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How FC financing works for BIG There has been a lot of confusion...

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    How FC financing works for BIG

    There has been a lot of confusion as to how the financing agreement with FC works so I have taken some time to write out the process to make this clearer. Now that I understand how this agreement works I am extremely happy with the arrangement and I believe once you understand it you will feel a lot better about it as well. I was able to understand the finance agreement with the help of @Thanky , we spent some time this afternoon going through the response and piecing the following together.

    I will start by outlining the elements that make up the agreement and I will add some explanation for each element.

    Sponsorship Pool: The sponsorship pool of $20,000,000 is an amount agreed to by both parties as a cap of how many customers can be accepted for financing. This cap was not in place during the original agreement made in 2015. The cap has been put in place to minimize the risk associated with having too many customers under a financing agreement and then not being able to swap those customers out in the event of a cancellation. Of this available sponsorship pool $19,000,000 has been allocated at this time. When a customer becomes unconditional (accepts the video) the amount for that customer is then freed up in the sponsorship pool allowing BIG to offer financing to another potential customer. The customers repayments are then something that FC must deal with.
    The sponsorship pool is not a line of credit for BIG to draw down and pay back. It cannot be viewed as debt and therefore the company is not in “trouble” of being insolvent or requiring a capital raise. As you can now see this sponsorship pool or lending cap protects BIG and its shareholders from a situation of over lending (Think global financial crisis haha).

    Video Offer: The video offer is quite easy to understand, this is the video packages; bronze, silver, gold and platinum. Essentially the customer will initially choose one of these packages. Each package has an associated cost as documented on https://membership.bigreviewtv.com/

    Membership Fee: The membership fee has been misunderstood by everyone including myself on first reading of how the agreement works. This is what is written:

    The Customer signs an application agreement which includes the obligation to pay a monthly $1,000 fee for 12 months membership, contingent upon the Customer accepting the Video (Membership Fee);

    We all took this to mean that the customer is agreeing to pay BIG $12,000 per year for their video. Extremely confusing as none of the packages on the Big Review TV website is over $4,000. The membership fee is actually agreeing to be a Finstro member and use the $12,000 as an interest free line of credit. The video offer is deducted from the $12,000 and the remaining amount is available for the SME to use however they like. Now, how FC make money is not really our concern however I am happy to provide a couple of possible scenarios as to how they may would be making money as this will help some of you understand it better.
    1. The customer agrees to pay $1,000 per month over 12 months equally $12,000. That does not mean that the line of credit that the customer has access to is capped at $12,000. This could be a minimum payment amount on a $20,000 line of credit. Similar to the minimum payments made on a credit card.
    2. FC already gets a 24% commission. They may be happy to take the commission and have a new customer that they can potentially upsell the cash flow management software.
    Now that those three key elements have been explained I’ll provide a few examples of the breakdown of money when a customer signs up. In the examples I will explain how the adjustment works for an upgrade or a downgrade.

    Scenario 1: Customer chooses to sign up to the bronze package using FC finance then the customer decides to upgrade to Platinum
    1. Customer chooses the bronze package with a cost of $987.00 and chooses to pay with FC Finance.
    1. Customer signs an application agreement which includes the obligation to pay a monthly $1,000 fee for 12 months membership
    1. BIG will now submit a request to FC for the offer amount which in this scenario is $987.00 as the customer has chosen the bronze package.
    1. Within two business days after the request, FC pays the $987.00 to BIG.
    4a. 24% of the $987 which equals $236.88 is paid back to FC as commission.
    4b. 35% of the $987 which equals $345.45 is paid into BIGs operating account.
    4c. 41% of the $987 which equals $404.67 is paid into the security deposit account.

    1. Within two business days after the Customer accepts the video, the Security Deposit must be paid into a bank account nominated by BRTV (plus any Positive Adjustment and less any Negative Adjustment Amount)
    Now the adjustment is where I was getting stumped as that didn’t seem to make a lot of sense. However let’s say that the customer is blown away with the quality of the video that they decide to change the package that they want to purchase. The customer decides to choose the platinum package. There’s an obvious price difference between the Platinum package and the Bronze package. Let’s break it down.

    Bronze package = $987
    Platinum package = $3,987

    Adjustment Amount means, in respect of a Sponsorship Payment, an amount, A, determined in accordance with the following formula:

    A = B — C

    where

    B = the Sponsorship Rate multiplied by the Contract Value; and
    C = the Sponsorship Rate multiplied by the Offer Value.

    Sponsorship Rate = 76% (Amount paid to BIG minus FC commission)
    Contract Value = $3,987 (Customer chose the platinum package)
    Offer Value = $987 (Customer initially wanted the bronze package)

    For the purposes of clause 7.3:
    • If B is greater than C, then the Adjustment Amount will be referred to as the Positive Adjustment Amount; and
    • if C is greater than B, then the Adjustment Amount will be referred to as the Negative Adjustment Amount
    Substitute values:

    B
    = 76% x $3,987
    B = $3,030.12
    C = 76% x $987
    C = 750.12

    B is greater than C so a positive adjustment is applied.

    Adjustment = A
    A = B – C
    A = $3030.12 - $750.12
    A = $2,280

    BIG is paid an additional $2,280 from the SME’s line of credit to cover the upgrade to the Platinum package.

    Scenario 2: Customer chooses to sign up to the Platinum package using FC finance then the customer decides to downgrade to the Bronze package.
    1. Customer chooses the Platinum package with a cost of $3,987.00 and chooses to pay with FC Finance.
    1. Customer signs an application agreement which includes the obligation to pay a monthly $1,000 fee for 12 months membership
    1. BIG will now submit a request to FC for the offer amount which in this scenario is $3,987.00 as the customer has chosen the bronze package.
    1. Within two business days after the request, FC pays the $3,987.00 to BIG.
    9a. 24% of the $3,987 which equals $956.88 is paid back to FC as commission.
    9b. 35% of the $3,987 which equals $1,395.45 is paid into BIGs operating account.
    9c. 41% of the $3,987 which equals $1,634.67 is paid into the security deposit account.
    1. Within two business days after the Customer accepts the video, the Security Deposit must be paid into a bank account nominated by BRTV (plus any Positive Adjustment and less any Negative Adjustment Amount)
    Applying adjustment:

    Bronze package
    = $987
    Platinum package = $3,987

    Adjustment Amount means, in respect of a Sponsorship Payment, an amount, A, determined in accordance with the following formula:

    A = B — C

    where

    B = the Sponsorship Rate multiplied by the Contract Value; and
    C = the Sponsorship Rate multiplied by the Offer Value.
    Sponsorship Rate = 76% (Amount paid to BIG minus FC commission)
    Contract Value = $987 (Customer chose the platinum package)
    Offer Value = $3,987 (Customer initially wanted the bronze package)

    For the purposes of clause 7.3:
    • If B is greater than C, then the Adjustment Amount will be referred to as the Positive Adjustment Amount; and
    • if C is greater than B, then the Adjustment Amount will be referred to as the Negative Adjustment Amount
    Substitute values:

    B
    = 76% x $987
    B = $750.12

    C = 76% x $3,987
    C = $3,030.12

    C is greater than B so a negative adjustment is applied.

    Adjustment = A
    A = B – C
    A =$750.12 - $3030.12
    A = -$2,280

    $2,280 is deducted from the security deposit, as the initial payment that was made was for a more expensive package. The adjustment procedure ensures that BIG is not paid too much or too little based on the final choice by the customer. This means that the customer gets final say on the package they want right up until the time that they accept the video. This flexibility is also a preventative measure of the customer opting out altogether.

    Let’s discuss the security deposit. It is included in the 4C as cash on hand or in the bank. A lot of people feel that this is misleading as the account is still under the control of FC. It is still a deposit so it is technically not misleading the way that it is displayed on the 4C. Regardless of technicality consider last year when you read the 4C’s and you thought that there was so much cash available and then when the annual report was released and you saw all the deferred revenue. This security deposit is essentially the deferred revenue. BIG are allowing themselves to use the 35% as working capital however the remaining 41% is recognized over time as deferred revenue. The real reason for the security deposit is to cover any final adjustment that is made, allowing the customer to downgrade or upgrade.
    Finally we need to review what happens in the event of a cancellation. If the customer decides that they do not want to proceed with a video at all. BIG must now either find a replacement customer or pay back the 35% and an additional 24% cancellation fee.

    When the customer signs the application agreement they are choosing to pay $1,000 per month to FC. What does the customer get out of this agreement? They get a line of credit for a minimum amount of $12,000 minus their chosen video package. The customer also gets a promotional video and possibly some marketing depending on the package that they selected. The payments for any video package are extremely low per month compared to paying $1,000. If the customer did not want financing but did want the video then the customer would choose to pay for the video upfront or in installments over 12 months. That tells me that the customer really wants this line of credit that is being offered.

    The reason for cancellations
    In my opinion the reasons for cancellations are limited to three scenarios;
    1. The customer is not happy with the end product
    2. The customer has decided that they do not want to use this finance
    3. The customer doesn’t pass the finance checks by FC
    In scenario 1 it is possible that the customer finally decides not to go with deal because they just plain do not like the video. BIG can now go and find another customer to fill this gap. I believe that this situation would be a rare occurrence as the videos are of a pretty good standard and the customer initially signed the application agreement to pay $1,000 per month for the line of credit which they must be interested in or they would not have signed. Nevertheless this is still a risk and BIG has measures in place to fill the cancellation. Remember to date there have not been any cancellation fees paid.

    Scenario 2 is that the customer does not want to use the finance option. Another customer can be used to fill the cancellation; however I find this option fairly unlikely as the customer already signed an application agreement to pay $1,000 per month over 12 months for access to the line of credit so they must be interested having it available. The customer is still paying BIG with an alternative payment method that they have chosen.
    Scenario 3 is that the customer does not pass the finance checks by FC. We do not know what these checks are however we do know that a cancelled customer can be substituted for a new one. Again no cancellation fees have been paid to date.

    My Opinion
    At first as I said I did not understand this agreement. It certainly takes a long time to get your head around so I hope that this has helped you. My opinion of this deal is that it is extremely well thought out with minimal downside risk to the company. I’m happy with how it works and I’m excited at the extraordinary growth that this has allowed the company to make. Applying the cap of $20m was a great move by management as it definitely removes a lot of the risk of over financing clients.

    Given how difficult this finance agreement is to understand I do not blame management for not providing all of this information to the market. We were made aware of the sponsorship agreement with FC Capital and that is certainly good enough for me.

    Imo, When the share price drops at open it will be purely because of the corporate governance issues and anyone that doesn't understand how the financing works. I'm not alarmed that ASIC are involved as the company has openly admitted to a breach of the listing rules and will be punished accordingly by ASIC.

    I apologize for any typos in the above. If you have any questions about this I would be happy to try and answer them.
 
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