
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1,585 |
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|
552 |
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| |
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|
Gross profit |
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4,934 |
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|
7,718 |
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|
2,460 |
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|
14,468 |
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|
19,497 |
|
|
8,074 |
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| |
|
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|
|
|
|
|
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|
|
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23.5% |
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16.3% |
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11.1% |
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19.5% |
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17.1% |
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11.2% |
|
EXPENSES |
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| |
Research and development |
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2,873 |
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4,827 |
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5,000 |
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10,981 |
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14,386 |
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|
15,085 |
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| |
Selling and marketing |
|
|
2,418 |
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|
3,557 |
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|
3,479 |
|
|
8,714 |
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|
10,230 |
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|
10,036 |
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| |
General and administrative |
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|
3,398 |
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|
3,808 |
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|
4,144 |
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|
10,487 |
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11,797 |
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|
13,325 |
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| |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
8,689 |
|
|
12,192 |
|
|
12,623 |
|
|
30,182 |
|
|
36,413 |
|
|
38,446 |
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| |
|
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Loss before other items |
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|
(3,755 |
) |
|
(4,474 |
) |
|
(10,163 |
) |
|
(15,714 |
) |
|
(16,916 |
) |
|
(30,372 |
) |
| |
Goodwill impairment |
|
|
— |
|
|
— |
|
|
— |
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|
(11,927 |
) |
|
— |
|
|
— |
|
| |
Restructuring costs |
|
|
(1,419 |
) |
|
— |
|
|
— |
|
|
(1,419 |
) |
|
— |
|
|
— |
|
| |
Amortization of intangible assets |
|
|
(149 |
) |
|
(333 |
) |
|
(500 |
) |
|
(481 |
) |
|
(981 |
) |
|
(1,496 |
) |
| |
Accretion expense |
|
|
(36 |
) |
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(69 |
) |
|
(53 |
) |
|
(168 |
) |
|
(109 |
) |
|
(174 |
) |
| |
Interest expense |
|
|
(499 |
) |
|
(301 |
) |
|
(392 |
) |
|
(1,590 |
) |
|
(1,105 |
) |
|
(1,310 |
) |
| |
Warrant issuance expenses |
|
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— |
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— |
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(662 |
) |
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— |
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|
(221 |
) |
|
(662 |
) |
| |
Gain on change in estimate |
|
|
— |
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|
200 |
|
|
2,970 |
|
|
— |
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|
301 |
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|
3,312 |
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| |
Gain on contract amendment |
|
|
— |
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|
— |
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|
417 |
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|
— |
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|
— |
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|
5,702 |
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| |
Gain on sale of fixed assets |
|
|
— |
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|
18 |
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|
— |
|
|
— |
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|
18 |
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|
— |
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| |
Fair value adjustment–warrant liability |
|
|
293 |
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|
1,880 |
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|
3,587 |
|
|
1,188 |
|
|
1,028 |
|
|
3,587 |
|
| |
Foreign exchange (loss) gain |
|
|
270 |
|
|
145 |
|
|
(724 |
) |
|
(24 |
) |
|
519 |
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|
(1,219 |
) |
| |
|
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|
Loss before income taxes |
|
|
(5,295 |
) |
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(2,934 |
) |
|
(5,520 |
) |
|
(30,135 |
) |
|
(17,466 |
) |
|
(22,632 |
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| |
Income tax expense |
|
|
459 |
|
|
502 |
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|
102 |
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2,146 |
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|
1,047 |
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|
270 |
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| |
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Net Loss |
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(5,754 |
) |
|
(3,436 |
) |
|
(5,622 |
) |
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(32,281 |
) |
|
(18,513 |
) |
|
(22,902 |
) |
| |
Net (Income) Loss Attributable to Non-Controlling Interest |
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(493 |
) |
|
(320 |
) |
|
113 |
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(892 |
) |
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(739 |
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259 |
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| |
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Net Loss attributable to shareholders |
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(6,247 |
) |
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(3,756 |
) |
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(5,509 |
) |
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(33,173 |
) |
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(19,252 |
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(22,643 |
) |
Basic & Diluted loss per share |
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(0.08 |
) |
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(0.05 |
) |
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(0.12 |
) |
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(0.44 |
) |
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(0.29 |
) |
|
(0.55 |
) |
Basic & Diluted weighted average shares outstanding |
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75,450,850 |
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75,254,452 |
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47,329,275 |
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|
75,341,034 |
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|
65,738,695 |
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|
41,144,953 |
|
Note 1: "Gross profit before inventory provisions" is a non-GAAP financial measure. See
"Use of Non-GAAP Performance Measures".
4
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The principal differences between the three and nine months ended November 30, 2015 and November 30, 2014 are explained
as follows:
- •
- The reduction in revenue can be attributed primarily to reduced sales both through the Nokia channel and to a
Tier 1 carrier in India.
- •
- The gross profit percentage increased during the three and nine months ended November 30, 2015 compared to the same
periods in fiscal year 2015 due primarily to a change in the mix of customers and products.
- •
- Operating expenses were $3.5 million and $6.2 million lower than they were in the same periods in the
previous year. The decreases were driven by factors including lower compensation costs which resulted from restructuring activities, lower material and contractor spending, as well as lower travel
spending. Canadian based costs were lower when translated to USD because of the weakened Canadian dollar.
The
principal differences between the three and nine months ended November 30, 2015 and November 30, 2013 are explained as follows:
- •
- Revenue changes between these two periods can be attributed to lower sales both through the NSN channel and to direct
customers in the Middle East and Europe, which was offset by higher sales to India.
- •
- Our gross profit percentage was higher during the three and nine months ended November 30, 2015 compared to the
same periods two years prior. A higher percentage of sales in the three and nine months ended November 30, 2013 were made through OEM channels with inherently lower gross profit percentage
levels. In addition, costs associated with raw material components and distribution were higher in fiscal year 2014.
- •
- Operating expenses were $3.9 million and $8.3 million lower than they were in the same periods two years
prior primarily as a result of lower depreciation, and compensation related spending following global restructuring activities. A weakened Canadian dollar ("CAD") also reduced our USD-translated
operating expenses in fiscal year 2016.
5
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Consolidated Balance Sheet Data
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As at
November 30,
2015 |
|
As at
February 28,
2015 |
|
Assets |
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Current Assets |
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| |
Cash and cash equivalents |
|
|
7,784 |
|
|
23,692 |
|
| |
Trade receivables |
|
|
27,566 |
|
|
48,626 |
|
| |
Inventory |
|
|
25,403 |
|
|
24,294 |
|
| |
Other current assets |
|
|
3,611 |
|
|
5,834 |
|
| |
Deferred tax asset |
|
|
25 |
|
|
61 |
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| |
|
|
|
|
|
|
|
|
64,389 |
|
|
102,507 |
|
Long Term Assets |
|
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|
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| |
Property and equipment |
|
|
4,148 |
|
|
4,322 |
|
| |
Deferred tax asset |
|
|
— |
|
|
1,485 |
|
| |
Deferred financing cost |
|
|
— |
|
|
18 |
|
| |
Intangible assets |
|
|
704 |
|
|
794 |
|
| |
Goodwill |
|
|
— |
|
|
11,927 |
|
| |
|
|
|
|
|
|
|
|
4,852 |
|
|
18,546 |
|
Total Assets |
|
|
69,241 |
|
|
121,053 |
|
| |
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
| |
Debt facility |
|
|
26,652 |
|
|
— |
|
| |
Accounts payable and accrued liabilities |
|
|
26,118 |
|
|
40,163 |
|
| |
Deferred revenue |
|
|
2,024 |
|
|
830 |
|
| |
Capital lease obligation |
|
|
211 |
|
|
514 |
|
| |
Warrant liability |
|
|
47 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
55,052 |
|
|
41,507 |
|
Long Term Liabilities |
|
|
|
|
|
|
|
| |
Debt facility |
|
|
— |
|
|
32,400 |
|
| |
Other long term liabilities |
|
|
888 |
|
|
1,139 |
|
| |
Warrant liability |
|
|
4 |
|
|
1,239 |
|
| |
|
|
|
|
|
|
|
|
892 |
|
|
34,778 |
|
Shareholders' equity |
|
|
|
|
|
|
|
| |
Capital stock |
|
|
221,126 |
|
|
220,952 |
|
| |
Contributed surplus |
|
|
9,024 |
|
|
8,388 |
|
| |
Deficit |
|
|
(209,094 |
) |
|
(175,921 |
) |
| |
Accumulated other comprehensive loss |
|
|
(9,618 |
) |
|
(9,618 |
) |
| |
|
|
|
|
|
Total Shareholder's equity |
|
|
11,438 |
|
|
43,801 |
|
| |
Non-controlling interests |
|
|
1,859 |
|
|
967 |
|
| |
|
|
|
|
|
Total Equity |
|
|
13,297 |
|
|
44,768 |
|
Total Liabilities and Equity |
|
|
69,241 |
|
|
121,053 |
|
| |
|
|
|
|
|
Shares issued and outstanding |
|
|
75,487,649 |
|
|
75,290,818 |
|
6
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
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.
Historically,
our financial 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 reflect
the project nature of network installations. In addition, results may vary as a result of staffing levels, infrastructure additions required to support our operations and material costs required to
support design initiatives.
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FY14 |
|
|
FY15 |
|
|
FY16 |
|
|
|
Feb 28
2014
|
|
May 31
2014
|
|
Aug 31
2014
|
|
Nov 30
2014
|
|
Feb 28
2015
|
|
May 31
2015
|
|
Aug 31
2015
|
|
Nov 30
2015
|
|
| |
|
|
|
|
|
|
|
Revenue |
|
|
17,857 |
|
|
28,771 |
|
|
37,933 |
|
|
47,320 |
|
|
43,742 |
|
|
26,340 |
|
|
26,917 |
|
|
20,997 |
|
Gross Profit before inventory provisions (note 1) |
|
|
3,115 |
|
|
5,976 |
|
|
7,116 |
|
|
7,990 |
|
|
9,684 |
|
|
5,844 |
|
|
4,715 |
|
|
5,144 |
|
| |
Gross Profit % |
|
|
17.4% |
|
|
20.8% |
|
|
18.8% |
|
|
16.9% |
|
|
22.1% |
|
|
22.2% |
|
|
17.5% |
|
|
24.5% |
|
Inventory provisions |
|
|
526 |
|
|
90 |
|
|
1,223 |
|
|
272 |
|
|
1,187 |
|
|
295 |
|
|
730 |
|
|
210 |
|
Gross Profit after inventory provisions |
|
|
2,589 |
|
|
5,886 |
|
|
5,893 |
|
|
7,718 |
|
|
8,497 |
|
|
5,549 |
|
|
3,985 |
|
|
4,934 |
|
| |
Gross Profit % after inventory provisions |
|
|
14.5% |
|
|
20.5% |
|
|
15.5% |
|
|
16.3% |
|
|
19.4% |
|
|
21.1% |
|
|
14.8% |
|
|
23.5% |
|
Operating Expenses |
|
|
11,790 |
|
|
12,056 |
|
|
12,165 |
|
|
12,192 |
|
|
11,304 |
|
|
10,963 |
|
|
10,530 |
|
|
8,689 |
|
Loss before other items |
|
|
(9,201 |
) |
|
(6,170 |
) |
|
(6,272 |
) |
|
(4,474 |
) |
|
(2,807 |
) |
|
(5,414 |
) |
|
(6,545 |
) |
|
(3,755 |
) |
–(gross profit less operating expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period |
|
|
(11,599 |
) |
|
(6,667 |
) |
|
(8,410 |
) |
|
(3,436 |
) |
|
(2,123 |
) |
|
(5,824 |
) |
|
(20,703 |
) |
|
(5,754 |
) |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
(0.20 |
) |
|
(0.11 |
) |
|
(0.14 |
) |
|
(0.05 |
) |
|
(0.03 |
) |
|
(0.08 |
) |
|
(0.28 |
) |
|
(0.08 |
) |
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic & Diluted |
|
|
57,062,936 |
|
|
58,194,153 |
|
|
63,894,060 |
|
|
75,254,452 |
|
|
75,276,644 |
|
|
75,298,537 |
|
|
75,372,314 |
|
|
75,450,850 |
|
Total Assets |
|
|
91,120 |
|
|
86,130 |
|
|
110,597 |
|
|
120,291 |
|
|
121,053 |
|
|
113,587 |
|
|
88,327 |
|
|
69,241 |
|
Note 1: Gross profit before inventory provisions is a non-GAAP financial measure. See "Use
of Non-GAAP Performance Measures".
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
7
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
principal
application of DragonWave's products is mobile network backhaul. Additional applications include leased line replacement, last mile fiber extension and enterprise networks.
We
support product lines branded under the names Horizon, Avenue and Avenue Lite, Harmony and Harmony Lite, Harmony Eband and Harmony Enhanced. The key elements of our solutions include:
high performance; carrier-grade availability; cost-competitiveness; support of legacy networking standards; and the availability of advanced network management and wireless network IP planning.
The
demand for our products is driven by global trends, including IP convergence and pressure on backhaul capacity caused by increased functionality of mobile devices, the shift in
demand from voice to multimedia content and services, growing demand for wireless coverage, increasing number of subscribers, and investment in radio access network spectrum. In our target markets,
network traffic is shifting from legacy TDM traffic to IP-based traffic to improve network efficiency and enable IP-based services. Principally, we target the global wireless communications service
provider market and, in particular, those service providers offering high-capacity wireless communication services, including traditional cellular service providers and emerging broadband wireless
access (BWA) service providers.
We
sell our products both directly and indirectly through our channel partners.
Our
direct customers are typically service providers that operate networks in large geographical areas. The sales cycle to this class of customer typically involves a trial
(or trials), and typically requires nine to twelve months from first contact before orders are received, but can be longer, particularly in greenfield situations. Once the order stage is
reached, a supply agreement is usually established and multiple orders are processed under one master supply agreement. Master supply agreements provide the framework for future business and do not
generally include any volume commitments.
Our
channel partners are distributors, value-added resellers and OEMs including system integrators and network equipment vendors. In 2012, we acquired Nokia's microwave product
line. Nokia rebrands our Harmony product as FlexiPacket. During the three and nine months ended November 30, 2015, the Nokia channel accounted for 40% and 43% respectively of our sales. See
"Relationship with Nokia" below.
We
also have a 50.1% owned subsidiary, DragonWave HFCL India Private Limited ("DragonWave HFCL") to address the Indian market. Because we have a controlling interest in
the subsidiary we consolidate its results. Our sales of services and locally sourced material in India flowed through DragonWave HFCL and accounted for $2.6 million and $8.3 million of
our total revenue in the three and nine months ended November 30, 2015.
We
outsource most of our manufacturing and certain elements of the supply chain management and distribution functions. Outsourcing these functions allows us to focus on designing,
developing, selling and supporting our products. Our research and development expenses have historically been, and will continue to be, a significant portion of our overall cost structure as we will
continue to invest in new product features and new platforms to better serve the current and future needs of our customers.
8
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Our
industry is global and highly competitive. We face competition in our target markets from two types of microwave equipment suppliers: hybrid equipment suppliers (including NEC
Corporation, Alcatel-Lucent (recently acquired by Nokia), Ericsson and Huawei) and suppliers, like us, of Ethernet equipment (including SIAE Microelettronica, Ceragon Networks Ltd. and Aviat
Networks, Inc.). We also face competition from full service network integrators such as Huawei, NEC Corporation, Alcatel-Lucent (recently acquired by Nokia) and Ericsson, who have developed
competing Ethernet-based products for IP networks.
Our
business priorities include: managing resources to minimize cash demands; strengthening our balance sheet; maintaining our global reach while focusing on key revenue growth areas;
maintaining
and growing our relationships with channel partners; building on customer wins; and building toward leadership in outdoor smallcell backhaul.
Our
primary operational objective is to achieve cash flow break-even and reduce our net losses. To this end, we plan to focus on revenue opportunities with higher gross margin potential
and lower working capital requirements, at the same time as we restructure the size of the organization to stay in line with our current revenue levels and geographic focus.
Recent Developments
Highlights of Our Financial Results
The following are key points on our results of operations for the three and nine months ended November 30, 2015, compared to the
same periods in the prior fiscal year:
- •
- Our revenue decreased by $26.3 million when comparing the three month periods ended November 30, 2015 and
November 30, 2014. When comparing the nine month periods, revenue decreased by $39.8 million between fiscal year 2015 and fiscal year 2016. The primary factors contributing to revenue
changes included decreases in sales through the Nokia channel, and to a Tier 1 carrier in India. Decreases to direct customers in Europe, the Middle East and Africa were partially offset by
increases to direct customers in North America.
- •
- Our gross profit percentage in the third quarter of FY2016 increased to 23.5%, compared to 16.3% in the third quarter of
FY2015. A change in customer and product mix has driven this improvement.
9
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- Operating expenses decreased as well. The following table highlights the key factors contributing to the lower operating
expenses.
|
|
|
|
|
|
|
|
|
|
Q3 FY2016
vs.
Q3 FY2015 |
|
YTD FY2016
vs.
YTD FY2015 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending |
|
|
(1.4 |
) |
|
(0.5 |
) |
Restructuring costs in Q1 FY2016 |
|
|
— |
|
|
(0.4 |
) |
Material spending on prototypes & tooling costs |
|
|
(0.2 |
) |
|
(1.2 |
) |
Depreciation |
|
|
— |
|
|
(0.4 |
) |
Travel & living |
|
|
(0.5 |
) |
|
(0.8 |
) |
Contractor and professional services spending |
|
|
(0.6 |
) |
|
(0.3 |
) |
Foreign exchange benefit to operating expenses of translating Canadian dollar expenses to USD |
|
|
(0.8 |
) |
|
(2.6 |
) |
| |
|
|
|
|
|
(as the Canadian dollar has weakened our USD translated expenses have decreased) |
|
|
(3.5 |
) |
|
(6.2 |
) |
| |
|
|
|
|
|
- •
- We recorded a restructuring expense in the amount of $1.4 million related to staff reductions which took place in
the three months ended November 30, 2015.
- •
- We recorded a non-cash impairment charge of $11.9 million in the three months ended August 31, 2015 after
performing our annual goodwill impairment test. This adjustment is reflected in the nine months ended November 30, 2015
- •
- A fair value adjustment gain of $0.3 million and $1.2 million, respectively, was realized during the three
and nine month periods ended November 30, 2015, as a result of a depreciation of the warrant valuation on the remaining warrants outstanding from the public equity offerings completed in
September 2013 and August 2014.
- •
- Other items before taxes impacting the loss in the third quarter and during the nine months ended November 30, 2015
totaled $0.4 million and $2.3 million, respectively, and included amortization of software assets, accretion expense, interest expense, and a foreign exchange gain.
- •
- We increased a valuation allowance on a deferred tax asset related to net operating loss carry-forwards in the
United States in the nine months ended November 30, 2015 for $1.5 million and recognized a tax expense associated with taxes owing in profitable jurisdictions in the amount of
$0.5 million and $0.7 million for the three and nine months ended November 30, 2015 respectively.
- •
- The net loss applicable to shareholders was $6.2 million and $33.2 million, respectively, for the three and
nine months ended November 30, 2015.
- •
- In the three months ended November 30, 2015, we repaid $6.2 million on our line of credit which decreased
the outstanding debt balance to $26.7 million. We have repaid a further $4.5 million to the date of this MD&A. As a result, as of the date of this MD&A the balance of our line of credit is
$22.2 million. Our ending cash position at November 30, 2015 was $7.8 million.
10
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Liquidity and Cash Resources
The consolidated interim financial statements for the three and nine months ended November 30, 2015 have been prepared assuming
we will continue as a going concern, which contemplates the realization of assets and the disbursement of liabilities and commitments in the normal course of business in the foreseeable future. We
have a history of losses and we have consumed significant cash resources in the past, and we have continued to do so in the nine months ended November 30, 2015. Recently, additional pressure
has been placed on our liquidity position as a result of reduced revenue from a significant OEM channel and challenges with product shipped in the three months ended August 31, 2015 to a new
customer in India. As a result we have breached the terms of our debt facility, we are currently operating under forbearance and we have yet to conclude on a longer term agreement. At
January 13, 2016 we are in breach of one of the financial terms of the forbearance agreement. These factors have raised substantial doubt about our ability to continue as a going concern. Our
plans to restructure the business and overcome these difficulties include several key assumptions.
Some
of the significant assumptions include our continued efforts in the following areas:
- •
- Targeting our sales efforts to direct and indirect opportunities in markets with higher gross margins, and lower working
capital requirements;
- •
- Continuing to minimize fixed and variable operating expenses – leveraging the
savings achieved through staff reductions internationally in the three months ended November 30, 2015;
- •
- Renegotiating the terms of existing debt facilities;
- •
- Actively investigating and pursuing alternative forms of financing;
- •
- Resolving the dispute over product shipped in the three months ended August 31, 2015 to a new customer in India and
pursuing our related contractual legal remedies;
- •
- Exploring opportunities to sell non-core intellectual property and legacy product technology;
- •
- Adjusting our business focus and resources as a result of a revised channel strategy that moves away from Nokia;
- •
- Reducing inventory levels in both raw material and finished goods inventory; and,
- •
- Working closely with vendors to ensure supply continuity;
These
plans may be difficult to achieve. It is possible that the plans described above may not be fully executed or may occur too slowly to solve our current liquidity concerns. There
can be no assurance that the existing financing facility can be renegotiated or that any other forms of financing can be arranged on satisfactory terms. These consolidated interim financial statements
do not include any adjustments to the accounts and classification of assets and liabilities that may be necessary if we are unable to continue as a going concern. Such adjustments could
be material.
Expense Reduction Actions
As part of an overall plan to decrease our operating expenses we reduced our global workforce early in the third quarter of fiscal 2016
by approximately 23%. The reductions impacted our Shanghai design center as well as a number of sales and customer support centers around the world. Staff changes also occurred across a variety of
functional areas in Canada. We recognized a restructuring expense of
11
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
$1.4 million,
and approximately $0.2 million of that amount remains as a liability on the balance sheet at November 30, 2015. It is expected that the reduction in staff will
enable us to reduce operating expenses by approximately $7.0 million annually.
Product Issues in India
During the deployment phase with a new Tier 1 customer in India we experienced an unexpected problem with our product. Our root
cause analysis identified the cause of the problem and a plan was developed which would fully address the problem through a retrofit. Replacement parts for the retrofit involve a well-known and
reliable technology and are readily available. The customer was advised of this solution, however the deployment has not resumed. We continue to pursue a resolution to this situation.
Relationship with Nokia
Following, Nokia's announced combination with Alcatel-Lucent (ALU), which has a vertically integrated microwave business unit, we
announced that we have reshaped our channel strategy. Our revised strategy primarily positions our latest and new products directly to customers. A mutual understanding between our Company and Nokia
on the companies' future relationship is an important part of that strategy.
Our
future relationship will be focused on the following:
- •
- Supply of Legacy Products. Nokia will continue to be our
main channel to supply the Harmony Flexipacket Multiradio (Harmony Radio) product family and legacy products.
- •
- Support of Installed Base. We will continue to provide
software maintenance and level 3 hardware support to Nokia for the large installed base of network elements deployed by both our Company and Nokia to date.
- •
- New products. Our companies may mutually agree on a case
by case basis to address additional future specific customer requests of our new products through Nokia. For us this focused approach will replace the current open ecosystem environment.
To
facilitate these ongoing activities, our global framework agreements will continue in place.
Debt Facility
Following our breach of certain covenants at August 31, 2015 and in light of our liquidity issues, our credit facility and our
relationship with our lenders is a primary focus for us.
We
have an existing credit facility with Comerica Bank and Export Development Canada which is an asset based credit facility and was structured for a total of $40.0 million plus
$4.0 million for letters of credit and foreign exchange facilities. We had drawn $26.7 million on the facility as at November 30, 2015 (February 28,
2015-$32.4 million), and $1.8 million against our letter of credit facility (February 28, 2015-$1.9 million). The credit facility which was extended on January 6,
2014, matures on June 1, 2016 and is secured by a first priority charge on all of our assets and our principal direct and indirect subsidiaries. The terms of the credit facility include other
customary terms, conditions, covenants, and representations and warranties and credit availability is subject to ongoing compliance with borrowing covenants and short term assets on hand.
12
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
We
have in place a forbearance agreement until January 29, 2016, which identifies new minimum covenant levels reflecting our revised financial plans. The forbearance agreement
includes a requirement to hold a minimum of $3.0 million at Comerica Bank. In addition, the forbearance agreement reduces the facility commitment from $40.0 million to
$35.0 million and implements more frequent monitoring. Subsequent to November 30, 2015 we repaid $4.5 million on the line of credit. As of the date of this MD&A the balance of the
line of credit is $22.2 million. We are not in compliance with one of the financial terms of the forbearance agreement at January 13, 2016.
Borrowing
options under the credit facility include US dollar, Canadian dollar, 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. During the three and nine month period ended November 30, 2015 the weighted average debt outstanding was $29.1 million and
$31.7 million (three months and nine months ended November 30, 2014-$19.4 million and $17.8 million) and we recognized $0.5 million and $1.6 million in
interest expense related to the debt facility (three and nine months ended November 30, 2014-$0.3 million and $0.9 million).
Strategic Review Process
Our Board of Directors reviews our corporate strategy on an ongoing basis. The Board continues to review all strategic and financial
alternatives that may be available, including a potential sale of the Company, debt or equity financing, business combinations, joint ventures and strategic alliances, and ways to optimize our stand
alone plan. To assist in the strategic and financial elements of this review, CIBC World Markets Inc. has been engaged as adviser to the Board and H. C. Wainwright & Co.
has been engaged to investigate financing options for the Company. The strategic review is overseen by the Board of Directors.
Transfer of Securities to the NASDAQ Capital Market
On September 1, 2015 we announced that the transfer of the listing of our securities from The NASDAQ Global Market to The NASDAQ
Capital Market had been approved by the Staff of the NASDAQ Listing Qualifications Department ("NASDAQ Staff"), effective as of the
opening of trading on August 28, 2015. Our common shares continue to trade under the symbol "DRWI".
As
previously announced, on March 5, 2015, we received notice that our closing bid price had been below US$1.00 per share for 30 consecutive business days and that,
accordingly, the NASDAQ Staff had granted us an extension through November 30, 2015 to regain compliance with the US$1.00 per share bid price requirement. We were not been able to regain
compliance with this requirement within such period, and as a result we transferred the listing of our common shares from The NASDAQ Global Market to The NASDAQ Capital Market. In connection with such
transfer, we were granted an additional 180 days to regain compliance with the minimum $1.00 bid price per share requirement. The new extension period runs through February 29, 2016. In
order to regain compliance with the $1.00 per share bid price requirement, our common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days (subject to being
increased to 20 consecutive business days at the discretion of NASDAQ's Staff) prior to the end of the new extension period. If we cannot demonstrate compliance with this requirement by
February 29, 2016, or it does not comply with the terms of the extension granted by the NASDAQ Staff, our common stock may then be subject to delisting.
13
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
On
December 1, 2015, we announced that, we will hold a meeting of shareholders on January 26, 2016 to consider, a special resolution to authorize an amendment of our
articles which would enable the consolidation of our common shares. Subject to the approval of the Toronto Stock Exchange, approval of the special resolution by shareholders would give the Board of
Directors the authority to implement the share consolidation at a consolidation ratio between 15-for-1 and 25-for-1, or, in its discretion, revoke the special resolution, without further approval or
action or prior notice to shareholders. If approved and implemented, the share consolidation will occur simultaneously for all of our common shares and will affect all shareholders uniformly. We
expect that a consolidation would meet the requirement set out by the NASDAQ Staff.
Adjusted Cashflow from Operations/Adjusted EBITDA
Please note: Adjusted Cashflow from Operations/Adjusted EBITDA is a non-GAAP measure. See "Use of Non-GAAP Performance
Measures".
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY16
Q3 |
|
FY16
Q2 |
|
FY16
Q1 |
|
FY15
Q4 |
|
Revenue |
|
|
20,997 |
|
|
26,917 |
|
|
26,340 |
|
|
43,742 |
|
Cost of Sales |
|
|
16,063 |
|
|
22,236 |
|
|
20,791 |
|
|
35,245 |
|
| |
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
4,934 |
|
|
3,985 |
|
|
5,549 |
|
|
8,497 |
|
|
|
|
23.5% |
|
|
14.8% |
|
|
21.1% |
|
|
19.4% |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Provisions |
|
|
210 |
|
|
730 |
|
|
295 |
|
|
1,187 |
|
| |
|
|
|
|
|
|
|
|
|
Gross profit before inventory provisions (Note 1) |
|
|
5,144 |
|
|
4,715 |
|
|
5,844 |
|
|
9,684 |
|
|
|
|
24.5% |
|
|
17.5% |
|
|
22.2% |
|
|
22.1% |
|
Operating Expenses |
|
|
8,689 |
|
|
10,530 |
|
|
10,963 |
|
|
11,304 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization |
|
|
(494 |
) |
|
(498 |
) |
|
(472 |
) |
|
(446 |
) |
| |
Stock-based compensation |
|
|
(273 |
) |
|
(228 |
) |
|
(277 |
) |
|
(302 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
7,922 |
|
|
9,804 |
|
|
10,214 |
|
|
10,556 |
|
| |
|
|
|
|
|
|
|
|
|
Adjusted Cashflow from Operations/Adjusted EBITDA |
|
|
(2,778 |
) |
|
(5,089 |
) |
|
(4,370 |
) |
|
(872 |
) |
| |
|
|
|
|
|
|
|
|
|
Note 1: Gross profit before inventory provisions is a non-GAAP financial measure. See "Use of Non-GAAP Performance
Measures".
Comparison of the three and nine months ended November 30, 2015 and November 30, 2014
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
20,997 |
|
|
47,320 |
|
|
(26,323 |
) |
|
74,254 |
|
|
114,024 |
|
|
(39,770 |
) |
14
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
We continue to have one reportable segment, broadband wireless backhaul equipment. The 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 original equipment manufacturers (OEMs).
We
also analyze our sales according to geographic region and target product development and sales strategies to meet the unique requirements of each region. The table below displays this
information for the three months ended November 30, 2015 and November 30, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30, 2015 |
|
Three Months Ended
November 30, 2014 |
|
|
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Canada |
|
|
519 |
|
|
— |
|
|
519 |
|
|
2% |
|
|
1,180 |
|
|
— |
|
|
1,180 |
|
|
2% |
|
Europe, Middle East & Africa |
|
|
1,728 |
|
|
6,860 |
|
|
8,588 |
|
|
41% |
|
|
1,855 |
|
|
16,377 |
|
|
18,232 |
|
|
39% |
|
India |
|
|
2,176 |
|
|
1,296 |
|
|
3,472 |
|
|
17% |
|
|
12,366 |
|
|
4,595 |
|
|
16,961 |
|
|
36% |
|
United States |
|
|
6,057 |
|
|
— |
|
|
6,057 |
|
|
29% |
|
|
5,027 |
|
|
— |
|
|
5,027 |
|
|
11% |
|
Rest of World |
|
|
2,140 |
|
|
221 |
|
|
2,361 |
|
|
11% |
|
|
3,164 |
|
|
2,756 |
|
|
5,920 |
|
|
12% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,620 |
|
|
8,377 |
|
|
20,997 |
|
|
100% |
|
|
23,592 |
|
|
23,728 |
|
|
47,320 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below displays the geographic comparatives for the nine months ended November 30, 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30, 2015 |
|
Nine Months Ended
November 30, 2014 |
|
|
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Canada |
|
|
2,099 |
|
|
— |
|
|
2,099 |
|
|
3% |
|
|
3,222 |
|
|
— |
|
|
3,222 |
|
|
3% |
|
Europe, Middle East & Africa |
|
|
5,395 |
|
|
26,130 |
|
|
31,525 |
|
|
42% |
|
|
7,407 |
|
|
44,461 |
|
|
51,868 |
|
|
45% |
|
India |
|
|
12,748 |
|
|
3,281 |
|
|
16,029 |
|
|
22% |
|
|
18,983 |
|
|
8,230 |
|
|
27,213 |
|
|
24% |
|
United States |
|
|
17,399 |
|
|
19 |
|
|
17,418 |
|
|
23% |
|
|
15,023 |
|
|
— |
|
|
15,023 |
|
|
13% |
|
Rest of World |
|
|
4,606 |
|
|
2,577 |
|
|
7,183 |
|
|
10% |
|
|
5,399 |
|
|
11,299 |
|
|
16,698 |
|
|
15% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,247 |
|
|
32,007 |
|
|
74,254 |
|
|
100% |
|
|
50,034 |
|
|
63,990 |
|
|
114,024 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The following chart identifies the major contributors to the decrease in sales between fiscal year 2016 and fiscal year 2015.
|
|
|
|
|
|
|
|
|
|
Three months
ended Nov 30 |
|
Nine months
ended Nov 30 |
|
Revenue ended November 30, 2014 |
|
|
47,320 |
|
|
114,024 |
|
Decrease in sales through Nokia Channel |
|
|
(15,351 |
) |
|
(31,983 |
) |
Decrease in direct sales to a Tier 1 carrier located in India |
|
|
(10,190 |
) |
|
(6,235 |
) |
Increase in direct and indirect sales in North America |
|
|
369 |
|
|
1,253 |
|
Decrease in direct sales in Europe, Middle East & Africa |
|
|
(127 |
) |
|
(2,012 |
) |
Other |
|
|
(1,024 |
) |
|
(793 |
) |
| |
|
|
|
|
|
Total Change |
|
|
(26,323 |
) |
|
(39,770 |
) |
| |
|
|
|
|
|
Revenue ended November 30, 2015 |
|
$ |
20,997 |
|
$ |
74,254 |
|
| |
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Gross Profit before inventory provisions |
|
|
5,144 |
|
|
7,990 |
|
|
(2,846 |
) |
|
15,703 |
|
|
21,082 |
|
|
(5,379 |
) |
(Note) |
|
|
24.5% |
|
|
16.9% |
|
|
7.6% |
|
|
21.1% |
|
|
18.5% |
|
|
2.6% |
|
Inventory provisions |
|
|
210 |
|
|
272 |
|
|
(62 |
) |
|
1,235 |
|
|
1,585 |
|
|
(350 |
) |
Gross Profit |
|
|
4,934 |
|
|
7,718 |
|
|
(2,784 |
) |
|
14,468 |
|
|
19,497 |
|
|
(5,029 |
) |
|
|
|
23.5% |
|
|
16.3% |
|
|
7.2% |
|
|
19.5% |
|
|
17.1% |
|
|
2.4% |
|
Note: Gross profit before inventory provision is a non-GAAP financial measure. See "Use of Non-GAAP Performance
Measures".
A large component of our cost of sales is the cost of products purchased from outsourced manufacturers. Final testing and assembly for the links
sold by us is carried out 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.
Our
gross profit percentage increased during the three and nine months ended November 30, 2015 compared to the same periods in the prior fiscal year. The primary reasons for the
improvement relate to a change in the mix of customers, and an increase in the percentage of higher margin products and services in fiscal 2016.
16
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Expenses
The foreign exchange benefit on the charts below is the estimated reduction in the expenses paid in Canadian dollars when translated to
USD. The Canadian dollar has weakened relative to the USD between FY2015 and FY2016.
Canadian dollar to USD average rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
FY2016 |
|
FY2015 |
|
% change |
|
Q1 |
|
|
0.80 |
|
|
0.91 |
|
|
11% |
|
Q2 |
|
|
0.78 |
|
|
0.92 |
|
|
15% |
|
Q3 |
|
|
0.76 |
|
|
0.90 |
|
|
15% |
|
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
2,873 |
|
|
4,827 |
|
|
(1,954 |
) |
|
10,981 |
|
|
14,386 |
|
|
(3,405 |
) |
Research
and development ("R&D") costs relate mainly to the compensation of our engineering group and the material consumption associated with prototyping activities. Staff employed in
this functional area are located in Canada and China. Staff levels declined by approximately 38% between November 30, 2014 and November 30, 2015 primarily as a result of restructuring
initiatives. A reduction in materials spending also contributed to the decline. The impact of a weakened Canadian dollar reduced the cost of our Canadian based expenses when translated to
United States dollars.
Changes to R&D Expenses in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q3 FY2016
vs.
Q3 FY2015 |
|
YTD FY2016
vs.
YTD FY2015 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending (includes Q1 FY2016 termination costs of $0.4 million) |
|
|
(0.7 |
) |
|
(0.4 |
) |
Depreciation |
|
|
(0.1 |
) |
|
(0.8 |
) |
Material spending on prototypes |
|
|
(0.8 |
) |
|
(1.0 |
) |
Rent (China) |
|
|
(0.2 |
) |
|
(0.4 |
) |
Foreign exchange–benefit of Canadian to USD conversion |
|
|
(0.2 |
) |
|
(0.8 |
) |
| |
|
|
|
|
|
|
|
|
(2.0 |
) |
|
(3.4 |
) |
| |
|
|
|
|
|
17
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
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,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
2,418 |
|
|
3,557 |
|
|
(1,139 |
) |
|
8,714 |
|
|
10,230 |
|
|
(1,516 |
) |
Sales
and marketing ("S&M") expenses include the remuneration of sales, marketing, product line management and customer service staff, including their associated travel and other
spending. Recent staff reductions which were part of the restructuring efforts undertaken in September, 2015 impacted the S&M organization as well.
Changes to S&M Expenses in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q3 FY2016
vs.
Q3 FY2015 |
|
YTD FY2016
vs.
YTD FY2015 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending |
|
|
(0.3 |
) |
|
(0.3 |
) |
External contracted services |
|
|
(0.2 |
) |
|
0.1 |
|
Variable compensation (program changes and lower revenue) |
|
|
(0.2 |
) |
|
(0.3 |
) |
Travel & living |
|
|
(0.2 |
) |
|
(0.4 |
) |
Foreign exchange |
|
|
(0.2 |
) |
|
(0.6 |
) |
| |
|
|
|
|
|
|
|
|
(1.1 |
) |
|
(1.5 |
) |
| |
|
|
|
|
|
General and Administrative
General and administrative ("G&A") expenses include finance, human resources and the executive office, as well as the portion of the
costs of the operations organization which does not flow directly into Cost of Sales. This operations team includes inventory and production management, as well as IT and purchasing.
18
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Changes to G&A Expenses in USD Millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
3,398 |
|
|
3,808 |
|
|
(410 |
) |
|
10,487 |
|
|
11,797 |
|
|
(1,310 |
) |
Breakdown by functional area: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance, human resources and exec office |
|
|
1,339 |
|
|
1,855 |
|
|
(516 |
) |
|
4,968 |
|
|
5,668 |
|
|
(700 |
) |
Operations groups not in Cost of Sales |
|
|
1,747 |
|
|
1,621 |
|
|
126 |
|
|
4,564 |
|
|
5,344 |
|
|
(780 |
) |
DragonWave HFCL spending |
|
|
312 |
|
|
332 |
|
|
(20 |
) |
|
955 |
|
|
785 |
|
|
170 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,398 |
|
|
3,808 |
|
|
(410 |
) |
|
10,487 |
|
|
11,797 |
|
|
(1,310 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes to G&A expenses in USD millions:
|
|
|
|
|
|
|
|
|
|
|
Q3 FY2016
vs.
Q3 FY2015 |
|
YTD FY2016
vs.
YTD FY2015 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending |
|
|
(0.1 |
) |
|
— |
|
Travel & living |
|
|
(0.2 |
) |
|
(0.4 |
) |
Professional fees and insurance costs |
|
|
(0.2 |
) |
|
0.2 |
|
Warehousing costs |
|
|
0.4 |
|
|
— |
|
Operations/IT related contractor spending |
|
|
(0.1 |
) |
|
(0.3 |
) |
Operations spending not recovered through Cost of Goods Sold |
|
|
0.2 |
|
|
0.4 |
|
| |
(results from lower volumes) |
|
|
|
|
|
|
|
Foreign exchange |
|
|
(0.4 |
) |
|
(1.2 |
) |
| |
|
|
|
|
|
|
|
|
(0.4 |
) |
|
(1.3 |
) |
| |
|
|
|
|
|
Goodwill Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
— |
|
|
— |
|
|
— |
|
|
(11,927 |
) |
|
— |
|
|
(11,927 |
) |
We
recorded a non-cash impairment charge of $11.9 million in the nine months ended November 30, 2015 after performing our annual goodwill impairment test which indicated
the carrying value of the goodwill was fully impaired.
19
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
149 |
|
|
333 |
|
|
(184 |
) |
|
481 |
|
|
981 |
|
|
(500 |
) |
The
amortization of software has decreased significantly as the net book value of software on the balance sheet has been declining.
Accretion Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
36 |
|
|
69 |
|
|
(33 |
) |
|
168 |
|
|
109 |
|
|
59 |
|
Accretion
expenses have been recognized for both capital leases and for the termination liability which exists in connection with the termination of a services agreement with Nokia. In
the prior fiscal year capital leases accounted for 100% of the accretion expense. In fiscal year 2016 the accretion expense associated with the termination liability represents approximately 80% of
the total expense in this category.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
499 |
|
|
301 |
|
|
198 |
|
|
1,590 |
|
|
1,105 |
|
|
485 |
|
Interest
expense relates primarily to interest on our debt facility, this expense has increased because the weighted average debt outstanding has increased between fiscal year 2016 and
fiscal year 2015.
During
the three month period ended November 30, 2015 the weighted average debt outstanding was $29.1 million (three month period ended November 30,
2014–$19.4 million) while for the nine month period ended November 30, 2015 it was $31.7 million (nine months ended November 30,
2014–$17.8 million). Interest rates vary with market rate fluctuations, with loans bearing interest in the range of 3% to 4% above the applicable base rates.
20
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Gain on Change in Estimate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
— |
|
|
(200 |
) |
|
200 |
|
|
— |
|
|
(301 |
) |
|
301 |
|
During
the nine months ended November 30, 2014, we revised the Nokia termination fee estimate, received the final invoice, and determined the payment schedule of the Italian
operations termination fee. This resulted in a gain in change in estimate.
The
total termination fee liability is valued at $3.2 million as at November 30, 2015. All of this liability is considered short term in nature.
Fair Value Adjustment-Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
293 |
|
|
1,880 |
|
|
(1,587 |
) |
|
1,188 |
|
|
1,028 |
|
|
160 |
|
The
warrant liability is required to be presented at its estimated fair value as at each balance sheet date. As DragonWave's stock price has decreased, the liability has decreased as
well, which has resulted in a recognition of a gain in the consolidated statement of operations.
Foreign Exchange (Gain)/Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30,
2015
|
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(270 |
) |
|
(145 |
) |
|
(125 |
) |
|
24 |
|
|
(519 |
) |
|
543 |
|
The
foreign exchange gains and losses result from the translation of foreign denominated monetary accounts and the strength of the U.S. dollar relative to foreign currencies.
During the three and nine months ended November 30, 2015 the translation of liability accounts resulted in foreign currency gains of $0.3 million for the three months ended
November 30, 2015. With higher cash balances denominated in other currencies earlier in fiscal year 2016 the gains on liability accounts were offset by losses on the translation of those
accounts. Consequently the November 30, 2015 year to date foreign exchange balance is an expense of $24 thousand.
21
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Income Taxes Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
November 30,
2015 |
|
November 30,
2014 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Increase in valuation allowance on deferred tax asset |
|
|
— |
|
|
— |
|
|
— |
|
|
1,485 |
|
|
— |
|
|
1,485 |
|
Income tax expense |
|
|
459 |
|
|
502 |
|
|
(43 |
) |
|
661 |
|
|
1,047 |
|
|
(386 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459 |
|
|
502 |
|
|
(43 |
) |
|
2,146 |
|
|
1,047 |
|
|
1,099 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three and nine months ended November 30, 2015 we recognized a tax expense of $0.5 million and $2.1 million respectively (three and nine months ended
November 30, 2014-$0.5 million and $1.0 million).
As
of November 30, 2015 our deferred tax assets relate to net operating loss carry-forwards in the United States. During the nine months ended November 30, 2015 we
recorded an increase in the valuation allowance of $1.5 million as we believe it is more likely than not that the related deferred tax assets will not be realized (increase in the valuation
allowance in the three and nine months ended November 30, 2014-nil).
We
accrue tax expenses for entities located in foreign jurisdictions that are anticipated to be profitable for fiscal year 2016. The determination of our tax provision is based on the
statutory tax rates applicable in each region and takes into account any available tax losses in each country. For the three and nine months ended November 30, 2015, we recognized a tax expense
of $0.5 million and $0.7 million relating to foreign jurisdictions which are anticipated to be profitable within the current fiscal year.
Use of Non-GAAP Performance Measures
In this MD&A, we break out "Gross profit before inventory provisions" as this measure allows management to evaluate our operational
performance and compare to prior periods more effectively. "Gross profit before inventory provisions" does not have any standardized meaning prescribed by GAAP, it is therefore unlikely to be
comparable to similar measures presented by other issuers and is not designed to replace other measures of financial performance or the statement of operations as an indicator of performance. This
measure should not be considered in isolation or as a substitute for other measures of performance calculated according to GAAP. We believe that it is useful to compare gross profit results without
the impact of inventory provisions, since our inventory provisions generally relate to discontinuance of products. We believe this non-GAAP measure also provides investors with a better ability to
understand our operational performance. We calculate "Gross profit before inventory provisions" consistently over each fiscal period.
22
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The
most directly comparable GAAP measure presented in our consolidated interim financial statements for the three and nine months ended November 30, 2015 to "Gross profit before
inventory provisions" is "Gross profit".
In this MD&A, we also break out "Adjusted Cashflow from Operations" also called "Adjusted EBITDA". This measure corresponds to earnings
before interest, taxes, depreciation and amortization less elements that are non-cash in nature. Because it omits non-cash items, we feel that Adjusted Cashflow from Operations/Adjusted EBITDA better
represents the cash impact of the results of operations in the period. Adjusted Cashflow from Operations/Adjusted 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 operations as an indicator of performance. This measure should not be considered in isolation or as a substitute for other
measures of performance calculated according to GAAP. Consistent improvement in Adjusted Cashflow from Operations/Adjusted EBITDA is one of management's primary objectives. Reducing cash usage from
drivers other than working capital and capital investments is an important objective for us and we believe this financial measure is therefore useful to investors in evaluating our operating
performance.
The
most directly comparable GAAP measure presented in our consolidated interim financial statements for the three and nine months ended November 30, 2015 to "Adjusted Cashflow
from Operations/Adjustment EBITDA" is "Net Loss". A reconciliation of "Adjusted Cashflow from Operations/Adjusted EBITDA" to "Net Loss" is set out below.
In this MD&A we break out "Days Sales Outstanding excluding Tier 1 carrier in India" as this measure allows management to
evaluate our DSO performance and compare to prior periods absent the effect of the extended payment terms granted to this customer. "Days Sales Outstanding excluding Tier 1 carrier in India"
does not have any standardized meaning prescribed by GAAP, it is therefore not comparable to similar measures presented by other issuers and is not designed to replace other measures of financial
performance or the statement of operations as an indicator of performance. This measure should not be considered in isolation or as a substitute for other measures of performance calculated according
to GAAP. We believe that it is useful to compare DSO results without the impact of extended payment terms granted to one customer, since these terms are not standard for us and are unlikely to be
afforded to other customers. We believe this non-GAAP measure also provides investors with a better ability to understand our operational performance. The most directly comparable GAAP measure
presented in our consolidated interim financial statements for the three months ended November 30, 2015 to "Days Sales Outstanding excluding Tier 1 carrier in India" is "Days Sales
Outstanding".
23
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Reconciliation of Adjusted Cashflow from Operations/Adjusted EBITDA to Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY16
Q3 |
|
FY16
Q2 |
|
FY16
Q1 |
|
FY15
Q4 |
|
Adjusted Cashflow from Operations/Adjusted EBITDA |
|
|
(2,778 |
) |
|
(5,089 |
) |
|
(4,370 |
) |
|
(872 |
) |
Include the following items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
(273 |
) |
|
(228 |
) |
|
(277 |
) |
|
(302 |
) |
Inventory provisions |
|
|
(210 |
) |
|
(730 |
) |
|
(295 |
) |
|
(1,187 |
) |
Amortization of Property Plant and Equipment |
|
|
(494 |
) |
|
(498 |
) |
|
(472 |
) |
|
(446 |
) |
Goodwill impairment |
|
|
— |
|
|
(11,927 |
) |
|
— |
|
|
— |
|
Restructuring Costs |
|
|
(1,419 |
) |
|
— |
|
|
— |
|
|
— |
|
Amortization of intangible assets |
|
|
(149 |
) |
|
(149 |
) |
|
(183 |
) |
|
(207 |
) |
Accretion expense |
|
|
(36 |
) |
|
(61 |
) |
|
(71 |
) |
|
(59 |
) |
Interest expense |
|
|
(499 |
) |
|
(560 |
) |
|
(531 |
) |
|
(452 |
) |
Gain on change in estimate |
|
|
— |
|
|
— |
|
|
— |
|
|
(234 |
) |
Fair value adjustment–warrant liability |
|
|
293 |
|
|
373 |
|
|
522 |
|
|
979 |
|
Foreign exchange (loss) gain |
|
|
270 |
|
|
(214 |
) |
|
(80 |
) |
|
327 |
|
Income taxes |
|
|
(459 |
) |
|
(1,620 |
) |
|
(67 |
) |
|
330 |
|
| |
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(5,754 |
) |
|
(20,703 |
) |
|
(5,824 |
) |
|
(2,123 |
) |
| |
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
The following table sets out some of the key balance sheet metrics:
|
|
|
|
|
|
|
|
|
|
|
As at
November 30,
2015 |
|
As at
February 28,
2015 |
|
Key Balance Sheet Amounts and Ratios: |
|
|
|
|
|
|
|
| |
Cash and Cash Equivalents |
|
|
7,784 |
|
|
23,692 |
|
| |
Working Capital (Note 1) |
|
|
9,337 |
|
|
61,000 |
|
| |
Long Term Assets |
|
|
4,852 |
|
|
18,546 |
|
| |
Long Term Liabilities |
|
|
892 |
|
|
34,778 |
|
| |
Working Capital Ratio |
|
|
1.2: 1 |
|
|
2.5: 1 |
|
| |
Days Sales Outstanding in accounts receivable (Note 2) |
|
|
110 days |
|
|
96 days |
|
| |
Inventory Turnover |
|
|
2.2 times |
|
|
6.5 times |
|
Note 1: The debt facility was included in long term liabilities at February 28, 2015
Note 2: Days Sales Outstanding in accounts receivable excluding a Tier 1 carrier in
India at November 30, 2015 were 53 days (59 days at February 28, 2015). This is a non-GAAP measure. See "Use of Non-GAAP performance measures".
24
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Cash and Cash Equivalents
As at November 30, 2015, we had $7.8 million in Cash and Cash Equivalents ("Cash"), representing a $15.9 million
decrease from the Cash balance at February 28, 2015.
The
following table explains the change in Cash during the three and nine months ended November 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30, 2015 |
|
Nine Months Ended
November 30, 2015 |
|
Beginning Cash Balance |
|
|
13,075 |
|
|
23,692 |
|
Net Loss–adjusted for certain non cash items |
|
|
(4,953 |
) |
|
(15,851 |
) |
| |
Change in inventory (net of inventory provisions) |
|
|
1,589 |
|
|
(2,344 |
) |
| |
Change in accounts receivable, and other current assets |
|
|
11,487 |
|
|
23,221 |
|
| |
Change in accounts payable and other liabilities |
|
|
(7,204 |
) |
|
(12,454 |
) |
| |
Nokia termination liability |
|
|
— |
|
|
(1,119 |
) |
| |
Change in other |
|
|
123 |
|
|
339 |
|
| |
|
|
|
|
|
Working capital changes and other changes |
|
|
5,995 |
|
|
7,643 |
|
| |
|
|
|
|
|
| |
Capital asset acquisitions |
|
|
(39 |
) |
|
(1,290 |
) |
| |
Purchases of intangible assets |
|
|
(63 |
) |
|
(391 |
) |
| |
|
|
|
|
|
Cash used in investing activities |
|
|
(102 |
) |
|
(1,681 |
) |
| |
|
|
|
|
|
| |
Capital leases |
|
|
(87 |
) |
|
(303 |
) |
| |
Other changes to equity (ESPP and issuance costs charged to warrant) |
|
|
6 |
|
|
32 |
|
| |
|
|
|
|
|
Cash provided through financing activities |
|
|
(81 |
) |
|
(271 |
) |
| |
|
|
|
|
|
Change in cash before repayment of debt |
|
|
859 |
|
|
(10,160 |
) |
| |
|
|
|
|
|
| |
Change in debt facility |
|
|
(6,150 |
) |
|
(5,748 |
) |
| |
|
|
|
|
|
Total Change in Cash |
|
|
(5,291 |
) |
|
(15,908 |
) |
| |
|
|
|
|
|
Ending Cash Balance |
|
|
7,784 |
|
|
7,784 |
|
| |
|
|
|
|
|
Key
points associated with the Cash decrease of $5.3 million in the third quarter of fiscal year 2016 include:
- •
- We repaid $6.2 million on the debt facility.
- •
- Working capital changes provided $6.0 million in cash.
- •
- We used $5.0 million in cash as a result of our net loss from operations.
- •
- Spending on capital acquisitions and software spending have been strictly controlled.
25
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
|
|
|
|
|
|
|
|
Changes in working capital
|
|
August 31, 2015
to
November 30, 2015 |
|
February 28, 2015
to
November 30, 2015 |
|
Beginning working capital balance |
|
|
15,992 |
|
|
61,000 |
|
Cash and cash equivalents |
|
|
(5,291 |
) |
|
(15,908 |
) |
Trade receivables |
|
|
(9,724 |
) |
|
(21,060 |
) |
Inventory |
|
|
(1,799 |
) |
|
1,109 |
|
Other current assets |
|
|
(1,695 |
) |
|
(2,223 |
) |
Future income tax asset |
|
|
(36 |
) |
|
(36 |
) |
Debt facility |
|
|
6,150 |
|
|
(26,652 |
) |
Accounts payable and accrued liabilities |
|
|
5,075 |
|
|
14,045 |
|
Deferred revenue |
|
|
563 |
|
|
(1,194 |
) |
Capital lease obligation |
|
|
149 |
|
|
303 |
|
Warrant liability |
|
|
(47 |
) |
|
(47 |
) |
| |
|
|
|
|
|
Net change in working capital |
|
|
(6,655 |
) |
|
(51,663 |
) |
| |
|
|
|
|
|
Ending working capital balance |
|
|
9,337 |
|
|
9,337 |
|
| |
|
|
|
|
|
Our trade receivables balance decreased by $21.1 million between February 28, 2015 and November 30, 2015 primarily
due to lower sales levels in the three months ended
November 30, 2015, compared to the fourth quarter of fiscal year 2015 (Q3 FY2016 vs. Q4 FY2015-$ 22.7 million lower). Our rate of collection has remained fairly consistent
for most of our customers, so the reduction in accounts receivable is attributed primarily to the lower sales levels. Our allowance for doubtful accounts continues to represent a small percentage of
our total trade receivables outstanding (November 30, 2015–1.0%; February 28, 2015–1.0%).
As
at November 30, 2015, two customers exceeded 10% of the total receivable balance. These customers represented 49% and 22% of the trade receivables balance (February 28,
2015–two customers represented 37% and 34% of the trade receivables balance).
Included
in G&A expenses is bad debt expense of ($0.1 million) and $0.1 million for the three and nine months ended November 30, 2015 (three and nine months ended
November 30, 2014-nominal and $0.2 million).
26
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The inventory balance increased by $1.1 million relative to the closing balance at February 28, 2015. By product category
the changes in inventory are as follows in USD millions:
|
|
|
|
|
|
Closing inventory February 28, 2015 |
|
|
24.3 |
|
Increase in Harmony Enhanced (product built for Tier 1 customer in India) |
|
|
4.5 |
|
Increase in Horizon Compact Plus |
|
|
1.3 |
|
Increase in inventory held for customer support & warranty |
|
|
0.2 |
|
Decrease in Harmony (Flexipacket & Hubs for Enhanced) product porfolio |
|
|
(5.0 |
) |
| |
driven by a sale of raw material back to a contract manufacturer |
|
|
|
|
Other |
|
|
0.1 |
|
| |
|
|
|
Net Change in Inventory |
|
|
1.1 |
|
| |
|
|
|
Ending inventory at November 30, 2015 |
|
|
25.4 |
|
| |
|
|
|
During
the three months ended November 30, 2015, we entered into an agreement to sell back inventory to a contract manufacturer. The total reduction of raw material inventory was
$10.2 million and we reduced accounts payable owing to the contract manufacturer by the same amount. Inventory increased at this contract manufacturer between February 28, 2015 and
August 31, 2015 which is the explanation for why the $10.2 million reduction in inventory (when the transaction took place) is greater than the $5.0 million reduction in inventory
described in the chart above. With the exception of an amount provided for, we expect to consume the transferred inventory over the normal course of business. As at November 30, 2015 we have
provided $1.6 million for inventory owned by contract manufacturers.
The accounts payable and accrued liabilities balance decreased by $14.0 million between February 28, 2015 and
November 30, 2015. This decrease was driven by the inventory transaction described above which decreased the payable balance to a contract manufacturer by $10.2 million. In addition we
have reduced our inventory purchasing over the year as sales levels have declined.
Equity Offerings and Use of Proceeds
2014 Equity Offering
On August 1, 2014 we completed a public equity offering (the "2014 Equity Offering"). Under the terms of the 2014 Equity
Offering, we issued and sold 15,927,500 units at CAD$1.80 per unit for aggregate gross proceeds of $26.2 million (CAD$28.7 million). After deducting commissions and expenses, we
realized net proceeds of $24.0 million. Each unit consisted of one
common share of the Company and one half of one warrant. Each whole warrant entitles the holder to purchase one of our common shares at an exercise price of CAD$2.25 per share until August 1,
2016. Upon issuance, we recognized a liability in the amount of $2.6 million for the warrants.
27
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
2013 Equity Offering
On September 23, 2013, pursuant to the public equity offering of units (the "2013 Equity Offering"), 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 originally
entitled the holder to purchase one common share at an exercise price of $2.70 per share until September 23, 2018, subject to certain adjustments. In connection with the 2014 Equity Offering,
and pursuant to the terms of such warrants, the exercise price of the warrants issued in the 2013 Equity Offering was changed to $1.30 per share. As at September 23, 2013 we recognized a
liability in the amount of $6.4 million for the warrants.
Commitments as at November 30, 2015
Future minimum operating lease payments as at November 30, 2015 per fiscal year relate to leases of office and warehouse space.
They
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
(Figures are in thousands of USD) |
|
Contractual Obligations
|
|
Total |
|
Less than
1 year |
|
1-3 years |
|
3-5 years |
|
More than
5 years |
|
Total Operating Lease Obligations |
|
$ |
1,684 |
|
$ |
1,460 |
|
$ |
224 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
We
are subject to claims and legal actions in the normal course of our business activities. 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.
28
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
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 |
|
Dubai |
|
UAE |
|
TECOM Investments FZ-LLC |
|
November, 2016 |
|
$ |
3,450 |
|
Luxembourg City |
|
Luxembourg |
|
FPS Office Center S.A.R.L. |
|
Month to Month |
|
$ |
1,150 |
|
Singapore |
|
Singapore |
|
ARCC |
|
February, 2016 |
|
$ |
2,980 |
|
Ottawa (Warehouse & Operations at Terry Fox Drive + Office Space at 411 Legget Drive) |
|
Canada |
|
Kanata Research Park |
|
November, 2016 |
|
$ |
90,000 |
|
Herzlyia |
|
Israel |
|
Margalin Holdings Ltd. |
|
November, 2016 |
|
$ |
2,500 |
|
Shanghai |
|
China |
|
Shanghai Lingang Economic Development Group |
|
September, 2017 |
|
$ |
20,800 |
|
Gurgaon |
|
India |
|
Narinder Singh & Songs (P) LTD |
|
March, 2018 |
|
$ |
4,430 |
|
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, and have in place subleases in Ottawa which reduce the
monthly cost by approximately 10%.
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 we take provisions against any portion of that inventory that we do not expect
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.
As
at November 30, 2015, we have provisions totaling $1.6 million on inventory held by contract manufacturers that we do not expect to be fully used.
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.
29
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Our
warrants issued on August 1, 2014 in connection with the 2014 Equity Offering are traded on the Toronto Stock Exchange under the symbol DWI.WT and on the NASDAQ Capital Market
under the symbol DRWIW.
The
following tables show common share activity in the three and nine months ended November 30, 2015.
|
|
|
|
|
|
|
Common Shares |
|
Balance at February 28, 2015 |
|
|
75,290,818 |
|
| |
|
|
|
ESPP |
|
|
83,087 |
|
Exercise of restricted share units |
|
|
60,000 |
|
| |
|
|
|
Balance at August 31, 2015 |
|
|
75,433,905 |
|
| |
|
|
|
ESPP |
|
|
53,744 |
|
| |
|
|
|
Balance at November 30, 2015 |
|
|
75,487,649 |
|
| |
|
|
|
The
following is a summary of stock option activity:
|
|
|
|
|
|
|
|
|
|
Three and nine months ended
November 30, 2015 |
|
|
|
Options |
|
Weighted Average
Exercise Price
(CAD) |
|
Options outstanding at February 28, 2015 |
|
|
3,985,587 |
|
$ |
3.05 |
|
Granted |
|
|
1,494,200 |
|
$ |
0.77 |
|
Forfeited |
|
|
(691,216 |
) |
$ |
4.69 |
|
| |
|
|
|
|
|
Options outstanding at August 31, 2015 |
|
|
4,788,571 |
|
$ |
2.11 |
|
| |
|
|
|
|
|
Granted |
|
|
2,783,550 |
|
$ |
0.12 |
|
Forfeited |
|
|
(400,810 |
) |
$ |
2.39 |
|
| |
|
|
|
|
|
Options outstanding at November 30, 2015 |
|
|
7,171,311 |
|
$ |
1.32 |
|
| |
|
|
|
|
|
As
at November 30, 2015 the following securities were issued and outstanding: 75,487,649 common shares, options to purchase 7,171,311 common shares granted under our
Share Based Compensation Plan, and warrants exercisable for 10,052,500 common shares. The number of common shares issuable upon the exercise of the warrants is subject to adjustment in
accordance with terms of the warrants.
As
of January 13, 2016 the following securities were issued and outstanding: 75,493,512 common shares, options to purchase 6,961,381 common shares granted under our
Share Based Compensation Plan, and warrants exercisable for 10,052,500 common shares. The number of common shares issuable upon the exercise of the warrants is subject to adjustment in
accordance with terms of the warrants.
30
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 and nine months ended November 30, 2015 a total of 50,767 and 118,423 common shares were purchased by employees at fair market
value, while we issued 11,735 and 27,802 common shares, net of forfeitures, as its matching contribution. The shares we contributed will vest twelve (12) months after issuance.
We
record an expense equal to the fair value of shares granted pursuant to the ESPP over the period the shares vest. The total fair value of the shares earned during the three and nine
months ended November 30, 2015 was $2 thousand and $8 thousand with a corresponding credit to contributed surplus (three and nine months ended November 30,
2014-$3 thousand and $10 thousand). The fair value of the unearned ESPP shares as at November 30, 2015 was $11 thousand (November 30, 2014-$12 thousand). The
number of shares held for release, and still restricted under the ESPP at November 30, 2015 was 23,703 (November 30, 2014-9,088).
Restricted Share Units (RSUs)
Pursuant to the terms of our Share Based Compensation Plan, we entered into restricted share unit agreements with certain of our
independent directors. These units which were issued during July 2014 were subject to each director's continued engagement on the Board for a period of one year from the date of issuance. All
of the originally issued RSUs vested during the third quarter of fiscal year 2016 with the exception of 20,000 RSUs which were cancelled on April 14, 2015.
The
following table sets forth the summary of RSU activity under our Share Based Compensation Plan for the three and nine months ended November 30, 2015:
|
|
|
|
|
|
|
|
|
|
Nine months ended
November 30, 2015 |
|
|
|
RSU's |
|
Weighted
Average Price
(CAD) |
|
RSU balances at February 28, 2015 |
|
|
80,000 |
|
$ |
2.15 |
|
Forfeited |
|
|
(20,000 |
) |
$ |
2.15 |
|
Vested |
|
|
(60,000 |
) |
$ |
2.15 |
|
| |
|
|
|
|
|
RSU balances at November 30, 2015 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
We
have recognized $nil and $39 thousand for the three and nine months ended November 30, 2015 as compensation expense for restricted share units, with a corresponding
credit to contributed surplus.
Financial Instruments
Financial instruments are classified into one of the following categories: assets held at fair value, loans and receivables, other
financial liabilities, or liabilities held at fair value.
31
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Categories for financial assets and liabilities
The following table summarizes the carrying values of our financial instruments:
|
|
|
|
|
|
|
|
|
|
November 30,
2015 |
|
February 28,
2015 |
|
Assets held at fair value (A) |
|
|
7,784 |
|
|
23,692 |
|
Loans and receivables (B) |
|
|
27,780 |
|
|
49,614 |
|
Other financial liabilities (C) |
|
|
50,992 |
|
|
71,728 |
|
Liabilities held at fair value (D) |
|
|
51 |
|
|
1,239 |
|
- (A)
- Includes
cash and cash equivalents
- (B)
- Includes
trade receivables and other miscellaneous receivables
- (C)
- Includes
accounts payable, accrued liabilities, payroll related accruals, debt facility and termination fee
- (D)
- Warrant
liability
Fair value
We classify our fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the
measurements. The accounting standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial
instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The inputs fall into three levels that may be
used to measure fair value.
The
September 23, 2013 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs.
The
August 1, 2014 warrant liability is classified as Level 1 as the warrants issued in the 2014 Equity Offering are traded on the Toronto Stock Exchange and on the NASDAQ
Capital Market.
As
at November 30, 2015 we held the following Level 3 financial instruments carried at fair value on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
Total |
|
Financial Liabilities |
|
|
|
|
|
|
|
Warrant liability |
|
|
4 |
|
|
4 |
|
32
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
As
at February 28, 2015, we held the following Level 3 financial instruments carried at fair value on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
Total |
|
Financial Liabilities |
|
|
|
|
|
|
|
Warrant liability |
|
|
603 |
|
|
603 |
|
A
reconciliation of the Level 3 warrant liability measured at fair value for the three and nine months ended November 30, 2015 follows:
|
|
|
|
|
|
|
|
|
|
Three and nine months ended
November 30, 2015 |
|
|
|
Warrants |
|
$ |
|
Balance at February 28, 2015 |
|
|
2,088,750 |
|
|
603 |
|
Fair value adjustment-warrant liability |
|
|
— |
|
|
(585 |
) |
| |
|
|
|
|
|
Balance at August 31, 2015 |
|
|
2,088,750 |
|
|
18 |
|
| |
|
|
|
|
|
Fair value adjustment-warrant liability |
|
|
— |
|
|
(14 |
) |
| |
|
|
|
|
|
Balance at November 30, 2015 |
|
|
2,088,750 |
|
|
4 |
|
| |
|
|
|
|
|
Interest rate risk
Cash, 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, excluding deferred financing costs, recognized during the three and nine months ended November 30, 2015 was $0.5 million and
$1.6 million on our cash, cash equivalents and debt facility (three and nine months ended November 30, 2014-expense of $0.3 million and $0.9 million).
Credit risk
In addition to trade receivables and other receivables, we are exposed to credit risk on our cash and cash equivalents 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 trade receivables and other receivables, and cash and cash equivalents by transacting with only reputable financial institutions
and customers.
Foreign exchange risk
Foreign exchange risk arises because of fluctuations in exchange rates. To mitigate exchange risk, we may 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.
33
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
As
of November 30, 2015, if the U.S. dollar had appreciated 1% against all foreign currencies to which we have exposure, with all other variables held constant, the impact
of this foreign currency change on our foreign denominated financial instruments would have resulted in a nominal increase in after-tax net loss for the three and nine months ended November 30,
2015 (three and nine months ended November 30, 2014-nominal decrease) with an equal and opposite effect if the U.S. dollar had depreciated 1% against all foreign currencies at
November 30, 2015.
The
risk described above relates to balance sheet accounts. However, as the section under "Expenses" indicates fluctuations in the Canadian dollar relative to the USD make it relatively
more or less expensive to operate our R&D and head office functions in Canada.
Economic Dependence
We were dependent on two key customers with respect to revenue in the three months ended November 30, 2015. These customers
represented approximately 40% and 15% of sales for the three months ended November 30, 2015 (three months ended November 30, 2014-two customers represented 50% and 26%).
We
were dependent on three key customers with respect to revenue in the nine months ended November 30, 2015. These customers represented approximately 43%, 16% and 11% of sales
for the nine months ended November 30, 2015 (nine months ended November 30, 2014-two customers represented 56% and 17%).
Controls and Procedures
At the end of the period covered by this MD&A (such period being the three and nine months ended November 30, 2015), 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, 2015 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.
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,
34
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 and that there are no material weaknesses in the Company's disclosure controls and procedures as of November 30, 2015.
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.
We
regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on factors including our estimated forecast of product demand, the stage
of the product life cycle and production requirements for the units in question.
We
carry inventory for the purposes of supporting our product warranty. Our standard warranty is typically between 12 and 36 months but we earn revenue by providing enhanced and
extended warranty and repair service during and beyond the standard warranty period. Customer service inventory consists of both component parts and finished units. 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 conditions to final acceptance of the product are 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 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
35
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 both for the undelivered items 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 on 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.
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 liability is estimated based on recent actual return
experience and repair costs. Where product defects have been identified which would cause the cost or warranty experience to change, additional warranty costs are recognized.
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.
We
offer our customers the option to purchase advanced replacement and extended warranty contracts 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 customers with 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 36 months. Our extended warranty programs enable customers to continue to have repairs made as needed and
customer support guidance beyond the standard warranty period.
36
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
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 is not considered a separate unit of accounting.
Periodically,
a customer may request that we arrange for the installation of our equipment. Installations are performed by a third party service provider. 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 Nokia's microwave transport business. Shipping terms through the Nokia 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 are expensed as incurred unless we 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 our deferred tax assets when we believe 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.
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
37
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2015
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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.
FUTURE ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-9, "Revenue from Contracts with Customers". The amendments in this Update
create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition
guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type
Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. In August 2015, the FASB issued ASU No. 2015–14, "Revenue from Contracts
with Customers" which reflects decisions reached by the FASB at its meeting earlier in the year to defer the effective date to fiscal years beginning after December 15, 2017, with early
adoption permitted. We are currently assessing the impact this amendment will have on our consolidated financial statements.
In
August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern". The update provides U.S. GAAP guidance on management's
responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management
will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial
statements are issued. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact
this amendment will have on our consolidated financial statements.
38
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