Interim Results for the 6 months ended 31 Dec 2020

4 March 2021

ThinkSmart Limited

("ThinkSmart" or the "Company" which together with its subsidiaries is the "Group")

Interim Results for the six month period ended 31 December 2020

Clearpay holding revaluation drives 237% profit uplift to £53.7m

ThinkSmart Limited (AIM: TSL), the specialist digital payments business with a 10%(1) equity shareholding in Clearpay Finance Ltd ("Clearpay"), today announces its Interim Results for the six months ended 31 December 2020 (the "period" or "H1 2021").

Highlights

Clearpay shareholding revaluation continues to drive material value

Clearpay trading performance for the six months ended 31 December 2020

Figures are as announced to the Australian Stock Exchange by Afterpay Ltd on Thursday 25 February 2021 in its half year results to 31 December 2020 and the following is extracted from that announcement. All currency figures are in Australian dollars unless otherwise stated. Clearpay is 90% owned by Afterpay.

Managed wind down of legacy operations continues to generate positive cash flow

Commenting on the results, Ned Montarello, Executive Chairman of ThinkSmart, said:

"The value of our shareholding in Clearpay is underpinned by the rapid consumer acceptance and subsequent compelling growth of the Buy Now Pay Later market coupled with the trading performance of Clearpay. Clearpay's trading in the period has been outstanding, and it has continued to accelerate rapidly. Importantly, Clearpay continues to grow within Afterpay, reflecting its increasing importance to Afterpay's group-wide metrics.

"Our investment in Clearpay has now generated over £116 million of profit for shareholders, with further upside potential for our retained stake from Clearpay's ongoing progress. Our agreement with Afterpay provides shareholders with a clear and agreed legal mechanism for realisation of the value of our Clearpay holding in 2023/24.

"While our strategic efforts are focused on further value creation for shareholders via our holding in Clearpay, the managed wind down of our legacy operations continues to generate positive cash flow as we control costs while rightsizing the operations to lower volumes. This leaves our balance sheet robust. There is inherent, tangible value within our proprietary payments technology and we are continuing to consider how best to optimise the value of this asset. 

"Ultimately, the Company is well placed to continue accruing material value for our shareholders, subject to Clearpay's ongoing progress, and we thank them for their ongoing support of the strategy."

For further information please contact:

(1) A proportion of the 10% retained shareholding (up to 3.5% of the total share capital of Clearpay) will be made available to employees of Clearpay under an employee share ownership plan.

(2) The Group engaged a third party global professional services firm to independently value its retained shareholding in Clearpay at 31 December 2020 for accounting purposes under AASB 9 in accordance with AASB 13 (Fair Value Measurement). This valuation has been undertaken based on publicly available information, reflecting the Afterpay call option (exercisable from 23 August 2023) and ThinkSmart put option (exercisable from 23 February 2024) and including a discount for the lack of marketability of Clearpay as a privately owned company, and has produced a range of values for the Group's 10%(1) shareholding in Clearpay from which the Group has taken at two thirds of the range. Under either the call or put option, the sale of the 10%(1) shareholding in Clearpay to Afterpay will be at a price calculated on agreed valuation principles at the time. Further detail is provided in Note 10(i) to the 31 December 2020 Group interim financial report below.

Notes to Editors

About ThinkSmart Limited

ThinkSmart is a specialist digital payments platform business. It offers investors unique exposure to the UK 'Buy Now Pay Later' payments sector which is undergoing exponential growth, driven by ongoing digital transformation of consumer shopping habits and financial services. 

This announcement contains inside information for the purposes of article 7 of the Market Abuse Regulation (EU) 596/2014 as amended by regulation 11 of the Market Abuse (Amendment) (EU Exit) Regulations 2019/310. With the publication of this announcement, this information is now considered to be in the public domain.

Chairman's Statement

Clearpay Drives Significant Value for Shareholders

Our six month period to 31 December 2020 has been beneficial for our shareholders. Our business was founded on a deeply entrepreneurial mindset and culture, always ready to move quickly, in particular in relation to how digital transformation has and continues to reshape consumer behaviour in the core retail markets and the way in which retailers have needed to adapt their offerings to stay relevant. Accordingly, in 2017/18 we developed and launched Clearpay in the UK, taking first mover advantage in the nascent 'Buy Now, Pay Later' market. Our decision in 2018 to sell 90% of Clearpay to Australian listed Afterpay, a highly capitalised, well-funded global financial technology business, has delivered - and I'm confident will continue to deliver - material value for shareholders.

Our results for the half year reflect record profitability, with profit after tax of £53.7m, driven by the revaluation gains attributable to our remaining 10%(1) holding in Clearpay as a result of the exceptional underlying performance of that business. Our Net Asset Value stood at £116.6 million at the period end, or 109.44 pence per share. On a per share basis this is an uplift of 82 pence per share in the last 12 months, in addition to the 3.4 pence per share capital return and special dividend paid to shareholders in December 2020. All in all, the sale of 90% of the Clearpay business and our retained 10%(1) shareholding has now generated cumulative profit of £116.7 million (including £106.5(2) million of non-cash fair value gains), with the 10%(1) stake offering further upside potential subject to the performance of Clearpay.

As part of the agreement with Afterpay, made at the time of the Clearpay sale, there is a put/call option mechanism which gives an agreed, clear legal mechanism to a realisation of the stake in 2023/24. The price will be calculated on agreed principles based on market valuations at that time. These principles are reflected in the carrying valuation of the asset on our balance sheet.

The Board has consistently sought to return capital to shareholders where appropriate and is mindful of maintaining a prudent level of cash reserves in the business. In line with this, the business paid a special dividend and capital return of A$6.5 million (6.1 cents per share), equivalent to £3.7 million (3.4 pence per share), in December 2020.

Turning to our legacy retail consumer and business finance offerings, shareholders will be aware that this has been in managed wind-down, reflecting our strategic focus on delivering value to holders via the Clearpay asset, together with providing the outsourced call centre customer support service for Clearpay. As announced on 10 August 2020 we reached a settlement with Carphone Warehouse for £1.45 million and as a result have now ceased writing any new business. We are managing the wind-down by adjusting the cost base accordingly and are continuing to deliver net positive cash flows. Therefore, we expect our cash reserves to continue to build over the next few years.

We do see tangible value, however, in the investment made in our proprietary, highly robust credit origination and decision engine, SmartCheck, which powers point-of-sale lease finance payments solutions. The Board will continue to consider how best to optimise the value of this asset.

The Group has a robust financial position, with net cash of £6.9 million at 31 December 2020 (after the payment of £3.7 million special dividend/capital return in December 2020 and including receipt of the £1.45 million settlement amount in August 2020).

I'm very pleased to be reporting this level of value accretion to our shareholders.

Operating Business Performance

As expected, leasing volumes fell 62% to £0.5 million (H1 2020: £1.3 million) in the period, and we expect this volume reduction to continue as we manage the division's wind down. Revenues were consequently 27% lower for the period at £2.4 million (H1 FY20: £3.3 million) as the lower volumes in the period are partially offset by the majority of revenue for the period being derived from higher volumes in previous years.

As announced on 10 August 2020, ThinkSmart reached a settlement agreement of £1.45 million in relation to the legal proceedings issued by the Group against Carphone Warehouse. As part of the settlement, the Group has agreed with Dixons Carphone ("DC") to the orderly winding up of all of its agreements with DC including Flexible Leasing, SmartPlan and Upgrade Anytime. In the period to 31 December 2020, all of ThinkSmart's new business volumes were generated from its existing agreements with DC. The Group will continue to service its existing customer base ensuring the fair treatment of customers, along with any new volumes generated during the orderly winding up of the three products and will continue to benefit from cash generation in the meantime.

The Group continues to have a good mix of consumer and business customers, in addition to being diversified by region and demography. The quality of the Group's underwriting procedures, as well as the small value of debt per customer and its high-quality credit customer portfolio, continues to mitigate the risk to any adverse impact on its existing customers' financial positions. As at 31 December 2020, lease receivables under management were £4.5 million, with approximately 9,800 active customer contracts.

Operating costs decreased further to £1.8 million (H1 2020: £2.2 million) over the period and remain controlled, aligned to the volume performance of the division.

Group Financial Position

The Group's 10%(1) holding in Clearpay Finance Limited was revalued to £106.6(2) million at 31 December 2020 (FY 2020: £53.7 million). An asset valuation exercise was performed by an independent third-party valuer, a leading global professional services firm. The sale of the Group's holding is subject to a put/call arrangement with Afterpay in 2023/24, based on agreed valuation principles using the same valuation metrics, multiples and methodologies, including those used by market participants and with regard to sell-side analysts, to value the Clearpay business within the Afterpay listed group. These valuation principles are the same principles that the independent third-party valuer used to determine the £106.6(2) million valuation of the Group's 10%(1) stake in Clearpay as at 31 December 2020.

The Group held cash and cash equivalents of £6.9 million at 31 December 2020, after the £3.7 million payment of the special dividend/capital return in December 2019 and including receipt of the £1.45 million settlement amount in August 2020. This is down from £8.8m at 30 June 2020.

Current Trading Update

ThinkSmart anticipates its cash reserves will continue to build over the next few years, as the Group's operating division continues to service its existing customer base alongside any potential new volumes generated during the orderly winding up of its existing agreements. ThinkSmart also provides an outsourced call centre customer support service for Clearpay. As announced in August 2020, following the settlement agreement with DC, the Group has now ceased writing any new business.

Looking ahead, the business is well positioned to further benefit from future growth in the value of its shareholding in Clearpay subject to the ongoing performance of Clearpay, and therefore to continue creating material value for shareholders.

Key Performance Indicators:

The following results have been extracted from the interim financial statements

Consolidated Statement of Profit or Loss and Other Comprehensive Income

for the six months ended 31 December 2020

The attached notes form an integral part of these consolidated financial statements.

Consolidated Statement of Financial Position

as at 31 December 2020

The attached notes form an integral part of these consolidated financial statements.

Consolidated Statement of Changes in Equity

for the six months ended 31 December 2020

The attached notes form an integral part of these consolidated financial statements.

Consolidated Statement of Cash Flows

for the six months ended 31 December 2020

The attached notes form an integral part of these consolidated financial statements.

1. General Information

ThinkSmart Limited (the "Company" or "ThinkSmart") is a limited liability company incorporated in Australia. These consolidated interim financial statements ("interim financial statements") as at and for the six months ended 31 December 2020 comprise the Company and its subsidiaries (the "Group"). The Group is a for profit entity and its principal activity during the period was the provision of lease and rental financing services in the UK. The consolidated annual financial statements of the Group as and for the year ended 30 June 2020 are available upon request from the Company's registered offices at Suite 5, 531 Hay Street Subiaco, West Perth, WA 6008 or at www.thinksmartworld.com.

2. Basis of Preparation

(a) Statement of compliance

The Company is listed on the Alternative Investment Market ("AIM"), a market of the London Stock Exchange. The financial information has been prepared in accordance with the AIM Rules for Companies and in accordance with this basis of preparation, including the significant accounting policies set out below. The interim results are unaudited but have been reviewed by the auditors and their review statement is on page 21.

The consolidated financial statements are general purpose financial statements which have been prepared and approved by the Directors in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (AASB) adopted by the International Accounting Standards Board (AASB) as well as International Financial Reporting Standards as adopted by the EU (''Adopted AASBs'').

The consolidated financial statements were authorised for issue by the Board of Directors on 3 March 2021.

This interim report does not include all the notes of the type normally included in annual financial statements. Accordingly, these statements should be read in conjunction with the most recent annual financial report, but additional notes have been included where such notes are deemed relevant to the understanding of the half-year financial report.

(b) Basis of measurement

The financial report has been prepared on the basis of historical cost, except for financial instruments measured at fair value. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in British Pounds ("GBP") unless otherwise noted.

(c) Functional and presentation currency

These consolidated financial statements are presented in British Pounds, which is the Group's functional currency. The Group is of a kind referred to in ASIC Corporations (Rounding in Financial/ Directors' Reports) Instrument 2016/191b and in accordance with that instrument, amounts in the consolidated financial statements and directors' report have been rounded off to the nearest thousand pounds, unless otherwise stated.

(d) Going Concern

The consolidated interim financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group has the resources to continue in business for the foreseeable future (which has been taken as 12 months from the date of approval of these consolidated interim financial statements). In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including the current state of the statement of financial position, future projections of profitability, cash flows and resources and the longer term strategy of the business. The Directors have assessed the impact of COVID-19 on the current and forecast position of the Group. As the Group has only been minimally impacted the Directors are satisfied that the Group has more than adequate resources to meet its liabilities as they fall due even when stressed to reasonable worst case scenarios.

3. Significant accounting policies

The accounting policies applied by the consolidated entity in this interim financial report are consistent with those disclosed in the consolidated annual financial report for the year ended 30 June 2020 other than as detailed below.

New accounting policies adopted in the financial year

The Group has adopted all new or amended Australian Accounting Standards that are mandatory for adoption in the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted.

4. Critical accounting estimates and judgements

The preparation of interim financial reports requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing the consolidated interim financial report, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those disclosed in the consolidated annual financial report for the year ended 30 June 2020.

5. Financial risk management

The consolidated entity's financial risk management objectives and policies are consistent with those disclosed in the consolidated annual financial report for the year ended 30 June 2020.

6. Consolidated Statement of Profit or Loss

In the period to 31 December 2020 unrealised gains arose from the revaluation of the Group's investment in 10% of ClearPay Finance Limited (see note 10(i)). In the period to 31 December 2019 realised gains arose on disposal of the remaining holding of 125,000 shares in APT at a share price of AUD $27.73 per share. Unrealised gains arose from the revaluation of the Group's investment in 10% of ClearPay Finance Limited (see note 10(i)). These amounts are shown above.

In the period to 31 December 2020 other gains arose on the settlement of legal claims against Carphone Warehouse as announced on 10 August 2020. 

7. Income tax expense

The consolidated entity's consolidated effective tax rate in respect of continuing operations for the six months ended 31 December 2020 was 0.02% (31 December 2019: 0.22%).

8. Finance lease receivables

9. Other current assets

10. Financial assets at fair value through profit or loss

11. Contract assets

11. Contract assets (continued)

(i) A contract asset is recognised where the Group act as agent for the lessor (STB) during the minimum lease term and have a contractual right to the inertia asset at the end of the minimum lease term. Contract assets are recognised as revenue accruing over the minimum lease term building up inertia asset (non-cash consideration) over the minimum lease term.

(ii) Customer acquisition costs are capitalised as an asset where such costs are incremental to obtaining a contract between the funder and the end customer, for which the Group receives commission under the funder contract, and are expected to be recovered. Customer acquisition costs are amortised on a straight line basis over the term of the contract.

12. Other non-current assets

13. Plant and Equipment

14. Intangible Assets

15. Trade, other payables and provisions

16. Lease liabilities

16. Lease liabilities (continued)

17. Contract liabilities

18. Issued capital

19. Commitments and contingent liabilities

Under the terms of the UK current funding agreement with Secure Trust Bank (STB), the Group is obliged to purchase delinquent leases (contracts in arrears for 91 days) from the funder at the funded amount. The Group has entered into a financial guarantee contract with STB for which the Group has provided a deposit to support future delinquent leases.

The deposit held by funders is recognised as an asset on the Group's statement of financial position within other non-current assets (see note 12).

20. Fair value of financial instruments

The carrying amounts of financial assets and financial liabilities recorded in the financial statements are not materially different to their fair values.

Fair value hierarchy

The financial instruments carried at fair value have been classified by valuation method.

The different levels have been defined as follows:

- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

- Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)

- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

Key assumptions in the valuation of the instruments were limited to interpolating interest rates for certain future periods where there was no observable market data. The majority of the financial instruments are measured at amortised cost. At 31 December 2020 the Group held one financial instrument at fair value through profit or loss:

· 10% holding in ClearPay Finance Limited with a fair value of £106,600,000 (2019: £16,453,125). The holding in Clearpay is a Level 3 financial instrument. See Note 10(i).

21. Segmental information

The Group currently has one reportable segment which comprise the Group's core business unit (UK). Head office and other unallocated corporate functions are shown separately. For the segment, the Board and the CEO review internal management reports on a monthly basis. The composition of the reportable segment is as follows:

UK:

- ThinkSmart Europe Ltd

- RentSmart Ltd

- ThinkSmart Insurance Services Administration Ltd

- ThinkSmart Financial Services Ltd

- ThinkSmart UK Ltd

Corporate and unallocated:

- ThinkSmart Limited

- ThinkSmart Finance Group Limited

- ThinkSmart Inc

22. Related party disclosures

As at 31 December 2020 the following were Key Management Personnel of the Group:

Executive Chairman

N Montarello

Executive Directors

G Halton (Chief Financial Officer)

Non-Executive Directors

P Gammell

D Adams

R McDowell (resigned 11 November 2020)

22. Related party disclosures (continued)

The Key Management Personnel remuneration included in 'employee benefits expense' in Note 6(e) is as follows:

23. Events occurring after the reporting date

There has not arisen, in the interval between the end of the financial period and the date of this report, any other item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years.

24. Earnings per share