1. 1Key Concepts in Intellectual Property Valua4on March 2013 Brian Buss, CFADoug Bania, CLP

2. Introduc4on Our View of IP The Why, What & How of IP Valua4on Key Concepts of IP Analysis IP Analysis Example

3. Nevium Intellectual Property Solutions3Develops supportable financial and economicanalyses for clients ranging from law firms toentrepreneurs to fortune 500 corporations tonot-for-profit organizations. Brian applies hisexperience in finance, banking and valuation tovalue individual assets and bundles ofintellectual properties, calculate damages in IPinfringement disputes, and develop return oninvestment analyses to support strategicdecisions. 20 year career in Valuation, Financial Analysis,Banking Charted Financial Analyst (CFA) MBA (SDSU); BA in Biology and Economics(Claremont McKenna College) Valuation and M&A experience on 5 continentsBrian BussWorks closely with clients to develop licensingand monetization strategies for assets includingtrademarks, patents, brands, publicity rights andcopyrights. Using his experience analyzing andstructuring intellectual property transactions,Doug serves clients as an expert witness,negotiating transactions and in implementing IPstrategies. Doug is an active member of SanDiegos Licensing Executive Society, currentlyserving as the Chair-elect. Certified Licensing Professional (CLP) MA in Television, Film and New Media Production;BA in Cinema Over 11 years experience in intellectual propertyadvisory and managementDoug BaniaComplementary skills and experience

4. 4Responsibility ChainComplementary Views on IPA FinancialandEconomicView of IPIP Developmentand OwnershipIP BusinessManagementIP LegalManagement

5. 5Responsibility ChainValuation BasicsArt &Science . . .but notMagicValue = Present Value of Future BenefitsFair Market Value = price at which un-related parties would transactValuation happens every day, only somevaluations involve a formal analysisIP Valuation requires one more stepcompared to Business Valuation

6. How IP Contributes to Value6Descrip4on Economic BenetsMonopolyBarrier to entry, exclude others from using Pricing power Greater prot marginsLi4ga4onSeek damages if others use Li>ga>on award (PV of award less costs) Threat of li>ga>on (force Monopoly or Permission)PermissionAbility to be compensated when others use Value of license (PV of royal>es+fees costs) Value if soldPromo4onSignals innova>on, uniqueness, source of origin to consumers Addi>onal sales Reduced marke>ng Incremental marginValueDerivedFrom theEconomicBenefitsCreated

7. IP Valua4on: What / Why / How

8. Why8Buying or sellingLicensingBankruptcyBuild, buy or licenseIP portfolio alignmentROI, ROMIOur first question: Why do you need the Asset valued?Fair value reportingPurchase price allocationImpairment testingEstate transfers &contributionsTransfer pricingNon-profit to for-profitEminent domainDamagesValuationStrategy / TransactionsComplianceLitigationContext impacts the Analysts approach to the assignment

9. What9Early on,All partiesagree on whatis being valuedOur 2nd question: Which assets will be valued?TrademarksCopyrightsPublicity RightsPatentsCopyrightsTrade SecretsMarketing Assets Technology AssetsDomain NamesCustomer ListsRelationshipsPractices / ProceduresKnow-how / ResearchTest ResultsRelationshipsPractices / ProceduresWhat other assets are related to the IP?

10. Valuation Approaches for Brand IPDescription Information RequiredCostApproachAmount a potential buyerwould pay to replace orcreate an asset themself Historical Cost to develop the IP Amount spent to promote, maintain and support the IP Estimate of cost to replace or replicate (R&D expenses,corrective advertising, time and effort)IncomeApproachPresent value of futureeconomic benefitsreceived from ownershipof an asset Product-level earnings forecast Apportion profits from products using the IP Reasonable royalty rates & licensing compensation For damages: But-for and As-is forecastsMarketApproachValue based onobserved transactionsinvolving comparable orsimilar assets Comparable transactions research Peer Group: market share, pricing strategy & results Similar forms of IP, IP used in similar contextHowSame Approaches as Business Valua4on . . . apply as many methodologies as possible 10

11. Key Concepts

12. 12Responsibility ChainTheIntellectualProperty& Products ProfitsPeople ResourcesTangible Assets /Natural ResourcesBusiness and IP ValuationThe Key inIP Valuation:Apportionprofits to theIPIP depends on other assets and resources in order togenerate economic benefits=Capital ResourcesOther IP & IA

13. 13Responsibility ChainPresentValue ofExpectedFutureBenefitsValue ofBusiness=IntangibleAssets= =TrademarksCopyrightsTangibleAssetsIntangibleAssetsTangibleAssetsConcept 1: ApportionmentIP amongstmany assetsused togenerateEconomicBenefitValue of Business > Value of IP Assets owned by the BusinessPatents

14. IP MarketplaceProductMarketplace14Responsibility ChainLicensorConcept 2: Value for WhomTransactionrequiresbenefit formultiplepartiesFor LicenseeValue = Revenue Compensation Paid(often a Royalty)LicenseeCustomerFor LicensorValue = Royalty Cost toDevelop & OwnIP CompensationProduct Revenue

15. 15Responsibility ChainConcept 2: Value to WhomBoth partiesexpected tobenefit0 1 2 3 4 5Forecast Licensee Sales 1,000 1,300 1,495 1,645 1,727 1,761Growth Rate 30% 15% 10% 5% 2%Annual Royalty Rate 8.0% 8.0% 8.0% 8.0% 8.0%For IP User (Licensee)Up-front payment (50)Annual Fee (5) (5) (5) (5) (5)Additional Profit Margin 15% 20% 15% 10% 5%Additional Profits - 195 299 247 173 88% of Sales Royalty - (104) (120) (132) (138) (141)Total Benefits (50) 86 174 110 30 (58)Present Value @ 25% (50) 69 112 56 12 (19)Value of IP to Licensee 180For IP Owner (Licensor)Up-front payment 50Promotions Commitment (130) (150) (82) - -Promotions Commitment % 10% 10% 5% 0% 0%Annual Fee 5 5 5 5 5% of Sales Royalty 104 120 132 138 141Total Benefits 50 (21) (25) 54 143 146Present Value @ 20% 50 (18) (17) 31 69 59Value of IP to Licensor 174

16. Income StatementRevenuesGross Sales 1,000 100%Discounts 5 1%Net Revenue 995 100%Cost of Sales 450 45%Gross Profit 545 55%Operating ExpensesSales & Marketing 100 10%General & Admin 75 8%Research & Development 50 5%Depreciation 35 4%Other 15 2%Total OpEx 275 28%Operating Income 270 27%Other Income / (Expense)Interest, net (55) -6%Non-recurring (45) -5%Sale fo Assets 85 9%Total Other Income (15) -2%Pre-tax Income 285 29%Tax Expense (100) -10%Net Profit 185 19%Not allroyalties arethe sameConcept 3: Royalty RatesBest for LicensorBest for LicenseeFinancial Risk to Licensee $ / Unit made$ / Unit SoldGross Sales ($ invoiced)Gross Sales (Collections)Net SalesGross ProfitsEBITNet ProfitsLevel of Benefit Drives the Royalty16

17. Concept 3: Royalty RatesLicensor ActivitiesResearch / Develop Design & Test Regulatory / Approvals Manufacture Market Distribute Service Adopt Licensee ActivitiesReasonable Royalty considers:the level of benefit, and the allocation of rolesAllocation of Roles Drive the Royalty17

18. 18Concept 4: Forecasting Future BenefitsAsset RemainingLife (Years)Cash Flow ($)AssetValue ($)IP: Remaining Life, Cash Flow & Value IP and the products that use IPhave life spans Benefits from the IP will grow, peakand then decline as other IP andother products take their place Companies can expect perpetualgrowth, IP cannotGuiding ConceptsTotal ContributionPatentsIP: Relative contributionTrademarks &Other IntangiblesTimeProduct Life Cycle Products & BusinessesIP RemainingLifeBusiness RevenuesBenefitTodaysProductsProductsIn-developmentFutureProducts

19. Damaging Event TimeValua>on Date / Today EconomicBenefitsForecast PeriodBut-For ResultsAs-Is ResultsHistorical PeriodDamages =lost earningsfor pastperiods(section A),plus forecastperiods(section B)ABAs-Is and But-For ScenariosConcept 4: Forecasting Future Benefits19

20. 20Tie the forecast to the facts Market outlook Economic trends Peer group analysis Competitive product analysis Pricing and discounting history Pricing strategy Share of product portfolio Product life cycle stage Cost to clean or repairBuilding Benefit ForecastsThe ForecastsConcept 4: Forecasting Future Benefits

21. 21Responsibility ChainConcept 5: Discounting Future BenefitsWACC =WARRRates from15 30% aretypicalThe Discounting Formula: FB = forecast benefits R = discount rateTwo Key ConceptsWACC = WAAR Principal of Substitution

22. One lastelement22Responsibility ChainIntellectualPropertyValuation&Key ConceptsBringing it all togetherWhy, What & HowApportionmentValue for WhomRoyalty RatesDiscountingForecasting Future Benefits

23. 23Financial Performance: historical, trends, forecasts, ratiosTimelines: chronologies, histories and event chartsMarket Share: market positions, market mapsSWOT / Porters: identify forces shaping the businessScoring Analyses: confusion scores, comparable claims, brandstrength scoresCompany Language Analysis: what competitive advantage theCompany has claimedSurveys and Intercepts: consumer preference, confusionRoyalty Rates: benchmarks, surveys and comparabletransactionsBest Practices: licensing and transaction practices as describedin texts and guidebooksTools for the NarrativeSupportableanalysisrequires acohesivenarrative . . .and lots oftoolsCombine Concepts & Build the NarrativeThe Qualitative is as important as the Quantitative

24. A Quick Example

25. 25Responsibility ChainIP Assets&Products/ ServicesProfitsPeople ResourcesTangible Assets /Natural ResourcesIP ValuationTwo Steps:DetermineProfitsthenApportionProfits to theIP AssetAn IP Asset Requires Other ResourcesCapital ResourcesValue of theIP AssetSimply . . .ForecastProfitsx Apportionment =DiscountRatexOther IP & IA

26. 26Responsibility ChainTrademark Valuation ExampleThats allValue ofTrademarkForecastProfitsx Apportionment =$1,000year 1x =$150year 1PV of Future BenefitApportionment ResultsAnalysis Type Low HighWebsite Analysis 5% 20%Company Language 15% 25%CUT 8% 12%Use% of Profits to IP15%= $603Why Value: Sale of trademark to un-related party

27. Questions to Start an Analysis27Buying, Selling &LicensingIs an earnings forecast or business plan available?Who else would use the Assets?Are there any outside claims to the Assets?Does the current owner of the Assets engage in any licensing?Tax & Compliance Which products rely on the Assets?How will use of the Assets change after the transfer?What are the key assets of the organization?Do records of cost to create/develop exist?Bankruptcy What is the reorganization plan?Which products rely on the Assets?What are the key assets of the organization?Litigation orPre-litigationAre detailed accounting records available?Does the Asset owner engage in any licensing?How and where was the Asset used / infringed?Management,Planning &StrategyIs an earnings forecast or business plan available?Does the Asset owner engage in any licensing?Which products rely on the Assets?What are the key assets of the Organization?

28. 28Nevium Intellectual Property Solu4ons www.nevium.com 858 255 4361 Managing intellectual property iskey to maximizing value