Rbg Holdings Regulatory News (RBGP)

28 September 2023

RBG Holdings plc

("RBG", "the Group", or "the Company")

Unaudited Interim Results for the six months ended 30 June 2023

Executing a clear strategy to restore value and reduce risk profile

RBG Holdings plc (AIM: RBGP), the professional services group, today announces its unaudited results for the six months ended 30 June 2023.

Strategic Highlights:

During the first six months of the financial year, the Group's new executive management team which brings expertise from the practice leaders of the core revenue generation centres, took action to:

· Return the Group's focus to its core Legal Services business where both of its core brands have over 30 years' proven track record of trading through:

o  Targeting organic growth in the highly cash generative Legal Services business and increasing average revenue per fee earner which is now among the highest in the industry[1].

o  Hiring seven additional partners since April 2023

o  From May, the two law firms started sharing a Practice Management System allowing them to work seamlessly on the same cases, and improving cross selling opportunities

· Reduce the Group's risk profile through:

o  Ceasing to carry any investment in Conditional Fee Arrangements ("CFAs") and Damages Based Agreements ("DBAs") as assets on its balance sheet in contrast to the treatment by the previous management; any fees from wins on such cases will simply be recorded as revenue when paid

o  Writing down the retained value of all remaining CFAs, DBAs and the retained LionFish cases on the balance sheet to zero, leading to a non-cash write off of £12.8m

· Prioritise the reduction of the Group's debt by:

o  Disposing of LionFish Litigation Finance Limited in July for a consideration of up to £3.07m, of which £1.07m was used for immediate repayment of an intercompany loan

o  Suspending the dividend policy

Financial Highlights[2]:

· Revenue of £20.5m (H1 2022: £24.9m excluding gains on litigation assets, £26.5m including) reflecting reduced deal flow at Convex Capital due to market conditions 

· Adjusted EBITDA of £2.9m (H1 2022: £7.0m) 

· Adjusted profit before tax of £0.4m (H1 2022: £4.6m) 

· Non-recurring non-cash costs of £13.7m (H1 2022: £nil) of which the majority relates to the decision to write off the Group's litigation assets

· Statutory EBITDA loss of £10.8m (H1 2022: profit of £7.0m)

· Loss before tax of £13.3m (H1 2022: profit of £4.6m)

· Loss per share of 9.08 pence (H1 2022: 3.62 pence profit)

· Loss from continuing operations of £10.2m (H1 2022: profit £3.6m)

· Adjusted free cash flow generation in the period was £0.4m (H1 2022: £3.1m)

· Pre IFRS 16 net debt of £21.0m (H1 2022: net debt of £17.5m)

Discontinued operations:

· Profit from discontinued operations of £1.6m (H1 2022: loss £0.2m)

Post Balance Sheet Events (July 2023)

· Appointment in July of Ian Rosenblatt OBE, the Group's largest shareholder and individual revenue generator, to the Board as Executive Vice Chair

Current Trading & Outlook

· The first half of the Company's financial year has historically been the slower of the two halves, and the Board can already see this trend continuing, with a strong start to H2 2023

· Trading within the Group's Legal Services division was robust in the first half, and the Group has good visibility on revenue and profitability in this division for the second half

· As a result, the Board is confident that the core Legal Services business will meet full year market expectations

· Convex Capital has grown its pipeline to 22 deals, seven of which are in the latter stages of completion. The Board is confident that several of these deals will complete before the end of the year

· The Board therefore expects to meet its current market forecasts for FY23[3]

· Positive discussions with lenders underway regarding the Group's debt facilities due for refinancing in April 2024

Jon Divers, CEO, RBG Holdings plc, commented: "Over the last six months, the new leadership team has established a clear strategy to restore value to the Group by focusing on the Group's core Legal Services business. Furthermore, we have reduced the Group's risk profile and are prioritising the payback of the Company's debt. To help achieve this, we have now disposed of LionFish, suspended the dividend, and discontinued the previous management's strategy of carrying investments in CFAs and DBAs as assets on our balance sheet and only recognising revenue when it is paid. 

"Overall, I am pleased with the performance of our core Legal Services businesses, Rosenblatt and Memery Crystal, which are delivering solid revenues and profits. Their trading, despite the wider economic environment, has highlighted the resilience and counter cyclical nature of the businesses, both of which have over 30 years' proven trading history. Driving the organic growth of these businesses is at the heart of our plans. Our average revenue per fee earner have improved significantly during the period and is among the highest in the industry. Since April, we have hired seven additional Partners; five have already started with the remaining two joining either later in the year or early 2024. They all have high levels of experience and knowledge in their respective fields, creating more revenue opportunities. 

"M&A activity in the UK during the first half of 2023, industry-wide, has been at a much lower level than in recent years. As a result, our specialist sell-side M&A advisory business, Convex Capital, only completed one deal in the first half of 2023. However, momentum is returning, and the business has a strong and growing pipeline. We are confident that several deals will complete before the end of the year.

"The decisive action we have taken during the first half, means that the Group has been de-risked and simplified, providing greater visibility to investors going forward. The ongoing business is profitable and highly cash generative and we are committed to reducing the Group's debt. We have a clear vision, a solid foundation on which to grow, and an absolute commitment to restoring the Group's value."

Enquiries:

About RBG Holdings plc

Further information about RBG Holdings plc is available at:  www.rbgholdings.co.uk

Further information about Rosenblatt (founded in 1989) is available at:  www.rosenblatt.co.uk

Further information about Memery Crystal (founded in 1979) is available at:  www.memerycrystal.co.uk

Further information about Convex Capital (founded in 2010) is available at:  www.convexcap.com

Chief Executive's Statement

Since my appointment at the beginning of the year, the newly strengthened Board and I have returned the Group's focus to its core Legal Services business, reduced the Group's risk profile, and prioritised the reduction of the Group's debt.

The performance in the first six months of the financial year reflects this approach, and has involved significant non-cash write offs, particularly through our decision to write down to zero our litigation finance assets. However, in the future it means we will be able to focus more on organic growth in Legal Services and Convex Capital while reducing debt. We believe this approach will be the most effective way of restoring shareholder value.

Group revenue was £20.5m (H1 2022: £26.5m including gains from litigation assets) which partially reflected the absence of gains from litigation assets in line with our decision to exit LionFish Litigation Finance Limited ("LionFish") and reduce the risk profile of the Group. Revenue was also impacted by reduced M&A deal flow at Convex Capital due to market conditions which delayed completions, some of which we now expect to occur in the second half of 2023.

Our pre IFRS 16 net debt position as at 30 June 2023 was £21.0m (H1 2022: £17.5m) which rose during the period due to the emergence of a number of one-off, unforeseen legacy payments that needed settling. Repaying this debt is a critical priority for the new executive team and we have already paid back £3.5m from the Group's £10m term loan. Exiting our third-party litigation finance business, LionFish, along with a number of other actions taken will also mean that the Group can focus on the reduction of our net debt going forward. Furthermore, we have had positive discussions with lenders regarding the Group's debt facilities due for refinancing in April 2024.

The nomination committee is actively engaged with a search agency to identify an additional non-executive director.

RBG Legal Services Limited ("RBGLS")

RBGLS combines our two legal brands - Rosenblatt and Memery Crystal - which are aligned to contentious and non-contentious services to reflect their brand position within the market. We are building one of London's premier mid-tier law firms providing quality advice to corporates, entrepreneurs and high net worth individuals.

We are focused on the organic growth of these businesses. As at 30 June 2023, the combined businesses had 174 people, including 120 fee earners, with particular strength in Dispute Resolution, Corporate and Real Estate. Since April, we have hired seven new Partners; five have already started with the remaining two joining either later in the year or early in 2024. They all have high levels of experience and knowledge in their respective fields, creating more revenue opportunities.

The average revenue per fee earner was £406,000 (H1 2022: £363,000). Our revenue per fee earner is in the top 20 of all UK law firms[4] driven by improved allocation of resources. The small reduction in gross margin to 39% (H1 2022: 42%) reflects the diversification of the Legal Services business into more non-contentious areas of law, following the acquisition of Memery Crystal. This is lower margin work but more consistent, which provides a natural hedge to the Group's dispute resolution activities which, while more profitable, are more contingent.

The combined businesses are winning a broad range of new instructions, including corporate transactions, employment advisory work and financial restructuring mandates. The significantly enhanced scale has enabled us to win these mandates as well as improve the opportunity pipeline. From May, the two law firms started sharing a Practice Management System allowing them to work seamlessly on the same cases, and improving cross selling opportunities.

The macroeconomic uncertainty seen in the first quarter of 2023 contributed to revenue in H1 2023 being more subdued than in 2022. Underlying revenue (excluding gains on litigation assets) was £19.8m in 2023 compared to £20.7m in 2022, a decrease of 4.4%. The consolidated Legal Services business has given us a more balanced business across the key areas of Dispute Resolution, Corporate and Real Estate. The Dispute Resolution division was responsible for 44.4% (H1 2022: 31.6%) of RBGLS's revenue, Corporate was 42.0% (H1 2022: 44.0%), and Real Estate represented 13.6% (H1 2022: 24.4%) of the combined business. 

During the period, the Board reviewed the previous management's strategy to invest in a number of Conditional Fee Arrangements ("CFAs") and Damages Based Agreements ("DBAs") undertaken through RBGLS. Over the past six years, RBGLS invested in 13 cases with a total cash investment of £17.4m. The carrying value of the remaining cases was £13.3m. One of these cases, Project Shango, accounted for £9.3m of the total. As announced in July, having taken advice, the Board concluded that Project Shango would not be successful. The Board took the prudent decision to further write down the value of all remaining cases on the balance sheet to zero, including the four remaining fully funded retained LionFish investments. The total non-cash write off is £13.3m. Any successful outcomes of the cases will be returned to the Group as revenue in line with RBGLS's percentage stake in the cases.

This decision simplified and de-risked the Group's balance sheet, providing greater visibility to investors. RBGLS will continue to offer its clients alternative billing arrangements (both CFAs and DBAs) where appropriate but any investments in such cases will be expensed when incurred and not be carried as assets on its balance sheet in contrast to the treatment by the previous management. Any fees from wins on such cases will simply be recorded as revenue when paid.

Convex Capital Limited ("Convex Capital")

Convex Capital, the specialist sell-side corporate finance advisory boutique based in Manchester, is entirely focused on helping companies, particularly owner-managed and entrepreneurial businesses, realise their value through sales to large corporates or private equity investors. Convex Capital identifies and proactively targets businesses that it believes represent attractive acquisition opportunities. Convex has a motivated, dynamic team of 14 people, 13 of whom are fee-earners.

The acquisition of Convex Capital was part of the Board's strategy focusing on other high-margin professional services areas. Convex Capital is an entrepreneurial, cash-generative business operating across the UK and Europe and will provide the Group with further funds for reinvestment into other high-margin areas.

As at 30 June 2023, Convex Capital had completed one deal and delivered £0.7m of revenue reflecting the subdued M&A market across the UK. The strength of its pipeline and the agile nature of the business has enabled Convex Capital to maintain deal flow through the first half. As at 27 September 2023, Convex Capital had 22 active deals. We are confident that several of these deals will complete before the end of the year.

The business is actively building the target pipeline with a data-driven approach to generate deals rather than the traditional passive model where the target company waits to be approached and then appoints a corporate finance partner. Completed deals lead to recommendations (which still go through the active data driven qualification). It is the Board's expectation that the current macro-economic environment will support the on-going fundamentals that drive M&A.

LionFish

On 12 July 2023, the Group completed the disposal of the non-core business, LionFish to Blackmead Infrastructure Limited ("Blackmead") which reduced the Group's exposure to litigation funding commitments.

LionFish was started by the previous management and financed litigation matters run by third-party solicitors. The consideration for the disposal is up to £3.07m, comprising an immediate payment of £1.07m to be used for repayment of an intercompany loan, an additional payment of up to £2.0m, subject to performance conditions to be used to repay additional intercompany debt, and £1 for the entire share capital of LionFish. The proceeds from the sale will be used for working capital purposes and to reduce Group borrowings. The net asset value of the four cases acquired by Blackmead had an adjusted net book value of £3.7m, leading to a loss on disposal of £0.64m.

Balance Sheet and Dividend Policy

The previous management's strategy to acquire new businesses and invest in LionFish had a significant impact on the Group's cash resources over the past four years. Following feedback from significant shareholders about the importance of reducing borrowings, the Board announced it was suspending the Group's dividend policy for the foreseeable future. The disposal of LionFish and a pause in any future acquisitions will enable the Group to more effectively prioritise debt reduction. The Board recognises the importance of dividends to shareholders and will reinstate its dividend policy once it has made headway in reducing the Group's debt to a more prudent level.

Outlook

The work undertaken in the first half of 2023 by the new executive leadership team leaves the Group well placed to execute its strategic objectives of returning the focus to the Group's core Legal Services business, reducing the Group's risk profile, and paying down debt.

The Board notes the first half of the Company's financial year has historically been the slower of the two halves, and the Board expects this trend to continue in 2023. Trading within the Group's Legal Services division was robust in H1, despite the economic headwinds, and the Group has good visibility on revenue and profitability for this division for H2.

As a result, the Board is confident that the core Legal Services business will meet its full year expectations. Convex Capital has grown its pipeline to 22 deals over the past few months, seven of which are in the latter stages of completion. We are confident that several of these deals will complete before the end of the year. The Board therefore expects to achieve full-year market forecast.

Economic conditions continue to be volatile, but we look forward to the coming months with optimism and are confident about the Group's long-term prospects following the actions taken.

Jon Divers

Group Chief Executive Officer

28 September 2023

Chief Financial Officer's Review

Financial Review

The first half of 2023 was about the new management team refocussing the Group on its core activities and cleaning up some of the historic baggage of previous periods. While the key financial indicators for H1 2023 were down from the previous year, they represent a solid basis from which to grow the business going forward.

Key Performance Indicators[5]:

· Revenue down 22.6% to £20.5m (H1 2022: £26.5m (which included gains on litigation assets of £1.6 m))

· Adjusted EBITDA £2.9m (H1 2022: £7.0 m)

· Adjusted profit before tax £0.4m (H1 2022: profit £4.6m)

· Non-recurring costs £13.7m (H1 2022: £nil)

· EBITDA loss of £10.8m (H1 2022: profit of £7.0m)

· Loss before tax of £13.3m (H1 2022: profit of £4.6m)

· Loss from continuing operations £10.2m (H1 2022: profit of £3.6m)

· Profit from discontinued operations £1.6m (H1 2022: loss of £0.2m)

· Adjusted free cash flow generation in the period was £0.4m (H1 2022: £3.1m)

· Net debt of £21.0m (H1 2022: net debt of £17.5m)

· Legal services average revenue per fee earner £406,000 (H1 2022: £363,000)

Revenue and Gains on Litigation Assets

Reported Group revenue for the period is £20.5m compared to £26.6m in 2022, representing a 22.6% decrease (H1 2022 included gains on litigation assets of £1.6m).

Revenue from Legal Services decreased from £22.3m in H1 2022 to £19.8m in H1 2023. The 2022 figures, however, include £1.6m of gains on litigation assets (2023: £nil). In July, the Group announced that it was writing off the value of its remaining litigation assets following the disposal of LionFish and would not, therefore, have any future gains or losses on the revaluation of litigation assets. The underlying trading revenue of the Legal Services division on a like for like basis (excluding gains on litigation assets) of £19.8m was 4% lower than the £20.7m for 2022.

The more significant drop in revenue was at Convex. Revenue for H1 2023 was down to £0.7m from £4.2m in 2022. The impact on revenues was driven by a very challenging market for M&A in H1 2023 as interest rates continues to increase and transactions volumes collapsed across the sector. Fortunately, the transactions that Convex were working on suffered delays rather than failure and the pipeline for H2 2023 and beyond remains strong. 

Staff costsTotal staff costs for the first half of 2023 were £13.6m (H1 2022: £15.6 m), which includes £12.1m for Legal Services and £0.9m for Convex. The average number of employees across the Group was 201 (H1 2022: 216). The reduction reflects the Group's more flexible approach to staffing and the use of consultant solicitors to allow the business to more effectively scale up and scale down during the course of the year.

Overhead costs

During the half year 2023, the Group incurred overheads of £31.3m (before depreciation and amortisation) (H1 2022: £19.5m). The vast majority of this increase is due to non-underlying items during the period which totalled £13.7m (H1 2022: £nil).

The non-underlying items of £13.7m are made up of £11.0m for RBGLS litigation asset write offs, £2.2m for Group costs associated with discontinued operations, a £0.3m release of prior year restructuring cost accrual and £0.7m of other one-off costs.

Adjusting for the non-underlying items, the overheads for H1 2023 were £17.6m compared with £19.5m. This included a reduction in central overheads of £700k as a result of the changes in the leadership team. The decrease of £1.9m, or 13% was driven principally by staff costs being 13% less in HY2023, professional fees down 31% and marketing and promotion down 18%.

EBITDA

EBITDA loss for the half year to 30 June 2023 was (£10.8m) (H1 2022: EBITDA £7.0 m).

Loss Before Tax

The loss before tax for the period was £13.3m representing (H1 2022: profit of £4.6 m).

Earnings Per Share (EPS)

The weighted average number of shares in 2023 was 95.3m which gives a basic earnings per share (Basic EPS) from total operations for the period of (9.08)p (H1 2022: 3.62p).

Balance Sheet

The Group's net assets as at 30 June 2023 decreased by £9.6m on the prior year. Of this decrease, £11.0m relates to the non-cash write off of litigation assets.

Goodwill, Tangible and Intangible Assets

Included within tangible assets is £14.0m which relates to IFRS 16 right of use assets for the Group's leases. Within total intangible assets of £57.1m, £51.9m relates to goodwill, £2.8m relates to Brand of acquisitions and £2.4m to other intangible assets. The Company has considered the amounts at which goodwill and intangible assets are stated on the basis of forecast future cash flows and have concluded that these assets have not been materially impaired.

Working Capital

For the Legal Services business, lock up days is a measure of the length of time it takes to convert work done into cash. It is calculated as the combined debtor and WIP days.

Lock up days at 30 June 2023 were 152 compared to 120 for the previous year, with debtor days being 61 (H1 2022: 52 days) and WIP days being 91 (H1 2022: 68 days). As the business has become more balanced across departments, lock up has increased, driven by non-contentious transactions, which have longer payment terms. This is an area of intense focus for management as the business grows. At 30 June 2023, trade debtors less provision for impairment were £10.5m (H1 2022: £7.7m) and contract assets were £9.8m (H1 2022: £8.0m).

In Convex, invoices are raised, and cash is received, at the point of deal completion.

Borrowings

The Group has a revolving credit facility of £15m and a term loan of £10m repayable over 5 years (£3.5m repaid as at 30 June 2023).

Our net debt position was £21.0m at the end of the period (H1 2022: £17.5m). Pressure on working capital has meant the Group relied more heavily on the revolving credit facility in 2023 than previously. Management expects this to continue through the remainder of 2023 but then to reduce significantly in 2024.

The Group has commenced a review of its borrowing facilities in anticipation of their upcoming renewal in April 2024. We are currently in discussions with a number of potential debt providers as part of that process. The Group remains in compliance with the terms and conditions of its existing loan agreements and will continue to update the market on progress in relation to the refinancing of those facilities.

Cash Conversion

The cash conversion percentage measures the Group's conversion of its underlying profit after tax into free cash flows. Net cash generated from operations includes £0.7 m (H1 2022: £4.9 m) of net litigation investments. Cash conversion of (5%) (H1 2022: 91%) for the half year shows a decrease from previous periods as a result of the stronger six-month trading period.

Summary

We are pleased with the underlying profitability and performance of the Group during the first half of the year as the new management team refocuses the business. The Legal Services division has responded well to the challenges of the uncertain economy whereas Convex has been more materially impacted. Convex's healthy pipeline of transactions provides the opportunity for it to return to profitability while the Legal Services business returns to the consistent growth of the past several years.

Kevin McNair

Interim Finance Director

28 September 2023

Unaudited consolidated statement of comprehensive income

For the period ended 30 June 2023

Unaudited consolidated statement of financial position

As at 30 June 2023

The interim statements were approved by the Board of Directors and authorised for issue on 28 September 2023.

Unaudited consolidated statement of cash flows

For the period ended 30 June 2023

Consolidated statement of changes in equity

For the period ended 30 June 2023

Consolidated statement of changes in equity

For the period ended 30 June 2023 (continued)

Consolidated statement of changes in equity

For the period ended 30 June 2023 (continued)

Unaudited notes to the financial statements for the period ended 30 June 2023

RBG Holdings plc is a public limited company, incorporated in the United Kingdom. The principal activity of the Group is the provision of legal and professional services, including management and financing of litigation projects.

Status of Interim Report

The Interim Report covers the six months ended 30 June 2023, with comparative figures for the six months ended 30 June 2022 and the year ended 31 December 2022 and was approved by the Board of Directors on 28 September 2023. The Interim Report is unaudited.

The interim condensed set of consolidated financial statements in the Interim Report are not statutory accounts as defined by Section 434 of the Companies Act 2006.

The statutory accounts for the year ended 31 December 2022 have been reported on by the Group's auditors and delivered to the Registrar of Companies. The audit report thereon was unqualified, did not include references to matters to which the auditors drew attention by way of emphasis without qualifying the report, and did not contain a statement under Section 498 of the Companies Act 2006.

The principal accounting policies adopted in the preparation of the unaudited consolidated financial statements are set out in Note 2. The policies have been consistently applied to the periods presented, unless otherwise stated.

The unaudited consolidated financial statements of the Group have been prepared in accordance with IFRS as adopted by the UK and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group's accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in Note 3.

Discontinued operations

During the year ended 31 December 2022, the Board approved plans to dispose of the Group's interests in LionFish. LionFish is classified as held for sale at the balance sheet date. The net results of LionFish have been presented as discontinued operations in the Group statement of comprehensive income (for which the comparatives have been restated). See Note 6 for further details.

Going concern

The Group financial statements are prepared on a going concern basis as the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements.

Notes (continued)

Revenue

Revenue comprises the fair value of consideration receivable in respect of services provided during the year, inclusive of recoverable expenses incurred but excluding value added tax.

Legal and Other Professional services revenues

Where fees are contractually able to be rendered by reference to time charged at agreed rates, the revenue is recognised over time, based on time worked charged at agreed rates, to the extent that it is considered recoverable.

Where revenue is subject to contingent fee arrangements, including where services are provided under Damages Based Agreements (DBAs), the Group estimates the amount of variable consideration to which it will be entitled and constrains the revenue recognised to the amount for which it is considered highly probable that there will be no significant reversal. Due to the nature of the work being performed, this typically means that contingent revenues are not recognised until such time as the outcome of the matter being worked on is certain.

Bills raised are payable on delivery and until paid form part of trade receivables. The Group has taken advantage of the practical exemption in IFRS 15 not to account for significant financing components where the Group expects the time difference between receiving consideration and the provision of the service to a client will be one year or less. Where revenue has not been billed at the balance sheet date, it is included as contract assets and forms part of trade and other receivables.

Professional services revenue

Professional services revenue is contingent on the completion of a deal and is recognised when the deal has completed. Bills raised are payable on deal completion and are generally paid at that time.

Basis of consolidation

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

Non-Controlling interests

The total comprehensive income of non-wholly owned subsidiaries is attributed to owners of the parent and to the non-controlling interests in proportion to their relative ownership interests.

Notes (continued)

Goodwill

Goodwill represents the excess of the cost of a business combination over the Group's interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired.

Cost comprises the fair value of assets given, liabilities assumed, and equity instruments issued, plus the amount of any non-controlling interests in the acquiree plus, if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree. Contingent consideration is included in cost at its acquisition date fair value and, in the case of contingent consideration classified as a financial liability, remeasured subsequently through profit or loss. Direct costs of acquisition are recognised immediately as an expense.

Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.

Financial assets

The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Group's accounting policy for each category is as follows:

Fair value through profit or loss

Litigation assets relate to the provision of funding to litigation matters in return for a participation share in the settlement of that case. Investments are initially measured at the sum invested and are subsequently held at fair value through the profit or loss.

When the Group disposes of a proportion of its participation share in the settlement of the case to a third-party under an uninsured ("naked") contract, where the percentage of the litigation asset being disposed of and the percentage return remain proportionate irrespective of the final outcome of the litigation, the difference between the disposal proceeds and the cost of investment disposed gives rise to a profit on disposal which is recognised through the profit and loss when the sale is agreed. These sales are non-recourse and, if the case is successful, the relevant % of the settlement received is paid to the third-party. For uninsured cases, the Group uses the value of third-party disposals to calculate the gross value of the proportion of the investment retained by the Group and deducts the expected cost of investment to be borne by the Group to give the fair value of the Group's investment. The proportion of each investment retained is calculated using the expected total return on the investment, the expected return payable to the onward investor and the expected total return retained by the Group.

Notes (continued)

For insured cases, when the Group disposes of a proportion of its participation share in the settlement of the case to a third-party, where the third-party return is calculated as a fixed percentage daily rate irrespective of the settlement value of a successful litigation outcome, the derecognition requirements under IFRS 9 para 3.2.2 are not met and no sale or profit on disposal arise. The Group retains the full litigation asset and the proceeds of disposal under the third-party contract are included as litigation liabilities. The fair value of the litigation asset is calculated using the expected total return retained by the Group in the different possible outcomes factored by Management's expectation of the likelihood of each outcome.

Litigation assets are reviewed for impairment where events or circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of the litigation assets exceeds its recoverable amount, the asset is written down accordingly.

Amortised cost

These assets arise principally from the provision of goods and services to customers (e.g., trade receivables), but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised in profit or loss. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

From time to time, the Group elects to renegotiate the terms of trade receivables due from customers with which it has previously had a good trading history. Such renegotiations will lead to changes in the timing of payments rather than changes to the amounts owed and, in consequence, the new expected cash flows are discounted at the original effective interest rate and any resulting difference to the carrying value is recognised in the consolidated statement of comprehensive income (operating profit).

Impairment provisions for receivables from related parties and loans to related parties, including those from subsidiary companies, are recognised based on a forward looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. This annual assessment considers forward-looking information on the general economic and specific market conditions together with a review of the operating performance and cash flow generation of the entity relative to that at initial recognition. For those where the credit risk has not increased significantly since initial recognition of the financial asset, twelve month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.

The Group's financial assets measured at amortised cost comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position. Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short term highly liquid investments with original maturities of three months or less.

Notes (continued)

Financial liabilities

The Group classifies its financial liabilities depending on the purpose for which the liability was acquired.

Other financial liabilities

All the Group's financial liabilities are classified as other financial liabilities, which include the following items:

Bank borrowings are initially recognised at fair value net of any transactions costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Externally acquired intangible assets

Externally acquired intangible assets are initially recognised at cost and subsequently amortised over their useful economic lives.

Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques.

The significant intangibles recognised by the Group, their useful economic lives and the methods used for amortisation and to determine the cost of intangibles acquired in a business combination are as follows:

Notes (continued)

Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the directors. In the case of final dividends, this is when approved by the shareholders at the AGM.

The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on actual experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed below.

Judgements, estimates and assumptions

Estimated impairment of intangible assets including goodwill

Determining whether an intangible asset is impaired requires an estimation of the value in use of the cash generating units to which the intangible has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from each cash generating unit and determine a suitable discount rate. A difference in the estimated future cash flows or the use of a different discount rate may result in a different estimated impairment of intangible assets.

Revenue recognition

Where the Group performs work that is chargeable based on hours worked at agreed rates, assessment must be made of the recoverability of the unbilled time at the period end. This is on a matter by matter basis, with reference to historic and post year-end recoveries. Different views on recoverability would give rise to a different value being determined for revenue and a different carrying value for unbilled revenue.

Where revenue is subject to contingent fee arrangements, the Group estimates the amount of variable consideration to which it will be entitled and constrains the revenue recognised to the amount for which it is considered highly probable that there will be no significant reversal. Due to the nature of the work being performed, this typically means that contingent revenues are not recognised until such time as the outcome of the matter being worked on is certain. Factors the Group considers when determining whether revenue should be constrained are whether: -

a) The amount of consideration receivable is highly susceptible to factors outside the Group's influence

b) The uncertainty is not expected to be resolved for a long time

c) The Group has limited previous experience (or limited other evidence) with similar contracts

d) The range of possible consideration amounts is broad with a large number of possible outcomes

Notes (continued)

Different views being determined for the amount of revenue to be constrained in relation to each contingent fee arrangement may result in a different value being determined for revenue and also a different carrying value being determined for unbilled amounts for client work.

Where the group enters into contingent fee arrangements, including where services are provided under Damages Based Agreements ("DBAs"), the Group estimates the total amount of variable consideration to which it will be entitled and constrains the revenue recognition to the amount for which it is considered highly probable that there will be no significant reversal. Due to the nature of the work being performed, this typically means that contingent revenues are not recognised until such time as the outcome of the matter being worked on is certain.

Where non-contingent fees as well as contingent revenue are earned on DBAs, the group must make a judgement as to whether non-contingent amounts represent revenue or a reduction in funding, with reference to the terms of the agreement and timing and substance of time worked and payments made. Where non-contingent revenue arises, the Group must match it against the services to which it relates. This requires Management to estimate work done as a proportion of total expected work to which the fee relates. Different views could impact the level of non-contingent revenue recognised.

Impairment of trade receivables

Receivables are held at cost less provisions for impairment. Impairment provisions are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. A different assessment of the impairment provision with reference to the probability of the non-payment of trade debtors or the expected loss arising from default, may result in different values being determined.

Litigation assets and fair value

LionFish

For each of LionFish's uninsured ("naked") investments, a third-party disposal has been made. To calculate the profit on disposal, the Group allocates the corresponding proportion of the total expected cost of the investment against the proportion of the investment sold. The total expected cost of each investment involves an assumption regarding the total expected drawdown on that investment, which may be less than the total value of funds committed. To calculate the proportion of each investment retained, the Group has estimated the expected total return on the investment and the expected return payable to the onward investor. As returns are dependent on the timing of the settlement, these estimates are driven by assumptions over the most likely timing of settlement. The sales prices of the part disposal are used to value the gross value of the proportion of the litigation asset retained by the Group and the estimated remaining capital to invest is deducted to give the fair value of the Group's investment. The estimates used in these calculations are based on semi-annual individual case by case reviews by Management.

The fair value of LionFish's insured investments is calculated using the expected total return retained by the Group in the different possible outcomes factored by Management's expectation of the likelihood of each outcome. As returns are dependent on the timing of the settlement, these estimates are driven by assumptions over the most likely timing of settlement. The total expected cost of each investment involves an assumption regarding the total expected drawdown on that investment, which may be less than the total value of funds committed. The expected total returns retained by the Group in the different possible outcomes are then factored by Management's expectation of the likelihood of each outcome. The estimates used in these calculations, are based on semi-annual individual case by case reviews by Management.

Notes (continued)

The recorded profits on disposal and carrying values are relatively insensitive to assumptions made, with the exception that matters for which capital invested is insured are sensitive to the estimated settlement date and the success likelihood factor applied. In general, the later the anticipated settlement date, the greater the carrying value of the investment. Management has exercised caution in its assessment of settlement dates. Management have used historic success rates on contingent contentious cases to factor the returns for the different possible outcomes.

Rosenblatt

Unlike LionFish's investments, the total return on Rosenblatt's litigation assets is a proportion of damages awarded, rather than being dependent on timing of settlement. As this figure is potentially large and uncertain, and has a strong impact on fair value calculations, where possible the Group avoids using it as an input to its fair value calculations.

Where a recent disposal of an interest in a DBA has been made, the sales price of the disposal has been used to value the gross value of the interest in damages retained by the Group. The sales price is adjusted downwards for the cost of the Group's ongoing funding of the matter, which is not borne by the onward investor. This involves an estimate of the likely amount and timing of disbursements over the course of the matter, the minimum being funds already disbursed at the balance sheet date. As management believes the sales price of disposals to represent the floor level, having been used to create a market and de-risk the original investment, the minimum level of disbursements has also been used in valuing the investment. If the present value of the maximum level of disbursements were applied against the value of damages based on disposal price, this would reduce the fair value of the investment to zero. Conversely, if a discounted cash flow method of valuation were used, including an estimate of the likely amount of damages on settlement, the value of the investment would be significantly increased.

It is presumed that fair value and cost approximate to each other on initial recognition and where a damages based agreement is at an early stage, such that the level of time worked is de minimis, the financial asset has been valued at cost, subject to assessment for overstatement.

Where there has been minimal activity on a damages based agreement from period to period, the prior year valuation is taken as the initial indication of fair value, subject to assessment for overstatement.

Litigation assets are reviewed for impairment where events or circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of the litigation asset exceeds its recoverable amount, the asset is written down accordingly.

Claims and regulatory matters

The Group from time to time receives claims in respect of professional service matters. The Group defends such claims where appropriate but makes provision for the possible amounts considered likely to be payable, having regard to any relevant insurance cover held by the Group. A different assessment of the likely outcome of each case or of the possible cost involved may result in a different provision or cost.

The Company has been informed that HMRC has started an inquiry into the valuation of employee related securities issued by the Company in April 2018 prior to the IPO. 

Notes (continued)

The Group's reportable segments are strategic business groups that offer different products and services. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, which has been identified as the Board of Directors of RBG Holdings plc.

The following summary describes the operations of each reportable segment: