Customer-Sponsored Credit Enhancement Programs (Consignment and PMSI) and Payment Programs (Supply Chain Finance): Reducing Supplier A/R and Preference Risk, or Opening the Door for a Priority Fight? JERRY BAILEY jbailey@ncscredit.com RONALD A. CLIFFORD, ESQ. rclifford@blakeleyllp.com SCOTT E. BLAKELEY, ESQ. seb@blakeleyllp.com

Credit Enhancement Decision Tree

Two Required Elements 1. Security Agreement 2. Financing Statement or UCC-1 We’ll start with security agreements There are 2 critical elements to your UCC Filing: Security agreement, and the UCC-1 or financing statement. They’re synonymous The security agreement is where the customer grants the secured interest to you. The financing statement is the second part It makes the public record This is my “you can’t have one without the other slide” You can’t get a security agreement signed, and never file a financing statement and think you are secured, you’re not. Conversely, you can’t just file financing statements if you haven’t gotten a signed security agreement And just because you’ve gotten security agreement signed doesn’t mean you have to file it. We have clients that get them signed in every credit application, but they only file on accounts over a certain dollar amount 3

Sports Authority Pre-Bankruptcy Consignment Program First Day Hearing Judge approves GOB sales at 140 stores Consignment vendors seek to reclaim their goods 170 consignment vendors Approximately $84.8 million in consigned inventory 20% of TSA’s revenue Consignment Challenge TSA sells consigned inventory and proceeds to consignors TSA files 160 lawsuits against consignors, challenging their standing to have a senior right to inventory

Hancock Fabrics Pre-Bankruptcy Consignment Arrangement Chapter 11 Restructuring Plan 70 stores conduct GOB sales Consignment Challenge Debtor files adversary complaints against consignment vendors Part of bankruptcy estate Avoid interest on consignment goods

Family Christian Books Pre Bankruptcy Consignment Program Consignment program offered to all suppliers Chapter 11 Restructuring Plan Sale of stores to insider Consignment Challenge Consignment vendors filed objections to retain ownership of consigned inventory

Supply Chain Finance Stages The customer approves a vendor’s invoice and uploads to a supply chain finance platform Financial institution contacts the vendor to offer an earlier payment of the invoice in exchange for financing the receivable through its due date Financial institution purchases the vendor’s receivable from the customer at a discount Financial institution pays the vendor on the agreed upon date, Ex. 10 days from issuance of the invoice, instead of the customer-imposed term 75 days The customer pays the financial institution by the invoice due date

Vendor Strategy for Dealing with TPS