Litigation Cap. Mgmt - Half-year Report
14/03/2023 07:00
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RNS Number : 8224S Litigation Capital Management Ltd 14 March 2023
14 March 2023
Litigation Capital Management Limited
("LCM" or the "Company")
Interim results for the half year ended 31 December 2022
Highlights
• Fund II Capital commitment at A$79m as at 31 December 2022 and A$114m as at 28
February 2023. Fund I fully committed
· Assets under Management (AuM) increased to A$506m by 31 December 2022 with
further commitments in Fund II bringing our AuM to A$537m at 28 February 2023
· Overall Capital commitments were up significantly on the same prior year
period at A$107m
· 162 applications reviewed, made up of better quality, larger and more complex
cases, with expectations of enhanced returns from these cases
· Capital invested during the period increased from A$31.5m to A$56.9m
· Total revenue A$3.0m with a further A$22.5m recognised post the period end
· Adjusted loss for the period A$5.5m reflecting conservative revenue
recognition. Post balance sheet resolutions would have increased LCM only
performance to an adjusted operating profit of A$6.3m
Post period events and outlook
· Post Year End first successful settlement from a Fund I co-investment,
generating ROIC of 278% for LCM's balance sheet contribution and expected to
contribute A$6.3m to gross profit
· Post Year End successful settlement on one of LCM's 100% direct balance sheet
investments which was an Australian class action contributing approximately
A$5.8m to gross profit
(Capital commitment means the total estimated budget of an investment)
Commenting on the results, Patrick Moloney, CEO of Litigation Capital
Management, said: "I am pleased we have continued to make progress on our Fund
Management business, which has the potential to bring superior returns to LCM,
as demonstrated by the first successful settlement from a Fund I investment,
producing favourable outcomes both for the Fund and our balance sheet."
"Building on the increased levels of commitments in the period, we expect more
investment opportunities to present themselves, in part due to the counter
cyclical nature of our business, and as moratoriums against insolvency and
restructuring disputes are relaxed. Our track record shows we are well
positioned to capitalise on these opportunities, wherever they present
themselves in the world."
LCM will be hosting a webinar for investors today at 11.00 a.m. The
presentation is open to all existing and potential shareholders. If you would
like to attend this presentation, please register using the following link:
https://www.investormeetcompany.com/litigation-capital-management-limited/register-investor
(https://www.investormeetcompany.com/litigation-capital-management-limited/register-investor)
A webinar presentation for analysts will take place at 9.00am. Analysts
wishing to attend should contact lcm@tavistock.co.uk to register.
The accompanying results presentation is available on LCM's website:
https://www.lcmfinance.com/shareholders/investor-presentations-results/
(https://www.lcmfinance.com/shareholders/investor-presentations-results/)
The Interim Financial Report is available at:
https://www.lcmfinance.com/shareholders/annual-reports-financial-reports/
(https://www.lcmfinance.com/shareholders/annual-reports-financial-reports/)
Enquiries
Litigation Capital Management c/o Tavistock 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
Tavistock PR Tel: 020 7920 3150
Tim Pearson lcm@tavistock.co.uk
Katie Hopkins
Simon Hudson
NOTES TO EDITORS
Litigation Capital Management (LCM) is an alternative asset manager
specialising in disputes financing solutions internationally, which operates
two business models. The first is direct investments made from LCM's permanent
balance sheet capital and the second is third party fund management. Under
those two business models, LCM currently pursues three investment strategies:
Single-case funding, Portfolio funding and Acquisitions of claims. LCM
generates its revenue from both its direct investments and also performance
fees through asset management.
LCM has an unparalleled track record driven by disciplined project selection
and robust risk management.
Currently 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)
Chief Executive's Statement
Progress on Fund management business
We enter 2023 with confidence having made substantive progress in our asset
management business with our AuM growing to A$0.5 billion. We have observed
significantly improved performance across our key metrics which are an
indicator of long-term sustainable growth, building out our portfolio for the
future.
As previously announced, we have now fully committed our US$150m Global
Alternative Returns Fund ("Fund I"), (allocated to investments) with
approximately 60% of that capital deployed, demonstrating our ability to put
capital to work. The resolution of our first traditional investment from Fund
I has reinforced the economic benefit of our Funds management model, yielding
a 278% return on invested capital (ROIC) to LCM and a 90% ROIC to Fund
Investors.
Commitments in our Global Alternative Returns Fund II ("Fund II") now comprise
A$114m of investments. We have observed a significant increase in the demand
for our capital in recent months with commitments at A$107m for the six months
ended 31 December 2022 compared to A$104m for the full year ended 30 June
2022.
Over the past two years the Company has transitioned from a 100% direct
investment model, where LCM funded 100% from balance sheet capital, into a
Funds Management model. This model enables us to leverage third party capital
to co-invest in larger and more diversified portfolios of investments. The
structure of our Funds management model ensures we maintain a disciplined
approach to investing capital as it aligns LCM's interests with those of third
party investors at the same time as enhancing returns to LCM based on the
performance of those underlying investments. This enables LCM to deliver
disciplined and sustainable long-term growth to both our Fund and equity
investor base. As demonstrated from the resolution of the Carillion matter,
this model is generating enhanced returns which in turn generate larger pools
of organic cash to be reinvested in a more diversified portfolio of
investments.
Investment performance
The underlying performance of the business continues to strengthen. We remain
focussed on building our Funds Management business and developing a model that
delivers sustainable growth. This is best measured by the growth of our Assets
under Management combined with the performance of those investments. The
funding of disputes involves longer than usual investment periods.
Historically our investments have taken on average 27 months to complete and
don't typically yield linear returns year-on-year. Consequently, the
performance of the business in any given six or twelve month period does not
accurately reflect the underlying performance of the business which is
exacerbated further as investment cycles lengthen due to the complexity and
size of the underlying investment. Our ability to continue to deliver strong
return metrics on our investments is a better measure of performance as it
reinforces the strength of our investment selection process and the likelihood
of generating positive returns on assets under management.
Notwithstanding the H1 results, two resolutions subsequent to the half year
period ended 31 December 2022 delivered revenue of A$22.5m and gross profit of
approximately A$12m. This combined with disciplined cost management, clearly
demonstrates how the timing of resolutions, in such a short period, can
significantly impact reported performance.
Progress on our portfolio of investments:
Direct investments
· Two investments have been successful at first instance, one of which is
subject to an appeal which was heard in February 2023 and the other is subject
to a challenge as announced on 23 February 2023
· One investment was unsuccessful at first instance but is subject to a
challenge
· Awaiting a judgment or award in three further investments
· Final hearings scheduled for three further investments in 2023 calendar year
Fund I
· Fund I fully committed across 26 investments (two terminated after due
diligence), two resolved, one of which resolved in FY22
· Successful conclusion in the Carillion investment contributing approximately
A$6.3m to gross profit in H2
· Two Fund I investments successful at final hearing (awaiting outcomes of
appeal/additional issues)
· One Fund I class action investment has had a partial resolution through
settlement
· Six further Fund I investments have had final hearings and are awaiting an
award/judgment
· Two further Fund I investments have final hearing dates scheduled in 2023
Fund II
· As at March 2023 there are 10 investments in Fund II with two terminated after
further due diligence
· A number of further potential investments are close to being finalised
Market outlook
A combination of Covid disruption, high inflation, increasing interest rates,
geo-political disruption, supply and logistics disruption and economic risks
are both increasing the number of global disputes and placing pressure upon
capital allocation for those disputes. Economic uncertainty generally
increases pressure on internal legal spend and Internal legal counsel are
exploring alternative ways to achieve their funding requirements which are
increasing the demand for funding. We are observing an increase in insolvency
and restructuring with online and high street retailers amongst the first to
suffer with some recent big name collapses. Additionally, there is a rising
number of cases related to shareholder mis-selling, fraud and competition
claims which are also driving the demand for LCM's capital.
Business update
The strength of our team is critical to our success and our ability to deliver
value for investors. Over the past year we have focussed on building a highly
motivated team globally. We have strengthened our UK office with the addition
of Fiona Heyes who joins the London office as Head of Underwriting - EMEA and
Timothy Mayer who joins as a Senior Investment Manager for EMEA. Both Fiona
and Timothy are regarded as highly experienced litigation finance
professionals in the London market. Additionally we welcome Daniel Kinnear to
lead our global Corporate Origination strategy. Daniel brings more than 20
years of experience across various areas of risk management and finance gained
within Investment Banking.
In APAC we welcome Alice Pailthorpe and Carolina Carlstedt. Alice joined LCM's
Sydney office as an Investment Manager. Alice specialised in Disputes &
Regulatory Investigations at a Senior Associate level at Allens Linklaters and
as a Solicitor at Gilbert and Tobin. Carolina Carlstedt joins LCM as an
Investment Manager based in LCM's Singapore office. Carolina is a Hong Kong
and English law qualified international arbitration lawyer with significant
experience of handling a broad range of commercial disputes with a particular
specialisation in construction and engineering matters.
Our strongest and most experienced team to date are well positioned to ensure
the successful delivery of value to our shareholders and fund investors
Patrick Moloney
Chief Executive Officer
14 March 2023
Consolidated Statement of Profit or Loss and other Comprehensive Income
For the six months ended 31 December 2022
Unaudited six months
ended 31 December
Note 2022 2021
$'000 $'000
Revenue from contracts with customers
Litigation service revenue 3 4,699 19,321
Portfolio revenue - -
Performance fees 3 - -
4,699 19,321
Litigation service expense (3,558) (5,444)
Gross profit 1,141 13,878
Other income - -
Interest income 5 -
Expenses
Employee benefits expense 5 (4,759) (5,134)
Depreciation & amortisation expense 5 (80) (28)
Corporate expenses (2,441) (1,721)
Finance costs 5 (3,736) (2,222)
Fund administration expense 5 (1,061) (730)
Total expenses (12,077) (9,835)
(Loss)/profit before income tax expense (10,931) 4,043
Analysed as:
Adjusted operating (loss)/profit (5,521) 7,525
Non-operating expenses 5 (1,674) (1,260)
Finance costs (3,736) (2,222)
(Loss)/profit before income tax expense (10,931) 4,043
Income tax benefit/(expense) 6 3,434 (1,420)
(Loss)/profit after income tax expense for the period (7,497) 2,623
Other comprehensive income for the period, net of tax (1,273) 364
Total comprehensive income for the period (8,770) 2,987
(Loss)/profit for the period is attributable to:
Owners of Litigation Capital Management Limited (7,497) 2,623
(7,497) 2,623
Total comprehensive income for the period is attributable to:
Owners of Litigation Capital Management Limited (8,770) 2,987
(8,770) 2,987
Cents Cents
Basic earnings per share 14 (7.03) 2.47
Diluted earnings per share 14 (7.03) 2.30
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 31 December 2022
Consolidated
Note Unaudited Audited
31 December 30 June
2022 2022
$'000 $'000
Assets
Current assets
Cash and cash equivalents 7 33,399 49,964
Trade and other receivables 8 20,413 34,491
Contract costs 9 31,527 21,634
Other assets 513 614
Total current assets 85,852 106,703
Non-current assets
Contract costs 9 206,204 162,763
Property, plant and equipment 185 182
Intangible assets 376 646
Other assets 492 249
Total non-current assets 207,257 163,840
Total assets 293,109 270,543
Liabilities
Current liabilities
Trade and other payables 13,209 12,908
Borrowings 10 - 14,494
Employee benefits 637 700
Total current liabilities 13,846 28,102
Non-current liabilities
Deferred tax liability 6 7,346 11,513
Borrowings 10 56,063 54,915
Employee Benefits 268 227
Third-party interests in consolidated entities 13 130,041 81,780
193,718 148,435
Total liabilities 207,564 176,537
Net assets 85,545 94,006
Equity
Issued Capital 11 69,674 69,674
Reserves (3,304) (2,339)
Retained Earnings 19,175 26,671
Parent interest 85,545 94,006
Total equity 85,545 94,006
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 31 December 2022
Consolidated Issued Retained earnings Share based
capital $'000 payments Foreign Non-
$'000 reserve currency controlling Total
$'000 translation Total interests equity
$'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 period - 2,623 - - 2,623 - 2,623
Other comprehensive income for the period - - - 364 364 (19) 345
Total comprehensive income for the period - 2,623 - 364 2,987 (19) 2,968
Equity Transactions:
Share-based payments (Note 15) - - 86 86 - 86
Contributions of equity (Note 11) 770 - - - 770 - 770
770 - 86 - 856 - 856
Balance at 31 December 2021 69,674 22,651 1,403 (1,013) 92,715 - 92,715
Consolidated Issued Retained earnings Share based
capital $'000 payments Foreign Non-
$'000 reserve currency controlling Total
$'000 translation Total interests equity
$'000 $'000 $'000 $'000
Balance at 1 July 2022 69,674 26,672 1,573 (3,912) 94,006 - 94,006
Loss after income tax expense for the period - (7,497) - - (7,497) - (7,497)
Other comprehensive income for the period - - - (1,273) (1,273) - (1,273)
Total comprehensive income for the period - (7,497) - (1,273) (8,770) - (8,770)
Equity Transactions:
Share-based payments (Note 15) - - 308 - 308 - 308
- - 308 - 308 - 308
Balance at 31 December 2022 69,674 19,175 1,881 (5,185) 85,545 - 85,545
The above Consolidated 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 31 December 2022
Unaudited six months ended
31 December
Consolidated
Note 2022 2021
$'000 $'000
Cash flows from operating activities
(Loss)/profit after income tax expense for the period (7,497) 2,623
Adjustments for:
Depreciation and amortisation of intangibles 80 28
Amortisation of finance costs 235 255
Share-based payments 308 86
Interest reclassified to financing activities 3,668 2,213
Exceptional items 520 250
Other non-cash including exchange rate movements (1,678) (234)
Change in operating assets and liabilities:
Increase in contract costs - litigation contracts (54,289) (30,035)
Decrease in trade and other receivables 14,117 1,432
Increase/(decrease) in trade and other payables 1,420 (2,737)
(Decrease)/increase in deferred tax liabilities (4,167) 1,390
Increase in prepayments (25) (79)
Increase/(decrease) in employee benefits (21) 298
Increase/(decrease) in third party consolidated interests 3,180 (163)
Net cash used in operating activities (44,149) (24,672)
Cash flows from investing activities
Payments for property, plant and equipment (22) (9)
Payments for intangibles (34) (91)
Payments of security deposits (12) (5)
Net cash used in investing activities (68) (105)
Cash flows from financing activities
Proceeds from issue of shares - 770
Repayments of borrowings (14,494) -
Finance costs (3,482) (2,268)
Transaction costs related to third-party interests (777) (625)
Net contributions from third-party interests in consolidated entities 45,298 19,064
Payments for fund establishment & administration costs - (162)
Net cash from financing activities 26,545 16,779
Net decrease in cash and cash equivalents (17,673) (7,997)
Cash and cash equivalents at the beginning of the period 49,964 49,737
Effects of exchange rate changes on cash and cash equivalents 1,108 1,729
Cash and cash equivalents at the end of the period 7 33,399 43,469
The above Consolidated Statement of Cash Flows should be read in conjunction
with accompanying Notes to the Financial Statements.
Notes to the financial statements
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 period (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 14 March 2023. The Directors have the power to
amend and reissue the financial statements.
Note 2 Significant accounting policies
These consolidated financial statements are general purpose financial
statements for the interim reporting period ended 31 December 2022 and have
been prepared in accordance with the Corporations Act 2001 and Australian
Accounting Standard AASB 134 Interim Financial Reporting.
These interim financial statements do not include all the notes of the type
normally included in annual financial statements. Accordingly, these financial
statements are to be read in conjunction with the annual report for the year
ended 30 June 2022 and any public announcements made by the Company during the
interim reporting period.
Basis of preparation
The principal accounting policies adopted are consistent with those of the
previous financial year and corresponding interim reporting period, unless
otherwise stated.
Historical cost convention
The financial statements have been prepared under the historical cost
convention.
Critical accounting estimates
The critical accounting judgements, estimates and assumptions that have been
applied in the preparation of the interim consolidated financial statements
are consistent with those followed in the preparation of the Group's annual
report for the year ended 30 June
2022.
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.
Note 3 Revenue
Unaudited six months
ended 31 December
2022 2021
$'000 $'000
Major service lines
Litigation service revenue 3,003 19,154
Litigation service revenue attributable to third party interests 1,696 168
4,699 19,321
Geographical regions
Australia 2,106 335
United Kingdom 2,593 18,911
Singapore - 75
4,699 19,321
Contract duration
Less than 1 year 27 -
1-4 years 4,672 19,189
More than 4 years - 132
4,699 19,321
Note 4 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 period ended 31 December 2022 there were 2 major external customers
(December 2021: 1 customer, unrelated to those in December 2022) where revenue
exceeded 10% of the consolidated revenue. Revenue from each customer for the
period ended 31 December 2022 amounted to $2,603,000 and $1,302,000 (December
2021: $18,401,000).
Note 5 Profit/loss before tax
Profit/loss before income tax expense includes the following specific
expenses:
Unaudited six months
ended 31 December
2022 2021
$'000 $'000
Employee benefits expense
Salaries & wages 3,841 4,176
Directors' fees 196 198
Superannuation and pension 355 141
Share based payments expense 308 86
Other employee benefits & costs 59 533
4,759 5,134
Depreciation
Plant and equipment 20 18
Intangible assets 60 10
80 28
Finance costs
Interest on borrowings 3,536 2,067
Other finance costs 200 154
3,736 2,222
Fund administration expense
Finance costs 140 247
General administration expenses 289 112
Set-up expenses 73 -
Amortisation of transaction costs 559 370
1,061 730
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 379 331
Adjusted operating profit/loss
Adjusted operating profit/loss 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 Group's underlying performance.
Non-operating expenses includes the following items:
Share based payments expense 308 86
Consultancy & legal - 197
Other transaction costs 38 33
Litigation fees 225 -
Other expenses 42 215
Fund administration expenses 1,061 730
Total non-operating expenses 1,674 1,260
Note 6 Income tax expense
Unaudited six months
ended 31 December
2022 2021
$'000 $'000
Numerical reconciliation of income tax expense and tax at the statutory rate
(Loss)/profit before income tax expense (10,931) 4,043
At the Group's statutory income tax rate of 25% (2021: 25%) (2,733) 1,011
Tax effect amounts which are not deductible/(taxable) in calculating taxable
income:
Foreign tax rate adjustments (232) (9)
Share-based payments 77 22
Other non-deductible expenses - 131
Adjustment for tax effect of loss attributable to third party interests 147 64
Adjustment in respect of deferred tax rate (693) 202
(3,434) 1,420
Adjustment to deferred tax balances as a result of change in statutory tax - -
rate
Income tax (benefit)/expense (3,434) 1,420
Statutory tax rate of 25% is applicable to Australian entities with aggregated
turnover below $50 million for the period ended 30 June 2023. 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.
Deferred liability
Deferred tax asset/(liability) comprises temporary differences attributable
to:
Unaudited six months
ended 31 December
2022 2021
$'000 $'000
Tax losses 28,037 15,561
Employee benefits 272 269
Accrued expenses 380 140
Contract costs - litigation contracts (36,168) (25,304)
Transaction costs on share issue 133 401
Deferred tax liability (7,346) (8,933)
Movements:
Opening balance (11,513) (7,543)
Charged to profit or loss 4,167 (1,390)
Closing balance (7,346) (8,933)
Note 7 Cash and cash equivalents
31 December 30 June
2022 2022
$'000 $'000
Cash at Bank 16,573 29,253
Cash of third-party interests in consolidated entities 16,826 20,711
33,399 49,964
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 8 Trade and other receivables
31 December 30 June
2022 2022
$'000 $'000
Due from litigation service(1) 15,112 27,893
Due from litigation service - portfolios(2) 5,225 6,452
Other receivables 76 146
20,413 34,491
(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 (June 2022: $nil) in profit or loss in
respect of the expected credit losses for the period ended 31 December 2022.
Note 9 Contract costs - litigation contracts
31 December 30 June
2022 2022
$'000 $'000
Contract costs - litigation contracts 237,731 184,397
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:
31 December 30 June
2022 2022
$'000 $'000
Opening balance 184,397 134,558
Additions during the period 21,283 28,927
Additions during the period made by third-party interests 35,609 37,255
Litigation service expense - successful contracts(1) (2,583) (16,343)
Litigation service expense - write down(2) (975) -
Closing balance 237,731 184,397
(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:
31 December 30 June
2022 2022
$'000 $'000
Attributable to owners of LCM 119,513 101,267
Third-party interests 118,218 83,130
Consolidated total 237,731 184,397
31 December 30 June
2022 2022
$'000 $'000
Current 31,527 21,634
Non Current 206,204 162,763
237,731 184,397
Note 10 Borrowings
31 December 30 June
2022 2022
$'000 $'000
Current
Borrowings of third-party interests in consolidated entities - 14,494
- 14,494
Non-current
Borrowings 56,063 54,915
56,063 54,915
Reconciliation of borrowings of third-party interests in consolidated
entities:
31 December 30 June
2022 2022
$'000 $'000
Balance 1 July 14,494 13,253
Proceeds from borrowings - -
Repayment of borrowings (14,695) -
Net accrued interest (17) 17
Payments for borrowing costs - (185)
Amortisation of borrowing costs 34 230
Other non-cash items 184 1,178
Balance as at period end - 14,494
Reconciliation of borrowings of LCM:
31 December 30 June
2022 2022
$'000 $'000
Balance 1 July 54,915 37,171
Proceeds from borrowings - 13,298
Payments for borrowing costs (221) (259)
Amortisation of borrowing costs 200 919
Other non-cash items 1,169 3,786
Balance as at period end 56,063 54,915
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
$73,475,000 (the "Facility"). The Facility carries interest of a LIBOR 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 31
December 2022, the Group's outstanding utilisation amounted to US$10,000,000,
an AUD equivalent of $14,695,000.
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 period
ended 31 December 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 $1,613,000
which were reflected transactions costs and will be amortised over the 4 year
term of the borrowings. As at 31 December 2022 $988,000 of the loan
arrangement fees remained outstanding.
Note 11 Equity - issued capital
Consolidated
31 December 30 June 31 December 30 June
2022 2022 2022 2022
Shares Shares $'000 $'000
Ordinary shares - fully paid 106,613,927 106,613,927 69,674 69,674
12,586,405 12,586,405 - -
Ordinary shares - under loan share plan
119,200,332 119,200,332 69,674 69,674
Movements in ordinary share capital Date Shares $'000
Balance 30 June 2021 105,014,157 68,904
Conversion of partly paid shares paid up at $0.17 per share 22 October 2021 498,583 85
Conversion of options paid up at $1.00 per share 5 November 2021 600,000 600
Conversion of partly paid shares paid up at $0.17 per share 16 December 2021 501,187 85
Balance 31 December 2021 106,613,927 69,674
31 December 2022 106,613,927 69,674
Movements in ordinary shares issued under loan share plan Date Shares $'000
Balance 30 June 2021 11,073,767 -
Issue of shares under loan share plan 27 October 2021 612,638 -
Issue of shares under loan share plan 5 November 2021 900,000 -
Balance 31 December 2021 12,586,405 -
Balance 31 December 2022 12,586,405 -
Reconciliation of ordinary shares issued under LSP:
2022 2021
Total shares allocated under existing LSP arrangements with underlying LSP 8,134,929 8,134,929
shares
Less shares allocated under existing LSP arrangements without underlying LSP (465,988) (465,988)
shares
Shares held by LCM Employee Benefit Trust for future allocation under LSP 4,917,464 4,917,464
12,586,405 12,586,405
Ordinary shares
Ordinary shares entitle the holder to participate in dividends and the
proceeds on the winding up of the Company in proportion to the number of and
amounts paid on the shares held. The fully paid ordinary shares have no par
value and the Company does not have a limited amount of authorised capital.
On a show of hands every member present at a meeting in person or by proxy
shall have one vote and upon a poll each share shall have one vote.
Ordinary shares - under loan share plan ('LSP')
The Company has an equity scheme pursuant to which certain employees may
access a LSP. The acquisition of shares under this LSP is fully funded by the
Company through the granting of a limited recourse loan. The shares under LSP
are restricted until the loan is repaid. The underlying options within the LSP
have been accounted for as a share-based payment. Refer to note 15 for further
details. When the loans are settled the shares are reclassified as fully paid
ordinary shares and the equity will increase by the amount of the loan repaid.
Ordinary shares - partly paid
As at 31 December 2022, there are currently 1,433,022 partly paid shares
issued at an issue price of $0.17 per share. No amount has been paid up and
the shares will become fully paid upon payment to the Company of $0.17 per
share. As per the terms of issue, the partly paid shares have no maturity date
and the amount is payable at the option of the holder.
Partly paid shares entitle the holder to participate in dividends and the
proceeds of the Company in proportion to the number of and amounts paid on the
shares held. The partly paid shares do not carry the right to participate in
new issues of securities. Partly paid shareholders are entitled to receive
notice of any meetings of shareholders. The partly paid shareholders are
entitled to vote in the same proportion as the amounts paid on the partly paid
shares bears to the total amount paid and payable.
Capital risk management
The Group's objectives when managing capital is to safeguard its ability to
continue as a going concern, so that it can provide returns for shareholders
and benefits for other stakeholders and to maintain an optimum capital
structure to reduce the cost of capital.
Capital is regarded as total equity as recognised in the statement of
financial position.
In order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders,
issue new shares or sell assets to reduce debt.
The capital risk management policy remains unchanged from the 30 June 2022
Annual Report.
Note 12 Contingent liabilities
The majority of the Group's funding agreements contain a contractual indemnity
from the Group to the funded party that the Group will pay adverse costs
awarded to the successful party in respect of costs incurred during the period
of funding, should the client's litigation be unsuccessful. The Group's
position is that for the majority of litigation projects which are subject to
funding, the Group enters insurance arrangements which lessen or eliminate the
impact of such awards and therefore any adverse costs order exposure.
Note 13 Third-party interests in consolidated entities
AASB requires the Group to consolidate fund investment vehicles over which it
has exposure to variable returns from the fund investment vehicles. As a
result, third party interests in relation to the Funds have been consolidated
in the financial statements.
As at 31 December 2022, the financial liability due to third-party interests
is $130,079,000 (June 2022: $81,780,000), recorded at amortised cost and net
of transaction costs. The net amount due comprises cash and cash equivalents,
contract costs and trade payables. Third-party interests exclude the 25%
co-investment made by Litigation Capital Management Limited and its wholly
owned subsidiaries ("LCM"). The third-party interests in the Funds carry an
entitlement to receive an 8% soft return hurdle. Upon satisfaction of the
third-party interests soft return hurdle, LCM is entitled to performance fees
as fund manager on the basis of a deal by deal waterfall. The residual net
cash flows are to be distributed 25% to LCM and 75% to the third-party
interests until an IRR of 20% is achieved by the third-party interests,
thereafter the net residual cash flows are distributed 35% to LCM and 65% to
the third-party interests.
The following tables reflect the impact of consolidating the results of the
Funds with the results for LCM to arrive at the totals reported in the
consolidated statement of comprehensive income and consolidated statement of
financial position. The Fund column in the table below presents the interests
of third-party investors comprising both the investment in the litigation
contracts made on their behalf and costs of administering the funds. The LCM
column includes the 25% co-investment in these litigation contracts.
Consolidated Statement of Comprehensive Income
31 December 2022 31 December 2021
LCM Fund Consolidated LCM Fund Consolidated
$'000 $'000 $'000 $'000 $'000 $'000
Revenue from contracts with customers
Litigation service revenue 3,003 1,696 4,699 19,154 168 19,321
Portfolio revenue - - - - - -
Performance fees - - - - - -
3,003 1,696 4,699 19,154 168 19,321
Litigation service expense (3,037) (521) (3,558) (5,378) (65) (5,444)
Gross income (34) 1,175 1,141 13,775 103 13,878
Other income - - - - - -
Interest income 5 - 5 - - -
Expenses
(4,759) - (4,759) (5,134) - (5,134)
Employee benefits expense
(80) - (80) (28) - (28)
Depreciation & amortisation expense
(1,596) (845) (2,441) (1,721) - (1,721)
Corporate expenses
Litigation fees - - - - - -
Finance costs (3,736) - (3,736) (2,222) - (2,222)
(559) (502) (1,061) (370) (359) (730)
Fund administration expense
Total expenses (10,730) (1,347) (12,077) (9,476) (359) (9,835)
(10,759) (172) (10,931) 4,300 (257) 4,043
Profit/(loss) before income tax expense
Analysed as:
(5,851) 330 (5,521) 7,423 103 7,525
Adjusted operating profit/(loss)
(1,172) (502) (1,674) (901) (359) (1,260)
Non-operating expenses
Finance costs (3,736) - (3,736) (2,222) - (2,222)
(10,759) (172) (10,931) 4,300 (257) 4,043
Profit/(loss) before income tax expense
3,434 - 3,434 (1,420) - (1,420)
Income tax expense
(7,325) (172) (7,497) 2,880 (257) 2,623
Profit/(loss) after income tax expense for the period
Other comprehensive income for the period, net of tax 310 (1,583) (1,273) 442 (78) 364
(7,015) (1,755) (8,770) 3,322 (335) 2,987
Total comprehensive income for the period
Profit/(loss) for the period is attributable to:
(7,015) - (7,015) 3,322 - 3,322
Owners of Litigation Capital Management Limited
- (1,755) (1,755) - (335) (335)
Third-party interests in the Fund
- - - - - -
Non-controlling interest
(7,015) (1,755) (8,770) 3,322 (335) 2,987
Consolidated statement of financial position
31 December 2022 30 June 2022
LCM Fund Consolidated LCM Fund Consolidated
$'000 $'000 $'000 $'000 $'000 $'000
Assets
Current assets
Cash and cash equivalents 16,573 16,826 33,399 29,253 20,711 49,964
Trade and other receivables 20,413 - 20,413 34,491 - 34,491
Contract costs 31,527 - 31,527 21,634 - 21,634
Other assets 647 (134) 513 1,238 (624) 614
Total current assets 69,160 16,692 85,852 86,616 20,087 106,703
Non-current assets
Contract costs 87,986 118,218 206,204 79,633 83,130 162,763
Property, plant and equipment 185 - 185 182 - 182
Intangible assets 376 - 376 646 - 646
Other assets 492 - 492 249 - 249
Total non-current assets 89,039 118,218 207,257 80,710 83,130 163,840
Total assets 158,199 134,910 293,109 167,326 103,217 270,543
Liabilities
Current liabilities
Trade and other payables 7,932 5,277 13,209 7,091 5,817 12,908
Borrowings - - - - 14,494 14,494
Employee benefits 637 - 637 700 - 700
8,569 5,277 13,846 7,791 20,311 28,102
Total current liabilities
Non-current liabilities
Deferred tax liability 7,346 - 7,346 11,513 - 11,513
Borrowings 56,063 - 56,063 54,915 - 54,915
Employee Benefits 268 - 268 227 - 227
Third-party interests in consolidated entities(1) (5,231) 135,272 130,041 (5,014) 86,794 81,780
Total non-current liabilities 58,446 135,272 193,718 61,641 86,794 148,435
Total liabilities 67,015 140,549 207,564 69,432 107,105 176,537
Net assets 91,184 (5,639) 85,545 97,894 (3,888) 94,006
(1)LCM incurred placement fees and other costs in relation to the LCM Global
Alternative Returns Fund and LCM Global Alternative Returns Fund II which
closed in March 2020 and October 2021 (first close) respectively. The amounts
are reflected as transaction costs and reflected in the LCM balance sheet
above.
Consolidated Statement of Cash Flows
31 December 2022 31 December 2021
LCM Fund Consolidated LCM Fund Consolidated
$'000 $'000 $'000 $'000 $'000 $'000
Cash flows from operating activities
(Loss)/profit after income tax expense for the year (7,325) (172) (7,497) 3,322 (335) 2,987
Adjustments for: 80 - 80 28 - 28
Depreciation and amortisation of intangibles
Amortisation of finance costs 200 35 235 154 101 255
Share-based payments 308 - 308 86 - 86
Interest reclassified to financing activities 3,536 132 3,668 2,067 146 2,213
Exceptional items 520 - 520 250 - 250
Other non-cash including exchange rate movements 189 (1,868) (1,678) (442) (156) (598)
Change in operating assets and liabilities:
Increase in contract costs - litigation contracts (18,246) (36,043) (54,289) (12,547) (17,488) (30,035)
Decrease in trade and other receivables 14,117 - 14,117 1,432 - 1,432
Increase/(decrease) in trade and other payables 1,470 (50) 1,420 (688) (2,049) (2,737)
(Decrease)/increase in deferred tax liabilities (4,167) - (4,167) 1,390 - 1,390
Increase in prepayments (25) - (25) (79) - (79)
Increase in employee benefits (22) - (22) 298 - 298
Increase/(decrease) in third party consolidated interests - 3,180 3,180 - (163) (163)
Net cash used in operating activities (9,364) (34,785) (44,149) (4,728) (19,944) (24,672)
Cash flows from investing activities
Payments for property, plant and equipment (22) - (22) (9) - (9)
Payments for intangibles (34) - (34) (91) - (91)
Payments of security deposits (12) - (12) (5) - (5)
Net cash used in investing activities (69) - (69) (105) - (105)
Cash flows from financing activities
Proceeds from issue of shares - - - 770 - 770
Repayments of borrowings - (14,494) (14,494) - - -
Finance costs (3,350) (132) (3,482) (1,999) (269) (2,268)
Transaction costs related to third-party interests (777) - (777) (625) - (625)
Net contributions from third-party interests in consolidated entities - 45,298 45,298 - 19,064 19,064
Payments for fund establishment & administration costs - - - - (162) (162)
(4,127) 30,672 26,545 (1,854) 18,633 16,779
Net cash from financing activities
(13,560) (4,113) (17,673) (6,686) (1,311) (7,997)
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the period 29,253 20,711 49,964 35,526 14,210 49,736
Effects of exchange rate changes on cash and cash equivalents 880 228 1,108 1,415 314 1,729
Cash and cash equivalents at the end of the period 16,573 16,826 33,399 30,255 13,214 43,469
Note 14 Earnings per share
Unaudited six
ended 31 December
2022 2021
$'000 $'000
(Loss)/profit after income tax (7,497) 2,623
Non-controlling interest - -
(Loss)/profit after income tax attributable to the owners of Litigation (7,497) 2,623
Capital Management Limited
Number Number
Weighted average number of ordinary shares used in calculating basic earnings 106,613,927 106,015,738
per share
Adjustments for calculation of diluted earnings per share:
Amounts uncalled on partly paid shares and calls in arrears - 1,306,445
Options over ordinary shares - 6,610,912
Weighted average number of ordinary shares used in calculating diluted 106,613,927 113,933,095
earnings per share
Cents Cents
Basic earnings/(loss) per share (7.03) 2.47
Diluted earnings/(loss) per share (7.03) 2.30
Note 15 Share-based payments
The share-based payment expense for the year was $308,000 (2021: $86,000).
Loan Funded Share Plans ('LSP')
As detailed in note 11, the Group has an equity scheme pursuant to which
certain employees may access a LSP. The shares under LSP are issued at the
exercise price by granting a limited recourse loan. The LSP shares are
restricted until the loan is repaid. The underlying options have been
accounted for as share-based payments. The options are issued over a 1-3 year
vesting period. Vesting conditions include satisfaction of customary
continuous employment with the Group and may include a share price hurdle.
During the period the Group granted nil (June 2021: 1,912,489) shares under
the LSP.
Set out below are summaries of shares/options granted under the LSP:
December 2022
Grant date Expiry date Exercise Balance at the start of the period Granted Exercised Expired/ Balance at the end of the period
Price
forfeited/
other
04/12/2017 04/12/2027 $0.60 2,000,000 2,000,000
31/08/2018 31/08/2028 $0.77 411,972 411,972
19/11/2018 25/11/2028 $0.47 1,595,058 1,595,058
03/12/2018 03/12/2028 $0.89 100,000 100,000
01/11/2019 01/11/2029 £0.7394 1,432,753 1,432,753
01/11/2019 01/11/2029 £0.7730 66,137 66,137
13/10/2020 13/10/2030 £0.6655 616,520 616,520
27/10/2021 27/10/2031 £1.06 1,512,638 1,512,638
27/10/2021 27/10/2031 £1.06 269,044 269,044(1)
27/10/2021 27/10/2031 £1.14 130,807 130,807(1)
8,134,929 - - - 8,134,929
(1)Options granted without an underlying LSP share until exercised i.e. do not
form part of the Group's issued share capital.
Deferred Bonus Share Plan ('DBSP')
The Company has in place a DBSP. Options granted under the DBSP reflect past
performance and are in the form of nil cost options and will vest in three
equal tranches from the date of issue and are subject to continued employment
over the three year period.
In addition, the Options granted under the DBSP are subject to malus and
clawback provisions. In the event of a change of control of the Company,
unvested awards will vest to the extent determined by the Board, taking into
account the proportion of the period of time between grant and the normal
vesting date that has elapsed at the date of the relevant event.
During the period the Group granted 1,132,692 (December 2022: nil) shares
under the DBSP.
Set out below are summaries of options granted under the DBSP:
December 2022
Grant date Expiry date Exercise Balance at the start of the period Granted Exercised Expired/ Balance at the end of the period
Price
forfeited/
other
07/10/2022 07/10/2032 $1.1816 - 1,132,692 - - 1,132,692
- 1,132,692 - - 1,132,692
Executive Long Term Incentive Plan ('LTIP')
The Company has in place an Executive LTIP. Options over ordinary shares in
the capital of the Company ("Ordinary Shares") are issued to recipients under
the LTIP plan. The options set out above have been granted under the LTIP in
the form of nil cost options and are subject to performance conditions which
require the growth of Funds under Management ('FuM') over a five year
performance period. The performance conditions associated with the options are
set out below:
(1) 50% vesting on reaching a minimum of FuM of US$750m; and
(2) 100% vesting on reaching FuM of US$1bn.
The vesting date of options granted is the later of:
(1) the third anniversary of the Grant Date;
(2) the satisfaction of the Performance Condition; or
(3) the date of any adjustment under the Plan rules of the Plan at the
Boards discretion.
Any awards made to the participants are subject to a five year holding period
from the grant date. In the event of a change of control of the Company,
unvested awards will vest to the extent determined by the Board, taking into
account the proportion of the period of time between grant and the normal
vesting date that has elapsed at the date of the relevant event and the extent
to which any performance condition has been satisfied at the date of the
relevant event.
During the period the Group granted 5,671,516 (December 2022: nil) shares
under the LTIP.
Set out below are summaries of shares/options granted under the LTIP:
December 2022
Grant date Expiry date Exercise Balance at the start of the period Granted Exercised Expired/ Balance at the end of the period
Price
forfeited/
other
07/10/2022 07/10/2032 $1.1816 - 5,671,516 - - 5,671,516
- 5,671,516 - - 5,671,516
For the options under LSP granted during the current period, the valuation
model inputs used in the Black-Scholes pricing model to determine the fair
value at the grant date, are as follows:
Grant date Expiry date Share price at grant date Exercise price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date(1)
04/10/2022 04/10/2032 £0.73 £0.00 35.00% 0.00% 3.19% $1.287
04/10/2022 04/10/2032 £0.73 £0.00 35.00% 0.00% 3.21% $1.287
(1)AUD amount. GBP equivalent £0.726.
The expected volatility reflects the assumption that the historical volatility
over a period similar to the life of the options is indicative of future
trends, which may not necessarily be the actual outcome.
Note 16 Events after the reporting period
On 16 February 2023, LCM drew down US$7m from the Northleaf Capital Partners
credit facility.
On 20 February 2023, LCM announced a confidential settlement was reached in
its claim in the Commercial Court of the High Court of Justice of England
& Wales against the Carillion group's former auditors, KPMG. As a result,
LCM is expected to receive approximately A$5.4m in litigation service revenue,
that amount includes A$3.1m of invested capital in addition to A$3.2m in
performance fees (figures mentioned are subject to change based on the receipt
of cash and FX rate at the time).
The claim was funded directly from LCM's balance sheet (25%) and from the LCM
managed Global Alternative Returns Fund ("Fund I") (75%).
On 9 March 2023, LCM announced the resolution of an investment in a class
action which forms part of LCM's Direct Investment Portfolio and was 100%
funded from balance sheet capital.
LCM expects to receive revenue of approximately A$14.0m. That amount includes
capital invested of approximately A$8.25m together with an expected gross
profit of approximately A$5.75m. The Company's final revenue and profit
figures are subject to change pending final distribution of settlement monies.
Directors Declaration
In the directors' opinion:
1. the attached financial statements and notes comply with the
Corporations Act 2001, Australian Accounting Standards and other mandatory
professional reporting requirements;
a. complying with Accounting Standard AASB 134: Interim
Financial Reporting; and
b. the attached financial statements and notes give a true and
fair view of the consolidated entity's financial position as at 31 December
2022 and of its performance for the period ended on that date;
2. there are reasonable grounds to believe that the company will
be able to pay its debts as and when they become due and payable.
Signed in accordance with a resolution of directors.
On behalf of the directors
Patrick Moloney
Director
Dated this 14 day of March 2023
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