Document:

Exhibit 4.2

 

	
  

  

 

 

 

DragonWave
Inc.

Management’s
Discussion and Analysis

For the year
ended February 28, 2009

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

DATED:  MAY 7,
2009

 

The following
provides management’s discussion and analysis (“MD&A”) of DragonWave Inc.’s
consolidated results of operations and financial condition for year ended February 28,
2009. For additional information and details about the risks the company faces,
readers are referred to the Company’s Annual Information Form (AIF), which
is published separately on May 7, 2009 and available at www.sedar.com.

 

The
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (GAAP) and are reported in Canadian
dollars.  The information contained
herein is dated as of May 7, 2009 and is current to that date, unless
otherwise stated.

 

The Company’s
fiscal year commences March 1 of each year and ends on the last day of February of
the following year.

 

In this
document, “we”, “us”, “our”, “Company” and “DragonWave” all refer to DragonWave
Inc. collectively with its subsidiaries, DRAGONWAVE CORP & 4472314
Canada Inc. The content of this MD&A has been approved by the Board of
Directors, on the recommendation of its Audit Committee.

 

Forward-Looking Statements

 

Certain statements included in this management’s
discussion and analysis constitute forward-looking statements, including those
identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”,
“intent” and similar expressions to the extent they relate to the Company or
its management.  The Company’s actual
results are subject to a number of risks and uncertainties that could cause the
actual results or events to differ materially from those indicated in the
forward-looking statements.

 

The following table sets out selected consolidated
financial information for the periods indicated.  The selected financial information set out
below as at, and for the years ended, February 28, 2009, February 29,
2008 and February 28, 2007 has been derived from the consolidated
financial statements and accompanying notes. 
Each investor should read the following information in conjunction with
those statements and the related notes.

 

 

	
   

  	
   

  	
  Year Ended

  	
   

  	
  Year Ended

  	
   

  	
  Year Ended

  	
   

  
	
   

  	
   

  	
  February 28,

  	
   

  	
  February 29,

  	
   

  	
  February 28,

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  REVENUE

  	
   

  	
  43,334

  	
   

  	
  40,404

  	
   

  	
  24,170

  	
   

  
	
  Cost of sales

  	
   

  	
  28,683

  	
   

  	
  24,980

  	
   

  	
  16,124

  	
   

  
	
  Gross profit

  	
   

  	
  14,651

  	
   

  	
  15,424

  	
   

  	
  8,046

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXPENSES

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development

  	
   

  	
  10,628

  	
   

  	
  10,378

  	
   

  	
  6,107

  	
   

  
	
  Selling and marketing

  	
   

  	
  10,649

  	
   

  	
  8,858

  	
   

  	
  5,983

  	
   

  
	
  General and administrative

  	
   

  	
  4,079

  	
   

  	
  3,885

  	
   

  	
  2,554

  	
   

  
	
  Investment tax credits

  	
   

  	
  (82

  	
  )

  	
  (492

  	
  )

  	
  (739

  	
  )

  
	
  Restructuring Charges

  	
   

  	
  501

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  25,775

  	
   

  	
  22,629

  	
   

  	
  13,905

  	
   

  
	
  Loss from Operations

  	
   

  	
  (11,124

  	
  )

  	
  (7,205

  	
  )

  	
  (5,859

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest income (expense), net

  	
   

  	
  658

  	
   

  	
  906

  	
   

  	
  (492

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest expense on debt component of redeemable preferred shares and
  convertible debt

  	
   

  	
  —

  	
   

  	
  (500

  	
  )

  	
  (3,610

  	
  )

  
	
  Patent fee

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (435

  	
  )

  
	
  Foreign exchange gain (loss)

  	
   

  	
  4,514

  	
   

  	
  (1,453

  	
  )

  	
  (328

  	
  )

  
	
  Net loss

  	
   

  	
  (5,952

  	
  )

  	
  (8,252

  	
  )

  	
  (10,724

  	
  )

  
	
  Income taxes

  	
   

  	
  (37

  	
  )

  	
   

  	
   

  	
   

  	
   

  
	
  Net and Comprehensive Loss

  	
   

  	
  (5,989

  	
  )

  	
  (8,252

  	
  )

  	
  (10,724

  	
  )

  
	
  Deficit, beginning of period

  	
   

  	
  (71,871

  	
  )

  	
  (63,619

  	
  )

  	
  (52,895

  	
  )

  
	
  Deficit, end of period

  	
   

  	
  (77,860

  	
  )

  	
  (71,871

  	
  )

  	
  (63,619

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and fully diluted loss per share

  	
   

  	
  (0.21

  	
  )

  	
  (0.35

  	
  )

  	
  (2.96

  	
  )

  
	
  Basic and diluted weighted average number of Shares outstanding (1) 

  	
   

  	
  28,537,202 

  	
   

  	
  23,448,504 

  	
   

  	
  3,615,466 

  	
   

  

 

(1) after
giving effect to the one-for-ten share consolidation

 

	
   

  	
   

  	
  As at

  	
   

  	
  As at

  	
   

  	
  As at

  	
   

  
	
   

  	
   

  	
  February 28,

  	
   

  	
  February 29,

  	
   

  	
  February 28,

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
  Consolidated Balance Sheet Data:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
  8,504

  	
   

  	
  1,551

  	
   

  	
  1,334

  	
   

  
	
  Short Term Investments

  	
   

  	
  14,994

  	
   

  	
  31,908

  	
   

  	
  —

  	
   

  
	
  Total Assets

  	
   

  	
  51,828

  	
   

  	
  59,815

  	
   

  	
  20,540

  	
   

  
	
  Line of credit

  	
   

  	
  641

  	
   

  	
  550

  	
   

  	
  4,443

  	
   

  
	
  Convertible debt

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  13,020

  	
   

  
	
  Debt component of redeemable preferred shares

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  18,004

  	
   

  
	
  Total liabilities

  	
   

  	
  8,533

  	
   

  	
  11,318

  	
   

  	
  44,744

  	
   

  
	
  Total shareholder’s equity (deficiency)

  	
   

  	
  43,295

  	
   

  	
  48,497

  	
   

  	
  (24,204

  	
  )

  

 

 

Overview

 

DragonWave Inc. is a foremost industry innovator who
designs, develops and manufactures carrier-grade microwave equipment offering
high capacity broadband wireless systems for network operators and service
providers worldwide.  The Company
delivers native Ethernet wireless point-to-point backhaul networks for the
transport of voice, video and data.

 

DragonWave entered fiscal 2009 with a strategy to
continue its thrusts to grow revenue, expand internationally, penetrate new
customers, and improve margin.  The year end results show that a revenue
growth of 7% over the previous year was attained.  There were two main
factors that constrained revenue from growing faster during the year.  The
first is the announcement of a business combination of two of DragonWave’s
carrier customers in North America that resulted in purchases from both
customers being curtailed as regulatory approval was pursued and the
combination was completed.  The combination of Clearwire and Sprint’s
broadband business was completed successfully at the end of November 2008
and the transaction included an injection of $3.2 billion USD.  The second
factor constraining growth was the effect of the macroeconomic instability the
world is experiencing which had the impact of changing some customer buying
patterns to conserve cash.  On the international expansion front, revenue
from outside north America increased by 11% year over year.  The dampening
effect of the financial market situation was most noticeable in Europe with the
Middle East market reflecting less of an impact.  New customer acquisition
was strong with 55 new customers being sold to during the year bringing the
customer base to more than 250 customers worldwide, in 56 countries.  The
value proposition of DragonWave’s Horizon product family with its carrier class
performance, low power consumption, in indoor and outdoor configurations were
important determinants of these new customer wins.  DragonWave’s gross
margin came in at 34% in fiscal 2009 versus 38% in fiscal 2008.  Half of
this decline in gross margin is a result of an excess inventory charge of $1.0
million being taken in the fourth quarter. This provision recognizes material
that has become excess based on the rapid success of the Horizon product
platform.  The other half of the decline was a combination of product mix
shifting to an average of lower capacity products, some one-time costs
associated with a new carrier win, and higher freight costs. Overall the
company has remained healthy and is now well positioned to address
opportunities in FY2010.

 

Several important customer announcements during the
year highlighted the scale and geographic distribution of the new wins.  In the Latin American region, M3 Wireless of
Bermuda announced their intention to use DragonWave equipment for backhaul in
their network and DragonWave was pleased to have Brightstar sign on as a new
distributor in the Caribbean.  In Europe,
Altitude Infrastructure, a subsidiary of Altitude Group, selected DragonWave
products to provide high capacity Ethernet backhaul as part of its rollout of
WiMAX broadband services across France. 
A major win in Italy was also announced where Linkem Spa, one of that
country’s largest broadband service providers selected DragonWave’s Horizon
Compact for their new WiMAX network. 
Pakistan has become one of DragonWave’s most active markets and the
recently announced win with wi-tribe Pakistan Limited, a WiMAX service provider
in the country has further strengthened DragonWave’s presence there.

 

One of the most significant shifts in the product mix
in this fiscal year was the swing toward DragonWave’s Horizon product
family.  By the fourth quarter this year,
greater than 90% of all orders received were for either Horizon Compact or
Horizon Duo, and this trend is expected to continue.  The Company is very pleased with the market’s
adoption of Horizon and believes that it will continue to gain traction in the
backhaul market.  The low projected
demand for AirPair products, however has necessitated an examination of the
existing inventory levels for AirPair specific components.  The total value of the inventory provision
recorded in the 4th quarter of FY09 for excess AirPair inventory
is $1.0 million.  A significant portion
of this provision relates to two critical components secured by DragonWave as
part of a last time buy agreement in 2005 ($ 0.9 million).

 

Within the context of limited revenue growth and
visibility, DragonWave’s focus centred on cost control.  Although certain costs were consciously
expended to achieve new large customer wins, where possible DragonWave took aggressive
steps to find new sources of supply, and re-think shipping methods.  In an environment of intense pricing
pressure, higher fuel surcharges, and increased overhead and labour costs
associated early stage production of Horizon, DragonWave was able to limit the
margin erosion to 2% before the excess 

 

 

AirPair inventory provision was taken (FY09
Margin before AirPair provision: 36.1%; FY09 Margin after AirPair provision:
33.8%; FY08 gross margin 38.2%).

 

The aggressive cost reduction measures designed to
proactively reduce the cost structure of the company were extended to include
the elimination of approximately twenty positions from the Company’s workforce
in the third quarter which reduced the Company’s total headcount by close to
13%.  The Company also announced that it
would be cancelling its dual listing on the London Stock Exchange’s Alternative
Investor Market (AIM).

 

DragonWave also took the proactive step in fiscal 2009
of adopting a shareholder rights plan (the “Rights Plan”) designed to encourage
the fair and equal treatment of shareholders in connection with any take-over
bid for the outstanding securities of the Company.  The Rights Plan is intended to provide the
Company’s Board with adequate time to assess a take-over bid, to consider alternatives
to a take-over bid as a means of maximizing shareholder value, to allow
competing bids to emerge, and to provide the Company’s shareholders with
adequate time to properly assess a take-over bid without undue pressure. The
Rights Plan is not intended to prevent take-over bids that treat shareholders
fairly and offer fair value, and permits bids that meet certain requirements
intended to protect the interests of all shareholders.

 

In fiscal year 2010, the Company plans to continue to
attract new customers globally whilst meeting the growing needs of its existing
customer base including carriers, distributors, and Value Added
Re-sellers.  The Company will continue to
push down the cost curve with investment in product design, and through global
changes to the sources of its supply.

 

Revenue and Expenses

 

The Company distributes its products and services
through a combination of direct and indirect sales channels.  In the service provider market, the Company’s
direct sales efforts target customers worldwide implementing or planning
networks, and include marketing to prospective customers where spectrum is
being sold in anticipation of a network build. 
The sales cycle to this class of customer typically involves a trial (or
trials), and generally requires nine to twelve months from first contact before
orders are received.  Once the order
stage is reached, a supply agreement is usually established and multiple orders
are processed under one master supply arrangement.  The Company addresses the remainder of the
market through a network of distributors, Value Added Resellers (“VARs”) and
Original Equipment Manufacturers  (“OEMs”),
leveraging the market specific expertise of these channel partners.

 

The Company evaluates revenue performance over three
main geographic regions.  These regions
are North America; Europe the Middle East and Africa (EMEA); and Rest of World
(ROW).  The following table sets out the
portion of new customers and existing customers DragonWave shipped to in fiscal
year 2009.

 

 

 

The chart above demonstrates the growing interest in
DragonWave’s wireless Ethernet products internationally.  To support the globalization initiative, the
Company invested in more sales resources in EMEA, in developing product
variants to meet specific country requirements, and in certifying products for
sale in new regions. The Company intends to continue its efforts to increase
sales penetration in locations outside North America in fiscal 2010.

 

The Company’s manufacturing strategy continues to
centre on the utilization of outsourced manufacturing to meet the increasing
demand for the Company’s products worldwide. 
As such, a large component of the Company’s cost of sales is the cost of
product purchased from outsourced manufacturers.  In addition to the cost of product payable to
outsourced manufacturers, the Company incurs expenses associated with final
configuration, testing, logistics and warranty activities.  Final test and assembly for the links sold by
the Company is carried out on DragonWave’s premises. The Company primarily uses
the services of two outsourced manufacturers.  
One of those manufacturers is BreconRidge Corporation. BreconRidge is a
related party because one of its directors, Terence Matthews, holds a
significant equity position in both the Company and BreconRidge. Management
believes that the commercial terms of the Company’s arrangement with
BreconRidge reflect fair market terms and payment provisions. Research and
development costs relate mainly to the compensation of the Company’s engineering
group and the material consumption associated with prototyping activities.  Selling and marketing expenses include the
remuneration of sales staff, travel and trade show activities, and customer
support services.

 

General and administrative expenses relate to the
remuneration of related personnel, and professional fees associated with tax,
accounting and legal advice, and insurance costs.

 

Occupancy and information systems costs are related to
the Company’s leasing costs and communications networks and are accumulated and
allocated, based on headcount, to all functional areas in the Company’s
business.  The Company’s facilities are
leased from a related party that is controlled by a director and shareholder of
the Company. Management believes the terms of the lease reflect fair market
terms and payment provisions.

 

For the period from March 1, 2007 until
DragonWave’s initial public offering on April 19, 2007 DragonWave was
classified as a Canadian controlled private corporation (CCPC).  By virtue of being a CCPC, the Company
claimed and received a partial cash refund relating to qualified research and
development expenditures from the Canadian federal and provincial
governments.  The cash refundable amount
was estimated by Management each year and is reflected in the financial
statements of the Company as a reduction to expenses.  As a consequence of ceasing to be a CCPC, the
federal portion of Investment Tax Credits (ITCs) earned by the Company will no
longer

 

 

be refundable but will still be available
to the Company at a reduced rate to reduce future cash taxes payable.  There is still a refundable provisional
investment tax credit available to the Company.

 

The Company conducts the majority of its business transactions
in two currencies, U.S. dollars and Canadian dollars.  Most of the Company’s sales and cost of sales
are denominated in U.S. dollars.  Since
the Company’s headquarters are located in Canada, the majority of the Company’s
operating expenses (including salaries and operating costs but excluding cost
of sales) are denominated in Canadian dollars. 
The majority of the proceeds from the initial public offering and follow
on offering were received by the Company in Canadian dollars.   This supply of Canadian currency
significantly reduces the requirement for DragonWave to purchase Canadian
dollars to pay Canadian based expenses for the foreseeable future.  The requirement to sell U.S. currency and
purchase Canadian dollars in the past exposed the company to fluctuations in
the Canadian and U.S. dollar exchange rates.

 

Comparison of  the three months, and years ended February 28, 2009 and February 29,
2008

 

Revenue

 

	
  Three
  Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11,333

  	
   

  	
  10,342

  	
   

  	
  43,334

  	
   

  	
  40,404

  	
   

  

 

Revenue increased by 9.6% or $1.0 million for the
fourth quarter of fiscal 2009 compared with the same period in the previous
year and by 7.3 % or $2.9 million for the year ended February 28, 2009
compared with the twelve months ended February 29, 2008.

 

	
  Changes to Revenue; Q4 FY2009 vs. Q4 FY008

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  New Customers (China, Pakistan, Middle East, Italy)

  	
   

  	
  3.0

  	
   

  
	
  Existing Customers: Distributors and VARs globally

  	
   

  	
  (0.4

  	
  )

  
	
  Existing Customers: Regional Carriers and Internet Service Providers,
  primarily in Europe

  	
   

  	
  (0.9

  	
  )

  
	
  Timing of the completion of certain Engineering Services Contracts

  	
   

  	
  (0.7

  	
  )

  
	
   

  	
   

  	
  1.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Changes to Revenue; FY2009 vs. FY008

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  New Customers: (Primarily a regional carrier in Pakistan; VAR in
  Italy)

  	
   

  	
  4.6

  	
   

  
	
  New Customers: (VAR in China)

  	
   

  	
  1.5

  	
   

  
	
  New Customers: (North American based VARs & Regional
  Carriers)

  	
   

  	
  0.8

  	
   

  
	
  Existing Customers: (Regional Carrier in Canada)

  	
   

  	
  0.7

  	
   

  
	
  Existing Customers: (Primarily the timing of completion of projects in
  Germany/Spain)

  	
   

  	
  (3.5

  	
  )

  
	
  Existing Customers: (North American based distributors and VARs)

  	
   

  	
  (0.4

  	
  )

  
	
  Timing of the completion of certain Engineering Services Contracts

  	
   

  	
  (0.8

  	
  )

  
	
   

  	
   

  	
  2.9

  	
   

  

 

 

The table below, shows the fourth quarter and total year
breakdown by region, and reveals the impact by region of the factors described
above.

 

	
   

  	
   

  	
  Three months ended

  	
   

  	
  Twelve Months ended

  	
   

  
	
   

  	
   

  	
  Feb. 28, 2009

  	
   

  	
  Feb. 29, 2008

  	
   

  	
  Feb. 28, 2009

  	
   

  	
  Feb. 29, 2008

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
  %

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  North America

  	
   

  	
  7,579

  	
   

  	
  67

  	
  %

  	
  8,121

  	
   

  	
  79

  	
  %

  	
  29,641

  	
   

  	
  69

  	
  %

  	
  28,065

  	
   

  	
  70

  	
  %

  
	
  Europe, Middle East and Africa

  	
   

  	
  2,141

  	
   

  	
  19

  	
  %

  	
  2,074

  	
   

  	
  20

  	
  %

  	
  11,334

  	
   

  	
  26

  	
  %

  	
  11,382

  	
   

  	
  28

  	
  %

  
	
  ROW

  	
   

  	
  1,613

  	
   

  	
  14

  	
  %

  	
  147

  	
   

  	
  1

  	
  %

  	
  2,359

  	
   

  	
  5

  	
  %

  	
  957

  	
   

  	
  2

  	
  %

  
	
   

  	
   

  	
  11,333

  	
   

  	
  100

  	
  %

  	
  10,342

  	
   

  	
  100

  	
  %

  	
  43,334

  	
   

  	
  100

  	
  %

  	
  40,404

  	
   

  	
  100

  	
  %

  

 

Gross Profit

 

	
   

  	
   

  	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
   

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
  Gross Margin before Airpair

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Inventory Provision

  	
   

  	
  3,935

  	
   

  	
  4,256

  	
   

  	
  15,647

  	
   

  	
  15,424

  	
   

  
	
   

  	
   

  	
  34.7

  	
  %

  	
  41.2

  	
  %

  	
  36.1

  	
  %

  	
  38.2

  	
  %

  
	
  Less: Airpair Inventory Provision

  	
   

  	
  996

  	
   

  	
  0

  	
   

  	
  996

  	
   

  	
  0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Gross Profit

  	
   

  	
  2,939

  	
   

  	
  4,256

  	
   

  	
  14,651

  	
   

  	
  15,424

  	
   

  
	
   

  	
   

  	
  25.9

  	
  %

  	
  41.2

  	
  %

  	
  33.8

  	
  %

  	
  38.2

  	
  %

  

 

The
decrease in margin as a percentage of revenue in the fourth quarter of fiscal
2009 when compared to the same period in the previous year can be attributed to
several factors which have been impacting the Company for the past two
quarters.  First, a combination of
product mix changes and significant global pricing pressures have resulted in a
4.5% reduction to margin year over year.  
Second, overhead and labour costs associated with the shift to a product
line in the early phases of production had the impact of reducing margin by
1%.  Finally, higher costs associated
with the globalization of DragonWave’s product sourcing strategy, including
costs associated with transportation accounted for a 1% reduction.  The AirPair inventory provision, discussed
previously reflects the excess component inventory perceived to exist in an
environment where DragonWave’s Horizon product line has been so successful in
its acceptance.  The provision had a 8.8%
impact on margin in the quarter.

 

An
examination of the 2.1% margin percentage change when comparing fiscal year
2009 to fiscal year 2008 reveals the impact of a number of pressures on the
business.  Once again, labour and
overhead costs associated with the final test and assembly for the horizon
product line are higher than the more mature AirPair product line and these
higher costs had a 1% impact on gross margin. 
The shift to suppliers located in China and the utilization of a
Contract Manufacturer in the United States resulted in higher freight costs and
this reduced margin by approximately 1% in the year as well.   DragonWave continues to take significant
steps to reduce the material costs of their products through design
modifications and changes to their sources of supply.  Strategies to minimize the impact of
transportation costs are being employed and the overhead and labour costs
associated with the early 

 

 

phases of
producing Horizon Compact and Horizon Duo are expected to decline with
experience and the migration of a greater portion of the process to contract
manufacturers.  The AirPair inventory
provision had a 2.3% impact on margin for the year.

 

Research and Development

 

	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2,476

  	
   

  	
  2,806

  	
   

  	
  10,628

  	
   

  	
  10,378

  	
   

  

 

Research and development (“R&D”) expenses
decreased by $0.4 million for the three months ended February 28, 2009 and
increased by $0.3 million for the year ended February 28, 2009 when
compared with the same periods in the prior fiscal year.

 

The restructuring actions which were announced on the
first day of the fourth quarter had the effect of reducing the number of
R&D resources.  Lower compensation
related charges, and costs associated with external contractors were the
primary contributors to the $0.4 million of lower spending in the fourth
quarter of fiscal 2009 when compared to the same period in the previous year.

 

The R&D organization grew in the first three
quarters of fiscal 2009 and this growth fueled a $0.4 million dollar increase
in compensation related charges relative to the compensation costs in fiscal
2008.  In addition, depreciation expenses
on recently purchased test equipment and related costs added $0.2 million to
the R&D costs base year over year. 
Offsetting these increases was lower material spending, which decreased
by $0.3 million.  Material spending for
prototype builds increases or decreases in response to the timing of product
releases.  Horizon Compact and Duo were
released in fiscal 2008 and early in fiscal 2009 respectively, and therefore
the material spending in support of these releases was higher in fiscal 2008
than it was in fiscal 2009.

 

Selling & Marketing

 

	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2,453

  	
   

  	
  2,728

  	
   

  	
  10,649

  	
   

  	
  8,858

  	
   

  

 

Sales and Marketing expenses decreased by $0.3 million
in the fourth quarter of fiscal 2009 relative to the same period in the
previous year and increased by $1.8 million for the twelve month period ending February 28,
2009 relative to fiscal 2008.

 

DragonWave took active steps in fiscal 2009 to
increase the number of sales and support personnel internationally. In
addition, new marketing and product line management team members were also
successfully recruited.  Compensation
costs including variable compensation, therefore, was the primary contributor
to higher 

 

 

spending levels in fiscal 2009. The higher
costs associated with the increased resource pool were offset in the fourth
quarter by lower variable compensation costs (Q4 - $0.3 million lower; FY2009 -
$ 1.1 million higher)  The costs
associated with supporting foreign offices increased year over year as well (Q4
- $0.1 million higher; FY2009 - $ 0.3 million higher).  Travel related spending for the year
increased, although aggressive steps to minimize travel and control costs in
the fourth quarter resulted in a decreased spending level quarter over quarter
(Q4 - $0.1 million lower; FY2009 - $ 0.4 million higher)

 

General &
Administrative

 

	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1,051

  	
   

  	
  991

  	
   

  	
  4,079

  	
   

  	
  3,885

  	
   

  

 

General and administrative expenses increased by $0.1
million for the three months ended February 28, 2009 and $0.2 million for
year ended February 28, 2009 when compared to the same periods in the
previous year.

 

The $0.1 million increase in spending in the fourth
quarter of 2009 compared to the same quarter in fiscal 2008 can be attributed
to higher business taxes, insurance and banking fees.  An examination of total year spending indicates
that $0.2 million higher expenses associated with stock option compensation was
a contributor to the year over year variance. 
Stock option compensation expense is not cash impacting.  A higher bad debt provision associated with a
specific account in the Middle East contributed $0.2 million to the increase
which was offset by lower commodity and capital tax provisions which were
reduced by approximately $0.2 million.

 

Investment Tax Credits

 

	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  0

  	
   

  	
  (50

  	
  )

  	
  (82

  	
  )

  	
  (492

  	
  )

  

 

Investment tax credits declined by $0.1 million for
the three months ended February 28, 2009 and by $0.4 million for the year
ended February 28, 2009.  The
Company was eligible to claim both federal and provincial refundable investment
tax credits (ITCs) for the first 49 days of fiscal 2008, until April 18th, 2007.  After that date the
Company’s status as a Canadian Controlled Private Corporation (CCPC) ended and
the federal portion of the refundable ITCs ceased to be available.   While the company will continue to be
eligible to claim investment tax credits to reduce future tax liabilities, only
the provincial portion of the credit remains refundable.

 

 

Restructuring Expenses

 

	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  17

  	
   

  	
  0

  	
   

  	
  501

  	
   

  	
  0

  	
   

  

 

During the third fiscal quarter of the year ending February 29,
2008, the Company implemented a restructuring plan aimed at reducing its operating
expenses due to the uncertainty in some of its markets arising from the global
financial conditions.

 

Restructuring charges related to severance costs and
other cost reduction measures were $0.5 million and $.04 million respectively.
Other costs include both legal and contract termination costs. All
restructuring costs have been recognized in the current period. The greater
part of all cash disbursements related to these restructuring costs took place
during the three month period ending February 28, 2009 with a balance
still owing of $17 thousand which is included in accounts payable.

 

Interest Income
(Net)

 

	
   

  	
   

  	
  Three Months
  Ended

  	
   

  	
  Twelve Months
  Ended

  	
   

  
	
   

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest Income

  	
   

  	
  83

  	
   

  	
  454

  	
   

  	
  693

  	
   

  	
  1109

  	
   

  
	
  Interest Expense

  	
   

  	
  (10

  	
  )

  	
  (11

  	
  )

  	
  (35

  	
  )

  	
  (203

  	
  )

  
	
   

  	
   

  	
  73

  	
   

  	
  443

  	
   

  	
  658

  	
   

  	
  906

  	
   

  

 

Interest income is calculated on the Company’s
guaranteed short term investment.  The
Company values the investment at market value. 
Interest expense is paid on the Company’s line of credit.

 

The decreased principal and prime lending rate has
resulted in lower interest income values in the fourth quarter and year to
date, when compared to the same periods in the previous year.  The line of credit balance in its native
currency has remained unchanged for the last five fiscal quarters, which
resulted in no significant variance in interest expense.   In fiscal 2008, the line of credit balance
remained high for a portion of the year.

 

 

Interest expense on debt component
of preferred shares and convertible debt:

 

	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  (500

  	
  )

  

 

Interest accrued on the debt portion of Series A-1
Preferred Shares and Class B Preferred Shares and on the convertible
secured subordinated promissory notes (the “Convertible Debt”) decreased from $
0.5 million for the twelve months ended February 29, 2008 to $nil for the
twelve months ended February 28, 2009. Following the Company’s IPO the
convertible debt and redeemable preferred shares were converted into common
shares and interest no longer needed to be accrued on these instruments.

 

Foreign Exchange Gain (Loss)

 

	
  Three Months Ended

  	
   

  	
  Twelve Months Ended

  	
   

  
	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  	
  Feb. 28

  	
   

  	
  Feb. 29

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  850

  	
   

  	
  (472

  	
  )

  	
  4,514

  	
   

  	
  (1,453

  	
  )

  

 

The foreign exchange gains recognized in fiscal 2009
result from the increasing strength of the U.S. dollar relative to the Canadian
dollar over the course of fiscal 2009. 
The gain is generated when U.S. denominated monetary assets are
translated into Canadian dollars at the balance sheet date.

 

Liquidity and Capital Resources

 

As at February 28, 2009, the Company had a credit
line in place with a major U.S.-based bank which allows borrowing to support
working capital requirements of up to $5.0 million.

 

 

The table below outlines selected balance sheet
accounts and key ratios:

 

	
   

  	
   

  	
  As at

  	
   

  	
  As at

  	
   

  
	
   

  	
   

  	
  February 28,

  	
   

  	
  February 29,

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
  Key Balance Sheet Amounts and Ratios:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and
  Cash Equivalents

  	
   

  	
  8,504

  	
   

  	
  1,551

  	
   

  
	
  Short Term
  Investments

  	
   

  	
  14,994

  	
   

  	
  31,908

  	
   

  
	
  Working
  Capital

  	
   

  	
  40,619

  	
   

  	
  45,674

  	
   

  
	
  Long Term
  Assets

  	
   

  	
  2,676

  	
   

  	
  2,823

  	
   

  
	
  Long Term
  Liabilities

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Working
  Capital Ratio

  	
   

  	
  5.8  :
  1

  	
   

  	
  5.0 : 1

  	
   

  
	
  Days Sales
  Outstanding in accounts receivable

  	
   

  	
  76 days

  	
   

  	
  97 days

  	
   

  
	
  Inventory
  Turnover

  	
   

  	
  2.3 times

  	
   

  	
  3.2 times

  	
   

  

 

Cash

 

As at February 28, 2009 the Company had $23.5
million in cash and cash equivalents plus short term investments representing a
$10.0 million decrease from February 29, 2008.  The cash was used in FY09 in a number of
ways.  First, the net loss of $4.3
million ($5.9 million adjusted for items in net income which don’t affect cash
including $1.1 million in depreciation and $0.6 million in stock based
compensation) had a significant impact. 
The $5.0 million growth in non-cash working capital was also an
important driver, the most significant element in the non-cash working capital
increase was the growth in inventory. 
The Company continued to invest in critical capital assets and this
further utilized $0.9 million in cash resources.  Offsetting these factors were a number of
small financing activities including most prominently the exercise of warrants,
together these activities provided $0.2 million dollars to the cash available
to the Company.

 

Working
Capital

 

	
   

  	
   

  	
  February 29, 2008 to

  	
   

  
	
  Changes in working capital

  	
   

  	
  February 28, 2009

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Cash and
  cash equivalents and Short Term Investments

  	
   

  	
  (10.0

  	
  )

  
	
  Accounts
  Receivable

  	
   

  	
  (0.9

  	
  )

  
	
  Other
  receivables

  	
   

  	
  (0.4

  	
  )

  
	
  Inventory

  	
   

  	
  3.7

  	
   

  
	
  Prepaid
  Expenses

  	
   

  	
  (0.3

  	
  )

  
	
  Accounts
  Payable and accrued liabilities

  	
   

  	
  3.4

  	
   

  
	
  Deferred Revenue

  	
   

  	
  (0.5

  	
  )

  
	
   

  	
   

  	
   

  	
   

  
	
  Net Change in Working Capital

  	
   

  	
  (5.0

  	
  )

  

 

Working capital is calculated as the difference
between the Company’s current assets and current liabilities. The Company’s
working capital balance decreased by $5.0 million between February 29,
2008 and February 28, 2009. The decrease in cash and cash equivalents
combined with short term investments had the most significant impact.  

 

 

Decreases in the outstanding accounts
receivable balance as well as other receivables was offset by the growth in
inventory and the decrease in accounts payable and accrued liabilities amounts.

 

The days sales outstanding in accounts receivable,
(DSO), as at February 28, 2009 was 76 days.  This calculation was 21 days lower than the
DSO of 97 days at February 29, 2008. 
The Company evaluates DSO by determining the number of days of sales in
the ending accounts receivable balance with reference to the most recent
monthly sales, rather than average yearly or quarterly values.  A significant number of customers world wide
are demanding longer payment terms, which is a reflection of the global
economic environment at present.  This
appetite for extended terms is likely to continue to push DragonWave’s days
sales outstanding figure higher.

 

Inventory turnover for February 28, 2009 was 2.3
times for the period then ended, a turnover level similar to that experienced
at November 30, 2008..  Turnover is
calculated with reference to the most recent monthly standard cost of goods
sold and is based on the period ending inventory balance of production related
inventory (net of labour and overhead allocations).  The Company will be continuing to pursue a
variety of strategic directions with their outsourced manufacturers with the
objective of reducing inventory levels and improving turnover going forward.

 

Cash
Inflows and Outflows:

 

	
   

  	
   

  	
  28-Feb-09

  	
   

  	
  29-Feb-08

  	
   

  	
  28-Feb-07

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
  Cash Inflows and (Outflows) by Activity:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  activities

  	
   

  	
  (10,356

  	
  )

  	
  (10,178

  	
  )

  	
  (8,165

  	
  )

  
	
  Investing
  activities

  	
   

  	
  16,150

  	
   

  	
  (34,182

  	
  )

  	
  (300

  	
  )

  
	
  Financing
  activities

  	
   

  	
  252

  	
   

  	
  45,150

  	
   

  	
  4,679

  	
   

  
	
  Effect of
  foreign exchange on bank accounts

  	
   

  	
  907

  	
   

  	
  (573

  	
  )

  	
  (1

  	
  )

  
	
  Net cash
  inflows (outflows)

  	
   

  	
  6,953

  	
   

  	
  217

  	
   

  	
  (3,787

  	
  )

  

 

Cash
Used in Operating Activities

 

DragonWave used $10.4 million dollars in operating
related activities in the twelve month period ended February 28,
2009.  The Company’s net loss accounted
for the majority of the usage ($5.9 million), while the increase in non-cash
working capital ($5.0) million accounted for the majority of the remaining
difference.

 

Purchase
of Capital Assets

 

Capital asset purchases for the year ended February 28,
2009 were $0.9 million compared to $2.8 million for the same period in the
prior year.  In FY2008 the significant
capital spending level related primarily to the acquisition of test equipment
and R&D lab equipment required to meet the changing capability requirements
of the new product lines including Horizon Compact and Horizon Duo.  This spending declined in FY09 as most of the
capability related equipment was already purchased.  Spending also occurred, to a lesser extent in
the desktop and IT infrastructure area to meet the needs of the growing labour
force in the Company.

 

Financing
Activities

 

There was a limited level of financing activities during the twelve
month period ending February 28, 2009. 
Proceeds of $0.2 million were received due to the issuance of 114,980 common shares as
a result of the Company’s bank exercising three separate warrants.

 

 

Liquidity
and Capital Resource Requirements

 

Based on the Company’s recent performance, current
revenue expectations, and the funds raised through the financing activities
during the year outlined above, Management believes cash resources will be
available to satisfy working capital needs for at least the next 12 months.

 

Off Balance Sheet Arrangements

 

The Company leases space for its headquarters in
Ottawa, Ontario.   The research and
development, final configuration and test, and G&A groups are also housed
in this facility.  The Company also
leases warehouse spaces in Ottawa, Ontario. 
The building lease expires in November, 2011, while the warehouse lease
expires in October 2009.  Additional
warehouse space is leased on a month by month basis. The rental costs including
operating expenses total $49,640 and $13,370 per month respectively.    In April, 2008 the Company signed a lease
agreement in England.  The lease expires
in April, 2013 and rental costs including operating costs total $6,349 per month.

 

The Company uses an outsourced manufacturing model
whereby most of the component acquisition and assembly of the Company’s
products are executed by third parties. 
Generally, the Company provides the supplier with a purchase order 90
days in advance of expected delivery. 
The Company is responsible for the financial impact of any changes to
the product requirements within this period.

 

Transactions with Related Parties

 

The Company leases premises from a real estate company
controlled by a board member.  During the
year ended February 28, 2009, the Company paid $0.8 million (year ended February 29,
2008 - $0.8 million), relating to the rent and operating costs
associated with this real estate.  These
amounts have been allocated amongst various expense accounts.

 

The Company also purchased products and services from
two companies controlled or significantly influenced by a Board Member.  Total net product and services purchased for
the year ended February 28, 2009 was $14.3 million (year ended February 29,
2008 - $14.9 million), and the value owing for net purchases at February 28,
2009 was $1.4 million (February 29, 2008 - $1.0 million) and is
included in accounts payable and accrued liabilities. The majority of the
purchases have been recorded in inventory and cost of sales.

 

Interest expense paid to a related party for a Company
issued Convertible Debenture for the year ended February 28, 2009 was $nil
(year ended February 29, 2008 - $0.1 million).

 

All transactions are in the normal course of business
and have been recorded at the exchange amount.

 

Description of Credit Facilities

 

Bank
Line of Credit

 

As at February 28, 2009, the Company had drawn
$0.6 million (February 29, 2008 – $0.6 million), on an operating
credit facility with a limit of $5.0 million (February 29,
2008 - $5.0 million).  Interest
is calculated at the bank’s prime rate of interest plus 1.0% and resulted in a
weighted average effective rate of 5.44% (February 29, 2008 - 8%).  The draw on the line of credit is denominated
in both Canadian and US currencies. The Company has 

 

 

provided a general security agreement on
accounts receivable and a refundable tax credit assignment (included in other
receivables - note 3). The Company was in compliance with the financial
covenants included in the lending agreement as at February 28, 2009

 

CONTROLS AND PROCEDURES

 

In compliance with the Canadian Securities
Administrators’ National Instrument 52-109 (“NI 52-109”), we have filed
certificates signed by the Chief Executive Officer (“CEO”) and the Chief
Financial Officer (“CFO”) that, among other things, report on the design and
effectiveness of disclosure controls and procedures and the design and
effectiveness of internal controls over financial reporting.

 

Disclosure
controls and procedures

 

The CEO and the CFO have designed disclosure controls
and procedures, or have caused them to be designed under their supervision, in
order to provide reasonable assurance that within the time periods specified in
securities legislation:

 

·                  material information
relating to the Corporation has been made known to them; and

 

·                  information required to be
disclosed in the Corporation’s filings is recorded, processed, summarized and
reported

 

An evaluation was carried
out, under the supervision of the CEO and the CFO, of the effectiveness of our
disclosure controls and procedures. Based on this evaluation, the CEO and the
CFO concluded that the disclosure controls and procedures are effective.

 

Internal
controls over financial reporting

 

The CEO and the CFO have also designed internal
controls over financial reporting, or have caused them to be designed under
their supervision, in order to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian GAAP.

 

An evaluation was carried out, under the supervision
of the CEO and the CFO, of the design and effectiveness of our internal
controls over financial reporting. Based on this evaluation, the CEO and the
CFO concluded that the internal controls over financial reporting are
effective.

 

 

Changes
in internal controls over financial reporting

 

No changes were made to our internal controls over
financial reporting that occurred during the fourth quarter of fiscal year 2009
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Inventory

 

Inventory is
valued at the lower of cost and market. 
The cost of raw materials is calculated on a standard cost basis, which
approximates average cost. Market is determined as net realizable value for
finished goods, raw materials and work in progress. Indirect manufacturing
costs and direct labour expenses are allocated systematically to the total
production inventory.

 

Revenue
recognition

 

The Company derives
revenue from the sale of broadband wireless backhaul equipment which includes
embedded software and a license to use said software and extended product
warranties.  Software is considered to be
incidental to the product.  Services
range from installation and training to basic consulting.  Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred and there are no
significant remaining vendor obligations, collection of receivables is
reasonably assured and the fee is fixed and determinable.  Where final acceptance of the product is
specified by the customer, revenue is deferred until acceptance criteria have
been met.  Additionally, the Company’s
business agreements may contain multiple elements.  Accordingly, the Company is 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,
the Company allocates revenue to each component of the arrangement using the
residual value method, based on vendor-specific objective evidence of the fair
value of the undelivered elements.  These
elements may include one or more of the following:  advanced replacement, extended warranties,
training, and installation.  The Company
allocates the arrangement fee, in a multiple-element transaction, to the
undelivered elements based on the total fair value of those undelivered
elements, as indicated by vendor-specific objective evidence.  This portion of the arrangement fee is
deferred.  The difference between the
total arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements.  In some instances, a group of contracts or
agreements with the same customer may be so closely related that they are, in
effect, part of a single multiple element arrangement, and therefore, the
Company would allocate the corresponding revenue among the various components,
as described above.

 

The Company generates revenue through direct sales and
sales to distributors.  Revenue on
stocking orders sold to distributors is not recognized until the product is
delivered to an end user.

 

Arrangements that include services such as training
and installation are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement.  When services are considered essential,
revenue allocable to the other elements is deferred until the services have
been performed.  When services are not
considered essential, the revenue allocable to the services is recognized as
the services are performed.

 

Revenue associated with extended warranty and advanced
replacement is recognized rateably over the life of the contract.

 

 

Revenue from engineering services or development
agreements is recognized according to the specific terms and acceptance
criteria as services are rendered.

 

The Company accrues estimated potential product
liability as warranty costs when revenue on the sale of equipment is
recognized.  Warranty costs are
calculated on a percentage of revenue per month based on current actual
warranty costs and return experience.

 

Shipping and handling costs borne by the Company are
recorded in costs 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.

 

Research
and development

 

Research costs are expensed as incurred.  Development costs other than property and
equipment are expensed as incurred unless they meet generally accepted
accounting criteria for deferral and amortization.  Development costs incurred prior to
establishment of technological feasibility do not meet these criteria, and are
expensed as incurred.  Government
assistance and investment tax credits relating to ongoing research and
development costs are recorded as a recovery of the related research and
development expenses, and where such assistance is reasonably assured.

 

Foreign
currency translation

 

The Company’s foreign subsidiary is considered
financially and operationally integrated and is translated into Canadian
dollars using the temporal method of translation: monetary assets and
liabilities are translated at the period end exchange rate, non-monetary assets
are translated at the historical exchange rate, and revenue and expense items
are translated at the average exchange rate. Gains or losses resulting from the
translation adjustments are included in income.

 

Income
taxes

 

The Company follows the liability method in accounting for income
taxes.  Under this method, current income
taxes are recognized based on an estimate of the current year.  Future tax assets and liabilities are
recorded for the effects of temporary differences between the tax basis of an
asset or liability and its reported amount in the financial statements. The
future benefit of losses available to be carried forward, and likely to be
realized are measured using the substantively enacted tax rate in effect at the
time in which the losses will be utilized. A valuation allowance is recorded
when it is more likely than not that the benefit of the future income tax asset
will not be realized.

 

Loss
per share

 

Basic loss per share is calculated by dividing net
loss available to Common shareholders by the weighted average number of Common
shares outstanding during the period. For all periods presented, the net loss
available to Common shareholders equates to the net loss. The diluted loss per
share does not differ from the basic loss per share as outstanding dilutive
instruments are anti-dilutive.

 

Diluted net loss per share is equal to the basic net
loss per share since the effect of exercising 2,075,918 stock options (2008 —
1,604,350) would be antidilutive for all periods.

 

 

Stock
option plan

 

The company has a stock option plan which is described
in Note 9.  The Company accounts for
stock options granted to employees using the fair value method, in accordance
with the recommendations in CICA Handbook section 3870, Stock-based
Compensation and Other Stock-based Payments. 
In accordance with the fair value method, the Company recognizes
estimated compensation expense related to stock options over the vesting period
of the options granted, with the related credit being charged to contributed
surplus.

 

The Company launched an employee share purchase plan
on October 20, 2008.  The plan
includes provisions to allow employees to purchase Common shares.  The Company will match the contribution at a
rate of 25%. Proceeds from employees and cost of matching shares are recorded
in equity at the time the shares are issued. The shares contributed by the
Company will vest 12 months after issuance with a corresponding compensation
expense recognized into income.

 

CHANGES IN ACCOUNTING POLICIES

 

The
CICA has issued the following new Handbook Sections which affect the current
period:

 

a)  Handbook Section 3862, “Financial
Instruments — Disclosures,” applies to fiscal years beginning on or after October 1,
2007. This Section modifies the disclosure standards for financial
instruments that were included in Section 3861 “Financial Instruments —
Disclosure and Presentation”. The new standard requires entities to provide
disclosure on a) the significance of financial instruments for the entity’s
financial position and performance and b) the nature and extent of risks
arising from financial instruments to which the entity is exposed during the
period and at the balance sheet date, and how the entity manages those risks.
The Company has provided the required disclosure in Note 11.

 

b)  Handbook Section 3863, “Financial
Instruments — Presentation,” applies to fiscal years beginning on or after October 1,
2007. This Section carries forward the same presentation standards for
financial instruments that were included in Section 3861 “Financial
Instruments — Disclosure and Presentation”.

 

c)  Handbook Section 3031, “Inventories”, was
issued in March 2007 and replaces Section 3030 “Inventories”
effective for fiscal years beginning on or after January 1, 2008. The new
section prescribes measurement of inventories at the lower of cost and net
realizable value. It provides guidance on the determination of cost,
prohibiting the use of the last in, first out method (LIFO), and requires the
reversal of previous write-downs when there is a subsequent increase in the
value of inventories. The changes noted above have been incorporated in the
current years financial statements and analysis.

 

d)  Section 1535, “Capital Disclosures”,
establishes standards for disclosing information about an entity’s capital and
how it is managed. It describes the disclosure of the entity’s objectives,
policies and processes for managing capital, the qualitative data about what
the entity regards as capital, whether the entity has complied with any capital
disclosure requirements, and, if it has not complied, the consequences of such
non-compliance.

 

The Company is in
compliance with the new Handbook Sections mentioned above as of February 28,
2009.

 

 

Future
Accounting Changes

 

a)              In 2006, Canada’s Accounting Standards Board
ratified a strategic plan that will result in Canadian GAAP, as used by public
companies, being evolved and converged with International Financial Reporting
Standards (“IFRS”) over a transitional period to be complete by 2011 (Q1
FY2012). The Company will be required to report using the converged standards
effective for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2011. Canadian GAAP will be converged
with IFRS through a combination of two methods: as current joint-convergence
projects of the United States’ Financial Accounting Standards Board and the
International Accounting Standards Board are agreed upon, they will be adopted
by Canada’s Accounting Standards Board and may be introduced in Canada before
the complete changeover to IFRS; and standards not subject to a
joint-convergence project will be exposed in an omnibus manner for introduction
at the time of the complete changeover to IFRS. The International Accounting
Standards Board currently has projects underway that should result in new
pronouncements that continue to evolve IFRS.

 

Transition
to International Financial Reporting Standards (“IFRS”)

 

DragonWave
will be required to report consolidated year end financial statements under
IFRS for the first time on February 28, 2012.  The Company is aware of the magnitude of the
effort involved to succeed in such a transition and has begun the process to
prepare for this eventuality.

 

The
Company will start on the conversion plan in Q1 and Q2 FY2010 with the help of
an external advisor. The project consists of three phases to be completed in
order to change over to IFRS: diagnostic, development and implementation.

 

The
first phase includes the identification of significant differences between the
current Canadian GAAP standards and IFRS that are relevant to DragonWave and a
review of the alternatives available upon adoption. The Company will perform a
diagnostic review and establish the most significant differences for the
Company. Canadian GAAP and IFRS differ in the following areas:  revenue recognition, property and equipment,
leases, provisions, reporting currency, presentation and additional disclosure
requirements under IFRS. Additional differences might be identified in the
future as changes to IFRS standards are released.

 

The
second phase includes identification, evaluation and selection of accounting
policies necessary for DragonWave to change over to IFRS as well as potential
first-time adoption exemptions. During this phase, the Company will assess the
impact of the transition on the data system and internal control over financial
reporting, the further training required for the financial team and the impact
on business activities such as foreign currency, capital requirements, banking
agreements or compensation arrangements. The Company will begin this phase in
Q3-Q4 FY2010.

 

The
implementation phase will integrate all the solutions into the Company’s
financial system and processes that are necessary for the Company to convert to
IFRS.

 

 

SELECTED CONSOLIDATED
QUARTERLY FINANCIAL INFORMATION

 

You
will find below a selection of the Company’s annual audited and quarterly
un-audited financial results.

 

	
   

  	
   

  	
  FY 2008

  	
   

  	
  FY 09

  	
   

  
	
   

  	
   

  	
  May 31

  	
   

  	
  Aug 31

  	
   

  	
  Nov 30

  	
   

  	
  Feb 29

  	
   

  	
  YE

  	
   

  	
  May 31

  	
   

  	
  Aug 31

  	
   

  	
  Nov 28

  	
   

  	
  Feb 28

  	
   

  	
  YE

  	
   

  
	
   

  	
   

  	
  2007

  	
   

  	
  2007

  	
   

  	
  2007

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2009

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Revenue

  	
   

  	
  8,629

  	
   

  	
  9,885

  	
   

  	
  11,548

  	
   

  	
  10,342

  	
   

  	
  40,404

  	
   

  	
  10,725

  	
   

  	
  10,572

  	
   

  	
  10,704

  	
   

  	
  11,333

  	
   

  	
  43,334

  	
   

  
	
  Gross Profit

  	
   

  	
  3,025

  	
   

  	
  3,611

  	
   

  	
  4,532

  	
   

  	
  4,256

  	
   

  	
  15,424

  	
   

  	
  4,381

  	
   

  	
  3,627

  	
   

  	
  3,704

  	
   

  	
  2,939

  	
   

  	
  14,651

  	
   

  
	
  Gross Profit
  %

  	
   

  	
  35

  	
  %

  	
  37

  	
  %

  	
  39

  	
  %

  	
  41

  	
  %

  	
  38

  	
  %

  	
  41

  	
  %

  	
  34

  	
  %

  	
  35

  	
  %

  	
  26

  	
  %

  	
  34

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  Expenses

  	
   

  	
  4,899

  	
   

  	
  5,405

  	
   

  	
  5,850

  	
   

  	
  6,475

  	
   

  	
  22,629

  	
   

  	
  6,835

  	
   

  	
  6,460

  	
   

  	
  6,483

  	
   

  	
  5,997

  	
   

  	
  25,775

  	
   

  
	
  Income from
  operations

  	
   

  	
  (1,874

  	
  )

  	
  (1,794

  	
  )

  	
  (1,318

  	
  )

  	
  (2,219

  	
  )

  	
  (7,205

  	
  )

  	
  (2,454

  	
  )

  	
  (2,833

  	
  )

  	
  (2,779

  	
  )

  	
  (3,058

  	
  )

  	
  (11,124

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income
  (loss) for the year

  	
   

  	
  (2,726

  	
  )

  	
  (2,069

  	
  )

  	
  (1,208

  	
  )

  	
  (2,249

  	
  )

  	
  (8,252

  	
  )

  	
  (1,941

  	
  )

  	
  (1,677

  	
  )

  	
  (221

  	
  )

  	
  (2,150

  	
  )

  	
  (5,989

  	
  )

  
	
  Basic and fully
  diluted loss per share

  	
   

  	
  (0.21

  	
  )

  	
  (0.08

  	
  )

  	
  (0.04

  	
  )

  	
  (0.08

  	
  )

  	
  (0.35

  	
  )

  	
  (0.07

  	
  )

  	
  (0.06

  	
  )

  	
  (0.01

  	
  )

  	
  (0.08

  	
  )

  	
  (0.21

  	
  )

  
	
  Basic and
  diluted weighted average number of shares outstanding 

  	
   

  	
  13,181,112 

  	
   

  	
  24,639,351 

  	
   

  	
  27,646,025 

  	
   

  	
  28,440,355 

  	
   

  	
  23,448,504 

  	
   

  	
  28,480,522 

  	
   

  	
  28,555,335 

  	
   

  	
  28,555,716 

  	
   

  	
  28,536,427 

  	
   

  	
  28,537,202 

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Assets

  	
   

  	
  42,961

  	
   

  	
  40,248

  	
   

  	
  62,268

  	
   

  	
  59,815

  	
   

  	
  59,815

  	
   

  	
  54,988

  	
   

  	
  55,371

  	
   

  	
  56,102

  	
   

  	
  51,828

  	
   

  	
  51,828

  	
   

  

 

Historically, the Company’s
operating results have fluctuated on a quarterly basis and it is expected that
quarterly financial results will continue to fluctuate in the future.
Fluctuations in results relate to the growth in the Company’s revenue, and the
project nature of the network installations of our end customers.  In addition, results may fluctuate as a
result of the timing of staffing, infrastructure additions required to support
growth, and material costs required to support design initiatives.Exhibit
4.3

 

 

 

 

DragonWave Inc.

Management’s Discussion and
Analysis

For the three months ended May 31,
2009

 

The following
provides management’s discussion and analysis (“MD&A”) of DragonWave Inc.’s
unaudited interim consolidated results of operations and financial condition
for the three months ended May 31, 2009. 
This discussion should be read in conjunction with the Company’s
unaudited consolidated interim financial statements for the three months ended
May 31, 2009. For additional information and details, readers are referred to
the audited annual consolidated financial statements and MD&A for fiscal
2009 and the Company’s Annual Information Form (AIF), all of which are
published separately and are available at www.sedar.com.

 

The financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles (GAAP) and are reported in Canadian dollars.  The information contained herein is dated as
of July 14, 2009 and is current to that date, unless otherwise stated.  The Company’s fiscal year commences March 1 of
each year and ends on the last day of February of the following year.

 

In this document,
“we”, “us”, “our”, “Company” and “DragonWave” all refer to DragonWave Inc.
collectively with its subsidiaries, DRAGONWAVE CORP & 4472314 Canada Inc.
The content of this MD&A has been approved by the Board of Directors, on
the recommendation of its Audit Committee.

 

Forward-Looking
Statements

 

Certain statements included in this management’s
discussion and analysis constitute forward-looking statements, including those
identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”,
“intent” and similar expressions to the extent they relate to the Company or
its management.  The Company’s actual
results are subject to a number of risks and uncertainties that could cause the
actual results or events to differ materially from those indicated in the
forward-looking statements.  To develop a
better understanding of the business risk factors that could cause the actual
results of DragonWave to differ materially from expectations either expressed
or implied please refer to the Company’s Annual Information Form (“AIF”),
a copy of which is available on SEDAR at www.sedar.com.

 

 

	
   

  	
   

  	
  Three
  Months

  	
   

  	
  Three
  Months

  	
   

  
	
   

  	
   

  	
  Ended
  May 31,

  	
   

  	
  Ended
  May 31,

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  REVENUE

  	
   

  	
  15,950

  	
   

  	
  10,725

  	
   

  
	
  Cost
  of sales

  	
   

  	
  10,440

  	
   

  	
  6,344

  	
   

  
	
  Gross profit

  	
   

  	
  5,510

  	
   

  	
  4,381

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXPENSES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research
  and development

  	
   

  	
  3,024

  	
   

  	
  3,131

  	
   

  
	
  Selling
  and marketing

  	
   

  	
  2,539

  	
   

  	
  2,624

  	
   

  
	
  General
  and administrative

  	
   

  	
  1,231

  	
   

  	
  1,130

  	
   

  
	
  Investment
  tax credits

  	
   

  	
  (60

  	
  )

  	
  (50

  	
  )

  
	
  Restructuring
  Charges

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  6,734

  	
   

  	
  6,835

  	
   

  
	
  Loss from Operations

  	
   

  	
  (1,224

  	
  )

  	
  (2,454

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest
  income (expense), net

  	
   

  	
  27

  	
   

  	
  245

  	
   

  
	
  Foreign
  exchange gain (loss)

  	
   

  	
  (1,686

  	
  )

  	
  268

  	
   

  
	
  Net loss

  	
   

  	
  (2,883

  	
  )

  	
  (1,941

  	
  )

  
	
  Income
  taxes

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Net and Comprehensive Loss

  	
   

  	
  (2,883

  	
  )

  	
  (1,941

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic
  and fully diluted loss per share

  	
   

  	
  (0.10

  	
  )

  	
  (0.07

  	
  )

  
	
  Basic
  and diluted weighted average number of Shares outstanding

  	
   

  	
  28,569,238

  	
   

  	
  28,480,522

  	
   

  

 

	
   

  	
   

  	
  As
  at

  	
   

  	
  As at

  	
   

  
	
   

  	
   

  	
  May 31,

  	
   

  	
  February 28,

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2009

  	
   

  
	
  Consolidated Balance Sheet Data:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
  21,975

  	
   

  	
  8,504

  	
   

  
	
  Short Term Investments

  	
   

  	
  —

  	
   

  	
  14,994

  	
   

  
	
  Total Assets

  	
   

  	
  49,818

  	
   

  	
  51,828

  	
   

  
	
  Line of credit

  	
   

  	
  586

  	
   

  	
  641

  	
   

  
	
  Total liabilities

  	
   

  	
  9,153

  	
   

  	
  8,533

  	
   

  
	
  Total shareholder’s equity (deficiency)

  	
   

  	
  40,665

  	
   

  	
  43,295

  	
   

  

 

 

Overview

 

DragonWave Inc. is a foremost industry innovator who
designs, develops and manufactures carrier-grade microwave equipment offering
high capacity broadband wireless systems for network operators and service
providers worldwide.  The Company
delivers native Ethernet wireless point-to-point backhaul networks for the
transport of voice, video and data.

 

Early in the first quarter of fiscal 2010 DragonWave
made an announcement relating to the significant increase in order activity
attributed to an existing Customer in North America.  Further, the Company released a business
update in May of 2009 which articulated the expectation that this would be
a “break out” year for DragonWave as a result of the expected growth in sales
during the year.  The first quarter was
shaped by this surge, with a record quarterly revenue of $16.0 Million
representing a growth of 49% year over year. 
Underpinning this increase was a significant effort by the operations team
to successfully adjust the output levels by working with our suppliers to
respond to the changing demand.   Margin
remained at 34.5 %, consistent with the quarterly margin realized in the fourth
quarter of fiscal 2009.  The Company
continues to execute the cost reduction strategies which will enable DragonWave
to track back toward higher margins as the year progresses.  The loss from operations narrowed to $1.2
million, down from $2.5 million in the previous year.  The Company’s net loss increased from $1.2
million to $2.9 million as a result of a foreign exchange expense of $1.7
million which resulted primarily from the translation of DragonWave’s cash and
accounts receivable balances.

 

DragonWave’s growth strategy continues to have the
dual focus of satisfying the growing demands from existing customers, coupled
with the drive to acquire new carriers and distributors around the world.  In the first quarter the Company shipped
product to 11 new customers increasing the customer base to more than 260 customers
in 57 countries.  In the continued bid to
offer comprehensive solutions to its customer base, DragonWave announced that
it had qualified for the Cisco Technology Developer Program which connects
Cisco with third-party developers of hardware and software to deliver tested
interoperable solutions to joint customers. 
DragonWave also announced that its 
cost effective horizon compact solution was selected for Connecteo’s
network throughout Western Africa.

 

DragonWave’s continues to focus on improving its
margins by reducing the cost of its products. 
The strategy to achieve that comes from an outsourcing strategy that
will see DragonWave’s products being sourced increasingly from low cost
manufacturing locations in the Far East. 
Further, certain time intensive manufacturing functions will migrate to
contract manufacturers better able to scale output for high volumes.  In addition to the cost benefits anticipated
from changing the sources of supply, and the location of manufacturing,
DragonWave is anticipating that high volume orders will enable the company to
achieve price discounts for many of its raw materials.

 

Revenue and Expenses

 

The Company distributes its products and services
through a combination of direct and indirect sales channels.  In the service provider market, the Company’s
direct sales efforts target customers worldwide implementing or planning
networks, and include marketing to prospective customers where spectrum is
being sold in anticipation of a network build. 
The sales cycle to this class of customer typically involves a trial (or
trials), and generally requires nine to twelve months from first contact before
orders are received.  Once the order
stage is reached, a supply agreement is usually established and multiple orders
are processed under one master supply arrangement.  The Company addresses the remainder of the
market through a network of distributors, Value Added Resellers (“VARs”) and
Original Equipment Manufacturers  (“OEMs”),
leveraging the market specific expertise of these channel partners.

 

The Company evaluates revenue performance over three
main geographic regions.  These regions
are North America; Europe, the Middle East and Africa (EMEA); and Rest of World
(ROW).  The following table sets out the
portion of new customers and existing customers DragonWave shipped to in the
first quarter of fiscal year 2010.

 

 

 

The chart above demonstrates the continued push to
expand the Company’s international reach. 
In order to achieve the globalization objective, DragonWave continues to
hire new sales and customer support representatives, and invest in
certifications and product variants that enable DragonWave’s products to be
marketable across a spectrum of regions.

 

The Company’s manufacturing strategy continues to
centre on the utilization of outsourced manufacturing to meet the increasing
demand for the Company’s products worldwide. 
As such, a large component of the Company’s cost of sales is the cost of
product purchased from outsourced manufacturers.  In addition to the cost of product payable to
outsourced manufacturers, the Company incurs expenses associated with final
configuration, testing, logistics and warranty activities.  Final test and assembly for the links sold by
the Company is carried out on DragonWave’s premises. The Company primarily uses
the services of two outsourced manufacturers.  
One of those manufacturers is BreconRidge Corporation. BreconRidge is a
related party because one of its directors, Terence Matthews, holds a
significant equity position in both the Company and BreconRidge. Management
believes that the commercial terms of the Company’s arrangement with
BreconRidge reflect fair market terms and payment provisions.

 

Research and development costs relate mainly to the
compensation of the Company’s engineering group and the material consumption
associated with prototyping activities.

 

Selling and marketing expenses include the
remuneration of sales staff, travel and trade show activities, and customer
support services.

 

General and administrative expenses relate to the
remuneration of related personnel, professional fees associated with tax,
accounting and legal advice, and insurance costs.

 

Occupancy and information systems costs are related to
the Company’s leasing costs and communications networks and are accumulated and
allocated, based on headcount, to all functional areas in the Company’s
business.  The Company’s facilities are
leased from a related party that is controlled by a director and shareholder of
the Company.  Management believes the
terms of the lease reflect fair market terms and payment provisions.

 

 

As a consequence of being a publicly traded company
the federal portion of Investment Tax Credits (ITCs) earned by the Company are
no longer refundable but are still available to the Company to reduce future
cash taxes payable.  There remains a
refundable provincial investment tax credit available to the Company.

 

The Company conducts the majority of its business
transactions in two currencies, U.S. dollars and Canadian dollars.  Most of the Company’s sales and cost of sales
are denominated in U.S. dollars.  Since
the Company’s headquarters are located in Canada, the majority of the Company’s
operating expenses (including salaries and operating costs but excluding cost
of sales) are denominated in Canadian dollars. 
The majority of the proceeds from the initial public offering and follow
on offering were received by the Company in Canadian dollars.   This supply of Canadian currency
significantly reduces the requirement for DragonWave to purchase Canadian
dollars to pay Canadian based expenses. 
The expense or gain on the P&L is driven largely by the requirement
to translate U.S. based cash deposits and accounts receivable into Canadian
dollars.

 

Comparison of  the three months ended May 31, 2009 and May 31, 2008

 

Revenue

 

	
  Three
  Months Ended

  	
   

  
	
  May 31

  	
   

  	
  May 31

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  15,950

  	
   

  	
  10,725

  	
   

  

 

Revenue increased by 49% or $5.2 million for the first
quarter of fiscal 2010 compared with the same period in the previous year.

 

Changes to Revenue: Q1 FY2010 vs Q1
FY2009

 

	
  Existing Customers: Regional Carriers and Internet
  Service Providers, primarily in NA

  	
   

  	
  4.4

  	
   

  
	
  Existing Customers: Distributors and VARS globally

  	
   

  	
  0.9

  	
   

  
	
  New Customers (Middle East, Europe, Turkey)

  	
   

  	
  0.2

  	
   

  
	
  External Engineering Services Contracts

  	
   

  	
  (0.3

  	
  )

  
	
   

  	
   

  	
  5.2

  	
   

  

 

The table below shows the first quarter regional
revenue breakdown.  The impact of the
growth in demand from an existing carrier in North America is evident in the
60% increase in North America.  The 26%
growth in EMEA, was driven by regional carrier demand primarily in Pakistan.

 

 

	
   

  	
   

  	
  Three
  months ended

  	
   

  
	
   

  	
   

  	
  May 31,
  2009

  	
   

  	
  May 31,
  2008

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
  %

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  North
  America

  	
   

  	
  12,852

  	
   

  	
  80

  	
  %

  	
  8,059

  	
   

  	
  75

  	
  %

  
	
  Europe,
  Middle East and Africa

  	
   

  	
  3,027

  	
   

  	
  19

  	
  %

  	
  2,416

  	
   

  	
  23

  	
  %

  
	
  ROW

  	
   

  	
  71

  	
   

  	
  1

  	
  %

  	
  250

  	
   

  	
  2

  	
  %

  
	
   

  	
   

  	
  15,950

  	
   

  	
  100

  	
  %

  	
  10,725

  	
   

  	
  100

  	
  %

  

 

Gross Margin

 

	
  Three
  Months Ended

  	
   

  
	
  May 31

  	
   

  	
  May 31

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  10,440

  	
   

  	
  6,344

  	
   

  
	
  34.5

  	
  %

  	
  40.8

  	
  %

  

 

DragonWave’s gross margin
remains at a level consistent with both the third and fourth quarter of FY2009
(Q3 FY09; 34.6% and Q4 FY09; 34.7% - before the AirPair provision).  The factors which continue to have an impact
on the Company’s gross margin centre on pricing pressures and product mix
factors which the Company experienced through this period.  Relative to the first quarter of fiscal 2009,
these factors combined to reduce margin by approximately 6%.    DragonWave is in the process of securing a
supply of raw materials which will assist the Company in reducing its material
costs, in part as a result of the higher volumes being ordered, and in part
because of a change in the sources of supply. 
In addition, through fiscal 2010, DragonWave will be migrating labour
intensive final test and assembly processes to the contract manufacturers,
which are expected to help reduce the variable overhead and labour costs for
the organization.

 

Research and Development

 

	
  Three
  Months Ended

  	
   

  
	
  May 31

  	
   

  	
  May 31

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3,024

  	
   

  	
  3,131

  	
   

  

 

Research and development (“R&D”) expenses
decreased by $0.1 million for the three months ended May 31, 2009 when
compared with the same period in the prior fiscal year.

 

 

The restructuring actions which were announced on the
first day of the fourth quarter fiscal year 2009 had the effect of reducing the
number of R&D resources.  As a
result, lower compensation related charges, and costs associated with external
contractors were primary contributors to the lower spending. (Positive
variance: $0.2 million).  In addition,
lower project spending on software when compared to the first quarter of fiscal
2009 was also partly responsible for the improvement. (Positive variance: $0.2
million).  Offsetting these savings were
the decreased recoveries generated from external contract billings in
comparison to the first period of fiscal 2009. 
When revenue is recognized on these contracts the associated costs are
removed from R&D and recognized in cost of goods sold. (Negative variance:
$0.3 million).

 

Selling & Marketing

 

	
  Three
  Months Ended

  	
   

  
	
  May 31

  	
   

  	
  May 31

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2,539

  	
   

  	
  2,624

  	
   

  

 

Sales and Marketing expenses decreased slightly in the
first quarter of fiscal 2010 relative to the same period in the previous year.

 

Higher variable compensation costs which
contributed to increased spending quarter over quarter ($0.2 million) were
offset by travel related reductions and sales promotion activity decreases.  Travel and other sales spending decisions
have been closely monitored and alternatives to travel, for example, have been
encouraged as part of the on-going efforts to control spending.

 

General &
Administrative

 

	
  Three
  Months Ended

  	
   

  
	
  May 31

  	
   

  	
  May 31

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  1,231

  	
   

  	
  1,130

  	
   

  

 

General and administrative expenses increased by $0.1
million for the three months ended May 31, 2009 when compared to the same
period in the previous year.

 

The $0.1 million increase in spending can be attributed
to higher compensation costs quarter over quarter.  Two factors contributed to this growth; an
increase in the resources required to administer the “new product”
introduction  process as well as supply
chain management functions in addition to variable compensation spending.

 

 

Investment Tax
Credits

 

	
  Three
  Months Ended

  	
   

  
	
  May 31

  	
   

  	
  May 31

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (60

  	
  )

  	
  (50

  	
  )

  

 

DragonWave continues to accrue an amount related to
the refundable portion of the investment tax credits available in the province
of Ontario.  There has been no
significant change in the value accrued in the first quarter of fiscal 2010
over the amount accrued in the same quarter in the previous fiscal year.

 

Interest Income (Net)

 

	
   

  	
   

  	
  Three
  Months Ended

  	
   

  
	
   

  	
   

  	
  May 31

  	
   

  	
  May 31

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest
  Income

  	
   

  	
  34

  	
   

  	
  254

  	
   

  
	
  Interest
  Expense

  	
   

  	
  -7

  	
   

  	
  -9

  	
   

  
	
   

  	
   

  	
  26

  	
   

  	
  245

  	
   

  

 

Interest income is calculated on the Company’s
guaranteed short term investment.  The
Company values the investment at market value. 
Interest expense is paid on the Company’s line of credit.

 

The decreased principal as well as the decrease in the
prime lending rate has resulted in lower interest income values in the first
quarter, when compared to the same periods in the previous year.  The line of credit balance in its native
currency has remained unchanged for the last five fiscal quarters, which
resulted in no significant variance in interest expense.

 

 

Foreign Exchange Gain (Loss)

 

	
  Three
  Months Ended

  	
   

  
	
  May 31

  	
   

  	
  May 31

  	
   

  
	
  2009

  	
   

  	
  2008

  	
   

  
	
  $

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (1,686

  	
  )

  	
  268

  	
   

  

 

The foreign exchange loss recognized in the first
quarter of fiscal 2010 resulted from the increasing strength of the Canadian
dollar relative to the U.S. dollar over the three month period.  The loss is created when U.S. denominated
monetary assets are translated into Canadian dollars at the balance sheet date.

 

Liquidity and Capital Resources

 

As at May 31, 2009, the Company had a credit line
in place with a major U.S.-based bank which allows borrowing to support working
capital requirements of up to $10.0 million USD and capital expenditure
requirements of up to $3 million USD.

 

The table below outlines selected balance sheet
accounts and key ratios:

 

	
   

  	
   

  	
  As
  at

  	
   

  	
  As
  at

  	
   

  
	
   

  	
   

  	
  May 31,
  2009

  	
   

  	
  February 28,
  2009

  	
   

  
	
  Key Balance Sheet Amounts and Ratios:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash
  and Cash Equivalents

  	
   

  	
  21,975

  	
   

  	
  8,504

  	
   

  
	
  Short
  Term Investments

  	
   

  	
  —

  	
   

  	
  14,994

  	
   

  
	
  Working
  Capital

  	
   

  	
  37,700

  	
   

  	
  40,619

  	
   

  
	
  Long
  Term Assets

  	
   

  	
  2,965

  	
   

  	
  2,676

  	
   

  
	
  Long
  Term Liabilities

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Working
  Capital Ratio

  	
   

  	
  5.1 : 1

  	
   

  	
  5.8 : 1

  	
   

  
	
  Days
  Sales Outstanding in accounts receivable

  	
   

  	
  59 days

  	
   

  	
  76 days

  	
   

  
	
  Inventory
  Turnover

  	
   

  	
  4.1 times

  	
   

  	
  2.3 times

  	
   

  

 

 

Cash

 

As at May 31, 2009 the Company had $22.0 million
in cash and cash equivalents representing a $1.5 million decrease from February 28,
2009.  The cash outflow in Q1 FY10 was
due to a number of factors.  The net loss
of ($2.3) million (adjusted for non-cash items) was the largest usage of cash,
followed by the acquisition of property and equipment ($0.6M).  Offsetting these cash draws were changes in
the non-cash working capital items ($1.4 million), driven by the reduction in
inventory levels.

 

Working
Capital

 

	
   

  	
   

  	
  February 28,

  	
   

  
	
   

  	
   

  	
  2009
  to May 31,

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  
	
  Changes in working capital

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents and Short Term
  Investments

  	
   

  	
  (1,523.0

  	
  )

  
	
  Accounts Receivable

  	
   

  	
  735.0

  	
   

  
	
  Other receivables

  	
   

  	
  (80.0

  	
  )

  
	
  Inventory

  	
   

  	
  (1,705.0

  	
  )

  
	
  Prepaid Expenses

  	
   

  	
  274.0

  	
   

  
	
  Line of Credit

  	
   

  	
  55.0

  	
   

  
	
  Accounts Payable and accrued liabilities

  	
   

  	
  (1,004.0

  	
  )

  
	
  Deferred Revenue

  	
   

  	
  329.0

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Net Change in Working Capital

  	
   

  	
  (2,919.0

  	
  )

  

 

Working capital is calculated as the difference
between the Company’s current assets and current liabilities. The Company’s
working capital balance decreased $2.9 million between February 28, 2009
and May 31, 2009. The decrease in cash and cash equivalents had a
significant impact, as did the decrease in inventory balances.  Growth in the Accounts Receivable balance was
offset by the growth in accounts payable and accrued liabilities amounts.

 

The days sales outstanding in
accounts receivable, (DSO), as at May 31, 2009 was 59 days.  This calculation was 17 days lower than the
DSO of 76 days at February 28, 2009. 
The Company evaluates DSO by determining the number of days of sales in
the ending accounts receivable balance with reference to the most recent
monthly sales, rather than average yearly or quarterly values.  The favourable DSO performance relates to
strong collection efforts and timely receipt of carrier payments.  Inventory turnover for May 31, 2009 was
4.1 times for the period then ended, an improvement to that experienced at February 28,
2009.  Turnover is calculated with
reference to the most recent monthly standard cost of goods sold and is based
on the period ending inventory balance of production related inventory (net of
labour and overhead allocations).  The
Company will be continuing to pursue a variety of actions with the objective of
continuing to improve turnover.

 

 

Cash
Inflows and Outflows:

 

	
   

  	
   

  	
  Quarter
  ending

  	
   

  
	
   

  	
   

  	
  May 31

  	
   

  	
  Aug
  31

  	
   

  	
  Nov
  30

  	
   

  	
  Feb
  28

  	
   

  	
  May 31

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2009

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Beginning Cash (incl ST INV)

  	
   

  	
  33,459

  	
   

  	
  31,002

  	
   

  	
  27,697

  	
   

  	
  25,220

  	
   

  	
  23,498

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net Loss

  	
   

  	
  (1,941

  	
  )

  	
  (1,677

  	
  )

  	
  (221

  	
  )

  	
  (2,150

  	
  )

  	
  (2,883

  	
  )

  
	
  Changes in Working Capital

  	
   

  	
  (740

  	
  )

  	
  (1,711

  	
  )

  	
  (2,625

  	
  )

  	
  79

  	
   

  	
  1,451

  	
   

  
	
  Investing Activities

  	
   

  	
  (323

  	
  )

  	
  (347

  	
  )

  	
  (136

  	
  )

  	
  (117

  	
  )

  	
  (592

  	
  )

  
	
  Financing Activities

  	
   

  	
  156

  	
   

  	
  22

  	
   

  	
  59

  	
   

  	
  15

  	
   

  	
  (44

  	
  )

  
	
  Non Cash items

  	
   

  	
  391

  	
   

  	
  408

  	
   

  	
  446

  	
   

  	
  451

  	
   

  	
  545

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ending Cash

  	
   

  	
  31,002

  	
   

  	
  27,697

  	
   

  	
  25,220

  	
   

  	
  23,498

  	
   

  	
  21,975

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Cash Used

  	
   

  	
  (2,457

  	
  )

  	
  (3,305

  	
  )

  	
  (2,477

  	
  )

  	
  (1,722

  	
  )

  	
  (1,523

  	
  )

  

 

DragonWave’s cash
utilization has continued to decline over the past five quarters.

 

Cash
Used in Operating Activities

 

The net loss, excluding non cash items, was $ 2.3
million in the quarter.  This usage of
cash was offset by the changes in working capital.   Inventory levels decreased between February 28,
2009 and May 31, 2009 and new inventory purchased within quarter has not
yet been paid for.

 

Purchase
of Capital Asset

 

The Company is currently investing in capital
equipment to support engineering programs as well as the capacity requirements
associated with the increase in sales demand. 
In the quarter spending on capital equipment used $0.6 million in cash
resources.

 

Liquidity
and Capital Resource Requirements

 

Based on the Company’s recent performance, current
revenue expectations, and funds raised through the financing activities of the
previous year, Management believes cash resources will be available to satisfy
working capital needs for at least the next 12 months.

 

CONTROLS AND PROCEDURES

 

The Company’s CEO and CFO are responsible for
establishing and maintaining disclosure controls and procedures for the
Company.  As such, the Company maintains
a set of disclosure controls and procedures designed to ensure that information
required to be disclosed in filings is recorded, processed, summarized and
reported within the time periods specified in the Canadian Securities
Administrators rules and forms.  The
Company’s Chief Executive Officer and Chief Financial Officer have evaluated
the Company’s disclosure controls and procedures as 

 

 

of February 28, 2009 and have determined that such disclosure
controls and procedures are effective. 
There have been no changes noted during the three months ended May 31,
2009.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Inventory

 

Inventory is
valued at the lower of cost and market. 
The cost of raw materials is calculated on a standard cost basis, which
approximates average cost. Market is determined as net realizable value for
finished goods, raw materials and work in progress. Indirect manufacturing
costs and direct labour expenses are allocated systematically to the total
production inventory.

 

Revenue
recognition

 

The Company derives
revenue from the sale of broadband wireless backhaul equipment which includes
embedded software and a license to use said software and extended product
warranties.  Software is considered to be
incidental to the product.  Services
range from installation and training to basic consulting.  Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred and there are no
significant remaining vendor obligations, collection of receivables is
reasonably assured and the fee is fixed and determinable.  Where final acceptance of the product is
specified by the customer, revenue is deferred until acceptance criteria have
been met.  Additionally, the Company’s
business agreements may contain multiple elements.  Accordingly, the Company is 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, the Company allocates revenue to each component of the
arrangement using the residual value method, based on vendor-specific objective
evidence of the fair value of the undelivered elements.  These elements may include one or more of the
following:  advanced replacement,
extended warranties, training, and installation.  The Company allocates the arrangement fee, in
a multiple-element transaction, to the undelivered elements based on the total
fair value of those undelivered elements, as indicated by vendor-specific
objective evidence.  This portion of the
arrangement fee is deferred.  The
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered
elements.  In some instances, a group of
contracts or agreements with the same customer may be so closely related that
they are, in effect, part of a single multiple element arrangement, and
therefore, the Company would allocate the corresponding revenue among the
various components, as described above.

 

The Company generates revenue through direct sales and
sales to distributors.  Revenue on
stocking orders sold to distributors is not recognized until the product is
delivered to an end user.

 

Arrangements that include services such as training
and installation are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement.  When services are considered essential,
revenue allocable to the other elements is deferred until the services have
been performed.  When services are not
considered essential, the revenue allocable to the services is recognized as
the services are performed.

 

Revenue associated with extended warranty and advanced
replacement is recognized rateably over the life of the contract.

 

Revenue from engineering services or development agreements
is recognized according to the specific terms and acceptance criteria as
services are rendered.

 

 

The Company accrues estimated potential product
liability as warranty costs when revenue on the sale of equipment is
recognized.  Warranty costs are
calculated on a percentage of revenue per month based on current actual
warranty costs and return experience.

 

Shipping and handling costs borne by the Company are
recorded in costs 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.

 

Research
and development

 

Research costs are expensed as incurred.  Development costs other than property and
equipment are expensed as incurred unless they meet generally accepted
accounting criteria for deferral and amortization.  Development costs incurred prior to
establishment of technological feasibility do not meet these criteria, and are
expensed as incurred.  Government assistance
and investment tax credits relating to ongoing research and development costs
are recorded as a recovery of the related research and development expenses,
and where such assistance is reasonably assured.

 

Foreign
currency translation

 

The Company’s foreign subsidiary is considered
financially and operationally integrated and is translated into Canadian
dollars using the temporal method of translation: monetary assets and
liabilities are translated at the period end exchange rate, non-monetary assets
are translated at the historical exchange rate, and revenue and expense items
are translated at the average exchange rate. Gains or losses resulting from the
translation adjustments are included in income.

 

Income
taxes

 

The Company
follows the liability method in accounting for income taxes.  Under this method, current income taxes are
recognized based on an estimate of the current year.  Future tax assets and liabilities are recorded
for the effects of temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements. The future
benefit of losses available to be carried forward, and
likely to be realized are measured using the substantively enacted tax rate in
effect at the time in which the losses will be utilized. A valuation allowance
is recorded when it is more likely than not that the benefit of the future
income tax asset will not be realized.

 

FUTURE ACCOUNTING CHANGES

 

In 2006, Canada’s
Accounting Standards Board ratified a strategic plan that will result in
Canadian GAAP, as used by public companies, being evolved and converged with
International Financial Reporting Standards (“IFRS”) over a transitional period
to be complete by 2011 (Q1 FY2012). The Company will be required to report
using the converged standards effective for interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2011.
Canadian GAAP will be converged with IFRS through a combination of two methods:
as current joint-convergence projects of the United States’ Financial
Accounting Standards Board and the International Accounting Standards Board are
agreed upon, they will be adopted by Canada’s Accounting Standards Board and
may be introduced in Canada before the complete changeover to IFRS; and
standards not subject to a joint-convergence project will be exposed in an
omnibus manner for introduction at the time of the complete changeover to IFRS.
The International Accounting Standards Board currently has projects underway
that should result in new pronouncements that continue to evolve IFRS.

 

 

Transition
to International Financial Reporting Standards (“IFRS”)

 

DragonWave will be
required to report consolidated year end financial statements under IFRS for
the first time on February 28, 2012. 
The Company is aware of the magnitude of the effort involved to succeed
in such a transition and has begun the process to prepare for this eventuality.

 

The Company began the
conversion plan in Q1 and will continue into Q2 of FY2010 with the help of an
external advisor. The project consists of three phases to be completed in order
to change over to IFRS: diagnostic, development and implementation.

 

The first phase includes
the identification of significant differences between the current Canadian GAAP  standards and
IFRS that are relevant to DragonWave and a review of the alternatives available
upon adoption. The Company will perform a diagnostic review and establish the
most significant differences for the Company. Canadian GAAP and IFRS differ in
the following areas:  revenue
recognition, property and equipment, leases, provisions, reporting currency,
presentation and additional disclosure requirements under IFRS. Additional
differences might be identified in the future as changes to IFRS standards are
released.

 

The second phase includes
identification, evaluation and selection of accounting policies necessary for
DragonWave to change over to IFRS as well as potential first-time adoption
exemptions. During this phase, the Company will assess the impact of the
transition on the data system and internal control over financial reporting,
the further training required for the financial team and the impact on business
activities such as foreign currency, capital requirements, banking agreements
or compensation arrangements. The Company will begin this phase in Q3-Q4
FY2010.

 

The implementation phase
will integrate all the solutions into the Company’s financial system and
processes that are necessary for the Company to convert to IFRS.

 

 

SELECTED CONSOLIDATED QUARTERLY
FINANCIAL INFORMATION

 

You will find below a
selection of the Company’s quarterly un-audited financial results.

 

	
   

  	
   

  	
  FY
  2008

  	
   

  	
  FY
  09

  	
   

  	
  FY10

  	
   

  
	
   

  	
   

  	
  Aug
  31

  	
   

  	
  Nov
  30

  	
   

  	
  Feb
  29

  	
   

  	
  May 31

  	
   

  	
  Aug
  31

  	
   

  	
  Nov
  28

  	
   

  	
  Feb
  28

  	
   

  	
  May 31

  	
   

  
	
   

  	
   

  	
  2007

  	
   

  	
  2007

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2009

  	
   

  	
  2009

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Revenue

  	
   

  	
  9,885

  	
   

  	
  11,548

  	
   

  	
  10,342

  	
   

  	
  10,725

  	
   

  	
  10,572

  	
   

  	
  10,704

  	
   

  	
  11,333

  	
   

  	
  15,950

  	
   

  
	
  Gross
  Profit

  	
   

  	
  3,611

  	
   

  	
  4,532

  	
   

  	
  4,256

  	
   

  	
  4,381

  	
   

  	
  3,627

  	
   

  	
  3,704

  	
   

  	
  2,939

  	
   

  	
  5518.7

  	
   

  
	
  Gross
  Profit %

  	
   

  	
  37

  	
  %

  	
  39

  	
  %

  	
  41

  	
  %

  	
  41

  	
  %

  	
  34

  	
  %

  	
  35

  	
  %

  	
  26

  	
  %

  	
  35

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  Expenses

  	
   

  	
  5,405

  	
   

  	
  5,850

  	
   

  	
  6,475

  	
   

  	
  6,835

  	
   

  	
  6,460

  	
   

  	
  6,483

  	
   

  	
  5,997

  	
   

  	
  6,734

  	
   

  
	
  Income
  from operations

  	
   

  	
  (1,794

  	
  )

  	
  (1,318

  	
  )

  	
  (2,219

  	
  )

  	
  (2,454

  	
  )

  	
  (2,833

  	
  )

  	
  (2,779

  	
  )

  	
  (3,058

  	
  )

  	
  (1,224

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net
  income (loss) for the year

  	
   

  	
  (2,069

  	
  )

  	
  (1,208

  	
  )

  	
  (2,249

  	
  )

  	
  (1,941

  	
  )

  	
  (1,677

  	
  )

  	
  (221

  	
  )

  	
  (2,150

  	
  )

  	
  (2,883

  	
  )

  
	
  Basic
  and fully diluted loss per share

  	
   

  	
  (0.08

  	
  )

  	
  (0.04

  	
  )

  	
  (0.08

  	
  )

  	
  (0.07

  	
  )

  	
  (0.06

  	
  )

  	
  (0.01

  	
  )

  	
  (0.08

  	
  )

  	
  (0.10

  	
  )

  
	
  Basic and diluted weighted average number of shares
  outstanding

  	
   

  	
  24,639,351

  	
   

  	
  27,646,025

  	
   

  	
  28,440,355

  	
   

  	
  28,480,522

  	
   

  	
  28,555,335

  	
   

  	
  28,555,716

  	
   

  	
  28,536,427

  	
   

  	
  28,569,238

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total
  Assets

  	
   

  	
  40,248

  	
   

  	
  62,268

  	
   

  	
  59,815

  	
   

  	
  54,988

  	
   

  	
  55,371

  	
   

  	
  56,102

  	
   

  	
  51,828

  	
   

  	
  49,818

  	
   

  

 

Historically, the Company’s
operating results have fluctuated on a quarterly basis and it is expected that
quarterly financial results will continue to fluctuate in the future.
Fluctuations in results relate to the growth in the Company’s revenue, and the
project nature of the network installations of our end customers.  In addition, results may fluctuate as a
result of the timing of staffing, infrastructure additions required to support
growth, and material costs required to support design initiatives.

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00163-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00163-of-00352.parquet"}]]