Interim Results for the six months to 30 June 2019

RNS Number : 6897M

GLI Finance Limited

18 September 2019

 

18 September 2019

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

GLI Finance Limited

("the Group" or "GLI")

Interim Report and

Unaudited Condensed Consolidated Financial Statements

For the six month period ended 30 June 2019

Group Highlights

While the headline financial results for the first six months remain disappointing, they mask some crucial developments in asset efficiency and cost controls that have led to a significant improvement in return on tangible assets in our core business. Impressive loan growth in asset backed secured lending in our offshore jurisdictions, together with the establishment of offices in our future growth markets in the UK and Ireland are where operations have barely begun, lay the foundations for improved financial results in the years ahead.

·      Group loss for the half year is £6.1m (H1 2018: loss £9.3m) and Group net assets are £44.0m (31 December 2018:  £50.2m).

·      The overall result once again impacted by material write downs within the FinTech portfolio.

·      The Group is focussed on the repayment of the Zero Dividend Preference shares ("ZDPs") due on 5 December 2019. The total amount due on maturity was originally £27.2m which had reduced to £20.4m at 30 June 2019 following a series of buybacks by the Company.  Post period end, following further buy backs, the amount due has fallen to £16.8m at the end of August 2019.

·      Whilst we are focussed on selling down our on-balance sheet loan exposure and using cash assets to repay the ZDPs on maturity, there will likely be a near term funding gap as loans take longer to repay.  We are in active discussions with the major ZDP holders and are exploring options including extending the current ZDPs for a further year with a coupon of 7% or potentially issuing further bonds under its existing bond instrument.

Sancus BMS Highlights          

·      Over the last twelve months, we have scrutinised capital allocation and we have been divesting assets where return on capital, on a risk adjusted basis, is below other areas of the business.  This has led to a gradual divestment of our SME lending activities where loans tend to deserve a higher risk weighting and require significant use of our own balance sheet.  We have redirected resources to our asset backed secured lending activities where third-party funding is more accessible and our balance sheet less utilised;

·      Costs have been managed well during the period and we have seen a reduction in operating expenses by £0.5m largely in employment costs;  

·      The combination of better asset utilisation and better cost control have delivered an improvement in return on tangible assets and our return on tangible equity rose to 6.1% compared to a negative return on equity for the full year 2018 of 1.7%;

·      Strong growth has been delivered across the asset backed secured lending businesses.  Over the last twelve months we have delivered a 24% increase in the loan book from £151m at 30 June 2018 to £188m at 30 June 2019;

·      A key growth initiative for the Group has been the establishment of the UK business in April 2019 and Irish business in December 2018.  These have significantly larger markets than we are presently operating in and we expect the future growth of the Group to be driven by these jurisdictions.  The pipeline for these two new businesses is strong but the initial loan deployment has been somewhat impacted by Brexit.  Thus, the offshore regions still dominate and the full impact of opening in these two larger markets is yet to be reflected;

·      In line with our focus to improve asset efficiency and the quality of our financials, for the first half of the year proforma* on-balance sheet loan exposure reduced by 43% compared to 30 June 2018, with revenue falling by far less, 15% from £6.3m to £5.4m;

·      Proforma operating profit for the first half of the year was £0.3m (June 2018: £1.4m).  The reduction is partly due to timings of one-off large exit fees and the loss of the BMS Irish admin fees, plus associated costs in our UK and Irish jurisdictions where the revenue stream is not yet up to its full potential.  Results are also impacted by a £1.2m IFRS 9 provision in the period (30 June 2018: £0.5m).  Half of this movement relates to an SME loan within the BMS UK Fund where the underlying SME business is facing financial difficulties;

·      We continue to diversify and grow our sources of capital and lending capacity.  At 30 June 2019, Sancus had loans outstanding of £188m with Co-Funders providing £173m, equating to a co-funding ratio of 92%.  This is up from last year where Sancus had loans outstanding of £151m and Co-Funding of £135m equating to an 89% ratio.  The three main sources of syndicated capital are the £45m credit facility (£34m loans in HIT at 30 June 2019) with Honeycomb Investment Trust plc ("HIT"), the Sancus Loan Notes ("SLNs") £25m and individual Co-Funders £114m.

FinTech Ventures Highlights

·      The carrying value of FinTech Ventures portfolio is £8.7m (£13.8m at 31 December 2018);

·      NAV per share for FinTech Ventures portfolio is 3.2 pence (31 December 2018: 5.1 pence);

·      The write down in the period relates primarily to three of our platforms.  One of the platforms has disappointingly ceased trading in September 2019 following an enforcement by their debt provider.  Another of the platforms is finding it difficult to secure the additional equity capital they require.  The third platform where we have suffered a write down has secured further equity capital during H1 2019, but the providers of the new equity have negotiated a favourable liquidation preference which has impacted our value.  

* A proforma reconciliation to Statutory Results is noted in Table 1 and Table 3.

Enquiries

GLI Finance Limited

Andy Whelan

[phone]

Liberum Capital (Nominated Adviser and Corporate Broker)

Chris Clarke

Steve Pearce

[phone]

Instinctif Partners (PR Advisor)

Tim Linacre

Katie Bairsto

[phone] 

CHAIRMAN'S STATEMENT

Positioning the business for the future

Our focus remains on maximising the earning potential of our two distinct business units, whilst recognising that Sancus is the key for GLI's future.

Sancus BMS comprises the Group's property backed and SME lending businesses.  FinTech Ventures represents the Group's investments in a portfolio of SME focussed lending platforms.  Over the last few years we have seen the valuation of the FinTech Ventures portfolio become a much smaller part of the Group's assets as businesses have failed and numerous valuations in the sector have reduced.  However, we continue to work hard to maximise the value from this portfolio, but as previously highlighted this has proven to be extremely challenging, as we are a minority investor with limited financial resources to support the platforms.

Sancus BMS is our core trading business and continues to show good growth with 24% increase in the loan book from £151m at 30 June 2018 to £188m at 30 June 2019.  Over the past six months, the loan book has increased by 12% from £168m to £188m.  Sancus BMS revenue on a statutory reporting basis has remained flat at £6.8m for the six months ended 30 June 2019 compared to £6.9m in the prior period.  £1.6m of this revenue related to Sancus Loans Limited ("SLL") which increased by 148% in comparison to the prior period, highlighting the demand we have seen in loan origination.  In our view, to show the true economic performance of the Group, all Co-Funders should be assessed in the same way.  However, as SLL is 100% owned by Sancus BMS Group Limited (as it was required to be set up as an SPV for the HIT facility) it is consolidated into the Group's results.  In our proforma statements on Table 1 the SLL results have been deducted from the consolidated statement of comprehensive income ("SOCI") and the consolidated statement of financial position ("SOFP") and we show the results on a net basis which is the same for all our other syndicated arrangements.

Sancus BMS revenue on a proforma basis has not moved in line with the loan book growth with a reduction of 15% (£0.9m) compared to the same period last year.  This is in part due to a reduction in exit fees of £0.3m which by their nature are lumpy and will vary by period. In addition, the sale of the Irish BMS Fund mandate last year contributed to a £0.3m reduction in admin fee income.  However, the reduction in admin revenue is materially less than the associated fall in assets used to support the SME lending activities.  Interest income is expected to decrease further over the remainder of this year as we reduce our on-balance sheet loan book to use funds to repay the ZDPs.  This is in line with our long-term strategy to increase return on tangible assets over time with reduced on-balance sheet risk exposure.

The growth in the loan book is a factor of growth in Co-Funder appetite, which includes the £45m HIT facility that was launched in January 2018, of which the loan balance at  the end of June 2019 was £34m.  In addition to this facility and regular participation by Co-Funders, we also have the Sancus Loan Note programme that has proven very successful and provides Co-Funders with the option of participating in a wider pool of loans with a fixed rate of return.  As seen by the HIT facility this diversification of funding has allowed us to grow the Sancus BMS loan book and we continue to look at other similar debt providers to aid expansion plans.

ZDPs

The repayment of our ZDPs on 5 December 2019 remains at the forefront of our mind and we have made good progress acquiring those which have become available in the market over the last 12 months.  We have spent £9.4m on buybacks up to the date of this report with a total of 7.9m ZDP shares now held by the Group.  This has reduced the ZDP liability to £16.8m at the end of August 2019. Whilst we are focussed on selling down our on-balance sheet loan exposure and using cash assets, there will likely be a near term funding gap as loans take longer to repay.  We have been exploring several options to fund this potential gap.  This includes letting a portion of the ZDPs run past the scheduled repayment date and repaying the liability as liquidity becomes available to enable the Company lawfully to redeem the ZDPs, which although contemplated by the Company's articles of incorporation and the ZDP prospectus, is not our preferred route.  We have engaged with the major ZDP holders and are looking into the potential extension of the current ZDPs for a further year with a coupon of 7% or issuing further Bonds under the current Bond instrument.

Taking into account the varying possible outcomes of factors and assumptions listed above, these constitute a material uncertainty that may cast significant doubt over the Company's and Group's ability to continue as a going concern, such that it may be unable to release its assets and discharge its liabilities in the normal course of business.  The Directors expect that if they are able to action the mitigations being considered above, the material uncertainties will be extinguished.  Refer Note 2(c) for further details.

Brexit

The uncertainties created by Brexit makes it very difficult to predict what impact this will have on the UK property lending market.  However, Sancus has further tightened its credit processes to decline proposals where the repayment strategy is based upon bull market behaviour.  This was due to our continued fears that global economies are at or are reaching the peak of this long bull market cycle and the threat of a global recession or correction in stock and bond markets is increasing.  However, we do believe that the medium-term benefits will be positive for alternative lenders as banks will step back further from their lending activities as they closely monitor their Tier 1 Capital ratios.  In the immediate future, businesses may pause and take a wait and see approach for new projects, however, for already committed projects we expect them to continue to push forward and execute on their plans.  In any stressful period, there are arbitrage pricing opportunities and Sancus will seek to benefit from such instability.

Overview

We have made significant strides to lay the foundation for growth and operational improvements to create and build shareholder value in the Sancus BMS Group.  The funding facility, Loan Note and Co-funder network helps to support this growth, but we are also continuing to secure a steady flow of new Co-Funders due to the attractive risk-adjusted returns that are available on our lending opportunities.  Our focus for the foreseeable future is growing the UK and Irish operations and continuing to expand the offshore jurisdictions.

We shall continue carefully managing the FinTech Ventures portfolio and explore options to maximise the return to Shareholders, although we note the continuing challenges on these investments and the poor performance to date.  

We are also pleased to welcome Nick Wakefield as a Director of the Company.  Nick was proposed as a representative of our largest shareholder and brings significant experience to the Board.    

Following shareholder feedback at the 2019 AGM a new Company Remuneration Policy is being prepared and details of this will be included in our 2019 Annual Report.

Dividend and Shareholders

In line with our dividend policy, it is not proposed to declare a dividend for this period.  We expect our investments in Ireland and the UK together with further focus on operational matters to drive cash flow in the coming years.  This will allow us to resume the dividend.  I am grateful to all our shareholders who have kept confidence with the Group through what continues to be a challenging period as reflected in the depressed share price.  We believe that the share price is trading well below the inherent value of the business and we look forward to seeing it recover in due course on the back of the strong growth delivered by the Executive Team within Sancus BMS.  

Patrick Firth

Chairman

Date: 17 September 2019

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

During the first half of 2019 Sancus BMS has seen a flurry of asset backed secured loan activity and we have spent considerable time, energy and focus on the UK and Irish operations to ensure they are well positioned to grow in the coming months.   We have felt the effects of Brexit, which has created a more cautious environment and look forward to a conclusion on this hopefully in the final quarter of this year.  We continue to work closely with the FinTech Ventures portfolio providing support where we can.  No further capital has been invested in the portfolio during 2019 and it remains a challenging market for many of the platforms to raise capital.

The Group results for the first half of 2019 produced a revenue of £7.1m (30 June 2018: £7.2m) and an operating loss of £0.1m (30 June 2018: profit £0.6m).  As we go onto explain below, the statutory results include the revenue and debt costs of the HIT facility which saw a significant increase from last June as we have utilised our Co-Funder base to grow the loan book.  The Group net assets have decreased in the period from £50.2m at 31 December 2018, to £44.0m at 30 June 2019, largely impacted by the £5.2m write down of the FinTech Ventures portfolio.

Sancus BMS

The Board believes our economic performance is best illustrated from our proforma statements.  In our view, all Co-Funders should be assessed in the same way.  However, as Sancus Loans Limited ("SLL") is 100% owned by Sancus BMS Group Limited (as it was required to be set up as an SPV for the HIT facility) it is consolidated into the Group's results.  In our proforma statements the SLL results have been deducted from the consolidated statement of comprehensive income ("SOCI") and the consolidated statement of financial position ("SOFP") noted below and we show the results on a net basis which is the same for all our other Co-Funder arrangements.  We show the reconciliation of the proforma statements with accounting statements below.

Financial Results for the six months ended 30 June 2019 (Table 1) - Sancus BMS Group

Sancus BMS SOCI Proforma Results			30 June 2019 £'000	30 June 2018 £'000		Movement %		Movement £'000
Sancus BMS interest on loans			1,620	1,784		(9%)		(164)
Sancus BMS Fees and Other Income			3,530	4,486		(21%)		(956)
Sancus Loans Limited Fees and Other Income			271	75		261%		196
Revenue			5,421	6,345		(15%)		(924)
Interest costs			(891)	(985)		10%		94
Other cost of sales			(253)	(110)		(130%)		(143)
Total Cost of Sales			(1,144)	(1,095)		(4%)		(49)
Gross profit			4,277	5,250		(19%)		(973)
Operating expenses			(2,779)	(3,327)		16%		548
Changes in expected credit losses ("ECLs") (IFRS 9)			(1,175)	(518)		(127%)		(657)
Net operating profit			323	1,405		(77%)		(1,082)
Other net (losses) / gains			(753)	227		(432%)		(980)
Goodwill impairment			-	(2,139)		100%		2,139
Tax			(144)	(162)		11%		18
Loss for the period			(574)	(669)		14%		95
Reconciliation to SOCI - Revenue		30 June  2019 £m			30 June 2018 £m		Movement %		Movement £'000
Revenue per proforma Sancus BMS SOCI		5,421			6,345		(15%)		(924)
Less Sancus Loans Limited Fee and Other Income		(271)			(75)		(261%)		(196)
Sancus Loans Limited Revenue		1,611			649		148%		962
Revenue per Sancus BMS SOCI (Note 3)	6,761				6,919		(2%)		(158)
Reconciliation to SOCI - Cost of Sales		30 June  2019 £m			30 June 2018 £m		Movement %		Movement £'000
Cost of sales per proforma Sancus BMS SOCI		(1,144)			(1,095)		(4%)		(49)
Sancus Loans Limited interest costs		(1,340)			(574)		(133%)		(766)
Cost of Sales per Sancus BMS SOCI (Note 3)	(2,484)				(1,669)		(49%)		(815)

Sancus BMS Entity Results (Table 2) 

£'000	2019 - Half Year				2018 - Half Year				%
	Offshore	BMS	UK	Total	Offshore	BMS	UK	Total
Revenue	4,263	807	351	5,421	3,754	1,924	667	6,345	(15%)
Other Cost of Sales	(183)	-	(70)	(253)	(35)	-	(75)	(110)	(130%)
Operating Expenses	(1,488)	(453)	(838)	(2,779)	(1,383)	(851)	(1,093)	(3,327)	16%
Change in ECLs	(565)	(610)	-	(1,175)	(518)	-	-	(518)	(127%)
Debt costs				(891)				(985)	10%
Net Operating Profit	2,027	(256)	(557)	323	1,818	1,073	(501)	1,405	(77%)
Loan Book £m	186	34	5	225	151	81	13	246	(8%)
On-balance sheet loans £m gross of IFRS 9 (Table 4)	15	9	0	24	16	21	1	38	(38%)

Revenue

Sancus BMS Group revenue on a proforma basis was £5.4m for the first half of the year (H1 2018: £6.3m).  On a statutory basis revenue was £6.8m (H1 2019: £6.9m).  A reconciliation between the proforma and statutory results is included in Table 1.  The reduction in the period is partly due to the sale of the BMS Irish Fund in May 2018, therefore we no longer receive admin fees for this fund, and we have had movements in the exit fees during the period compared to prior year, which by their nature tend to be quite sizable and lumpy.  Our asset backed secured lending activities within the Sancus offshore jurisdictions have had a solid first six months with a 14% increase in revenue, although we are always pursuing more loan origination and deployment.  For BMS, which focuses on SME lending, revenue has decreased by 58% compared to the same period last year as a result of the sale of the BMS Irish Fund in July 2018 and the reduction in the advisory fee charged to the UK Fund.  The UK has also seen a 47% revenue decrease from the closure of our supply chain finance offering.  The UK and Ireland asset backed lending businesses are our primary focus going forward.  The UK office only became fully operational in April 2019 and we are expecting to report an improvement of this revenue stream in the second half of the year, albeit we are concerned that Brexit may have an adverse effect on our expectations.  Revenues from interest income on loans relates to the Sancus BMS on-balance sheet loans.  These have reduced in the period by 9% as on-balance sheet loans have reduced.   Revenues from interest income on loans relates to the Sancus BMS on-balance sheet loans. These have reduced in the period by 9% as on-balance sheet loans have reduced.

Total Cost of Sales

Total cost of sales which includes interest and other direct costs, has remained flat in the period with lower interest costs (reducing our capital intensity) being offset by higher loan broker costs from new Sancus loan introductions.   

o  £10m 5-year Bond (7%) matures 30 June 2021, interest paid half yearly;

o  £20.8m 2019 ZDPs (5.5%) income entitlement and principal due on expiry 5 December 2019 (net due £16.8m as at 31 August 2019).

To measure business unit performance, finance costs are allocated to Sancus BMS to recognise its use of the Group's debt facilities in its lending activities.  FinTech Ventures is treated as being funded by equity.  This allocation best matches the risk profile of each business unit with its capital structure, as well as recognising that interest costs are effectively serviced by interest income from Sancus BMS.

Operating Expenses

We continue to manage costs carefully and within the Sancus BMS Group £0.5m of cost savings were achieved in the period with operating expenses for the first 6 months falling from £3.3m to £2.8m.  Savings relate predominantly to employment costs. Headcount in the period has reduced by a further 5 heads to 35 in the Sancus BMS Group at the end of June 2019.

IFRS 9

We have had a movement in expected credit losses (IFRS 9) of £1.2m in the period (£0.5m in June 2018).  Half of this movement relates to an SME loan within the BMS UK Fund where the underlying SME business is facing financial difficulties.  

The majority of the remainder of the movement in expected credit losses relates to our Sancus asset backed lending loan portfolio and is as a result of a couple of secured loans going into default, which we are actively working on to resolve (Refer Note 21).

Other net (losses) and gains

We have reported a £0.7m other net loss in the period (30 June 2018: gain £0.2m).  This balance includes revaluations of our associate holdings in Amberton Asset Management and Sancus Isle of Man ("IOM"), but the largest movement was due to additional costs associated with Sancus Properties Limited which accounted for £0.6m of the loss.  These costs relate to security previously held by a former borrower.  During the period unbudgeted remediation expenses were incurred to enable them to be sold at the highest possible value in due course.

Sancus Properties Limited

In August 2018 a 100% owned SPV called Sancus Properties Limited was incorporated to hold assets previously held by a former borrower.  The intention remains to realise these assets via orderly transactions; the timing of which will be determined so as to best deliver shareholder capital.  These assets are reported under IAS2 Inventories whereby they are held at the lower of cost or NRV.  As at 30 June 2019 they had a value assigned to them of £4.1m and consist of a combination of houses, a block of apartments and a large plot of land.  We continue to make progress with the portfolio and have sold one house during the period with the block of apartments due on the market very shortly.  We continue to look at all options to ensure the greatest return for shareholders whilst balancing the risk/reward and liquidity of each.

Honeycomb Investment Trust (HIT) Facility

A special purpose loan vehicle called Sancus Loans Limited ("SLL"), which is non-recourse to GLI, was established during 2018 with a £50m funding capacity.  This has been backed by a £45m credit facility from HIT, with a term of 3 years.  Sancus has £5m equity invested in this vehicle.  Although non-recourse to GLI the SPV is 100% owned by the Group and is therefore consolidated.  As a result, both the Sancus Loans Limited loans and HIT facility appear on the consolidated balance sheet but deducted from our proforma results as noted earlier.

Revenue within Sancus Loans Limited has increased by £1m in the period from £0.6m to £1.6m for the period ended 30 June 2019.  This reflects the increased draw down of the facility from £23m in June 2018 to £32m in June 2019 (maximum facility £45m).  At the period end, interest bearing debt comprised:

o  £32m HIT facility (7.25%) (maximum facility £45m), interest paid monthly.

Sancus BMS Proforma Statement of Financial Position (Table 3)

£'000	30 June 2019 (unaudited) Note 3	30 June 2019 SLL	30 June 2019 Proforma	31 December 2018 (audited) Note 3	31 December 2018 SLL	31 December 2018 Proforma
Sancus BMS on-Balance Sheet Loans and loan equivalents	20,909	-	20,909	26,678	-	26,678
Sancus Loans Limited loans	33,913	33,913	-	25,639	25,639	-
Goodwill	22,894	-	22,894	22,894	-	22,894
Sancus Properties Limited	4,110	-	4,110	4,404	-	4,404
Trade and other receivables	8,012	1,954	6,058	4,678	2,005	2,673
Other assets	4,235	-	4,235	3,839	-	3,839
Cash and cash equivalents	3,727	2,172	1,555	3,856	364	3,492
Total Assets	97,800	38,039	59,761	91,988	28,008	63,980
ZDPs payable	(19,991)	-	(19,991)	(24,059)	-	(24,059)
Bond payable	(10,000)	-	(10,000)	(10,000)	-	(10,000)
HIT Debt	(32,446)	(32,446)	-	(22,684)	(22,684)	-
Other Liabilities	(1,953)	(27)	(1,926)	(1,723)	(25)	(1,698)
Total Liabilities	(64,390)	(32,473)	(31,917)	(58,466)	(22,709)	(35,757)
Sancus BMS net assets	33,410	5,566	27,844	33,522	5,299	28,223
Sancus own equity within SLL			5,566			5,299
Sancus BMS net assets including SLL equity			33,410			33,522

Sancus BMS on-Balance Sheet Loans and loan equivalents (Table 4)

On-balance sheet loan and loan equivalents have decreased in the period from £26.7m to £20.9m.  As previously noted, the disinvestment from SME lending is allowing asset utilisation to improve, which will drive an improvement in ROTA and shareholder value over time.  As we have also seen from our loan book funding, our access to capital has also improved allowing funding of asset backed secured loans from other sources such as the HIT facility, SLNs and Co-Funders.

£'000	30 June 2019	31 December 2018
Jersey	10,843	8,219
Gibraltar	3,745	6,268
Guernsey	438	310
BMS - Investment in the fund and other loans	8,554	10,074
Sancus UK	74	143
Sancus Loan Notes	-	3,311
IOM preference shares	-	950
Ireland	85	-
IFRS 9 Provision	(2,830)	(2,597)
Total Sancus BMS on-Balance Sheet Loans and loan equivalents (ex SLL)	20,909	26,678

Marketing

We continue to grow our market share.  The Sancus brand is becoming increasingly well-known and we are receiving a healthy flow of new lending opportunities with strong growth in new Co-Funders.

Loan Book

Whilst the Sancus asset backed lending loan book has grown strongly by 24% (to £188m) year on year, this has been somewhat offset by a £47m reduction in the BMS loan book over the same period from the sale of the Irish BMS Fund and a reduction in the UK BMS Fund.  We have seen the HIT facility increase by 36% from the same period last year as well as the loan notes up 35% and Co-Funders up 24%.  Our on-balance sheet loans have decreased by 19% from 31 December 2018 and 43% from 30 June 2018, in line with our ZDP repayment strategy and the continued focus on improving ROTA.

Loan deployment for asset backed lending is a key metric we use to monitor the performance of the Sancus BMS Group.  Over the last two years we have seen a steady increase in loan deployments from £102m for the full year 2017 and £115m for the full year 2018 representing a 12% increase.  For the first six months of 2019 loan deployment was 28% ahead of last year at £73m (H1 2018: £57m).  We have set ourselves stretching targets for this year incorporating the new asset backed lending for the UK and Ireland.

The UK and Ireland has seen slower loan deployment than anticipated but we fully expect this to grow in the second half of the year, albeit Brexit is causing a strong head wind that cannot be ignored.  A final resolution to this debacle is required as soon as possible as the UK economy is being damaged by the continued uncertainty. 

Sancus Loan Notes

The Sancus Loan Notes ("SLNs") comprise a planned series of Special Purpose Vehicles ("SPVs") designed to act like securitisation vehicles to help diversify our funding options and enable additional Co-Funder participation in diversified loan portfolios.  These are attractive to new clients that want to participate in a pooled vehicle, delivered across a number of loans, rather than via direct participation in individual loans. SLN4 had a successful launch in July 2018, and has now grown to £7.4m, which matures on 30 September 2019 and has a coupon of 6%.  As part of the structure of the loan notes, Sancus BMS provides first loss positions.  For SLN4 this exposure is 20% of the total capital in these Loan Notes. On 8 November 2018 SLN5 was launched with £6.5m and is now at £17.1m with a coupon of 7%.  Sancus BMS has a 10% first loss position on this Loan Note.

Technology

The Group continues to invest in its technology. Following the successful launch of the Group's proprietary Loan Management System (LMS) in 2017, an online reporting platform for offshore Co-Funders was rolled out in 2018.  We have now rolled out a fully online transactional platform in the UK.  

Sancus BMS Group KPIs

We set out in our 2018 Annual Report that we will be reporting our KPIs going forward to demonstrate the progress we are making over time.  We are committed to driving shareholder value through judicious growth, improving asset utilisation and cost controls.  We believe the share price will positively reflect improvement in these metrics overtime (Refer to Note 20 Performance Measures).

Sancus BMS Group KPIs (Table 5)

	30 June 2019  6 months £m		31 December 2018 Full Year £m
Total Sancus BMS Loan Book		225	219
Sancus Asset Backed Lending Loan Book		188	168
Sancus on-balance sheet loans excluding SLL*		21	27
Sancus Loan Deployment		73	115
Proforma Revenue		5,421	11,664
Total Costs		5,098	11,845
Net Operating Profit / (Loss)		323	(181)
Tangible Assets		45,993	48,455
Tangible Equity		10,516	10,628
ROTA		1.4%	(0.4%)
ROTE		6.1%	(1.7%)
Cost Income Ratio		94%	102%

* Sancus Loans Limited ("SLL") - refer Table 4 for Sancus on-balance sheet loan breakdown.

Return on Total Assets ("ROTA")

We have seen an improvement in this ratio in the first half of the year from (0.4%) for the year ended 31 December 2018 to 1.4% annualised for the first six months of 2019 as operating profits have increased and the total tangible assets figure has reduced following the reduction of our on-balance sheet loans and concurrent reduction in our liability to purchase the ZDPs in the market. 

Cost Income Ratio ("CIR")

The total costs include operating expenses, debt costs and broker costs as set out in Note 20. CIR for the first half of 2019 has reduced to 94% from 102% for the full year 2018.  Cost efficiencies have been delivered across a number of areas, but primarily in employment costs.

Return on Tangible Equity ("ROTE")

Equity has been adjusted to exclude goodwill, so we can monitor the return we are making on tangible equity.  The return, being the net operating profit figure noted above has increased to £323k in this first half year compared to a loss for the full year in 2018 of £181k when there was a large provision from the adoption of IFRS 9 in the year.  ROTE on an annualised basis for the first half of 2019 was 6.1% compared to negative 1.7% for the full year 2018 results.

 

FinTech Ventures

Financial Results for the six months ended 30 June 2019 (Table 6) - FinTech Ventures

	30 June 2019 £'000	30 June 2018 £'000	Movement %	Movement £'000
Revenue	325	260	25%	65
Operating expenses	(234)	(637)	63%	403
FinTech Ventures fair value movement	(5,190)	(8,251)	37%	3,061
FinTech Ventures foreign exchange gain	39	429	(91%)	(390)
Other net gains	54	20	170%	34
Total Loss after tax	(5,006)	(8,179)	39%	3,173

	30 June 2019 £'000	31 Dec 2018 £'000	Movement %	Movement £'000
FinTech Ventures Portfolio	8,665	13,804	(37%)	(5,139)
FinTech Total Net Assets	9,791	15,598	(37%)	(5,807)

It is disappointing to again be reporting further write downs in the FinTech Ventures portfolio.  As we have previously outlined, we are largely a passenger on this journey and due to capital constraints, we have not been able to follow our money into these platforms.  Whilst FinTech as a sector continues to grow strongly, the increased competition is making it increasingly difficult for smaller players, particularly those that are loss making, to raise further equity.  Investors are much more discerning regarding potential valuations and are seeking key unique service propositions as to why a particular platform will succeed.  For several of our platforms, it is taking longer for them to achieve breakeven than previously envisaged and they are currently seeking to raise further equity to fund further growth and to see them through to sustained profitability.  Competing demands for our capital means that the platforms have often had to secure new third-party investors.  Given the plethora of investment opportunities, these investors are often able to negotiate favourable terms and frustratingly, we have often not been able to follow our money. 

We have a further £5.2m write down across the FinTech Ventures portfolio in the period.  The write down relates primarily to three of our platforms.  One of the platforms has disappointingly ceased trading in September 2019 following an enforcement by their debt provider.  Another of the platforms is finding it difficult to secure the additional equity capital they require.  The third platform where we have suffered a write down has secured further equity capital during H1 2019, but the providers of the new equity have negotiated a favourable liquidation preference which has impacted our value. 

No further investments have been made during the period.  The movement in foreign currency rates since 31 December 2018 has resulted in a marginal £39k increase in the fair value of our investments.  £82k has been received in respect of two previously written down platforms.  We continue to carefully monitor and actively engage with the platforms in which we hold investments in order to protect our interests.

Group

ZDPs

The maturity of the ZDPs on 5 December 2019 is a key priority for the coming months.  As at the end of August 2019, the liability has been reduced by 38% to £16.8m via the series of buy backs which we have been able to complete over the last 18 months.  This has been achieved by reducing exposure to loans on our balance sheet. 

By their nature, bridging and development loans often extend, and their repayment date is more uncertain.  Moreover, we have found that Brexit has had an impact on the secondary liquidity of loans.  It is likely that there is a timing issue in that not all loans have repaid as expected and as such, there will likely be a near term funding gap.  We are in active discussions with the larger ZDP shareholders to explore the options available to us, which include the following:

·      Roll the existing ZDPs for a further 1 year at an increased rate of 7%;

·      Fund the gap by issuing ZDP shareholders units in the GLI bond, which matures on 30 June 2021. This bond pays a coupon of 7% semi-annually and ranks higher in the liquidity preference than the current ZDPs.

Subject to liquidity, we intend to recommence the buyback programme to reduce the outstanding balance on the ZDPs using monies from on-balance sheet loans, which are repaid prior to 5 December 2019.

Costs

A thorough review of the cost allocation within the Group was conducted in H1 2019.  Whilst overall Head Office and FinTech costs reduced by 25% to £0.8m, FinTech costs reduced by £0.4m following the new allocation basis, and Head Office costs increased by £0.1m.

Remuneration

As referred to in the Chairman's Statement, we are reviewing the Group's Remuneration policy following shareholder feedback from the 2019 AGM and will provide full details of this in the 2019 Annual Report.

Strategic Objectives

The Group's strategy is to maximise shareholder value through growing the profitability of Sancus BMS and realising value from its investments in FinTech Ventures.  We are focussed on the main key targets below, which we believe will maximise shareholder value.

Become a capital light entity

We have been focussed on reducing our on-balance sheet loan book exposure and deploying these funds into acquiring and repaying the ZDPs due on 5 December 2019.  This in turn will de-risk our balance sheet and improve ROTA. At the end of June 2019 ROTA was 1.4% (31 December 2018: (0.4%)).

The ZDP liability has been reducing by buying back ZDPs as these have become available.  At the end of August 2019, we held 7,934,460 ZDPs, reducing the liability by 38% from £27.2m due on maturity to £16.8m at end of August 2019.  The intention remains to repay the ZDPs on maturity and we are exploring all options available to us to do so as discussed in the CEO report.

Sancus needs capital to underwrite its deal flow but continual efforts to diversify and grow our Co-Funders improves our ability to syndicate and drive better returns on the Company's assets.

Focus on creating shareholder value

We believe value creation will be achieved by:

·      Revenue growth - this is largely driven by loan deployment.

·      Improving our ROTA - by reducing our on-balance sheet loan book and increasing operating profits.

·      Increasing operating profits - by increasing gross margin and reducing costs.

Over time we expect Ireland and the UK to be our largest revenue generating entities and as noted our focus is on growing these.  The UK office was opened in London in April 2019 (after closing the larger Basingstoke office).  Whilst revenue in the UK has been modest to date, the pipeline is healthy, and we expect revenue to pick up in the second half.  The position is similar in Ireland.  The UK business also benefits from our own proprietary fully transactional electronic platform.  These are the largest potential markets and are key for growth.

The loan book has grown by 24% over the last year as referred to earlier.

We have seen an improvement in Sancus BMS Group ROTA from (0.4%) in 2018 to 1.4% at 30 June 2019.

2019 has seen a reorganization within the Group. We have reduced headcount across the Group by a further 6 in the first half of the year, resulting in an improved cost income ratio.

Profitably expand the funding base

Growing and diversifying pools of lending capital is critical for our growth.  Our funding sources include institutional, corporate and high net worth individuals.  We continue to launch further loan notes through Amberton Asset Management or similar structured vehicles to expand our Co-Funder base.  SLN4 matures on 30 September 2019 and it is the intention to grow SLN5, which has a maximum mandate of £50m and matures on 8 November 2021.

We also continue to target the Co-Funder base and nurture relationships.  The HIT funding line is designed to be complementary to our Co-Funder base and work alongside it to complete on larger sized loans which have a greater revenue impact on the Group.  Our total syndicated lending has increased by 28% in the last six months from £135m at 31 December 2018 to £173m at 30 June 2019.

We also continue to explore long term financing lines that sit alongside our syndicated lending approach.

Realise value from FinTech Ventures Investments

We continue to assist platforms with strategy, corporate finance and capital restructuring within the FinTech Ventures portfolio. Two platforms successfully completed capital restructurings during H1 2019, and several other platforms are looking to raise equity over the next 12 months.  Monitoring and governance of FinTech Ventures continues.

It remains a challenging market for many of the FinTech platforms to raise further capital, which in several cases is impacting their growth.  Sadly, the outcome is binary in that they will either succeed or be forced into administration.

Outlook

The Group has gone through a period of sustained change over the past three years.  Our focus on growth, stringent capital allocation and profitability will drive value for shareholders.  This year we are changing the shape of the Group to reduce our debt costs and on-balance sheet risk exposure.

However, I fully appreciate that we have two businesses; Sancus BMS and the FinTech Ventures portfolio, which might not ordinarily be grouped together.  Therefore, I will continue to consider and explore how we can maximise their values independently in the future.

We are now in a solid position with the potential for strong risk-adjusted performance for the Group.  The asset backed secured lending activity of Sancus is clearly the Group's future.  It has created a strong niche in the alternative lending sector, a robust loan system with two electronic platforms and has the ability to significantly grow its operation and profitability.  My medium-term target is to achieve a "live" loan book of £500m from £270m at the end of June 2019 (includes IOM), which will enable the Company to recommence its dividend programme and strengthen our balance sheet reserves.

We remain highly focussed on our liability to repay the ZDPs, which mature in December 2019 and I have been in contact with some of the larger ZDP shareholders to discuss the various options (as previously highlighted) available to the Company.  Whilst no decision has been made we will actively pursue all options available, which could also potentially include repaying them from the proceeds of selling some assets. We will provide an update to shareholders in due course.

Finally, I want to thank all shareholders for their continued support during this period of change.  I fully acknowledge that the journey to date has been disappointing.  However, we have successfully aligned the business to focus on Sancus, which through its multi-jurisdictional asset backed secured lending service, is in a strong position to deliver future growth, profitability and in due course recommence the dividend programme.

Andrew Whelan

Chief Executive Officer

17 September 2019

RISKS, UNCERTAINTIES AND RESPONSIBILITY STATEMENT

Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the group's performance over the remainder of the financial year. These include, but are not limited to, Capital and liquidity risk, Regulatory and compliance risk, Market risk, Credit risk, Operational risk - execution of Sancus BMS strategy and Investment risk - platform valuation. These risks remain unchanged from December 2018 and are not expected to change in the 6 months to the end of the financial year. Further details on these risks and uncertainties can be found in the December 2018 Annual Report.

Responsibility statement

The Directors confirm that to the best of their knowledge:

§  The Interim Report has been prepared in accordance with the AIM rules of the London Stock Exchange;

§  This financial information has been prepared in accordance with IAS 34 as adopted by the EU;

§  The interim results include a fair review of the important events during the first half of the financial year and their impact on the financial information as required by DTR 4.2.7R; and

§  The interim results include a fair review of the disclosure of related party transactions as required by DTR 4.2.8R.

Approved and signed on behalf of the Board of Directors

17 September 2019

INDEPENDENT REVIEW REPORT TO GLI FINANCE LIMITED

We have been engaged by the Company to review the condensed set of Consolidated Financial Statements in the Interim Report for the six months ended 30 June 2019 which comprises the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Shareholders' Equity, the Condensed Consolidated Statement of Cash Flows and related Notes 1 to 21. We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Consolidated Financial Statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK & Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board.  Our work has been undertaken so that we might state to the company 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 company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

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

As disclosed in Note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of Financial Statements included in this Interim 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 Company a conclusion on the condensed set of Financial Statements in the Interim Report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK & Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board 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 set of Financial Statements in the Interim 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.

Material uncertainty relating to going concern

We draw attention to Note 2(c) in the financial statements, which indicates that there is a material uncertainty over the timing and quantum of cash flows needed to generate sufficient cash reserves to repay the ZDP shares on the maturity date of 5 December 2019 and extinguish its liabilities as they fall due. The mitigations identified by the Directors are inherently uncertain as to their success.

As stated in Note 2(c), these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the Group's and the Company's ability to continue as a going concern. Our conclusion is not modified in respect of this matter.

Deloitte LLP

Guernsey, Channel Islands

17 September 2019

 

For the period ended 30 June 2019

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

	Notes	Period ended	Period ended
		30 June 2019 (unaudited) £'000	30 June 2018 (unaudited) £'000
Revenue	4	7,086	7,179
Cost of sales	5	(2,488)	(1,669)
Gross profit		4,598	5,510
Operating expenses	6	(3,565)	(4,370)
Changes in expected credit losses	17	(1,175)	(518)
Operating profit		(142)	622
FinTech Ventures fair value movement	17	(5,190)	(8,251)
FinTech Ventures foreign exchange gain	17	39	429
Other net (losses)/gains		(699)	247
Impairment of goodwill		-	(2,139)
Loss for the period before tax		(5,992)	(9,092)
Income tax expense		(144)	(162)
Loss for the period after tax		(6,136)	(9,254)
Other comprehensive losses
Foreign exchange arising on consolidation		(5)	-
Total comprehensive loss for the year		(6,141)	(9,254)
Basic and Diluted loss per Ordinary Share	7	(2.02)p	(3.03)p

The accompanying Notes form an integral part of these financial statements.

As at 30 June 2019

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

		30 June 2019 (unaudited)	31 December 2018 (audited)
ASSETS	Notes	£'000	£'000
Non-current assets
Fixed assets	8	1,186	31
Goodwill	9	22,894	22,894
Other intangible assets	10	450	571
Sancus BMS loans and loan equivalents	17	7,923	14,916
FinTech Ventures investments	17	8,665	13,804
Other investments		-	327
Investments in joint ventures and associates		2,919	2,855
Total Non-current assets		44,037	55,398
Current assets
Loans through platforms		870	883
Other assets	12	4,110	4,404
Sancus BMS loans and loan equivalents	17	46,899	37,401
Trade and other receivables	11	8,315	5,656
Cash and cash equivalents		5,061	5,863
Total current assets		65,255	54,207
Total assets		109,292	109,605
EQUITY
Share premium	13	112,557	112,557
Treasury shares	13	(1,099)	(1,162)
Retained earnings		(67,479)	(61,168)
Total Equity		43,979	50,227
LIABILITIES
Non-current liabilities	14	43,214	32,684
Current liabilities	14	22,099	26,694
Total liabilities		65,313	59,378
Total equity and liabilities		109,292	109,605

The financial statements were approved by the Board of Directors on 17 September 2019 and were signed on its behalf by:

Director: Patrick Firth

Director: John Whittle

The accompanying Notes form an integral part of these financial statements.

For the period ended 30 June 2019

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

			Notes	Share  Premium	Treasury Shares	Foreign Exchange Reserve	Retained Earnings/ (Losses)	Capital and reserves attributable to equity holders of the Company	Non-controlling Interest	Total Equity
				£'000	£'000	£,000	£'000	£'000	£'000	£'000
Balance at 31 December 2018 (audited)				112,557	(1,162)	1	(61,169)	50,227	-	50,227
Transferred from management		13	13	-	(336)	-	-	(336)	-	(336)
Bonuses settled by shares			13	-	399	-	(170)	229	-	229
Transactions with owners				-	63	-	(170)	(107)	-	(107)
Total comprehensive loss for the period				-	-	(5)	(6,136)	(6,141)	-	(6,141)
Balance at 30 June 2019 (unaudited)				112,557	(1,099)	(4)	(67,475)	43,979	-	43,979
Balance at 31 December 2017 (audited)				112,557	(1,162)	-	(36,588)	74,807	(4)	74,803
Adjustment on adoption of IFRS 9				-	-	-	(1,350)	(1,350)	-	(1,350)
Restated balance at 1 January 2018				112,557	(1,162)	-	(37,938)	73,457	(4)	73,453
Acquisition of non-controlling interest in Sancus Finance				-	-	-	(67)	(67)	4	(63)
Transactions with owners				-	-	-	(67)	(67)	4	(63)
Total comprehensive loss for the period				-	-	-	(9,254)	(9,254)	-	(9,254)
Balance at 30 June 2018 (unaudited)				112,557	(1,162)	-	(47,259)	64,136	-	64,136

For the period ended 30 June 2019

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

		Period ended	Period ended
		30 June 2019 (unaudited)	30 June 2018 (unaudited)
	Notes	£'000	£'000
Cash outflow from operations, excluding loan movements	15	(1,853)	(192)
Increase in Sancus BMS loans		(1,182)	(936)
Decrease in loans through platforms		13	8
Decrease in loans to UK and Irish SARLS		1,515	-
Increase in loans through the HIT facility		(8,242)	(24,882)
Repayment of Sancus Loan notes		3,311	8,015
Net cash outflow from operating activities		(6,438)	(17,987)
Cash inflows/(outflows) from investing activities
Acquisition of non-controlling interest		-	(63)
Disposal of IOM Preference Shares		950	-
Repayments / (Investments) in FinTech Ventures		70	(2,160)
Divestment in UK and Irish SARLS		82	-
Expenditure on SPL Properties	12	(708)	-
Sale of SPL Properties	12	435	-
Investment in joint venture		-	(200)
Expenditure on fixed assets and intangibles		(172)	(131)
Net cash inflow/(outflow) from investing activities		657	(2,554)
Cash inflows/(outflows) from financing activities
Draw down of HIT facility	15	9,706	22,592
Purchase of own shares		(336)	-
Capital element of lease payments	15	(101)	-
Repayment of ZDPs	15	(4,290)	-
Net cash inflow from financing activities		4,979	22,592
Net (decrease)/increase in cash and cash equivalents		(802)	2,051
Cash and cash equivalents at beginning of period		5,863	3,016
Cash and cash equivalents at end of period		5,061	5,067

The accompanying Notes form an integral part of these financial statements.

 

For the period ended 30 June 2019

NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS

1.      GENERAL INFORMATION

GLI Finance Limited (the "Company"), and together with its subsidiaries, ("the Group") was incorporated, and domiciled in Guernsey, Channel Islands, as a company limited by shares and with limited liability, on 9 June 2005 in accordance with The Companies (Guernsey) Law, 1994 (since superseded by The Companies (Guernsey) Law, 2008). Until 25 March 2015, the Company was an Authorised Closed-ended Investment Scheme and was subject to the Authorised Closed-ended Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission ("GFSC"). On 25 March 2015, the Company was registered with the GFSC as a Non-Regulated Financial Services Business, at which point the Company's authorised fund status was revoked. The Company's Ordinary Shares were admitted to trading on the AIM market of the London Stock Exchange on 5 August 2005 and its issued zero dividend preference shares were listed and traded on the Standard listing Segment of the main market of the London Stock Exchange with effect from 5 October 2015.

The Company does not have a fixed life and the Articles do not contain any trigger events for a voluntary liquidation of the Company.

The Company is an operating company for the purpose of the AIM rules. The Executive Team is responsible for the management of the Company.

As at 30 June 2019, the Group comprises the Company and its subsidiaries.

The Company has taken advantage of the exemption conferred by the Companies (Guernsey) Law, 2008, Section 244, not to prepare company only financial statements which is consistent with the 2018 Annual Report.

2.      ACCOUNTING POLICIES

(a)           Basis of preparation

These condensed consolidated financial statements ("financial statements") have been prepared in accordance with International Financial Reporting Standard (IAS) 34 'Interim Financial Reporting', as adopted by the European Union and all applicable requirements of Guernsey Company Law.  They do not include all the information and disclosures required in annual financial statements and should be read in conjunction with the Company's annual audited financial statements for the year ended 31 December 2018, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as endorsed by the European Union.

The Group does not operate in an industry where significant or cyclical variations, as a result of seasonal activity, are experienced during any particular financial period.

These financial statements were authorised for issue by the Company Directors on 17 September 2019.

(b)           Principal accounting policies

The same accounting policies and methods of computation are followed in these financial statements as in the last annual financial statements for the year ended 31 December 2018 except for changes in accounting policy brought about by the adoption of new accounting standards. These changes are detailed in Note 18.

(c)         Going Concern

The Board has assessed the Group's financial position as at 30 June 2019 and the factors that may impact its performance in the forthcoming year. In assessing the prospects of the Group, the Directors in particular are focussed on the repayment of the ZDPs due on 5 December 2019.

We set out in the Annual Report 2018 that we expected the repayment of the ZDPs to be repaid from using cash reserves of the Group, by running down the on-balance sheet loans, but we could also call upon other assets to raise cash, including the sale of shares held in treasury, the sale of the FinTech Ventures portfolio and other assets as well as the option of obtaining a short term loan if there was a shortfall. By their nature, bridging and development loans often extend, and their repayment date is more uncertain. Moreover, we have found that Brexit has had an impact on the secondary liquidity of loans. It is likely that we will face a near term funding gap as not all loans have repaid as expected and there could be further timing issues going forward.

We have engaged with the larger ZDP holders as to exploring the options available to us, which include rolling the existing ZDPs for a further year at an increased rate of 7%, or by issuing ZDP holders with units in the existing GLI Bond. We will also try to realise other assets on our balance sheet and all options available to us will be explored.  

As noted in our Annual Report and taking into account the varying outcomes of factors and assumptions listed above these constitute a material uncertainty that may cast significant doubt over the Company's and Group's ability to continue as a going concern, such that it may be unable to release its assets and discharge its liabilities in the normal course of business.

The Directors expect that if they are able to action the mitigations in accordance with the plan outlined above, the material uncertainly will be extinguished. The Directors are therefore of the opinion that the Company and the Group will have adequate financial resources to continue in operation and meet its liabilities as they fall due for the foreseeable future and continue to adopt the going concern basis in preparing the financial statements.

(d)           Critical accounting estimates and judgements in applying accounting policies

The critical accounting estimates and judgements are as outlined in the financial statements for the year ended 31 December 2018.

3.      SEGMENTAL REPORTING

Operating segments are reported in a manner consistent with the manner in which the Executive Team reports to the Board, which is regarded to be the Chief Operating Decision Maker (CODM) as defined under IFRS 8. The Executive Team is responsible for allocating resources and assessing performance of the Group, as well as making strategic investment decisions, subject to the oversight of the Board of Directors. The Executive Team is responsible for the entire Group and considers it to have two operating segments as well as group treasury.

The segments are as follows:

 

Sancus BMS

-       Platforms with an established business model

-       Amberton - fundraising for Sancus BMS

-       Investments in the BMS loan funds

-       HIT facility

 

FinTech Ventures

-       FinTech Ventures platform investments

 

Group Treasury

-       Group Treasury - Primarily includes cash balances and related expenses to manage the Group's consolidated position and listed holding company

The accounting policies of each segment are the same as the accounting policies of the Group, therefore no differences arise between the segment report and the Group statements.

	30 June 2019				30 June 2018
£'000	Sancus BMS	FinTech Ventures	Group Treasury	Total Group	Sancus  BMS	FinTech Ventures	Group Treasury	Total Group
Revenue	6,761	325	-	7,086	6,919	260	-	7,179
Cost of sales	(2,484)	-	(4)	(2,488)	(1,669)	-	-	(1,669)
Gross profit/(loss)	4,277	325	(4)	4,598	5,250	260	-	5,510
Operating expenses	(2,779)	(234)	(552)	(3,565)	(3,327)	(637)	(406)	(4,370)
Changes in expected credit losses	(1,175)	-	-	(1,175)	(518)	-	-	(518)
Operating profit/(loss)	323	91	(556)	(142)	1,405	(377)	(406)	622
FinTech Ventures fair value movement	-	(5,190)	-	(5,190)	-	(8,251)	-	(8,251)
FinTech Ventures foreign exchange gain	-	39	-	39	-	429	-	429
Other net (losses)/gains	(753)	54	-	(699)	227	20	-	247
Impairment of goodwill	-	-	-	-	(2,139)	-	-	(2,139)
Loss for the period before tax	(430)	(5,006)	(556)	(5,992)	(507)	(8,179)	(406)	(9,092)
Income tax expense	(144)	-	-	(144)	(162)	-	-	(162)
Loss for the period after tax	(574)	(5,006)	(556)	(6,136)	(669)	(8,179)	(406)	(9,254)
Other comprehensive income
Foreign exchange on consolidation	(5)	-	-	(5)	-	-	-	-
Total comprehensive loss for the period	(579)	(5,006)	(556)	(6,141)	(669)	(8,179)	(406)	(9,254)

	30 June 2019				31 December 2018
£'000	Sancus BMS	FinTech Ventures	Group Treasury	Total Group	Sancus BMS	FinTech Ventures	Group Treasury	Total Group
ASSETS
Non-current assets
Fixed assets	824	-	362	1,186	31	-	-	31
Goodwill	22,894	-	-	22,894	22,894	-	-	22,894
Other intangible assets	450	-	-	450	571	-	-	571
Sancus BMS loans and loan equivalents	7,923	-	-	7,923	14,916	-	-	14,916
FinTech Ventures investments	-	8,665	-	8,665	-	13,804	-	13,804
Other investments	-	-	-	-	327	-	-	327
Joint ventures and associates	2,919	-	-	2,919	2,855	-	-	2,855
Total Non-current assets	35,010	8,665	362	44,037	41,594	13,804	-	55,398
Current assets
Loans through platforms	42	828	-	870	55	828	-	883
Other assets	4,110	-	-	4,110	4,404	-	-	4,404
Sancus BMS loans and loan equivalents	46,899	-	-	46,899	37,401	-	-	37,401
Trade and other receivables	8,012	290	13	8,315	4,678	972	6	5,656
Cash and cash equivalents	3,727	15	1,319	5,061	3,856	1	2,006	5,863
Total current assets	62,790	1,133	1,332	65,255	50,394	1,801	2,012	54,207
Total assets	97,800	9,798	1,694	109,292	91,988	15,605	2,012	109,605
LIABILITIES
Non-current liabilities	43,027	-	187	43,214	32,684	-	-	32,684
Current liabilities	21,363	7	729	22,099	25,782	7	905	26,694
Total liabilities	64,390	7	916	65,313	58,466	7	905	59,378
Net Assets	33,410	9,791	778	43,979	33,522	15,598	1,107	50,227

Sancus BMS is treated as being funded by the debt facilities whilst FinTech Ventures is treated as being funded by equity. This allocation best matches the risk profile of each business unit with its capital structure, as well as recognising that interest costs are effectively serviced by interest and fee income from Sancus BMS.

4.     FEE AND OTHER INCOME

	30 June 2019 (unaudited)	30 June 2018 (unaudited)
	£'000	£'000
Co-Funder fees	965	862
Earn out (exit) fees	561	874
Advisory fees	325	648
Transaction fees	1,227	2,102
Total revenue from contracts with customers	3,078	4,486
Interest on loans	1,945	2,044
HIT interest income	1,611	649
Other income	452	-
Total Revenue	7,086	7,179

5.      COST OF SALES

	30 June 2019 (unaudited)	30 June 2018 (unaudited)
	£'000	£'000
Interest costs	895	985
HIT interest costs	1,340	574
Other cost of sales	253	110
Total cost of sales	2,488	1,669

6.      OPERATING EXPENSES

	30 June 2019 (unaudited)	30 June 2018 (unaudited)
	£'000	£'000
Administration and secretarial fees	63	94
Amortisation and depreciation	263	148
Audit fees	107	119
Corporate Insurance	28	10
Directors Remuneration	49	46
Employment costs	2,260	2,979
Investor relations expenses	44	40
Legal and professional fees	106	163
Marketing expenses	22	48
NOMAD fees	38	56
Other office and administration costs	404	527
Pension costs	155	113
Registrar fees	17	21
Sundry	9	6
	3,565	4,370

7.          LOSS PER ORDINARY SHARE

Consolidated loss per Ordinary Share has been calculated by dividing the consolidated loss attributable to Ordinary Shareholders in the period by the weighted average number of Ordinary Shares outstanding (excluding treasury shares) during the period. There was no dilutive effect for potential Ordinary Shares during the current or prior periods.

Note 13 describes the warrants in issue and Note 16 describes the unexercised share options in issue. As both the warrants and share options are out of the money they have not been considered to have a dilutive effect on the calculation of Loss per ordinary share.  

	30 June 2019 (unaudited)	30 June 2018 (unaudited)
Number of shares in issue	312,065,699	312,065,699
Weighted average number of shares outstanding (excluding treasury shares)	304,520,121	305,911,597
Consolidated loss attributable to Ordinary Shareholders in the period	£6,136,000	£9,254,000
Consolidated Loss per Ordinary Share	(2.02)p	(3.03)p

8.          FIXED ASSETS

	Right of use assets	Property & Equipment	Total
Cost	£'000	£'000	£'000
At 31 December 2018	-	261	261
Amounts recognised on adoption of IFRS 16 (Note 18)	892	-	892
At 1 January 2019	892	261	1,153
Additions in the period	233	164	397
At 30 June 2019	1,125	425	1,550

Accumulated depreciation	£'000	£'000	£'000
At 31 December 2018	-	230	230
Charge in the period	116	18	134
At 30 June 2019	116	248	364
Net book value 30 June 2019	1,009	177	1,186
Net book value 31 December 2018	-	31	31

 

9.         GOODWILL

At 30 June 2019 and 31 December 2018

22,894

Goodwill at 30 June 2019 and 31 December 2018 comprises:
		£'000
Sancus Jersey		14,255
Sancus Gibraltar		8,639
Total		22,894

Impairment tests

The carrying amount of goodwill arising on the acquisition of certain subsidiaries is assessed by the Board for impairment on an annual basis or sooner if there has been any indication of impairment. At 30 June 2019 there has been no indication of impairment and a full review will be carried out as at 31 December 2019.

10.       OTHER INTANGIBLE ASSETS

Cost	£'000
At 31 December 2018	1,576
Additions in the period	8
At 30 June 2019	1,584
Amortisation
At 31 December 2018	1,005
Charge for the period	129
At 30 June 2019	1,134
Net book value at 30 June 2019	450
Net book value at 31 December 2018	571

Intangible assets comprise capitalised contractors' costs and costs related to core systems development. No impairment provision has been recorded. The amortisation charge has been recorded within Operating Expenses.

11.                             TRADE AND OTHER RECEIVABLES

	30 June 2019 (unaudited)	31 December 2018 (audited)
Current	£'000	£'000
Dividend income receivable	68	68
Loan fees and similar receivable	2,102	1,359
Preference share dividends receivable	160	-
Loan interest receivable	3,518	3,646
Receivable from associated companies	293	51
Other trade receivables and prepaid expenses	2,174	532
	8,315	5,656

12.        OTHER ASSETS

	Properties held for sale	Development properties	Total
Cost	£'000	£'000	£'000
At 31 December 2018	1,377	3,027	4,404
Transfers	(509)	509	-
Additions	12	696	708
Disposals	(435)	-	(435)
Write downs	-	(567)	(567)
At 30 June 2019	445	3,665	4,110

Other assets comprise of a number of repossessed properties and developments which were previously held as security against certain loans which have defaulted. These assets are held at the lower of cost and net realisable value.

13.       SHARE CAPITAL, SHARE PREMIUM & DISTRIBUTABLE RESERVE

GLI Finance Limited has the power under its articles of association to issue an unlimited number of Ordinary Shares of nil par value.

No Ordinary Shares were issued in the period to 30 June 2019 (Period to 30 June 2018: Nil).

Share Capital
Number of Ordinary Shares - nil par value
At 30 June 2019 (unaudited) and 31 December 2018 (audited)	312,065,699

Share Premium
Ordinary Shares - nil par value	£'000
At 30 June 2019 (unaudited) and 31 December 2018 (audited)	112,557

Treasury Shares

As at 30 June 2019 a total of 7,925,999 Ordinary Shares, with an aggregate value of £1,098,814 were held by a Subsidiary, Sancus BMS Group Limited ("SBMSGL") and eliminated on consolidation (31 December 2018: 6,154,102 Ordinary Shares, with an aggregate value of £1,161,975).

	30 June            2019 (unaudited)	31 December  2018 (audited)
	£'000	£'000
Balance at start of the period/year	1,162	1,162
GLI shares transferred by SBMSGL to key members of management	(399)	-
GLI shares purchased by SBMSGL from BMS management	336	-
Balance at end of period/year	1,099	1,162

Warrants in Issue

On 25 February 2016, Shareholders approved special resolutions authorising the issue of warrants to Golf Investments Limited which confer the warrant holder the right to subscribe for up to 32,000,000 new Ordinary Shares in the capital of the Company at the following subscription prices:

10,000,000 Ordinary Shares at 40 pence per Ordinary Share;

10,000,000 Ordinary Shares at 45 pence per Ordinary Share;

12,000,000 Ordinary Shares at 55 pence per Ordinary Share.

These warrants expire on 25 February 2020.

On 16 September 2016, Shareholders approved a special resolution authorising the issue of warrants to Golf Investments Limited which confer the warrant holder the right to subscribe for up to 10,000,000 shares at 37 pence per Ordinary Share, exercisable up to 9 August 2020.

As at 30 June 2019, the above warrants were in issue but not yet exercised. On issue of these warrants, no provision has been made for a fair value adjustment, as following the Board's assessment of the fair value it was not deemed to be materially different to the current carrying value of £Nil.

14.   LIABILITIES

Non-current liabilities	30 June          2019 (unaudited)	31 December 2018 (audited)
	£'000	£'000
Corporate bond (1)	10,000	10,000
HIT facility (2)	32,446	22,684
Lease Creditor	768	-
Total non-current liabilities	43,214	32,684

Current liabilities	30 June           2019     (unaudited)	31 December  2018         (audited)
	£'000	£'000
ZDP shares (3)	19,991	24,059
Accounts payable	212	278
Accruals and other payables	1,349	1,679
Tax payable	323	454
Deferred income	6	67
Lease creditor	218	-
Payable to related party	-	157
Total current liabilities	22,099	26,694

Interest costs on debt facilities	30 June 2019 (unaudited)	30 June 2018 (unaudited)
	£'000	£'000
Corporate bond (1)	347	347
HIT Facility (2)	1,340	573
ZDP Shares (3)	530	633
Lease interest	18	-
Total interest cost on debt facilities	2,235	1,553

(1)    Corporate Bond

On 30 June 2016, GLI Finance issued £10m corporate bonds as part of the acquisition of Sancus Gibraltar. The bond maturity date is 30 June 2021 and they bear interest at 7% (2018: 7%).

(2)    HIT Facility

On 29 January 2018, GLI Finance signed a new funding facility with Honeycomb Investment Trust plc (HIT). The funding line has a term of 3 years and comprises a £45m accordion and revolving credit facility. The facility bears interest at 7.25%.

The HIT facility has portfolio performance covenants including that actual loss rates are not to exceed 4% in any twelve month period and underperforming loans are not to exceed 10% of the portfolio.

Sancus BMS Group has a £5m first loss position on the HIT facility. GLI has also provided HIT with a guarantee, capped at £2m that will continue to ensure the orderly wind down of the loan book, in the event of the insolvency of Sancus BMS Group, given its position as facility and security agent.

(3)    ZDP shares

The ZDP shares have a maturity date of 5 December 2019 with a final capital entitlement of £1.30696 per ZDP share, and bear interest at an average rate of 5.5% (2018: 5.5%).

Refer to the Company's Memorandum and Articles of Incorporation for full detail of the rights attached to the ZDP shares. This document can be accessed via the Company's website www.glifinance.com.

In accordance with article 7.5.5 of the Company's Memorandum and Articles of Incorporation, the Company may not incur more than £30m of long term debt without the prior approval from the ZDP shareholders. The Memorandum and Articles also specify that two debt cover tests must be met in relation to the ZDPs.

At 30 June 2019 the Company was in compliance with these covenants as Cover Test A was 2.89 (minimum of 1.7) and Cover Test B was 3.82 (minimum of 3.25).

At the period end senior debt borrowing capacity amounted to £20m. The HIT facility does not impact on this capacity as this is non-recourse to GLI.

15. NOTES TO THE CASH FLOW STATEMENT      

Cash generated from operations (excluding loan movements)		30 June 2019 (unaudited)	30 June 2018 (unaudited)
		£'000	£'000
Loss for the period		(6,136)	(9,254)
Adjustments for:
Net loss on FinTech Ventures		5,166	7,802
Other net losses/(gains)		393	(316)
Accrued interest on ZDPs		530	633
Impairment of financial assets		1,175	518
Impairment of SPL assets		567	-
Gain on purchase of ZDPs		(308)	-
Impairment of goodwill		-	2,139
Amortisation/depreciation of fixed assets		263	148
Amortisation of debt issue costs		56	37
Changes in working capital:
Trade and other receivables		(2,703)	(2,126)
Trade and other payables		(856)	227
Cash outflow from operations, excluding loan movements		(1,853)	(192)

Changes in liabilities arising from financing activities

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be classified in the Group's consolidated cash flow statement as cash flows from financing activities.

	1 January 2019	Financing cash flows1	Additions Non-cash	Amortisation of debt issue costs Non-cash	Other Non-cash	30 June 2019
	£'000	£'000	£'000	£'000	£'000	£'000
ZDP Shares	24,059	(4,290)	-	-	2222	19,991
Corporate Bond	10,000	-	-	-	-	10,000
HIT Facility	22,684	9,706	-	56	-	32,446
Lease Liability	892	(101)	233	-	(38)3	986
Total liabilities from financing activities	57,635	5,315	233	56	184	63,423

	1 January 2018	Financing cash flows1	Additions Non-cash	Amortisation of debt issue costs Non-cash	Interest Accruals Non-cash	30 June 2018
	£'000	£'000	£'000	£'000	£'000	£'000
ZDP Shares	24,714	-	-	-	633	25,347
Corporate Bond	10,000	-	-	-	-	10,000
HIT Facility	-	22,592	-	37	-	22,629
Total liabilities from financing activities	34,714	22,592	-	37	633	57,976

¹These amounts can be found under financing cash flows in the cash flow statement.

² Interest accruals

³ Cash paid in previous period

16.       RELATED PARTY TRANSACTIONS

Transaction with the Directors/Executive Team

Non-executive Directors

As at 30 June 2019, the non-executive Directors' annualised fees, excluding all reasonable expenses incurred in the course of their duties which were reimbursed by the Company, were as detailed in the table below:

	30 June 2019		30 June 2018
	£		£
Patrick Firth (Chairman)	50,000		50,000
John Whittle	42,500		42,500
Nick Wakefield	35,000		-

On 4 June 2019 Mr Wakefield was appointed as a non-executive Director to the Board. Mr Wakefield's directorships were listed in the RNS issued on 5 June 2019. Golf Investments Limited ("Golf"), of which Mr Wakefield is a Director, holds 50,815,167 ordinary shares in the Company. Golf is part of the Somerston Group of companies which collectively holds 83,017,496 ordinary shares in the Company, representing 26.6 per cent of the current issued share capital. Other than directors' fees and expenses in relation to Mr Wakefield's appointment as a director the Group does not transact with either Golf or Somerston.

There was no increase in the other Directors' base fees during the period ended 30 June 2019. Total Directors' fees charged to the Company for the period ended 30 June 2019 were £48,839 (30 June 2018: £46,250).

Executive Team

For the period ended 30 June 2019, the Executive Team members' remuneration from the Company, excluding all reasonable expenses incurred in the course of their duties which were reimbursed by the Company, were as detailed in the table below:

	30 June 2019	30 June 2018
	£'000	£'000
Aggregate remuneration in respect of qualifying service - fixed salary	364	353
Aggregate amounts contributed to Money Purchase pension schemes	51	46
Aggregate bonus paid (cash)	-	125

All amounts have been charged to Operating Expenses.

At the Company's annual general meeting ("AGM") held on 10 May 2017 Shareholders approved terms for a revised long-term incentive scheme, pursuant to which members of the Executive Team will be entitled to receive options to subscribe for new Ordinary Shares in the capital of the Company ("Share Options") at strike prices of 25p, 30p and 35p and will vest on the first, second and third anniversaries of the respective grant (the "New Scheme"). The New Scheme took effect from the date of the AGM and replaced the previous Executive Bonus Scheme. The Remuneration Committee will be issuing a revised Executive Bonus Scheme following shareholder feedback from the 2019 AGM. Further details of this will be included in the 2019 Annual Report.

Directors' and Persons Discharging Managerial Responsibilities ("PDMR") shareholdings in the Company

As at 30 June 2019, the Directors had the following beneficial interests in the Ordinary Shares of the Company:

	30 June 2019		31 December 2018
	No. of Ordinary Shares Held	% of total issued Ordinary Shares	No. of Ordinary Shares Held	% of total issued Ordinary Shares
Patrick Firth (Chairman)	278,669	0.09	278,669	0.09
John Whittle	104,550	0.03	104,550	0.03
Andrew Whelan	9,553,734	3.06	8,051,912	2.58
Emma Stubbs	1,380,940	0.44	1,005,485	0.32
Aaron Le Cornu	1,405,790	0.45	1,405,790	0.45
Dan Walker	911,300	0.29	-	-
Nick Wakefield	-	-	-	-

In the six month period to June 2019 and the year to December 2018, none of the above received any amounts relating to their shareholding. As at 30 June 2019 there were 3,333,333 unexercised share options for Ordinary Shares of the Company (31 December 2018: 3,333,333 and 30 June 2018: Nil). These options are currently out of the money.

During the period Mr Whelan received £20,567 in relation to the coupon on his holding of £592,500 GLI Bonds (30 June 2018: £20,567).

Transactions with connected entities

The following significant transactions with connected entities took place during the current period:

	30 June 2019		30 June 2018
	Balance £'000	Interest accrued in the period	Balance £'000		Interest accrued in  the period
		£'000			£'000
Loans (and corresponding interest receivable) to entities in which GLI Group has a significant stake	2,201	174	5,217		252
Preference shares (and corresponding interest receivable) in entities which GLI Group has a significant stake	-	129	1,943		77
(Payable)/receivable (to)/from related parties			30 June 2019		31 December 2018
			£'000		£'000
Sancus (IOM) Holdings Limited			-		2
Sancus (IOM) Limited			281		43
Amberton Asset Management			12		(151)
Office and staff costs recharges
			30 June 2019		30 June 2018
Amberton Asset Management			17		26

There is no ultimate controlling party of the Company.

All platform loans and preference shares bear interest at a commercial rate. 

17.       FINANCIAL INSTRUMENTS - Fair values and risk management

Sancus BMS loans and loan equivalents

	30 June 2019 (unaudited)	31 December 2018 (audited)
Non-current	£'000	£'000
Sancus BMS loans	3,943	11,316
Sancus Loans Limited loans	3,980	3,600
Total Non-current Sancus BMS loans and loan equivalents	7,923	14,916
Current
Sancus BMS loans	16,864	10,975
Investment in Sancus Loan Notes	-	3,311
Loan equivalents	102	1,076
Sancus Loans Limited loans	29,933	22,039
Total Current Sancus BMS loans and loan equivalents	46,899	37,401
Total Sancus BMS loans and loan equivalents	54,822	52,317

Fair Value Estimation

The financial assets and liabilities measured at fair value in the Consolidated Statement of Financial Position are grouped into the fair value hierarchy as follows:

	30 June 2019 (unaudited)	31 December 2018 (audited)
	Level 3	Level 3
	£	£
FinTech Ventures investments	8,665	13,804
Investments in Sancus Loan Notes	-	3,311
Other investments at fair value	2,919	3,182
Total assets at fair value	11,584	20,297

The classification and valuation methodology remains as noted in the 2018 Annual Report. In relation to the Level 3 valuation methodology for the FinTech Ventures investments the Board assesses the fair value based on either the value at the last capital transaction or valuation techniques, performed internally or by an independent third-party expert. Factors considered in these valuation analyses included discounted cash flows, comparable company and comparable transaction analysis. Key inputs used in the discounted cash flows include costs of equity, illiquidity discount rates, revenue and costs growth rates, interest margins, bad debt expense and tax rates. These are consistent with the inputs described in the 2018 Annual Report and adjusted where necessary. The Board considers all the information presented to it, including indicative bids, internal analysis, and independent valuations, in order to reach, in good faith, their value determination.

Assets at Amortised Cost

	30 June 2019	31 December 2018
	(unaudited)	(audited)
	£'000	£'000
Sancus BMS loans and loan equivalents	54,822	49,006
Loans through platforms	870	883
Trade and other receivables	8,315	5,656
Cash and cash equivalents	5,061	5,863
Total assets at amortised cost	69,068	61,408

Liabilities at Amortised Cost

	30 June 2019	31 December 2018
	(unaudited)	(audited)
	£'000	£'000
ZDP shares	19,991	24,059
Corporate Bond	10,000	10,000
HIT facility	32,446	22,684
Trade and other payables	1,890	2,635
Lease creditor	986	-
Total liabilities at amortised cost	65,313	59,378

Refer to Note 14 for further information on liabilities.

FinTech Ventures Investments	Equity	Loans	Total
30 June 2019	£	£	£
At 31 December 2018	11,608	2,196	13,804
New investments/loans advanced	12	-	12
Unrealised losses recognised in profit and loss	(4,764)	(426)	(5,190)
Foreign exchange gain	34	5	39
At 30 June 2019	6,890	1,775	8,665

	Equity	Loans	Total
31 December 2018	£	£	£
At 31 December 2017	26,470	3,128	29,598
New investments/loans advanced	200	2,419	2,619
Converted from accrued interest	293	-	293
Converted to Equity	2,071	(2,071)	-
Unrealised losses recognised in profit and loss	(18,221)	(1,413)	(19,634)
Foreign exchange gain	795	133	928
At 31 December 2018	11,608	2,196	13,804

Level 3 investment valuation techniques used and key inputs

The following table gives information about how the fair values of financial assets categorised as level 3 in the fair value hierarchy are determined by the Company:

Valuation technique and key inputs	Fair Value £'000	Fair Value £'000	Reason for any changes in valuation techniques from prior years	Significant unobservable inputs	Relationship of unobservable inputs to fair value
	At 30 June 2019	At 31 December 2018
Market comparable transaction based on recent fundraising activity, adjusted for any relevant risk	7,498	12,637	Equity raises completing H1 2019	None	None
Discounted cash flow forecasts	1,167	1,167	There has been no change in valuation techniques.	Cash flows are discounted by a range of 25.1% for cost of equity and 15% for illiquidity of the investment. Significant internal sensitivities are also applied to the forecasts, creating high and low cases used in the weighted average output	A smaller adjustment for these factors would increase the fair value - see sensitivity analysis noted below
Investment in redeemable preference shares of the loan notes is valued at fair value	-	3,311	None	Fair value which closely approximates the net asset value of the Loan Note special purpose vehicles	None
Other investments at fair value including joint ventures and associates	2,919	3,182	None	Fair value which equates to share of net assets of the investment	None
Total Level 3 at Fair Value	11,584	20,297

Sensitivities of key inputs

When discounted cash flow ("DCF") valuation methodology is utilised, the variables which influence the resultant valuations most significantly are the discount rates applied to the future cash flows, the revenue forecasts and the illiquidity discounts. The table below shows the impact of stressing year end valuations by the sensitivities which the Board believe to be reasonably foreseeable.

Sensitivities of key inputs

	Effect on consolidated statement of comprehensive income
	30 June 2019
	£'000
20% pa increase in revenue	100
20% pa decrease in revenue	(100)
5% increase in discount rate	(88)
5% decrease in discount rate	137
10% increase in illiquidity discount	(59)
10% decrease in illiquidity discount	59

Credit Risk

Credit risk is defined as the risk that a borrower/debtor may fail to make required repayments within the contracted timescale. The group invests in senior debt, senior subordinated debt, junior subordinated debt and secured loans. Credit risk is taken in direct lending to third party borrowers, investing in loan funds, lending to associated platforms and loans arranged by associated platforms. The group mitigates credit risk by only entering into agreements related to loan instruments in which there is sufficient security held against the loans or where the operating strength of the investee companies is considered sufficient to support the loan amounts outstanding.

Credit risk is determined on initial recognition of each loan and re-assessed at each balance sheet date. It is categorized into Stage 1, Stage 2 and Stage 3 with Stage 1 being to recognise 12 month Expected Credit Losses (ECL), Stage 2 being to recognise Lifetime ECL not credit impaired and Stage 3 being to recognise Lifetime ECL credit impaired.

Provision for ECL

Provision for ECL is made using the credit risk, the probability of default (PD) and the probability of loss given default (PL) all of which are underpinned by the Loan to Value (LTV), historical position, forward looking considerations and on occasion, subsequent events and the subjective judgement of the Board. Preliminary calculations for ECL are performed on a loan by loan basis using the simple formula: Outstanding Loan Value x PD x PL and are then amended as necessary according to the more subjective measures as noted above.

A probability of default is assigned to each loan. This probability of default is arrived at by reference to historical data and the ongoing status of each loan which is reviewed on a regular basis. The probability of loss is arrived at with reference to the LTV and consideration of cash that can be redeemed on recovery.

Movement of provision for ECL in the period

	30 June 2019	31 December 2018
	£'000	£'000
At beginning of period/year	2,597	1,350
Charged through profit and loss in the period/year	1,175	1,247
Utilised in the period/year	(942)	-
At end of period/year	2,830	2,597

18.       CHANGES IN ACCOUNTING POLICY

IFRS 16 'Leases'

IFRS 16 requires lessees to recognise assets and liabilities for all leases greater than 12 months in length unless the underlying asset is of low value. This standard replaced IAS 17, the previous lease accounting standard, and is effective for reporting periods beginning on or after 1 January 2019. As such IFRS 16 has been adopted for the first time in these condensed interim financial statements.

All leases in the Group are currently classed as operating in nature. In previous financial statements these leases have been accounted for through the posting of a rental charge to profit and loss in accordance with the requirements of IAS 17. No asset or liability had previously been recognised on the balance sheet in respect of such leases. IFRS 16 now requires us to recognise a Right-of-use asset for all leases where the length of lease is greater than 12 months and the underlying asset is greater in value than c.£3,000 (considered to be a "low value asset"). In addition, the standard requires us to recognise a corresponding liability representing the discounted future lease payments until the end of the lease. This liability determines the value of the "Right-of-use" asset. In place of the previous rental charge under IAS 17 the Group now suffers (under IFRS 16) an interest charge, being the wind-down of the discount, and a depreciation charge relating to the Right-of-use asset.

In accordance with the standard the Group has decided to use the incremental borrowing rate (IBR) as a proxy for the discount rate implicit in the lease. The IBR is defined as the rate that the company would have to pay if it went out in to the market and bought a similar asset under a finance arrangement. The IBR is therefore company, asset and length of lease specific. Given it is not practically possible to go into the market and obtain an IBR for each right of use asset the IBR is an accounting estimate.

An IBR of 7.25% has been used to calculate the discounted future lease payments and hence the opening value of each Right-of-use asset. This has been arrived at by reviewing current commercial property rates obtainable in the market, adjusted for the particular circumstances of the company which holds the leases, and then comparing to funding that the Group has raised historically. It should be noted that moving the rate by c2% in either direction does not alter the initial value materially.

On adoption of the standard on 1 January 2019 the Group recognised Right-of-use assets amounting to £892,000, and a corresponding Lease Liability of the same amount. The Right-of-use assets are being depreciated on a straight-line basis over the terms of the respective leases. In the 6 months to June 2019 the Group has suffered depreciation from Right-of-use assets of £116,000 and interest charges of £18,000. Under IAS 17, the previous accounting standard, rental charges of £116,000 would have been suffered. See Note 8 for other movements in the period.

19.       GUARANTEES

The Group undertakes a number of Guarantees and first loss positions which are not deemed to be contingent liabilities under IAS37 as there is no present obligation for these guarantees and it is considered unlikely that these liabilities will crystallise.  

HIT Facility

Sancus BMS Group has invested £5m of its own capital in Sancus Loans Limited which sits in a £5m first loss position as part of the HIT facility. GLI has also provided HIT with a guarantee, capped at £2m that it will continue to ensure the orderly wind down of the HIT related loan book, in the event of the insolvency of Sancus BMS Group, given its position as facility and security agent.

Sancus Loan Notes

Sancus BMS typically provides first loss positions as part of the Loan Note structures. In SLN4, Sancus BMS has no capital invested but has a 20% first loss position and in SLN5 a 10% first loss position. For IFRS 9 purposes in calculating our capital at risk provision ratio of 3.4%, we have included the Sancus on-balance sheet loans plus the full amount of those loans which include the first loss risk position we have with HIT and the Loan Notes.

20.       PERFORMANCE MEASURES

We have identified the below performance measures which for Sancus BMS we will report on as we believe improving these will improve shareholder value.

             Return on Tangible Assets ("ROTA")

This is operating profit (including credit losses) divided by total assets less goodwill and HIT (but adding back our £5m HIT equity).

             Cost Income Ratio

Total costs include operating expenses, cost of sales and interest costs (excluding HIT interest costs) divided by total revenue (total revenue being the proforma revenue which excludes the gross HIT revenue and instead includes the net HIT fees received).

21.       POST PERIOD END EVENTS

Acquisition of Group ZDPs

Post period end, the Company has acquired a further 2,755,629 ZDPs at an average price of £1.213 taking the total ZDPs held in treasury to 7,934,460. As well as reducing the liability on maturity of the ZDPs in December 2019, these purchases deliver a good return on capital given the ZDPs have been trading below their accrued capital entitlement.

Defaulted loans

Post period end, an official receiver has been appointed to sell the underlying properties of 2 loans that were in default at 30 June 2019. These loans were included in the 30 June 2019 IFRS 9 provision calculations.

 

END

 

 

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