Litigation Cap. Mgmt - Final Results
20/09/2022 07:00
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RNS Number : 9357Z Litigation Capital Management Ltd 20 September 2022
20 September 2022
Litigation Capital Management Limited
(LCM or the Company)
Final Results 2022
Delivered improved underlying performance, maintained momentum across KPIs
while driving meaningful growth in fund management business
Litigation Capital Management Limited (AIM:LIT), a leading alternative asset
manager of disputes financing solutions, announces its audited financial
results for the year ended 30 June 2022 ("FY22").
Financials
· Gross profit of A$31.1m, up 17% (FY21: A$26.6m) inclusive of third party
interests and increased by 19% to A$30.9m exclusive of third party interests
· Adjusted operating profit of A$20.2m, up 23% (FY21:A$16.4m) inclusive of third
party interests and increased by 27% to $20.0m exclusive of third party
interests
· Statutory profit before tax A$10.7m, down 17% (FY21: A$12.9m) inclusive of
third party interests and was broadly in line with the prior year at A$12.9m
(FY21: A$13.1m) exclusive of third party interests
· Cash of A$50.0m at 30 June 2022 (A$29.3m exclusive of third party fund
consolidation)*
· Cash generated from the resolution of matters stood at $26.6m (FY21: $37.5m)
exclusive of third party interests
· Total equity of A$97.9m up 9% (FY21 A$90.1), exclusive of third party
interests
*exclusive of borrowings
KPIs
· Total assets under management grew 23% to A$414m (FY21: A$336m), increasing to
A$452m at 31 August 2022.
· 442 applications received. Whilst 23% down on FY21, commitment levels were
maintained reflecting higher quality applications
· Investment commitment of A$104m, inclusive of third party funds were broadly
in line with the prior year (FY21:A$109m)
· Total invested capital A$66.2m, inclusive of A$37.3m of third party fund
investment
· Cumulative 163% ROIC and IRR of 79% over the past 11 years inclusive of losses
Operations
· Global Alternative Returns Fund ("Fund I"), 100% committed with diversity
across jurisdictions, industry sector, claim type and capital commitment and
within the two year investment period
· Over two thirds of our targeted US$300m Global Alternative Returns Fund II
("Fund II") raised. Final close expected by the end of the calendar year.
· Strong growth in EMEA region and growth observed in competition claims, a
sector we have strong experience in
· Fund II commitments of A$55m demonstrating our continued ability to source
opportunities
· Recent change in newly elected government in Australia has resulted in a more
favourable environment for Class Actions
Outlook
· Greater access to capital through growing asset management business and
expansion of origination network across EMEA and APAC positions LCM
exceptionally well
· Expected increase in the number of applications as a result of the current
economic environment and an increase in the conversion rate over time as
experience of investment managers continues to develop
· Focus remains on long-term sustainable growth and delivering value by driving
performance and growing the Company's Funds management offering
Patrick Moloney, CEO of Litigation Capital Management, commented: "Reflecting
on the past year navigating the impacts of Covid related restrictions, I am
delighted with the growth achieved and particularly with the significant
progress in our asset management business and total assets under management
now at A$452m.
With our core executive team now based in the London office, much greater
access to capital and market conditions which are most conducive to increasing
demand for disputes funding, we are exceptionally well placed for the year
ahead."
An overview of the final results from Patrick Moloney, CEO is available to
watch here: https://bit.ly/LCMfy22 (https://bit.ly/LCMfy22)
The Annual Report is available at:
https://www.lcmfinance.com/shareholders/annual-reports-financial-reports/
(https://www.lcmfinance.com/shareholders/annual-reports-financial-reports/)
The Company's results presentation slides can be found here:
https://www.lcmfinance.com/shareholders/investor-presentations-results/
(https://www.lcmfinance.com/shareholders/investor-presentations-results/)
Enquiries
Litigation Capital Management c/o Alma PR
Patrick Moloney, Chief Executive Officer
Mary Gangemi, Chief Financial Officer
Canaccord (Nomad and Joint Broker) Tel: 020 7523 8000
Bobbie Hilliam
Investec Bank plc (Joint Broker) Tel: 020 7597 5970
David Anderson
Alma PR Tel: 020 3405 0205
Justine James LCM@almapr.co.uk (mailto:LCM@almapr.co.uk)
Kieran Breheny
NOTES TO EDITORS
Litigation Capital Management (LCM) is a global provider of disputes
finance. LCM provides capital and risk management services into the disputes
market including insolvency, commercial disputes, arbitral disputes, class
actions and corporate portfolios.
LCM has an unparalleled track record, driven by effective project selection,
active project management and robust risk management.
Current headquartered in Sydney, with offices in London, Singapore, Brisbane
and Melbourne, LCM listed on AIM in December 2018, trading under the ticker
LIT.
www.lcmfinance.com (http://www.lcmfinance.com/)
This announcement contains inside information for the purposes of article 7 of
the Market Abuse Regulation (EU) 596/2014 as amended by regulation 11 of the
Market Abuse (Amendment) (EU Exit) Regulations 2019/310. With the publication
of this announcement, this information is now considered to be in the public
domain.
Chairman's Statement
When I wrote this letter this past year, many parts of the world were still
dealing with effects and disruption caused by COVID 19. While the remarkable
success of the vaccine programs in many countries has allowed significant
progress to be made, a number of countries are clearly still dealing with the
continued effects of the virus and the personal and economic effects of the
pandemic.
This past year has witnessed continued uncertainty - humanitarian and economic
uncertainty, of course mainly driven by the war in Ukraine. We have seen
stresses in many financial indices and significant price disruption in the
commodity markets and a market re- evaluation of the US Dollar, among other
indices, which has risen by almost 20 percent over these past 18 months at the
time of writing. We have seen inflation at levels that were hardly believable
pre-pandemic. These are very significant economic events.
It is against this backdrop that we look ahead to the future of LCM. We are in
a changing world and a very uncertain world. It is inevitable that there will
be additional corporate restructurings, insolvencies and bankruptcies. LCM is
one of the most experienced litigation funders and I am pleased to see the
progress the company has made over this past year to position strongly for
this changing environment.
Our CEO Patrick Moloney relocated to London in the 4th quarter of 2021 - a
move planned to occur months earlier that was delayed by the global pandemic.
This is an important step for the company and one that underscores our belief
in the significant opportunities presented by the UK market and Continental
Europe. Our APAC team is highly experienced and many of our senior employees
have been with the company for an extended period of time. The combination of
a stronger London-based presence and a strong APAC presence positions the
company well for further market developments as litigation finance becomes
much more widely accepted not just as a litigation tool but one of appropriate
risk management.
Our performance continues to remain strong - although clearly the disruption
caused by the pandemic has caused more uncertainty in timing of certain
disputes. As a Board we remain committed to providing information to the
market on the most timely and relevant basis possible. The nature of our
business does mean that deal resolution announcements can be punctuated by
periods of quiet.
As we have discussed previously, LCM recognises revenue only when the service
conditions of the litigation funding agreement have been fully satisfied. This
is the most conservative valuation methodology and a direct contrast to a
number of other litigation funders who recognise revenue on what is called
fair value accounting. Fair value accounting uses current market values as the
basis for recognising certain assets and liabilities. This can prove
challenging in illiquid asset classes.
In the view of the Board, at this stage in the development of the litigation
funding industry, the clarity and conservative nature of our valuation
methodology is the most appropriate one for our investors. We are continuing
to focus on how we can provide further information to the market on the
strength of our underlying investments and this remains a priority for us.
To this end, I would encourage all shareholders, and potential shareholders,
to read the CEO's report for further information. Patrick has given detailed
parameters on the historical performance of our investments and their time to
maturity. LCM has a major advantage over a number of our competitors in that
it has been operational in the market for a much longer period of time than
many. It has the advantage to be able to look back on the performance
statistics over more than 4 cycles of investments with a total of 244
disputes. We are exceptionally pleased by our ratio of successes which is at
around 96 percent and we believe signals strong confidence in our future.
Over the past three years, the company has made a very important evolution as
it well known. This has been to develop our third-party asset management
business. We closed our first fund of US$150m in March 2020, a significant
achievement given the market volatility around the developing Covid news at
the time. Our second fund is in the final stages of closure - having raised
approximately two thirds of the targeted US$300m to date - and we are
expecting to complete a final close before the end of the calendar year.
The asset management business is the key part of the future of LCM given it
allows us to leverage our capital extremely effectively and build scale.
Equally pivotal is our capacity to originate deals of the highest calibre. We
are currently working to build out our origination business - particularly in
the UK and we expect to announce further key hires in this space in due
course.
We are encouraged by the interest expressed by many of our current blue-chip
investors to commit further investment as we continue to build our assets
under management and expect strong growth in this part of our business.
So, in conclusion, while the background has been a challenge over the past two
years, we believe we are now better positioned than at any previous time to
continue to develop scale in key areas, and particularly asset management. We
clearly continue to believe that interest and opportunities in litigation
funding will continue to grow as the market develops. We also believe that,
given this current point in the economic cycle, the opportunities for LCM will
remain strong.
Jonathan Moulds
Non-Executive Chairman
CEO Review
Introduction
The results for the year ended 30 June 2022 represents the first full year
results following my relocation to London in December 2021 as part of our
wider strategy to drive growth from our London office. This has brought our
core executive team together in one location.
The knowledge and experience of our London team, which services the UK and
Continental Europe, combined with my experience of the APAC region where
litigation finance originally developed, has provided us with an entirely
different perspective to our London based business. In particular, it has
allowed our UK business to draw on the experience of funding into the
insolvency and restructuring market, which is how the industry began in
Australia back in the late 1990's and early 2000's. We believe this is a
significant advantage given the prevailing market conditions.
LCM's greatest achievements during the FY22 financial period has been the
growth in its asset management business. That includes the launch of LCM's
second Fund targeting US$300 million and its substantial close through a
combination of existing investors. The development of LCM's second fund
fortifies LCM's strategy in moving into asset management.
FY22 in review
The end of FY22 saw LCM move from what we hope to be the end of Covid
restrictions into very uncertain economic times and therefore, a market of
opportunity for our skills and capital. We emerge into a high inflationary
period with central banks generally increasing official interest rates to
combat inflation. In addition, we have seen great disruption across markets
both as a consequence of Covid and the geopolitical risk consequent upon the
war in Ukraine. That has disrupted markets from food production through to
logistics and into supply.
Although we saw a decline in applications generally to 442 compared with 572
in the prior period, commitments remained stable with $104 million of
commitment for the fiscal year ending 30 June 2022 compared against $109
million during the prior year. This generally indicates that the quality of
applications is beginning to improve, which is pleasing given it is one of
LCM's longer term strategic objectives. In terms of application numbers and
commitments generally, we were very pleased to achieve that result given the
level of disruption to our normal business practices during the financial
period.
LCM launched its asset management business in late March 2020 with a close of
a US$150 million. We were pleased to have fully committed our first Fund
within the two year investment period, in line with the Fund mandate. This is
a great achievement despite the close coinciding with the onset of the Covid
pandemic and the disruption it caused across economies globally. The
commitment of Fund I allowed us to commence the marketing of our second Fund,
with a target size of US$300 million. We are pleased to have raised
approximately two thirds of the target size and expect to complete a final
close before the end of the calendar year. That gives LCM access to
incrementally larger capital resources than it has historically had, allowing
LCM to take advantage of the prevailing market conditions and generally the
increased demand for its capital.
In the context of growth generally, LCM has managed to build an asset
management business with approximately A$500 million under management in less
than 2.5 years. We have made strong progress in committing those funds to
quality investments, which should allow us to incrementally grow our asset
management business over time.
Overall LCM increased its assets under management from A$336 million at the
end of FY21 to A$414 million at the end of FY22. That continued year-on-year
growth is a testament to the resilience of LCM's business notwithstanding
considerable disruption. It places LCM to continue its growth strategy in much
more favourable market conditions.
Portfolio Update
LCM operates two business models; the first is asset management whereby LCM
acts as a fund manager investing in disputes and the second is a direct
investment model whereby LCM invests its balance sheet capital in disputes.
The two business models crossover and interact via a co-investment strategy.
LCM's balance sheet invests directly alongside fund investors in each
investment, typically with LCM's balance sheet investing 25% of each
investment and benefiting from all the economic upside generated by successful
dispute investments. Additionally, LCM receives, as a fund manager,
performance fees in respect of its asset management business.
Over a period of time the nature of LCM's business is changing. Currently, LCM
maintains a portfolio of historical direct investments where LCM has invested
100% of the capital commitment from its balance sheet capital, whereby LCM
benefits 100% of the economic upside with respect to those investments.
LCM's portfolio of 100% direct investments is very mature and we expect that a
significant number of those investments will mature in the short to medium
term. Over the short to medium term, LCM will see a transition from 100%
direct investments capital contribution to a co-investment model.
As previously mentioned, LCM commenced the raising of a second managed Fund.
It gave us great confidence that all the investors in Fund I increased their
investment level into Fund II.
In addition, LCM has commenced commitments into Fund II and as at the end of
August we have committed a total of 4 investments. We are encouraged by the
level of early commitments in to Fund II given the current market and believe
the additional capital gives LCM the ability to genuinely benefit from the
changing market conditions. The asset management model gives LCM far greater
access to capital and the ability to diversify LCM's balance sheet capital
across multiple investments through the co-investment model, well beyond what
could have been achieved purely utilising LCM's balance sheet as a capital
source.
Performance Metrics
LCM enjoys a number of benefits from being a pioneer in the litigation finance
industry.
The first lies in its long experience in funding disputes and determining
which disputes have the characteristics of an investment capable of generating
returns for investors. The second, which is to a large extent born out of our
experience, is a remarkably strong track record in terms of performance
metrics. It is those two factors together with others, which have enabled LCM
to attract the highest calibre institutional investors to participate in its
asset management business. LCM guards that track record zealously and strives
to maintain a very high level of investment performance.
Since LCM first listed in the public markets back in 2016, we have been
challenged on whether LCM will be able to maintain its remarkably strong track
record as we build in scale.
Whilst we should expect some pressure to be applied to our investment
performance metrics as we build in scale, given the level at which we
currently perform, there is significant room to move while still delivering
attractive returns. Our running performance metrics for the last 11 years
measuring every single completed investment, including losses, has generated
an investment internal rate of return of 79%. We have also achieved a return
on invested capital of 163%.
The average life of LCM's investments at the conclusion of the 11 year period
remains at 27 months. Over the past couple of years we have indicated to
investors that we generally expect the duration of investments to increase to
between 36 - 42 months.
The reason for that is twofold. Firstly, the effects of disruption consequent
upon the global pandemic. There is no do doubt that the global pandemic caused
significant delays to Court systems globally and also the arbitral process.
Those delays have been felt to a greater or lesser degree in different
territories. Whilst the majority of those delays have now ceased and indeed a
number of efficiencies created as a consequence of Covid and technology, there
will be a lengthening of any investments entered into within approximately 18
months prior to the global pandemic right through to investments entered into
during the current financial period. The reality is that the delays
experienced there will increase the time to conclusion or achieving a
liquidity event.
The second factor, which will have the tendency to increase the time necessary
for our investments to reach a conclusion, is their size and complexity. As
LCM has the benefit of larger pools of capital through its asset management
business, we are able to consider larger and more complex disputes. These
investments were not always available to us previously when we were working
with a smaller capital base, as they had a tendency to cause concentration
risk. We have always possessed the skill and experience to participate in
those larger disputes, but not always the capital. We are now able to
construct larger and more diversified portfolios of disputes lessening the
risk of capital loss. Naturally the motivations for a party to fight longer
and harder in a dispute concerning large amounts of money is obvious as people
fight longer and harder over larger sums. We have yet to see any elongation of
our investments to date.
LCM's high investment performance can be attributed to a number of factors.
The first is the rigor with which we undertake a due diligence and risk
management process. Both the factors taken into account and the process by
which that due diligence is undertaken, have been developed over our 24 year
history. It is a combination of both investment criteria and disciplined
process that we have been able to select which disputes are suitable for
investment and which are not. Our investment performance is in some ways a
direct reflection of that rigorous due diligence process. A second factor is
the level of monitoring that we undertake in respect of the dispute
investments which we manage post investment and through to a profitable
conclusion. It is the level of scrutiny that contributes towards LCM's
investment success and our performance metrics. It is also a testament to our
experienced and talented investment managers.
Our Win: Loss Ratio
Since LCM commenced its litigation finance business some 24 years ago, it has
completed 244 separate investments. That is, LCM has invested in 244 separate
disputes.
That represents a very significant pool of experience in an industry which is
relatively young. Of those 244 separate investments, LCM has suffered a
financial loss in respect of only 11. Again, that is a remarkably strong win
loss ratio. It represents a loss rate less than 5%. That strong metric is
again a direct reflection of the methodologies and systems developed by
LCM over the years to undertake an effective and rigorous due diligence
process in selecting those disputes which represent sound investments.
Of those 11 investments where LCM suffered a financial loss, it has only been
on 6 occasions where LCM's due diligence process has predicted the incorrect
result. That process, at its essence, is taking a given set of factual
circumstances applying the legal principles and predicting how a judge or
arbitrator would adjudicate the dispute. On six occasions, LCM has got that
exercise incorrect. That, of course, does not necessarily mean that LCM and
its investment managers were entirely incorrect after all, the adjudication of
large and complex disputes is not an exact science. It is open to human error,
which from time to time occurs. One only needs to give consideration to the
determination of appellate to know that the system is not infallible.
Notwithstanding LCM's strong track record in terms of wins and losses and the
performance metrics generated from the investments which we manage, the
resolution of disputes either through litigation or arbitration can be
inherently unpredictable. That unpredictable characteristic is also a factor
which complicates the market's desire for financial forecasting and guidance.
Notwithstanding all of those factors, LCM continues to improve its otherwise
rigorous due diligence processes and the criteria that we apply when
considering an application for finance and the potential outcome of a dispute.
It also drives us to ensure that we are diligent when it comes to monitoring
our investments through to a profitable outcome.
It is prudent to recognise that losses from dispute investments are a feature
of the investment class. Indeed, they are present across the track record of
all participants in the litigation finance industry. As the resolution of
disputes is not a precise or exact science, it is inevitable that losses will
occur from time to time. Given LCM's significant experience in the industry
combined with the robust and ever evolving processes and systems employed, we
expect that such losses will be infrequent and minimal consistent with our
track record to date.
Forecasting and guidance
The provision of financial forecasting and/ or guidance has been a vexed issue
for those litigation financers who are listed on the public markets. The issue
has been addressed in a number of ways. One way that some operators have dealt
with this issue is through fair value accounting. Through that mechanism,
public litigation financers have been able to recognise revenue and thus the
progress of their investments before they are actually realised, and the
resolution achieved. LCM has always adopted an exceptionally conservative view
towards revenue recognition. LCM has preferred to recognise investment revenue
once we have satisfied all of the conditions of the litigation funding
arrangement. That means we do not recognise the proceeds of a completed
investment until such time as they have crystalised and LCM can be satisfied
that they will be received within a short period. We do not fair value our
dispute investments prior to completion, nor do we recognise revenue on a fair
value basis.
That conservatism tends to create a revenue line punctuated by infrequent but
large inflows, a feature of LCM's revenue line since its inception.
Historically, more than 90% of investments have resolved through commercial
negotiation rather than the imposition of a Judgement or Award by a Court or
Arbitral Tribunal. That is, the parties to the litigation have negotiated a
commercial outcome. We encourage that approach and are very comfortable with a
high proportion of our investments being resolved in that fashion.
Despite LCM benefitting from being a pioneer in the litigation finance
industry and having a very strong record of accurately selecting disputes as
suitable investments, forecasting both the timing and quantification of an
individual commercial settlement is notoriously difficult. It involves
predicting not only the timing of a negotiated settlement between two third
party commercial participants, but also the quantum of that settlement.
Consequently, LCM has taken the view that we are unable to accurately or
responsibly provide forecasts of revenue to the market.
Additionally, LCM structures its underlying Litigation Finance Agreement as a
rising multiple of invested capital or rising percentage over time. Therefore,
in terms of the investment returns generated, it is often the case that the
longer the investment, the better the returns generated. For that reason, it
has never been a matter of concern whether an investment resolves on one side
or the other of a financial period. Equally, a delay is not seen as impacting
the performance of a particular single investment.
We are constantly endeavouring to provide information and data to the market
to enable investors and those analysts who cover our business to make informed
decisions about when investments are expected to be realised and what returns
they might generate. We hope that we continue to improve that information set
over time.
Strategy
Approximately three years ago, LCM began to develop a strategy with a view to
increasing the scale of its business. That strategy involved a change in both
mindset and in the way we operated our business. In executing that strategy,
LCM has changed its business from the use of its balance sheet capital to fund
litigation to establishing an asset management business specialising in
alternate and uncorrelated investments, being disputes.
The first steps in executing the strategy were to diversify LCM's capital
structure. That was done in two ways. First, the introduction of a
conservative amount of leverage against LCM's balance sheet, secondly, through
the establishment of LCM's asset management business. The execution of the
strategy commenced approximately 2.5 years ago and has progressed swiftly.
In particular, over the past financial period LCM has made considerable
headway with respect to its asset management business.
The diversification of LCM's capital structure, and in particular the
commencement of its asset management business, creates significant advantages
to LCM beyond simply allowing us to build scale. It reduces concentration
risk, aids in the smoothing of LCM's revenue line and leverages LCM's ability
to generate profits from its investment strategy utilising external capital
sources. With respect to risk, it allows LCM to invest its balance sheet
capital across a far wider portfolio of investments, thus defraying
concentration risks. It also permits LCM to generate revenue both directly
from its co-investment participation, but also by way of performance fees.
Additionally, it allows for the management of much larger portfolios of
disputes resulting in increased frequency of liquidity events having the
effect, over time, of smoothing LCM's revenue and increasing the frequency of
inflows. It also allows concentration risk from single investments to be
avoided through the structuring of much larger portfolios of disputes. We
believe all of those factors contribute to the acceleration of delivering
value and growth.
The structure of our asset management business provides LCM with the benefit
of a fee structure whereby LCM receives performance fees with respect to its
role as fund manager.
The structure for Fund I and Fund II allows LCM to receive a 25% share of
profits derived from fund investments over a hurdle rate of return of 8% up to
an IRR of 20%. Profits earned above a 20% IRR attract an outperformance fee
equivalent to 35% of the profits. Importantly, that profit participation
occurs at the conclusion of each investment as distinct from at the end of the
fund, providing exposure to performance returns throughout the life of the
Fund.
Another feature of our asset management business is the right of co-funding.
LCM enjoys a right to directly invest its balance sheet capital in each and
every investment that the asset management business participates in. That
allows LCM, as a direct investor, to enjoy the full economics derived from
each investment up to its right of participation as a co-investor.
That blend of returns generated from direct investments together with
performance fees provides a very robust business structure for LCM moving
forward. The raising of Funds I and II have firmly established LCM's asset
management business with overall funds under management of A$0.5 billion
inside 2.5 years. We are proud of that achievement.
Market and environment
Resilient Business Model and Operations
LCM's Business Model, and more particularly its investment strategies, operate
in all market conditions. That is to say whilst the demand for capital in the
litigation finance industry varies from market to market, it is ever present
whether economies are growing or contracting. With the current market
conditions exhibiting more of a challenging economic environment, demand for
LCM's capital will increase. To that extent, litigation finance as an industry
generally, operates somewhat countercyclically with an increased demand during
economic downturns. With economic headwinds as they currently are together
with significant uncertainty in global markets, we are seeing and expect to
continue to see, increased applications for finance.
We are also seeing an increased volume of applications and ultimately
investments coming from the insolvency and restructuring sector.
That position is consequent not only upon the prevailing economic conditions,
but also as a consequence of prohibitions on the winding up of insolvent
companies during the global pandemic. Effectively, during the two years when
global economies were most effected by the global pandemic, governments in the
territories in which we operated, prohibited insolvent companies being wound
up. Those prohibitions have recently been relaxed and as a consequence a
backlog of insolvency activity is ensuing. There is no doubt that increased
activity in insolvency and bankruptcy will lead to an increase in applications
coming from that sector.
Industry Regulation
LCM continues to monitor all jurisdictions and territories in which it
operates with respect to regulation or the potential for regulation. There
have been no other developments in those territories other than the commentary
above with respect to Australia. That said, those litigation financers who
operate globally, and in particular those who are subject to regulation
through the public markets, have indicated their support with respect to forms
of regulation when they have been raised. Ultimately, any form of regulation
that is introduced will favour the larger and more established litigation
financers such as LCM and will create further barriers to entry into the
litigation funding industry.
Outlook
It is with some relief that markets globally move on from the unprecedented
effects of the global pandemic. Markets now face the consequences of those
years. As described in more detail throughout this report the prevailing
conditions both economically and market driven, are incredibly conducive to
the use of litigation finance across all sectors. That is an increasing number
of insolvencies, bankruptcies and restructurings which are occurring in the
market will lead to a greater number of opportunities for investment in that
sector.
Additionally, the general sentiment driven by economic forces across the
middle market of disputes generally will see greater prevalence towards using
litigation finance, both as a capital tool and a risk management tool.
Finally, we are seeing prevailing conditions both economically and in terms of
market certainty favour large sophisticated and well capitalised corporates
considering the use of litigation finance, again as both a capital tool and a
tool for managing risk. Since LCM commenced its strategy for corporate
portfolio funding, the market conditions have never been more conducive to
that part of the market.
With increasing demand for litigation finance capital, LCM's greater access to
capital through its asset management business, and finally the expansion of
our origination network, LCM is exceptionally well placed to benefit from the
changing market conditions.
Patrick Moloney
Chief Executive Officer
Financial Review
During the year markets were confronted with the challenges brought about by
the geo- political landscape which created economic uncertainty and
volatility. As economies emerged from a tumultuous two and a half years
following the disruption caused by Covid, markets were faced with rising
interest rates, surging gas prices and the highest inflation experienced in
decades. Hospitality industries across the world have faced a number of
challenges resuming to pre-covid business levels and several industries
continue to experience disruption caused by various factors including
industrial action and chain supply shortages.
As a consequence of these uncertain conditions, economies across the world
will likely see an uplift in corporate and social disputes at a time when
businesses typically preserve capital for core. We have observed a 25% uplift
in applications in the second half of the fiscal year when compared to H1.
During the year LCM delivered meaningful growth across our key performance
metrics building scale and sustainable long term growth. Our first Fund of
US$150m is now fully committed across 26 projects and we have made significant
progress in building scale across our funds under management with Fund II
raising approximately two thirds of the targeted US$300 million from existing
investors. Commitments towards the second fund have commenced and we are
aiming for a final close of the targeted size before the end of the calendar
year. Our strong underwriting skills and investment selection expertise
continues to support our financial performance with our 11 year historical IRR
at 79% and 11 year ROIC of 163%. We experienced some delays in the resolution
of balance sheet matters but expect organic cash flows from these matters to
crystallise in the short to medium term, delivering meaningful profits in the
future.
Adjusted profit before tax inclusive of third party interests was A$20.2
million which was up 23% on the prior period. LCMs business benefits from
being counter-cyclical to the market, meaning we tend to observe an increased
demand for funding during times of economic uncertainty when companies
preserve capital for core business. Disputes are largely unaffected as courts
and tribunals will continue to operate and progress matters, despite changing
conditions in the wider market.
LCM standalone results
The performance of the business presented in the consolidated statement of
profit and loss and other comprehensive income, the consolidated statement of
financial position, the consolidated statements of changes in equity and the
consolidated statement of cash flows has been presented in accordance with the
Australian Accounting Standards ('AASB') and the International Financial
Reporting Standards ('IFRS').
AASB requires the consolidation of the Fund as LCM has exposure, or rights, to
variable returns from its co-investment with the Fund. Consequently, third
party interests have been consolidated in the financial statements.
Both Management and the Board believe that the Funds should be excluded from
the presentation of our financial performance to provide a clearer
understanding of the underlying performance attributable to LCM.
The tables following provide a full reconciliation of the consolidated
statement of comprehensive income and consolidated statement of financial
position so that investors are able to relate our performance discussion with
our financial report. Note that these are non-AASB measures and may not be
directly comparable with adjusted measures of other companies. They are not a
substitute for or replacement of AASB measures.
Income statement Note AASB as reported Fund LCM-only AASB as reported Fund LCM-only
30 June 2022 interests* 30 June 2022 30 June 2021 interests* 30 June 2021
$'000
$'000
$'000 $'000 $'000 $'000
Revenue from contracts with customers
Litigation service revenue 4 47,350 207 47,143 36,924 664 36,260
Performance fees 4 53 1 52 135 - 135
47,403 208 47,195 37,059 664 36,395
Litigation service expense (16,343) (81) (16,262) (10,439) (114) (10,325)
Gross profit 31,060 127 30,933 26,620 550 26,070
Other income - - - - - -
Interest income 1 - 1 4 - 4
Expenses
Employee benefits expense 6 (8,841) - (8,841) (8,396) - (8,396)
Depreciation expense 6 (65) - (65) (59) - (59)
Corporate expenses (3,599) - (3,599) (2,750) - (2,750)
Finance costs 6 (4,703) - (4,703) (1,334) - (1,334)
Fund administration expense 6 (3,169) (2,369) (800) (1,153) (685) (468)
Total expenses (20,377) (2,369) (18,008) (13,692) (685) (13,007)
Profit before income tax 10,684 (2,242) 12,926 12,932 (135) 13,067
Analysed as:
Adjusted operating profit 20,165 127 20,038 16,384 550 15,834
Non-operating expenses 6 (4,778) (2,369) (2,409) (2,118) (685) (1,433)
Finance costs 6 (4,703) - (4,703) (1,334) - (1,334)
Profit before income tax expense 10,684 (2,242) 12,926 12,932 (135) 13,067
Income tax expense 7 (4,040) - (4,040) (4,069) - (4,069)
Profit/(loss) after income tax expense for the period 6,644 (2,242) 6,644 8,863 (135) 8,998
Profit for the period is attributable to:
Third party interests in the Fund (2,242) (2,242) - (135) (135) -
Owners of Litigation Capital Management Limited 8,886 - 8,886 8,998 - 8,998
6,644 (2,242) 8,886 8,863 (135) 8,998
Other comprehensive income for the year, net of tax (2,535) (432) (2,103) (1,377) 105 (1,482)
Total comprehensive income for the period 4,109 (2,674) 6,783 7,486 (30) 7,516
* Third party interests.
** Non-operating expenses which includes items which are considered
unusual, non-cash or one-off in nature. Management have opted to separately
present these items as it better reflects the Group's core operations and
underlying performance
Reconciliation of adjusted profit is provided below:
AASB as reported AASB as reported
30 June 2022
30 June 2021
$'000
$'000
Statutory profit before tax 10,684 12,932
Add:
Transaction costs 401 174
Share-based payments (loan shares) 256 316
Provision for annual leave and long service leave 80 31
Non-recurring consultancy fees 183 358
Litigation fees 689 86
Finance costs 4,703 1,334
Third party fund costs 3,169 1,153
FY22 adjusted operating profit 20,165 16,384
Statement of financial position AASB as reported Fund interests** $'000 LCM-only AASB as reported Fund interests* $'000 LCM-only
30 June 2022
30 June 2021
$'000 30 June 2022
$'000 30 June 2021
$'000
$'000
Current assets
Cash and cash equivalents 49,964 20,711 29,253 49,736 14,210 35,526
Trade and other receivables 34,491 - 34,491 13,843 - 13,843
Contract costs 21,634 - 21,634 16,663 - 16,663
Other assets 614 (624) 1,238 616 (23) 639
Total current assets 106,703 20,087 86,616 80,858 14,187 66,671
Non-current assets
Contract costs 162,763 83,130 79,633 117,895 45,956 71,939
Property, plant and equipment 182 - 182 186 - 186
Intangible assets 646 - 646 391 - 391
Other assets 249 - 249 284 - 284
Total non-current assets 163,840 83,130 80,710 118,759 45,956 72,800
Total assets 270,543 103,217 167,326 199,614 60,143 139,471
Liabilities
Current liabilities
Trade and other payables 12,908 5,817 7,091 12,392 4,378 8,014
Borrowings 14,494 14,494 - 13,253 13,253 -
Employee benefits 700 - 700 452 - 452
Total current liabilities 28,102 20,311 7,791 26,097 17,631 8,466
Non-current liabilities
Deferred tax liability 11,513 - 11,513 7,543 - 7,543
Borrowings 54,915 - 54,915 37,171 - 37,171
Employee benefits 227 - 227 148 - 148
Third party interests in consolidated entities 81,780 86,794 (5,014) 39,764 43,725 (3,961)
Total non-current liabilities 148,435 87,694 61,641 84,626 43,725 40,901
Total liabilities 176,537 107,105 69,432 110,723 61,356 49,367
Net assets 94,006 (3,888) 97,894 88,891 (1,213) 90,104
* Elimination of third party interests in Fund I.
** Elimination of third party interests in Fund I and Fund II.
Cash flow
LCM cash generated from the resolution of matters during the period was $26.6
million, as compared to $37.5 million in FY21, this was primarily as a result
of resolutions materialising just before the financial year end. Payments
related to capital invested was $29.8 million, compared to the same prior
period in FY21 of $47.6 million. The following waterfall is exclusive of third
party fund interests.
The following financial and non-financial KPIs are measures we believe are
relevant to the performance of our business and reflect progress in the growth
of our assets under management, portfolio of investments and shareholder
value. During the year:
· investment commitment was A$104 million inclusive of third party funds,
decreasing marginally from A$109 million in FY21;
· the 11 year cumulative portfolio Internal Rate of Return (IRR) was 79%;
· 11 year cumulative portfolio Return on Invested Capital (ROIC) was 163%;
· applications received decreased to 442 from 572 in FY21 and decrease of 23%;
· gross profit increased by 17% to A$31.1 million from A$26.6 million;
· statutory profit before tax decreased by 17% to A$10.7 million from A$12.9
million. On an LCM only basis (excluding third party interests) profit before
tax was broadly in line with the prior year at A$12.9 million compared to
A$13.1 million in FY21; and
· adjusted operating profit increased by 23% to A$20.2 million from A$16.4
million in FY21 and increased by 27% to A$20.0 million compared to A$15.8
million in FY21 exclusive of third-party interests.
Revenue
Gross revenue increased by 28% to A$47.4 million during the period compared to
A$37.06 million in FY21. Litigation service expenses (investments in realised
disputes) increased by 57% to A$16.3 million during the period from $10.4
million in FY21, resulting in an increase of 16.7% in gross profit to $31.1
million from $26.6 million.
Litigation revenue Number of investments/projects Number of Litigation revenue Number of investments/projects Number of
30 June 2022
cases
30 June 2021
cases
$'000 $'000
Single cases - completed 43,557 4 4 24,860 1 1
Single cases - ongoing 1,397 6 6 444 4 4
Law firm portfolios - ongoing - - - 728 1 1
Corporate portfolios - ongoing 814 1 14 3,586 2 12
Insolvency - completed 1,567 2 2 5,022 5 5
Insolvency - ongoing 15 1 1 2,283 3 8
Other 53 1 1 136 2 1
Total 47,403 15 28 37,059 18 32
As illustrated in the table above, the variability of returns fluctuates
significantly between one investment and the next irrespective of the
investment type. The ability to accurately forecast profitability is
impracticable without the detail supporting the underlying data specific to
each matter. Each case is unique based on the investment type, duration to
completion, jurisdiction, cost and merits.
Litigation Litigation
revenue revenue
30 June 2022 30 June 2021
$'000 $'000
APAC 27,985 32,536
EMEA 19,418 4,523
Total 47,403 37,059
Revenue during the year increased by 28% to A$47.4 million when compared to
A$37.1 million the prior year.
Portfolio update
Capital invested during FY22 was $66.2 million, inclusive of $37.3 million of
third party fund investment, a decrease on FY21 which was
$88.0 million inclusive of $39.5 million of third party investments. LCMs
ability to originate investment opportunities and deploy capital is a measure
of its growth and future performance as the value of our future profits are
derived from the capital we deploy in our investments at the time a resolution
is achieved. We observed further delays in cases this year but this does not
indicate a loss but rather a shift from one period to the next. With delays,
often comes a ratchet increase in the multiple on invested capital deployed to
date, so delays in some circumstances will enhance our returns further.
Despite these delays, LCM continued to demonstrate its ability to maintain
progressive momentum year on year.
As at 30 June 2022 there were 24 direct balance sheet investments under
management, inclusive of 5 recoveries matters, and 25 ongoing investments
co-invested alongside Fund I and 2 matters in Fund II. Of the total 51
investments, 45 were unconditionally signed. As at 30 June 2021 there were 21
direct balance sheet investments and 20 investments co-invested alongside the
Fund. This comprised 44 unconditionally funded investments.
We continued to maintain diversity across our portfolio across industry
sector, jurisdiction and capital commitment, in line with LCM's investment
philosophy.
Financial performance
During the year we had two material investments move into future financial
periods.
The uncertainty of timing with respect to our portfolio of investments is
still present, however as we grow scale the impact this has on our financial
performance will become less significant. Delays should not be taken as a
direct shift of the matters into the following period as the collective
portfolio and timing of resolutions is continually assessed based on how
investments are progressing through either the court or arbitral cycle. The
performance of the business during the earlier stages of growth should be
reviewed alongside our key performance metrics which provide a more accurate
representation of the momentum achieved during the period.
The nature and complexity of the assets we invest in means they are subject to
external factors beyond LCMs control. We rely on our rigorous investment
selection process, extensive experience at inception of an investment and
active project management of the investments through to their completion,
however delays either through the court or tribunal, or awards and negotiated
settlements between parties can provide a myriad of possible outcomes for a
dispute. Despite this, LCM still delivered a strong set of results primarily
attributable to its 100% direct balance sheet portfolio. The Group's overall
gross revenue of A$47.4 million, inclusive of A$0.2 million of third party
fund revenue, was up 28% compared to A$37.1 million in the prior financial
period.
Gross profit of A$31.1 million, inclusive of A$0.1 million of third party fund
gross profit, represented an increase of 17% compared to A$26.6 million in
FY21.
The Group generated a statutory profit before tax of A$10.7 million, inclusive
of third party fund costs A$2.2 million representing a decrease of 17% on the
prior financial year. On a LCM stand-alone basis which excludes third party
costs, statutory profit before tax was A$12.9 million which was marginally
down by 1% on FY21 which was $13.1 million.
Operating expenses of $10.9 million increased by 6% compared to $10.2 million
in FY21. We expect to see an increase in operating costs as we expand, however
these are expected to remain in line relative to the size of the portfolio
under management.
Non-operating expenses of $4.8 million include; $2.4 million of costs related
to the third party funds which have been consolidated to comply with AASB
standards but are not attributable to LCM, $0.8 million of amortisation costs
related to placement fees; $0.2 million related to share-based expenses, $0.2
million related to non-recurring consultancy costs, $0.4m related to fund
costs attributable to LCM, $0.7million related to legal fees and $0.1 million
related to other expenses (see note 6).
We have made significant progress in building the foundations for sustainable
long-term growth through the launch of our second and larger Fund.
Finance costs
On 22 February 2021, the Company entered into a credit facility with Northleaf
Capital Partners to provide the Company with additional investment capital.
Northleaf is a global private markets investment firm, with experience in the
litigation finance sector. The Credit Facility, which is secured against LCM's
assets, is available for general corporate purposes, and has an overall term
of four years. The coupon comprises a LIBOR based rate of 8% per annum
together with a profit participation calculated by reference to the
profitability of LCM's direct investments. In all circumstances, the overall
cost of the facility is capped at 13% per annum. The Credit Facility can be
drawn down during the first two years of the facility. The facility otherwise
contains the usual financial covenants and reporting conditions of a facility
of this nature.
Dividend
The Board remains committed to returning to the payment of a dividend as a
matter of fiscal discipline. The ongoing uncertainty in global markets caused
by geo-political unrest continues to impact most sectors. As governments start
to look at measures to curb inflation, there is an expectation that the impact
will ricochet across several industries and will likely lead to an increase in
restructuring and insolvency related disputes. At this stage, the Board has
made the decision that no dividend will be paid, to preserve cash to meet any
increase in demand for investments in order to accelerate growth in our
portfolio.
The Board will continue to assess global market stability to determine the
appropriate level of dividend based on profitability, cash flows, growth and
available capital. Shareholders should not interpret the Board's current
stance as a change in policy relating to dividends.
Mary Gangemi
Chief Financial Officer
Consolidated statement of profit or loss and other comprehensive income
For the period ended 30 June 2022
Note Consolidated
2022 2021
$'000 $'000
Revenue from contracts with customers
Litigation service revenue 4 47,350 36,924
Performance fees 4 53 135
47,403 37,059
Litigation service expense (16,343) (10,439)
Gross profit 31,060 26,620
Other income -
Interest income 1 4
Expenses
Employee benefits expense 6 (8,841) (8,396)
Depreciation expense 6 (65) (59)
Corporate expenses (3,599) (2,750)
Finance costs 6 (4,703) (1,334)
Fund administration expense 6 (3,169) (1,153)
Total expenses (20,377) (13,692)
Profit before income tax expense 10,684 12,932
Analysed as:
Adjusted operating profit 20,165 16,384
Non-operating expenses 6 (4,778) (2,118)
Finance costs 6 (4,703) (1,334)
Profit before income tax expense 10,684 12,932
Income tax expense 7 (4,040) (4,069)
Profit after income tax expense for the period 6,644 8,863
Other comprehensive income
Items that may be subsequently reclassified to profit and loss:
Movement in foreign currency translation reserve (2,535) (1,377)
Total comprehensive income for the period 4,109 7,486
Profit for the period is attributable to:
Owners of Litigation Capital Management Limited 6,644 8,863
Non-controlling interest - -
6,644 8,863
Total comprehensive income for the period is attributable to:
Owners of Litigation Capital Management Limited 4,109 7,486
Non-controlling interest (19) -
4,090 7,486
Cents Cents
Basic earnings per share 14 6.28 8.46
Diluted earnings per share 14 6.09 7.95
The above Consolidated Statement of Profit or Loss and Other Comprehensive
Income should be read in conjunction with accompanying Notes to the Financial
Statements.
Consolidated statement of financial position
As at 30 June 2022
Consolidated
Note 2022 2021
$'000 $'000
Assets
Current assets
Cash and cash equivalents 8 49,964 49,736
Trade and other receivables 9 34,491 13,843
Contract costs 10 21,634 16,663
Other assets 614 616
Total current assets 106,703 80,858
Non-current assets
Contract costs 10 162,763 117,895
Property, plant and equipment 182 186
Intangible assets 646 391
Other assets 249 284
Total non-current assets 163,840 118,756
Total assets 270,543 199,614
Liabilities
Current liabilities
Trade and other payables 11 12,908 12,392
Borrowings 13 14,494 13,253
Employee benefits 12 700 452
Total current liabilities 28,102 26,097
Non-current liabilities
Deferred tax liability 7 11,513 7,543
Borrowings 13 54,915 37,171
Employee benefits 12 227 148
Third-party interests in consolidated entities 81,780 39,764
Total non-current liabilities 148,435 84,626
Total liabilities 176,537 110,723
Net assets 94,006 88,891
Equity
Issued capital 69,674 68,904
Reserves (2,339) (60)
Retained earnings 26,671 20,028
Parent interest 94,006 88,872
Non-controlling interest - 19
Total equity 94,006 88,891
The above Consolidated Statement of Financial Position should be read in
conjunction with accompanying Notes to the Financial Statements.
Consolidated statements of changes in equity
For the period ended 30 June 2022
Consolidated Issued Retained Share based Foreign Total Non- Total
capital earnings payments currency $'000 controlling equity
$'000 $'000 reserve translation interests $'000
$'000 $'000 $'000
Balance at 1 July 2020 68,830 11,165 1,001 - 80,996 19 81,015
Profit after income tax expense for the year - 8,863 - - 8,863 - 8,863
Other comprehensive income for the year, net of tax - - - (1,377) (1,377) - (1,377)
Total comprehensive income for the year - 8,863 - (1,377) 7,486 - 7,486
Equity Transactions:
Share-based payments - - 316 - 316 - 316
Contributions of equity 74 - 74 74
74 - 316 - 390 - 390
Balance at 30 June 2021 68,904 20,028 1,317 (1,377) 88,872 19 88,891
Consolidated Issued Retained Share based Foreign Total Non- Total
capital earnings payments currency $'000 controlling equity
$'000 $'000 reserve translation interests $'000
$'000 $'000 $'000
Balance at 1 July 2021 68,904 20,028 1,317 (1,377) 88,872 19 88,891
Profit after income tax expense for the year - 6,644 - - 6,644 - 6.644
Other comprehensive income for the year, net of tax - - - (2,535) (2,535) (19) (2,554)
Total comprehensive income for the year - 6,644 - (2,535) 4,109 (19) 4,090
Equity Transactions:
Share-based payments - - 256 - 256 - 256
Contributions of equity 770 - 770 770
770 - 256 - 1,026 - 1,026
Balance at 30 June 2022 69,674 26,672 1,573 (3,912) 94,006 - 94,006
The above Statement of Changes in Equity should be read in conjunction with
accompanying Notes to the Financial Statements.
Consolidated statements of cash flows
For the period ended 30 June 2022
Consolidated
Note 2022 2021
$'000 $'000
Cash flows from operating activities
Proceeds from litigation contracts - settlements, fees and reimbursements 26,641 37,508
Payments to suppliers and employees (41,804) (59,412)
Non-operating items paid (1,353) (649)
Interest received 14 4
Net payments made by third-party interests in consolidated entities (38,702) (33,995)
Net cash used in operating activities 15 (55,217) (56,544)
Cash flows from investing activities
Payments for property, plant and equipment (38) (14)
Payments for intangibles (278) (66)
Refunds of security deposits (19) 10
Net cash used in investing activities (335) (70)
Cash flows from financing activities
Proceeds from issue of shares 770 74
Proceeds from borrowings 13 13,298 63,153
Repayments of borrowings - (13,391)
Payments of finance costs (4,637) (2,546)
Payments of transaction costs related to third-party interests (1,853) (1,749)
Net contributions from third-party interests in consolidated entities 45,060 29,234
Payments for fund establishment & administration costs (778) (635)
Net cash from financing activities 51,859 74,140
Net (decrease)/increase in cash and cash equivalents (3,693) 17,525
Cash and cash equivalents at the beginning of the financial year 49,736 31,754
Effects of exchange rate changes on cash and cash equivalents 3,921 457
Cash and cash equivalents at the end of the financial year 8 49,964 49,736
The above Statement of Cash flows should be read in conjunction with
accompanying Notes to the Financial Statements.
Notes to the financial
statements
30 June 2022
Note 1 General Information
The financial statements cover Litigation Capital Management Limited (the
'Company') as a Group consisting of Litigation Capital Management Limited and
the entities it controlled at the end of, or during, the year (referred to as
the 'Group'). The financial statements are presented in Australian dollars,
which is Litigation Capital Management Limited's functional and presentation
currency.
Litigation Capital Management Limited was admitted onto the Alternative
Investment Market ('AIM') on 19 December 2018.
Litigation Capital Management Limited is a listed public company limited by
shares, incorporated and domiciled in Australia. Its registered office and
principal place of business is:
Level 12, The Chifley Tower
2 Chifley Square
Sydney NSW 2000
A description of the nature of the Group's operations and its principal
activities are included in the Directors' report, which is not part of the
financial statements.
The financial statements were authorised for issue, in accordance with a
resolution of Directors, on 20 September 2022. The Directors have the power to
amend and reissue the financial statements.
Note 2 Significant accounting policies
The principal accounting policies adopted in the preparation of the financial
statements are set out below. These policies have been consistently applied to
all the years presented, unless otherwise stated.
New or amended Accounting Standards and Interpretations adopted
The Group has adopted all of the new or amended Accounting Standards and
Interpretations issued by the Australian Accounting Standards Board ('AASB')
that are mandatory for the current reporting period.
Any new or amended Accounting Standards or Interpretations that are not yet
mandatory have not been early adopted.
The adoption of these Accounting Standards and Interpretations did not have
any significant impact on the financial performance or position of the Group.
Basis of preparation
These general purpose financial statements have been prepared in accordance
with Australian Accounting Standards and Interpretations issued by the
Australian Accounting Standards Board ('AASB') and the Corporations Act 2001,
as appropriate for for-profit oriented entities. These financial statements
also comply with International Financial Reporting Standards as issued by the
International Accounting Standards Board
('IASB').
Historical cost convention
The financial statements have been prepared under the historical cost
convention.
Critical accounting estimates
The preparation of the financial statements requires the use of certain
critical accounting estimates. It also requires management to exercise its
judgement in the process of applying the Group's accounting policies. The
areas involving a higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the financial statements, are
disclosed in note 3.
Parent entity information
In accordance with the Corporations Act 2001, these financial statements
present the results of the Group only. Supplementary information about the
parent entity is disclosed in note 22 of the annual report.
Principles of consolidation
The consolidated financial statements incorporate the assets and liabilities
of all subsidiaries of Litigation Capital Management Limited ('Company' or
'parent entity') as at 30 June 2022 and the results of all subsidiaries for
the year then ended. Litigation Capital Management Limited and its
subsidiaries together are referred to in these financial statements as the
'Group'.
The Group includes fund investment vehicles over which the Group has the right
to direct the relevant activities of the fund under contractual arrangements
and has exposure to variable returns from the fund investment vehicles. See
Note 24 of the annual
report.
Subsidiaries are all those entities over which the Group has control. The
Group controls an entity when the Group is exposed to, or has rights to,
variable returns from its involvement with the entity and has the ability to
affect those returns through its power to direct the activities of the entity.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. They are de-consolidated from the date that control
ceases.
Intercompany transactions, balances and unrealised gains on transactions
between entities in the Group are eliminated. Unrealised losses are also
eliminated unless the transaction provides evidence of the impairment of the
asset transferred. Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
The acquisition of subsidiaries is accounted for using the acquisition method
of accounting. A change in ownership interest, without the loss of control, is
accounted for as an equity transaction, where the difference between the
consideration transferred and the book value of the share of the
non-controlling interest acquired is recognised directly in equity
attributable to the
parent.
Non-controlling interest in the results and equity of subsidiaries are shown
separately in the statement of profit or loss and other comprehensive income,
statement of financial position and statement of changes in equity of the
Group. Losses incurred by the Group are attributed to the non-controlling
interest in full, even if that results in a deficit
balance.
Where the Group loses control over a subsidiary, it derecognises the assets
including goodwill, liabilities and non-controlling interest in the subsidiary
together with any cumulative translation differences recognised in equity. The
Group recognises the fair value of the consideration received and the fair
value of any investment retained together with any gain or loss in profit or
loss.
Operating segments
Operating segments are presented using the 'management approach', where the
information presented is on the same basis as the internal reports provided to
the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the
allocation of resources to operating segments and assessing their
performance.
Foreign currency translation
The financial statements are presented in Australian dollars, which is
Litigation Capital Management Limited's functional and presentation currency.
Foreign currency transactions
Foreign currency transactions are translated into the entity's 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 financial year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are
recognised in profit or loss.
Foreign operations
The assets and liabilities of foreign operations are translated into
Australian dollars using the exchange rates at the reporting date. The
revenues and expenses of foreign operations are translated into Australian
dollars using the average exchange rates, which approximate the rates at the
dates of the transactions, for the period. All resulting foreign exchange
differences are recognised in other comprehensive income through the foreign
currency reserve in equity.
The foreign currency reserve is recognised in profit or loss when the foreign
operation or net investment is disposed of.
Revenue recognition
The Group recognises revenue as follows:
Revenue from contracts with
customers
Revenue is recognised at an amount that reflects the consideration to which
the Group is expected to be entitled in exchange for transferring services to
a customer. For each contract with a customer, the Group: identifies the
contract with a customer; identifies the performance obligations in the
contract; determines the transaction price which takes into account estimates
of variable consideration and the time value of money; allocates the
transaction price to the separate performance obligations on the basis of the
relative stand-alone selling price of each distinct service to be delivered;
and recognises revenue when or as each performance obligation is satisfied in
a manner that depicts the transfer to the customer of the services
promised.
Variable consideration within the transaction price, if any, reflects the
variability of potential outcomes in awards or settlements of the litigation
and any other contingent events. Such estimates are determined using either
the 'expected value' or 'most likely amount' method. The measurement of
variable consideration is subject to a constraining principle whereby revenue
will only be recognised to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue recognised will not
occur. The measurement constraint continues until the uncertainty associated
with the variable consideration is subsequently resolved. Amounts received
that are subject to the constraining principle are recognised as a refund
liability.
Litigation service
revenue
The performance of a litigation service contract by the Group entails the
management and progression of the litigation project during which costs are
incurred by the Group over the life of the litigation project.
As consideration for providing litigation management services and financing of
litigation projects, the Group receives either a percentage of the gross
proceeds of any award or settlement of the litigation, or a multiple of
capital deployed, and is reimbursed for all invested capital.
Revenue, which includes amounts in excess of costs incurred and the
reimbursement for all invested capital, is not recognised as revenue until the
successful completion of the litigation project ie, complete satisfaction of
the performance obligation, which is generally at the point in time when a
judgement has been awarded or on an agreed settlement between the parties to
the litigation, and therefore when the outcome is considered highly probable.
On this basis, revenue is not recognised over time and instead recognised at
the point in time when the Group satisfies the performance obligation. Costs
includes only external costs of funding the litigation, such as solicitors'
fees, counsels' fees and experts' fees.
The terms and duration of each settlement or judgement varies by litigation
project. Payment terms are not defined by the Group's litigation contracts
however upon successful completion of a litigation project, being the
satisfaction of the single performance obligation, funds are generally paid
into trust within 28 days. The funds will remain in trust until the
distribution amounts have been determined and agreed by the relevant parties,
after which payment will be received by the Group.
Performance fees
"Performance fees are derived from the management of litigation projects under
externally financed financing arrangements and governed by the agreement with
external investors. Performance fees are recognised at the point in time when
a judgement has been awarded or a settlement agreement has been agreed on the
litigation projects.
Interest
Interest income is recognised as interest accrues using the effective interest
method. This is a method of calculating the amortised cost of a financial
asset and allocating the interest income over the relevant period using the
effective interest rate, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial asset to the
net carrying amount of the financial
asset.
Income
tax
The income tax expense or benefit for the period is the tax payable on that
period's taxable income based on the applicable income tax rate for each
jurisdiction, adjusted by the changes in deferred tax assets and liabilities
attributable to temporary differences, unused tax losses and the adjustment
recognised for prior periods, where
applicable.
Deferred tax assets and liabilities are recognised for temporary differences
at the tax rates expected to be applied when the assets are recovered or
liabilities are settled, based on those tax rates that are enacted or
substantively enacted, except
for:
· When the deferred income tax asset or liability arises from the
initial recognition of goodwill or an asset or liability in a transaction that
is not a business combination and that, at the time of the transaction,
affects neither the accounting nor taxable profits;
or
· When the taxable temporary difference is associated with interests in
subsidiaries, associates or joint ventures, and the timing of the reversal can
be controlled and it is probable that the temporary difference will not
reverse in the foreseeable future.
· Deferred tax assets are recognised for deductible temporary
differences and unused tax losses only if it is probable that future taxable
amounts will be available to utilise those temporary differences and
losses.
The carrying amount of recognised and unrecognised deferred tax assets are
reviewed at each reporting date. Deferred tax assets recognised are reduced to
the extent that it is no longer probable that future taxable profits will be
available for the carrying amount to be recovered. Previously unrecognised
deferred tax assets are recognised to the extent that it is probable that
there are future taxable profits available to recover the
asset.
Deferred tax assets and liabilities are offset only where there is a legally
enforceable right to offset current tax assets against current tax liabilities
and deferred tax assets against deferred tax liabilities; and they relate to
the same taxable authority on either the same taxable entity or different
taxable entities which intend to settle
simultaneously.
Litigation Capital Management Limited (the 'head entity') and its wholly-owned
Australian subsidiaries have formed an income tax consolidated group under the
tax consolidation regime. The head entity and each subsidiary in the tax
consolidated group continue to account for their own current and deferred tax
amounts. The tax consolidated group has applied the 'separate taxpayer within
group' approach in determining the appropriate amount of taxes to allocate to
members of the tax consolidated group.
In addition to its own current and deferred tax amounts, the head entity also
recognises the current tax liabilities (or assets) and the deferred tax assets
arising from unused tax losses and unused tax credits assumed from each
subsidiary in the tax consolidated
group.
Assets or liabilities arising under tax funding agreements with the tax
consolidated entities are recognised as amounts receivable from or payable to
other entities in the tax consolidated group. The tax funding arrangement
ensures that the intercompany charge equals the current tax liability or
benefit of each tax consolidated group member, resulting in neither a
contribution by the head entity to the subsidiaries nor a distribution by the
subsidiaries to the head entity.
Current and non-current
classification
Assets and liabilities are presented in the statement of financial position
based on current and non-current
classification.
An asset is classified as current when: it is either expected to be realised
or intended to be sold or consumed in the Group's normal operating cycle; it
is held primarily for the purpose of trading; it is expected to be realised
within 12 months after the reporting period; or the asset is cash or cash
equivalent unless restricted from being exchanged or used to settle a
liability for at least 12 months after the reporting period. All other assets
are classified as non-current.
A liability is classified as current when: it is either expected to be settled
in the Group's normal operating cycle; it is held primarily for the purpose of
trading; it is due to be settled within 12 months after the reporting period;
or there is no unconditional right to defer the settlement of the liability
for at least 12 months after the reporting period. All other liabilities are
classified as non-current.
Deferred tax assets and liabilities are always classified as
non-current.
Cash and cash
equivalents
Cash and cash equivalents includes cash on hand, deposits held at call with
financial institutions, other short-term, highly liquid investments with
original maturities of three months or less that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of
changes in value.
Trade and other receivables
Trade receivables are initially recognised at fair value and subsequently
measured at amortised cost using the effective interest method, less any
allowance for expected credit losses. Trade receivables generally do not have
a specifically defined time frame for settlement, additionally, when the
receivable is due from part of the portfolio of litigation projects, the
settlement of the receivable is generally made upon an additional resolution
of another litigation project within the portfolio which also may not be
within a specifically defined time frame.
The Group has applied the simplified approach to measuring expected credit
losses, which uses a lifetime expected loss allowance. To measure the expected
credit losses, trade receivables have been grouped based on days
overdue.
Contract
costs
Contract costs are recognised as an asset when the Group incurs costs in
fulfilling a contract and when all the following are met: (i) the costs relate
directly to the contract; (ii) the costs generate or enhance resources of the
Group that will be used to satisfy future performance obligations; and (iii)
the costs are expected to be recovered. Contract costs are non-financial
assets for impairment purposes. Contract costs are amortised upon complete
satisfaction of the performance obligation. Refer to the Group's revenue
recognition policy for further
information.
Leases
Lease payments on short-term leases and leases of low-value assets are
recognised as an expense on a straight-line basis over the lease term. The
short-term lease recognition exemption applies to those leases that have a
lease term of 12 months or less from the commencement date. It also applies to
leases over assets that are considered of low value.
Impairment of non-financial
assets
Non-financial assets are reviewed for impairment at each reporting date and
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recognised for the amount by
which the asset's carrying amount exceeds its recoverable
amount.
Recoverable amount is the higher of an asset's fair value less costs of
disposal and value-in-use. The value-in-use is the present value of the
estimated future cash flows relating to the asset using a pre-tax discount
rate specific to the asset or cash-generating unit to which the asset belongs.
Assets that do not have independent cash flows are grouped together to form a
cash-generating unit.
Trade and other
payables
These amounts represent liabilities for goods and services provided to the
Group prior to the end of the financial year and which are unpaid. Due to
their short-term nature they are measured at amortised cost and are not
discounted. The amounts are unsecured and are usually paid within 30 days of
recognition.
Borrowings
Borrowings are initially recognised at fair value net of transaction costs
incurred. Subsequent to initial recognition, borrowings are stated at
amortised cost. The borrowings are classified as current liabilities unless
the Group has an unconditional right to defer settlement of the liability for
at least 12 months after the balance date.
Employee benefits
Short-term employee
benefits
Liabilities for wages and salaries, including non-monetary benefits, annual
leave and long service leave expected to be settled wholly within 12 months of
the reporting date are measured at the amounts expected to be paid when the
liabilities are settled.
Other long-term employee
benefits
The liability for annual leave and long service leave not expected to be
settled within 12 months of the reporting date are measured at the present
value of expected future payments to be made in respect of services provided
by employees up to the reporting date. Consideration is given to expected
future wage and salary levels, experience of employee departures and periods
of service. Expected future payments are discounted using market yields at the
reporting date on high quality corporate bonds with terms to maturity and
currency that match, as closely as possible, the estimated future cash
outflows.
Defined contribution superannuation
expense
Contributions to defined contribution superannuation plans are expensed in the
period in which they are incurred.
Share-based
payments
Equity-settled share-based compensation benefits are provided to
employees.
Equity-settled transactions are awards of shares, or options over shares, that
are provided to employees in exchange for the rendering of
services.
The cost of equity-settled transactions are measured at fair value on grant
date. Fair value is determined using either the Monte Carlo or Black-Scholes
option pricing model that takes into account the exercise price, the term of
the option, the impact of dilution, the share price at grant date and expected
price volatility of the underlying share, the expected dividend yield and the
risk free interest rate for the term of the option, together with non-vesting
conditions that do not determine whether the Group receives the services that
entitle the employees to receive payment. No account is taken of any other
vesting conditions.
The cost of equity-settled transactions are recognised as an expense with a
corresponding increase in equity over the vesting period. The cumulative
charge to profit or loss is calculated based on the grant date fair value of
the award, the best estimate of the number of awards that are likely to vest
and the expired portion of the vesting period. The amount recognised in profit
or loss for the period is the cumulative amount calculated at each reporting
date less amounts already recognised in previous periods.
Market conditions are taken into consideration in determining fair value.
Therefore any awards subject to market conditions are considered to vest
irrespective of whether or not that market condition has been met, provided
all other conditions are satisfied.
If equity-settled awards are modified, as a minimum an expense is recognised
as if the modification has not been made. An additional expense is recognised,
over the remaining vesting period, for any modification that increases the
total fair value of the share-based compensation benefit as at the date of
modification.
If the non-vesting condition is within the control of the Group or employee,
the failure to satisfy the condition is treated as a cancellation. If the
condition is not within the control of the Group or employee and is not
satisfied during the vesting period, any remaining expense for the award is
recognised over the remaining vesting period, unless the award is
forfeited.
If equity-settled awards are cancelled, it is treated as if it has vested on
the date of cancellation, and any remaining expense is recognised immediately.
If a new replacement award is substituted for the cancelled award, the
cancelled and new award is treated as if they were a modification.
Fair value measurement
When an asset or liability, financial or non-financial, is measured at fair
value for recognition or disclosure purposes, the fair value is based on the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date;
and assumes that the transaction will take place either: in the principal
market; or in the absence of a principal market, in the most advantageous
market.
Fair value is measured using the assumptions that market participants would
use when pricing the asset or liability, assuming they act in their economic
best interests. For non-financial assets, the fair value measurement is based
on its highest and best use. Valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to measure fair
value, are used, maximising the use of relevant observable inputs and
minimising the use of unobservable inputs.
Assets and liabilities measured at fair value are classified into three
levels, using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. Classifications are reviewed at each
reporting date and transfers between levels are determined based on a
reassessment of the lowest level of input that is significant to the fair
value measurement.
For recurring and non-recurring fair value measurements, external valuers may
be used when internal expertise is either not available or when the valuation
is deemed to be significant. External valuers are selected based on market
knowledge and reputation. Where there is a significant change in fair value of
an asset or liability from one period to another, an analysis is undertaken,
which includes a verification of the major inputs applied in the latest
valuation and a comparison, where applicable, with external sources of
data.
Financial assets and liabilities at amortised
cost
Financial assets and liabilities held at amortised cost includes third party
interests in consolidated entities and portfolio costs. Financial assets and
liabilities are initially recognised at fair value, net of transaction costs.
They are subsequently measured at amortised cost using the effective interest
method, less any allowances for expected credit losses.
Issued
capital
Ordinary shares are classified as
equity.
Incremental costs directly attributable to the issue of new shares or options
are shown in equity as a deduction, net of tax, from the
proceeds.
Dividends
Dividends are recognised when declared during the financial year and no longer
at the discretion of the Company.
Earnings per
share
Basic earnings per
share
Basic earnings per share is calculated by dividing the profit attributable to
the owners of Litigation Capital Management Limited, excluding any costs of
servicing equity other than ordinary shares, by the weighted average number of
ordinary shares outstanding during the financial year, adjusted for bonus
elements in ordinary shares issued during the financial
year.
Diluted earnings per
share
Diluted earnings per share adjusts the figures used in the determination of
basic earnings per share to take into account the after income tax effect of
interest and other financing costs associated with dilutive potential ordinary
shares and the weighted average number of shares assumed to have been issued
for no consideration in relation to dilutive potential ordinary
shares.
Goods and Services Tax ('GST') and other similar
taxes
Revenues, expenses and assets are recognised net of the amount of associated
GST, unless the GST incurred is not recoverable from the tax authority. In
this case it is recognised as part of the cost of the acquisition of the asset
or as part of the
expense.
Receivables and payables are stated inclusive of the amount of GST receivable
or payable. The net amount of GST recoverable from, or payable to, the tax
authority is included in other receivables or other payables in the statement
of financial
position.
Cash flows are presented on a gross basis. The GST components of cash flows
arising from investing or financing activities which are recoverable from, or
payable to the tax authority, are presented as operating cash
flows.
Commitments and contingencies are disclosed net of the amount of GST
recoverable from, or payable to, the tax authority.
Third-party interests in consolidated entities
Non-controlling interests where the Group does not own 100% of a consolidated
entity are recorded as third-party interests in consolidated entities.
Third-party interests in consolidated entities are classified as financial
liabilities and are initially recognised at the fair value, net of transaction
costs. They are subsequently measured at amortised cost using the effective
interest method. Amounts included in the consolidated statement of financial
position represent the net asset value of the third-parties'
interests.
Rounding of
amounts
The Company is of a kind referred to in Corporations Instrument 2016/191,
issued by the Australian Securities and Investments Commission, relating to
'rounding-off'. Amounts in this report have been rounded off in accordance
with that Corporations Instrument to the nearest thousand dollars, or in
certain cases, the nearest
dollar.
Note 3 Critical accounting judgements, estimates and
assumptions
The preparation of the financial statements requires management to make
judgements, estimates and assumptions that affect the reported amounts in the
financial statements. Management continually evaluates its judgements and
estimates in relation to assets, liabilities, contingent liabilities, revenue
and expenses. Management bases its judgements, estimates and assumptions on
historical experience and on other various factors, including expectations of
future events, management believes to be reasonable under the circumstances.
The resulting accounting judgements and estimates will seldom equal the
related actual results. The judgements, estimates and assumptions that have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities (refer to the respective notes) within the next
financial year are discussed below.
Key
judgements
Revenue from contracts with
customers
The entity's active involvement in litigation service contracts to achieve a
successful resolution for the client is the predominant purpose of the service
provided and accordingly the litigation funding contracts are within the scope
of AASB 15 'Revenue from Contracts with Customers', and so are excluded from
the scope of AASB 9 'Financial Instruments' which would require the
recognition of a financial asset for each contract, measured at fair
value.
Performance obligations and recognition of revenue
In the provision of litigation management services and financing of litigation
projects, management has determined that there is a single performance
obligation and that complete satisfaction of that performance obligation
occurs at the point in time when the Group achieves a successful resolution
for the client as it is the predominant purpose of the service provided. On
this basis, revenue is not recognised over time and only recognised at the
point in time when the Group satisfies that performance obligation.
Consolidation of entities in which the Group holds less than 100% of
interests
The Group has assessed the entities in which it has an interest to determine
whether or not control exists and the entity is, therefore, consolidated into
the Group (refer note 23 of the annual report). Where the Group does not own
100% of interests, the Group makes judgements to determine whether to
consolidate the entity in question by applying the factors set forth in AASB
10, including but not limited to the Group's equity and economic ownership
interest, the economic structures in use in the entity, the level of control
the Group has over the entity through the entity's structure or any relevant
contractual agreements, and the rights of other investors.
Significant estimates and
assumptions
Deferred tax assets includes an amount relating to carried-forward tax losses
in Australia. The Group only recognises the deferred tax asset if it is
probable that future taxable amounts of the Group's business in Australia will
be available to utilise those losses and therefore they are assessed as
recoverable (refer to note 7). The tax losses can be carried forward
indefinitely and have no expiry date.
Impairment of non-financial assets other than goodwill
The Group assesses impairment of non-financial assets other than goodwill at
each reporting date, and whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable, by evaluating conditions
specific to the Group and to the particular asset that may lead to impairment.
This includes evaluating the expected outcome pursuant to the contracts,
including consideration of whether each individual litigation contract is
likely to result in a successful outcome, the cost and timing to completion
and the ability of the defendant to pay the settlement or award. If an
impairment trigger exists, the recoverable amount of the asset is determined.
This involves value in use calculations, which incorporate a number of key
estimates and assumptions (refer note 10).
Note 4 Revenue
Consolidated
2022 2021
Major service lines $'000 $'000
Litigation service revenue
Revenue attributable to LCM 47,143 36,260
Attributable to third party interests 207 664
47,350 36,924
Performance fees 53 135
47,403 37,059
Geographical regions
Australia 27,984 32,536
United Kingdom 19,419 4,523
47,403 37,059
Contract duration
Less than 1 year - 1,043
1-4 years 43,407 35,834
More than 4 years 3,996 182
47,403 37,059
Note 5 Segment information
The Group's operating segments are based on the internal reports that are
reviewed and used by the Board of Directors (who are identified as the Chief
Operating Decision Makers ('CODM')) in assessing performance and in
determining the allocation of
resources.
The Directors have determined that there is one operating segment. The
information reported to the CODM is the consolidated results of the Group. The
segment result is as shown in the statement of profit or loss and other
comprehensive income. Refer to statement of financial position for assets and
liabilities.
Major customers
During the year ended 30 June 2022 there was three major external customer
(2021: 1 customers, unrelated to that in 2022) where revenue exceeded 10% of
the consolidated revenue. Revenue from these customers for the year ended 30
June 2022 amounted to $18,401,000, $13,670,000, and $7,951,000 (2021:
$24,860,000).
Note 6 Profit before
tax
Consolidated
2022 2021
$'000 $'000
Profit before income tax expense includes the following specific expenses:
Employee benefits expense
Salaries & wages 7,337 7,205
Directors' fees 390 380
Superannuation and pension 254 277
Share based payments expense 256 316
Other employee benefits & costs 604 218
8,841 8,396
Depreciation
Plant and equipment 41 39
Intangible assets 24 20
65 59
Finance costs
Interest on borrowings (note 13) 4,376 1,235
Other finance costs 327 99
4,703 1,334
Fund administration expense
Finance costs 553 387
General administration expenses 327 9
Set-up expenses 1,489 289
Amortisation of transaction costs 800 468
3,169 1,153
Fund administration expenses relates to costs associated with the setup and
administration of the LCM Global Alternative Returns Fund which are wholly
attributable to the third party interest in consolidated entities.
Leases
Short-term lease payments 639 541
Adjusted operating profit
Adjusted operating profit excludes non-operating expenses which includes items
which are considered unusual, non-cash or one-off in nature.
Non-operating expenses
Management have opted to separately present these items as it better reflects
the Groups underlying performance. Non-operating expenses includes the
following
items:
Share based payments expense 256 316
Consultancy 183 358
IPO and other transaction costs 401 174
Litigation fees 689 86
Other expenses 80 31
Fund administration expenses 3,169 1,153
Total non-operating expenses 4,778 2,118
Note 7 Income tax expense
Consolidated
2022 2021
$'000 $'000
Numerical reconciliation of income tax expense and tax at the statutory rate
Profit before income tax expense 10,684 12,932
At the Group's statutory income tax rate of 25% (2021: 26%) 2,671 3,362
Tax effect amounts which are not deductible/(taxable) in calculating taxable
income:
Foreign tax rate adjustments (16) (29)
Share-based payments 64 82
Other assessable income 98 127
Other non-deductible expenses - 35
Unrealised foreign exchange - 93
Change in tax rate 662 12
Adjustment for tax effect of loss attributable to third party interests 561 -
Adjustment in respect of deferred tax of previous years - 387
4,040 4,069
Adjustment to deferred tax balances as a result of change in statutory tax
rate
Income tax expense / (benefit) 4,040 4,069
Statutory tax rate of 25% is applicable to Australian entities with aggregated
turnover below $50 million for the period ended 30 June 2022. The Group's
turnover is expected to be above the threshold of $50 million in the future
reporting periods which will attract a statutory tax rate of 30%. As a result,
recognition of deferred tax asset is made by applying a 30% statutory rate
instead of the lower 25% tax rate.
Consolidated
2022 2021
$'000 $'000
Deferred tax asset/(liability)
Deferred tax asset/(liability) comprises temporary differences attributable
to:
Tax losses 12,880 14,596
Employee benefits 279 185
Accrued expenses 255 79
Contract costs - litigation contracts (25,195) (22,938)
Transaction costs on share issue 268 535
Deferred tax asset/(liability) (11,513) (7,543)
Movements:
Opening balance (7,543) (3,559)
Charged to profit or loss (3,970) (3,984)
Closing balance (11,513) (7,543)
Note 8 Cash and cash equivalents
Consolidated
2022 2021
$'000 $'000
Cash at Bank 29,253 35,526
Cash of third-party interests in consolidated entities 20,711 14,210
49,964 49,736
Cash of third-party interests in consolidated entities is restricted as it is
held within the fund investment vehicles on behalf of the third-party
investors in these vehicles. The cash is restricted to use cashflows in the
litigation contracts made on their behalf and costs of administering the fund.
Note 9 Trade and other receivables
Consolidated
2022 2021
$'000 $'000
Due from litigation service(1) 27,893 8,267
Due from litigation service - portfolios(2) 6,452 5,576
Other receivables 146 -
34,491 13,843
1 Receivables relate to the recovery of litigation projects that have
successfully completed which may not have a specified time frame for
settlement
2 Receivables which form part of a portfolio of litigation projects and
settlement of the receivable can be made upon an additional resolution of
another litigation project within the portfolio which may not be within a
specified contractual due date
Allowance for expected credit losses
The Group has recognised a loss of $nil (2021: $nil) in profit or loss in
respect of the expected credit losses for the year ended 30 June
2022.
Note 10 Contract costs - litigation contracts
Consolidated
2022 2021
$'000 $'000
Contract costs - litigation contracts 184,397 134,558
Reconciliation of litigation contract
costs
Reconciliation of the contract costs (current and non-current) at the
beginning and end of the current period and previous financial year are set
out
below:
Consolidated
2022 2021
$'000 $'000
Opening balance 134,558 62,518
Additions during the period 28,927 48,495
Additions during the period made by third-party interests 37,255 39,539
Litigation service expense - successful contracts(1) (16,343) (10,439)
Litigation service expense - write down(2) - (4)
Other contract costs reimbursed - successful contracts(1) - (5,551)
Closing balance 184,397 134,558
1 Contract costs amortised upon the successful resolution of the litigation
contract
2 Due diligence costs written off upon determining that the litigation
contract would not be pursued further
Third-party interests in contract assets
Contract costs (current and non-current) associated with interests of third
parties in the entities which are consolidated in the consolidated statement
of financial position is set out below:
2022 2021
$'000 $'000
Attributable to owners of LCM 101,267 88,602
Third-party interests 83,130 45,956
Consolidated total 184,397 134,558
Consolidated
2022 2021
$'000 $'000
Current 21,634 16,663
Non Current 162,763 117,895
184,397 134,558
Impairment
considerations
The recoverable amount of the Group's contract costs has been determined by a
value in use calculation using a discounted cash flow model, based on cash
flow projections and financial budgets as approved by management for the life
of each litigation contract.
Key assumptions were used in the discounted cash flow model for determining
the value in use of litigation contracts:
· The estimated cost to complete a litigation contract is budgeted,
based on estimates provided by the external legal advisors handling the
litigation;
· The value to the Group of the litigation contract, once completed, is
estimated based on the expected settlement or judgement amount of the
litigation and the fees due to the Group under the litigation contract;
· The discount rate applied to the cash flow projections is based on
the Group's weighted average cost of capital and other factors relevant to the
particular litigation contract. The discount rate applied was 15% (2021:
15%).
Based on the above, the Group has recognised impairment losses of $nil (2021:
$nil) in profit or loss on contract costs for the year ended 30 June 2022.
Note 11 Current liabilities - trade and other
payables
Consolidated
2022 2021
$'000 $'000
Trade payables 12,562 11,655
Distribution payable - 32
Tax payable 68 84
Other payables 278 621
12,908 12,392
Refer to note 16 of the annual report for further information on financial
instruments.
Note 12 Current and non-current liabilities - Employee
benefits
Consolidated
2022 2021
$'000 $'000
Current
Annual Leave 700 452
700 452
Non-current
Long Service Leave 227 148
Note 13 Borrowings
Consolidated
2022 2021
$'000 $'000
Current
Borrowings of third-party interests in consolidated entities 14,494 13,253
14,494 13,253
Non-current
Borrowings 54,915 37,171
54,915 37,171
Reconciliation of borrowings of third-party interests in consolidated Consolidated
entities:
2022 2021
$'000 $'000
Balance 1 July 13,253 -
Proceeds from borrowings - 26,782
Repayment of borrowings - (13,391)
Net accrued interest 17 18
Payments for borrowing costs (185) (354)
Amortisation of borrowing costs 230 281
Other non-cash items 1,178 (83)
Balance as at 30 June 14,494 13,253
On 8 September 2020 the Group entered into a multicurrency revolving credit
facility with Raiffeisen Bank International AG for an aggregate amount of
USD$30,000,000 (the "Facility"). The Facility carries interest of LIBOR or
equivalent plus margin of 2.2% p.a. and was available for period of 364 days
from the date of the agreement. As at 30 June 2022, the Group's outstanding
utilisation amounted to USD$10,000,000 and was due for repayment on 9
September 2022.
Reconciliation of borrowings of LCM: Consolidated
2022 2021
$'000 $'000
Balance 1 July 37,171 -
Proceeds from borrowings 13,298 36,371
Payments for borrowing costs (259) (1,134)
Amortisation 919 247
Other non-cash items 3,786 1,687
Balance as at 30 June 54,915 37,171
On 22 February 2021 the Group entered into a credit facility with Northleaf
Capital Partners for an aggregate amount of US$50,000,000, AUD equivalent of
$72,519,000(1) (the "Facility"). The Facility carries interest of a LIBOR or
equivalent based rate of 8 per cent together with a profit participation
calculated by reference to the profitability of a defined category of the
Group's investments, and a non-utilisation margin of 1 per cent for the first
two years. The overall cost of the Facility is capped at 13% per annum. The
Facility is available to be drawn down during the first two years, has an
overall term of four years and is secured against the Group's assets. As at 30
June 2022, the Group's outstanding utilisation amounted to US$10,000,000, an
AUD equivalent of $14,504,000(1).
The Group agreed to various debt covenants including a minimum effective net
tangible worth, borrowings as a percentage of effective net tangible worth,
minimum liquidity, a minimum consolidated EBIT and a minimum multiple of
invested capital on concluded contract assets over a specified period. There
have been no defaults or breaches related to the Facility during the year
ended 30 June 2022. Should the Group not satisfy any of these covenants, the
outstanding balance of the Facility may become due and payable.
The Group incurred costs in relation to arranging the Facility of $1,393,000
which were reflected transactions costs and will be amortised over the 4 year
term of the borrowings. As at 30 June 2022, $968,000 of the loan arrangement
fees remained outstanding.
(1) Converted at the functional currency spot rates of exchange at the
reporting date
Note 14 Earnings per share
Consolidated
2022 2021
$'000 $'000
Profit after income tax 6,644 8,863
Non-controlling interest 19 -
Profit after income tax attributable to the owners of Litigation Capital 6,663 8,863
Management Limited
Number Number
Weighted average number of ordinary shares used in calculating basic earnings 106,015,738 104,706,722
per share
Adjustments for calculation of diluted earnings per share:
Amounts uncalled on partly paid shares and calls in arrears 1,229,103 2,144,431
Options over ordinary shares 2,140,866 4,693,686
Weighted average number of ordinary shares used in calculating diluted 109,385,707 111,544,839
earnings per share
Cents Cents
Basic earnings per share 6.28 8.46
Diluted earnings per share 6.09 7.95
Dilutive potential shares which are contingently issuable are only included in
the calculation of diluted earnings per share where the conditions are met.
Note 15 Reconciliation of cash flows
Reconciliation of profit after income tax to net cash from operating
activities:
Consolidated
2022 2021
$'000 $'000
Profit/(loss) after income tax expense for the year 6,644 8,863
Adjustments for:
Depreciation and amortisation of intangibles 284 342
Amortisation of finance costs 327 99
Share-based payments 256 316
Fund administration expenses 800 468
Interest reclassified to financing activities 4,710 176
Other non-cash including exchange rate movements (739) (265)
Change in operating assets and liabilities:
Increase in contract costs - litigation contracts (88,020) (72,040)
Decrease/(increase) in trade and other receivables (22,074) 1,455
(Decrease)/increase in trade and other payables 1,095 (135)
Increase in deferred tax liabilities 3,970 3,985
(Increase)/decrease in prepayments 22 (189)
Increase/(decrease) in employee benefits 327 107
Increase/(decrease) in third party consolidated interests 37,181
Increase/(decrease) in other liabilities - 274
Net cash from operating activities (55,217) (56,544)
Cash and non-cash movements in Third-party interests in consolidated
entities are shown below:
Consolidated
2022 2021
$'000 $'000
Balance 1 July (39,764) (12,600)
Proceeds (45,060) (29,234)
Payments 778 635
Other non-cash items 2,266 1,435
Balance as at 30 June (81,780) (39,764)
Note 16 Events after the reporting period
In the Directors' opinion, no matter or circumstance has arisen since the end
of the financial year, that has significantly affected, or may significantly
affect, the operations of the Group, the results of those operations, or the
state of affairs of the Group in future
years.
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