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Exhibit 99.3
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 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 nine months ended November 30, 2016. This MD&A should be read in conjunction with our unaudited consolidated interim financial statements and corresponding notes for the three and
nine months ended November 30, 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 nine months ended November 30, 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 January 11, 2017 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 plans and objectives for managing cash flows and liquidity risks; 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
1
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
other
purposes. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are made as of the date of this MD&A and we do not undertake to publicly
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent expressly required by law.
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 exposure to credit risk for accounts receivable;
- •
- 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 with customers who previously purchased 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 dependence on the development and growth of the market for high-capacity wireless communications services;
2
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- the allocation of radio spectrum and regulatory approvals for our products;
- •
- the ability of our customers to secure a license for applicable radio spectrum;
- •
- changes in government regulation or industry standards that may limit the potential market for
our products;
- •
- currency fluctuations;
- •
- our ability to protect our own intellectual property and potential harm to our business if we infringe the intellectual
property rights of others;
- •
- risks associated with software licensed by us;
- •
- a change in our tax status or assessment by domestic or foreign tax authorities;
- •
- exposure to risks resulting from our international sales and operations, including the requirement to comply with export
control and economic sanctions laws;
- •
- 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;
- •
- risk that we will be unable to comply with the Nasdaq listing requirement to maintain a minimum shareholder's equity
greater than $2.5 million or alternative requirement which would require that we transact only in the Toronto Stock exchange which may reduce the liquidity of
our stock;
- •
- 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;
3
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- 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.
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 nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
SELECTED FINANCIAL INFORMATION
|
|
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Three Months Ended |
|
Nine Months Ended |
|
(Unaudited)
|
|
November 30
2016 |
|
November 30
2015 |
|
November 30
2014 |
|
November 30
2016 |
|
November 30
2015 |
|
November 30
2014 |
|
REVENUE |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Hardware and other |
|
|
7,743 |
|
|
15,713 |
|
|
44,686 |
|
|
25,895 |
|
|
61,890 |
|
|
107,490 |
|
| |
Services |
|
|
2,446 |
|
|
5,284 |
|
|
2,634 |
|
|
10,069 |
|
|
12,364 |
|
|
6,534 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,189 |
|
|
20,997 |
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|
47,320 |
|
|
35,964 |
|
|
74,254 |
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|
114,024 |
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| |
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COST OF SALES |
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| |
Hardware and other |
|
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6,319 |
|
|
12,989 |
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|
38,062 |
|
|
20,123 |
|
|
51,197 |
|
|
90,850 |
|
| |
Services |
|
|
987 |
|
|
2,864 |
|
|
1,268 |
|
|
4,844 |
|
|
7,354 |
|
|
2,092 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,306 |
|
|
15,853 |
|
|
39,330 |
|
|
24,967 |
|
|
58,551 |
|
|
92,942 |
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| |
|
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|
|
|
|
|
|
|
|
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|
|
Gross profit before inventory provisions (note 1) |
|
|
2,883 |
|
|
5,144 |
|
|
7,990 |
|
|
10,997 |
|
|
15,703 |
|
|
21,082 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.3% |
|
|
24.5% |
|
|
16.9% |
|
|
30.6% |
|
|
21.1% |
|
|
18.5% |
|
| |
Inventory provision |
|
|
221 |
|
|
210 |
|
|
272 |
|
|
586 |
|
|
1,235 |
|
|
1,585 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,662 |
|
|
4,934 |
|
|
7,718 |
|
|
10,411 |
|
|
14,468 |
|
|
19,497 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.1% |
|
|
23.5% |
|
|
16.3% |
|
|
28.9% |
|
|
19.5% |
|
|
17.1% |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development |
|
|
1,891 |
|
|
2,873 |
|
|
4,827 |
|
|
6,027 |
|
|
10,981 |
|
|
14,386 |
|
| |
Selling and marketing |
|
|
1,931 |
|
|
2,418 |
|
|
3,557 |
|
|
5,726 |
|
|
8,714 |
|
|
10,230 |
|
| |
General and administrative |
|
|
3,200 |
|
|
3,398 |
|
|
3,808 |
|
|
9,451 |
|
|
10,487 |
|
|
11,797 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,022 |
|
|
8,689 |
|
|
12,192 |
|
|
21,204 |
|
|
30,182 |
|
|
36,413 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other items |
|
|
(4,360 |
) |
|
(3,755 |
) |
|
(4,474 |
) |
|
(10,793 |
) |
|
(15,714 |
) |
|
(16,916 |
) |
Other Expenses |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Goodwill impairment |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(11,927 |
) |
|
— |
|
| |
Restructuring Costs |
|
|
— |
|
|
(1,419 |
) |
|
— |
|
|
— |
|
|
(1,419 |
) |
|
— |
|
| |
Amortization of intangible assets |
|
|
(98 |
) |
|
(149 |
) |
|
(333 |
) |
|
(282 |
) |
|
(481 |
) |
|
(981 |
) |
| |
Accretion expense |
|
|
(33 |
) |
|
(36 |
) |
|
(69 |
) |
|
(101 |
) |
|
(168 |
) |
|
(109 |
) |
| |
Interest expense |
|
|
(346 |
) |
|
(499 |
) |
|
(301 |
) |
|
(1,082 |
) |
|
(1,590 |
) |
|
(1,105 |
) |
| |
Warrant issuance expenses |
|
|
— |
|
|
— |
|
|
— |
|
|
(561 |
) |
|
— |
|
|
(221 |
) |
| |
Fair value adjustment — warrant liability |
|
|
798 |
|
|
293 |
|
|
1,880 |
|
|
1,644 |
|
|
1,188 |
|
|
1,028 |
|
| |
Gain on change in estimate |
|
|
— |
|
|
— |
|
|
200 |
|
|
— |
|
|
— |
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|
301 |
|
| |
Gain on sale of fixed assets |
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|
— |
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— |
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18 |
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|
— |
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|
— |
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|
18 |
|
| |
Foreign exchange gain (loss) |
|
|
141 |
|
|
270 |
|
|
145 |
|
|
(79 |
) |
|
(24 |
) |
|
519 |
|
| |
|
|
|
|
|
|
|
|
|
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|
|
|
Loss before income taxes |
|
|
(3,898 |
) |
|
(5,295 |
) |
|
(2,934 |
) |
|
(11,254 |
) |
|
(30,135 |
) |
|
(17,466 |
) |
| |
Income tax expense |
|
|
264 |
|
|
459 |
|
|
502 |
|
|
646 |
|
|
2,146 |
|
|
1,047 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and comprehensive loss |
|
|
(4,162 |
) |
|
(5,754 |
) |
|
(3,436 |
) |
|
(11,900 |
) |
|
(32,281 |
) |
|
(18,513 |
) |
| |
Net loss (income) attributable to non-controlling interest |
|
|
43 |
|
|
(493 |
) |
|
(320 |
) |
|
(257 |
) |
|
(892 |
) |
|
(739 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss attributable to shareholders |
|
|
(4,119 |
) |
|
(6,247 |
) |
|
(3,756 |
) |
|
(12,157 |
) |
|
(33,173 |
) |
|
(19,252 |
) |
Basic & Diluted loss per share |
|
|
(0.72 |
) |
|
(2.07 |
) |
|
(1.25 |
) |
|
(2.77 |
) |
|
(11.01 |
) |
|
(7.32 |
) |
Basic & Diluted weighted average shares outstanding |
|
|
5,732,584 |
|
|
3,018,034 |
|
|
3,010,178 |
|
|
4,383,406 |
|
|
3,013,641 |
|
|
2,629,548 |
|
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 nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The principal differences between the three and nine months ended November 30, 2016 and November 30, 2015 are explained
as follows:
- •
- In the three and nine month period ended November 30, 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, and a decrease in service revenue from installation projects with Tier 1 carriers in
both the United States and India.
- •
- Our gross profit percentage was higher during the three and nine months ended November 30, 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 nine months ended November 30, 2016 were $1.7 million and
$9.0 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 nine months ended November 30, 2016 and November 30, 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 nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
As at
November 30,
2016 |
|
As at
February 29,
2016 |
|
Assets |
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
|
|
4,486 |
|
|
4,277 |
|
| |
Trade receivables |
|
|
13,442 |
|
|
18,986 |
|
| |
Inventory |
|
|
22,086 |
|
|
22,702 |
|
| |
Other current assets |
|
|
2,017 |
|
|
2,777 |
|
| |
|
|
|
|
|
|
|
|
42,031 |
|
|
48,742 |
|
Long Term Assets |
|
|
|
|
|
|
|
| |
Property and equipment |
|
|
2,873 |
|
|
3,702 |
|
| |
Intangible assets |
|
|
407 |
|
|
623 |
|
| |
|
|
|
|
|
|
|
|
3,280 |
|
|
4,325 |
|
Total Assets |
|
|
45,311 |
|
|
53,067 |
|
| |
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
| |
Debt facility |
|
|
17,030 |
|
|
22,152 |
|
| |
Accounts payable and accrued liabilities |
|
|
23,202 |
|
|
23,832 |
|
| |
Deferred revenue |
|
|
617 |
|
|
1,944 |
|
| |
Deferred tax liability |
|
|
281 |
|
|
294 |
|
| |
Warrant liability |
|
|
435 |
|
|
117 |
|
| |
|
|
|
|
|
|
|
|
41,565 |
|
|
48,339 |
|
Long Term Liabilities |
|
|
|
|
|
|
|
| |
Deferred revenue |
|
|
514 |
|
|
498 |
|
| |
Warrant liability |
|
|
3,061 |
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
3,575 |
|
|
501 |
|
Shareholders' equity (deficiency) |
|
|
|
|
|
|
|
| |
Capital stock |
|
|
228,435 |
|
|
221,128 |
|
| |
Contributed surplus |
|
|
9,772 |
|
|
9,235 |
|
| |
Deficit |
|
|
(230,382 |
) |
|
(218,225 |
) |
| |
Accumulated other comprehensive loss |
|
|
(9,618 |
) |
|
(9,618 |
) |
| |
|
|
|
|
|
Total Shareholder's equity (deficiency) |
|
|
(1,793 |
) |
|
2,520 |
|
| |
Non-controlling interests |
|
|
1,964 |
|
|
1,707 |
|
| |
|
|
|
|
|
Total Equity |
|
|
171 |
|
|
4,227 |
|
Total Liabilities and Equity |
|
|
45,311 |
|
|
53,067 |
|
| |
|
|
|
|
|
Shares issued & outstanding |
|
|
6,104,008 |
|
|
3,020,069 |
|
7
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 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 |
|
(Unaudited)
|
|
Feb 28
2015
|
|
May 31
2015
|
|
Aug 31
2015
|
|
Nov 30
2015
|
|
Feb 29
2016
|
|
May 31
2016
|
|
Aug 31
2016
|
|
Nov 30
2016
|
|
| |
|
|
|
|
|
|
|
Revenue |
|
|
43,742 |
|
|
26,340 |
|
|
26,917 |
|
|
20,997 |
|
|
12,041 |
|
|
12,545 |
|
|
13,230 |
|
|
10,189 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit before inventory provisions (note 1) |
|
|
9,684 |
|
|
5,844 |
|
|
4,715 |
|
|
5,144 |
|
|
2,684 |
|
|
3,892 |
|
|
4,222 |
|
|
2,883 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross Profit % |
|
|
22.1% |
|
|
22.2% |
|
|
17.5% |
|
|
24.5% |
|
|
22.3% |
|
|
31.0% |
|
|
31.9% |
|
|
28.3% |
|
Inventory provisions |
|
|
1,187 |
|
|
295 |
|
|
730 |
|
|
210 |
|
|
3,181 |
|
|
— |
|
|
365 |
|
|
221 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit after inventory provisions |
|
|
8,497 |
|
|
5,549 |
|
|
3,985 |
|
|
4,934 |
|
|
(497 |
) |
|
3,892 |
|
|
3,857 |
|
|
2,662 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross Profit % after inventory provisions |
|
|
19.4% |
|
|
21.1% |
|
|
14.8% |
|
|
23.5% |
|
|
(4.1% |
) |
|
31.0% |
|
|
29.2% |
|
|
26.1% |
|
Operating Expenses |
|
|
11,304 |
|
|
10,963 |
|
|
10,530 |
|
|
8,689 |
|
|
7,594 |
|
|
7,261 |
|
|
6,921 |
|
|
7,022 |
|
Loss before other items |
|
|
(2,807 |
) |
|
(5,414 |
) |
|
(6,545 |
) |
|
(3,755 |
) |
|
(8,091 |
) |
|
(3,369 |
) |
|
(3,064 |
) |
|
(4,360 |
) |
–(gross profit less operating expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period |
|
|
(2,123 |
) |
|
(5,824 |
) |
|
(20,703 |
) |
|
(5,754 |
) |
|
(9,283 |
) |
|
(4,038 |
) |
|
(3,700 |
) |
|
(4,162 |
) |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
(0.75 |
) |
|
(1.98 |
) |
|
(7.00 |
) |
|
(2.07 |
) |
|
(3.02 |
) |
|
(1.23 |
) |
|
(0.96 |
) |
|
(0.72 |
) |
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic & Diluted |
|
|
3,011,065 |
|
|
3,011,941 |
|
|
3,014,892 |
|
|
3,018,034 |
|
|
3,019,712 |
|
|
3,346,378 |
|
|
4,085,920 |
|
|
5,732,584 |
|
Total Assets |
|
|
121,053 |
|
|
113,587 |
|
|
88,327 |
|
|
69,241 |
|
|
53,067 |
|
|
48,418 |
|
|
50,031 |
|
|
45,311 |
|
Note 1: Gross profit before inventory provisions is a non-GAAP financial measure. See "Use
of Non-GAAP Performance Measures".
Overview
DragonWave is a leading provider of high-capacity packet microwave solutions that drive next-generation IP networks. DragonWave's
carrier-grade point-to-point packet microwave systems transmit broadband voice, video and data, enabling service providers, government agencies, enterprises and other organizations to meet their
increasing bandwidth requirements rapidly and affordably. The
8
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
principal
application of DragonWave's products is mobile network backhaul. Additional applications include leased line replacement, last mile fiber extension and enterprise networks.
We
support product lines branded under the names Horizon, Avenue and Avenue Lite, Harmony and Harmony Lite, Harmony Eband, 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 nine months ended November 30, 2016, the Nokia channel accounted for 22% and 28% 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 $0.5 million and $3.4 million of
our total revenue in the three and nine months ended November 30, 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 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,
9
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 control our operational expense spending in order to stay in line with our current revenue levels.
Recent Developments
Highlights of Our Financial Results
The following are key points on our results of operations for the third quarter ended November 30, 2016, compared to the same
periods in the prior fiscal year:
- •
- Our revenue decreased by $10.8 million and $38.3 million when comparing the three and nine month periods
ended November 30, 2016 and November 30, 2015.
|
|
|
|
|
|
|
|
|
|
Three months ended
November 30 |
|
Nine months ended
November 30 |
|
Revenue ended November 30, 2015 |
|
|
20,997 |
|
|
74,254 |
|
Decrease in sales (hardware and services) through Nokia Channel |
|
|
(6,119 |
) |
|
(21,863 |
) |
Decrease in the sale of hardware into India |
|
|
(864 |
) |
|
(7,814 |
) |
Decrease in direct and indirect sales in North America |
|
|
(1,108 |
) |
|
(6,140 |
) |
Decrease in direct sales in Europe, Middle East & Africa |
|
|
(471 |
) |
|
(1,820 |
) |
Decrease in installation services to a Tier1 customer in the USA |
|
|
(2,088 |
) |
|
(1,545 |
) |
Decrease in services revenue in India |
|
|
(530 |
) |
|
(747 |
) |
Increase in direct sales to the Rest of World |
|
|
372 |
|
|
1,639 |
|
| |
|
|
|
|
|
Total Change |
|
|
(10,808 |
) |
|
(38,290 |
) |
| |
|
|
|
|
|
Revenue ended November 30, 2016 |
|
$ |
10,189 |
|
$ |
35,964 |
|
| |
|
|
|
|
|
- •
- Our gross profit percentage in the third quarter of fiscal year 2017 increased to 26.1% from 23.5% in the third quarter of
fiscal year 2016. The improvement was driven by a decrease in the proportion of sales made through lower margin customers and a shift toward the sale of higher capacity products.
- •
- Operating expenses decreased as well. The following table highlights the key factors contributing to lower operating
expenses.
10
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
|
|
|
|
|
|
|
|
USD millions
|
|
Q3 FY2017
vs.
Q3 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending; results primarily from global staff reductions in FY2016 |
|
|
(1.0 |
) |
|
(6.1 |
) |
Contractor and professional services spending |
|
|
(0.2 |
) |
|
(1.8 |
) |
Travel & living |
|
|
(0.1 |
) |
|
(0.8 |
) |
Spending on materials for prototypes |
|
|
(0.2 |
) |
|
(0.5 |
) |
Warehousing costs |
|
|
(0.2 |
) |
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
(1.7 |
) |
|
(9.0 |
) |
| |
|
|
|
|
|
- •
- In the nine months ended November 30, 2016, we recorded warrant issuance expenses associated with both the
August 2016 public offering and the April, 2016 registered direct offering of $0.6 million.
- •
- A fair value adjustment gain of $0.8 million and $1.6 million was realized during the three and nine months
ended November 30, 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 three and nine months ended November 30, 2016 totaled
$0.3 million and $1.5 million and included amortization of software assets, accretion expense, interest expense, and a foreign exchange loss.
- •
- In the three and nine months ended November 30, 2016 we recognized a tax expense of $0.3 million and
$0.6 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 $4.1 million and $12.2 million for the three and nine months
ended November 30, 2016.
- •
- In the three and nine months ended November 30, 2016, we repaid nil and $5.1 million on our line of credit.
The outstanding debt balance was $17.0 million at November 30, 2016.
- •
- 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 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
11
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Liquidity and Cash Resources
The consolidated interim financial statements for the three and nine months ended November 30, 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 have continued to do so in the three and nine months ended November 30, 2016. Recently, additional
pressure has been placed on our liquidity position as a result of reduced revenue from a significant Original Equipment Manufacturer (OEM) channel, a dispute over inventory shipped to a customer in
India in June 2015, and difficulty in collecting on undisputed accounts receivable.
The
Company has been able to make progress in restructuring the business. This progress includes the following highlights:
Debt Facility:
- •
- Reduced outstanding debt on our credit facility from a high of $32.8 million as at August 31, 2015 to
$17.0 million as at November 30, 2016 by leveraging our working capital;
- •
- Continued to work closely with our credit facility partners;
New Capital:
- •
- Raised $9.5 million in cash (net of commissions 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;
- •
- Received $2.4 million in cash from the exercise of warrants during the three months ended
November 30, 2016;
Other:
- •
- Initiated arbitration proceedings to seek resolution to its customer dispute in India.
12
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Despite
the progress identified above, we remain in breach of the original terms of our debt facility and fourth forbearance agreement, and have not yet been able to achieve a quarterly
break-even level. The continued consumption of cash has raised substantial doubt about our ability to continue as a going concern. Our plans to restructure the business, improve our financial results
and overcome these difficulties include initiatives in a number of areas, including:
- •
- Being in a position which allows investors to exercise their short-term warrants which expire on
February 8, 2017;
- •
- 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;
- •
- Accelerating efforts to collect accounts receivable from customers in a timely manner;
- •
- Actively investigating and pursuing alternative forms of financing;
- •
- Reducing inventory levels in both raw material and finished goods inventory; and
- •
- Working closely with vendors, including contract manufacturers, to ensure supply continuity.
In
addition, we no longer comply with Nasdaq Listing Rule 5550(b)(1) due to our failure to maintain a minimum of $2.5 million in shareholders' equity or any alternatives to
such requirement, and we were granted an extension to April 17, 2017 to remedy the deficiency. Continued listing of our common shares on the Nasdaq increases our ability to raise additional
capital in the future.
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 and success in collecting on overdue accounts receivable. It is possible that the plans described above may not be
fully executed or may occur too slowly to solve our current liquidity concerns. There can be no assurance that the existing financing facility can be renegotiated or that any other forms of financing
can be arranged on satisfactory terms. These consolidated interim financial statements do not include any adjustments to the accounts and classification of assets and liabilities that may be necessary
if we are unable to continue as a going concern. Such adjustments could be material.
Recent Customer Wins and Product Traction
We continue to believe that our recently designed products, including Harmony Enhanced MC, position us well to win business in the
current wireless backhaul market which is driven by operational efficiency and increased capacity requirements. As evidence of the ability to win business, we recently announced that Sprint had
selected our microwave backhaul equipment for network deployment as part of
13
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
the
Company's densification and optimization strategy. We believe our product solutions coupled with our extensive experience with this customer will be beneficial as this deployment progresses.
Following that announcement we communicated that our Harmony Enhanced MC product had completed more than ten successful trials, and that those trials have resulted in multiple orders for eight
customers. We were also honored to be selected as a finalist in this year's "Fierce Innovation Awards: Telecom Edition" for the selection of our Harmony Enhanced MC in the category Rural Wireless
Networks. We
believe that business interest and order activity surrounding our new product offerings provide evidence of the competitive strength of these products in the current microwave backhaul market.
Notification Letter from the Nasdaq Stock Market
We received a written notice from the Listing Qualifications Staff ("Staff") of The Nasdaq Stock Market ("Nasdaq") notifying us that we
no longer comply with Nasdaq Listing Rule 5550(b)(1) due to our failure to maintain a minimum of $2.5 million in shareholders' equity or any alternatives to such requirement. We reported
shareholders' equity of $1.662 million for the period ended August 31, 2016. We responded to the Nasdaq with a letter which outlined out plans to increase shareholders' equity and on
December 9, 2016 the Staff provided their decision by letter to offer an extension to April 17, 2017 to remedy the deficiency.
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 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 submitted a
counter-claim in June 2016 for the full value of the contract and damages. Four arbitration meetings have been held to date. The next arbitration meeting is expected to take place early in
calendar year 2017. The timing on a final decision has not been defined. No decision has been made as of the date of this report and the outcome of this matter is not determinable.
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. Sales through the Nokia channel may continue for some time but
are expected to occur at a diminishing level.
We
negotiated a termination fee with Nokia in 2013, valued at $8.7 million which was to be paid in installments by us to Nokia. At November 30, 2016 the liability is valued
at $3.3 million (February 29,
14
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
2016-$3.3 million).
The decrease in the valuation of the liability since February 29, 2016 relates to changes in the foreign exchange rates between the EURO and USD.
Expense Reduction Actions
As part of an overall plan to decrease our operating expenses we have reduced our global workforce both through restructuring
initiatives and through attrition. Since the beginning of fiscal year 2016 the workforce has declined by approximately 40%. 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 also been severely curtailed. As a result of these
initiatives operating expenses have declined $9.0 million between the first nine months of fiscal year 2017 and the same period in the prior fiscal year.
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 asset based credit facility with Comerica Bank and Export Development Canada. The original credit facility matured on June 1, 2016, however, we are currently operating
under a fourth forbearance agreement which is valid until April 1, 2017. We had drawn $17.0 million on the facility as at November 30, 2016 (February 29,
2016–$22.2 million), and $1.9 million against our letter of credit facility (February 29, 2016–$1.9 million). The original credit facility which
matured on June 1, 2016 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.
The
fourth forbearance agreement which was signed on October 12, 2016 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.
As
of January 11, 2017 we are not in compliance with the financial terms of the fourth forbearance agreement.
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
15
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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
We
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.
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.
16
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Adjusted Cashflow from Operations/Adjusted EBITDA
(Unaudited)
Please note: Adjusted Cashflow from Operations/Adjusted EBITDA is a non-GAAP measure. See "Use of Non-GAAP Performance
Measures".
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY17
Q3 |
|
FY17
Q2 |
|
FY17
Q1 |
|
FY16
Q4 |
|
FY16
Q3 |
|
Revenue |
|
|
10,189 |
|
|
13,230 |
|
|
12,545 |
|
|
12,041 |
|
|
20,997 |
|
Cost of Sales |
|
|
7,527 |
|
|
9,373 |
|
|
8,653 |
|
|
12,538 |
|
|
16,063 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
2,662 |
|
|
3,857 |
|
|
3,892 |
|
|
(497 |
) |
|
4,934 |
|
|
|
|
26.1% |
|
|
29.2% |
|
|
31.0% |
|
|
(4.1% |
) |
|
23.5% |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Provisions |
|
|
221 |
|
|
365 |
|
|
— |
|
|
3,181 |
|
|
210 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross profit before inventory provisions (Note 1) |
|
|
2,883 |
|
|
4,222 |
|
|
3,892 |
|
|
2,684 |
|
|
5,144 |
|
|
|
|
28.3% |
|
|
31.9% |
|
|
31.0% |
|
|
22.3% |
|
|
24.5% |
|
Operating Expenses |
|
|
7,022 |
|
|
6,921 |
|
|
7,261 |
|
|
7,594 |
|
|
8,689 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization |
|
|
(420 |
) |
|
(458 |
) |
|
(469 |
) |
|
(467 |
) |
|
(494 |
) |
| |
Stock-based compensation |
|
|
(188 |
) |
|
(160 |
) |
|
(215 |
) |
|
(210 |
) |
|
(273 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,414 |
|
|
6,303 |
|
|
6,577 |
|
|
6,917 |
|
|
7,922 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Adjusted Cashflow from Operations/Adjusted EBITDA |
|
|
(3,531 |
) |
|
(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".
Comparison of the three and nine months ended November 30, 2016 and November 30, 2015
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
November 30
2016
|
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Hardware and other |
|
|
7,743 |
|
|
15,713 |
|
|
(7,970 |
) |
|
25,895 |
|
|
61,890 |
|
|
(35,995 |
) |
Services |
|
|
2,446 |
|
|
5,284 |
|
|
(2,838 |
) |
|
10,069 |
|
|
12,364 |
|
|
(2,295 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,189 |
|
|
20,997 |
|
|
(10,808 |
) |
|
35,964 |
|
|
74,254 |
|
|
(38,290 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
17
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
revenue
relates to the timing of installation services contracts with Tier 1 carriers in both India and the United States.
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 November 30, 2016 and November 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30, 2016 |
|
Three Months Ended
November 30, 2015 |
|
|
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Canada |
|
|
689 |
|
|
— |
|
|
689 |
|
|
7% |
|
|
519 |
|
|
— |
|
|
519 |
|
|
2% |
|
Europe, Middle East & Africa |
|
|
1,257 |
|
|
1,873 |
|
|
3,130 |
|
|
31% |
|
|
1,728 |
|
|
6,860 |
|
|
8,588 |
|
|
41% |
|
India |
|
|
782 |
|
|
27 |
|
|
809 |
|
|
8% |
|
|
2,176 |
|
|
1,296 |
|
|
3,472 |
|
|
17% |
|
United States |
|
|
2,691 |
|
|
— |
|
|
2,691 |
|
|
26% |
|
|
6,057 |
|
|
— |
|
|
6,057 |
|
|
29% |
|
Rest of World |
|
|
2,512 |
|
|
358 |
|
|
2,870 |
|
|
28% |
|
|
2,140 |
|
|
221 |
|
|
2,361 |
|
|
11% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,931 |
|
|
2,258 |
|
|
10,189 |
|
|
100% |
|
|
12,620 |
|
|
8,377 |
|
|
20,997 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below displays the geographic comparatives for the nine months ended November 30, 2016 and November 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
November 30, 2016 |
|
Nine Months Ended
November 30, 2015 |
|
|
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Direct &
Indirect
Sales |
|
OEM Sales
through
Nokia |
|
Total |
|
% of
total
revenue |
|
Canada |
|
|
2,105 |
|
|
— |
|
|
2,105 |
|
|
6% |
|
|
2,099 |
|
|
— |
|
|
2,099 |
|
|
3% |
|
Europe, Middle East & Africa |
|
|
3,575 |
|
|
9,379 |
|
|
12,954 |
|
|
36% |
|
|
5,395 |
|
|
26,130 |
|
|
31,525 |
|
|
42% |
|
India |
|
|
4,187 |
|
|
293 |
|
|
4,480 |
|
|
12% |
|
|
12,748 |
|
|
3,281 |
|
|
16,029 |
|
|
22% |
|
United States |
|
|
9,708 |
|
|
— |
|
|
9,708 |
|
|
27% |
|
|
17,399 |
|
|
19 |
|
|
17,418 |
|
|
23% |
|
Rest of World |
|
|
6,245 |
|
|
472 |
|
|
6,717 |
|
|
19% |
|
|
4,606 |
|
|
2,577 |
|
|
7,183 |
|
|
10% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,820 |
|
|
10,144 |
|
|
35,964 |
|
|
100% |
|
|
42,247 |
|
|
32,007 |
|
|
74,254 |
|
|
100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Gross Profit before inventory provisions |
|
|
2,883 |
|
|
5,144 |
|
|
(2,261 |
) |
|
10,997 |
|
|
15,703 |
|
|
(4,706 |
) |
(Note 1) |
|
|
28.3% |
|
|
24.5% |
|
|
3.8% |
|
|
30.6% |
|
|
21.1% |
|
|
9.4% |
|
Inventory provisions |
|
|
221 |
|
|
210 |
|
|
11 |
|
|
586 |
|
|
1,235 |
|
|
(649 |
) |
Gross Profit |
|
|
2,662 |
|
|
4,934 |
|
|
(2,272 |
) |
|
10,411 |
|
|
14,468 |
|
|
(4,057 |
) |
|
|
|
26.1% |
|
|
23.5% |
|
|
2.6% |
|
|
28.9% |
|
|
19.5% |
|
|
9.5% |
|
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 nine months ended November 30, 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 |
|
Nine Months Ended |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
1,891 |
|
|
2,873 |
|
|
(982 |
) |
|
6,027 |
|
|
10,981 |
|
|
(4,954 |
) |
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.
19
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Changes to R&D Expense in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q3 FY2017
vs.
Q3 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending–international staff levels down by approximately 50% |
|
|
(0.6 |
) |
|
(3.0 |
) |
Professional fees, contractor services and government incentives in China |
|
|
0.2 |
|
|
(0.2 |
) |
Material spending on prototypes and software |
|
|
(0.6 |
) |
|
(1.8 |
) |
| |
|
|
|
|
|
|
|
|
(1.0 |
) |
|
(5.0 |
) |
| |
|
|
|
|
|
Sales and Marketing ("S&M")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
1,931 |
|
|
2,418 |
|
|
(487 |
) |
|
5,726 |
|
|
8,714 |
|
|
(2,988 |
) |
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.
Changes to S&M expense in USD Millions:
|
|
|
|
|
|
|
|
|
|
Q3 FY2017
vs.
Q3 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending; results primarily from global staff reductions in FY2016 |
|
|
(0.3 |
) |
|
(1.8 |
) |
Professional fees and contractor spending |
|
|
(0.1 |
) |
|
(0.7 |
) |
Travel & Living |
|
|
(0.1 |
) |
|
(0.5 |
) |
| |
|
|
|
|
|
|
|
|
(0.5 |
) |
|
(3.0 |
) |
| |
|
|
|
|
|
20
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 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 |
|
Nine Months Ended |
|
|
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Breakdown by functional area: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance, human resources and executive office |
|
|
1,248 |
|
|
1,339 |
|
|
(91 |
) |
|
3,706 |
|
|
4,968 |
|
|
(1,262 |
) |
Operations organization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross operations spending |
|
|
2,019 |
|
|
2,488 |
|
|
(469 |
) |
|
6,173 |
|
|
7,503 |
|
|
(1,330 |
) |
| |
Portion to be recovered through Cost of Sales |
|
|
(387 |
) |
|
(741 |
) |
|
354 |
|
|
(1,283 |
) |
|
(2,939 |
) |
|
1,656 |
|
DragonWave HFCL spending |
|
|
320 |
|
|
312 |
|
|
8 |
|
|
855 |
|
|
955 |
|
|
(100 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,200 |
|
|
3,398 |
|
|
(198 |
) |
|
9,451 |
|
|
10,487 |
|
|
(1,036 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
Q3 FY2017
vs.
Q3 FY2016 |
|
YTD FY2017
vs
YTD FY2016 |
|
Key Drivers: |
|
|
|
|
|
|
|
Compensation related spending |
|
|
(0.1 |
) |
|
(0.6 |
) |
Professional fees and insurance costs |
|
|
(0.1 |
) |
|
(0.8 |
) |
Travel & Living |
|
|
— |
|
|
(0.2 |
) |
Lower spending on rent and consumable materials for operations |
|
|
— |
|
|
(0.2 |
) |
DragonWave HFCL spending (India) |
|
|
— |
|
|
(0.1 |
) |
Warehousing costs |
|
|
(0.2 |
) |
|
0.2 |
|
Operations spending not recovered through Cost of Sales (due to decreased volumes) |
|
|
0.2 |
|
|
0.7 |
|
| |
|
|
|
|
|
|
|
|
(0.2 |
) |
|
(1.0 |
) |
| |
|
|
|
|
|
Goodwill Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(11,927 |
) |
|
11,927 |
|
21
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 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 |
|
Nine Months Ended |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
98 |
|
|
149 |
|
|
(51 |
) |
|
282 |
|
|
481 |
|
|
(199 |
) |
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 |
|
Nine Months Ended |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
33 |
|
|
36 |
|
|
(3 |
) |
|
101 |
|
|
168 |
|
|
(67 |
) |
During
the three and nine months ended November 30, 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 nine months ended November 30, 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 |
|
Nine Months Ended |
|
November 30
2016
|
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
346 |
|
|
499 |
|
|
(153 |
) |
|
1,082 |
|
|
1,590 |
|
|
(508 |
) |
Interest
expense relates primarily to interest on our debt facility, this expense decreased in the three and nine month period ending November 30, 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 nine months ended November 30, 2016 the weighted average debt outstanding was $17.0 million and $18.2 million (three and nine months ended
November 30, 2015–$29.1 million and $31.7 million). Interest rates vary with market rate fluctuations, with loans bearing interest in the range of 3% to 4% above the
applicable base rates.
22
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Warrant Issuance Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30
2016
|
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
— |
|
|
— |
|
|
— |
|
|
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 nine months ended November 30, 2016.
Fair Value Adjustment–Warrant Liability
(Gain)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30
2016
|
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(798 |
) |
|
(293 |
) |
|
(505 |
) |
|
(1,644 |
) |
|
(1,188 |
) |
|
(456 |
) |
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 in our consolidated statement of operations. The income for the three and nine months ended November 30, 2016 related to the warrants which were issued pursuant to the
offerings in August 2016, April 2016, August 2014 and September 2013.
Foreign Exchange (Gain) Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30
2016
|
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
(141 |
) |
|
(270 |
) |
|
129 |
|
|
79 |
|
|
24 |
|
|
55 |
|
The
foreign exchange losses result from the translation of foreign denominated monetary accounts and the strength of the USD relative to foreign currencies. During the three and nine
months ended November 30, 2016 the most significant impact on the foreign exchange loss came from the translation of the foreign denominated liabilities to the USD.
23
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Income Taxes Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
Nine Months Ended |
|
November 30
2016
|
|
November 30
2015 |
|
Variance |
|
November 30
2016 |
|
November 30
2015 |
|
Variance |
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
| |
264 |
|
|
459 |
|
|
(195 |
) |
|
646 |
|
|
2,146 |
|
|
(1,500 |
) |
The
tax expense in both the three and nine months ended November 30, 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 $0.5 million and $0.7 million was recognized for the anticipated payment of cash taxes
in the three and nine months ended November 30, 2015 respectively. The second element relates to the creation of a valuation allowance. As of November 30, 2015 our deferred tax assets
related to net operating loss carry-forwards in the United States. During the nine months ended November 30, 2015 we recorded an increase in the valuation allowance of
$1.5 million as 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
November 30, 2016.
Use of Non-GAAP Performance Measures
In this MD&A we break out "Gross profit before inventory provisions" as this measure allows management to evaluate our operational
performance and compare to prior periods more effectively. "Gross profit before inventory provisions" does not have any standardized meaning prescribed by GAAP, it is therefore unlikely to be
comparable to similar measures presented by other issuers and is not designed to replace other measures of financial performance or the statement of operations as an indicator of performance. This
measure should not be considered in isolation or as a substitute for other measures of performance calculated according to GAAP. We believe that it is useful to compare gross profit results without
the impact of inventory provisions, since our inventory provisions generally relate to discontinuance of products. We believe this non-GAAP measure also provides investors with a better ability to
understand our operational performance. We calculate "Gross profit before inventory provisions" consistently over each fiscal period.
The
most directly comparable GAAP measure presented in our consolidated interim financial statements for the three and nine months ended November 30, 2016 to "Gross profit before
inventory provisions" is "Gross profit".
In this MD&A we also break out "Adjusted Cashflow from Operations" also called "Adjusted EBITDA". This measure corresponds to earnings
before interest, taxes, depreciation and amortization less elements that are non-cash in nature. Because it omits non-cash items, we feel that Adjusted Cashflow from Operations/Adjusted EBITDA better
represents the cash impact of the results of operations in the
24
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 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 nine months ended November 30, 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
Q3 |
|
FY17
Q2 |
|
FY17
Q1 |
|
FY16
Q4 |
|
FY16
Q3 |
|
Adjusted Cashflow from Operations/Adjusted EBITDA |
|
|
(3,531 |
) |
|
(2,081 |
) |
|
(2,685 |
) |
|
(4,233 |
) |
|
(2,778 |
) |
Include the following items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensaton |
|
|
(188 |
) |
|
(160 |
) |
|
(215 |
) |
|
(210 |
) |
|
(273 |
) |
Inventory provisions |
|
|
(221 |
) |
|
(365 |
) |
|
— |
|
|
(3,181 |
) |
|
(210 |
) |
Amortization of Property, Plant and Equipment |
|
|
(420 |
) |
|
(458 |
) |
|
(469 |
) |
|
(467 |
) |
|
(494 |
) |
Amortization of intangible assets |
|
|
(98 |
) |
|
(94 |
) |
|
(90 |
) |
|
(96 |
) |
|
(149 |
) |
Accretion expense |
|
|
(33 |
) |
|
(33 |
) |
|
(35 |
) |
|
(37 |
) |
|
(36 |
) |
Restructuring expense |
|
|
— |
|
|
— |
|
|
— |
|
|
(130 |
) |
|
(1,419 |
) |
Interest expense |
|
|
(346 |
) |
|
(354 |
) |
|
(382 |
) |
|
(424 |
) |
|
(499 |
) |
Warrant issuance expenses |
|
|
— |
|
|
(469 |
) |
|
(92 |
) |
|
— |
|
|
— |
|
Fair value adjustment–warrant liability |
|
|
798 |
|
|
602 |
|
|
244 |
|
|
(69 |
) |
|
293 |
|
Foreign exchange (loss)/gain |
|
|
141 |
|
|
(68 |
) |
|
(152 |
) |
|
(307 |
) |
|
270 |
|
Income tax expense |
|
|
(264 |
) |
|
(220 |
) |
|
(162 |
) |
|
(129 |
) |
|
(459 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(4,162 |
) |
|
(3,700 |
) |
|
(4,038 |
) |
|
(9,283 |
) |
|
(5,754 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
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
25
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 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 nine months ended November 30, 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
November 30,
2016 |
|
As at
February 29,
2016 |
|
Key Balance Sheet Amounts and Ratios: |
|
|
|
|
|
|
|
| |
Cash and Cash Equivalents |
|
|
4,486 |
|
|
4,277 |
|
| |
Working Capital |
|
|
466 |
|
|
403 |
|
| |
Long Term Assets |
|
|
3,280 |
|
|
4,325 |
|
| |
Long Term Liabilities |
|
|
3,575 |
|
|
501 |
|
| |
Working Capital Ratio |
|
|
1: 1 |
|
|
1: 1 |
|
| |
Days Sales Outstanding in accounts receivable (Note 1) |
|
|
109 days |
|
|
114 days |
|
| |
Inventory Turnover |
|
|
1.1 times |
|
|
1.6 times |
|
Note 1: Days Sales Outstanding in accounts receivable excluding a Tier 1 carrier in India at November 30, 2016 were
81 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 November 30, 2016, we had $4.5 million in Cash and Cash Equivalents ("Cash"), representing a $0.2 million
increase from the Cash balance at February 29, 2016.
26
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 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 nine months ended November 30, 2016.
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Three months ended
November 30, 2016 |
|
Nine months ended
November 30, 2016 |
|
Operating activities |
|
|
|
|
|
|
|
Net loss |
|
|
(4,162 |
) |
|
(11,900 |
) |
Items not affecting cash |
|
|
(59 |
) |
|
636 |
|
| |
|
|
|
|
|
Net loss excluding items not affecting cash |
|
|
(4,221 |
) |
|
(11,264 |
) |
| |
|
|
|
|
|
Working Capital Changes |
|
|
|
|
|
|
|
| |
Trade receivables |
|
|
437 |
|
|
5,544 |
|
| |
Inventory |
|
|
615 |
|
|
616 |
|
| |
Other current assets |
|
|
376 |
|
|
760 |
|
| |
Accounts payable and accrued liabilities |
|
|
(2,141 |
) |
|
(687 |
) |
| |
Deferred revenue and other long term liabilities |
|
|
(128 |
) |
|
(1,311 |
) |
| |
|
|
|
|
|
Changes in non-cash working capital items |
|
|
(841 |
) |
|
4,922 |
|
| |
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
| |
Acquisition of property and equipment |
|
|
(201 |
) |
|
(518 |
) |
| |
Acquisition of intangible assets |
|
|
(10 |
) |
|
(66 |
) |
| |
|
|
|
|
|
|
|
|
(211 |
) |
|
(584 |
) |
| |
|
|
|
|
|
Financing activities–excluding debt repayment |
|
|
|
|
|
|
|
| |
Repayments on capital lease obligation |
|
|
(12 |
) |
|
(44 |
) |
| |
Issuance of common shares and warrants net |
|
|
2,300 |
|
|
12,301 |
|
| |
|
|
|
|
|
|
|
|
2,288 |
|
|
12,257 |
|
| |
|
|
|
|
|
Cash (used)/generated before debt repayment |
|
|
(2,985 |
) |
|
5,331 |
|
| |
|
|
|
|
|
Debt repayment |
|
|
— |
|
|
(5,122 |
) |
Cash and cash equivalents at beginning of period |
|
|
7,471 |
|
|
4,277 |
|
| |
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
4,486 |
|
|
4,486 |
|
| |
|
|
|
|
|
Key
points associated with the Cash increase include:
- •
- We utilized cash from operations during both the three and nine month periods because we continue to operate in a net
loss position;
- •
- Net working capital changes provided cash for the business in the nine months ended November 30, 2016 but were a
use of cash in the third quarter of fiscal year 2017;
- •
- Investments in the acquisition of property and equipment as well as in software continue to be small;
27
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
- •
- We increased our cash resources through the exercise of warrants in the three months ended November 30, 2016 and
through the issuance of common shares and warrants in the nine months ended November 30, 2016; and,
- •
- We continued to make debt repayments in fiscal year 2017 which depleted our cash resources.
|
|
|
|
|
|
|
|
Changes in working capital
|
|
August 31, 2016
to
November 30, 2016 |
|
February 29, 2016
to
November 30, 2016 |
|
Beginning working capital balance |
|
|
1,954 |
|
|
403 |
|
Cash and cash equivalents |
|
|
(2,985 |
) |
|
209 |
|
Trade receivables |
|
|
(437 |
) |
|
(5,544 |
) |
Inventory |
|
|
(615 |
) |
|
(616 |
) |
Other current assets |
|
|
(376 |
) |
|
(760 |
) |
Debt facility |
|
|
— |
|
|
5,122 |
|
Accounts payable and accrued liabilities |
|
|
2,141 |
|
|
630 |
|
Deferred revenue |
|
|
162 |
|
|
1,327 |
|
Deferred tax liability |
|
|
— |
|
|
13 |
|
Warrant liability |
|
|
622 |
|
|
(318 |
) |
| |
|
|
|
|
|
Net change in working capital |
|
|
(1,488 |
) |
|
63 |
|
| |
|
|
|
|
|
Ending working capital balance |
|
|
466 |
|
|
466 |
|
| |
|
|
|
|
|
Our trade receivables balance decreased by $5.5 million between February 29, 2016 and November 30, 2016 due to our
continued collection efforts in the three and nine months ended November 30, 2016. Our days sales outstanding performance improved from 114 days at February 29, 2016 to
109 days at November 30, 2016. Our allowance for doubtful accounts continues to
represent a small percentage of our total trade receivables outstanding (November 30, 2016–1.8%; February 29, 2016–1.2%).
As
at November 30, 2016, three customers exceeded 10% of the total receivable balance. These customers represented 32%, 16% and 15% of the trade receivables balance
(February 29, 2016–two customers represented 52% and 16% of the trade receivables balance).
Included
in G&A expenses is a nominal bad debt recovery and expense for the three and nine month period ended November 30, 2016 (three and nine months ended November 30,
2015–recovery of $0.1 million and expense of $0.1 million).
28
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
The inventory balance decreased by $0.6 million relative to the closing balance at February 29, 2016. By product category
the increases in inventory are as follows in USD millions:
|
|
|
|
|
Closing inventory February 29, 2016 |
|
|
22.7 |
|
Increase in Harmony Enhanced |
|
|
3.1 |
|
Decrease in Horizon Compact Plus |
|
|
(1.5 |
) |
Decrease in Hub800 |
|
|
(0.8 |
) |
Decrease in Quantum |
|
|
(0.6 |
) |
Decrease in inventory held for customer support & warranty |
|
|
(0.5 |
) |
Other |
|
|
(0.3 |
) |
| |
|
|
|
Net Change in Inventory |
|
|
(0.6 |
) |
| |
|
|
|
Ending inventory at November 30, 2016 |
|
|
22.1 |
|
| |
|
|
|
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 November 30, 2016 was $13.7 million (February 29, 2016–$16.8 million).
The accounts payable and accrued liabilities balance decreased by $0.7 million between February 29, 2016 and
November 30, 2016 primarily due to continued spending constraints. 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 hold 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.
Over
the past twelve month period, we have reduced the balance of the debt facility by $9.7 million from $26.7 million at November 30, 2015 to $17.0 million
at November 30, 2016. (February 29, 2016–$22.2 million) We also had $1.8 million outstanding against our letter of credit facility at November 30, 2016
(February 29, 2016–$1.9 million).
29
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 nine months ended November 30, 2016
the weighted average debt outstanding was $17.0 million and $18.2 million (three and nine months ended November 30, 2015–$29.1 million and $31.7 million)
and we recognized $0.3 million and $1.0 million in interest expense related to the debt facility (three and nine months ended November 30, 2015–$0.5 million and
$1.6 million).
We
made no further payments on the debt facility between November 30, 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$ |
3.7 million |
|
No variances to date |
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
30
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 November 30, 2016
Future minimum operating lease payments as at November 30, 2016 per fiscal year relate to leases of office and warehouse space.
They
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
(Figures are in thousands of USD) |
|
Contractual Obligations
|
|
Total |
|
Less than
1 year |
|
1-3 years |
|
3-5 years |
|
More than
5 years |
|
Total Operating Lease Obligations |
|
$ |
4,696 |
|
$ |
1,093 |
|
$ |
1,835 |
|
$ |
1,605 |
|
$ |
163 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
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.
In
the normal course of business, we are subject to patent infringement complaints. We defend ourselves vigorously in these matters and do not believe any known complaint
is material.
31
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 nine months ended November 30, 2016.
|
|
|
|
|
|
|
Common Shares |
|
Balance as at February 29, 2016 |
|
|
3,020,069 |
|
| |
|
|
|
Share issuance |
|
|
2,423,878 |
|
Exercise of pre-funded warrants |
|
|
30,164 |
|
Exercise of warrants |
|
|
6 |
|
Exercise of options |
|
|
12,181 |
|
Share issuance–ESPP |
|
|
478 |
|
| |
|
|
|
Balance as at August 31, 2016 |
|
|
5,486,776 |
|
| |
|
|
|
Exercise of warrants |
|
|
610,908 |
|
Exercise of options |
|
|
6,039 |
|
Share issuance–ESPP |
|
|
285 |
|
| |
|
|
|
Balance as at November 30, 2016 |
|
|
6,104,008 |
|
| |
|
|
|
The
following is a summary of stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and nine months ended
November 30, 2016 |
|
Three and nine months ended
November 30, 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 |
|
|
87,145 |
|
$ |
6.28 |
|
|
59,768 |
|
$ |
19.28 |
|
Exercised |
|
|
(12,181 |
) |
$ |
3.00 |
|
|
— |
|
$ |
— |
|
Forfeited |
|
|
(42,322 |
) |
$ |
71.08 |
|
|
(27,642 |
) |
$ |
117.23 |
|
| |
|
|
|
|
|
|
|
|
|
Options at August 31, 2016 and 2015 |
|
|
309,370 |
|
$ |
21.28 |
|
|
191,547 |
|
$ |
52.63 |
|
| |
|
|
|
|
|
|
|
|
|
Granted |
|
|
236,500 |
|
$ |
3.66 |
|
|
106,590 |
|
$ |
3.02 |
|
Exercised |
|
|
(6,039 |
) |
$ |
3.16 |
|
|
— |
|
$ |
— |
|
Forfeited |
|
|
(9,920 |
) |
$ |
27.91 |
|
|
(16,033 |
) |
$ |
59.77 |
|
| |
|
|
|
|
|
|
|
|
|
Options at November 30, 2016 and 2015 |
|
|
529,911 |
|
$ |
13.50 |
|
|
282,104 |
|
$ |
33.48 |
|
| |
|
|
|
|
|
|
|
|
|
As
at November 30, 2016 the following securities were issued and outstanding: 6,104,008 common shares, options to purchase 529,911 common shares granted under our
Share Based Compensation Plan
32
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
and
6,075,535 warrants exercisable for 5,336,035 common shares. The number of common shares issuable upon the exercise of the warrants is subject to adjustment in accordance with terms
of the warrants.
As
of January 11, 2017 the following securities were issued and outstanding: 6,104,173 common shares, options to purchase 529,911 common shares granted under our
Share Based Compensation Plan, and 6,075,535 warrants exercisable for 5,336,035 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 nine months ended November 30, 2016 a total of 229 and 613 common shares were
purchased by employees at fair market value, while we issued 56 and 150 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 nine
months ended November 30, 2016 was $2 thousand and $8 thousand (three and nine months ended November 30, 2015–$3 thousand and $9 thousand). The
fair value of the unearned ESPP shares as at November 30, 2016 was $1 thousand (November 30, 2015–$11 thousand). The number of shares held for release, and
still restricted under the ESPP at November 30, 2016 was 265 (November 30, 2015–948).
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 third 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, 2017 |
|
$ |
3,450 |
|
Luxembourg City |
|
Luxembourg |
|
ME Business Solutions S.à r.l. |
|
Month to Month |
|
$ |
1,600 |
|
Ottawa (Warehouse & Operations at Terry Fox Drive + Office Space at 411 Legget Drive) |
|
Canada |
|
Kanata Research Park |
|
November, 2016 |
|
$ |
74,400 |
|
Shanghai |
|
China |
|
Shanghai Lingang Economic |
|
September, 2017 |
|
$ |
19,300 |
|
Gurgaon |
|
India |
|
Narinder Singh & Songs (P) LTD |
|
March, 2018 |
|
$ |
4,300 |
|
33
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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 November 30, 2016, we have provisions totaling $2.4 million on inventory held by contract manufacturers that we do not expect to be fully used.
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:
|
|
|
|
|
|
|
|
|
|
Novemebr 30,
2016 |
|
February 29,
2016 |
|
Assets held at fair value (A) |
|
|
4,486 |
|
|
4,277 |
|
Loans and receivables (B) |
|
|
13,618 |
|
|
19,110 |
|
Other financial liabilities (C) |
|
|
39,104 |
|
|
44,434 |
|
Liabilities held at fair value (D) |
|
|
3,496 |
|
|
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
34
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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
November 30, 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
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
November 30, 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
November 30, 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 November 30, 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 |
|
|
3,496 |
|
|
3,496 |
|
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 |
|
35
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
A reconciliation of the Level 3 warrant liability measured at fair value for the three and nine months ended November 30, 2016 follows:
|
|
|
|
|
|
|
|
|
|
Warrants |
|
$ |
|
Balance at February 29, 2016 |
|
|
2,088,750 |
|
|
3 |
|
Issuance of warrants |
|
|
5,862,131 |
|
|
5,203 |
|
Fair value adjustment-warrant liability |
|
|
— |
|
|
(729 |
) |
| |
|
|
|
|
|
Balance at August 31, 2016 |
|
|
7,950,881 |
|
|
4,477 |
|
| |
|
|
|
|
|
Exercise of warrants |
|
|
(1,906,908 |
) |
|
(183 |
) |
Fair value adjustment-warrant liability |
|
|
— |
|
|
(798 |
) |
| |
|
|
|
|
|
Balance at November 30, 2016 |
|
|
6,043,973 |
|
|
3,496 |
|
| |
|
|
|
|
|
Interest rate risk
Cash, cash equivalents and our debt facility, which has interest rates with market rate fluctuations, expose us to interest rate risk
on these financial instruments. Net interest expense, excluding deferred financing costs, recognized during the three and nine ended November 30, 2016 was $0.3 million and
$1.0 million on our cash, cash equivalents and debt facility (three and nine months ended November 30, 2015-expense of $0.5 million and $1.6 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 reduce 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 November 30,
2016 and November 30, 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 November 30, 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 $22 thousand increase in after-tax net loss for the three and nine months ended November 30, 2016 (three
and nine months ended November 30, 2015-increase of $32 thousand) with an equal and opposite effect if the U.S. dollar had depreciated 1% against all foreign currencies at
November 30, 2016.
36
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Economic Dependence
For the three months ended November 30, 2016, we were dependent on three key customers with respect to revenue. These customers
represented approximately 22%, 15% and 11% of sales during that three month period [three months ended November 30, 2015-two customers represented 40% and 15%].
We
were dependent on two key customers with respect to revenue in the nine months ended November 30, 2016. These customers represented approximately 28% and 13% of sales for the
nine months ended November 30, 2016 [nine months ended November 30, 2015-three customers represented 43%, 16% and 11%].
Controls and Procedures
At the end of the period covered by this MD&A (such period being the three and nine months ended November 30, 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 CEO and CFO have concluded that our disclosure controls and
procedures were effective as at November 30, 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
November 30, 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.
37
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Critical Accounting Policies and Estimates
Inventory
Inventory is valued at the lower of cost and net realizable value ("NRV"). The cost of inventory is calculated on a standard cost
basis, which approximates average actual cost. NRV is determined as the market value for finished goods, replacement cost for raw materials, and finished goods market value less cost to complete for
work in progress inventory.
We
regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on factors including our estimated forecast of product demand, the stage
of the product life cycle and production requirements for the units in question.
We
carry inventory for the purposes of supporting our product warranty. Our standard warranty is typically between 12 and 36 months but we earn revenue by providing enhanced and
extended warranty and repair service during and beyond the standard warranty period. Customer service inventory consists of both component parts and finished units. Indirect manufacturing costs and
direct labour expenses are allocated systematically to the total production inventory.
Revenue recognition
We derive revenue from the sale of broadband wireless backhaul equipment which includes embedded software and a license to use said
software and extended product warranties. Software is considered to be incidental to the product. Services range from installation and training to basic consulting. Revenue is recognized when
persuasive evidence of an arrangement exists,
delivery has occurred and there are no significant remaining vendor obligations, collection of receivables is reasonably assured and the fee is fixed and determinable. Where conditions to final
acceptance of the product are specified by the customer, revenue is deferred until acceptance criteria have been met.
Our
business agreements may also contain multiple elements. Accordingly, we are required to determine the appropriate accounting, including whether the deliverables specified in a
multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, the fair value of these separate units of accounting and when to recognize revenue for
each element. For arrangements involving multiple elements, we allocate revenues to each element based on a selling price 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.
38
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
Revenue
associated with extended warranty and advanced replacement warranty is recognized ratably over the life of the contracted service.
Revenue
from engineering services or development agreements is recognized according to the specific terms and acceptance criteria as services are rendered.
We
accrue estimated potential product liability as warranty costs when revenue on the sale of equipment is recognized. Warranty liability is estimated based on recent actual return
experience and repair costs. Where product defects have been identified which would cause the cost or warranty experience to change, additional warranty costs are recognized.
Shipping
and handling costs borne by us are recorded in cost of sales. Shipping and handling costs charged to customers are recorded as revenue, if billed at the time of shipment. Costs
charged to customers after delivery are recorded in cost of sales.
We
generate revenue through royalty agreements as a result of the use of our intellectual property. Royalty revenue is recognized as it is earned.
We
offer our customers the option to purchase advanced replacement and extended warranty contracts either at the time the goods are shipped or at any time
after shipment takes place. Many customers wait to purchase extended warranty coverage until their standard warranty period ends.
Advanced
replacement is a service we sell which provides customers with the benefit of having a replacement radio or modem shipped to them when a unit they own has been confirmed by us
to be malfunctioning. When the customer receives the replacement radio or modem, they ship the malfunctioning unit back to us. We repair and keep the returned unit.
Our
standard warranty for customers generally varies between 12 and 36 months. Our extended warranty programs enable customers to continue to have repairs made as needed and
customer support guidance beyond the standard warranty period.
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
39
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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
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.
40
DragonWave Inc.
Management's Discussion and Analysis
For the three and nine months ended November 30, 2016
Tables are expressed in USD $000's except share and per share amounts unless otherwise indicated
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.
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.
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