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Exhibit 4.6

 

 

AMENDED AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE

YEARS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008

AND AMENDED CONSOLIDATED FINANCIAL STATEMENTS FOR THE

THREE MONTH PERIOD ENDED MAY 31, 2009

1

 
 
 

  AUDITORS' REPORT    
    

To
the Shareholders of
 DragonWave Inc.

        We
have audited the consolidated balance sheets of DragonWave Inc. as at February 28, 2009 and February 29, 2008 and
the consolidated statements of operations, comprehensive loss and deficit and cash flows for each of the years in the two-year period ended February 28, 2009. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 

        We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 

        In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at February 28, 2009 and
February 29, 2008 and the results of its operations and its cash flows for each of the years in the two-year period ended February 28, 2009 in accordance with Canadian
generally accepted accounting principles. 

			
	Ottawa, Canada,	 	/s/ Ernst & Young LLP
	April 17, 2009 (except as to note 20,	 	Chartered Accountants
	which is as of August 25, 2009)	 	Licensed Public Accountants

2

 

 

 
 

  DRAGONWAVE INC.
  
    CONSOLIDATED BALANCE SHEETS
  
    (Expressed in Cdn $000's)    
    

														
	 
	 	Note	 	As at

May 31,

2009 	 	As at

February 28,

2009 	 	As at

February 29,

2008 	 
	 
	 	 
	 	$
	 	$
	 	$
	 
	 
	 	 
	 	(non-audited)
	 	(audited)
	 
	 Assets
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Current Assets
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Cash and cash equivalents
	 	 	 	 	 	21,975	 	 	8,504	 	 	1,551	 
	 Short-term investments
	 	 	 	 	 	—	 	 	14,994	 	 	31,908	 
	 Accounts receivable
	 	 	 6	 	 	11,258	 	 	10,523	 	 	11,433	 
	 Other receivables
	 	 	 3	 	 	640	 	 	720	 	 	1,092	 
	 Inventory
	 	 	 4	 	 	12,533	 	 	14,238	 	 	10,584	 
	 Prepaid expenses
	 	 	 	 	 	447	 	 	173	 	 	424	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 46,853	 	 	 49,152	 	 	 56,992	 
	 	 	 	 	 	 	 	 	 	 	 
	 Property and equipment
	 	 	  5
	 	 	

2,965	 	 	

2,676	 	 	

2,823	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 2,965	 	 	 2,676	 	 	 2,823	 
	 	 	 	 	 	 	 	 	 	 	 
	 Total Assets
	 	 	 	 	 	

49,818	 	 	

51,828	 	 	

59,815	 
	 	 	 	 	 	 	 	 	 	 	 
	 Liabilities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Current Liabilities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Line of credit
	 	 	 6	 	 	586	 	 	641	 	 	550	 
	 Accounts payable and accrued liabilities
	 	 	 	 	 	6,681	 	 	5,677	 	 	9,055	 
	 Deferred revenue
	 	 	 	 	 	1,886	 	 	2,215	 	 	1,713	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 9,153	 	 	 8,533	 	 	 11,318	 
	 	 	 	 	 	 	 	 	 	 	 
	 Commitments
	 	 	  10
	 	 	 	 	 	 	 	 	 	 
	 Shareholders' equity
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Capital stock
	 	 	 9	 	 	119,936	 	 	119,925	 	 	119,435	 
	 Contributed surplus
	 	 	 9	 	 	1,472	 	 	1,230	 	 	933	 
	 Deficit
	 	 	 	 	 	(80,743	)	 	(77,860	)	 	(71,871	)
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 40,665	 	 	 43,295	 	 	 48,497	 
	 	 	 	 	 	 	 	 	 	 	 
	 Total Liabilities and Shareholders' Equity
	 	 	 	 	 	

49,818	 	 	

51,828	 	 	

59,815	 
	 	 	 	 	 	 	 	 	 	 	 

On
behalf of the Board: 

			
	/s/ GERRY SPENCER	 	/s/ CLAUDE HAW
	Director	 	Director

See accompanying notes  

3

 
  
 

      DRAGONWAVE INC.
  
    CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE LOSS AND DEFICIT
  
    (Expressed in Cdn $000's except share and per share amounts)    
    

																	
	 
	 	 
	 	For the

three months ended 	 	For the

year ended 	 
	 
	 	Note	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 
	 	 
	 	$
	 	$
	 	$
	 	$
	 
	 
	 	 
	 	(non-audited)
	 	(audited)
	 
	 Revenue
	 	 	 17	 	 	15,950	 	 	10,725	 	 	43,334	 	 	40,404	 
	 Cost of sales
	 	 	 4	 	 	10,440	 	 	6,344	 	 	28,683	 	 	24,980	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Gross profit
	 	 	 	 	 	 5,510	 	 	 4,381	 	 	 14,651	 	 	 15,424	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Expenses
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Research and development
	 	 	 	 	 	3,024	 	 	3,131	 	 	10,628	 	 	10,378	 
	 Selling and marketing
	 	 	 	 	 	2,539	 	 	2,624	 	 	10,649	 	 	8,858	 
	 General and administrative
	 	 	 	 	 	1,231	 	 	1,130	 	 	4,079	 	 	3,885	 
	 Investment tax credits
	 	 	 	 	 	(60	)	 	(50	)	 	(82	)	 	(492	)
	 Restructuring charges
	 	 	 14	 	 	—	 	 	—	 	 	501	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 6,734	 	 	 6,835	 	 	 25,775	 	 	 22,629	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 (1,224	)	 	 (2,454	)	 	 (11,124	)	 	 (7,205	)
	 Interest income
	 	 	 	 	 	

34	 	 	

254	 	 	

693	 	 	

1,109	 
	 Interest expense
	 	 	 	 	 	(7	)	 	(9	)	 	(35	)	 	(203	)
	 Interest expense on debt component of preferred shares and convertible debt
	 	 	 7&8	 	 	—	 	 	—	 	 	—	 	 	(500	)
	 Foreign exchange gain (loss)
	 	 	 	 	 	(1,686	)	 	268	 	 	4,514	 	 	(1,453	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Loss before income taxes
	 	 	 	 	 	 (2,883	)	 	 (1,941	)	 	 (5,952	)	 	 (8,252	)
	 Income taxes
	 	 	 12	 	 	—	 	 	—	 	 	(37	)	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net and comprehensive loss
	 	 	 	 	 	 (2,883	)	 	 (1,941	)	 	 (5,989	)	 	 (8,252	)
	 Deficit, beginning of period
	 	 	 	 	 	(77,860	)	 	(71,871	)	 	(71,871	)	 	(63,619	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Deficit, end of period
	 	 	 	 	 	 (80,743	)	 	 (73,812	)	 	 (77,860	)	 	 (71,871	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Loss per share
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Basic and fully diluted
	 	 	 	 	 	 (0.10	)	 	 (0.07	)	 	 (0.21	)	 	 (0.35	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Basic and diluted weighted average number of shares outstanding
	 	 	 	 	 	28,569,238	 	 	28,480,522	 	 	28,537,202	 	 	23,448,504	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

See accompanying notes  

4

 
  
 

      DRAGONWAVE INC.
  
    CONSOLIDATED STATEMENTS OF CASH FLOWS
  
    (Expressed in Cdn $000's except share and per share amounts)    
    

																		
	 
	 	 
	 	For the

three months ended 	 	For the

year ended 	 
	 
	 	Note	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 
	 	 
	 	$
	 	$
	 	$
	 	$
	 
	 
	 	 
	 	(non-audited)
	 	(audited)
	 
	 Cash and cash equivalents provided by (used in)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Operating Activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net loss
	 	 	 	 	 	 (2,883	)	 	 (1,941	)	 	 (5,989	)	 	 (8,252	)
	 Items not affecting cash
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Depreciation
	 	 	 5	 	 	 303	 	 	 235	 	 	 1,070	 	 	 563	 
	 	 Interest on debt component of preferred shares
	 	 	 7	 	 	 —	 	 	 —	 	 	 —	 	 	 350	 
	 	 Interest on debt component of convertible debt
	 	 	 8	 	 	 —	 	 	 —	 	 	 —	 	 	 150	 
	 	 Stock-based compensation
	 	 	 9	 	 	 242	 	 	 145	 	 	 624	 	 	 327	 
	 	 Warrant expense
	 	 	 9	 	 	 —	 	 	 11	 	 	 2	 	 	 64	 
	 	 Unrealized foreign exchange (gain) loss
	 	 	 	 	 	 1,032	 	 	 60	 	 	 (907	)	 	 479	 
	 	 Accrued interest on fair value of short-term investments
	 	 	 15	 	 	 —	 	 	 150	 	 	 (159	)	 	 (534	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 (1,306	)	 	 (1,340	)	 	 (5,359	)	 	 (6,853	)
	 Changes in non-cash working capital items
	 	 	  11
	 	 	

1,451	 	 	

(740	
)	 	

(4,997	
)	 	

(3,419	
)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 145	 	 	 (2,080	)	 	 (10,356	)	 	 (10,272	)
	 Investing Activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Acquisition of property and equipment
	 	 	 5	 	 	 (592	)	 	 (323	)	 	 (923	)	 	 (2,808	)
	 	 Maturity (Investment) of short-term investments
	 	 	 	 	 	 14,994	 	 	 31,758	 	 	 17,073	 	 	 (31,374	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 14,402	 	 	 31,435	 	 	 16,150	 	 	 (34,182	)
	 Financing Activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Change in line of credit
	 	 	 6	 	 	 (55	)	 	 4	 	 	 91	 	 	 (3,893	)
	 	 Exercise of warrants
	 	 	 9	 	 	 —	 	 	 152	 	 	 150	 	 	 —	 
	 	 Issuance of Common stock net of stock issuance costs
	 	 	 9	 	 	 11	 	 	 —	 	 	 11	 	 	 49,043	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 (44	)	 	 156	 	 	 252	 	 	 45,150	 
	 Effect of foreign exchange on cash and cash equivalents
	 	 	 	 	 	 (1,032	)	 	 (60	)	 	 907	 	 	 (479	)
	 Net increase in cash and cash equivalents
	 	 	 	 	 	 13,471	 	 	 29,451	 	 	 6,953	 	 	 217	 
	 Cash and cash equivalents — beginning of period
	 	 	 	 	 	 8,504	 	 	 1,551	 	 	 1,551	 	 	 1,334	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Cash and cash equivalents — end of period
	 	 	 	 	 	 21,975	 	 	 31,002	 	 	 8,504	 	 	 1,551	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Cash paid during the year for:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Interest
	 	 	 	 	 	 7	 	 	 9	 	 	 35	 	 	 203	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

See accompanying notes  

5

 

 
  
  DRAGONWAVE INC.    
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
    
    (Expressed in Cdn $000's except share and per share amounts)    
    

 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. 

All
references to shares in these consolidated financial statements have been restated to reflect one-for-ten share consolidation which was approved on
April 10, 2007. 

 2.     SIGNIFICANT ACCOUNTING POLICIES  

The
consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and include the following significant accounting policies as well
as a reconciliation of the significant differences with generally accepted accounting principles in the United States in note 20. 

 Use of accounting estimates  

The
preparation of the consolidated financial statements in conformity with Canadian GAAP requires the Company's management to make estimates that affect the reported amounts of assets and liabilities
and disclosure of contingent amounts of assets and liabilities as at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods
presented. Actual results could differ from the estimates made by management. 

The
following accounts include estimates by management: allowance for doubtful accounts, other receivables, inventory provisions, and accrued liabilities. 

 Cash and cash equivalents  

The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 

 Short-term investments  

The
Company has classified its short-term investments as held for trading and are carried at fair value with both realized and unrealized gains and losses included in the net loss. 

 Comprehensive loss  

Comprehensive
loss is composed of the Company's net loss and other comprehensive loss. The Company does not currently have any other comprehensive loss. 

 Consolidation  

These
consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, DragonWave Corp., incorporated in the state of Delaware, and
4472314 Canada Inc., incorporated in Canada. All intercompany accounts and transactions have been eliminated. 

 Property and equipment  

Property
and equipment are stated at cost. Amortization is calculated using the straight-line method over the anticipated useful lives of the assets as follows: 

				
	 	 Research and development equipment
	 	5 years
	 	 Furniture and fixtures
	 	5 years
	 	 Automobiles
	 	5 years
	 	 Leasehold improvements
	 	5 years
	 	 Test equipment
	 	4 years
	 	 Communication equipment
	 	3 years
	 	 Warehouse and production fixtures
	 	3 years
	 	 Computer hardware
	 	2 years
	 	 Computer software
	 	2 years

6

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 2.     SIGNIFICANT ACCOUNTING POLICIES (Continued) 

 Impairment of long-lived assets  

Management
evaluates the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the
estimated undiscounted future net cash inflows attributable to the asset are less than the carrying amount, an impairment loss is recognized. The amount of impairment loss to be recorded is the
difference between the asset's carrying value and the net discounted estimated future cash flows. 

As
at May 31, 2009, there are no indicators of impairment of long-lived assets. 

 Inventory  

Inventory
is valued at the lower of cost and market. The cost of inventory 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 sold 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 contracted service. 

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 cost of sales. Shipping and handling costs charged to customers are recorded as revenue, if billed at the time of shipment. Costs
charged to customers after delivery are recorded in cost of sales. 

 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 

7

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 2.     SIGNIFICANT ACCOUNTING POLICIES (Continued) 

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 consolidated 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. 

Diluted
net loss per share is equal to the basic net loss per share since the effect of exercising 2,070,255 stock options outstanding at May 31, 2009 (February 28,
2009 — 2,075,918; February 29, 2008 — 1,604,350) would be anti-dilutive 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 the Canadian Institute of Chartered Accountants ("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 employees'
contribution at a rate of 25%. Proceeds from employees and cost of matching shares are recorded in share capital and contributed surplus 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 in income. 

 CHANGES IN ACCOUNTING POLICIES  

The
CICA has issued the following new Handbook Sections which affect the year ended February 29, 2008: 

	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 15.

	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". The Company has provided the required disclosure in note 15.

	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 

8

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 2.     SIGNIFICANT ACCOUNTING POLICIES (Continued) 

(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 periods presented. 

	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 has provided this disclosure in note 16. 

The
Company is in compliance with the new Handbook Sections mentioned above as of February 28, 2009. There was no transitional adjustment required for the year ended
February 29, 2008. 

 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. 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. 

Discussion
of the Company's progress with respect to the established conversion plan is addressed in the Management's Discussion and Analysis of the financial results for the three months ended
May 31, 2009. 

 3.     OTHER RECEIVABLES  

Other
receivables are comprised of the following: 

												
	 	 
	 	May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Investment tax credits recoverable
	 	 	247	 	 	187	 	 	329	 
	 	 Goods and Services Tax receivable
	 	 	234	 	 	229	 	 	628	 
	 	 Provincial sales tax receivable
	 	 	1	 	 	—	 	 	28	 
	 	 UK Value Added Tax receivable
	 	 	18	 	 	203	 	 	—	 
	 	 Miscellaneous receivables
	 	 	140	 	 	101	 	 	107	 
	 	 	 	 	 	 	 	 	 
	 	 Total Other Receivables
	 	 	 640	 	 	 720	 	 	 1,092	 
	 	 	 	 	 	 	 	 	 

 4.     INVENTORY  

Inventory
is comprised of the following: 

												
	 	 
	 	May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Raw materials
	 	 	5,199	 	 	6,368	 	 	3,887	 
	 	 Work in progress
	 	 	878	 	 	455	 	 	1,343	 
	 	 Finished goods
	 	 	3,634	 	 	4,822	 	 	4,144	 
	 	 	 	 	 	 	 	 	 
	 	 Total production inventory
	 	 	 9,711	 	 	 11,645	 	 	 9,374	 
	 	 Inventory held for customer service/warranty
	 	 	2,822	 	 	2,593	 	 	1,210	 
	 	 	 	 	 	 	 	 	 
	 	 Total Inventory
	 	 	 12,533	 	 	 14,238	 	 	 10,584	 
	 	 	 	 	 	 	 	 	 

9

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 4.     INVENTORY (Continued) 

Cost
of sales for the three and twelve months ended May 31, 2009 and February 28, 2009 was $10,440 and $28,683 respectively (May 31,
2008 — $6,344; February 29, 2008 — $24,980), which included $9,929 and $25,689 respectively (three months ended
May 31, 2008 — $5,848; year ended February 29, 2008 — $23,332) of costs associated with inventory. The
remaining costs of $511 and $2,994 respectively (three months ended May 31, 2008 — $496; year ended February 29,
2008 — $1,648) related principally to freight, warranty and other direct costs of sales. 

During
the three months and twelve months ended May 31 and February 28, 2009, the Company recognized an impairment charge on inventory of $25 and $1,221 (May 31,
2008 — $149; February 29, 2008 — $220). 

 5.     PROPERTY AND EQUIPMENT  

																					
	 	 
	 	May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 
	 	Cost 	 	Accumulated

Amortization 	 	Cost 	 	Accumulated

Amortization 	 	Cost 	 	Accumulated

Amortization 	 
	 	 R&D equipment
	 	 	2,026	 	 	1,181	 	 	2,013	 	 	1,114	 	 	1,964	 	 	851	 
	 	 Furniture and fixtures
	 	 	602	 	 	520	 	 	602	 	 	515	 	 	566	 	 	488	 
	 	 Leasehold improvements
	 	 	531	 	 	404	 	 	512	 	 	397	 	 	478	 	 	370	 
	 	 Test equipment
	 	 	6,363	 	 	5,157	 	 	5,903	 	 	5,064	 	 	5,760	 	 	4,775	 
	 	 Communication equipment
	 	 	162	 	 	138	 	 	151	 	 	136	 	 	138	 	 	132	 
	 	 Computer hardware
	 	 	1,463	 	 	1,227	 	 	1,418	 	 	1,163	 	 	1,226	 	 	949	 
	 	 Computer software
	 	 	1,161	 	 	962	 	 	1,106	 	 	909	 	 	918	 	 	730	 
	 	 Production fixtures
	 	 	393	 	 	164	 	 	404	 	 	153	 	 	136	 	 	91	 
	 	 Automobile
	 	 	24	 	 	7	 	 	24	 	 	6	 	 	24	 	 	1	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 12,725	 	 	 9,760	 	 	 12,133	 	 	 9,457	 	 	 11,210	 	 	 8,387	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Accumulated Amortization
	 	 	(9,760	)	 	 	 	 	(9,457	)	 	 	 	 	(8,387	)	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Net Book Value
	 	 	 2,965	 	 	 	 	 	 2,676	 	 	 	 	 	 2,823	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 6.     LINE OF CREDIT  

As
at May 31, 2009, the Company had drawn $586 (February 28, 2009 — $641; February 29, 2008 — $550) on
an operating credit facility with a limit of $10,000 USD (February 28, 2009 — $5,000 CDN; February 29,
2008 — $5,000 CDN). Interest is calculated at the bank's prime rate of interest plus 1.75% (May 31, 2008 — 1%;
February 28, 2009 — 1%; February 29, 2008 — 1%) and resulted in a weighted average effective rate of 3.92%
(May 31, 2008 — 6.22%; February 28, 2009 — 5.44%; February 29,
2008 — 8%). The draw on the line of credit is denominated in both Canadian and US currencies. An additional $1,522 USD 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 at all periods mentioned above. 

The
Company also holds a capital expenditure facility with a limit of $3,000 USD (February 28, 2009 — nil; February 29,
2008 — nil). 

 7.     REDEEMABLE PREFERRED SHARES  

On
April 19, 2007, a capital reorganization occurred pursuant to which the outstanding Series A-1 Preferred shares and Class B Preferred shares were converted to
Common shares, on the following basis: 

	•
	The outstanding Series A-1 Preferred shares of the Company were converted into 1,908,315 Common
shares on a basis of 1.647932 Common shares for each series A-1 Preferred share, rounded down to the nearest whole number of Common shares held by each holder;  

	•
	The outstanding Class B Preferred shares of the Company were converted into 7,069,386 Common shares, on the
basis of one Common share for each Class B Preferred share. 

The
amount recorded for the debt component of redeemable Preferred shares at April 19, 2007 totalling $18,354 has been recorded to Common shares. 

During
the three and twelve months ended May 31, 2009 and February 28, 2009, interest of nil and nil (three months ended May 31, 2008 — nil;
year ended February 29, 2008 — $350) was accrued on the value of the redeemable Preferred shares. 

10

 

 

DRAGONWAVE INC.  

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  

 (Expressed in Cdn $000's except share and per share amounts)  

 8.     CONVERTIBLE DEBT  

On
April 19, 2007, a capital reorganization occurred pursuant to which the Convertible Debt was converted into 3,763,283 Common shares at a 10% discount to the price of the Common
shares. The amount recorded as Convertible Debt on April 19, 2007 totalled $13,171 and on conversion has been recorded to Common shares. 

During
the three and twelve months ended May 31, 2009 and February 28, 2009, interest of nil and nil (three months ended May 31, 2008 — nil;
year ended February 29, 2008 — $150) was accrued on the debt component of the Convertible Debt. Certain lenders are related party shareholders, which is
further discussed in note 13. 

 9.     CAPITAL STOCK  

Share
capital consists of the following: 

The
Company is authorized to issue an unlimited number of voting Common shares. After all preferential dividends are declared; common shareholders are entitled to dividends, if and when declared by
the Board of Directors, provided that an equivalent dividend on the outstanding Class A-1 Preferred shares, Class B Preferred shares, and Class B-1
Preferred shares are declared. 

On
April 19, 2007, the Company completed an initial public offering ("IPO"). Pursuant to the offering, the Company issued 7,595,000 Common shares for gross proceeds of $30,000. On
May 23, 2007, the Company closed an over-allotment option of 700,000 shares resulting in additional gross proceeds to the Company of $2,765. The net proceeds from both the
IPO and the over-allotment, after deducting share issue costs of $5,832, which have been netted against the value of the Common shares, was $26,935. In addition, the Company has converted
its Series A-1 Preferred shares (note 7), Class B Preferred shares (note 7), and the Convertible Debt (see note 8) into 1,908,315, 7,069,386, and
3,763,283 Common shares respectively. Upon conversion of the Preferred shares and the Convertible Debt; the amounts previously recorded in contributed surplus of $16,011 and $1,109,
respectively, have been allocated from contributed surplus to the value recorded for Common shares. Additionally, the debt component of the Preferred shares and the Convertible Debt outstanding at the
date of the capital reorganization amounting to $18,354 and $13,171, respectively, have also been adjusted to the value recorded for the Common 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. 

													
	 	 
	 	May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 in shares
	 	 	 	 	 	 	 	 	 	 
	 	 Issued and outstanding
	 	 	

28,614,780	 	 	

28,559,297	 	 	

28,440,355	 
	 	 	 	 	 	 	 	 	 
	 	 in dollars
	 	 	 	 	 	 	 	 	 	 
	 	 Value of Capital Stock
	 	 	 	 	 	 	 	 	 	 
	 	 	 Common shares
	 	 	119,936	 	 	119,925	 	 	119,435	 
	 	 	 Contributed surplus
	 	 	1,472	 	 	1,230	 	 	933	 
	 	 	 	 	 	 	 	 	 
	 	 Total Capital Stock
	 	 	 121,408	 	 	 121,155	 	 	 120,368	 
	 	 	 	 	 	 	 	 	 

During
the three months ended May 31, 2009 and the year ended February 28, 2009, the Company repurchased nil and 3,221 restricted Common shares from departing employees
respectively (year ended February 29, 2008 — 5,209 shares). 

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 of Directors 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 published separately and available at www.sedar.com. 

11

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 9.     CAPITAL STOCK (Continued) 

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

												
	 	 
	 	May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Fair value of warrants
	 	 	66	 	 	66	 	 	393	 
	 	 Stock based compensation — stock option
	 	 	1,406	 	 	1,164	 	 	540	 
	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 1,472	 	 	 1,230	 	 	 933	 
	 	 	 	 	 	 	 	 	 

 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 4,292,217 (February 28, 2009 — 4,283,894; February 29,
2008 — 4,266,053) Common shares reserved for issuance as at May 31, 2009. 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. 

The
following is a summary of Common stock option activity: 

																						
	 	 
	 	May 31, 2009 	 	February 28, 2009 	 	February 29, 2008 	 
	 	 
	 	Options 	 	Weighted

average price 	 	Options 	 	Weighted

average price 	 	Options 	 	Weighted

average price 	 
	 	 
	 	#
	 	$
	 	#
	 	$
	 	#
	 	$
	 
	 	 Opening Balance
	 	 	2,075,918	 	 	3.37	 	 	1,604,350	 	 	3.90	 	 	920,655	 	 	2.33	 
	 	 	 Granted
	 	 	52,337	 	 	3.13	 	 	544,268	 	 	1.97	 	 	703,750	 	 	5.94	 
	 	 	 Cancelled and expired
	 	 	(4,400	)	 	3.55	 	 	(72,250	)	 	4.47	 	 	(1,091	)	 	2.46	 
	 	 	 Exercised
	 	 	(53,600	)	 	0.10	 	 	(450	)	 	2.46	 	 	(18,964	)	 	3.30	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 Closing Balance
	 	 	 2,070,255	 	 	 3.30	 	 	 2,075,918	 	 	 3.37	 	 	 1,604,350	 	 	 3.90	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

The
Company has recognized $242 and $624 as compensation expense for stock-based grants, with a corresponding credit to contributed surplus, for the three and twelve months ended May 31 and
February 28, 2009 respectively (three months ended May 31, 2008 — $145; year ended February 29,
2008 — $327). 

Prior
to the IPO, 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 subsequent to April 19, 2007 at the date of grant using the Black-Scholes Model. The following are the weighted
average values used in determining the fair value: 

												
	 	 
	 	May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Volatility
	 	 	90.4%	 	 	61.2%	 	 	52.0%	 
	 	 Risk free rate of return
	 	 	1.3%	 	 	1.6%	 	 	4.3%	 
	 	 Dividend yield
	 	 	Nil	 	 	Nil	 	 	Nil	 
	 	 Average expected life
	 	 	4 yrs	 	 	4 yrs	 	 	4 yrs	 

12

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 9.     CAPITAL STOCK (Continued) 

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

																			
	 	 
	 	Options outstanding 	 	Options exercisable 	 
	 	Exercise price 	 	Number of

options 	 	Weighted average

remaining

contractual life 	 	Weighted average

exercise

price 	 	Number of

options 	 	Weighted average

exercise

price 	 
	 	$
	 	#
	 	(yrs)
	 	$
	 	#
	 	$
	 
	 	 	0.10 - 2.00	 	 	451,000	 	 	4.46	 	 	1.37	 	 	2,500	 	 	1.61	 
	 	 	2.01 - 3.00	 	 	836,300	 	 	1.34	 	 	2.46	 	 	588,073	 	 	2.46	 
	 	 	3.01 - 3.38	 	 	432,587	 	 	4.43	 	 	3.38	 	 	142,969	 	 	3.38	 
	 	 	3.39 - 6.57	 	 	350,368	 	 	3.53	 	 	6.37	 	 	139,048	 	 	6.38	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 2,070,255	 	 	 3.03	 	 	 3.08	 	 	 872,590	 	 	 3.23	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 

The
following table summarizes information about the Company's stock options outstanding and exercisable on February 28, 2009: 

																			
	 	 
	 	Options outstanding 	 	Options exercisable 	 
	 	Exercise price 	 	Number of

options 	 	Weighted average

remaining

contractual life 	 	Weighted average

exercise

price 	 	Number of

options 	 	Weighted average

exercise

price 	 
	 	$
	 	#
	 	(yrs)
	 	$
	 	#
	 	$
	 
	 	 	0      - 0.10	 	 	53,600	 	 	2.31	 	 	0.10	 	 	53,600	 	 	0.10	 
	 	 	0.11 - 2.50	 	 	1,275,100	 	 	2.50	 	 	2.08	 	 	554,943	 	 	2.46	 
	 	 	2.51 - 4.00	 	 	66,300	 	 	3.77	 	 	3.62	 	 	12,789	 	 	3.89	 
	 	 	4.01 - 6.00	 	 	293,868	 	 	3.81	 	 	5.33	 	 	85,265	 	 	5.30	 
	 	 	6.01 - 6.57	 	 	387,050	 	 	3.60	 	 	6.57	 	 	132,185	 	 	6.57	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 2,075,918	 	 	 2.92	 	 	 3.37	 	 	 838,782	 	 	 3.26	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 

The
Company introduced a restricted stock purchase plan as at June 30, 2005. The plan which 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. All the employees of the Company participated in an option
exchange program where their Common options and Special Purpose Common options were exchanged for restricted stock as at June 30, 2005. 

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

									
	 	 
	 	Restricted

stock 	 	Weighted

average

exercise

price 	 
	 	 
	 	#
	 	$
	 
	 	 Stock with restrictions on April 17, 2007
	 	 	 1,839,296	 	 	 0.01	 
	 	 Restrictions lapsed
	 	 	 (1,747,585	)	 	 0.01	 
	 	 Restricted stock repurchased on employee departure
	 	 	 (31,548	)	 	 0.01	 
	 	 	 	 	 	 	 
	 	 Restricted stock at May 31, 2009
	 	 	 60,163	 	 	 0.01	 
	 	 	 	 	 	 	 

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

The
Company launched an Employee Share Purchase Plan ("ESPP") 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 twelve months ended May 31 and February 28,
2009 a total of 1,506 and 6,732 shares were issued respectively (three and twelve months ended May 31, 2008 and February 29, 2008 — nil and
nil). Proceeds from these issuances were $5 and $7 respectively (three and twelve months ended May 31, 2008 and February 29, 2008 — nil and nil). 

13

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 9.     CAPITAL STOCK (Continued) 

 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 $315 US and $35US 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 its 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 its 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 warrants 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 warrants mentioned above were exercised and resulted in proceeds
of $150 being paid to the Company. The warrants and their 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 the Convertible Debt, 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. The warrants entitle the holders to purchase an aggregate of 178,287 Common shares at
a purchase price of $3.56 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 expire on
April 19, 2010. 

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 warrant 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. 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. 

 10.   COMMITMENTS  

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

						
	 	 
	 	$ 	 
	 	 2010
	 	 	643	 
	 	 2011
	 	 	679	 
	 	 2012
	 	 	512	 
	 	 2013
	 	 	77	 
	 	 Thereafter
	 	 	12	 
	 	 	 	 	 
	 	 
	 	 	 1,923	 
	 	 	 	 	 

In
addition to the 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 

14

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 10.   COMMITMENTS (Continued) 

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. 

 11.   SUPPLEMENTAL CASH FLOW INFORMATION  

																
	 	 
	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Changes in non-cash working capital balances:
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 Accounts receivable
	 	 	(735	)	 	3,891	 	 	910	 	 	(3,756	)
	 	 	 Other receivables
	 	 	80	 	 	323	 	 	372	 	 	(106	)
	 	 	 Inventory
	 	 	1,705	 	 	(1,763	)	 	(3,654	)	 	(3,686	)
	 	 	 Prepaid expenses
	 	 	(274	)	 	7	 	 	251	 	 	(92	)
	 	 	 Accounts payable and accrued liabilities
	 	 	1,004	 	 	(2,862	)	 	(3,378	)	 	3,137	 
	 	 	 Deferred revenue
	 	 	(329	)	 	(336	)	 	502	 	 	1,084	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 Changes in non-cash working capital balances
	 	 	 1,451	 	 	 (740	)	 	 (4,997	)	 	 (3,419	)
	 	 	 	 	 	 	 	 	 	 	 

 12.   INCOME TAXES  

The
reported income tax provision differs from the amount computed by applying the Canadian statutory rate to the net loss, for the following reasons: 

									
	 	 
	 	Year Ended

February 28,

2009 	 	Year Ended

February 29,

2008 	 
	 	 
	 	$
	 	$
	 
	 	 Loss before income taxes
	 	 	(5,952	)	 	(8,252	)
	 	 Statutory income tax rate
	 	 	33.42	%	 	35.68	%
	 	 	 	 	 	 	 
	 	 Expected income tax recovery
	 	 	 (1,989	)	 	 (2,944	)
	 	 Tax effect of expenses only deductible for tax purposes
	 	 	(490	)	 	—	 
	 	 Tax effect of realizing benefit of prior years' loss carryforwards
	 	 	(275	)	 	(69	)
	 	 Tax effect of losses not recognized
	 	 	—	 	 	813	 
	 	 Foreign tax rate differences
	 	 	5	 	 	14	 
	 	 Foreign branch taxes
	 	 	37	 	 	—	 
	 	 Tax effect of expenses not deductible for tax purposes
	 	 	364	 	 	(41	)
	 	 Tax effect of temporary differences not recognized
	 	 	2,385	 	 	2,227	 
	 	 	 	 	 	 	 
	 	 Income tax expense
	 	 	 37	 	 	 —	 
	 	 	 	 	 	 	 

The
Company's future tax assets and liabilities include the following significant components: 

									
	 	 
	 	February 28,

2009 	 	February 29,

2008 	 
	 	 
	 	$
	 	$
	 
	 	 Scientific Research and Experimental Development expenditures
	 	 	10,120	 	 	9,068	 
	 	 Income tax loss carryforwards
	 	 	5,416	 	 	10,086	 
	 	 Book and tax differences on assets
	 	 	4,259	 	 	718	 
	 	 Ontario Harmonization tax credit
	 	 	1,857	 	 	1,019	 
	 	 	 	 	 	 	 
	 	 Total future tax assets
	 	 	 21,652	 	 	20,891	 
	 	 	 	 	 	 	 
	 	 Valuation allowance
	 	 	 (21,652	)	 	(20,891	)
	 	 	 	 	 	 	 
	 	 Net future tax assets
	 	 	 —	 	 	 —	 
	 	 	 	 	 	 	 

15

 

 

DRAGONWAVE INC.  

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  

 (Expressed in Cdn $000's except share and per share amounts)  

 12.   INCOME TAXES (Continued)  

As
at February 28, 2009, the Company had $16,176 of cumulative income tax loss carry forwards in Canada that expire between Fiscal 2010 and Fiscal 2027. 

The
Company also had $1,232 of Federal tax loss carry forwards in the U.S. that expire between Fiscal 2025 and Fiscal 2027. Internal Revenue Code Section 382 imposes an annual limitation
on the use of a company's net operating loss carry forwards when a company has an ownership change. As a result of the Company's public offering in April 2007 and the follow-on
offering in September 2007, the Company effectuated a change of ownership as understood by Section 382. The annual restriction in the amount of losses that may be used has been
calculated as $490. 

As
at February 28, 2009, the Company had $6,620 of investment tax credits available to reduce future Canadian income taxes payable. These investment tax credits begin to expire in 2010. A tax
benefit for these investment tax credits has not been recognized in the consolidated financial statements. During the years ended February 28, 2009 and February 29, 2008, the Company
recognized investment tax credits of $82 and $493, respectively. Also as at February 28, 2009, the Company had scientific research and experimental development expenditures of $34,896, which
may be carried forward indefinitely. 

The
Company had a transitional tax credit of $1,857, arising from Federal/Ontario Corporate Tax Harmonization, that is available to reduce future Ontario income tax and expires in 2013. 

 13.   RELATED PARTY TRANSACTIONS  

The
Company leases premises from a real estate company controlled by a member of the Board of Directors. During the three months ended May 31, 2009 and the year ended February 28, 2009,
the Company paid $203 and $845 respectively (three months ended May 31, 2008 — $205; year ended February 29,
2008 — $792), 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 three months ended
May 31, 2009 and the year ended February 28, 2009 were $2,321 and $14,308 respectively (three months ended May 31, 2008 — $3,596; year ended
February 29, 2008 — $14,883), and the value owing for net purchases at May 31, 2009 was $428 (February 28,
2009 — $1,405; February 29, 2008 — $1,033) 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. 

Interest
expense paid to a related party for a Company issued Convertible Debenture for the three months ended May 31, 2009 and the year ended February 28, 2009 was nil and nil
respectively (three months ended May 31, 2008 — $116; year ended February 29, 2008 — $116). 

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

 14.   RESTRUCTURING COSTS RELATED TO SPECIFIC ITEMS  

During
the third fiscal quarter of the year ended February 28, 2009, 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 $461 and $40 respectively. Other costs include both legal and contract termination costs. All restructuring
costs were recognized during the third fiscal quarter of the year ended February 28, 2009. The greater part of all cash disbursements related to these restructuring costs took place during the
three months ended February 28, 2009; the remaining $17 held in accounts payable was disbursed in the following fiscal quarter. 

 15.   FINANCIAL INSTRUMENTS  

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

16

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 15.   FINANCIAL INSTRUMENTS (Continued) 

 Fair value  

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

												
	 	 
	 	May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Held for trading(1)
	 	 	21,975	 	 	23,498	 	 	33,459	 
	 	 Loans and receivables(2)
	 	 	11,898	 	 	11,243	 	 	12,525	 
	 	 Other financial liabilities(3)
	 	 	6,745	 	 	5,934	 	 	9,176	 

	(1)
	Includes
cash, 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 receivable, other receivables, line of credit, accounts payable and accrued liabilities are short-term financial
instruments whose fair value 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 and short-term investments with fixed interest rates expose the Company to interest rate risk on these financial instruments. Interest income of $34 and $693 was
recognized during the three and twelve months ended May 31, 2009 and February 28, 2009 respectively, on the Company's cash, cash equivalents and short-term investments (three
months ended May 31, 2008 — $254; year ended February 29, 2008 — $1,109). 

The
following table illustrates the effect of a change in interest rates on the Company's net loss for the periods mentioned below, with all other variables held constant. The change in
after-tax loss is due to adjustments in the fair value for fixed rate short-term investments classified as held for trading. 

										
	 	 
	 	Interest Rates

+25 basis points 	 	Interest Rates

-25 basis points 	 
	 	 Effect on the Company's after-tax income
	 	 	 	 	 	 	 
	 	 	 as at May 31, 2009
	 	 	nil	 	 	nil	 
	 	 	 as at February 28, 2009
	 	 	(2)	 	 	2	 
	 	 	 as at May 31, 2008
	 	 	(5)	 	 	5	 
	 	 	 as at February 29, 2008
	 	 	(7)	 	 	7	 

The
Company pays interest on its line of credit at the bank's prime rate of interest plus 1.75% (February 28, 2009 — 1%; February 29,
2008 — 1%), 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 May 31, 2009, one customer exceeded 10% of the total receivable balance. This customer represented 45%
(February 28, 2009 — two customers represented 44%; February 29, 2008 — one customer represented 26%)
of the accounts receivable 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 May 31, 2009, 28% of trade receivables (net of allowances) are considered at least one day past due (February 28,
2009 — 23%; February 29, 2008 — 49%). 

17

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 15.   FINANCIAL INSTRUMENTS (Continued) 

 Foreign exchange risk  

The
following table summarizes the currency distribution of the Company's financial instruments in Canadian dollars: 

																														
	 	 
	 	May 31, 2009 	 	February 28, 2009 	 	February 29, 2008 	 
	 	 
	 	CDN

Dollars 	 	US

Dollars 	 	Other

Currency 	 	CDN

Dollars 	 	US

Dollars 	 	Other

Currency 	 	CDN

Dollars 	 	US

Dollars 	 	Other

Currency 	 
	 	 Cash and cash equivalents
	 	 	65%	 	 	30%	 	 	5%	 	 	69%	 	 	26%	 	 	5%	 	 	96%	 	 	3%	 	 	1%	 
	 	 Accounts receivable
	 	 	3%	 	 	96%	 	 	1%	 	 	4%	 	 	90%	 	 	6%	 	 	15%	 	 	84%	 	 	1%	 
	 	 Financial liabilities
	 	 	43%	 	 	56%	 	 	1%	 	 	40%	 	 	59%	 	 	1%	 	 	43%	 	 	56%	 	 	1%	 

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 United States 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 percent against all foreign currencies at May 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 $149 for the three months ended May 31, 2009 (three month ended
May 31, 2008 — $86; year ended February 28, 2009 — $211; year ended February 29,
2008 — $69). If the Canadian dollar had depreciated 1 percent against all foreign currencies for the three months ended May 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 $149 of after-tax net
income for the three month period ended May 31, 2009 (three months ended May 31, 2008 — $86; year ended February 28,
2009 — $211; year ended February 29, 2008 — $69). 

For
the three months ended May 31, 2009, a foreign exchange loss of $1,686 was recognized (three months ended May 31, 2008 — $268 gain; year ended
February 28, 2009 — $4,514 gain; year ended February 29, 2008 — $1,453 loss). 

 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. 

 16.   CAPITAL MANAGEMENT  

The
Company defines capital to include 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 of its capital management strategy with the exception of an operating line of credit. For all periods noted, the Company has not distributed dividends to its shareholders. The
Company is not subject to any externally imposed requirements other than disclosed in note 6; and there were no changes in the Company's approach to capital management during the periods
noted in these consolidated financial statements. 

 17.   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: 

																											
	 	 
	 	May 31, 2009 	 	May 31, 2008 	 	February 28, 2009 	 	February 29, 2008 	 
	 	 
	 	$
	 	%
	 	$
	 	%
	 	$
	 	%
	 	$
	 	%
	 
	 	 Canada
	 	 	966	 	 	6	 	 	1,820	 	 	17	 	 	4,690	 	 	11	 	 	5,678	 	 	14	 
	 	 North America (excluding Canada)
	 	 	11,886	 	 	74	 	 	6,239	 	 	58	 	 	24,951	 	 	58	 	 	22,387	 	 	56	 
	 	 Europe, Middle East, and Africa
	 	 	3,027	 	 	19	 	 	2,416	 	 	23	 	 	11,334	 	 	26	 	 	11,382	 	 	28	 
	 	 Other
	 	 	71	 	 	1	 	 	250	 	 	2	 	 	2,359	 	 	5	 	 	957	 	 	2	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 15,950	 	 	 100	 	 	 10,725	 	 	 100	 	 	 43,334	 	 	 100	 	 	 40,404	 	 	 100	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

18

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

 18.   ECONOMIC DEPENDENCE  

The
Company is dependent on a key customer with respect to revenue. This customer represents approximately 52% and 19% of sales for the three and twelve months ended May 31 and
February 28, 2009 respectively (three months ended May 31, 2008 — 39%; year ended February 29,
2008 — 27%). 

 19.   COMPARATIVE FIGURES  

Certain
of the comparative figures have been reclassified to conform to the presentation adopted in the current fiscal year. 

 20.   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 	 	Twelve months ended 	 
	 	 
	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Net loss and comprehensive loss in accordance with Canadian GAAP
	 	 	(2,883	)	 	(1,941	)	 	(5,989	)	 	(8,252	)
	 	 	 Share-based compensation (a)
	 	 	3	 	 	(36	)	 	(145	)	 	(138	)
	 	 	 Redemable Preferred shares (b)
	 	 	 	 	 	 	 	 	 	 	 	350	 
	 	 	 Covertible debentures (c)
	 	 	 	 	 	 	 	 	 	 	 	(600	)
	 	 	 	 	 	 	 	 	 	 	 
	 	 Net and Comprehensive loss in accordance with U.S. GAAP
	 	 	 (2,880	)	 	 (1,977	)	 	 (6,134	)	 	 (8,640	)
	 	 	 	 	 	 	 	 	 	 	 

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

																
	 	 
	 	Three months ended 	 	Twelve months ended 	 
	 	 
	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Loss attributed to Common shareholders — basic and diluted
	 	 	(2,880	)	 	(1,977	)	 	(6,134	)	 	(8,640	)
	 	 	 Weighted average number of shares
	 	 	28,569,238	 	 	28,480,522	 	 	28,537,202	 	 	23,448,504	 
	 	 	 Basic loss per share
	 	 	 (0.10	)	 	 (0.07	)	 	 (0.21	)	 	 (0.37	)
	 	 	 Weighted average number of shares — diluted(1)
	 	 	28,569,238	 	 	28,480,522	 	 	28,537,202	 	 	23,448,504	 
	 	 	 Dilutes loss per share
	 	 	 (0.10	)	 	 (0.07	)	 	 (0.21	)	 	 (0.37	)

	(1)
	excludes
the effect of all options and warrants that are anti-dilutive due to the loss reported in the year 

There
was no cumulative effect of the above adjustments on the Company`s shareholders' equity.  

	a)
	Stock-based compensation

	i)
	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". 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 

19

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

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

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-month
periods ended May 31, 2009 and May 31, 2008 and for the years ended February 28, 2009 and February 29, 2008. 

During
the three-month period ended May 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 period ended May 31, 2009 related to the modification under U.S. GAAP is
less than the amount recorded under Canadian GAAP.  

	ii)
	As
at May 31, 2009 and February 28, 2009, compensation costs not yet recognized relating to stock option awards outstanding of $2,132 and
$2,164 respectively (May 31, 2008 — $2,454 February 29, 2008 — $2,464) net of estimated forfeitures. As
at May 31, 2009, compensation cost will be recognized on a straight line basis over the remaining weighted-average period of approximately 2.3 years for the time vesting options and the
performance vesting awards will vest as performance conditions are met. Compensation will be adjusted for subsequent changes in estimated forfeitures.

	iii)
	The
total intrinsic value of options exercised during the three-month period ended May 31, 2009 was $177 (three-month period ended May 31,
2008 — nil) and for the year ended February 28, 2009 was nil (February 29, 2008 — $3).

	iv)
	The
total intrinsic value of fully vested options at May 31, 2009 was $777 (May 31, 2008 — $1,411) and
was ($516) at February 29, 2009 (February 29, 2008 — $1,000).

	v)
	The
total fair value of options that vested during the three-month period ended May 31, 2009 was $239 (three month period ended May 31,
2008 — $181) and for the year ended February 28, 2009 was $769 (2008 — $464).

	vi)
	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.

	vii)
	The
Company records an expense equal to the fair value of shares granted pursuant to the employee share purchase plan over the period the shares vest. The
total fair value of the shares recognized during the three-month period ended May 31, 2009 was $1 (three-month period ended May 31, 2008 — nil) and
for the year ended February 28, 2009 was $1 (2008 — nil). The fair value of the unearned ESPP shares as at May 31, 2009 was $2 (May 31,
2008 — nil) and as at February 28, 2009 was $1 (2008 — nil). The number of shares held for release under the
plan at May 31, 2009 and February 28, 2009 were 1,076 and 1,413 respectively (May 31, 2008 — nil; February 29,
2008 — nil).

 

	b)
	Redeemable Preferred Shares

Under
Canadian GAAP, the fair value of the redemption feature of the redeemable Preferred shares at their date of issuance was separated from the Preferred shares and recorded as a liability. As a
result, the amount allocated to the Preferred shares was less than their redemption amount. The Preferred shares were accreted up to their redemption amount over the term to the date that the
redeemable Preferred shares first became redeemable. This accretion was charged to interest expense. Under Canadian GAAP, the value of the conversion feature was recorded in shareholders' equity. 

Under
U.S. GAAP, the fair value of the conversion feature was not required to be separately recorded. As a result, no interest expense was required to be recorded under U.S. GAAP. Under
U.S. GAAP, the redeemable Preferred shares are classified outside of permanent shareholders' equity as they are redeemable at the option of the holder. This results in a U.S. GAAP
reconciling item to reflect the different classification. As the Preferred shares were all redeemed prior to February 28, 2008, there is no classification difference for any of the periods
presented. 

20

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

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

	c)
	Convertible Debt

Under
Canadian GAAP, the fair value of the liability component of the Convertible Debt at the date of issuance was recorded as long-term debt. This liability component was being accreted
up to the face amount of the Convertible Debt over the term to maturity until the underlying debt was converted into Preferred shares. This accretion was charged to interest expense using the
effective interest rate method. Under Canadian GAAP the equity components of the Convertible Debt, consisting of the conversion right and warrants, were valued using the residual valuation of the
equity component method where the liability component is valued first, and the difference between the proceeds of the debt issuance and the fair value of the liability is assigned to the equity
components and recorded in shareholders' equity. 

Under
U.S. GAAP, the proceeds of debt instruments issued with detachable stock purchase warrants should be allocated based on a relative fair value basis. As a result, the relative fair value
of the warrants at their issuance was determined to be $465 and was allocated to shareholders' equity with a corresponding discount on the Convertible Debt. Due to the allocation of proceeds to
warrants and ability for holders to convert the debt at a price equal to ninety percent (90%) of the then-current share price, a Beneficial Conversion Feature ("BCF") exists under
U.S. GAAP. In accordance with U.S. GAAP, a further discount on the Convertible Debt and increase to shareholders' equity of $1,854 was recorded representing the fair value of the BCF
upon issuance. The discounts on the Convertible Debt are accreted to interest expense using the effective interest method and any unamortized balance is expensed immediately upon conversion of the
Convertible Debt. 

The
discount on Convertible Debt under U.S. GAAP is greater than that under Canadian GAAP, and as a result, additional interest expense was recorded under U.S. GAAP for the year ended
February 29, 2008. 

 OTHER DISCLOSURES REQUIRED UNDER U.S. GAAP  

	a)
	Income Statement

	i)
	During
each of the periods presented revenue is comprised of: 

															
	 	 
	 	Three months ended 	 	Twelve months ended 	 
	 	 
	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Product Sales
	 	 	14,929	 	 	9,289	 	 	38,952	 	 	37,640	 
	 	 Services
	 	 	1,021	 	 	1,436	 	 	4,382	 	 	2,764	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 Total Revenue
	 	 	 15,950	 	 	 10,725	 	 	 43,334	 	 	 40,404	 
	 	 	 	 	 	 	 	 	 	 	 

	ii)
	Stock
based compensation: 

Non-cash
stock based compensation of $239 was recorded for the three-month period ended May 31, 2009 (three month period ended May 31,
2008 — $181) and $769 for the year ended February 28, 2009 (2008 — $465) and was included in General and
administrative, Selling and Marketing, and Research and Development expenses as detailed below. 

															
	 	 
	 	Three months ended 	 	Twelve months ended 	 
	 	 
	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 General and Administrative
	 	 	93	 	 	52	 	 	306	 	 	153	 
	 	 Research and Development
	 	 	60	 	 	51	 	 	186	 	 	153	 
	 	 Sales and Marketing
	 	 	86	 	 	78	 	 	277	 	 	158	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 239	 	 	 181	 	 	 769	 	 	 464	 
	 	 	 	 	 	 	 	 	 	 	 

21

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

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

	iii)
	Details
of related party transaction amounts included in income statement captions are as follows: 

															
	 	 
	 	Three months ended 	 	Twelve months ended 	 
	 	 
	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Cost of Sales
	 	 	2,321	 	 	3,574	 	 	14,103	 	 	14,782	 
	 	 Reaserch and Development
	 	 	98	 	 	109	 	 	437	 	 	423	 
	 	 General and administrative
	 	 	76	 	 	65	 	 	280	 	 	260	 
	 	 Sales and Marketing
	 	 	29	 	 	53	 	 	333	 	 	208	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 Total
	 	 	 2,524	 	 	 3,801	 	 	 15,153	 	 	 15,673	 
	 	 	 	 	 	 	 	 	 	 	 

	iv)
	Bad
debt expense: 

Included
in general and administrative expenses is $11 related to bad debt expense for the three-month period ended May 31, 2009 (three-month period ended May 31,
2008 — $47) and $325 related to the year ended February 28, 2009 (year ended February 29, 2008 — $116). 

	v)
	Rental
expense: 

Included
in general and administrative expenses is $191 related to premises rental expense for the three-month period ended May 31, 2009 (three-month period ended May 31,
2008 — $191) and $759 related to the year ended February 28, 2009 (year ended February 29, 2008 — $617). 

	vi)
	Depreciation
expense: 

Included
in general and administrative expenses is $92 related to depreciation of capital assets for the three-month period ended May 31, 2009 (three-month period ended May 31,
2008 — $74) and $341 related to the year ended February 28, 2009 (year ended February 29, 2008 — $199). 

	b)
	Balance Sheet

	i)
	Accounts
Payable and Accrued Liabilities: 

Details
of accounts payable and accrued liabilities are as follows: 

												
	 	 
	 	 
	 	Twelve months ended 	 
	 	 
	 	Three months ended

May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Accounts payable
	 	 	3,739	 	 	1,764	 	 	3,423	 
	 	 Accruals
	 	 	2,148	 	 	1,991	 	 	3,840	 
	 	 Payroll related Accruals
	 	 	366	 	 	487	 	 	759	 
	 	 Related party
	 	 	428	 	 	1,422	 	 	1,033	 
	 	 Taxes
	 	 	—	 	 	13	 	 	—	 
	 	 	 	 	 	 	 	 	 
	 	 Total accounts payables and accrued liabilities
	 	 	 6,681	 	 	 5,677	 	 	 9,055	 
	 	 	 	 	 	 	 	 	 

	ii)
	Warranty
liability: 

The
Company records a liability for future warranty costs based on management's best estimate of probable claims within the Companies product warranties. The accrual is based on the terms of the
warranty which vary by customer, product, or service and historical experience. The Company regularly evaluate the appropriateness of the remaining accrual. 

22

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

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

The
following table details the changes in the warranty liability: 

												
	 	 
	 	 
	 	Twelve months ended 	 
	 	 
	 	Three months ended

May 31,

2009 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Balance at beginning of period
	 	 	401	 	 	429	 	 	286	 
	 	 Accruals
	 	 	236	 	 	531	 	 	669	 
	 	 Utilization
	 	 	(115	)	 	(559	)	 	(526	)
	 	 	 	 	 	 	 	 	 
	 	 Balance at end of period
	 	 	 522	 	 	 401	 	 	 429	 
	 	 	 	 	 	 	 	 	 

	iii)
	Restructuring
charges: 

During
the year ended February 28, 2009, the Company recorded restructuring charges of $501 related to severance and benefit costs associated with a workforce reduction of 20 employees,
all of whom were notified of their termination during the year ended February 28, 2009. Of the total expense, $484 was disbursed during the three months ended February 28, 2009 with the
remainder disbursed during the subsequent fiscal quarter.  

	iv)
	Short-term
investments: 

Cost
and fair value of investments classified as held for trading, as at February 29, 2008, by contractual maturity were as follows: 

									
	 	 
	 	Amortized

Cost 	 	Fair

Value 	 
	 	 Due in one to 3 months
	 	 	31,878	 	 	31,908	 
	 	 Due in 3 to 6 months
	 	 	—	 	 	—	 
	 	 	 	 	 	 	 
	 	 Total Investments
	 	 	 31,878	 	 	 31,908	 
	 	 	 	 	 	 	 

	v)
	Allowance
for doubtful accounts: 

Allowance
for doubtful accounts at May 31, 2009 was $281 (February 28, 2009 — $296; February 29,
2008 — $77).  

	c)
	Capital Stock

	i)
	Shares
outstanding: 

Under
U.S. GAAP, issued and authorized capital is required to be presented on the face of the balance sheet. The Company is authorized to issue an unlimited number of voting Common shares.
After all preferential dividends are declared, common shareholders are entitled to dividends, if and when declared by the Board of Directors provided that an equivalent dividend on the outstanding
Class A-1 Preferred shares, and Class B Preferred shares are declared. 

The
Company had 28,614,780 and 28,559,297 Common shares issued and outstanding as at May 31, 2009 and February 28, 2009, respectively (28,555,335 and 28,440,355 as at
May 31, 2008 and February 29, 2008, respectively).  

	d)
	Income Taxes

	i)
	Adoption
of FASB Interpretation 48: 

In
June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, an interpretation of
FAS 109, effective for fiscal years beginning on or after December 15, 2006. FIN 48 provides specific guidance on the recognition, de-recognition and measurement of
income tax positions in financial statements, including the accrual of related interest and penalties recorded in interest expense. An income tax position is recognized when it is more likely than not
that it will be sustained upon examination based on its technical merits, and is measured as the largest amount that is greater than 50% likely of being realized upon ultimate settlement. Under
Canadian GAAP, the Company recognizes and measures income tax positions based on the best 

23

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

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

estimate
of the amount that is more likely than not of being realized. The adoption of FIN 48 did not have any impact on the Company's U.S. GAAP results. 

	ii)
	Substantively
enacted tax rates: 

Under
Canadian GAAP, income taxes are measured using substantively enacted tax rates, while under U.S. GAAP, measurement is based upon enacted tax rates. This difference does not result in a
difference for any periods presented in these consolidated financial statements.  

	iii)
	Deferred
tax asset: 

Under
U.S. GAAP, investment tax credits are included in the determination of deferred tax asset whereas under Canadian GAAP, investment tax credits are not considered in the determination of
future tax assets. Including the investment tax credits as a deferred tax asset under U.S. GAAP would have the impact of increasing deferred tax assets with a corresponding increase in the
Company's valuation allowance of $4,700 as at February 28, 2009 and $3,647 as at February 29, 2008.  

	iv)
	Accrued
interest expenses: 

The
Company recognizes interest accrued relating to unrecognized tax liabilities as interest expense.  

	v)
	Fiscal
period subject to examination: 

The
Company files income tax returns in Canada, the United States, and the United Kingdom. Generally, the years 2002 to 2009 remain subject to examination by tax authorities. 

	vi)
	Income
(loss) by jurisdiction: 

The
components of the Company's income (loss) from continuing operations before income taxes, by taxing jurisdiction, were as follows: 

															
	 	 
	 	Three months ended 	 	Twelve months ended 	 
	 	 
	 	May 31,

2009 	 	May 31,

2008 	 	February 28,

2009 	 	February 29,

2008 	 
	 	 Canada
	 	 	(1,638	)	 	(2,503	)	 	(11,354	)	 	(7,393	)
	 	 United States
	 	 	412	 	 	61	 	 	230	 	 	188	 
	 	 Other
	 	 	2	 	 	(12	)	 	—	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 (1,224	)	 	 (2,454	)	 	 (11,124	)	 	 (7,205	)
	 	 	 	 	 	 	 	 	 	 	 

	vii)
	Future
tax liabilities by jurisdiction: 

The
Company's future tax liability for each tax jurisdiction is nil for all periods noted above.  

	viii)
	Valuation
Allowance: 

Under
U.S. GAAP, any valuation allowance related to investment tax credits ("ITC") must be included in the valuation allowance for deferred tax assets. Accordingly, the Company recorded a
valuation allowance of $26,352 as at February 28, 2009 (February 29, 2008 — $24,538).  

	ix)
	Recognition
of deferred tax assets: 

In
assessing the likelihood of realizing deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of future income tax assets is dependent upon the generation of future taxable income during the years in which the temporary differences are deductible. Management considers the scheduled
reversals of deferred tax liabilities, the character of the deferred income tax assets and available tax planning strategies in making this assessment. 

To
the extent that management determines that the realization of future income taxes does not meet the more likely than not realization criterion, a valuation allowance is recorded against the future
income tax assets. 

24

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

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

	e)
	Fair Value Measurements

Effective
March 1, 2008, the Company adopted FASB standard SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework and prescribes methods for
measuring fair value and outlines the additional disclosure requirements on the use of fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date.
SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of fair value hierarchy based on the reliability of
inputs are as follows: 

	•
	Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;  

	•
	Level 2 inputs are significant observable inputs other than quoted prices included in level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data; and   

	•
	Level 3 inputs are significant unobservable inputs that reflect the reporting entity's own assumptions and are
supported by little or no market activity. 

The
Company's financial assets and liabilities that are measured at fair value on a recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the
inputs used to determine the fair value at the measurement date in the table below. SFAS No. 157-2 delayed the effective date for non-financial assets and
liabilities until March 1, 2009, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. 

Financial
assets and liabilities measured at fair value as at February 28, 2009 in the consolidated financial statements on a recurring basis are summarized below: 

												
	 	 
	 	Fair value measurements using:
 
	 
	 	 
	 	Level 1 	 	Level 2 	 	Level 3 	 
	 	 Assets
	 	 	 	 	 	 	 	 	 	 
	 	 Cash
	 	 	8,504	 	 	—	 	 	—	 
	 	 Short Term Investments
	 	 	14,994	 	 	—	 	 	—	 
	 	 	 	 	 	 	 	 	 
	 	 Total assets
	 	 	23,498	 	 	—	 	 	—	 
	 	 	 	 	 	 	 	 	 

Financial
assets and liabilities measured at fair value as at May 31, 2009 in the consolidated financial statements on a recurring basis are summarized below: 

												
	 	 
	 	Fair value measurements using:
 
	 
	 	 
	 	Level 1 	 	Level 2 	 	Level 3 	 
	 	 Assets
	 	 	 	 	 	 	 	 	 	 
	 	 Cash
	 	 	21,975	 	 	—	 	 	—	 
	 	 Short Term Investments
	 	 	—	 	 	—	 	 	—	 
	 	 	 	 	 	 	 	 	 
	 	 Total assets
	 	 	21,975	 	 	—	 	 	—	 
	 	 	 	 	 	 	 	 	 

	f)
	Recent United States accounting pronouncements

	i)
	Business
Combinations: 

In
December 2007, the FASB issued FASB Statement No. 141R, Business Combinations. This statement requires the acquirer to recognize the assets acquired, liabilities assumed and any
non-controlling interest in the acquiree at fair value as of the acquisition date. The statement is effective for the Company beginning March 1, 2009. 

There
was no material impact on the Company's financial position or results of operations as a result of adopting this standard. 

25

 

DRAGONWAVE INC. 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 (Expressed in Cdn $000's except share and per share amounts) 

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

	ii)
	Non-controlling
interests: 

In
December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests in Financial Statements. This statement will require non-controlling interest
in a subsidiary to be reported in equity in the consolidated financial statements. The statement is effective for the Company beginning March 1, 2009. 

There
was no material impact on the Company's financial position or results of operations as a result of adopting this standard.  

	iii)
	Disclosure
about Derivative Instruments and Hedging Activities: 

In
March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. This new statement enhances disclosures regarding an entity's
derivative and hedging activities. This statement is effective for the Company beginning March 1, 2009. 

There
was no impact to the Company on adoption of this statement.  

	iv)
	Hierarchy
of Generally Accepted Accounting Principles: 

In
May 2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. The statement identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements in accordance with GAAP in the United States. This statement was effective for the Company
November 15, 2008, which is 60 days after the Securities and Exchange Commission's approval of Auditing Standard No. 6, Evaluating Consistency of Financial Statements. 

There
was no impact to the Company on adoption of this statement.  

	v)
	Subsequent
events: 

In
May 2009, the FASB issued SFAS No. 165, Subsequent Events, ("SFAS 165"), which is effective for the Company June 30, 2009. SFAS 165 provides guidance for
disclosing events that occur after the balance sheet date, but before financial statements are issued or available to be issued. 

The
adoption of SFAS 165 did not have a significant impact on the Company's consolidated financial statements. 

26

QuickLinks

AUDITORS' REPORT

DRAGONWAVE INC. CONSOLIDATED BALANCE SHEETS (Expressed in Cdn $000's)

DRAGONWAVE INC. CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE LOSS AND DEFICIT (Expressed in Cdn $000's except share and per share amounts)

DRAGONWAVE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in Cdn $000's except share and per share amounts)

DRAGONWAVE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Cdn $000's except share and per share amounts)Exhibit 4.7

 

[Form of
Warrant Certificate]

 

[Face]

 

	
  NUMBER

  	
   

  	
  WARRANTS

  

 

THIS
WARRANT WILL BE VOID IF NOT EXERCISED PRIOR TO

5:00 P.M.
NEW YORK CITY TIME, NOVEMBER 14, 2013

 

KENNEDY-WILSON
HOLDINGS, INC.

Incorporated Under the Laws of the State of Delaware

 

	
   

  	
  CUSIP

  

 

WARRANT
CERTIFICATE

 

This Warrant Certificate certifies that                , or registered
assigns, is the registered holder of              
warrants (the “Warrants”)
to purchase shares of Common Stock, $.0001 par value (the “Common Stock”), of Kennedy-Wilson
Holdings, Inc. (formerly Prospect Acquisition Corp.), a Delaware
corporation (the “Company”).
Each Warrant entitles the holder, upon exercise during the period set forth in
the Warrant Agreement referred to below, to purchase from the Company that
number of fully paid and non-assessable shares of Common Stock (each, a “Warrant Share”) as
set forth below at the exercise price (the “Exercise Price”) as determined pursuant
to the Warrant Agreement payable in lawful money of the United States of America
upon surrender of this Warrant Certificate and payment of the Exercise Price at
the office or agency of the Warrant Agent, but only subject to the conditions
set forth herein and in the Warrant Agreement. Defined terms used in this
Warrant Certificate but not defined herein shall have the meanings given to
them in the Warrant Agreement.

 

Each Warrant is initially exercisable for one
fully paid and non-assessable share of Common Stock. The number of Warrant
Shares issuable upon exercise of the Warrants is subject to adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.

 

The initial Exercise Price per share of
Common Stock for any Warrant is equal to $12.50 per share. The Exercise Price
is subject to adjustment upon the occurrence of certain events set forth in the
Warrant Agreement.

 

Warrants may be exercised only during the
Warrant Exercise Period subject to the conditions set forth in the Warrant
Agreement and to the extent not exercised by the end of such Warrant Exercise
Period such Warrants shall become void.

 

Reference is hereby made to the further
provisions of this Warrant Certificate set forth on the reverse hereof and such
further provisions shall for all purposes have the same effect as though fully
set forth at this place.

 

This Warrant Certificate shall not be valid
unless countersigned by the Warrant Agent, as such term is used in the Warrant
Agreement.

 

 

This Warrant Certificate shall be governed
and construed in accordance with the internal laws of the State of New York,
without regard to conflicts of laws principles thereof.

 

	
   

  	
  KENNEDY-WILSON HOLDINGS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Patrick J. Landers 

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  James Cahill 

  
	
   

  	
   

  	
  Secretary

  

 

Countersigned:

Dated:              ,
20    

CONTINENTAL STOCK TRANSFER & TRUST COMPANY,

as Warrant Agent

 

	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized Signatory

  	
   

  

 

 

[Form of Warrant Certificate]

 

[Reverse]

 

The Warrants evidenced by this Warrant
Certificate are part of a duly authorized issue of Warrants entitling the
holder on exercise to receive shares of Common Stock, par value $0.0001 per
share, of the Company (the “Common Stock”), and are issued or to be issued pursuant
to an amended and restated Warrant Agreement dated as of [                       ], 2009 (the “Warrant Agreement”),
duly executed and delivered by the Company to Continental Stock Transfer &
Trust Company, a New York corporation, as warrant agent (the “Warrant Agent”),
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Warrant Agent, the Company and the holders (the words “holders” or “holder”
meaning the registered holders or registered holder) of the Warrants. A copy of
the Warrant Agreement may be obtained by the holder hereof upon written request
to the Company. Defined terms used in this Warrant Certificate but not defined
herein shall have the meanings given to them in the Warrant Agreement.

 

Warrants may be exercised at any time during
the Warrant Exercise Period set forth in the Warrant Agreement. The holder of
Warrants evidenced by this Warrant Certificate may exercise them by
surrendering this Warrant Certificate, with the form of election to purchase
set forth hereon properly completed and executed, together with payment of the
Exercise Price as specified in the Warrant Agreement, at the principal
corporate trust office of the Warrant Agent. In the event that upon any
exercise of Warrants evidenced hereby the number of Warrants exercised shall be
less than the total number of Warrants evidenced hereby, there shall be issued
to the holder hereof or his assignee a new Warrant Certificate evidencing the
number of Warrants not exercised. No adjustment shall be made for any dividends
on any Common Stock issuable upon exercise of this Warrant.

 

Notwithstanding anything else in this Warrant
Certificate or the Warrant Agreement, no Warrant may be exercised unless at the
time of exercise (i) a registration statement covering the Warrant Shares
to be issued upon exercise is effective under the Act and (ii) a
prospectus thereunder relating to the Warrant Shares is current. In no event
shall the Warrants be settled on a net cash basis during the Warrant Exercise
Period nor shall the Company be required to issue unregistered shares upon the
exercise of any Warrant.

 

Once the Warrants become exercisable and
there is an effective registration statement covering the shares of Common
Stock issuable upon exercise of the Warrants available and current throughout
the 30-day redemption period defined below, the Company may redeem the
outstanding Warrants (except with respect to the sponsors’ Warrants held by a
sponsor or its permitted transferee) in whole and not in part at a price of
$0.01 per Warrant upon a minimum of 30 days’ prior written notice of
redemption (the “30-day
redemption period”) and if, and only if, the last sale price of
the Company’s Common Stock equals or exceeds $19.50 per share for any 20 trading
days within a 30-trading day period ending three business days before the
notice of redemption is sent. If the Company calls the Warrants for redemption,
it will have the option to require all holders that wish to exercise Warrants
to do so on a “cashless basis.” In such event, each holder would pay the
exercise price by surrendering the Warrants for that number of shares of Common
Stock equal to the quotient obtained by dividing (x) the product of the
number of shares of Common Stock underlying the Warrants, multiplied by the
difference between the exercise price of the Warrants and the “fair market
value” (defined below) by (y) the fair market value. The “fair market value”
shall mean the average reported last sale price of the Common Stock for the ten
trading days ending on the third trading day prior to the date on which the
notice of redemption is sent to the holders of Warrants.

 

The Warrant Agreement provides that upon the
occurrence of certain events the number of Warrant Shares set forth on the face
hereof may, subject to certain conditions, be adjusted. No 

 

 

fractions of a share of Common Stock will be issued upon the exercise
of any Warrant, but the Company will pay the cash value thereof determined as
provided in the Warrant Agreement.

 

Warrant Certificates, when surrendered at the
principal corporate trust office of the Warrant Agent by the registered holder
thereof in person or by legal representative or attorney duly authorized in
writing, may be exchanged, in the manner and subject to the limitations
provided in the Warrant Agreement, but without payment of any service charge,
for another Warrant Certificate or Warrant Certificates of like tenor
evidencing in the aggregate a like number of Warrants.

 

Upon due presentation for registration of
transfer of this Warrant Certificate at the office of the Warrant Agent a new
Warrant Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided in
the Warrant Agreement, without charge except for any tax or other governmental
charge imposed in connection therewith.

 

The Company and the Warrant Agent may deem
and treat the registered holder(s) thereof as the absolute owner(s) of
this Warrant Certificate (notwithstanding any notation of ownership or other
writing hereon made by anyone), for the purpose of any exercise hereof, of any
distribution to the holder(s) hereof, and for all other purposes, and
neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary. Neither the Warrants nor this Warrant Certificate entitles any
holder hereof to any rights of a stockholder of the Company.

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