PRIVATE COMPANY SECURITIES VALUATION IRC 409A & ASC 820 (SFAS 157)

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Summary:SincethepublicationoftheAICPAPracticeGuideonvaluingtheequityofprivatelyheldcompaniesin2004,andthe subsequentIRSrequirementthatSection409Abeimplementedbycompaniesin2006,thepracticeofutilizingvaluationreports purpose p ofissuing gstockoptions p hasbecomeastandardpractice p forventurebackedcompanies p andtheirinvestors.Yet forthep themethodsofdeterminingthesevaluesandthejustification/determinantsforthelevelsofthesevaluesremainsanareanot wellunderstoodbyalargepercentageofmanagementteams.Thefollowingpresentationprovidesinsightinto:(a)409Arelated FAQ;(b)thenatureandeffectoflimitationsplacedonvaluationsbyvaluationspecialistreviewgroups;and(c)anempirical studyofresultsforvaluationsconductedduringthepast5years. While409Avaluationshavebecomeincreasinglystandardized,theadoptionofSFAS157hascreatedanewvaluationchallenge forcompaniesandtheirshareholders:todetermineandharmonizethevaluationofallclassesofsecurities.Inordertoprovide clientswithahigherlevelofvalue,Whitehawk Advisoryhasadoptedanewanalysisandreportingframeworkwhichenables companiestoprovideinvestorswithSFAS157compliantsecuritiesvaluations.Dependingupontherequirementsofthese investors,Whitehawk caneither:(a)providecompanieswithaFairValuedeterminationforallsecuritiesatthetimeofanIRC Section409Avaluationupdate;or(b)costeffectivelyoffervaluationupdatesonaquarterlybasis.Thecostoftheexpanded valuationscope(dualpurposevaluation)hasnotincreasedincomparisontoa409Avaluationunlesstheupdatefrequency changesfromannualtoquarterly.

OVER RVIEW OF TOPICS

IRCSection409A:Top5QuestionsAskedin2010 TypicalAuditAreasofFocus,EffectofCapitalStructure EmpiricalStudyofValuationResults(20062010) SampleUpdatedAnalysis SimpleCapitalStructure SampleUpdatedAnalysis ComplexCapitalStructure ResearchSources,Whitehawk AdvisoryBackgroundInformation

3 4 5 7 8 9

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IRCSECTION 4 409A:TR RENDS IN PRACTICE (20062 2010)

5MostFrequentlyAskedClientQuestionsin2010 WhataretherespectivestandardsofvaluationforIRC409Aand SFAS157and dhow h do d these th standards t d d differ? diff ? IRC409AutilizesaFairMarketValuestandard SFAS157utilizesaFairValuestandard TheprimarydifferenceisthatFairValuedoesnottakeinto accountdiscountsforlackofmarketability(DLOM)anddiscounts forlackofcontrol(DLOC) thereforeFairValueisalwayshigher thanFairMarketValue WhatarethekeyvariablesindeterminingthevalueoftheCommon shares? Moneyness ComparisonofCompanyEquityValuetoLiquidation Preferences CapitalStructure:ConvertiblePreferredvs.Participating Preferred;MultipleofLiquidationPreferences ExpectedLiquidityHorizon(Term) HowdoesaCompanyscapitalstructuredetermineCommonShare pricingandtheratioofCommonpricetoPreferredprice? ParticipatingPreferredresultsinlowervaluesthanConvertible Preferred;Higherliquidationpreferencesresultinlowervalues Avg.Preferencesofcompaniesw/Convertible:$20.5MM Avg.Preferencesofcompaniesw/Participating:$38.9MM WhyistheratioofCommonsharepricetoPreferredsharepriceno longerconsistentwiththehistorical10:1RuleofThumb? Theformer10:1RulewasprohibitedexplicitlyintheAICPA PracticeGuide.Interestingly,duetothewaysinwhichaudit reviewhasprohibitedcertainmethodsandproscribedothers, newpriceratioshavebecomefairlyconventional Howisthetermoftheoptiondetermined determined,andhowdoesthis comparetocontractualtermaswellasvestingperiod? Thetermoftheoptionin409Aanalysisisdeterminedby managementsexpectedliquidityhorizonfortheCompany(i.e. timeframetoM&Aevent,IPOand/orinsolvency)

IllustrationofMoneyness andimpactonRatioofOptionstoPreferred
100%

MoneynessofOptionPool M

50% 0% 50% 100% 150% 200% 250% 0% 10% 20% 30% 40% 50% 60% 70%

RatioofOptionPricetoMostRecent Preferred

ProportionofPreferredtypeswithinSampleSet

33% 67%

Convertible Participating

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AUDIT REVIEW W AND EFF FECT OF PRESCRIBE ED METHO ODS

KeyLimitationsonValuationsplacedbyAuditValuationReviewGroups

EffectofConvertiblevs.ParticipatingPreferred Allelseequal
$1.20 $1.00 $1.00 $1.00

UseofEnterpriseValuedeterminationmethods: DCFmethodoftenviewedasunreliableforcompanieswithhigh projectedrevenuegrowthrates.CanbeimpracticaltouseDCF, since(forhighgrowthcompanies)thereturnexpectationsof investorsareoftensignificantlyhigherthandiscountrates producedbytheCapitalAssetPricingModelorothervaluation discountingconventions Cost/Assetbasedmethodsviewedasappropriateonlyforseed stage,distressed,orrestartsituations UseofEnterpriseValueAllocationMethods: CurrentValuemethod(i.e.whatarecommonsharesworthtoday) onlypermittedforseedstagecompanies,whenrestart/liquidation isimminent,orwhennoPreferredexists Optionpricingmethod,usingBlackScholes calculation,ismost common Expectedreturnmethodcanbeviewedasunreliable,assumptions areoftentoosubjectivetoaudit Application A li ti of fDi Discounts: t Maynotbeappliedatlevelofoverallcompanyvalue(i.e.priorto optionpricingcalculation) mustbecalculatedatlevelofper sharevalue Increasinglyrigidrequirementtoutilizequantitativemethodsto estimatemarketabilitydiscount MinorityDiscount someauditreviewgroupshaveinterpreted certainSECcommentstodisallowdiscountsforlackofcontrol (DLOC)orrequirethatcompaniesdemonstratedifferentialcash flowstorespectiveshareclasses;otherauthoritativevaluation literaturedeemstherespectivegovernancerightsofPreferred and dCommon C adequate d t to t justify j tif the th continued ti duseof fMinority Mi it Discounts AbilitytovalidateconsistencybetweenCommonpriceandPreferred price(backsolvingforCompanyEnterpriseValuewhichresultsinBSM calculationconsistentwithrecentPreferredtransactionprice also knownasReverseOPM)

$0.80

$ $0.60

$0.40 $0.19 $0 06 $0.06 $ Convertible CommonOptions (Unissued) Participating SeriesA

$0.20

UsingBackSolvingMethodcanreduceoptionpriceby50%

Methods ofDetermining Total Equity Value

$1.40 $1.22 $1.20 $1.01 $1.00 $0.80 $0.60 $0.40 $0.20 $ PreferredTransaction CommonOptions (Unissued) BackSolvedModel SeriesA $0 38 $0.38 $0.19

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EMPIRICAL STU UDY OF VALUATION N RESULTS S (20062 2010)

RatioofOptionPricetoMostRecentPreferredbyTypeofPreferred TheratioofCommonoptionpricingtomostrecentPreferredround pricing i i has h increased i doverthe th last l t5years Significantfactorisalowerproportionofcompanies(both generallytrueandalsoreflectedinsampleset)withsignificant liquidationpreferenceoverhang(fewercompanieshaveoption poolswhichare200%+outofthemoney) AlsodrivenbyincreasingauditproscriptiontowardsuseofBlack Scholes model,specificassumptionswithinmodeland/orthe requirementforuseofspecifiedinputs 16%ofValuationsweresubjecttoreviewbyValuation specialistgroups,yettoourknowledgenoneinthe samplesetrequiredaclienttorestatethevalueofthe options ti
35% 30% 25% 20% Convertible 15% 10% 5% 0% 2006 2007 2008 2009 Participating

AverageLevelofMarketability/MinorityDiscountsUsed:20062010

UseofValuationDiscountscanbeEffectiveifusedProperly DiscountsforLackofMarketability(DLOM)andDiscountsforLackof Control(DLOC)remainacontentiousareaforthevaluationcommunity ingeneral,andtheresultof409Avaluationsspecifically Theaveragelevelofunadjusted(input)andadjusted(actual)discounts usedinthestudyarereflectedinthegraph graph.Thestandarddeviationof thevaluationdiscountsshownisapproximately912% Adjustmentstodiscountsaremadebasedonthenatureoftheequity valueinput(controlvs.minority;marketablevs.nonmarketable)and itscontributiontotheoverallequityvalue Whitehawk iscommittedtodefending gtheuseofthesediscounts whereappropriateinordertoreflecttheactualFairMarketValueof optionsgrantedtoexecutives utilizingthesediscountswhen appropriatecancreatevalueforclientsintheformofmorereasonably pricedoptiongrants

44.51%

29.12% 19.98%

31.25%

DLOMAdjusted

DLOMUnadjusted

DLOCAdjusted

DLOCUnadjusted

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UPDATED ANALYSIS & INCORPORATION OF SFAS 157 OBJECTIVES

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SAMPLE ANAL LYSIS (SIMPLE CAPIT TAL STRUC CTURE)

Whitehawk Advisoryhasupdateditsanalysisandreportingtoprovideamoreintuitiveunderstandingofanalysistoclients
Company X Securities Valuation as of June 30, 2010

Underlying Security Price Determination Guideline Public Companies Method (TEV/LTM Rev) Precedent Transactions Method (TEV/LTM Rev) Net Asset Value Analysis Series A Transaction Value Total Equity Value based on Weighted Average Calculation Option Value Determination Option Analysis Inputs Breakpoints (Strike Prices) Expected Term (years): Based on Management's expected liquidity horizon for Company. Risk-Free Interest Rate: 4-year daily Treasury yield as of the Valuation Date. Expected Volatility Dividends e Interim Calculations d1 d2 N1 N2 C Value of Options Aggregate Value of Option Incremental Value of Option Contingent Claims Model by % % to Series A Preferred % to Common Options (Issued) % to Common Options (Unissued) % to Common Contingent Claims Model by $ % to Series A Preferred % to Common Options (Issued) % to Common Options (Unissued) % to Common

Equity Value $ 5,560,000 $ 5,560,000 $ 5,621,200 $ 14,018,704

Weighting 0.00% 0.00% 75.00% 25.00%

$ $ $ $ $

Equity Value 4,215,900 3,504,676 7,720,576 3rd

Summary of Methods Equity Value Determination: Net Asset Value, Subject Company Transaction Enterprise Value Allocation: Option Pricing Method, Using Black-Scholes Calc. Premise of Value: Going Concern Valuation Date: June 30, 2010

1st

2nd

0 4.00 2.69% 40.54% 0 2.7182818

5,800,000 4.00 2.69% 40.54% 0% 2.7182818

9,588,400 4.00 2.69% 40.54% 0% 2.7182818

Break point Description 1st BP: Zero 2nd BP: Series A LP Surpassed 3rd BP: Exercise of Common Stock Options

122.33 121.52 1 1 7,720,576

0.89 0.08 1 1 3,510,336

0.27 -0.54 1 0 2,147,715

%ofValuebyShareClass
Common Options (Unissued), 3.34% SeriesA, 75.14%

7,720,576 4,210,240 1st 100.00% 0.00% 0.00% 0.00%

3,510,336 1,362,621 2nd 49.22% 0.00% 0.00% 50.78%

2,147,715 2,147,715 3rd 42.87% 0.89% 12.01% 44.23%

4,210,240 -

670,636 691,985

920,676 19 207 19,207 257,848 949,984

Common Options (Issued), 0.25%

Common, 21 27% 21.27%

Value by Share Class Value to Shares Shares Assumed Fair Value per Share (Applicable to ASC 820/SFAS 157) Adjusted Minority Discount/(Control Premium) (See Note 1) Equity Value per Share (non-marketable basis) Adjusted Marketability Discount (See Note 2) Fair Market Value per Share (Applicable to IRC 409A) % of Value by Share Class % of Fully Diluted Equity by Share Class

Common Common Options Options Common (Issued) (Unissued) Series A $ 1,641,968 $ 19,207 $ 257,848 $ 5,801,552 5,984,630 121,000 1,624,370 5,800,000 $ 0.27 $ 0.16 $ 0.16 $ 1.00 36.57% 36.57% 36.57% 36.57% $ 0.17 $ 0.10 $ 0.10 $ 0.63 37.43% 37.43% 37.43% 37.43% $ 0.11 $ 21.27% 44.23% 0.06 $ 0.25% 0.89% 0.06 $ 3.34% 12.01% 0.40 75.14% 42.87%

ContingentClaimsModel
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1st SeriesA CommonOptions (Unissued) 2nd 3rd CommonOptions (Issued) Common 4th

(1) Adjusted M inority Discount is equivalent to 100% of unadjusted M inority Discount. Adjustment to M inority Discount is based upon number of Black-Scholes l k h l Enterprise i value l inputs i which hi h require i application li i of f a M inority i i Discount. i (2) Adjusted M arketability Discount is equivalent to 50% of unadjusted M arketability Discount. Adjustment to M arketability Discount is based upon number of Black-Scholes Enterprise value inputs which require application of a M arketability Discount.

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SAMPLE ANAL LYSIS (COM MPLEX CA APITAL STR RUCTURE)

Whitehawk AdvisoryhasupdateditsanalysisandreportingtoincludeSFAS157compliantvaluationofPreferredShares
Underlying Security Price Determination Guideline Public Companies Method (TEV/LTM Rev) Series C Preferred Transaction Total Equity Value based on Weighted Average Calculation Option Value Determination Option Analysis Inputs Breakpoints (Strike Prices) Expected Term (years): Based on Management's expected liquidity horizon for Company. Risk Free Interest Rate: 3 Risk-Free 3-year year daily Treasury yield as of the Valuation Date Date. Expected Volatility Dividends e Value of Options Aggregate Value of Option Incremental Value of Option Contingent Claims Model by % % to Series A-1 Preferred % to Series A-2 Preferred % to Series B-1 Preferred % to Sereis B-2 Preferred % to Series B-3 Preferred % to Series C Preferred % to Series C Preferred Warrants % to Common % to Common Warrants % to Common Options (Issued) % to Common Options (Unissued) Contingent Claims Model by $ % to Series A-1 Preferred % to Series A-2 Preferred % to Series B-1 Preferred % to Sereis B-2 Preferred % to Series B-3 Preferred % to Series C Preferred % to Series C Preferred Warrants % to Common % to Common Warrants % to Common Options (Issued) % to Common Options (Unissued) 1st Equity Value $ 33,634,503 $ 134,398,647 Weighting Equity Value 50.00% $ 16,817,252 50.00% $ 67,199,324 $ 84,016,575 2nd 3rd 4th Break point Description 1st BP: Zero 2nd BP: Aggregate Series B and Series C Liquidation Preferences 3rd BP: Exercise of Unissued Common Stock Options 4th BP: Exercise of Issued Common Stock Options Summary of Methods Equity Value Determination: Comp. Companies, Subject Company Transaction Enterprise Value Allocation: Option Pricing Method, Using Black-Scholes Calc. Premise of Value: Going Concern Valuation Date: June 30, 2010

0 3.00 1 00% 1.00% 91.59% 0 2.7182818 1st $ 84,016,575 $ $ 27,180,429 $ 1st 0.00% 0.00% 18.81% 14.97% 19.57% 46.65% 0.00% 0.00% 0.00% 0.00% 0.00% $ - $ $ $ $ $ $ 5,112,079 $ $ 4,068,651 $ $ 5,320,090 $ $ 12,679,609 $ $ $ $ $ $ $ $ $ $ $

51,916,849 3.00 1 00% 1.00% 91.59% 0 2.7182818

83,793,704 3.00 1 00% 1.00% 91.59% 0 2.7182818

99,289,398 3.00 1 00% 1.00% 91.59% 0 2.7182818

2nd 3rd 4th 56,836,146 $ 48,672,895 $ 45,604,464 8,163,251 $ 3,068,431 $ 45,604,464 2nd 3.66% 0.66% 10.48% 8.34% 10.91% 26.00% 14.61% 22.61% 2.74% 0.00% 0.00% 298,644 54,076 855,610 680,971 890,424 2,122,188 1,192,269 1,845,303 223,766 $ $ $ $ $ $ $ $ $ $ $ $ 3rd 3.39% 0.61% 9.71% 7.73% 10.11% 24.09% 13.54% 20.95% 2.54% 0.00% 7.32% 104,042 18,839 298,078 237,237 310,207 739,329 415,364 642,868 77,956 224,512 4th 3.39% 0.61% 9.71% 7.73% 10.10% 24.08% 13.53% SeriesB3 20.93% 2.54% 0.08% 7.31% $ $ 1,545,097 $ 279,772 SeriesB2 $ 4,426,671 $ 3,523,142 $ 4,606,792 $ 10,979,574 $ 6,168,448 $ 9,547,052 $ 1,157,699 $ 36,052 $ 3,334,166

%ofValuebyShareClass

SeriesC

SeriesC Warrants

Common Common Options(Issued) SeriesB1 Common Warrants SeriesA 1 Common Options (Unissued)

S i A2 Series

Common Options Value by Share Class Value to Shares Shares Assumed Fair Value p per Share (Applicable ( pp to ASC 820/SFAS 157) ) Adjusted Minority Discount/(Control Premium) (See Note 1) Equity Value per Share (non-marketable basis) Adjusted Marketability Discount (See Note 2) Fair Market Value per Share (Applicable to IRC 409A) % of Value by Share Class % of Fully Diluted Equity by Share Class

Common Options Common Series C Warrants Warrants Series A-1 Series A-2 Series B-1 Series B-2 Series B-3 Series C 1,459,420 $ 1,947,783 $ 352,686 10,692,438 8,510,001 11,127,513 26,520,700 7,776,081 1,123,909 1,500,000 271,606 4,297,470 3,420,312 4,472,334 10,659,114 5,988,410 1.30 $ 1.30 $ 1.30 $ 2.49 $ 2.49 $ 2.49 $ 2.49 $ 1.30 12.60% 12.60% 12.60% (16.84%) (16.84%) (16.84%) (16.84%) (16.84%) 1.13 $ 1.13 $ 1.13 $ 2.91 $ 2.91 $ 2.91 $ 2.91 $ 1.52 24.66% 24.66% 24.66% 24.66% 24.66% 24.66% 24.66% 24.66% 0.86 $ 1.74% 2.54% 0.86 $ 2.32% 3.39% 0.86 $ 0.42% 0.61% 2.19 $ 12.73% 9.71% 2.19 $ 10.13% 7.73% 2.19 $ 13.24% 10.10% 2.19 $ 31.57% 24.08% 1.14 9.26% 13.53%

(Issued) (Unissued) Common $ 12,035,223 $ 36,052 $ 3,558,678 $ 9,268,403 35,000 3,236,852 $ 1.30 $ 1.03 $ 1.10 $ 12.60% 12.60% 12.60% $ 1.13 $ 0.90 $ 0.96 $ 24.66% 24.66% 24.66% $ 0.86 $ 14.32% 20.93% 0.68 $ 0.04% 0.08% 0.72 $ 4.24% 7.31%

(1) Adjusted M inority Discount/(Control Premium) is equivalent to 50% of unadjusted M inority Discount/(Control Premium). Adjustment to M inority Discount/(Control Premium) is based upon weighting of Black-Scholes equity value inputs which require application of a M inority Discount/(Control Premium). (2) Adjusted M arketability Discount is equivalent to 50% of unadjusted M arketability Discount. Adjustment to M arketability Discount is based upon weighting of Black-Scholes equity value inputs which require application of a M arketability Discount.

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RESO OURCES AN ND BACKG GROUND

ListofSupplementalResources

OverviewofServiceCosttoClients

SupplementalResourcesfor409A ValuingEarlyStageandVentureBackedCompanies(2010) byNeilBeaton,Partner,GrantThorntonValuationGroup TheEffectofSecondaryMarketSaleson409AValuations Arcstone Partnersarticle,www.arcstonepartners.com DiscountforLackofMarketabilityinPreferredFinancings FairValueForum,DiscussionTopic,October2009 SupplementalResourcesforASC820/SFAS157 ValuationforFinancialReporting,2nd Edition(2007) byMichaelMard, Mard JamesHitchner, Hitchner andStevenHyden TheFinancialValuationGroup March2007UpdatedUSPrivateEquityValuationGuidelines, issuedbythePrivateEquityIndustryGuidelinesGroup
ContactInformation

Costofexpandedvaluationanalysis/formatincludingpricingof h security i classes l (SFAS157compliant) li )is i consistent i with i h other marketcostfor409Avaluations Annualvaluations(includingIRC409AandSFAS157): SimpleCapitalStructures upto5classesofEquity securities:$6,000 ComplexCapitalStructures morethan5classesofEquity securities:$7,500 Quarterlyupdates(perquarter):50%ofcostifupdateisannual

InvestmentBankingandFinancialAdvisoryExperience

Whitehawk Advisory,LLC AlexKlingelberger,AVA ManagingDirector Email:ak@whitehawkadvisory.com Direct:(512)5141156 www.whitehawkadvisory.com

Whitehawk Advisoryexclusivelyservesmiddlemarketcompanies inthetechnologysector,providingfinancialadvisoryservices (409A,SFAS157,SFAS141/142valuations,transactionrelated fairnessopinions)andinvestmentbankingservices(sellsideand b side buy id M&Aadvisory, d i equity it capital it lformation f ti and ddebt d bt financingplacement). AlexKlingelberger,theprincipalofWhitehawk Advisory,hasledor playedakeyadvisoryrolein20middlemarketinvestmentbanking transactionsrepresentingapproximately$400 $ MMinvalue,which haveincludedcompanysalestolargestrategicbuyerssuchas Aeroflex andConstellationSoftware.Hehasalsobeenaleading provideroffinancialadvisoryservicestoTexascompanies,having deliveredmorethan100valuationengagementssince2006. SecuritiesareofferedthroughWestlakeSecurities Securities,LLC, LLC amember ofFINRAandSIPC.

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