1

Valuation Creation Through Synergies&

Capital Structure and Distribution of Proceeds From a Liquidation Event

December 1, 2014

UC San Diego

2

Presentation Outline Acquisition Value

Background and Introduction

DCF Approach

Conclusions

Equity Capital Structure Terms

IPO Vs. M&A Differences

Distribution Allocation

Q&A

Company OverviewDescription of Business

Seller: Aesthetic Medical Device Company Products and Treatments for Personal Aesthetics

Typically all consumer expenditures are not covered by insurance

Med Devices regulated by the FDA

Acquirer: Large Multi-National Company Pharmaceutical, consumer care and dental subsidiaries

Global sales and marketing group

3

Merger ConsiderationFair Value Summary

4

Payment ($000s)

Fair Value Factor (1)

Indicated Fair Value ($000)

Initial Merger Consideration (net cash) 410,484 410,484

Contingent Merger Considerations

Regulatory Milestone 50,000 100% 50,000 Product Milestone 25,000 59% 14,679 Initial 2015 Net Sales Milestone 12,500 86% 10,811 Additional 2015 Net Sales Milestone 12,500 80% 10,001 Initial Key Product Net Sales Milestone 25,000 60% 15,018 Additional Key Product Net Sales Milestone 25,000 53% 13,157

Contingent Merger Considerations 150,000 76% 113,666 Banker fee on Milestone Payments 1,500 1% 1,137

148,500 112,529

Indemnity Escrow Fund 30,000 99% 29,833 Equityholder Expense Fund 750 0% -

Fair Value of Total Merger Consideration 589,734 552,846

Notes:(1) Determined using a probability distribution model.

Discounted Cash FlowCash Flow Projections

5

Cash flow projects were projected over a ten year period under the premise that the fair value of a security is equal the present value of its expected cash flows.

The projected cash flows are discounted by the weighted average cost of capital (“WACC”) of the Company.

The DCF value is calculated as the sum of the discounted cash flows plus a terminal value.

A terminal value of the Company is measured using a two-stage Gordon growth multiple.

Enterprise ForecastsStand Alone Revenue and Expenses ($000s)

6

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Terminal

Revenue growth 28.7% 36.3% 25.3% 22.5% 19.7% 16.9% 14.2% 11.4% 8.6% 5.8% 3.0%

Revenue $105,118 $143,231 $179,474 $219,884 $263,263 $307,860 $351,429 $391,366 $424,929 $449,524 $463,010Cost of goods sold 25,099 29,733 35,745 43,793 52,433 61,315 69,993 77,947 84,631 89,530 92,216

Gross profit 80,019 113,497 143,729 176,091 210,830 246,545 281,437 313,419 340,298 359,995 370,795

Cost savings - - - - - - - - - - - Operating expenses 74,183 85,200 91,517 112,123 134,242 156,983 179,200 199,564 216,679 229,220 236,097 Total operating expenses 74,183 85,200 91,517 112,123 134,242 156,983 179,200 199,564 216,679 229,220 236,097

EBITDA 5,837 28,297 52,212 63,968 76,588 89,562 102,237 113,855 123,620 130,775 134,698 Depreciation 1,101 1,068 1,045 1,030 1,095 1,218 1,382 1,572 1,773 1,969 2,580 Amortization - - - - - - - - - - -

EBIT 4,735 27,229 51,167 62,938 75,493 88,345 100,855 112,283 121,847 128,806 132,118 Taxes 40% 1,894 10,892 20,467 25,175 30,197 35,338 40,342 44,913 48,739 51,522 52,847

Net income 2,841 16,337 30,700 37,763 45,296 53,007 60,513 67,370 73,108 77,283 79,271

Cash FlowsNet income 2,841 16,337 30,700 37,763 45,296 53,007 60,513 67,370 73,108 77,283 79,271 Depreciation 1,101 1,068 1,045 1,030 1,095 1,218 1,382 1,572 1,773 1,969 2,580 Amortization - - - - - - - - - - - Capital expenditures (1,000) (1,000) (1,000) (1,225) (1,467) (1,715) (1,958) (2,181) (2,368) (2,505) (2,580) Change in non-cash working capital (1,375) (2,547) (1,787) (853) (896) (898) (850) (749) (592) (388) (279)

Free cash flow 1,568 13,858 28,959 36,715 44,028 51,611 59,086 66,013 71,921 76,360 78,992

Fiscal Year End

Enterprise ForecastsStand Alone Revenue and Expenses

Pro forma EBITDA margin expansion EBITDA margins are expected to increase from 5.6 percent in 2014 to 29.1 percent in

2016

The pro forma income statement indicates the following terminal margins: 80.1 percent Gross Profit margin

29.1 percent EBITDA margin

28.5 percent EBIT margin

7

Enterprise ForecastsSynergistic Revenue and Expenses ($000s)

Added expected cost savings

8

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Terminal

Revenue growth 28.7% 36.3% 25.3% 22.5% 19.7% 16.9% 14.2% 11.4% 8.6% 5.8% 3.0%

Revenue $105,118 $143,231 $179,474 $219,884 $263,263 $307,860 $351,429 $391,366 $424,929 $449,524 $463,010Cost of goods sold 25,099 29,733 35,745 43,793 52,433 61,315 69,993 77,947 84,631 89,530 92,216

Gross profit 80,019 113,497 143,729 176,091 210,830 246,545 281,437 313,419 340,298 359,995 370,795

Cost savings (16,219) (22,100) (27,692) (33,927) (40,620) (47,501) (54,223) (60,385) (65,564) (69,359) (71,439) Operating expenses 74,183 85,200 91,517 112,123 134,242 156,983 179,200 199,564 216,679 229,220 236,097 Total operating expenses 57,964 63,101 63,825 78,196 93,623 109,482 124,976 139,179 151,115 159,861 164,657

EBITDA 22,056 50,396 79,904 97,895 117,208 137,063 156,460 174,240 189,183 200,133 206,137 Depreciation 1,101 1,068 1,045 1,030 1,095 1,218 1,382 1,572 1,773 1,969 2,580 Amortization - - - - - - - - - - -

EBIT 20,954 49,329 78,858 96,865 116,113 135,845 155,078 172,669 187,411 198,164 203,558 Taxes 40% 8,382 19,731 31,543 38,746 46,445 54,338 62,031 69,067 74,964 79,266 81,423

Net income 12,573 29,597 47,315 58,119 69,668 81,507 93,047 103,601 112,446 118,899 122,135

Cash FlowsNet income 12,573 29,597 47,315 58,119 69,668 81,507 93,047 103,601 112,446 118,899 122,135 Depreciation 1,101 1,068 1,045 1,030 1,095 1,218 1,382 1,572 1,773 1,969 2,580 Amortization - - - - - - - - - - - Capital expenditures (1,000) (1,000) (1,000) (1,225) (1,467) (1,715) (1,958) (2,181) (2,368) (2,505) (2,580) Change in non-cash working capital (1,858) (3,490) (2,759) (1,916) (2,012) (2,016) (1,909) (1,681) (1,330) (871) (626)

Free cash flow 10,816 26,175 44,602 56,008 67,284 78,994 90,561 101,312 110,522 117,492 121,509

Fiscal Year End

Enterprise ForecastsSynergistic Revenue and Expenses

Cost Reductions Reduced sales & marketing costs by 50%. Assumes acquirer's sales & marketing

department will have capacity

The pro forma income statement indicates the following terminal margins: 80.1 percent Gross Profit margin

44.5 percent EBITDA margin

44.0 percent EBIT margin

9

Discounted Cash FlowWeighted Average Cost of Capital

10

The WACC was determined using the following inputs: Beta Debt to Equity Ratio Company Risk Premium Equity Risk Premium Risk Free Rate Size Premium Debt Rate

The WACC was concluded to be 18.2 percent as a standalone, and 15.0 percent under the merger scenario.

Standalone MergerScenario Scenario

Selected beta 1.32 1.32 Selected debt to equity ratio 5.00% 5.00%

Market risk premium 6.11% 6.11%Relevered beta x 1.36 1.36

Industry risk premium = 8.31% 8.31%Company risk premium + 2.50% 2.50%Forecast period risk premium + 0.00% 0.00%

Total risk premium = 10.81% 10.81%

Cost of equityRisk free rate (Rf) 3.66% 3.66%Risk premium 10.81% 10.81%Size premium 4.40% 1.16%

Total cost of equity 18.87% 15.63%

Cost of equity (rounded) 18.90% 15.60%

Cost of debt 5.35% 5.35%Less tax benefit 40% -2.14% -2.14%

After-tax cost of debt 3.21% 3.21%

Percentage debt 5% 0.15% 0.15%Percentage equity 95% 18.00% 14.86%Total cost of capital 100% 18.15% 15.01%

Cost of capital, rounded 18.20% 15.00%

Discounted Cash FlowValuation ($000s)

11

The indicated synergistic value is $276 million higher.

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Terminal

Stand alone net cash flow 1,568 13,858 28,959 36,715 44,028 51,611 59,086 66,013 71,921 76,360 78,992Adjustment for partial year 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000Mid year adjustment 0.5000 1.5000 2.5000 3.5000 4.5000 5.5000 6.5000 7.5000 8.5000 9.5000Present value factor 18.2% 0.9198 0.7782 0.6583 0.5570 0.4712 0.3987 0.3373 0.2853 0.2414 0.2042

Present value of cash flows 1,442 10,784 19,065 20,449 20,747 20,575 19,928 18,836 17,362 15,596

Present value of cash flows 164,785

Present value of terminal stage cash flow 134,442Stand alone enterprise value $299,227

Annual net cash flow 10,816 26,175 44,602 56,008 67,284 78,994 90,561 101,312 110,522 117,492 121,509Adjustment for partial year 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000

Mid year adjustment 0.5000 1.5000 2.5000 3.5000 4.5000 5.5000 6.5000 7.5000 8.5000 9.5000Present value factor 15.0% 0.9325 0.8109 0.7051 0.6131 0.5332 0.4636 0.4031 0.3506 0.3048 0.2651

Present value of cash flows 10,086 21,224 31,449 34,341 35,873 36,623 36,510 35,516 33,691 31,144

Present value of cash flows 306,458Present value of terminal stage cash flow 268,408

Business enterprise value $574,866

Synergistic value $275,639

Fiscal Year End

Valuation ResultsMerger Decision

12

With an indicated business enterprise value of $575M under the Merger Scenario, the Acquirer offered a Total Merger Consideration of $553M.

With an indicated business enterprise value of $299M under the Standalone Scenario, the Seller accepted a Total Merger Consideration of $553M.

Equity Capital StructureGeneral Information

13

Equity is dividend into: Preferred Stock (Class A, B, C, etc.)

• Anti-Dilution Rights• Board Rights• Conversion Rights• Covenants• Dividend Rights• Liquidation Rights• Priority over Common Stock Holder• Redemption Rights • Voting Rights

Common Stock• Board Rights• Dividend Rights• Voting Rights

Equity Capital StructureLiquidation Rights

14

Liquidation Preference (“First Money Out”) Entitles the holder of preferred stock to be paid a certain amount first before all other

equity classes Typically by multiplier of original purchase price of preferred stock

Participation Preference Unlimited Participation: After payment of liquidation preference, the remaining funds

available will be distributed to the holders of preferred stock and common stock on a pro-rata basis as if the preferred stock was converted to common stock

1x Participation: After payment of liquidation preference, the remaining funds available will be distributed to the holders of preferred stock and common stock on a pro-rata basis as if the preferred stock was converted to common stock up to 1x the original purchase price. Thereafter, the common stock will retain the remaining funds.

No Participation: After payment of liquidation preference, remaining funds available will be distributed to the holders of common stock.

1x Liquidation Preference + Unlimited Participation

1x Liquidation Preference + No Participation + 1:1 Conversion

15

Sample WaterfallWaterfall Distribution Example – Series A $25M Financing

Shares 12,500,000 3,000,000 Shares 12,500,000 3,000,000

Equity Value (MMs) Series A

Common Stock

Equity Value (MMs) Series A

Common Stock

0 - - 0 - - 5 0.40 - 5 0.40 - 10 0.80 - 10 0.80 - 15 1.20 - 15 1.20 - 20 1.60 - 20 1.60 - 25 2.00 - 25 2.00 - 30 2.32 0.32 30 2.00 1.67 35 2.65 0.65 35 2.26 2.26 40 2.97 0.97 40 2.58 2.58 45 3.29 1.29 45 2.90 2.90 50 3.61 1.61 50 3.23 3.23

Equity Capital StructureConversion Rights

16

Conversion Rights Conversion of preferred stock to common stock (1:1, 1:10, etc.)

IPO Scenario Automatic conversion of preferred stock based on minimum common stock price per

share price and / or IPO proceed amount Generally, preferred stock holders vote as a single class to convert preferred stock to

common stock

M&A Transaction1x Liquidation Preference + Unlimited Participation

IPO TransactionConversion of Preferred Stock to Common Stock (1:1)

17

Sample WaterfallWaterfall Distribution Example – M&A vs IPO

Shares 12,500,000 3,000,000 Shares 12,500,000 3,000,000

Equity Value (MMs) Series A

Common Stock

Equity Value (MMs) Series A

Common Stock

0 - - 0 - - 5 0.40 - 5 0.32 0.32 10 0.80 - 10 0.65 0.65 15 1.20 - 15 0.97 0.97 20 1.60 - 20 1.29 1.29 25 2.00 - 25 1.61 1.61 30 2.32 0.32 30 1.94 1.94 35 2.65 0.65 35 2.26 2.26 40 2.97 0.97 40 2.58 2.58 45 3.29 1.29 45 2.90 2.90 50 3.61 1.61 50 3.23 3.23

Equity Capital StructureVoting and Anti-Dilution Rights

18

Preferred Stock Holders have special voting rights Right to nominate a certain number of board members Right to approve or deny certain business decisions

• Acquisitions• Exit Scenario – IPO vs. M&A• Key Partnerships

Voting based on a single class or all equity classes (as-converted basis)

Anti-Dilution Rights In a down round (value of company has decreased from prior financing round), the

holders of preferred stock will be able to receive additional shares to prevent dilution• Full Ratchet – Based on fully diluted basis (all possible shares)• Half Ratchet – Shares outstanding

Equity Capital StructureOther Rights

19

Covenants Restrictions such as fundraising, acquisitions, divestures, amendments to articles of

incorporation, debt issuance, etc.

Dividend Rights Accrued vs. Non-Accrued Compounding vs. Non- compounding Typically 8 percent of original purchase price

Redemption Rights Company must purchase back preferred stock at fair market value Essentially forces company into liquidity event Typically 5 year timeframe must elapse before right can be executed

Sellers’ WaterfallAcquisition: IPO vs. M&A

20

Equity Value Series A Series B Series C Common

Stock -$ - - - -

50,000,000 1.56 2.14 0.89 0.23 100,000,000 2.13 2.13 2.13 2.13 150,000,000 3.17 3.17 3.17 3.17 200,000,000 4.21 4.21 4.21 4.21 250,000,000 5.25 5.25 5.25 5.25 300,000,000 6.28 6.28 6.28 6.28 350,000,000 7.32 7.32 7.32 7.32 400,000,000 8.36 8.36 8.36 8.36 450,000,000 9.39 9.39 9.39 9.39 500,000,000 10.43 10.43 10.43 10.43 550,000,000 11.47 11.47 11.47 11.47 600,000,000 12.50 12.50 12.50 12.50

Equity Value Series A Series B Series C Common

Stock -$ - - - -

50,000,000 1.56 2.14 0.89 0.23 100,000,000 2.62 3.20 1.94 1.29 150,000,000 3.65 4.23 2.98 2.32 200,000,000 4.69 5.27 4.02 3.36 250,000,000 5.73 6.31 5.06 4.40 300,000,000 6.76 7.34 6.09 5.43 350,000,000 7.80 8.38 7.13 6.47 400,000,000 8.84 9.42 8.17 7.51 450,000,000 9.87 10.45 9.20 8.54 500,000,000 10.91 11.49 10.24 9.58 550,000,000 11.95 12.53 11.28 10.62 600,000,000 12.98 13.56 12.31 11.65

IPO Waterfall M&A Waterfall

The liquidation rights of the preferred equity has a detrimental effect on the value of the common stock in an M&A deal.

Therefore, certain equity holders will inherently be at odds over exit strategy. The exit strategy will ultimately be decided by whichever equity class controls the board,

and will look to maximize value to their particular class of equity.

21

Conclusions Fluff vs. Substance

Synergies can be pie in the sky Need for detailed and supported revenue increases Need for detailed and supportable expense reductions Who bears risk of synergistic forecast? Buyer or seller? Both?

Risk vs. Reward Negotiation for terms and preferences Mitigate risk by adjustment of preferred stock terms Lawyers are a must

22

About Caliber Advisors

Founded in 1990

Clients are primarily mid-market and Fortune 1000

Client Promise Exceed in quality, responsiveness and price point

Technical Expertise Compliant and consistent with guidance Manage complex and critical matters Defensible, supportable and persuasive

23

ServicesValuation and Economics

Fair Value Services Intangible Asset & Purchase Allocations (ASC 805) Goodwill and Intangible Impairment (ASC 350 and 360) Options, Warrants and Derivatives (ASC 718, 815)

Tax Reporting Transfer Pricing & Purchase Allocation Implied Interest Expense Estate & Gift

Transaction Services Fairness and Solvency Opinions M&A Advisory Valuation Opinions Royalty Rates

Expert Witness Services Dispute Analysis & Litigation Services Tax Litigation & Controversy

QualificationsKen Nunes, CFA

24

Ken Nunes founded Caliber Advisors, Inc., in 1987 and today maintains the technical vision, quality, and responsiveness of the firm as president and managing director. He has over 25 years of experience advising companies on financial, valuation, and dispute-resolution issues. He has worked extensively with security pricing, intangible assets, and intellectual property and has developed numerous analytical models for economic issues.

Mr. Nunes performs valuations and provides transaction advisory services for mergers and acquisitions, divestitures, financial statement reporting, transfer pricing agreements, corporate reorganizations, strategic planning, estate and gift tax purposes, corporate tax planning, and pur chase price allocations.

He has extensive experience with the appraisal of securities and intangible assets, having con ducted analyses under various regulatory requirements including tax (IRS §338 and §482), GAAP (ASC 805, SFAS 141R, IFRS 3 and APB 16), and Federal bankruptcy court require ments. He also has significant experience with the valuation of emerging companies, option pricing, and complex capital structures. In 1990, he began testifying as an expert witness in valuation, and since then has testified in United States district, tax, and bankruptcy courts, and in California state superior court.

QualificationsKen Nunes, CFA

25

Mr. Nunes frequently acts as a guest lecturer on business and IP valuation matters and has lectured at Santa Clara University, UC San Diego, and Chapman University. Mr. Nunes is one of 50 members of the Appraisal Issues Task Force (AITF), which advises regulators and the FASB on best practices and methods for business valuation.

Mr. Nunes began his financial advisory career as a manager at Arthur D. Little in 1985, and formed Caliber Advisors in 1987 to specialize in business valuation and transactional services.

Mr. Nunes received his MBA from the University of California Los Angeles with high honors in 1985. He graduated first-of-class at University of California, Davis, with an MS in mechanical engineering in 1981. He is a Chartered Financial Analyst and holds numerous business appraisal credentials.

QualificationsJimmy Mar, CFA

26

Jimmy Mar is a Manager at Caliber Advisors, joining the practice in 2007. Mr. Mar provides economic and valuation opinions for board, disclosure, litigation and tax purposes for emerging and mature companies. These opinions include buy-sell agreements, estate and gift, fairness opinions, financial statement reporting and security and intellectual property valuations.

Mr. Mar has extensive experience with the appraisal of equity securities and intangible assets, conducting analysis under GAAP (ASC 350, 360, 718, 805 and 820) and tax regulatory requirements for companies in the biotechnology, construction, financial, healthcare, restaurant and technology industries.

In 2007, Mr. Mar graduated from the University of California, San Diego with a BS in management science and psychology. Mr. Mar has been conferred the designation of Chartered Financial Analyst and is a member of the CFA Society of San Diego.

QualificationsDan Rubin

27

Dan Rubin is a Senior Associate at Caliber Advisors, providing valuation opinions and financial advisory services to organizations both locally and globally. Mr. Rubin’s opinions are used for board, financial reporting and disclosure, litigation and tax purposes. His experience includes portfolio valuation, Monte Carlo simulations, private company valuation, intangible asset valuation, transaction advisory and the valuation of intellectual property.

Mr. Rubin graduated from the University of California, San Diego with a Bachelors’ of Science in Management Science in 2011. Mr. Rubin frequently assisted in behavioral economic research studies, participated in the honors economic program, and studied in Paris, France for five months.

Mr. Rubin is pursuing the designation of Chartered Financial Analyst, and will sit for the 2015 Level III examination.

Contact Information

San Diego – Coast San Diego – Inland Washington, DC514 Via de la Valle, Suite 210 10620 Treena Street, Suite 230 1600 Tysons Boulevard, 8th Floor

Solana Beach, California 92075 San Diego, CA 92131 McLean, Virginia 22102

Phone: 858-792-8990 Phone: 858-549-4900 Phone: 703-537-0976

Fax: 858-792-8988 Fax: 858-549-9317

28

Ken NunesManaging DirectorSan Diegokbnunes@caliberadvisors.com858-792-8984 (D)858-414-3511 (M)

Jimmy MarManagerSan Diegojmar@caliberadvisors.com858-792-8990 x160 (D)

Dan RubinSenior AssociateSan Diegodrubin@caliberadvisors.com858-792-8990 x200 (D)

Chicago – Loop Chicago – ITRC150 N. Michigan Ave, Suite 2800 1730 Park Street, Suite 211

Chicago, Illinois 60601 Naperville, Illinois 60563

Phone:312-276-5120 Phone: 630-375-9500

Fax: 312-276-5127 Fax: 630-375-9595

29

We Value Your Business