For the year ended 31 December 2017

CONSOLIDATED STATEMENT OF CASH FLOWS

 

	Notes	31 December 2017 £'000	31 December 2016 * £'000
Cash flows (used in)/from operations	16	(1,649)	5,565
Increase on Sancus BMS loans		(5,384)	(6,727)
Decrease on loans through platforms		2,726	-
Investment in Sancus Loan Notes		(3,000)	(7,500)
Net Cash flows used in operating activities		(7,307)	(8,662)
Investing activities
Net cash on disposal of subsidiaries		-	12,621
Net cash acquired on acquisition of subsidiaries		-	4,477
Acquisition of non-controlling interest and connected entities		(849)	(528)
Purchase of investments - Fintech Ventures		(6,949)	(8,678)
Sale of investments/repayment of loans in FinTech Ventures		414	1,412
Other cost of investment		(180)
Sale of SSIF investment		22,675	-
Property, equipment and other intangibles acquired		(298)	(321)
Net cash inflow from investing activities		14,813	8,983
Financing activities
Proceeds from issue of Ordinary Shares		-	7,036
Repayment of syndicated loan	14	(11,920)	(9,520)
Interest paid on debt facilities	14	(868)	-
Dividends paid		(1,318)	(5,799)
Net cash used in financing activities		(14,106)	(8,283)
Net decrease in cash and cash equivalents		(6,600)	(7,962)
Cash and cash equivalents at beginning of year		9,616	17,415
Effect of foreign exchange rate changes during the year		-	163
Cash and cash equivalents at end of year		3,016	9,616

 

 

* The increase in Sancus BMS loans has been reclassified to operating cash flows, having been disclosed as a financing activity in the prior year statutory accounts.

 

The investment in Sancus Loan Notes is considered an operating activity since it generates operating cash flows.

 

 

GLI Finance Limited

For the year ended 31 December 2017

NOTES TO THE 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by shares and with limited liability, on 9 June 2005 in accordance with The Companies (Guernsey) Law, 1994 (since superseded by The Companies (Guernsey) Law, 2008).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 31 December 2017, the Group comprises the Company and its subsidiaries (please refer to Note 17 for full details of the Company's subsidiaries).

 

Given the changes made as a result of the strategic review, the Company has taken advantage of the exemption conferred by the Companies (Guernsey) Law, 2008, Section 244, not to prepare company only financial statements.

 

 

2.         ACCOUNTING POLICIES

 

(a)        Basis of preparation

 

The consolidated and separate financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU"), and all applicable requirements of Guernsey Company Law.  The financial statements have been prepared under the historical cost convention, as modified for the measurement of investment at fair value through profit or loss. The principal accounting policies of the Group have remained unchanged from the previous year and are set out below. Comparative information in the primary statements is given for the year ended 31 December 2016.

 

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.

 

Going Concern

 

The Board has assessed the Group's financial position as at 31 December 2017 and the factors that may impact its performance in the forthcoming year. After considering the maturity profile of the debt structure of the Group and projected cash flows, the Directors are of the opinion that it is appropriate to prepare these financial statements on a going concern basis.

 

Refer the Viability Statement for further comment on the solvency and liquidity of the Group.

 

 

(b)               Basis of consolidation

 

The financial statements comprise the results of GLI Finance Limited and its subsidiaries for the year ended 31 December 2017. The subsidiaries are all entities where the Company has the power to control the investee, is exposed, or has rights to variable returns and has the ability to use its power to affect these returns. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated in full on consolidation.

 

Non-controlling interests, presented as part of equity, represent the portion of a subsidiary's profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests measured at their proportionate share of net assets acquired.

 

 

 

(c)        Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, deposits held on call with banks and other short term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

 

(d)         Dividends

 

Dividend distributions are made at the discretion of the Company. A dividend distribution to shareholders is accounted for as a reduction in retained earnings. A proposed dividend is recognised as a liability in the period in which it has been approved and declared.

 

(e)          Expenditure

 

All expenses are accounted for on an accruals basis. The management fees, administration fees, finance costs and all other expenses (excluding share issue expenses which were offset against share premium) are charged through the Consolidated Statement of Comprehensive Income. 

 

(f)         Financial assets and liabilities

 

Recognition and initial measurement

 

Financial assets and financial liabilities are initially recognised on the trade date, which is the date on which the Group becomes party to the contractual provisions of the instrument.

 

Financial assets and financial liabilities at fair value through profit or loss are initially recognised at fair value, with transaction costs recognised in the Consolidated Statement of Comprehensive Income. Financial assets and financial liabilities not at fair value through profit or loss are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue.

 

Subsequent to initial recognition, financial assets are either measured at fair value or amortised cost. Financial liabilities are either measured at fair value or amortised cost. Realised gains and losses arising on the derecognition of financial assets and liabilities are recognised in the period in which they arise.

 

Fair value measurement

 

"Fair value" is the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.

 

When available, the Group measures the fair value of an instrument using quoted price in an active market for that instrument. A market is regarded as "active" if transactions of the asset or liability take place with sufficient frequency and volume to provide pricing information on an on-going basis. The Group measures financial instruments quoted in an active market at a mid price.

 

If there is no quoted price in an active market, the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. Please refer to Note 19.

 

The Group recognises transfers between levels of the fair value hierarchy as at the end of the reporting period during which the change has occurred.

 

If in the case of any investment the Directors at any time consider that the above basis of valuation is inappropriate or that the value determined in accordance with the foregoing principles is unfair, they are entitled to substitute what in their opinion, is a fair value. 

 

Gains and losses arising from changes in the fair value of the financial assets and liabilities at fair value through profit or loss are included in the Consolidated Statement of Comprehensive Income in the period in which they arise. 

 

Loans and receivables

 

Non-derivative financial assets such as loans, loan equivalents, trade and other receivables with fixed or determinable payments and not quoted in an active market, are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. The effect of discounting on these trade and other receivables is not considered to be material.

 

The Group has loans and receivables with embedded prepayment options. Given the low probability of exercise and undetermined exercise dates, the value attributed to these embedded derivatives is considered to be £ nil.

 

Debt and Equity Instruments

 

Debt and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

 

Equity instruments are recorded at the proceeds received less any direct costs of issue. Financial liabilities, including borrowings and trade payables, are recorded at amortised cost. Interest cost of such liabilities is allocated over the appropriate period.

Derecognition

 

Sales of all financial assets are recognised on trade date - the date on which the Group disposes of the economic benefits of the asset. Financial assets are derecognised when the rights to receive cash flows from the asset have expired or the Group has transferred substantially all risks and rewards of ownership.

 

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the consideration received (including any new asset obtained less any new liability assumed) is recognised in the Consolidated Statement of Comprehensive Income. Any interest in such transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability.

 

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.

 

(g)        Foreign currency translation

 

Functional and presentation currency

 

The financial statements of the Group are presented in the currency of the primary economic environment in which the Company operates (its functional currency). The Directors have considered the primary economic currency of the Company and considered the currency in which finance is raised, distributions made, and ultimately what currency would be returned if the Company was wound up. The Directors have also considered the currency to which the underlying investments are exposed. On balance, the Directors believe Sterling best represents the functional currency of the Company.  Therefore the books and records are maintained in Sterling and for the purpose of the financial statements, the results and financial position of the Group are presented in Sterling, which is also the presentation currency of the Group.

 

Transactions and balances

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income.

 

Non-monetary items measured at historical cost are translated using the exchange rates at the date of the transaction (not retranslated). Non-monetary items measured at fair value are translated using the exchange rates at the date when fair value was determined.

 

All subsidiaries are presented in Sterling, which is their primary currency in which they operate.

 

Translation differences on non-monetary items are reported as part of the fair value gain or loss reported in the Consolidated Statement of Comprehensive Income.  

 

 

Foreign exchange differences arising on consolidation of the Group's foreign operations are taken to the foreign exchange reserve. The rates of exchange as at the year end are as follows:

 

 

31 December 2017	31 December 2016
£1: USD1.3508	£1: USD1.2340
£1: EUR1.1258	£1: EUR1.1731

 

(h)        Goodwill

 

Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognised. Goodwill is measured as the excess of (a) the aggregate of: (i) the consideration transferred measured in accordance with IFRS 3, which generally requires acquisition-date fair value; (ii) the amount of any non-controlling interest in the acquiree measured in accordance with IFRS 3; and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree; over (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with IFRS 3. Goodwill is carried at cost less accumulated impairment losses. Refer to Note 2 (k) for a description of impairment testing procedures.

 

(i)         Interest costs

 

Interest costs are recognised when economic benefits are due to debt holders. Interest costs are accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability to the liability's net carrying amount on initial recognition.

 

(j)         Other intangible assets

 

Intangible assets with finite useful lives are amortised to profit or loss on a straight-line basis over their estimated useful lives. Useful lives and amortisation methods are reviewed at the end of each annual reporting period, or more frequently when there is an indication that the intangible asset may be impaired, with the effect of any changes accounted for on a prospective basis. Amortisation commences when the intangible asset is available for use. The residual value of intangible assets is assumed to be zero.

 

Computer hardware and software

Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Company are recognised as intangible assets when the following criteria are met:

 

·           it is technically feasible to complete the software product so that it will be available of use;

·           management intends to complete the software product and use or sell it;

·           there is an ability to use or sell the software product;

·           it can be demonstrated how the software product will generate probable future economic benefits;

·           adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and

·           the expenditure attributable to the software product during its development can be reliably measured.

 

Directly attributable costs that are capitalised as part of the software product include the software development employee costs and third party contractor costs. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use over their estimated useful lives, which does not exceed four years.  

 

(k)        Impairment testing of goodwill, intangible assets and property and equipment

 

An impairment loss is recognised for the amount by which the asset's or cash-generating unit's carrying amount exceeds its recoverable amount, which is the higher of fair value less costs of disposal and value-in-use. To determine the value-in-use, management estimates expected future cash flows from each cash-generating unit and determines a suitable discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group's latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements. Discount factors are determined individually for each cash-generating unit and reflect management's assessment of respective risk profiles, such as market and asset-specific risks factors.

 

 

Impairment losses for cash-generating units reduce first the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment loss is reversed if the asset's or cash-generating unit's recoverable amount exceeds its carrying amount.

 

All impairments or subsequent reversals of impairments are recognised in the Consolidated Statement of Comprehensive Income.

 

(l)        Investment in Joint Venture and associates

 

A joint venture is a joint arrangement over which the Group has joint control. An associate is an entity over which the Group has significant influence but is not a subsidiary.

 

An investment in a joint venture or associate is accounted for by the Group using the equity method except for certain FinTech Ventures associates as described in Note 3.

 

Any goodwill or fair value adjustment attributable to the Group's share in the joint venture or associate is not recognised separately and is included in the amount recognised as an investment.

 

The carrying amount of the investment in a joint venture or associate is increased or decreased to recognise the Group's share of the profit or loss and other comprehensive income of the joint venture or associate and adjusted where necessary to ensure consistency with the accounting policies of the Group.

 

Unrealised gains and losses on transactions between the Group and its joint venture or associate are eliminated to the extent of the Group's interest in the entity. Where unrealised losses are eliminated, the underlying asset is also tested for impairment.

 

(m)      Non-Current Liabilities

 

Loans payable are recognised initially at fair value less directly attributable transaction costs. Subsequent to initial recognition, loans payable are stated at amortised cost using the effective interest rate method.

 

The Zero Dividend Preference Shares ("ZDP shares") are contractually required to be redeemed on their maturity date and they will be settled in cash, thus, ZDP shares are classified as liabilities (refer to Note 14) in accordance with IAS 32 Financial Instruments: Presentation. After initial recognition, these liabilities are measured at amortised cost, which represents the initial proceeds of the issuance plus the accrued entitlement to the date of these financial statements.

 

(n)        Property and equipment

 

Tangible fixed assets include computer equipment, furniture and fittings stated at cost less accumulated depreciation.

 

Depreciation is provided at rates calculated to write off the cost of tangible property and computer software on a straight-line basis over its expected useful economic life as follows:

 

Furniture and fittings         3 years

Computer equipment        2 to 4 years

 

(o)        Revenue recognition

 

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business, net of discounts, VAT and other sales-related taxes where applicable in the Group. Revenue is reduced for estimated rebates and other similar allowances. The Group has five principal sources of revenue and related accounting policies are outlined below:

 

Interest on loans

 

Interest income is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.

 

Dividend income

 

Dividend income from investments is recognised when the shareholders' rights to receive payment have been established (provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably).

 

Fee income on syndicated and non-syndicated loans

 

In accordance with the guidance in IAS 18 Revenue, the Group distinguishes between fees that are an integral part of the effective interest rate of a financial instrument, fees that are earned as services are provided, and fees that are earned on the execution of a significant act.

 

Commitment and arrangement fees earned for syndicated loans are recognised on origination of the loan as compensation for the service of syndication. This is a reflection of the commercial reality of the operations of the business to arrange and administer loans for other parties i.e. the execution of a significant act.

 

Consistent with the policy outlined above, commitment and arrangement fees earned on loans originated for the sole benefit of the Group are also recorded in revenue on completion of the service of analysing or originating the loan. Whilst this is not in accordance with the requirements of the effective interest rate method outlined in IAS 39 Financial Instruments, this is not considered to have a material impact on the financial performance or financial position of the Group.

 

The Directors consider that the economic measurement of fee revenues that relate specifically to the completion of a loan (exit fees and warrants) cannot reliably be measured over the life of a loan and such fees are duly recognised when earned and they become unconditional. This is due to uncertainties and risk factors including credit risk, timing risk, liquidity risk, quantum uncertainty and conditions precedent. The Directors consider that this treatment is prudent and best reflects the commercial operations of the Group as an administrator of loan arrangements.

 

Fee income earned by peer-to-peer subsidiary platforms

 

Fee income earned by subsidiaries whose principal business is to operate online lending platforms that arrange financing between co-funders and borrowers includes arrangement fees, trading transaction fees, repayment fees and other lender related fees.

 

Revenue earned from the arrangement of financing is classified as a transaction fee and is recognised immediately upon acceptance of the arrangement by borrowers. Other transaction fees, including revenue from co-funders in relation to the sale of their loan participations in platform secondary markets is also recognised immediately.  

 

Loan repayment fees are charged on a straight line basis over the repayments of the borrower's financing arrangement.

 

Advisory fees

 

Advisory fee income is invoiced and recognised on an accruals basis in accordance with the relevant investment advisory agreement.

 

(p)        Share based payments

 

As explained in the Remuneration Report, the Company provides a discretionary bonus, part of which is satisfied through the issuance of the Company's own shares, to certain senior management. The cost of such bonuses is taken to the Consolidated Statement of Comprehensive Income with a corresponding credit to Shareholders' Equity.

 

The fair value of any share options granted is determined at the grant date and the expense is spread over the vesting period in accordance with IFRS 2.

 

(q)        Taxation

 

Current tax, including corporation tax in relevant jurisdictions that the Group operates in, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

 

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date.  Timing differences are differences between the Group's taxable profits, and its results as stated in the financial statements, that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.

 

(r)        Trade and other receivables

 

Receivables are recognised initially at fair value plus transaction costs that are directly attributable to their acquisition or origination. They are subsequently measured at amortised cost.

 

(s)        Trade and other payables

 

Payables are recognised initially at fair value and subsequently stated at amortised cost using the effective interest rate method. 

 

(t)         Treasury shares

 

Where the Company purchases its own Share Capital, the consideration paid, which includes any directly attributable costs, is recognised as a deduction from Share Premium.

 

When such shares are subsequently sold or reissued to the market, any consideration received, net of any directly attributable incremental transaction costs, is recognised as an increase in Share Premium. Where the Company cancels treasury shares, no further action is required to the Share Premium account at the time of cancellation.

 

(u)        Warrants

 

Warrants are accounted for as either equity or liabilities based upon the characteristics and provisions of each instrument and are recorded at fair value as of the date of issuance.

 

(v)        Adoption of new and revised Standards

 

Amendments to IFRSs that are mandatorily effective for the current year

 

In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2017. These have been listed below and their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements.

 

·           Amendments to IAS 7 Disclosure Initiative

·           Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses

·           Amendments to IFRS 12 Annual Improvements to IFRSs 2014-2016 Cycle

 

Amendments to IFRSs that are in issue but not yet effective

 

At the date of approval of these Consolidated Financial Statements, the following standards and interpretations, which have not been applied in these Consolidated Financial Statements, were in issue but not yet effective:

 

·           IFRS 9 'Financial instruments'

 

IFRS 9 'Financial Instruments' addresses the classification, measurement and derecognition of financial assets and liabilities. It replaces the multiple classification and measurement models in IAS 39 and is effective for reporting periods beginning on or after 1 January 2018.

 

Whilst we have not adopted this standard in this set of financial statements we have outlined below how we plan on adopting this standard in the next financial year and the impact that it may have on the financial statements.

 

·           Key requirements of IFRS 9

 

Classification and measurement of debt assets will be driven by the entity's business model for managing the financial assets and the contractual cash flow characteristics of those financial assets.

 

There are three principal classification categories for financial assets that are debt instruments: (i) amortised cost, (ii) fair value through other comprehensive income and (iii) fair value through profit and loss. Equity investments in scope of IFRS 9 are measured at fair value with gains and losses recognised in profit or loss unless an irrevocable election is made to recognise gains or losses in other comprehensive income.

 

IFRS 9 also introduces a new expected credit loss impairment model, as opposed to the incurred credit loss model currently implemented under IAS 39. This requires entities to account for expected credit losses at initial recognition and changes to expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.

 

Finally, under IFRS 9 greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. Enhanced disclosure requirements about an entities risk management activities have also been introduced.

 

·           Impact of IFRS 9 - Classification and measurement

 

Based on an analysis of the Group's financial assets and liabilities as at 31 December 2017 the directors have assessed the impact of IFRS 9 to the Group's consolidated financial statements as follows:

 

Sancus BMS loans, loan equivalents and loans through platforms are held solely for the collection of contractual cash flows, being interest, fees and payments of principal. As such these assets are expected to continue to be held at amortised cost upon the application of IFRS 9.

 

Fintech Ventures investments relate to equity, preference shares and some working capital loans. Whilst some of these investments do attract interest the assets are held primarily to assist the development of the entities involved. These investments are currently held at fair value through profit and loss using the exemption available under IAS 28.18 which states that when an investment in an associate is held by, or is held indirectly through, an entity that is a venture capital organisation, the entity may elect to measure investments in those associates at fair value through profit or loss in accordance with IAS 39. As such these assets will continue to be measured at fair value through profit and loss upon the application of IFRS 9.

 

Trade payables, financial liabilities and trade receivables are held solely for the collection and payment of contractual cash flows, being payments of principal and interest where applicable. As such these assets will continue to be held at amortised cost under IFRS 9.

 

·           Impact of IFRS 9 - Impairment

 

Sancus BMS loans and loan equivalents will be assessed for credit risk on initial recognition. Credit Risk will be 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. A loan is considered to be in default when there is a failure to meet the legal obligation of the loan agreement. Having regards for the principles of IFRS 9 this would also include provisions against loans that are considered by management as unlikely to pay their obligations in full without realisation of collateral. Provision for ECL will be made at initial recognition calculated using the credit risk, the probability of default and the probability of loss, all underpinned by the Loan to Value (LTV), historical position and on occasion subsequent events, and the subjective judgement of the Board. At each reporting period-end loans will be re-assessed for credit risk and provision for ECL will be updated appropriately.

 

With respect to the loans to the UK SARL and Ireland SARL there is no direct exposure to individual loans. As a result these two loans will be assessed for credit risk based upon the Net Asset Value of the SARLS, and their ability to repay the loans. Should the Net Asset Value of the SARLS fall materially then the loans will have deemed to have fallen into Stage 2, with a further significant drop in Net Asset Value pushing the loans into Stage 3. Provision for ECL will then be made according to the credit risk and the deemed ability of the SARL to repay the loan.

 

Given historical and current levels of LTV historical losses have been negligible, the directors anticipate that the application of the ECL model will not result in any material earlier recognition of credit losses. In respect of the Group's trade and other receivables, the directors intend to apply the simplified approach to recognise lifetime expected credit losses.

 

·           Impact of IFRS 9 - Hedge Accounting

 

The Group has not used any hedging instruments during 2016 or 2017 although exposure is monitored on a regular basis and the Board reviews this approach quarterly. As a result, unless there is a change in approach, IFRS 9 will have no impact.

 

Overall the directors do not anticipate that the application of IFRS 9 will have a material impact on the Group's consolidated financial statements.

 

·      Overall Impact of IFRS

 

Overall the directors do not expect the implementation of IFRS 9 to have a material impact on the financial statements.

 

·      IFRS 16 'Leases'

 

IFRS 16 was published in January 2016 and specifies how to recognise, measure, present and disclose leases.  The standard provides a single lessee accounting model, allowing lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.  Lessors continue to classify leases as operating or finance, with IFRS 16's approach to lessor accounting substantially unchanged from its predecessor, IAS 17.  IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019. There are a number of operating leases for premises occupied by the Group which will lead to bringing a right of use asset onto the balance sheet and corresponding lease liability. Current lease obligations are stated in note 23. The overall profit and loss impact is expected to be immaterial.

 

·      IFRS 15 'Revenue from Contracts with Customers'

 

IFRS 15 was published in May 2016 and specifies how and when to recognise revenue as well as requiring entities to provide users of financial statements with more informative, relevant disclosures.  The standard provides a single, principles based five-step model to be applied to all contracts with customers.  IFRS 15 is effective for annual reporting periods beginning on or after 1 January, 2018. Material revenue streams have been reviewed and it is not anticipated that there will be a material impact on timing of recognition or gross up for principal/agent considerations.

 

Other IFRSs and amenedments that are in issue but not yet effective which are not envisaged to have a material impact on the financial statements are:

 

·      IFRS 17 'Insurance Contracts'

·      IFRS 2 (amendments) 'Classification and Measurement of Share-based Payment Transactions'

·      IFRS 4 (amendments) 'Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts'

·      IAS 40 (amendments) 'Transfers of Investment Property'

·      IFRS 10 and IAS 28 (amendments) 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture'

·      Annual Improvements to IFRSs 2014-2016 Cycle 'Amendments to IFRS 1 First-time Adoption of Inetrnational Financial Reporting Standards and IFRS 28 Investments in Associates and Joint Ventures'

·      IFRIC 22 'Foreign Currency Transactions and Advanced Consideration'

·      IFRIC 23 'Uncertainty over Income Tax Treatments'

 

3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES

 

In the application of the Group's accounting policies, which are described in Note 2, the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. There is no change in applying accounting policies for critical accounting estimates and judgments from the prior year.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Critical judgements in applying the group's accounting policies

 

The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

 

Fair value accounting for FinTech Ventures' investments

 

Some of the group's Fintech Ventures investments meet the definition of an associate. However, the Group has applied the exemption available under IAS 28.18 which states that when an investment in an associate is held by, or is held indirectly through, an entity that is a venture capital organisation, the entity may elect to measure investments in those associates at fair value through profit or loss in accordance with IAS 39 - Financial Instruments.

 

The Directors consider that the Group is of a nature similar to a venture capital organisation on the basis that FinTech Ventures' investments form part of a portfolio which is monitored and managed without distinguishing between investments that qualify as associate undertakings. Furthermore, the most appropriate point in time for exit from such investments is being actively monitored as part of the Group's investment strategy.

 

The Group therefore designates those investments in associates which qualify for this exemption as fair value through profit or loss. Refer to Note 22 for fair value techniques used. If the Group had not applied this exemption the investments would be accounted for using the equity method of accounting. This would have the impact of taking a share of each investment's profit or loss for the year and would also affect the carrying value of the investments.

 

The Directors consider that equity and loan stock share the same investment characteristics and risks and they are therefore treated as a single unit of account for valuation purposes and a single class for disclosure purposes.

 

IFRS 10 Control Judgements

 

Judgement is sometimes required to determine whether after considering all relevant factors, the Group has control, joint control or significant influence over an entity or arrangement. Other companies may make different judgements regarding the same entity or arrangement. The Directors have assessed whether or not the Group has control over Sancus Loan Notes Limited, Sancus Loan Notes 2 Limited and Sancus Loan Notes 3 Limited based on whether the Group has the practical ability to direct the relevant activities unilaterally. In making their judgement, the directors considered the rights associated with its investment in preference shares. After assessment, the directors concluded that the Group does not have the ability to affect returns through voting rights (the preference shares do not have voting rights) or other arrangements such as direct management of these entities (the Group does not have control over the investment manager).

 

Key sources of estimation uncertainty

 

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

 

Impairment of goodwill

 

As detailed in Note 10, the Directors will review the carrying value of goodwill and carry out an impairment review annually to assess whether goodwill is impaired. In doing so, the Directors have assessed the value in use of each cash generating unit through an internal discounted cash flow analysis, details of which are set out in Note 10. Given the nature of the Group's operations, the calculation of value in use is sensitive to the estimation of future cash flows and the discount rates applied, the impact of which is also disclosed in note 10.

 

Refer Notes 2 (h) and (k) for accounting policies relating to the valuation and impairment of goodwill.

 

Impairment of Loans

 

Loans made by the Group may, after funding, become non-performing for a wide variety of reasons including non-payment of principal or interest, as well as covenant violations by the borrower in respect of the underlying loan documents. In such circumstances, the Directors will make an assessment as to whether this indicates objective evidence of impairment having taken into account other factors including, but not limited to:

 

·                    significant financial difficulty of the borrower;

·                    default or delinquency in interest or principal payments;

·                    a substantial reduction in performance of the underlying business;

·                    a substantial fall in the value of the underlying security; or

·                    it becoming probable that the borrower will enter bankruptcy or financial reorganization

 

Assets, other than those measured at fair value, are assessed for indicators of impairment at each statement of financial position date. If there is objective evidence of impairment, an impairment loss is recognised in profit or loss.

 

For financial assets carried at amortised cost, the amount of an impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate.

 

Fair Value of the FinTech Ventures' investments

 

The Group invests in financial instruments which are not quoted in active markets and may receive such financial instruments as distributions on certain investments. Fair values are determined by using valuation techniques as detailed in Note 22.

 

The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.

 

·                    Level 1 - Inputs that are quoted market prices (unadjusted) in active markets for identical instruments. A market is regarded as "active" if transactions of the asset or liability take place with sufficient frequency and volume to provide pricing information on an on-going basis. The Group measures financial instruments quoted in an active market at a bid price.

 

·                    Level 2 - Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

 

·           Level 3 - Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments but for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. If in the case of any investment the Directors at any time consider that the above basis of valuation is inappropriate or that the value determined in accordance with the foregoing principles is unfair, they are entitled to substitute what in their opinion, is a fair value.  In this case, the fair value is estimated with care and in good faith by the Directors in consultation with the Executive Team with a view to establishing the probable realisation value for such shares as at close of business on the relevant valuation day.

 

 

Given the early stage nature of the investee companies, the valuations are sensitive to the cash flows assumed and discount rates applied and management have made a number of material judgements in concluding on the valuations. The methods and valuation techniques used for the purposes of measuring fair value are unchanged compared to the previous reporting year, although transactional data has become available in some cases, eliminating the need for reliance on the discounted cash flow method.  All of the FinTech Ventures investments are measured by Level 3.

 

4.                   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 in addition to Group Treasury. There has been one minor change in the period which has been to move Sancus Funding from FinTech Ventures to Sancus BMS as this now has an established business model and work has begun to integrate into the Sancus BMS Group.

 

The segments are as follows:

 

Sancus BMS

·           Platforms with an established business model (now including Sancus Funding, a wholly owned subsidiary)

·           Amberton - fundraising for Sancus BMS

·           Investments in the BMS loan funds

 

FinTech Ventures

·           Eleven platform investments

 

Group Treasury

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

·           SSIF (sold in March 2017, however is included in prior year comparatives)

 

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.

 

 

For the year ended 31 December 2017

NOTES TO THE FINANCIAL STATEMENTS

 

4.             SEGMENTAL REPORTING (Continued)

 

£'000	Sancus BMS	FinTech Ventures	Group Treasury	31 December 2017	Sancus  BMS	FinTech Ventures	Group Treasury	31 December 2016
Revenue
Interest on loans	3,280	1,293	-	4,573	4,237	413	-	4,650
SSIF dividends	303	-	-	303	2,393	-	-	2,393
Fee and other income	6,758	-	-	6,758	4,770	215	-	4,985
Total revenue	10,341	1,293	-	11,634	11,400	628	-	12,028
Interest costs	(2,178)	-	-	(2,178)	(3,774)	-	-	(3,774)
Other cost of sales	(270)	-	-	(270)	(78)	-	-	(78)
Gross profit	7,893	1,293	-	9,186	7,548	628	-	8,176
Total operating expenses	(6,340)	(1,673)	(1,072)	(9,085)	(6,320)	(2,875)	(1,814)	(11,009)
Net operating profit/(loss)	1,553	(380)	(1,072)	101	1,228	(2,247)	(1,814)	(2,833)
Losses on financial assets at fair value through profit and loss
SSIF loss on disposal / fair value adjustment	-	-	(953)	(953)	(1,529)	-	-	(1,529)
Net loss on / de-recognition of SSIF as a subsidiary	-	-	-	-	(1,208)	-	-	(1,208)
Share of profit/(loss) of associates and Joint ventures	(454)	-	-	(454)	(22)	-	-	(22)
FinTech Ventures fair value adjustment	-	(13,459)	-	(13,459)	-	(7,432)	-	(7,432)
Other net gains / (losses)	54	(453)	-	(399)	167	553	(2)	718
Losses on financial assets at fair value through profit or loss	(400)	(13,912)	(953)	(15,265)	(2,592)	(6,879)	(2)	(9,473)
Goodwill impairment	-	-	-	-	(3,408)	(738)	-	(4,146)
Profit/(loss) before tax	1,153	(14,292)	(2,025)	(15,164)	(4,772)	(9,864)	(1,816)	(16,452)
Income tax expense	(20)	-	-	(20)	(83)	-	-	(83)
Profit/(loss) for the year after tax	1,133	(14,292)	(2,025)	(15,184)	(4,855)	(9,864)	(1,816)	(16,535)
Other comprehensive income
Items that may subsequently be reclassified to profit or loss:
Foreign exchange on consolidation	-	-	-	-	-	163	-	163
Total comprehensive income/(loss) for the year	1,133	(14,292)	(2,025)	(15,184)	(4,855)	(9,701)	(1,816)	(16,372)
Operating (loss)/profit attributable to:
Equity holders of the Company	1,153	(14,292)	(2,025)	(15,164)	(5,913)	(9,864)	(1,816)	(17,593)
Non-controlling interest	(20)	-	-	(20)	1,058	-	-	1,058
	1,133	(14,292)	(2,025)	(15,184)	(4,855)	(9,864)	(1,816)	(16,535)
Total comprehensive (loss)/income attributable to:
Equity holders of the Company	1,153	(14,292)	(2,025)	(15,164)	(5,913)	(9,701)	(1,816)	(17,430)
Non-controlling interest	(20)	-	-	(20)	1,058	-	-	1,058
	1,133	(14,292)	(2,025)	(15,184)	(4,855)	(9,701)	(1,816)	(16,372)

 

 

For the year ended 31 December 2017

NOTES TO THE FINANCIAL STATEMENTS

 

4.         SEGMENTAL REPORTING (Continued)

£'000	Sancus BMS*	FinTech Ventures	Group Treasury	31 December  2017	Sancus BMS	FinTech Ventures	Group Treasury	31 December 2016
ASSETS
Non-current assets
Property and equipment	60	-	3	63	82	5	11	98
Goodwill	25,033	-	-	25,033	25,033	-	-	25,033
Other intangible assets	530	-	-	530	520	-	-	520
Sancus BMS Loans	24,238	-	-	24,238	19,216	-	-	19,216
Investment in Sancus Loan Notes	3,000	-	-	3,000	7,500	-	-	7,500
Total Sancus BMS loans and loan equivalents	27,238	-	-	27,238	26,716	-	-	26,716
FinTech Ventures Investments	-	29,598	-	29,598	-	36,104	-	36,104
Other Investments	542	-	-	542	873	-	-	873
Joint Ventures and associates	2,266	-	-	2,266	528	-	-	528
Total Non-current assets	55,669	29,598	3	85,270	53,752	36,109	11	89,872
Current assets
Investment in SSIF	-	-	-	-	23,781	-	-	23,781
Loans through platforms	69	839	-	908	-	4,034	-	4,034
Sancus BMS Loans	8,560	-	-	8,560	3,900	-	-	3,900
Investment in Sancus Loan Notes	7,907	-	-	7,907	-	-	-	-
Loan equivalents	2,621	-	-	2,621	8,205	-	-	8,205
Total Sancus BMS loans and loan equivalents	19,088	-	-	19,088	12,105	-	-	12,105
Trade and other receivables	2,796	616	758	4,170	1,854	748	110	2,712
Cash and cash equivalents	926	-	2,090	3,016	5,619	480	3,517	9,616
Total Current assets	22,879	1,455	2,848	27,182	43,359	5,262	3,627	52,248
Total assets	78,548	31,053	2,851	112,452	97,111	41,371	3,638	142,120
EQUITY
Share premium	-	-	112,557	112,557	-	-	111,942	111,942
Treasury shares	-	-	(1,162)	(1,162)	-	-	(1,734)	(1,734)
Distributable reserve	-	-	-	-	-	-	34,803	34,803
Retained earnings	41,514	31,051	(109,153)	(36,588)	46,933	41,253	(142,454)	(54,268)
Capital and reserves attributable to equity holders of the Group	41,514	31,051	2,242	74,807	46,933	41,253	2,557	90,743
Non-controlling interest	(4)	-	-	(4)	125	-	-	125
Total equity	41,510	31,051	2,242	74,803	47,058	41,253	2,557	90,868
LIABILITIES
Non-current liabilities
ZDP shares	24,714	-	-	24,714	23,436	-	-	23,436
Corporate bond	10,000	-	-	10,000	8,500	-	-	8,500
	34,714	-	-	34,714	31,936	-	-	31,936
Current liabilities
Syndicated loan	-	-	-	-	11,920	-	-	11,920
Trade and other payables	2,324	2	609	2,935	6,197	118	1,081	7,396
	2,324	2	609	2,935	18,117	118	1,081	19,316
Total liabilities	37,038	2	609	37,649	50,053	118	1,081	51,252
Total equity and liabilities	78,548	31,053	2,851	112,452	97,111	41,371	3,638	142,120

 

 

5.     FEE AND OTHER INCOME

 

	31 December 2017	31 December 2016
	£'000	£'000
Co-Funder fees	1,220	543
Earn out (exit) fees	1,062	207
Advisory fees	1,287	1,186
Transaction fees	2,782	2,516
Sundry income	407	533
	6,758	4,985

 

6.         OTHER EXPENSES

 

	31 December 2017	30 December 2016
Other expenses:	£'000	£'000
Audit fees	122	294
Amortisation and depreciation	322	270
Corporate Insurance	90	72
Directors Remuneration	117	203
Employment costs	5,664	5,298
Independent valuation fees	64	149
Investor relations expenses	96	183
Marketing expenses	169	286
NOMAD fees	96	55
Other office and administration costs	1,089	1,176
Pension costs	175	97
Registrar fees	33	109
Sundry	180	74
	8,217	8,266

 

 

7.         DISPOSAL OF SSIF (formerly The SME Loan Fund)

 

 

On 8 March 2017, the company sold its shares in SSIF at 90p per share, valuing its holding at £22.7m. As part of this sale the company agreed to purchase certain performing loans from SSIF for cash in the amount of £5.27m (including accrued interest to 8 March 2017). Of the net proceeds £11.9m was used to repay the syndicated loan. 

 

 

8.         INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

 

 

	31 December 2017	31 December 2016
	£'000	£'000
At beginning of year	528	-
Additions	2,192	550
Share of profit of associate	3
Share of loss in joint venture	(457)	(22)
At end of year	2,266	528

 

 

 

The investment in joint venture relates to a 50% share in Amberton Asset Management Limited.

 

 

Details of material associates

 

 

 

	Principal Activity	Place of Incorporation	Proportion of ownership interest/voting rights held by the group
			31 December 2017	31 December 2016
Sancus (Isle of Man) Holdings Limited	Holding Company for Sancus (IOM) Limited	Guernsey	29.3%	7.1%

 

The above associate is accounted for using the equity method in these consolidated financial statements as set out in the Group's accounting policies in Note 2. This investment will allow the Group to benefit from the growth of the Isle of Man business as it continues to execute its strategy.

 

Summarised financial information in respect of Sancus (Isle of Man) Holdings is set out below. The summarised financial information below represents amounts in associates' financial statements prepared in accordance with IFRSs.

 

 

	31 December 2017	31 December 2016
	£'000	£'000
Current assets	11,935	15,641
Current liabilities	(388)	(175)
Non-current liabilities	(6,885)	(11,000)
Equity attributable to owners of the company	4,662	4,466
Revenue	630	395
Profit or loss from continuing operations	195	123
Reconciliation of the above summarised financial information to the carrying amount of the interest in Sancus (Isle of Man) Holdings Limited recognised in the consolidated financial statements:
	31 December 2017	31 December 2016
	£'000	£'000
Net assets of associate	4,662	4,466
Proportion of the Group's ownership interest in the associate	1,366	-
Goodwill arising on acquisition	754	-
Carrying amount of the Group's interest in the associate	2,120	-

 

In 2016 the Group's interest in Sancus (Isle of Man) Holdings was accounted for as an investment. During 2017, 22.2% of the Sancus Isle of Man shares were acquired from the Directors of Sancus Group taking the holding at the end of 2017 to 29.3%.

 

 

9.          LOSS PER ORDINARY SHARE

 

Consolidated loss per Ordinary Share has been calculated by dividing the consolidated loss for the year after tax attributable to Ordinary Shareholders of £15,164,402 (31 December 2016: loss of £17,593,313) by the weighted average number of Ordinary Shares (excluding treasury shares) outstanding during the period o f 302,673,708 (31 December 2016: 270,934,270). There was no dilutive effect for potential Ordinary Shares during the current or prior periods.

 

Note 13 describes the warrants in issue which are currently out of the money, and therefore have not been considered to have a dilutive effect on the calculation of Loss per Ordinary Share. Share options as noted in Note 20 are also out of the money and have therefore not been considered to have a dilutive effect on the calculation of Loss per Ordinary Share.

 

 

	31 December 2017	31 December 2016
No. of shares	312,065,699	309,298,113
Weighted average no. of shares in issue throughout the year	302,673,708	270,934,270
Loss per share	(5.01)p	(6.49)p

 

10.       GOODWILL

 

	31 December 2017	31 December 2016
	£'000	£'000
Brought forward	25,033	14,255
Additions:
Acquisition of Sancus Finance	-	5,547
Acquisition of Sancus Funding	-	738
Acquisition of Sancus Gibraltar	-	8,639
Impairment:
-   Sancus Finance	-	(3,408)
-   Sancus Funding	-	(738)
Carried forward	25,033	25,033

 

Goodwill comprises:
Sancus Jersey	14,255	14,255
Sancus Gibraltar	8,639	8,639
Sancus Finance	2,139	2,139
	25,033	25,033

 

 

Impairment tests

The carrying amount of the goodwill arising on the acquisition of certain subsidiaries is assessed by the Board for impairment on an annual basis or more frequently if there has been an event which suggests that there may have been an impairment.

 

The value in use of Sancus Jersey was based on an internal Discounted Cash Flow ("DCF") valuation analysis using cash flow forecasts for the years 2018 to 2022. The starting point for the cash flows was the 2018 budget which was produced by Sancus Jersey management and ratified by its board. Management's revenue forecast applied a compound annual growth rate (CAGR) to revenue of 15%. A cost of equity discount rate of 13.5% (as determined by independent valuation experts), which is reflective of Sancus's cost of equity, was employed in the valuation model. The resultant valuation indicated that no impairment of goodwill was required, with significant headroom.

 

The value in use of Sancus Finance was also determined using a similar DCF basis starting from the 2018 budgets, but using a revenue CAGR of 36% (which reflects accelerated near term growth, reducing from 25% to 10% throughout the years 2019 to 2022) and a cost of equity discount rate of 18.1%, both higher than that applied in the valuation of Sancus Jersey, to take into account the fact that this business is still in a development stage. The resultant valuation indicated that no impairment of goodwill was required, with significant headroom. This surplus was not considered a reversal of previous impairments.

 

The value in use of Sancus Gibraltar was also determined on a similar DCF basis starting from the 2018 budgets, but using a CAGR of 13% and a cost of equity discount rate of 14.0%. The resultant valuation indicated that no impairment of goodwill was required, again with significant headroom.

 

Goodwill valuation sensitivities

When the discounted cash flow valuation methodology is utilised as the primary goodwill impairment test, the variables which influence the results most significantly are the discount rates applied to the future cash flows and the revenue forecasts.

 

The table below shows the impact on the Consolidated Statement of Comprehensive Income of stress testing the period end goodwill valuation with a decrease in revenues of 10% and an increase in cost of equity discount rate of 3%. These potential changes in key assumptions fall within historic variations experienced by the business (taking other factors into account) and are therefore deemed reasonable.  

 

 

 

Sensitivity Applied	Reduction in headroom implied by sensitivity
	Sancus Jersey £'000	Sancus Finance £'000	Sancus Gibraltar £'000	Total £'000
10% decrease in revenue per annum	3,822	1,406	2,644	7,872
3% increase in cost of Equity discount rate	5,108	817	4,097	10,022

 

   Neither scenario results in an implied reduction of Goodwill.

 

11.       INTANGIBLE ASSETS

		£'000
Cost
At 1 January 2017		1,050
Additions from internal development		262
At 31 December 2017		1,312
		£'000
Amortisation
At 1 January 2017		530
Charge for the year		252
At 31 December 2017		782

 

 

Net book value 31 December 2017

530

 

Net book value 1 January 2017

520

 

 

Intangible assets comprise capitalised contractors' costs and other costs related to core systems development. In the prior year these were disclosed within Property and equipment but have now been separately disclosed with the prior year reclassified. No impairment provision has been recorded. The amortisation charge has been recorded in Other expenses.

 

 

12.       TRADE AND OTHER RECEIVABLES

	31 December 2017	31 December 2016
	£'000	£'000
Dividend income receivable	68	371
Loan fees and similar receivable	930	121
Loan interest receivable	1,973	940
Preference share dividends receivable	607	415
Other trade receivables and prepaid expenses	592	865
	4,170	2,712

 

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 no par value.

 

During the year the Company issued the following additional Ordinary Shares:

 

 

	2017
Date	No of shares issued	Share Premium £	Reason for issue
21 April 2017	2,767,586	615,239	2016 fourth quarter scrip dividend
	2,767,586	615,239

 

	2016
Date	No of shares issued	Share Premium £	Reason for issue
20 January 2016	51,020	18,750	Bonus entitlement
22 March 2016	237,230	79,709	2015 fourth quarter scrip dividend
13 June 2016	270,015	84,650	2016 first quarter scrip dividend
30 June 2016	43,408,360	13,500,000	Acquisition of Sancus Gibraltar
30 June 2016	11,093,247	3,450,000	Increased stake in GLIF BMS Holdings Limited
15 August 2016	23,020,560	7,036,374	Placing with Somerston Group
16 September 2016	295,943	83,974	2016 second quarter scrip dividend
02 December 2016	686,784	213,591	BIS Management Seller share portion
15 December 2016	317,590	69,552	2016 third quarter scrip dividend
	79,380,749	24,536,600

 

 

Share Capital	31 December 2017	31 December 2016
Ordinary Shares - nil par value	Shares in issue	Shares in issue
Balance at start of year	309,298,113	229,917,364
Issued during the year	2,767,586	79,380,749
Balance at end of the year	312,065,699	309,298,113

 

Share Premium	31 December 2017	31 December 2016
Ordinary Shares - nil par value	£'000	£'000
Balance at start of year	111,942	87,405
Issued during the year	615	24,537
Balance at end of the year	112,557	111,942

 

Ordinary shareholders have the right to attend and vote at Annual General Meetings and the right to any dividends or other distributions which the company may make in relation to that class of share.

 

Treasury Shares

 

As at 31 December 2017 a total of 6,154,102 (2016: 8,632,619) Ordinary Shares, with an aggregate value of £1,161,975 (2016: £1,733,283) were held by a Subsidiary, Sancus BMS Group Limited and eliminated on consolidation. These shares were part consideration for this company's minority shareholding in Sancus Gibraltar purchased by the Group in June 2016.

 

 

 

		31 December 2017	31 December 2016
		£'000	£'000
Balance at start of the year		1,734	-
Acquired through Group restructure in June 2016		-	1,900
GLI shares transferred to key members of management		(572)	(166)
Balance at end of year		1,162	1,734

 

The GLI shares transferred to key members of management relate, in the main, to discretionary bonus paid in shares.

 

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; and,

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 31 December 2017, 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.

 

 

Distributable Reserve

 

As at 31 December 2017, the Distributable Reserve stood at £Nil, following a transfer of this balance to retained earnings in the year. (31 December 2016, the Distributable Reserve stood at £34,802,740).

 

Whilst UK Legislation only permits companies to pay dividends out of profits for distribution (i.e. realised profits), under the Companies (Guernsey) Law 2008, this operates on a solvency model and therefore does not have any impact on dividend distribution.

 

14.   LIABILITIES

 

	31 December 2017	31 December 2016
Non-current liabilities	£'000	£'000
ZDP shares (1)	24,714	23,436
Corporate Bond (2)	10,000	8,500
	34,714	31,936

 

	31 December 2017	31 December 2016
Current liabilities	£'000	£'000
Syndicated Loan (3)	-	11,920
Accounts payable	319	2,582
Accruals and other payables	1,432	1,624
Dividend payable	-	215
Other staff costs	240	375
Payable to related party*	950	2,400
Preference shares	-	200
	2,935	19,316

 

 

 

 

*Relates to the amount owing by Sancus BMS Group Limited to Sancus IOM Holdings Limited for its subscription for preference shares, which is due in respect of issued but uncalled preference shares and does not bear interest.

	31 December  2017	31 December 2016
Interest costs on debt facilities	£'000	£'000
ZDP Shares (1)	1,279	1,275
Corporate Bond (2)	648	298
Syndicated Loan (3)	220	1,597
	2,147	3,170

 

 

(1)        ZDP shares

 

The ZDP Shares have a maturity date of 5 December 2019 with a final capital entitlement of £1.30696 per ZDP Share.

 

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 .

 

During the year, the interest costs accrued on the ZDPs amounted to £1.3m (31 December 2016: £1.3m), at an average interest rate of 5.5% (31 December 2016: 5.5%).

 

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 31 December 2017 the Company was in compliance with these covenants as Cover Test A was 3.26 (minimum of 1.7) and Cover Test B was 4.09 (minimum of 3.25).

 

At the year end senior debt borrowing capacity amounted to £20m after the repayment of the syndicated Loan (see Note 14.3).  

 

(2)        Corporate Bond

 

On 30 June 2016 GLI Finance issued £10m corporate bonds as part of the acquisition of Sancus Gibraltar. As at 31 December 2017 Sancus BMS Group Limited holds £Nil of these (31 December 2016: £1.5m leaving a balance on consolidation of £8.5m). The bond maturity date is 30 June 2021 and they bear interest at 7%.

 

During the year the interest costs to the Group on the bonds amounted to £0.6m (31 December 2016: £0.3m).

 

(3)        Syndicated Loan Facility

 

On 15 March 2017, the Syndicated Loan Facility of £14.9m was repaid. £11.9m was repaid to external parties and £3.0m was paid to Sancus BMS Group Limited to settle their participation in the loan.

 

In the period to 15 March 2017 interest costs to the Group on the Loan Facility amounted to £0.2m (year to 31 December 2016: £1.6m).

 

15.       TAXATION

 

The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed annual fee of £1,200 (31 December 2016: £1,200) is payable to the States of Guernsey in respect of this exemption.

 

Reconciliation of tax charge

	31 December 2017	31 December 2016
	£'000	£'000
Accounting loss before tax	(15,164)	(16,452)
Accounting profit/(loss) before tax relating to non Guernsey resident companies	685	(1,403)
UK Corporation Tax at 19% (2016: 20%)	(118)	134
Gibraltar Corporation Tax at 10%	138	83
Utilisation of tax losses and other adjustments	-	(134)
Tax expense	20	83

 

Certain of the Group's subsidiaries have losses available for carry forward and offset against future trading profit of £15,065,000 (31 December 2016: £7,340,000).

 

	31 December 2017	31 December 2016
	£'000	£'000
Consolidated loss
Losses brought forward restricted to UK	(7,158)	(7,826)
Losses brought forward restricted to Guernsey	(182)	(116)
Losses (in year)/utilised in UK	(7,693)	668
Losses (in year)/utilised in Guernsey	(32)	(66)
Losses carried forward UK	(14,851)	(7158)
Losses carried forward Guernsey	(214)	(182)

 

 

Deferred income tax assets in respect of capital losses, trading losses and non-trade deficits have not been recognised as their future recovery is uncertain or not currently anticipated.

 

 

16.       CASH GENERATED FROM OPERATIONS

	31 December 2017	31 December 2016
	£'000	£'000
Loss for the year	(15,184)	(16,535)
Adjustments for:
Net losses on FinTech Ventures	13,459	7,432
Net losses on fair value of SSIF	953	1,529
Net loss on associate of SSIF	-	1,208
Other net losses/(gains)	399	(718)
Non-cash item on finance costs on ZDPs	1,278	1,275
Amortisation/depreciation of fixed assets	322	272
Other non-cash	1,136	1,358
Goodwill write off	-	4,146
Changes in working capital:
Trade and other receivables	(1,533)	1,949
Trade and other payables	(2,479)	3,649
Cash (outflow)/inflow from operations	(1,649)	5,565

 

 

 

17.       CONSOLIDATED SUBSIDIARIES

 

The Directors consider the following entities as wholly and partly owned subsidiaries of the Group and their results and financial positions are included within its consolidated results. Subsidiary entity Date of incorporation Country of incorporation Nature of holding Percentage holding Sancus BMS Group Limited ("SBMS") 27 December 2013 Guernsey Directly held -Equity Shares 100% Sancus BMS Holdings Limited ("SBHL") (formerly GLIF BMS Holdings Limited ("GBHL")) 5 November 2012 United Kingdom Indirectly held -Equity Shares 100% BMS Finance AB Limited ("BMS Finance AB") 24 November 2006 United Kingdom Indirectly held -Equity Shares 100% Sancus Services Limited (formerly GLI Finance (UK) Limited) 21 October 2014 United Kingdom Indirectly held -Equity Shares 100% Sancus (Jersey) Limited 1 July 2013 Jersey Indirectly held -Equity Shares 100% Sancus (Guernsey) Limited 18 June 2014 Guernsey Indirectly held -Equity Shares 100% Sancus (Gibraltar) Limited                            10 March 2015 Gibraltar Indirectly held -Equity Shares 100% Sancus Funding Limited (formerly Funding Knight Limited) 17 February 2011 United Kingdom Indirectly held -Equity Shares 100% Sancus Finance Limited 7 January 2011 United Kingdom Indirectly held -Equity Shares 98.2% FinTech Ventures Limited 9 December 2015 Guernsey Directly held -Equity Shares 100%

 

 

 

18.       FINTECH VENTURES AND OTHER INVESTMENTS

 

The Directors consider the following entities as associated undertakings of the Group as at 31 December 2017.

 

Name of Investment:	Nature of holding	Country of incorporation	Percentage holding	Measurement
FinTech Ventures:
LiftForward Inc.	Indirectly held - Equity	United States of America	18.40%	Fair Value
Finexkap	Indirectly held - Equity	France	29.80%	Fair Value
Ovamba Solutions Inc.	Directly held - Equity	United States of America	20.48%	Fair Value
The Credit Junction Holdings	Indirectly held - Equity	United States of America	22.24%	Fair Value
Funding Options Limited	Indirectly held - Equity and Preference Shares	United Kingdom	28.90%	Fair Value
TradeRiver Finance Limited	Directly held - Equity and Preference Shares	Guernsey	43.9%	Fair Value
TradeRiver USA Inc	Directly held - Equity and Preference Shares	United States of America	30.25%	Fair Value
Open Energy Group Inc	Directly held - Equity	United States of America	23.10%	Fair Value
MytripleA	Directly held - Equity	United Kingdom	15.00%	Fair Value
UK Bond Network Limited	Directly held - Equity	United Kingdom	21.11%	Fair Value
Finpoint Limited	Directly held - Equity	United Kingdom	21.12%	Fair Value
Other Investments:
BMS Finance (Ireland) Sarl	Indirectly & Directly held - Equity	Luxembourg	30.25%	Fair Value
BMS Finance (UK) Sarl	Indirectly held - Equity	Luxembourg	25.24%	Fair Value

 

No significant restrictions exist on the ability of these associates to transfer funds to the Group in the form of cash dividends, or to repay loans or advances made by the Group.

 

19.       FINANCIAL RISK MANAGEMENT

 

The Group is exposed to financial risk through its investment in a range of financial instruments, ie. in the equity and debt of investee companies and through the use of debt instruments to fund its investment in loans. Such risks are categorised as capital risk, liquidity risk, investment risk, credit risk, and market risk (market price risk, interest rate risk and foreign currency risk).

 

Comments supplementary to those on risk management in the Corporate Governance section of this report as are included below.

 

(1)   Capital Risk Management

 

The Group's capital comprises ordinary shares as well as a number of debt instruments. Its objective when managing this capital is to enable the Group to continue as a going concern in order to provide a consistent appropriate risk-adjusted return to shareholders, and to support the continued development of its investment activities. Details of the Group's equity is disclosed in Note 13 and of its debt in Note 14.

 

The Group and its subsidiaries are not subject to regulatory or industry specific requirements to hold a minimum level of capital, other than the legal requirements for Guernsey incorporated entities. The Group considers the amount and composition of its capital is currently in proportion to its risk profile.

 

The Group monitors the ratio of debt (loans payable, bonds and ZDP Shares) to other capital which, based upon shareholder approval, is limited to 5 to 1 (or 500%). At year end this ratio stood at 46% (31 December 2016: 48%). 

 

(2)   Liquidity risk

 

Liquidity risk is the risk that arises when there is a mismatch in the maturity of assets and liabilities, which results in the risk that liabilities may not be settled at contractual maturity. The Group's investments are generally more illiquid than publicly traded securities.

 

The Group Treasury Committee meets twice monthly to manage the liquidity position of the Group. Where necessary contingency plans are made to realise assets which are reasonably liquid in the short term.

 

The following table analyses the Group's financial assets and liabilities into relevant maturity groupings based on the period to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows, assuming interest rates in effect at the year end. 

 

	Current	Non-current
	Within 12 months	1 to 5 years
31 December 2017	£'000	£'000
Assets
Sancus BMS loans and loan equivalents	11,181	24,238
Loan notes	7,907	3,000
FinTech Ventures Investments	3,508	26,090
Other Investments at Fair value	-	542
Joint ventures and associates	-	2,266
Loans through Platforms	908	-
Trade and other receivables	4,170	-
Cash and cash equivalents	3,016	-
Total assets	30,690	56,136

 

 

Liabilities
ZDP Shares	-	24,714
Corporate Bond	-	10,000
Trade and other payable	2,935	-
Total liabilities	2,935	34,714

 

 

Net Liquidity

27,755

21,422

 

 

(3) Interest rate risk

Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates and that mismatches in the interest rates applying to assets and liabilities will impact on the Group's earnings.

 

The Group's cash balances, debt instruments and loan notes are exposed to interest rate risk.

 

The Group did not enter into any interest rate risk hedging transactions during the current or prior years.

 

The table below summarises the Group's exposure to interest rate risk:

 

 

	Floating rate Financial Instruments	Fixed Rate Financial Instruments	Total
31 December 2017	£'000	£'000	£'000
Assets
BMS Loans and loan equivalents	1,064	45,262	46,326
Financial assets at fair value through profit and loss	-	3,128	3,128
Loans through Platforms	-	908	908
Cash and cash equivalents	3,016	-	3,016
Total assets	4,080	49,298	53,378

 

Liabilities
ZDP shares payable	-	24,714	24,714
Corporate Bond	-	10,000	10,000
Total liabilities	-	34,714	34,714
Total interest sensitivity gap	4,080	14,584	18,664

 

 

31 December 2016
Assets (restated)
Sancus BMS Loans and loan equivalents	563	38,258	38,821
Financial assets at fair value through profit and loss	-	2,040	2,040
Loans through Platforms	-	4,034	4,034
Cash and cash equivalents	9,616	-	9,616
Total assets	10,179	44,332	54,511

 

Liabilities
Loans payable	-	11,920	11,920
ZDP shares payable	-	23,436	23,436
Corporate Bond	-	8,500	8,500
Total liabilities	-	43,856	43,856
Total interest sensitivity gap	10,179	476	10,655

 

Interest rate sensitivities

 

Given that the majority of financial assets and liabilities are at fixed rates the Group is not materially exposed to changes in interest rates in relation to existing assets/liabilities (2016: similar exposure).

 

The GLI Treasury Committee reviews interest rate risk on an ongoing basis, and the exposure is reported quarterly to the Board and/or Audit and Risk Committee.

 

 

(4) Investment risk

Investment risk is defined as the risk that an investment's actual return will be different to that expected. Investment risk primarily arises from the Group's exposure to its FinTech Ventures portfolio. This risk in turn is driven by the underlying risks taken by the platforms themselves - their own strategic, liquidity, credit and operational risks.

 

The Group's framework for the management of this risk includes the following:

 

·      Seats on the boards of most of the platforms, which allow input into strategy and monitoring of progress;

·      pre-emptive rights on participation in capital raises, or the support for capital raises, to protect against dilution;

·      regular monitoring of the financial results of platforms;

·      bi-annual reviews of the valuations of platforms, which provide an opportunity to test the success of platforms' strategies, and,

·      quarterly reporting to the Board on these matters.

 

The methodology for the valuation of such investments is noted above.

Investment valuation sensitivities

 

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 31 December 2017	At 31 December 2016
Market comparable transaction based on recent fundraising activity, adjusted for any relevant risk	15,346	-	Equity raises completing Q4 17/Q1 18	Transaction price negatively adjusted by a range of 0-50% for completion risk, nature of fundraising and other risks	A smaller adjustment for these factors would increase the fair value
Discounted cashflow forecasts	11,961	27,597	There has been no change in valuation techniques. Recent market comparable transaction data became available (see above)	Cashflows are discounted by a range of 18.1-26.1% for cost of equity and 15-17.5% 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
Fair value based on cost and adjusted for FX movement and any new investment (WC loan, convertible note etc)	2,291	8,507	None	None	None
Investment in redeemable preferences shares of the loan notes is valued on fair value	10,907	7,500	None	Fair value which closely approximates the net asset value of the Loan Note Special purpose vehicles	None
	40,505	43,604

 

 

When the 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:

 

Increasing and decreasing revenues by 10%

 

Increasing and decreasing discount rates by 3% (discount rates in valuation models average 18.1%-26.1%)

 

Increasing and decreasing illiquidity discounts by 5% (discounts applied in valuation models vary between 15% and 17.5%)

 

 

	Consolidated Statement of Comprehensive Income
		31 December 2017
		£'000
10% pa increase in revenue		3,268
10% pa decrease in revenue		(3,268)
3% increase in discount rate		(1,570)
3% decrease in discount rates		2,154
5% increase in illiquidity discount		(411)
5% decrease in illiquidity discount		411

 

 

The DCF methodology has been used on different investments and a different number of investments this year compared to the prior year. As a result, no prior year comparative has been given as it would not provide a meaningful comparison.

 

With regards to market comparable transactions, a total discount of £900k was applied to reflect completion risk of transactions not yet finalised. 

 

(5) Credit risk

Credit risk is defined as the risk that a borrower/debtor may fail to make required repayments within the contracted time scale. The Group invests in senior debt, senior subordinated debt, junior subordinated debt and secured loans.

Credit risk is taken in the following ways:

 

·      Direct lending to third party borrowers;

·      Investing in loan funds (the BMS Sarls);

·      Lending to associated platforms; and,

·      Loans arranged by associated platforms.

 

The maximum investment size, at the time of the investment, will generally be limited to 15% of the Group's Gross Assets. However, the Group may make larger investments and it may seek to syndicate or sell down a portion of any such investment.

 

The Group mitigates credit risk on its loan portfolio by only entering into agreements related to loan instruments in which the operating strength of the investee companies is considered sufficient to support the loan amounts outstanding. This determination of whether the loan instruments are sufficiently supported is made by the Executive Team at the time of the agreements, and the Executive Team continues to evaluate the loan instruments in the context of these agreements.

 

The entities in the Sancus BMS Group operate Credit Committees which are responsible for evaluating and deciding upon loan proposals, as well as monitoring the recoverability of loans, and taking action on any doubtful accounts. All lending undertaken by Sancus BMS is secured. The credit committee reports to the Sancus BMS Board on a quarterly basis.

 

Credit risk exposure is set out in the table below. At the year-end there is no accrued interest which is considered uncollectable (31 December 2016: £nil).

 

The risk of default on bank accounts and other short-term financial assets is considered negligible, since the counterparties are reputable banks with high quality external credit ratings.

 

31 December 2017
Credit Risk (£'000)	Amounts advanced	Provisions / Write offs	Net exposure
Sancus BMS loans and loan equivalents	46,326	-	46,326
FinTech Ventures Investments	5,918	(2,790)	3,128
Loans through Platforms	908	-	908
Total	53,152	(2,790)	50,362

 

 

Credit Risk exposure of third party funders/co-lenders in loans managed/administered by the Group's subsidiaries

 

The credit risk on loans managed by Sancus BMS Group is borne by third party funders/co-lenders, who are provided with sufficient information to assess the risk at the time they enter the transaction. In the case of Sancus Finance's supply chain product, credit insurance is typically, put in place covering up to 90% of the funders' exposure.

 

Sancus, BMS Finance and Sancus Finance have developed credit policies, approval and monitoring processes to be effective for each businesses' different type of lending (property-backed, business cash flow and invoice/supply chain finance respectively). Limited default experience indicate that the policies and processes are proving effective.

 

(6) Market price risk

 

Following the sale of the investment in SSIF the Group has no exposure to market price risk of financial assets valued on a Level 1 basis as disclosed in Note 22.

 

Market price risk sensitivities

The following details the Group's sensitivity to a 5% increase and decrease in the market prices of Level 1 financial instruments, which were primarily the investment in SSIF. As at 31 December 2017 the Group had no investment in Level 1 financial instruments.

 

 

	Consolidated Statement of Comprehensive Income
	31 December 2017	31 December 2016
	£'000	£'000
5% increase in market prices	-	1,189
5% decrease in market prices	-	(1,189)

 

 

(7) Foreign exchange risk

 

Foreign exchange risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Group has made investments in currencies other than Sterling and is therefore exposed to this risk.

 

The extent of exposure is set out in the table below.

 

31 December 2017

 

Balance sheet exposure (000)	Assets	Liabilities	Net	In £	Rates applied	% of Group total assets
Euro	9,298	-	9,298	8,259	1.12579	7.34%
USD	20,840	-	20,840	15,428	1.35077	13.72%

 

The exchange rates used by the Group to translate foreign currency balances are as follows:

 

Currency	31 December 2017	30 June 2017	31 December 2016	30 June 2016	31 December 2015
USD	1.3508	1.3027	1.2340	1.3311	1.4736
EUR	1.1258	1.1402	1.1731	1.1984	1.3571

 

 

Foreign exchange risk sensitivities

The sensitivity analysis below stresses the Group's outstanding foreign currency denominated financial assets and liabilities by a 15% increase/decrease in Sterling.

 

	Consolidated Statement of Comprehensive Income
	31 December 2017	31 December 2016
	£'000	£'000
15% decrease in foreign exchange rates	4,180	5,712
15% increase in foreign exchange rates	(3,090)	(4,222)

 

 

The Treasury Committee Team monitors the Group's currency position on a regular basis, and the Board of Directors reviews it on a quarterly basis. Although this risk may be hedged, the current approach is not to do. No hedging instruments were used during either 2017 or 2016.

 

 

20.       SHARE-BASED PAYMENTS

 

On 26 September 2017, the Company granted a total of 10,00,000 options over ordinary shares of no par value to certain directors of the Company. The Options will vest in three equal tranches on the first, second and third anniversaries of the Grant with exercise prices of 25p, 30p and 35p respectively. The options are not subject to performance conditions.

 

The expense recognised for these share-based payments during the year to December 2017 is £8,475 (2016: £Nil).

 

Details of the share options outstanding during the year are as follows:

 

	31 December 2017		31 December 2016
	Number of share options	Weighted average exercise price	Number of share options	Weighted average exercise price
		p		p
Outstanding at the beginning of the year	-	-	-	-
Granted during the year	10,000,000	30	-	-
Outstanding at the end of the year	10,000,000	30	-	-
Exercisable at the end of the year	-	-	-	-

 

 

The estimated fair values of the options granted were 0.99p, 1.06p and 0.84p for the first, second and third tranches respectively. The weighted average fair value of the options not yet exercised is 0.96p. These fair values were calculated using The Black-Scholes pricing model. The inputs to the model were as follows:

 

 

	Tranche 1	Tranche 2	Tranche 3
Weighted average exercise price	25p	30p	35p
Expected volatility	45%	40%	34%
Expected contracted life	2 years	3.5 years	5 years
Risk free rate	0.45%	0.50%	0.76%

 

The expected volatility was determined by reference to the share price volatilities of the company itself, over the life of the options.

 

 

21.       RELATED PARTY TRANSACTIONS

 

Transaction with the Directors/Executive Team

 

Non-executive Directors

 

As at 31 December 2017, 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:

 

 

	31 December 2017		31 December 2016
	£		£
Patrick Firth (Chairman)	50,000		50,000
John Whittle	42,500		40,000
Frederick Forni (1)	-		37,500
James Carthew (1)	-		40,000

 

(1)  Resigned on 23 September 2016

 

There was no increase in the Directors' base fees during the year ended 31 December 2017, but Mr Whittle received an additional £2,500 as Chairman of the Audit Committee. Total Directors' fees charged to the Company for the year ended 31 December 2017 were £92,357 (31 December 2016: £86,380) with £Nil (31 December 2016: £Nil) remaining unpaid at the year end.

 

Executive Team

 

The Executive team consists of Andrew Whelan, Russell Harte (ceased employment on 1 July 2017), Emma Stubbs, Aaron Le Cornu (commenced employment 1 May 2017), Marc Krombach (ceased employment 29 April 2016) and Louise Beaumont (ceased employment 27 September 2016).

 

For the year ended 31 December 2017, 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:

 

 

	31 December 2017	31 December 2016
	£'000	£'000
Aggregate remuneration in respect of qualifying service - fixed salary	565	500
Aggregate amounts contributed to Money Purchase pension schemes	79	66
Aggregate bonus paid (shares and cash)	550	394

 

 

See remuneration report for further details.

 

All amounts have been charged to Other 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 replaces the previous Executive Bonus Scheme.

 

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

 

As at 31 December   2017, the Directors had the following beneficial interests in the Ordinary Shares of the Company:

 

	31 December 2017		31 December 2016
	No. of Ordinary Shares Held	% of Ordinary Shares	No. of Ordinary Shares Held	% of Ordinary Shares
Patrick Firth (Chairman)	278,669	0.09	271,049	0.09
John Whittle	104,550	0.03	-	N/A
Andrew Whelan	8,051,921	2.58	3,800,000	1.23
Emma Stubbs	1,005,485	0.32	179,640	0.06
Aaron Le Cornu	445,790	0.15	-	-

 

During the year, Mr Firth, Mr Whittle, Mr Whelan and Mrs Stubbs received total amounts of £1,694, £Nil, £43,506 and £2,022 (31 December 2016: £6,390, £Nil, £95,000 and £3,026) respectively from the Company by way of dividends on their Ordinary Share holdings in the Company.

 

See Note 24 for details of the Directors' interests in the Ordinary Shares of the Company as at the date of this report.

 

As at 31 December 2017, there were 10,000,000 unexercised share options for Ordinary Shares of the Company (31 December 2016: Nil Ordinary Shares) (Note 20).

 

During the year Mr Whelan received £41,475 in relation to the coupon on his holding of £800,000 GLI Bonds.

 

Transactions with connected entities

 

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

 

	31 December 2017		31 December 2016
	Balance £'000	Interest accrued in the year £'000	Balance £'000	Interest accrued in the year £'000
Platform loans & corresponding interest
GLIF and investments in Fintech Ventures	3,128	668	3,288	360
Platform preference shares & corresponding interest
GLIF and investments in Fintech Ventures	1,916	739	3,405	50
(Payable)/receivable to/from related parties
Intercompany with Sancus (IOM) Holdings Limited	(950)	-	(2,400)	-
Intercompany with Sancus (IOM) Holdings Limited	2	-	-	-
Intercompany with Sancus (IOM) Limited	24	-	-	-
	31 December 2017		31 December 2016
		£'000		£'000
Office and staff costs recharges
Amberton Asset Management		47		163

 

 

 

There is no ultimate controlling party of the Company.

 

All platform loans bear interest at a commercial rate.

 

All preference shares bear interest at a commercial rate.

 

 

22.       FINANCIAL INSTRUMENTS

 

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:

 

	31 December 2017		31 December 2016
	Level 1	Level 3	Level 1	Level 3
Assets	£'000	£'000	£'000	£'000
Investment in SSIF	-	-	23,781	-
FinTech Ventures investments	-	29,598	-	36,104
Investments in Sancus Loan Notes	-	10,907	-	7,500
Other investments at Fair Value		2,808	-	873
Total assets at Fair Value	-	43,313	23,781	44,477

 

 

 

The classification and valuation methodology remains as noted in the 2016 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 cashflows and comparable company and comparable transaction analysis. Key unobservable inputs used in the discounted cashflows include costs of equity and illiquidity discount rates. Other factors included revenue and costs growth rates, interest margins, bad debt expense and tax rates. These are consistent with the inputs described in the 2016 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.

 

The investment in SSIF was sold on the 8 March 2017, raising £22.7m in cash.

 

 

FinTech Ventures' Investments	Equity	Loans	Total
31 December 2017	£	£	£
Opening fair value	34,699	1,405	36,104
New investments/loans advanced	1,455	5,494	6,949
Reclassification of loan	-	418	418
Disposals/loan repayments	-	(414)	(414)
Losses recognised in profit and loss:
-       Realised	-	-	-
-       Unrealised	(9,684)	(3,775)	(13,459)
Closing fair value	26,470	3,128	29,598

 

	Equity	Loans	Total
31 December 2016	£	£	£
Opening fair value	34,028	4,778	38,806
New investments/loans advanced	4,601	4,077	8,678
Transfer from Associate to Subsidiary - Sancus Finance	(2,536)	-	(2,536)
Disposals/loan repayments	(500)	(912)	(1,412)
Losses recognised in profit and loss:
-       Realised	(500)	(1,001)	(1,501)
-       Unrealised	(394)	(5,537)	(5,931)
Closing fair value	34,699	1,405	36,104

 

 

Assets at Amortised Cost

	31 December 2017	31 December 2016
	£'000	£'000
Sancus BMS loans and loan equivalents	35,419	31,321
Loans through platforms	908	4,034
Trade and other receivables	4,170	2,712
Cash and cash equivalents	3,016	9,616
Total assets at amortised cost	43,513	47,683

 

Sancus BMS loans and loan equivalents has increased in the year largely due to the participation by BMS and GLI in the UK and Irish Funds. Loans through the platforms has reduced in the year from net repayments and loan provisions.

 

 

Liabilities at Amortised Cost

 

	31 December 2017	31 December 2016
	£'000	£'000
ZDP Shares	24,714	23,436
Syndicated Loan	-	11,920
Corporate Bond	10,000	8,500
Trade and other payables	2,935	7,396
Total liabilities at amortised cost	37,649	51,252

 

Refer to Note 14 for further information on liabilities.

 

 

23.       COMMITMENTS AND CONTINGENCIES

 

As at 31 December 2017, the Group had the following aggregate unrecognised commitments to loans denominated in Sterling, Euro and US Dollar, due to its Associates and other underlying investments:

 

Aggregate loan commitment by currency	31 December 2017	31 December 2016
	£'000	£'000
Sterling	60	1,066
Euro	255	703
US Dollar	-	1,297
	315	3,066

 

Operating lease commitments	31 December 2017	31 December 2016
	£'000	£'000
Within one year	328	96
Between two and five years	883	235
Over 5 years	107	-
	1,318	331

 

All lease commitments relate to office space.

 

 

24.       POST YEAR END EVENTS

 

Directors and PDMR Interests

 

At the date of these financial statements, the Directors and PDMRs' beneficial interests in the Ordinary Shares of the Company were:

 

	No. of Ordinary Shares Held	% of Ordinary Shares
Patrick Firth (Chairman)	278,669	0.09
John Whittle	104,550	0.03
Andrew Whelan	8,051,921	2.58
Emma Stubbs	1,005,485	0.32
Aaron Le Cornu	1,105,790	0.35

 

 

Subsidiary - Name Change

 

On 16 January 2018, Funding Knight Limited changed its name to Sancus Funding Limited.

 

HIT Funding Facility

 

On 29 January 2018 it was announced that a special purpose loan vehicle called Sancus Loans Limited which is non-recourse to GLI has been established with a £50m funding capacity. This has been backed by a £45m credit facility from HIT, with a term of 3 years, of which £17.5m had been drawn and deployed immediately.

 

Repayment of Sancus Loan Note 1

 

On 29 January 2018 it was announced that Sancus Loan Note 1 (the "SPV") would be repaid early using the "HIT" funding facility noted above. The SPV was launched in November 2016 with a 2 year life and £17.55m in size; £7.5m of which were redeemable preference shares subscribed for by Sancus. £5m of the c.£7.5m repaid to Sancus, will be used as security under the terms of the new funding facility. 

 

There were no other significant post year end events that require disclosure in these financial statements.