Product-specific Q&A

1. What is included in the Binomial Model?

2. How can I purchase the model?

3. How do I Install the model?

4. How does it value option grants?

5. How did you verify that your calculations are correct?

6. What is the initial cost? Are there any additional costs?

7. Can multiple people use the product concurrently?

8. Can I share your templates?

ASC 718 (Formerly FAS123 & FAS123r) Q&A

9. Who needs to comply with ASC 718/FAS123r?

10. Can I change models before expensing as required by ASC 718?

11. Can I change models in the future?

12. Is Binomial Lattice the appropriate Model for me?

13. What if I need help finding Inputs to the Model?

Model Requirements Q&A

14. What do I need to use the Model?

15. What if I need additional help?

16. How do I install the Model?

Product-specific Q&A

1. What is included in the Binomial Model?

The Binomial Lattice Model includes a rich Excel template with software to prevent user error and complete documentation. The specific model is the Binomial Lattice model supporting up to 10 years, in increments of 1 year with a potential node count of 1024. The Model also includes extensive documentation.

2. How can I purchase the model?

The model is purchased from our website using PayPal and is available for immediate download. We're sorry but once you have downloaded the file, refunds will not be possible.

3. How do I Install the model?

We provide two installation methods: Windows Installer and Self-Extracting Zip file. If you have Windows XP or later, we recommend using the Windows Installer option (you can also install the Microsoft Installer software on Windows 2000 and NT 4.0 platforms).

The Self-Extracting Zip file is an executable that can be run on any Windows platform. You simply run the executable the same as any executable (.EXE file) from Window Explorer and the Zip file will prompt you to select a directory to install ('Extract To:'). You press the 'Start' button and files and directories are simply copied to the directory you select.

After installation on either method, a directory is created that contains the template file and documentation. Simply read the documentation PDF and you are ready to use the model.

Our model requires Microsoft® Office 2000 or later and can run on any Windows-based computer certified for use with the Office software. We recommend that you have at least 100MB of available disk space to store option grant valuations.

You may install the model on a server or multiple PC's/laptops but the model is only licensed for a single grantor (legal entity or company). Bulk licensing is available for CPA and Consulting firms. Contact sales@procognis.com for details.

4. How does it value option grants?

The Binomial Lattice model is calculated using a complex set of mathematical procedures producing a tree structure with financial calculations on each node. The computation follows industry best practices to produce an efficient binomial model of stock behavior using the provided input assumptions. It models up to 1024 possible outcomes or scenarios that are averaged to compute an expected valuation and an imputed life. See the Whitepaper for more details.

The inputs include the following:

• Total Options Granted: the number of shares available for exercise.
• Stock price at Grant Date: the actual market price when the option grant becomes effective
• Exercise (strike) price: the contractual strike price per the option agreement.
• Risk-Free Interest Rate: the theoretical interest rate a 'risk-free' debt instrument would earn. This value is used to compute the Net Present Value for future option exercises.
• Suboptimal Exercise Factor: a factor multiplied by the strike price to find the prevailing stock price a option holder could be expected to exercise their shares (provides a floor stock price that a stock option could be exercised during the contractual life).
• Contractual Term (Years): The number of years the option contract is in effect (usually 10 years but some option contracts may be different. The maximum supported value is 10 years).
• Lattice Model: The specific volatility computation method that produces the potential up and down stock values generated at each node. The values include the 'Cox, Ross & Rubenstein' or CRR and the 'Equal Probabilities' or EP models. The CRR model uses an exponent that emphasizes upward stock prices but smoothes downward movement. The EP model creates equal pricing movement for both up and down movements. The CRR model is more widely accepted since it produces slightly more conservative valuations than the EP model.
• Expected Volatility Table: the list of expected Volatility that is used in the Lattice model to compute upward and downward stock price movements.(see our Volatility Tool for more information)
• Expected Dividend Yield Table: the annualized dividend yield assumed to be paid to stockholders at the end of each annual period.
• Annual Vesting Table: the percentage of the option grant that vests each year.
• Blackout Checkbox: if checked, no options granted may be exercised in each year regardless of stock price.

The most important inputs are Expected Volatility and the Suboptimal Exercise Factor. The Expected Volatility input defines the stock price movement. Careful selection of Volatility will produce a more accurate valuation. The Suboptimal Exercise Factor defines exercise behavior and is an important component of the valuation.

5. How did you verify that your calculations are correct?

The Binomial Model uses a algorithm known as a binary tree to capture all of the potential stock price outcomes or nodes. For each node, the stock price either increases or decreases using the volatility percentage. The actual price change up or down depends on the Lattice model in use (Cox, Ross, Rubenstein uses a square-root function to exaggerate upward movement while the Equal probability assumes even up and down pricing). The dividend yield is used to reduce the stock price at each node to adjust out dividend impact to valuation (the exact formulas are detailed in the documentation provided with the product in the Appendix).

Each exercise scenario produces a stock value and a year of exercise. The Risk-free rate is used to adjust the ending stock values to compensate for the time-value of money and to make the stock values comparable. Then, all scenarios that result in a stock value are summed and all scenarios that result in stock prices at or below the strike price are valued at 0. All scenarios are averaged (including the 0 value scenarios) and this average creates the total grant valuation. Each individual option value is the division of the total average value divided by the number of options in each grant.

While the FASB has not provided guidance over the functioning of Lattice models, our model produces a valuation that approaches the modified Black-Scholes-Merton value with high Sub-Optimal inputs. Further, the valuation increases proportionally to our Black-Scholes model with comparable inputs (i.e. inputs that cause Black-Scholes valuation to increase also cause our Binomial Model valuation to increase and those increases are proportional; likewise inputs that cause a decrease in Black-Scholes value also cause a proportional decrease in our Binomial Model).

We have further tested our model using actual inputs from our customers and found the results to match expected values.

6. What is the initial cost? Are there any additional costs?

The base product is $999 (US Dollars). You purchase by online payment with PayPal.

The license is per Company or legal entity that grants stock-based contracts (option 'grantor'). CPA firms, consulting firms or other entities that have business relationships with multiple companies that issue stock options will need to purchase a license for each grantor. Please contact our sales team for more details and pricing for license packs or bulk licenses.

There are no ongoing maintenance costs. Once you have purchased the Model, you own the license for it. Ongoing technical support services are on a per-incident basis with no support contract required.

We're sorry but returns cannot be accepted after the transaction has been completed.

7. Can multiple people use the product concurrently?

Yes. Any grants created with our software can be accessed or created by anyone with access to the software.

You may install the model on a server or multiple PC's/laptops but the model is only licensed for a single legal entity or company (grantor).

8. Can I share your templates?

No. Our templates are proprietary. By purchasing the Model, you have been granted a license to use them for one company and grantor. If you have sister companies or other affiliated entities, each must purchase a separate license.

ASC 718 (Formerly FAS123 & FAS123r) Q&A

9. Who needs to comply with ASC 718/FAS123r?

Any company that has issued stock options or warrants and that prepares GAAP financials. See the FASB site for more information. Also, please see our whitepaper on ASC 718.

10. Can I change models before expensing as required by ASC 718?

ASC 718 (formerly FAS123r) allows a Company to change models if the new model is anticipated to produce a more effective valuation. Changes to the model must be disclosed in the Company's financial statements and can only be applied prospectively to grants made after the new model has been adopted.

11. Can I change models in the future?

You can change models at any time for new option grants, so long as the new model is "more effective" than the previous model. See the Codification for more details.

12. Is Binomial Lattice the appropriate Model for me?

Companies with the following characteristics are more appropriate for Binomial Lattice models:

• Significant Option Activity and High Option Holder Turnover
• A High Level of Volatility
• A Stock Price which has Periods of Declining Value as well as Periods of Increasing Value
• Significant Stock Option Expense
• History of Early Exercises

13. What if I need help finding Inputs to the Model?

The Binomial Lattice model requires inputs that characterize the behavior of the stock you are trying to model. These inputs can be produced with historical data or by other methods.

If you are a non-public company, you may not have historical pricing trends and stock behavior to provide reasonable and supportable data to use in the model. We can provide Professional Services expertise to guide you in gathering and supporting your conclusions. Please contact our Consulting group for information.

Model Requirements Q&A

14. What do I need to use the Model?

The model is based on an Excel template using embedded code. You will need Excel 10.0 or greater (Office XP or greater). You will also need to set Medium Macro security to allow Macros to run on each workstation. Disk space required will depend on the number of grants saved on the system. Each grant will require approximately 650KB and the base installation will require about 3MB.

15. What if I need additional help?

Technical support is available via email on a per-incident basis. If encounter technical issues, simply email us at support@procognis.com. We will make every effort to resolve your technical issues.

16. How do I install the Model?

Simply run the Installer file or the Executable you downloaded following the PayPal transaction. The installation software will ask you where you would like to install the files on your hard drive or network. Both applications default to installing the software in the current directory (where you saved the installation file). After installation is complete, a shortcut will be created on your desktop that will link to the working template file.

For the Windows Installer version, should you want to delete the installation, you should use the Add/Remove programs feature in the Control Panel or simply use the Remove option when re-running the installer.