Big Trouble In Big Un
I am totally staggered by this BIG situation, but I’m late to this story. Although I thought the Tipsly transaction was unusual, I didn’t pick any problems with BIG and in fact I had a hard look at its books late last year and I couldn’t see any obvious warning signs. So I did not tip off AFR, I do not have and have never had any kind of investment position in BIG, long or short.
I wrote last month that I thought Getswift (ASX: GSW) was in deep shit with the regulators. I know that several people reported them and their adviser firms to ASIC for possible breaches of the Corporations Act. At the time I thought Getswift and it’s onetime $700m market cap were pretty ‘special’. I didn’t think I’d see anything like it again for quite some time.
Then along came Big Un Limited (ASX: BIG) which has totally blown Getswift out of the water. If Getswift was in deep shit, I think BIG is totally fucked. Totally. I think it is a zero and I think it never trades again. The latter statement is based on this little hint from the ASX:
I’ve seen maybe 30-40 suspensions at ASX’s pleasure (listing rule 17.3) but I’ve never seen those two little words. That’s the biggest clue that this is serious. You didn’t see those two words in the Getswift 17.3 suspension. Yet ASIC is inquiring here.
Even if you are still a believer in BIG, the simple fact that so much of this stuff was seemingly not released until the ASX forced them to is a huge red flag in itself, in my opinion.
Here is an abbreviated list of problems I spotted in yesterday’s announcement:
- Response #5: Customer substitution
It appears that First Class Capital (FCC) advances cash to BRTV to fund a video. If the customer is unhappy and doesn’t pay, BRTV can substitute another customer in without penalty. This is bizarre because this (and a couple of other things, below) says to me that FCC is not incentivized to care about the credit quality of the people they sponsor. This is because BRTV appears to carry all the risk of the customer defaulting:
Response #29: At any time that a Default Event continues (and has not been remedied by BRTV) ….FC may: …c) demand and recover any or all of the Secured Money from BRTV.
Response #30: If a Default Event occurs, BRTV must indemnify FC against any loss resulting directly from an Offer Amount…
Although, that doesn’t completely make sense because Response #27 says “As such, BRTV does not guarantee the repayment obligations of the Customers.”
I understand that to mean that BRTV doesn’t have to repay the 12 x $1000 monthly payments for customers – it just has to repay the Offer Amount ($12000). Which isn’t much of a difference.
Response #34 says: “where BRTV simply stops using the Sponsorship Pool, FC agrees that BRTV has no further obligations in relation to contracts with customers which have been the subject of Final Acceptance by the Customer.”
Do these obligations include BRTV’s obligation to indemnify losses? Where does the ultimate liability lie?
My confusion may be due to the pre- and post- acceptance phase from the customer. After the customer agrees to pay for the video, then collecting that seems to be FC Capital’s responsibility. Before that however, it appears to be BRTV’s issue. This is still a concern given most customers are in the pre-acceptance phase (more on this below).
So it is not certain what role FC Capital even plays – if BRTV carries all the risk, it should just extend credit to customers directly. However, that would have made its cash flows look really bad – paying the cost of creating the video up front and then only taking repayment over 12 months. BIG would also not have been able to grow revenues and cash receipts nearly so quickly.
As BRTV seems to be on the hook for repaying FC Capital, FC Capital has no real incentive to control its lending in my opinion – it can issue as much as it wants (up to $20m, subject to covenants) because BRTV will repay it and FC gets huge fees. In my opinion this is a very circular arrangement:
I think BRTV carries virtually all of the risk, given the security over its assets as well as the fact that most customers (for which cash has been advanced) are still in the pre-approval phase. FC Capital can refuse any customers it wants (cherry picking the risks) and if that happens BIG has to either come up with another customer or refund the Offer Amount plus a 24% commission.
In my opinion this is not a sponsorship, but an extremely expensive working capital loan. There is an additional concern about this arrangement:
No business willingly gives away a 24%(!) commission to their financier while simultaneously indemnifying their financier against losses. This to me signifies that BIG is desperate and that most of the power in the arrangement rests with FC Capital. I also think this means that the BRTV business is lower quality than was otherwise apparent, because it implies an inability to seek alternative sources of finance.
It is staggering that the payment terms have not been disclosed previously (as far as I know). In this light, I think BIG’s Response #15 “SME financing is broadly used and well understood in the market” appears disingenuous. It’s factually true, but I doubt SME financing on BRTV’s precise terms is widely used, if at all.
Given that FC Capital has security over all of BRTV’s property, it looks as though BRTV is basically borrowing against its assets (at 24%p.a.) in order to extend money to customers that then comes back through the front door as revenue and cash flow. FC Capital holds onto 65% of all monies and BRTV is apparently obligated to indemnify them, so FC Capital appears pretty unlikely to have to bear any losses.
In my opinion this is a concerning arrangement and smacks of desperation. Notably this is not recorded as a loan on the balance sheet, and I think that that has the general effect of overstating BIG’s financial position, the quality of earnings, and the amount of growth that has occurred.
It also seems unusual that FC Capital is only financing 35% of receivables, since it keeps 41% as security. Many debtor finance programs will offer 50%-80% of receivables or more. In the ASX announcement (p.39, Q25 (b) ), BIG said that $19.8 million is held as Security Deposits. This compares to ‘approximately $19 million’ of the Sponsorship pool that has been used. It is not clear why ~104% of the Sponsorship Pool is held as security, given the security deposit is supposed to be only 41%. I’m not sure if I understand this correctly, but why is BIG paying 24% per annum for an arrangement where its financier appears to have more than 100% collateral?
On a different topic, hypothetically speaking, if BRTV had no real customers using the FC Capital arrangement (and I am not saying that it doesn’t) then this would be a scheme to inflate revenues and cash flow. That is why some of the media reports of customers not being aware that they have open accounts are concerning.
Description of the First Class Capital deal:
In the original announcement in Dec 2015, the wording of the FC Capital deal doesn’t really explain the true nature of the arrangement, in my opinion. It indirectly hints at debtor finance, but it doesn’t even explicitly state that it is a debtor finance arrangement (where FC Capital extends credit to BRTV based on BRTV’s receivables from customers).
The use of the word ‘sponsorship’ of customers I think is materially misleading, especially in context of the terms which make the arrangement look a lot more like a working capital loan – not debtor finance – since FC Capital appears to advance cash before a paying customer is secured (more on this below).
To me this is another big red flag as the wording has (whether intentionally or unintentionally) significantly clouded the true nature of the arrangement, in my opinion.
Response #8: Videos add value to BIG even when customers don’t pay for them.
Even when customers don’t pay for their BIG videos, these videos have ‘material long term value’ because they populate the video review platform and content library. They make BIG’s platform look ‘lived in’, I get that. But how is BIG going to “develop strategies for using these assets to generate revenue” ? If the customer doesn’t like the video, they wont use it. In my opinion, it is hard to see who is going to subscribe to advertising videos of random restaurants.
Plus, given that the customer already paid for their videos, is BIG really going to ask them to pay some sort of annuity revenue for its continued use as well? Doubt it. Videos have a limited shelf life even when used in advertising. In my opinion, they are consumed and then after a while they are old.
Response #54, and #60 (Q.1-3): BIG did not correctly disclose the arrangement to issue discounted shares to FC Capital.
I think this is a red flag, administrative error or not. Given the terms of the financing I describe above, the subsequent decision to issue shares to FC Capital without proper disclosure is concerning, especially given it took a year to execute the agreement (during which time the value of the shares rose manyfold).
I thought the Tipsly acquisition was pretty concerning.
- Tipsly website registered in February 2017
- Deal negotiated in May 2017
- Tipsly LLC wasn’t registered until five months later on 20 October 2017 (to Tyler & Ryan O’Rear)
- Tipsly was acquired for 3m BIG shares at $0.60 plus another $2.4m in cash and scrip
- An additional 1.8 million (valued at over $3m at time of issue) BIG shares were paid to Thirty Three Affiliated Holdings, (of which Doug, Cydney, Tyler, & Ryan O’Rear are directors) in return for ‘services’. It’s not clear what this was for, nor what services were provided that weren’t already included in the Tipsly transaction.
- Until very recently there were videos on Youtube (via Brandon Evertz’ YouTube account) that showed Doug O’Rear at social events with (presumably?) the BIG CEO, suggesting a social connection:
The above videos were already hidden on YouTube. They were apparently embedded on the Big Review TV website using YouTube and you had to have the exact link to watch them. (They are now completely taken down).
I’ve been told that Big Un’s explanation for the timing of the LLC creation was that Tipsly was not set up for acquisition, but something about that does not sit right with me. I can’t think of a good reason why Tipsly would not already have its own LLC, especially since it was supposedly just about to launch when BIG offered them a deal.
Others have pointed out issues with the seeming quality of Tipsly’s tech:
— Fred McBill (@fmcbill) February 12, 2018
The first tranche of Tipsly was bought by $BIG for its sophisticated app. Tipsly app images are from iOS template Routes by Beans UI Goods in Sweden. https://t.co/oDvxdzVEUW pic.twitter.com/jP9WhqzpEk
— Fred McBill (@fmcbill) February 12, 2018
Who were the recipients of 3M $BIG shares issued on 22/01/18 for the acquisition of the “Tipsly Mobile Application Technology”? Market value at time of issue: $10m.
Tipsly app images are from a template available for $38.
No escrow according to 3B. Have they been sold already? pic.twitter.com/X6WXYQpOic
— Fred McBill (@fmcbill) February 20, 2018
If you look around the Tipsly site there’s certainly not much there. I have been checking for a while and I haven’t been able to find the app in either the Android or Apple store. (I don’t have an Apple or an Android device though, so if you check today and that has changed, please let me know).
Questions from the Second Aware Letter
This part appears to show a considerable amount of churn at BRTV’s customers. There are apparently minimum conversion ratios (that didn’t seem to be specified) to prevent BIG holding on to finance forever, but they do not appear to be a high threshold.
If I understand correctly, seemingly only around 1 in 5 customers (791 out of 3,518) that is presented with a video actually accepts it (accepts the agreement to pay FC Capital):
That suggests that BRTV has to do a lot of sales activity to win replacement customers, whatever they say about their pipeline. This part is even worse:
So $18 million of last quarter’s cash flows came from FC Capital for POTENTIAL CUSTOMERS. These are customers that have “not yet accepted a video but have not been declined…”. As we saw in the above table it looks as though only around 1 in 5 Potential Customers go on to become an Accepted Customer. This implies a significant contingent liability for BRTV in the event that it cannot find customers to replace them. To put it another way, if BRTV for some reason cannot replace customers, I think its cash flows could be something like 80% overstated (possibly even more, given that all cancellations seem to require full repayment, plus the 24% commission to FC Capital).
Another concern in my opinion is that the other $2.3 million cash receipts came from ‘pilot sponsorship programs’ in the USA. Remember how I said the FC Capital sponsorship program looks like an expensive working capital facility? I wonder if these two US sponsorship programs are established on similar terms.
If so, that would be a concern, in my opinion, because it could suggest that basically 90% of BIG’s cash receipts last quarter (There was a further $2m from general advertising) were from entities that are financing BRTV customers via BRTV basically borrowing against itself. Also, just under two thirds of BIG’s reported cash at bank is actually held in security by FC Capital.
I think it would be a grave cognitive error for an investor to attempt to rationalise or explain away this situation. If you are not concerned about the recent disclosures then, in my humble opinion, you really, really should be.
P.S. and if you got to the end of all that and you’re either a) asking WTF is going on or b) thinking that 10foot is an outrageous downramper with no grasp of what a good business looks like, ask yourself this simple question:
Why does BRTV have to borrow at 24% per annum to grow its business?
I have no, and have never had, any financial position whatsoever in any company mentioned, listed or unlisted. This is a disclosure and not a recommendation.