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REG - Sancus Lending Group - Final Results for the year ended 31 December 2022

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RNS Number : 9138U  Sancus Lending Group Limited  31 March 2023

The information contained within this announcement is deemed to constitute
inside information as stipulated under the Market Abuse Regulation (EU) No.
596/2014 as amended by The Market Abuse (Amendment) (EU Exit) Regulations
2019. The person responsible for making this announcement on behalf of the
Company is Rory Mepham.

 

31 March 2023

 

 

 

Sancus Lending Group Limited

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

 

Final Results for the year ended 31 December 2022

 

 

 

HIGHLIGHTS

 

Rory Mepham, Chief Executive Officer of Sancus Lending Group Limited,
commented:

 

"After 18 months in my post as CEO, the turnaround of the business is on track
and we are confident of our ability to deliver profitability. The business has
undergone considerable restructuring and simplification during my tenure and
we continue to be exclusively focussed on residential property lending in the
development and bridging space, a market which remains underserved and offers
significant growth possibilities.

 

During the year, we have carried out various cost optimisation projects in an
effort to ensure that every pound of cost incurred is geared towards
delivering growth. We remain convinced that technological enablement holds one
of the keys to our future and are pleased with both the progress that has been
made to date and the further enhancements in the pipeline. The robustness of
our credit process, institutional quality of our underwriting, due diligence
and active loan management means that despite recent inflationary and interest
rate pressures we report only a small increase of 3.14% (£0.4m) increase to
our previously reported IFRS9 provisions, all of which relate to loans written
in 2019 or before.

 

I am excited by the potential in the teams that we have assembled in the UK,
Ireland and Offshore and believe that we have the basis from which to become
"best in class" in each of these markets.

 

Financial Highlights

 

·      Group revenue increased by 11% to £10.0m FY22 (FY21: £9.0m);

·      Operating losses narrowed to £4.7m (FY21: loss £10.2m);

·      Group PBT loss for the year of £14.1m (FY21: loss £10.3m)
impacted by the exceptional write down of goodwill in Gibraltar of £8.6m;
and

·      A small increase of 3.14% (£0.4m) to IFRS9 provisions in 2022,
compared to £6.4m charge in 2021, the result of operational improvements
within the business.

 

Operational Highlights

 

·      Geographic focus remains unchanged: UK and Ireland the key areas
of growth for the business with UK revenue up 81%, Ireland up 132%;

·      Sancus' Offshore business saw a decline of 64% in revenue
following the repayment of some large loans and insufficient new loans written
to mitigate the reduction in their loan book. Offshore new loan facilities
written in 2022 however increased by 47% on 2021;

·      Impressive growth of 88% on total new facilities written, from
£83m to £156m year on year with UK up 76% and Ireland up 180%, and a strong
pipeline in the Group's key growth markets for FY23; and

·      Loan book at year end £169m (2021: £142m) as a result of
continued increase in UK and Irish loan books.

 

Strategic Highlights

 

·      Restructuring of the Group's funding facility, extension of the
Zero Dividend Preferences Shares ("ZDPs") and Tender offer, and new equity and
bond subscription from Somerston:

o  Increase and extension of the Company's facility arranged by Pollen Street
Plc ("Pollen Street") from £75m to up to £125m, not to expire before
November 2026, providing additional funding capacity as the Company seeks to
grow its lending book;

o  Refinancing and extension of the ZDP shares to December 2027, accompanied
by a 15% tender offer

o  Further investment by Somerston through the exercise of warrants over
94,294,869 ordinary shares, for an aggregate subscription price of £2.1m;

o  Somerston subscribed to £2.43m bonds in December 2022, taking the
Company's aggregated bond principal to £15m, of which £10.13m is now held by
Somerston;

·      The Company announced in January 2023 its decision to rationalise
the number of offices from which it operates, from five to
three: London, Dublin and Jersey, providing the Group with a footprint
reflecting its three core areas of geographic focus: UK, Ireland and
Offshore;

·      This rationalisation resulted in the closure of the Company's
office in Guernsey and the decision to cease new business activities
in Gibraltar, having not identified sufficient quality lending opportunities
to merit continued efforts in the region; and

·      Sancus Gibraltar was subsequently sold for £10k, resulting in
closure cost savings of around £200k. The departure from
the Gibraltar market will result in cost saving, risk reduction and allow
dedicated resources to focus on the Group's core markets. Goodwill of £8.64m
held in respect of Sancus Gibraltar written down to nil.

 

For further information, please contact:

 

 Sancus Lending Group Limited                              +44 (0)1534 708 900

 Rory Mepham

 Liberum Capital (Nominated Adviser and Corporate Broker)  +44 (0) 20 3100 2000

 Lauren Kettle

 Chris Clarke

 William King

 Instinctif Partners (PR Adviser)                          +44 (0)207 457 2020

 Tim Linacre

 Victoria Hayns

 Sanne Fund Services (Guernsey) Limited                    +44 (0)1481 755530

 (Company Secretary)

 Matt Falla

 

Introduction

 

We are now a year into a structured change programme which we expect to
reposition the Group for growth. Demand in our chosen markets remains firm and
the reduced appetite of some traditional balance sheet lenders, may present an
opportunity to write good quality new business.

 

The expansion of the business development team has started to pay dividends
with an increase in the volume of new loan facilities written to £156m,
versus £83m in the previous year.

 

Last year, as part of a wider review of the business and an expansion of the
credit and recovery teams, we carried out a detailed review of the Group's
loan book which resulted in an impairment provision of £6.4m (FY 2021). We
believe that last year's write down effectively draws a line under recent
losses and we are reporting an IFRS9 impairment of £0.4m in 2022, partially
the result of ongoing recovery costs. The provisions made to date all relate
to loans written in 2019 or before.

 

We have decided to close the Gibraltar office. This will result in cost
savings and improved focus in stronger markets. As a result of the decision to
close the office, Goodwill (£8.64m) arising from the acquisition of Sancus
Lending (Gibraltar) Limited ("Sancus Gibraltar") in 2016, has been written
down to nil.

 

Our People

 

Following last year's personnel changes, the team has settled in well and is
working hard to deliver our goals of profitability, growth and shareholder
value. The Group has invested in rebuilding and reinforcing the team and our
headcount has increased from 32 at the end of 2021 to 39 at 31 December 2022.
We do not expect to increase headcount in 2023. The new resource is focussed
on expansion in our growth markets of the UK and Ireland, credit risk and
technology.

 

As announced on 10 January 2023 Emma Stubbs, CFO, will be leaving the business
at the end of March 2023 and Tracy Clarke will be appointed as the Group's
Interim Chief Financial Officer, for an initial period of 12 months. Emma
leaves as a result of our continuing commitment to reduce cost and to switch
the focus of our operations to Jersey where we have a significant presence.
Emma leaves with our very best wishes and thanks for her time with the Group.

 

Tracy has been a non-executive Director of the Company since March 2022 and is
a Fellow of the Institute of Chartered Accountants
in England and Wales and holds the CISI Investment Advice Diploma.  Tracy
is currently Managing Director of Carlton Management Services Limited
("Carlton"), a licensed Jersey Trust Company business which provides
administration and finance services to clients including the Somerston Group
(the Company's largest shareholder).

 

With effect from 31 March 2023, as an interim measure which may become
permanent, Carlton has been appointed to manage and develop the Group's
finance function, including new technology integrations for forecasting,
performance and treasury management. Under its service agreement with Carlton,
which has a three-year term and covers services including accounts
preparation, budgeting and cashflow forecasting, book-keeping, financial KPI
analysis and various administrative services, Sancus will pay to Carlton an
annual fee of £170k (the "Carlton Agreement"). Furthermore, it has been
agreed that Carlton will sub-lease office space from Sancus in the Group's
offices in Jersey, pursuant to a sub-lease agreement dated 30 March 2023 to
which Sancus, Carlton and the landlord of the Group's Jersey offices are each
a party (the "Carlton Sub-lease"). Pursuant to the Carlton Sub-lease, Carlton
will be charged approximately £100k, on the same terms as Sancus for the
proportion of space occupied, which is not currently being used by Sancus. The
Carlton Sub-lease therefore represents cost savings for the Group, while also
facilitating a smoother working relationship as envisaged by the Carlton
Agreement.

 

Entry by the Company into the Carlton Agreement and the Carlton Sub-lease each
represents a related party transaction, pursuant to AIM Rule 13. The
independent directors (being the Company's directors except for Tracy Clarke)
consider, having consulted with its nominated adviser, Liberum Capital, that
the terms of the respective transactions are each fair and reasonable insofar
as its independent shareholders are concerned.

 

The Board intend to appoint a permanent CFO in due course and will review
these arrangements on a regular basis.

 

Capital Raise and Facility and Debt Restructuring

 

At the end of 2022 we announced an expansion of the Company's Funding Facility
with Pollen Street from £75m to up to £125m to expire no earlier than 23
November 2026. This will provide additional funding capacity as the Company
seeks to grow its loan book.

 

We also deferred the maturity of the ZDP shares until 5 December 2027 and
completed a tender offer for 15% of ZDP shares, excluding those held in
treasury, that was fully subscribed.

 

Somerston, the Group's largest shareholder, invested further equity in the
Company on 30 November 2022 by exercising warrants over 94,294,869 ordinary
shares for an aggregate subscription price of £2.1m. On 1 December 2022
Somerston subscribed to £2.425m of bonds taking the Company's aggregated bond
exposure to £15m (of which £10.13m is held by Somerston).

 

Dividend and Shareholders

 

The Group is engaged in a recovery programme and there is no capacity to
declare a dividend this year. The Board will revisit this policy as soon as
the cash flow and profitability permit.

 

On behalf of the Board, I would like to thank shareholders for their
continuing support and patience. As a result of the continuing efforts of our
team the Group has made good progress this year and while the Board do not
underestimate the scale of the challenge ahead we believe we have the right
strategy, systems and personnel to return the business to profitability.

 

I look forward to reporting positive developments in the coming year.

 

Steve Smith

Chairman

Date: 30 March 2023

 

 
CHIEF EXECUTIVE OFFICER'S REVIEW

 

Outlook

 

This year saw a number of achievements and I am pleased with the progress
made.  There is still more work to do on the road to profitability, but the
foundation to meet our goals were built upon during the year.

 

We saw a significant increase in loans written in the year from £83m written
in 2021 to £156m in 2022. This will lead to corresponding growth of loans
under management, and revenue increase, as these loans are drawn over time.

 

The loan book growth has been prevalent in the UK (129% growth versus 2021)
and Irish markets (22% growth versus 2021) where the Sancus name and
reputation continues to develop. Following the repayment of several large
loans in our Offshore business in the year, the team are working hard to
replenish the book with this new loan capacity. In the UK we are particularly
proud to have been shortlisted for the award of Development Finance provider
of the year at the Bridging & Commercial awards, a clear demonstration of
our growing reputation as a straightforward and trusted business partner.

 

It will take time for the loan writing process to deliver revenue uplift as
there is a time lag between execution and drawdown, though fees are paid
upfront on new deals and we generally receive exit fees when the loan is
repaid. At the end of 2022 the loan book stood at £169m, an 11% increase
versus FY 2021 when it was £142m. We expect growth in the loan book to
increase during 2023 as the newly written loans continue to be drawn.

 

In addition to growing the revenue side of the Company, during the year we
have been seeking to find opportunities to both optimise cost and create
efficiencies. This has ultimately culminated in our decisions to close our
offices in Gibraltar and Guernsey, whilst retaining our ability to do business
in Guernsey. Technological enablement of our systems and processes is further
designed to drive efficiency and mitigate cost increases as the business
scales up.

 

Strategic KPIs

 

We have seen progress against the Board agreed KPI's:

 

·      Revenue growth

 

o  11% up on last year due to modest increase in loan deployment. Positive
upticks in our growth areas of the UK and Ireland, with the UK revenue up 81%
on last year and Ireland up 132%.

 

·      Growing loans under management

 

o  Loan book increase from £142m at 31 December 2021 to £169m at 31
December 2022.

 

·      Reducing cost of funding

 

o  This remains a focus for the Group, and we continue to seek cheaper cost
of funding. This has been challenging in the macro-economic environment of the
year but remains a strategic objective. To address the movements in base rates
across our markets, we have implemented variable rate loans with the margin
pegged to the relevant base rate.

 

·      Become a capital efficient business

 

o  We continue to reduce the amount of own capital within loans, which at the
end of 2022 represented 3.5% of the total loan book, in comparison to 5.6% at
the end of 2021.

 

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

 

o  Operating loss for 2022 was £4.7m against an operating loss of £10.2m in
2021. We have a small increase  of £0.4m in relation to IFRS9 losses in the
year, whereby £6.5m was reported in 2021.

o  Our cost base has increased on prior year as we focus on growth but in the
future, we expect the cost ratio to revenue to reduce.

 

·      Return on Equity ("ROE")

 

o  Going forward we plan to become profitable and report a positive ROE which
the management team will be tasked to improve year-on year.

 

·      Ensuring a risk-based approach is taken on all decision making

 

o  Embedding institutional credit processes and becoming increasingly
technology enabled has been a focus of the Group over the last year.

 

Origination

 

We have seen growth in new loan facilities written during the year with £156m
written during 2022 against £83m in 2021, as the benefits of our investment
in the origination teams begin to deliver.

 

Maintaining a high-quality credit process whilst scaling the quantity of new
loans is a priority. We expect to see continued growth in the UK and Ireland
as these remain key areas of investment for the Group. We further anticipate
that the Offshore business will continue to see attractive lending
opportunities and we are confident that the teams in our three core
jurisdictions are well placed to execute against those opportunities as they
arise.

 

Standardisation of the loan execution process has been implemented across the
Group, including documentation, conditions precedent, conditions subsequent
and closing checklists. We have also implemented a new workflow process to
expediate the time between the loan credit approval and loan drawdown and are
exploring how we can better utilise technology to manage certain elements more
efficiently. We have now onboarded and integrated Salesforce (our chosen CRM
software) with our Loan Management System which will create further
standardisation and unlock efficiencies going forward.

 

Loan Management

 

The loan book increased from £142m at the end of 2021 to £169m at the end of
2022. With the number of new facilities written and as we see funds deployed,
we expect to be reporting a further increase in our loan book over the coming
year. The increase was driven by the UK loan book increasing by 129% and
Ireland by 22% in the year, with Offshore decreasing by 14%. New facilities
written in total increased by 88% year on year. We have a strong pipeline and
expect to see the loan book continue to increase. At the year end, the asset
backed loan book comprised Offshore at £82m (31 December 2021: £96m) UK at
£66m (31 December 2021: £29m) and Ireland at £21m (31 December 2021:
£17m).

 

Continued emphasis has been placed on actively managing loans once the initial
drawdown has been made and further investment has been made in recruiting
experienced loan management team members during the year. This has been
particularly important during a time when various market related pressures
such as cost inflation are impacting our borrowers. Active management is
helping us to deal with issues before they become problems and we are pleased
to report that the percentage of loan book in recovery continues to reduce.

 

Funding

 

We continue to focus on increasing the funding capacity and diversifying the
funding sources of the business, on improved terms. This is particularly
important in the context of the wider economic climate where we are in a
significant inflationary environment. We are seeking to work with a
diversified mix of funders, both private and institutional, to match funders
with loans meeting their varied risk and reward criteria. Currently, the Group
is reliant on four funding sources:

 

·      Co-Funders

·      Loan Note program

·      Institutional funders

·      Proprietary capital

 

Co Funders remain our largest funding channel, with the majority of the
Offshore loan book being co-funded. The percentage of the loan book funded by
co-funders continues to reduce from 50% at the end of 2021 to 39% at the end
of 2022, as the proportion of co-funding from institutional funding lines
increases. We continue to nurture relationships with the Co-Funder base,
typically being Offshore private individuals and family offices.  In addition
to the large pool of Co-Funders that have been working with Sancus for a
number of years, the business is actively seeking to widen its net and has
recruited team members in its Offshore team to be exclusively focused on
targeting and building relationships with potential new Co-Funders.

 

Loan Notes, managed by Amberton Limited, remain an important funding
instrument for the business. Loan Note 8 was launched in January 2022 and
currently stands at £2.7m. Loan Note 8 matures on 1 December 2026 and has a
coupon of 5% p.a. (payable quarterly), with Sancus providing a 20% first loss
guarantee. Loan Note 7 was launched in May 2021 and currently stands at
£14.8m. Loan Note 7 matures in May 2024 and has a coupon of 7% p.a. (payable
quarterly), with Sancus providing a 10% first loss guarantee. We are in the
process of re-launching Loan Note 8, with an improved coupon of 8%, to reflect
the current interest rate environment.

 

Sancus has secured an increase and extension to the institutional funding line
arranged by Pollen Street Capital ("Pollen Street") and is designed to be
complementary to our Co-Funder base and Loan Note program. As announced on 24
November 2022 the credit facility was increased to £125m from £75m and the
term was extended such that it will expire at least four years from the date
of the Agreed Terms, being not before 23 November 2026. At 31 December 2022
the total drawn was £67.75m (31 December 2021: £49.9m). The Pollen Street
facility continues to be strategic for the business and is generally utilized
in relation to funding development loans.

 

Sancus also has a forward flow bridge funding arrangement with a global
private equity backed debt acquisition business and continues to explore
additional long term financing lines that could sit alongside our syndicated
lending approach.

 

The availability, cost and flexibility of funding is key to achieving our
growth ambitions and we are continually reviewing the capital position of the
business with a view to ensuring it is best placed to grow funding capacity on
improved terms. Over the course of 2022 the loan book funded by institutional
funding increased by 69%, with the majority of the UK and Irish loan book
funded by this channel which now makes up 48% of the loan book. We will seek
to increase institutional funding alongside building the loan note program and
co-funder network over time.

 

Finance & Operations

 

A focus on operational efficiency within Finance and Operations, driven by
technology wherever possible, commenced during 2022 and will continue into
2023. Sancus has continued to develop its own proprietary loan managements
system ("LMS") for the administration of loans and has completed the
integration of this system with a CRM system provided by a third party.

 

The Executive team continue to improve Corporate Governance and Compliance and
Risk management as these are the bedrock for the business to achieve future
growth targets.

 

We made some selective hires across the business over the last year with the
focus of bolstering our Funding and Origination capabilities in our active
markets. At the end of 2022, the Group headcount was 39 (31 December 2021: 32)
with the largest increases in the Origination and Loan Management teams. We
believe the business is now well resourced to meet its objectives and are
focussing on continuous improvement and development of our people.

 

As announced on 10 January 2023 Emma Stubbs, CFO, will be leaving the business
at the end of March 2023 and Tracy Clarke will be appointed as the Group's
Interim Chief Financial Officer, for an initial period of 12 months.  Tracy,
who has been a non-executive Director of the Company since March 2022, is a
Fellow of the Institute of Chartered Accountants in England and Wales and
holds the CISI Investment Advice Diploma.  Tracy is currently Managing
Director of Carlton Management Services Limited ("Carlton"), a licensed Jersey
Trust Company business which provides administration and finance services to
clients including the Somerston Group (the Company's largest shareholder).
With effect from 31 March 2023, Carlton has been appointed to augment and
support the development of the Group's finance function, including new
technology integrations for forecasting, performance and treasury management
and reporting, further detail on which is set out in the Chairman's Statement.
It is ultimately the intention of the Board to appoint a permanent CFO in due
course and intends to review these arrangements in 12 months.

 

A key milestone at the end of 2022 was the successful increase and extension
of the term of our facility with Pollen Street, as well as restructuring our
ZDPs and raising further capital from an equity raise as well as restructuring
our debt (Bonds and ZDPs). This transaction had the full support of our
largest shareholder Somerston Group who participated in both the equity raise
and new bond issue. With the ZDP's intended to play a long-term part of the
Group's finance strategy, the extension of the maturity date from 5 December
2022 to 5 December 2027 allows the Group time to focus on its growth plans.

 

Realising value from the legacy FinTech Ventures Investments remains a target
for the management team albeit we now only hold stakes in four platforms.
Monitoring and governance of FinTech Ventures is ongoing and we continue to
assist our investee platforms with their strategy. Unfortunately, the
profitability of many of these companies have failed to meet expectations
within an acceptable timeframe and their ability to raise additional capital
without proving concept is severely constrained and we have fully written down
our portfolio to nil at the end of 2022. It remains a challenging market for
many of the FinTech platforms.

 

Summary of Financial Performance

 

Group revenue increased by 11% year on year from £9.0m in 2021 to £10.0m in
2022. Note 3 Segmental Reporting sets out the results by Offshore, UK and
Ireland and we can start to see revenue growth in our growth target markets,
with the UK revenue up by 81% and Ireland up 132% over the course of 2022.

 

We have seen Offshore revenue decrease by 64% in the year, partly due to some
large exit fees received in 2021 and a reduction in administration and
transactional fees as the total loan book in the region decreased over the
last few years. The Offshore team has seen significant change in senior
management personnel in the last two years, and the new team are focussed on
re-building the loan book over the coming years. Offshore continues to be a
core market.

 

We have reported an operating loss of £4.7m (FY 2021: loss of £10.2m) and a
small increase of £0.4m of expected credit losses (IFRS 9) in the year (FY
2021: £6.5m loss).

 

The Group's net assets have reduced in the year from £19.1m at 31 December
2021 to £7.2m as a result of the operating loss in the year and the goodwill
impairment in Gibraltar of £8.6m. We did see £2.1m of new equity come into
the Group from Somerston at the end of November 2022, who exercised the
balance of their existing warrants.

 

Group cash and cash equivalents was £4.1m at 31 December 2022 of which £2.5m
related to Group operational cash and £1.6m was within Sancus Loans Limited.

 

As announced on 10 January 2023 in reviewing its operations
in Gibraltar during 2022, the Company has not identified sufficient quality
lending opportunities to merit continued efforts in the region.  Leaving
the Gibraltar market will result in cost saving, risk reduction and allow
dedicated resources to focus on the Group's core markets.  As a result, the
Goodwill (£8.64 million), held by the Company since the acquisition of Sancus
Lending (Gibraltar) Limited ("Sancus Gibraltar") in 2016, has consequently
been written down to nil in the 2022 results. We announced post year-end on 15
March 2023 that we have sold Sancus Gibraltar for £10,000.

 

Goodwill remains on the balance sheet at £14.3m. This relates to the carrying
amount of goodwill arising on the acquisition of Sancus Jersey. This is
assessed by the Board for impairment on an annual basis (or sooner if there
has been any indication of impairment). A full testing for impairment of the
carrying amount of goodwill was reported in the June 2022 interim accounts.
The resultant value in use calculation indicated that no impairment of
goodwill was required in Sancus Jersey. Following on from this review the
Board have considered whether there have been any further indicative events of
impairment since June 2022, and they have concluded that there have not. The
next full testing impairment review will take place in the 2023 Interim
Report.

 

We continue to reduce our on balance sheet loans (excluding those loans in
Sancus Loans Limited). These amounted to £8.2m before IFRS9 provisions at 31
December 2022 compared to £9.7m at 31 December 2021 (£3.0m net of IFRS9
provisions at 31 December 2022 compared to £4.7m at 31 December 2021). Sancus
Loans Limited had loans of £74.7m at 31 December 2022 (31 December 2021:
£49.9m).

 

The Group's liabilities consist of the Bond instrument which now stands at
£15m of principal following a further subscription by Somerston in 2022. This
has a quarterly paid coupon of 7% p.a. and matures on 31 December 2025; and
ZDPs of £9.1m with a coupon now of 9% following the restructure and refinance
in the year (previously 8%) and matures on 5 December 2027 (previous maturity
date was 5 December 2022). The Pollen credit facility which was increased to
£125m from £75m on 26 November 2022, stood at £67.75m drawn at 31 December
2022.

 

ESG

 

At Sancus, we are committed to taking environmental, social and governance
("ESG") factors seriously. We recognise our responsibility to incorporate
sustainability throughout the operations of our business, be custodians of
the environment and practice good stewardship of our stakeholders'
interests. We are now taking steps to improve our approach to managing these
factors.

 

During 2022 we have been focused on defining our ESG strategy. Having now
established an internal ESG focus group we have also drawn on external
industry experts as required.

 

It is essential that we understand what ESG factors are most important to our
stakeholders, such that we can focus our strategy around improving our
approach to these issues. We have completed a materiality assessment and have
engaged with stakeholders during the year.

 

I am pleased to report these results in detail in our ESG report.

 

Going Concern

 

The Directors have considered the going concern basis in the preparation of
the financial statements as supported by the Director's assessment of the
Company's and Group's ability to pay its debts as they fall due and have
assessed the current position and the principal risks facing the business with
a view to assessing the prospects of the Company. Following the extension of
the ZDPs at the end of 2022, for a further 5 years to 5 December 2027 and with
the Bonds maturity date not until 31 December 2025, the Company does not have
any debt liabilities that fall due within the next 12 months.  Based on this,
the Directors are of the opinion that the Company has adequate financial
resources to continue in operation and meet its liabilities as they fall due
for the foreseeable future.

 

It is however expected, whereby equity is required to facilitate an increase
in drawdown from institutional funding lines that the Company will require
growth capital to fund the continued growth of the loan book. The Company's
largest shareholder, Somerston has indicated their willingness to support the
Company's growth plans. The Company will be looking at options available to
raise additional growth capital over the course of the year, which may include
a form of equity raise or sale by the Company of ZDP shares held in treasury.

 

The Directors therefore believe it is appropriate to continue to adopt the
going concern basis in preparing the financial statements.

Outlook

 

The economic uncertainty is likely to lead to the continued retrenchment of
major Banks from both SME and development financing and during Q4 we have
observed a reduction in the number of active competitors in both the UK and
Ireland, further providing attractive opportunities for alternative lenders
such as Sancus. We continue to track the economic and geopolitical situation
closely as the potential for supply chain disruption and inflationary risks
continue to be a concern.

 

We remain optimistic about the outlook for our business and continue to look
forward to delivering both profitability and a "best in class" offer to our
clients.

 

Rory Mepham

Chief Executive Officer

 

 

PRINCIPAL RISKS, UNCERTAINTIES AND RELATED INTERNAL CONTROLS

 

The Group aims to carefully manage the risks which are inherent across its
business activities in order to deliver an appropriate risk adjusted
commercial return. The principal risks which the Group has consciously
accepted in the pursuit of value creation are liquidity risk, regulatory and
compliance risk, market risk, credit risk, strategic risk, and investment
risk. With regard to the FinTech activities, exposure to investment risk is a
factor of the strategic, liquidity, credit and operational risks assumed by
the platforms in which the Group is invested.

 

This section on the Group's Principal Risks should be read together with the
sections on the Group's Governance Framework, the operation of the Audit and
Risk Committee, as well as Note 22 which describes the sensitivity of the
Group's financial results to its Financial Risk exposures. These sections
explain how these risks are being managed, monitored and governed.

 

The table below describes the Group's assessment of the principal risks being
those which have the potential to have a significant impact on the Group's
business model, future performance, solvency or liquidity.

 

 Principal Risks                                                                  Internal controls mitigating Risks                                               Current Rating of Risks
 Group
 1. Capital and liquidity Risk                                                                                                                                     Medium
 Sancus's own funding is sourced primarily from the ZDP shares and the            Sancus has a Treasury Committee which meets once a month to manage its capital   Completion of the fundraising and liability management exercise over the last
 Corporate Bond (as detailed in Note 17).                                         and liquidity position, and forecasts over several years to predict longer       couple of years has significantly improved the Group's capital and liquidity

                                                                                term funding requirements.                                                       position.

 Expansion of lending and investment activities will be constrained to the

 extent of retained profits unless further sources of funding are secured.        Management of each of the operating companies balance their lending and          Management at Group and subsidiary level are focussed on raising additional on
                                                                                  funding and proposals to advance lending are typically contingent on             and off balance sheet funding in order to grow lending activities and support
                                                                                  sufficient funding having been secured in advance.                               funding commitments.

                                                                                  The business seeks to maintain a material liquidity buffer at all times.
 2. Regulatory and Compliance Risk                                                                                                                                 Medium
 As a Financial Services business, compliance with regulation is considered       All entities have developed and implemented appropriate policies and             The compliance framework as described is considered to be operating
 paramount within the Group, particularly with regard to the various regulators   procedures relating to regulatory compliance and Anti Money Laundering.          effectively and has recently been enhanced to increase oversight of all risks
 in the jurisdictions that Sancus operating entities conduct business within,
                                                                                within the Sancus lending business through the Executive Risk Committee
 the Financial Conduct Authority (FCA) Handbook (UK) and the various Anti Money

 Laundering (AML) regulations with the regulatory landscape in all

 jurisdictions continually evolving                                               The Executive Risk Committee monitors these risks, and forthcoming

                                                                                regulations, with appropriate reporting from the Risk and Compliance Director    Measures are in place to monitor clients against various databases to identify
                                                                                  and Money Laundering Reporting Officers.  External, independent partners         if any sanctions (including the recent increase in sanctions relating to the

                                                                                complete additional regulatory horizon scanning reviews and conduct periodic     Ukraine/Russia conflict).
 The Company has chosen to comply with the provisions of the QCA Corporate        reviews of internal compliance including AML file reviews.

 Governance Code.

                                                                                The Company has an appointed NOMAD, Liberum, whom it liaises with regularly,
                                                                                  to ensure compliance with the AIM rules, including the Market Abuse
                                                                                  Regulations.

                                                                                  Boards receive quarterly reports from the Risk & Compliance Director and
                                                                                  where appropriate, Money Laundering Reporting Officers on compliance
                                                                                  monitoring plans and any breaches identified.
 3. Market risk                                                                                                                                                    High
 The primary market risks are considered to be interest rate and foreign          Exposures to these risks are monitored regularly by the Sancus Treasury          More information on the sensitivity to these risks is contained in Note 22.
 exchange risk. Given the nature of the business operations, with relatively      Committee and reported to the Board on a quarterly basis.

 short-term lending and currencies on lending opportunities being matched (or

 hedged) the exposure is considered to have limited impact on its position as a

 Going Concern.
                                                                                Macro-economics including increased inflation and bank base rate and euro

                                                                                These risks are identified and assessed at the time of entering into new         margin fluctuations may have an effect on margin. The introduction of variable
                                                                                  transactions.                                                                    base rate loans and foreign exchange hedging are having an impact on

                                                                                                                                                                 mitigating the risk.
 Foreign exchange risk primarily arises from the USD and Euro investments in

 the FinTech portfolio and Euro loans held in the Irish lending book.

                                                                                                                                                                   With the increase in bank base rate, Co-Funders might look elsewhere to
                                                                                                                                                                   invest; however, variable rate Co-Funder returns should minimise this risk
                                                                                                                                                                   with investors continuing to receive attractive risk adjusted returns on asset
                                                                                                                                                                   backed lending.
 4. Credit Risk                                                                                                                                                    High
 The Group has direct credit exposures through its on balance sheet lending and   Each operational entity has its own credit policies and procedures which are     The IFRS 9 provision increased substantially during 2021 however, no further
 credit support. Indirect credit risk (potential losses to Co-Funders) could      the subject of at least annual review by operating entity Boards.                material provisions were required this year. The credit performance across the
 impact further business development.
                                                                                Group remains resilient with actual losses incurred being less than 1% of

                                                                                                                                                                 loans advanced.

                                                                                  The respective Credit Committees take all credit decisions, monitor credit
                                                                                  exposures on an ongoing basis and manage recoveries situations. Following

                                                                                  Covid-19 tighter lending criteria has been implemented.                          See Note 22 (5) for further details.

                                                                                                                                                                   Increases in material costs, base rate and inflation have created downside
                                                                                                                                                                   risk through potential delays in loan repayments and reduced recoveries.
                                                                                                                                                                   Increased loan management oversight will help mitigate this risk.

 5. Operational Risk - Execution of the Sancus strategy                                                                                                            Medium
 The majority of Sancus's capital has been deployed into the Sancus Group.        The Board and Executive Committee of Sancus Group recognise the challenge of     By its nature, this risk remains an on-going area of focus for the Board,
 There is a risk that the planned growth of these businesses will not be          building the business to meet the financial targets and actively manage all      particularly with respect to business development in the UK and Ireland.
 realised primarily as a result of sub optimal levels of loan origination and     aspects of the business on an ongoing basis. Plans and budgets are in place

 funding.                                                                         and performance against these is monitored regularly by the management team

                                                                                and the Executive Committee.

                                                                                The emergence of Covid-19 created downside risk on new loan origination levels

                                                                                                                                                                 although we believe this risk has now reduced.

                                                                                  There continues to be strong demand from both Borrowers and Co-Funders for the
                                                                                  lending products offered across the business, and the risk adjusted returns

                                                                                  available to Co-Funders.                                                         IT capabilities for Sancus were further enhanced during 2021 and 2022,

                                                                                providing Co-Funders with online interactive services and creating operational
                                                                                                                                                                   efficiencies.
 6. Operational Risk - Operating entities                                                                                                                          High
 Loan funding is provided by a blend of institutional and co-funding models,      The Executive Committee of Sancus Group are in active engagement with            Oversight of these risks is completed by the Executive Risk Committee, with
 with jurisdictional variations in the utilisation of these models. The limited   additional institutional funding lines to increase diversity and consider cost   agreement on the mitigation necessary to minimise the risks and monitoring to
 availability of diverse funding presents an operational risk to continued        of funds and continue to evolve the co-funder model with the view to increase    ensure these controls are effective.
 growth of the lending model.                                                     exposure across the lending operation.

 With the recent focus on increasing the loan book and resourcing the operation   The lending operation is mitigating this through the introduction of
 effectively, there is a risk that management of the existing loan book is        technology improving oversight of key milestones and is actively engaged in
 under resourced and key milestones in the loan lifecycle are missed.             acquiring additional resource for loan management.

 With reliance on various proprietary and third-party IT systems to conduct the   Introduction of new technology to compliment the existing operational
 lending operations, whilst ensuring these systems remain effective for the       framework ensures elements of these risks are mitigated with effective
 business, enable automation, are utilised to maximum effect, maintain data       automation and data resilience. Continual development of the existing
 integrity and remain secure from external factors remains an ongoing challenge   technology and enhancements to the back-office systems ensures the systems
 and presents potential risks.                                                    remain secure.

 7. Investment risk - FinTech Ventures Platform Valuations                                                                                                         Low
 Across the majority of the FinTech portfolio, the growth rates historically      The Group has board observer rights on most of the remaining investee company    As a result of the platforms taking longer to reach profitability, and given
 have been slower than originally anticipated and the business models have        boards and thus is able to participate in the strategic discussions and          that several are seeking additional capital, the Board has valued our holding
 proved more capital intensive.                                                   monitor the progress on each platform.                                           of the FinTech portfolio at Nil at the end of 2022 (2021: £0.5m).

 Many of the FinTech platforms require additional capital to fund their ongoing   The Group regularly monitors the  progress of each business, with regular        The valuations are also subject to a number of material estimation
 growth to enable them to reach profitability. There remains a risk that some     review of financial and KPI reporting.                                           uncertainties, refer to Note 22 (4).
 platforms may not be successful in the longer term, either as a result of lack

 of loan funding, lack of working capital funding or difficulties in
 establishing a competitive position in their chosen markets

                                                                                Quarterly valuations are conducted for all investments in platforms. These are
                                                                                  based on a variety of factors including the pricing for any recent relevant
                                                                                  capital transactions by the respective platform or using an appropriate
                                                                                  valuation methodology.

 

 

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

 

Introduction

 

Sancus is pleased to present its first Environmental, Social, and Governance
(ESG) report, marking the start of our journey towards greater transparency
and sustainability. This report highlights our progress and achievements in
the areas of environmental protection, social responsibility, and governance,
as well as the challenges and opportunities that we have faced.

 

As a firm, we acknowledge our imperative to act to become a more responsible
and sustainable business. We recognise the impact that we have on the
environment and society, as well as the effect of our operations and financial
performance. We are committed to continuing our efforts to embed ESG
principles into our operations, investments and build our capability and
capacity to respond to these challenges and create long-term value for our
stakeholders.

 

ESG is a continuous process of assessment and refinement. At Sancus, we
recognise that we are at the beginning of our ESG journey and that we still
have much to learn and improve upon. This journey requires a commitment to
ongoing education, regular reflection, and a willingness to adapt and change
as needed. We understand that ESG is not a one-time project or initiative, but
rather an ongoing exercise of improvement.

 

We believe transparency is essential to this process. It allows us to be
honest and open about our progress, challenges, and failures. It also enables
our stakeholders to hold us accountable and provide feedback on our ESG
efforts to enable us to support the long-term success and viability of our
business.

 

We hope that this report will provide insight into Sancus' approach to ESG and
our efforts to make a positive impact on the world around us. We look forward
to continuing our journey and to sharing our progress with our stakeholders.

 

Our Approach to ESG

 

At Sancus, we are committed to a data-driven approach to ESG that is informed
by our stakeholders views.

 

To guide our efforts, we conducted a materiality assessment - drawing on both
qualitative and quantitative insight data - to help us to identify the most
important ESG issues for our business and our stakeholders.

 

We have established baseline performance criteria across material ESG topics,
and the assessment has allowed us to set specific ESG objectives and goals
that are aligned with our current maturity, ambition and stakeholder
expectations.

 

The detail below summarises our ESG roadmap, which outlines the measures and
initiatives we will undertake to close the gap between the baseline and our
objectives and goals. This roadmap includes key performance indicators (KPIs)
that will facilitate monitoring and reporting of our progress.

 

A key outcome of this process is that we have an understanding of where we
stand today and where we need to be in the future. This means we are able to
prioritise our ESG efforts in a way that is relevant, actionable and address
the most critical challenges and opportunities we face.

 

Our Headline Objectives

 

1.     Environmental

Promote the efficient use of resources by improving our understanding of the
environmental impacts associated with our operations, including carbon
emissions, waste and water use.

 

2.     Social

Enhance our approach to Social Impact and Diversity, Equity and Inclusion
(DE&I) by aligning with relevant measures in the National Themes, Outcomes
and Measures (TOMs) Framework.

 

3.     Governance

Strengthen our data management, internal capability and reporting maturity to
support our internal and external stakeholders to deliver on our ESG goals.

 

Best practice guidance and frameworks

 

·      GHG Protocol: We have established a carbon accounting system for
greenhouse gases (GHGs) following the methodology set out in the GHG Protocol
corporate Standard.

·      National TOMs: We are using the National TOMs Framework to
identify, measure and report on our social value.

·      Sustainable Development Goals (SDG): We have used the SDGs
framework to inform our materiality assessment to support identifying priority
areas where we can contribute to sustainable development.

 

Our Impact

 

Our strategic ESG priorities are focused on three main areas: commitment to
reducing our environmental impact, focus on improving our social impact, and
enhancing the responsibility of our governance practices.

 

We are committed to reducing our carbon emissions and promoting sustainable
practices throughout our operations. We also aim to improve the communities we
operate in through investment in local economies and delivery of voluntary
programmes. Finally, we will prioritise good governance practices, work
towards a more diverse and inclusive leadership approach and maintain high
ethical standards across all aspects of our business.

 

We will measure and report our progress against these priorities on an annual
basis. Transparency and honesty will form fundamental principles of our ESG
reporting - we are committed to providing accurate and comprehensive
information about our ESG performance, both positive and negative, to all of
our stakeholders. To make this possible, we will ensure our reporting is
guided by industry best practices and standards and informed by stakeholder
feedback to guide our decision-making.

 

Our Plan

 

This is only the beginning of Sancus's ESG programme. As outlined above, we
have embedded fundamental processes and frameworks into our operations which
will help shape our roadmap. Firstly, having established a team focused on ESG
supported by external industry experts, Clarasys. The ESG team has direct
reporting responsibilities and the full support of the Executive team.
Producing our first ESG report has been a significant milestone allowing us to
assess our current status and set realistic targets for the next period and
beyond.

 

A core focus for the next year will be improving our data collection and
reporting processes, so that we can better understand our capacity to deliver.
It has been a challenging year, so we will be taking steps to make next year's
report more detailed and aligned to our wider and longer ambitions. Employee
health and wellbeing is a focus in the coming period. We have set up a working
group to lead initiatives in this area, which we believe is a critical part of
our company culture and ultimately business success.

 

We endeavour to achieve all of our business targets and these ESG targets are
no different, but equally, we understand that ESG is a continuing journey and
not a destination. We will ensure that sufficient resources will be available
to make progress against each area, commensurate with our overall ESG
strategy. Additionally, our people working on the initiatives will have
targets embedded in their performance management to ensure accountability.

 

Beyond 2024

 

Our overriding ambition is that ESG becomes an integral and integrated part of
Sancus, which runs through the business as a whole, both in our practices and
our people. As we move forward and mature our ESG approach and capabilities,
we will leverage this to continue to deliver positive impacts for our
stakeholders, while driving long-term value creation and growth for Sancus.

 

Key enables

 

·      Data - optimising our systems and processes to ensure we can
capture better quality data to improve confidence in our measurement,
target-setting and reporting.

·      Employee engagement - undertake a follow-up survey to the one
carried out in October 2022; enabling us to monitor progress and inform our
employee wellbeing initiatives.

·      Technology strategy - our focus on integrating technology will be
at a broader, business transformation scale. This will enhance the delivery of
our ESG strategy in data collection and processing, but also in the business's
ability to streamline operations.

·      Training - providing training to our people to improve knowledge
of ESG generally and Sancus's journey. Focus on building a centre of
excellence within the business to further our initiatives.

 

Key milestones

 

·      Office move - our UK operations will be relocating to a new
office in 2023. This represents an opportunity for us to build ESG into our
contracts and relationship more generally with suppliers. We envisage this
will allow us to navigate some of the challenges we have faced to date around
the collection of data on energy, waste, and water.

·      Gibraltar business sale and Guernsey office closure - the
consolidation of our Channel Islands businesses to Jersey will result in
greater efficiencies with office spaces and reduced travel, two key areas of
our carbon footprint.

 

Our ESG Landscape

 

We are cognizant of the evolving ESG landscape and how this will continue to
influence our ability to bring our ambition into reality. As part of our
initial efforts, we have evaluated key drivers of ESG, including regulatory,
voluntary and broader stakeholder pressures, to shape our roadmap.

 

●      PRESENT - Our biggest institutional funding line has become
increasingly focused on ESG over the last few years. A proprietary scoring
matrix now forms part of our access to investment - meaning improvements in
ESG performance are rewarded by reductions in our cost of funding. We believe
that this trend to reward appropriate behaviours is gathering moment amongst
financial institutions and we see this as a key priority, to remain attractive
to current and potential funders.

●      PRESENT - Section 172 AIM (Alternative Investment Market) listed
companies required to report on the impact of their operations on communities
and the environment.

●      Early 2023 - Updated Modern Slavery Bill (proposing amendments
to the Modern Slavery Act 2015) expected to be published in early 2023, which
is likely to introduce additional criminal offences designed to encourage
businesses to address problem suppliers and make more accurate and complete
statements.

●      April 2023 - Minimum Energy Efficiency Standard (MEES)
Regulation. For commercial properties there will be a prohibition on
continuing to let properties with an EPC rating of "F" or less. Whilst there
is no express obligation to bring relevant properties up to a compliant
standard under the MEES Regulations, local authorities will have enforcement
powers, including the ability to impose penalties.

●      June 2023 - Consultation on Future Buildings Standard. Expected
date of further consultation on the detailed technical aspects of the UK
Government's Future Buildings Standard which will set out more stringent
efficiency standards, to ensure that new buildings are 'zero carbon ready'
from 2025.

●      November 2023 - UK Biodiversity Net Gain requirement applies to
new developments in UK. The UK's Environment Act 2021 will require all new
real estate developments to deliver a 10% 'biodiversity net gain' from
November 2023, which will effectively become a requirement of its planning
permission. This can be delivered through on-site or off-site measures or a
combination.

●      April 2025 - EPC Rules for rented properties. A move to more
sustainable buildings generally across the real estate sector. We believe that
dwellings and homes being built to be more energy efficient and sustainable,
which will ultimately impact the value of homes not meeting standards. We have
already seen a significant move towards this in Minimum EPC rating to be
raised from E to C. The plan is to enforce this from 1 April 2025 for new
tenancies, and from 1 April 2028 for existing tenancies.

●      2025 - UK's Future Buildings Standard implemented. The Future
Buildings Standard, which will set out more stringent efficiency standards, to
ensure that new non-domestic buildings are zero carbon ready from 2025, is
expected to be implemented in 2025 for all new non-domestic developments.

●      2025 - Mandatory Task Force on Climate-related Financial
Disclosures (TCFD) compliance will be required.

●      2025 - EU Corporate Sustainability Reporting Directive (CSRD) to
set sustainability reporting requirements for 'large' (two of following:
>250 employees; >€20 million balance sheet; >€40 million net
turnover) companies with operations in the EU. This will impose also mandatory
third-party assurance requirements on ESG disclosure.

 

 ENVIRONMENT
 Focus Area                                  2022 Progress                                                                   2023 Commitment                                                                 Actions

                                             What we have done so far                                                        Where we want to be                                                             How we will get there
 Carbon Emissions                            Completed our first carbon footprint calculation                                Identified, prioritised and implementing 'low hanging fruit' measures to        Establish approach to office energy efficiency
                                                                                                                             reduce our footprint.

                                                                               Update systems and processes to fill data gaps
                                                                                                                             An enhanced view of our carbon footprint through improving its scope and data
                                                                                                                             quality.
 Waste and circularity                       Captured data on our waste generation at our facilities                         Identified waste hot spots and opportunities for reduction                      Engage property management at our facilities to enable detailed waste audit

                                                                                                                                                                                                             Establish separate waste streams
 Business travel                             Identified gaps in data availability and opportunities to improve               Establish a sustainable business travel policy                                  Update systems and processes to fill data gaps

                                                                                                                                                                                                             Gather insight into employee travel attitudes and behaviours
 Climate resilience                          Undertaken research to better understand climate resilience                     Deeper understanding of what climate resilience means to Sancus                 Set-up climate resilience audit

                                                                                                                                                                                                             Draft a Sancus Climate Resilience Framework
 SOCIAL
 Focus Area                                  2022 Progress                                                                   2023 Commitment                                                                 Actions

                                             What we have done so far                                                        Where we want to be                                                             How we will get there
 Community building                          Evaluated existing practices to identify opportunities for social value         A clearly defined set of social value measures (using National TOMs) for        Develop a plan to measure and evaluate Sancus's performance against National
                                             creation                                                                        community building                                                              TOMs
 Diversity, equity and inclusion (DE&I)      Developed an initial view of how our current practices impact DE&I              An informed view of our performance across key DE&I metrics                     Collect baseline performance data across gender pay gap, ethnic representation
                                                                                                                                                                                                             and social mobility (quantitative)

                                                                                                                                                                                                             Deliver internal DE&I training and carry out surveys (qualitative)
 Employee health and wellbeing               Mental Health First Aid Training - 2 people fully trained.                      An informed view of our employee health and wellbeing to inform future          Continue bi-annual employee engagement surveys to ensure we are providing

                                                                               initiatives                                                                     health and wellbeing initiatives that are important to our staff

                                             First employee engagement survey.

                                             Embedded a wellbeing awareness email newsletter to better educate our people.
 Local economic growth                       Review of existing practices' impact on local economic growth and identified    A clearly defined set of social value measures (using National TOMs) for local  Develop a plan to measure and evaluate Sancus's performance against National
                                             data gaps in ability to measure.                                                economic growth                                                                 TOMs
 GOVERNANCE
 Focus Area                                  2022 Progress                                                                   2023 Commitment                                                                 Actions

                                             What we have done so far                                                        Where we want to be                                                             How we will get there
 Ethical business practices                  Developed Anti-Bribery and Corruption and Modern Slavery policies               Promote ethical business practices throughout supply chain                      Evaluate enhancements to policy and processes in line with learnings and best
                                                                                                                                                                                                             practice

                                                                                                                                                                                                             Educate our employees on the identification and management of risks on ethical
                                                                                                                                                                                                             business topics
 ESG management                              Established our ESG strategy, identified data and governance requirements and   Embed ESG into risk and data management approach and have grown ESG awareness   Explore ESG risk frameworks
                                             started to build internal capability                                            and knowledge

                                                                                                                                                                                                             Integrate carbon accounting software in broader processes/ systems

                                                                                                                                                                                                             Deliver ESG training and embed into wider decision-making forums
 Responsible investment                      Identified responsible investment as an ESG priority                            ESG is integrated into our funding decisions                                    Research enabling standards and frameworks, such as the UN Principles for
                                                                                                                                                                                                             Responsible Investment

                                                                                                                                                                                                             Establish ESG Funding Policy
 Transparency and reporting                  Developed an understanding of Sancus's ESG reporting and disclosure context     Explore alignment of ESG reporting and disclosure with relevant industry        Develop ESG communications plan
                                                                                                                             frameworks

                                                                                                                                                                                                             Explore additional ESG reporting frameworks

 

ESG report

 

This section is an executive summary of Sancus' full ESG report, which will be
made available on the website shortly.

 

CORPORATE GOVERNANCE

 

Board of Directors and Executive Management Team

 

Introduction

 

The Board recognises the importance of a strong corporate governance culture.

 

The composition of the Board is the subject of ongoing review. Somerston Group
had the right to nominate a candidate for appointment to the Board and took up
this right in 2019 with the appointment of Nick Wakefield. On the 8 March 2022
it was announced that Nick Wakefield has been replaced by Tracy Clarke (bio
noted below).

 

Board of Directors

 

The Company operates a unitary Board Structure, comprised of both Executive
and Non-Executive Directors. Biographical details of the Directors can be
found below. The terms of Directors' appointments are available from the
Company Secretary.

 

On joining the Board, any new director will have received an induction through
face to face meetings with existing directors, senior management and the
Company Secretary.

 

The Chairman leads the Board and is responsible for its overall effectiveness
in directing the Company, its corporate governance responsibilities, and
addressing any training or development needs of the directors.

 

Steve Smith - Independent Non-Executive Director

 

Mr Smith was formerly an Executive Director and the Chief Investment Officer
of The British Land Company plc, the FTSE 100 real estate investment trust,
with responsibility for the group's property and investment strategy, standing
down in 2013. Prior to this, Mr Smith was Global Head of Asset Management and
Transactions at AXA Real Estate Investment Managers, where he was responsible
for the asset management of a portfolio of assets valued at more than €40
billion on behalf of life funds, listed property vehicles, unit linked and
closed end funds. Prior to joining AXA in 1999, Mr Smith was Managing Director
at Sun Life Properties for over five years. Over the last decade, Mr Smith has
worked extensively in governance related roles for a number of real estate
focused organisations. Mr Smith is Chairman of the Board and is a member of
the Audit and Risk Committee and Remuneration and Nomination Committee. Mr
Smith was appointed to the Board on 11 May 2021. He is resident in the UK.

 

John Whittle - Independent Non-Executive Director

 

Mr Whittle has a background in large third party Fund Administration. He has
worked extensively in high tech service industries and has in-depth experience
of strategic development and mergers/acquisitions. He has experience of listed
company boards as well as the private equity, property and fund of funds
sectors. He is currently Chairman of Starwood European Real Estate Finance
Limited and Director and Audit Chair of The Renewable Infrastructure Group Ltd
("TRIG") (both listed on the main market of the London Stock Exchange) and
Director and Audit Chair of Chenavari Toro Income Fund Limited (admitted to
trading on the Specialist Fund Segment of the London Stock Exchange). Mr
Whittle, a Chartered Accountant, has also served as Finance Director of Close
Fund Services Limited (responsible for internal finance and client financial
reporting), Managing Director of Hugh Symons Group PLC and Finance Director
and Deputy MD of Talkland International Limited (now Vodafone Retail).

 

Mr Whittle was appointed to the Board, the Audit and Risk Committee and the
Remuneration and Nomination Committee on 23 September 2016, after having
served as an Alternate Director since December 2015. He is resident in
Guernsey. Mr Whittle is Chairman of the Audit and Risk Committee, and of the
Remuneration and Nomination Committee.

 

Tracy Clarke - Non-Executive Director

 

Ms Clarke is a representative of the Somerston group of companies
("Somerston"), the Company's largest shareholder which has the right to
nominate one individual for appointment to the Board. Ms Clarke joined
Somerston in 2016 and acts as the group's Chief Operating Officer.  Ms Clarke
is also Managing Director of Carlton Management Services Limited, a licensed
Jersey trust company business. Prior to joining Somerston, Ms Clarke worked
for Deutsche Bank in Jersey and Zurich for  over 10 years, specialising in
financial Intermediary and external asset manager business. Ms Clarke is a
Fellow of the Institute of Chartered Accountants in England and Wales and
holds the CISI Investment Advice Diploma. Ms Clarke was appointed to the Board
on 8 March 2022 and is a member of the Company's Audit and Risk Committee and
Remuneration and Nomination Committee.

 

Rory Mepham - Executive Director

 

Rory joined Sancus in January 2021, assuming the role of Interim CEO on 1 July
2021 and was then confirmed as CEO and board member on 23 November 2021.
Joining Sancus from The Somerston Group where he managed their European real
estate platform which includes businesses in the hotel, retail, land
development, student housing and PRS sectors. Rory has over 20 years
experience in the UK and European property market. He has spent his career
working with institutional capital and has an extensive track record in
M&A, corporate finance, capital raising, debt finance, investment
management and property development. Rory holds an MBA from the Cranfield
School of Management, a BSc(Hons) in Land Management from the University of
Reading and qualified as a member of the Royal Institute of Chartered
Surveyors (MRICS).

 

Emma Stubbs - Executive Director

 

Emma joined the Group in November 2013 as Chief Financial Officer and was
appointed to the Board on 16 September 2014. Emma is also a Board member of
Sancus Group Holdings Limited and a number of the subsidiary entities. Emma
was appointed as a Non Executive Director on Funding Options Limited on 24
March 2020 until 24 November 2022. Emma is also a Non-Executive Director of
Amberton Limited. Emma is a Fellow member of the Association of Chartered
Certified Accountants and qualified with Deloitte in 2004. She graduated from
the University of the West of England with a BA Hons degree in Accounting and
Finance. Emma is resident in Guernsey.

 

Executive Management Team

 

Rory Mepham - Chief Executive Officer

See above.

 

Emma Stubbs - Chief Financial Officer

See above.

 

Helen Trott - Chief Operating Officer & Legal Counsel (joined Executive
Management Team on 29 November 2022)

 

Helen was appointed to the Executive Management Team on 29 November 2022.
Helen is a Finance Executive/qualified Lawyer with over 20 years experience
in various aspects of retail financial services, private banking and insurance
law. This includes regulatory, compliance, governance and company secretariat
activities. She is currently responsible for the legal, risk and compliance,
people, IT and ESG functions within Sancus Group.

 

Dan Walker - Chief Operating Officer (left Company on 31 January 2022)

 

James Waghorn - Chief Investment Officer (joined Executive Management Team on
8 March 2022)

 

James was appointed to the Executive Management Team on 8 March 2022. James
has over 14 years experience in the UK and European real estate market. James
has extensive experience across the corporate real estate, investment and
property development sectors. For the past 6 years James has led Somerston's
land development business, a strategic land and

development focused business with capacity for in excess of 2,350 units within
its strategic portfolio. James holds a BSc in Investment and Finance in
Property from the University of Reading and is MRICS accredited. James joined
Sancus in January 2021.

 

 
GOVERNANCE FRAMEWORK

 

The Board is committed to maintaining high standards of corporate governance
throughout the Company's operations and to ensuring that all of its practices
are conducted transparently, ethically and efficiently. The Board believes
that scrutinising all aspects of the Company's business and reflecting,
analysing and improving its procedures will minimise the potential for
downside risk and will preserve shareholder value. In compliance with the AIM
Rules for Companies, published March 2018, the Company has chosen to comply
with the provisions of the QCA Corporate Governance Code (the "QCA Code"). The
Company is also mindful of the provisions of the Finance Sector Code of
Corporate Governance, as amended by the Guernsey Financial Services Commission
in November 2021.

 

The Board believes that applying the principles and reporting against the
provisions of the QCA Code accurately reflects the nature, scale and
complexity of the business and enables the Board to provide information to
shareholders on its activities in accordance with the principles set out in a
recognised governance framework. Furthermore, through applying the relevant
provisions the Company is better positioned to mitigate downside risk and in
doing so, preserve long-term shareholder value. The Company's corporate
governance framework has been based on these principles and is designed to
deliver the Group's strategy, and the application of such principles to the
operation of the Board ensures that its decision-making processes remain
focussed on the long-term sustainable success of the Company.

 

As at 31 December 2022, the Company complied substantially with the relevant
provisions of the QCA Code and it is the intention of the Board that the
Company will comply with these provisions throughout the year ending 31
December 2023, save with regard to the following:

 

·      The appointment of a Senior Independent Director: Given the size
and composition of the Board, the Board does not consider it is necessary to
appoint a Senior Independent Director. The Board considers that all the
independent Directors have different qualities and areas of expertise on which
they may lead where issues arise and to whom concerns can be referred.

 

·      Internal audit function: The Board has considered the need for an
internal audit function and is satisfied that the compliance policies,
procedures and reporting mechanisms in place throughout the group are
sufficient, and that implementing a separate internal audit function would be
unnecessary. This requirement is assessed annually by the Audit and Risk
Committee.

 

How we apply the QCA Code

 

The Company has established specific formally constituted committees and
implemented certain policies, to ensure that:

 

·      It is led by an effective Board which is collectively responsible
for the long-term sustainable success of the Company and establishes a culture
whereby the tone is set from the top which is consistent with the objectives,
strategy and business model of the Group;

 

·      the Board and its committees have the appropriate balance of
skills, experience, independence, and knowledge of the Company to enable them
to discharge their respective duties and responsibilities effectively;

 

·      the Board establishes a formal and transparent arrangement for
considering how it applies the corporate reporting, risk management, and
internal control principles and for maintaining an appropriate relationship
with the Company's auditors; and

 

·      there is a dialogue with shareholders based on the mutual
understanding and alignment of objectives, conducted primarily through the CEO
and the Corporate Broker.

 

Risk management remains a key area of focus during Board meetings.

 

Composition and Independence of the Board of Directors

 

The Board of Directors is responsible for ensuring the affairs of the Company
are properly managed through formulating, reviewing and approving the
Company's strategy, budgets, and corporate actions and that oversight,
scrutiny and challenge is applied to Executives responsible for the day-to-day
activities of the Group. The Company seeks to deliver long-term growth for
shareholders and maintain a flexible, efficient and effective management
framework within an entrepreneurial environment.

 

It is important that the Board itself contains the right mix of skills and
experience in order to deliver the strategy of the Company. As such, the Board
is comprised of:

 

·      Two Independent Non-Executive Directors, one of which serves as
the Chairman, who is responsible for leadership of the Board and ensuring its
effectiveness on all aspects of its role;

 

·      One Non-Executive Director who, whilst sharing the fiduciary and
statutory duties of the independent directors, is also an executive director
of the Somerston Group, a significant shareholder of the Company, and
therefore not considered independent under the QCA Code; and

 

·      Two Executive Directors, who are also members of the Group's
Executive Committee and are therefore not considered independent under the QCA
Code.

 

The Board is comprised of individuals holding professional qualifications and
experience relevant to the activities of the Company. The time requirement
expected from each of the Directors is set out in writing in their respective
appointment letters.

 

Liberum Capital has been appointed as the Company's Corporate Broker and
Nominated Adviser under the AIM Rules and advises on compliance with the AIM
Rules, corporate communications and acts as financial adviser to corporate
actions. Additionally, the Company has appointed a professional Company
Secretary who assists the Board of Directors in preparing for and running
effective board meetings, including the timely dissemination of appropriate
information. The Company Secretary provides guidance to the extent required by
the Board on certain aspects of the legal and regulatory environment, within
which the Company operates.

 

The Board believes that long serving Directors should not be prevented from
forming part of the Board or from acting as Chairman and no limit has been
imposed on the overall length of service of the Directors. Each Director will
retire and seek reappointment at every third annual general meeting, with
those serving for nine years or more subject to reappointment annually. The
Board meets on at least a quarterly basis during the financial year.

 

The Board has appointed several committees to support it in different areas of
the business; each with formal terms of reference, with specific roles as set
out below.

 

The Board undertakes an annual evaluation of its own performance, the
performance of its formally constituted committees and that of individual
Directors. This includes a formal process of self-appraisal reviewing the
balance of skills, experience, independence and diversity present on the
Board, and individual director performance, contribution and commitment to the
Group to ensure that the Board and its committees continue to operate
effectively, or to identify areas where action is required. The remainder of
the Board is responsible for evaluating the performance of the Chairman. The
Chairman also has responsibility for assessing the individual Board members'
training requirements. No significant findings were identified in the 2022
evaluation which required further action.

 

The Directors remain mindful of the benefits which can flow from increasing
the level of diversity represented on the Board including, but not limited to,
cultural, gender, experience and background. Such factors will be taken into
consideration by the Nomination Committee during any selection process.

 

Executive Management Team

 

As at the year end, the Company's Executive Management Team comprised Rory
Mepham (Chief Executive Officer), Emma Stubbs (Chief Financial Officer), James
Waghorn (Chief Investment Officer) and Helen Trott (Chief Operating Officer
and Legal Counsel) (together the "Executive Management Team" or "Management").
Management are responsible for the day-to-day management of the Company's
operations. The non-executive independent Directors monitor and evaluate the
performance of the Management Team on an ongoing basis. James Waghorn was
appointed to the Executive Management Team as Chief Investment Officer on 8
March 2022 and Helen Trott was appointed as Chief Operating Officer and Legal
counsel on 29 November 2022.

 

 

BOARD COMMITTEE STRUCTURE

 
Audit and Risk Committee

The Audit and Risk Committee conducts formal meetings at least twice a year.
The Audit and Risk Committee's key duties include:

 

·      monitoring the integrity of the financial statements of the
Group, including its annual and half-yearly reports and any other formal
announcement relating to its financial performance, reviewing, challenging
(where necessary) and reporting to the Board on significant financial
reporting issues and judgements which they contain having regard to matters
communicated to it by the auditor, and how they were addressed;

·      reviewing the Group's internal financial controls and the Group's
internal control and risk management systems;

·      making recommendations to the Board for it to put to the
shareholders for their approval in general meeting in relation to the
appointment, re-appointment or removal of the external auditor and to
recommend the remuneration and terms of engagement of the external auditor;

·      monitoring the external auditor's independence and objectivity
and the effectiveness of the audit process, taking into account relevant
professional and regulatory requirements;

·      in conjunction with executive management, advise the Board on the
overall risk appetite, tolerance and strategy of the Group, current risk
exposures and future risk strategy; and

·      keep under review the Group's overall risk assessment processes
that inform the Board's decision making, ensuring both qualitative and
quantitative metrics are used.

·              The Audit and Risk Committee has three members,
two of whom are independent, non-executive directors and one of whom is a
non-executive director, and at least one member has recent and relevant
financial experience. The current members of the Committee are John Whittle as
the Chairman, Steve Smith and Tracy Clarke.

·              The Audit and Risk Committee is supported by a
risk management and oversight process employed by the Executive Management
Team and receives reports twice a year on key risks and developments during
the period, or as otherwise required in the case of a material development.

·              The terms of reference of the Audit and Risk
Committee are available from the Company Secretary.

Remuneration and Nomination Committee

The purpose of the Remuneration and Nomination Committee is to determine and
agree with the Board the framework or broad policy for the remuneration of the
Company's Directors, senior executives, and any bonus-related arrangements in
place by the Company as well as to consider the structure, size and
composition of the Board. The key duties of the Remuneration and Nomination
Committee include:

 

·      determining and agreeing with the Board the framework or broad
policy for the remuneration of the Company's Chairman, executive and
non-executive directors and such other members of the management as it is
designated to consider;

·      reviewing the ongoing appropriateness and relevance of the
remuneration policy;

·      reviewing the structure, size and composition of the Board;

·      considering the succession planning for Directors and the
Executive Management Team;

·      reviewing the leadership needs of the organisation; and

·      identifying candidates for appointment to the Board.

 

The Remuneration and Nomination Committee has three members, all of whom are
non-executive directors and two are independent. The current members of the
committee are John Whittle as the Chairman, Steve Smith and Tracy Clarke.

 

The terms of reference of the Remuneration and Nomination Committee are
available from the Company Secretary.

Please refer to the Remuneration Report for details of fees paid to the
Directors during the year.

 

Meetings and attendance

The Directors meet on a quarterly basis ('Quarterly' meetings per the table
below) and at other unscheduled times ('Other' meetings per the table below)
when necessary to assess Group operations and the setting and monitoring of
strategy and performance.

 

The table below, details the attendance of the Board at eligible Board and
Committee meetings during the year, noting that certain Directors retired or
were appointed during the course of the year as set out below the table:

 

                                                Board
                                                                                                                                        Remuneration & Nomination Committee      Audit and Risk Committee

                                                Quarterly                                    Other
 Total number of meetings held during the year  4                                            14                                         1                                        3
 Stephen Smith (Chairman)                       4 of 4                                       9 of 14                                    1 of 1                                   3 of 3
 John Whittle                                   4 of 4                                       14 of 14                                   1 of 1                                   3 of 3
 Nicholas Wakefield (1)                         1 of 1                                       1 of 1 (plus 4 as Observer when resigned)  1 of 1                                   N/A
 Tracy Clarke (2)                               3 of 3 (plus 1 as Observer pre-appointment)  9 of 13                                    N/A                                      3 of 3
 Emma Stubbs                                    4 of 4                                       13 of 14                                   N/A                                      N/A
 Rory Mepham                                    4 of 4                                       12 of 14                                   N/A                                      N/A

 

·      Nicholas Wakefield resigned from the Board on 8 March 2022.

·      Tracy Clarke was appointed to the Board on 8 March 2022.

 

Relations with Stakeholders

The Board's advisers and the Executive Management Team maintain regular
dialogue with key shareholders, the feedback from which is reported to the
Board and the Chairman. Shareholders who wish to communicate with the Board
should contact the Company Secretary in the first instance.

 

The Board also regularly monitors the shareholder profile of the Company. All
shareholders have the opportunity to and are encouraged to attend the
Company's annual general meeting at which members of the Board are available
in person to meet shareholders and answer questions.

 

Whilst the primary duty of the Directors is owed to the Company as a whole,
the Board takes into consideration the interests of all key stakeholder groups
as part of its decision-making process and particular consideration is given
to the impact of any decision on holders of its securities, the Co-Funders to
the underlying loan businesses, and providers of the Group's long-term debt
capital. The Board also recognises the crucial roles played by those involved
throughout the Group's operations who contribute to delivering strategy,
including staff and key service providers, to ensure a continued alignment of
interests between their activities and those of the Company.

 

 

Terms of Reference of Committees

Committee Terms of Reference are available from the Company Secretary.

 

 

AUDIT AND RISK COMMITTEE REPORT
 

The Audit and Risk Committee

 

The Audit and Risk Committee has a formal terms of reference mandate
documenting the duties and responsibilities which it has been delegated by the
Board. These are available from the Company Secretary.

The Audit and Risk Committee has been in operation throughout the year under
review.

 

Chairman and Membership

 

The Audit and Risk Committee comprises of John Whittle as Chairman, Steve
Smith and Tracy Clarke. Only Non-Executive Directors serve on the Audit and
Risk Committee and members of the Audit and Risk Committee have no links with
the Company's external auditor and are independent of the Executive Management
Team. The Audit and Risk Committee meets not less than three times a year in
Guernsey and meets the external auditor at least twice a year in Guernsey. The
identity of the Chairman of the Audit and Risk Committee is reviewed on an
annual basis and the membership of the Audit and Risk Committee, and its terms
of reference are kept under review. Regular attendees at the Audit and Risk
Committee include the CEO, CFO and CIO.

 

Duties

 

The Audit and Risk Committee is responsible for monitoring the financial
reporting process, including the appropriateness of the Company's accounting
policies and the effectiveness of the Company's risk management and internal
control systems. The Committee continues to spend a considerable amount of
time reviewing significant risks and areas of judgement. In particular, the
Committee conducts detailed reviews and analysis of the valuations prepared by
the Executive Management Team of the FinTech Ventures investments, the
Subsidiary Goodwill value in use models to assess if any impairment might be
required and the Expected Credit Loss model. These valuations are key elements
in the Group's financial statements and the Audit and Risk Committee questions
these carefully.

 

External Audit

 

The Audit and Risk Committee is responsible for overseeing the relationship
with the external auditor, including the ongoing assessment of the auditor's
independence. The Committee makes recommendations to the Board with regard to
the appointment of the external auditor and approves their terms of engagement
and fees. The Committee discusses and agrees the nature and scope of the audit
as set out in the audit engagement letter, reviews the results of the audit as
described in the auditors' management letter and the ongoing independence and
objectivity of the external auditor. Following a tender process, Moore
Stephens were appointed as the Company's auditor in 2021, taking over from
Deloitte who held this position since 2016.

 

Processes are in place to safeguard the independence of the external auditor,
including controls around the use of the external auditor for non-audit
services.  The external auditor also provides the Audit and Risk Committee
with further assurance as to the procedures that it maintains to preserve
objectivity and confirmation that it remains independent.  All non-audit
services are pre-approved by the Audit and Risk Committee.

 

Effectiveness of External Auditor

 

The Committee assessed the effectiveness of the external auditor and the
external audit process for 2022 through a number of steps, including:

 

·      agreement of their engagement letter and fees;

·      review of the external audit plan;

·      meetings with the external auditors;

·      considering the extent of any non-audit services provided by the
external auditors;

·      considering the external auditors' fulfilment of the agreed audit
plan and variations from it;

·      considering the report from the auditor highlighting any major
issues that arose during the course of the audit; and

·      conducting interviews to obtain feedback from the Executive
Management Team to evaluate the performance of the audit team.

 

For the audit for the year ended 31 December 2022, the Audit and Risk
Committee was satisfied that the audit was effective and that there were no
factors which had any bearing on the independence or effectiveness of the
external auditor.

 

 

Financial Reporting

 

The Audit and Risk Committee reviews, considers and, if thought appropriate,
recommends to the Board the approval of the contents of the half yearly report
and annual report and audited financial statements together with the external
auditor's report thereon. It focuses particularly on compliance with legal
requirements, accounting standards and the relevant Listing Rules. The
ultimate responsibility for reviewing and approving the half year report and
annual report and audited financial statements remains with the Board.

 

The Audit and Risk Committee provides a forum through which the external
auditor reports to the Board and the external auditor is invited to attend
Audit and Risk Committee meetings at which annual and half yearly financial
statements are considered. After discussions with the Executive Management
Team and external auditor, the Audit and Risk Committee determined that the
key risks of misstatement of the Group's financial statements relate to the
valuation of financial assets at fair value through profit or loss, the
valuation and recoverability of goodwill, loan impairments and revenue.

 

Freely tradeable market prices are not available for the majority of the
Group's financial assets, including the carrying value of goodwill arising on
consolidation, which are therefore based on a discounted cash flow basis.
Goodwill impairment testing is carried out annually or sooner where an
indicative event of impairment has been identified. As announced on 10 January
2023 in reviewing its operations in Gibraltar during 2022, the Company has
not identified sufficient quality lending opportunities to merit continued
efforts in the region.  As a result, the Goodwill (£8.64 million), held by
the Company since the acquisition of Sancus Lending (Gibraltar) Limited
("Sancus Gibraltar") in 2016, has consequently been written down to nil in the
2022 results. There have been no indicative events of impairment for the
goodwill held for Jersey since the last annual review which coincided with the
preparation of the 2022 interim accounts. The next annual review will coincide
with the preparation of the 2023 interim accounts. Full details can be found
in Note 2 (h), Note 3 and Note 12 to the financial statements.

 

For the valuations of the FinTech Ventures portfolio, the Executive Management
Team provides a detailed valuation report on a quarterly basis. The Executive
Management Team has confirmed to the Audit and Risk Committee that the
valuation methodology has been applied consistently during the year. The
accounting policies are described in detail in Note 2 (f) to the financial
statements.

 

The Audit and Risk Committee has assessed the processes around the expected
credit loss provisions recorded in respect of the Group's loan assets and
reviewed the IFRS 9 model adopted at year-end which had also gone through the
credit committee for approval.

 

The accounting policies for revenue recognition are described in detail in
Note 2 (o) to the financial statements. The Audit and Risk Committee has
reviewed the revenue recognition policies of the Group and has determined that
they are in accordance with the accounting standards and have been applied
consistently.

 

After due consideration, the Audit and Risk Committee recommends to the Board
that the Annual Report and Financial Statements, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Group and Company's performance, business model and
strategy.

 

Non-Audit and audit related fees paid to the External Auditors

 

During 2022 no non-audit fees were paid to Moore Stephens, the external
auditors. £15,000 was paid to Moore Stephens for audit related services,
being the half year review. There is no perceived threat to auditor
independence given the nature of the services provided and the safeguards in
place.

 

Risk Management and Internal Control Systems

 

During 2022, management continued to enhance its reporting on risk management
to the Board and the Audit and Risk Committee, which cover the operation of
the Company and its wholly owned subsidiaries. The Audit and Risk Committee
has received and considered these reports on three occasions, which has been
the basis for its conclusion below.

 

In addition to the review of risk management reports, and in accordance with
the guidance published in the Guidance on Risk Management, Internal Control
and Related Financial and Business Reporting by the Financial Reporting
Council (the "FRC"), the Audit and Risk Committee has reviewed the Company's
internal control procedures and concluded that these are adequate to manage
the current risk profile.

 

A robust, ongoing process of Risk Management and Internal Control

 

The Board and Executive Management Team are responsible for safeguarding the
assets of the Group through establishing effective systems of risk management
and internal control. This responsibility is shared by the Directors of
subsidiary companies, who are similarly responsible for safeguarding the
assets of these companies.

 

The Board is also responsible for deciding on whether the nature and extent of
risks taken within the Group are within its risk appetite. Such risks have
been formally defined, setting the basis for the design and implementation of
the Group's internal control framework.

 

On behalf of the Board, the Audit and Risk Committee oversees the Group's risk
management and internal control systems. These systems are designed to ensure
proper accounting records are maintained and that internal and published
financial information is reliable, and that the assets of the Group are
safeguarded. Such a system of internal controls can only provide reasonable
and not absolute assurance against misstatement or loss.

 

Critical components of the Group's internal control framework include the
documented policies which describe how each risk is to be managed and governed
and the governance committees established in terms of such policies, which
have mandates describing how they should operate, what reports they should
receive and how they should govern the management of principal risks. Such
policies have been implemented at Company as well as subsidiary levels.

 

On a semi-annual basis, the Executive Management Team review the key risks
across the Group to ensure they are being managed within the Company's risk
appetite.  Action plans are drawn up if any risks are considered to be
outside of the Company's risk appetite and these are monitored on a regular
basis until they return to levels back within the risk appetite.

 

On a semi-annual basis, the Board and/or Audit and Risk Committee receive
reports on risk management, the key risks and the exposures outstanding. Also
included in these reports are the results of the Executive Management Team's
risk and issue identification discussions noted above. These meetings also
provide the Directors with the opportunity to consider any other issues which
management may not have identified and give direction on any additional risk
management actions which might be required.

 

Insurance

 

The Sancus and subsidiaries insurance programme is subject to annual review
each year, with cover generally renewed in April of the following year. A
significant amount of Insurance cover is held for Public Indemnity, Directors'
and Officers' liability, Cyber, and Crime. Appropriate office and travel
insurance is also in place.

 

During 2022, the Committee did not receive any reports relating to
whistleblowing across the Group.

 

On behalf of the Audit and Risk Committee

 

John Whittle

Chairman

Audit and Risk Committee

 
 
REMUNERATION REPORT

 

Introduction

 

An ordinary resolution for the approval of the annual remuneration report will
be put to the shareholders at the annual general meeting to be held in 2023.

 

Remuneration and Nomination Committee

 

The Remuneration and Nomination Committee comprises of John Whittle as
Chairman, Steve Smith and Tracy Clarke. The key duties include, but are not
limited to, agreeing a framework for Director remuneration, ensuring
management staff are appropriately incentivised to enhance performance, and
reviewing the effectiveness of the remuneration policy on an on-going basis.
No Director is involved in determining their own remuneration.

 

Remuneration Policy

In February 2020 the Remuneration Policy was last approved and adopted. The
Company is committed to the objective of maximising shareholder return in the
longer term. The remuneration policy aims to be competitive, aligned with
shareholder interests and relatively simple and transparent. The Board takes
into consideration the views of significant shareholders when determining the
remuneration of directors.

 

The objective is to put in place a remuneration package that, as a whole:

 

·      aligns the interests of employees with that of shareholders and
the success of the Company;

·      is appropriately benchmarked, such that it aids retention and
recruitment; and

·      meets applicable legal or regulatory requirements, is tax
efficient and simple to implement and administer.

 

The Board is reviewing the Remuneration Policy against these objectives.

 

The Policy is divided into two parts; the first part in relation to the
remuneration of the Non-Executive directors of the Company, and the second
part in relation to the remuneration of the Executive Directors of the
Company.

 

 

Part 1 - Remuneration Policy of Non-Executive Directors

 

Each Non-Executive Director receives a fixed fee per annum based on their
role and responsibility within the Company and the time commitment required.
It is not considered appropriate that Non-Executive Directors' remuneration
should be performance related and none of the Non-Executive Directors are
eligible for pension benefits, share options, long-term incentive schemes or
other benefits in respect of their services as Non-Executive directors of the
Company. Shares held by the Non-Executive Directors are disclosed in the
Annual Report.

 

Pursuant to Article 30.3 of the Company's Articles of Incorporation (the
"Articles") the Board may award additional remuneration to any Director
engaged in exceptional work at the request of the Board on a time spent basis
to compensate for the additional time spent over their expected time
commitment.

 

The total remuneration of the Non‑Executive Directors has not exceeded the
£300,000 per annum limit (excluding amounts payable in respect of any
out-of-pocket expenses pursuant to Article 30.2 or any additional remuneration
awarded pursuant to Article 30.3) pursuant to an ordinary resolution passed at
the Annual General Meeting of the Company held on 19 May 2016.

 

The Articles provide that Non-Executive Directors retire and offer themselves
for re‑election at the first annual general meeting after their appointment
and at least every three years thereafter. A Non-Executive Director's
appointment may at any time be terminated by and at the discretion of either
party upon three months' written notice. A Non-Executive Director's
appointment will terminate immediately without notice (or payment in lieu of
notice) if such director is not re-appointed at a General Meeting of the
Company (if required under the Articles), if such director is removed as a
director at a General Meeting of the Company, or if such director resigns or
ceases to be a director in accordance with the provisions of the Articles.

 

The terms and conditions of appointment of each Non-Executive Director are
available for inspection at the Company's registered office.

 

The last independent remuneration review was carried out in July 2014. The
Directors intend to put in place a Long-Term Incentive Plan for Senior
Management during the course of 2023 which will also include a remuneration
review.

 

For comparative purposes the table below sets out the Non-Executive Directors'
remuneration approved and actually paid for the year to 31 December 2021 as
well as that proposed for the year ending 31 December 2022 (to be approved at
the 2023 AGM).

 

 Director               Role                                                                           Base for 2022  Additional fees for 2022                                                      Total fees for 2022  Base for 2021  Additional fees for 2021                                                      Total fees for 2021

 Patrick Firth*         Non-Executive Director and Chairman of the Board                               -              -                                                                             -                    £23,333        £10,000 for Chairman of the Board                                             £33,333

 Steve Smith**          Non-Executive Director and Chairman of the Board                               £35,000        £15,000 for Chairman of the Board                                             £50,000              £22,446        £5,000 for Chairman of the Board                                              £27,446

 John Whittle           Non-Executive Director, Chairman of the Audit and Risk Committee and Chairman  £35,000        £5,000 for Chairman of the ARC and £2,500 for Chairman of Rem & Nom Co        £42,500              £35,000        £5,000 for Chairman of the ARC and £2,500 for Chairman of Rem & Nom Co        £42,500
                        of the Remuneration Committee

 Nicholas Wakefield***  Non-Executive Director                                                         £6,329         -                                                                             £6,329               £35,000        Nil                                                                           £35,000
 Tracy Clarke***        Non-Executive Director                                                         £28,671        Nil                                                                           £28,671              -              -                                                                             -
 Total                                                                                                 £105,000       £22,500                                                                       £127,500             £115,779       £22,500                                                                       £138,279

 

* Pro rata for 2021 as Mr Firth resigned as a Non-Executive Director and
Chairman of the Board on 31 August 2021.

** Pro rata for 2021 as Mr Smith was appointed to the Board on 11 May 2021 and
succeeded Mr Firth as Board Chairman following his resignation.

*** Pro rata for 2022 as Mr Wakefield was succeeded by Ms Clark on 8 March
2022.

 

 

Part 2 - Remuneration Policy of Executive Directors

 

Base Remuneration

 

For the year ended 31 December 2022, the Executive Directors' base salary 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 2022  31 December 2021
 Andrew Whelan(1)  -                 £260,981
 Rory Mepham(2)    £220,000          £220,000
 Emma Stubbs       £170,000          £170,000
 Dan Walker(3)     -                 £200,000
 James Waghorn(4)  £135,000          -
 Helen Trott(5)    £135,000          -

 

(1) Mr Whelan resigned on 30 June 2021, and his contract ended on 28 February
2022.

(2) Mr Mepham was appointed Interim CEO on 30 June 2021 and permanent CEO on
23 November 2022.

(3) Mr Walker resigned on 31 January 2022.

(4) Mr Waghorn was appointed CIO on 8 March 2022. In addition to his Sancus
salary Mr Waghorn also receives £35k p.a. from Somerston
        Capital Limited as Managing Director of Healthcare &
Development for Somerston.

(5) Mrs Trott was appointed COO and Legal Counsel on 29 November 2022 and is
on a 4 day a week contract.

 

In addition to fixed salary payments, in 2022 the Executive Management Team
members received pension contributions of £11,000 Rory Mepham, £8,500 Emma
Stubbs, £1,076 James Waghorn and £117 Helen Trott. (2021: £3,278 Andrew
Whelan, £7,045 Rory Mepham, £6,299 Emma Stubbs and £7,581 Dan Walker).

 

Long Term Incentives

 

The Board intends to introduce a Long Term Incentive Plan for Senior
Management during 2023 and an external advisor will be engaged to assist with
this.

 

Discretionary Executive Bonus

 

There was one discretionary bonus awarded to James Waghorn of £50,000
relating to 2022. (In the year to 2021: £125,000, £50,000, £75,000 and
£75,000 were paid to Andrew Whelan, Rory Mepham, Emma Stubbs and Dan Walker
respectively).

 

On behalf of the Remuneration Committee

 

John Whittle

Remuneration Committee Chairman

 

 

DIRECTORS' REPORT

 

The Directors submit their Report together with the Consolidated Statement of
Comprehensive Income, the Consolidated Statement of Financial Position, the
Consolidated Statement of Changes in Shareholders' Equity, the Consolidated
Statement of Cash Flows and the related Notes for the year ended 31 December
2022, which have been prepared in accordance with International Financial
Reporting Standards as adopted by the UK, in accordance with any relevant
enactment for the time being in force, and are in agreement with the
accounting records, which comply with Section 238 of The Companies (Guernsey)
Law, 2008.

 

Principal Activities

The Company was incorporated and domiciled in Guernsey, 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). From January 2023 the Company changed its management and control
from Guernsey to Jersey. Until 25 March 2015, the Company was Authorised as a
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 the AIM market of the London Stock Exchange on 5 August 2005.
The ZDPs were listed and traded on the main market of the London Stock
Exchange with effect from 5 October 2015 and following shareholder approval
now have a maturity date of 5 December 2027. The Company's 2021 bonds were
repaid on 21 December 2021 and a total of £12.575m principal of new bonds
(the "New Bonds") were issued on 22 December 2021. Somerston subscribed to a
further £2.425m bonds on 1 December 2022 taking the Company's aggregated bond
principal to £15m of which £10.13m is now held by Somerston. The New Bonds
are not listed and have an interest rate of 7%.

 

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

 

Following the approval by Shareholders at the Company AGM on 19 May 2016, the
Company changed its status from being an investing company for the purpose of
the AIM rules to a trading Company.

 

The Executive Management Team is responsible for the day-to-day management of
the Company.

 

The Group

As at 31 December 2022, the Group comprises the Company and the entities
disclosed in Note 20 to the financial statements.

 

Directors and Executive Management Team of the Company

A list of the Directors and the Executive Management Team who served the
Company during the year and as at the date of this report is shown in the
Corporate Governance report.

 

Results and Dividends

The Group results for the year are set out in the consolidated statement of
comprehensive income. No Dividends were paid during the year (31 December
2021: Nil).

 

Substantial Shareholdings

As at 31 December 2022, the Company was aware of the following substantial
shareholders who held 3% or more of issued share capital of the Company:

 

                                    Number of         Percentage of total

                                    Ordinary Shares    ordinary shares

                                     held              issued held
 Somerston Group                    294,644,553       50.44%

 Philip J Milton & Company plc      94,215,644        16.13%

 

Directors' Interests

 

As at 31 December 2022, the Directors had the following beneficial interests
in the Ordinary Shares of the Company:

 

                         31 December 2022                                        31 December 2021
                         No. of Ordinary Shares Held  % of Ordinary Shares Held  No. of Ordinary Shares Held  % of Ordinary Shares Held

 John Whittle            138,052                      0.03                       138,052                      0.03
 Nick Wakefield          -                            -                          -                            -
 Emma Stubbs             1,380,940                    0.28                       1,380,940                    0.28
 Steve Smith (Chairman)  -                                                       -                            -
 Rory Mepham             -                            -                          -                            -
 Tracy Clarke            -                            -                          -                            -

 

 

Statement of Directors' Responsibilities

 

The Directors are responsible for preparing the financial statements in
accordance with International Financial Reporting Standards (IFRSs) as adopted
by the United Kingdom (UK), and The Companies (Guernsey) Law, 2008 for each
financial period to give a true and fair view of the state of affairs of the
Group as at the end of the financial year and of the profit or loss for that
period.  International Accounting Standard 1 requires that financial
statements present fairly for each financial period the Group's financial
position, financial performance and cash flows. This requires faithful
representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses set out in the International Accounting
Standards Board's "Framework for the preparation and presentation of financial
statements".  In virtually all circumstances a fair presentation will be
achieved by compliance with all IFRSs as adopted by the UK.

 

In preparing these financial statements, the Directors are required to:

 

·       Ensure that the financial statements comply with the Memorandum
and Articles of Incorporation and IFRSs, as adopted by the United Kingdom;

·       Select suitable accounting policies and apply them
consistently;

·       Present information including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;

·       Make judgements and estimates that are reasonable and prudent;
and

·       Prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company and the Group will
continue in business.

 

The Directors confirm that they have complied with the above requirements in
preparing the financial statements.

 

The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and the Group and enable them to ensure that the financial statements
have been properly prepared in accordance with The Companies (Guernsey) Law,
2008. They are also responsible for safeguarding the assets of the Company and
the Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.

 

The Directors also confirm that the annual report and financial statements,
taken as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group and Company's
performance, business model and strategy.

 

Internal Controls Review

 

Taking into account the ongoing work of the Audit and Risk Committee in
monitoring the risk management and internal control systems on behalf of the
Board the Directors, the latter has conducted a robust assessment of the
principal risks and uncertainties faced by the Group as set out in the risk
table and is satisfied that each of these has been properly identified and is
being effectively managed through the operation of appropriate internal
controls and risk management systems, within the constraints of the resources
of the Group.

 

Statement as to Disclosure of Information to Auditor

 

The Directors who held office at the date of approval of this Directors'
Report confirm that:

 

· There is no relevant audit information of which the Company's auditors are
unaware; and

· The Directors have taken all steps that they ought to have taken to make
themselves aware of any relevant audit information and to establish that the
auditors are aware of that information.

 

Auditor

 

Moore Stephens have indicated their willingness to continue in office and a
resolution to re-appoint Moore Stephens will be tabled at the forthcoming AGM.

 

Going Concern

 

The Directors have considered the going concern basis in the preparation of
the financial statements as supported by the Director's assessment of the
Company's and Group's ability to pay its debts as they fall due and have
assessed the current position and the principal risks facing the business with
a view to assessing the prospects of the Company. Following the extension of
the ZDPs at the end of 2022, for a further 5 years to 5 December 2027 and with
the Bonds maturity date not until 31 December 2025, the Company does not have
any debt liabilities that fall due within the next 12 months.  Based on this,
the Directors are of the opinion that the Company has adequate financial
resources to continue in operation and meet its liabilities as they fall due
for the foreseeable future.

 

It is however expected, whereby equity is required to facilitate an increase
in drawdown from institutional funding lines that the Company will require
growth capital to fund the continued growth of the loan book. The Company's
largest shareholder, Somerston has indicated their willingness to support the
Company's growth plans. The Company will be looking at options available to
raise additional growth capital over the course of the year, which may include
a form of equity raise or sale by Company of ZDP shares held in treasury.

 

The Directors therefore believe it is appropriate to continue to adopt the
going concern basis in preparing the financial statements.

 

Board Succession

 

The Directors remain focussed on ensuring the Board is comprised of
individuals with the requisite skills, knowledge, experience and diversity to
operate effectively and to meet the future leadership needs of the Company.
The Board welcomed the appointment of Ms Tracy Clarke who succeeded Mr Nick
Wakefield in March 2022 as the Somerston appointed Board representative.  It
is noted that Emma Stubbs will resign on 30 March 2023 and will be replaced by
Tracy Clarke, who will become an executive Director and cease to be
Somerston's appointed Board representative.  At this time no replacement is
deemed necessary for Tracy Clarke's Non Executive position, but this will be
kept under review.

 

Approved and signed on behalf of the Board of Directors on 30 March 2023.

 

 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF SANCUS LENDING GROUP LIMITED

 

Opinion

 

We have audited the financial statements of Sancus Lending Group Limited (the
'company' or the 'parent company and its subsidiaries together as the 'group')
for the year ended 31 December 2022 which comprise of the Consolidated
Statement of Comprehensive Income, Consolidated Statement of Financial
Position, Consolidated Statement of Cash Flows, the Consolidated Statement of
Changes in Equity and notes to the financial statements, including a summary
of significant accounting policies. The financial reporting framework that has
been applied in their preparation is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the United Kingdom and, as
regards the parent company financial statements, as applied in accordance with
the provisions of the Companies Act 2006.

 

In our opinion:

 

·      the financial statements give a true and fair view of the state
of the group's and of the parent company's affairs as at 31 December 2022 and
of the group's loss for the year then ended;

·      the group financial statements have been properly prepared in
accordance with IFRSs as adopted by the United Kingdom; and

·      the financial statements have been prepared in accordance with
the requirements of the Companies (Guernsey) Law, 2008.

 

Basis for opinion

 

We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the Auditor's Responsibilities for the
audit of the financial statements section of our report. We are independent of
the Group, in accordance with the ethical requirements that are relevant to
our audit of the financial statements in Guernsey, including the FRC's Ethical
Standard as applied to listed entities, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We believe
that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.

 

Conclusions relating to Going Concern

 

In auditing the financial statements, we have concluded that the directors'
use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.

 

Our evaluation of the directors' assessment of the company's ability to
continue to adopt the going concern

basis of accounting included:

 

·      comprehensive analysis of the Entity's financial position; and

·      cash flows, including the key assumptions underlying the Entity's
forecasted cash flows.

 

Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Group's ability to continue as
a going concern.

 

Our responsibilities and the responsibilities of the directors with respect to
going concern are described in the relevant sections of this report. However,
because not all future events or conditions can be predicted, this statement
is not a guarantee as to the Group's ability to continue as a going concern.

 

Key audit matters

 

Key audit matters are those matters that, in our professional judgement, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) we identified, including those
which had the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.

 

The key audit matters that we identified in the current year are:

 

 Audit Matter                                                                     Procedures
 Impairment of Goodwill                                                           We obtained our understanding of how the discounted cash flow forecasts are

                                                                                modelled as part of the Board's processes to identify and recognise
                                                                                  impairment. With regards to valuation, we performed the following procedures:

 As at 31 December 2022, the Group has recorded goodwill of £14.3m (2021:         We obtained an understanding of the relevant controls over the impairment
 £22.9m) representing 22.64% (2021: 23.1%) of group total assets at year end.     assessment process;
 Discounted cash flow models are prepared by management to assist the Board and

 Audit Committee in determining whether indicators of impairment exist and
 estimating the recoverable amount of goodwill, based on information available

 at 30 June 2022. The management believes that there is no further change till    We have reviewed and checked the key assumptions to the cash flows including
 31 December 2022.                                                                revenue growth rates, discount rates, and future income and expenditure cash

                                                                                flows, and tested for any
 The risk is explained further in the Strategic report where this is included
inconsistencies with our understanding of the group's business model;
 as a key risk of misstatement. Note

2(h) and Note 3 set out the associated accounting policy and disclosure in
 respect of critical judgements and key sources of estimation uncertainty, with

 Note 12 setting out details of the impairment tests and goodwill                 We internally performed stress testing on the key assumptions to determine the

valuation sensitivities.                                                        impact on the recoverable amount of goodwill and whether this would lead to

                                                                                any impairment;

                                                                                  We checked the critical model assumptions related to the cash flow and growth
                                                                                  rate assumptions, which were used in the forecast to model the recovery to
                                                                                  pre-Covid-19 levels of loan origination, by assessing trends in external
                                                                                  sector reports, evaluating the expected cash flows from the loan pipeline and
                                                                                  loans originated post impairment test date;

                                                                                  We agreed inputs to supporting evidence where appropriate;

                                                                                  We reviewed the models prepared by management for consistency with the
                                                                                  requirements of IAS 36;

                                                                                  We challenged management's assertion that no further impairment triggers exist
                                                                                  at the balance sheet date, considering the sources of information to identify
                                                                                  such indicators as listed in IAS 36 Impairment of Assets; and

                                                                                  We reviewed the disclosures made per requirements of IAS 36.

                                                                                  Based on our audit work, we concur with management that the goodwill balance
                                                                                  was not impaired as at 31 December 2022.

                                                                                  As described in Note 12 to the financial statements, we noted that management
                                                                                  have assumed that Sancus Lending (Jersey) does not require impairment as of 31
                                                                                  December 2022.

                                                                                  Note 12 to the financial statements describes the underlying sensitivity of
                                                                                  the key inputs used.

 Impairment and recoverability of loans receivable                                We have performed the following procedures:

                                                                                  We have obtained an understanding of significant controls over the loans

                                                                                impairment process;
 As at 31 December 2022. the aggregate value of loans and loan equivalents

 amounted to £76.13m (2021: £53.24m) representing 74.97% of total assets
 (2021: 54.89%). The loan portfolio comprises of property-backed loans

 (Sancus). Through Sancus, the group has direct exposure to loans through         Performed a walkthrough of relevant controls in the valuation process to
 co-investment alongside third-party lenders.                                     confirm they were appropriately designed and implemented;

 The group has also provided a first loss guarantee as part of the Sancus Loan    We have tested, on a sample basis, inputs used in the 'Loans Monitoring
 Note structures. The value of these assets are also supported by the             Report', including the accuracy of covenant calculations, such as loan to
 underlying loan book. Management is required to assess loans for impairment,     value ratios, collateral values, and other financial and non-financial
 including the application of the expected credit loss ('ECL') model under IFRS   information;
 9.

                                                                                We have checked the reasonableness of management's significant judgments
 In making this assessment, management makes several significant judgements.      relating to the categorisation of loans into the various credit stages
 These include determining appropriate assumptions for calculating the loss       required under IFRS 9. We have considered this in relevance to management's
 allowance under IFRS 9 (including probability of default and loss given          definition of a significant increase in credit risk ('SICR') and the
 default), as well as loan-specific matters including cash flow forecasts and     definition of default
 covenant compliance, specifically related to loan to value (LTV) ratio. As a
and performed a review of the Loan Monitoring Report to assess evidence of
 result, errors or deliberate manipulation of these determining factors could     changes in credit risk resulting
 result in material misstatement of the financial statements, as such it is
from factors such as:
 considered as a fraud key audit matter.
- exceedances in LTV;

- covenant breaches;

- delinquencies in payments; or

- other signs of financial stress.
 The risk is explained further in the strategic report where this is included

 as a key risk of misstatement. Note

2(f) and Note 3 set out the associated accounting policy and disclosure in

 respect of critical judgements and key sources of estimation uncertainty, with   We also checked the reasonableness of management's assumptions related to the
 Note 23 setting out details of the associated risk factors, including            recoverable value of any non-performing loans in light of available evidence

credit risk.                                                                    and the underlying collateral;

                                                                                  We have checked the reasonableness of management's assumptions relating to
                                                                                  their capital market expectations, such as Covid-19, including any overlays
                                                                                  required to compensate for the change in the market environment not reflected
                                                                                  in the ECL model;

                                                                                  We have evaluated the reasonableness of management's judgements and estimates
                                                                                  in deriving the probability of default (PD), determining the loss given
                                                                                  default (LGD) and exposure at default (EAD) for each stage within which loans
                                                                                  are classified and their compliance with IFRS 9 requirements;

                                                                                  We tested the numerical accuracy of the ECL calculation based on the above
                                                                                  inputs; and

                                                                                  We evaluated the adequacy of disclosures made in the financial statements in
                                                                                  light of the requirements of IFRS 7 and IFRS 9.

                                                                                  We have concluded that the overall carrying value of loans is reasonable.

                                                                                  As described in note 3 to the financial statements, IFRS 9 requires the
                                                                                  application of a probability-weighted unbiased estimate in determining the ECL
                                                                                  on loans. There are therefore certain loans where the amounts recovered could
                                                                                  be materially different to the

estimate at 31 December 2022.

                                                                                  Note 23 to the financial statements describes the underlying sensitivity of
                                                                                  the key inputs used.
 Revenue recognition                                                              We have performed the following procedures:

                                                                                  We have obtained reports from LMS, related to interest income and tested on

                                                                                sample basis by recalculating interest income and comparing it with the
 The Group's revenue for the year ended 31 December 2022 was £9.98m (2021:        amounts accounted in the general ledger.
 £9.02m) of which £5.48m (2021: £5.39m) sourced from interest income and

 fees enforced as per lending agreements and £4.5m (2021: £3.62m) was from
 interest on loans.

                                                                                We also performed analytical review to test the reasonableness of interest
                                                                                  income.

 We consider revenue as a presumed fraud risk and have directed our tests
 towards this risk

                                                                                  For fee income, we have verified on sample basis, fee from various contracts
                                                                                  and tested for accuracy.

                                                                                  We have concluded that the reported revenue is presented fairly.

 

Our application of materiality

 

We define materiality as the magnitude of misstatement in the financial
statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both
in planning the scope of our audit work and in evaluating the results of our
work. Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:

 

 Group Materiality  £393k
 Basis              2% of net assets
 Rationale          considered as most appropriate based on the significance of the on balance
                    sheet lending and goodwill balances.
                    In determining performance materiality, we considered the following
                    significant judgements:

                    ·      Our risk assessment, including our assessment of the Group's
                    overall control environment; and

                    ·      No past audit experience with the Group.

 

We have also adopted a lower level of materiality for revenue balances
consistent with the prior year audit. We consider revenue to be a critical
performance measure for the group as it is expected to be a key driver for
future distributions from profits now the group has further developed its SME
and property backed lending business.

 

The lower-level materiality applied was £199.6k (2021: £180k), being
approximately 2% (2021: 2%) of total revenue. We agreed with the Audit
Committee that this was appropriate as revenue balances are relatively low
compared to our overall group materiality set out above, yet there is an
increasing focus on these as performance measures.

 

Performance materiality

We set performance materiality at a level lower than materiality to reduce the
probability that, in aggregate, uncorrected and undetected misstatements
exceed the materiality for the financial statements as a whole. Group
performance materiality was set at 60% of group materiality for the 2022 audit
(2021: 60%). In determining performance materiality, we considered the
following factors:

·      Our risk assessment, including our assessment of the group's
overall control environment and that we consider it appropriate to rely on
controls on a key business process;

·      Our past experience of the audit, which has indicated a low
number of uncorrected misstatements identified in prior periods; and

 

 

Error reporting threshold

 

We would report to the Committee all audit differences in excess of £19.6k
(2021: £23k), as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.

 

An overview of the scope of our audit

 

Our audit was scoped by obtaining an understanding of the group and its
environment, including internal control, and assessing the risks of material
misstatement for the company and its subsidiaries. Audit work to respond to
the risks of material misstatement was performed directly by the group audit
team for both the parent entity and its subsidiaries.

 

Audit work performed for the subsidiaries was executed by the group audit team
at levels of materiality applicable to each subsidiary, which in all instances
was lower than group materiality and ranged between £53k and £184k (2021:
between £4.4k and £1,006k).

 

Other information

 

The directors are responsible for the other information. The other information
comprises the information included in the annual report, other than the
financial statements and our auditor's report thereon. Our opinion on the
financial statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express any form
of assurance conclusion thereon.

 

In connection with our audit of the financial statements, our responsibility
is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the
other information. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to
report that fact.

 

We have nothing to report in this regard.

 

Matters on which we are required to report by exception

 

In the light of the knowledge and understanding of the Group and the parent
company and its environment obtained in the course of the audit, we have not
identified material misstatements in the strategic report or the directors'
report.

 

We have nothing to report in respect of the following matters where the
Companies Act 2006 requires us to report to you if, in our opinion:

 

·      adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received from
branches not visited by us; or

·      the consolidated financial statements are not in agreement with
the accounting records and returns; or

·      certain disclosures of directors' remuneration specified by law
are not made; or

·      we have not received all the information and explanations we
require for our audit.

 

Responsibilities of directors

 

As explained more fully in the directors' responsibilities statement set out
in the Directors' Report, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and
fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.

 

In preparing the financial statements, the directors are responsible for
assessing the group's and the parent company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to
liquidate the group or the parent company or to cease operations, or have no
realistic alternative but to do so.

 

Auditor's responsibilities for the audit of the financial statements

 

Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.  A further description of our
responsibilities for the audit of the financial statements is located on the
Financial Reporting Council's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.

 

Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud is detailed below.

 

Explanation as to what extent the audit was considered capable of detecting
irregularities, including fraud

 

The objectives of our audit in respect of fraud, are; to identify and assess
the risks of material misstatement of the financial statements due to fraud;
to obtain sufficient appropriate audit evidence regarding the assessed risks
of material misstatement due to fraud, through designing and implementing
appropriate responses to those assessed risks; and to respond appropriately to
instances of fraud or suspected fraud identified during the audit. However,
the primary responsibility for the prevention and detection of fraud rests
with both management and those charged with governance of the company.

 

Our approach was as follows:

 

·      We obtained an understanding of the legal and regulatory
requirements applicable to the company and considered that the most
significant are the Companies (Guernsey) Law, 2008, International Financial
Reporting Standards as adopted by the UK, and taxation legislation.

 

·      We obtained an understanding of how the company complies with
these requirements by discussions with management and those charged with
governance.

 

·      We assessed the risk of material misstatement of the financial
statements, including the risk of material misstatement due to fraud and how
it might occur, by holding discussions with management and those charged with
governance.

 

·      We inquired of management and those charged with governance as to
any known instances of non-compliance or suspected non-compliance with laws
and regulations.

 

·      Based on this understanding, we designed specific appropriate
audit procedures to identify instances of non-compliance with laws and
regulations. This included making enquiries of management and those charged
with governance and obtaining additional corroborative evidence as required.

 

As part of an audit in accordance with ISAs (UK) we exercise professional
judgement and maintain professional scepticism throughout the audit. We also:

 

·      Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.

 

·      Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the circumstances,
but not for the purposes of expressing an opinion on the effectiveness of the
group's internal control.

 

·      Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
directors.

 

·      Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the group's or the parent company's ability to
continue as a going concern. If we conclude that a material uncertainty
exists, we are required to draw attention in our auditor's report to the
related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor's report. However, future
events or conditions may cause the group or the parent company to cease to
continue as a going concern.

 

·      Evaluate the overall presentation, structure and content of the
financial statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a manner that
achieves fair presentation.

 

·      Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within the group
to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.

 

We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.

 

From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the consolidated
financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.

 

Use of our report

 

This report is made solely to the company's members, as a body, in accordance
with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has
been undertaken so that we might state to the company's members those matters
we are required to state to them in an auditor's report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company's members as a
body, for our audit work, for this report, or for the opinions we have formed.

 

Jeff Vincent (Senior Statutory Auditor)

for and on behalf of Moore Stephens Audit and Assurance (Guernsey)
Limited

Level 2 Park Place

Park Street

St Peter Port

Guernsey

GY1 3HZ

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

                                                    Notes                                  2022      2021

                                                                                           £'000     £'000

 Revenue                                            5                                      9,989     9,022

 Cost of sales                                      6                                      (7,609)   (6,537)

 Gross profit                                                                              2,380     2,485

 Operating expenses                                 7                                      (6,674)   (6,231)

 Operating loss before credit losses                                                       (4,294)   (3,746)

 Changes in expected credit losses                  22                                     (418)     (6,399)
 Incurred losses on financial assets                                                       -         (90)

 Operating Loss                                                                            (4,712)   (10,235)

 FinTech Ventures fair value movement               22                                     (894)     434
 Other net gains/(losses)                           8                                      233       (557)
 Goodwill impairment                                                                       (8,639)   -

 Loss for the year before tax                                                              (14,012)  (10,358)

 Income tax                                         18                                     (50)      19

 Loss for the year after tax                                                               (14,062)  (10,339)

 Items that may be reclassified subsequently to profit and loss
 Foreign exchange gain arising on consolidation                                            20        12
 Other comprehensive income for the year after tax                                         20        12

 Total comprehensive loss for the year                                                     (14,042)  (10,327)

 Loss for the year after tax attributable to equity holders of the company                 (14,062)  (10,339)

 Total comprehensive loss attributable to equity holders of the company                    (14,042)  (10,327)

 Basic Loss per Ordinary Share                      10                                     (2.89)p   (2.16)p
 Diluted Loss per Ordinary Share                    10                                     (2.89)p   (2.09)p

 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

 

 ASSETS                                                            Notes  31 December 2022  31 December 2021

                                                                          £'000             £'000
 Non-current assets
 Fixed assets                                                      11     425               660
 Goodwill                                                          12     14,255            22,894
 Other intangible assets                                           13     -                 53
 Sancus loans and loan equivalents                                 22     23,864            6,643
 FinTech Ventures investments                                      22     -                 500
 Other investments                                                        100               100
 Investments in joint ventures and associates                      9      -                 500
 Total non-current assets                                                 38,644            31,350

 Current assets
 Other assets                                                      14     706               496
 Sancus loans and loan equivalents                                 22     52,261            46,602
 Trade and other receivables                                       15     5,806             6,075
 Cash and cash equivalents                                                4,134             12,436
 Total current assets                                                     62,907            65,609

 Total assets                                                             101,551           96,959

 EQUITY
 Share premium                                                     16     118,340           116,218
 Treasury shares                                                   16     (1,172)           (1,172)
 Other reserves                                                           (109,994)         (95,952)
 Capital and reserves attributable to equity holders of the Group         7,174             19,094

 Total equity                                                             7,174             19,094

 LIABILITIES
 Non-current liabilities
 Borrowings                                                               90,868            64,677
 Lease liabilities                                                        152               364
 Total non-current liabilities                                     17     91,020            65,041

 Current liabilities
 Borrowings                                                               -                 10,532
 Trade and other payables                                                 1,708             1,628
 Hedging contracts                                                        398               -
 Tax liabilities                                                          145               86
 Provisions                                                               413               -
 Lease liabilities                                                        212               212
 Interest payable                                                         481               366
 Total current liabilities                                         17     3,357             12,824

 Total liabilities                                                        94,377            77,865

 Total equity and liabilities                                             101,551           96,959

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

 

 

                                                 Note  Share Premium  Treasury Shares  Warrants Outstanding  Foreign      Retained Earnings/  Capital and reserves attributable to

                                                                                                              Exchange    (Losses)            equity holders of

                                                                                                             Reserve                          the Company
                                                       £'000          £'000            £'000                 £'000        £'000               £'000

 Balance at 1 January 2022                             116,218        (1,172)          385                   11           (96,348)            19,094
 Exercise of warrants                            16    2,122          -                -                     -            -                   2,122
 Movement in fair value of warrants              16    -              -                (385)                 -            385                 -
 Transactions with owners                              2,122          -                (385)                 -            385                 2,122
 Total comprehensive income/(loss) for the year        -              -                -                     20           (14,062)            (14,042)
 Balance at 31 December 2022                           118,340        (1,172)          -                     31           (110,025)           7,174

 Balance at 1 January 2021                             116,218        (1,099)          847                   (1)          (86,471)            29,494
 Acquired on sale of BMS                         16    -              (73)             -                     -            -                   (73)
 Movement in fair value of warrants                    -              -                (462)                 -            462                 -
 Transactions with owners                              -              (73)             (462)                 -            462                 (73)
 Total comprehensive income/(loss) for the year        -              -                -                     12           (10,339)            (10,327)
 Balance at 31 December 2021                           116,218        (1,172)          385                   11           (96,348)            19,094

CONSOLIDATED STATEMENT OF CASH FLOWS

 

                                                           Notes  31 December  31 December

                                                                  2022         2021

                                                                  £'000        £'000

 Cash flow from operations, excluding loan movements       19     (3,548)      (4,121)

 Increase in Sancus loans                                         (140)        (1,340)
 Decrease in loans through platforms                              -            8
 Increase in Sancus Loans Limited loans                           (21,450)     (4,564)
 Decrease in loans re: UK SARL                                    -            1,808
 Investment in Sancus Loan Notes                                  -            (100)
 Net Cash flows used in operating activities                      (25,138)     (8,309)

 Investing activities
 Net investments in FinTech Ventures                              (394)        (66)
 Divestment/(Investment) in Sancus (IOM) Holdings Limited         516          (16)
 Investment in joint venture                                      (50)         (91)
 Expenditure on SPL Properties                                    (210)        (157)
 Sale of SPL Properties                                           -            743
 Property, equipment and other intangibles acquired               (17)         (14)
 Net cash (outflow) / inflow from investing activities            (155)        399

 Financing activities
 Drawdown of Pollen facility                               19     15,250       7,500
 Capital element of lease payments                         19     (212)        (193)
 Exercise of warrants                                             2,122        -
 Issue of bonds                                            19     2,425        -
 Debt issue costs                                          19     (577)        (3)
 Repayment of ZDPs                                         19     (2,037)      (2,756)
 Net cash generated by financing activities                       16,971       4,548

 Effects of foreign exchange                                      20           12

 Net decrease in cash and cash equivalents                        (8,302)      (3,350)

 Cash and cash equivalents at beginning of year                   12,436       15,786

 Cash and cash equivalents at end of year                         4,134        12,436

 

 

NOTES TO THE FINANCIAL STATEMENTS

 

1.      GENERAL INFORMATION

 

Sancus Lending Group Limited, (the "Company"), and together with its
subsidiaries, ("the Group") was incorporated, and domiciled in Guernsey,
Offshore, 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 ZDPs 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 Management
Team is responsible for the management of the Company.

 

As at 31 December 2022, the Group comprises the Company and its subsidiaries
(Note 20).

 

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 financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), as adopted by the UK,
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 investments at fair value through profit or
loss. With the exception of any new and amended accounting standards which
require policy changes, detailed in Note 2 (v), 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 2022.

 

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 Directors have considered the going concern basis in the preparation of
the financial statements as supported by the Director's assessment of the
Company's and Group's ability to pay its debts as they fall due and have
assessed the current position and the principal risks facing the business with
a view to assessing the prospects of the Company. Following the extension of
the ZDPs at the end of 2022, for a further 5 years to 5 December 2027 and with
the Bonds maturity date not until 31 December 2025, the Company does not have
any liabilities that fall due within the next 12 months.  Based on this, the
Directors are of the opinion that the Company has adequate financial resources
to continue in operation and meet its liabilities as they fall due for the
foreseeable future.

 

It is however expected, whereby equity is required to facilitate an increase
in drawdown from institutional funding lines that the Company will require
growth capital to fund the continued growth of the loan book. The Company's
largest shareholder, Somerston has indicated their willingness to support the
Company's growth plans. The Company will be looking at options available to
raise additional growth capital over the course of the year, which may include
a form of equity raise or sale by Company of ZDP shares held in treasury.

 

The Directors therefore believe it is appropriate to continue to adopt the
going concern basis in preparing the financial statements.

 

(b)           Basis of consolidation

 

The financial statements comprise the results of Sancus Lending Group and its
subsidiaries for the year ended 31 December 2022. 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 is 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.

 

(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 by the Directors.

 

(e)           Expenditure

 

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

 

(f)            Financial assets and liabilities

 

Classification, recognition and initial measurement

 

Classification and measurement of debt assets is driven by the 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 the scope of IFRS 9
are measured at fair value with gains and losses recognised in profit and loss
unless an irrevocable election is made to recognise gains or losses in other
comprehensive income.

 

We are a lending business, which participates in financing to borrowers,
Sancus loans, loan equivalents and loans through platforms. As a result all of
these loans/loan equivalents are held solely for the collection of contractual
cash flows, being interest, fees and payment of principal. These assets are
held at amortised cost using the effective interest rate method, adjusted for
any credit loss allowance.

 

FinTech Ventures investments relate to equity, preference shares and some
working capital loans. Whilst some of these investments attract interest, the
assets are held primarily to assist the development of the entities involved.
These investments are held at fair value with charges recognised in profit and
loss.

 

(g)           Financial assets and liabilities (continued)

 

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. Trade receivables are held at
amortised cost using the effective interest rate method, adjusted for any
credit loss allowance. Trade payables and financial liabilities are held at
amortised cost with any interest cost calculated in accordance with the
effective interest rate.

 

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 as noted above. Realised gains and losses arising
on the derecognition of financial assets and liabilities are recognised in the
period in which they arise. The effect of discounting on trade and other
receivables is not considered to be material.

 

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 22.

 

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.

 

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.

 

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.

 

Derivative financial instruments

 

The Group enters into foreign exchange forward contracts in order to manage
its exposure to foreign exchange rate movements. Further details can be found
in Note 22.

 

Forward contracts are initially recognised at fair value at the date the
contract is entered into and are subsequently remeasured to their fair value
at each balance sheet date. Resulting gains/losses are recognised in profit or
loss immediately. Forward contracts with positive fair value are recognised as
financial assets whereas forward contracts with negative fair value are
recognised as financial liabilities. Contracts are presented as non-current
assets or liabilities if the remaining maturity of the instrument is more than
12 months and is not expected to be settled within 12 months. Other contracts
are presented as current assets.

 

Expected credit losses

 

Credit risk is assessed at initial recognition of each financial asset and
subsequently re-assessed at each reporting period-end. For each category of
Credit risk loans have been 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. When for example LTV exceeds 65% or
amounts become 30 days past due judgement will be used to reassess whether
Credit risk has increased significantly enough to move the loan from one stage
to another. A loan is considered to be in default when there is a failure to
meet the legal obligation of the loan agreement. This would include provisions
against loans that are considered by management as unlikely to pay their
obligations in full without realisation of collateral. Refer to Note 22 for
further details.

 

Sancus loans and loan equivalents are assessed for credit risk based on
information available at initial recognition, predominantly (but not solely)
using Loan to Value (LTV). For trade and other receivables, the Group has
applied the simplified approach to recognise lifetime expected credit losses
although loan interest receivable is included in the gross carrying value when
determining ECL.

 

Provision for ECL is calculated using the credit risk, the probability of
default and the probability of loss given default, all underpinned by the LTV,
historical position, forward looking considerations and on occasion subsequent
events, and the subjective judgement of the Board. ECL assumes the life of the
loan is consistent with contractual term.

 

Financial guarantee contracts

 

Financial guarantee contracts are only recognised as a financial liability
when it becomes probable that the guarantee will be called upon in the future.
The liability is measured at fair value and subsequently in accordance with
the expected credit loss model under IFRS 9. The fair value of financial
guarantees is determined based on the present value of the difference in cash
flows between contracted payments required under the debt instrument and the
payments that would be required without the guarantee, or the estimated amount
that would be payable to a third party for assuming the obligations.

 

(h)           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 environment 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 the primary currency in
which they operate with the exception of Sancus Lending (Ireland) Limited
whose primary currency is the Euro. 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 direct to reserves. The rates of exchange as at the
year-end are £1: USD1.2101 (31 December 2021 USD1.3527) and £1: EUR1.1284
(31 December 2021 EUR1.1898)

 

(i)            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 and Note 12 for details on
impairment testing.

 

(j)            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.

 

(k)           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 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 Group 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.

 

(l)            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 risk 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.

 

(m)         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. These are measured at fair value through profit or loss
in accordance with policy Note 2 (f).

 

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.

 

(n)           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 ZDPs 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 17) 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 reporting date. Any ZDPs acquired by the group, as
noted in Note 17, are held in Treasury and shown as a reduction in carrying
value.

 

(o)           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
equipment on a straight-line basis over its expected useful economic life as
follows:

 

Furniture and fittings         3 to 5 years

Computer equipment        2 to 4 years

 

(p)           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 in accordance with IFRS 9. Interest income is
accrued over the contractual life of the loan, 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 IFRS 15 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.

 

i)              Commitment and arrangement fees

 

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 and satisfying the Group's performance obligation at the point
of arranging the loan.

 

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 IFRS 9 Financial Instruments, this is not
considered to have a material impact on the financial performance or financial
position of the Group.

 

ii)             Exit fees

 

Where a loan is syndicated and has standard terms the exit fee is recognised
as part of the arrangement fee, reflecting the costs of syndication at the
start of the loan. Where a loan is syndicated and has milestones or conditions
which determine if the fee becomes payable and/or the magnitude of the fee the
exit fee is treated as variable consideration in line with IFRS 15 and is only
recognised when the relevant milestones/conditions are met. Where loans are
not syndicated the exit fee is deemed to be part of the effective interest
rate and recognised over the term of the loan.

 

iii)                    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.

 

iv)                    Advisory fees

 

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

 

(q)           Share based payments

 

As explained in the Remuneration Report, the Company provides a discretionary
bonus, part of which may be 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.

 

(r)            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.

 

(s)           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.

 

(t)            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. In subsequent periods an amount representing
the difference between the warrant exercise price and the prevailing market
price of the company's shares is transferred from/to retained earnings to/from
warrants outstanding.

 

(u)           Inventories - Development properties

 

Inventories are stated at the lower of cost and net realisable value. Cost
comprises initial outlay and, where applicable, additional costs that have
been incurred in bringing the inventories to their present location and
condition. Net realisable value represents the estimated selling price less
all estimated costs of completion and costs to be incurred in marketing and
selling. Repossessed assets are accounted for under IAS 2: Inventories because
the Group will either immediately seek to dispose of those assets which are
readily marketable or pursue the original development plans to sell for those
that are not readily marketable. Such assets are classed as "Other Assets"
within current assets on the balance sheet.

 

(v)           Leases

 

The Group assesses whether a contract is or contains a lease, at inception of
the contract. The Group recognises a right-of-use asset and a corresponding
lease liability with respect to all lease arrangements in which it is the
lessee, except for short-term leases (defined as leases with a lease term of
12 months or less) and leases of low value assets. For these leases, the Group
recognises the lease payments as an operating expense on a straight-line basis
over the term of the lease unless another systematic basis is more
representative of the time pattern in which economic benefits from the leased
assets are consumed.

 

The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted by using the
incremental borrowing rate.

 

Lease payments included in the measurement of the lease liability comprise
fixed lease payments (including in-substance fixed payments) less any lease
incentives receivable, variable lease payments that depend on an index or rate
(initially measured using the index or rate at the commencement date), the
amount expected to be payable by the lessee under residual value guarantees,
the exercise price of purchase options (if the lessee is reasonably certain to
exercise the options) and payments of penalties for terminating the lease if
the lease term reflects the exercise of an option to terminate the lease.

 

The lease liability is presented within current and non-current liabilities in
the consolidated statement of financial position. It is subsequently measured
by increasing the carrying amount to reflect interest on the lease liability
(using the effective interest method) and by reducing the carrying amount to
reflect the lease payments made. The Group remeasures this liability (and
makes a corresponding adjustment to the related right-of-use asset) whenever
the lease term has changed or there is a change in the lease payments used on
inception to measure the liability as described above.

 

The right-of-use assets comprise the initial measurement of the corresponding
lease liability, lease payments made at or before the commencement day, less
any lease incentives received and any initial direct costs. They are
subsequently measured at cost less accumulated depreciation and impairment
losses.

 

Right-of-use assets are depreciated over the shorter period of lease term and
useful life of the underlying asset. If a lease transfers ownership of the
underlying asset or the cost of the right-of-use asset reflects that the Group
expects to exercise a purchase option, the related right-of-use asset is
depreciated over the useful life of the underlying asset. The depreciation
starts at the commencement date of the lease.

 

The Group applies IAS 36 to determine whether a right-of-use asset is impaired
and accounts for any identified impairment loss as described in the 'Property,
Plant and Equipment' policy.

 

Variable rents that do not depend on an index or rate are not included in the
measurement of the lease liability and the right-of-use asset. The related
payments are recognised as an expense in the period in which the event or
condition that triggers those payments occurs and are included in 'Operating
expenses' in profit or loss.

 

(w)          Adoption of new and revised Standards

 

Amendments to IFRSs and IASs that are mandatorily effective for the current
year

 

In the current year, the Group has applied a number of amendments to IFRSs and
IASs issued by the International Accounting Standards Board (IASB) that are
mandatorily effective for an accounting period that begins on or after 1
January 2022. These have been listed below. Their adoption has not had any
material impact on the disclosures or on the amounts reported in these
financial statements.

 

Amendments to IFRS 1: Amendments resulting from Annual Improvements to IFRS
Standards 2018-2020

Amendments to IFRS 3: Amendments updating a reference to the Conceptual
Framework

Amendments to IFRS 9: Amendments resulting from Annual Improvements to IFRS
Standards 2018-2020

Amendments to IAS 16: Amendments prohibiting a company from deducting from the
cost of property, plant and equipment amounts received from selling items
produced while the company is preparing the asset for its intended use

Amendments to IAS 37: Amendments regarding the costs to include when assessing
whether a contract is onerous

 

(x)           Adoption of new and revised Standards (continued)

 

IFRSs, IASs and amendments that are in issue but not yet effective

 

At the date of approval of these Consolidated Financial Statements, the
following IFRSs, IASs and amendments, which have not been applied in these
Consolidated Financial Statements and are not envisaged to have a material
impact on the financial statements when they are applied, were in issue but
not yet effective:

 

Amendments to IFRS 4: Amendments regarding the expiry date of the deferral
approach

Amendments to IFRS 16: Amendments to clarify how a seller-lessee subsequently
measures sale and leaseback transactions

IFRS 17: Insurance Contracts

Amendments to IFRS 17: Amendments to address concerns and implementation
challenges that were identified after IFRS 17 was published

Amendments to IFRS 17: Amendments regarding the initial application of IFRS 17
and IFRS 9

Amendments to IAS 1: Amendments regarding the classification of liabilities

Amendments to IAS 1: Amendments to defer the effective date of the January
2020 amendments

Amendments to IAS 1: Amendments regarding the disclosure of Accounting
Policies

Amendments to IAS 1: Amendments regarding the classification of debt with
covenants

Amendments to IAS 8: Amendments regarding the definition of accounting
estimates

Amendments to IAS 12: Amendments regarding deferred tax on leases and
decommissioning obligations

Amendments to IAS 28: Amendments regarding the sale or contribution of assets
between an investor and its associate or joint venture

 

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 IFRS 9 - 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.

 

Critical judgements in applying the group's accounting policies (continued)

 

Exit fees

 

The Directors consider that the economic measurement of fee revenues that
arise and become due on the completion of a loan (exit fees and warrants)
should be accounted for as variable consideration and the exit fee constrained
to the extent that it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur. Variable consideration
is included based on the expected value or most likely amount, with the
estimated transaction price associated with syndication services (being the
performance obligation to which these fees are attributable) due on collection
of the loan, updated at the end of each reporting period to represent the
circumstances present and any changes in circumstances during the reporting
period. This includes factors such as timing risk, liquidity risk, quantum
uncertainty and conditions precedent in the syndicated finance contract. The
Directors consider that this treatment best reflects the commercial operations
of the Group as an administrator of loan arrangements.

 

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 7 and 8
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). If the
Directors had concluded that the ownership of preference shares was sufficient
to give the Group control, these entities would instead have been consolidated
with the results of the Group.

 

IFRS 9 Credit Risk

 

Credit risk and determining when a significant increase in credit risk has
occurred are critical accounting judgements and are assessed at each reporting
period end. Credit risk is used to calculate estimated credit losses (ECL).
Further details on credit risk can be found in Note 22.

 

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 12, the Directors carry out an impairment review annually
to assess whether goodwill is impaired. In doing so, the Directors assess the
value in use of each cash generating unit through an internal discounted cash
flow analysis. The last impairment review was carried out for the June 2022
interim reporting.

 

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

 

Key sources of estimation uncertainty (continued)

 

IFRS 9 ECL

 

Key areas of estimation and uncertainty are the probabilities of default (PD)
and the probabilities of loss given default (PL) which are used along with the
credit risk in the calculation of ECL. Further details on ECLs, PD and PL can
be found in Note 22. Should the estimates of PD or PL prove to be different
from what actually happens in the future, then the recoverability of loans
could be higher or lower than the accounts currently suggest, although this
should be mitigated by the levels of LTV which are, in the main, less than
70%. Where loans are in default and classified within stage 3, the Directors
estimate of the present value of amounts recoverable through enforcement or
other repayment plans could be materially different to the actual proceeds
received to settle the balances due. In respect of certain loans held by the
Group, the range of outcomes is significant and has a material impact on the
calculation of ECL.

 

Fair Value of the FinTech Ventures investments

 

The Group invests in financial instruments which are not quoted in active
markets and measures their fair values as detailed in Note 22.

 

All of the FinTech Ventures investments are categorised as Level 3 in the fair
value hierarchy. In the past the Directors have estimated the fair value of
financial instruments using discounted cash flow methodology, comparable
market transactions, recent capital raises and other transactional data
including the performance of the respective businesses. Having considered the
terms, rights and characteristics of the equity and loan stock held by the
Group in the FinTech Ventures investments, the Board's estimate of liquidation
value of these assets is £Nil at 31 December 2022 (31 December 2021: £0.5m)
following a further £0.6m deployed into an existing investment during the
year and then subsequently written down to £Nil. Changes in the performance
of these businesses and access to future returns via its current holdings
could affect the amounts ultimately realised on the disposal of these
investments, which may be greater or less than £nil. There have been no
transfers between levels in the period (2021: None).

 

4.     SEGMENTAL REPORTING

 

Operating segments are reported in a manner consistent with the manner in
which the Executive Management Team reports to the Board, which is regarded to
be the Chief Operating Decision Maker (CODM) as defined under IFRS 8. The main
focus of the Group is Sancus. Bearing this in mind the Executive Management
Team have identified 4 segments based on operations and geography.

 

Finance costs and Head Office costs are not allocated to segments as such
costs are driven by central teams who provide, amongst other services,
finance, treasury, secretarial and other administrative functions based on
need. The Group's borrowings are not allocated to segments as these are
managed by the Central team. Segment assets and liabilities are measured in
the same way as in these financial statements and are allocated to segments
based on the operations of the segment and the physical location of those
assets and liabilities.

 

The four segments based on geography, whose operations are identical (within
reason), are listed below. Note that Sancus Loans Limited, although based in
the UK, is reported separately as a stand-alone entity to the Board and as
such is considered to be a segment in its own right.

 

1.     Offshore

 

Contains the operations of Sancus Lending (Jersey) Limited, Sancus Lending
(Guernsey) Limited, Sancus Lending (Gibraltar) Limited, Sancus Properties
Limited and Sancus Group Holdings Limited.

 

2.     United Kingdom (UK)

 

Contains the operations of Sancus Lending (UK) Limited and Sancus Holdings
(UK) Limited.

 

3.     Ireland

 

Contains the operations of Sancus Lending (Ireland) Limited.

 

4.     Sancus Loans Limited

 

Contains the operations of Sancus Loans Limited.

 

                                                                                                                         Reconciliation to Consolidated Financial Statements

 Year to 31 December 2022    Offshore  UK      Ireland  Sancus Loans Limited (SLL)  Sancus Debt Costs  Total Sancus      Head Office  SLL Debt Costs  Fintech Ventures Fair Value & Forex      Other                 Consolidated Financial Statements

                             £'000     £'000   £'000    £'000                       £'000              £'000             £'000        £'000           £'000                                    £'000                 £'000

 Revenue                     1,372     2,679   1,547    (725)                       -                  4,873             -            5,116           -                                        -                     9,989

 Operating (Loss)/profit *   (943)     (446)   647      (744)                       -                  (1,486)           (1,026)      -               -                                        (31)                  (2,543)
 Credit Losses               (244)     -       -        (174)                       -                  (418)             -            -               -                                        -                     (418)
 Debt Costs                  -         -       -        -                           (1,751)            (1,751)           -            -               -                                        -                     (1,751)
 Other (Losses)/gains        (8,630)   -       10       191                         -                  (8,429)           -            -               (894)                                    57                    (9,266)
 Loss on JVs and associates  -         -       -        -                           -                  -                 -            -               -                                        (34)                  (34)
 Taxation                    18        -       (68)     -                           -                  (50)              -            -               -                                        -                     (50)

 (Loss)/Profit After Tax     (9,799)   (446)   589      (727)                       (1,751)            (12,134)          (1,026)      -               (894)                                    (8)                   (14,062)

 

 Year to 31 December 2021

 Revenue                     3,810    1,480  667   (1,149)  -        4,808        -        4,137  -    77         9,022

 Operating Profit/(loss) *   1,207    (462)  88    (1,170)  -        (337)        (1,601)  -      -    67         (1,871)
 Credit Losses               (3,892)  -      -     (2,579)  -        (6,471)      -        -      -    (18)       (6,489)
 Debt Costs                  -        -      -     -        (1,875)  (1,875)      -        -      -    -          (1,875)
 Other Gains/(losses)        56       2      (38)  (100)    -        (80)         -        -      420  10         350
 Loss on JVs and associates  -        -      -     -        -        -            -        -      -    (473)      (473)
 Taxation                    19       -      -     -        -        19           -        -      -    -          19

 (Loss)/Profit After Tax     (2,610)  (460)  50    (3,849)  (1,875)  (8,744)      (1,601)  -      420  (414)      (10,339)

 

* Operating Profit/(loss) before credit losses and debt costs

 

Sancus Loans Limited is consolidated into the Group's results as it is 100%
owned by Sancus Group. However, the reality is that Sancus Loans Limited is a
Co-Funder the same as any other Co-Funder. As a result the Board reviews the
economic performance of Sancus Loans Limited in the same way as any other
Co-Funder, with revenue being stated net of debt costs. Operating expenses
include recharges from UK to Offshore £466,000, Offshore to Ireland
£127,000, Head Office to Offshore £125,000 and Offshore to Head Office
£8,000.

 

                                                                                                  Reconciliation to Financial Statements

 At 31 December 2022       Offshore  UK        Ireland  Sancus Loans Limited (SLL)  Total Sancus        Head Office  Investment in IOM     Fintech Portfolio     Other   Inter Segment Balances        Consolidated Financial Statements

                           £'000     £'000     £'000    £'000                       £'000               £'000        £'000                 £'000                 £'000   £'000                         £'000

 Total Assets              37,724    14,855    1,133    78,952                      132,664             44,214       -                     -                     93      (75,420)                      101,551

 Total Liabilities         (44,250)  (16,528)  (653)    (83,205)                    (144,636)           (25,068)     -                     -                     (93)    75,420                        (94,377)

 Net (Liabilities)/Assets  (6,526)   (1,673)   480      (4,253)                     (11,972)            19,146       -                     -                     -       -                             7,174

 

 

 At 31 December 2021

 Total Assets              45,397    11,127    586    60,504    117,614        43,129        500     500  793      (65,577)      96,959

 Total Liabilities         (40,503)  (12,599)  (714)  (64,355)  (118,171)      (23,978)      -       -    (1,293)  65,577        (77,865)

 Net Assets/(liabilities)  4,894     (1,472)   (128)  (3,851)   (557)          19,151        500     500  (500)    -             19,094

 

 

 

Head Office liabilities include borrowings £24,042,000 (2021: £23,007,000).

 

5.     REVENUE

 

                                              2022     2021

                                              £'000    £'000

 Co-Funder fees                               1,733    1,574
 Earn out (exit) fees                         677      962
 Transaction fees                             3,063    2,862
 Total revenue from contracts with customers  5,473    5,398

 Interest on loans                            83       168
 Pollen Interest income                       4,390    2,989
 Sundry income                                43       467
 Total Revenue                                9,989    9,022

 

The disaggregation of revenue reflects the different performance obligations
in contracts with customers as described in the accounting policy Note 2(o)
and the typical timing of payment for those relevant revenue streams.

 

6.     COST OF SALES

 

                        2022    2021
                        £'000   £'000

 Interest costs         1,789   1,911
 Pollen interest costs  5,116   4,137
 Other cost of sales    704     489
 Total cost of sales    7,609   6,537

 

7.     OPERATING EXPENSES

 

                                        2022     2021

                                        £'000     £'000

 Amortisation and depreciation          305      356
 Audit fees                             140      155
 Company secretarial                    112      124
 Corporate insurance                    (16)     96
 Employment costs                       4,858    4,363
 Investor relations expenses            63       81
 Legal & professional                   (141)    251
 Marketing expenses                     255      93
 NOMAD fees                             75       76
 Other office and administration costs  901      514
 Pension costs                          101      87
 Registrar fees                         16       31
 Sundry                                 5        4
                                        6,674    6,231

 

8.     OTHER NET GAINS/(LOSSES)

 

The £233,000 other net gains is made up of gains on foreign exchange
£267,000 and loss on joint ventures and associates of £34,000. (2021
£557,000 other net losses: predominantly made up of losses on foreign
exchange £143,000 and loss on joint ventures and associates of £473,000
offset by the profit on the sale of Sancus Property Limited properties of
£59,000).

 

9.     INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

 

                                     31 December 2022  31 December 2021

                                     £'000             £'000

 At beginning of year                500               866
 Additions                           -                 107
 Share of profit of associate        -                 161
 Share of loss in joint venture      -                 (91)
 Write down joint venture/associate  -                 (543)
 Disposals                           (500)             -
 At end of year                      -                 500

 

The £500,000 investment in associate related to a 29.32% investment in Sancus
(Isle of Man) Holdings Limited. This investment was disposed of on 31 January
2022 at book value.

 

The group has a 50% share in Amberton Limited. This investment is held at
£Nil. Amberton Limited, which is a Jersey  registered entity, was
incorporated in January 2021 and has been established as a joint venture to
manage the loan note programme going forward.

 

10.  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 £14,062,000 (31 December 2021: loss of £10,339,000) by the weighted
average number of Ordinary Shares (excluding treasury shares) outstanding
during the period of 485,999,406 (31 December 2021: 478,141,413).

 

Note 16 describes the warrants in issue, which are currently out of the money.
As such the warrants have not been considered to have a dilutive effect on the
loss per Ordinary Share in the current year.

 

                                                              31 December 2022  31 December 2021

 Number of shares                                             584,138,346       489,843,477
 Weighted average no. of shares in issue throughout the year  485,999,406       478,141,413
 Basic Loss per share                                         (2.89)p           (2.16)p
 Diluted Loss per share                                       (2.89)p           (2.09)p

 

11.  FIXED ASSETS

 Cost                   Right-of-use assets  Property & Equipment      Total

                        £'000                £'000

                                                                       £'000
 At 31 December 2020    1,267                462                       1,729
 Additions in the year  128                  15                        143
 Disposals              -                    (14)                      (14)
 Leases expired         (132)                -                         (132)
 Lease variations       (16)                 -                         (16)
 At 31 December 2021    1,247                463                       1,710

 Additions in the year  -                    17                        17
 Disposals              -                    (20)                      (20)
 At 31 December 2022    1,247                460                       1,707

 

 Accumulated depreciation         Right-of-use assets  Property & Equipment      Total

                                  £'000                £'000

                                                                                 £'000
 At 31 December 2020              628                  327                       955
 Charge in the year               190                  51                        241
 Disposals                        -                    (14)                      (14)
 Leases expired                   (132)                -                         (132)
 At 31 December 2021              686                  364                       1,050

 Charge for the year              197                  55                        252
 Disposals                        -                    (20)                      (20)
 At 31 December 2022              883                  399                       1,282

 Net book value 31 December 2022  364                  61                        425

 Net book value 31 December 2021  561                  99                        660

 

12.  GOODWILL

                             £'000

 At 31 December 2021         22,894
 Impairment of Goodwill      (8,639)
 At 31 December 2022         14,255

 

The impairment of goodwill relates to that associated with Gibraltar. As a
result of poor trading a decision was made to close the Gibraltar office and
hence write-off the goodwill associated with that office. The remaining
goodwill of £14,255,000 relates solely to Jersey.

 

Impairment tests

 

The carrying amount of goodwill arising on the acquisition of certain
subsidiaries is assessed by the Board for impairment on an annual basis or
sooner if there has been any indication of impairment. The Board last assessed
the Goodwill for impairment on the preparation of the 2022 interim accounts,
with the next assessment due on the preparation of the 2023 interim accounts,
assuming that there having been no indicators of impairment in the interim
period. However, the poor trading in Gibraltar and closing of the Gibraltar
office are indicators of impairment, and as such the entire goodwill relating
to Gibraltar has been written off. There have been no indicators of impairment
relating to the Jersey goodwill so this will next be assessed for impairment
in June 2023.

 

At 30 June 2022 the value in use of Sancus Jersey was based on an internal
Discounted Cash Flow ("DCF") value-in-use analysis using cash flow forecasts
for the years 2022/23 to 2026/27. The starting point for each of the cash
flows was the revised forecast for 2022 produced by Sancus Lending Jersey
management. Management's revenue forecasts applied a compound annual growth
rate (CAGR) to revenue of 25.5% and a cost of equity discount rate of 13.5%.
The resultant valuation indicated that no impairment of goodwill was required.

 

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. The current model reveals that a
sustained decrease in revenue of circa 13% or a sustained increase of circa 9%
in the cost of Equity discount rate would remove the headroom.

 

 Sensitivity Applied                               Reduction in headroom implied by sensitivity

                                                                                     £'000

 10% decrease in revenue per annum                                                   5,026
 3% increase in cost of equity discount rate                                         2,490

 

13.  OTHER INTANGIBLE ASSETS

 Cost                                                            £'000

 At 31 December 2022, 31 December 2021 and 31 December 2020      1,584

 Amortisation                                                    £'000
 At 31 December 2020                                             1,416
 Charge for the year                                             115
 At 31 December 2021                                             1,531
 Charge for the year                                             53
 At 31 December 2022                                             1,584

 

 Net book value 31 December 2022      -

 

 Net book value 31 December 2021    53

 

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

 

14.  OTHER ASSETS

                      Development

                       properties

                      £'000

 At 31 December 2020  1,015
 Additions            157
 Disposals            (676)
 At 31 December 2021  496

 

 Additions            210
 At 31 December 2022  706

 

 

Other assets comprise of a development property which was previously held as
security against a loan which had defaulted. The property is held at cost
(cost being lower than its estimated net realisable value).

 

15.  TRADE AND OTHER RECEIVABLES

                                               31 December

                                               2022         31 December

                                               £'000        2021

                                                            £'000

 Loan fees, interest and similar receivables   4,673        4,146
 Receivable from associated companies          5            10
 Taxation                                      58           40
 Derivative contracts (Note 22)                -            759
 Other trade receivables and prepaid expenses  1,070        1,120
                                               5,806        6,075

 

Loan fees, interest and similar receivables amounted to £11,166,000 at 31
December 2022 (31 December 2021: £11,201,000) before provisions against
receivables of £6,493,000 (31 December 2021: £7,055,000).

 

16.  SHARE CAPITAL, SHARE PREMIUM & DISTRIBUTABLE RESERVE

 

Sancus has the power under its articles of association to issue an unlimited
number of Ordinary Shares of no par value.

 

94,294,869 Ordinary shares were issued as a result of warrants that have been
exercised during the year (see warrants section below. (2021: Nil).

 

 Share Capital - ordinary shares of nil par value
                                                   31 December 2022  31 December 2021
                                                   Number of shares  Number of shares

 At beginning of the year                          489,843,477       489,843,477
 Issued during the year                            94,294,869        -
 At end of the year                                584,138,346       489,843,477

 

 Share Premium - Ordinary shares of nil par value
                                                   31 December 2022  31 December 2021
                                                   £'000             £'000

 At beginning of the year                          116,218           116,218
 Exercise of warrants                              2,122             -
 At end of the year                                118,340           116,218

 

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

                                                               31 December 2022 Number of shares  31 December 2021 Number of shares

 At beginning of the year                                      11,852,676                         7,925,999
 Sancus shares acquired on sale of BMS Finance AB Limited      -                                  3,926,677
 At end of the year                                            11,852,676                         11,852,676

 

Treasury Shares (Continued)

                                                               31 December 2022  31 December 2021

                                                               £'000             £'000

 At beginning of the year                                      1,172             1,099
 Sancus shares acquired on sale of BMS Finance AB Limited      -                 73
 At end of the year                                            1,172             1,172

 

Warrants in Issue

 

On 22 December 2020, in connection with the issue of the New Bonds, the
Company issued 153,994,543 Warrants to subscribe in cash for new Ordinary
Shares at a subscription price of 2.25 pence per Ordinary Share. The
Warrants will be exercisable on at least 30 days notice in the period to 31
December 2025.

 

On 30 November 2022 Somerston Fintech (the Group's major shareholder)
exercised 94,294,869 warrants at an aggregate subscription price of
£2,122,635. No other warrants have been exercised in the year (year to 31
December 2021: Nil exercised).

 

The warrants in issue are classified as equity instruments because a fixed
amount of cash is exchangeable for a fixed amount of equity, there being no
other features which could justify a financial liability classification. The
fair value of the warrants at 31 December 2022 is £Nil (31 December 2021:
£385,000).

 

17.  LIABILITIES

                                              31 December 2022  31 December 2021
 Non-current liabilities                      £'000             £'000

 ZDP shares (1)                               9,117             -
 Corporate Bond (2)                           14,925            12,474
 Pollen Facility (3)                          66,826            52,203
 Lease creditors (Notes 2(u), 2(v) & 24)      152               364
                                              91,020            65,041

 

                                              31 December 2022  31 December 2021

 Current liabilities                          £'000             £'000

 ZDP shares (1)                               -                 10,532
 Accounts payable                             224               93
 Payable to associated companies              12                16
 Interest payable                             481               366
 Accruals and other payables                  1,472             1,519
 Hedging Contracts                            398               -
 Taxation                                     145               86
 Provisions for financial guarantees          413               -
 Lease creditors (Notes 2(u), 2(v) & 24)      212               212
                                              3,357             12,824

 

 

Provisions for financial guarantees are recognised in relation to ECLs on
off-balance sheet loans and debtors where the company has provided a
subordinated position or other guarantee (Note 25). No such provision was
required in the prior year. The fair value is determined using the exact same
methodology as that used in determining ECLs (Note 2(f) and Note 22).

                                    31 December 2022  31 December 2021
 Interest costs on debt facilities  £'000             £'000

 ZDP shares (1)                     831               969
 Corporate Bond (2)                 920               906
 Pollen Facility (3)                5,116             4,137
 Lease Interest                     38                36
                                    6,905             6,048

 

(1)           ZDP shares

 

The ZDP Shares have a maturity date of 5 December 2027 following a 5 year
extension on 5 December 2022. The final capital entitlement will be £2.5332
per ZDP Share.

 

Under the Companies (Guernsey) Law, 2008 shares in the Company can only be
redeemed if the Company can satisfy the solvency test prescribed under that
law. 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.sancus.com (http://www.sancus.com) .

 

The ZDP shares bore interest at an average rate of 8% until 5 December 2022
(2021: 8%). As part of the extension agreement noted above the interest rate
has increased to an average of 9% per annum through to 5 December 2027. 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 (section 7.6) also specify that two debt cover tests must be met in
relation to the ZDPs. At 31 December 2022 the Company was in compliance with
these covenants as Cover Test A was 2.57 (minimum of 1.7) and the adjusted
Cover Test B was 4.23 (minimum of 2.05). At 31 December 2022 senior debt
borrowing capacity amounted to £15m. The Pollen facility does not impact on
this capacity as it is non-recourse to Sancus.

 

In addition to a tender offer on 5 December 2022, whereby the company
acquired, and subsequently cancelled 931,923 ZDP shares, the company purchased
a further 338,957 ZDP shares in the period 19 July 2022 to 19 August 2022. At
31 December 2022 the Company held 12,574,705 shares (31 December 2021:
12,235,748) with an aggregate value of £20,861,686 (31 December 2021:
£18,810,266).

 

(2)   Corporate Bond

 

The £15m (31 December 2021: £12.575m) Corporate bonds bear interest at 7%
(2021: 7%). The bonds have a maturity date of 31 December 2025.

 

(3)   Pollen Facility (previously HIT Facility)

 

On 28 January 2018, Sancus signed a funding facility with Honeycomb Investment
Trust plc (HIT), now Pollen Street PLC ("Pollen"). The funding line initially
had a term of 3 years and comprised of a £45m accordion and revolving credit
facility. On 3 December 2020 this facility was extended to a 6 year term to
end on 28 January 2024 and on 23 November 2022 this was extended further to 23
November 2026. In addition to the extension the facility was increased to
£75m in December 2020 and to £125m in November 2022.

 

The Pollen facility has portfolio performance covenants including that actual
loss rates are not to exceed 4% in any twelve month period and underperforming
loans are not to exceed 10% of the portfolio. Sancus Group has a 10% (£7.5m)
first loss position on the Pollen facility. Sancus has also provided Pollen
with a guarantee, capped at £4m that will continue to ensure the orderly wind
down of the loan book, in the event of the insolvency of Sancus Group, given
its position as facility and security agent. Refer to Note 25 Commitments and
Guarantees.

 

18.  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
2020: £1,200) is payable to the States of Guernsey in respect of this
exemption.

 

Reconciliation of tax charge

                                                 2022      2021
                                                 £'000     £'000

 Accounting loss before tax                      (13,819)  (10,358)

 Gibraltar Corporation Tax at 10% (2021: 10%)    -         -
 Jersey Corporation Tax at 10% (2021: 10%)       -         -
 Ireland Corporation Tax at 12.5% (2021: 12.5%)  68        -
 Adjustments in respect of prior years           (18)      (19)
 Tax expense/(credit)                            50        (19)

 

 

Certain of the Group's subsidiaries have an estimated £24m of losses between
them available to carry forward to offset against qualifying future trading
profits. The Group does not recognise deferred tax assets in respect of losses
arising because in the opinion of the directors the quantum and timing of any
suitable profits which can utilise these losses is unknown.

 

19.  NOTES TO THE CASH FLOW STATEMENT

 

Cash generated from operations (excluding loan movements)

                                                          2022      2021
                                                          £'000     £'000

 Loss for the year                                        (14,062)  (10,339)
 Adjustments for:
 Net losses on FinTech Ventures                           894       -
 Other net (gains)/losses                                 (86)      9
 ZDP finance costs                                        807       874
 Fair Value joint ventures and associates                 34        473
 Changes in expected credit losses                        418       6,489
 Amortisation/depreciation of fixed assets                305       356
 Write off of goodwill                                    8,639     -
 Amortisation of debt issue costs                         225       202
 SPL Properties                                           -         (59)

 Changes in working capital:
 Trade and other receivables                              (392)     (1,995)
 Trade and other payables                                 (330)     (131)
 Cash outflow from operations (excluding loan movements)  (3,548)   (4,121)

 

Changes in liabilities arising from financing activities

 

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

 

                                                              Debt issue costs (1)                              Amortisation of debt issue costs

                                                               £'000                                            Non-cash

                    1 January   Payments (1)   Receipts (1)                         Additions Non-cash £'000     £'000                            Other        31 December

                    2022         £'000          £'000                                                                                              Non-cash    2022

                    £'000                                                                                                                         £'000        £'000

 ZDP Shares         10,532      (2,037)(1)     -              (167)                 -                           25                                764(2)       9,117
 Corporate Bond     12,474      (-)            2,425          -                     -                           26                                -            14,925
 Pollen Facility    52,203      -              15,250         (410)                 -                           177                               (394)(2)     66,826
 Lease Liability    576         (212)(1)       -              -                     -                           -                                 (-)          364
 Total liabilities  75,785      (2,249)        17,675         (577)                 -                           228                               370          91,232

 

                                                              Debt issue costs (1)                              Amortisation of debt issue costs

                                                               £'000                                            Non-cash

                    1 January   Payments (1)   Receipts (1)                         Additions Non-cash £'000     £'000                            Other        31 December

                    2021         £'000          £'000                                                                                              Non-cash    2021

                    £'000                                                                                                                         £'000        £'000

 ZDP Shares         12,424      (2,756)(1)     -              -                     -                           24                                840(3)       10,532
 Corporate Bond     12,473      (24)(4)        -              -                     -                           25                                -            12,474
 Pollen Facility    44,553      -              7,500          (3)                   -                           153                               -            52,203
 Lease Liability    657         (193)(1)       -              -                     128                         -                                 (16)(3)      576
 Total liabilities  70,107      (2,973)        7,500          (3)                   128                         202                               824          75,785

 

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

(2) Comprises interest accruals and unpaid debt issue costs where applicable.

(3) Lease variations.

(4) Interest within operating cash flows.

 

20.  CONSOLIDATED SUBSIDIARIES

 

 The Directors consider the following entities as wholly owned subsidiaries of
 the Group as at 31 December 2022. Their results and financial positions are
 included within its consolidated results.

 Subsidiary entity                                               Date of           Country of      Nature of Holding                % held

                                 Incorporation     Incorporation
 Sancus Group Holdings Limited                                   27 December 2013  Guernsey        Directly held -Equity Shares     100%
 Sancus Lending (Jersey) Limited                                 1 July 2013       Jersey          Indirectly held - Equity Shares  100%
 Sancus Lending (Guernsey) Limited                               18 June 2014      Guernsey        Indirectly held - Equity Shares  100%
 Sancus Lending (Gibraltar)                                      10 March 2015     Gibraltar       Indirectly held - Equity Shares  100%
 Limited
 Sancus Lending (Ireland) Limited                                10 April 2017     Ireland         Indirectly held - Equity Shares  100%
 Sancus Lending (UK) Limited                                     17 February 2011  UK              Indirectly held - Equity Shares  100%
 Sancus Holdings (UK) Limited                                    7 January 2011    UK              Indirectly held - Equity Shares  100%
 FinTech Ventures Limited                                        9 December 2015   Guernsey        Directly held - Equity Shares    100%
 Sancus Properties Limited                                       21 August 2018    Guernsey        Indirectly held - Equity Shares  100%
 Sancus Loans Limited                                            3 July 2017       UK              Indirectly held - Equity Shares  100%

 

Sancus Group Holdings Limited and Sancus Holdings (UK) Limited act as holding
companies. Sancus Properties Limited engages in property development. Fintech
Ventures Limited is an investment company, investing in Fintech companies. The
activities of the remaining companies named above relate to the core business
of lending.

 

21.  FINTECH VENTURES AND OTHER INVESTMENTS

 

The Directors consider the following entities as associated undertakings of
the Group as at 31 December 2022.

 

 Name of Investment:    Nature of holding         Country of incorporation  Percentage holding  Measurement
 FinTech Ventures:
 LiftForward Inc        Indirectly held - Equity  United States of America  18.81%              Fair Value
 Finexkap               Indirectly held - Equity  France                    10.76%              Fair Value
 Ovamba Solutions Inc   Indirectly held - Equity  United States of America  20.18%              Fair Value
 Open Energy Group Inc  Indirectly held - Equity  United States of America  22.71%              Fair Value

 

The percentage holdings in the above table are on a fully diluted basis,
assuming any warrants and management options all vest.

 

22.  FINANCIAL INSTRUMENTS - FAIR VALUES AND RISK MANAGEMENT

 

 Sancus loans and loan equivalents                    31 December 2022  31 December 2021

                                                      £'000             £'000
 Non-current
 Sancus loans                                         171               447
 Sancus Loans Limited loans                           23,693            6,196
 Total non-current Sancus loans and loan equivalents  23,864            6,643

 Current
 Sancus loans                                         2,790             4,269
 Sancus Loans Limited loans                           49,471            42,333
 Total current Sancus loans and loan equivalents      52,261            46,602

 Total Sancus loans and loan equivalents              76,125            53,245

 

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 2022      31 December 2021
                                   Level 2    Level 3    Level 2    Level 3
                                   £'000      £'000      £'000      £'000

 FinTech Ventures investments      -          -          -          500
 Derivative contracts              (398)      -          759        -
 Total assets at Fair Value        (398)      -          759        500

 

 

All of the FinTech Ventures investments are categorised as Level 3 in the fair
value hierarchy. In the past the Directors have estimated the fair value of
financial instruments using discounted cash flow methodology, comparable
market transactions, recent capital raises and other transactional data
including the performance of the respective businesses. Having considered the
terms, rights and characteristics of the equity and loan stock held by the
Group in the FinTech Ventures investments, the Board's estimate of liquidation
value of these assets is £Nil at 31 December 2022 (31 December 2021: £0.5m)
following a further £0.6m deployed into an existing investment during the
year and then subsequently being written down to £Nil. Changes in the
performance of these businesses and access to future returns via its current
holdings could affect the amounts ultimately realised on the disposal of these
investments, which may be greater or less than £Nil. There have been no
transfers between levels in the period (2021: None).

 

 

 

 FinTech Ventures investments

 31 December 2022                               Equity  Loans   Total
                                                £'000   £'000   £'000

 Opening fair value                             -       500     500
 New investments/divestments                    -       394     394
 Realised losses recognised in profit and loss  -       (894)   (894)
 Closing fair value                             -       -       -

 

 

 FinTech Ventures investments (continued)

 31 December 2021                              Equity  Loans   Total
                                               £'000   £'000   £'000

 Opening fair value                            -       -       -
 New investments/divestments                   (8)     74      66
 Realised gains recognised in profit and loss  8       426     434
 Closing fair value                            -       500     500

 

 

Assets at Amortised Cost

                                    31 December 2022  31 December 2021
                                    £'000             £'000
 Sancus loans and loan equivalents  76,125            53,245
 Trade and other receivables        4,736             4,196
 Cash and cash equivalents          4,134             12,436
 Total assets at amortised cost     84,995            69,877

 

Due to the relatively short-term nature of the above assets, their carrying
amount is considered to be the same as their fair value.

 

Liabilities at Amortised Cost

 

                                      31 December 2022  31 December 2021
                                      £'000             £'000
 ZDP Shares                           9,117             10,532
 Corporate Bond                       14,925            12,474
 Pollen Facility                      66,826            52,203
 Trade and other payables             2,698             2,656
 Provisions in respect of guarantees  413               -
 Total liabilities at amortised cost  93,979            77,865

 

Refer to Note 17 for further information on liabilities.

 

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 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 16 and of its debt in Note 17.

 

The Group and its subsidiaries (with the exception of Sancus Lending (UK)
Limited, which is regulated by the FCA) 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.

 

(2)   Liquidity risk

 

Prudent liquidity risk management implies maintaining sufficient cash and the
availability of funding through an adequate amount of committed credit
facilities to meet obligations when due. At the end of the reporting period
the group held cash of £4,134,000. The Group Treasury Committee monitors
rolling forecasts of the group's cash position in relation to its obligations
as they become due on a monthly basis. In addition, the group's liquidity
management involves projecting cash flows and considering the level of liquid
assets necessary to meet obligations. 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 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.

 

 Contractual maturities of financial liabilities  Within 12 months  Between 1 and 2 years  Between 2 and 5 years  Total
                                                  £'000             £'000                  £'000                  £'000
 31 December 2022
 ZDP shares                                       -                 -                      9,117                  9,117
 Corporate bond                                   -                 -                      14,925                 14,925
 Sancus Loans Limited                             -                 -                      66,826                 66,826
 Trade and other payables                         3,357             85                     67                     3,509
 Total liabilities                                3,357             85                     90,935                 94,377

 

 

 Contractual maturities of financial liabilities  Within 12 months  Between 1 and 2 years  Between 2 and 5 years  Total
                                                  £'000             £'000                  £'000                  £'000
 31 December 2021
 ZDP shares                                       10,532            -                      -                      10,532
 Corporate bond                                   -                 -                      12,474                 12,474
 Sancus Loans Limited                             -                 -                      52,203                 52,203
 Trade and other payables                         2,292             212                    152                    2,656
 Total liabilities                                12,824            212                    64,829                 77,865

 

(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 2022                      £'000                                £'000                             £'000
 Assets
 Sancus loans and loan equivalents     7,194                                68,931                            76,125
 Cash and cash equivalents             4,134                                -                                 4,134
 Total assets                          11,328                               68,931                            80,259

 

 Liabilities
 ZDP shares                      -       9,117     9,117
 Corporate Bond                  -       14,925    14,925
 Sancus Loans Limited            -       66,826    66,826
 Total liabilities               -       90,868    90,868
 Total interest sensitivity gap  11,328  (21,937)  (10,609)

 

                                       Floating rate Financial Instruments  Fixed Rate Financial Instruments  Total
 31 December 2021                      £'000                                £'000                             £'000
 Assets
 Sancus loans and loan equivalents     -                                    53,245                            53,245
 Cash and cash equivalents             12,436                               -                                 12,436
 Total assets                          12,436                               53,245                            65,681

 

 Liabilities
 ZDP shares                      -       10,532    10,532
 Corporate Bond                  -       12,474    12,474
 Sancus Loans Limited            -       52,203    52,203
 Total liabilities               -       75,209    75,209
 Total interest sensitivity gap  12,436  (21,964)  (9,528)

 

Interest rate sensitivities

 

The Group currently holds £4,134,000 in cash deposits, predominantly in
sterling. Whilst interest rates are currently positive they have, in the
recent past, gone negative in certain jurisdictions. At the current level of
cash deposits this could cost the group £41,000 per annum for every 1%
decrease in interest rates. The Group does not hold significant amounts in
foreign currencies for any period of time.

 

The 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. Historically investment risk primarily arose
from the Group's investment in its FinTech Ventures portfolio (see Note 3).
This risk was  in turn driven by the underlying risks taken by the platforms
themselves - their own strategic, liquidity, credit and operational risks.
Given that the Fintech portfolio is now held at £Nil the Group has no further
exposure to investment risk, but does still retain investments in a number of
Fintech companies.

 

The Group measures fair values of the Fintech Portfolio 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 Management Team with a view to establishing
the probable realisation value for such shares as at close of business on the
relevant valuation day.

 

All of the FinTech Ventures investments are categorised as Level 3 in the fair
value hierarchy. In the past the Directors have estimated the fair value of
financial instruments using discounted cash flow methodology, comparable
market transactions, recent capital raises and other transactional data
including the performance of the respective businesses. Having considered the
terms, rights and characteristics of the equity and loan stock held by the
Group in the FinTech Ventures investments, the Board's estimate of liquidation
value of these assets is £Nil at 31 December 2022 (31 December 2020: £0.5m)
following a further £0.6m investment into an existing investment during the
year and subsequently written down to £Nil. Changes in the performance of
these businesses and access to future returns via its current holdings could
affect the amounts ultimately realised on the disposal of these investments,
which may be greater or less than £Nil. There have been no transfers between
levels in the period (2021: None).

 

(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 direct lending to third party borrowers,
investing in loan funds, lending to associated platforms and loans arranged by
associated platforms.

 

The Group mitigates credit risk by only entering into agreements related to
loan instruments in which there is sufficient security held against the loans
or where the operating strength of the investee companies is considered
sufficient to support the loan amounts outstanding.

 

Credit risk is determined on initial recognition of each loan and re-assessed
at each reporting date. The risk assessment is undertaken by the Executive
Management Team at the time of the agreements, and the Executive Management
Team continues to evaluate the loan instruments in the context of these
agreements. Credit risk is categorised 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.

 

Credit risk is initially evaluated using the LTV, (LTGDV and LTF where
relevant) and the circumstances of the individual borrower. For the majority
of loans security takes the form of real estate. There has been no significant
change in the quality of this security over the prior year. When determining
credit risk macro-economic factors such as GDP, unemployment rates, the impact
of Covid19 on real estate and other relevant factors including the war in
Ukraine are also taken into account. A loan is considered to be in default
when there is a failure to meet the legal obligation of the loan agreement.
Having regards to 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. Once identified as
being in default a re-assessment of the credit risk of that loan will be
undertaken using the factors as noted above. A decision will then be made as
to whether to credit impair that asset.

 

In some instances borrowers will request loan modifications, extensions or
renegotiation of terms. Any such event will trigger a reassessment of the
credit risk of that loan where the reasons for the modification, extension or
renegotiation will be carefully assessed and may result in that asset being
credit impaired.

 

The entities in the Sancus Lending 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 Lending is secured. The credit
committee reports to the Sancus Lending Board on a quarterly basis.

 

Provision for ECL

 

A probability of default is assigned to each loan. This probability of default
is arrived at by reference to historical data and the ongoing status of each
loan which is reviewed on a regular basis. The loss given default is deemed to
be nil where LTV is equal to or less than 65%, as it is assumed that the asset
can be sold and full recovery made.

 

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

 

To reflect the time value of money ECL is discounted back to the reporting
date using the effective interest rate of the asset (or an approximation
thereof) that was determined at initial recognition.

 

The following tables provide information on amounts reserved for ECL on loans
and loan equivalents as at 31 December 2022 and 31 December 2021 based on the
model adopted by management.

 

 Sancus loans and loan              Stage 1   Stage 2  Stage 3  Total

 equivalents at 31 December 2022    £'000     £'000    £'000    £'000

 Closing loans at 31 December 2021  30,060    5,743    17,441   53,244
 New Loans                          48,986    -        421      49,407
 Loans Repaid                       (17,109)  (2,776)  (6,215)  (26,100)
 Transfers from Stage 1 to Stage 3  (5)       -        5        -
 Transfers from Stage 2 to Stage 3  -         (2,967)  2,967    -
 Movement in ECL                    -                  (426)    (426)
 Closing loans at 31 December 2022  61,932    -        14,193   76,125

 

 

 Loss allowance                              Stage 1  Stage 2  Stage 3  Total

 at 31 December 2022                         £'000    £'000    £'000    £'000

 Closing loss allowance at 31 December 2021  -        -        6,409    6,409
 Increase in provision                       -        -        426      426
 Closing loss allowance at 31 December 2022  -        -        6,835    6,835

 

 

For certain loans the range of outcomes for loss given default considered by
the Directors is significant and therefore has a material impact on the
calculation of ECL.

 

 Sancus loans and loan              Stage 1   Stage 2  Stage 3  Total

 equivalents at 31 December 2021    £'000     £'000    £'000    £'000

 Closing loans at 31 December 2020  41,972    4,047    7,213    53,232
 New Loans                          27,794    -        -        27,794
 Loans Repaid                       (17,640)  (4,578)  (3,273)  (25,491)
 Transfers from Stage 1 to Stage 2  (5,739)   5,739    -        -
 Transfers from Stage 1 to Stage 3  (16,247)  -        16,247   -
 Transfers from Stage 2 to Stage 3  -         (368)    368      -
 Loans written off                  (80)      -        -        (80)
 Movement in ECL                    -         903      (3,113)  (2,210)
 Closing loans at 31 December 2021  30,060    5,743    17,442   53,245

 

 

 Loss allowance                              Stage 1  Stage 2  Stage 3  Total

 at 31 December 2021                         £'000    £'000    £'000    £'000

 Closing loss allowance at 31 December 2020  -        903      3,296    4,199
 Transfers from Stage 2 to Stage 3           -        (37)     37       -
 Increase in provision                       -        -        3,076    3,076
 Utilisations                                -        (866)    -        (866)
 Closing loss allowance at 31 December 2021  -        -        6,409    6,409

 

 

 

Reconciliation of Provision for ECLs to charge in the statement of
comprehensive income

 

                                     Loans  Trade Debtors  Guarantees  Total

 Loss allowance at 31 December 2021  6,409  7,055          -           13,464
 Charge/(credit) for the year 2022   426    (421)          413         418
 Utilisations                        -      (141)          -           (141)
 Loss allowance at 31 December 2022  6,835  6,493          413         13,741

 

 

For certain loans the range of outcomes for loss given default considered by
the Directors is significant and therefore has a material impact on the
calculation of ECL.

 

(6) Market price risk

 

The Group has no exposure to market price risk of financial assets valued on a
Level 1 basis as disclosed earlier in this note.

 

(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. Investments made in
currencies other than Sterling are currently valued at £Nil and therefore
there is no exposure.

 

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

 

 Currency  31 December 2022  31 December 2021  31 December

                                                2020
 EUR       1.1284            1.1898            1.1202
 USD       1.2101            1.3527            1.3664

 

The Treasury Committee monitors the Group's currency position on a regular
basis, and the Board of Directors reviews it on a quarterly basis. Loans
denominated in Euros which are taken out through the Pollen facility are
hedged. Forward contracts to sell Euros at loan maturity dates are entered
into when loans are drawn in Euros. The following forward foreign exchange
contracts were open at the respective dates:

 

At 31 December 2022

 

 Counterparty                 Settlement date                      Buy Currency  Buy Amount £'000   Sell currency  Sell amount €'000    Unrealised loss £'000

 EWealthGlobal Group Limited  January 2023    to May 2023          GBP           3,565              Euro           4,187                (144)

 Liberum Wealth Limited       January 2023    to February 2023     GBP           3,202              Euro           3,650                (35)

 Lumon Risk Management        January 2023    to May 2023          GBP           9,259              Euro           10,676               (219)
 Unrealised loss on forward foreign contracts                                                                                           (398)

 

At 31 December 2021

 

 Counterparty                 Settlement date            Buy Currency  Buy Amount £'000   Sell currency  Sell amount €'000    Unrealised gain £'000

 EWealthGlobal Group Limited  February 2022 to May 2023  GBP           14,769             Euro           16,817               623

 Liberum Wealth Limited       February 2022              GBP           1,183              Euro           1,299                92

 Lumon Risk Management        April 2022 to              GBP           5,148              Euro           6,046                44

                              May 2023
 Unrealised gain on forward foreign contracts                                                                                 759

 

 

23.  RELATED PARTY TRANSACTIONS

 

Transactions with the Directors/Executive Management Team

 

Non-executive Directors

 

As at 31 December 2022, 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 2022      31 December 2021
                                         £                     £

 Tracy Clarke (appointed 8 March 2022)   35,000                -
 Steven Smith                            50,000                50,000
 John Whittle                            42,500                42,500
 Nick Wakefield (resigned 8 March 2022)  -                     35,000

 

On 9 March 2022 Tracy Clarke was appointed as a non-executive Director to the
Board. Tracy's directorships were listed in the RNS issued on 9 March 2022.

 

Tracy Clarke is a director of a number of Somerston Group companies. The
Somerston Group of companies collectively holds 294,644,553 ordinary shares in
the Company, representing 50.44 per cent of the current issued share capital.
From time to time, the Somerston Group may participate as a Co-Funder in
Sancus loans. Other than this and the Directors' fees and expenses in relation
to Tracy's (and previously Nick's) appointment as a Director of the Group, the
Group has not recorded any transactions with any Somerston Group companies for
the period ended 31 December 2022 (31 December 2021: none).

 

Total Directors' fees charged to the Company for the year ended 31 December
2022 were £127,500 (31 December 2021: £138,279) with £Nil (31 December
2021: £Nil) remaining unpaid at the year-end.

 

Executive Management Team

 

The Executive Management Team consisted of Rory Mepham, Emma Stubbs, James
Waghorn (appointed 8 March 2022) and Helen Trott (appointed 29 November 2022).
The Executive Management Team members' remuneration from the Company,
excluding all reasonable expenses incurred in the course of their duties which
were reimbursed by the Company, was as detailed in the table below:

 

                                                                         2022    2021
                                                                         £'000   £'000

 Aggregate remuneration in respect of qualifying service - fixed salary  512     598

 Aggregate amounts contributed to Money Purchase pension schemes         21      24

 Aggregate bonus paid (cash)                                             50      325

See remuneration report for further details. All amounts have been charged to
Operating Expenses.

 

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

 

The Directors and PDMRs had the following beneficial interests in the Ordinary
Shares of the Company:

 

               31 December 2022                                   31 December 2021
               No. of Ordinary Shares Held  % of Ordinary Shares  No. of Ordinary Shares Held  % of Ordinary Shares

 John Whittle  138,052                      0.03                  138,052                      0.03
 Emma Stubbs   1,380,940                    0.28                  1,380,940                    0.28
 Dan Walker    N/A                          N/A                   911,300                      0.19

 

 

During the year and prior year no directors received dividends on their
Ordinary Share holdings in the Company.

 

Mr Walker had an outstanding unsecured loan from Sancus Holdings (UK) Limited
in the amount of £31,053 at 31 December 2021 and 31 December 2020. This was
waived in January 2022. The loan was interest free and repayable on demand.

 

In addition to his Sancus salary Mr Waghorn also receives £35,000 p.a. from
Somerston Capital Limited as Managing Director of Healthcare & Development
for Somerston.

 

From time to time members of key management personnel participate as
co-funders in loans originated by the Group.

 

 

Transactions with connected entities

 

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

 

                                                       31 December 2022 £'000      31 December 2021

                                                                                   £'000
 Net receivable from/(payable to) related parties
 Sancus (IOM) Holdings Limited(1)                      N/A                         (16)
 Amberton Limited                                      (7)                         10

 Office and staff costs recharges

 Amberton Asset Management Limited(2)                  N/A                         18
 Amberton Limited                                      47                          9

( )

(1) Sancus Group sold its interest in Sancus Isle of Man during the year

(2)Amberton Asset Management Limited was liquidated in 2021 (being replaced by
Amberton Limited)

 

There is no ultimate controlling party of the Company.

24.  LEASES

 

The Group as Lessee

 

Maturity Analysis - contracted undiscounted cash flows

                                         31 December 2022 £'000   31 December 2021

                                                                  £'000

 Within one year                         247                      247
 In the second to fifth years inclusive  166                      413
 After five years                        -                        -
                                         413                      660

 

All lease commitments relate to office space.

 

Lease liabilities included in the statement of financial position

 

              31 December 2022 £'000   31 December 2021 £'000

 Current      212                      212
 Non-current  152                      364
              364                      576

 

Amounts recognised in the statement of comprehensive income

 

                                                       2022     2021

                                                       £'000    £'000

 Depreciation expense on right-of-use assets           197      190
 Interest expense on lease liabilities                 38       36
 Expense related to short term leases                  149      78
 Income received from sub-leasing right-of-use assets  33       60

 

 

25.  COMMITMENTS AND GUARANTEES

 

The Group's commitments and guarantees are described below.

 

Pollen Facility

 

Sancus Group has invested £13.2m (2021: £9.5m) of its own capital in Sancus
Loans Limited which sits in a 10% (£7.5m) first loss position as part of the
Pollen facility. Sancus has also provided Pollen with a guarantee capped at
£4m following the restructure of the facility in the year (previously was
capped at £2m) that it will continue to ensure the orderly wind down of the
Pollen related loan book, in the event of the insolvency of Sancus Group,
given its position as facility and security agent. Nothing has been provided
in the accounts for this (2021: £Nil).

 

Sancus Loan Notes

 

Loan Note 7 was launched in May 2021 and currently stands at £17.3m. Loan
Note 7 matures in May 2024 and has a coupon of 7% p.a. (payable quarterly),
with Sancus providing a 10% first loss guarantee.

 

Loan Note 8 was launched in January 2022 and currently stands at £3.0m. Loan
Note 8 matures on 1 December 2026 and has a coupon of 5% p.a. (payable
quarterly), with Sancus providing a 20% first loss guarantee.

 

Unfunded Commitments

 

As at 31 December 2022 the Group has unfunded commitments of £73.9m (31
December 2021: £47.3m). These unfunded commitments primarily represent the
undrawn portion of development finance facilities. Drawdowns are conditional
on satisfaction of specified conditions precedent, including that the borrower
is not in breach of its representations or covenants under the loan or
security documents. The figure quoted is the maximum exposure assuming that
all such conditions for drawdown are met. Directors expect the majority of
these commitments to be filled by Co-Funders.

 

26.  EVENTS AFTER THE REPORTING DATE

 

Sale of Sancus Lending (Gibraltar) Limited

 

On 15 March 2023, the Company announced the sale of Sancus Lending (Gibraltar)
Limited for £10,000 to Mr John Davey (the "Disposal"). As noted on 10 January
2023, in reviewing its operations in Gibraltar during 2022, the Company did
not identify sufficient quality lending opportunities to merit continued
efforts in the region and as a result the Goodwill (£8.64 million) was
consequently written down to nil.  The Disposal will result in cost savings
of around £200,000 in relation to run-off costs, plus the avoidance of
redundancies and associated expenses. In addition, it will allow the Company
to focus on its core markets of the UK, Ireland and Channel Islands.

 

27.  AVAILABILITY OF REPORT AND ACCOUNTS

 

The Company's annual report and accounts for the year ended 31 December 2022
is available to download from the Company's website at www.sancus.com
(http://www.sancus.com/)   . A copy of the report and accounts, together with
a notice for the Company's 2023 annual general meeting (the "AGM Notice"), is
expected to be posted to shareholders who have elected to receive hard copies
in April. The AGM Notice will also be available to download from the Company's
website in due course.

 

 

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