1. October 23, 2015 Setting the Stage: Financial Due Diligence to Boost Credibility and Deal Value

2. Presenter(s) Page 2 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved Christine Schneider, CPA Partner MFA – Moody, Famiglietti & Andronico (978) 557-2948 tbrown@mfa-cpa.com Robert Busch, CPA Partner MFA – Moody, Famiglietti & Andronico (978) 557-5327 rbusch@mfa-cpa.com

3. About MFA – Moody, Famiglietti & Andronico Proactive CPA and consulting firm with national and global reach Founded in 1982 Over 100 professionals, including 17 partners Located in Tewksbury, Massachusetts Page 3 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

4. About MFA – Moody, Famiglietti & Andronico MFA Cornerstone Consulting: Performance & Controls, IT Advisory, Valuation, and Litigation Support Practices New Wealth Advisors: An independent, SEC-registered investment advisor with two distinct practice areas: Investment Management and Retirement Plan Advisory. Strategic Talent specializes the recruitment and placement of a broad range of highly skilled Finance and IT professionals. MFA Capital Advisors is a business consulting and transactional services firm that encompasses mergers and acquisitions, reorganizations, recapitalizations, stock repurchases, capital raising, bank financing, strategic alternatives and general corporate advisory on related matters. Page 4 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

5. Sources of Capital Private Equity Investment – Equity-based/Convertible Debt Venture Capital – Equity- based – Preferred Stock and/or Convertible Debt Investment Banks (IPO) Established Life Science Companies – Royalty- Based Financing – Licensing/Co-Development Agreements Page 5 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

6. What is the Goal of Financial Due Diligence? Review historical financial activity – Targeted testing of certain areas Gain understanding of policies, procedures and controls Assess finance and accounting team Make assessment of future financial needs and risks Gain comfort with forecasts and projections Page 6 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

7. Be the Exception It is all about mitigating risk and building credibility. Page 7 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

8. Get Your “Financial House” in Order Qualified individuals on your accounting/finance team Solid historical accounting records – Establish consistent, accurate financial reporting practices TTM – Trailing 12 months very important Page 8 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

9. Get Your “Financial House” in Order Establish a data room – Store all vital documents in one place – Design the data room based on a due diligence checklist Establish controls, policies and procedures – Access to cash, signing authority – Access to accounting systems and electronic records – Financial reporting oversight Page 9 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

10. Common Financial Diligence Issues Page 10 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved Accounting for Intangible Assets – Software Development Cost – Organizational Costs – Owner’s Goodwill Inventory management – Physical Counts – Excess and Obsolete Reserves – Overhead Rate Calculations The Devil is in the Details……

11. Common Financial Diligence Issues Page 11 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved Accruals/Cutoff of Accounts Payable – “Modified cash basis” not acceptable – Best practice is to address throughout the year; not just at year end – Accrued vacation Missed Sales Tax Collections/Filings – Buyers/Investors take conservation approach to affecting deal price when it comes to these issues

12. Common Financial Diligence Issues Page 12 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved Capitalization Table – Must be organized and complete – Who is responsible for maintenance? – Need to understand your capitalization table pre- and post-deal Stock Options Plans – 409A compliant? – Typically need a valuation Revenue Recognition – Misapplied GAAP can have significant impact on revenue – Revenue contracts can be complex to account for

13. Common Financial Diligence Issues Page 13 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved Contractor vs. Employee – Strict MA rules – Active IRS audit area Missed Foreign Activity Filings – Forms 5471 and 5472; informational but big penalties – Foreign bank accounts (FBAR); if >$10k at any point during the year

14. Taking a Look from an Outsider’s Perspective Page 14 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved Pre-revenue: – Burn rate (monthly expenses) – Anticipated market demand for product – Pricing models – Competing technologies – Cost of R&D required – Working Capital needs – Capex Revenue –generating: – Quality of earnings review – Evaluating customer concentrations – Analyze gross margins from multiple viewpoints – Understand trends – Customer attrition – Executive Compensation – Complexity of CAP TABLE

15. Taking a Look from an Outsider’s Perspective Qualified preparer of forecasts and projections – Accountant vs. Financial Analyst Projections/Forecast based on solid historical information – Understand your assumption and “Drivers” – Based in “reality” Understand how your company could be potentially valued as a starting point – EBITDA multiple – Revenue multiple – Normalized EBITDA – Projected EBITDA – Free Cash Flows Page 15 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

16. Financial Due Diligence - Why so important? How can common findings affect your deal? May cause re-pricing of the transaction Stall the transaction Affect representations, warranties and indemnification limits Can BLOW UP the deal!! Page 16 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

17. Financial Due Diligence Questions? Page 17 | Copyright 2015. MFA – Moody, Famiglietti & Andronico, LLP. All rights reserved

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