GLI Finance Limited

CHIEF EXECUTIVE OFFICER'S REVIEW (continued)

For the period ended 30 June 2016

Figure 1- Please see supplementary document     

GLI Finance Limited

CHIEF EXECUTIVE OFFICER'S REVIEW (continued)

For the period ended 30 June 2016

Pillar Performance Review:

Pillar One (Sancus BMS Group)

During the half year, GLI's investment in Sancus BMS Group increased following the acquisition of Sancus (Gibraltar) Limited ("Sancus Gibraltar") and the remaining stakes in GLIF BMS Holdings Limited ("GBHL") and increasing our interest in Platform Black. Post period-end, we are also pleased to announce that Platform Black has reached an agreement with a consortium of high net worth private investors to provide a GBP50m funding line as well as acquiring a 10% minority Shareholding in this Company.

The Sancus BMS Group operates in "niche" markets with strong sustainable loan origination underwritten by an experienced credit team. We are leveraging the breadth of the groups expertise by bringing them together under a single unified brand.

Sancus BMS already offers several loan products including asset backed lending, secured finance, shorter term cash flow lending and supply chain finance. With a newly integrated group there will be more opportunity for helping borrowers' funding requirements across the entire business generating cross-selling opportunities and better understanding of our borrowers' business. This will assist our risk management processes further. In addition, the technology behind Platform Black, which has always operated through an online platform, is now being developed for use by other parts of the Sancus BMS Group and will become fully operational throughout the Sancus entities by the end of the year.

In an industry which is typically characterised by single product platforms, I am confident that we are building a business which has unique value propositions. The Sancus BMS Group now operates in five jurisdictions: UK, Ireland, Jersey, Guernsey and Gibraltar, with endorsements from the British Business Bank and the Irish Strategic Investment Fund (ISIF) and which will soon have an online lending platform. These businesses are profitable and focus on specific niche lending opportunities. Importantly they do not try and compete with the traditional banks, but sit alongside and complement their services. We believe this is a strong competitive and operational position to be in. We also have an investment in the Sancus Isle of Man, which is performing in line with expectations.

From June 2015 to June 2016, on a comparable basis, loans under management increased from GBP42.3m to GBP78.1m. The Sancus BMS Group presently funds itself through a combination of three sources: SPV funds in which the British Business Bank and the Irish Strategic Investment fund largely invest; A growing network of High Net Worth and institutional investors we term 'co-lenders' to whom we sell our originated and underwritten loans; and on balance sheet lending funded by group working capital. The balance sheet is extremely lean helping to drive return on equity. On-balance sheet lending has decreased from GBP32.7m to GBP25.5m as our growing pool of co-lenders increased their participation in lending activities. We are seeing strong growth in the number of co-lenders (who comprise private clients, HNWIs, family offices and institutions) who are attracted to alternative opportunities for yield enhancement with moderate risk.

Strong loan origination, diligent risk management, and a lean balance sheet will propel our cash return on assets which we believe should gradually be reflected in a higher valuation being attributed to this part of the business which presently represents 55% of total company assets.

This Pillar (excluding Platform Black) remains on course to generate net profit of GBP2.5m for the 2016 financial year.

Pillar Two (FinTech platforms)

The minority stakes in start-up platforms accumulated by the Group during the 2014 and 2015 FinTech "gold rush" were recognised at the time as being high risk, but with the potential for some of these investments to deliver significant returns. Perhaps what was not recognised at the time was the length of time and the funding it might take for these businesses to mature and become profitable. Therefore, although disappointing, it is perhaps inevitable that some platforms have failed, or are underperforming to the point where write downs have been necessary, whereas others continue to show promise, and consequently positive revaluations have been made. It is expected that the investment risk related to this portfolio will remain an ongoing feature for the foreseeable future. However, this Pillar is where we would expect substantial positive surprise.

We have identified 4 platforms which have become the Group's "Prioritised" platforms, as a result of their innovative business models not only attracting investment from GLI, but also from other institutional investors. These are The Credit Junction, LiftForward, Funding Options and Finexkap. During the period we have increased our equity stakes in the Prioritised platforms from GBP7.7m to GBP10.2m. The continuing positive returns from these investments have resulted in a total investment capital return of GBP13.0m, representing a strong 117.4% return on investment since inception.

A new wholly owned subsidiary, FinTech Ventures Limited (FVL) will be used to hold the Group's investments in the Prioritised platforms. We are currently in the process of transferring these investments into FVL. This will support management focus on these investments, facilitate separate performance reporting and, in time, potentially enable separate funding of future capital required to assist the growth in these platforms. Other platform investments may be transferred into this entity.

In terms of other platforms, the Group's equity investment increased by GBP0.75m. This investment related to the outright purchase of FundingKnight Limited following the liquidation of its holding company. We are currently working with its management team to ensure it has a competitive distribution strategy to complement its quality IT platform. 

GLI Finance Limited

CHIEF EXECUTIVE OFFICER'S REVIEW (continued)

For the period ended 30 June 2016

Despite management's efforts to minimise the loss in value in eight of the less successful platforms, a prudent approach to valuation was adopted, leading to net write downs of GBP6.9m. During the period two platforms were in the process of closing (Raiseworks which was wholly-owned was closed on 24 August 2016 and CrowdShed in which we hold a 32.5% interest, is in orderly wind down), we reduced our interest in and removed our support from a third and post period end we have sold our interests in Proplend for a nominal consideration. Also during the period, Verus 360 an online SME finance provider, ceased operation, resulting in GBP4.5m write-down. I am working closely with the remaining 5 platforms management and boards and will provide further updates in the year end report on their development.

Pillar Three (Amberton)

At the start of the reporting period, GLI Asset Management Limited was a wholly owned subsidiary of GLI Finance.  Q1 saw a 50% stake in GLIAM sold to Somerston and the successful change of name and rebranding to Amberton Asset Management ("AAM"). AAM currently has a marginal financial impact on the Group, however it manages a significant portion of the Group's total assets, GBP22.7m, through its mandate to manage The SME Loan Fund plc ("SMEF" or the "Fund") (previously known as GLI Alternative Finance plc).

Financially, the company is not yet profitable, with assets under management of GBP53.4m, compared to an initial target of GBP100 million. The consolidated loss for the period amounted to GBP149k. AAM is pursuing a number of separate lines of business to broaden revenue streams.

In terms of SMEF, the Board of the Fund decided in August 2016 to change its name from GLI Alternative Finance PLC, also changing its listing codes from GLAF:LN to SMEF:LN. From a performance perspective, the first half of 2016 will be remembered for significant market volatility, particularly within the AltFi sector, enhanced by the decision that the UK electorate took to leave the European Union. Confidence in the investment trust sector was also negatively impacted by news of governance issues at Lending Club in the USA, resulting in share prices for the sector trading at a significant discount to net asset value. SMEF also suffered a share price fall which saw the shares trading at a discount to NAV of 11.4% at its low point. This recovered to a discount to NAV of 8.9% at the end of July. During this time the NAV of the Fund remained stable. The Fund continues to provide a low risk exposure within the sector. It remains unleveraged and we understand this stance is likely to continue for the foreseeable future. An EGM in August this year adjusted the investment restrictions to allow greater flexibility in the allocation of capital.

Group Head Office

We have been focused on improving Group governance, treasury, risk management processes and IT functions, whilst carefully managing Group Head Office costs. At the beginning of July, I was delighted to welcome both Russell Harte and Steve Simpson to the team, as Chief Operating Officer and Head of Group IT respectively. Russell brings a vast range of experience in a number of fields whilst Steve has 22 years of experience in IT, most recently as the architect of the successful Platform Black platform.

During the reorganisation period there were assets which did not fit to any pillar and were retained by head office. These included the Group's investment in SMEF and loans to and through platforms. Many of these loans have been written off during the reporting period making a material negative contribution to group profits. There are minimal loans outstanding other than for working capital purposes to Sancus BMS Group. In future we do not envisage the head office results to impact the group results to the same degree as we have seen in this period.

Income generation within SMEF has been in line with expectations with the dividend of 0.55p being paid monthly, equating to a yield 7.48% as at the end of the reporting period.

Capital and cash flow management

The current weighted average cost of debt is 6.8%, which was achieved during the period through the refinancing of a loan from a syndicate of high net worth individuals via the Sancus platform which reduced interest costs on this from 11% to 8.75% (the "Syndicated Loan").

One of my key objectives over the next 6 months is to optimise the group balance sheet and secure long term funding. By recognising losses early and reducing leverage, together with an increasingly profitable Sancus BMS Group, we have de-risked the business significantly and have a foundation for driving returns. Nonetheless a growing lending business needs capital.

The Board and I have assessed the Company's financial position as at 30 June 2016 and after taking into consideration the maturity profile of our debt structure and the various options we have available to us to meet these commitments, we are of the opinion that it is appropriate to prepare these accounts on a going concern basis. The options being considered by the Board include the possible refinance of the loan. In current market conditions, the rate being provided to investors is attractive and therefore the Board considers this could be one likely option. We are however looking to reduce our current debt, so the Board also notes the potential to "tap" the existing ZDPs and/or GLI Bond or the part sale of our holding in the SMEF shares could also repay the debt.

GLI Finance Limited

CHIEF EXECUTIVE OFFICER'S REVIEW (continued)

For the period ended 30 June 2016

Capital and cash flow management (continued)

I am working on a solution to improve the Group's debt to equity profile yet further, and I will provide more information during the course of the year as to how these plans develop.

Summary of financial results

The financial results for the period for the Company and the Group prepared in accordance with IFRS are set out in pages 33 to 41. The Group loss for the period was GBP8.4m (June 2015 loss GBP8k) and on a Company basis was GBP6.9m (June 2015 profit GBP5.3m).Results for the first half have been impacted by the write downs we have made and as touched upon at the start of my report, in order to assist in understanding the underlying performance and financial position of the period, we have developed the GLI Measurement basis. I have commented below on the GLI Measurement results presented in the CFO's report.

From a GLI measurement perspective, the loss of GBP10.3m as shown on page 17 largely reflects the results of the strategic review's impact on platform valuations in Pillar Two, with net write-downs incurred over the period of GBP6.9m and GBP6.0m on loan write offs. Also in the period we have incurred capital movements in relation to de-recognition of associates due to the restructuring of the Group, along with incurring GBP0.7m of legal and professional fees and the loss on the fair value on SMEF which we would deem as non-recurring. Adjusting for these items, on a normalised basis profits for the period are GBP5.2m.

In Pillar One, earnings for the period did not include the results of Sancus Gibraltar or the full BMS Finance profits as they were only fully acquired at the end of the period. EBIT on a consolidated basis was GBP1.4m, but on a pro forma basis, including new acquisitions for the full period, EBIT totalled GBP2.0m. We expect profits for Pillar One to steadily increase from the current year comprehensive profit target of GBP2.5m (excluding Platform Black), as it benefits from synergies, cross selling and continued organic growth. Platform Black is anticipated to move from a loss position (H1 2016 GBP0.7m loss) into profit following the recent commitment of a GBP50m funding line from new investors, and other synergies upon joining Sancus BMS Group.

In Pillar Two we have made write-downs where necessary, reflecting our prudent approach to valuations. Net write downs have totalled GBP6.9m. The companies in the Prioritised list of platforms are well placed to continue the growth in value we have seen this period, during which we have recognised a valuation uplift of GBP5.5m.

Amberton's loss amounted to GBP149k.

Group Head Office's results were negatively impacted by the share price decline in SMEF, resulting in an unrealised loss of GBP 2.6m on this asset. We expect this loss to reverse in time as the market price returns to the Fund's net asset value.

We have stated earlier in the year that following GLI's reclassification on AIM as a trading company rather than an investing company, we will in future focus reporting on earnings rather than on NAV. However we note that the Company's NAV is still important and in the CFO report a breakdown of the movements in the period is provided. 

Conclusion

Overall I am pleased with the progress the Group has made so far this year, although it has been a testing time for all. We have moved as quickly as possible and I believe that we have achieved a significant transformation in the past 8 months. We have executed on our plan to focus, simplify and rationalise the Group's operations after its rapid expansion over the previous two years. The Group's attention has now firmly shifted to generating sustainable earnings streams from our profitable, niche SME lenders, alongside the FinTech investment portfolio, where we will continue to actively support our Prioritised platforms. By the "venture" nature of the 20 start-up platforms in which GLI took an interest in recent years, there was always a risk that some would not yield a return - however, now that the "losers" have been written down, we consider that over time, the portfolio will provide a material positive return. 

By the end of the year I aim to have finished the strategic review I started in December 2015. I have taken all the necessary hard decisions and write downs and, I truly believe, we will have positioned the business for growth, laid the foundations for maximising returns to Shareholders. I will remain focused on executing our strategy, and, consistent with this, maximising value creating opportunities as they arise.

I would like to thank the Board for welcoming me as the Group CEO and for their support over the period. I would also like to thank my Executive Team and staff who have worked extremely hard to achieve our strategic goals. Finally, I would like to thank James and Fred for their support particularly over the past nine months and wish them well in the future.

Andrew Whelan

Chief Executive Officer

Date: 23 September 2016

GLI Finance Limited

CHIEF FINANCIAL OFFICER'S REVIEW

For the period ended 30 June 2016

Introduction

As the Group has transformed considerably over the last three years, we have aimed to improve our approach to disclosure with the introduction of reporting by Pillar, providing transparency of performance at this level. To enable this, we make, as referred to in the CEO report and explained in further detail below, certain adjustments to the key line items prepared under IFRS to arrive at the GLI Management Basis for commentary on these numbers. We have developed this methodology for presentation of the numbers in the CEO and CFO reports as, we believe, it helps provide the reader with a comprehensive understanding of our underlying performance and financial position over the period.

The GLI Measurement Basis

GLI has restructured its business into Three Pillars for the following reasons:-

-       to more clearly define the components of the Group's business;

-       to focus management on the achievement of value creation targets in each Pillar;

-       to clarify how value is created in each area of the Group's business, and,

-       to improve the measurement and disclosure of value created in each Pillar.

As the Group's transformation has progressed, it has become increasingly obvious that the application of International Financial Reporting Standards (IFRS) to the Group's business does not necessarily provide a clear understanding of performance and financial position. To address this issue, the Group has developed a hybrid approach to presenting its results, referred to as the GLI Measurement Basis, which is explained in the table below.

It should be noted that the GLI Measurement Basis is only applied to disclosures in the CEO's and CFO's reports. The primary statements are presented in accordance with IFRS. Key reconciliations to IFRS disclosures of Consolidated Comprehensive Income are included below.

GLI Finance Limited

CHIEF FINANCIAL OFFICER'S REVIEW (continued)

For the period ended 30 June 2016

The GLI Measurement Basis (continued)

Significant events over the half year

Significant events in the first half of the year which have had an impact on the results and capital structure are listed below:

·      On 5 February 2016 GLI entered into a Share Sale agreement with Golf Investments (part of the Somerston Group of companies) which included:

·      Sale of 15m SMEF shares to Golf Investments;

·      The sale of 50% of AAM for GBP0.25m;

·      Issuing a warrant instrument to Golf Investments to subscribe in cash for up to 32m new Ordinary Shares on the basis below:

·      10,000,000 Warrants at 40 pence per Ordinary Share;

·      10,000,000 Warrants at 45 pence per Ordinary Share; and

·      12,000,000 Warrants at 55 pence per Ordinary Share.

·      On 5 February 2016 GLI increased its' stake in Platform Black from 43.9% to 83.7%.

·      On 16 February 2016 we announced our strategic goals, including a target to achieve a saving of GBP1.0m in costs on an annualised basis from closure of non-performing subsidiaries, advisory fees and travel. We are on target to achieve these cost savings.

·      On 3 March 2016 the sale of 15 million SMEF shares to Golf Investments was completed for a cash consideration of GBP15m which was used to reduce Company debt. GLI now holds 47.94% and Somerston 27.94% of SMEF's issued share capital.

·      On 10 March 2016 GLI subscribed for GBP5.0m Platform Black preference shares at an interest rate of 9%.

·      On 15 March 2016, the GBP30m syndicated loan facility which was at an interest rate of 11% was repaid and a new facility put in place for GBP14.86m for one year at 8.75%.

·      On 20 April 2016, the dividend for Q1 2016 of 0.625 pence per share was declared, following the announcement on 21 December 2015 that the annual dividend would be halved from 5.0 pence per annum to 2.5 pence per annum.

·      On 27 April 2016, it was announced, subject to Shareholder approval, that the Company would no longer be classified as an "Investing Company" under the AIM Rules, reflecting the Board's view that the Company now exhibits the characteristics of a trading company. Shareholders approved the change at GLI's AGM on 19 May 2016 and, as a result, the Company is no longer classified as an Investing Company effective 20 May 2016.

GLI Finance Limited

CHIEF FINANCIAL OFFICER'S REVIEW (continued)

For the period ended 30 June 2016

Significant events over the half year (continued)

·      On 28 June 2016 it was announced that GLI had acquired Funding Knight Limited and two of its operating subsidiaries for a consideration of GBP0.75m.

·      GLI committed to providing Funding Knight Limited with at least GBP1.0m of further capital to finance its ongoing operations.

·      Funding Knight Holdings Limited ("FKHL") was put into administration and GLI wrote off its holding in the ordinary share capital of GBP2.48m, GBP1.0m in preference shares and loans and accrued interest of GBP0.82m.

·      It was confirmed by the administrator of FKHL that GBP0.45m would be repaid to GLI from FKHL in partial settlement of the loan.

·      On 30 June 2016 the 100% acquisition of Sancus Gibraltar and GBHL (the Company owned 15.26% and 62.5% respectively before the deal) completed to create Sancus BMS Group. The transaction was completed by:

·      The issue of 43,408,360 new Ordinary Shares and GBP10m bond as consideration for Sancus Gibraltar; and

·      11,093,247 shares issued and GBP1.75m cash in payment for GBHL.

·      Post period, on 8 July 2016, the Company announced a change of external auditor from Grant Thornton Limited  to Deloitte LLP and the change of registrar from Equiniti Investment Solutions to Capita Registrars.

·      On 9 August 2016 an update of dividend policy was announced. The Board has resolved to maintain the policy of paying a dividend of not less than 2.5p per annum on a quarterly basis in respect of the 2016 financial year, but from 2017, dividends will only be paid when fully covered by cash earnings. This ensures that the Company has the resources to make the most of its opportunities to create longer term shareholder value, with the objective of providing for the payment of a progressive dividend.

Company Net Asset Value (at fair value) and the GLI Share Price

Figure 2- Please see supplementary document     

The Company NAV per share at the end of June 2016 was 37.07p represented a 13.25% decline since December 2015. The share price at 30 June 2016 was 24.88p representing a 32.9% discount to NAV on a fair value basis.

The Net Asset Value of the Company has been negatively impacted by write-downs in its Pillar Two investments, primarily at 31 December 2015 and 30 June 2016. This is further explained later in this report.

GLI Finance Limited

CHIEF FINANCIAL OFFICER'S REVIEW (continued)

For the period ended 30 June 2016

Movement in the Company Net Asset Value (at Fair Value)

Figure 3- Please see supplementary document     

Net assets increased in the first half of the year by 7.5% from GBP98.24m to GBP105.64m. The main reason for this was due to the issue of new shares as part of the transaction which closed on the 30 June 2016 and the upwards revaluation of the Company's existing holdings in Sancus Gibraltar and GBHL, based on the acquisition prices of GBP13.5m and GBP13.8m respectively.

Pillar Two Prioritised platforms were revalued on the basis of the most recent transaction prices, in line with our valuation policy.

Pillar Two Other FinTech required write-downs of GBP6.9m in equity and GBP6.0m in loans as platforms either underperformed or were closed. Specifically, two platforms were in the process of closing during the period (CrowdShed and Raiseworks), with interests in one (Proplend) being sold post period end and another in the process or being sold or exited. Pillar Two benefited from a GBP2.7m unrealised foreign exchange gain.

We experienced a loss on the carrying value of our investment in SMEF based on the mid-price of this quoted fund falling to 89.75p at 30 June 2016, however there is a potential for upside with the NAV per share at 30 June 2016 at 101.31p.

Company Net Asset Value by Pillar (at fair value)

As set out in the tables below, at June 2016 Company NAV comprises gross assets of :

·      Pillar One GBP87.0 (30.52p per share) being a combination of equity and intercompany loans.

·      Pillar Two GBP37.66m (13.22p per share) being the fair value of the FinTech platforms.

·      Pillar Three, GBP0.45m (0.16p per share) being the net asset value of AAM.  

·      Group Head Office

o  Holding in SMEF shares of GBP22.74m (7.96p per share)

o  Loans through platforms and held in BMS managed funds of GBP8.8m (3.08p per share)

o  Net Liabilities of GBP50.99m (-17.86p per share) largely made up of the Zero Dividend Preference Shares ("ZDPs"), Bond and the Syndicated Loan.

In comparison to December 2015, the increase in Pillar One was due to the acquisition and revaluation of Sancus Gibraltar and GBHL. Pillar Two has had a minimal movement overall, due to the net effects of write ups, write downs, acquisitions, disposals and new loans made to prioritised platforms. The value held in the SMEF has decreased following the sale of 15 million shares to Somerston at the beginning of the year and a fair value loss on share price of GBP2.6m. The slight increase in loans made to SME's in the period relates to loans made to the BMS managed funds in the period.