Collection House : Appendix 4D - Half Year Accounts

For personal use only

Collection House Limited

Licensed Commercial Agent

ABN 74 010 230 716

Level 12

100 Skyring Terrace

Newstead QLD 4006

GPO Box 2247

Fortitude Valley BC QLD 4006

Telephone [phone]

Facsimile 61 7 3832 0222

www.collectionhouse.com.au

Collection House Limited ABN 74 010 230 716

ASX half-year report for the period ended 31 December 2021

Lodged with the ASX under listing Rule 4.2A

Contents	Page
Results for announcement to the market	2
Directors' report	3
Auditor's independence declaration	9
Income statement	10
Statement of comprehensive income	11
Balance sheet	12
Statement of changes in equity	13
Statement of cash flows	14
Notes to the financial statements	15
Directors' declaration	28
Independent auditor's review report to the members	29

For personal use only

Collection House Limited

Appendix 4D

Reporting Period: half-year ended 31 December 2021

Previous corresponding period: half-year ended 31 December 2020

Results for announcement to the market

			Percentage
All comparisons to half-year ended 31 December 2020	$'000	Up/down	change
Revenue from ordinary activities	26,477	down	(42.7%)
Loss from continuing activities after tax attributable to members	(63,703)	down	(570.3%)
Net loss for the period attributable to members	(63,703)	down	(570.3%)
Net loss before tax for the half-year	(13,217)	up	4.1%
Loss per share (cents)	(44.9)	down	(570.3%)

Dividends

No dividend has been paid or declared for the half-years ended 31 December 2021 and 31 December 2020.

Explanation of results

Refer to accompanying Director's Report and Financial Statements for commentary on the above results.

Net tangible assets

	31 Dec 2021	30 Jun 2021
Net tangible asset backing per ordinary share	(37.09)	(28.30)

Collection House Limited 2022 | Appendix 4D & Half-year report 2

For personal use only

Directors' Report

for the half-year ended 31 December 2021

The Directors present their report on the consolidated entity (referred to hereafter as the Company or the Group) consisting of Collection House Limited and the entities it controlled for the half-year ended 31 December 2021.

Directors

The following persons were Directors of the Group during the whole of the financial period and up to the date of this report, unless stated otherwise:

• Leigh Berkley - Chairman
• Sandra Birkensleigh
• Catherine McDowell
• Michael Knox (resigned 22 November 2021)

Principal activities and Key Changes

The Group provides debt collection and receivables management services from offices in Australia, New Zealand, and the Philippines, and has two reportable segments: Collection Services and Purchased Debt Ledgers (PDLs). The previous corresponding period includes a significant profit contribution from the Company's PDL segment. In line with actions arising from a strategic review which commenced in November 2019, the majority of the Company's PDLs were disposed in December 2020, the proceeds of which were applied in debt reduction.

During the six months to 31 December 2021, the transformation of the Company's operating model and capital structure continued, amidst difficult trading conditions. Notwithstanding, the Company pursued a range of initiatives which will see it better positioned to deliver on its customer focussed service strategy. Of particular importance, is the significant recapitalisation transaction ("Recapitalisation") which was entered into after half-year end and described in more detail below. When completed, that Recapitalisation will accelerate achievement of the above strategic objectives and provide a stable capital structure for the Company moving forward.

A challenging operating period

The Company's operating performance for the period was disappointing, with little improvement from the previous six- month period. General levels of activity in the receivables management sector over the last six months remained depressed, as clients continued to implement conservative customer engagement strategies in response to the longer than anticipated COVID-19 impacts, with revenue remaining significantly lower than pre-COVID levels.

Key aspects of Company's performance over the period are:

• Before tax loss consistent with previous six-month trading performance, with an expectation of improved performance as COVID-19 collection restrictions are relaxed;
• A material one-off,non-recurring, deferred tax adjustment reflecting a more conservative position adopted in respect of the accounting for the Company's substantial carried forward tax loss position;
• Further cost control initiatives implemented during the period, and a recognition that further action is required to accelerate return to profitability; and
• Short term net asset position improved upon completion of the Recapitalisation and the Company being substantially debt-free.

The Company is cautiously optimistic of customer referral volumes gradually returning to pre-COVID activity levels over the coming months. The Company will also benefit from activity commencing on new client service arrangements secured over the last six months, which are anticipated to generate referral volumes over coming months.

The Company evaluated and bid on a number of debt purchasing opportunities during the period, but prices, particularly in Australia have remained at prohibitively high levels. Until more sustainable market conditions return to the purchased debt market, the Company will continue to evaluate opportunities and proceed cautiously. The Company continues to pursue a co-investment approach to purchased debt assets, which will see it invest a substantially lower level of the Group's capital and generate a higher return on equity.

The Group's $13.2 million loss before tax for the six months to 31 December 2021 is consistent with the Company's performance in the previous six months and reflective of little improvement in general market conditions. CLH is confident that with a return to pre-COVID-19 customer referral volumes and further reduction to fixed overhead costs, the Company can return to sustainable profitability. That half-year loss is exacerbated by a one-off,non-cash charge to income tax expense of $49.7 million, arising from the decision to derecognise the Group's carried forward tax losses.

In light of continued difficult trading conditions and a slower COVID-19 recovery timeline than originally anticipated, accounting rules required the Company to reassess the level of tax losses carried forward as deferred tax assets on the Company's balance sheet. This more conservative commercial outlook has required these deferred tax assets to be derecognised in the half-year results, with the associated charge taken through current period income tax expense ($49.7 million) and other comprehensive income ($1.5 million). Although derecognised as a tax asset, the Company retains access to carried forward tax losses of $58.3 million and remains confident that the losses will be used to shelter taxable income over coming financial periods.

Collection House Limited 2022 | Appendix 4D & Half-year report 3

For personal use only

Directors' Report

for the half-year ended 31 December 2021

Outlook

As announced on 23 February 2022, the Company has entered into a series of transactions which will provide it with additional working capital and when completed results in the Company being substantially debt-free.

CLH has retained its best-in-class capabilities of people, systems, and processes, allowing it to provide end-to-end receivables management services to clients and customers under either contingent collections or purchased debt frameworks. The Company has simultaneously reduced its overhead cost structure and embraced a more agile approach that is expected to create significantly improved productivity and a return to profitability over the coming months.

The Directors are conscious that urgent revenue improvement and tight cost control remain of paramount importance. Employment and overhead costs had already been substantially reduced when compared with the prior period but are subject to ongoing review. Further adjustments to the Company's direct cost structure will be required in conjunction with ongoing business development and revenue improvement initiatives over the coming six-month period. Given the longer than anticipated impacts from COVID-19, further cost reduction initiatives are also being implemented over the next few months, in the areas of technology, occupancy and corporate costs. The Company continues to carefully manage its working capital and liquidity while the short-term operating outlook remains challenging.

Despite these continuing constrained trading conditions, client relationships remain strong, and the Company is advanced in securing a number of significant new client opportunities which will result in an improvement in underlying revenue as market conditions stabilise. The market has responded positively to the Company's transformation initiatives and customer experience focus, and it is experiencing a high level of client engagement as we explore how we can serve our clients and customers better

The Directors recognise and appreciate the ongoing commitment and contribution of management, staff, and the Company's advisors toward achievement of Collection House's revised purpose and strategy.

Key Risks

Key risks to the Company's outlook and strategy are:

• Continuing sustained impacts of COVID-19 on general growth in the credit sector and limitations on efficiently conducting customer engagement to drive collection activity.
• Changes to regulations governing collection activities or breaching compliance obligations.
• Failure to retain existing or acquire new Collection Services clients.
• Due to current market conditions, inadequate supply of purchased debt at acceptable prices to create a sustainable PDL pipeline.
• Disruption to systems and operation due to cyber-attack or privacy breaches.
• Failure to maintain appropriate level of investment in information systems to improve customer experience; and
• Failure to attract and retain talent in a challenging and changing market.

The Audit and Risk Management Committee provides Board oversight to the management of risk mitigation strategies that are implemented for the Group.

Overview of Group operations and financial results

	31 Dec 2021	31 Dec 2020	Percentage
	$'000	$'000	change
Revenue	26,477	46,227	(42.7)
Net Loss after tax for the half-year	(63,703)	(9,503)	(570.3)
Underlying net loss before tax for the half-year	(12,228)	(2,246)	(444.4)
Loss per share	(44.9)	(6.7)	(570.3)

Key elements of the result were:

• Total revenue $26.5 million was down on the previous period reflecting the reduced contribution from Australian purchased debt ledger assets which were disposed of in December 2020. In the half to 31 December 2020, those assets contributed revenue of $13.5 million.
• An underlying net loss before tax of $12.2 million (31 Dec 2020: NLBT of $2.2 million) reflecting continued challenging trading conditions in the collection services segment.
• Consolidated Net Loss after Tax (NLAT) of $63.7 million (31 Dec 2020: NLAT of $9.5 million).
• A reassessment of the Group's recognised deferred tax asset position with a charge of $49.7 million brought to account through tax expense and $1.5 million through other comprehensive income
• Loss per share of 44.9 cents (31 Dec 2020: Loss per share 6.7 cents).
• Closing gross assets of $69.7 million (30 Jun 2021: $145.9 million) and net liabilities of $25.4 million (31 Jun 2021: $39.7 million).

Collection House Limited 2022 | Appendix 4D & Half-year report 4

For personal use only

Directors' Report

for the half-year ended 31 December 2021

The Group is reporting a Net Loss after tax of $63.7 million for the half-year ended 31 December 2021 with the underlying operating loss for the half-year being $12.2 million. The Net Loss Before Tax ($13.2m) is adjusted for Right- of-use impairment ($0.9m) and restructuring expenses ($0.1m) to arrive at the underlying loss.

Collection Services revenue was down $6.7 million (-23%) on the previous corresponding period largely in line with reduced referral volumes arising from the sustained COVID-19 pandemic. Importantly, the Group expects natural improvements to the Collection Services revenue as restrictions ease and client referral levels return to more stable levels. Revenue from the Group's investment in PDL assets (predominately New Zealand based) was in line with expectations.

As at 31 December 2021, net cash on hand was $1.9 million (30 Jun 2021: $7.3 million) with total senior debt of $54.8

million (30 Jun 2021: $51.1 million). After half-year end, and described more comprehensively below, the Company entered into a series of transactions which will see it become debt free by 30 June 2022.

As a consequence of the sale of the majority of the Group's purchased debt assets in December 2020 and subsequent operating losses, the Group has net tax losses of $58.3 million (30 Jun 2021: $65.8 million). In line with the requirements of applicable accounting standards which impose a much more conservative outlook for the recognition of forecast profitability, the Directors have re-evaluated the portion of those losses which meet the criteria for ongoing recognition as a deferred tax asset given the longer than expected impact of COVID-19 and the continued difficult trading conditions. As a result, deferred tax assets of $51.2 million have been derecognised during the period. Notwithstanding, the Company continues to have access to $58.3 million of tax losses available to offset the Group's future taxable income.

Largely as a result of the above deferred tax asset derecognition, the Group has net liabilities of $25.4 million (30 Jun 2020: net assets of $39.7 million), as well as a current ratio of 0.6 (30 Jun 2021: 1.1) and a net gearing ratio of 186% (30 Jun 2021: 61%). The above metrics are materially altered by the subsequent transaction described more comprehensively below - see table below which on a proforma basis reflects the 31 December 2021 balances as notionally adjusted by the subsequent transaction.

	Selected 31 December 2021
	items proforma adjusted for
	Subsequent Transaction
	31 Dec 2021	31 Dec 2021
	Adjusted	Reported
	$'000	$'000
Cash	11,400	1,924
PDL Assets	173	11,585
Borrowings	6,000	54,849
Net Assets/(Liabilities)	23.9	(25.4)

Collection House Limited 2022 | Appendix 4D & Half-year report 5