Mr. Lee Pierhal
ODIS, Inc.
Three Corporate Drive, Suite 204
Shelton, CT 06484
Dear Mr. Pierhal:
In accordance with your request, the following are the key assumptions that we used in the construction of our valuation models.
General Key Valuation Assumptions
The following are key assumptions that are common to all of our valuation models:
* It will take between 6 and 18 months for POET to pass through technical readiness level ("TRL"), making POET then desirable for licensing transactions.
* All revenue models rely on technology licensing fees; thus, there is no cost of goods sold
* ODIS will incur cumulative nominal monthly expenses that current grant revenues satisfy.
* The nominal discount rate for future cash flows is 32.04%
* The base target rate of return used for the discount rate determination is 23.98%.
* The success rate used for the discount rate determination is 25%.
* The holding period used for the discount rate determination would reflect an investment of 22 years (i.e., ODIS is a strategic acquisition, not a financial acquisition).
* The nominal remaining economic life for the technology is 22 years.
* ODIS will incur a 40% nominal income tax rate.
* ODIS will incur a 5% royalty payment to UCONN for the technology licensing.
* ODIS will enjoy an average of 20 remaining years for statutory protection for POET patent portfolio.
* A per-unit royalty would constitute 8.17% of the total value basis for the product.
* Once deployed, it will take 48 months for penetration of the market to the nominal ending market share.
* Product adoption will occur along a Fisher-Pry market adoption curve with a market shape of 0.2000
Defense Market Key Valuation Assumptions
The following are key assumptions that we integrated into the valuation model for the defense market:
* ODIS will continue to receive annual revenues from Small Business Innovation Research (SBIR) grants and other awards, in accordance with a projected schedule provided by ODIS representatives
* ODIS will likely license POET to one or all of the top ten defense contractors.
* Each defense contractor's licensing decision is an equally probable binary outcome (i.e., they will either license it or not, each occurrence having equal probability).
* Each defense contractor's licensing decision is independent of other defense contractors (i.e., we modeled no conditional licensing probabilities).
* A time gap that ranges between 2 and 18 months exists that captures when each defense contractor considers executing a license.
* The defense contractors would pay an initial, nonexclusive license fee that may range between $20 million and $50 million
* Defense contractors would make monthly royalty payments thereafter of $250,000 to account for any product-specific royalties.
Commercial Market Key Valuation Assumptions
The following are key assumptions that we integrated into the valuation model for the commercial market:
* The first market application for POET in the commercial market would be for general- purpose microprocessors for server computers.
* The second market application for POET in the commercial market would be for general- purpose microprocessors for desktop computers.
* The third market application for POET in the commercial market would be for general- purpose microprocessors for laptop computers.
* ODIS will likely license POET to one or all of the top general computer microprocessor manufacturers on an exclusive basis.
* In each target market, POET platform would nominally allow a manufacturer to capture its current nominal market share deploying it.
* The server processor market would start at 6,939,877 annual units, growing at 0% per year.
* Server processors would enter the market 48 months from the effective date of the valuation.
* Server processors average $828.89 per unit, which would serve as a basis for a negotiated royalty payment.
* Each server would require two processors.
* The desktop processor market would start at 128,200,000 annual units, growing at 1.13% per year.
* Desktop processors would enter the market 48 months from the effective date of the valuation.
* Desktop processors average $93.22 per unit, which would serve as a basis for a negotiated royalty payment.
* Each desktop would require one processor.
* The laptop processor market would start at 231,900,000 annual units, growing at 12.43% per year.
* Laptop processors would enter the market 48 months from the effective date of the valuation.
* Laptop processors average $93.22 per unit, which would serve as a basis for a negotiated royalty payment.
* Each laptop would require one processor.
Smartphone Market Key Valuation Assumptions
The following are key assumptions that we integrated into the valuation model for the smartphone market:
* The POET platform would nominally allow a smartphone microprocessor manufacturer to capture its current nominal market share deploying it.
* ODIS will likely license POET to one or all of the top smartphone microprocessor manufacturers on an exclusive basis.
* The desktop processor market would start at 188,100,000 annual units, growing at 10.00% in Year 1, 18.18% in Year 2, 15.38% in Year 3, 13.33% in Year 4, 11.28% in Year 5, 9.23% in Year 6, 7.18% in Year 7, 5.13% in Year 8, 3.08% in Year 9, and 1.03% in Year 10.
* Smartphone processors would enter the market 48 months from the effective date of the valuation.
* Smartphone value creation averages $78.96 per unit, which would serve as a basis for a negotiated royalty payment.
* Each smartphone would require one processor.
