Half-year Report

RNS Number : 8224S

Litigation Capital Management Ltd

14 March 2023

 

14 March 2023

Litigation Capital Management Limited

("LCM" or the "Company")

Interim results for the half year ended 31 December 2022

Highlights

•	Fund II Capital commitment at A$79m as at 31 December 2022 and A$114m as at 28 February 2023. Fund I fully committed
·	Assets under Management (AuM) increased to A$506m by 31 December 2022 with further commitments in Fund II bringing our AuM to A$537m at 28 February 2023
·	Overall Capital commitments were up significantly on the same prior year period at A$107m
·	162 applications reviewed, made up of better quality, larger and more complex cases, with expectations of enhanced returns from these cases
·	Capital invested during the period increased from A$31.5m to A$56.9m
·	Total revenue A$3.0m with a further A$22.5m recognised post the period end
·	Adjusted loss for the period A$5.5m reflecting conservative revenue recognition. Post balance sheet resolutions would have increased LCM only performance to an adjusted operating profit of A$6.3m

Post period events and outlook

·	Post Year End first successful settlement from a Fund I co-investment, generating ROIC of 278% for LCM's balance sheet contribution and expected to contribute A$6.3m to gross profit
·	Post Year End successful settlement on one of LCM's 100% direct balance sheet investments which was an Australian class action contributing approximately A$5.8m to gross profit

(Capital commitment means the total estimated budget of an investment)

Commenting on the results, Patrick Moloney, CEO of Litigation Capital Management, said: "I am pleased we have continued to make progress on our Fund Management business, which has the potential to bring superior returns to LCM, as demonstrated by the first successful settlement from a Fund I investment, producing favourable outcomes both for the Fund and our balance sheet."

"Building on the increased levels of commitments in the period, we expect more investment opportunities to present themselves, in part due to the counter cyclical nature of our business, and as moratoriums against insolvency and restructuring disputes are relaxed. Our track record shows we are well positioned to capitalise on these opportunities, wherever they present themselves in the world."

LCM will be hosting a webinar for investors today at 11.00 a.m. The presentation is open to all existing and potential shareholders. If you would like to attend this presentation, please register using the following link:

https://www.investormeetcompany.com/litigation-capital-management-limited/register-investor

A webinar presentation for analysts will take place at 9.00am. Analysts wishing to attend should contact [e-mail] to register.

The accompanying results presentation is available on LCM's website: 

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

The Interim Financial Report is available at:

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

Enquiries

Litigation Capital Management	c/o Tavistock PR
Patrick Moloney, Chief Executive Officer Mary Gangemi, Chief Financial Officer
Canaccord (Nomad and Joint Broker)	Tel: [phone]
Bobbie Hilliam
Investec Bank plc (Joint Broker)	Tel: [phone]
David Anderson
Tavistock PR	Tel: [phone]
Tim Pearson Katie Hopkins Simon Hudson	[e-mail]

NOTES TO EDITORS

Litigation Capital Management (LCM) is an alternative asset manager specialising in disputes financing solutions internationally, which operates two business models. The first is direct investments made from LCM's permanent balance sheet capital and the second is third party fund management. Under those two business models, LCM currently pursues three investment strategies: Single-case funding, Portfolio funding and Acquisitions of claims. LCM generates its revenue from both its direct investments and also performance fees through asset management.

LCM has an unparalleled track record driven by disciplined project selection and robust risk management.

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

www.lcmfinance.com

Chief Executive's Statement

Progress on Fund management business

We enter 2023 with confidence having made substantive progress in our asset management business with our AuM growing to A$0.5 billion. We have observed significantly improved performance across our key metrics which are an indicator of long-term sustainable growth, building out our portfolio for the future.

As previously announced, we have now fully committed our US$150m Global Alternative Returns Fund ("Fund I"), (allocated to investments) with approximately 60% of that capital deployed, demonstrating our ability to put capital to work. The resolution of our first traditional investment from Fund I has reinforced the economic benefit of our Funds management model, yielding a 278% return on invested capital (ROIC) to LCM and a 90% ROIC to Fund Investors.

Commitments in our Global Alternative Returns Fund II ("Fund II") now comprise A$114m of investments. We have observed a significant increase in the demand for our capital in recent months with commitments at A$107m for the six months ended 31 December 2022 compared to A$104m for the full year ended 30 June 2022.

Over the past two years the Company has transitioned from a 100% direct investment model, where LCM funded 100% from balance sheet capital, into a Funds Management model. This model enables us to leverage third party capital to co-invest in larger and more diversified portfolios of investments. The structure of our Funds management model ensures we maintain a disciplined approach to investing capital as it aligns LCM's interests with those of third party investors at the same time as enhancing returns to LCM based on the performance of those underlying investments. This enables LCM to deliver disciplined and sustainable long-term growth to both our Fund and equity investor base. As demonstrated from the resolution of the Carillion matter, this model is generating enhanced returns which in turn generate larger pools of organic cash to be reinvested in a more diversified portfolio of investments.

Investment performance

The underlying performance of the business continues to strengthen. We remain focussed on building our Funds Management business and developing a model that delivers sustainable growth. This is best measured by the growth of our Assets under Management combined with the performance of those investments. The funding of disputes involves longer than usual investment periods. Historically our investments have taken on average 27 months to complete and don't typically yield linear returns year-on-year. Consequently, the performance of the business in any given six or twelve month period does not accurately reflect the underlying performance of the business which is exacerbated further as investment cycles lengthen due to the complexity and size of the underlying investment. Our ability to continue to deliver strong return metrics on our investments is a better measure of performance as it reinforces the strength of our investment selection process and the likelihood of generating positive returns on assets under management.

Notwithstanding the H1 results, two resolutions subsequent to the half year period ended 31 December 2022 delivered revenue of A$22.5m and gross profit of approximately A$12m. This combined with disciplined cost management, clearly demonstrates how the timing of resolutions, in such a short period, can significantly impact reported performance. 

Progress on our portfolio of investments:

Direct investments

·	Two investments have been successful at first instance, one of which is subject to an appeal which was heard in February 2023 and the other is subject to a challenge as announced on 23 February 2023
·	One investment was unsuccessful at first instance but is subject to a challenge
·	Awaiting a judgment or award in three further investments
·	Final hearings scheduled for three further investments in 2023 calendar year

Fund I

·	Fund I fully committed across 26 investments (two terminated after due diligence), two resolved, one of which resolved in FY22
·	Successful conclusion in the Carillion investment contributing approximately A$6.3m to gross profit in H2
·	Two Fund I investments successful at final hearing (awaiting outcomes of appeal/additional issues)
·	One Fund I class action investment has had a partial resolution through settlement
·	Six further Fund I investments have had final hearings and are awaiting an award/judgment
·	Two further Fund I investments have final hearing dates scheduled in 2023

Fund II

·	As at March 2023 there are 10 investments in Fund II with two terminated after further due diligence
·	A number of further potential investments are close to being finalised

Market outlook

A combination of Covid disruption, high inflation, increasing interest rates, geo-political disruption, supply and logistics disruption and economic risks are both increasing the number of global disputes and placing pressure upon capital allocation for those disputes. Economic uncertainty generally increases pressure on internal legal spend and Internal legal counsel are exploring alternative ways to achieve their funding requirements which are increasing the demand for funding. We are observing an increase in insolvency and restructuring with online and high street retailers amongst the first to suffer with some recent big name collapses. Additionally, there is a rising number of cases related to shareholder mis-selling, fraud and competition claims which are also driving the demand for LCM's capital.

Business update

The strength of our team is critical to our success and our ability to deliver value for investors. Over the past year we have focussed on building a highly motivated team globally. We have strengthened our UK office with the addition of Fiona Heyes who joins the London office as Head of Underwriting - EMEA and Timothy Mayer who joins as a Senior Investment Manager for EMEA. Both Fiona and Timothy are regarded as highly experienced litigation finance professionals in the London market. Additionally we welcome Daniel Kinnear to lead our global Corporate Origination strategy. Daniel brings more than 20 years of experience across various areas of risk management and finance gained within Investment Banking. 

In APAC we welcome Alice Pailthorpe and Carolina Carlstedt. Alice joined LCM's Sydney office as an Investment Manager. Alice specialised in Disputes & Regulatory Investigations at a Senior Associate level at Allens Linklaters and as a Solicitor at Gilbert and Tobin. Carolina Carlstedt joins LCM as an Investment Manager based in LCM's Singapore office. Carolina is a Hong Kong and English law qualified international arbitration lawyer with significant experience of handling a broad range of commercial disputes with a particular specialisation in construction and engineering matters.

Our strongest and most experienced team to date are well positioned to ensure the successful delivery of value to our shareholders and fund investors

Patrick Moloney

Chief Executive Officer

14 March 2023

Consolidated Statement of Profit or Loss and other Comprehensive Income

For the six months ended 31 December 2022

		Unaudited six months ended 31 December
	Note	2022 $'000	2021 $'000
Revenue from contracts with customers
Litigation service revenue	3	4,699	19,321
Portfolio revenue		-	-
Performance fees	3	-	-
		4,699	19,321
Litigation service expense		(3,558)	(5,444)
Gross profit		1,141	13,878
Other income		-	-
Interest income		5	-
Expenses
Employee benefits expense	5	(4,759)	(5,134)
Depreciation & amortisation expense	5	(80)	(28)
Corporate expenses		(2,441)	(1,721)
Finance costs	5	(3,736)	(2,222)
Fund administration expense	5	(1,061)	(730)
Total expenses		(12,077)	(9,835)
(Loss)/profit before income tax expense		(10,931)	4,043
Analysed as:
Adjusted operating (loss)/profit		(5,521)	7,525
Non-operating expenses	5	(1,674)	(1,260)
Finance costs		(3,736)	(2,222)
(Loss)/profit before income tax expense		(10,931)	4,043
Income tax benefit/(expense)	6	3,434	(1,420)
(Loss)/profit after income tax expense for the period		(7,497)	2,623
Other comprehensive income for the period, net of tax		(1,273)	364
Total comprehensive income for the period		(8,770)	2,987
(Loss)/profit for the period is attributable to:
Owners of Litigation Capital Management Limited		(7,497)	2,623
		(7,497)	2,623
Total comprehensive income for the period is attributable to:
Owners of Litigation Capital Management Limited		(8,770)	2,987
		(8,770)	2,987

		Cents	Cents
Basic earnings per share	14	(7.03)	2.47
Diluted earnings per share	14	(7.03)	2.30

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

Consolidated statement of financial position

As at 31 December 2022

		Consolidated
	Note	Unaudited 31 December 2022 $'000	Audited 30 June 2022 $'000
Assets
Current assets
Cash and cash equivalents	7	33,399	49,964
Trade and other receivables	8	20,413	34,491
Contract costs	9	31,527	21,634
Other assets		513	614
Total current assets		85,852	106,703
Non-current assets
Contract costs	9	206,204	162,763
Property, plant and equipment		185	182
Intangible assets		376	646
Other assets		492	249
Total non-current assets		207,257	163,840
Total assets		293,109	270,543
Liabilities
Current liabilities
Trade and other payables		13,209	12,908
Borrowings	10	-	14,494
Employee benefits		637	700
Total current liabilities		13,846	28,102
Non-current liabilities
Deferred tax liability	6	7,346	11,513
Borrowings	10	56,063	54,915
Employee Benefits		268	227
Third-party interests in consolidated entities	13	130,041	81,780
		193,718	148,435
Total liabilities		207,564	176,537
Net assets		85,545	94,006
Equity
Issued Capital	11	69,674	69,674
Reserves		(3,304)	(2,339)
Retained Earnings		19,175	26,671
Parent interest		85,545	94,006
Total equity		85,545	94,006

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

Consolidated statements of changes in equity

For the period ended 31 December 2022

Consolidated	Issued 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 period	-	2,623	-	-	2,623	-	2,623
Other comprehensive income for the period	-	-	-	364	364	(19)	345
Total comprehensive income for the period	-	2,623	-	364	2,987	(19)	2,968
Equity Transactions:
Share-based payments (Note 15)	-	-	86		86	-	86
Contributions of equity (Note 11)	770	-	-	-	770	-	770
	770	-	86	-	856	-	856
Balance at 31 December 2021	69,674	22,651	1,403	(1,013)	92,715	-	92,715

Consolidated	Issued 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 2022	69,674	26,672	1,573	(3,912)	94,006	-	94,006
Loss after income tax expense for the period	-	(7,497)	-	-	(7,497)	-	(7,497)
Other comprehensive income for the period	-	-	-	(1,273)	(1,273)	-	(1,273)
Total comprehensive income for the period	-	(7,497)	-	(1,273)	(8,770)	-	(8,770)
Equity Transactions:
Share-based payments (Note 15)	-	-	308	-	308	-	308
	-	-	308	-	308	-	308
Balance at 31 December 2022	69,674	19,175	1,881	(5,185)	85,545	-	85,545

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

Consolidated statements of cash flows

For the period ended 31 December 2022

		Unaudited six months ended 31 December Consolidated
	Note	2022 $'000	2021 $'000
Cash flows from operating activities
(Loss)/profit after income tax expense for the period		(7,497)	2,623
Adjustments for:
Depreciation and amortisation of intangibles		80	28
Amortisation of finance costs		235	255
Share-based payments		308	86
Interest reclassified to financing activities		3,668	2,213
Exceptional items		520	250
Other non-cash including exchange rate movements		(1,678)	(234)
Change in operating assets and liabilities:
Increase in contract costs - litigation contracts		(54,289)	(30,035)
Decrease in trade and other receivables		14,117	1,432
Increase/(decrease) in trade and other payables		1,420	(2,737)
(Decrease)/increase in deferred tax liabilities		(4,167)	1,390
Increase in prepayments		(25)	(79)
Increase/(decrease) in employee benefits		(21)	298
Increase/(decrease) in third party consolidated interests		3,180	(163)
Net cash used in operating activities		(44,149)	(24,672)
Cash flows from investing activities
Payments for property, plant and equipment		(22)	(9)
Payments for intangibles		(34)	(91)
Payments of security deposits		(12)	(5)
Net cash used in investing activities		(68)	(105)
Cash flows from financing activities
Proceeds from issue of shares		-	770
Repayments of borrowings		(14,494)	-
Finance costs		(3,482)	(2,268)
Transaction costs related to third-party interests		(777)	(625)
Net contributions from third-party interests in consolidated entities		45,298	19,064
Payments for fund establishment & administration costs		-	(162)
Net cash from financing activities		26,545	16,779
Net decrease in cash and cash equivalents		(17,673)	(7,997)
Cash and cash equivalents at the beginning of the period		49,964	49,737
Effects of exchange rate changes on cash and cash equivalents		1,108	1,729
Cash and cash equivalents at the end of the period	7	33,399	43,469

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

Notes to the financial statements

Note 1 General Information

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

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

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

Level 12, The Chifley Tower

2 Chifley Square

Sydney NSW 2000

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

The financial statements were authorised for issue, in accordance with a resolution of Directors, on 14 March 2023. The Directors have the power to amend and reissue the financial statements.

Note 2 Significant accounting policies

These consolidated financial statements are general purpose financial statements for the interim reporting period ended 31 December 2022 and have been prepared in accordance with the Corporations Act 2001 and Australian Accounting Standard AASB 134 Interim Financial Reporting.

These interim financial statements do not include all the notes of the type normally included in annual financial statements. Accordingly, these financial statements are to be read in conjunction with the annual report for the year ended 30 June 2022 and any public announcements made by the Company during the interim reporting period.

Basis of preparation

The principal accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, unless otherwise stated.

Historical cost convention

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

Critical accounting estimates

The critical accounting judgements, estimates and assumptions that have been applied in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group's annual report for the year ended 30 June 2022. 

Operating segments

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

Note 3 Revenue

										Unaudited six months
										ended 31 December
										2022	2021
										$'000	$'000
Major service lines
Litigation service revenue										3,003	19,154
Litigation service revenue attributable to third party interests										1,696	168
										4,699	19,321
Geographical regions
Australia										2,106	335
United Kingdom										2,593	18,911
Singapore										-	75
										4,699	19,321
Contract duration
Less than 1 year										27	-
1-4 years										4,672	19,189
More than 4 years										-	132
										4,699	19,321

Note 4  Segment information

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

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

Major customers

During the period ended 31 December 2022 there were 2 major external customers (December 2021: 1 customer, unrelated to those in December 2022) where revenue exceeded 10% of the consolidated revenue. Revenue from each customer for the period ended 31 December 2022 amounted to $2,603,000 and $1,302,000 (December 2021: $18,401,000).

Note 5 Profit/loss before tax

Profit/loss before income tax expense includes the following specific expenses:

									Unaudited six months
									ended 31 December
									2022	2021
									$'000	$'000
Employee benefits expense
Salaries & wages									3,841	4,176
Directors' fees									196	198
Superannuation and pension									355	141
Share based payments expense									308	86
Other employee benefits & costs									59	533
									4,759	5,134
Depreciation
Plant and equipment									20	18
Intangible assets									60	10
									80	28

Finance costs
Interest on borrowings									3,536	2,067
Other finance costs									200	154
									3,736	2,222
Fund administration expense
Finance costs									140	247
General administration expenses									289	112
Set-up expenses									73	-
Amortisation of transaction costs									559	370
									1,061	730

Fund administration expenses relates to costs associated with the setup and administration of the LCM Global Alternative Returns Fund which are wholly attributable to the third party interest in consolidated entities.

Leases

Short-term lease payments

379

331

Adjusted operating profit/loss

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

Non-operating expenses

Management have opted to separately present these items as it better reflects the Group's underlying performance.

Non-operating expenses includes the following items:

Share based payments expense							308	86
Consultancy & legal							-	197
Other transaction costs							38	33
Litigation fees							225	-
Other expenses							42	215
Fund administration expenses							1,061	730
Total non-operating expenses							1,674	1,260

Note 6 Income tax expense

										Unaudited six months
										ended 31 December
										2022	2021
										$'000	$'000
	Numerical reconciliation of income tax expense and tax at the statutory rate
	(Loss)/profit before income tax expense									(10,931)	4,043
	At the Group's statutory income tax rate of 25% (2021: 25%)									(2,733)	1,011
	Tax effect amounts which are not deductible/(taxable) in calculating taxable income:
			Foreign tax rate adjustments							(232)	(9)
			Share-based payments							77	22
			Other non-deductible expenses							-	131
			Adjustment for tax effect of loss attributable to third party interests							147	64
			Adjustment in respect of deferred tax rate							(693)	202
										(3,434)	1,420
	Adjustment to deferred tax balances as a result of change in statutory tax rate									-	-
	Income tax (benefit)/expense									(3,434)	1,420

Statutory tax rate of 25% is applicable to Australian entities with aggregated turnover below $50 million for the period ended 30 June 2023. The Group's turnover is expected to be above the threshold of $50 million in the future reporting periods which will attract a statutory tax rate of 30%. As a result, recognition of deferred tax asset is made by applying a 30% statutory rate instead of the lower 25% tax rate.

Deferred liability

Deferred tax asset/(liability) comprises temporary differences attributable to:

									Unaudited six months
									ended 31 December
									2022	2021
									$'000	$'000
Tax losses									28,037	15,561
Employee benefits									272	269
Accrued expenses									380	140
Contract costs - litigation contracts									(36,168)	(25,304)
Transaction costs on share issue									133	401
Deferred tax liability									(7,346)	(8,933)
Movements:
Opening balance									(11,513)	(7,543)
Charged to profit or loss									4,167	(1,390)
Closing balance									(7,346)	(8,933)

Note 7 Cash and cash equivalents

									31 December	30 June
									2022	2022
									$'000	$'000
Cash at Bank									16,573	29,253
Cash of third-party interests in consolidated entities									16,826	20,711
									33,399	49,964

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

Note 8 Trade and other receivables

									31 December	30 June
									2022	2022
									$'000	$'000
Due from litigation service1									15,112	27,893
Due from litigation service - portfolios2									5,225	6,452
Other receivables									76	146
									20,413	34,491

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

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

Allowance for expected credit losses

The Group has recognised a loss of $nil (June 2022: $nil) in profit or loss in respect of the expected credit losses for the period ended 31 December 2022.

Note 9 Contract costs - litigation contracts

									31 December	30 June
									2022	2022
									$'000	$'000
Contract costs - litigation contracts									237,731	184,397

Reconciliation of litigation contract costs

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

									31 December	30 June
									2022	2022
									$'000	$'000
Opening balance									184,397	134,558
Additions during the period									21,283	28,927
Additions during the period made by third-party interests									35,609	37,255
Litigation service expense - successful contracts1									(2,583)	(16,343)
Litigation service expense - write down2									(975)	-
Closing balance									237,731	184,397

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

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

Third-party interests in contract assets

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

									31 December	30 June
									2022	2022
									$'000	$'000
Attributable to owners of LCM									119,513	101,267
Third-party interests									118,218	83,130
Consolidated total									237,731	184,397
									31 December	30 June
									2022	2022
									$'000	$'000
Current									31,527	21,634
Non Current									206,204	162,763
									237,731	184,397

Note 10 Borrowings

									31 December	30 June
									2022	2022
									$'000	$'000
Current
Borrowings of third-party interests in consolidated entities									-	14,494
									-	14,494
Non-current
Borrowings									56,063	54,915
									56,063	54,915

Reconciliation of borrowings of third-party interests in consolidated entities:

									31 December	30 June
									2022	2022
									$'000	$'000
Balance 1 July									14,494	13,253
Proceeds from borrowings									-	-
Repayment of borrowings									(14,695)	-
Net accrued interest									(17)	17
Payments for borrowing costs									-	(185)
Amortisation of borrowing costs									34	230
Other non-cash items									184	1,178
Balance as at period end									-	14,494

Reconciliation of borrowings of LCM:

									31 December	30 June
									2022	2022
									$'000	$'000
Balance 1 July									54,915	37,171
Proceeds from borrowings									-	13,298
Payments for borrowing costs									(221)	(259)
Amortisation of borrowing costs									200	919
Other non-cash items									1,169	3,786
Balance as at period end									56,063	54,915

On 22 February 2021 the Group entered into a credit facility with Northleaf Capital Partners for an aggregate amount of US$50,000,000, AUD equivalent of $73,475,000 (the "Facility"). The Facility carries interest of a LIBOR based rate of 8 per cent together with a profit participation calculated by reference to the profitability of a defined category of the Group's investments, and a non-utilisation margin of 1 per cent for the first two years. The overall cost of the facility is capped at 13% per annum. The Facility is available to be drawn down during the first two years, has an overall term of four years and is secured against the Group's assets. As at 31 December 2022, the Group's outstanding utilisation amounted to US$10,000,000, an AUD equivalent of $14,695,000.

The Group agreed to various debt covenants including a minimum effective net tangible worth, borrowings as a percentage of effective net tangible worth, minimum liquidity, a minimum consolidated EBIT and a minimum multiple of invested capital on concluded contract assets over a specified period. There have been no defaults or breaches related to the Facility during the period ended 31 December 2022. Should the Group not satisfy any of these covenants, the outstanding balance of the Facility may become due and payable.

The Group incurred costs in relation to arranging the Facility of $1,613,000 which were reflected transactions costs and will be amortised over the 4 year term of the borrowings. As at 31 December 2022 $988,000 of the loan arrangement fees remained outstanding.

Note 11 Equity - issued capital

							Consolidated
							31 December	30 June	31 December	30 June
							2022	2022	2022	2022
							Shares	Shares	$'000	$'000
Ordinary shares - fully paid							106,613,927	106,613,927	69,674	69,674
Ordinary shares - under loan share plan							12,586,405	12,586,405	-	-
							119,200,332	119,200,332	69,674	69,674

Movements in ordinary share capital								Date	Shares	$'000
Balance								30 June 2021	105,014,157	68,904
Conversion of partly paid shares paid up at $0.17 per share								22 October 2021	498,583	85
Conversion of options paid up at $1.00 per share								5 November 2021	600,000	600
Conversion of partly paid shares paid up at $0.17 per share								16 December 2021	501,187	85
Balance								31 December 2021	106,613,927	69,674
								31 December 2022	106,613,927	69,674
Movements in ordinary shares issued under loan share plan								Date	Shares	$'000
Balance								30 June 2021	11,073,767	-
Issue of shares under loan share plan								27 October 2021	612,638	-
Issue of shares under loan share plan								5 November 2021	900,000	-
Balance								31 December 2021	12,586,405	-
Balance								31 December 2022	12,586,405	-

Reconciliation of ordinary shares issued under LSP:

	2022	2021
Total shares allocated under existing LSP arrangements with underlying LSP shares	8,134,929	8,134,929
Less shares allocated under existing LSP arrangements without underlying LSP shares	(465,988)	(465,988)
Shares held by LCM Employee Benefit Trust for future allocation under LSP	4,917,464	4,917,464
	12,586,405	12,586,405

Ordinary shares

Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital.

On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.

Ordinary shares - under loan share plan ('LSP')

The Company has an equity scheme pursuant to which certain employees may access a LSP. The acquisition of shares under this LSP is fully funded by the Company through the granting of a limited recourse loan. The shares under LSP are restricted until the loan is repaid. The underlying options within the LSP have been accounted for as a share-based payment. Refer to note 15 for further details. When the loans are settled the shares are reclassified as fully paid ordinary shares and the equity will increase by the amount of the loan repaid.

Ordinary shares - partly paid

As at 31 December 2022, there are currently 1,433,022 partly paid shares issued at an issue price of $0.17 per share. No amount has been paid up and the shares will become fully paid upon payment to the Company of $0.17 per share. As per the terms of issue, the partly paid shares have no maturity date and the amount is payable at the option of the holder.

Partly paid shares entitle the holder to participate in dividends and the proceeds of the Company in proportion to the number of and amounts paid on the shares held. The partly paid shares do not carry the right to participate in new issues of securities. Partly paid shareholders are entitled to receive notice of any meetings of shareholders. The partly paid shareholders are entitled to vote in the same proportion as the amounts paid on the partly paid shares bears to the total amount paid and payable.

Capital risk management

The Group's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital.

Capital is regarded as total equity as recognised in the statement of financial position.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The capital risk management policy remains unchanged from the 30 June 2022 Annual Report.

Note 12 Contingent liabilities

The majority of the Group's funding agreements contain a contractual indemnity from the Group to the funded party that the Group will pay adverse costs awarded to the successful party in respect of costs incurred during the period of funding, should the client's litigation be unsuccessful. The Group's position is that for the majority of litigation projects which are subject to funding, the Group enters insurance arrangements which lessen or eliminate the impact of such awards and therefore any adverse costs order exposure.

Note 13 Third-party interests in consolidated entities

AASB requires the Group to consolidate fund investment vehicles over which it has exposure to variable returns from the fund investment vehicles. As a result, third party interests in relation to the Funds have been consolidated in the financial statements. 

As at 31 December 2022, the financial liability due to third-party interests is $130,079,000 (June 2022: $81,780,000), recorded at amortised cost and net of transaction costs. The net amount due comprises cash and cash equivalents, contract costs and trade payables. Third-party interests exclude the 25% co-investment made by Litigation Capital Management Limited and its wholly owned subsidiaries ("LCM"). The third-party interests in the Funds carry an entitlement to receive an 8% soft return hurdle. Upon satisfaction of the third-party interests soft return hurdle, LCM is entitled to performance fees as fund manager on the basis of a deal by deal waterfall. The residual net cash flows are to be distributed 25% to LCM and 75% to the third-party interests until an IRR of 20% is achieved by the third-party interests, thereafter the net residual cash flows are distributed 35% to LCM and 65% to the third-party interests.

The following tables reflect the impact of consolidating the results of the Funds with the results for LCM to arrive at the totals reported in the consolidated statement of comprehensive income and consolidated statement of financial position. The Fund column in the table below presents the interests of third-party investors comprising both the investment in the litigation contracts made on their behalf and costs of administering the funds.  The LCM column includes the 25% co-investment in these litigation contracts.

Consolidated Statement of Comprehensive Income

					31 December 2022			31 December 2021
					LCM	Fund	Consolidated	LCM	Fund	Consolidated
					$'000	$'000	$'000	$'000	$'000	$'000
Revenue from contracts with customers
Litigation service revenue					3,003	1,696	4,699	19,154	168	19,321
Portfolio revenue					-	-	-	-	-	-
Performance fees					-	-	-	-	-	-
					3,003	1,696	4,699	19,154	168	19,321
Litigation service expense					(3,037)	(521)	(3,558)	(5,378)	(65)	(5,444)
Gross income					(34)	1,175	1,141	13,775	103	13,878
Other income					-	-	-	-	-	-
Interest income					5	-	5	-	-	-
Expenses
Employee benefits expense					(4,759)	-	(4,759)	(5,134)	-	(5,134)
Depreciation & amortisation expense					(80)	-	(80)	(28)	-	(28)
Corporate expenses					(1,596)	(845)	(2,441)	(1,721)	-	(1,721)
Litigation fees					-	-	-	-	-	-
Finance costs					(3,736)	-	(3,736)	(2,222)	-	(2,222)
Fund administration expense					(559)	(502)	(1,061)	(370)	(359)	(730)
Total expenses					(10,730)	(1,347)	(12,077)	(9,476)	(359)	(9,835)
Profit/(loss) before income tax expense					(10,759)	(172)	(10,931)	4,300	(257)	4,043
Analysed as:
Adjusted operating profit/(loss)					(5,851)	330	(5,521)	7,423	103	7,525
Non-operating expenses					(1,172)	(502)	(1,674)	(901)	(359)	(1,260)
Finance costs					(3,736)	-	(3,736)	(2,222)	-	(2,222)
Profit/(loss) before income tax expense					(10,759)	(172)	(10,931)	4,300	(257)	4,043
Income tax expense					3,434	-	3,434	(1,420)	-	(1,420)
Profit/(loss) after income tax expense for the period					(7,325)	(172)	(7,497)	2,880	(257)	2,623
Other comprehensive income for the period, net of tax					310	(1,583)	(1,273)	442	(78)	364
Total comprehensive income for the period					(7,015)	(1,755)	(8,770)	3,322	(335)	2,987
Profit/(loss) for the period is attributable to:
Owners of Litigation Capital Management Limited					(7,015)	-	(7,015)	3,322	-	3,322
Third-party interests in the Fund					-	(1,755)	(1,755)	-	(335)	(335)
Non-controlling interest					-	-	-	-	-	-
					(7,015)	(1,755)	(8,770)	3,322	(335)	2,987

Consolidated statement of financial position

					31 December 2022			30 June 2022
					LCM	Fund	Consolidated	LCM	Fund	Consolidated
					$'000	$'000	$'000	$'000	$'000	$'000
Assets
Current assets
Cash and cash equivalents					16,573	16,826	33,399	29,253	20,711	49,964
Trade and other receivables					20,413	-	20,413	34,491	-	34,491
Contract costs					31,527	-	31,527	21,634	-	21,634
Other assets					647	(134)	513	1,238	(624)	614
Total current assets					69,160	16,692	85,852	86,616	20,087	106,703
Non-current assets
Contract costs					87,986	118,218	206,204	79,633	83,130	162,763
Property, plant and equipment					185	-	185	182	-	182
Intangible assets					376	-	376	646	-	646
Other assets					492	-	492	249	-	249
Total non-current assets					89,039	118,218	207,257	80,710	83,130	163,840
Total assets					158,199	134,910	293,109	167,326	103,217	270,543
Liabilities
Current liabilities
Trade and other payables					7,932	5,277	13,209	7,091	5,817	12,908
Borrowings					-	-	-	-	14,494	14,494
Employee benefits					637	-	637	700	-	700
Total current liabilities					8,569	5,277	13,846	7,791	20,311	28,102
Non-current liabilities
Deferred tax liability					7,346	-	7,346	11,513	-	11,513
Borrowings					56,063	-	56,063	54,915	-	54,915
Employee Benefits					268	-	268	227	-	227
Third-party interests in consolidated entities1					(5,231)	135,272	130,041	(5,014)	86,794	81,780
Total non-current liabilities					58,446	135,272	193,718	61,641	86,794	148,435
Total liabilities					67,015	140,549	207,564	69,432	107,105	176,537
Net assets					91,184	(5,639)	85,545	97,894	(3,888)	94,006

¹ LCM incurred placement fees and other costs in relation to the LCM Global Alternative Returns Fund and LCM Global Alternative Returns Fund II which closed in March 2020 and October 2021 (first close) respectively. The amounts are reflected as transaction costs and reflected in the LCM balance sheet above.

Consolidated Statement of Cash Flows

			31 December 2022			31 December 2021
			LCM	Fund	Consolidated	LCM	Fund	Consolidated
			$'000	$'000	$'000	$'000	$'000	$'000
Cash flows from operating activities
(Loss)/profit after income tax expense for the year			(7,325)	(172)	(7,497)	3,322	(335)	2,987
Adjustments for: Depreciation and amortisation of intangibles			80	-	80	28	-	28
Amortisation of finance costs			200	35	235	154	101	255
Share-based payments			308	-	308	86	-	86
Interest reclassified to financing activities			3,536	132	3,668	2,067	146	2,213
Exceptional items			520	-	520	250	-	250
Other non-cash including exchange rate movements			189	(1,868)	(1,678)	(442)	(156)	(598)
Change in operating assets and liabilities:
Increase in contract costs - litigation contracts			(18,246)	(36,043)	(54,289)	(12,547)	(17,488)	(30,035)
Decrease in trade and other receivables			14,117	-	14,117	1,432	-	1,432
Increase/(decrease) in trade and other payables			1,470	(50)	1,420	(688)	(2,049)	(2,737)
(Decrease)/increase in deferred tax liabilities			(4,167)	-	(4,167)	1,390	-	1,390
Increase in prepayments			(25)	-	(25)	(79)	-	(79)
Increase in employee benefits			(22)	-	(22)	298	-	298
Increase/(decrease) in third party consolidated interests			-	3,180	3,180	-	(163)	(163)
Net cash used in operating activities			(9,364)	(34,785)	(44,149)	(4,728)	(19,944)	(24,672)
Cash flows from investing activities
Payments for property, plant and equipment			(22)	-	(22)	(9)	-	(9)
Payments for intangibles			(34)	-	(34)	(91)	-	(91)
Payments of security deposits			(12)	-	(12)	(5)	-	(5)
Net cash used in investing activities			(69)	-	(69)	(105)	-	(105)
Cash flows from financing activities
Proceeds from issue of shares			-	-	-	770	-	770
Repayments of borrowings			-	(14,494)	(14,494)	-	-	-
Finance costs			(3,350)	(132)	(3,482)	(1,999)	(269)	(2,268)
Transaction costs related to third-party interests			(777)	-	(777)	(625)	-	(625)
Net contributions from third-party interests in consolidated entities			-	45,298	45,298	-	19,064	19,064
Payments for fund establishment & administration costs			-	-	-	-	(162)	(162)
Net cash from financing activities			(4,127)	30,672	26,545	(1,854)	18,633	16,779
Net decrease in cash and cash equivalents			(13,560)	(4,113)	(17,673)	(6,686)	(1,311)	(7,997)
Cash and cash equivalents at the beginning of the period			29,253	20,711	49,964	35,526	14,210	49,736
Effects of exchange rate changes on cash and cash equivalents			880	228	1,108	1,415	314	1,729
Cash and cash equivalents at the end of the period			16,573	16,826	33,399	30,255	13,214	43,469

Note 14 Earnings per share

									Unaudited six
									ended 31 December
									2022	2021
									$'000	$'000
(Loss)/profit after income tax									(7,497)	2,623
Non-controlling interest									-	-
(Loss)/profit after income tax attributable to the owners of Litigation Capital Management Limited									(7,497)	2,623
									Number	Number
Weighted average number of ordinary shares used in calculating basic earnings per share									106,613,927	106,015,738
Adjustments for calculation of diluted earnings per share:
	Amounts uncalled on partly paid shares and calls in arrears								-	1,306,445
	Options over ordinary shares								-	6,610,912
Weighted average number of ordinary shares used in calculating diluted earnings per share									106,613,927	113,933,095
									Cents	Cents
Basic earnings/(loss) per share									(7.03)	2.47
Diluted earnings/(loss) per share									(7.03)	2.30

Note 15 Share-based payments  

The share-based payment expense for the year was $308,000 (2021: $86,000).

Loan Funded Share Plans ('LSP')

As detailed in note 11, the Group has an equity scheme pursuant to which certain employees may access a LSP. The shares under LSP are issued at the exercise price by granting a limited recourse loan. The LSP shares are restricted until the loan is repaid. The underlying options have been accounted for as share-based payments. The options are issued over a 1-3 year vesting period. Vesting conditions include satisfaction of customary continuous employment with the Group and may include a share price hurdle.

During the period the Group granted nil (June 2021: 1,912,489) shares under the LSP.

Set out below are summaries of shares/options granted under the LSP:

December 2022
		Grant date	Expiry date	Exercise Price	Balance at the start of the period	Granted	Exercised	Expired/ forfeited/ other	Balance at the end of the period
		04/12/2017	04/12/2027	$0.60	2,000,000				2,000,000
		31/08/2018	31/08/2028	$0.77	411,972				411,972
		19/11/2018	25/11/2028	$0.47	1,595,058				1,595,058
		03/12/2018	03/12/2028	$0.89	100,000				100,000
		01/11/2019	01/11/2029	£0.7394	1,432,753				1,432,753
		01/11/2019	01/11/2029	£0.7730	66,137				66,137
		13/10/2020	13/10/2030	£0.6655	616,520				616,520
		27/10/2021	27/10/2031	£1.06	1,512,638				1,512,638
		27/10/2021	27/10/2031	£1.06	269,044				269,0441
		27/10/2021	27/10/2031	£1.14	130,807				130,8071
					8,134,929	-	-	-	8,134,929

¹ Options granted without an underlying LSP share until exercised i.e. do not form part of the Group's issued share capital.

Deferred Bonus Share Plan ('DBSP')

The Company has in place a DBSP. Options granted under the DBSP reflect past performance and are in the form of nil cost options and will vest in three equal tranches from the date of issue and are subject to continued employment over the three year period.

In addition, the Options granted under the DBSP are subject to malus and clawback provisions. In the event of a change of control of the Company, unvested awards will vest to the extent determined by the Board, taking into account the proportion of the period of time between grant and the normal vesting date that has elapsed at the date of the relevant event.

During the period the Group granted 1,132,692 (December 2022: nil) shares under the DBSP.

Set out below are summaries of options granted under the DBSP:

December 2022
		Grant date	Expiry date	Exercise Price	Balance at the start of the period	Granted	Exercised	Expired/ forfeited/ other	Balance at the end of the period
		07/10/2022	07/10/2032	$1.1816	-	1,132,692	-	-	1,132,692
					-	1,132,692	-	-	1,132,692

Executive Long Term Incentive Plan ('LTIP')

The Company has in place an Executive LTIP. Options over ordinary shares in the capital of the Company ("Ordinary Shares") are issued to recipients under the LTIP plan. The options set out above have been granted under the LTIP in the form of nil cost options and are subject to performance conditions which require the growth of Funds under Management ('FuM') over a five year performance period. The performance conditions associated with the options are set out below:

(1)  50% vesting on reaching a minimum of FuM of US$750m; and

(2)  100% vesting on reaching FuM of US$1bn.

The vesting date of options granted is the later of:

(1)  the third anniversary of the Grant Date;

(2)  the satisfaction of the Performance Condition; or

(3)  the date of any adjustment under the Plan rules of the Plan at the Boards discretion.

Any awards made to the participants are subject to a five year holding period from the grant date. In the event of a change of control of the Company, unvested awards will vest to the extent determined by the Board, taking into account the proportion of the period of time between grant and the normal vesting date that has elapsed at the date of the relevant event and the extent to which any performance condition has been satisfied at the date of the relevant event.

During the period the Group granted 5,671,516 (December 2022: nil) shares under the LTIP.

Set out below are summaries of shares/options granted under the LTIP:

December 2022
		Grant date	Expiry date	Exercise Price	Balance at the start of the period	Granted	Exercised	Expired/ forfeited/ other	Balance at the end of the period
		07/10/2022	07/10/2032	$1.1816	-	5,671,516	-	-	5,671,516
					-	5,671,516	-	-	5,671,516

For the options under LSP granted during the current period, the valuation model inputs used in the Black-Scholes pricing model to determine the fair value at the grant date, are as follows:

Grant date	Expiry date	Share price at grant date	Exercise price	Expected volatility	Dividend yield	Risk-free interest rate	Fair value at grant date 1
04/10/2022	04/10/2032	£0.73	£0.00	35.00%	0.00%	3.19%	$1.287
04/10/2022	04/10/2032	£0.73	£0.00	35.00%	0.00%	3.21%	$1.287

¹ AUD amount. GBP equivalent £0.726.

The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome.

Note 16 Events after the reporting period

On 16 February 2023, LCM drew down US$7m from the Northleaf Capital Partners credit facility.

On 20 February 2023, LCM announced a confidential settlement was reached in its claim in the Commercial Court of the High Court of Justice of England & Wales against the Carillion group's former auditors, KPMG. As a result, LCM is expected to receive approximately A$5.4m in litigation service revenue, that amount includes A$3.1m of invested capital in addition to A$3.2m in performance fees (figures mentioned are subject to change based on the receipt of cash and FX rate at the time).

The claim was funded directly from LCM's balance sheet (25%) and from the LCM managed Global Alternative Returns Fund ("Fund I") (75%).

On 9 March 2023, LCM announced the resolution of an investment in a class action which forms part of LCM's Direct Investment Portfolio and was 100% funded from balance sheet capital.

LCM expects to receive revenue of approximately A$14.0m. That amount includes capital invested of approximately A$8.25m together with an expected gross profit of approximately A$5.75m. The Company's final revenue and profit figures are subject to change pending final distribution of settlement monies.

Directors Declaration

In the directors' opinion:

1.  the attached financial statements and notes comply with the Corporations Act 2001, Australian Accounting Standards and other mandatory professional reporting requirements;

a.  complying with Accounting Standard AASB 134: Interim Financial Reporting; and

b.  the attached financial statements and notes give a true and fair view of the consolidated entity's financial position as at 31 December 2022 and of its performance for the period ended on that date;

2.  there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of directors.

On behalf of the directors

Patrick Moloney

Director

Dated this 14 day of March 2023

 

END

 

 

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