Document:

reeds_8k-ex1002.htm

    EXHIBIT
10.2

     

    

     

    September
11, 2009

    

    Christopher
Reed

    Reed’s,
Inc.

    13000
South Spring Street

    Los
Angeles, California  90061

    

    Source
Capital Group, Inc. Proposed Offering Engagement Letter

    

    

    To Mr.
Reed:

    

    The
purpose of this engagement letter is to set forth the terms pursuant to which
Source Capital Group, Inc. whose address is 276 Post Road West, Westport, CT
06880 (hereinafter referred to as “Source” or “SCG” or “Dealer Manager”) will act as
the sole exclusive placement agent and financial advisor for a proposed
issuance, or series of issuances, of registered or unregistered equity and/or
debt securities (“Proposed
Offering”) of Reed’s, Inc., 13000 South Spring Street, Los Angeles,
California  90061 (collectively, with its subsidiaries and
affiliates), (hereinafter referred to as the “Issuer” or the “Company”), in connection with
a “Registered Direct
Offering” and/or sale of up to $1,500,000 from an effective Form S-3
registration statement.

     

    The terms
of our agreement are as follows:

     

    1.   The
Issuer hereby retains and engages Source, for the period beginning on the date
hereof and ending on September 30, 2009, unless sooner terminated
pursuant to the terms of this engagement letter agreement (the “Engagement Period”), to act as
the Issuer’s sole exclusive placement agent, financial advisor and/or
dealer-manager in connection with the Proposed Offering.  The
compensation for acting as the exclusive sole placement agent to the Issuer and
conditions of Source’s engagement is stated hereunder.  During the
Engagement Period and as long as Source is proceeding in good faith with
activities in connection with the Proposed Offering, the Issuer agrees not to
solicit, negotiate with or enter into any agreement with any other source of
financing (whether equity, debt or otherwise other than bank financings or
financings in connection with strategic alliances), any placement agent,
financial advisor, dealer manager or any other person or entity in connection
with  the Proposed Offering, as the case may be.

     

    2.   In
consideration for its services in the Proposed Offering, Source shall be
entitled to a cash fee equal to 8% of the dollar amount received by the Issuer
in connection with a Proposed Offering (the “Financial Advisory
Fee”).

     

    3.   The
Issuer shall be responsible for and pay all expenses relating to the Proposed
Offering, including, without limitation, all filing fees relating to any
registration statement required by be filed as part of the Proposed Offering of
and any filing fees relating to the review of the Proposed Offering materials by
the Financial Industry Regulatory Authority, Inc. (“FINRA”); all fees and expenses
relating to the listing of such Shares on the exchange where the Common Stock is
(or will be) listed; all fees, expenses and disbursements relating to the
registration or qualification of the Shares under the “blue sky” securities laws
of any states or other jurisdictions; the costs of  mailing and
printing all of the Proposed Offering documents, Registration Statements,
Prospectuses and all amendments, supplements and exhibits thereto and as many
preliminary and final Prospectuses as Source may reasonably deem necessary; the
fees and expenses of the Issuer’s accountants and the fees and expenses of the
Issuer’s legal counsel and other agents and representatives.

    
    

     

     

     

    
      	      
              Members
      FINRA & SIPC

            	      
              276
      Post Road West, Westport, CT  06880

            	      
              www.Sourcegrp.com

            

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      	Page 2	

    

     

     

    4.   During
the 45-day period prior to the filing of the Registration Statement, if
applicable, with the Securities and Exchange Commission (“Commission”), and at all times
thereafter prior and following the effectiveness of such Registration Statement,
the Issuer and its officers, directors and related parties will abide by all
rules and regulations of the Commission relating to public Proposed Offerings,
including, without limitation, those relating to public statements (i.e., “gun
jumping”) and disclosures of material non-public information.

     

    5.   The
Issuer shall supply Source and its counsel, at the Issuer’s cost, with bound
volumes of the Proposed Offering materials within a reasonable time after the
closing of the Proposed Offering (the “Closing”).

     

    6.   The
Proposed Offering shall be conditioned upon, among other things, the
following:

     

    (a)   Satisfactory
completion by Source of its due diligence investigation and analysis of: (i) the
Issuer’s arrangements with its officers, directors, employees, affiliates,
customers and suppliers, (ii) the audited historical financial statements of the
Issuer as may be required by the Act and rules and regulations of the Commission
thereunder for inclusion in the Registration Statement, if applicable, and (iii)
the Issuer’s projected financial results for the fiscal years ending December
31, 2009 and December 31, 2010;

     

    (b)   The
continued listing of the Common Stock on its current exchange or migration to a
higher exchange (“Trading
Market”);

     

    (c)   Source
shall have received from outside counsel to the Issuer such counsel’s written
opinion, addressed to Source, dated as of the Closing, in customary form and
substance reasonably satisfactory to Source;

     

    (d)   FINRA
shall have raised no objection to the fairness and reasonableness of the terms
and arrangements of this Agreement. In addition, the Company shall, if requested
by Source, make or authorize Source’s counsel to make on the Company’s behalf,
an Issuer Filing with the FINRA Corporate Financing Department pursuant to FINRA
Rule 5110 and pay all filing fees required in connection
therewith.

     

    (e)   Prior to
the Closing, the Company shall have furnished to Source such further
information, certificates and documents as Source may reasonably request,
including customary audit comfort letters (all opinions, letters, evidence and
certificates mentioned above or elsewhere in this Agreement shall be deemed to
be in compliance with the provisions hereof only if they are in form and
substance reasonably satisfactory to counsel for Source);

     

    (f)   Any
Proposed Offering shall fund through an escrow account established by Source and
paid for by the Issuer; and

    

    7.   Upon
consummation of a Proposed Offering, if any, Source shall not be granted the
right of first refusal (“Right
of First Refusal”) on any and all subsequent offerings by the
Issuer.

     

    8.   The
Issuer represents and warrants to Source as follows:

     

    (a)   The
Issuer has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated hereunder and otherwise to carry out
its obligations hereunder. The execution and delivery of this Agreement by the
Issuer and the consummation by it of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of the Issuer and no
further action is required by the Issuer, its board of directors or its
stockholders in connection herewith.  This Agreement has been duly
authorized and executed by the Issuer and, when delivered in accordance with the
terms hereof and thereof, will constitute the valid and binding obligation of
the Issuer enforceable against the Issuer in accordance with its terms except
(i) as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally, (ii) as limited by
laws relating to the availability of specific performance, injunctive relief or
other equitable remedies, and (iii) that rights to indemnification and
contribution thereunder may be limited by federal or state securities laws or
public policy relating thereto.

     

    
       

       

      
        	      
                Members
      FINRA & SIPC

              	      
                276
      Post Road West, Westport, CT  06880

              	      
                www.Sourcegrp.com

              

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    
       

      
        	Page 3	

      

       

    

     

    (b)   The
execution, delivery and performance of this Agreement by the Issuer do not and
will not (i) conflict with or violate any provision of the Issuer’s or any
subsidiary’s certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, result in the creation of any Lien upon any of the properties or
assets of the Issuer or any subsidiary, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Issuer or subsidiary debt or otherwise) or other
understanding to which the Issuer or any subsidiary is a party or by which any
property or asset of the Issuer or any subsidiary is bound or affected (except
as may have been consented to or waived), or (iii)  conflict with or result
in a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the Issuer
or a Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Issuer or a Subsidiary is
bound or affected.

     

    (c)   The
Issuer is not required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
federal, state, local or other governmental authority or other “Person” (defined as an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability Issuer, joint stock Issuer,
government (or an agency or subdivision thereof) or other entity of any kind) in
connection with the execution, delivery and performance by the Issuer of this
Agreement, other than such filings as are required to be made under applicable
Federal and state securities laws, by the Trading Market.

     

    (d)   Except as
otherwise provided in this Agreement, no brokerage or finder’s fees or
commissions are or will be payable by the Issuer to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank or other
Person with respect to the transactions contemplated by the this Agreement.
Source shall  have no obligation with respect to any fees or with
respect to any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the offer and
sale of the Securities contemplated by the this Agreement.

     

    (e)   The
Issuer has not, and to its knowledge none of its officers or directors have,
(i) taken, directly or indirectly, any action designed to cause or to
result in the stabilization or manipulation of the price of any security of the
Issuer to facilitate the sale or resale of any of the Securities,
(ii) sold, bid for, purchased, or, paid any compensation for soliciting
purchases of, any of the Securities (other than Source’s placement of the
Securities), or (iii) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Issuer other than
pursuant to this Agreement.

     

    (f)   To the
knowledge of the Issuer, there are no affiliations with any FINRA member firm
among the Issuer’s officers, directors or any five percent (5%) or greater
stockholder of the Issuer.

     

    (g)   Source
shall be a third party beneficiary of any representations and warranties given
to any investors in the Proposed Offering, which representation and warranties
shall be reasonably acceptable to Source.

    
       

       

       

      
        	      
                Members
      FINRA & SIPC

              	      
                276
      Post Road West, Westport, CT  06880

              	      
                www.Sourcegrp.com

              

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    
       

      
        	Page 4	

      

       

    

     

    9.   Source
reserves the right to reduce any item of its compensation or adjust the terms
thereof as specified herein in the event that a determination and/or suggestion
shall be made by FINRA to the effect that Source’s aggregate compensation is in
excess of FINRA rules or that the terms thereof require adjustment; provided, however, the
aggregate compensation otherwise to be paid to Source by the Issuer may not be
increased above the amounts stated herein without the approval of the
Issuer.

     

    10.   The
Issuer agrees that no solicitation material apart from, if applicable, the
Registration Statement will be used by it in connection with the Proposed
Offering or filed with the Commission or any federal, state or local
governmental or regulatory authority by or on behalf of the Issuer without
Source’s prior approval, which approval may not be unreasonably delayed,
withheld or denied.

     

    11.   The
Issuer agrees that it will not issue press releases or engage in any other
publicity, without Source’s prior written consent, commencing on the date hereof
and continuing for a period of forty  (40) days from the Closing of
the Proposed Offering, other than normal and customary releases issued in the
ordinary course of the Issuer’s business.  The Issuer covenants to
adhere to all “gun jumping” and “quiet period” rules and regulations of the
Commission prior to, during and following the filing of the Registration
Statement, if applicable, and the consummation of the Proposed
Offering.

     

    12.   During
the Engagement Period or until the Closing, the Issuer agrees to cooperate with
Source and to furnish, or cause to be furnished, to Source, any and all
information and data concerning the Issuer, its subsidiaries and the Proposed
Offering that Source deems appropriate, including, without limitation, the
Issuer’s acquisition plans and plans for raising capital or additional financing
(the “Information”).  The
Issuer shall provide Source reasonable access during normal business hours from
and after the date of execution of this Agreement until the date of the Closing
to all of the Issuer’s and its subsidiaries assets, properties, books,
contracts, commitments and records and to the Issuer’s and its subsidiaries
officers, directors, employees, appraisers, independent accountants, legal
counsel and other consultants and advisors.  The Issuer represents and
warrants to Source that all Information: (i) made available by the Issuer to
Source or its agents and representatives, (ii) contained in any preliminary or
final Prospectus prepared by the Issuer in connection with the Proposed
Offering, and (iii) contained in any filing by the Issuer with any court or
governmental regulatory agency, commission or instrumentality, will be complete
and correct in all material respects and will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein not misleading in light of the circumstances under which such
statements are made.  The Issuer further represents and warrants to
Source that all such Information will have been prepared by the Issuer in good
faith and will be based upon assumptions which, in light of the circumstances
under which they were made, are reasonable.  The Issuer acknowledges
and agrees that in rendering its services hereunder, Source will be using and
relying on such information (and information available from public sources and
other sources deemed reliable by Source) without independent verification
thereof by Source or independent appraisal by Source of any of the Issuer’s
assets.  The Issuer acknowledges and agrees that this engagement
letter and the terms hereof are confidential and will not be disclosed to anyone
other than the officers and directors of the Issuer and the Issuer’s
accountants, advisors and legal counsel.  Except as contemplated by
the terms hereof or as required by applicable law, Source shall keep strictly
confidential all non-public Information concerning the Issuer provided to
Source.  No obligation of confidentiality shall apply to Information
that: (a) is in the public domain as of the date hereof or hereafter enters the
public domain without a breach by Source, (b) was known or became known by
Source prior to the Issuer’s disclosure thereof to Source, (c) becomes known to
Source from a source other than the Issuer, and other than by the breach of an
obligation of confidentiality owed to the Issuer, (d) is disclosed by the Issuer
to a third party without restrictions on its disclosure or (e) is independently
developed by Source.  Source’s obligations of confidentiality
hereunder shall extend to its employees.

     

    13.   This
engagement letter shall be deemed to have been made and delivered in New York
City and both this engagement letter and the transactions contemplated hereby
shall be governed as to validity, interpretation, construction, effect and in
all other respects by the internal laws of the State of New York, without regard
to the conflict of laws principles thereof.

     

    
       

       

      
        	      
                Members
      FINRA & SIPC

              	      
                276
      Post Road West, Westport, CT  06880

              	      
                www.Sourcegrp.com

              

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    
      
        	Page 5	

      

       

    

     

    14.   Each of
Source and the Issuer: (i) agrees that any legal suit, action or proceeding
arising out of or relating to this engagement letter and/or the transactions
contemplated hereby shall be instituted exclusively in New York Supreme Court,
County of New York, or in the United States District Court for the Southern
District of New York, (ii) waives any objection which it may have or hereafter
to the venue of any such suit, action or proceeding, and (iii) irrevocably
consents to the jurisdiction of the New York Supreme Court, County of New York,
and the United States District Court for the Southern District of New York in
any such suit, action or proceeding.  Each of Source and the Issuer
further agrees to accept and acknowledge service of any and all process which
may be served in any such suit, action or proceeding in the New York Supreme
Court, County of New York, or in the United States District Court for the
Southern District of New York and agrees that service of process upon the Issuer
mailed by certified mail to the Issuer’s address shall be deemed in every
respect effective service of process upon the Issuer, in any such suit, action
or proceeding, and service of process upon Source mailed by certified mail to
Source’s address shall be deemed in every respect effective service process upon
Source, in any such suit, action or proceeding.  Notwithstanding any
provision of this engagement letter to the contrary, the Issuer agrees that
neither Source nor its affiliates, and the respective officers, directors,
employees, agents and representatives of Source, its affiliates and each other
person, if any, controlling Source or any of its affiliates, shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Issuer for or in connection with the engagement and transaction described herein
except for any such liability for losses, claims, damages or liabilities
incurred by us that are finally judicially determined to have resulted from the
bad faith or gross negligence of such individuals or entities.  Source
will act under this engagement letter as an independent contractor with duties
to the Issuer.  Because Source will be acting on the Issuer’s behalf
in this capacity, it is Source’s practice to receive
indemnification.  A copy of Source’s standard indemnification form is
attached to this engagement letter as Exhibit A.

    

    

    [Signature
Page Follows]

     

     

    
       

      
        	      
                Members
      FINRA & SIPC

              	      
                276
      Post Road West, Westport, CT  06880

              	      
                www.Sourcegrp.com

              

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    
      
        	Page 6	

      

       

       

    

    We are
delighted at the prospect of working with you and look forward to a successful
Proposed Offering.  If you are in agreement with the foregoing, please
execute and return two copies of this engagement letter to the
undersigned.  This engagement letter may be executed in counterparts
and by facsimile transmission.

    

    
      
        	 	      
                Regards,

                 

                SOURCE
      CAPITAL GROUP, INC.

              	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Richard
      Kreger                                     	 
	 	 	Name:  Richard
      Kreger	 
	 	 	Title:    Senior
      Managing Director	 
	 	 	 	 

      

      

      
        
          	 	      
                   

                	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Russ
      Newton                                          	 
	 	 	Name:  Russ
      Newton	 
	 	 	Title:    Chief
      Financial Officer	 
	 	 	 	 

        

         

         

        ACCEPTED
AND AGREED TO AS OF THE DATE FIRSTABOVE WRITTEN:

      

    

    

    REED’S,
INC.

    

    

    

    By: /s/
Christopher
Reed                                       

          Name:  Christopher
Reed

          Title:
Chief Executive Officer

    
      
         

        
 

      

    

    [Signature
Page to Engagement Letter]

    

    [Exhibit
A, Indemnification Letter Begins on Next Page]

    

    

     

    
      	      
              Members
      FINRA & SIPC

            	      
              276
      Post Road West, Westport, CT  06880

            	      
              www.Sourcegrp.com

            

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      
        	Page 7	

      

       

    

    

    This
Exhibit A is a part of
and is incorporated into the Proposed Offering Engagement Letter dated September
11, 2009 between the Issuer and Source Capital Group, Inc. ("Source").
Capitalized terms used herein and not otherwise defined shall have the
respective meanings provided in the Agreement.

    

    The Issuer agrees to indemnify and
hold harmless Source, its affiliates and each person controlling Source
(within the meaning of Section 15 of the Securities Act), and the
directors, officers, agents and employees of Source, its affiliates and each
such controlling person (Source, and each such entity or person. an "Indemnified
Person") from and against any losses, claims, damages, judgments, assessments,
costs and other liabilities (collectively, the "Liabilities"), and shall
reimburse each Indemnified Person for all fees and expenses (including the
reasonable fees and expenses of one counsel for all Indemnified Persons, except
as otherwise expressly provided herein) (collectively, the "Expenses") as they
are incurred by an Indemnified Person in investigating, preparing, pursuing or
defending any claim, action, proceeding or investigation, whether or not any
Indemnified Person is a party thereto (collectively, the "Actions"), (i) caused
by, or arising out of or in connection with, any untrue statement or alleged
untrue statement of a material fact contained in any offering documents prepared
by the Issuer (including any amendments thereof and supplements thereto) (the
"Offer Documents") or by any omission or alleged omission to state therein a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (other than untrue
statements or alleged untrue statements in, or omissions or alleged omissions
from, information relating to an Indemnified Person furnished in writing by or
on behalf of such Indemnified Person expressly for use in the Offer Documents)
or (ii) otherwise arising out of or in connection with advice or services
rendered or to be rendered by any Indemnified Person pursuant to the Agreement,
the transactions contemplated thereby or any Indemnified Person's actions or
inactions in connection with any such advice, services or transactions; provided, however,
that, in the case of clause (ii) only, the Issuer shall not be responsible for
any Liabilities or Expenses of any Indemnified Person that have resulted
primarily from such Indemnified Person's (x) gross negligence, bad faith or
willful misconduct in connection with any of the advice, actions, inactions or
services referred to above or (y) use of any offering materials or information
concerning the Issuer in connection with the offer or sale of the Securities in
the Transaction which were not authorized for such use by the Issuer and which
use constitutes negligence, bad faith or willful misconduct. The Issuer also
agrees to reimburse each Indemnified Person for all Expenses as they are
incurred in connection with enforcing such Indemnified Person's rights under the
Agreement, which includes this Exhibit A.

    

    Upon
receipt by an Indemnified Person of actual notice of an Action against such
Indemnified Person with respect to which indemnity may be sought under the
Agreement, such Indemnified Person shall promptly notify the Issuer in writing;
provided that failure by any Indemnified Person so to notify the Issuer shall
not relieve the Issuer from any liability which the Issuer may have on account
of this indemnity or otherwise to such Indemnified Person, except to the extent
the Issuer shall have been prejudiced by such failure. The Issuer shall, if
requested by Source, assume the defense of any such Action including the
employment of counsel reasonably satisfactory to Source, which counsel may also
be counsel to the Issuer. Any Indemnified Person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Person unless: (i) the Issuer has failed promptly to assume the
defense and employ counsel or (ii) the named parties to any such Action
(including any impeded parties) include such Indemnified Person and the Issuer,
and such Indemnified Person shall have been advised in the reasonable opinion of
counsel that there is an actual conflict of interest that prevents the counsel
selected by the Issuer from representing both the Issuer (or another client of
such counsel) and any Indemnified Person; provided that the Issuer shall not in
such event be responsible hereunder for the fees and expenses of more than one
firm of separate counsel for all Indemnified Persons in connection with any
Action or related Actions, in addition to any local counsel. The Issuer shall
not be liable for any settlement of any Action effected without its written
consent (which shall not be unreasonably withheld). In addition, the Issuer
shall not, without the prior written consent of Source (which shall not be
unreasonably withheld), settle, compromise or consent to the entry of any
judgment in or otherwise seek to terminate any pending or threatened Action in
respect of which indemnification or contribution may be sought hereunder
(whether or not such Indemnified Person is a party thereto) unless such
settlement, compromise, consent or termination includes an unconditional release
of each Indemnified Person from all Liabilities arising out of such Action for
which indemnification or contribution may be sought hereunder. The
indemnification required hereby shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as such expense,
loss, damage or liability is incurred and is due and payable.

     

    
       

      
        	      
                Members
      FINRA & SIPC

              	      
                276
      Post Road West, Westport, CT  06880

              	      
                www.Sourcegrp.com

              

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

     

    
      	Page 8	

    

     

     

    In the
event that the foregoing indemnity is unavailable to an Indemnified Person other
than in accordance with the Agreement, the Issuer shall contribute to the
Liabilities and Expenses paid or payable by such Indemnified Person in such
proportion as is appropriate to reflect (i) the relative benefits to the Issuer,
on the one hand, and to Source and any other Indemnified Person, on the other
hand, of the matters contemplated by the Agreement or (ii) if the allocation
provided by the immediately preceding clause is not permitted by applicable law,
not only such relative benefits but also the relative fault of the Issuer, on
the one hand, and Source and any other Indemnified Person, on the other hand, in
connection with the matters as to which such Liabilities or Expenses relate, as
well as any other relevant equitable considerations; provided that in no event
shall the Issuer contribute less than the amount necessary to ensure that all
Indemnified Persons, in the aggregate, are not liable for any Liabilities and
Expenses in excess of the amount of fees actually received by Source pursuant to
the Agreement. For purposes of this paragraph, the relative benefits to the
Issuer, on the one hand, and to Source on the other hand, of the matters
contemplated by the Agreement shall be deemed to be in the same proportion as
(a) the total value paid or contemplated to be paid to or received or
contemplated to be received by the Issuer in the transaction or transactions
that are within the scope of the Agreement, whether or not any such transaction
is consummated, bears to (b) the fees paid to Source under the Agreement.
Notwithstanding the above, no person guilty of fraudulent misrepresentation
within the meaning of Section 11(f) of the Securities Act of 1933, as amended,
shall be entitled to contribution from a party who was not guilty of fraudulent
misrepresentation.

    

    The
Issuer also agrees that no Indemnified Person shall have any liability (whether
direct or indirect, in contract or tort or otherwise) to the Issuer for or in
connection with advice or services rendered or to be rendered by any Indemnified
Person pursuant to the Agreement, the transactions contemplated thereby or any
Indemnified Person's actions or inactions in connection with any such advice,
services or transactions except for Liabilities (and related Expenses) of the
Issuer that have resulted primarily from such Indemnified Person's gross
negligence, bad faith or willful misconduct in connection with any such advice,
actions, inactions or services.

    

    The
reimbursement, indemnity and contribution obligations of the Issuer set forth
herein shall apply to any modification of the Agreement and shall remain in full
force and effect regardless of any termination of, or the completion of any
Indemnified Person's services under or in connection with, the
Agreement.

    

    ACCEPTED
AND AGREED TO AS OF THE DATE FIRSTABOVE WRITTEN:

     

    
      	Reed’s,
    Inc.	Source Capital
      Group, Inc.
	 	 
	 	 
	 	 
	By:  /s/
      Christopher Reed	By:  /s/
      Richard Kreger
	
              Name: Christopher
      Reed

              Title: Chief Executive Officer

            	
              Name: Richard
      Kreger

              Title: Senior Managing
  Director

            

    

     

     

    
       

      
        	      
                Members
      FINRA & SIPC

              	      
                276
      Post Road West, Westport, CT  06880

              	      
                www.Sourcegrp.comQuickLinks
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  Exhibit 4.7    
    

 

			
	

	

 	

 

	
DragonWave

Inc.	
 	
 For the three and six months ended
 August 31
 2009

			
	 
	 	 

	

 
	
 	
 Consolidated

Financial

Statements

 

 
 

CONSOLIDATED BALANCE SHEETS  
    
    Expressed in Canadian $000's  
    
    unaudited  
  

												
	 
	 	Note
	 	As at

August 31,

2009 	 	As at

February 28,

2009 	 
	 Assets
	 	 	 	 	 	 	 	 	 	 
	 Current Assets
	 	 	 	 	 	 	 	 	 	 
	 	 Cash and cash equivalents
	 	 	 	 	 	 21,349	 	 	8,504	 
	 	 Short term investments
	 	 	 	 	 	 —	 	 	14,994	 
	 	 Accounts receivable
	 	 	 4	 	 	 26,002	 	 	10,523	 
	 	 Other receivables
	 	 	 	 	 	 1,240	 	 	720	 
	 	 Inventory
	 	 	 3	 	 	 15,346	 	 	14,238	 
	 	 Prepaid expenses
	 	 	 	 	 	 746	 	 	173	 
	 	 Future income tax asset
	 	 	 	 	 	 207	 	 	—	 
	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 64,890	 	 	49,152	 
	 Long Term Assets
	 	 	 	 	 	 	 	 	 	 
	 	 Property and equipment
	 	 	 	 	 	 4,130	 	 	2,676	 
	 	 Future income tax asset
	 	 	 	 	 	 139	 	 	—	 
	 	 Deferred financing
	 	 	 14	 	 	 657	 	 	—	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 4,926	 	 	 2,676	 
	 Total Assets
	 	 	 	 	 	

69,816	 	 	

51,828	 
	 	 	 	 	 	 	 	 	 
	 Liabilities
	 	 	 	 	 	 	 	 	 	 
	 Current Liabilities
	 	 	 	 	 	 	 	 	 	 
	 	 Line of credit
	 	 	 4	 	 	 587	 	 	641	 
	 	 Accounts payable and accrued liabilities
	 	 	 	 	 	 20,128	 	 	5,640	 
	 	 Taxes payable
	 	 	 	 	 	 246	 	 	37	 
	 Deferred revenue
	 	 	 	 	 	 1,562	 	 	2,215	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 22,523	 	 	8,533	 
	 Commitments
	 	 	 7	 	 	 	 	 	 	 
	 Shareholders' equity
	 	 	 	 	 	 	 	 	 	 
	 	 Capital stock
	 	 	 5	 	 	 120,001	 	 	119,925	 
	 	 Contributed surplus
	 	 	 5	 	 	 1,744	 	 	1,230	 
	 	 Deficit
	 	 	 	 	 	 (74,452	)	 	(77,860	)
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 47,293	 	 	43,295	 
	 Total Liabilities and Shareholders' Equity
	 	 	 	 	 	 69,816	 	 	51,828	 
	 	 	 	 	 	 	 	 	 

On behalf of the Board: 

			
	
 (s) GERRY SPENCER

Director	
 	
(s) CLAUDE HAW

Director

See accompanying notes  

2

 

 
 

CONSOLIDATED STATEMENTS OF OPERATIONS,  
    
    COMPREHENSIVE INCOME AND DEFICIT  
    
    Expressed in Canadian $000's except share and per share amounts  
    
    unaudited  
  

																		
	 
	 	 
	 	Three months ended 	 	Six months ended 	 
	 
	 	Note
	 	August 31,

2009 	 	August 31,

2008 	 	August 31,

2009 	 	August 31,

2008 	 
	 REVENUE
	 	 	 11	 	 	 35,509	 	 	10,572	 	 	 51,459	 	 	21,297	 
	 	 Cost of sales
	 	 	 3	 	 	 20,584	 	 	6,945	 	 	 31,024	 	 	13,289	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Gross profit
	 	 	 	 	 	 14,925	 	 	3,627	 	 	 20,435	 	 	8,008	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 EXPENSES
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Research and development
	 	 	 	 	 	 3,544	 	 	2,594	 	 	 6,568	 	 	5,725	 
	 	 Selling and marketing
	 	 	 	 	 	 3,567	 	 	2,783	 	 	 6,106	 	 	5,407	 
	 	 General and administrative
	 	 	 	 	 	 1,819	 	 	1,133	 	 	 3,050	 	 	2,263	 
	 	 Investment tax credits
	 	 	 	 	 	 (60	)	 	(50	)	 	 (120	)	 	(100	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 8,870	 	 	6,460	 	 	 15,604	 	 	13,295	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Income (Loss) from operations
	 	 	 	 	 	 6,054	 	 	(2,833	)	 	 4,830	 	 	(5,287	)
	 	 Interest income
	 	 	 	 	 	 10	 	 	179	 	 	 44	 	 	433	 
	 	 Interest expense
	 	 	 	 	 	 (15	)	 	(9	)	 	 (22	)	 	(18	)
	 	 Gain on sale of property and equipment
	 	 	 	 	 	 35	 	 	—	 	 	 35	 	 	—	 
	 	 Foreign exchange gain (loss)
	 	 	 	 	 	 70	 	 	997	 	 	 (1,616	)	 	1,265	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Income (Loss) before income taxes
	 	 	 	 	 	 6,154	 	 	(1,666	)	 	 3,271	 	 	(3,607	)
	 	 Income tax expense
	 	 	 	 	 	

(209	
)	 	

(11	
)	 	

(209	
)	 	

(11	
)
	 	 Future income tax recovery
	 	 	 	 	 	 346	 	 	—	 	 	 346	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net and Comprehensive Income (Loss)
	 	 	 	 	 	 6,291	 	 	(1,677	)	 	 3,408	 	 	(3,618	)
	 Deficit, beginning of period
	 	 	 	 	 	 (80,743	)	 	(73,812	)	 	 (77,860	)	 	(71,871	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Deficit, end of period
	 	 	 	 	 	 (74,452	)	 	(75,489	)	 	 (74,452	)	 	(75,489	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Income (Loss) per share
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Basic
	 	 	 6	 	 	 0.22	 	 	(0.06	)	 	 0.12	 	 	(0.13	)
	 	 Diluted
	 	 	 6	 	 	 0.21	 	 	(0.06	)	 	 0.12	 	 	(0.13	)
	 Weighted Average Shares Outstanding
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Basic
	 	 	 6	 	 	 28,620,162	 	 	28,555,335	 	 	 28,594,700	 	 	28,517,929	 
	 	 Diluted
	 	 	 6	 	 	 29,675,696	 	 	28,555,335	 	 	 29,281,050	 	 	28,517,929	 

See accompanying notes  

3

 

 
 

CONSOLIDATED STATEMENTS OF CASH FLOWS  
    
    Expressed in Canadian $000's  
    
    unaudited  
  

															
	 
	 	Three months ended 	 	Six months ended 	 
	 
	 	August 31,

2009 	 	August 31,

2008 	 	August 31,

2009 	 	August 31,

2008 	 
	 Operating Activities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net Income (loss)
	 	 	 6,291	 	 	(1,677	)	 	 3,408	 	 	(3,618	)
	 Items not affecting cash
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Depreciation
	 	 	 336	 	 	260	 	 	 639	 	 	495	 
	 	 Stock-based compensation
	 	 	 302	 	 	157	 	 	 544	 	 	303	 
	 	 Warrant expense
	 	 	 —	 	 	(9	)	 	 —	 	 	2	 
	 	 Unrealized foreign exchange (gain) loss
	 	 	 359	 	 	(124	)	 	 1,391	 	 	(64	)
	 	 Gain on sale of fixed asset
	 	 	 (35	)	 	—	 	 	 (35	)	 	—	 
	 	 Benefit on recognition of future income tax asset
	 	 	 (346	)	 	—	 	 	 (346	)	 	—	 
	 	 Accrued interest on fair value of short-term investments
	 	 	—	 	 	—	 	 	 —	 	 	150	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 6,907	 	 	(1,393	)	 	 5,601	 	 	(2,732	)
	 Changes in non-cash working capital items
	 	 	 (5,709	)	 	(1,711	)	 	 (4,258	)	 	(2,450	)
	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 1,198	 	 	(3,104	)	 	 1,343	 	 	(5,182	)
	 	 	 	 	 	 	 	 	 	 
	 Investing Activities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Acquisition of property and equipment
	 	 	 (1,501	)	 	(347	)	 	 (2,093	)	 	(670	)
	 	 Maturity of short-term investments
	 	 	 —	 	 	—	 	 	 14,994	 	 	31,758	 
	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 (1,501	)	 	(347	)	 	 12,901	 	 	31,088	 
	 	 	 	 	 	 	 	 	 	 
	 Financing Activities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Change in line of credit
	 	 	 1	 	 	22	 	 	 (54	)	 	26	 
	 	 Exercise of warrants
	 	 	 —	 	 	—	 	 	 —	 	 	150	 
	 	 Issuance of common share net of issuance costs
	 	 	 35	 	 	—	 	 	 46	 	 	—	 
	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 36	 	 	22	 	 	 (8	)	 	176	 
	 	 	 	 	 	 	 	 	 	 
	 Effect of foreign exchange on cash and cash equivalents
	 	 	 (359	)	 	124	 	 	 (1,391	)	 	64	 
	 Net increase in cash and cash equivalents
	 	 	 (626	)	 	(3,305	)	 	 12,845	 	 	26,146	 
	 Cash and cash equivalents at beginning of period
	 	 	 21,975	 	 	31,002	 	 	 8,504	 	 	1,551	 
	 	 	 	 	 	 	 	 	 	 
	 Cash and cash equivalents at end of period
	 	 	 21,349	 	 	27,697	 	 	 21,349	 	 	27,697	 
	 	 	 	 	 	 	 	 	 	 
	 Cash paid during the period for interest
	 	 	 15	 	 	9	 	 	 22	 	 	18	 
	 	 	 	 	 	 	 	 	 	 

See accompanying notes  

4

 

 
  
  DragonWave Inc.    
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
    
    Expressed in Canadian $000's except share and per share amounts    
    
    unaudited
 
    
    August 31, 2009    
    

 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION  

        DragonWave Inc. [the "Company"], incorporated under the Canada Business Corporations Act in February 2000, is in the business of developing
next-generation broadband wireless backhaul equipment. 

        These
consolidated interim financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles ["GAAP"]
applicable to interim financial statements and follow the same accounting policies and methods of application as the Company's consolidated financial statements for the year ended February 28,
2009. Under GAAP, additional disclosures are required in the annual financial statements and accordingly, these interim consolidated financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended February 28, 2009 and the accompanying notes. 

        A
reconciliation to generally accepted accounting principles in the United States has been presented in note 13. These interim consolidated financial statements should be
read in conjunction with the financial statements re-filed on September 24, 2009 covering the periods ending May 31, 2009 and February 28, 2009. 

 2. ACCOUNTING POLICIES  

        There are no new Handbook Sections as issued by the CICA which affect the current period. 

 3. INVENTORY  

        Inventory is comprised of the following: 

									
	 
	 	August 31

2009 	 	February 28

2009 	 
	 Raw materials
	 	 	 4,227	 	 	6,368	 
	 Work in process
	 	 	 1,544	 	 	455	 
	 Finished goods
	 	 	 6,697	 	 	4,822	 
	 	 	 	 	 	 
	 Total production inventory
	 	 	 12,468	 	 	11,645	 
	 	 Inventory held for customer service/warranty
	 	 	 2,878	 	 	2,593	 
	 	 	 	 	 	 
	 Total inventory
	 	 	 15,346	 	 	14,238	 
	 	 	 	 	 	 

        Cost
of sales for the three and six months ended August 31, 2009 were $20,584 and $31,024 respectively [three and six months ended August 31,
2008—$6,945 and $13,289 respectively], which included $18,932 and $28,861 [three and six months ended August 31, 2008—$6,447 and $12,296
respectively] of costs associated with inventory. The remaining costs of $1,652 and $2,163 [three and six months ended August 31, 2008—$498 and $993
respectively] related principally to freight, warranty and other direct costs of sales. 

5

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 3. INVENTORY (Continued) 

        For
the three and six month periods ended August 31, 2009, the Company recognized an impairment charge on inventory of $329 and $353 respectively [three and six months
ended August 31, 2008—$6 and $155 respectively]. 

 4. LINE OF CREDIT  

        As at August 31, 2009, the Company had drawn $587 [February 28, 2009—$641], on an operating credit facility with a limit of U.S.$10,000
[February 28, 2009—C$5,000]. Interest is calculated at the bank's U.S. prime rate of interest plus 1.75% and resulted in a weighted average effective
rate of 4.59% and 4.25% for the three and six months ended August 31, 2009 [three and six months ended August 31, 2008—5.89% and 6.06%]. The draw on
the line of credit is denominated in both Canadian [C$240] and U.S. [U.S.$316] currencies. An additional U.S.$1,571 has been reserved against the
operating line of credit to secure letters of credit to support performance guarantees. The Company has provided a general security agreement on accounts receivable. The Company was in compliance with
the financial covenants included in the lending agreement as at August 31, 2009. 

        The
Company also holds a capital expenditure facility with a limit of U.S.$3,000 [February 28, 2009—Nil]. This facility was not utilized as at
August 31, 2009. 

 5. SHAREHOLDERS' EQUITY  

 Capital Stock  

								
	 
	 	August 31

2009 	 	February 28

2009 	 
	 Issued and outstanding
	 	 	 	 	 	 	 
	 28,633,995 [Feb 28, 2009—28,559,297]
	 	 	 	 	 	 	 
	 Common shares
	 	 	 120,001	 	 	119,925	 
	 Contributed surplus
	 	 	 1,744	 	 	1,230	 
	 	 	 	 	 	 
	 
	 	 	 121,745	 	 	121,155	 
	 	 	 	 	 	 

        During
the three months and six months ended August 31, 2009, the Company repurchased 315 restricted shares from departing employees [year ended
February 28, 2009—3,221 shares]. 

        On
March 11 and May 22, 2008, the Company issued 36,446 and 78,534 common shares respectively. These shares were issued as a result of the Company's bank exercising
three separate warrants for cash consideration of $150. 

        During
the six month period ended August 31, 2009, shares outstanding increased by 74,698. This increase is attributed warrant exercises [4,905], option
exercises [66,246], restricted shares repurchased [315], and share issuances as a result of participation in the employee share purchase plan
[3,862]. 

6

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 5. SHAREHOLDERS' EQUITY (Continued) 

        On
January 29, 2009 the Board of Directors of the Company approved the adoption of a shareholder rights plan (the "Rights Plan"). 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. 

        The
Rights Plan was approved by the Toronto Stock Exchange and was ratified by the Company's shareholders on June 9, 2009 at the Company's Annual and Special Meeting of the
shareholders. The complete Rights Plan is filed separately and available at www.sedar.com. 

 Contributed Surplus  

        The following table provides details of the amount recorded to contributed surplus: 

								
	 
	 	August 31

2009 	 	February 28

2009 	 
	 Fair value of warrants
	 	 	 66	 	 	66	 
	 Stock based compensation—Stock option
	 	 	 1,678	 	 	1,164	 
	 	 	 	 	 	 
	 
	 	 	 1,744	 	 	1,230	 
	 	 	 	 	 	 

 Employee stock option/stock issuance plan  

        The Company has established the DragonWave Inc. Key Employee Stock Option/Stock Issuance Plan [the
"Plan"] applicable to full-time employees, directors and consultants of the Company for purchase of common shares with 4,295,091 common shares reserved for issuance.
Options are granted with an exercise price equal to the fair value of the common shares of the Company, and may generally be exercised at a rate of 25% one year from the date of the option grant, and
1/36th of the remaining 75% per additional month of full-time employment with the Company. Options expire in periods ranging from three to ten years, or upon
termination of employment. 

7

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 5. SHAREHOLDERS' EQUITY (Continued) 

        The
following is a summary of stock option activity: 

								
	 
	 	Options 	 	Weighted

average

exercise

price 	 
	 
	 	#
	 	$
	 
	 Options outstanding at February 28, 2009
	 	 	 2,075,918	 	 	 3.37	 
	 Granted
	 	 	

52,337	 	 	

3.13	 
	 Cancelled and expired
	 	 	(4,400	)	 	3.55	 
	 Exercised
	 	 	(53,600	)	 	0.10	 
	 	 	 	 	 	 
	 Options outstanding at May 31, 2009
	 	 	 2,070,255	 	 	 3.30	 
	 Granted
	 	 	

102,379	 	 	

6.04	 
	 Cancelled and expired
	 	 	(24,771	)	 	4.25	 
	 Exercised
	 	 	(12,646	)	 	2.86	 
	 	 	 	 	 	 
	 Options outstanding at August 31, 2009
	 	 	 2,135,217	 	 	 2.93	 

        The
Company has recognized $302 and $544 for the three and six months ended August 31, 2009 respectively as compensation expense for stock-based grants, with a corresponding
credit to contributed surplus [three and six months ended August 31, 2008—$157 and $303]. 

        On
May 14, 2009, the Company exchanged outstanding options held by employees with exercise prices in excess of the fair market value for new options with an exercise price of
$3.38 [fair market value at May 14, 2009]. The new options were granted with an additional year of vesting, and an expiry date one year later than the original grant.
This exchange affected 371,150 issued and outstanding options. The period expense of $216 associated with this exchange will be recognized immediately for options already vested on
May 14, 2009 [expense of $86] with the remainder recognized rateably over the remaining vesting period. On June 9, 2009, the shareholders of the Company ratified
a similar modification for officers of the Corporation affecting 290,000 outstanding options. The exchange has the same characteristics as the exchange executed for employees with the exception
of the exercise price set at $4.45. The period expense of $197 associated with this exchange will be recognized immediately for options already vested on June 9, 2009 [expense of
$83] with the remainder recognized rateably over the remaining vesting period. During the three months ended August 31, 2009 the expense related to the vesting of the above
mentioned options resulted in the Company recognizing $19 of compensation expense. 

        Prior
to the initial public offering ["IPO"] on April 19, 2007, the fair value of options were estimated at the date of grant using the minimum value
option pricing model with the following assumptions: risk-free interest rate of 2% to 4%, a dividend yield of nil, and an average expected life of four years. 

        Pursuant
to the IPO, the Company calculates the fair value of options granted at the date of grant using the Black-Scholes Model. 

8

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 5. SHAREHOLDERS' EQUITY (Continued) 

        The
following are the weighted average values used in determining the fair value: 

								
	 
	 	Three months

ended

August 31

2009 	 	Twelve months

ended

Feb 28

2009 	 
	 Volatility
	 	 	111%	 	 	61.2%	 
	 Risk free rate of return
	 	 	1.84%	 	 	1.6%	 
	 Dividend yield
	 	 	Nil	 	 	Nil	 
	 Avg. Expected life
	 	 	4 yrs	 	 	4 yrs	 

        The
102,379 options granted during the three month period ended August 31, 2009 were determined to have a fair value of $459. 

        The
following table summarizes information about the Company's stock options outstanding and exercisable on August 31, 2009: 

																	
	 
	 	Options outstanding 	 	Options exercisable 	 
	Exercise

Price

 
	 	Number of

options 	 	Weighted Avg

remaining

contractual life 	 	Weighted

average

exercise price 	 	Number of

options 	 	Weighted

average

exercise price 	 
	$
	 	#
	 	(yrs)
	 	$
	 	#
	 	$
	 
	 0 - 2.00
	 	 	450,500	 	 	4.21	 	 	1.37	 	 	—	 	 	—	 
	 2.01 - 3.50
	 	 	829,125	 	 	1.83	 	 	2.46	 	 	649,424	 	 	2.46	 
	 3.51 - 5.00
	 	 	712,337	 	 	4.17	 	 	3.85	 	 	310,826	 	 	3.88	 
	 5.00 - 6.44
	 	 	143,255	 	 	4.72	 	 	5.94	 	 	16,380	 	 	5.61	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 2,135,217	 	 	 3.31	 	 	 2.93	 	 	 976,630	 	 	 2.97	 

 Restricted Shares  

        The Company introduced a restricted stock purchase plan as at June 30, 2005. The plan included provisions to allow employees to
purchase common shares as restricted stock. The restrictions are removed at a rate of 25% one year from purchase and 1/36th of the remaining 75% per month thereafter. 

9

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 5. SHAREHOLDERS' EQUITY (Continued) 

        The
following is a life to date summary of restricted stock activity: 

								
	 
	 	Restricted

Stock 	 	Weighted

average

exercise

price 	 
	 
	 	#
	 	$
	 
	 Granted
	 	 	 1,839,296	 	 	 0.01	 
	 Vested
	 	 	 (1,794,634	)	 	 0.01	 
	 Restricted stock repurchased on employee departure
	 	 	 (31,863	)	 	 0.01	 
	 	 	 	 	 	 
	 Unvested restricted stock at August 31, 2009
	 	 	 12,799	 	 	 0.01	 
	 	 	 	 	 	 

        These
restricted stocks vest at various dates with a vesting period of 48 months. 

        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
employees contribution at a rate of 25%. The shares contributed by the Company will vest 12 months after issuance. During the three and six months ended August 31, 2009 a total of 1,978
and 3,861 shares were issued for proceeds of $11 and $17 respectively. 

 Warrants  

        On December 21, 2001, and as amended and restated on November 10, 2003, in connection with the issuance of the
long-term debt, the Company issued to two parties the right to purchase U.S.$315 and U.S.$35 Series A-1 Preferred Shares of the Company. On April 19, 2007, a
capital reorganization occurred pursuant to which all Preferred Shares were converted into common shares. As a result, and in accordance with the original terms of the agreement, the terms of the
warrant were updated such that the holders are entitled to purchase an aggregate of 42,171 common shares at a purchase price of $9.10 per share. The warrants, which carry a cashless conversion
privilege, expire upon the later of: [a] the tenth anniversary of the grant of the right to purchase or [b] April 19, 2012. 

        On
March 31, 2005, the Company issued to its bank the right to purchase $120 of Class B Preferred shares of the Company which carries a cashless conversion privilege and
expires on March 31, 2010. On September 9, 2005, the Company issued to their bank the right to purchase $30 of Class B Preferred shares of the Company which carries a cashless
conversion privilege and expires on September 9, 2010. On January 31, 2007, the Company issued to their bank the right to purchase $152 of Class B Preferred shares of the Company
which expire on January 31, 2012. On April 19, 2007, a capital reorganization occurred pursuant to which all Preferred shares were converted into common shares. As a result, and in
accordance with the original terms of the agreement, the terms of the warrant were updated such that the holders are entitled to purchase an aggregate of 157,068 common shares at a purchase
price of $1.91 per share. The fair value was determined using the Black-Scholes Model at the date of issuance using a volatility factor of 75%, risk free interest rate between 4% and 4.5%, dividend
yield of nil and expected life of 5 years. The fair value of the warrants was established at $329. During the three months ended May 31, 2008, the 

10

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 5. SHAREHOLDERS' EQUITY (Continued) 

warrants
mentioned above were exercised and resulted in proceeds of $150 being paid to the Company. The warrants and its associated proceeds previously recorded as contributed surplus are now recorded
in share capital. On March 11, 2008, the Company's bank exercised 78,534 warrants in exchange for 36,446 common shares. The bank utilized the cashless conversion provision within
the agreement resulting in no additional funds being paid to the Company. On May 22, 2008, the Company's bank exercised 78,534 warrants in exchange for 78,534 common shares. The
warrants were valued at $1.91 per common share. 

        In
consideration for entering into a convertible debt agreement with certain lenders, the Company issued warrants to the lenders which, pursuant to the capital reorganization on
April 19, 2007, resulted in the determination of the number of common shares available for purchase, and the corresponding exercise price. As at August 31, 2009, outstanding warrants
entitle the holders to purchase an aggregate of 178,287 common shares at a purchase price of $3.555 per share. A cashless conversion is permitted based on a formula detailed in the warrant
agreement. The warrants become exercisable on April 19, 2007, and expires on April 19, 2010. During the three months ended August 31, 2009, 11,581 warrants were exercised
resulting in the issuance of 4,905 shares after giving effect to the cashless conversion feature. The value of common shares increased by $17 with a corresponding decrease in contributed
surplus. 

        Effective
May 30, 2007, the Company granted a warrant to a party to purchase up to 126,250 common shares of the Company at a price of $3.55 per share. The warrant expires
10 years after the date of issuance. The warrants shall vest based on the achievement of pre-determined business milestones. As at August 31, 2008, a revenue reduction
provision in the amount of $66 was recognized with a corresponding increase in contributed surplus based on achievement. The provision was determined using the Black-Scholes Model using a volatility
factor of 50%, risk free rate of 3.3% dividend yield of nil, and an expected life of 8.75 years. 

11

 

DragonWave Inc.  

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  

 Expressed in Canadian $000's except share and per share amounts  

 unaudited  

 August 31, 2009  

 6. NET INCOME PER SHARE  

        The following table illustrates the dilutive impact on net income per share including the effect of outstanding options and warrants (000s, except share and per share amounts): 

															
	 
	 	Three months ended 	 	Six months ended 	 
	 
	 	August 31,

2009 	 	August 31,

2008 	 	August 31,

2009 	 	August 31,

2008 	 
	 Basic Net Income (Loss) per share
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Net Income (Loss)
	 	 	 6,291	 	 	(1,677	)	 	 3,408	 	 	(3,618	)
	 	 Weighted average number of shares outstanding
	 	 	 28,620,162	 	 	28,555,335	 	 	 28,594,700	 	 	28,517,929	 
	 	 	 	 	 	 	 	 	 	 
	 	 Net Income (Loss) per share
	 	 	 0.22	 	 	(0.06	)	 	 0.12	 	 	(0.13	)
	 	 	 	 	 	 	 	 	 	 
	 Diluted Net Income (Loss) per share
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Net Income (Loss)
	 	 	 6,291	 	 	(1,677	)	 	 3,408	 	 	(3,618	)
	 	 Weighted average number of shares outstanding
	 	 	 28,620,162	 	 	28,555,335	 	 	 28,594,700	 	 	28,517,929	 
	 	 Dilutive effect of warrants
	 	 	 73,412	 	 	—	 	 	 21,982	 	 	—	 
	 	 Dilutive effect of stock options
	 	 	 982,122	 	 	—	 	 	 664,368	 	 	—	 
	 	 	 	 	 	 	 	 	 	 
	 	 Adjusted weighted average number of shares outstanding
	 	 	 29,675,696	 	 	28,555,335	 	 	 29,281,050	 	 	28,517,929	 
	 	 	 	 	 	 	 	 	 	 
	 	 Net Income (Loss) per share
	 	 	 0.21	 	 	(0.06	)	 	 0.12	 	 	(0.13	)
	 	 	 	 	 	 	 	 	 	 

 7. COMMITMENTS  

        Future minimum operating lease payments as at August 31, 2009 per fiscal year are as follows: 

					
	 
	 	$ 	 
	 2010
	 	 	527	 
	 2011
	 	 	1,059	 
	 2012
	 	 	750	 
	 2013
	 	 	77	 
	 Thereafter
	 	 	13	 
	 	 	 	 
	 
	 	 	 2,426	 
	 	 	 	 

        In
addition to the commitments noted above, on December 1, 2008, the Company issued a letter of credit to support a guarantee with a European bank. The guarantee expires on
April 30, 2010 and has an amount of up to 860,000 Euros. The Company is selling equipment to an integrator who will resell the equipment to a service provider. The Company will be
required to fulfill its obligations under the guarantee in the event that the service provider defaults on its obligations to the bank. The Company has recourse against the integrator in the event
that the guarantee is exercised. 

12

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 7. COMMITMENTS (Continued) 

        In
the normal course of its business activities, the Company is subject to claims and legal actions. The Company recognizes a provision for estimated loss contingencies when it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In management's opinion, adequate provisions have been made for all current and
future claims. 

 8. RELATED PARTY TRANSACTIONS  

        The Company leases premises from a real estate company controlled by a board member. During the three and six months ended August 31, 2009, the Company paid $266 and $469
[three and six months ended August 31, 2008—$202 and $407 respectively], 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 a company significantly influenced by a Board Member. Total net product and services purchased during the three and six months ended
August 31, 2009 were $5,126 and $6,441 respectively [three and six months ended August 31, 2008—$2,589 and $6,175 respectively], and the value owing
for net purchases at August 31, 2009 was $1,377 [February 28,
2009—$1,405] and is included in accounts payable and accrued liabilities. The majority of the purchases have been recorded in inventory and ultimately in cost of sales. 

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

 9. FINANCIAL INSTRUMENTS  

        Under Canadian generally accepted accounting principles, financial instruments are classified into one of the following categories: held for trading,
held-to-maturity, available-for-sale, loans and receivables, or other liabilities. 

 Fair Value  

        The following table summarizes the carrying values of the Company's financial instruments: 

								
	 
	 	August 31

2009 	 	February 28

2009 	 
	 Held for Trading(1)
	 	 	21,349	 	 	23,498	 
	 Loans and receivables(2)
	 	 	26,124	 	 	11,243	 
	 Other financial liabilities(3)
	 	 	19,088	 	 	5,934	 

	(1)
	Includes
cash and cash equivalents, and short-term investments

	(2)
	Includes
accounts receivable and other receivables

	(3)
	Includes
line of credit, accounts payable and accrued liabilities which are financial in nature 

        Cash
and cash equivalents, short term investments, accounts receivables, other receivables, line of credit, accounts payable and accrued liabilities are short term financial instruments
whose fair value 

13

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 9. FINANCIAL INSTRUMENTS (Continued) 

approximates
the carrying amount given that they will mature shortly. As at the balance sheet date, there are no significant differences between the carrying value of these items and their estimated
fair values. 

 Interest rate risk  

        Cash and cash equivalents with variable interest rates expose the Company to interest rate risk on these financial instruments. The
Company pays interest on its line of credit at the bank's prime rate of interest plus 1.75%, and has interest rate risk exposure due to changes in the bank's prime rate. 

 Credit risk  

        The Company is exposed to credit risk with respect to accounts receivable in the event that its counterparties do not meet their
obligations. The Company minimizes its credit risk with respect to accounts receivable by performing credit reviews for each of its customers. As at August 31, 2009, one customer exceeded 10%
of the total receivable balance. This customer represents 78% [February 28, 2009—20%] of the trade receivables balance. 

        The
Company's allowance for doubtful accounts reflects the Company's assessment of collectability across its global customer base. The Company defines past due based on agreed upon terms
with each individual customer. As at August 31, 2009, 19% of trade receivables (net of allowances), are considered at least one day past due. 

 Foreign exchange risk  

        The following table summarizes the proportion of its financial assets held in foreign currencies. Proportions are shown after
conversion into Canadian dollars as at August 31, 2009: 

														
	 
	 	CDN

Dollars 	 	U.S.

Dollars 	 	Other

Currency 	 	Total 	 
	 
	 	%
	 	%
	 	%
	 	%
	 
	 Cash and cash equivalents
	 	 	38	 	 	60	 	 	2	 	 	100	 
	 Accounts Receivable and other receivables
	 	 	5	 	 	93	 	 	2	 	 	100	 
	 Line of credit, accounts payable and accrued liabilities
	 	 	30	 	 	69	 	 	1	 	 	100	 

        Foreign
exchange risk arises because of fluctuations in exchange rates. The Company's financial results are reported in Canadian dollars while it conducts a significant portion of its
business activities in foreign currencies, primarily U.S. dollars. The assets, liabilities, revenue and expenses that are denominated in foreign currencies will be affected by changes in the
exchange rate between the Canadian dollar and these foreign currencies. The Company does not currently use derivative financial instruments to mitigate this risk. 

        If
the Canadian dollar had appreciated 1% against all foreign currencies at August 31, 2009, with all other variables held constant, the impact of this foreign currency change on
the Company's foreign denominated financial instruments would have resulted in a reduction of after tax net income of $256 for 

14

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 9. FINANCIAL INSTRUMENTS (Continued) 

the
three month period ended August 31, 2009 [six months ended August 31, 2008—$342]. If the Canadian dollar had depreciated 1% against all foreign
currencies at August 31, 2009, with all other variables held constant, the impact of this foreign currency change on the Company's foreign denominated financial instruments would have resulted
in an additional $256 of after tax net income for the three month period ending August 31, 2009 [six months ended August 31, 2008—$342]. 

 Liquidity risk  

        Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. Based on the
Company's recent performance, current revenue expectations and strong current ratio, management believes that liquidity risk is low. 

 10. CAPITAL MANAGEMENT  

        The Company defines capital as its shareholders equity. The Company manages its capital in order to maintain flexibility and respond to changes in economic and/or marketplace conditions.
In order to increase shareholder value, the Company may adjust its capital structure by issuing new shares, purchasing shares for cancellation or raising debt. At this time, the Company does not
utilize debt facilities as part its capital management strategy with the exception of an operating line of credit. For the three months ended August 31, 2009, the Company has not distributed
dividends to its shareholders. The Company is not subject to any externally imposed requirements other than disclosed in note 4; and there were no changes in the Company's approach to
capital management during the three month period ended on August 31, 2009. 

 11. SEGMENTS AND GEOGRAPHICAL INFORMATION  

        The Company operates in one reportable segment—broadband wireless backhaul equipment. All significant assets held by the Company are located in Canada. The following table
presents total revenues by geographic location: 

																										
	 
	 	Three months ended 	 	Six months ended 	 
	 
	 	August 31,

2009 	 	August 31,

2008 	 	August 31,

2009 	 	August 31,

2008 	 
	 
	 	$ 	 	% 	 	$ 	 	% 	 	$ 	 	% 	 	$ 	 	% 	 
	 Canada
	 	 	 1,158	 	 	3	%	 	1,248	 	 	12	%	 	 2,124	 	 	4	%	 	3,068	 	 	15	%
	 North America (excluding Canada)
	 	 	 30,711	 	 	87	%	 	6,396	 	 	60	%	 	 42,597	 	 	83	%	 	12,635	 	 	59	%
	 Europe, Middle East, and Africa
	 	 	 2,965	 	 	8	%	 	2,751	 	 	26	%	 	 5,992	 	 	12	%	 	5,167	 	 	24	%
	 Other
	 	 	 675	 	 	2	%	 	177	 	 	2	%	 	 746	 	 	1	%	 	427	 	 	2	%
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 35,509	 	 	 	 	 	 10,572	 	 	 	 	 	 51,459	 	 	 	 	 	 21,297	 	 	 	 

15

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 12. ECONOMIC DEPENDENCE  

        The Company is dependent on a key customer with respect to revenue. This customer represents
approximately 77% and 69% of sales respectively for the three and six months ended August 31, 2009 [three and six months ended August 31, 2008—8% and 24%
respectively]. 

 13. RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES  

        The Company follows Canadian GAAP which is different in some respects from the accounting principles applicable in the United States ("U.S. GAAP") and from practices
prescribed by the United States Securities and Exchange Commission. The significant differences between Canadian and U.S. GAAP, and their effects on the consolidated financial
statements, are described below: 

        The
following table reconciles net loss and comprehensive loss as reported under Canadian GAAP to net loss and comprehensive loss that would have been reported had the consolidated
financial statements been prepared in accordance with U.S. GAAP: 

															
	 
	 	Three months ended 	 	Six months ended 	 
	 
	 	August 31,

2009 	 	August 31,

2008 	 	August 31,

2009 	 	August 31,

2008 	 
	 Net and comprehensive income (loss) in accordance with Canadian GAAP
	 	 	 6,291	 	 	(1,677	)	 	 3,408	 	 	(3,618	)
	 	 Share-based compensation
	 	 	 12	 	 	(36	)	 	 14	 	 	(73	)
	 	 	 	 	 	 	 	 	 	 
	 Net and Comprehensive income (loss) in accordance with U.S. GAAP
	 	 	 6,303	 	 	(1,713	)	 	 3,422	 	 	(3,691	)
	 	 	 	 	 	 	 	 	 	 

        The
following table details the computation of U.S. GAAP for basic and diluted loss per share: 

															
	 
	 	Three months ended 	 	Six months ended 	 
	 
	 	August 31,

2009 	 	August 31,

2008 	 	August 31,

2009 	 	August 31,

2008 	 
	 Net and Comprehensive income (loss) in accordance with U.S. GAAP
	 	 	 6,303	 	 	(1,713	)	 	 3,422	 	 	(3,691	)
	 	 Weighted average number of shares
	 	 	 28,620,162	 	 	28,555,335	 	 	 28,594,700	 	 	28,517,929	 
	 	 Basic income (loss) per share
	 	 	 0.22	 	 	(0.06	)	 	 0.12	 	 	(0.13	)
	 	 Weighted average number of shares—diluted
	 	 	 29,675,696	 	 	28,555,335	 	 	 29,281,050	 	 	28,517,929	 
	 	 Diluted income (loss) per share
	 	 	 0.21	 	 	(0.06	)	 	 0.12	 	 	(0.13	)

        There
was no effect of the above adjustments on the total shareholders' equity. 

16

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 13. RECONCILIATION WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) 

 Stock-based compensation  

        Under Canadian GAAP, effective March 1, 2004, the Company accounts for stock-based compensation granted to employees, officers
and directors at fair value, which is measured using the Black-Scholes option pricing model. Prior to the IPO, the Company was privately
held and used the minimum value methodology for valuing stock-based compensation, also allowable under Canadian GAAP. 

        Under
U.S. GAAP, effective March 1, 2006, the Company adopted Statement of Financial Accounting Standards SFAS No. 123(R) "Share-based payments"
["SFAS 123(R)"]. This standard requires companies to expense the fair value of stock-based compensation awards through operations, including estimating forfeitures at
the time of grant in order to estimate the amount of stock-based awards that will ultimately vest. The Company elected to apply the modified prospective application transition method to account for
stock options outstanding as at February 28, 2005. This method requires that the provisions of SFAS 123(R) are generally applied only to share-based awards granted, modified, repurchased
or cancelled on March 1, 2006 and thereafter. SFAS 123(R) was applied prospectively to new awards and to awards modified, repurchased, or cancelled after the required effective date. The
Company had previously applied SFAS 123(R) and recognizes the remaining value of awards granted prior to March 1, 2006 over their remaining service period. 

        The
Company has adopted the straight-line attribution method for determining the compensation cost to be recorded during each accounting period. However, awards based on
performance conditions are recorded as compensation expense when the performance conditions are expected to be met. 

        As
a result of adopting SFAS 123(R), which does not permit the use of the minimum value method additional compensation expense has been recorded under U.S. GAAP for the
three and six month periods ended August 31, 2009 and August 31, 2008 and for the years ended February 28, 2009 and February 29, 2008. 

        During
the three-month periods ended May 31 and August 31, 2009, the Company modified certain outstanding stock options by reducing the exercise price of the options and
extending their contractual life by one year. Under Canadian GAAP, in calculating the value of the option immediately prior to the modification, its expected life was limited to the remaining life of
the previously granted option. Under U.S. GAAP, in accordance with SFAS 123(R), the expected life of the option was re-evaluated immediately prior to the modification and was
not limited to the remaining expected life of the un-modified option. As a result, compensation cost recorded for the three-month periods ended May 31 and August 31, 2009
related to the modification under U.S. GAAP is less than the amount recorded under Canadian GAAP. 

        SFAS 123(R)
does not permit the use of the minimum value method. The Company derives the volatility over the expected term of the awards based on comparable companies' historical
volatilities as this represents the most appropriate basis to determine actual expected volatility of its own shares in future periods. The expected life of options was determined based on several
factors including historical life, probable life before exercise, and probability of exercise. 

17

 

DragonWave Inc. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 Expressed in Canadian $000's except share and per share amounts 

 unaudited 

 August 31, 2009 

 14. SUBSEQUENT EVENT  

        On September 24, 2009 the Company announced that it has filed a registration statement in the United States concurrently with a preliminary short form base PREP prospectus
[the "Preliminary Prospectus"] in all of the provinces of Canada, except Quebec. This will constitute the Company's initial public offering of common shares in the
United States [the "U.S. IPO"]. In connection with the filling of the Preliminary Prospectus and the U.S. IPO, the Company proposes to offer
7,454,050 common shares and certain selling shareholders propose to offer 5,518,250 common shares [the "Offering"]. In connection with its U.S. IPO, the
Company has received conditional approval to list its common shares on the NASDAQ Global Market. Listing of the common shares on NASDAQ will be subject to the Company fulfilling all applicable listing
requirements. 

        The
Company has agreed to grant the underwriters in respect to the offering an over-allotment option to purchase 15% of the common shares sold pursuant to the Offering,
exercisable at any time, in whole or in part, up to 30 days from the closing of the Offering. The Offering will be priced in the context of the market with the final terms of the Offering to be
determined at the time of pricing. 

        The
common shares of the Company will be registered in the United States pursuant to a registration statement filed under a multi-jurisdictional disclosure system permitted for
certain Canadian companies filing registration statements in the United States. The registration statement has been filed with the United States Securities and Exchange Commission but
has not yet become effective. The common shares may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. 

        The
costs incurred to date and classified as a deferred financing asset will be applied against the proceeds of the Offering in shareholders' equity. 

18

QuickLinks

Exhibit 4.7

CONSOLIDATED BALANCE SHEETS Expressed in Canadian $000's unaudited

CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND DEFICIT Expressed in Canadian $000's except share and per share amounts unaudited

CONSOLIDATED STATEMENTS OF CASH FLOWS Expressed in Canadian $000's unaudited

DragonWave Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Expressed in Canadian $000's except share and per share amounts unaudited August 31, 2009

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