QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 99.3
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
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 six months ended August 31, 2016. This MD&A should be read in conjunction with our unaudited consolidated interim financial statements and corresponding notes for the three and six
months ended August 31, 2016 and our Annual Information Form for the year ended February 29, 2016 (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 six months ended August 31, 2016 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 October 12, 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 our 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 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 cautioned not to place undue
1
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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
product 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 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;
- •
- the allocation of radio spectrum and regulatory approvals for our
products;
- •
- the ability of our customers to secure a license for applicable
radio spectrum;
2
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- changes in government regulation or industry standards that may limit the potential market for
our products;
- •
- 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;
- •
- our exposure to potential product defects and product liability claims and health and safety risk
relating to wireless products;
- •
- the impact that general economic weakness and volatility may be having on our
customers; and
- •
- disruption resulting from economic and geopolitical uncertainty.
Additional risks related specifically to our securities include:
- •
- risks associated with our outstanding warrants and the impact that the terms of such warrants have
on our ability to raise capital and to undertake certain business transactions;
- •
- risks associated with our ability to raise additional
capital;
- •
- large fluctuations in the trading price of our common
shares;
- •
- our actual financial results may vary from our publicly disclosed
forecasts;
- •
- expense and risks associated with being a U.S. public company and possible loss of our
foreign private issuer status;
- •
- expense and risks associated with the loss of our ability to use the multi-jurisdictional
disclosure system ("MJDS") adopted by the United States and Canada;
- •
- an investor may not be able to bring actions or enforce judgment against us and certain of our
directors and officers;
- •
- we do not currently intend to pay dividends on our common
shares;
- •
- tax consequences associated with an investment in our
securities;
- •
- future sales of common shares by our existing shareholders could cause our share price
to fall;
- •
- our management's broad discretion over the use of proceeds of financings;
and
- •
- certain Canadian laws could prevent or deter a change of control.
In
the three and six months ended August 31, 2016, approximately 24% and 31% of our sales were through the Nokia channel. Recent developments within Nokia, including Nokia's
combination with
3
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Alcatel-Lucent,
have increased uncertainty for the future of this channel. See "Recent Developments – Nokia Sales Channel
Update".
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".
4
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
SELECTED FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
August 31,
2016 |
|
August 31,
2015 |
|
August 31,
2014 |
|
August 31,
2016 |
|
August 31,
2015 |
|
August 31,
2014 |
|
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Hardware and other |
|
|
9,530 |
|
|
22,613 |
|
|
35,233 |
|
|
18,152 |
|
|
46,177 |
|
|
62,804 |
|
| |
Services |
|
|
3,700 |
|
|
4,304 |
|
|
2,700 |
|
|
7,623 |
|
|
7,080 |
|
|
3,900 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,230 |
|
|
26,917 |
|
|
37,933 |
|
|
25,775 |
|
|
53,257 |
|
|
66,704 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Hardware and other |
|
|
7,085 |
|
|
19,458 |
|
|
30,479 |
|
|
13,804 |
|
|
38,208 |
|
|
52,967 |
|
| |
Services |
|
|
1,923 |
|
|
2,744 |
|
|
338 |
|
|
3,857 |
|
|
4,490 |
|
|
645 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,008 |
|
|
22,202 |
|
|
30,817 |
|
|
17,661 |
|
|
42,698 |
|
|
53,612 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit before inventory provisions (note 1) |
|
|
4,222 |
|
|
4,715 |
|
|
7,116 |
|
|
8,114 |
|
|
10,559 |
|
|
13,092 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.9% |
|
|
17.5% |
|
|
18.8% |
|
|
31.5% |
|
|
19.8% |
|
|
19.6% |
|
| |
Inventory provision |
|
|
365 |
|
|
730 |
|
|
1,223 |
|
|
365 |
|
|
1,025 |
|
|
1,313 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3,857 |
|
|
3,985 |
|
|
5,893 |
|
|
7,749 |
|
|
9,534 |
|
|
11,779 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.2% |
|
|
14.8% |
|
|
15.5% |
|
|
30.1% |
|
|
17.9% |
|
|
17.7% |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development |
|
|
2,027 |
|
|
3,875 |
|
|
4,859 |
|
|
4,136 |
|
|
8,108 |
|
|
9,559 |
|
| |
Selling and marketing |
|
|
1,774 |
|
|
3,052 |
|
|
3,308 |
|
|
3,795 |
|
|
6,296 |
|
|
6,673 |
|
| |
General and administrative |
|
|
3,120 |
|
|
3,603 |
|
|
3,998 |
|
|
6,251 |
|
|
7,089 |
|
|
7,989 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,921 |
|
|
10,530 |
|
|
12,165 |
|
|
14,182 |
|
|
21,493 |
|
|
24,221 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other items |
|
|
(3,064 |
) |
|
(6,545 |
) |
|
(6,272 |
) |
|
(6,433 |
) |
|
(11,959 |
) |
|
(12,442 |
) |
Other Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Goodwill impairment |
|
|
— |
|
|
(11,927 |
) |
|
— |
|
|
— |
|
|
(11,927 |
) |
|
— |
|
| |
Amortization of intangible assets |
|
|
(94 |
) |
|
(149 |
) |
|
(339 |
) |
|
(184 |
) |
|
(332 |
) |
|
(648 |
) |
| |
Accretion expense |
|
|
(33 |
) |
|
(61 |
) |
|
— |
|
|
(68 |
) |
|
(132 |
) |
|
(40 |
) |
| |
Interest expense |
|
|
(354 |
) |
|
(560 |
) |
|
(379 |
) |
|
(736 |
) |
|
(1,091 |
) |
|
(804 |
) |
| |
Warrant issuance expenses |
|
|
(469 |
) |
|
— |
|
|
(221 |
) |
|
(561 |
) |
|
— |
|
|
(221 |
) |
| |
Fair value adjustment — warrant liability |
|
|
602 |
|
|
373 |
|
|
(1,002 |
) |
|
846 |
|
|
895 |
|
|
(852 |
) |
| |
Gain on change in estimate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
101 |
|
| |
Foreign exchange (loss)/gain |
|
|
(68 |
) |
|
(214 |
) |
|
253 |
|
|
(220 |
) |
|
(294 |
) |
|
374 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(3,480 |
) |
|
(19,083 |
) |
|
(7,960 |
) |
|
(7,356 |
) |
|
(24,840 |
) |
|
(14,532 |
) |
| |
Income tax expense |
|
|
220 |
|
|
1,620 |
|
|
450 |
|
|
382 |
|
|
1,687 |
|
|
545 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(3,700 |
) |
|
(20,703 |
) |
|
(8,410 |
) |
|
(7,738 |
) |
|
(26,527 |
) |
|
(15,077 |
) |
| |
Net income attributable to non-controlling interest |
|
|
(238 |
) |
|
(269 |
) |
|
(454 |
) |
|
(300 |
) |
|
(399 |
) |
|
(419 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss attributable to shareholders |
|
|
(3,938 |
) |
|
(20,972 |
) |
|
(8,864 |
) |
|
(8,038 |
) |
|
(26,926 |
) |
|
(15,496 |
) |
Basic & Diluted loss per share |
|
|
(0.96 |
) |
|
(6.96 |
) |
|
(3.47 |
) |
|
(2.16 |
) |
|
(8.94 |
) |
|
(6.34 |
) |
Basic & Diluted weighted average shares outstanding |
|
|
4,085,920 |
|
|
3,014,892 |
|
|
2,555,762 |
|
|
3,716,149 |
|
|
3,013,417 |
|
|
2,442,248 |
|
Note 1: Gross profit before inventory provisions is a non-GAAP financial measure. See "Use of Non-GAAP Performance
Measures".
5
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The
principal differences between the three and six months ended August 31, 2016 and August 31, 2015 are explained as follows:
- •
- In the three and six month period ended August 31, 2016 the most significant contributors to the decrease in
revenue over the same period in the prior fiscal year were decreases in sales through the Nokia channel, combined with decreases in sales a Tier 1 carrier in India.
- •
- Our gross profit percentage was higher during the three and six months ended August 31, 2016 compared to the same
periods in fiscal year 2016 primarily due to a change in the mix of customers and products.
- •
- Operating expenses in the three and six months ended August 31, 2016 were $3.6 million and
$7.3 million lower than they were in the same period in the previous year primarily as a result of restructuring initiatives taken in fiscal year 2016 which reduced the size of the staff
internationally and cut spending on contractors and material purchased for the creation of prototypes.
The
principal differences between the three and six months ended August 31, 2016 and August 31, 2014 are explained as follows:
- •
- The reduction in revenue can be primarily attributed to reduced sales through the Nokia channel in addition to reduced
sales to a Tier 1 carrier in India.
- •
- The gross profit percentage improved due to decreases in material costs and a change in customer mix with a less
significant percentage of the total revenue coming from lower margin customers.
- •
- Operating expenses decreased primarily as a result of decreased spending across a number of areas, most significantly
compensation related spending following the restructuring initiatives in fiscal year 2016.
6
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
As at
August 31,
2016 |
|
As at
February 29,
2016 |
|
Assets |
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
|
|
7,471 |
|
|
4,277 |
|
| |
Trade receivables |
|
|
13,879 |
|
|
18,986 |
|
| |
Inventory |
|
|
22,701 |
|
|
22,702 |
|
| |
Other current assets |
|
|
2,393 |
|
|
2,777 |
|
| |
|
|
|
|
|
|
|
|
46,444 |
|
|
48,742 |
|
Long Term Assets |
|
|
|
|
|
|
|
| |
Property and equipment |
|
|
3,092 |
|
|
3,702 |
|
| |
Intangible assets |
|
|
495 |
|
|
623 |
|
| |
|
|
|
|
|
|
|
|
3,587 |
|
|
4,325 |
|
Total Assets |
|
|
50,031 |
|
|
53,067 |
|
| |
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
| |
Debt facility |
|
|
17,030 |
|
|
22,152 |
|
| |
Accounts payable and accrued liabilities |
|
|
25,343 |
|
|
23,832 |
|
| |
Deferred revenue |
|
|
779 |
|
|
1,944 |
|
| |
Deferred tax liability |
|
|
281 |
|
|
294 |
|
| |
Warrant liability |
|
|
1,057 |
|
|
117 |
|
| |
|
|
|
|
|
|
|
|
44,490 |
|
|
48,339 |
|
Long Term Liabilities |
|
|
|
|
|
|
|
| |
Deferred revenue |
|
|
459 |
|
|
498 |
|
| |
Warrant liability |
|
|
3,420 |
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
3,879 |
|
|
501 |
|
Shareholders' equity (deficiency) |
|
|
|
|
|
|
|
| |
Capital stock |
|
|
225,943 |
|
|
221,128 |
|
| |
Contributed surplus |
|
|
9,593 |
|
|
9,235 |
|
| |
Deficit |
|
|
(226,263 |
) |
|
(218,225 |
) |
| |
Accumulated other comprehensive loss |
|
|
(9,618 |
) |
|
(9,618 |
) |
| |
|
|
|
|
|
Total Shareholder's equity (deficiency) |
|
|
(345 |
) |
|
2,520 |
|
| |
Non-controlling interests |
|
|
2,007 |
|
|
1,707 |
|
| |
|
|
|
|
|
Total Equity |
|
|
1,662 |
|
|
4,227 |
|
Total Liabilities and Equity |
|
|
50,031 |
|
|
53,067 |
|
| |
|
|
|
|
|
Shares issued & outstanding |
|
|
5,486,776 |
|
|
3,020,069 |
|
7
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY15 |
|
|
FY16 |
|
|
FY17 |
|
|
|
Nov 30
2014
|
|
Feb 28
2015
|
|
May 31
2015
|
|
Aug 31
2015
|
|
Nov 30
2015
|
|
Feb 29
2016
|
|
May 31
2016
|
|
Aug 31
2016
|
|
| |
|
|
|
|
|
|
|
Revenue |
|
|
47,320 |
|
|
43,742 |
|
|
26,340 |
|
|
26,917 |
|
|
20,997 |
|
|
12,041 |
|
|
12,545 |
|
|
13,230 |
|
Gross Profit before inventory provisions (note 1) |
|
|
7,990 |
|
|
9,684 |
|
|
5,844 |
|
|
4,715 |
|
|
5,144 |
|
|
2,684 |
|
|
3,892 |
|
|
4,222 |
|
| |
Gross Profit % |
|
|
16.9% |
|
|
22.1% |
|
|
22.2% |
|
|
17.5% |
|
|
24.5% |
|
|
22.3% |
|
|
31.0% |
|
|
31.9% |
|
Inventory provisions |
|
|
272 |
|
|
1,187 |
|
|
295 |
|
|
730 |
|
|
210 |
|
|
3,181 |
|
|
0 |
|
|
365 |
|
Gross Profit after inventory provisions |
|
|
7,718 |
|
|
8,497 |
|
|
5,549 |
|
|
3,985 |
|
|
4,934 |
|
|
(497 |
) |
|
3,892 |
|
|
3,857 |
|
| |
Gross Profit % after inventory provisions |
|
|
16.3% |
|
|
19.4% |
|
|
21.1% |
|
|
14.8% |
|
|
23.5% |
|
|
(4.1% |
) |
|
31.0% |
|
|
29.2% |
|
Operating Expenses |
|
|
12,192 |
|
|
11,304 |
|
|
10,963 |
|
|
10,530 |
|
|
8,689 |
|
|
7,594 |
|
|
7,261 |
|
|
6,921 |
|
Loss before other items |
|
|
(4,474 |
) |
|
(2,807 |
) |
|
(5,414 |
) |
|
(6,545 |
) |
|
(3,755 |
) |
|
(8,091 |
) |
|
(3,369 |
) |
|
(3,064 |
) |
– (gross profit less operating expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period |
|
|
(3,436 |
) |
|
(2,123 |
) |
|
(5,824 |
) |
|
(20,703 |
) |
|
(5,754 |
) |
|
(9,283 |
) |
|
(4,038 |
) |
|
(3,700 |
) |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
(1.25 |
) |
|
(0.75 |
) |
|
(1.98 |
) |
|
(7.00 |
) |
|
(2.00 |
) |
|
(3.02 |
) |
|
(1.23 |
) |
|
(0.96 |
) |
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic & Diluted |
|
|
3,010,178 |
|
|
3,011,065 |
|
|
3,011,941 |
|
|
3,014,892 |
|
|
3,018,034 |
|
|
3,019,712 |
|
|
3,346,378 |
|
|
4,085,920 |
|
Total Assets |
|
|
120,291 |
|
|
121,053 |
|
|
113,587 |
|
|
88,327 |
|
|
69,241 |
|
|
53,067 |
|
|
48,418 |
|
|
50,031 |
|
Note 1: Gross profit before inventory provisions is a non-GAAP financial measure. See "Use
of Non-GAAP Performance Measures".
8
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Overview
DragonWave is a leading provider of high-capacity packet microwave solutions that drive next-generation IP networks. DragonWave's
carrier-grade point-to-point packet microwave systems transmit broadband voice, video and data, enabling service providers, government agencies, enterprises and other organizations to meet their
increasing bandwidth requirements rapidly and affordably. The principal application of DragonWave's products is mobile network backhaul. Additional applications include leased line replacement, last
mile fiber extension and enterprise networks.
We
support product lines branded under the names Horizon, Avenue and Avenue Lite, Harmony and Harmony Lite, Harmony Eband, Harmony Enhanced and Harmony Enhanced MC. 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 twelve to eighteen 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 six months ended August 31, 2016, the Nokia channel accounted for 24% and 31% of our sales. See "Recent
Developments – Nokia Sales Channel Update" 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 $1.8 million and $2.9 million of
our total revenue in the three and six months ended August 31, 2016.
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
9
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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.
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, 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, 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 second quarter ended August 31, 2016, compared to the same
periods in the prior fiscal year:
- •
- Our revenue decreased by $13.7 million and $27.5 million when comparing the three and six month periods
ended August 31, 2016 and August 31, 2015.
|
|
|
|
|
|
|
|
|
|
Three months ended
August 31 |
|
Six months ended
August 31 |
|
Revenue ended August 31, 2015 |
|
|
26,917 |
|
|
53,257 |
|
Decrease in sales through Nokia Channel |
|
|
(6,769 |
) |
|
(15,744 |
) |
Decrease in direct sales to a Tier 1 carrier located in India |
|
|
(5,355 |
) |
|
(7,167 |
) |
Decrease in direct and indirect sales in North America |
|
|
(1,928 |
) |
|
(4,490 |
) |
Decrease in direct sales in Europe, Middle East & Africa |
|
|
(636 |
) |
|
(1,349 |
) |
Increase in direct sales to the Rest of World |
|
|
1,001 |
|
|
1,268 |
|
| |
|
|
|
|
|
Total Change |
|
|
(13,687 |
) |
|
(27,482 |
) |
| |
|
|
|
|
|
Revenue ended August 31, 2016 |
|
$ |
13,230 |
|
$ |
25,775 |
|
| |
|
|
|
|
|
- •
- Our gross profit percentage in the second quarter of fiscal year 2017 increased to 29.2% from 14.8% in the second quarter
of fiscal year 2016. The improvement was driven by a decrease in the
10
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
|
|
|
|
|
|
|
|
|
|
Q2 FY2017
vs.
Q2 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending; results primarily from global staff reductions in FY2016 |
|
|
(1.8 |
) |
|
(4.3 |
) |
Contractor and professional services spending |
|
|
(1.0 |
) |
|
(1.7 |
) |
Travel & living |
|
|
(0.3 |
) |
|
(0.6 |
) |
Spending on materials for prototypes |
|
|
(0.8 |
) |
|
(1.2 |
) |
Warehousing costs |
|
|
0.3 |
|
|
0.5 |
|
| |
|
|
|
|
|
|
|
|
(3.6 |
) |
|
(7.3 |
) |
| |
|
|
|
|
|
- •
- We recorded a warrant issuance expense associated with the August 2016 public offering of $0.5 million in
the three months ended August 31, 2016. The results on a year to date basis also include $0.1 million of warrant issuance costs associated with the April, 2016 registered direct
offering, so that on a year to date basis the warrant issuance expense is $0.6 million.
- •
- A fair value adjustment gain of $0.6 million and $0.8 million was realized during the three and six months
ended August 31, 2016, respectively as a result of a change in the warrant valuation on the warrants outstanding from the equity offerings completed in August 2016, April 2016,
August 2014 and September 2013.
- •
- Other items before taxes impacting the loss in the second quarter and six months ended August 31, 2016 totaled
$0.5 million and $1.2 million and included amortization of software assets, accretion expense, interest expense, and a foreign exchange loss.
- •
- In the three and six months ended August 31, 2016 we recognized a tax expense of $0.2 million and
$0.4 million related to tax liabilities in regions in which we are profitable but do not have loss carry-forwards available.
- •
- The net loss attributable to shareholders was $ 3.9 million and $ 8.0 million for the three and six months
ended August 31, 2016.
- •
- In the three and six months ended August 31, 2016, we repaid $1.8 million and $5.1 million on our
line of credit which decreased the outstanding debt balance to $17.0 million.
- •
- We completed an underwritten public offering on August 8, 2016. Under the terms of the offering, we issued and sold
1,823,880 Class A units at $3.35 and 30,164 Class B units at $3.34. Each Class A unit consisted of one common share, one five-year warrant (the "Long-Term
Warrant") to purchase one common share and two six-month warrants (the "Short-Term Warrant"). Each Class B unit
11
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
consisted
of a pre-funded warrant (the "Pre-Funded Warrant") to purchase one common share, one Long-Term Warrant and two Short-Term Warrants. The Long-Term Warrants have an exercise price of
$4.37 per share, are exercisable immediately and will expire on August 8, 2021. The Short-Term Warrants have an exercise price of $4.00 per share, are exercisable immediately and will expire on
February 8, 2017. The Pre-Funded Warrants are exercisable immediately with no expiration date, are deemed purchased for a price of $3.34 per underlying common share by virtue of purchasing a
Class B Unit and have an exercise price of $0.01 per share. The net proceeds of the offering, after expenses, were $5.5 million.
- •
- Our cash balance at August 31, 2016 was $7.5 million which represented a $3.2 million increase from
the cash balance at February 29, 2016.
Liquidity and Cash Resources
The consolidated financial statements for the year ended August 31, 2016 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 three and six months ended August 31, 2016. Recently, we have experienced additional liquidity
pressure as a result of reduced revenue from a significant OEM channel and an ongoing dispute over inventory shipped to a customer in India in June 2015.
We
have been able to make progress in restructuring the business. This progress includes the following highlights:
- •
- Reduced operating expenses by 34% in the first six months of fiscal year 2017 compared to the same period in the previous
year primarily through reductions in staff levels internationally;
- •
- Raised $9.5 million in cash (net of commission and expenses) with a public offering in August, 2016 and a
registered direct offering in April, 2016 which in both cases included common shares and warrants;
- •
- Reduced outstanding debt on our credit facility by $15.8 million between August 31, 2015 and
August 31, 2016 primarily by leveraging our working capital;
- •
- Improved the gross profit percentage in the second quarter of fiscal year 2017 to 29.2% from 14.8% in the second quarter
of fiscal year 2016;
- •
- Continued to work closely with our credit facility partners;
- •
- Initiated arbitration proceedings to seek resolution to our customer dispute in India.
We
remain in breach of the original terms of our debt facility, and we are negotiating a new long term debt facility with our lending partners. See the discussion under "Debt Facility"
below. The continued consumption of cash has raised substantial doubt about our ability to continue as a going concern. Our
12
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
plans
to restructure the business and overcome these difficulties include initiatives in a number of areas including:
- •
- Targeting our sales efforts to direct and indirect opportunities in markets with higher gross margins, and lower working
capital requirements;
- •
- Adjusting our business focus and resources away from Nokia in order to support new sales channels;
- •
- Renegotiating the terms of existing debt facilities;
- •
- Continuing to minimize fixed and variable operating expenses, by tightly controlling discretionary spending and headcount
growth;
- •
- Actively investigating and pursuing alternative forms of financing;
- •
- 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. They are dependent on a number of key assumptions including the timing of significant new customer projects, success in arbitration with the
customer located in India, and accommodations from our suppliers and credit lenders. 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. Our unaudited
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 year
2016 by approximately 23%. Through attrition, staff levels have continued to decline so that the current regular full time global head count is 35% lower than it was twelve months ago. Coupled with
this staff reduction, has been a significant decline in the number of external contractors used to fulfill R&D program requirements, particularly in China. Material spending for prototype development
has been severely curtailed as well as travel spending. As a result of these initiatives operating expenses have declined $7.3 million between the first six months of fiscal year 2017 and the
same period in the prior fiscal year.
Arbitration Process in India
An arbitration process has been initiated with a customer in India, Bharti Airtel Limited, through an arbitral tribunal to resolve a
dispute over the customer's payment for inventory (with a sale value of $4.7 million) shipped to this customer in June, 2015. The customer has now submitted its claim statement, which discloses
an aggregate claim amount of approximately $5.1 million in respect of, among other things, damages claimed with respect to lost revenue, import duties, and inventory replacement costs. We
believe that the claim has no merit. We do not believe that we will incur a loss related to this claim. As a result, we
13
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
have
not recognized any expense associated with this claim in our financial statements. We have booked the value of the inventory provided to Bharti as an asset with a cost of $4.6 million. We
have not
received any payment with respect to this inventory. We have submitted a counter-claim and the arbitration meetings are held on a regular basis.
Nokia Sales Channel Update
Following Nokia's announced combination with Alcatel-Lucent, 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. We may 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. In addition, we expect to sell the Harmony FlexiPacket
Multiradio (Harmony Radio) product family and legacy products through the Nokia channel to customers who wish to continue with this platform, although we do expect these sales levels to decrease over
time. To facilitate these ongoing activities, our global framework agreements will continue in place.
We
negotiated a termination fee with Nokia in 2013, valued $8.7 million which was to be paid in installments by us to Nokia. At August 31, 2016 the liability is valued at
$3.5 million (February 29, 2016 – $3.3). The increase in the valuation of the liability since February 29, 2016 relates to changes in the
foreign exchange rates between the EURO and U.S. dollar.
Debt Facility
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. We had drawn $17.0 million on the facility as at
August 31, 2016 (February 29, 2016 – $22.2 million), and $1.9 million against our letter of credit facility (February 29,
2016 – $1.9 million). The credit facility which was extended on January 6, 2014, matured 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, representations and warranties.
Credit availability is subject to ongoing compliance with borrowing covenants and short term assets on hand.
On
October 12, 2016 we signed a fourth forbearance agreement which is valid until April 1, 2017. It identifies new minimum covenant levels reflecting our revised financial
plans. The forbearance
agreement includes a requirement to hold a minimum of $1.0 million at Comerica Bank, reduces the facility commitment from $40.0 million to $30.0 million, includes additional
compliance requirements and implements more frequent monitoring. As part of this forbearance agreement, we will be issuing warrants to purchase 375,000 common shares to the lenders at an
exercise price of $4.00 per share. These warrants will expire five years from the date of issuance. We are in ongoing negotiations with our lending partners to put in place a new long term
debt facility.
We
have not made any debt re-payments on the line of credit subsequent to August 31, 2016.
14
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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. CIBC World Markets Inc. has been engaged since January, 2014 to assist in the analysis of our strategic and financing alternatives. They continue to be engaged in this
capacity. HC Wainwright has been engaged to investigate financing options, and recently represented us in the registered direct offering in April, 2016 and the underwritten public offering in August,
2016. Both are discussed further below.
Share Consolidation
The Board of Directors effected a share consolidation on February 2, 2016 ("the Consolidation") on the basis of
twenty-five (25) pre-Consolidation shares for one (1) post-Consolidation share. The Consolidation of our common shares was intended to establish the basis for the shares to trade above
US$1.00, as per the listing requirements of the NASDAQ. The Consolidation reduced the number of outstanding common shares from approximately 75,493,513 to approximately 3,019,717. Each fractional
share remaining after the share consolidation was cancelled. The number of outstanding warrants, stock options and restricted share units were proportionately adjusted by the consolidation ratio and
the exercise prices correspondingly increased by the same consolidation ratio. All shares and exercise prices are presented on a post-consolidation basis in our unaudited interim consolidated
financial statements and in this MD&A.
Equity Offerings
On August 8, 2016 we completed a public offering. Under the terms of the offering, we issued and sold
1,760,880 Class A units at $3.35 and 30,164 Class B units at $3.34, for aggregate gross proceeds of $6.0 million. Concurrent with the underwritten public offering in
the United States, we issued an additional 63,000 Class A Units on a private placement basis to purchasers in Canada for additional gross proceeds of $0.2 million. The
total net proceeds after deducting commission and expenses was $5.5 million. Each Class A unit consisted of one common share, one five-year warrant (the "Long-Term Warrant") to
purchase one common share and two six-month warrants (the "Short-Term Warrant"). Each Class B unit consisted of a pre-funded warrant (the "Pre-Funded Warrant") to purchase one
common share, one Long-Term Warrant and two Short-Term Warrants. The Long-Term Warrants have an exercise price of $4.37 per share, are exercisable immediately and will expire on August 8, 2021.
The Short-Term Warrants have an exercise price of $4.00 per share, are exercisable immediately and will expire on February 8, 2017. The Pre-Funded Warrants are exercisable immediately with no
expiration date, are deemed purchased for a price of $3.34 per underlying common share by virtue of purchasing a Class B Unit and have an exercise price of $0.01 per share. Upon issuance, we
recognized a liability in the amount of $4.0 million for the warrants.
15
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
On April 11, 2016 we completed a registered direct offering. Under the offering, we issued 599,998 common shares and concurrently in a private
placement issued warrants to purchase 299,999 common shares exercisable until April 11, 2021 at an exercise price of $8.50. The price per common share and one half of a warrant was $7.25
and resulted in total gross proceeds of $4.35 million. The net proceeds of the offering, after expenses, were $4.0 million. We expect that any exercise of the warrants will result in the
cash proceeds from the exercise of such warrants being paid to us. Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC acted as the exclusive placement agent for the
registered direct offering.
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".
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY17
Q2 |
|
FY17
Q1 |
|
FY16
Q4 |
|
FY16
Q3 |
|
Revenue |
|
|
13,230 |
|
|
12,545 |
|
|
12,041 |
|
|
20,997 |
|
Cost of Sales |
|
|
9,373 |
|
|
8,653 |
|
|
12,538 |
|
|
16,063 |
|
| |
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
3,857 |
|
|
3,892 |
|
|
(497 |
) |
|
4,934 |
|
|
|
|
29.2% |
|
|
31.0% |
|
|
(4.1 |
)% |
|
23.5% |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Provisions |
|
|
365 |
|
|
— |
|
|
3,181 |
|
|
210 |
|
| |
|
|
|
|
|
|
|
|
|
Gross profit before inventory provisions (Note 1) |
|
|
4,222 |
|
|
3,892 |
|
|
2,684 |
|
|
5,144 |
|
|
|
|
31.9% |
|
|
31.0% |
|
|
22.3% |
|
|
24.5% |
|
Operating Expenses |
|
|
6,921 |
|
|
7,261 |
|
|
7,594 |
|
|
8,689 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization |
|
|
(458 |
) |
|
(469 |
) |
|
(467 |
) |
|
(494 |
) |
| |
Stock-based compensation |
|
|
(160 |
) |
|
(215 |
) |
|
(210 |
) |
|
(273 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
6,303 |
|
|
6,577 |
|
|
6,917 |
|
|
7,922 |
|
| |
|
|
|
|
|
|
|
|
|
Adjusted Cashflow from Operations/Adjusted EBITDA |
|
|
(2,081 |
) |
|
(2,685 |
) |
|
(4,233 |
) |
|
(2,778 |
) |
| |
|
|
|
|
|
|
|
|
|
Note 1: Gross profit before inventory provisions is a non-GAAP financial measure. See "Use of Non-GAAP Performance
Measures".
16
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Comparison of the three and six months ended August 31, 2016 and August 31, 2015
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Hardware and other |
|
|
9,530 |
|
|
22,613 |
|
|
(13,083 |
) |
|
18,152 |
|
|
46,177 |
|
|
(28,025 |
) |
Services |
|
|
3,700 |
|
|
4,304 |
|
|
(604 |
) |
|
7,623 |
|
|
7,080 |
|
|
543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,230 |
|
|
26,917 |
|
|
(13,687 |
) |
|
25,775 |
|
|
53,257 |
|
|
(27,482 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
and other sales include both the microwave backhaul equipment shipped and the related software upgrades. The Services category includes software maintenance contracts, extended
warranty programs and site planning and installation services. Hardware and related software sales revenue declined, primarily as a result of decreases in sales through the Nokia Channel. The change
in services revenue relates to the timing of installation services contracts with Tier 1 carriers in both India and North America.
We
analyze our sales according to geographic region, and target our product development strategy and the location of our sales and marketing resources according to where we believe
opportunity exists. The table below displays this information for the three months ended August 31, 2016 and August 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31, 2016 |
|
Three Months Ended
August 31, 2015 |
|
|
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Canada |
|
|
771 |
|
|
— |
|
|
771 |
|
|
6% |
|
|
898 |
|
|
— |
|
|
898 |
|
|
3% |
|
Europe, Middle East & Africa |
|
|
1,424 |
|
|
2,895 |
|
|
4,319 |
|
|
33% |
|
|
2,060 |
|
|
7,767 |
|
|
9,827 |
|
|
37% |
|
India |
|
|
1,952 |
|
|
212 |
|
|
2,164 |
|
|
16% |
|
|
7,307 |
|
|
1,412 |
|
|
8,719 |
|
|
32% |
|
United States |
|
|
3,581 |
|
|
— |
|
|
3,581 |
|
|
27% |
|
|
5,382 |
|
|
19 |
|
|
5,401 |
|
|
20% |
|
Rest of World |
|
|
2,380 |
|
|
15 |
|
|
2,395 |
|
|
18% |
|
|
1,379 |
|
|
693 |
|
|
2,072 |
|
|
8% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,108 |
|
|
3,122 |
|
|
13,230 |
|
|
100% |
|
|
17,026 |
|
|
9,891 |
|
|
26,917 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The table below displays the geographic comparatives for the six months ended August 31, 2016 and August 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
August 31, 2016 |
|
Six Months Ended
August 31, 2015 |
|
|
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Canada |
|
|
1,416 |
|
|
— |
|
|
1,416 |
|
|
6% |
|
|
1,580 |
|
|
— |
|
|
1,580 |
|
|
3% |
|
Europe, Middle East & Africa |
|
|
2,318 |
|
|
7,507 |
|
|
9,825 |
|
|
38% |
|
|
3,667 |
|
|
19,270 |
|
|
22,937 |
|
|
43% |
|
India |
|
|
3,405 |
|
|
266 |
|
|
3,671 |
|
|
14% |
|
|
10,572 |
|
|
1,985 |
|
|
12,557 |
|
|
24% |
|
United States |
|
|
7,016 |
|
|
— |
|
|
7,016 |
|
|
27% |
|
|
11,342 |
|
|
19 |
|
|
11,361 |
|
|
21% |
|
Rest of World |
|
|
3,733 |
|
|
114 |
|
|
3,847 |
|
|
15% |
|
|
2,465 |
|
|
2,357 |
|
|
4,822 |
|
|
9% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,888 |
|
|
7,887 |
|
|
25,775 |
|
|
100% |
|
|
29,626 |
|
|
23,631 |
|
|
53,257 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Gross Profit before inventory provisions |
|
|
4,222 |
|
|
4,715 |
|
|
(493 |
) |
|
8,114 |
|
|
10,559 |
|
|
(2,445 |
) |
| |
(Note 1) |
|
|
31.9% |
|
|
17.5% |
|
|
14.4% |
|
|
31.5% |
|
|
19.8% |
|
|
11.7% |
|
Inventory provisions |
|
|
365 |
|
|
730 |
|
|
(365 |
) |
|
365 |
|
|
1,025 |
|
|
(660 |
) |
Gross Profit |
|
|
3,857 |
|
|
3,985 |
|
|
(128 |
) |
|
7,749 |
|
|
9,534 |
|
|
(1,785 |
) |
|
|
|
29.2% |
|
|
14.8% |
|
|
14.3% |
|
|
30.1% |
|
|
17.9% |
|
|
12.2% |
|
Note 1: Gross profit before inventory provisions is a non-GAAP financial measure. See "Use of Non-GAAP Performance
Measures".
Our gross profit percentage improved during the three and six months ended August 31, 2016 compared to the same periods in the prior fiscal
year. This improvement relates primarily to a shift in both product and customer mix. A less significant portion of our sales are flowing through OEM channels, which traditionally have a lower margin.
In addition a lower percentage of our sales are being derived from shipments to low margin geographic regions like India.
Expenses
Research and Development ("R&D")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
2,027 |
|
|
3,875 |
|
|
(1,848 |
) |
|
4,136 |
|
|
8,108 |
|
|
(3,972 |
) |
18
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
R&D
spending is lower as a result of decreased spending following restructuring activities that took place in FY2016. Not only has there been a significant reduction in the size of our
R&D staff in both China and Canada but we have scaled back the number of programs we are working on. As a result, R&D contractor spending and materials spending for prototype development and software
have both decreased as well.
|
|
|
|
|
|
|
|
|
|
Q2 FY2017
vs.
Q2 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending – international staff levels down by approximately 50% |
|
|
(0.9 |
) |
|
(2.5 |
) |
Professional fees, contractor services and government incentives in China |
|
|
(0.3 |
) |
|
(0.4 |
) |
Material spending on prototypes and software |
|
|
(0.6 |
) |
|
(1.1 |
) |
| |
|
|
|
|
|
|
|
|
(1.8 |
) |
|
(4.0 |
) |
| |
|
|
|
|
|
Sales and Marketing ("S&M")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
1,774 |
|
|
3,052 |
|
|
(1,278 |
) |
|
3,795 |
|
|
6,296 |
|
|
(2,501 |
) |
The
S&M organization, which includes marketing, product line management, customer service and sales was also impacted by staff reductions in fiscal year 2016. With the objective of
reducing spending in the organization we reduced travel & living disbursements as well as professional and consulting fees.
|
|
|
|
|
|
|
|
|
|
Q2 FY2017
vs.
Q2 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending; results primarily from global staff reductions in FY2016 |
|
|
(0.7 |
) |
|
(1.5 |
) |
Professional fees and contractor spending |
|
|
(0.4 |
) |
|
(0.6 |
) |
Travel & Living |
|
|
(0.2 |
) |
|
(0.4 |
) |
| |
|
|
|
|
|
|
|
|
(1.3 |
) |
|
(2.5 |
) |
| |
|
|
|
|
|
19
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
General and Administrative ("G&A")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Breakdown by functional area: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance, human resources and executive office |
|
|
1,225 |
|
|
1,822 |
|
|
(597 |
) |
|
2,457 |
|
|
3,630 |
|
|
(1,173 |
) |
Operations organization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross operations spending |
|
|
2,057 |
|
|
2,478 |
|
|
(421 |
) |
|
4,155 |
|
|
5,014 |
|
|
(859 |
) |
| |
Portion to be recovered through Cost of Sales |
|
|
(410 |
) |
|
(1,001 |
) |
|
591 |
|
|
(896 |
) |
|
(2,198 |
) |
|
1,302 |
|
DragonWave HFCL spending |
|
|
248 |
|
|
304 |
|
|
(56 |
) |
|
535 |
|
|
643 |
|
|
(108 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,120 |
|
|
3,603 |
|
|
(483 |
) |
|
6,251 |
|
|
7,089 |
|
|
(838 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A
expenses have decreased across all functional areas, however, as sales have declined the recovery of direct operations spending through Cost of Sales has also declined.
Changes to G&A Expenses in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q2 FY2017
vs.
Q2 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending |
|
|
(0.5 |
) |
|
(1.1 |
) |
Professional fees and insurance costs |
|
|
(0.5 |
) |
|
(0.9 |
) |
Travel & Living |
|
|
(0.1 |
) |
|
(0.2 |
) |
Lower spending on rent and consumable materials for operations |
|
|
(0.2 |
) |
|
(0.3 |
) |
DragonWave HFCL spending (India) |
|
|
(0.1 |
) |
|
(0.1 |
) |
Warehousing costs |
|
|
0.3 |
|
|
0.5 |
|
Operations spending not recovered through Cost of Sales (due to decreased volumes) |
|
|
0.6 |
|
|
1.3 |
|
| |
|
|
|
|
|
|
|
|
(0.5 |
) |
|
(0.8 |
) |
| |
|
|
|
|
|
Goodwill Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
— |
|
|
(11,927 |
) |
|
11,927 |
|
|
— |
|
|
(11,927 |
) |
|
11,927 |
|
20
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
We recorded a non-cash impairment charge of $11.9 million in the second quarter of fiscal year 2016 after performing our annual goodwill impairment test
which indicated the carrying value of the goodwill was fully impaired.
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
94 |
|
|
149 |
|
|
(55 |
) |
|
184 |
|
|
332 |
|
|
(148 |
) |
The
amortization of software has decreased as the net book value of Infrastructure Systems Software and Computer Software has declined.
Accretion Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
33 |
|
|
61 |
|
|
(28 |
) |
|
68 |
|
|
132 |
|
|
(64 |
) |
During
the three and six months ended August 31, 2016 we incurred accretion expenses associated with a termination liability in connection with the termination of a services
agreement with Nokia discussed above under "Recent Developments–Nokia Sales Channel Update". The accretion expense in the three and six months ended August 31, 2015 includes both
the accretion expense associated with the termination liability and the accretion expense associated with a capital lease.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
354 |
|
|
560 |
|
|
(206 |
) |
|
736 |
|
|
1,091 |
|
|
(355 |
) |
Interest
expense relates primarily to interest on our debt facility, this expense decreased in the three and six month period ending August 31, 2016 compared with the same period
in the prior year because the weighted average debt outstanding decreased between fiscal year 2017 and fiscal year 2016.
During
the three and six months ended August 31, 2016 the weighted average debt outstanding was $17.8 million and $18.8 million (three and six months ended
August 31, 2015–$33.4 million and $33.0 million). Interest rates vary with market rate fluctuations, with loans bearing interest in the range of 3% to 4% above the
applicable base rates.
21
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Warrant Issuance Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
469 |
|
|
— |
|
|
469 |
|
|
561 |
|
|
— |
|
|
561 |
|
In
April 2016 and August 2016 we completed equity offerings which included the issuance of warrants. Of the total equity issuance costs, a portion was attributed to the
warrants specifically and expensed to our consolidated statement of operations for the three and six months ended August 31, 2016.
Fair Value Adjustment–Warrant Liability
(Gain)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(602 |
) |
|
(373 |
) |
|
(229 |
) |
|
(846 |
) |
|
(895 |
) |
|
49 |
|
The
warrant liability is required to be presented at its estimated fair value as at each balance sheet date. Increases or decreases in fair value of the warrants are included as a
component of other income (expense) in our consolidated statement of operations. The income for the three and six months ended August 31, 2016 related to the warrants which were issued pursuant
to the offerings in August 2016, April 2016, August 2014 and September 2013.
Foreign Exchange Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
68 |
|
|
214 |
|
|
(146 |
) |
|
220 |
|
|
294 |
|
|
(74 |
) |
The
foreign exchange 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 six months ended August 31, 2016 the most significant impact on the foreign exchange loss came from the translation of the foreign denominated liabilities to U.S. dollars.
22
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Income Taxes Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Six Months Ended |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
August 31,
2016 |
|
August 31,
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
220 |
|
|
1,620 |
|
|
(1,400 |
) |
|
382 |
|
|
1,687 |
|
|
(1,305 |
) |
The
tax expense in both the three and six months ended August 31, 2016 reflects the anticipated payment of cash taxes in India and in entities which perform services for
DragonWave internationally including in China.
In
the prior fiscal year the tax expense is comprised of two elements. An expense of $0.1 million and $0.2 million was recognized for the anticipated payment of cash taxes
in the three and six months ended August 31, 2015 respectively. The second element relates to the creation of a valuation allowance. As of August 31, 2015 our deferred tax assets related
to net operating loss carry-forwards in the United States. During the three months ended August 31, 2015 we recorded an increase in the valuation allowance of $1.5 million as
management believed it was more likely than not that the related deferred tax assets would not be realized. There are no deferred tax assets recorded as at August 31, 2016.
Use of Non-GAAP Performance Measures
"Gross profit before inventory provisions"
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.
The
most directly comparable GAAP measure presented in our consolidated interim financial statements for the three and six months ended August 31, 2016 to "Gross profit before
inventory provisions" is "Gross profit".
"Adjusted Cashflow from Operations/Adjusted EBITDA"
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
23
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 six months ended August 31, 2016 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.
Reconciliation
of Adjusted Cashflow from Operations/Adjusted EBITDA to Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY17
Q2 |
|
FY17
Q1 |
|
FY16
Q4 |
|
FY16
Q3 |
|
Adjusted Cashflow from Operations/Adjusted EBITDA |
|
|
(2,081 |
) |
|
(2,685 |
) |
|
(4,233 |
) |
|
(2,778 |
) |
Include the following items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Stock-based compensaton |
|
|
(160 |
) |
|
(215 |
) |
|
(210 |
) |
|
(273 |
) |
| |
Inventory provisions |
|
|
(365 |
) |
|
— |
|
|
(3,181 |
) |
|
(210 |
) |
| |
Amortization of Property, Plant and Equipment |
|
|
(458 |
) |
|
(469 |
) |
|
(467 |
) |
|
(494 |
) |
| |
Amortization of intangible assets |
|
|
(94 |
) |
|
(90 |
) |
|
(96 |
) |
|
(149 |
) |
| |
Accretion expense |
|
|
(33 |
) |
|
(35 |
) |
|
(37 |
) |
|
(36 |
) |
| |
Restructuring expense |
|
|
— |
|
|
— |
|
|
(130 |
) |
|
(1,419 |
) |
| |
Interest expense |
|
|
(354 |
) |
|
(382 |
) |
|
(424 |
) |
|
(499 |
) |
| |
Warrant issuance expenses |
|
|
(469 |
) |
|
(92 |
) |
|
— |
|
|
— |
|
| |
Fair value adjustment–warrant liability |
|
|
602 |
|
|
244 |
|
|
(69 |
) |
|
293 |
|
| |
Foreign exchange (loss)/gain |
|
|
(68 |
) |
|
(152 |
) |
|
(307 |
) |
|
270 |
|
| |
Income tax expense |
|
|
(220 |
) |
|
(162 |
) |
|
(129 |
) |
|
(459 |
) |
| |
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(3,700 |
) |
|
(4,038 |
) |
|
(9,283 |
) |
|
(5,754 |
) |
| |
|
|
|
|
|
|
|
|
|
"Days Sales Outstanding excluding Tier 1 carrier in India"
In this MD&A we break out "Days Sales Outstanding excluding Tier 1 carrier in India" as this measure allows management to
evaluate our Days Sales Outstanding (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
24
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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
and six months ended August 31, 2016 to "Days Sales Outstanding excluding Tier 1 carrier in India" is "Days Sales Outstanding".
Liquidity and Capital Resources
The following table sets out some of the key balance sheet metrics:
|
|
|
|
|
|
|
|
|
|
|
As at
August 31,
2016 |
|
As at
February 29,
2016 |
|
Key Balance Sheet Amounts and Ratios: |
|
|
|
|
|
|
|
| |
Cash and Cash Equivalents |
|
|
7,471 |
|
|
4,277 |
|
| |
Working Capital |
|
|
1,954 |
|
|
403 |
|
| |
Long Term Assets |
|
|
3,587 |
|
|
4,325 |
|
| |
Long Term Liabilities |
|
|
3,879 |
|
|
501 |
|
| |
Working Capital Ratio |
|
|
1:1 |
|
|
1:1 |
|
| |
Days Sales Outstanding in accounts receivable (Note 1) |
|
|
95 days |
|
|
114 days |
|
| |
Inventory Turnover |
|
|
1.2 times |
|
|
1.6 times |
|
Note 1: Days Sales Outstanding in accounts receivable excluding a Tier 1 carrier in India at August 31, 2016 were 60 days
(68 days at February 29, 2016).This is a non-GAAP measure. See "Use of Non-GAAP performance measures".
Cash and Cash Equivalents
As at August 31, 2016, we had $7.5 million in Cash and Cash Equivalents ("Cash"), representing a $3.2 million
increase from the Cash balance at February 29, 2016.
25
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The
following table explains the change in Cash during the three and six months ended August 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
Three months ended
August 31, 2016 |
|
Six months ended
August 31, 2016 |
|
Operating activities |
|
|
|
|
|
|
|
Net loss |
|
|
(3,700 |
) |
|
(7,738 |
) |
Items not affecting cash |
|
|
157 |
|
|
695 |
|
| |
|
|
|
|
|
Net loss excluding items not affecting cash |
|
|
(3,543 |
) |
|
(7,043 |
) |
| |
|
|
|
|
|
Working Capital Changes |
|
|
|
|
|
|
|
| |
Trade receivables |
|
|
1,121 |
|
|
5,107 |
|
| |
Inventory |
|
|
611 |
|
|
1 |
|
| |
Other current assets |
|
|
(209 |
) |
|
384 |
|
| |
Accounts payable and accrued liabilities |
|
|
2,223 |
|
|
1,475 |
|
| |
Deferred revenue and other long term liabilities |
|
|
(651 |
) |
|
(1,204 |
) |
| |
|
|
|
|
|
Changes in non-cash working capital items |
|
|
3,095 |
|
|
5,763 |
|
| |
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
| |
Acquisition of property and equipment |
|
|
(148 |
) |
|
(317 |
) |
| |
Acquisition of intangible assets |
|
|
(20 |
) |
|
(56 |
) |
| |
|
|
|
|
|
|
|
|
(168 |
) |
|
(373 |
) |
| |
|
|
|
|
|
Financing activities–excluding debt repayment |
|
|
|
|
|
|
|
| |
Repayments on capital lease obligation |
|
|
(12 |
) |
|
(32 |
) |
| |
Issuance of common shares and warrants net (Note 1) |
|
|
5,985 |
|
|
10,001 |
|
| |
|
|
|
|
|
|
|
|
5,973 |
|
|
9,969 |
|
| |
|
|
|
|
|
Cash generated before debt repayment |
|
|
5,357 |
|
|
8,316 |
|
| |
|
|
|
|
|
Debt repayment |
|
|
(1,837 |
) |
|
(5,122 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,951 |
|
|
4,277 |
|
| |
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
7,471 |
|
|
7,471 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Note 1: |
|
|
|
|
|
Issuance of common shares and warrants net |
|
|
5,985 |
|
|
Less: warrant issuance costs (reflected in Net Loss) |
|
|
(469 |
) |
|
Less: proceeds options and warrants |
|
|
(28 |
) |
|
| |
|
|
|
|
Net proceeds from the August 2016 direct equity offering |
|
|
5,488 |
|
|
| |
|
|
|
|
26
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Key points associated with the Cash increase include:
- •
- We utilized cash from operations during both the three and six month periods because we continue to operate in a net
loss position;
- •
- Net working capital changes provided cash for the business;
- •
- Investments in the acquisition of property and equipment as well as in software continue to be small;
- •
- We increased our cash resources through the issuance of common shares and warrants in both the three and six months ended
August 31, 2016; and,
- •
- We continued to make debt repayments in fiscal year 2017 which depleted our cash resources.
|
|
|
|
|
|
|
|
Changes in working capital
|
|
May 31, 2016
to
August 31, 2016 |
|
February 29, 2016
to
August 31, 2016 |
|
Beginning working capital balance |
|
|
667 |
|
|
403 |
|
Cash and cash equivalents |
|
|
3,520 |
|
|
3,194 |
|
Trade receivables |
|
|
(1,121 |
) |
|
(5,107 |
) |
Inventory |
|
|
(611 |
) |
|
(1 |
) |
Other current assets |
|
|
209 |
|
|
(384 |
) |
Debt facility |
|
|
1,837 |
|
|
5,122 |
|
Accounts payable and accrued liabilities |
|
|
(2,223 |
) |
|
(1,511 |
) |
Deferred revenue |
|
|
625 |
|
|
1,165 |
|
Deferred tax liability |
|
|
(14 |
) |
|
13 |
|
Warrant liability |
|
|
(935 |
) |
|
(940 |
) |
| |
|
|
|
|
|
Net change in working capital |
|
|
1,287 |
|
|
1,551 |
|
| |
|
|
|
|
|
Ending working capital balance |
|
|
1,954 |
|
|
1,954 |
|
| |
|
|
|
|
|
Our trade receivables balance decreased by $5.1 million between February 29, 2016 and August 31, 2016 due to our
continued collection efforts in the three and six months ended August 31, 2016. Our days sales outstanding performance improved from 114 days at February 29, 2016 to
95 days at August 31, 2016. Our allowance for doubtful accounts continues to represent a small percentage of our total trade receivables outstanding (August 31, 2016-1.8%;
February 29, 2016-1.2%).
As
at August 31, 2016, two customers exceeded 10% of the total receivable balance. These customers represented 37% and 14% of the trade receivables balance (February 29,
2016 – two customers represented 52% and 16% of the trade receivables balance).
27
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Included
in G&A expenses is a nominal bad debt expense for the three and six month period ended August 31, 2016 (three and six months ended August 31,
2015 – expense of $0.1 million and $0.1 million).
The inventory balance remained unchanged relative to the closing balance at February 29, 2016. There were however, changes by
product category and those changes are outlined below in USD millions:
|
|
|
|
|
Closing inventory February 29, 2016 |
|
|
22.7 |
|
Increase in Harmony Enhanced |
|
|
2.6 |
|
Decrease in Horizon Compact Plus |
|
|
(0.9 |
) |
Decrease in Hub800 |
|
|
(0.7 |
) |
Decrease in Quantum |
|
|
(0.6 |
) |
Decrease in inventory held for customer support & warranty |
|
|
(0.3 |
) |
Other |
|
|
(0.1 |
) |
| |
|
|
|
Net Change in Inventory |
|
|
0.0 |
|
| |
|
|
|
Ending inventory at August 31, 2016 |
|
|
22.7 |
|
| |
|
|
|
We
use an outsourced manufacturing model in which most of the component acquisition and assembly of our products is executed by third parties. Our contract manufacturers currently have
inventory intended for use in the production of our products, and we have purchase orders or demand forecasts in place for raw materials and manufactured products with these contract manufacturers.
The value of the inventory held by our primary contract manufacturer at August 31, 2016 was $13.6 million (February 29,
2016 – $16.8 million).
The accounts payable and accrued liabilities balance increased by $1.5 million between February 29, 2016 and
August 31, 2016 primarily due to increases in purchasing tied to higher sales level. We continue to extend the payment terms with our vendors as we manage the business with limited
cash resources.
Debt Facility
We established an asset based credit facility with Comerica Bank and Export Development Canada which was extended on January 6,
2014 and matured on June 1, 2016. On October 12, 2016 we signed a forbearance agreement (our fourth) related to this credit facility, which will expire on April 1, 2017.
Under the forbearance agreement we are required to a minimum of $1.0 million at Comerica Bank. In addition, the forbearance agreement reduces the facility commitment from $40.0 million
to $30.0 million, includes other compliance requirements and implements more frequent monitoring. As well, warrants to purchase 375,000 common shares will be issued to the lenders at an
exercise price of $4.00 per share. These warrants expire five years from the date of issuance. We are working closely with our lenders to establish a new long term debt facility.
28
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Over
the past twelve month period, we have reduced the balance of the debt facility by $15.8 million from $32.8 million at August 31, 2015 to $17.0 million at
August 31, 2016. (February 29, 2016 – $22.2 million) We also had $1.9 million outstanding against our letter of credit facility at
August 31, 2016 (February 29, 2016 – $1.9 million).
The
credit facility is secured by a first priority charge on all of the assets of DragonWave Inc. and its principal direct and indirect subsidiaries. The terms of the credit
facility include other customary terms, conditions, covenants, and representations and warranties. 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 six months ended August 31, 2016
the weighted average debt outstanding was $17.8 million and $18.8 million (three and six months ended August 31, 2015 – $33.4 million
and $33.0 million) and we recognized $0.3 million and $0.7 million in interest expense related to the debt facility (three and six months ended August 31,
2015 – $0.6 million and $1.1 million).
We
made no further payments on the debt facility between August 31, 2016 and the date of this MD&A.
Equity Offerings and Use of Proceeds
August 2016 Equity Offering
On August 8, 2016 we completed a public offering. Under the terms of the offering, we issued and sold
1,760,880 Class A units at $3.35 and 30,164 Class B units at $3.34, for aggregate gross proceeds of $6.0 million. Concurrent with the underwritten public offering in
the United States, we issued an additional 63,000 Class A Units on a private placement basis to purchasers in Canada for additional gross proceeds of $0.2 million. The
total net proceeds after deducting commission and expenses was $5.5 million. Each Class A unit consisted of one common share, one five-year warrant (the "Long-Term Warrant") to
purchase one common share and two six-month warrants (the "Short-Term Warrant"). Each Class B unit consisted of a pre-funded warrant (the "Pre-Funded Warrant") to purchase one
common share, one Long-Term Warrant and two Short-Term Warrants. The Long-Term Warrants have an exercise price of $4.37 per share, are exercisable immediately and will expire on August 8, 2021.
The Short-Term Warrants have an exercise price of $4.00 per share, are exercisable immediately and will expire on February 8, 2017. The Pre-Funded Warrants are exercisable immediately with no
expiration date, are deemed purchased for a price of $3.34 per underlying common share by virtue of purchasing a Class B Unit and have an exercise price of $0.01 per share. Upon issuance, we
recognized a liability in the amount of $4.0 million for the warrants.
|
|
|
|
|
|
|
|
|
|
|
Intended Use of Proceeds
|
|
Estimated Amount |
|
Actual Use of Proceeds |
|
Actual Amount |
|
Variances |
General corporate purposes |
|
USD$ |
5.5 million |
|
General corporate purposes |
|
USD$ |
0.9 million |
|
No variances to date |
29
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
April 2016 Equity Offering
On April 11, 2016, we issued 599,998 common shares in a registered direct offering, and concurrently in a private
placement, issued warrants to purchase 299,999 common shares (the "2016 Warrants") exercisable at an exercise price of $8.50 until April 11, 2021 (the "April 2016
Equity Offering"). The price per common share and one half of a warrant was $7.25 and resulted in total gross proceeds of $4.4 million (net proceeds of $4.0 million). The warrants
are not exercisable until October 12, 2016. The proceeds from the April 2016 Equity Offering are expected to be used for general corporate purposes, which may include working capital,
general and administrative expenses, capital expenditures and implementation of our strategic priorities.
Upon
issuance, we recognized a liability in the amount of $1.2 million for the April 2016 Warrants.
|
|
|
|
|
|
|
|
|
|
|
Intended Use of Proceeds
|
|
Estimated Amount |
|
Actual Use of Proceeds |
|
Actual Amount |
|
Variances |
General corporate purposes |
|
USD$ |
4.0 million |
|
General corporate purposes |
|
USD$ |
4.0 million |
|
No variances to date |
2013 Equity Offering
On September 23, 2013, pursuant to the public 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 a "2013
Warrant"). Each whole 2013 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.
Subsequent to the Consolidation, 25 whole 2013 Warrants entitled the holder to purchase one common share at an exercise price of $32.50 per share. In connection with the August 2016
public offering, and pursuant to the terms of the 2013 Warrants, the exercise price of the 2013 Warrants was changed, such that 25 whole 2013 Warrants entitle the holder to purchase one common
share at a price of $2.80 per share.
As
at September 23, 2013 we recognized a liability in the amount of $6.4 million for the 2013 Warrants.
Commitments as at August 31, 2016
Future minimum operating lease payments as at August 31, 2016 per fiscal year relate to leases of office and warehouse space.
30
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 |
|
$ |
603 |
|
$ |
525 |
|
$ |
78 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
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.
A
complaint for patent infringement against us was filed but not served on September 9, 2016. We believe that it has no merit and we intend to vigorously defend ourselves in
this matter.
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.
The
following table shows common share activity in the three and six months ended August 31, 2016.
|
|
|
|
|
|
|
Common Shares |
|
Balance at February 29, 2016 |
|
|
3,020,069 |
|
| |
|
|
|
Share issuance |
|
|
599,998 |
|
Other |
|
|
500 |
|
| |
|
|
|
Balance at May 31, 2016 |
|
|
3,620,567 |
|
| |
|
|
|
Share issuance |
|
|
1,823,880 |
|
Exercise of pre-funded warrants |
|
|
30,164 |
|
Exercise of options |
|
|
11,893 |
|
Share issuance – ESPP |
|
|
272 |
|
| |
|
|
|
Balance at August 31, 2016 |
|
|
5,486,776 |
|
| |
|
|
|
31
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The
following is a summary of stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and six months
ended August 31, 2016 |
|
Three and six months
ended August 31, 2015 |
|
|
|
Options |
|
Weighted
Average
Exercise Price
(CAD) |
|
Options |
|
Weighted
Average
Exercise Price
(CAD) |
|
Options at February 29, 2016 and February 28, 2015 |
|
|
276,728 |
|
$ |
32.82 |
|
|
159,421 |
|
$ |
76.34 |
|
Granted |
|
|
82,025 |
|
$ |
6.22 |
|
|
59,608 |
|
$ |
19.29 |
|
Exercised |
|
|
(288 |
) |
$ |
3.00 |
|
|
— |
|
$ |
— |
|
Forfeited |
|
|
(16,205 |
) |
$ |
131.67 |
|
|
(7,283 |
) |
$ |
182.77 |
|
| |
|
|
|
|
|
|
|
|
|
Options at May 31, 2016 and 2015 |
|
|
342,260 |
|
$ |
21.79 |
|
|
211,746 |
|
$ |
56.62 |
|
| |
|
|
|
|
|
|
|
|
|
Granted |
|
|
5,120 |
|
$ |
7.32 |
|
|
160 |
|
$ |
14.50 |
|
Exercised |
|
|
(11,893 |
) |
$ |
3.00 |
|
|
— |
|
$ |
— |
|
Forfeited |
|
|
(26,117 |
) |
$ |
33.48 |
|
|
(20,359 |
) |
$ |
93.78 |
|
| |
|
|
|
|
|
|
|
|
|
Options at August 31, 2016 and 2015 |
|
|
309,370 |
|
$ |
21.28 |
|
|
191,547 |
|
$ |
52.63 |
|
| |
|
|
|
|
|
|
|
|
|
As
at August 31, 2016 the following securities were issued and outstanding: 5,486,776 common shares, options to purchase 309,370 common shares granted under our
Share Based Compensation Plan and 7,982,443 warrants exercisable for 5,946,943 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 October 12, 2016 the following securities were issued and outstanding: 5,487,500 common shares, options to purchase 541,822 common shares granted under our
Share Based Compensation Plan, and 7,982,443 warrants exercisable for 5,946,943 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.
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 six months ended August 31, 2016 a total of 218 and 384 common shares were
purchased by employees at fair market value, while we issued 54 and 94 common shares 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 six
months ended August 31, 2016 was $3 thousand and $6 thousand (three and six months ended August 31, 2015 – $3 thousand and
$6 thousand). The fair value of the unearned ESPP shares as at August 31, 2016 was $2 thousand (August 31,
2015 – $13 thousand). The number of shares held for release, and still restricted under the ESPP at August 31, 2016 was 679
(August 31, 2015-915).
32
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 RSU"s vested during the second quarter of fiscal year 2016 with the exception of 800 RSU's which were cancelled on April 14, 2015.
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 |
|
ME Business Solutions S.à r.l. |
|
Month to Month |
|
$ |
1,700 |
|
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 |
|
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. There can be no assurance that we will secure sub-leases or
that sub-lease terms will be favorable.
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 August 31, 2016, we have provisions totaling $2.7 million on inventory held by contract manufacturers that we do not expect to be fully used.
33
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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.
Categories for financial assets and liabilities
The following table summarizes the carrying values of our financial instruments:
|
|
|
|
|
|
|
|
|
|
August 31,
2016 |
|
February 29,
2016 |
|
Assets held at fair value (A) |
|
|
7,471 |
|
|
4,277 |
|
Loans and receivables (B) |
|
|
13,951 |
|
|
19,110 |
|
Other financial liabilities (C) |
|
|
41,005 |
|
|
44,434 |
|
Liabilities held at fair value (D) |
|
|
4,477 |
|
|
120 |
|
- (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)
- Includes
warrant liability
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.
Level 1 – Unadjusted
quoted prices at the measurement date for identical assets or liabilities in active markets.
Level 2 – Observable
inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3 – Significant
unobservable inputs which are supported by little or no market activity.
Cash
and cash equivalents are measured using Level 1 inputs.
The
September 23, 2013 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs. Significant assumptions used at
August 31, 2016 for the warrants include a dividend yield of 0%, a 1% assumption that the fundamental transaction will happen every year, volatility of 75%, and a risk free spot rate
term structure.
34
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The
April 11, 2016 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs. Significant assumptions used at
August 31, 2016 for the warrants include a dividend yield of 0%, a 1% assumption that the fundamental transaction will happen every year, volatility of 75%, and a risk free spot rate
term structure.
The
August 8, 2016 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs. Significant assumptions used at
August 31, 2016 for the warrants include a dividend yield of 0%, a 1% assumption that the fundamental transaction will happen every year, volatility of 75%, and a risk free spot rate
term structure.
As
at August 31, 2016 we held the following Level 3 financial instruments carried at fair value on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
Total |
|
Financial Liabilities |
|
|
|
|
|
|
|
Warrant liability |
|
|
4,477 |
|
|
4,477 |
|
As
at February 29, 2016, we held the following Level 3 financial instruments carried at fair value on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
Total |
|
Financial Liabilities |
|
|
|
|
|
|
|
Warrant liability |
|
|
3 |
|
|
3 |
|
A
reconciliation of the Level 3 warrant liability measured at fair value for the three and six months ended August 31, 2016 follows:
|
|
|
|
|
|
|
|
|
|
Warrants |
|
$ |
|
Balance at February 29, 2016 |
|
|
2,088,750 |
|
|
3 |
|
Warrant issuance |
|
|
299,999 |
|
|
1,175 |
|
Fair value adjustment – warrant liability |
|
|
— |
|
|
(249 |
) |
| |
|
|
|
|
|
Balance at May 31, 2016 |
|
|
2,388,749 |
|
|
929 |
|
| |
|
|
|
|
|
Warrant issuance |
|
|
5,562,132 |
|
|
4,028 |
|
Fair value adjustment – warrant liability |
|
|
— |
|
|
(480 |
) |
| |
|
|
|
|
|
Balance at August 31, 2016 |
|
|
7,950,881 |
|
|
4,477 |
|
| |
|
|
|
|
|
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 six ended August 31, 2016 was $0.4 million and
35
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
$0.7 million
on our cash, cash equivalents and debt facility (three and six months ended August 31, 2015 – expense of $0.6 million and
$1.1 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 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. As at August 31, 2016
and August 31, 2015, we had no forward contracts in place. All foreign currency gains and losses related to forward contracts are included in foreign exchange gain (loss) in the consolidated
statement of operations.
As
of August 31, 2016, if the U.S. dollar had appreciated 1% against all foreign currencies, with all other variables held constant, the impact of this foreign currency
change on our foreign denominated financial instruments would have resulted in a nominal increase in after-tax net loss for the three and six months ended August 31, 2016 (three and six months
ended August 31, 2015 – increase of $35 thousand) with an equal and opposite effect if the U.S. dollar had depreciated 1% against all foreign
currencies at August 31, 2016.
Economic Dependence
For the three months ended August 31, 2016, we were dependent on three key customers with respect to revenue. These customers
represented approximately 24%, 13% and 11% of sales during that three month period [three months ended August 31, 2015 – three customers
represented 37%, 26% and 10%].
We
were dependent on three key customers with respect to revenue in the six months ended August 31, 2016. These customers represented approximately 31%, 14% and 10% of sales for
the six months ended August 31, 2016 [six months ended August 31, 2015 – two customers represented 44% and 19%].
Controls and Procedures
At the end of the period covered by this MD&A (such period being the three and six months ended August 31, 2016), 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
36
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
CEO
and CFO have concluded that our disclosure controls and procedures were effective as at August 31, 2016 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, 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 our disclosure controls and procedures as of August 31, 2016.
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.
37
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 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.
38
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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.
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.
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
39
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 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 for the year beginning after December 15, 2016. 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.
In
November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes". The amendments in this Update eliminate the current requirement for companies to
separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. Instead, companies will be required to classify all deferred
tax liabilities and assets as non-current. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption is permitted. We are currently
assessing the impact this amendment will have on our consolidated financial statements.
40
DragonWave Inc.
Management's Discussion and Analysis
For the three and six months ended August 31, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
In
February 2016, the FASB issued ASU No. 2016-02, "Leases". The amendments in this Update create Topic 842, Leases, and supersede the lease requirements in Topic 840,
Leases. The Update will require companies to recognize a right-of-use asset and a lease liability in their balance sheets, while still distinguishing between finance leases and operating leases. For
finance leases, the lessee would recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income, and for operating leases,
the lessee would recognize a straight-line lease expense. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are
currently assessing the impact this amendment will have on our consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting". The amendments in this Update simplify several aspects of the accounting for
employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption is permitted. We are currently assessing the impact this amendment will have on our
consolidated financial statements.
41
QuickLinks
