risk

Company Mission

for innovation industries andtheir investors.

CREATE & MARKET

managementTOOLS

ObjectiveMore Efficient Risk Management

and Financing For Innovation• Extremal designs, markets, and assembles a Dodd-Frank complaint financial

products for innovation industries and committed purchasers and manages private investment funds for those purchasers.

– According to NYSE/Euronext: This instrument may be the ideal way to hedge risk and assist with financing “Big I” projects that generate most corporate profits and growth.

• The company’s initial line of products focus on the film industry, for which every new film is in effect a new “innovative” start-up company. Extremal has in effect created a new asset class for films, which has been accepted by the industry. Future applications include commercial and residential real estate development, oil and natural gas exploration, and Big Pharma.

• For investors, the Extremal Instrument offers transparent access to low-frequency but large returns --“Black Swans” (the movie Titanic) that dominate returns.

• For innovators, the Extremal Instrument offers a guaranteed minimum revenue that preserves their equity and their dominant share of the Black Swans.

Definitions

• Innovation industries are defined to mean industries where returns follow a stable Paretian or Power Law distribution instead of a normal distribution.– Returns are dominated by rare events (tech start-ups, film).– High current returns do not exhaust the potential future returns.– Returns are auto correlated so past success (of a single event) predicts

future success.

• Innovation industry returns have characteristics which make them hard to value.– Modal average <<Mean average = high risk.– Non-Gaussian high kurtosis distribution = non-traditional fair value

models.

• The Instrument enables innovation industries to transfer the risk to outside investors.

• Provide film producers and distributors a tool to manage and reduce financial risk in producing and marketing motion pictures.

• Provide investors with a financial instrument that reliably rewards risk-taking granting them a “first dollar” claim on box that avoids the uncertainties associated with “Hollywood Accounting” methodology.

Hollywood ObjectiveCreate a Win/Win For Industry & Investors

CURRENTLY, INVESTORS LOSE

Hollywood Accounting Example

•Harry Potter and the Order of the Phoenix, the 2007 Warner Bros. sequel.

•The film grossed $612.3M worldwide (as of 9/30/09), but the accounting statement showed the film was still $167M in the red.

…Even on Successful Films

• Box office returns to movies do not follow standard finance theory (lognormal distribution) where 80% of all films lose money – the variance is infinite and the mean may not exist because Black Swans drive results.

• Normal distribution models under-predict large and small returns and cannot account for blockbusters.

• Hollywood accounting is not trans-parent and leads to costly litigation and uncertainty for equity investors.

The Black SwanOpportunity In Hollywood

The Extremal Instrument Allows both Industry and Investors to Transparently Benefit from Black

Swans

Extremal’s Solution -- Transparent Structure

• The distribution of box office revenues (determined by Rentrak’s internet-accessible, point-of-sale, real-time data) can be separated by a break point.

• The break point is determined through negotiation, a defense against adverse selection, with guidance from Extremal’s proprietary statistical modeling.

• Due to the asymmetry of the distribution, a trade can be negotiated that leaves both parties better off.

• Producer receives $10M which is also the investor’s maximum exposure, up to the negotiated break point of the $40M box*.

• Investor covers 25% of the shortfall of the box below the break point.*

• Both receive 25% of the box in excess of the break point, as depicted by the shaded triangles.*

• Once the break point is achieved, the investor risk is covered and 25% of the further box is pure profit.*

*Based on The Grey. Each contract is negotiated independently. Actual returns to the producer/distributor may vary based on their deals with the exhibitors who share in the box office revenues.

Graph shows producer and investor receipts with Extremal Instrument in place (y axis) based upon box office revenues (x axis).

Why Extremal Does Not Predict Box Office Revenue

• Its impossible because every movie is unique and must find its own audience within a highly competitive and uncertain theatrical market.

• Goldman’s “Nobody Knows” principle is proven by experience common sense, and academic research.-Hollywood box office revenues do not converge under the Central Limit Theorem to the Normal Distribution. They follow the General Central Limit Theorem, meaning they converge to a stable class of probability distributions that have infinite variance and need not have finite means.

- Infinite variance means forecasts of expected values or means have zero precision because the error term around the forecast is infinite.

-Thus, expectations of box office revenues are of no value since the error is plus or minus infinity.

How Extremal Deals With The Non-Forecastability of Box Office Revenues

• Extremal estimates the probability distribution of box office revenues. This can be done with high precision. Such distribution always exists as the limiting distribution of box office revenue dynamics throughout a movie’s theatrical run.

• Using its estimates of the probability distribution of each movie’s box office revenues, Extremal can compute ALL possible box office outcomes.

• Extremal can use any quantile or decile of the probability distribution as a break point for its swap contract and compute gains and loses associated with each break point.

• Through extensive research, Extremal has devised a method to optimize the selection of break points so as to allow both parties to the contract to gain relative to a naked, unhedged movie deal.

• Extremal is also able to compute the probabilities of gains or losses to portfolios of swap contracts for differing portfolio sizes and break points.

• Extremal contract issuers receive a guaranteed minimum box.• Investors receive a high Internal Rate of Return (IRR) at a clearly defined and

limited downside risk. • The instrument is a general obligation. The investor is guaranteed their money

above the break point even if 25% of the box isn’t remaining because of the issuer’s deal with exhibitors.

• Issuers may recoup losses even if a film tanks. • Both issuer and investor share in the rare, but massive, Black Swan returns in the

upper tail of the distribution (to the far right).

Extremal’s Solution

Transparent, Secure ResultsInvestor ReturnProbability Distribution Producer/Distributor Return

Probability Distribution

“So, if Warner Bros. remains true to the hoary Hollywood tradition of giving civilian investors the short end of the stick, it will steer this hedge-fund money to its riskier products while concentrating its own capital on franchise films with a proven record of success, such as the Harry Potter movies. As one savvy studio executive explained, "it's a great hustle" of the hedge funds.”

“So, if Warner Bros. remains true to the hoary Hollywood tradition of giving civilian investors the short end of the stick, it will steer this hedge-fund money to its riskier products while concentrating its own capital on franchise films with a proven record of success, such as the Harry Potter movies. As one savvy studio executive explained, "it's a great hustle" of the hedge funds.”

Since ours is a negotiated instrument, an investor can guard against adverse selection by offering lower prices. Every other film finance deal presents an incentive for the producer/distributor side to offer biased estimates of box and /or profit. We are an independent third party with no stake in the film and offer an unbiased opinion to both parties. The earlier in the production schedule that the

instrument is negotiated, the less is known to both parties. At early stages, both are similarly ignorant.

Since ours is a negotiated instrument, an investor can guard against adverse selection by offering lower prices. Every other film finance deal presents an incentive for the producer/distributor side to offer biased estimates of box and /or profit. We are an independent third party with no stake in the film and offer an unbiased opinion to both parties. The earlier in the production schedule that the

instrument is negotiated, the less is known to both parties. At early stages, both are similarly ignorant.

Resolving Adverse Selection

Using Outrun (an August, 2012, Open Road release as an example), the Internal Rate of Return (IRR) for investments in films under the Extremal Instrument range from 56% to 154% for different negotiated break points in the contract.

The above range assumes that cash, in the amount hedged, is placed into an escrow at the beginning of the release and released on the settlement date, two months after the end of the 16 week measurement period.

Measured IRR will be greater if the collateral is a pre-existing investment or if collateral is released during the measurement period as gross box office receipts accumulate.

The investor’s value-at-risk is between - $2.5M and - $3.8M. These values will be bettered by 95% of outcomes. Based

Upon VaR

The Extremal Instrument Offers a Greater Risk Adjusted Rate of Return Than Other Methods of Investing in a Film

Portfolios of 25 Films

• The probability of a positive portfolio return is better than 95%.

• The probability distribution fits the data well (see right).

• Only 9 portfolios show losses.

• The biggest gain is $838 million, the average gain is $186 million.

1000 simulated returns to $50M 25-film portfolios released at an average rate of 2 films per month

EFP Term Sheet

Term Sheet for the Extremal Instrument on The Grey with Open Road, which was released January 27, 2012.

Accomplishments&

The Future

Marketed and Proved the Concept to Hollywood

• Created an Extremal Instrument on The Grey, which hit it’s $40M break point in its 3rd week of release.

• It’s box office revenues are $51, 548,330 at the end of 16 weeks, reflecting a profit to the investor of $2.88M on a balance sheet commitment of less than 2 weeks.

Fund Advantages• Assembling a fund committed to purchasing a

portfolio of Extremal Instruments offers:– Management fees and a share of portfolio profits

to EFP.– Portfolio returns that increase non-linearly with

size. – Reduces cost and assures each Extremal

instrument issued is purchased.– A fund would further establish EFP as a legitimate,

powerful resource in Hollywood.

Conclusion• Gaussian (bell curve) financial models and instruments have the

wrong risks and returns that result in billion-dollar financial crises and artificially constrict investor returns.

• To hedge risk, preserve equity, and finance innovations, Extremal has engineered the first transparent, Power Law financial instrument that offers investors a bounded risk of loss and unbounded returns (in the upper tails of Extreme outcomes).

• Our proprietary, Dodd-Frank compliant instrument offers a guaranteed minimum revenue to issuers, a share of the blockbusters to issuers, and reliable counter parties.

• Extremal has marketed and proved the model to Hollywood, which is poised to enter into up to 60 Extremal Contracts.