20 September 2022

 

Litigation Capital Management Limited

(LCM or the Company)

 

Final Results 2022

 

Delivered improved underlying performance, maintained momentum across KPIs

while driving meaningful growth in fund management business

 

Litigation Capital Management Limited (AIM:LIT), a leading alternative asset manager of disputes financing solutions, announces its audited financial results for the year ended 30 June 2022 ("FY22").

 

Financials

·	Gross profit of A$31.1m, up 17% (FY21: A$26.6m) inclusive of third party interests and increased by 19% to A$30.9m exclusive of third party interests
·	Adjusted operating profit of A$20.2m, up 23% (FY21:A$16.4m) inclusive of third party interests and increased by 27% to $20.0m exclusive of third party interests
·	Statutory profit before tax A$10.7m, down 17% (FY21: A$12.9m) inclusive of third party interests and was broadly in line with the prior year at A$12.9m (FY21: A$13.1m) exclusive of third party interests
·	Cash of A$50.0m at 30 June 2022 (A$29.3m exclusive of third party fund consolidation)*
·	Cash generated from the resolution of matters stood at $26.6m (FY21: $37.5m) exclusive of third party interests
·	Total equity of A$97.9m up 9% (FY21 A$90.1), exclusive of third party interests
	*exclusive of borrowings

 

KPIs

·	Total assets under management grew 23% to A$414m (FY21: A$336m), increasing to A$452m at 31 August 2022.
·	442 applications received. Whilst 23% down on FY21, commitment levels were maintained reflecting higher quality applications
·	Investment commitment of A$104m, inclusive of third party funds were broadly in line with the prior year (FY21:A$109m)
·	Total invested capital A$66.2m, inclusive of A$37.3m of third party fund investment
·	Cumulative 163% ROIC and IRR of 79% over the past 11 years inclusive of losses

 

Operations

·	Global Alternative Returns Fund ("Fund I"), 100% committed with diversity across jurisdictions, industry sector, claim type and capital commitment and within the two year investment period
·	Over two thirds of our targeted US$300m Global Alternative Returns Fund II ("Fund II") raised. Final close expected by the end of the calendar year.
·	Strong growth in EMEA region and growth observed in competition claims, a sector we have strong experience in
·	Fund II commitments of A$55m demonstrating our continued ability to source opportunities
·	Recent change in newly elected government in Australia has resulted in a more favourable environment for Class Actions

 

Outlook

 

·	Greater access to capital through growing asset management business and expansion of origination network across EMEA and APAC positions LCM exceptionally well
·	Expected increase in the number of applications as a result of the current economic environment and an increase in the conversion rate over time as experience of investment managers continues to develop
·	Focus remains on long-term sustainable growth and delivering value by driving performance and growing the Company's Funds management offering

 

Patrick Moloney, CEO of Litigation Capital Management, commented: "Reflecting on the past year navigating the impacts of Covid related restrictions, I am delighted with the growth achieved and particularly with the significant progress in our asset management business and total assets under management now at A$452m.

With our core executive team now based in the London office, much greater access to capital and market conditions which are most conducive to increasing demand for disputes funding, we are exceptionally well placed for the year ahead."

 

An overview of the final results from Patrick Moloney, CEO is available to watch here:  https://bit.ly/LCMfy22

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 Mary Gangemi, Chief Financial Officer
Canaccord (Nomad and Joint Broker)	Tel: 020 7523 8000
Bobbie Hilliam
Investec Bank plc (Joint Broker)	Tel: 020 7597 5970
David Anderson
Alma PR	Tel: 020 3405 0205
Justine James Kieran Breheny	[email protected]

 

 

NOTES TO EDITORS

 

Litigation Capital Management (LCM) is a global provider of disputes finance.  LCM provides capital and risk management services into the disputes market including insolvency, commercial disputes, arbitral disputes, class actions and corporate portfolios.

LCM has an unparalleled track record, driven by effective project selection, active project management and robust risk management.

 

Current headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker LIT.

 

www.lcmfinance.com

 

This announcement contains inside information for the purposes of article 7 of the Market Abuse Regulation (EU) 596/2014 as amended by regulation 11 of the Market Abuse (Amendment) (EU Exit) Regulations 2019/310. With the publication of this announcement, this information is now considered to be in the public domain.

 

 

 

Chairman's Statement

When I wrote this letter this past year, many parts of the world were still dealing with effects and disruption caused by COVID 19. While the remarkable success of the vaccine programs in many countries has allowed significant progress to be made, a number of countries are clearly still dealing with the continued effects of the virus and the personal and economic effects of the pandemic.

This past year has witnessed continued uncertainty - humanitarian and economic uncertainty, of course mainly driven by the war in Ukraine. We have seen stresses in many financial indices and significant price disruption in the commodity markets and a market re- evaluation of the US Dollar, among other indices, which has risen by almost 20 percent over these past 18 months at the time of writing. We have seen inflation at levels that were hardly believable pre-pandemic. These are very significant economic events.

It is against this backdrop that we look ahead to the future of LCM. We are in a changing world and a very uncertain world. It is inevitable that there will be additional corporate restructurings, insolvencies and bankruptcies. LCM is one of the most experienced litigation funders and I am pleased to see the progress the company has made over this past year to position strongly for this changing environment.

Our CEO Patrick Moloney relocated to London in the 4th quarter of 2021 - a move planned to occur months earlier that was delayed by the global pandemic. This is an important step for the company and one that underscores our belief in the significant opportunities presented by the UK market and Continental Europe. Our APAC team is highly experienced and many of our senior employees have been with the company for an extended period of time. The combination of a stronger London-based presence and a strong APAC presence positions the company well for further market developments as litigation finance becomes much more widely accepted not just as a litigation tool but one of appropriate risk management.

Our performance continues to remain strong - although clearly the disruption caused by the pandemic has caused more uncertainty in timing of certain disputes. As a Board we remain committed to providing information to the market on the most timely and relevant basis possible. The nature of our business does mean that deal resolution announcements can be punctuated by periods of quiet.

As we have discussed previously, LCM recognises revenue only when the service conditions of the litigation funding agreement have been fully satisfied. This is the most conservative valuation methodology and a direct contrast to a number of other litigation funders who recognise revenue on what is called fair value accounting. Fair value accounting uses current market values as the basis for recognising certain assets and liabilities. This can prove challenging in illiquid asset classes.

In the view of the Board, at this stage in the development of the litigation funding industry, the clarity and conservative nature of our valuation methodology is the most appropriate one for our investors. We are continuing to focus on how we can provide further information to the market on the strength of our underlying investments and this remains a priority for us.

To this end, I would encourage all shareholders, and potential shareholders, to read the CEO's report for further information. Patrick has given detailed parameters on the historical performance of our investments and their time to maturity. LCM has a major advantage over a number of our competitors in that it has been operational in the market for a much longer period of time than many. It has the advantage to be able to look back on the performance statistics over more than 4 cycles of investments with a total of 244 disputes. We are exceptionally pleased by our ratio of successes which is at around 96 percent and we believe signals strong confidence in our future.

Over the past three years, the company has made a very important evolution as it well known. This has been to develop our third-party asset management business. We closed our first fund of US$150m in March 2020, a significant achievement given the market volatility around the developing Covid news at the time. Our second fund is in the final stages of closure - having raised approximately two thirds of the targeted US$300m to date - and we are expecting to complete a final close before the end of the calendar year.

The asset management business is the key part of the future of LCM given it allows us to leverage our capital extremely effectively and build scale. Equally pivotal is our capacity to originate deals of the highest calibre. We are currently working to build out our origination business - particularly in the UK and we expect to announce further key hires in this space in due course.

We are encouraged by the interest expressed by many of our current blue-chip investors to commit further investment as we continue to build our assets under management and expect strong growth in this part of our business.

So, in conclusion, while the background has been a challenge over the past two years, we believe we are now better positioned than at any previous time to continue to develop scale in key areas, and particularly asset management. We clearly continue to believe that interest and opportunities in litigation funding will continue to grow as the market develops. We also believe that, given this current point in the economic cycle, the opportunities for LCM will remain strong.

 

Jonathan Moulds

Non-Executive Chairman

 

 

CEO Review

 

Introduction

The results for the year ended 30 June 2022 represents the first full year results following my relocation to London in December 2021 as part of our wider strategy to drive growth from our London office. This has brought our core executive team together in one location.

The knowledge and experience of our London team, which services the UK and Continental Europe, combined with my experience of the APAC region where litigation finance originally developed, has provided us with an entirely different perspective to our London based business. In particular, it has allowed our UK business to draw on the experience of funding into the insolvency and restructuring market, which is how the industry began in Australia back in the late 1990's and early 2000's. We believe this is a significant advantage given the prevailing market conditions.

LCM's greatest achievements during the FY22 financial period has been the growth in its asset management business. That includes the launch of LCM's second Fund targeting US$300 million and its substantial close through a combination of existing investors. The development of LCM's second fund fortifies LCM's strategy in moving into asset management.

FY22 in review

The end of FY22 saw LCM move from what we hope to be the end of Covid restrictions into very uncertain economic times and therefore, a market of opportunity for our skills and capital. We emerge into a high inflationary period with central banks generally increasing official interest rates to combat inflation. In addition, we have seen great disruption across markets both as a consequence of Covid and the geopolitical risk consequent upon the war in Ukraine. That has disrupted markets from food production through to logistics and into supply.

Although we saw a decline in applications generally to 442 compared with 572 in the prior period, commitments remained stable with $104 million of commitment for the fiscal year ending 30 June 2022 compared against $109 million during the prior year. This generally indicates that the quality of applications is beginning to improve, which is pleasing given it is one of LCM's longer term strategic objectives. In terms of application numbers and commitments generally, we were very pleased to achieve that result given the level of disruption to our normal business practices during the financial period.

LCM launched its asset management business in late March 2020 with a close of a US$150 million. We were pleased to have fully committed our first Fund within the two year investment period, in line with the Fund mandate. This is a great achievement despite the close coinciding with the onset of the Covid pandemic and the disruption it caused across economies globally. The commitment of Fund I allowed us to commence the marketing of our second Fund, with a target size of US$300 million. We are pleased to have raised approximately two thirds of the target size and expect to complete a final close before the end of the calendar year. That gives LCM access to incrementally larger capital resources than it has historically had, allowing LCM to take advantage of the prevailing market conditions and generally the increased demand for its capital.

In the context of growth generally, LCM has managed to build an asset management business with approximately A$500 million under management in less than 2.5 years. We have made strong progress in committing those funds to quality investments, which should allow us to incrementally grow our asset management business over time.

Overall LCM increased its assets under management from A$336 million at the end of FY21 to A$414 million at the end of FY22. That continued year-on-year growth is a testament to the resilience of LCM's business notwithstanding considerable disruption. It places LCM to continue its growth strategy in much more favourable market conditions.

Portfolio Update

LCM operates two business models; the first is asset management whereby LCM acts as a fund manager investing in disputes and the second is a direct investment model whereby LCM invests its balance sheet capital in disputes. The two business models crossover and interact via a co-investment strategy. LCM's balance sheet invests directly alongside fund investors in each investment, typically with LCM's balance sheet investing 25% of each investment and benefiting from all the economic upside generated by successful dispute investments. Additionally, LCM receives, as a fund manager, performance fees in respect of its asset management business.

Over a period of time the nature of LCM's business is changing. Currently, LCM maintains a portfolio of historical direct investments where LCM has invested 100% of the capital commitment from its balance sheet capital, whereby LCM benefits 100% of the economic upside with respect to those investments.

LCM's portfolio of 100% direct investments is very mature and we expect that a significant number of those investments will mature in the short to medium term. Over the short to medium term, LCM will see a transition from 100% direct investments capital contribution to a co-investment model.

As previously mentioned, LCM commenced the raising of a second managed Fund. It gave us great confidence that all the investors in Fund I increased their investment level into Fund II.

In addition, LCM has commenced commitments into Fund II and as at the end of August we have committed a total of 4 investments. We are encouraged by the level of early commitments in to Fund II given the current market and believe the additional capital gives LCM the ability to genuinely benefit from the changing market conditions. The asset management model gives LCM far greater access to capital and the ability to diversify LCM's balance sheet capital across multiple investments through the co-investment model, well beyond what could have been achieved purely utilising LCM's balance sheet as a capital source.

Performance Metrics

LCM enjoys a number of benefits from being a pioneer in the litigation finance industry.

The first lies in its long experience in funding disputes and determining which disputes have the characteristics of an investment capable of generating returns for investors. The second, which is to a large extent born out of our experience, is a remarkably strong track record in terms of performance metrics. It is those two factors together with others, which have enabled LCM to attract the highest calibre institutional investors to participate in its asset management business. LCM guards that track record zealously and strives to maintain a very high level of investment performance.

Since LCM first listed in the public markets back in 2016, we have been challenged on whether LCM will be able to maintain its remarkably strong track record as we build in scale.

Whilst we should expect some pressure to be applied to our investment performance metrics as we build in scale, given the level at which we currently perform, there is significant room to move while still delivering attractive returns. Our running performance metrics for the last 11 years measuring every single completed investment, including losses, has generated an investment internal rate of return of 79%. We have also achieved a return on invested capital of 163%.

The average life of LCM's investments at the conclusion of the 11 year period remains at 27 months. Over the past couple of years we have indicated to investors that we generally expect the duration of investments to increase to between 36 - 42 months.

The reason for that is twofold. Firstly, the effects of disruption consequent upon the global pandemic. There is no do doubt that the global pandemic caused significant delays to Court systems globally and also the arbitral process. Those delays have been felt to a greater or lesser degree in different territories. Whilst the majority of those delays have now ceased and indeed a number of efficiencies created as a consequence of Covid and technology, there will be a lengthening of any investments entered into within approximately 18 months prior to the global pandemic right through to investments entered into during the current financial period. The reality is that the delays experienced there will increase the time to conclusion or achieving a liquidity event.

The second factor, which will have the tendency to increase the time necessary for our investments to reach a conclusion, is their size and complexity. As LCM has the benefit of larger pools of capital through its asset management business, we are able to consider larger and more complex disputes. These investments were not always available to us previously when we were working with a smaller capital base, as they had a tendency to cause concentration risk. We have always possessed the skill and experience to participate in those larger disputes, but not always the capital. We are now able to construct larger and more diversified portfolios of disputes lessening the risk of capital loss. Naturally the motivations for a party to fight longer and harder in a dispute concerning large amounts of money is obvious as people fight longer and harder over larger sums. We have yet to see any elongation of our investments to date.

LCM's high investment performance can be attributed to a number of factors. The first is the rigor with which we undertake a due diligence and risk management process. Both the factors taken into account and the process by which that due diligence is undertaken, have been developed over our 24 year history. It is a combination of both investment criteria and disciplined process that we have been able to select which disputes are suitable for investment and which are not. Our investment performance is in some ways a direct reflection of that rigorous due diligence process. A second factor is the level of monitoring that we undertake in respect of the dispute investments which we manage post investment and through to a profitable conclusion. It is the level of scrutiny that contributes towards LCM's investment success and our performance metrics. It is also a testament to our experienced and talented investment managers.

Our Win: Loss Ratio

Since LCM commenced its litigation finance business some 24 years ago, it has completed 244 separate investments. That is, LCM has invested in 244 separate disputes.

That represents a very significant pool of experience in an industry which is relatively young. Of those 244 separate investments, LCM has suffered a financial loss in respect of only 11. Again, that is a remarkably strong win loss ratio. It represents a loss rate less than 5%. That strong metric is again a direct reflection of the methodologies and systems developed by

LCM over the years to undertake an effective and rigorous due diligence process in selecting those disputes which represent sound investments.

Of those 11 investments where LCM suffered a financial loss, it has only been on 6 occasions where LCM's due diligence process has predicted the incorrect result. That process, at its essence, is taking a given set of factual circumstances applying the legal principles and predicting how a judge or arbitrator would adjudicate the dispute. On six occasions, LCM has got that exercise incorrect. That, of course, does not necessarily mean that LCM and its investment managers were entirely incorrect after all, the adjudication of large and complex disputes is not an exact science. It is open to human error, which from time to time occurs. One only needs to give consideration to the determination of appellate to know that the system is not infallible.

Notwithstanding LCM's strong track record in terms of wins and losses and the performance metrics generated from the investments which we manage, the resolution of disputes either through litigation or arbitration can be inherently unpredictable. That unpredictable characteristic is also a factor which complicates the market's desire for financial forecasting and guidance.

Notwithstanding all of those factors, LCM continues to improve its otherwise rigorous due diligence processes and the criteria that we apply when considering an application for finance and the potential outcome of a dispute. It also drives us to ensure that we are diligent when it comes to monitoring our investments through to a profitable outcome.

It is prudent to recognise that losses from dispute investments are a feature of the investment class. Indeed, they are present across the track record of all participants in the litigation finance industry. As the resolution of disputes is not a precise or exact science, it is inevitable that losses will occur from time to time. Given LCM's significant experience in the industry combined with the robust and ever evolving processes and systems employed, we expect that such losses will be infrequent and minimal consistent with our track record to date.

Forecasting and guidance

The provision of financial forecasting and/ or guidance has been a vexed issue for those litigation financers who are listed on the public markets. The issue has been addressed in a number of ways. One way that some operators have dealt with this issue is through fair value accounting. Through that mechanism, public litigation financers have been able to recognise revenue and thus the progress of their investments before they are actually realised, and the resolution achieved. LCM has always adopted an exceptionally conservative view towards revenue recognition. LCM has preferred to recognise investment revenue once we have satisfied all of the conditions of the litigation funding arrangement. That means we do not recognise the proceeds of a completed investment until such time as they have crystalised and LCM can be satisfied that they will be received within a short period. We do not fair value our dispute investments prior to completion, nor do we recognise revenue on a fair value basis.

That conservatism tends to create a revenue line punctuated by infrequent but large inflows, a feature of LCM's revenue line since its inception.

Historically, more than 90% of investments have resolved through commercial negotiation rather than the imposition of a Judgement or Award by a Court or Arbitral Tribunal. That is, the parties to the litigation have negotiated a commercial outcome. We encourage that approach and are very comfortable with a high proportion of our investments being resolved in that fashion.

Despite LCM benefitting from being a pioneer in the litigation finance industry and having a very strong record of accurately selecting disputes as suitable investments, forecasting both the timing and quantification of an individual commercial settlement is notoriously difficult. It involves predicting not only the timing of a negotiated settlement between two third party commercial participants, but also the quantum of that settlement. Consequently, LCM has taken the view that we are unable to accurately or responsibly provide forecasts of revenue to the market.

Additionally, LCM structures its underlying Litigation Finance Agreement as a rising multiple of invested capital or rising percentage over time. Therefore, in terms of the investment returns generated, it is often the case that the longer the investment, the better the returns generated. For that reason, it has never been a matter of concern whether an investment resolves on one side or the other of a financial period. Equally, a delay is not seen as impacting the performance of a particular single investment.

We are constantly endeavouring to provide information and data to the market to enable investors and those analysts who cover our business to make informed decisions about when investments are expected to be realised and what returns they might generate. We hope that we continue to improve that information set over time.

Strategy

Approximately three years ago, LCM began to develop a strategy with a view to increasing the scale of its business. That strategy involved a change in both mindset and in the way we operated our business. In executing that strategy, LCM has changed its business from the use of its balance sheet capital to fund litigation to establishing an asset management business specialising in alternate and uncorrelated investments, being disputes.

The first steps in executing the strategy were to diversify LCM's capital structure. That was done in two ways. First, the introduction of a conservative amount of leverage against LCM's balance sheet, secondly, through the establishment of LCM's asset management business. The execution of the strategy commenced approximately 2.5 years ago and has progressed swiftly.

In particular, over the past financial period LCM has made considerable headway with respect to its asset management business.

The diversification of LCM's capital structure, and in particular the commencement of its asset management business, creates significant advantages to LCM beyond simply allowing us to build scale. It reduces concentration risk, aids in the smoothing of LCM's revenue line and leverages LCM's ability to generate profits from its investment strategy utilising external capital sources. With respect to risk, it allows LCM to invest its balance sheet capital across a far wider portfolio of investments, thus defraying concentration risks. It also permits LCM to generate revenue both directly from its co-investment participation, but also by way of performance fees. Additionally, it allows for the management of much larger portfolios of disputes resulting in increased frequency of liquidity events having the effect, over time, of smoothing LCM's revenue and increasing the frequency of inflows. It also allows concentration risk from single investments to be avoided through the structuring of much larger portfolios of disputes. We believe all of those factors contribute to the acceleration of delivering value and growth.

The structure of our asset management business provides LCM with the benefit of a fee structure whereby LCM receives performance fees with respect to its role as fund manager.

The structure for Fund I and Fund II allows LCM to receive a 25% share of profits derived from fund investments over a hurdle rate of return of 8% up to an IRR of 20%. Profits earned above a 20% IRR attract an outperformance fee equivalent to 35% of the profits. Importantly, that profit participation occurs at the conclusion of each investment as distinct from at the end of the fund, providing exposure to performance returns throughout the life of the Fund.

Another feature of our asset management business is the right of co-funding. LCM enjoys a right to directly invest its balance sheet capital in each and every investment that the asset management business participates in. That allows LCM, as a direct investor, to enjoy the full economics derived from each investment up to its right of participation as a co-investor.

That blend of returns generated from direct investments together with performance fees provides a very robust business structure for LCM moving forward. The raising of Funds I and II have firmly established LCM's asset management business with overall funds under management of A$0.5 billion inside 2.5 years. We are proud of that achievement.

Market and environment

Resilient Business Model and Operations

LCM's Business Model, and more particularly its investment strategies, operate in all market conditions. That is to say whilst the demand for capital in the litigation finance industry varies from market to market, it is ever present whether economies are growing or contracting. With the current market conditions exhibiting more of a challenging economic environment, demand for LCM's capital will increase. To that extent, litigation finance as an industry generally, operates somewhat countercyclically with an increased demand during economic downturns. With economic headwinds as they currently are together with significant uncertainty in global markets, we are seeing and expect to continue to see, increased applications for finance.

We are also seeing an increased volume of applications and ultimately investments coming from the insolvency and restructuring sector.

That position is consequent not only upon the prevailing economic conditions, but also as a consequence of prohibitions on the winding up of insolvent companies during the global pandemic. Effectively, during the two years when global economies were most effected by the global pandemic, governments in the territories in which we operated, prohibited insolvent companies being wound up. Those prohibitions have recently been relaxed and as a consequence a backlog of insolvency activity is ensuing. There is no doubt that increased activity in insolvency and bankruptcy will lead to an increase in applications coming from that sector.

Industry Regulation

LCM continues to monitor all jurisdictions and territories in which it operates with respect to regulation or the potential for regulation. There have been no other developments in those territories other than the commentary above with respect to Australia. That said, those litigation financers who operate globally, and in particular those who are subject to regulation through the public markets, have indicated their support with respect to forms of regulation when they have been raised. Ultimately, any form of regulation that is introduced will favour the larger and more established litigation financers such as LCM and will create further barriers to entry into the litigation funding industry.

Outlook

It is with some relief that markets globally move on from the unprecedented effects of the global pandemic. Markets now face the consequences of those years. As described in more detail throughout this report the prevailing conditions both economically and market driven, are incredibly conducive to the use of litigation finance across all sectors. That is an increasing number of insolvencies, bankruptcies and restructurings which are occurring in the market will lead to a greater number of opportunities for investment in that sector.

Additionally, the general sentiment driven by economic forces across the middle market of disputes generally will see greater prevalence towards using litigation finance, both as a capital tool and a risk management tool. Finally, we are seeing prevailing conditions both economically and in terms of market certainty favour large sophisticated and well capitalised corporates considering the use of litigation finance, again as both a capital tool and a tool for managing risk. Since LCM commenced its strategy for corporate portfolio funding, the market conditions have never been more conducive to that part of the market.

With increasing demand for litigation finance capital, LCM's greater access to capital through its asset management business, and finally the expansion of our origination network, LCM is exceptionally well placed to benefit from the changing market conditions.

Patrick Moloney

Chief Executive Officer

Financial Review

During the year markets were confronted with the challenges brought about by the geo- political landscape which created economic uncertainty and volatility. As economies emerged from a tumultuous two and a half years following the disruption caused by Covid, markets were faced with rising interest rates, surging gas prices and the highest inflation experienced in decades. Hospitality industries across the world have faced a number of challenges resuming to pre-covid business levels and several industries continue to experience disruption caused by various factors including industrial action and chain supply shortages.

As a consequence of these uncertain conditions, economies across the world will likely see an uplift in corporate and social disputes at a time when businesses typically preserve capital for core. We have observed a 25% uplift in applications in the second half of the fiscal year when compared to H1.

During the year LCM delivered meaningful growth across our key performance metrics building scale and sustainable long term growth. Our first Fund of US$150m is now fully committed across 26 projects and we have made significant progress in building scale across our funds under management with Fund II raising approximately two thirds of the targeted US$300 million from existing investors. Commitments towards the second fund have commenced and we are aiming for a final close of the targeted size before the end of the calendar year. Our strong underwriting skills and investment selection expertise continues to support our financial performance with our 11 year historical IRR at 79% and 11 year ROIC of 163%. We experienced some delays in the resolution of balance sheet matters but expect organic cash flows from these matters to crystallise in the short to medium term, delivering meaningful profits in the future.

Adjusted profit before tax inclusive of third party interests was A$20.2 million which was up 23% on the prior period. LCMs business benefits from being counter-cyclical to the market, meaning we tend to observe an increased demand for funding during times of economic uncertainty when companies preserve capital for core business. Disputes are largely unaffected as courts and tribunals will continue to operate and progress matters, despite changing conditions in the wider market.

LCM standalone results

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

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

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

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

 

Income statement	Note	AASB as reported 30 June 2022 $'000	Fund interests* $'000	LCM-only 30 June 2022 $'000	AASB as reported 30 June 2021 $'000	Fund interests* $'000	LCM-only 30 June 2021 $'000
Revenue from contracts with customers
Litigation service revenue	4	47,350	207	47,143	36,924	664	36,260
Performance fees	4	53	1	52	135	-	135
		47,403	208	47,195	37,059	664	36,395
Litigation service expense		(16,343)	(81)	(16,262)	(10,439)	(114)	(10,325)
Gross profit		31,060	127	30,933	26,620	550	26,070
Other income		-	-	-	-	-	-
Interest income		1	-	1	4	-	4
Expenses
Employee benefits expense	6	(8,841)	-	(8,841)	(8,396)	-	(8,396)
Depreciation expense	6	(65)	-	(65)	(59)	-	(59)
Corporate expenses		(3,599)	-	(3,599)	(2,750)	-	(2,750)
Finance costs	6	(4,703)	-	(4,703)	(1,334)	-	(1,334)
Fund administration expense	6	(3,169)	(2,369)	(800)	(1,153)	(685)	(468)
Total expenses		(20,377)	(2,369)	(18,008)	(13,692)	(685)	(13,007)
Profit before income tax		10,684	(2,242)	12,926	12,932	(135)	13,067
Analysed as:
Adjusted operating profit		20,165	127	20,038	16,384	550	15,834
Non-operating expenses	6	(4,778)	(2,369)	(2,409)	(2,118)	(685)	(1,433)
Finance costs	6	(4,703)	-	(4,703)	(1,334)	-	(1,334)
Profit before income tax expense		10,684	(2,242)	12,926	12,932	(135)	13,067
Income tax expense	7	(4,040)	-	(4,040)	(4,069)	-	(4,069)
Profit/(loss) after income tax expense for the period		6,644	(2,242)	6,644	8,863	(135)	8,998
Profit for the period is attributable to:
Third party interests in the Fund		(2,242)	(2,242)	-	(135)	(135)	-
Owners of Litigation Capital Management Limited		8,886	-	8,886	8,998	-	8,998
		6,644	(2,242)	8,886	8,863	(135)	8,998
Other comprehensive income for the year, net of tax		(2,535)	(432)	(2,103)	(1,377)	105	(1,482)
Total comprehensive income for the period		4,109	(2,674)	6,783	7,486	(30)	7,516

*      Third party interests.

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

 

Reconciliation of adjusted profit is provided below:

	AASB as reported 30 June 2022 $'000	AASB as reported 30 June 2021 $'000
Statutory profit before tax	10,684	12,932
Add:
Transaction costs	401	174
Share-based payments (loan shares)	256	316
Provision for annual leave and long service leave	80	31
Non-recurring consultancy fees	183	358
Litigation fees	689	86
Finance costs	4,703	1,334
Third party fund costs	3,169	1,153
FY22 adjusted operating profit	20,165	16,384

 

 

 

Statement of financial position	AASB as reported 30 June 2022 $'000	Fund interests** $'000	LCM-only 30 June 2022 $'000	AASB as reported 30 June 2021 $'000	Fund interests* $'000	LCM-only 30 June 2021 $'000
Current assets
Cash and cash equivalents	49,964	20,711	29,253	49,736	14,210	35,526
Trade and other receivables	34,491	-	34,491	13,843	-	13,843
Contract costs	21,634	-	21,634	16,663	-	16,663
Other assets	614	(624)	1,238	616	(23)	639
Total current assets	106,703	20,087	86,616	80,858	14,187	66,671
Non-current assets
Contract costs	162,763	83,130	79,633	117,895	45,956	71,939
Property, plant and equipment	182	-	182	186	-	186
Intangible assets	646	-	646	391	-	391
Other assets	249	-	249	284	-	284
Total non-current assets	163,840	83,130	80,710	118,759	45,956	72,800
Total assets	270,543	103,217	167,326	199,614	60,143	139,471
Liabilities
Current liabilities
Trade and other payables	12,908	5,817	7,091	12,392	4,378	8,014
Borrowings	14,494	14,494	-	13,253	13,253	-
Employee benefits	700	-	700	452	-	452
Total current liabilities	28,102	20,311	7,791	26,097	17,631	8,466
Non-current liabilities
Deferred tax liability	11,513	-	11,513	7,543	-	7,543
Borrowings	54,915	-	54,915	37,171	-	37,171
Employee benefits	227	-	227	148	-	148
Third party interests in consolidated entities	81,780	86,794	(5,014)	39,764	43,725	(3,961)
Total non-current liabilities	148,435	87,694	61,641	84,626	43,725	40,901
Total liabilities	176,537	107,105	69,432	110,723	61,356	49,367
Net assets	94,006	(3,888)	97,894	88,891	(1,213)	90,104

* Elimination of third party interests in Fund I.

** Elimination of third party interests in Fund I and Fund II.

Cash flow

LCM cash generated from the resolution of matters during the period was $26.6 million, as compared to $37.5 million in FY21, this was primarily as a result of resolutions materialising just before the financial year end. Payments related to capital invested was $29.8 million, compared to the same prior period in FY21 of $47.6 million. The following waterfall is exclusive of third party fund interests.

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

·	investment commitment was A$104 million inclusive of third party funds, decreasing marginally from A$109 million in FY21;
·	the 11 year cumulative portfolio Internal Rate of Return (IRR) was 79%;
·	11 year cumulative portfolio Return on Invested Capital (ROIC) was 163%;
·	applications received decreased to 442 from 572 in FY21 and decrease of 23%;
·	gross profit increased by 17% to A$31.1 million from A$26.6 million;
·	statutory profit before tax decreased by 17% to A$10.7 million from A$12.9 million. On an LCM only basis (excluding third party interests) profit before tax was broadly in line with the prior year at A$12.9 million compared to A$13.1 million in FY21; and
·	adjusted operating profit increased by 23% to A$20.2 million from A$16.4 million in FY21 and increased by 27% to A$20.0 million compared to A$15.8 million in FY21 exclusive of third-party interests.

 

Revenue

Gross revenue increased by 28% to A$47.4 million during the period compared to A$37.06 million in FY21. Litigation service expenses (investments in realised disputes) increased by 57% to A$16.3 million during the period from $10.4 million in FY21, resulting in an increase of 16.7% in gross profit to $31.1 million from $26.6 million.

	Litigation revenue 30 June 2022 $'000	Number of investments/projects	Number of cases	Litigation revenue 30 June 2021 $'000	Number of investments/projects	Number of cases
Single cases - completed	43,557	4	4	24,860	1	1
Single cases - ongoing	1,397	6	6	444	4	4
Law firm portfolios - ongoing	-	-	-	728	1	1
Corporate portfolios - ongoing	814	1	14	3,586	2	12
Insolvency - completed	1,567	2	2	5,022	5	5
Insolvency - ongoing	15	1	1	2,283	3	8
Other	53	1	1	136	2	1
Total	47,403	15	28	37,059	18	32

 

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

 

	Litigation revenue	Litigation revenue
	30 June 2022	30 June 2021
	$'000	$'000
APAC	27,985	32,536
EMEA	19,418	4,523
Total	47,403	37,059

 

Revenue during the year increased by 28% to A$47.4 million when compared to A$37.1 million the prior year.

Portfolio update

Capital invested during FY22 was $66.2 million, inclusive of $37.3 million of third party fund investment, a decrease on FY21 which was

$88.0 million inclusive of $39.5 million of third party investments. LCMs ability to originate investment opportunities and deploy capital is a measure of its growth and future performance as the value of our future profits are derived from the capital we deploy in our investments at the time a resolution is achieved. We observed further delays in cases this year but this does not indicate a loss but rather a shift from one period to the next. With delays, often comes a ratchet increase in the multiple on invested capital deployed to date, so delays in some circumstances will enhance our returns further. Despite these delays, LCM continued to demonstrate its ability to maintain progressive momentum year on year.

As at 30 June 2022 there were 24 direct balance sheet investments under management, inclusive of 5 recoveries matters, and 25 ongoing investments co-invested alongside Fund I and 2 matters in Fund II. Of the total 51 investments, 45 were unconditionally signed. As at 30 June 2021 there were 21 direct balance sheet investments and 20 investments co-invested alongside the Fund. This comprised 44 unconditionally funded investments.

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

Financial performance

During the year we had two material investments move into future financial periods.

The uncertainty of timing with respect to our portfolio of investments is still present, however as we grow scale the impact this has on our financial performance will become less significant. Delays should not be taken as a direct shift of the matters into the following period as the collective portfolio and timing of resolutions is continually assessed based on how investments are progressing through either the court or arbitral cycle. The performance of the business during the earlier stages of growth should be reviewed alongside our key performance metrics which provide a more accurate representation of the momentum achieved during the period.

The nature and complexity of the assets we invest in means they are subject to external factors beyond LCMs control. We rely on our rigorous investment selection process, extensive experience at inception of an investment and active project management of the investments through to their completion, however delays either through the court or tribunal, or awards and negotiated settlements between parties can provide a myriad of possible outcomes for a dispute. Despite this, LCM still delivered a strong set of results primarily attributable to its 100% direct balance sheet portfolio. The Group's overall gross revenue of A$47.4 million, inclusive of A$0.2 million of third party fund revenue, was up 28% compared to A$37.1 million in the prior financial period.

Gross profit of A$31.1 million, inclusive of A$0.1 million of third party fund gross profit, represented an increase of 17% compared to A$26.6 million in FY21.

The Group generated a statutory profit before tax of A$10.7 million, inclusive of third party fund costs A$2.2 million representing a decrease of 17% on the prior financial year. On a LCM stand-alone basis which excludes third party costs, statutory profit before tax was A$12.9 million which was marginally down by 1% on FY21 which was $13.1 million.

Operating expenses of $10.9 million increased by 6% compared to $10.2 million in FY21. We expect to see an increase in operating costs as we expand, however these are expected to remain in line relative to the size of the portfolio under management.

Non-operating expenses of $4.8 million include; $2.4 million of costs related to the third party funds which have been consolidated to comply with AASB standards but are not attributable to LCM, $0.8 million of amortisation costs related to placement fees; $0.2 million related to share-based expenses, $0.2 million related to non-recurring consultancy costs, $0.4m related to fund costs attributable to LCM, $0.7million related to legal fees and $0.1 million related to other expenses (see note 6).

We have made significant progress in building the foundations for sustainable long-term growth through the launch of our second and larger Fund.

Finance costs

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

Dividend

The Board remains committed to returning to the payment of a dividend as a matter of fiscal discipline. The ongoing uncertainty in global markets caused by geo-political unrest continues to impact most sectors. As governments start to look at measures to curb inflation, there is an expectation that the impact will ricochet across several industries and will likely lead to an increase in restructuring and insolvency related disputes. At this stage, the Board has made the decision that no dividend will be paid, to preserve cash to meet any increase in demand for investments in order to accelerate growth in our portfolio.

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

 

Mary Gangemi

Chief Financial Officer

 

Consolidated statement of profit or loss and other comprehensive income

For the period ended 30 June 2022

	Note	Consolidated
		2022 $'000	2021 $'000
Revenue from contracts with customers
Litigation service revenue	4	47,350	36,924
Performance fees	4	53	135
		47,403	37,059
Litigation service expense		(16,343)	(10,439)
Gross profit		31,060	26,620
Other income			-
Interest income		1	4
Expenses
Employee benefits expense	6	(8,841)	(8,396)
Depreciation expense	6	(65)	(59)
Corporate expenses		(3,599)	(2,750)
Finance costs	6	(4,703)	(1,334)
Fund administration expense	6	(3,169)	(1,153)
Total expenses		(20,377)	(13,692)
Profit before income tax expense		10,684	12,932
Analysed as:
Adjusted operating profit		20,165	16,384
Non-operating expenses	6	(4,778)	(2,118)
Finance costs	6	(4,703)	(1,334)
Profit before income tax expense		10,684	12,932
Income tax expense	7	(4,040)	(4,069)
Profit after income tax expense for the period		6,644	8,863
Other comprehensive income
Items that may be subsequently reclassified to profit and loss:
Movement in foreign currency translation reserve		(2,535)	(1,377)
Total comprehensive income for the period		4,109	7,486
Profit for the period is attributable to:
Owners of Litigation Capital Management Limited		6,644	8,863
Non-controlling interest		-	-
		6,644	8,863
Total comprehensive income for the period is attributable to:
Owners of Litigation Capital Management Limited		4,109	7,486
Non-controlling interest		(19)	-
		4,090	7,486
		Cents	Cents
Basic earnings per share	14	6.28	8.46
Diluted earnings per share	14	6.09	7.95

The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with accompanying Notes to the Financial Statements.

 

Consolidated statement of financial position

As at 30 June 2022

		Consolidated
	Note	2022 $'000	2021 $'000
Assets
Current assets
Cash and cash equivalents	8	49,964	49,736
Trade and other receivables	9	34,491	13,843
Contract costs	10	21,634	16,663
Other assets		614	616
Total current assets		106,703	80,858
Non-current assets
Contract costs	10	162,763	117,895
Property, plant and equipment		182	186
Intangible assets		646	391
Other assets		249	284
Total non-current assets		163,840	118,756
Total assets		270,543	199,614
Liabilities
Current liabilities
Trade and other payables	11	12,908	12,392
Borrowings	13	14,494	13,253
Employee benefits	12	700	452
Total current liabilities		28,102	26,097
Non-current liabilities
Deferred tax liability	7	11,513	7,543
Borrowings	13	54,915	37,171
Employee benefits	12	227	148
Third-party interests in consolidated entities		81,780	39,764
Total non-current liabilities		148,435	84,626
Total liabilities		176,537	110,723
Net assets		94,006	88,891
Equity
Issued capital		69,674	68,904
Reserves		(2,339)	(60)
Retained earnings		26,671	20,028
Parent interest		94,006	88,872
Non-controlling interest		-	19
Total equity		94,006	88,891

 

The above Consolidated Statement of Financial Position should be read in conjunction with accompanying Notes to the Financial Statements.

 

Consolidated statements of changes in equity

For the period ended 30 June 2022

 

Consolidated	Issued 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	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 2021	68,904	20,028	1,317	(1,377)	88,872	19	88,891
Profit after income tax expense for the year	-	6,644	-	-	6,644	-	6.644
Other comprehensive income for the year, net of tax	-	-	-	(2,535)	(2,535)	(19)	(2,554)
Total comprehensive income for the year	-	6,644	-	(2,535)	4,109	(19)	4,090
Equity Transactions:
Share-based payments	-	-	256	-	256	-	256
Contributions of equity	770			-	770		770
	770	-	256	-	1,026	-	1,026
Balance at 30 June 2022	69,674	26,672	1,573	(3,912)	94,006	-	94,006

The above Statement of Changes in Equity should be read in conjunction with accompanying Notes to the Financial Statements.

 

Consolidated statements of cash flows

For the period ended 30 June 2022

 

		Consolidated
	Note	2022 $'000	2021 $'000
Cash flows from operating activities
Proceeds from litigation contracts - settlements, fees and reimbursements		26,641	37,508
Payments to suppliers and employees		(41,804)	(59,412)
Non-operating items paid		(1,353)	(649)
Interest received		14	4
Net payments made by third-party interests in consolidated entities		(38,702)	(33,995)
Net cash used in operating activities	15	(55,217)	(56,544)
Cash flows from investing activities
Payments for property, plant and equipment		(38)	(14)
Payments for intangibles		(278)	(66)
Refunds of security deposits		(19)	10
Net cash used in investing activities		(335)	(70)
Cash flows from financing activities
Proceeds from issue of shares		770	74
Proceeds from borrowings	13	13,298	63,153
Repayments of borrowings		-	(13,391)
Payments of finance costs		(4,637)	(2,546)
Payments of transaction costs related to third-party interests		(1,853)	(1,749)
Net contributions from third-party interests in consolidated entities		45,060	29,234
Payments for fund establishment & administration costs		(778)	(635)
Net cash from financing activities		51,859	74,140
Net (decrease)/increase in cash and cash equivalents		(3,693)	17,525
Cash and cash equivalents at the beginning of the financial year		49,736	31,754
Effects of exchange rate changes on cash and cash equivalents		3,921	457
Cash and cash equivalents at the end of the financial year	8	49,964	49,736

 

The above Statement of Cash flows should be read in conjunction with accompanying Notes to the Financial Statements.

 

 

Notes to the financial statements                                                                                                          

30 June 2022     

 

Note 1 General Information

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

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

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

Level 12, The Chifley Tower

2 Chifley Square

Sydney NSW 2000

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

The financial statements were authorised for issue, in accordance with a resolution of Directors, on 20 September 2022. The Directors have the power to amend and reissue the financial statements.

 

Note 2 Significant accounting policies  

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

New or amended Accounting Standards and Interpretations adopted

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

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

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

Basis of preparation      

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

Historical cost convention

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

Critical accounting estimates     

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

Parent entity information          

In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 22 of the annual report.

Principles of consolidation        

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Litigation Capital Management Limited ('Company' or 'parent entity') as at 30 June 2022 and the results of all subsidiaries for the year then ended. Litigation Capital Management Limited and its subsidiaries together are referred to in these financial statements as the 'Group'.

The Group includes fund investment vehicles over which the Group has the right to direct the relevant activities of the fund under contractual arrangements and has exposure to variable returns from the fund investment vehicles. See Note 24 of the annual report.                               

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

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

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

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

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

 

Operating segments

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

Foreign currency translation

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

Foreign currency transactions

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

Foreign operations         

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

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

Revenue recognition                    

The Group recognises revenue as follows:

Revenue from contracts with customers                                                                                                               

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

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

Litigation service revenue                                            

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

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

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

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

Performance fees                                           

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

Interest                                                               

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

Income tax                                        

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

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

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

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

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

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

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

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

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

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

Current and non-current classification                                                                 

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

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

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

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

Cash and cash equivalents                                                                                                                         

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

Trade and other receivables

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

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

Contract costs                                  

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

Leases                                                                                                                                                 

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

Impairment of non-financial assets                                                                                       

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

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

Trade and other payables                                           

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

Borrowings                        

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

Employee benefits                                                                        

Short-term employee benefits                                                                                   

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

Other long-term employee benefits                                        

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

Defined contribution superannuation expense                                  

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

Share-based payments                                                                

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

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

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

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

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

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

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

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

Fair value measurement                                                                                                                                             

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

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

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

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

Financial assets and liabilities at amortised cost                                              

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

Issued capital                                   

Ordinary shares are classified as equity.                               

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

Dividends                                                          

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

Earnings per share                                         

 Basic earnings per share                                             

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

Diluted earnings per share                                                                          

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

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

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

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

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

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

Third-party interests in consolidated entities   

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

Rounding of amounts                                                                   

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

Note 3 Critical accounting judgements, estimates and assumptions                       

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

Key judgements                                              

Revenue from contracts with customers                                                               

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

Performance obligations and recognition of revenue

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

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

The Group has assessed the entities in which it has an interest to determine whether or not control exists and the entity is, therefore, consolidated into the Group (refer note 23 of the annual report). Where the Group does not own 100% of interests, the Group makes judgements to determine whether to consolidate the entity in question by applying the factors set forth in AASB 10, including but not limited to the Group's equity and economic ownership interest, the economic structures in use in the entity, the level of control the Group has over the entity through the entity's structure or any relevant contractual agreements, and the rights of other investors.                        

Significant estimates and assumptions                                                

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

Impairment of non-financial assets other than goodwill                                                                                               

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

Note 4 Revenue              

									Consolidated
									2022	2021
Major service lines									$'000	$'000
Litigation service revenue
Revenue attributable to LCM									47,143	36,260
Attributable to third party interests									207	664
									47,350	36,924
Performance fees									53	135
									47,403	37,059
Geographical regions
Australia									27,984	32,536
United Kingdom									19,419	4,523
									47,403	37,059
Contract duration
Less than 1 year									-	1,043
1-4 years									43,407	35,834
More than 4 years									3,996	182
									47,403	37,059

                                               

Note  5 Segment information                   

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

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

Major customers            

During the year ended 30 June 2022 there was three major external customer (2021: 1 customers, unrelated to that in 2022) where revenue exceeded 10% of the consolidated revenue. Revenue from these customers for the year ended 30 June 2022 amounted to $18,401,000, $13,670,000, and $7,951,000 (2021: $24,860,000).   

 

Note  6 Profit before tax                                             

 

									Consolidated
									2022	2021
									$'000	$'000
Profit before income tax expense includes the following specific expenses:
Employee benefits expense
Salaries & wages									7,337	7,205
Directors' fees									390	380
Superannuation and pension									254	277
Share based payments expense									256	316
Other employee benefits & costs									604	218
									8,841	8,396
Depreciation
Plant and equipment									41	39
Intangible assets									24	20
									65	59
Finance costs
Interest on borrowings (note 13)									4,376	1,235
Other finance costs									327	99
									4,703	1,334
Fund administration expense
Finance costs									553	387
General administration expenses									327	9
Set-up expenses									1,489	289
Amortisation of transaction costs									800	468
									3,169	1,153
Fund administration expenses relates to costs associated with the setup and administration of the LCM Global Alternative Returns Fund which are wholly attributable to the third party interest in consolidated entities.
Leases
Short-term lease payments									639	541

 

Adjusted operating profit

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

Non-operating expenses                                                                                                            

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

Share based payments expense									256	316
Consultancy									183	358
IPO and other transaction costs									401	174
Litigation fees									689	86
Other expenses									80	31
Fund administration expenses									3,169	1,153
Total non-operating expenses									4,778	2,118

 

 

 

Note  7 Income tax expense      

									Consolidated
									2022	2021
									$'000	$'000
Numerical reconciliation of income tax expense and tax at the statutory rate
Profit before income tax expense									10,684	12,932
At the Group's statutory income tax rate of 25% (2021: 26%)									2,671	3,362
Tax effect amounts which are not deductible/(taxable) in calculating taxable income:
		Foreign tax rate adjustments							(16)	(29)
		Share-based payments							64	82
		Other assessable income							98	127
		Other non-deductible expenses							-	35
		Unrealised foreign exchange							-	93
		Change in tax rate							662	12
		Adjustment for tax effect of loss attributable to third party interests							561	-
		Adjustment in respect of deferred tax of previous years							-	387
									4,040	4,069
Adjustment to deferred tax balances as a result of change in statutory tax rate
Income tax expense / (benefit)									4,040	4,069
Statutory tax rate of 25% is applicable to Australian entities with aggregated turnover below $50 million for the period ended 30 June 2022. The Group's turnover is expected to be above the threshold of $50 million in the future reporting periods which will attract a statutory tax rate of 30%. As a result, recognition of deferred tax asset is made by applying a 30% statutory rate instead of the lower 25% tax rate.

 

									Consolidated
									2022	2021
									$'000	$'000
Deferred tax asset/(liability)
Deferred tax asset/(liability) comprises temporary differences attributable to:
Tax losses									12,880	14,596
Employee benefits									279	185
Accrued expenses									255	79
Contract costs - litigation contracts									(25,195)	(22,938)
Transaction costs on share issue									268	535
Deferred tax asset/(liability)									(11,513)	(7,543)
Movements:
Opening balance									(7,543)	(3,559)
Charged to profit or loss									(3,970)	(3,984)
Closing balance									(11,513)	(7,543)

 

Note 8 Cash and cash equivalents           

									Consolidated
									2022	2021
									$'000	$'000
Cash at Bank									29,253	35,526
Cash of third-party interests in consolidated entities									20,711	14,210
									49,964	49,736

 

 

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

 

Note 9 Trade and other receivables       

									Consolidated
									2022	2021
									$'000	$'000
Due from litigation service1									27,893	8,267
Due from litigation service - portfolios2									6,452	5,576
Other receivables									146	-
									34,491	13,843

 

 

1 Receivables relate to the recovery of litigation projects that have successfully completed which may not have a specified time frame for settlement                                                                                                                                          

2 Receivables which form part of a portfolio of litigation projects and settlement of the receivable can be made upon an additional resolution of another litigation project within the portfolio which may not be within a specified contractual due date      

 

Allowance for expected credit losses

The Group has recognised a loss of $nil (2021: $nil) in profit or loss in respect of the expected credit losses for the year ended 30 June 2022.                                                                                                                      

 

Note 10 Contract costs - litigation contracts       

									Consolidated
									2022	2021
									$'000	$'000
Contract costs - litigation contracts									184,397	134,558

 

Reconciliation of litigation contract costs                                                                                             

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

									Consolidated
									2022	2021
									$'000	$'000
Opening balance									134,558	62,518
Additions during the period									28,927	48,495
Additions during the period made by third-party interests									37,255	39,539
Litigation service expense - successful contracts1									(16,343)	(10,439)
Litigation service expense - write down2									-	(4)
Other contract costs reimbursed - successful contracts1									-	(5,551)
Closing balance									184,397	134,558

 

1 Contract costs amortised upon the successful resolution of the litigation contract         

2 Due diligence costs written off upon determining that the litigation contract would not be pursued further

Third-party interests in contract assets                 

Contract costs (current and non-current) associated with interests of third parties in the entities which are consolidated in the consolidated statement of financial position is set out below:            

									2022	2021
									$'000	$'000
Attributable to owners of LCM									101,267	88,602
Third-party interests									83,130	45,956
Consolidated total									184,397	134,558

 

									Consolidated
									2022	2021
									$'000	$'000
Current									21,634	16,663
Non Current									162,763	117,895
									184,397	134,558

 

 

Impairment considerations                                                                                                                                                        

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

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

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

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

·    The discount rate applied to the cash flow projections is based on the Group's weighted average cost of capital and other factors relevant to the particular litigation contract. The discount rate applied was 15% (2021: 15%).            

Based on the above, the Group has recognised impairment losses of $nil (2021: $nil) in profit or loss on contract costs for the year ended 30 June 2022.

Note 11 Current liabilities - trade and other payables                   

									Consolidated
									2022	2021
									$'000	$'000
Trade payables									12,562	11,655
Distribution payable									-	32
Tax payable									68	84
Other payables									278	621
									12,908	12,392

 

Refer to note 16 of the annual report for further information on financial instruments.

 

Note 12 Current and non-current liabilities - Employee benefits                             

									Consolidated
									2022	2021
									$'000	$'000
Current
Annual Leave									700	452
									700	452
Non-current
Long Service Leave									227	148

 

Note 13 Borrowings                       

									Consolidated
									2022	2021
									$'000	$'000
Current
Borrowings of third-party interests in consolidated entities									14,494	13,253
									14,494	13,253
Non-current
Borrowings									54,915	37,171
									54,915	37,171
Reconciliation of borrowings of third-party interests in consolidated entities:									Consolidated
									2022	2021
									$'000	$'000
Balance 1 July									13,253	-
Proceeds from borrowings									-	26,782
Repayment of borrowings									-	(13,391)
Net accrued interest									17	18
Payments for borrowing costs									(185)	(354)
Amortisation of borrowing costs									230	281
Other non-cash items									1,178	(83)
Balance as at 30 June									14,494	13,253
On 8 September 2020 the Group entered into a multicurrency revolving credit facility with Raiffeisen Bank International AG for an aggregate amount of USD$30,000,000 (the "Facility"). The Facility carries interest of LIBOR or equivalent plus margin of 2.2% p.a. and was available for period of 364 days from the date of the agreement. As at 30 June 2022, the Group's outstanding utilisation amounted to USD$10,000,000 and was due for repayment on 9 September 2022.
Reconciliation of borrowings of LCM:									Consolidated
									2022	2021
									$'000	$'000
Balance 1 July									37,171	-
Proceeds from borrowings									13,298	36,371
Payments for borrowing costs									(259)	(1,134)
Amortisation									919	247
Other non-cash items									3,786	1,687
Balance as at 30 June									54,915	37,171

 

On 22 February 2021 the Group entered into a credit facility with Northleaf Capital Partners for an aggregate amount of US$50,000,000, AUD equivalent of $72,519,000¹ (the "Facility"). The Facility carries interest of a LIBOR or equivalent based rate of 8 per cent together with a profit participation calculated by reference to the profitability of a defined category of the Group's investments, and a non-utilisation margin of 1 per cent for the first two years. The overall cost of the Facility is capped at 13% per annum. The Facility is available to be drawn down during the first two years, has an overall term of four years and is secured against the Group's assets. As at 30 June 2022, the Group's outstanding utilisation amounted to US$10,000,000, an AUD equivalent of $14,504,000¹.

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 2022. Should the Group not satisfy any of these covenants, the outstanding balance of the Facility may become due and payable.    

The Group incurred costs in relation to arranging the Facility of $1,393,000 which were reflected transactions costs and will be amortised over the 4 year term of the borrowings. As at 30 June 2022, $968,000 of the loan arrangement fees remained outstanding.

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

Note 14 Earnings per share        

									Consolidated
									2022	2021
									$'000	$'000
Profit after income tax									6,644	8,863
Non-controlling interest									19	-
Profit after income tax attributable to the owners of Litigation Capital Management Limited									6,663	8,863
									Number	Number
Weighted average number of ordinary shares used in calculating basic earnings per share									106,015,738	104,706,722
Adjustments for calculation of diluted earnings per share:
	Amounts uncalled on partly paid shares and calls in arrears								1,229,103	2,144,431
	Options over ordinary shares								2,140,866	4,693,686
Weighted average number of ordinary shares used in calculating diluted earnings per share									109,385,707	111,544,839
									Cents	Cents
Basic earnings per share									6.28	8.46
Diluted earnings per share									6.09	7.95

 

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

 

Note 15 Reconciliation of cash flows                     

Reconciliation of profit after income tax to net cash from operating activities:
									Consolidated
									2022	2021
									$'000	$'000
Profit/(loss) after income tax expense for the year									6,644	8,863
Adjustments for:
Depreciation and amortisation of intangibles									284	342
Amortisation of finance costs									327	99
Share-based payments									256	316
Fund administration expenses									800	468
Interest reclassified to financing activities									4,710	176
Other non-cash including exchange rate movements									(739)	(265)
Change in operating assets and liabilities:
Increase in contract costs - litigation contracts									(88,020)	(72,040)
Decrease/(increase) in trade and other receivables									(22,074)	1,455
(Decrease)/increase in trade and other payables									1,095	(135)
Increase in deferred tax liabilities									3,970	3,985
(Increase)/decrease in prepayments									22	(189)
Increase/(decrease) in employee benefits									327	107
Increase/(decrease) in third party consolidated interests									37,181
Increase/(decrease) in other liabilities									-	274
Net cash from operating activities									(55,217)	(56,544)
Cash and non-cash movements in Third-party interests in consolidated entities are shown below:
									Consolidated
									2022	2021
									$'000	$'000
Balance 1 July									(39,764)	(12,600)
Proceeds									(45,060)	(29,234)
Payments									778	635
Other non-cash items									2,266	1,435
Balance as at 30 June									(81,780)	(39,764)

 

Note 16  Events after the reporting period                                                                                                                         

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