REG - Litigation Cap. Mgmt - Interim Results
15/03/2022 07:00
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RNS Number : 7999E Litigation Capital Management Ltd 15 March 2022
15 March 2022
Litigation Capital Management Limited
("LCM" or the "Company")
Interim results for the half year ended 31 December 2021
Strong H1 results bolstered by increase in resolution of direct investment
Litigation Capital Management Limited (AIM:LIT), a leading international
alternative asset manager of disputes financing solutions, is pleased to
announce its unaudited interim results for the half year ended 31 December
2021, delivering a significant improvement on the prior year.
Operations
· US$150m Global Alternative Returns Fund ("GAR"), now fully committed and
achieved within the two year mandated commitment period
· Completed US$200m first close of second Fund - Global Alternative Returns Fund
II ("Fund II") with targeted close of US$300m well progressed and expected to
complete during FYH2
· Resolution of previously announced direct investment delivered strong returns
with a ROIC of 261% and IRR of 199%(1)
· Portfolio of direct investments well progressed with three investments
resolved and awaiting payment or resolution of appeals, four direct
investments had final hearings and are awaiting judgment and four direct
investments have or expect hearing dates scheduled before end of 2022
KPIs
· Total assets under management increased to A$343m at 31 December 2021 and
A$386m by 8 March 2022
· 196 applications received during the period vs 266 in H121. A further 89
applications received in the two month period to 28 February 2022,
demonstrates an acceleration in momentum and return to normal operating
conditions
· Investment commitments of A$25m during the period, down on the prior period
commitment of A$67m which was skewed by a large construction portfolio
investment which was consequently scaled down due to a sale and change in
ownership of the funded party
· Total invested capital during the period was A$31.5m vs A$39.7m in H121
· Improved performance - cumulative 162% ROIC and IRR of 79% over the past 10
and a half years (inclusive of third party unless otherwise stated)
Financials
· Gross profit of A$13.9m (H121: A$5.4m)
· Adjusted profit before tax A$7.5m (H121: A$0.2m loss)
· Statutory profit before tax of A$4.0m (H121: A$1.4m loss)
· Cash of A$43.5m at 31 December 2021 (A$30.3m exclusive of third party
interests)
· Cash receipts from the completion of litigation investments of A$20.6m, up 94%
on the prior year*
· Total equity of A$94.3m*
*exclusive of third party fund consolidation
Post period events and outlook
· Mary Gangemi, CFO, appointed to the Board bringing extensive and valuable
experience
· LCM continues to build out the platform and extend both its own balance sheet
commitments and fund management business.
(1)metrics based on final AUD cashflows
Commenting on the results, Patrick Moloney, CEO of Litigation Capital
Management, said: "We have achieved great progress during the period
despite disruption as a result of COVID-19 lockdowns and unprecedented
restrictions in the areas we operate.
"I am pleased with the progress in our Fund Management business, which is now
well established, with our first US$150m Fund now fully committed and the
US$200m first close of Fund II with a final close target of US$300m by the
period end. Equally, our portfolio of direct investments has performed well
given the difficult external circumstances impacting our industry, with a
number of ongoing investments resolved and awaiting payment, or awaiting
judgment in the second half.
"As conditions normalise and with the core executive team now in place in our
London office, LCM is now in a stronger position to grow both divisions,
enabling us to access greater amounts of capital and facilitate the expansion
of our portfolio of investments. The countercyclical nature of our industry
suggests that economic and market conditions at present, represent a growing
opportunity for the Company which will be realised over the long-term. We look
to the second half and beyond with optimism and confidence."
An overview of the interim results from Patrick Moloney, CEO is available to
view on this link: https://bit.ly/LIT_H122_overview_video
(https://bit.ly/LIT_H122_overview_video) .
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 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
Rebecca Sanders-Hewett
Kieran Breheny
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
Market and environment
Whilst the past two years have been impacted by the global pandemic, the past
interim period has been particularly disrupted for two main reasons: First
is the impact on the progression of disputes through the courts or the
arbitral process as a result of a backlog of postponed and delayed cases.
While these systems are now much more efficient than pre-COVID, there is
inevitably a long process to work through in order to expedite the cases.
The second key impact is our ability to source investment opportunities.
Between July and December 2021 each of the offices we operate; London,
Singapore and Australia, experienced prolonged lockdowns and/or guidance
against travel and office work. Those measures varied from approximately one
and a half months of restrictions and home-working guidance in the UK, through
to three to four months of lockdowns in Australia and almost the entire six
months of lockdown in Singapore. These lockdowns prevented LCM from operating
its usual business of origination.
Whilst there will always be external factors which cause increases and
decreases in the timing and number of new applications, we are now seeing
increased momentum since the start of the new calendar year with a return to
more normal operating conditions.
The restricted market conditions during the interim period resulted in our new
applications being down by 26% compared to the prior period. That reduction
was almost exclusively consequent upon our investment managers in all offices
being home bound due to lockdowns. That reduction was not solely due to the
constraints upon LCM's staff but also insolvency professionals and lawyers
also being subject to the same restrictions. Those lockdowns had a significant
impact on our referral lines in all jurisdictions in which we operate in.
Notwithstanding this, we generated 196 new applications during the period.
Pleasingly we are already seeing a strong and increased demand for our
capital, with an acceleration in applications in the first two months of the
current period in which we have already received 89 new applications which
indicates a return to more normal and positive operating conditions.
The level of commitment was also comparatively lower, noting the prior period
contained commitments which were ultimately discontinued due to risks created
through a sale and change of ownership in LCM's contracting party. Taking this
into consideration, following this adjustment, the level of commitments
improved against the prior period. Importantly and encouragingly, as with new
applications, we have seen a sharp correction in the market in the first two
months of this period with total assets under management increasing from
A$343m as at 31 December 2021 to A$386m in early March.
We saw a reduction in capital invested during the interim period. This is due
to a series of factors and is neither a trend nor a matter for concern. This
will always vary because capital invested is a part of our dispute investments
that we manage closely but do not control, and the characteristics of our
investments are unusual in that they involve a progressive monthly capital
deployment over the life of the dispute on a monthly basis.
Another key factor is the investments have their own life which are managed
and brought to an end by the Court or Tribunal and as a result capital
investment in a given period depends on the individual investment cycles.
In general terms the capital investment is not linier but rather follows the
work levels of the underlying disputes. The investment cycle tends to follow a
U curve with increased investment at the beginning and end of the dispute. The
investment cycle can fluctuate the volume of capital invested in a given
financial period. The other factor at play is the transition from a 100%
direct investment strategy from LCM's balance sheet to a co-funding model
alongside our fund management business.
Overall, we are very happy with the progress of our portfolio of dispute
investments, particularly given the challenging market conditions in the June
to December 2021 period.
Asset Management
Our Fund Management business continues to gain traction and achieve strong
growth. We are pleased to confirm we have now fully committed our
US$150m Global Alternative Returns Fund ("Fund I"), with diversity across
jurisdictions, industry sector, claim type and capital commitment. This
achievement is notable as the entire fund has been committed in markets
adversely affected by Covid. In addition, the Fund has been fully committed
inside the 24 month commitment period.
In October, we achieved a US$200m first close of Global Alternative Returns
Fund II (Fund II) with a final close target of US$300m which we expect to
achieve before the end of the current financial period. We were encouraged
that all existing investors in Fund I have increased their commitments in Fund
II. The establishment of Fund II and its strong first close of US$200m in
October provides LCM with significant capital to continue its growth.
Revenue profile
The business of litigation finance involves a series of investments into
disputes and for LCM this has historically ranged, on average, from 25-27
months to complete. Those investments may mature before or after that monthly
average and it is important to note that as we invest in larger and more
profitable disputes we expect that the investment cycle will lengthen more in
line with the estimate we have previously provided ranging between 36 and 42
months. We continue to expect that the time to resolution of investments
moving forward will be within that range.
As a result of this, it is exceptionally difficult to predict the timing of
when such realisations take place. They are largely controlled by the
underlying parties to the dispute and the court or tribunal adjudicating their
dispute. LCM's investments vary in size and through industry sector and
jurisdiction, therefore, the revenue recognised can be infrequent and often
does not fall neatly within the half or full year results which, therefore,
results in profit fluctuations from one period to the next rather than an even
and smooth increase in profits from period to period. Therefore emphasis
should not be placed on comparing performance from one period to the next in
the early stages of growth.
Investment performance
In terms of measuring our ongoing investment performance we measure each
investment completed over the past 10 and a half years, including losses, as
if they comprised one portfolio irrespective of capital source. These
performance metrics are not just the financial result of our investments but a
reflection of our thorough and robust due diligence processes and our ability
to underwrite and manage risk.
During the 10 and a half year period we have evolved from being a private
company to a public company and have utilised our own balance sheet capital as
well as managing third party capital. Encouragingly at the ten-and-a-half-year
mark we have seen an increase in our investment performance metrics achieving
a cumulative Return on Invested Capital (ROIC) of 162%, [including losses] and
a cumulative IRR of 79% (HY 2021: 78%).
This demonstrates the clear direction of travel and delivery of consistent
growth achieved by LCM. This performance sits within a tight parameter from
period-to-period and is a direct reflection of LCM's disciplined project
selection and robust risk management processes and systems.
A final point on investment performance which is important to note, and as
previously outlined, is that as LCM's business increases in scale we would
expect to see a reduction in these performance metrics.
Business fundamentals and building scale
In terms of building LCM's business as an alternative investment manager in
the asset class of disputes, there are three fundamental and essential
elements. These must not only be present to ensure success, but they must also
be achieved in a methodical order.
Underwriting - The first essential element is underwriting expertise. That is
the ability to undertake a rigorous due diligence exercise to determine which
investments to make and which not to pursue. Underwriting experience cannot be
acquired overnight. It is developed over many years of sometimes bitter
experience. LCM is fortunate to have been a pioneer in the disputes finance
industry with over 23 years' experience. We have made some bad investments in
the past, albeit not many, that have helped us learn the craft of selecting
which disputes will be successful. The true measure of our underwriting
expertise is our track record. Through hard work we have one of the best track
records in the industry. Notwithstanding this, we continue to learn and
improve our knowledge and systems and will continue to do so into the future.
Access to capital - Investing in disputes is a very capital intensive
enterprise. Once an investment is entered into and a commitment made
sufficient capital is necessary to see that dispute to its conclusion. The
investment is illiquid and there is currently no mature secondary market. In
order to build a portfolio of disputes which is diversified by industry sector
and jurisdiction and is not attended with concentration risk, sufficient
capital is necessary. A disputes financier cannot construct a diversified
portfolio without adequate capital.
LCM has in the past years added to its capital structure which has facilitated
growth. Most significant is the establishment of our Asset Management
business, which has given LCM access to meaningful pools of capital enabling
us to not only build out a portfolio of dispute investments but also and
importantly create diversification. Increasing our portfolio size will in time
smooth our revenue line, while the diversification aids in reducing risk.
We have been fortunate to have attracted the very best long term sophisticated
and experienced investors in our asset class. From the support received on
Fund II, we expect that those investors will continue to support LCM with
their investment capital in future funds. Indeed, our cornerstone fund
investors have negotiated entrenched rights to participate in our next two
funds.
We will never be complacent about the quality of our fund investors and expect
to enjoy long standing relationships well into the future.
Origination - The third element which is fundamental to the success of our
business is the ability to originate the highest quality dispute investments
globally. The building of a scalable origination platform cannot be achieved
without first gaining the experience and secondly attracting the right
capital. LCM has best in class skills when it comes to origination. Testament
to this is our ability to raise a fund of US$150m in March 2020 and fully
commit that fund inside the two year commitment period mandate entirely during
Covid.
One of LCM's strategic objectives has been to build out its origination
capability such that it can continue to commit current and future funds. Our
ability to build out our origination platform will be accelerated by our
executive management team being centralised in our London office. That recent
development, which had previously been delayed by Covid, will allow that
expansion.
Board and Management update
In December 2021, I completed my relocation to London in a strategic move
originally planned for 2020, in order to manage LCM's growth from our London
office. This has brought our core executive team in one location, with LCM's
CEO and CFO now both operating from our London office.
In December 2021, we also announced the departure of Nick Rowles-Davies from
the business. From this point, I have been working with the investment
managers at our London headquarters. Origination from the London office
remains strong and our ability to capitalise on the pipeline ahead is
unchanged.
Post-period, in February 2022, we were pleased to announce the appointment of
Chief Financial Officer, Mary Gangemi to the Board. Mary joined the Company in
April 2020 as Chief Financial Officer, working from the London office and her
extensive experience is proving to be extremely valuable as we continue to
build out the LCM platform and extend both our own balance sheet commitments
and our fund management business.
Outlook
Global markets are still yet to fully stabilise from the shock and uncertainty
of Covid. Whilst Covid risks are easing, there is a sharp increase in
geo-political risks with the atrocity of the Russian invasion of Ukraine.
Ongoing economic conditions result in businesses operating outside their
normal terms of trade. Economic and operational disruption are an ongoing
feature of global markets. The economic trade conditions which have and
continue to dominate markets create an increased number of disputes. Those
disputes have to a large extent not yet been resolved. The same economic
conditions that create the disputes also constrain the allocation of budgets
to resolve those disputes and recover losses sustained. Businesses tend, in
such conditions, to reserve capital for core business activities. Such market
conditions will inevitably lead to an increased number of insolvencies,
restructuring and bankruptcies. The market is yet to experience those trends
due largely to government constraints and economic stimulus. This is further
impacted as stimulus packages have concluded and interest rates in most
developed economies are set to rise, adding significant pressure to businesses
who are likely to be impacted by the lifting of moratoriums preventing the
winding up of insolvent companies.
Demand for disputes finance exists in all economic cycles, however, our
industry can operate countercyclically. That is, economic and market
conditions at present, create opportunity. That opportunity may not be
immediate, however, it will occur.
LCM has significant experience in financing complex commercial disputes,
insolvencies and restructuring disputes. Additionally, we are well capitalised
to fund the opportunities that will follow. We look forward with optimism to
the year ahead.
Patrick Moloney
Chief Executive Officer
15 March 2022
Consolidated Statement of Profit or Loss and other Comprehensive Income
For the six months ended 31 December 2021
Unaudited six months
ended 31 December
Note 2021 2020
$'000 $'000
Revenue from contracts with customers
Litigation service revenue 3 19,321 7,524
Portfolio revenue - 563
Performance fees 3 - 16
19,321 8,103
Litigation service expense (5,444) (2,721)
Gross profit 13,878 5,382
Other income - -
Interest income - 4
Expenses
Employee benefits expense 5 (5,134) (4,512)
Depreciation & amortisation expense 5 (28) (28)
Corporate expenses (1,721) (1,575)
Litigation fees 5 - (87)
Finance costs 5 (2,222)
Fund administration expense 5 (730) (554)
Total expenses (9,835) (6,756)
Profit/(loss) before income tax expense 4,043 (1,370)
Analysed as:
Adjusted operating profit/(loss) 7,525 (175)
Non-operating expenses 5 (1,260) (1,195)
Finance costs (2,222) -
Profit/(loss) before income tax expense 4,043 (1,370)
Income tax expense 6 (1,420) 200
Profit/(loss) after income tax expense for the period 2,623 (1,170)
Other comprehensive income for the period, net of tax 364 (706)
Total comprehensive income for the period 2,987 (1,876)
Profit/(loss) for the period is attributable to:
Owners of Litigation Capital Management Limited 2,623 (1,170)
Non-controlling interest - -
2,623 (1,170)
Total comprehensive income for the period is attributable to:
Owners of Litigation Capital Management Limited 2,987 (1,876)
Non-controlling interest - -
2,987 (1,876)
Cents Cents
Basic earnings per share 14 2.47 (1.12)
Diluted earnings per share 14 2.30 (1.12)
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 2021
Consolidated
Note Unaudited Audited
31 December 30 June
2021 2021
$'000 $'000
Assets
Current assets
Cash and cash equivalents 7 43,469 49,736
Trade and other receivables 8 12,483 13,843
Contract costs 9 15,971 16,663
Other assets 704 616
Total current assets 72,627 80,858
Non-current assets
Contract costs 9 144,631 117,895
Property, plant and equipment 177 186
Intangible assets 471 391
Other assets 436 284
Total non-current assets 145,714 118,756
Total assets 218,341 199,614
Liabilities
Current liabilities
Trade and other payables 5,351 12,392
Borrowings 10 13,720 13,253
Employee benefits 684 452
Total current liabilities 19,756 26,097
Non-current liabilities
Deferred tax liability 6 8,933 7,543
Borrowings 10 38,727 37,171
Employee Benefits 213 148
Third-party interests in consolidated entities 13 57,996 39,764
Total non-current liabilities 105,870 84,626
Total liabilities 125,626 110,723
Net assets 92,715 88,891
Equity
Issued Capital 11 69,674 68,904
Reserves 390 (60)
Retained Earnings 22,651 20,028
Parent interest 92,715 88,872
Non-controlling interest - 19
Total equity 92,715 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 31 December 2021
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 2020 68,830 11,165 1,001 - 80,996 19 81,015
Loss after income tax expense for the period - (1,170) - - (1,170) - (1,170)
Other comprehensive income for the period - - - (706) (706) - (706)
Total comprehensive income for the period - (1,170) - (706) (1,876) - (1,876)
Equity Transactions:
Share-based payments (Note 15) - - 240 240 - 240
- - 240 - 240 - 240
Balance at 31 December 2020 68,830 9,995 1,241 (706) 79,360 19 79,379
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
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 2021
Unaudited six months ended
31 December
Consolidated
Note 2021 2020
$'000 $'000
Cash flows from operating activities
Proceeds from litigation contracts - settlements, fees and reimbursements 20,577 10,610
Payments to suppliers and employees (24,860) (28,355)
Non-operating items paid (445) (350)
Interest received - 4
Net payments made by third-party interests in consolidated entities (19,943) (17,132)
Net cash used in operating activities (24,672) (35,223)
Cash flows from investing activities
Payments for property, plant and equipment (9) (9)
Payments for intangibles (91) (16)
(Payments)/refund of security deposits (5) 10
Net cash used in investing activities (105) (15)
Cash flows from financing activities
Proceeds from issue of shares 770 -
Dividends paid - (888)
Finance costs (2,268) -
Transaction costs related to third-party interests (625) -
Net contributions from third-party interests in consolidated entities 19,064 21,357
Payments for fund establishment & administration costs (162) (668)
Net cash from financing activities 16,779 19,801
Net decrease in cash and cash equivalents (7,997) (15,437)
Cash and cash equivalents at the beginning of the period 49,737 31,754
Effects of exchange rate changes on cash and cash equivalents 1,729 (907)
Cash and cash equivalents at the end of the period 7 43,469 15,410
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 15 March 2022. 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 2021 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 2021 and any public announcements made by the Company during the
interim reporting period.
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 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
2021.
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
2021 2020
$'000 $'000
Major service lines
Litigation service revenue 19,154 7,524
Portfolio revenue - 563
Performance fees - 16
Litigation service revenue attributable to third party interests 168 -
19,321 8,103
Geographical regions
Australia 335 5,565
United Kingdom 18,911 2,538
Singapore 75 -
19,321 8,103
Contract duration
Less than 1 year - 563
1-4 years 19,189 7,540
More than 4 years 132 -
19,321 8,103
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 2021 there was 1 major external customer
(2020: 4 customers, unrelated to those in 2021) where revenue exceeded 10% of
the consolidated revenue. Revenue from each customer for the period ended 31
December 2021 amounted to $18,401,000 (2020: $2,520,000, $1,796,000,
$1,259,000 and $1,108,000).
Note 5
Profit/loss before tax
Profit/loss before income tax expense includes the following specific
expenses:
Unaudited six months
ended 31 December
2021 2020
$'000 $'000
Employee benefits expense
Salaries & wages 4,176 3,847
Directors' fees 198 179
Superannuation and pension 141 162
Share based payments expense 86 240
Other employee benefits & costs 533 84
5,134 4,512
Depreciation
Plant and equipment 18 18
Intangible assets 10 10
28 28
Litigation fees
Litigation fees - (87)
Litigation fees includes fees relating to the costs of litigation commenced by
Australian Insolvency Group Pty Limited ('AIG') against the Group, and
subsequent cross claim by the Group in these proceedings against Vannin
Capital Limited and Mr Patrick Coope, a director of AIG and former employee of
the Group. The proceedings have concluded following reaching a binding
settlement with all parties in April 2020.
Finance costs
Interest on borrowings 2,067 -
Other finance costs 154 -
2,222 -
Fund administration expense
Finance costs 247 -
General administration expenses 112 245
Set-up expenses - 938
Amortisation of transaction costs 370 -
730 1,183
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 331 298
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 Groups underlying performance.
Non-operating expenses includes the following items:
Share based payments expense 86 240
Consultancy & legal 197 263
Other transaction costs 33 -
Litigation fees - 87
Other expenses 215 51
Fund administration expenses 730 554
Total non-operating expenses 1,260 1,195
Note 6
Income tax expense
Unaudited six months
ended 31 December
2021 2020
$'000 $'000
Numerical reconciliation of income tax expense and tax at the statutory rate
Profit/(loss) before income tax expense 4,043 (1,370)
At the Group's statutory income tax rate of 25% (2020: 26%) 1,011 (356)
Tax effect amounts which are not deductible/(taxable) in calculating taxable
income:
Foreign tax rate adjustments (9) -
Share-based payments 22 62
Other non-deductible expenses 131 -
Adjustment for tax effect of loss attributable to third party interests 64 34
Adjustment in respect of deferred tax rate 202 -
1,420 (260)
Adjustment to deferred tax balances as a result of change in statutory tax - 60
rate
Income tax expense / (benefit) 1,420 (200)
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.
Deferred tax asset/(liability)
Deferred tax asset/(liability) comprises temporary differences attributable
to:
Unaudited six months
ended 31 December
2021 2020
$'000 $'000
Tax losses 15,561 17,130
Employee benefits 269 164
Accrued expenses 140 26
Contract costs - litigation contracts (25,304) (21,423)
Transaction costs on share issue 401 744
Deferred tax asset/(liability) (8,933) (3,359)
Movements:
Opening balance (7,543) (3,559)
Charged to profit or loss (1,390) 200
Closing balance (8,933) (3,359)
Note 7
Cash and cash equivalents
31 December 30 June
2021 2021
$'000 $'000
Cash at Bank 30,255 35,526
Cash of third-party interests in consolidated entities 13,214 14,210
43,469 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 8
Trade and other receivables
31 December 30 June
2021 2021
$'000 $'000
Due from litigation service(1) 5,684 8,267
Due from litigation service - portfolios(2) 6,732 5,576
Other receivables 68 -
12,483 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 (June 2021: $nil) in profit or loss in
respect of the expected credit losses for the period ended 31 December 2021.
Note 9
Contract costs - litigation contracts
31 December 30 June
2021 2021
$'000 $'000
Contract costs - litigation contracts 160,601 134,558
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:
31 December 30 June
2021 2021
$'000 $'000
Opening balance 134,558 62,518
Additions during the period 13,937 48,495
Additions during the period made by third-party interests 17,553 39,539
Litigation service expense - successful contracts(1) (5,444) (10,439)
Litigation service expense - write down(2) (3) (4)
Other contract costs reimbursed - successful contracts(1) - (5,551)
Foreign exchange losses - -
Closing balance 160,601 134,558
(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:
31 December 30 June
2021 2021
$'000 $'000
Attributable to owners of LCM 97,158 88,602
Third-party interests 63,444 45,956
Consolidated total 160,601 134,558
31 December 30 June
2021 2021
$'000 $'000
Current 15,971 16,663
Non Current 144,631 117,895
160,601 134,558
Note 10
Borrowings
31 December 30 June
2021 2021
$'000 $'000
Current
Borrowings of third-party interests in consolidated entities 13,720 13,253
13,720 13,253
Non-current
Borrowings 38,727 37,171
38,727 37,171
Reconciliation of borrowings of third-party interests in consolidated
entities:
31 December 30 June
2021 2021
$'000 $'000
Balance 1 July 13,253 -
Proceeds from borrowings - 26,782
Repayment of borrowings - (13,391)
Payments for borrowing costs (127) 354
Amortisation of borrowing costs 113 (281)
Other non-cash items 481 (211)
Balance as at period end 13,720 13,253
Reconciliation of borrowings of LCM:
31 December 30 June
2021 2021
$'000 $'000
Balance 1 July 37,171 -
Proceeds from borrowings - 36,371
Payments for borrowing costs 155 1,134
Amortisation of borrowing costs (154) (99)
Other non-cash items 1,556 (235)
Balance as at period end 38,727 37,171
On 22 February 2021 the Group entered into a credit facility with with
Northleaf Capital Partners for an aggregate amount of US$50,000,000, AUD
equivalent of $68,964,000 (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 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 2021, the Group's outstanding utilisation amounted to
US$20,000,000, an AUD equivalent of $27,586,000.
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 2021. 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 $1,288,000
which were reflected transactions costs and will be amortised over the 4 year
term of the borrowings. As at 31 December 2021 $1,035,000 of the loan
arrangement fees remained outstanding.
Note 11
Equity - issued capital
Consolidated
31 December 30 June 31 December 30 June
2021 2021 2021 2021
Shares Shares $'000 $'000
Ordinary shares - fully paid 106,613,927 105,014,157 69,674 68,904
12,586,405 11,073,767 - -
Ordinary shares - under loan share plan
119,200,332 116,087,924 69,674 68,904
Movements in ordinary share capital Date Shares $'000
Balance 30 June 2020 104,580,899 68,830
Issue of partly paid shares paid up at $0.17 per share 17 March 2021 433,258 74
Balance 30 June 2021 105,014,157 68,904
Issue of partly paid shares paid up at $0.17 per share 22 October 2021 498,583 85
Issue of options paid up at $1.00 per share 5 November 2021 600,000 600
Issue 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
Movements in ordinary shares issued under loan share plan Date Shares $'000
Balance 30 June 2020 10,457,247 -
Issue of shares under loan share plan 13 October 2020 616,520 -
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 -
31 December 2021 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 2021, 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 2019
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 Fund have been consolidated
in the financial statements.
As at 31 December 2021, the financial liability due to third-party interests
is $57,996,000 (June 2021: $39,764,000), 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 Fund 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 a 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
Fund 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 fund. The LCM
column includes the 25% co-investment in these litigation contracts.
Consolidated Statement of Comprehensive Income
31 December 2021 31 December 2020
LCM Fund Consolidated LCM Fund Consolidated
$'000 $'000 $'000 $'000 $'000 $'000
Revenue from contracts with customers
Litigation service revenue 19,154 168 19,321 7,524 - 7,524
Portfolio revenue - - - 136 427 563
Performance fees - - - 16 - 16
19,154 168 19,321 7,676 427 8,103
Litigation service expense (5,378) (65) (5,444) (2,721) - (2,721)
Gross income 13,775 103 13,878 4,955 427 5,382
Other income - - - - - -
Interest income - - - 4 - 4
Expenses
(5,134) - (5,329) (4,512) - (4,512)
Employee benefits expense
(28) - (28) (28) - (28)
Depreciation & amortisation expense
(1,721) - (1,721) (1,575) - (1,575)
Corporate expenses
Litigation fees - - - (87) - (87)
Finance costs (2,222) - (2,222) - - -
(370) (359) (730) - (554) (554)
Fund administration expense
Total expenses (9,476) (359) (9,835) (6,202) (554) (6,756)
4,300 (257) 4,043 (1,243) (127) (1,370)
Profit/(loss) before income tax expense
Analysed as:
7,423 103 7,525 (602) 427 (175)
Adjusted operating profit/(loss)
(901) (359) (1,260) (641) (554) (1,195)
Non-operating expenses
Finance costs (2,222) - (2,222) - - -
4,300 (257) 4,043 (1,243) (127) (1,370)
Profit/(loss) before income tax expense
(1,420) - (1,420) 200 - 200
Income tax expense
2,880 (257) 2,623 (1,043) (127) (1,170)
Profit/(loss) after income tax expense for the period
Other comprehensive income for the period, net of tax 442 (78) 364 (706) - (706)
3,322 (335) 2,987 (1,749) (127) (1,876)
Total comprehensive income for the period
Profit for the period is attributable to:
3,322 - 3,322 (1,043) - (1,043)
Owners of Litigation Capital Management Limited
- (335) (335) - (127) (127)
Third-party interests in the Fund
- - - - - -
Non-controlling interest
3,322 (335) 2,987 (1,043) (127) (1,170)
Consolidated statement of financial position
31 December 2021 30 June 2021
LCM Fund Consolidated LCM Fund Consolidated
$'000 $'000 $'000 $'000 $'000 $'000
Assets
Current assets
Cash and cash equivalents 30,255 13,214 43,469 35,526 14,210 49,736
Trade and other receivables 12,483 - 12,483 13,843 - 13,843
Contract costs 15,971 - 15,971 16,663 - 16,663
Other assets 701 3 704 639 (23) 616
Total current assets 59,410 13,217 72,627 66,671 14,187 80,858
Non-current assets
Contract costs 81,187 63,444 144,631 71,939 45,956 117,895
Property, plant and equipment 177 - 177 186 - 186
Intangible assets 471 - 471 391 - 391
Other assets 436 - 436 284 - 284
Total non-current assets 82,270 63,444 145,714 72,800 45,956 118,756
Total assets 141,680 76,661 218,341 139,471 60,143 199,614
Liabilities
Current liabilities
Trade and other payables 3,490 1,862 5,351 8,014 4,378 12,392
Borrowings - 13,720 13,720 - 13,253 13,253
Employee benefits 684 - 684 452 - 452
4,174 15,582 19,756 8,466 17,631 26,097
Total current liabilities
Non-current liabilities
Deferred tax liability 8,933 - 8,933 7,543 - 7,543
Borrowings 38,727 - 38,727 37,171 - 37,171
Employee Benefits 213 - 213 148 - 148
Third-party interests in consolidated entities(1) (4,629) 62,626 57,996 (3,961) 43,725 39,764
Total non-current liabilities 43,245 62,626 105,870 40,901 43,725 84,626
Total liabilities 47,419 78,207 125,626 49,367 61,356 110,723
Net assets 94,261 (1,547) 92,715 90,104 (1,213) 88,891
(1)LCM incurred placement fees and other costs in relation to the LCM Global
Alternative Returns Fund which closed in March 2020. The amounts are reflected
as transaction costs and reflected in the LCM balance sheet above.
Note 14
Earnings per share
Unaudited six
ended 31 December
2021 2020
$'000 $'000
Profit/(loss) after income tax 2,623 (1,170)
Non-controlling interest - -
Profit/(loss) after income tax attributable to the owners of Litigation 2,623 (1,170)
Capital Management Limited
Number Number
Weighted average number of ordinary shares used in calculating basic earnings 106,015,738 104,580,899
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 113,933,095 104,580,899
earnings per share
Cents Cents
Basic earnings/(loss) per share 2.47 (1.12)
Diluted earnings/(loss) per share 2.30 (1.12)
Note 15
Share-based payments
The share-based payment expense for the year was $86,000 (2020: $240,000).
Employee share option scheme
A share option plan has been established by the Group and approved by
shareholders at a general meeting, whereby the Group may, at the discretion of
the Nomination and Remuneration Committee, grant options over ordinary shares
in the Company to certain key management personnel of the Group. The options
are issued for nil consideration and are granted in accordance with
performance guidelines established by the Nomination and Remuneration
Committee.
Set out below are summaries of options granted under the employee share option
plan:
2021
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
20/09/2016 01/11/2021 $1.00 1,500,000 - (1,500,000) - -
1,500,000 - (1,500,000) - -
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 a 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 1,912,489 (June 2021: 616,520) shares
under the LSP.
Set out below are summaries of shares/options granted under the LSP:
2021
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
06/03/2019 06/03/2029 £0.5200 4,528,664 4,528,664(1)
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
04/11/2019 04/11/2029 £0.7394 388,800 388,800(1)
13/10/2020 13/10/2030 £0.6655 616,520 616,520
27/10/2021 27/10/2031 £1.06 - 1,781,682 1,781,682
27/10/2021 27/10/2031 £1.14 - 130,807 130,807
11,139,904 1,912,489 - - 13,052,393
(1)As announced on 17 December 2021, the employment of former Executive
Director Nick Rowles-Davies was terminated and his performance related
shareholding did not vest. That benefit comprised 4,917,464 shares held
through the Group's Joint Share Ownership Plan ("JSOP").
These JSOP awards are held by the LCM Employee Benefit Trust ("EBT"), and were
due to vest 19 December 2021 subject to continued employment and performance
conditions including a share price target of 175 pence being achieved at any
time during the vesting period. The JSOP award was subject to malus and
clawback provisions. Although the JSOP awards did not vest by reason of the
termination of employment for cause, the awards had not vested at the date of
termination due to the share price of LCM not trading at 175 pence at any
point during the vesting period.
The awards remain held in the
EBT.
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
27/10/2021 27/10/2031 £1.14 £1.06 35.00% 0.00% 0.63% $0.480
27/10/2021 27/10/2031 £1.14 £1.06 35.00% 0.00% 1.10% $0.890
27/10/2021 27/10/2031 £1.14 £1.14 35.00% 0.00% 0.63% $0.520
(1)AUD amount. GBP equivalent £0.26, £0.48 and £0.28.
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
In the Directors' opinion, no matter or circumstance has arisen since the end
of the period, 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.
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
2021 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
Director
Dated this day 15 day of March
2022
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