How FC financing works for BIG, page-130

Hi everybody. Here are my thoughts on the financing model. Also much respect to @Ryzie and @Thanky for the earlier analysis. It has really helped me get my head around it.

Everything below is IMO and should NOT be taken as investment advice.

Firstly – in this analysis I’m not considering the issues around share disclosures and company structures/ownership etc. I feel that BIG have probably made a few mistakes in that regard. It doesn’t look good and I’m disappointed in them. I believe that’s why ASIC are now involved and I trust them to get to the bottom of it and dish out whatever fine(s) needed. I don’t have the time or expertise to really dig into those matters myself, but I just hope that management can learn from it and the business continue to be operational.

What I’m more interested about, assuming we do trade again, is if any of the details published impact on the ongoing viability of the business and growth story. Also if any of the previously reported figures have in anyway been incorrect or misleading.

My understanding of the financing model

Financing model only for Australian SME customers. It’s not applicable for the corporate, NFP or overseas customers. Also not related to any of the pillar 2 and 3 revenue.

$20m sponsorship pool available to customers of BRTV that have been approved by FC. Currently $19m has been used. This is an advance to BIG for video offers not yet accepted, providing advance capital to make the video.

BIG makes a video offer to the customer (<$5k typically for a SME). Customer signs up with FC for a 12 month $12k membership. Customer receives $12k LOC less amount of video offer. FC remit the following funds as percentage of the video offer amount…

• 24% FC commission
• 35% BIG working capital to make video.
• 41% BIG security deposit (held by FC initially)

Customer accepts - The remaining 41% security deposit is transferred from FC to BIG.

Customer declines – either a) The offer amount is refunded + cancellation fee or b) another customer is added in as a replacement.

Overall it certainly seems a smart way, albeit quite expensive way, to quickly raise capital to cover the production of videos, offer customers interest free payment terms and also a line of credit. It has obviously been popular so we can conclude there is market demand for that sort of bundle. However, in the future I would rather they used their own capital to fund the production costs, and then in turn a new agreement with FC with lower commission rates.

Accounting treatment

1) Cashflows - The payment of 41% security deposit and 35% working capital are both cash receipts and should be shown on the quarterly 4C cashflow reports. Has BIG done this correctly - YES

2) Accounts - The commission will be an expense recognised in month of sale. The remaining security deposit and working capital transfers should go straight to balance sheet as deferred income (a cash receipt that isn’t yet a revenue item due to timing). Is BIG doing this correctly – Yes, but see comment 1 below.

Risks / concerns

1) There is a risk that some of the deferred income on balance sheet may need to be refunded if the customer does not actually accept or a replacement can’t be found. I would personally like to see it split out on the balance sheet as a) “deferred income accepted customers” and b) “deferred income non-accepted customers”. That would help us to see how much of the deferred income is ‘locked in’ as future guaranteed revenue. Either that or they should be making a separate liability provision to cover the risk of cancellation fees and refunds. However, given the cancellation rate to date is zero they could just assume that zero rate to continue and no provision needed.

2) There is also risk of a 24% cancellation fee if replacement customer cannot be found. We did not know about that risk previously. However, whilst the pipeline is strong and video quality good, then risk is minimised.

3) The $20m sponsorship pool is now pretty much fully drawn at end of Dec, so will be very interesting to see the result for the Jan-Mar quarter. Growth may slow as they now need customers in that pool to accept their videos before the sponsorship pool can be recycled and extended back out to new customers again.

4) I was initially concerned with the 24% commission and 24% cancellation fees. I’m not an expert in financing but it does seem high. However, it must be covering both the margin for FC on each loan (as it’s interest fee for customer) and also an amount to cover any future defaults from accepted customers. Even though risk of default sits with FC, they would have allowed a provision for it when negotiating their fees).

5) A lot of people on the forum are getting confused between cash receipts and revenue. A cash receipt will include the security deposit, even if customer has not accepted. However, it only converts to revenue once accepted and then pro-rated over the 12 months. In that sense, it will be much easier to see the true business performance from the audited accounts, rather than trying to calculate/guess based on applying ratios to figures in the 4C cashflow reports.

6) I feel they need to provide more detail with the 4C cashflow reports. Whilst technically not required, I really feel if they are going to publish that data then it needs to come with a footnote or explanation in terms of the splits between financed deposits, non-financed receipts, other income etc.

Overall conclusion.

Are the accounts correct – Yes, although could be greatly improved by adding more detail & footnotes, especially the 4C’s. The model is a lot more complex than all of us previously thought. That added complexity creates fear/confusion when not fully understood and I feel that's why the market may react negatively.

Is the immediate growth story impacted – potentially the rapid growth shown in the last couple of quarters could be a one-off given that the $20m sponsorship pool is now fully drawn. It will now depend now on how quickly BIG can produce accepted videos (success rate vs non-accepted) and recycle the sponsorship pool facility. However, even if Australian growth moderates, with expansion in US and pillar 2/3 starting to kick off, I think that’s where we’ll start seeing the growth areas.

Long term strategy - Remember they are trying to build up a large database of videos, which even the non-accepted videos are adding to and have a value. This huge database of content will be the foundations for success in pillar 2 and 3. Just look at how many TrueLocal listings are auto generated with the “is this your business?” button for the owners to claim the listing. It’s just as much about building the database as securing paying customers. Potentially the non-accepting customers could also come back and accept at a later date, with no additional cost to BIG.