21 September 2021

 

Litigation Capital Management Limited

 

Final Results 2021

 

Robust performance during a period of unprecedented disruption demonstrates the strength of LCM's investment proposition

 

Litigation Capital Management Limited (AIM:LIT), an alternative asset manager specialising in dispute financing solutions internationally, announces its financial results for the year ended 30 June 2021.

 

Operations

·	Global Alternative Returns Fund 77% committed as at September 2021 with diversity across jurisdictions, industry sector, claim type and capital commitment
·	Scaling asset management business with Fund II well progressed, targeting US$300m with first close expected in the immediate future
·	Secured US$50m capital facility providing increased flexibility for LCM's capital structure to grow portfolio of direct and fund investments
·	Entered a number of investments involving large high profile corporate collapse including Carillion Group (Carillion) and CGL Realisations (Comet) a reflection of the strength of our track record and long term relationships
·	Established tailored disputes finance facility with DLA Piper, significantly expanding reach into major global disputes hubs and strengthening presence in under-penetrated markets

 

KPIs

·	Total assets under management grew 34% to A$336m (FY20: A$250m)
·	572 applications received, a 10% increase on FY21 highlighting the ability of investment managers to originate opportunities despite the challenges brought about by COVID
·	Investment Commitment of A$109m, inclusive of third party funds
·	Total invested capital increased 69% to A$88m, inclusive of third party funds
·	Cumulative 153% ROIC and IRR of 78% over the past 10 years

 

Financials

·	Gross profit of A$26.6m, up 23% (FY20: A$21.7m) inclusive of third party interests and increased by 20% to A$26.1m exclusive of third party interests
·	Adjusted operating profit of A$16.4m, up 47% (FY20:A$11.1m) inclusive of third party interests and increased by 42% to $15.8m exclusive of third party interests
·	Statutory profit before tax A$12.9m, up 61% (FY20: A$8.1m) inclusive of third party interests and increased by 41% to A$13.1m from $9.2m exclusive of third party interests
·	Cash of A$49.7m at 30 June 2021 (A$35.5m exclusive of third party fund consolidation)*.
·	Cash generated from the resolution of matters increased by 22% to $37.5m (FY20: $30.7m) exclusive of third party interests
·	Prudent decision taken not to pay a year-end dividend payment to preserve cash to meet increase in demand for investments to accelerate growth in our portfolio.
·	Total equity of A$90.1m up 10% (FY20 A$82.2m) exclusive of third party interests
	(*exclusive of borrowings)

 

 

Patrick Moloney, CEO of Litigation Capital Management, commented: "I am pleased to deliver a strong set of results following a year marred with global disruption. Not only does this demonstrate the resilience of our business it also reflects the strength of our robust and disciplined investment selection process and the high calibre of our investment managers. LCM's performance during the period was underpinned by our maturing balance sheet of direct investments which is beginning to deliver high yielding resolutions. We continue to build scale across our portfolio of investments and asset management business and anticipate an increased demand for our financing solutions as the effects of COVID on businesses starts to unfold. I look forward to my upcoming relocation to the UK  later this year and leading the team to driving the business forward and accelerating growth in the period ahead." 

 

An overview of the final results from Patrick Moloney, CEO is available to watch here:

https://bit.ly/LCM_FY21_overview

 

The Annual Report is available at:

https://www.lcmfinance.com/shareholders/annual-reports-financial-reports/

 

The Company's results presentation slides can be found here:

https://www.lcmfinance.com/shareholders/investor-presentations-results/

 

Enquiries

Litigation Capital Management	c/o Alma PR
Patrick Moloney, Chief Executive 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	[email protected]
Kieran Breheny
Molly Gretton

 

NOTES TO EDITORS

 

Litigation Capital Management (LCM) is an alternate 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

 

 

 

Chairman's Statement

 

At the time of writing this letter in August last year we had just witnessed months of disruption due to COVID-19. Disruption to physical, financial and mental well-being felt by many people across the world. Much of that disruption has continued over these past 12 months - although the stronger and more developed countries have generally performed much more resiliently during this period, largely due to the remarkable success of the vaccine programmes.

LCM has been in a most fortunate position due to the diversity of its business model, in both sector and geography, the flexibility of its funding structure and the ability of our team to work remotely so effectively. We are particularly encouraged by the strong interest we have seen in both single and portfolio commercial disputes - a core competency of the LCM business model. We remain well positioned for an expected upturn in both insolvency disputes and restructuring events that, we believe, will inevitably occur as business activity resumes and the economic cycle plays out.

In last year's letter, I noted the launch of our first third-party fund - the Global Alternative Returns Fund, a US$150 million co-investment fund with a number of key blue-chip global investors. The successful launch of this fund was an exciting development for the LCM business model as we continue to develop our asset management business. As a Board we are pleased to report that the GAR Fund is now more than 75% committed. We expect to launch Fund II, at a target size of US$300 million, in H1 FY22. This will be a highly significant milestone for the Company. All our cornerstone investors in the first fund have expressed their interest in participating in the second fund.

A further highlight of this past year has been a US$50 million credit facility secured with Northleaf Capital Partners. The Board of LCM had been considering for some time introducing additional capital to LCM's balance sheet to increase the flexibility of LCM's capital structure. Northleaf is a global private markets investment firm with considerable experience in the litigation funding sector. As detailed in our CEO Patrick Moloney's report, the number and quality of applications for our capital have continued to increase during this period. The Board considers the capital boost from Northleaf, at highly competitive market rates, an important step to further grow our business. This capital was secured in one of the most volatile and disruptive periods in the recent history of financial markets. In my view, this should give our shareholders further confidence in the underlying strength and opportunities inherent in our business model.

As discussed in this annual report, we continue to develop our global business model and see many attractive opportunities. As we have communicated in previous releases, Patrick planned to move to London during this recent period. This move was delayed due to COVID-19 and it is our firm intention that this move will now occur in the next few months, subject to COVID-19. This will be a major step forward in our ability to widen our business model and diversify our shareholder register.

Appropriate governance and transparency remain critical considerations for our Board. We are well aware of the challenges faced by a number of competitors in this industry in recent years. I believe shareholders can take significant assurance from the diversity of experience of our Board, both in the legal world and in structured finance. This differentiates LCM from many, if not all, of our competitors.

Our focus remains on long-term shareholder value creation and as such both our investments and remuneration schemes I strongly believe reflect this emphasis. I am also confident that our work culture and practices remain at the highest levels, at a time when we have been able to attract some of the industry's top talent while also diversifying our business model.

I am gratified to see the performance of LCM over these past 12 months, particularly given the challenging environment much of the sector has faced. In particular, I would highlight the following: since inception, LCM has completed 237 investments sustaining a financial loss in just 4.6% percent of cases. We are now at the 10-year mark of measuring investment performance and our portfolio IRR sits at 78% and our portfolio cumulative Return on Invested Capital is 153%.

As will be clear, we continue to believe this sector will continue to offer attractive opportunities for the experienced litigation funder. In many ways this sector is still nascent. Many areas for funding are yet to be fully developed and many potential beneficiaries, from corporates to law firms, have yet to fully understand the opportunity this market can provide. That process of development and education will be a key part of LCM's focus over the coming years.

We look forward to the future of LCM.

 

Jonathan Moulds

Non-Executive Chairman

 

CEO Review

 

Introduction

The financial year ended 30 June 2021 (FY21) marked the first full year that LCM has operated in markets disrupted by the global pandemic of COVID-19. The economic environment has produced a mixture of positives and challenges for LCM. While they have presented immediate and future opportunities, they have also required LCM to adapt the way it originates investment opportunities. Market conditions have driven higher demand for LCM's capital in our main markets for the funding of commercial disputes at a single case level and portfolio level, in both litigation and arbitration. Additionally, economic conditions have also set an expectation with respect to insolvency and restructuring disputes which LCM regards as being one of its longstanding core competencies. That part of the market, and indeed that economic cycle, is yet to translate into applications, however, our experience is that those opportunities will follow.

Overall, LCM performed strongly against the majority of its Key Performance Indicators ('KPIs'). Applications were up 10% on FY20 although commitments slowed due to the nature of operating through a pandemic. Invested capital increased by 69%, and assets under management increased by 34%.

LCM advanced its third-party capital asset management business by committing 76% of the Global Alternative Returns Fund ('GAR') as at the close of FY21 and made significant progress in its capital raising activities for Fund II.

During the FY21 period LCM also supplemented its capital structure by securing a credit facility with Northleaf Capital Partners, a high calibre and experienced international debt capital provider. This facility allows for added flexibility, enabling us to capitalise on our growth strategies, in advance of generating organic capital through our maturing portfolio of direct investments.

FY21 in review

Although LCM's business is resilient and fortunate enough to adapt and operate effectively, FY21 was a difficult and significantly disrupted period for LCM and the broader sector. Particularly impacted were origination and business development, progressing due diligence in relation to applications and the disruption and delays to court and arbitral processes. Notwithstanding this, LCM increased the number of applications it received compared to FY20 from 522 to 572, representing a 10% rise. That increase is a significant achievement given the prevailing market conditions globally.

The increase in applications is particularly significant as it demonstrates the ability of investment managers to originate opportunities despite the challenges brought about by COVID. Government imposed restrictions prevented investment managers from participating in their usual business development activities such as physical presentations, attending legal and insolvency conferences, participating in public speaking and industry debates and generally having the benefit of their established referral lines.

As previously announced, I had planned to relocate to the UK in order to manage LCM's growth from our London office. That would bring LCM's core executive team in one location, with LCM's Chief executive Officer and Chief Financial Officer both operating from our London office. The move will bring about significant efficiencies with the chief executives operating in the same time zone and where LCM enjoys its listing. That management restructure has been delayed as a consequence of Australia's borders being closed and an inability for me as CEO relocating. That position is now beginning to change. It is currently anticipated that such restructuring and relocation can be effected before the end of this calendar year. That is of course subject to border control issues, but it looking very promising.

The delay has permitted me to work closely with Susanna Taylor, our Head of Investments in the APAC region. That period of delay has been valuable in facilitating an extended planning and strategy period for both Susanna and myself with respect to ongoing growth in the APAC region. I can say, without hesitation, that I have every confidence in Susanna managing the ongoing growth of the APAC region. In terms of the London office, I look forward to heading up growth in the region as economies both in the UK and Europe emerge from the difficulties brought about by COVID.

During the year LCM encountered disruption in our ability to conduct efficiently our rigorous due diligence and risk management process. The information flow in respect of applications is largely managed through law firms, which, like many other sectors of the economy, experienced disruption. That slowed the process considerably and consequently, our ability to commit to matters as a result of those delays. This resulted in a reduced level of commitments when measured against the prior financial year. LCM's commitments were A$109 million in FY21 compared with $147 million in the prior year. We are seeing an increase in the efficiency of applications which is expected to help reverse this decline over the short term. The reality of commerce is that disputes must be resolved and all service providers to the global disputes industry, predominantly lawyers, are adapting to new work practices in a COVID environment.

Through the period the benefit of our strategic law firm partnerships continued to develop with the establishment of a tailored Disputes finance facility with DLA Piper which will significantly expand LCM's reach into major global disputes hubs and strengthens our presence in markets that are currently under-penetrated by litigation finance.

LCM also observed disruption in the progress of disputes either through the court process or the arbitral process. From time-to-time in all territories in which LCM operates, the court system and indeed, the community more widely, has been placed in a mandatory lockdown. That has inevitably caused delays in the finalisation of investments. Such disruption and delays have driven innovation and modernisation. Ultimately, the court system in many respects is now operating far more efficiently than it was pre-COVID.

Whilst commitments declined, invested capital increased from $52 million in the prior year to $88 million in FY21. That increase in capital investments is a direct reflection of LCM's growing portfolio of assets under management. The term 'assets under management' in this context refers to the aggregate capital commitments of all litigation funding investments comprising LCM's overall portfolio under management.

Notwithstanding the challenges of a pandemic impacted year, LCM's overall assets under management ('AUM') grew from $250 million at the close of FY20 to $336 million at the close of FY21. Given overall market conditions, we are very pleased with the progress which has been achieved growing LCM's overall portfolio of assets under management despite a year marked with disruption and change.

Credit facility

The Board is continuously looking at options to introduce additional capital to LCM's balance sheet to increase the flexibility of LCM's capital structure. In February LCM secured a US$50 million credit facility with Northleaf Capital Partners. Northleaf is a global private markets investment firm with considerable experience in the litigation funding sector.

The credit facility provides significant additional capital flexibility to enable the Company to grow its direct investment portfolio, its asset management business and to supplement balance sheet capital in relation to the co-funding opportunities of the LCM GAR Fund and for the second fund. It also provides LCM with a bridge to organically generated capital as its portfolio of direct investments matures.

Securing the facility at a time when global economies and markets were heavily disrupted was a significant achievement and demonstrates companies such as Northleaf see the value in LCM and potential of the sector. Northleaf is an excellent finance partner moving forward, not only in relation to the existing credit facility but with respect to other opportunities such as the co-funding of large investments.

Portfolio update

LCM's business comprises two models involving separate, but interlinked, portfolios of investment disputes. The first is LCM's asset management business and the second is LCM's portfolio of direct investments serviced from our balance sheet capital. The business models are linked through a process of co-investment. The majority of investment opportunities originated through LCM's platform are offered to the asset management business where investments are generally funded as 75% of the capital commitment from managed funds and 25% of the capital commitment from LCM's own balance sheet capital. Through this co-investment, the interests of equity investors and fund investors are aligned.

The development of LCM's asset management business has been crucial for LCM's growth and building scale. In an industry maturing rapidly on a global scale, LCM's fund management business has permitted it to gain access to larger pools of capital, which in turn allows LCM to build the size of its portfolios and in turn, assets under management.

LCM's GAR Fund had committed 76% of its capital by the end of FY21, which was the trigger for LCM to launch its second fund, building the scale of its asset management business. We are well advanced in terms of discussions with existing and prospective investors, concerning the raising of a second pool of managed capital. LCM is targeting US$300 million for Fund II. To date there has been strong support from existing investors, as well as a number of investors who were unable to participate in the GAR fund. We are in the process of considering the timing of a first close in respect of Fund II, but initial expectations are that it will take place in H1 of FY22.

With respect to both our portfolio of direct investments and asset management business, LCM actively manages its portfolio structure to ensure diversity and minimise concentration risk across its portfolio of global disputes. Both our asset management business and our portfolio of direct investments enjoys diversity across jurisdictions, industry sector, claim type and capital commitment.

At the close of FY21 LCM's portfolio of direct investments was A$181 million which comprised $105 million of commitments where LCM invests 100% of that commitment from balance sheet capital and $76 million of commitments which comprise co-investments funded from balance sheet capital alongside the third party fund. In respect of that total portfolio of direct investments of A$181 million, A$98 million has been invested from balance sheet funds to the end of FY21.

Over time, and as LCM's asset management business grows, we expect to see the aggregate value of the portion of LCM's portfolio of direct investments, where LCM is committing 100% of the capital, to diminish and be replaced with an increasing number of co-investments with its asset management business, spreading the risk of each dollar of invested capital across a more diverse pool of investments, further reducing concentration risk in respect of our direct investments. We believe this shift will accelerate long-term sustainable growth.

Performance Metrics

LCM is very proud of its investment performance and guards that performance zealously. We continually measure our track record, which is the cumulative performance of each and every investment completed by LCM. We have now reached the ten year point in that historical performance. Our investment performance in the period prior to the ten years is of less relevance to our expected performance moving forward because LCM's investment methodologies, our investment process, management, and capital structure, were all very different and had a significant impact upon both investment selection and investment performance. That is not to suggest that the performance was necessarily inferior prior to that, however, we believe that the past ten years is the most indicative of how our investment strategies might perform in the future.

We are often asked by shareholders whether LCM will be able to achieve similar high performance investment metrics as the business builds scale. We have candidly accepted that the building of scale in LCM's platform and the significant increase in the size of the portfolios under management are likely to reduce LCM's performance metrics over time. That said, our investment performance is currently at an exceptionally high rate and a reduction would be unlikely to impact LCM's profitability moving forward, if it is accompanied by a growth in scale and portfolio size.

Our performance metrics measure the performance of each and every investment completed by LCM in the past ten years, inclusive of those investments which did not produce a profit or otherwise sustained a loss. For the past 10 years, LCM's investments have generated an internal rate of return ('IRR') of 78%, which has remained consistent with the prior financial period Our Return On Invested Capital ('ROIC') increased to 153% compared to 134% for the nine year period ending 30 June 2020.

The high performance of LCM's investments can be attributed to two main factors. The first is the rigour with which LCM's investment managers undertake their due diligence process and the process itself. It brings to bear not only the experience and expertise of the investment manager who is responsible for that investment application, but also the collective skill and experience of their peers. LCM has developed a proprietary system of application evaluation, due diligence and risk management over its 23 year history. The second factor that drives LCM's performance is the close monitoring and management of investments through to a profitable conclusion. LCM's investments are far from a 'set and forget' strategy. Our highly experienced investment managers monitor closely and continuously, the progress of each dispute through the judicial system. That extends to practices such as attending court hearings to observe the interaction of the presiding judge with the parties and the general programme of the dispute towards its final hearing. Whilst it is accurate to say that our investment managers do not interfere with the provision of legal services, or the relationship between the provider of legal services and the funded party, LCM is not a passive investor. It monitors closely the progress of all investments at all times.

Historically, since LCM's very inception, the relationship between applications and investments has remained relatively consistent. That is the number of applications which are ultimately converted into an investment after being subjected to our rigorous due diligence and risk management process. That conversion rate has been between 3% and 7%. At the close of the financial year ended 30 June 2020, LCM's conversion rate was 3.5%. Over FY21 that conversion rate has dropped to 3%. In our last annual report we identified as one of our short-term goals, a desire to increase the conversion rate of applications to investments, whilst maintaining our investment performance. Regrettably, due to the market conditions, we have not been in a position properly to advance that goal. The reasons for that are many and varied, but the most meaningful initiative which will increase LCM's efficiency with respect to conversion rate, is through education. This is best achieved through our strategic partnerships with global law firms, and involves LCM's experienced investment managers educating the referrers, typically disputes lawyers, as to the elements which will increase the prospects of an application converting to an investment. Given the disruption occasioned by COVID during the entire financial period, we have not been in a position where we can effectively roll out that education programme. It remains one of our goals and we shall focus upon it as global markets return to the new normal.

One other factor which has affected our conversion rate and kept it at the lower end of the range is recovery risk. Recovery risk forms part of our five core assessment principles when considering an investment, before it is offered to our Investment Committee. Further detail is provided with respect to those five criteria under the Risk section on pages 44 and 45 of the annual report. LCM's investment managers, adapting quickly to market conditions, placed greater focus on the risk associated with recovery and collection given global conditions and the increased risk of corporate failure in volatile and unstable markets. LCM needs a clear line of sight towards a recovery before it is prepared to approve an investment. That risk typically drives our investment managers towards potential investments which are backed by an insurance product whether it be professional indemnity, or directors and officers insurance policies. That has resulted in LCM rejecting a larger proportion of investments which might otherwise have been approved during more stable economic times. We see that as an important initiative and a logical and intelligent reaction to market conditions.

Our Win: Loss Ratio

Since inception, LCM has completed 237 investments. That is, it has entered into litigation finance agreements in respect of 237 disputes, predominantly litigious disputes, which have completed. In respect of that number, LCM has sustained a financial loss in respect of 11 of those investments. That represents a loss rate of 4.6%. That remarkable statistic is achieved through LCM's rigorous and disciplined due diligence processes and risk management systems as well as our fastidious approach towards investment management and monitoring.

Of the 11 investments where LCM suffered a financial loss, six investments involved a court, or tribunal adjudicating the dispute in a different way from that which LCM had predicted or anticipated through its due diligence process. In simple terms, LCM had invested in a dispute it expected to win, the judge disagreed and the funded party lost. The other five investments which LCM made, did not result in a determination by a court or tribunal and resulted from a negotiated outcome. In those instances, the factors which led to the financial loss were outside LCM's control. Typically, a change in circumstances, the law, or otherwise.

It is important to emphasise that litigation is unpredictable. Losses are part of the investment class, and there will inevitably be some circumstances where LCM suffers a financial loss in a particular investment, although we have not seen a loss in respect of an investment for many years. That said, LCM has every intention of maintaining its rigorous and disciplined approach towards due diligence and risk management. In addition, we intend to continue to critically monitor our portfolio of investments through to conclusion.

Forecasting and guidance

LCM has extensive experience in the provision of litigation funding and finance products to the market. Indeed, that experience extends right back to the inception of the industry in the late 1990s. That experience enables LCM to observe, with some confidence, that accurate forward forecasting is exceptionally difficult to achieve. It requires the financier to predict accurately when a particular project, or portfolio of projects, will come to a conclusion either through a negotiated settlement of the dispute or an adjudication by a court or tribunal. Secondly, it requires the financier to predict what the quantum of such a resolution might be either as a negotiated settlement or as an award by the court. Given the myriad of outcomes that one might have in respect of such an investment in a dispute, it is simply not reasonable or responsible for us to provide forward forecasting.

Strategy

As noted above, the past financial period has been a challenging environment in which to operate which has impacted upon the progress of our short term priorities: the expansion of the asset management business, increase in the number of applications and to supplement the balance sheet capital.

In parallel with progressing these priorities, it also became necessary for management to focus its attention upon the formation and implementation of strategies to deal effectively with the disruption to global markets consequent upon COVID. Those initiatives focused upon new routes to market, business development, innovative origination of investment opportunities as well as adapting due diligence and risk management. Progress with respect to our short-term strategies were as follows:

•  Expansion of LCM's asset management business: This time last year we anticipated having progressed significantly towards a closure of Fund II during the FY21 period. As previously reported, LCM closed the US$150 million GAR Fund in late March 2020, which is currently committed at 76%. The structure of our first managed fund allowed a period of 24 months from closure for that fund to be committed and we have achieved this within 18 months. We are now well advanced in our progress of closing Fund II, targeting a raise of US$300 million which will take our asset management business to US$450 million of funds under management. That figure does not include our portfolio of 100% direct balance sheet commitments. We are currently aiming towards a first close of our second fund in H1 FY22.

•  Increase the number and quality of applications: Despite a very disrupted financial period, applications increased by 10%. We are pleased with the increase, particularly given the market conditions and most particularly LCM's inability to pursue its usual and traditional origination techniques. Conversion of those applications was down slightly consequent upon a number of factors. The first, explained above, is a greater focus and scrutiny upon recovery at due diligence and risk management levels. Secondly, LCM is encouraged to see an increase in the proportion of applications relating to larger investments and more complex commercial disputes. In particular, LCM entered into a number of investments involving large and high-profile corporate collapses including the Carillion Group ('Carillion') and CGL Realisations ('Comet'). We continue to focus upon strategies to increase the number and quality of applications received.

     One of the methods by which we are seeking to increase the quality of applications and thus increase the conversion rate of applications to investments is through our global strategic alliances. The past year has given LCM the opportunity to review and analyse our global alliances with law firms. We currently enjoy global alliances with Clyde & Co, DLA Piper and Norton Rose Fulbright in the Asia Pacific ('APAC') region. Those strategic alliances range from a relatively informal cooperation arrangement to a more structured agreement involving the establishment of purpose-built funding vehicles. We are constantly reviewing and innovating our relationships with those strategic partners. The advantage of the strategic alliances is not only to increase the number of applications that we receive during any given period, but also the quality of those applications. Increasing the quality of the applications will, in turn, increase the conversion rate and thus the overall efficiency of LCM's origination strategies.

•  Supplementing balance sheet capital: During the financial period LCM secured a capital facility through the highly experienced global capital provider, Northleaf Capital. That capital facility of US$50 million broadens LCM's capital structure and allows for continued growth, the benefits of which have previously been detailed earlier.

Progress in relation to longer term goals:

•  LCM continues to observe new markets and territories. As we have consistently stated, we will not move into a new jurisdiction or territory unless we can be satisfied that we have a sufficiently experienced team on the ground in that jurisdiction. It is essential in our view that recommendations made to our investment committees are made by professionals with real and relevant experience in the territory in which the dispute is to be adjudicated.

     The past financial period has not been conducive to advancing this goal other than to observe and study alternate territories. Due to COVID we have not been in a position to travel, and undertaking real and tangible investigations into new territories has not been possible. That said, LCM has received a number of inbound enquiries, several of which have been from North America, seeking to create strategic alliances and/or joint ventures. We are considering those enquiries as part of our longer-term strategic goals. We hope that as markets globally return to a new normal that we will be in a better position to advance this goal in a more meaningful and tangible way.

•  Our second goal is to increase our overall portfolios of assets under management. Notwithstanding the challenging market conditions, we increased AUM from $250 million at 30 June 2020 to $336 million at 30 June 2021, an increase of 34%. We are encouraged by that increase given the restricted market conditions.

•  The third longer term goal is to increase the innovation LCM brings to the litigation finance asset class. The extended periods of lockdown experienced over the past financial period have permitted a period of reflection. We have studied closely our routes to market, in particular with respect to products such as corporate portfolios. We have also looked closely with a view to innovating our actual finance products in order to better meet the needs of those involved in disputes.

Investment Strategies

LCM applies its capital in both balance sheet and managed funds, across three separate investment strategies. The first is Single Case Investments, the second Portfolio Investments and the third, an Acquisition of Claims strategy. Over time, and when each of the separate strategies warrant and are able to produce separate performance metrics, we will aim to report on them segmentally to the market. At present we report performance on an amalgamated basis which includes single case investments and portfolio investments. We have intentionally excluded the small number of acquisition of claim investments from our performance metrics to give a more accurate representation of performance, as these matters perform at such a high level of returns that including them would skew the metrics.

Single Case Investments

Single case investments comprise an investment in a single dispute whether it be in the court system or being pursued by the arbitral process. Typically those investments have more of a binary outcome and results in either a profitable or unprofitable investment. LCM has been investing in single disputes for 23 years and has very significant experience in undertaking a comprehensive due diligence and risk assessment process in respect of applications related to single case investments. The bulk of LCM's ten year track record involve single case investments.

LCM continues to see strong demand for its capital with respect to single case investments. The majority of applications received in any given financial period, including the one just passed, relate to potential single case investments. Across all jurisdictions in which LCM operates, we expect to see an increase in applications relating to single case disputes, particularly from the insolvency and restructuring part of the market. The timing of that increase will very much depend upon the extent to which global economies are subject to continuing stimulus packages and the reduction in safe-guards against insolvency and the winding-up of insolvent companies.

Portfolio Investments

Portfolio investments themselves fit into three separate categories, the first and most well-known are law firm portfolios. These investments involve LCM sharing risk with a law firm in respect of a portfolio of disputes. The terms of that arrangement vary, however, commonly involve the funder providing part of the costs of the portfolio of disputes in return for the law firm sharing a percentage of the law firm's contingency remuneration. These investments exist in jurisdictions in which law firms are able to enter into contingency fee arrangements.

The second type of portfolio investments are corporate portfolios. That involves LCM providing a capital facility to a single corporate, or corporate group to fund all, or some, of their disputes. The facility can be provided both in respect of disputes where the corporate is a claimant or where they are defending a claim brought against them. LCM's capital advance is collaterally secured across the portfolio of disputes. LCM is actively pursuing corporate portfolios as an investment strategy and is one of the few litigation financiers globally who provide corporate portfolio financing.

The third type of portfolio investments relate to insolvency and restructuring disputes. In select and large insolvencies or bankruptcies, the insolvency practitioner may seek a working capital facility to pursue a portfolio of disputes arising within an insolvent shell or bankrupt estate. As with corporate portfolio facilities, the capital can be supplied both in respect of claimant disputes, but also in defence claims. The volume of insolvency and restructuring related investments, as well as the number of appointments, is relatively low at present consequent upon global economic stimulus packages and measures put in place in various jurisdictions in which LCM operates in which to defer insolvency events and corporate wind-ups. LCM expects that as with single case investment opportunities in the insolvency and restructuring space that insolvency portfolios will represent opportunities in the future.

LCM sees portfolio investments as both an important part of the addressable market generally, but also as a reduced risk investment with favourable return metrics.

The market for corporate portfolio investments has been challenging over the last financial period. That is due to market disruption and lockdowns in the various jurisdictions in which LCM operates. That has hindered LCM's route to market with respect to originating those investment opportunities. It is difficult for LCM to develop an alternate route to market with respect to corporate portfolios simply due to it being a very new strategy which brings with it the need for there to be an educational process involved in origination. Notwithstanding those challenging conditions, LCM has seen an increase in the numbers of applications for corporate portfolio investments. We expect to see the number of quality applications for corporate portfolio investments to increase as global economies stabilise.

Acquisition of Claims

The acquisition of claims strategy involves LCM acquiring, through assignment, the cause of action and then pursuing that claim as principal as opposed to an external funder. It is the most recent of LCM's investment strategies. The strategy enjoys significant advantages as against a more traditional funding model particularly in circumstances where the claim size is modest. Over the years since LCM commenced its funding business in the late 1990s it has observed that the economics of funding claims where the amount in dispute is below approximately $8 million (depending on complexity) the traditional funding model is difficult to apply. It creates the potential for the commercial interests of the funder and the funded party to diverge. The implementation of the acquisition of claims strategy allows LCM to address that part of the market.

The acquisition strategy has a number of benefits to LCM. First, it allows LCM to exercise complete control over the investment without reference to a funded party. In other words, LCM has the absolute autonomy to settle or pursue through to a contested hearing without having to consider the interests of third parties. Secondly, these smaller types of claims have traditionally been resolved in a shorter period than our average investment period for larger claims. Currently the average time to maturity of LCM's portfolio of investments completed over the past ten years has been 27 months. We expect the duration of claims pursued as principal through acquisition to be between 12 and 18 months. Finally, we expect over a period of time for the return metrics to be greater than those of larger claims.

The acquisition of claims strategy is progressing well. We are managing a portfolio of five claims which have been acquired. We have also enjoyed a number of resolutions which have returned metrics well in excess of our ten-year track record and hope to provide segmental reporting metrics as our dataset warrants it.

Whilst this investment strategy is progressing well and we are happy with the size of the portfolio already established, the availability of investment opportunities for this strategy has been low consequent upon prohibitions imposed in the jurisdiction of Australia which has prevented insolvent companies from being wound up due to the economic impact of COVID. Therefore, there has been lower numbers of smaller to medium sized corporate insolvencies which would traditionally provide the source of investment opportunity during the time since COVID began its disruptive effect upon the Australian economy. Similar measures have been introduced in other jurisdictions in which we operate. We expect that as the economic restrictions and stimulus packages are removed that greater opportunity will arise in the market.

Our people and culture

LCM operates with a small but high performing team. As CEO I am fortunate to lead a team of investment managers who not only perform at a high level but are self-motivated and driven. Managing such a hardworking and high performing team requires us to be mindful and supportive of the working environment and culture of the Company.

The past financial period has also placed some pressures on that work environment and culture. In particular, our London and Melbourne offices have experienced prolonged periods in which the community was locked down and as such there has been very little attendance in the office itself. That is not to say that there has been a reduction in productivity, however, investment managers and their support teams have not had the benefit of the camaraderie and culture of those offices. Our other offices across the territories in which we operate have also been affected from time-to-time but not in such a profound way as London and Melbourne. Indeed, at the time of writing this report greater Sydney has been placed in a strict lockdown for an extended period of time preventing staff from attending the office at all. It is during these tough times that the culture of an organisation is so important. As has always been the case, investment managers have strongly supported each other from territory to territory. The drive of individual investment managers and their support for each other has contributed to a large degree in the investment resolutions which occurred during the financial period which has driven financial result.

The other clear measure of the discipline of investment managers is LCM's strong track record. We are now at the 10 year mark of measuring investment performance and our portfolio IRR sits at 78% and our portfolio cumulative ROIC is 153%. That performance is directly reflective of the systems and methodologies that LCM has developed over the many years of its operations. It is also a direct reflection of the skill and discipline with which those systems and methodologies have been applied to applications by our investment managers and how they have managed those investments through to a profitable outcome.

We have seen our global team increase by three investment managers during the financial year. In the coming financial period we anticipate further strengthening our team of investment managers in the London office as well as taking advantage of opportunistic hires. Given LCM's growth over the past five years, as well as the work environment that we have created, LCM has become a sought after employer for those moving within the industry itself but also those transitioning from a career in the law.

Market and environment

Resilient Business Model and Operations

LCM is fortunate as a business both to be able to operate remotely in an effective manner but also to benefit from turbulent and uncertain market conditions. Whilst the past financial year has been marked with disruption it is certainly not the type of disruption which suspends LCM's business operations to any great degree. As noted above, it does affect the way that LCM originates its investment opportunities and undertakes business development, however, its core business and the demand for its capital either remain the same, or indeed have been the beneficiary of the uncertain market.

We see through our application flow three particular dynamics at play in the current market conditions. The first is a desire by law firms to consider litigation finance as an alternate way of their disputes clients funding costly litigation. It is a concept that the disputes teams inside large international firms are forced to consider when facing market conditions which have a tendency to restrict the budgets being allocated towards disputes. This has driven increased dialogue and opportunity through our law firm relationships and strategic partnerships.

The second dynamic that we are observing in the market is that corporate clients in particular are reacting to the uncertainty in the market by allocating their resources and capital towards core business and at the same time restricting the budget on non-core items. That dynamic results in a more open-minded consideration of litigation finance than would be the case in more buoyant, stable times. That is particularly the case with respect to LCM's corporate portfolio product.

Finally, the prolonged periods of lockdown and interruption to economies generally are likely to lead to an increase in corporate insolvencies and bankruptcies. Market conditions in all the economies in which we operate are expected to see an increase in insolvencies, bankruptcies and restructuring. That is an area that LCM has enjoyed considerable experience since its inception 23 years ago.

Industry Regulation

Regulation of litigation finance as an industry is an area that LCM monitors continually. For many years LCM operated in an environment that was largely unregulated. More recently there has been small pockets of regulation although such regulation is seen by LCM as a positive.

When considering regulation, it is important to observe that LCM as a public company whose shares are traded on a public platform is subjected to a significantly higher level of regulation than a private litigation financier. Secondly, and as described in more detail below, LCM maintains an Australian Financial Services License ('AFSL') which it obtained and maintained prior to the recent change in regulation which required the holding of such a license. The regulation through the London Stock Exchange's rules, the requirement to audit, financial transparency and the maintenance of an AFSL are all features which provide a significant advantage when addressing the part of the addressable market where the user of litigation finance does so through choice. That is large, sophisticated, well capitalised, and often publicly listed corporations are far more willing to consider a litigation finance offering from a company who is regulated in some degree in a largely unregulated market. It results in LCM being well placed to address corporate clients and in particular offer corporate portfolio products.

The past financial period has seen regulation which has both expanded the available markets as well as place barriers to entry to others. The first jurisdictions to consider are Singapore and Hong Kong. As observed above, LCM has seen significant growth and activity in the Asian market as measured through its Singapore office. The legislatures of both Singapore and Hong Kong passed laws to specifically permit litigation finance to be utilised in international arbitration (and in the case of Hong Kong, also domestic arbitration). The opening of those markets occurred first in Singapore in 2017 and then in Hong Kong in 2019. Most recently in 2021, Singapore has extended the disputes in which litigation finance can be utilised to domestic arbitration and selected disputes to be adjudicated through their international commercial court. The recent legislative changes in Singapore and Hong Kong are welcomed as an extension of the available markets in which litigation finance can be utilised in those jurisdictions.

In Australia a number of legislative changes have been enacted which affect the litigation funding industry insofar as funding is supplied to the class action market. Those legislative changes now require any litigation financier providing litigation funding products in connection with a class action to both hold an AFSL and also provide their funding through a Managed Investment Scheme ('MIS'). As noted above, LCM already held an AFSL at the time that the requirement was introduced and has modified that AFSL to ensure that the appropriate approvals are in place to permit LCM to fund class actions. With respect to operating a class action and its funding as an MIS, LCM has implemented the necessary infrastructure to permit that to occur.

As previously reported, LCM had expected changes to the class action landscape and the introduction of some form of regulation. LCM had, prior to the changes being debated or made, consciously stepped back from the class action part of the market until such time that clarity around the changes had crystallised. Although the changes are recent and involve greater regulatory approval and administration, LCM is well placed to ensure compliance moving forward.

Indeed, it is likely to be the case that the level and cost of administration associated with the licensing and requirement for litigation financiers to operate a MIS will create a significant barrier to entry with respect to smaller providers of litigation finance products. It is anticipated, and generally accepted in the Australian market, that the best placed litigation financiers to navigate and provide funding to class actions are litigation financiers such as LCM. We welcome that form of regulation and believe it will ultimately result in a barrier to entry to those less experienced and smaller funders.

We are not aware of any other jurisdictions or geographies in which we operate contemplating any form of regulation at this time, as we constantly monitor the market for any form of suggested regulation.

Outlook

Notwithstanding a financial year punctuated by disruption, LCM has continued to deliver growth. We saw increases across the board from applications to capital invested through to overall assets under management. We also achieved the introduction of additional capital and flexibility to our capital structure through a US$50 million credit facility.

As we look ahead to the next financial period and beyond, it is not entirely clear when markets will return to normal, if at all. If market commentary is correct, it is likely that markets will never return to the way they were pre-COVID but will adjust and adapt. As the markets globally emerge from the restrictions imposed as a consequence of COVID there will be, to some degree, an increase in insolvencies, bankruptcies and restructuring. That appears to be an inevitable consequence of the markets, prolonged lockdowns and shifting economic conditions.

As we look forward, we see opportunity. With the GAR Fund significantly committed and first close of Fund II expected in H1 FY22 we are making solid progress in building the scale of the third-party capital asset management business. We find ourselves with a capital structure providing us with more flexibility to permit portfolio growth as well as a larger pool of funds under management in our asset management business. We see favourable market conditions looking forward, irrespective of how quickly or slowly global and local economies recover from the impacts of COVID.

 

Patrick Moloney

Chief Executive Officer

 

Market Overview and Outlook

 

Market Overview

It would be impractical to review the last year in the disputes finance market, or any market, without assessing the effect of COVID-19 on our business, the impact it has had, and the way LCM has responded and evolved. Undoubtedly, nobody anticipated the disruption that the pandemic would cause to the normality of business life. Whilst disputes financing is both counter-cyclical and historically also counter-recessionary, the disruption to travel and routine operations has been felt in every sector.

There have been challenges created by the shift to remote working, delays to the court and arbitral processes and the effect of several lockdowns in the jurisdictions in which we operate, all of which have required LCM's teams to adapt to new ways of creating and doing business, which they have achieved admirably.

Whilst there was a significant disruptive impact upon the court system however in London particularly, it has rebounded with the number of contractual claims filed in the High Court doubling in comparison to the previous year and the overall number of High Court claims increasing by 24%¹. Our strategic alliance partners featured heavily in those matters with both Clyde & Co and DLA Piper in the top ten for volume of Claimant cases for a second year running².

Whilst there has not yet been a surge in pandemic related disputes, some 31% of corporates have reported an increase in disputes directly related to the pandemic3 with contract disputes (including force majeure) and other commercial disputes the predominant drivers of increasing activity.

Origination and business development is a vital part of the process. We continue to review our origination methods and how successful or efficient they are. We respond and adapt to what we see in the market in a rapidly evolving industry. A significant part of our thinking in origination is the development of specific strategies to address any market observations and to improve the quality and size of our pipeline. The market penetration of disputes financing remains low in comparison and the percentage of matters that proceed with the assistance of disputes funding remains low in relation to the global universe of cases that could be funded. The market presents considerable opportunity and there remains vast untapped potential. We shall continue to deploy, review and refine our strategies to address these areas in the coming year.

In conclusion, the last 12 months have demonstrated the flexible and resilient nature of LCM's operations. We witnessed an increase in opportunities and built on the solid foundations of the prior year, despite the unprecedented challenges and disruption caused by a global pandemic. LCM has invested in some high profile and high value disputes in Australia and the UK, demonstrating the recognition of LCM as a global leader in disputes financing.

1   Solomonic - HFW The future of disputes - The COVID effect

2   Solomonic - https://www.solomonic.co.uk/news

3   Litigation Trends Survey 16th Annual Edition Norton Rose Fulbright

 

Market Outlook

The headline factor for the last 12 months and undoubtedly for many months to come is the effect of the pandemic. There has been increasing pressure on corporate in-house teams over the last year, which is set to continue as the number of disputes they face will continue to increase. Almost half of corporates have already seen a significant increase in disputes volumes, with a consequential impact on resourcing, that will lead to an inexorable rise in the consideration and use of disputes financing.

It took some time for the full effects of the 2008 global financial crisis on corporate disputes to filter through. Similarly, the effects of the pandemic may not be felt fully for six to 12 months. The result may well be different from 2008. That recession arose from a crisis of liquidity and resulted in a range of complex financial services disputes, involving bad loans, defunct financial services products and derivatives.

The pandemic is likely to produce more traditional corporate and commercial disputes. It is anticipated that the traditional areas of disputes such as construction and shipping, already hit by the early effects of the pandemic, will be joined by an increase in aviation, retail, hospitality, leisure and infrastructure related litigation.

The financial uncertainty in the coming year is also likely to give rise to an inevitable increase in insolvency related disputes. History suggests that disputes increase in uncertain financial times and that underlines the countercyclical and counter recessionary nature of disputes financing.

The next twelve months will see LCM reinforcing its position as a global leader in disputes finance. We shall build upon the foundations of the last year through continued innovation. We shall continue to promote our work with corporate clients and strategic law firm partnerships by the deployment and execution of our key business development strategies to maintain the excellent volume, but increase the quality of our pipeline.

1. Law Firm

Working closely and regularly with a law firm allows for an exchange of information and provides a bilateral education process. LCM is able to understand the needs or concerns of the law firm and their clients. The law firm quickly learns how to obtain a positive investment decision by appreciating the process that LCM undertakes. This improves efficiency and avoids a lengthy and ultimately disappointing and expensive application process for clients.

2. Corporate

The strategies we employ to assist corporate clients with a financial solution to their legal budgets are an important part of our plans for the next year although they are very much long-term projects. Corporate clients have begun to react more favourably to those firms that are investing in the longer-term development of the relationship and have begun to give them more work.⁷

The law firms adopting the practice of looking beyond short-term transactional goals and investing in the creation and development of longer-term relationships sits very comfortably with LCM's ethos of building evergreen disputes finance portfolio arrangements with corporates.

3. Insolvency

This strategy encompasses the acquisition of insolvency related disputes in the UK and Australia as well as traditional financing of insolvency disputes. We remain committed to this area with an anticipated rise in these types of dispute expected in the coming year.

4. Education and Advisory

The evolving nature of what can be done with disputes financing means that a part of what we do at LCM every day is education. The continuous process of innovation, education and explanation is an important part of the LCM brand and the individual brands of our team members who are all experts in their field.

 

Nick Rowles-Davies

Executive Vice Chairman

 

Financial Review

 

The global economy continued to face challenges as a result of the prolonged disruption caused by continued and subsequent outbreaks of COVID. Despite this, LCM delivered improved performance on the prior year and continued to build scale across the majority of key performance metrics. Our investment selection expertise is supported by our ten year historical IRR which remains at 78% and an improved ten year ROIC of 153%. We have made good progress in committing our first third party fund, and are well progressed with Fund II with an aim to launch in H1 FY22, with all existing investors expressing a strong interest to participate in our second Fund, demonstrating their confidence in LCM. As previously announced, the US$50m credit facility entered in February 2021, further supplements our balance sheet, significantly increasing our ability to invest in new opportunities and facilitating growth. The progress made over the past two years in growing our portfolio of investments positions us well for delivering meaningful profits in the future.

LCM standalone results

The performance of the business presented in the consolidated statement of profit and loss and other comprehensive income, the consolidated statement of financial position, the consolidated statements of changes in equity and the consolidated statement of cash flows has been presented in accordance with the Australian Accounting Standards ('AASB') and the International Financial Reporting Standards ('IFRS').

AASB requires the consolidation of the Fund as LCM has exposure, or rights, to variable returns from its co-investment with the Fund. Consequently, third party interests have been consolidated in the financial statements.

Both Management and the Board believe that the Fund should be excluded from the presentation of our financial performance to provide a clearer understanding of the underlying performance attributable to LCM.

The tables following provide a full reconciliation of the consolidated statement of comprehensive income and consolidated statement of financial position so that investors are able to relate our performance discussion with our financial report. Note that these are non-AASB measures and may not be directly comparable with adjusted measures of other companies. They are not a substitute for or replacement of AASB measures.

 

Income statement	Note	AASB as reported 30 June 2021 $'000	Fund interests* $'000	LCM-only 30 June 2021 $'000	AASB as reported 30 June 2020 $'000	Fund interests* $'000	LCM-only 30 June 2020 $'000
Revenue from contracts with customers
Litigation service revenue	4	36,924	664	36,260	35,833		35,833
Performance fees	4	135	-	135	2,608		2,608
		37,059	664	36,395	38,441		38,441
Litigation service expense		(10,439)	(114)	(10,325)	(16,723)		(16,723)
Gross profit		26,620	550	26,070	21,718		21,718
Other income		-	-	-	90		90
Interest income		4	-	4	35		35
Expenses
Employee benefits expense	6	(8,396)		(8,396)	(7,611)		(7,611)
Depreciation expense	6	(59)		(59)	(86)		(86)
Corporate expenses		(2,664)		(2,664)	(3,752)		(3,752)
Litigation fees	6	(86)		(86)	(1,159)		(1,159)
Finance costs	6	(1,334)	-	(1,334)	-	-	-
Fund administration expense	6	(1,153)	(685)	(468)	(1,183)	(1,183)	-
Total expenses		(13,692)	(685)	(13,007)	(13,791)	(1,183)	(12,608)
Profit before income tax		12,932	(135)	13,067	8,052	(1,183)	9,235
Analysed as:
Adjusted operating profit		16,384	550	15,834	11,137		11,137
Non-operating expenses	6	(2,118)	(685)	(1,433)
Finance costs	6	(1,334)	-	(1,334)
Profit before income tax expense		12,932	(135)	13,067	8,052	(1,183)	9,235
Income tax expense	7	(4,069)	-	(4,069)	(2,799)		(2,799)
Profit/(loss) after income tax expense for the period		8,863	(135)	8,998	5,253	(1,183)	6,436
Profit for the period is attributable to:
Non-controlling interests		-	-	-	8	-	8
Third party interests in the Fund		(135)	(135)	-	(1,183)	(1,183)	-
Owners of Litigation Capital Management Limited		8,998	-	8,998	6,428	-	6,428
		8,863	(135)	8,998	5,253	(1,183)	6,436
Other comprehensive income for the year, net of tax		(1,377)	105	(1,482)	-	-	-
Total comprehensive income for the period		7,486	(30)	7,516	-	-	-

*      Third party interests.

**    Other adjustments are Non-operating expenses which includes items which are considered unusual, non-cash or one-off in nature. Management have opted to separately present these items as it better reflects the Group's core operations and underlying performance

 

Revenue from contracts with customers reflects the consideration to which the Group is expected to be entitled in exchange for transferring services to a customer. (See further detail on revenue from contracts with customers in note 2.)

LCM continues to recognise revenue in line with AASB 15 Revenue from Contracts with Customers. Revenue is recognised at the point we achieve a successful resolution for the client and have satisfied our performance obligations. At this stage we have an unconditional right to consideration. As the portfolio is still relatively modest in size, one or two investments shifting into the next financial reporting period can have a material impact. The resolution of the direct balance sheet investment related to a partnership dispute in June 2021 emphasises the significance the impact of timing can have on results. While we expect this to have a less significant effect on profitability as the portfolio grows, the performance of the business should be assessed together with our key performance metrics to provide an accurate representation of the performance of the business during the year.

Litigation service revenue - as consideration for providing litigation management services and financing of litigation projects, the Group receives either a percentage of the gross proceeds of any award or settlement of the dispute, or a multiple of capital deployed, and is reimbursed for all invested capital. Revenue, which includes amounts in excess of capital deployed and the reimbursement for all invested capital, is not recognised as revenue until the successful completion of the litigation project ie, complete satisfaction of the performance obligation, which is generally at the point in time when a judgment has been awarded or on an agreed settlement between the parties to the litigation, and therefore when the outcome is considered highly probable.

Litigation service expense - are contract costs amortised upon the successful resolution of the litigation contract and generally include external costs of funding the dispute, such as solicitors' fees, counsels' fees and experts' fees.

The business of litigation finance involves a series of investments into disputes which historically take on average, approximately 27 months to complete. Those investments may mature before or after that monthly average. Consequently, 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 may flow through to profits at irregular intervals. This results in profit fluctuations from one year to the next rather than an even and linear increase in profits from year to year. Additionally, accounting for revenue under AASB 15 means that revenue is only recognised at the point we have satisfied our performance obligation and have an unconditional right to revenue. Consequently, to accurately interpret the performance of the business, it is critical to measure growth by assessing profits for the year alongside the progress of our key performance metrics, as these metrics provide a more accurate indication of the scale of growth in our underlying portfolio of investments and better reflect the intrinsic value of the underlying assets.

Adjusted profit before tax inclusive of third party interests was A$16.4 million which was up 47% on the prior period. LCMs business benefits from being counter-cyclical to the market and while the impact of COVID has disrupted operations across almost every sector in some way, disputes are largely unaffected as courts and tribunals will continue to operate and progress matters, despite changing conditions in the wider market. Consequently, we expect that further investments will materialise in the short to medium term, as LCM's portfolio of direct balance sheet investments is at a point of maturation.

 

A reconciliation of adjusted profit is provided below:

	AASB as reported 30 June 2021 $'000	AASB as reported 30 June 2020 $'000
Statutory profit before tax	12,932	8,052
Add:
IPO and other transaction costs	174	82
Share-based payments (loan shares)	316	432
Provision for annual leave and long service leave	31	47
Non-recurring consultancy fees	358	182
Litigation fees	86	1,159
Finance costs	1,334	-
Third party fund costs	1,153	1,183
FY21 adjusted operating profit	16,384	11,137

 

LCM only cash on balance sheet as at 30 June 2021 was $35.5m and long-term borrowings was $37.2m, compared with $24.9m and nil respectively for the same period in 2020. This is a direct reflection of the growth in investments during the period in both LCM's direct investments as well as investments in the Fund alongside third party investors.

 

 

 

Statement of financial position	AASB as reported 30 June 2021 $'000	Fund interests* $'000	LCM-only 30 June 2021 $'000	AASB as reported 30 June 2020 $'000	Fund interests* $'000	LCM-only 30 June 2020 $'000
Current assets
Cash and cash equivalents	49,736	14,210	35,526	31,754	6,812	24,942
Trade and other receivables	13,843		13,843	15,298		15,298
Contract costs	16,663		16,663	15,671		15,671
Other assets	616	(23)	639	439		439
Total current assets	80,858	14,187	66,671	63,162	6,812	56,350
Non-current assets
Contract costs	117,895	45,956	71,939	46,847	10,694	36,153
Property, plant and equipment	186		186	204		204
Intangible assets	391		391	336		336
Other assets	284		284	280		280
Total non-current assets	118,759	45,956	72,800	47,667	10,694	36,973
Total assets	199,614	60,143	139,471	110,829	17,506	93,323
Liabilities
Current liabilities
Trade and other payables	12,392	4,378	8,014	13,162	3,894	9,268
Borrowings	13,253	13,253
Employee benefits	452		452	376		376
Total current liabilities	26,097	17,631	8,466	13,538	3,894	9,644
Non-current liabilities
Deferred tax liability	7,543		7,543	3,559		3,559
Borrowings	37,171		37,171
Employee benefits	148		148	117		117
Third party interests in consolidated entities	39,764	43,725	(3,961)	12,600	14,795	(2,195)
Total non-current liabilities	84,626	43,725	40,901	16,276	14,795	1,481
Total liabilities	110,723	61,356	49,367	29,814	18,689	11,125
Net assets	88,891	(1,213)	90,104	81,015	(1,183)	82,198

 

*      Elimination of third party interests

 

Cash flow

LCM cash generated from the resolution of matters during the period was $37.5 million, an increase of 22% compared to the same prior period in FY20 at $30.7 million. Payments related to capital invested was $47.6 million, an increase of 20% compared to the same prior period in FY20 of $39.7 million.

The following financial and non-financial KPIs are measures we believe are relevant to the performance of our business and reflect progress in the growth of our portfolio of investments and shareholder value. During the year:

•  investment commitment was A$109m inclusive of third party funds, decreasing from $147 million in FY20;

•  the ten year cumulative portfolio Internal Rate of Return ('IRR') was 78%;

•  ten year cumulative portfolio Return on Invested Capital ('ROIC') was 153%;

•  applications received increased to 572 from 522 in FY20 and increase of 10%;

•  gross profit increased by 23% to $26.6 million from $21.7 million inclusive of third party interests, and increased by 20% exclusive of third party interests;

•  statutory profit before tax increased by 61% to $12.9 million from $8.1 million. On an adjusted basis (excluding third party interests) profit before tax increased by 41% to $13.1 million from $9.2 million; and

•  Adjusted operating profit increased by 47% to $16.4m from $11.1m in the prior period and increased by 42% to $15.8 million exclusive of third party interests

Revenue

Gross revenue fell marginally by 4% to $37.1 million, from $38.4 million in FY20. Litigation service expenses (investments in realised disputes) decreased by 37.6% to $10.4 million from $16.7 million in FY20, resulting in an increase of 23% in gross profit to $26.6 million from $21.7 million.

 

Revenue by investment strategy

 

	Litigation revenue 30 June 2021 $'000	Number of investments/ projects	Number of cases	Litigation revenue 30 June 2020 $'000	Number of investments/ projects	Number of cases
Single cases - completed	24,860	1	1	13,572	3	3
Single cases - ongoing	444	4	4	3,285	3	3
Law firm portfolios - ongoing	728	1	1	-	-	-
Corporate portfolios - ongoing	3,586	2	12	16,718	2	8
Insolvency - completed	5,022	5	5	354	1	1
Insolvency - ongoing	2,283	3	8	1,904	2	8
Other	136	2	1	2,608	1	1
Total	37,059	18	32	38,441	12	24

 

As illustrated in the table above, the variability of returns fluctuates significantly between one investment and the next irrespective of the investment type. The ability to accurately forecast profitability is impracticable without the detail supporting the underlying data specific to each matter. Each case is unique based on the investment type, duration to completion, jurisdiction, cost and merits.

 

Revenue by region

 

	Litigation revenue 30 June 2021 $'000	Litigation revenue 30 June 2020 $'000
APAC	32,536	21,723
EMEA	4,523	16,718
Total	37,059	38,441

 

Portfolio update

Capital invested during FY21 was $88.0 million, inclusive of $39.5 million of third party fund investment, a 69% increase on FY20 which was A$52.0 million inclusive of $10.7 million third party fund investments. LCM's ability to deploy capital is a crucial measure of its performance and measuring growth, as the value of our future profits are derived from the capital we deploy in our investments at the time a resolution is achieved. LCM has demonstrated its ability to maintain progressive momentum year on year, while we continue to apply the same rigorous due diligence processes in our investment selection process.

As at 30 June 2021 there were 30 direct balance sheet projects under management, inclusive of eight recoveries matters, and 20 ongoing projects co-invested alongside the Fund of which 44 were unconditionally signed. As at 30 June 2020 there were 23 direct balance sheet projects and 17 projects co-invested alongside the Fund. This comprised 32 unconditionally funded and eight conditionally signed.

We continued to maintain diversity across our portfolio across industry sector, jurisdiction and capital commitment, in line with LCM's investment philosophy.

Financial performance

LCM delivered robust results in FY21 despite the challenges faced in the wider global economy. This was primarily attributable to the resolution of six investments from its direct balance sheet portfolio and the partial resolution of 12 investments, of which one related to a Fund investment. The Group's overall gross revenue of A$37.1 million, inclusive of $0.7 million of third party fund revenue, was marginally down compared to $38.4 million in the prior financial period, a decrease of less than 4%.

Gross profit of $26.6 million, inclusive of $0.5 million of third party fund gross profit, represented an increase of 23% compared to A$21.7 million in FY20.

The Group generated a statutory profit before tax of A$12.9 million an increase of 61% on the prior financial period, however this is inclusive of third party fund costs of $0.7 million, on an adjusted basis which excludes third party costs, statutory profit before tax was $13.1 million, an increase of 41% on the prior financial period which was $9.2 million on an adjusted basis. It is fundamental to understand the significant impact the timing of resolutions can have on the results from one year to the next. To accurately assess the performance and underlying value of the business it is fundamental to review the financial performance of the Group alongside the key performance metrics as these provide a more accurate representation of the momentum achieved in the underlying portfolio of investments. Delays in the resolution of matters purely shifts the recognition of revenues from one period to the next, it does not result in a loss of revenue.

Operating expenses of $10.2 million decreased by 5% compared to $10.7 million in FY20. As we continue to expand we expect to see an increase in operating costs, however these are expected to remain at a similar margin relative to the size of the portfolio under management, allowing us to benefit from economies of scale.

Non-operating expenses of $2.1 million include; $0.7 million of costs related to the third party fund which have been consolidated to comply with AASB standards but are not attributable to LCM; $0.3 million related to share-based expenses, $0.4 million related to non-recurring consultancy costs, $0.4m related to fund costs attributable to LCM and $0.3 million related to other expenses (see note 6).

Finance costs

On 22 February 2021, the Company entered into a credit facility with Northleaf Capital Partners to provide the Company with additional investment capital. Northleaf is a global private markets investment firm, with experience in the litigation finance sector. The Credit Facility, which is secured against LCM's assets, is available for general corporate purposes, and has an overall term of four years. The coupon comprises a LIBOR based rate of 8% per annum together with a profit participation calculated by reference to the profitability of LCM's direct investments. In all circumstances, the overall cost of the facility is capped at 13% per annum.

The Credit Facility can be drawn down during the first two years of the facility. The facility otherwise contains the usual financial covenants and reporting conditions of a facility of this nature.

Dividend

The Board remains committed to returning to the payment of a dividend as a matter of fiscal discipline. The ongoing uncertainty in global markets caused by COVID continues to impact most sectors. As governments start to ease stimulus, there is an expectation that restructuring and insolvency related disputes will increase accordingly. Consequently, the Board has made the decision that no dividend will be paid, to preserve cash to meet any increase in demand for investments in order to accelerate growth in our portfolio.

The Board will continue to assess global market stability to determine the appropriate level of dividend based on profitability, cash flows, growth and available capital. Shareholders should not interpret the Board's current stance as a change in policy relating to dividends. 

Mary Gangemi

Chief Financial Officer

 

Consolidated statement of profit or loss and other comprehensive income

For the period ended 30 June 2021

 

	Note	Consolidated
		2021 $'000	2020 $'000
Revenue from contracts with customers
Litigation service revenue	4	36,924	35,833
Performance fees	4	135	2,608
		37,059	38,441
Litigation service expense		(10,439)	(16,723)
Gross profit		26,620	21,718
Other income		-	90
Interest income		4	35
Expenses
Employee benefits expense	6	(8,396)	(7,611)
Depreciation expense	6	(59)	(86)
Corporate expenses		(2,664)	(3,752)
Litigation fees	6	(86)	(1,159)
Finance costs	6	(1,334)	-
Fund administration expense	6	(1,153)	(1,183)
Total expenses		(13,692)	(13,791)
Profit before income tax expense		12,932	8,052
Analysed as:
Adjusted operating profit		16,384	11,137
Non-operating expenses	6	(2,118)	(3,085)
Finance costs	6	(1,334)	-
Profit before income tax expense		12,932	8,052
Income tax expense	7	(4,069)	(2,799)
Profit after income tax expense for the period		8,863	5,253
Other comprehensive income
Items that may be subsequently reclassified to profit and loss:
Movement in foreign currency translation reserve		(1,377)	-
Total comprehensive income for the period		7,486	5,253
Profit for the period is attributable to:
Owners of Litigation Capital Management Limited		8,863	5,245
Non-controlling interest		-	8
		8,863	5,253
Total comprehensive income for the period is attributable to:
Owners of Litigation Capital Management Limited		7,486	5,245
Non-controlling interest		-	8
		7,486	5,253
		Cents	Cents
Basic earnings per share	14	8.46	5.02
Diluted earnings per share	14	7.95	4.71

 

 

Consolidated statement of financial position

As at 30 June 2021

 

		Consolidated
	Note	2021 $'000	2020 $'000
Assets
Current assets
Cash and cash equivalents	8	49,736	31,754
Trade and other receivables	9	13,843	15,298
Contract costs	10	16,663	15,671
Other assets		616	439
Total current assets		80,858	63,162
Non-current assets
Contract costs	10	117,895	46,847
Property, plant and equipment		186	204
Intangible assets		391	336
Other assets		284	280
Total non-current assets		118,756	47,667
Total assets		199,614	110,829
Liabilities
Current liabilities
Trade and other payables	11	12,392	13,162
Borrowings	13	13,253	-
Employee benefits	12	452	376
Total current liabilities		26,097	13,538
Non-current liabilities
Deferred tax liability	7	7,543	3,559
Borrowings	13	37,171	-
Employee benefits	12	148	117
Third-party interests in consolidated entities		39,764	12,600
Total non-current liabilities		84,626	16,276
Total liabilities		110,723	29,814
Net assets		88,891	81,015
Equity
Issued capital		68,904	68,830
Reserves		(60)	1,001
Retained earnings		20,028	11,165
Parent interest		88,872	80,996
Non-controlling interest		19	19
Total equity		88,891	81,015

 

 

Consolidated statements of changes in equity

For the period ended 30 June 2021

 

Consolidated	Issued capital $'000	Retained earnings $'000	Share based payments reserve $'000	Foreign currency translation $'000	Total $'000	Non- controlling interests $'000	Total equity $'000
Balance at 1 July 2019	68,830	6,818	569		76,217	22	76,239
Profit after income tax expense for the year	-	5,245	-	-	5,245	8	5,253
Other comprehensive income for the year, net of tax	-	-	-	-	-	-	-
Total comprehensive income for the year	-	5,245	-	-	5,245	8	5,253
Transactions with owners in their capacity as owners:
Share-based payments	-	-	432		432	-	432
Dividends paid	-	(886)	-	-	(886)	-	(886)
Changes in portion of equity held by non-controlling interests		(12)			(12)	(11)	(23)
	-	(898)	432	-	(466)	(11)	(477)
Balance at 30 June 2020	68,830	11,165	1,001	-	80,996	19	81,015
Consolidated	Issued capital $'000	Retained earnings $'000	Share based payments reserve $'000	Foreign currency translation $'000	Total $'000	Non- controlling interests $'000	Total equity $'000
Balance at 1 July 2020	68,830	11,165	1,001	-	80,996	19	81,015
Profit after income tax expense for the year	-	8,863	-	-	8,863	-	8,863
Other comprehensive income for the year, net of tax	-	-	-	(1,377)	(1,377)	-	(1,377)
Total comprehensive income for the year	-	8,863	-	(1,377)	7,486	-	7,486
Equity Transactions:
Share-based payments	-	-	316	-	316	-	316
Contributions of equity	74			-	74		74
	74	-	316	-	390	-	390
Balance at 30 June 2021	68,904	20,028	1,317	(1,377)	88,872	19	88,891

 

 

Consolidated statements of cash flows

For the period ended 30 June 2021

 

		Consolidated
	Note	2021 $'000	2020 $'000
Cash flows from operating activities
Proceeds from litigation contracts - settlements, fees and reimbursements		37,508	30,673
Payments to suppliers and employees		(59,412)	(50,591)
Non-operating items paid		(649)	(1,412)
Interest received		4	35
Net payments made by third-party interests in consolidated entities		(33,995)	(6,891)
Net cash used in operating activities	15	(56,544)	(28,186)
Cash flows from investing activities
Payments for property, plant and equipment		(14)	(56)
Payments for intangibles		(66)	(288)
Refunds of security deposits		10	(1)
Net cash used in investing activities		(70)	(345)
Cash flows from financing activities
Proceeds from issue of shares		74	-
Dividends paid		-	(886)
Proceeds from borrowings	13	63,153	-
Repayments of borrowings		(13,391)	-
Payments of finance costs		(2,546)	-
Payments of transaction costs related to third-party interests		(1,749)	(2,066)
Net contributions from third-party interests in consolidated entities		29,234	14,582
Payments for fund establishment & administration costs		(635)	(920)
Net cash from financing activities		74,140	10,710
Net decrease in cash and cash equivalents		17,525	(17,821)
Cash and cash equivalents at the beginning of the financial year		31,754	49,119
Effects of exchange rate changes on cash and cash equivalents		457	456
Cash and cash equivalents at the end of the financial year	8	49,736	31,754

 

 

Notes to the financial statements

30 June 2021

 

Note 1 General Information

The financial statements cover Litigation Capital Management Limited (the 'Company') as a Group consisting of Litigation Capital Management Limited and the entities it controlled at the end of, or during, the year (referred to as the 'Group'). The financial statements are presented in Australian dollars, which is Litigation Capital Management Limited's functional and presentation currency.

Litigation Capital Management Limited was admitted onto the Alternative Investment Market ('AIM') on 19 December 2018.

Litigation Capital Management Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is:

Level 12, The Chifley Tower 2 Chifley Square Sydney NSW 2000

A description of the nature of the Group's operations and its principal activities are included in the Directors' report, which is not part of the financial statements.

The financial statements were authorised for issue, in accordance with a resolution of Directors, on 21 September 2021. The Directors have the power to amend and reissue the financial statements.

Note 2 Significant accounting policies

The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

New or amended Accounting Standards and Interpretations adopted

The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period.

Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted.

The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group.

Basis of preparation

These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the AASB and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB').             

Historical cost convention

The financial statements have been prepared under the historical cost convention.

Critical accounting estimates

The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3.

Parent entity information

In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 24 of the Annual Report.

Principles of consolidation

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Litigation Capital Management Limited ('Company' or 'parent entity') as at 30 June 2021 and the results of all subsidiaries for the year then ended. Litigation Capital Management Limited and its subsidiaries together are referred to in these financial statements as the 'Group'.

The Group includes fund investment vehicles over which the Group has the right to direct the relevant activities of the fund under contractual arrangements and has exposure to variable returns from the fund investment vehicles. See Note 26 of the Annual Report.

Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.          

Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent.

Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the Group. Losses incurred by the Group are attributed to the non-controlling interest in full, even if that results in a deficit balance.

Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss.

Operating segments

Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance.

Foreign currency translation

The financial statements are presented in Australian dollars, which is Litigation Capital Management Limited's functional and presentation currency.

Foreign currency transactions

Foreign currency transactions are translated into the entity's functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.

Foreign operations

The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity.

The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of.

Revenue recognition

The Group recognises revenue as follows:

Revenue from contracts with customers

Revenue is recognised at an amount that reflects the consideration to which the Group is expected to be entitled in exchange for transferring services to a customer. For each contract with a customer, the Group: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the services promised.

Variable consideration within the transaction price, if any, reflects the variability of potential outcomes in awards or settlements of the litigation and any other contingent events. Such estimates are determined using either the 'expected value' or 'most likely amount' method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability.

Litigation service revenue

The performance of a litigation service contract by the Group entails the management and progression of the litigation project during which costs are incurred by the Group over the life of the litigation project.

As consideration for providing litigation management services and financing of litigation projects, the Group receives either a percentage of the gross proceeds of any award or settlement of the litigation, or a multiple of capital deployed, and is reimbursed for all invested capital.     

Revenue, which includes amounts in excess of costs incurred and the reimbursement for all invested capital, is not recognised as revenue until the successful completion of the litigation project ie, complete satisfaction of the performance obligation, which is generally at the point in time when a judgement has been awarded or on an agreed settlement between the parties to the litigation, and therefore when the outcome is considered highly probable. On this basis, revenue is not recognised over time and instead recognised at the point in time when the Group satisfies the performance obligation. Costs includes only external costs of funding the litigation, such as solicitors' fees, counsels' fees and experts' fees.

The terms and duration of each settlement or judgement varies by litigation project. Payment terms are not defined by the Group's litigation contracts however upon successful completion of a litigation project, being the satisfaction of the single performance obligation, funds are generally paid into trust within 28 days. The funds will remain in trust until the distribution amounts have been determined and agreed by the relevant parties, after which payment will be received by the Group.

Performance fees

Performance fees are derived from the management of litigation projects under externally financed financing arrangements and governed by the agreement with external investors. Performance fees are recognised at the point in time when a judgement has been awarded or a settlement agreement has been agreed on the litigation projects.

Interest

Interest income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

Income tax

The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for:

•     When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or

•     When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset.                   

Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously.

Litigation Capital Management Limited (the 'head entity') and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the 'separate taxpayer within group' approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group.

In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group.

Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity.

Current and non-current classification

Assets and liabilities are presented in the statement of financial position based on current and non-current classification.

An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current.

A liability is classified as current when: it is either expected to be settled in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current.

Deferred tax assets and liabilities are always classified as non-current.

Cash and cash equivalents

Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Trade and other receivables

Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables generally do not have a specifically defined time frame for settlement, additionally, when the receivable is due from part of the portfolio of litigation projects, the settlement of the receivable is generally made upon an additional resolution of another litigation project within the portfolio which also may not be within a specifically defined time frame.

The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue.

Contract costs

Contract costs are recognised as an asset when the Group incurs costs in fulfilling a contract and when all the following are met: (i) the costs relate directly to the contract; (ii) the costs generate or enhance resources of the Group that will be used to satisfy future performance obligations; and (iii) the costs are expected to be recovered. Contract costs are non-financial assets for impairment purposes. Contract costs are amortised upon complete satisfaction of the performance obligation. Refer to the Group's revenue recognition policy for further information.

Leases

Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term. The short-term lease recognition exemption applies to those leases that have a lease term of 12 months or less from the commencement date. It also applies to leases over assets that are considered of low value.

Impairment of non-financial assets

Non-financial assets are reviewed for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount.

Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit.

 

Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition.

Borrowings

Borrowings are initially recognised at fair value net of transaction costs incurred. Subsequent to initial recognition, borrowings are stated at amortised cost. The borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance date.

Employee benefits

Short-term employee benefits

Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled.

Other long-term employee benefits

The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.

Defined contribution superannuation expense

Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred.

Share-based payments

Equity-settled share-based compensation benefits are provided to employees.

Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services.

The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions.

The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods.

Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied.

If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification.

If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited.

If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification.

Fair value measurement

When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market.

Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement.

For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data.

Financial assets and liabilities at amortised cost

Financial assets and liabilities held at amortised cost includes third party interests in consolidated entities and portfolio costs. Financial assets and liabilities are initially recognised at fair value, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method, less any allowances for expected credit losses.

Issued capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Dividends

Dividends are recognised when declared during the financial year and no longer at the discretion of the Company.

Earnings per share

Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to the owners of Litigation Capital Management Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year.

Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

Goods and Services Tax ('GST') and other similar taxes

Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense.

Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position.

Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority.

Third-party interests in consolidated entities

Non-controlling interests where the Group does not own 100% of a consolidated entity are recorded as third-party interests in consolidated entities. Third-party interests in consolidated entities are classified as financial liabilities and are initially recognised at the fair value, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Amounts included in the consolidated statement of financial position represent the net asset value of the third-parties' interests.

Rounding of amounts

The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar.

Note 3 Critical accounting judgements, estimates and assumptions

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below.

Key judgements          

Revenue from contracts with customers

The entity's active involvement in litigation service contracts to achieve a successful resolution for the client is the predominant purpose of the service provided and accordingly the litigation funding contracts are within the scope of AASB 15 'Revenue from Contracts with Customers', and so are excluded from the scope of AASB 9 'Financial Instruments' which would require the recognition of a financial asset for each contract, measured at fair value.

Performance obligations and recognition of revenue

In the provision of litigation management services and financing of litigation projects, management has determined that there is a single performance obligation and that complete satisfaction of that performance obligation occurs at the point in time when the Group achieves a successful resolution for the client as it is the predominant purpose of the service provided. On this basis, revenue is not recognised over time and only recognised at the point in time when the Group satisfies that performance obligation.

Consolidation of entities in which the Group holds less than 100% of interests

The Group has assessed the entities in which it has an interest to determine whether or not control exists and the entity is, therefore, consolidated into the Group (refer note 25 of the Annual Report). Where the Group does not own 100% of interests, the Group makes judgements to determine whether to consolidate the entity in question by applying the factors set forth in AASB 10, including but not limited to the Group's equity and economic ownership interest, the economic structures in use in the entity, the level of control the Group has over the entity through the entity's structure or any relevant contractual agreements, and the rights of other investors.

Significant estimates and assumptions

Recovery of deferred tax assets

Deferred tax assets includes an amount relating to carried-forward tax losses in Australia. The Group only recognises the deferred tax asset if it is probable that future taxable amounts of the Group's business in Australia will be available to utilise those losses and therefore they are assessed as recoverable (refer to note 7). The tax losses can be carried forward indefinitely and have no expiry date.

Impairment of non-financial assets other than goodwill

The Group assesses impairment of non-financial assets other than goodwill at each reporting date, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. This includes evaluating the expected outcome pursuant to the contracts, including consideration of whether each individual litigation contract is likely to result in a successful outcome, the cost and timing to completion and the ability of the defendant to pay the settlement or award. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves value in use calculations, which incorporate a number of key estimates and assumptions (refer note 10).

 

 

Note 4 Revenue

	Consolidated
	2021 $'000	2020 $'000
Major service lines
Litigation service revenue
Revenue attributable to LCM	36,260	35,833
Attributable to third party interests	664	-
	36,924	35,833
Performance fees	135	2,608
	37,059	38,441
Geographical regions
Australia	32,536	21,723
United Kingdom	4,523	16,718
	37,059	38,441
Contract duration
Less than 1 year	1,043	2,257
1-4 years	35,834	23,277
More than 4 years	182	12,907
	37,059	38,441

 

Note 5 Segment information

The Group's operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers ('CODM')) in assessing performance and in determining the allocation of resources.

The Directors have determined that there is one operating segment. The information reported to the CODM is the consolidated results of the Group. The segment result is as shown in the statement of profit or loss and other comprehensive income. Refer to statement of financial position for assets and liabilities.

Major customers

During the year ended 30 June 2021 there was one major external customer (2020: three customers, unrelated to that in 2021) where revenue exceeded 10% of the consolidated revenue. Revenue from this customer for the year ended 30 June 2021 amounted to $24,860,000 (2020 $13,926,000, $6,534,000, and $4,052,000).

 

Note 6 Profit before tax

	Consolidated
	2021 $'000	2020 $'000
Profit before income tax expense includes the following specific expenses:
Employee benefits expense
Salaries & wages	7,205	6,222
Directors' fees	380	449
Superannuation and pension	277	260
Share based payments expense	316	432
Other employee benefits & costs	218	248
	8,396	7,611
Depreciation
Plant and equipment	39	69
Intangible assets	20	17
	59	86
Litigation fees
Litigation fees	86	1,159

 

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 (note 13)	1,235	-
Other finance costs	99	-
	1,334	-
Fund administration expense
Finance costs	387	-
General administration expenses	9	245
Set-up expenses	289	938
Amortisation of transaction costs	468	-
	1,153	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	541	764

 

Adjusted operating profit

Adjusted operating profit excludes non-operating expenses which includes items which are considered unusual, non-cash or one-off in nature.

 

Non-operating expenses

Management have opted to separately present these items as it better reflects the Groups underlying performance. Non-operating expenses includes the following items:          

Share based payments expense	316	432
Consultancy	358	182
IPO and other transaction costs	174	82
Litigation fees	86	1,159
Other expenses	31	47
Fund administration expenses	1,153	1,183
	2,118	3,085

 

Note 7 Income tax expense

	Consolidated
	2021 $'000	2020 $'000
Numerical reconciliation of income tax expense and tax at the statutory rate
Profit before income tax expense	12,932	8,052
At the Group's statutory income tax rate of 26% (2020: 27.5%)	3,362	2,214
Tax effect amounts which are not deductible/(taxable) in calculating taxable income:
Foreign tax rate adjustments	(29)	-
Share-based payments	82	119
Other assessable income	127	-
Other non-deductible expenses	35	325
Unrealised foreign exchange	93	(93)
Change in tax rate	12	234
Adjustment in respect of deferred tax of previous years	387	-
	4,069	2,799
Adjustment to deferred tax balances as a result of change in statutory tax rate
Income tax expense / (benefit)	4,069	2,799

 

Statutory tax rate of 26% is applicable to Australian entities with aggregated turnover below $50 million for the period ended 30 June 2021. 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 26% tax rate.

	Consolidated
	2021 $'000	2020 $'000
Deferred tax asset/(liability)
Deferred tax asset/(liability) comprises temporary differences attributable to:
Tax losses	14,596	10,851
Employee benefits	185	154
Accrued expenses	79	30
Contract costs - litigation contracts	(22,938)	(15,547)
Transaction costs on share issue	535	953
Deferred tax asset/(liability)	(7,543)	(3,559)
Movements:
Opening balance	(3,559)	(760)
Charged to profit or loss	(3,984)	(2,799)
Credited to equity	-	0
Closing balance	(7,543)	(3,559)

 

Note 8 Cash and cash equivalents

	Consolidated
	2021 $'000	2020 $'000
Cash at Bank	35,526	24,942
Cash of third-party interests in consolidated entities	14,210	6,812
	49,736	31,754

 

Cash of third-party interests in consolidated entities is restricted as it is held within the fund investment vehicles on behalf of the third-party investors in these vehicles. The cash is restricted to use cashflows in the litigation contracts made on their behalf and costs of administering the fund.            

Note 9 Trade and other receivables

	Consolidated
	2021 $'000	2020 $'000
Due from litigation service1	8,267	3,821
Due from litigation service - portfolios2	5,576	11,477
	13,843	15,298

 

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 (2020: $nil) in profit or loss in respect of the expected credit losses for the year ended 30 June 2021.

Note 10 Contract costs - litigation contracts

	Consolidated
	2021 $'000	2020 $'000
Contract costs - litigation contracts	134,558	62,518

 

Reconciliation of litigation contract costs

Reconciliation of the contract costs (current and non-current) at the beginning and end of the current period and previous financial year are set out below:

	Consolidated
	2021 $'000	2020 $'000
Opening balance	62,518	27,386
Additions during the period	48,495	41,330
Additions during the period made by third-party interests	39,539	10,694
Litigation service expense - successful contracts1	(10,439)	(16,723)
Litigation service expense - write down2	(4)	(3)
Other contract costs reimbursed - successful contracts1	(5,551)	-
Foreign exchange losses	-	(166)
Closing balance	134,558	62,518

 

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:

	2021 $'000	2020 $'000
Attributable to owners of LCM	88,602	51,824
Third-party interests	45,956	10,694
Consolidated total	134,558	62,518
	Consolidated
	2021 $'000	2020 $'000
Current	16,663	15,671
Non Current	117,895	46,847
	134,558	62,518

 

Impairment considerations

The recoverable amount of the Group's contract costs has been determined by a value in use calculation using a discounted cash flow model, based on cash flow projections and financial budgets as approved by management for the life of each litigation contract.

Key assumptions were used in the discounted cash flow model for determining the value in use of litigation contracts:

•     The estimated cost to complete a litigation contract is budgeted, based on estimates provided by the external legal advisors handling the litigation;

•     The value to the Group of the litigation contract, once completed, is estimated based on the expected settlement or judgement amount of the litigation and the fees due to the Group under the litigation contract;

•     The discount rate applied to the cash flow projections is based on the Group's weighted average cost of capital and other factors relevant to the particular litigation contract. The discount rate applied was 15% (2020: 15%).

Based on the above, the Group has recognised impairment losses of $nil (2020: $nil) in profit or loss on contract costs for the year ended 30 June 2021.

Note 11 Current liabilities - trade and other payables

 

	Consolidated
	2021 $'000	2020 $'000
Trade payables	11,655	13,042
Distribution payable	32	32
Tax payable	84	-
Other payables	622	88
	12,392	13,162

 

Note 12 Current and non-current liabilities - Employee benefits

 

	Consolidated
	2021 $'000	2020 $'000
Current
Annual Leave	452	376
	452	376
Non-current
Long Service Leave	148	117
	148	117

 

Note 13 Borrowings

 

	Consolidated
	2021 $'000	2020 $'000
Current
Borrowings of third-party interests in consolidated entities	13,253	-
	13,253	-
Non-current
Borrowings	37,171	-
	37,171	-

 

 

	Consolidated
Reconciliation of borrowings of third-party interests in consolidated entities:	2021 $'000	2020 $'000
Balance 1 July	-	-
Proceeds from borrowings	26,782	-
Repayment of borrowings	(13,391)
Payments for borrowing costs	354	-
Amortisation of borrowing costs	(281)
Other non-cash items	(211)	-
Balance as at 30 June	13,253	-
Reconciliation of borrowings of LCM:	Consolidated
	2021 $'000	2020 $'000
Balance 1 July	-	-
Proceeds from borrowings	36,371	-
Payments for borrowing costs	1,134	-
Amortisation of borrowing costs	(99)
Other non-cash items	(235)
Balance as at 30 June	37,171	-

 

On 22 February 2021 the Group entered into a credit facility with Northleaf Capital Partners for an aggregate amount of US$50,000,000, AUD equivalent of $66,507,000¹ (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 30 June 2021, the Group's outstanding utilisation amounted to US$20,000,000, an AUD equivalent of $26,603,000¹.

The Group agreed to various debt covenants including a minimum effective net tangible worth, borrowings as a percentage of effective net tangible worth, minimum liquidity, a minimum consolidated EBIT and a minimum multiple of invested capital on concluded contract assets over a specified period. There have been no defaults or breaches related to the Facility during the year ended 30 June 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 $1,134,000 which were reflected transactions costs and will be amortised over the four year term of the borrowings. As at 30 June 2021 $1,035,000 of the loan arrangement fees remained outstanding.

1       Converted at the functional currency spot rates of exchange at the reporting date

 

 

 

Note 14 Earnings per share

	Consolidated
	2021 $'000	2020 $'000
Profit after income tax	8,863	5,253
Non-controlling interest	-	(8)
Profit after income tax attributable to the owners of Litigation Capital Management Limited	8,863	5,245

 

	Number	Number
Weighted average number of ordinary shares used in calculating basic earnings per share	104,706,722	104,580,899
Adjustments for calculation of diluted earnings per share:
Amounts uncalled on partly paid shares and calls in arrears	2,144,431	2,506,679
Options over ordinary shares	4,693,686	4,195,207
Weighted average number of ordinary shares used in calculating diluted earnings per share	111,544,839	111,282,785

 

	Cents	Cents
Basic earnings per share	8.46	5.02
Diluted earnings per share	7.95	4.71

 

Dilutive potential shares which are contingently issuable are only included in the calculation of diluted earnings per share where the conditions are met.

Note 15 Reconciliation of cash flows

Reconciliation of profit after income tax to net cash from operating activities:

	Consolidated
	2021 $'000	2020 $'000
Profit/(loss) after income tax expense for the year	8,863	5,253
Adjustments for:
Depreciation and amortisation of intangibles	342	86
Amortisation of finance costs	99	-
Share-based payments	316	432
Fund administration expenses	468	-
Other non-cash including exchange rate movements	(265)	372
Change in operating assets and liabilities:
Increase in contract costs - litigation contracts	(72,040)	(35,132)
Decrease/(increase) in trade and other receivables	1,455	(8,032)
(Decrease)/increase in trade and other payables	(135)	6,473
Increase in deferred tax liabilities	3,985	2,799
Increase in interest payable	176	-
(Increase)/decrease in prepayments	(189)	255
Increase/(decrease) in employee benefits	107	(563)
Increase/(decrease) in other liabilities	274	(129)
Net cash from operating activities	(56,544)	(28,186)

 

Cash and non-cash movements in third-party interests in consolidated entities are shown below:

	Consolidated
	2021 $'000	2020 $'000
Balance 1 July	(12,600)	-
Proceeds	(29,234)	(14,582)
Payments	635	920
Other non-cash items	1,435	1,062
Balance as at 30 June	(39,764)	(12,600)

 

Note 16 Events after the reporting period

In the Directors' opinion, no matter or circumstance has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future years.