Just some basic accounting observations:
When customer signs application agreement and after BRTV submits a request ($1000 x 12 Months) under video offer –
24% x 12,000 = $2,880
Debit (Commission Expense – but in BIG’s case from the Annual Report, lumped under “other expenses” (assumption).)
Credit (Cash and cash equivalents - the latest 4C splits payments into (b) advertising, marketing and sales commission)
35% x 12,000 = $4,200
Debit (Cash and cash equivalents – receipts from customers) $4,200
41% x 12,000 = $4,920
Debit (Cash and cash equivalents – receipts from customers) $4,920
Balance Sheet –
Deferred Revenue (Current Liability) - $12,000 CREDIT
Cash and Cash Equivalents (Current Asset) - $9,120 DEBIT
P&L –
Other Expenses (Commission) - $2,880 DEBIT
When video is accepted by the customer – is when the final consideration is complete for the transaction and a formal legally binding credit arrangement is established. Before that, a customer can opt out by declining the video. (When revenue can be recognized)
Immediately, the cash from security deposit is released to working capital or another account under BRTV.
Every month –
Debit – Deferred Revenue (liability) $1,000
Credit – Video Revenue or Sponsorships and Other Revenue $1,000 (differentiation not clear)
Technically under a perfect world:
The security deposit cash should have been recognised as something similar to
Debit - Cash Escrow Account - $4,920
But given the intricacies of the sponsorship arrangement, they from hindsight
should have disclosed the differences despite the pool of candidates revolving in and out.
So if you split 31 December 2017 Quarterly Receipts up for transparency:
$2,071,836 - Cash from Advertising Revenue (new acquisition)
$8,328,157 (35/76 x $18,084,000) – Cash advance for work capital facility
$9,755,842 (41/76 x $18,084,000) – Security Deposit Account
$2,354,164 – Cash from Non Finance Video Customers
The sponsorship pool is capped at $20,000,000. So, at any point in time, contingent customers can only equate to $20,000,000, once the Customer accepts the Video. Their account is removed out of the contingent sponsorship pool and put onto the books of FC, hence the company effectively transfers the credit risk and collection of payment to FC.
Right now $19 million of this facility is utilised. BRTV has never experienced an event where they had to pay the 24% penalty fee for not finding a customer. Lets for the purpose of discussion use $12,000 per customer. The current contingent customer pool is roughly 1583.
According to Second Aware Letter (13) –
“In addition to the 14,737 Purchasing Decision Customers, the Company has a further 17,701 potential customers currently in the production pipeline, some for whom videos were produced (even though they are not Purchasing Decision Customers). 2,000 of these customers have signed an application form as described in paragraph 20(b) of the Response Letter but are not sponsored by First Class. Some of these customers will be used to "swap in" to replace Declined Customers pursuant to the First Class Sponsorship Agreement. BRTV has been able to do so effectively, as evidenced by the fact it has not paid any cancellation fees to First Class.”
Therefore, it is in the interest of BIG to continue to shoot videos to replace the pool to avoid paying cancellation fees. However FC aren’t stupid hence as few have mentioned they have inscribed certain conversion ratios etc (37C) so this can’t go on forever. For this entire company to unravel, their product has to be a dud, and they can’t replenish the pool or FC exercises their contractual rights under the agreement if they fail to convert sales. I.E if BIG keeps shooting videos continuously without any video acceptances.
Hence, in their previous disclosure, they did look at options of financing from the company’s own books but then they will take on unnecessary credit risk. This arrangement seems from an accounting perspective very aggressive but also very clever as it allows the company to grow without shareholder dilution. It’s akin to having a credit facility with a bank really… but at that point in time, no one would give a start up that kind of revolving credit, but when traction grows in the end they will pursue a normal credit facility or maybe even used AFTERPAY and ZIP-PAY (just a tongue in cheek joke).
There is only these questions that you should ask yourselves:
- Does the company’s financials and potential justify the current valuation? Given the existence of the sponsorship financing, revenue is probably a better indication of performance than their Appendix 4C statements, as they can only recognise revenue on their books when the customer accepts the video.
- Given this sponsorship arrangement, if the company’s product is a dud and the conversion rate drops significant, there will be issues.
- The high utilisation of the sponsorship pool, is either indicating slower conversion rates than normal or just high level of customers signing an application agreement under the video offer.
Second aware letter gives conversion rates. (15). They also bunch up non paid membership customers (either declined or deciding to proceed) as Customers in their reference to “customers”.
