Dual Multi-Period Excess Earnings in the Valuation of Intangibles

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1 Dual Multi-Period Excess Earnings in the Valuation of Intangibles October 2013

2 Contributing AUTHORS: Randie Dial Partner CliftonLarsonAllen LLP Carol Lewis Partner BKD, LLP Michael Massey Partner Moss Adams LLP Brian Steen Principal Dixon Hughes Goodman LLP Reviewers: The Forensic and Valuation Services team and the authors thank the members of the AICPA Forensic and Valuation Services Executive Committee and AICPA Business Valuations Committee for reviewing this white paper. Copyright 2013 American Institute of CPAs. All rights reserved. DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of and does not represent an official position of the American Institute of CPAs. It is distributed with the understanding that the AICPA is not rendering legal, accounting or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For more information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC

3 TABLE OF CONTENTS Executive Summary...2 Method Overview...3 Hierarchy Method...4 Cross-Charge Method...5 Partial Separation Method...6 Separation Method...7 Conclusion...8 Examples...9

4 Executive Summary The purpose of this technical white paper is to discuss the application and issues of the multi-period excess earnings method ( MPEEM ) when two intangible assets are being valued using this method. This method typically is used to value the most important asset(s), (i.e., primary asset(s)) while other methods are used to value assets that are more secondary. Typically, the method is utilized to value only one of the subject intangible assets. However, in certain situations the method may be considered appropriate for two intangible assets when the assets are of similar importance to the company. For example, this case could be made for a technology company where technology is a driving force for the company, but strong customer relationships are also very important. This technical white paper will address the following related to utilizing the MPEEM for more than one intangible asset (dual excess earnings): Provide an overview of the methods Discuss options to consider with examples Identify advantages and disadvantages It is important to note that this technical white paper is informational only regarding the use of the MPEEM. It does not promote or criticize the use of the methods discussed. This paper is prepared merely to provide information to the valuation community regarding the methods and the potential pros and cons. Dual Multi-Period Excess Earnings in the Valuation of Intangibles 2

5 Method Overview The MPEEM is a form of the income approach and is generally reserved for the primary intangible asset with the most direct relationship to the revenue and cash flow stream. Unlike the discounted cash flow ( DCF ) method, the MPEEM measures fair value by discounting only the expected future cash flows attributable to a single intangible asset. To determine the cash flows attributable to a single intangible asset, those cash flows must be isolated by deducting a charge for the use of all the operating assets that contribute to the value of that intangible asset. The charge for the use of the operating assets is called a contributory charge. A contributory charge is a form of economic rent for the use of assets in generating the expected cash flows. After deducting these charges, the remaining residual cash flows are assumed to be the cash flows attributable to the subject intangible asset. When this method is used to value more than one intangible asset, the primary issues that surface are: 1. Separating the cash flows for the two intangible assets; and/or 2. Cross charging the intangible assets for the use of the other intangible assets. Splitting Revenues One method for estimating the value of two separate intangible assets is to isolate the revenues and cash flows for the two intangible assets. This method can be utilized when the assets have two distinct revenue sources and the intangible assets are not dependent upon each other. If this were the case, the calculations would not require a cross charge for the two intangible assets. Splitting revenues is not always as straight forward as it sounds. For example, how do you eliminate the overlap category sales of current technology to current customers? This can often be overlooked when splitting revenues. Cross Contributory Charges This issue relates to the concept of charging one of the intangible assets for the use of the other and vice versa. For example, servicing the customer relationships requires the use of technology; therefore, a contributory charge should be deducted from the customer relationships cash flow for the use of the technology and vice versa. One of the biggest issues with this approach is the circular relationship between the two calculations (i.e., the value of each intangible asset depends on the contributory charge of the other intangible asset). Opinions differ on the usefulness and reliability of this approach. Some believe the method results in reliable values, while others believe the method results in values that may be overstated. These issues are included and addressed in this white paper through the presentation of four dual excess earnings methods that exist. These methods include the Hierarchy Method, the Cross-Charge Method, the Partial Separation Method and the Separation Method. Each of these methods is unique and has its own nuances on how to deal with the above issues. This white paper addresses each method below with examples as well as the pros and cons. Dual Multi-Period Excess Earnings in the Valuation of Intangibles 3

6 Hierarchy Method The Hierarchy Method assumes that a hierarchy, or order of importance, exists between the two primary intangible assets. Under this method, both intangible assets are valued using an MPEEM and a contributory asset charge from the primary intangible asset is applied to the secondary intangible asset. However, the primary intangible asset does not receive a contributory asset charge from the secondary intangible asset. If there is no acquired in-process research and development (IPR&D) or backlog, the Hierarchy Method is a relatively simplistic method for valuing dual primary intangible assets. However, careful consideration must be given to the selection of a primary intangible asset. This selection is subjective in nature and has an impact on the value of the primary and secondary intangible assets. A factor that should be considered in identifying the primary intangible asset includes the buyer s motivation for acquiring the intangible assets. A buyer typically is able to identify the primary intangible asset that motivated them to make the acquisition. The buyer s motivations likely reflect those of a market participant buyer and may identify the primary intangible asset. Past experience may also help the appraiser to identify the primary intangible asset considering the nature of the intangible assets and which intangible assets typically have a higher value or a longer life. Because a contributory asset charge from the primary intangible asset is applied to the secondary intangible asset, but no contributory asset charge from the secondary intangible asset is applied to the primary intangible asset, the Hierarchy Method naturally provides a higher value for the primary intangible asset and a lower value for the secondary intangible asset. This is a main reason why the selection between primary and secondary intangible assets is a very important decision. In addition, because profits are not split between the two intangible assets, profits may be double-counted, further contributing to the overvaluation of the primary intangible asset. Profits allocated to the two intangible assets will not reconcile with total company profits. The Hierarchy Method has additional theoretical problems in that the value of the secondary intangible asset has no impact on the value of the primary intangible asset. In theory, the value of enabling intangible assets should impact the value of the primary intangible asset. In the Hierarchy Method, however, the primary intangible asset value impacts the value of the secondary intangible asset only. This white paper provides a high-level example in the section titled Examples Hierarchy Method. This example assumes that technology was deemed to be the primary intangible asset while customer relationships were deemed to be a secondary intangible asset. As presented on Exhibits 2A and 2B, both intangible assets are valued using the MPEEM, but only the secondary intangible asset (i.e., customer relationships) is being charged a contributory charge relating to the value of the primary intangible asset (i.e., technology). The contributory charge sheet (Exhibit 2C) shows the calculation of the charges and how they are calculated. Because the primary asset, technology, is not burdened by a contributory asset charge relating to customer relationships, its value may be overstated, as explained above. This again illustrates that the determination of which intangible asset is primary or secondary is very important. Because a contributory asset charge from the primary intangible asset is applied to the secondary intangible asset, but no contributory asset charge from the secondary intangible asset is applied to the primary intangible asset, the Hierarchy Method naturally provides a higher value for the primary intangible asset and a lower value for the secondary intangible asset. Dual Multi-Period Excess Earnings in the Valuation of Intangibles 4

7 Cross-Charge Method Unlike the Hierarchy Method, the Cross-Charge Method does not require the identification of a primary and secondary intangible asset. Under the Cross-Charge Method, both intangible assets are valued using an MPEEM and a contributory asset charge from each intangible asset is assigned to the other intangible asset. The Cross-Charge Method may result in a reasonable value conclusion if the proper cross-charge assumptions are included in the calculation. However, there are no guidelines regarding how cross charges should be calculated. This is a weakness because the Cross-Charge Method is based on a circular reference due to the cross charges that are applied to each intangible asset. Therefore, intangible asset values can vary widely depending on how the appraiser chooses to set up the cross charges. This issue becomes more complicated if the two intangible assets have significantly different lives because the selected revenue base typically impacts the contributory asset charge calculation. In addition, the Cross-Charge Method does not segregate profits. As a result, the profits allocated to the two intangible assets will not reconcile to the company s total profit. This can result in the over or under-statement of intangible asset values. A high-level example is presented in the section of this white paper titled Examples Cross-Charge Method. As presented on Exhibits 3A and 3B, both intangible assets are valued using the MPEEM, but in this instance, they are both charged for each other s use. In the technology valuation on Exhibit 3A, there is a charge relating to the customer relationships. In addition, in the valuation of the customer relationships on Exhibit 3B, there is a charge relating to the technology. Exhibit 3C illustrates the contributory asset charge determination and how the calculation works. The first step is to segregate the forecast into four buckets as presented. These buckets represent both existing and future technology revenue as well as both existing and future customer relationships revenue. The return on both technology and customers relationships is then determined by taking the discount rate applicable to each multiplied by their respective value. In Exhibit 3C, the value of the technology is presented as $1,756 and a discount rate of 16%. This implies a return of $281. This is why the analysis becomes circular as you have to know the value to determine the return required. The valuation of IPR&D and backlog may result in additional circular references. The Appraisal Foundation recommends that the Cross-Charge Method is not best practice and should be avoided. 1 The Cross-Charge Method may result in a reasonable value conclusion if the proper cross charge assumptions are included in the calculation. However, there are no guidelines regarding how cross charges should be calculated. 1 Best Practices for Valuations in Financial Reporting: Intangible Asset Working Group Contributory Assets, May 31, 2010, The Appraisal Foundation Dual Multi-Period Excess Earnings in the Valuation of Intangibles 5

8 Partial Separation Method Under the Partial Separation Method, an MPEEM is applied to one intangible asset using a contributory asset charge for another intangible asset, the value of which is determined in a two-step process. This method is complex and is more easily demonstrated through the use of a specific scenario. (See Examples Partial Separation Method.) In this scenario, the company has technology and customer relationships. This method determines a contributory asset charge for the customer relationships by applying an MPEEM to the existing customers based on the future technology only (see Exhibit 4B). An MPEEM is also applied to the company s existing technology (see Exhibit 4A). The contributory asset charge for customer relationships that was applied in the existing technology MPEEM is added to the customer relationships/future technology cash flows in order to arrive at total cash flows resulting from customer relationships (see Exhibit 4C). These cash flows drive the value of customer relationships and the contributory asset charge applied to existing technology. A benefit of the Partial Separation Method is that it begins to separate cash flows between the two assets to be valued. However, the Partial Separation Method has a number of challenges. One challenge is that it contains a circular reference. The customer relationships contributory asset charge applied to existing technology is based the total value of existing customer relationships, which is based, in part, on the contributory asset charge applied to existing technology. Therefore, it results in a circular reference. In addition, some argue that business enterprise revenue basis of the customer relationships contributory asset charge calculation is subjective. Finally, the method does not separate existing technology revenues between existing and future customers. As a result, this methodology may overstate the value of existing customer relationships. A high-level example is presented in the section of this white paper titled Examples Partial Separation Method. Note that in the calculation of the value of customer relationships, Exhibit 4B (Step 2a), that the revenue reflects only the future technology sold to existing customers. The residual profit from Step 2a is added to the customer relationship CAC that is utilized in Exhibit 4A (Step 1) to determine the total value of customer relationships. A benefit of the Partial Separation Method is that it begins to separate cash flows between the two assets to be valued. However, the Partial Separation Method has a number of challenges. Similar to prior methodologies that we discussed in previous sections of this white paper, the profits allocated to the two assets will not reconcile to the company s total profit. Dual Multi-Period Excess Earnings in the Valuation of Intangibles 6

9 Separation Method Following the scenario discussed above (assuming technology and customer relationships), the last method gets even more complicated. Under the Separation Method, revenues are split between existing and future customers and technology. In addition, research and development expenses are split between existing and future technology and sales and marketing expenses are split between existing and future customers. The development and presentation of the revenue and expense splitting is referred to as Step 0 and is presented on Exhibits 5A and 5B. The value of the technology intangible asset and customer relationships intangible asset is then determined in a multi-step process as follows: First, an MPEEM is applied to existing technology attributable to future customers on Exhibit 5C. In this analysis, only maintenance research and development, future sales and marketing expense, and general contributory asset charges are applied. This step provides one portion of the existing technology value. The existing technology royalty rate implied by the first calculation is calculated using the revenue stream attributable to existing technology and future customers (Exhibit 5D). Second, an MPEEM is applied to existing technology and existing customers as presented on Exhibit 5E. In this analysis, maintenance research and development, maintenance sales and marketing, general contributory asset charges and a technology contributory asset charge (as determined by the royalty above) are applied to arrive at a portion of the customer relationships value. This step provides one portion of the customer relationships value. Third, the present value of the technology contributory asset charge applied in the second step is calculated (Exhibit 5F). This step provides the second portion of the existing technology value. Fourth, an MPEEM is applied to future technology and existing customers. In this analysis, future research and development, maintenance sales and marketing expenses and general contributory asset charges are applied to arrive at the second portion of the customer relationships value (Exhibit 5G). Finally, the result of Steps 1 and 3 are added to arrive at existing technology value and the results of Steps 2 and 4 are added to arrive at the value of customer relationships. A high-level example is presented in the section of this white paper titled Examples Separation Method. Note that the separation map for revenue and expenses (Step 0) is included in Exhibits 5A and 5B, and that the total revenue reconciles to the revenue presented in the business enterprise value, Exhibit 1A. The conclusions of Steps 1 and 3 (for technology) and Steps 2 and 4 are (for customer relationships) presented in Exhibit 5H. This separation of revenues and expenses enables the valuation of existing technology and existing customers without the use of circular references using profits that reconcile to the Company s total profit. Therefore, it is believed it is more theoretically sound than the other methods described above. Drawbacks of the Separation Method revolve around the complexity of mapping revenues and expenses between existing and future customers and technology. This process is further complicated if IPR&D or backlog is introduced into the valuation as additional revenue and expense maps must be built into the model. If the existing technology is expected to generate different returns when sold to future customers compared to the returns generated from existing customers, adjustments may need to be applied to the implied royalty rate. Dual Multi-Period Excess Earnings in the Valuation of Intangibles 7

10 Conclusion As presented in this paper, there are several methods to choose from in applying a dual excess earnings approach. These methods each have their benefits and drawbacks. In practice, most appraisers are able to find methods other than MPEEM to value one of the intangible assets in order to avoid using a dual excess earnings approach. The examples are provided to give the reader a sense of how complex these methods can get. They often get very difficult reviews and questions because of the embedded assumptions and circular equations within the models. These examples were purely shown as hypothetical situations and are not meant to be copied and used. The narrative of this paper was meant to discuss these methods at a summary level to give the reader a sense of how the methods work and their difficulties. This paper was not meant to give the reader a roadmap of how to apply the methods, but was written at more of a demonstrative level. In the end, it is the choice of the practitioner on which methods to ultimately employ and it is his/her responsibility to justify the decision. Dual Multi-Period Excess Earnings in the Valuation of Intangibles 8

11 Examples Examples for all the methods discussed above are presented in this section. The examples consider a technology industry company acquisition at the end of 2013 of about $16 million, where both the technology and the customer relationships were the primary value drivers of the transaction. Other important assumptions for the analysis are: Last Year of Technology 2018 Existing Customers Revenue Growth percentage Customer Relationship Attrition each year Point when existing customers become less than 2% of sales 2.00% 20.00% 2025 In addition, although the examples do not present the determination of the weighted average cost of capital, it was determined that 16% was the required rate of return for both the customer relationships and the technology. The determination of the business enterprise value is presented in Exhibit 1A (note that the internal rate of return determined in the business enterprise value analysis is 15.0%) and a mid-year convention is utilized. Note that the conclusions under the various methods vary significantly. Under the Hierarchy Method, the technology value (it had been determined technology was the primary intangible asset) is much greater than the value determined in any of the other methods. The conclusions under the other methods are more closely aligned, as presented below. Hierarchy Method Technology $2,626 Customer Relationships $1,725 Cross-Charge Method Technology $1,756 Customer Relationships $2,887 Partial Separation Method Technology $2,000 Customer Relationships $1,900 Separation Method Technology $2,300 Customer Relationships $1,400 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 9

12 EXHIBIT 1A DISCOUNTED CASH FLOW ANALYSIS BUSINESS ENTERPRISE VALUE (BEV) Most recent terminal 12 months Period Net Revenue 12,500 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500 22,000 22,500 23,000 Growth 20.00% 16.67% 5.71% 2.70% 2.63% 2.56% 2.50% 2.44% 2.38% 2.33% 2.27% 2.22% Cost of Goods Sold 6,000 7,000 7,400 7,600 7,800 8,000 8,200 8,400 8,600 8,800 9,000 9,200 Gross Profit 9,000 10,500 11,100 11,400 11,700 12,000 12,300 12,600 12,900 13,200 13,500 13, % 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% R&D Expense 1,500 1,750 1,850 1,900 1,950 2,000 2,050 2,100 2,150 2,200 2,250 2, % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% S&M Expense 2,250 2,625 2,775 2,850 2,925 3,000 3,075 3,150 3,225 3,300 3,375 3, % 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% G&A Expense 1,500 1,750 1,850 1,900 1,950 2,000 2,050 2,100 2,150 2,200 2,250 2, % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 5,250 6,125 6,475 6,650 6,825 7,000 7,175 7,350 7,525 7,700 7,875 8,050 EBITDA 3,750 4,375 4,625 4,750 4,875 5,000 5,125 5,250 5,375 5,500 5,625 5, % 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% Depreciation ,000 1,025 1,050 1,075 1,100 1,125 1, % 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Operating Income 3,000 3,500 3,700 3,800 3,900 4,000 4,100 4,200 4,300 4,400 4,500 4, % 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Tax Expense 40.00% 1,200 1,400 1,480 1,520 1,560 1,600 1,640 1,680 1,720 1,760 1,800 1,840 After-Tax Operating Income 1,800 2,100 2,220 2,280 2,340 2,400 2,460 2,520 2,580 2,640 2,700 2,760 Plus: Depreciation ,000 1,025 1,050 1,075 1,100 1,125 1,150 Less: CapEx 6.00% (900) (1,050) (1,110) (1,140) (1,170) (1,200) (1,230) (1,260) (1,290) (1,320) (1,350) (1,150) Less: Changes in debt-free Net Working Capital 10.00% (250) (250) (100) (50) (50) (50) (50) (50) (50) (50) (50) (50) Unlevered Free Cash Flow 1,400 1,675 1,935 2,040 2,095 2,150 2,205 2,260 2,315 2,370 2,425 2, % 9.57% 10.46% 10.74% 10.74% 10.75% 10.76% 10.76% 10.77% 10.77% 10.78% 11.78% Partial Period Factor Mid-Year Convention Present Value Factor 15.00% Present Value of Cash Flow Net Present Value of Discrete Cash Flows 1,306 1,358 1,364 1,251 1, Net Present Value of Residual Cash Flows 5,205 Terminal Value Purchase Price 16,172 Residual Cash Flow 2,710 Implied Multiple of 2011 EBITDA 4.31 WACC 15.00% Long-term Growth 3.00% Plus: Excess WC 0 Divided by Cap Rate 12.00% Plus: NonOperating Assets, Net 0 22,583 Plus: NonOperating Loss Valuation 0 PV Factor Total Consideration, Rounded 16,176 5,205 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 10

13 EXHIBIT 2A HIERARCHY METHOD EXISTING TECHNOLOGY VALUE (PRIMARY ASSET) as of Dec. 31, Existing Technology Revenue 12,000 9,600 6,720 4,032 2,016 Growth % % % % Cost of Goods Sold 4,800 3,840 2,688 1, Gross Profit 7,200 5,760 4,032 2,419 1, % 60.00% 60.00% 60.00% 60.00% Maintenance/R&D Expense 1, % 10.00% 10.00% 10.00% 10.00% S&M Expense 1,800 1,440 1, % 15.00% 15.00% 15.00% 15.00% G&A Expense 1, % 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 4,200 3,360 2,352 1, EBITDA 3,000 2,400 1,680 1, % 25.00% 25.00% 25.00% 25.00% Depreciation % 5.00% 5.00% 5.00% 5.00% Operating Income 2,400 1,920 1, % 20.00% 20.00% 20.00% 20.00% Tax Expense 40.00% After-Tax Operating Income 1,440 1, After-Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% Assembled Workforce 0.80% Residual Profit % 8.20% 8.20% 8.20% 8.20% Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Discrete Cash Flows ,205 Tax Amortization Benefit 420 Fair Value of Developed Technology 2,626 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 11

14 EXHIBIT 2B HIERARCHY METHOD CUSTOMER RELATIONSHIPS VALUE (SECONDARY ASSET) as of Dec.31, Existing Customer Revenue 12,000 9,792 7,990 6,520 5,320 4,341 3,543 2,891 2,359 1,925 1,571 1,282 Growth % % % % % % % % % % % Cost of Goods Sold 4,800 3,917 3,196 2,608 2,128 1,737 1,417 1, Gross Profit 7,200 5,875 4,794 3,912 3,192 2,605 2,126 1,734 1,415 1, % 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% R&D Expense 1, % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Maintenance/S&M Expense 1,800 1,469 1, % 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% G&A Expense 1, % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 4,200 3,427 2,797 2,282 1,862 1,519 1,240 1, EBITDA 3,000 2,448 1,998 1,630 1,330 1, % 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% Depreciation % 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Operating Income 2,400 1,958 1,598 1,304 1, % 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Tax Expense 40.00% After-Tax Operating Income 1,440 1, After-Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% Technology (% on Exhibit 2C) Assembled Workforce 0.80% , Residual Profit % 3.41% 4.11% 4.79% 5.43% 5.43% 5.43% 5.43% 5.43% 5.43% 5.43% 5.43% Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Discrete Cash Flows ,449 Tax Amortization Benefit 276 Fair Value of Customer Relationships 1,725 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 12

15 EXHIBIT 2C HIERARCHY METHOD Technology CAC Calculation Value of Technology 2,626 Useful Life 5 Annual Amortization 525 Required Return on Technology 16.00% After-Tax Return OF, Amortizing Return ON over Existing Customer Revenue Technology Amortization Tax (210) (210) (210) (210) (210) Return OF Technology Technology Value at Year-End 2,101 1,576 1, Return ON Technology Total Return On and OF Technology Existing Customers Portion of Technology 90% 72% 58% 46% 37% Total Technology CAC for Existing Customers Existing Customers Revenues 12,000 9,792 7,990 6,520 5,320 Technology CAC 5.51% 4.79% 4.09% 3.41% 2.77% Return OF, and Full Return ON over BEV Revenue Return OF Technology Return ON Technology Total BEV Revenues 15,000 17,500 18,500 19,000 19,500 Total Return On and OF Technology 6.30% 5.40% 5.11% 4.98% 4.85% Return OF, and Full Return ON over BEV Revenue through Customer Life Return OF Technology Return ON Technology Total BEV Revenues 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 Total Return On and OF Technology 6.30% 5.40% 5.11% 4.98% 4.85% 2.10% 2.05% 2.00% Return ON only over BEV Revenue Return OF Technology Return ON Technology Total BEV Revenues 15,000 17,500 18,500 19,000 19,500 Total Return On and OF Technology 2.80% 2.40% 2.27% 2.21% 2.15% Return ON only over BEV Revenue through Customer Life Return OF Technology Return ON Technology Total BEV Revenues 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 Total Return On and OF Technology 2.80% 2.40% 2.27% 2.21% 2.15% 2.10% 2.05% 2.00% *** Several methods here to use in determining the primary asset CAC. The value of the secondary asset will change depending on the method used but the value of the primary asset will not change. Dual Multi-Period Excess Earnings in the Valuation of Intangibles 13

16 EXHIBIT 3A CROSS-CHARGE METHOD ESTIMATE OF EXISTING TECHNOLOGY as of Dec. 31, Existing Technology Revenue 12,000 9,600 6,720 4,032 2,016 Growth % % % % Cost of Goods Sold 4,800 3,840 2,688 1, Gross Profit 7,200 5,760 4,032 2,419 1, % 60.00% 60.00% 60.00% 60.00% Maintenance/R&D Expense 1, % 10.00% 10.00% 10.00% 10.00% S&M Expense 1,800 1,440 1, % 15.00% 15.00% 15.00% 15.00% G&A Expense 1, % 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 4,200 3,360 2,352 1, EBITDA 3,000 2,400 1,680 1, % 25.00% 25.00% 25.00% 25.00% Depreciation % 5.00% 5.00% 5.00% 5.00% Operating Income 2,400 1,920 1, % 20.00% 20.00% 20.00% 20.00% Tax Expense 40.00% After-Tax Operating Income 1,440 1, After-Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% CUSTOMER RELATIONSHIPS (Exhibit 3C) 2.72% Assembled Workforce 0.80% Residual Profit % 5.48% 5.48% 5.48% 5.48% Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Discrete Cash Flows ,475 Tax Amortization Benefit 281 Fair Value of Developed Technology 1,756 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 14

17 EXHIBIT 3B CROSS-CHARGE METHOD ESTIMATE OF CUSTOMER RELATIONSHIPS as of Dec. 31, Existing Customer Revenue 12,000 9,792 7,990 6,520 5,320 4,341 3,543 2,891 2,359 1,925 1,571 1,282 Growth % % % % % % % % % % % Cost of Goods Sold 4,800 3,917 3,196 2,608 2,128 1,737 1,417 1, Gross Profit 7,200 5,875 4,794 3,912 3,192 2,605 2,126 1,734 1,415 1, % 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% R&D Expense 1, % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Maintenance/S&M Expense 1,800 1,469 1, % 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% G&A Expense 1, % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 4,200 3,427 2,797 2,282 1,862 1,519 1,240 1, EBITDA 3,000 2,448 1,998 1,630 1,330 1, % 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% Depreciation % 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Operating Income 2,400 1,958 1,598 1,304 1, % 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Tax Expense 40.00% After-Tax Operating Income 1,440 1, After-Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% TECHNOLOGY 1.65% Assembled Workforce 0.80% Residual Profit % 6.55% 6.55% 6.55% 6.55% 6.55% 6.55% 6.55% 6.55% 6.55% 6.55% 6.55% Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Discrete Cash Flows ,425 Tax Amortization Benefit 462 Fair Value of Customer Relationships 2,887 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 15

18 EXHIBIT 3C CROSS-CHARGE METHOD Technology CAC Calculation Value of Technology 1,756 Useful Life 5 Annual Amortization 351 Required Return on Technology 16.00% Return of Technology 281 Value of Customer Relationships 2,887 Useful Life 13 Annual Amortization 222 Required Return on Technology 16.00% Return on Customers Existing Technology to Existing Customers 9,792 6,991 4,021 1, Future Technology to Existing Customers 2,448 4,661 6,031 6,739 7,055 5,904 4,938 4,128 Existing Technology to Future Customers 2,208 3,509 3,379 2, Future Technology to Future Customers 552 2,339 5,069 8,461 12,445 14,096 15,562 16,872 Total BEV Revenues 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 Average BEV Revenues Cumulative Average BEV Revenues 15,000 16,250 17,000 17,500 17,900 18,250 18,571 18,875 Return ON Technology Technology CAC% of Revenues 1.87% 1.73% 1.65% ** 1.61% 1.57% 1.54% 1.51% 1.49% Return ON Customers Customer Relationship CAC % of Revenues 3.08% 2.84% 2.72% 2.64% 2.58% 2.53% 2.49% 2.45% Return ON over Average BEV Revenue 2011 and 2016 Technology CAC 1.65% Customers CAC 2.72% ** The level of CAC depends on the selected average BEV Revenue Base Dual Multi-Period Excess Earnings in the Valuation of Intangibles 16

19 EXHIBIT 4A PARTIAL SEPARATION METHOD Estimate of Existing Technology, Step Net Revenue 12,000 9,600 6,720 4,032 2,016 Growth n/a % % % % Cost of Goods Sold 4,800 3,840 2,688 1, Gross Profit 7,200 5,760 4,032 2,419 1, % 60.00% 60.00% 60.00% 60.00% Maintenance R&D Expense 1, % 10.00% 10.00% 10.00% 10.00% S&M Expense 1,800 1,440 1, % 15.00% 15.00% 15.00% 15.00% G&A Expense 1, % 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 4,200 3,360 2,352 1, EBITDA 3,000 2,400 1,680 1, % 25.00% 25.00% 25.00% 25.00% Depreciation % 5.00% 5.00% 5.00% 5.00% Operating Income 2,400 1,920 1, % 20.00% 20.00% 20.00% 20.00% Tax Expense 40.00% After-Tax Operating Income 1,440 1, After Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% Customer Relationships 2.00% Assembled Workforce 0.80% Total Capital Charges Residual Profit % 6.20% 6.20% 6.20% 6.20% Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Residual Profit Sum of Residual Profit 1,667 Tax Amortization Benefit 318 Estimate of Developed Technology Fair Value 1,985 Estimate of Developed Technology Fair Value, Rounded 2,000 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 17

20 EXHIBIT 4B PARTIAL SEPARATION METHOD Estimate of Existing Customer Relationships, Step 2A Net Revenue (Future Tech to Exist Cust) 2,400 4,420 5,088 5,136 4,770 4,341 3,543 2,891 2,359 Growth n/a 84.18% 15.10% 0.95% -7.13% -8.99% % % % Less: Revenue Valued as Backlog Cost of Goods Sold 960 1,768 2,035 2,055 1,908 1,737 1,417 1, Gross Profit 1,440 2,652 3,053 3,082 2,862 2,605 2,126 1,734 1, % 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% Future Technology R&D Expense % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Maintenance S&M Expense ,018 1, % 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% G&A Expense % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 840 1,768 2,035 2,055 1,908 1,737 1,417 1, EBITDA ,018 1, % 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Depreciation % 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Operating Income % 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% Tax Expense 40.00% After-Tax Operating Income After Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% Technology (Return ON only) 2.50% Assembled Workforce 0.80% Total Capital Charges Residual Profit Net of Customer CAC from Technology % 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% Dual Multi-Period Excess Earnings in the Valuation of Intangibles 18

21 EXHIBIT 4C PARTIAL SEPARATION METHOD Estimate of Existing Customer Relationships, Step 2A Residual Profit Net of Customer CAC from Technology Add: Customer CAC from Technology (Step 1) Residual Profit Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Residual Profit PV of Existing Customer Future Technology 1,136 PV of Customer CAC taken from Technology (Exhibit 4D) 538 Tax Amortization Benefit 217 Estimate of Customer Relationship Fair Value 1,891 Estimate of Customer Relationship Fair Value, Rounded 1,900 EXHIBIT 4D SEPARATION METHOD Present Value of Customer CAC from Technology Customer CAC from Technology Step Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Residual Profit PV of Customer CAC from Technology 538 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 19

22 EXHIBIT 5A SEPARATION METHOD Dual Excess Earnings Method Revenue and Expense Map, Step 0 Revenue Map Customers Existing Customers 12,000 9,792 7,990 6,520 5,320 4,341 3,543 2,891 2,359 % of Total 80.0% 56.0% 43.2% 34.3% 27.3% 21.7% 17.3% 13.8% 11.0% Future Customers 3,000 7,708 10,510 12,480 14,180 15,659 16,957 18,109 19,141 % of Total 20.0% 44.0% 56.8% 65.7% 72.7% 78.3% 82.7% 86.2% 89.0% Total Customers 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500 % of BEV Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% Technology Existing Technology 12,000 9,600 6,720 4,032 2, % of Total 80.0% 54.9% 36.3% 21.2% 10.3% 0.0% 0.0% 0.0% 0.0% Future Technology 3,000 7,900 11,780 14,968 17,484 20,000 20,500 21,000 21,500 % of Total 20.0% 45.1% 63.7% 78.8% 89.7% 100.0% 100.0% 100.0% 100.0% Total Technology 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500 % of BEV Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% DEEM Revenue Map Existing Technology to Existing Customers 9,600 5,372 2,902 1, Future Technology to Existing Customers 2,400 4,420 5,088 5,136 4,770 4,341 3,543 2,891 2,359 Existing Technology to Future Customers 2,400 4,228 3,818 2,648 1, Future Technology to Future Customers 600 3,480 6,692 9,832 12,714 15,659 16,957 18,109 19,141 Total Revenue 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500 % of BEV Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% Total BEV Revenue 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500 EXHIBIT 5B SEPARATION METHOD Dual Excess Earnings Method Revenue and Expense Map, Step 0 Expense Map Research & Development Existing Technology Maintenance R&D 1, % of Revenue 10.0% 7.5% 5.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% Future Technology R&D 300 1,030 1,514 1,779 1,950 2,000 2,050 2,100 2,150 % of Revenue 10.0% 13.0% 12.9% 11.9% 11.2% 10.0% 10.0% 10.0% 10.0% Total BEV R&D Expense 1,500 1,750 1,850 1,900 1,950 2,000 2,050 2,100 2,150 % of Revenue 10% 10% 10% 10% 10% 10% 10% 10% 10% Sales & Marketing Existing Customers Maintenance S&M 1,800 1,958 1,598 1,304 1, % of Revenue 15.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Future Customers S&M ,177 1,546 1,861 2,132 2,366 2,572 2,753 % of Revenue 15.0% 8.6% 11.2% 12.4% 13.1% 13.6% 14.0% 14.2% 14.4% Total BEV S&M Expense 2,250 2,625 2,775 2,850 2,925 3,000 3,075 3,150 3,225 % of Revenue 15% 15% 15% 15% 15% 15% 15% 15% 15% Total BEV Revenue 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 20

23 EXHIBIT 5C SEPARATION METHOD Estimate of Existing Technology to Future Customers, Step Net Revenue 2,400 4,228 3,818 2,648 1,466 Growth n/a 76.18% -9.72% % % Cost of Goods Sold 960 1,691 1,527 1, Gross Profit 1,440 2,537 2,291 1, % 60.00% 60.00% 60.00% 60.00% Maintenance R&D Expense % 10.00% 10.00% 10.00% 10.00% S&M Expense % 8.65% 11.20% 12.39% 13.12% G&A Expense % 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 840 1,211 1, EBITDA 600 1,326 1, % 31.35% 28.80% 27.61% 26.88% Depreciation % 5.00% 5.00% 5.00% 5.00% Operating Income 480 1, % 26.35% 23.80% 22.61% 21.88% Tax Expense 40.00% After-Tax Operating Income After Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% Assembled Workforce 0.80% Total Capital Charges Residual Profit % 12.01% 10.48% 9.77% 9.33% Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Residual Profit Sum of Residual Profit 1,089 Tax Amortization Benefit 208 Estimate of Developed Technology Fair Value 1,297 Estimate of Developed Technology Fair Value, Rounded 1,300 EXHIBIT 5D SEPARATION METHOD Estimate of Existing Technology to Future Customers, Step 1a Net Revenue 2,400 4,420 5,088 5,136 4,770 4,341 3,543 2,891 2,359 Growth n/a 84.18% 15.10% 0.95% -7.13% -8.99% % % % Royalty Rate 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Pretax Royalties Tax Expense 40.00% After-Tax Royalties Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Residual Profit Sum of Residual Profit 1,062 Tax Amortization Benefit 202 Estimate of Developed Technology Fair Value 1,264 Estimate of Developed Technology Fair Value, Rounded 1,300 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 21

24 EXHIBIT 5E SEPARATION METHOD Estimate of Existing Customer Relationships from Existing Technology, Step Net Revenue 9,600 5,372 2,902 1, Growth n/a % % % % Cost of Goods Sold 3,840 2,149 1, Gross Profit 5,760 3,223 1, % 60.00% 60.00% 60.00% 60.00% Maintenance R&D Expense % 10.00% 10.00% 10.00% 10.00% Maintenance S&M Expense 1,440 1, % 20.00% 20.00% 20.00% 20.00% G&A Expense % 10.00% 10.00% 10.00% 10.00% Total Operating Expenses 3,360 2,149 1, EBITDA 2,400 1, % 20.00% 20.00% 20.00% 20.00% Depreciation % 5.00% 5.00% 5.00% 5.00% Operating Income 1, % 15.00% 15.00% 15.00% 15.00% Tax Expense 40.00% After-Tax Operating Income 1, After Tax Capital Charges Net Working Capital 0.60% Fixed Assets 2.40% Technology 5.40% Assembled Workforce 0.80% Total Capital Charges Residual Profit 269 (11) (6) (3) (1) 2.80% -0.20% -0.20% -0.20% -0.20% Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Residual Profit 250 (9) (4) (2) (1) Sum of Residual Profit 235 Tax Amortization Benefit 45 Estimate of Customer Relationship Fair Value 280 Estimate of Customer Relationship Fair Value, Rounded 300 EXHIBIT 5F SEPARATION METHOD Estimate of Existing Technology to Existing Customers, Step After-Tax Royalties Partial Period Factor Mid-Year Convention Present Value Factor 16.00% Present Value of Cash Flow Net Present Value of Residual Profit Sum of Residual Profit 881 Tax Amortization Benefit 168 Estimate of Existing Technology to Existing Customers, 1,049 Estimate of Existing Technology to Existing Customers, Rounded 1,000 Dual Multi-Period Excess Earnings in the Valuation of Intangibles 22