Distrib. Fin. Regulatory News (DFCH)

Distribution Finance Capital Holdings plc

("DFC Holdings" or together with its subsidiary "DFC Ltd", "DFC" or the "Company")

Interim Results for the six months to June 2019

DFC is pleased to announce its half year results for the 6 months ending 30 June 2019. Assets rose 48% to £168m (December 2018: £114m), with gross income up 181% to £5.8m compared to the six months to June 2018 (£1.9m). Losses before tax were £7.3m, which included £3.3m of costs related to the demerger from TruFin Plc and IPO.

Overall performance across the business has been in line with expectations, and DFC continues to have a strong pipeline with 66 manufacturers now signed at the end of June (December 2018: 45), and over £290m of credit lines extended to UK SMEs (December 2018: £200m). During the first half of 2019 we have signed several large manufacturers in the motorcycle and motorhome spaces and are seeing increasing traction with larger players at both a manufacturer and distributor level as our brand becomes increasingly well established.

Chris Dailey, CEO of DFC commenting on the results said: "The first 6 months of the year have seen the business continue to scale in line with our plans, and these results represent a particularly strong performance given the competing demands on the DFC team as we completed the demerger and IPO and progressed our bank licence application."

Outlook

While there is clearly uncertainty in the wider economic environment given the continuing questions around the UK's exit from the EU, we have as yet seen little impact, with retail sales from our funded dealers ahead of expectations in August and overall lending volumes coming through for September running ahead of plan. It is clearly difficult to predict the outcome and any impact but given the diverse range of industries DFC funds and the mix of products we believe we are well positioned to meet any challenges.

Our bank licence application, as confirmed in early August, has now been resubmitted. We have had good dialogue with the regulators and in line with our previous guidance the Board expects to launch the bank during Q4 2019.

We continue to see significant opportunities in the SME market where current funders are unable or unwilling to provide the right type of lending to businesses. Whilst our recent focus has been to support the growth in our existing businesses and on the bank licence process, the Board has also continued to develop its thinking so that as we look into the first half of 2020 we will be well positioned to accelerate our growth by delivering innovative lending products which expand the choice available for our customers.

Enquiries

Forward looking statements

This document contains forward looking statements with respect to the business, strategy and plans of the company and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about DFC or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. DFC's actual future results may differ materially from the results expressed or implied in these forward-looking statements as a result of a variety of factors. These include UK domestic and global economy and business conditions, risks concerning borrower credit quality, market related risks including interest rate risk, inherent risks regarding market conditions and similar contingencies outside DFC's control, any adverse experience in inherent operational risks, any unexpected developments in regulation or regulatory and other factors.

Interim Financial Report

For the six month period ended 30 June 2019

Chairman's Statement

As Chairman of Distribution Finance Capital (referred to as "DFC", the "Group", the "Company" and "we"), it is very pleasing to see how the business has continued to evolve and grow over the past 6 months. It has been a busy period, with our demerger and separate listing on the AIM market in May, a transaction which was done in under 3 months and successfully provided the basis for us to progress our bank licence application, although we were unable to complete the final stages required within the statutory timeline. Following the withdrawal of our application at the start of June, we re-submitted in early August and we remain confident that with the required changes made we will be in a position to complete the licencing process during Q4 of this year and launch to market with a range of deposit products.

Of course the work needed to execute on the demerger and listing, and to complete the licence application, caused considerable disruption to the business. Despite this it is a significant achievement that we continued to operate the core lending activity very much in line with plan, with assets vs. the year end up 48% at £168 million, which was ahead of plan.

Maintaining Strong Governance

I would like to take this opportunity to thank David Bateman, who stepped down from the Board at listing, for all his support. He was instrumental in the early stages of DFC's set up and he's provided great advice and support over the last couple of years. At the same time, I am happy to welcome James van den Bergh to the Board, who I'm sure will provide the same level of commitment and insight into the future.

DFC has operated with a high degree of governance over the past 18 months in anticipation of becoming a bank. Since early 2018 the Board has had a majority of independent directors and in line with any UK bank we have run a range of governance committees at both a Board and Executive Level. I would like to thank both Mark Stephens (Chair of REMCO, NOMCO and Board Risk) and Carole Machell (Chair of Board Audit) in particular for their support over the past 6 months as the listing process resulted in a considerable amount of work and review by all the key governance committees of the business. The whole Board has demonstrated great commitment and reacted with vigour to the challenges of the last 6 months.

At executive level we are very lucky to have Chris Dailey at the head of an excellent executive management team and he and they deserve the credit for a great performance and indeed staff commitment and capability at all levels has been exemplary. Nevertheless, we have further strengthened the business with additional hires into key positions including a General Counsel. We fully anticipate being a listed bank by the end of the year and are confident we have the framework and resources in place to meet the best standards of corporate governance, risk management and controls which you would expect.  

Outlook

Our first half performance is testament to the strength and depth we have built across the business in terms of people and the value of our proposition in the market. Customer growth in particular has been very encouraging, proving, as we move into our second full year of operation, the underlying value of the proposition. 

While clearly there is some uncertainty in certain sectors of the market given the broader macro-economic situation, but as yet we have not seen any significant changes to customer behaviour. Our model is deliberately designed to operate across different industry sectors, which will allow us to rebalance our business quickly should the need arise.

Looking at where we have come from in such a short time, I look forward with great confidence to leading a highly capable entrepreneurial team at both a board and executive level. There are considerable opportunities to accelerate our growth and build on the very solid and impressive foundations we have laid down.

Chief Executive's Statement

From an idea and a start in June 2016 with just 2 people, a lending pilot launch in mid 2017 which grew to £30m of assets at the end of 2017 to now a stand-alone listed lending business with over 70 people, 66 manufacturers signed up and over £290m of credit lines extended to SMEs it has been an amazing journey so far. DFC has established itself over the past 3 years and the first half of 2019 has seen the business start to reach real maturity. I am honoured to have led the business as we have gone on this journey and am excited by the future we have ahead of us.

Clearly the most significant development in the first half of the year has been the demerger from TruFin Plc. TruFin Plc was an excellent owner, and I would like to take this opportunity to thank Henry Kenner in particular for his support, and I'm delighted he has agreed to remain on the Board where he can continue to provide insight and a broader strategic view which has been invaluable to me and the team over the past 3 years. The demerger, while earlier than planned, has given DFC a firm footing on which to continue to grow and an enviable investor base for a firm of our size and maturity. We see considerable opportunity for growth in our business, in the context of an SME funding market which continues to evolve in the coming years, and I am grateful for the support our shareholders have shown and the confidence they have demonstrated in the future prospects of our business.

Commercial Performance

Given our underlying asset mix our business remains quite seasonal, so it is pleasing that our results today, when compared to the first half of 2018 show an excellent 162% increase in assets and 181% rise in gross income to £168m and £5.4m respectively. Promisingly, we have also seen a significant rise on credit lines granted to customers as our brand and market reputation has begun to flow through. At just over £290m of extended credit lines, an increasing amount of our focus is on driving in-life utilisation at this level, with 66 manufacturers signed as well representing a further potential £300m-400m of as yet unapproved but demanded credit across their SME customer bases - we have already a very significant pipeline to execute even before considering the considerable opportunities which exist for both new products and customers.

As we have grown, we have continued to invest in both our people, notably doubling the size of our account management team to drive the execution of the current pipeline and ensure we maintain customer service levels. Critically we have also invested in our technology, and during the first half of 2019 we made several enhancements to our customer self service capability, and have begun the build out of our digital origination platform. This will facilitate the 2020 launch of a broader range of products both for our current customers and for new segments. As set out at IPO, we are committed to building a blended service model which addresses customers' desire for best-in-class digital experience and a flexible and personal level of service.

Risk Management

Since the balance sheet date of June 2019 DFC has incurred its first actual credit losses and as we can see our provisions at June 2019, at 38bp have risen from year end. These levels are in line with expectations and after over 2 years of lending and over £700m advanced to customers this reflects that we have been able to fully test our security model and loss assumptions before we scale further. The good news is that everything we expected from our people and our security, controls and asset based lending model was in line with expectations, demonstrating our overall risk management approach is robust and our underlying assumptions on recovery in a problem loan scenario are in line with actual results.

Overall, DFC's portfolio continues to perform well and our multi-level security model with overall portfolio advances running at 87% LTV vs. wholesale asset values provides considerable security across our loan book.

Outlook

The next 6 months are key for DFC in its development, with the expected launch of the bank and the development of new products and markets to deliver the plan for 2020 and beyond. Since the period end we have undertaken further investment to ensure we are well positioned to support our further plans but we have also retained an unyielding focus on executing for our current customers and pipeline and managing our risk.

In terms of Brexit, we have considered the possible impact for DFC of the removal of passporting - requiring us to consider different options in the event we decide to expand our lending outside of the UK market. However, from a regulatory perspective our more immediate focus is on delivering the bank launch in the UK. In terms of the Brexit related impact on the ground we have yet to see any material change to customer decisions, although we are alert to the risk that macro events will impact the product turn and corresponding SME ordering profile in the second half of the year. In addressing this risk we have the advantage that we are relatively diverse in terms of asset mix, and we also have a good spread of manufacturer relationships such as with European (EU and non-EU) and US companies which may be experiencing different dynamics in their home or other markets. While we cannot be sure what the future may bring as the political situation evolves we do not see that there are material risks to the model at this time. As a business we will continue to monitor as events develop further and work closely with our customers at both a manufacturer and SME level to address any risks and also potential opportunities.

I remain convinced we have a great business and with the continued support of our customers, people, investors and partners we can deliver our business plan and accelerate our growth and capitalise on the many opportunities which we have in front of us.

Financial Highlights

§ Gross revenues were £5.4 million for the six month period to 30 June 2019 compared against £1.9 million for the six month period to 30 June 2018 and £5.2 million for the 12 month period up to 31 December 2018. This represents a 181% growth in gross revenues against 30 June 2018 results and the Group has recognised more revenue in a six-month period than the prior full year. 

§ Customer loan receivables increased by £55 million, representing a 48% increase from December 2018 position, giving a gross loan receivable balance at 30 June 2019 of £168 million.

Summarised Statement of Profit or Loss and Other Comprehensive Income:

Basis of preparation

Distribution Finance Capital Holdings Plc (the "Company" or "DFCH Plc") acquired Distribution Finance Capital Ltd ("DFC Ltd") on 8th May 2019 and on 9th May 2019 gained admission to the Alternative Investment Market on the London Stock Exchange. Merger accounting methodology has been used for preparing these consolidated interim financial statements, meaning comparative information will be prepared as if the Group had existed and been formed in prior periods. This will enable informative comparatives to users given the underlying activities and management structure of the Group remain largely unchanged following the IPO. Therefore, these condensed financial statements have been prepared in accordance with the presentation and accounting standards applied within the audited financial statements of Distribution Finance Capital Ltd for the year 31 December 2018.

Gross revenues

Gross revenues predominantly comprise interest and similar income due on advances to customers together with customer facility and related fees. Gross revenues also include interest on bank cash balances and gains on debt securities.

Gross revenues were £5.41 million for the period, increasing by £3.48 million (181%) from June 2018. This was driven by the growth of the Group's loan book over this period to £168.1 million at June 2019 from £64.1 million at June 2018.

For the six month period to 30 June 2019 assets yielded 7.9% on average compared to 8.2% for the period to June 2018. This reduction is driven by the funding of more large customers and having to diversify the book into more industry sectors quicker than intended arising from liquidity constraints of our primary funding facilities during the second-half of 2018. Whilst not ideal, the advantage of this has been that we expanded our footprint quicker in terms of manufacturer relationships achieving a broader base from which to accelerate growth through 2019. 

Interest expense

Interest expense is made up of interest on the Group's wholesale funding facility, interest on loans from the Trufin Group and interest on preference shares.

Interest expense was £2.81 million for the period, increasing by £1.09 million (64%) from June 2018. This increase is significantly lower than the proportional increase in the customer loan book as the cost of funds, expressed as a percentage of average customer receivables, reduced from 7.4% for June 2018 to 4.1% for June 2019. This reduction in cost of funds reflects the higher rate Trufin Group loan notes in place during the first quarter of 2018, the higher proportion of undrawn facility fees due on the wholesale funding facility to June 2018 and the equity injection of £25 million received from the Trufin Group in May 2019 upon demerger. 

In June 2019 the Group entered into a revolving mezzanine credit facility of £40.3 million with funds affiliated with Ares Management Corporation. Alongside the existing Citibank facility, this has led to an increase in the wholesale cost of funds as the Group enters the second half of 2019.

Net income

Net income was £2.59 million for the period, increasing by £2.39 million (1,171%) from June 2018.

The net interest margin for the period was 3.8% compared to 0.9% for the period to June 2018. The increase in the net interest margin is due to the asset yield and cost of funds factors referred to above.

Operating expenses

As a business we have been effectively operating with the structures and governance of a bank since the first half of 2018. Operating expenses have increased from £4.08 million in June 2018 to £7.13 million in the period. The increased operating expenses reflect the investment made in staff resources and infrastructure to meet the significant growth achieved over the past 12 months and going forwards. 

The operating expenses in the current period include £1.07 million of management and directors' bonuses paid in relation to the demerger and IPO. These bonuses were predominantly to cover the cost of loans advanced in respect of tax liabilities on shares issued to these individuals to reduce the dilution impact of their shareholdings arising from the issue of shares to Trufin prior to the demerger.

Impairment charges

Impairment charges for the period were £0.51 million, increasing by £0.43m from June 2018. These impairment charges relate to increases in IFRS 9 provisions. There have been no write-offs experienced by the business through to June 2019. The increase in impairment charge for the period to June 2019 compared to the equivalent period in 2018 results from the significant increase in loan book during the respective periods and also the increase in the IFRS9 provision (expressed as a percentage of the loan book) from 0.15% in December 2018 to 0.38% in June 2019 compared to an increase from 0.21% in December 2017 to 0.23% in June 2018. This increase in the IFRS 9 provision % relates to increases in the stage 3 provision from a small number of stage 3 cases arising in the period.

Exceptional items

Exceptional items of £2.19 million in the period relate to the professional fees incurred by the Group in respect of the demerger and IPO transaction that have been recognised as an expense. 

Summarised Statement of Financial Position:

The assets of the Group increased during the period by 74% to £227.3 million, primarily driven by the growth in the loan portfolio and also in respect of the equity injection of £25 million received in May 2019 prior to the demerger from Trufin.

The liabilities of the Group increased during the period by 107% to £156.5 million, primarily driven by an increase in wholesale funding.

Loans and advances to customers

Loan originations in the period were £206.0 million which is significantly ahead of loan originations in both the first half of 2018 (£92.1 million, 124% increase) and the second half (£141.3 million, 46% increase).

DFC finances SME's operating across the distribution supply chain and primarily focuses on financing products in five sectors:

·; recreational vehicles, lodges and caravans;

·; marine (typically smaller marine craft);

·; motor vehicles (typically mopeds, scooters, motorcycles and light commercial vehicles but not cars);

·; industrial equipment; and

·; agricultural equipment

The Gross Loan receivables balance across these sectors at 30 June 2019, 31 December 2018 and June 2018 is shown in the table below.

The table shows the continuing growth across all sectors in the six month periods ended December 2018 and June 2019 and the increased sector diversification of the loan book over this time.

Other assets

The increase in other assets during the period by 176% to £24.7 million is predominantly driven by the increase in debt securities held (UK Treasury Bills) from £5.0 million in December 2018 to £19.0 million at June 2019. This increase in debt securities is in part the initial utilisation of an element of the £25.0 million of equity received in May 2019 prior to the demerger.

Financial liabilities

Financial liabilities have increased during the period by 95% to £141.0 million. This mainly reflects an increase in wholesale funding during the period from £59.0 million to £121.5 million. This results from an increase in the senior drawing under the wholesale funding facility to fund the increase in the loan book together with the execution and drawing of a senior mezzanine facility in June 2019 that is in conjunction with this existing wholesale facility. The senior facility of this wholesale funding agreement was increased from £100.0 million to £155.0 million with the term extended by 12 months to December 2020. The senior mezzanine facility is £40.3 million with a concurrent term to December 2020.

Funding from the Trufin Group has also increased during the period from £10.3 million in December 2018 to £19.5 million in June 2019. This has resulted from receiving an additional £5 million in loan agreements from the TruFin Group and also converting £3.5 million of preference shares plus accrued interest into loan agreements prior to the IPO of DFCH plc.

Principal and Emerging Risks

The Group has developed and follows a "Risk Management Framework" which details how DFC defines and manages risks which are relevant to its business model and operations. It sets the requirements for our governance, culture and risk appetite frameworks supported by the Principal Risks structure which creates a common language to support the day to day management of those risks by efficiently and effectively identifying, measuring, control and monitoring of those risks in line with the firm's governance, culture and risk appetite.

The Corporate Governance Framework details the governance accountability and structures put in place for the management of DFC's operations to deliver against its strategic vision. 

The Board and Management are committed to creating an effective risk culture across the firm and we lay this out in our Code of Ethics framework which details the values which underpin the DFC proposition and how we will apply them.

Finally, the Risk Appetite Framework details the requirements and responsibility to set and allocate the firms risk appetite across the firm to support its strategic vision. Our aim is to have a Risk Appetite Framework which ensures there is a clear Business and Risk Strategy which aligns to the Boards Risk Appetite, and we describe this in such a way that it is understandable and is driven appropriately through the firm.

We have defined principal risks to help shape our policy and control framework. They create structure to our policy framework and clear ownership/responsibility for assessing performance and completeness.

Credit Risk:

The risk of financial loss arising from a client, customer or counterparty failing to meet their financial obligations to DFC to repay in accordance with agreed terms. The Group takes a proactive approach to monitoring the credit risk of its commercial lending through regular contact and review of its customers. In addition to the comprehensive customer onboarding process, the Group also conducts asset audits to verify the collateral status throughout the life of the loan.

Treasury Risk:

Treasury Risk covers three highly related risks relating to the management of the resulting customer assets and liabilities. The Group uses a monthly Asset and Liability Committee (ALCO) as a forum to monitor and discuss these risks. Furthermore, treasury risk Key Performance Indicators ("KPIs") are agreed and reported on a monthly basis to the Board. 

Liquidity Risk - the risk that the Group is not able to meet its financial obligations as they fall due or that it does not have the tenor and composition of funding and liquidity to support its assets.

Capital Risk - the risk that the Group has an insufficient amount or type of capital to support the regulatory requirements of its business activities through normal and stressed conditions.

Interest Rate Risk - the risk of financial loss through un-hedged or mismatched asset and liability positions due to interest rate changes.

Operational Risk:

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events (e.g. fraud). The Operational Risk Framework covers all processes, people and systems and sets across the firm the: Risk Management Process we promote of Identify, Measure, Control and Monitor; Coverage and requirements for Risk and Control Self Assessments and New Product Approval; and setting of Key Risk and Control Indicators across all risks. A robust operational event management and escalation process is in place which includes a risk events register. Use and monitoring of insurance including professional indemnity and D&O liability insurance. At a minimum, these indicators are reviewed at a monthly formal Operating Committee.

Conduct Risk:

The risk of detriment caused to DFC's customers due to inappropriate execution of its business activities and processes, including the sale of unsuitable products. The Conduct Risk Policy outlines our approach and process for ensuring good customer conduct outcomes. It is supported by specific policies on Anti-Bribery and Corruption; Conflicts of Interest, Financial Crime, Onboarding/Anti-Money Laundering/Know Your Customer, and Whistleblowing policies which detail the specific steps and responsibilities across the firm including the firm's Money Laundering Reporting Officer who sits within the Risk function.

Reputational Risk:

Reputational risk is the risk of loss or imposition of penalties, damages or fines from the failure of the firm to meets it legal obligations including regulatory requirements. DFC operates within the context of the UK legal and regulatory environment and the Reputational Risk policy sets responsibility within DFC is ensure the firm is aware of both current and upcoming legal or regulatory changes and plans/implements those requirements appropriately.

Macro-economic Risk and Brexit:

The Directors, at least quarterly, perform a review of current economic projections and a horizon scan of risks and proposed management actions to mitigate where possible a perceived risk outside of risk appetite. The Group's structure and license requirements are not impacted by Brexit as it only lends to UK based firms from a UK legal entity. However, the Group could be impacted by varying demand for credit and higher loss rates from customers due to changes in macro-economic factors (such as weak GDP, or higher interest rates in the UK), or from higher costs of doing business for our customers (such as higher import prices due to potential new tariffs or extreme movements in the purchasing power of Sterling). These potential risks could impact our customers margins, profitability and in more extreme scenarios lead to much higher levels of insolvency. However, as the Group is primarily a secured lender on short duration loans with uncommitted lines, there are a number of management levers which can be applied rapidly, and the Directors will continue to actively monitor the situation to ensure customers are supported within the agreed risk appetite. On this basis Brexit is not expected to cause a material adverse impact on the Group's resources.

Risk Management

The Group has risk committees and formal risk procedures in place which aim to manage risk effectively. The systems and processes, guidelines and policies are continually reviewed and updated and effectively communicated to all personnel to ensure that resources, governance and infrastructure are appropriate for the increasing size and complexity of the business.

We manage the risks of the Group by making judgements, including decisions (based on assumptions about economic factors) about the level and types of risk that the Group is willing to accept in order to achieve its business objectives, the maximum level of risk the Group can assume before breaching constraints determined by liquidity needs and its legal obligations. 

Directors' Responsibility Statement

The Directors confirm, to the best of their knowledge, that the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union, and that the Interim Financial Report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions.

By order of the Board

……………………………

Chris Dailey

Director

18 September 2019

Independent Review Report to Distribution Finance Capital Holdings Plc

Deloitte LLP (referred to as "we" within the independent review report to Distribution Finance Capital Holdings Plc only) have been engaged by the Group to review the condensed consolidated set of financial statements in the interim financial report for the six months ended 30 June 2019 which comprises the profit and loss account, the statement of financial position, the statement of changes in equity, the cash flow statement and related notes 1 to 29. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated set of financial statements.

This report is made solely to the Group in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the Group those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with the AIM Rules of the London Stock Exchange.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Group a conclusion on the condensed consolidated set of financial statements in the interim financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of financial statements in the interim financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules of the London Stock Exchange.

Deloitte LLP

Statutory Auditor

London, UK

18 September 2019

Unaudited Condensed Consolidated Statement of Profit or Loss and Other Comprehensive Income

The notes on pages 18 to 46 are an integral part of these financial statements.

Unaudited Condensed Consolidated Statement of Financial Position

The notes on pages 18 to 46 are an integral part of these financial statements.

These financial statements were approved by the Board of Directors and authorised for issue on 18 September 2019. They were signed on its behalf by:

……………………………

Chris Dailey

Director

Registered number: 11911574

Unaudited Condensed Consolidated Statement of Cash Flow

Unaudited Condensed Consolidated Statement of Changes in Equity

The notes on pages 18 to 46 are an integral part of these financial statements.

Refer to note 21 for further details on equity movements during the periods.

Notes to the Unaudited Condensed Consolidated Interim Financial Statements

1. Basis of preparation

The condensed set of financial statements has been prepared for Distribution Finance Capital Holdings Plc (the "Company" or "DFCH Plc") and its wholly owned subsidiary, Distribution Finance Capital Ltd ("DFC Ltd") (together, the "Group").

DFCH Plc is registered and incorporated in England and Wales whose company registration number is 11911574. The registered office is 12 Groveland Court, London, EC4M 9EH. The Company's ordinary shares were listed on the Alternative Investment Market ("AIM") of the London Stock Exchange on 9 May 2019. The Company subscribed 106,641,926 ordinary shares in the initial public offering, at a consideration of 90p per share, giving a total market capitalisation of £96 million.

The principal activity of the Company is that of an investment holding company. The principal activity of the Group is the provision of niche commercial lending activities including short-term financing to dealers.

These financial statements are presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates, and are rounded to the nearest thousand pounds, unless stated otherwise.

1.2 Basis of accounting

The condensed consolidated set of financial statements included in this Interim Financial Report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' ('IAS 34'), as adopted by the European Union and the Interim Financial Report has been prepared in accordance with the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority.

The condensed set of financial statements included within this interim financial report for the six months ended 30 June 2019 should be read in conjunction with the annual audited financial statements of Distribution Finance Capital Ltd for the year ended 31 December 2018.

The annual financial statements of Distribution Finance Capital Limited are prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

The statutory financial statements of DFC Ltd for the year ended 31 December 2018 have been reported on by the Company's auditors, Deloitte LLP, and have been delivered to the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The condensed consolidated financial information for the six months ended 30 June 2019 has been prepared using accounting policies consistent with IFRS. The interim information, together with the comparative information contained in this report for the year ended 31 December 2018, does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006. The financial information is unaudited but has been reviewed by the Company's auditor, Deloitte LLP, and their report appears on page 13 of this interim financial report.

Sale of DFC Limited and listing of DFCH PLC

On 8th May 2019 DFC Ltd was sold by the TruFin Group to DFCH Plc. On 9th May 2019, DFCH Plc gained admission to the Alternative Investment Market on the London Stock Exchange. During this transaction, shares that were held by the then controlling party of the Company, TruFin Group, were sold to external investors such that no individual shareholder held more than 50% of the shares in the Group. This transaction resulted in a change in ownership and control of DFC Ltd which is now a wholly owned subsidiary of the DFCH Plc. This change in control and ownership requires the Group to assess how to account for the transactions in accordance with applicable IFRS accounting standards.

The first part of the transaction was the sale of DFC Ltd from the TruFin Group so that DFC Ltd became a wholly owned subsidiary of the DFCH Plc. In exchange for the shares held by the TruFin Group, they were given shares in DFCH Plc which resulted in TruFin becoming the controlling party in the Company. Resultantly, this transaction has been deemed a combination of businesses under common control given TruFin can be identified as both the acquiree and acquirer in this transaction, therefore, TruFin did not relinquish control during this transaction. Given that control is not transitory in this transaction, IFRS 3 cannot be applied as it does not meet the definition of a combination of businesses. In such scenarios where IFRS 3 cannot be applied, the Group will consider other applicable accounting standards to assist with the treatment of the combination.

The second part of the transaction constituted the admission of the Company's shares on the Alternative Investment Market (AIM) of the London Stock Exchange on 9 May 2019. A key component and objective of the initial public offering was for the controlling party to reduce their shareholding below 50% so no party had a controlling interest in the Company. Although this transaction clearly indicates a loss of control by TruFin, the principal activity of DFCH Plc is that of an investment holding company given its primary activity is the ownership of a single subsidiary, DFC Ltd. This is not deemed sufficient to be considered a 'business' under IFRS given the Company does not offer any value or return to the Group. Therefore, IFRS 3 Business Combinations cannot be applied because the Company does not meet the definition of a business so cannot be deemed a combination of businesses.

In the absence of applicable IFRS accounting standards to follow, the Group has assessed the applicability of other relevant standards to adopt. Given that the underlying management and operating activities of the Group remain unchanged from the transaction, the Directors have taken this into consideration and elected to adopt "Merger Accounting", defined in FRS 102, using the book value accounting method in order to prepare the consolidated financial statements of the Group.

The principles of merger accounting are as follows:

§ Assets and liabilities of the acquired entity are stated at predecessor carrying values. Fair value measurement is not required.

§ No new goodwill arises in merger accounting.

§ Any difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity at the date of transaction is included in equity in retained earnings or in a separate "Merger Reserve" account.

By way of using the merger accounting methodology for preparing these consolidated interim financial statements, comparative information will be prepared as if the Group had existed and been formed in prior periods. The Directors agree this will enable informative comparatives to users given the underlying activities and management structure of the Group remain largely unchanged following the IPO. Therefore, these condensed financial statements have been prepared in accordance with the presentation and accounting standards applied within the audited financial statements of Distribution Finance Capital Ltd for the year ended 31 December 2018. These condensed financial statements should be read in conjunction with the audited financial statements of Distribution Finance Capital Ltd for the year ended 31 December 2018.

The financial statements have been prepared in accordance with European Union Endorsed International Financial Reporting Standards (IFRSs) and the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations Committee (IFRIC)) interpretations. The condensed set of financial statements included in this Interim Financial Report has been prepared in accordance with International Accounting Standards 34 'Interim Financial Reporting' ('IAS 34').

The financial statements have been prepared on a going concern basis and under the historical cost convention except for the treatment of certain financial instruments.

All intra-group transactions, balances, income and expenses are eliminated on consolidation. The consolidated financial statements contained in this document consolidate the statements of total comprehensive income, statements of financial position, cash flow statements, statements of changes in equity and related notes for Distribution Finance Capital Holdings Plc and Distribution Finance Capital Ltd, which together form the "Group", which have been prepared in accordance with applicable IFRS accounting standards.

1.3 Principal accounting policies

The principal accounting policies adopted in the preparation of this financial information are set out below. These policies have been applied consistently to all the financial periods presented.

1.4 Going concern

Following the £25 million cash injection from TruFin prior to the initial public offering and the subsequent successful listing on the AIM market, the Directors have assessed the Group's ability to continue in operational existence for at least 12 months from the reporting date.

The Directors have a reasonable expectation that the Group has adequate resources to meet its obligations for at least 12 months from the balance sheet date. Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements.

1.5 Critical accounting estimates and judgements

In accordance with IFRS accounting standards, the Directors of the Group are required to make judgements, estimates and assumptions in certain subjective areas whilst preparing these financial statements. The application of these accounting policies may impact the reported amounts of assets, liabilities, income and expenses and actual results may differ from these estimates.

Any estimates and underlying assumptions used within the statutory financial statements are reviewed on an ongoing basis, with revisions recognised in the period in which they are adjusted, and any future periods affected.

Further details can be found in note 3 of these financial statements on the critical accounting estimates and judgements used within these financial statements.

1.6 Foreign currencies

The financial statements are expressed in Pounds Sterling, which is the functional and presentational currency of the Group.

Transactions in foreign currencies are translated to the Group's functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the statement of income.

2. Summary of significant accounting policies

The same accounting policies, presentation and methods of computation are followed in the condensed consolidated set of financial statements as applied in the DFC Ltd.'s latest annual audited financial statements for the year ended 31 December 2018, with the exception of Merger Reserve, Earnings Per Share, Segmental Reporting and Leasing accounting policies. Furthermore, any adoption of new and amended standards are also set out below.

The preparation of interim condensed consolidated financial statements in compliance with IAS 34 requires the use of certain critical accounting judgements and key sources of estimation uncertainty. It also requires the exercise of judgement in applying the Group's accounting policies. There have been no material revisions to the nature and the assumptions used in estimating amounts reported in the annual audited financial statements of DFC Ltd. for the year ended 31 December 2018.

2.1 Merger Reserve

As detailed in section 1.2 of the notes to these financial statements, following the initial public offering of DFCH Plc, the Company is now the ultimate controlling party of the Group. The Board of Directors elected to account for the transaction using merger accounting which prescribes that any difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity at the date of transaction is included in equity in retained earnings or in a separate reserve account. Therefore, on consolidation of the Group financial statements, the difference between the consideration paid (proceeds from the initial public offering) and the book value of Distribution Finance Capital Ltd is recognised as a Merger Reserve, in accordance with relevant accounting standards relating to businesses under common control.

2.2 Earnings per share

In accordance with IAS 33, the Group will present on the face of the consolidated statement of comprehensive income basic and diluted EPS for:

§ Profit or loss from continuing operations attributable to the ordinary equity holders of Distribution Finance Capital Holdings Plc; and

§ Profit or loss attributable to the ordinary equity holders of Distribution Finance Capital Holdings Plc for the period for each class of ordinary shares that has a different right to share in profit for the period.

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the period.

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential ordinary shares.

Adjusted basic earnings per share is calculated using the basic loss per share calculation above after allowing for adjusted items such as expenses including taxes, minority interests and preference dividends. The number of shares is calculated by adjusting the shares in issue at the beginning of the period by the number of shares bought back or issued during the period, multiplied by a time-weighting factor. Contingently issuable shares are included in the basic EPS denominator when the contingency has been met.

Adjusted diluted earnings per share is calculated after adjusting the weighted average number of shares used in the adjusted basic earnings per share calculation to assume the conversion of all potentially dilutive shares.

There are no adjustments to account for in any of the periods presented and therefore the adjusted earnings per share is determined to be the same as the basic and diluted earnings per share.

2.3 Segmental Reporting

IFRS 8 Operating segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on the Group's internal management reports, both in the identification of operating segments and measurement of disclosed segment information.

The Group's product offering and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group.

However, in accordance with IFRS 8, the Group will continue to monitor its activities to ensure any further reportable segments are identified and the appropriate reporting and disclosures are made.

IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 supersedes the approach of IAS 17 Leases and the related interpretations and is mandatory effective to accounting periods beginning on or after 1 January 2019. The Group has adopted IFRS 16 for the six month period ending 30 June 2019. At the period ending 30 June 2019, the Group only has property leases which meet the classification requirements of IFRS 16.

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer for which these are deemed as right-of-use assets. The lessee is required to recognise a right-of-use asset representing the Group right of use and control over the leased asset. Furthermore, the Group is required to recognise a lease liability representing its obligation to make lease payments over the relevant term of the lease.

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst other variables. Furthermore, the classification of cash flows will also be affected because operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

The Group has elected not to retrospectively restate prior period comparatives given the Directors deem the impact of the new accounting standard to be immaterial. As such, the Directors have elected to follow the 'modified retrospective approach' whereby the Group does not restate prior period comparatives and instead recognises an adjustment in equity to the opening reserves balance at 1 January 2019.

3. Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial information in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The judgements and estimates that have a significant effect on the amounts recognised in the historical financial information noted below.

3.1 Critical accounting judgements

The Board Audit Committee assessed and reviewed the critical accounting judgement in respect of the recognition of transferred assets and equity raising transaction cost.

Loan derecognition

In December 2017 DFC Ltd sold the majority of its loan assets to DFC Funding No1 Limited. As part of this transaction DFC Funding No1 entered into a two year senior debt facility to December 2019 with an external funder, secured on this floating pool of underlying assets sold by the Group. This facility was subsequently extended to December 2020. On the basis that the Group retains substantially all the risks and rewards of ownership of these transferred financial assets, the Group has continued to recognise the financial assets and also recognised a collateralised borrowing for the proceeds received.

Transaction costs directly incremental to equity raising

In May 2019 the Group executed a complex transaction, as detailed in section 1.2 of these financial statements, which included a £25 million equity injection from the TruFin Group and subsequent listing on the AIM stock market. Throughout the transaction, the Group engaged with a number of external professional services companies which in some cases provided advisory services throughout the transaction. Resultantly, the Group incurred a material amount of costs associated with the overall transaction.

Complexity arises given that IAS 32 provides prescriptive guidance that transaction costs which are incremental and directly attributable to the issuance of new equity instruments can be deducted from equity rather than recognised as an expense in the profit or loss. This presents difficulty because the activities of the £25 million equity injection by TruFin were strictly conditional on the sale of DFC Ltd to DFCH Plc and successful IPO of DFCH Plc. Although the majority of the costs were incurred due to the sale of DFC Ltd and IPO, these were not necessarily equity raising as no consideration was generated from these transactions alone. However, due to the interdependencies of the £25 million equity injection to these events, a portion of the costs can be allocated to the raising of equity and resultantly be deducted from equity. This requires a degree of subjectivity given some of the transaction costs are grouped and cover various activities so at times a subjective apportionment is followed so that only those transaction costs are accounted for through equity reserves with the remainder through the profit or loss.

3.2 Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:

Loan impairment

The Group has considered the key areas of estimation used within the IFRS 9 impairment calculation and identified the variables which propose a material risk in terms of the preparation of the financial statements. The only variable considered to present a material risk of estimation uncertainty is the collateral values which are used within the loss given default (LGD) calculation. The Group has assessed that if the loss given default increased by a factor of 4, this would generate an additional provision of approximately £750,000 at 30 June 2019.

4. Interest and similar income

5. Operating segments

IFRS 8 Operating segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on DFC's internal management reports, both in the identification of operating segments and measurement of disclosed segment information.

It is the Director's view that DFC's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, it is considered that the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of DFC.

6. Interest and similar expense

As detailed in note 23, during the six month period ending 30 June 2019, £3.5 million of preference shares plus accrued interest were converted in to loan agreements. The interest expense accrued on the preference shares was calculated under an effective interest rate (EIR) method. Whereas, the calculation of the interest accrued for the conversion to debt was calculated on a straight line basis which resulted in a write back in interest expense during the period.

7. Fee income

8. Staff costs

Analysis of staff costs:

Consulting costs are recognised within personnel costs where the work performed would otherwise have been performed by employees. Consulting costs arising from the performance of other services is included within other operating expenses.

9. Other operating expenses

10. Exceptional expenses

The Directors consider these items to be exceptional in nature as they are directly attributable to the sale of DFC Ltd and initial public offering transaction as outlined in note 1 of these financial statements. The Group will not incur costs of this nature in the foreseeable future and given the materiality of these costs the Directors wish to highlight these within the financial statements.

11. Provision for commitments and other liabilities

Analysis for movements in provision for commitments and other liabilities:

12. Net impairment loss on financial assets

13. Loss before income tax

Loss before income tax is stated after charging:

14. Taxation

Analysis of tax charge recognised in the period: