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 lcm@tavistock.co.uk 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: 020 7523 8000

Bobbie Hilliam




Investec Bank plc (Joint Broker)

Tel: 020 7597 5970

David Anderson


 


Tavistock PR

Tel: 020 7920 3150

Tim Pearson

Katie Hopkins

Simon Hudson

lcm@tavistock.co.uk

 

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


















(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

 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy.
 
END
 
 
IR DDGDXUBBDGXX
UK 100