"What if" is a question that all contracts attempt to address?
In the case of royalty agreements the question is "what if the revenues achieved by the royalty issuer are significantly different than those projected by the royalty issuer seeking to induce the investor to buy the royalty"?
The REX Scaled Royalties approach facilitated by this website provides a means for the royalty issuer and the royalty investor to agree in advance as to the result of the projections being either too optimistic or too conservative. We have devised a carrot and stick approach of suggesting either a benefit for being conservative or a penalty for being too optimistic.
There are two variables to be addressed, the amount of disparity and period of time in which the achieved revenues differed from the projected revenues. In the latter case, we suggest the agreement as to the Selected Adjustment Period (SAP) which can be we recommend 3 years or any other period agreed by the parties. Actually, 3 years seems to us a reasonable SAP. The percentage of discrepancy can be any percentage agreed, but we suggest 140% and 75% of the projected revenues as being reasonable definitions of Plus and Minus.
Therefore, if the revenues are 140% of the projected revenues in the SAP the terms of the royalty will be changed in favor of the royalty issuer as agreed by the parties. If the revenues are disappointing as much as 25% in the SAP the royalty will be extended, making the royalty more costly to the issuer and more valuable to the investor.We suggest decreasing the royalty rate to 75% of that originally agreed in the case of a Plus situation. In the case of a Minus situation the calculator will display the amount of the shortfall in royalty payments which can be addressed by the royalty issuer giving the royalty investor a "Make-Up" note or by extending the maturity of the royalty as agreed by the parties. The possibilities are too varied and complex to be anticipated so all that we do is indicate the amount of difference between that paid and anticipated.
Although, we believe that one of the important benefits of royalties is that predicting revenues is easier than predicting Earnings Per Share, as is necessary in successful equity investing, revenues can be different than anticipated and Scaled Royalties addresses this possibility.
Predicting revenue trends is easier for many of us than guessing at future levels of per share earnings, due to both possible equity dilution and profit margin maintenance. However, the revenues projected by those wishing to sell royalties can also be overly optimistic. and we wanted to create a royalty term basis which rewarded the royalty issuer making and exceeding conservative revenue projections and applying a deterent for those issuers making revenue projections which were materially overstated and unachieved.