TIDMLIT
RNS Number : 6996Z
Litigation Capital Management Ltd
22 September 2020
22 September 2020
Litigation Capital Management Limited
("LCM" or the "Company")
Final Results
Transitioning into an Alternative Asset Manager following the
launch if its first Fund
Litigation Capital Management Limited (AIM:LIT), an alternative
asset manager specialising in dispute financing
solutions internationally, announces its financial results for the year ended 30 June 2020.
In 2019 LCM refined its business platform and in 2020 it
experienced substantial growth.
Operations
-- Launched asset management division following close of US$150m
Global Alternative Returns Fund ('GAR'), which was oversubscribed,
of which 61% is committed to date
-- Good progress in Portfolio financing
- Eight resolutions across the two Corporate Portfolios, which
are tracking in line with expectations
- Entered into the Group's largest corporate portfolio
transaction: 20+ disputes with a capital commitment up to
USD$34m
-- Single case funding applications increased as a result of the prevailing economic conditions
-- Mary Gangemi appointed as Chief Financial Officer, bringing
considerable public company experience
KPIs
-- Total assets under management of $250m at 30 June 2020 increased to $304m by September
-- 522 applications received, a 25% increase on the prior year
as a result of broader geographic reach and greater pools of
capital
-- Investment Commitment increased 50% to $147m, inclusive of third party funds
-- Total invested capital increased by 87% to A$52m, inclusive of third party funds
-- Cumulative 134% ROIC and IRR of 78% over the past 9 years
Financials
-- Gross profit increase of 7% to A$21.7m*
-- Profit before tax A$9.2m, decreased as a consequence of three investments shifting into FY21*
-- Statutory profit before tax of $8.0m
-- Cash of A$31.8m at 30 June 2020 (A$24.9m exclusive of third
party fund consolidation). The Group continues to deploy capital
into its direct investments as part of its growing portfolio
-- A$84m third party capital available (currently uncommitted)
-- Cash receipts from the completion of litigation investments
of A$30.7m, up 14% on the prior year*
-- Prudent decision taken not to pay a year-end dividend payment
to maximise deployment in the increased pool of investment
opportunities currently available
-- Total equity of A$82.2m*
(*exclusive of third party fund consolidation)
Post period events
-- Established a tailored Disputes finance facility with DLA
Piper, significantly expanding LCM's reach into major global
disputes hubs and strengthening its presence in markets currently
under-penetrated by litigation finance
-- Appointed Gerhard Seebacher, based in the US, as a
non-executive director who brings significant international
experience in fund management and financial services
Patrick Moloney, CEO of Litigation Capital Management,
commented: "LCM has seen significant growth in demand for
investment opportunities over the period, further increasing our
market opportunity. This has been demonstrated in the increased
number of applications received, growth in portfolio investments,
and the increase in capital committed.
"Our growth opportunity has also been further accelerated
following the most significant development in the year; the
establishment of LCM's asset management division. This allows us
greater pools of capital to invest, in turn providing greater
returns. It also enables us to expand our global footprint, and we
are pleased to have seen increasing traction across all our
regions, in particular in the EMEA region, with a strong
performance from the London office.
"We are known for our innovation and the range of solutions we
offer, particularly in regard to portfolio funding, which are
testament to our ability to be progressive in the industry. We see
our approach resonating well with the shifting legal market
dynamics and are pleased to see the market respond with an
increased demand for these solutions.
"The COVID-19 pandemic presented a challenge during the last
year, and the health and wellbeing of our team remains of paramount
importance. I would like to take this opportunity to thank all the
LCM staff across the globe who adapted quickly and who have worked
hard to contribute to the continued growth of LCM."
An overview of the final results from Patrick Moloney, CEO is
available to watch http://bit.ly/LCM_FY20_overview .
The Company's results presentation slides can be found here.
http://www.rns-pdf.londonstockexchange.com/rns/6996Z_1-2020-9-22.pdf
The Annual Report is available at
https://www.lcmfinance.com/wp-content/uploads/2020/09/2020-Annual-Report.pdf
.
Enquiries
Litigation Capital Management c/o Alma PR
Patrick Moloney, Chief Executive
Officer
Canaccord (Nomad and Joint Tel: 020 7523 8000
Broker)
Bobbie Hilliam
Investec Bank plc (Joint Broker) Tel: 020 7597 5970
David Anderson
Alma PR Tel: 020 3405 0205
Justine James LCM@almapr.co.uk
Rebecca Sanders-Hewett
Susie Hudson
Kieran Breheny
Chairman's Statement
In a year that has been marred by disruption to many of the
world's economies and impacted many lives and livelihoods, LCM's
business remains robust. On a personal level as I write I am
pleased to note that no member of our staff has been directly
impacted by COVID-19. We have though used this period to continue
to diversify the LCM business model.
One of the key highlights of our year has been the launch of our
first third-party fund. Many of our shareholders will have seen the
news release earlier this year. This fund is a co-investment
partnership with a number of key blue chip investors and marks a
major milestone for LCM. It positions the Company well on its
journey to develop its experience as an alternative asset manager
focusing on disputes finance globally. Over the course of the next
12 months we will be focusing on the launch of a second and larger
third party fund, reflecting the very significant growth in
disputes finance we are seeing.
As our CEO Patrick Moloney details in his report, we are
particularly pleased with the growth of our business outside
Australia. In particular the UK team is now seeing some excellent
origination opportunities and has been originating opportunities at
a similar volume to our traditional home market of Australia over
the course of 2019 under the development of Nick Rowles-Davies, one
of the veterans of the disputes finance industry. We continue to
see attractive opportunities in other European markets as well as
in Middle Eastern markets, as will be very evident from reading
this year's annual report.
To that end, as has been notified to the market earlier this
year, we are planning to relocate Patrick Moloney to London. This
move would already have occurred by now without the challenges of
COVID-19. We do, though, expect to complete this move in coming
months as soon as the global pandemic situation allows. This will
be another important step for LCM and our ability to capitalise on
the growing interest in disputes resolution within the EMEA region
as well as the broader sources of investment capital. Supporting
our build-out of our London office, we appointed Mary Gangemi as
Chief Financial Officer based in London earlier this year - another
important signal of our commitment to building our EMEA
presence.
With LCM seeing a greater demand for its investment capital, and
an expansion of geographic opportunities, it is important that the
Board of LCM has the breadth of experience to appropriately
represent the shareholder. I am pleased that we have recently
announced the addition of Gerhard Seebacher to the LCM Board.
Gerhard brings over 20 years of global banking and capital markets
experience as well as a strong understanding of the fund sector
having been recently a partner at one of the world's largest hedge
funds Brevan Howard based in the US. As we continue to evaluate
future business development opportunities, I will ensure the
experience of our Board fully reflects our business profile.
Further additions and changes to strengthen our Board are thus
possible over the coming 12 months. I would also like to take this
opportunity to thank Steve McClean, a long-standing Director of LCM
and Stephen Conrad former Chief Financial Officer who both stepped
down in the second half of this financial year following our
re-balancing of our business model towards EMEA.
I am fully aware of the challenges faced by a number of
participants in the sector of disputes finance. While LCM strives
to be an innovator in this sector, the Board remains fully
committed to both the appropriate level of transparency and
disclosure for our shareholders to reliably assess the underlying
performance of the business. Our focus remains on long-term
shareholder value creation and as such both our investments and
remuneration schemes I strongly believe reflect this emphasis. I am
also confident that our work culture and practices remain at the
highest levels, at a time when we have been able to attract some of
the industry's top talent over the past 18 months as we have
diversified our business model.
As I reflect on my first 15 months as Chairman, I have these key
observations. The UK listing was a major milestone for the Company,
allowing us to capitalise on the much larger markets in EMEA. The
build out of our teams have reflected this. The importance of our
first successful third-party fund launch was a critical step
forward. The coming months will see our key executive team working
out of London. It will also see a continued diversification of our
business model from single case funding to portfolio financing and
our development of our alternative asset management model. Much of
the foundations for future growth are now in place. The next year
promises to be an exciting one in the development and expansion of
LCM.
Jonathan Moulds
Non-Executive Chairman
CEO Review
LCM achieved a number of our planned objectives, notwithstanding
that a large part of the financial period just past was
significantly disrupted. The most significant was the introduction
of an asset management division to supplement the capital available
for investment. This begins LCM's transition into an alternate
asset manager specialising in disputes finance investment
globally.
The instability being experienced in global markets and
economies tends to focus attention on investment strategies.
Characteristics of certain asset classes become important. With
interest rates at historical lows and general instability in global
markets, alternate investment classes become important and sought
after. As an asset class, disputes financing possesses two
characteristics important to current market conditions. Firstly, it
is uncorrelated, meaning that dispute resolution or adjudication by
courts or tribunals is unaffected by general market conditions,
global economies or political influence. Lawyers, judges and
arbitrators do not apply different legal principles to the
adjudication of a commercial dispute, class action or other dispute
depending upon what investment cycle or prevailing economic
conditions may exist. Therefore, subject to collection risk, which
LCM is accustomed to evaluating, the expected returns of a balanced
portfolio of investments in disputes are largely immune to the
fluctuations experienced by other, more mainstream, asset classes.
The second characteristic is that the demand for disputes finance,
and consequently the number of quality investment opportunities
available to LCM, increases in times of economic uncertainty and
instability. Whilst the desirability of investments in uncorrelated
and countercyclical markets is recognised, alternate investment
classes such as disputes finance have been brought into sharp focus
by the current prevailing economic conditions brought about by
COVID-19.
There has been considerable evolution of the disputes finance
industry and of LCM, from its inception as a source of funding and
risk management to insolvency practitioners through prior market
downturns and recessions. Over this significant period LCM has
always been presented with a greater number of quality investments
than it has had capital to invest. With the introduction of the
asset management business and with it, access to greater pools of
capital, we have never been better positioned to benefit from the
opportunities that will arise from current and emerging global
economic conditions.
LCM Global Alternative Returns Fund
LCM's most significant development during the financial period
was the establishment of our asset management business. In March
2020, we closed a US$150 million fund with LCM acting as Fund
Manager. This underpins our expansion as an asset manager in the
alternatives sector. LCM now pursues two separate but interactive
business models being Direct Investments and Asset Management.
Across those two business models, LCM adopts
three investment strategies. The first investment strategy is
Single Case Funding, the second is Portfolios and the third is the
Acquisition of Claims.
We carefully considered our move into Asset Management,
previously preferring to develop our investment origination
strategies through direct balance sheet investments as well as
establishing our experience and track record. LCM's performance
metrics have consistently delivered strong returns.
LCM's third party fund was oversubscribed and attracted the
highest quality of institutional investors. The largest investor in
the Fund is a large US university endowment and the second largest
investor is an international investment bank. The balance of
smaller institutional and fund investors are highly experienced in
the disputes funding sector. All investors in LCM's Fund had prior
experience in the disputes funding industry indirectly through
managed funds. Most encouragingly, the two cornerstone investors
negotiated entrenched rights in the next two of LCM's future funds.
LCM is in a strong position and well placed to pursue its strategy
to grow the asset management business.
2020 in review
After a period of integration, LCM's London team is now
originating quality investment opportunities at a volume similar to
that of our longstanding market in Australia, through both
investment business models namely, direct balance sheet investments
attributable to LCM and contribution to the Global Alternative
Returns Fund ('GAR Fund', 'the Fund').
LCM's direct balance sheet investments portfolio is more mature
and was partially originated in the Asia Pacific region ('APAC')
prior to LCM's expansion into the UK, European and Middle Eastern
markets ('EMEA'). Approximately 70% of those direct balance sheet
investments were originated through the APAC team and 30% in EMEA
through our London office. By comparison the breakdown of
origination is more even in the recently established GAR Fund with
53% of investments committed at the period end originated in APAC
and 47% in EMEA. These trends demonstrate that LCM's market
presence in the EMEA region is increasing. We expect, over time,
that more opportunities will arise for LCM from the larger
economies globally, simply because those larger economies have more
economic activity and thus generate a greater number of disputes
presenting investment opportunities.
We are pleased to have achieved our goal of expanding our global
footprint as well as introducing new capital in the form of asset
management in a disciplined, yet progressive manner. In the regions
in which we operate, LCM is perfectly placed to deal with the
increased demand expected for disputes financing products.
We continue to observe sustained growth in Asia. The number of
applications for finance received through our Singapore office has
increased considerably compared to the prior year. We believe there
are a number of reasons for that growth. One is the general
increase in the number of parties utilising Singapore as a seat to
resolve global trade and other disputes through arbitration,
positioning Singapore as the leading disputes hub for Asia. In
addition, Singapore has also implemented legislative changes to
position itself as an Asian centre for cross-border insolvencies.
With an increasing trend in opting for Singapore as a jurisdiction
to resolve disputes, we expect to see greater opportunity for LCM's
Singapore office in future years.
In the Australian market, LCM continues to see a steady increase
in its business, mainly brought about by our increased access to
capital. The Australian business continues to perform solidly,
contributing the majority of LCM's revenue based upon its more
mature investments, however, as previously highlighted, this is set
to shift in future years. Changes to the class action landscape are
likely to present opportunities for LCM as a result of having an
Australian Financial Services Licence ('AFSL'). (See further below
under Industry regulation.)
Over the past nine years, including every investment as part of
one entire portfolio, LCM's Return on Invested Capital ('ROIC'),
inclusive of losses, is 134%. Over the same period, inclusive of
losses, LCM generated an Internal Rate of Return ('IRR') of 78%.
Whilst demonstrating buoyant performance metrics, those metrics are
achieved by a disciplined adherence to strict and comprehensive due
diligence processes.
Overall LCM is observing a greater demand for its investment
capital. The number of applications received in the last financial
year was 522, representing a 25% increase on the prior year. Not
only has LCM observed an increase in the overall number of
applications but those applications are increasing in quality. This
results from a number of factors but they include the expansion of
our geographical reach and our access to greater pools of capital
with the introduction of our asset management business.
Disputes finance is an asset class going through a period of
exponential growth and development. It is a sector that is almost
unrecognisable from five years ago. LCM has mirrored that growth
and as a company operating in the industry is also unrecognisable
from what it was just a few years ago.
LCM prides itself in being an innovator in its sector. Unlike
many of its peers in the disputes financing industry globally, LCM
focuses on a solutions based approach to providing disputes funding
to its clients. We do not operate, like many of our competitors, on
a rigid and inflexible model of providing template products. It is
through that solutions based approach to the disputes finance
market that has enabled LCM to develop new and innovative solutions
for our clients and become an early global leader in the
development of corporate disputes financing strategies.
Performance metrics
LCM has enjoyed strong performance metrics with respect to the
various underlying investments which make up its litigation finance
business over the past nine years. We believe assessing our metrics
on a cumulative basis as being the most representative of our
historical performance to date. Those metrics should be considered
not only from a financial perspective but also as a measure of the
effectiveness of LCM's due diligence and underwriting processes for
determining which disputes should be funded and those that will
deliver a positive result and return on LCM's investment. While
useful in providing guidance on performance historically, we do
expect that over time there will be a natural downward shift in
some of these metrics. This will be a combination of; growing our
portfolio funding investments which have a tendency to reduce risks
and consequently returns, investments in matters that require a
longer period of time to reach a resolution due to the size of the
claim, increased competition in the industry and the scale of the
business. Our aim is, and always has been, to achieve sustainable
growth for our shareholders and investors through disciplined
investment. No single metric alone can be relied on to quantify the
success
of achieving our business strategies. Instead a number of KPIs
should be looked at collectively to give a better representation of
that growth and its contribution towards the delivery of our
strategic objectives.
We expect that our investments will continue to perform with
meaningful returns and are not concerned about fluctuations as
these are in line with our expectations as we continue to diversify
our investment portfolio and the sectors we invest in.
Our win: loss ratio
Since it was founded in 1998, LCM has enjoyed an exceptional
record when it comes to its litigation investments. Of 226 separate
investments into underlying cases LCM has suffered a loss on only
11 and just six of those have been adjudicated by a court or
tribunal unfavourably. The number of cases which were adjudicated
against LCM's anticipated outcome is an important metric because it
demonstrates that out of 226 separate investments LCM only adopted
an incorrect position in respect of six.
The other five investments where LCM suffered a financial loss
could have been for reasons which were utterly unanticipated and
outside the knowledge and control of LCM and its investment
managers. To put it another way, LCM's ability to predict the
outcome of disputes is exceptional.
It is important however, to be mindful that losses are a feature
of LCM's business model. It is unreasonable to expect that LCM will
not suffer losses in the future. Shareholders should not be
concerned if one of LCM's investments proves to be unprofitable or
suffers a loss. It is simply part of LCM's business in the same way
that an investment fund which invests in equities is not expected
to be successful with every stock it selects.
Forecasting and guidance
LCM has extensive experience in the provision of litigation
funding and finance products to the market. Indeed that experience
extends right back to the inception of the industry in the late
1990s. That experience enables LCM to observe, with some
confidence, that accurate forward forecasting is exceptionally
difficult to achieve. It requires the financier to accurately
predict when a particular project, or portfolio of projects, will
come to a conclusion either through a negotiated settlement of the
dispute or an adjudication by a court or tribunal. Secondly, it
requires the financier to predict what the quantum of a resolution
might be either as a negotiated settlement or as an award by the
court. Given the myriad of outcomes possible in respect of an
investment into litigation, it is simply not reasonable or
responsible for us to provide forward forecasting other than
providing a likely range. The approach and position which is
adopted by our listed peers is to provide no forecast.
Strategy
We have identified the following priorities on which we expect
to focus and achieve in the shorter term:
-- To launch a second and larger third party fund to further
support and increase our asset management business. In
circumstances where demand continues, which we expect, the process
of closing a second fund should commence before the end of calendar
year 2020.
-- It is our continual aim to increase the number and the
quality of applications we receive. As our Investment Managers gain
greater experience, we have observed an increase in the quality of
applications they receive which we expect to continue.
Additionally, the increase in capital available to LCM, generated
both organically through its balance sheet and through third party
capital also increases the size of applications and therefore the
size of investments that we can consider.
-- In line with the increasing volume of applications received,
we also aim to increase the percentage of applications converted to
investments. This metric can appear counterintuitive to outside
observers. Ordinarily, commercial drivers would dictate that a
business aims for a higher conversion rate but in disputes
financing the investment selection is crucial. A low conversion
rate is the result of disciplined and rigorous due diligence
processes, yet it is certainly possible to increase the conversion
rate without affecting the quality of investments made. A
comfortable balance needs to be struck. Our most experienced
Investment Managers convert a much higher number of their
applications into profitable and high returning investments. This
is the result of their ability to attract applications which are
more likely to satisfy our investment criteria and their
experience. Through the education of both the market, which drives
a better quality of application, and of Investment Managers, a
higher conversion rate can be achieved safely without sacrificing
quality.
-- LCM has experienced significant growth in investment
opportunities over the past six months. This has been observed in
the number of applications received, growth in portfolio
investments, an increase in capital commitments and an increase in
invested capital. That growth is expected to continue. Current
instability in global markets is creating favourable conditions for
the litigation finance industry. This opportunity has prompted
LCM's Board to look at supplementing LCM's balance sheet capital to
meet the increasing demand. Whilst LCM's newly established asset
management business gives us access to significant capital to fund
a substantial portion of current and expected growth, there will
likely be a need for additional capital to match third party
managed funds. LCM's Board is at an advanced stage of exploring a
number of options which would supplement LCM's balance sheet
capital through debt, securitisation, or a combination of both.
We have identified the following longer term goals:
-- Expansion into new regions remains one of our aims. As with
all expansion undertaken to date, we shall continue to maintain a
disciplined and considered approach to ensure that ahead of
expanding into a new region, we can be satisfied that the
appropriate skill set can be put in place to manage investment
opportunities.
-- Increasing the level of assets under management is a
principal focus area for LCM over the long-term. We intend to raise
further third party pools of capital and to grow our asset
management business. We also aim to increase the size of those
funds and the portfolio of investments under management which in
turn will increase returns to shareholders and diversify LCM's
direct investments. The increase in the overall size of the
portfolios under management will smooth LCM's revenues over
time.
-- We continue to look at ways to innovate and to increase the
range of solutions we offer to the market. This goal is aimed at
addressing two markets. First, the investment community who
contribute to our third party pools of capital. Secondly, the
market for disputes finance solutions. LCM has a history of
innovation in the marketplace and we shall continue to test and
challenge the existing market with our innovative approach.
Since March 2020, when global markets began to feel the
instability that COVID-19 had created, LCM observed an increase in
the number of applications and a swift change in demand by
corporate clients eager to explore funding their disputes off
balance sheet. This demonstrates that corporates globally are keen
to allocate their financial resources towards core business as
opposed to non core activities such as legal disputes spending. We
expect that position to continue until economies return to a state
pre COVID-19.
Given the increased demand, LCM expects to commit the Fund
fully, well inside the two year period the Fund allowed for that
purpose. Indeed, if demand levels continue as they have since
March, which is anticipated, LCM expects to commit the Fund fully
by the end of calendar year 2020. Once the Fund is 75% committed,
LCM is free to commence marketing for its second fund.
Investment strategies
Single case funding
The single case funding strategy has been pursued by LCM since
its inception in 1998. It is an investment in a single dispute
whether that dispute is being pursued through the court system or
the arbitral process. Single case investments, by their nature,
represent the most challenging investment strategy given that the
outcome tends to be binary. That said, the vast majority of single
case investments that have been made by LCM to date, have been
resolved through commercial negotiation which has the effect of
reducing the binary nature of the outcome. LCM has extensive
experience in single case funding and its systems and methodologies
for underwriting risk and undertaking due diligence were developed
through single case funding. LCM's performance metrics are
generated overwhelmingly through single case investments and it
continues to represent a significant ongoing part of LCM's
investment strategy. LCM is seeing increasing numbers of
applications for single case funding year in, year out and most
recently an increased demand as a consequence of the prevailing
economic conditions. We expect to see a significant increase in the
demand for insolvency and restructuring funding globally as
governments bring stimulus measures to an end. Those insolvency and
restructuring investment opportunities are likely to persist for a
number of years. LCM sees this as a significant opportunity in the
future.
Portfolio financing
LCM is a market leader in Portfolio financing which involves the
provision of a finance facility across a bundle, or portfolio, of
single cases. The strategy can apply to the financing of a bundle
of single disputes for a corporate client referred to as corporate
portfolios, to a portfolio of single cases in an insolvency
situation or through a law firm.
As at the period end, LCM is providing finance with respect to
two separate corporate portfolios as part of its direct investment
portfolio. The total of underlying separate disputes in those two
corporate portfolios exceeds 40 disputes. The first of those
corporate portfolios was in the building and construction sector
and has seen the resolution of four separate disputes during the
financial period. Until the portfolio has completed, it is not
possible to calculate its overall financial performance, however,
it is currently tracking in line with expectation. LCM expects that
portfolio to resolve in the current financial period.
The second corporate portfolio investment came from the aviation
industry and originally comprised some 36 separate disputes. It has
subsequently increased in size. During the relevant financial
period, the portfolio saw four resolutions, both of which
contributed to LCM's EBITDA for the period.
Acquisition of claims
This strategy involves LCM acquiring or taking an assignment of
a cause of action and pursuing that claim through the court system
as the principal. It is a strategy created through opportunity and
the circumstances which led to the evolution of the strategy were
twofold. First LCM observed that it was considering a number of
quality applications for disputes funding which did not meet our
funding criteria due to their value. The economics of the
investment, being the relationship between legal spend and
anticipated recovery, created a misalignment between interests.
That misalignment occurs where the funded party becomes entitled to
a disproportionately small amount of the recovery. Those
applications were generally arising in situations of insolvency.
That left LCM in a situation where it had significant experience in
assessing the risks associated with the investment but could not
proceed to investment in the opportunity.
The second factor was a change in the law in both Australia and
the United Kingdom which permitted insolvency practitioners to sell
or assign causes of action, including statutory causes of action,
which previously would have vested solely in them. Prior to those
legislative changes the insolvency practitioners were restricted to
a more traditional funding model. Those two factors led LCM to
develop its acquisition or assignment strategy.
The acquisition or assignment strategy tends to operate in that
part of the market that was previously unavailable to LCM for the
reasons described above. It allows LCM to participate in
investments across the spectrum. LCM expects that the smaller
investments which are acquired or assigned will have an investment
cycle of 12 and 18 months and will generate metrics commensurate or
better than its historical record. LCM will act as principal in
these claims and will have complete control over the claims as they
travel through the court system.
LCM has seen that strategy develop over the financial period.
Our ability to offer this product as an alternative enhances our
reputation with insolvency practitioners as an innovative solutions
based disputes finance provider. We have had a number of small
resolutions however we have not had sufficient resolutions of
investments in this strategy to report separate performance metrics
to market. We anticipate being in a position to do so in the
future.
As with insolvency based opportunities generally, LCM
anticipates that there will be a considerable increase in the
demand for its acquisitions and assignment strategy with the
general instability in global markets and the expected increase in
insolvencies and restructuring in the markets in which we
operate.
The acquisition of the claims and pursuing as principal means
that LCM has complete control and autonomy as to how the claim is
pursued. Furthermore, LCM does not have a funded party to consider
in terms of returns.
Our people and culture
LCM operates a small, but high performing, global team. Our
headcount has grown with the business and we remain disciplined
about expanding our workforce against the increase in the size of
the overall portfolio of investments under management. LCM has
expanded its team of Investment Managers through a small number of
opportunistic hires during the year. That has boosted LCM's
capacity both to originate and to undertake due diligence on an
increased number of applications and in specific sectors in which
we have observed growth, such as building and construction and
insolvency. The interface between LCM's business and its clients,
to whom disputes financing solutions are supplied, are the
Investment Managers. LCM's Investment Managers typically come from
a legal background, having practised in disputes. The talent pool
from which experienced disputes finance practitioners can be
selected is limited which is not surprising in an industry which
has been operating at scale for little more than a decade. An
effective Investment Manager must not only possess legal,
litigation or arbitration experience, but also a level of
commercial acumen rarely developed through legal practice and an
ability to evaluate and assume risk.
LCM is known in the industry as having an exceptional work
culture and a desired career destination in disputes finance. Not
all Investment Managers achieve the transition from legal practice
despite their abilities in a former position as a disputes lawyer.
LCM has a very low turnover of Investment Managers. We work
continuously towards maintaining an inclusive and supportive work
culture, notwithstanding the high performance expectations we place
on Investment Managers. We acknowledge the importance of
identifying internal successors and developing talent to maintain
the long-term success of our business.
We have also added Mary Gangemi to our global team as our new
Chief Financial Officer coming from a public markets background in
the funds management sector. Mary brings considerable experience as
we move into asset management. Mary has also been a great cultural
fit and has moved our finance focus to the London office. We expect
to observe increased efficiency in the Finance department as Mary
implements new financial systems and accounting programmes moving
forward.
LCM operates a staff incentive scheme which allows staff to
acquire shares in the Company efficiently as distinct from
receiving a cash bonus. The evaluation criteria for participating
in the scheme involves not only personal achievement measured
through the origination of investment opportunities and successful
investments but also the overall performance of LCM. A shareholding
acquired through the incentive scheme vests over a period of years
to encourage loyalty and longevity of employment. The scheme is
designed to balance the interests of LCM and the employee and to
align the interests of staff, executives and shareholders
effectively.
I am pleased to report that no LCM staff member has been
directly affected by the COVID-19 virus.
Market and environment
Resilient business model and operations
The last financial year was significantly interrupted by the
COVID-19 pandemic. The effects of the pandemic were felt in every
region and through every office maintained by LCM. To their credit,
LCM staff adapted quickly and smoothly to remote operations.
Unsurprisingly, LCM's first priority was the safety of its
employees. Necessary changes were made to LCM's systems and
implemented to permit remote operations. Fortunately for LCM, those
changes and alterations were not significant as the global team
previously worked through a cloud-based solution.
The most significant change to LCM's business model was in the
area of business development where traditionally, face to face
meetings, including attendances and speaking at industry
conferences was a regular feature. As with many businesses we
adapted to virtual meetings and adopted digital technology.
Overall, the productivity of our various teams remained at very
high levels.
The one area that was affected by the global pandemic was the
completion of mature investments. That is, investments made by LCM
in litigation disputes fixed for a final hearing and adjudication
before a court. The most affected jurisdiction was Australia given
that, for historical reasons, Australia was the location of our
most mature investments. As businesses and economies went into shut
down, for a short period, so did the court system. Although the
superior courts in most jurisdictions in Australia moved swiftly to
provide facilities for virtual hearings, the introduction of such a
new process resulted in delays. Those delays were not so much
occasioned by the introduction of the new system itself but rather
the speed with which both judges and members of the legal
profession picked up the new processes. As a consequence, hearing
times for cases were extended and courts ran out of time to hear,
and adjudicate, all listed disputes. As a further consequence,
three of LCM's mature investments were postponed until the
following financial period. Such postponement does not affect the
overall prospects or merits of the investment, but merely shifts
their resolution from one financial period to the next. LCM may see
some further delays depending upon market factors.
Industry regulation
Disputes financing is an industry with a light regulatory touch
globally. In the United Kingdom, the industry implemented a form of
self-regulation through an industry body. In the US, the market is
largely unregulated. In Hong Kong and Singapore, the industry has a
light regulatory touch with capital adequacy requirements which
tend to restrict the market to the larger operators. In Australia,
where the industry started, there has been debate over the past few
years including a Law Reform Commission Inquiry and more recently a
Parliamentary Inquiry. Those inquiries have almost exclusively
involved that part of the market involving class actions. Many LCM
shareholders will be familiar with the cautious approach LCM has
taken to the class action segment in Australia over the last few
years. That part of the market has seen increased competition,
mainly from litigation funders outside Australia.
In May of this year, the Commonwealth Treasurer announced the
introduction of two changes which would operate to regulate the
disputes finance industry insofar as it concerns class actions in
Australia. The first was the introduction of a requirement that
litigation financiers wishing to fund class actions would need to
obtain an Australian Financial Services License ('AFSL'). Having
anticipated the potential for regulation LCM acquired an AFSL which
meant we were the only industry member with the required licence at
the time of implementation. The second change brought by the
regulation was to bring certain class actions under the Managed
Investment Scheme ('MIS') regime. That change will place a
considerable administrative burden upon those disputes financiers
wishing to invest in class actions. Australia's corporate regulator
charged with the responsibility for administering both the
licensing and investment scheme changes for class actions, did not
establish a separate regime in which class actions (despite their
particular features) will operate. Therefore, the practical
operation of those requirements is currently uncertain. What
appears clear, at this point, is that the changes are likely to
reduce competition for LCM in that part of the market. A likely
consequence of the changes is that the smaller operators and
offshore funders will find it more difficult and a far greater
regulatory burden to invest in class actions within the
jurisdiction of Australia. Given that LCM is a listed disputes
financier, it is not unfamiliar with regulation and compliance
generally. LCM's size and its access to capital will place it in a
favourable position when it comes to regulation of class actions in
Australia, whatever their form. We are not seeing signs of any
intention to further regulate the industry in other regions in
which we operate.
Outlook
By any measure, LCM's business continues to grow at a brisk
rate. Applications, assets under management, portfolio of
investments and available capital have all increased over the past
financial period significantly and growth in all of those areas is
set to continue.
We are regularly requested to provide some form of guidance or
forecasting as to expected earnings for the upcoming financial
period. Shareholders have, from time to time, expressed a
difficulty in assessing LCM's value as a business without the
benefit of forward estimates on revenue. That position is, to some
extent, made more difficult due to LCM adopting a conservative
accounting standard which recognises revenue only when it is earned
in contrast to ascribing a fair value to its book of investments
from time to time. That very conservative position is recognised by
the market as a cautious and reserved method of accounting however
it gives little insight to investors as to how LCM's portfolio of
investments may perform in future years.
As previously disclosed, LCM expects that as its portfolio of
investments grows globally and the business evolves, we will need
to reconsider the most appropriate accounting standard in relation
to revenue recognition, including the possible adoption of fair
value accounting. In any case, we remain committed to reporting
both conservatively and transparently.
Notwithstanding the obvious limitations associated with accurate
forecasting as described above, we have decided to give
shareholders some guidance as to future gross profits by providing
a range in the forthcoming financial period. Gross profit is
revenue derived from disputes investments net of the repayment of
the capital investment itself. LCM expects the resolution of seven
investments in the financial period ending 30 June 2021. Those
resolutions are expected to generate gross profit between A$30
million and A$47 million. Certain investments are significant in
size. As a consequence, LCM's gross profit for the period can move
considerably simply on the basis of one single investment moving
from one financial period to the next.
To date, the effect of COVID-19 on the maturation of LCM's
portfolio of investment has been limited. In FY20 three investments
were delayed due to the inability of court systems to facilitate
hearing dates which had previously been fixed. The investments
which LCM expects to complete in FY21 are in various jurisdictions.
We are currently not able to adequately forecast the adverse
impacts that second or third waves of COVID-19 may have on the
resolution of those projects. Any such impact would likely delay
the realisation of the investments. It is therefore with some
caution that we provide the range.
As also noted above, LCM's business tends to observe increased
opportunity in times of economic instability. We expect the changed
sentiment of corporate clients in utilising external capital to
fund non-core business such as disputes to continue beyond the
stabilisation of global economies. Economic conditions merely
provide the catalyst for corporates to recognise other significant
benefits such as accounting, risk management and enhanced
efficiency. In terms of insolvency and restructuring, LCM possesses
very considerable experience in investments from that sector. LCM
also enjoys long and deep referral relationships which will be
invaluable into the future. Based upon experience from prior
periods of significant economic disruption, the quality of
investment opportunities arising from the insolvency and
restructuring sector will continue well beyond the stabilisation of
global markets.
Over many years, LCM has built and developed the systems and
methodologies to select the most profitable investment
opportunities in the disputes sector. LCM's success in that regard
is demonstrated through its performance metrics over the past nine
years. LCM is exceptionally well placed amongst its global peers to
take advantage of the opportunities which it will receive in the
future. We are excited at what the immediate future will bring.
Patrick Moloney
Chief Executive Officer
Market Overview and Outlook
Market overview
The last 12 months have seen the continued growth of the
disputes financing industry. The uncorrelated returns and counter
cyclical nature of the industry are increasingly of interest to
investors with the addition of several new market entrants as well
as a number of new potential funders seeking investment.
Whilst the market for disputes financing continues to grow, the
education process of lawyers and corporate clients has also
continued at pace. This has led to more demand from law firms and
their corporate clients, whether funding out of choice or
necessity. The understanding of disputes finance, its evolution,
and how it can be used as a corporate finance tool has begun to
change the way the industry is viewed. That said, the demand for
traditional single case funding remains high and still accounts for
the majority of the global disputes financing market.
The growth of the industry has been seen first-hand at LCM with
a record number of applications in the last financial year. This
trend has increased significantly since the beginning of 2020 and
has been driven by the effect of the pandemic. This has
materialised in three specific ways.
First, those corporate clients who find themselves in the midst
of a dispute and are reviewing their budgets to decide whether to
continue with the litigation or arbitration given the need to
consider focusing their financial resources on their core
business.
Second, those corporates who were contemplating the launch of a
dispute and are now reconsidering how they spend their money.
Third, the law firms who are witnessing this reassessment and
seeing that they need to provide an alternative solution to the
traditional monthly cash drain that disputes brings to the finances
of a corporate client. A number of firms have realised that now is
a good time to learn how better to understand the economics of law.
This will allow them to offer clients a financial alternative and
help them to distinguish themselves in a crowded and competitive
market.
The industry continues to grow rapidly and existing funders have
continued to raise more capital. There have been a number of new
reported legal decisions in the UK on the use and acceptance of
funding which clarified specific areas of the law relating to
disputes financing in the UK, but provided no shocks in what is a
fast maturing industry. Despite the fast-growing nature of our
industry and our continued innovation, the majority of the industry
is still single case, template driven traditional third party
funding.
LCM remains the global market leader in corporate portfolio
financing. The lack of competition in that space is both helpful
and unhelpful.
The education of lawyers and corporate clients creates an
increased awareness of the benefits of our solutions for
corporates. We rarely see a competitive situation in the discussion
of corporate portfolio investments, but increased competition and
more funders offering solutions rather than the rigid single case
templates would assist in the ongoing education process and improve
understanding of the offering and the potential of disputes
financing as a corporate finance tool. As the understanding of what
is possible with disputes financing and the exposure to more and
more portfolio style investments, this will change.
There are only four full service, publicly listed disputes
financiers. The rest of the market remains privately held and
therefore performance metrics and reporting are very limited.
However, a comparison of LCM's performance metrics against the
other two listed peers is favourable. LCM distinguishes itself from
its peers by providing an entirely solutions-based approach rather
than a rigid template-driven single case model which is the
preference of much of the market.
A successful disputes finance business requires three key
pillars.
First, adequate capital to invest. The closing of our recent
Global Alternatives Fund has enhanced the level of capital that LCM
has available to invest. The fund is a significant achievement,
given the timing of the closing, in the midst of a global pandemic
and the quality of the investors.
Second, high quality underwriting and case assessment. Despite
increasing the number of applications in the last 12 months by 25%
from 419 to 522, LCM maintained its strict discipline and
underwriting criteria, by investing in only 3.5% of those
applications.
The third element is quality origination and business
development. LCM thinks very carefully about the route to market,
the sales channels and the methods of origination. Our methods of
origination are ever evolving. We continually adopt new strategies
and adapt existing strategies to make the best use of our resources
and in response to what we see and hear in the market.
It is that evolution and innovation which has driven the
origination methods for our portfolio strategy.
We have been very pleased with the corporate portfolio strategy,
both in the new transactions we are reviewing and in the way in
which the two existing portfolio investments are maturing. Whilst
these investments are relatively new, they are beginning to
demonstrate the characteristics that we have anticipated they would
in terms of returns and duration as well as the evergreen nature of
the relationship with the corporate client. That ongoing
relationship with a corporate client is important. We had
anticipated that once a corporate client was accustomed to the use
of external capital for the financing of their disputes budget, it
would be a method that was embraced and maintained. The increase in
the number of disputes within the aviation portfolio is an
indication of that.
Market Outlook
The negative effects of the pandemic are already being felt in
all aspects of life, but the economic downturn it had caused will
continue for some time. Over the next 12 months many corporates
will be capital constrained and forced to reconsider the allocation
of their budgets. It is widely accepted that an economic downturn
fuels a rise in disputes. Accordingly, we expect that there will be
an equal growth in the use of funding to finance those cases as
corporate clients turn to the use of external capital in the form
of disputes finance.
In the coming 12-18 months, there will be a significant rise in
insolvency related litigation in all jurisdictions in which we
operate is better. The regulation in Australia in the class action
regime, may well provide an opportunity for LCM, given our
expertise in those matters and the fact we hold an AFSL. Singapore
is an area of growth for our industry. The increasing number of
applications coupled with a growing understanding of what can be
done with disputes financing suggests that Singapore will continue
to be an important hub for Asia.
In the UK and Europe, the growth of the industry will
accelerate. The UK is the most advanced jurisdiction in which we
operate, as regards disputes funding. There is a growing
understanding by the lawyers that disputes funding is a tool they
can use in many ways. The current economic situation will
accelerate the education of law firm management and force them to
think differently about billing. In house teams have been asking
for more flexibility and innovation for some time but the coming
year is likely to see the better firms make those changes.
The lack of liquidity in certain industries changes budgetary
priorities and engenders a change of mindset. The financial and
accounting benefits to corporations of the use of disputes
financing is unarguable. Those corporate clients with high volumes
and low margins such as building and construction, infrastructure,
energy, outsourcing and aviation as well as those directly affected
by the pandemic will drive the change in law firm thinking and
demand a new approach.
The demand for disputes financing will be fuelled by those
corporations and by law firms recognising and understanding what we
offer. The accelerated learning of those law firms and their
understanding that the financial solutions we provide can help
lawyers to provide those flexible billing regimes and help them
distinguish themselves and assist them in keeping existing clients
as well as gaining new ones. There will be an increased use of
portfolio financing whether direct to corporates or for law
firms.
The outlook for the coming year in the global disputes financing
market is extremely positive.
Nick Rowles-Davies
Executive Vice Chairman
CFO Review
During the year LCM delivered a strong performance despite the
challenges and disruption to the global economy as a result of the
COVID-19 pandemic. We are pleased to have closed our first third
party fund in March 2020 at US$150 million. This supports our
strategy of becoming a leading operator in the alternative asset
management space, specialising in disputes financing. The fund
supplements our own balance sheet, significantly increasing our
ability to invest in new opportunities and accelerating growth.
LCM standalone results
The performance of the business has been presented in accordance
with the Australian Accounting Standards ('AASB') and the
International Financial Reporting Standards ('IFRS').
AASB requires the consolidation of the Fund as LCM has exposure,
or rights, to variable returns from its co-investment with the
Fund. Consequently, third party interests have been consolidated in
the financial statements.
Both Management and the Board believe that the Fund should be
excluded from the presentation of our financial performance to
provide a clearer understanding of the underlying performance
attributable to LCM and its shareholders.
The tables following provide a full reconciliation of the
consolidated statement of comprehensive income and consolidated
statement of financial position so that investors are able to
relate our performance discussion with our financial report. Note
that these are non-AASB measures and may not be directly comparable
with adjusted measures of other companies. They are not a
substitute for or replacement of AASB measures.
AASB as
reported Fund LCM-only LCM-only
30 June 30 June 30 June
2020 interests* 2020 2019
Income statement Note $'000 $'000 $'000 $'000
-------------------------------------- ---- --------- ------------ --------- ---------
Revenue from contracts with
customers
-------------------------------------- ---- --------- ------------ --------- ---------
Litigation service revenue 4 35,833 35,833 34,707
-------------------------------------- ---- --------- ------------ --------- ---------
Performance fees 4 2,608 2,608 -
-------------------------------------- ---- --------- ------------ --------- ---------
38,441 38,441 34,707
-------------------------------------- ---- --------- ------------ --------- ---------
Litigation service expense (16,723) (16,723) (14,366)
-------------------------------------- ---- --------- ------------ --------- ---------
Gross profit 21,718 21,718 20,341
-------------------------------------- ---- --------- ------------ --------- ---------
Other income 90 90 311
-------------------------------------- ---- --------- ------------ --------- ---------
Interest income 35 35 56
-------------------------------------- ---- --------- ------------ --------- ---------
Expenses
-------------------------------------- ---- --------- ------------ --------- ---------
Employee benefits expense 6 (7,611) (7,611) (6,069)
-------------------------------------- ---- --------- ------------ --------- ---------
Depreciation expense 6 (86) (86) (53)
-------------------------------------- ---- --------- ------------ --------- ---------
Corporate expenses (3,752) (3,752) (3,757)
-------------------------------------- ---- --------- ------------ --------- ---------
Litigation fees 6 (1,159) (1,159) (679)
-------------------------------------- ---- --------- ------------ --------- ---------
Fund administration expense 6 (1,183) (1,183) - -
-------------------------------------- ---- --------- ------------ --------- ---------
Total expenses (13,791) (1,183) (12,608) (10,558)
-------------------------------------- ---- --------- ------------ --------- ---------
Profit before income tax 8,052 (1,183) 9,235 10,150
-------------------------------------- ---- --------- ------------ --------- ---------
Analysed as:
-------------------------------------- ---- --------- ------------ --------- ---------
Adjusted operating profit 11,137 11,137 12,275
-------------------------------------- ---- --------- ------------ --------- ---------
Non-operating costs** 6 (3,085) (1,183) (1,902) (2,125)
-------------------------------------- ---- --------- ------------ --------- ---------
Profit before income tax expense 8,052 (1,183) 9,235 10,150
-------------------------------------- ---- --------- ------------ --------- ---------
Profit before income tax expense 8,052 (1,183) 9,235 10,150
-------------------------------------- ---- --------- ------------ --------- ---------
Income tax expense (2,799) (2,799) (3,039)
-------------------------------------- ---- --------- ------------ --------- ---------
Profit after income tax expense
for the period 5,253 (1,183) 6,436 7,111
-------------------------------------- ---- --------- ------------ --------- ---------
Other comprehensive income
for the year,
net of tax
-------------------------------------- ---- --------- ------------ --------- ---------
Total comprehensive income
for the period - - -
-------------------------------------- ---- --------- ------------ --------- ---------
Profit for the period is attributable
to:
-------------------------------------- ---- --------- ------------ --------- ---------
Non-controlling interests 8 - 8 (4)
-------------------------------------- ---- --------- ------------ --------- ---------
Third-party interests in the
Fund (1,183) (1,183) - -
-------------------------------------- ---- --------- ------------ --------- ---------
Owners of Litigation Capital
Management Limited 6,428 - 6,428 7,115
-------------------------------------- ---- --------- ------------ --------- ---------
5,253 (1,183) 6,436 7,111
-------------------------------------- ---- --------- ------------ --------- ---------
* Third party interests. There was no consolidation in the prior
period as the Fund was launched 10 March 2020
** Other adjustments are Non-operating expenses which includes
items which are considered unusual, non-cash or one-off in
nature.
Management have opted to separately present these items as it
better reflects the Group's core operations and underlying
performance
Revenue from contracts with customers reflects the consideration
to which the Group is expected to be entitled in exchange for
transferring services to a customer.
LCM continues to recognise revenue in line with AASB 15 Revenue
from Contracts with Customers. Revenue is recognised at the point
we achieve a successful resolution for the client and have
satisfied our performance obligations. At this stage we have an
unconditional right to consideration. As the portfolio is still
relatively modest in size, the impact of one or two investments
shifting into the next financial reporting period can have a
material impact. As the portfolio grows, the expected impact will
have a less significant effect on yearly profitability.
Litigation service revenue - as consideration for providing
litigation management services and financing of litigation
projects, the Group receives either a percentage of the gross
proceeds of any award or settlement of the dispute, or a multiple
of capital deployed, and is reimbursed for all invested capital.
Revenue, which includes amounts in excess of capital deployed and
the reimbursement for all invested capital, is not recognised as
revenue until the successful completion of the litigation project
i.e., complete satisfaction of the performance obligation, which is
generally at the point in time when a judgment has been awarded or
on an agreed settlement between the parties to the litigation, and
therefore when the outcome is considered highly probable.
Litigation service expense - are contract costs amortised upon
the successful resolution of the litigation contract and generally
include external costs of funding the dispute, such as solicitors'
fees, counsels' fees and experts' fees.
The business of litigation finance involves a series of
investments into disputes which historically take on average,
approximately 25-27 months to complete. Those investments may
mature before or after that monthly average. Consequently, it is
exceptionally difficult to predict the timing of when such
realisations take place. They are largely controlled by the
underlying parties to the dispute and the court or tribunal
adjudicating their dispute. LCM's investments vary in size and
through industry sector and jurisdiction, therefore the revenue
recognised can be infrequent and can be lumpy. This may result in
profit fluctuations from one year to the next rather than an even
and smooth increase in profits from year to year. The fact that
profits do not increase in a linear fashion from year to year
should not be interpreted as a reflection on either the level of
growth from year to year or the profitability. It is simply a
feature of the conservative accounting policies adopted. As LCM's
portfolio of investments grows in size the volatility of earnings
are expected to smooth out.
Adjusted profit before tax is A$11.1 million which was down 9%
on the prior period. That modest reduction results from the
reconciliation of three litigation projects being delayed due to
COVID-19. That revenue is not lost but simply pushed to the next
financial period. A reconciliation is provided below:
AASB as AASB as
reported reported
30 June 30 June
2020 2019
$'000 $'000
-------------------------------------------------- --------- ---------
Statutory profit before tax 8,052 10,150
-------------------------------------------------- --------- ---------
Add:
-------------------------------------------------- --------- ---------
IPO and other transaction costs 72 233
-------------------------------------------------- --------- ---------
Fund costs 10 17
-------------------------------------------------- --------- ---------
Share-based payments (loan shares) 432 320
-------------------------------------------------- --------- ---------
Provision for annual leave and long service leave 47 297
-------------------------------------------------- --------- ---------
Non-recurring consultancy fees 182 579
-------------------------------------------------- --------- ---------
Litigation fees 1,159 679
-------------------------------------------------- --------- ---------
Third party fund costs 1,183
-------------------------------------------------- --------- ---------
FY20 adjusted operating profit 11,137 12,275
-------------------------------------------------- --------- ---------
Cash on balance sheet as at 30 June 2020 was $24.9 million, down
49% on the same period in 2019 at A$49.1 million. This is a direct
reflection of the growth in LCMs direct investments as well as the
incremental investment into that growing portfolio.
AASB as AASB as
reported Fund LCM-only reported
30 June 30 June 30 June
2020 interests* 2020 2019
Statement of financial position $'000 $'000 $'000 $'000
-------------------------------------- --------- ------------ --------- ---------
Current assets
-------------------------------------- --------- ------------ --------- ---------
Cash and cash equivalents 31,754 6,812 24,942 49,119
-------------------------------------- --------- ------------ --------- ---------
Trade and other receivables 15,298 15,298 7,266
-------------------------------------- --------- ------------ --------- ---------
Contract costs 15,671 15,671 8,910
-------------------------------------- --------- ------------ --------- ---------
Other assets 439 439 693
-------------------------------------- --------- ------------ --------- ---------
Total current assets 63,162 6,812 56,350 65,988
-------------------------------------- --------- ------------ --------- ---------
Non-current assets
-------------------------------------- --------- ------------ --------- ---------
Contract costs 46,847 10,694 36,153 18,476
-------------------------------------- --------- ------------ --------- ---------
Property, plant and equipment 204 204 216
-------------------------------------- --------- ------------ --------- ---------
Intangible assets 336 336 64
-------------------------------------- --------- ------------ --------- ---------
Other assets 280 280 -
-------------------------------------- --------- ------------ --------- ---------
Total non-current assets 47,667 10,694 36,973 18,756
-------------------------------------- --------- ------------ --------- ---------
Total assets 110,829 17,506 93,323 84,744
-------------------------------------- --------- ------------ --------- ---------
Liabilities
-------------------------------------- --------- ------------ --------- ---------
Current liabilities
-------------------------------------- --------- ------------ --------- ---------
Trade and other payables 13,162 3,894 9,268 6,689
-------------------------------------- --------- ------------ --------- ---------
Employee benefits 376 376 986
-------------------------------------- --------- ------------ --------- ---------
Total current liabilities 13,538 3,894 9,644 7,675
-------------------------------------- --------- ------------ --------- ---------
Non-current liabilities
-------------------------------------- --------- ------------ --------- ---------
Deferred tax liability 3,559 3,559 760
-------------------------------------- --------- ------------ --------- ---------
Employee benefits 117 117 70
-------------------------------------- --------- ------------ --------- ---------
Third-party interests in consolidated
entities 12,600 14,795 (2,195) -
-------------------------------------- --------- ------------ --------- ---------
Total non-current liabilities 16,276 14,745 1,481 830
-------------------------------------- --------- ------------ --------- ---------
Total liabilities 29,814 18,689 11,125 8,505
-------------------------------------- --------- ------------ --------- ---------
Net assets 81,015 (1,183) 82,198 76,239
-------------------------------------- --------- ------------ --------- ---------
* Elimination of third party interests
Cash flow
We generated cash of $30.7 million from the resolution of
matters compared to $26.8 million in FY19. With payments related to
capital deployed of $39.7 million compared to $27.8 million in
FY19. The following waterfall is exclusive of third-party fund
interests.
We continue to focus on our approach of reporting financial and
non-financial KPIs which we believe are measures of growth,
performance and shareholder value. During the year:
-- Investment Commitment was $147 million inclusive of third
party funds, increasing from $98 million in FY19
-- The nine year cumulative portfolio Internal Rate of Return ('IRR') was 78%
-- Nine year cumulative portfolio Return on Invested Capital ('ROIC') was 134%
-- Applications received increased to 522 from 419 in FY19 and increase of 25%
-- Gross income increased by 7% to $21.7 million from $20.3 million
-- Statutory profit before tax decreased by 21% to $8.1 million
from $10.2 million with the main reason being
the inclusion of $1.2 million of third party fund related costs
as well as the shift of three investments into
the following financial period. On an adjusted basis (excluding
third party interests) profit before tax decreased by 9% to $9.2
million from $10.2 million
-- Adjusted operating profit decreased by 9% to $11.1 million from $12.3 million
Revenue
Gross revenue increased by 11% to $38.4 million, inclusive of
$2.6 million in performance fees, from $34.7 million in 2019.
Litigation service expenses (investments in realised disputes)
increased by 16% to $16.7 million from $14.4 million in 2019,
resulting in an increase of 7% in gross profit to $21.7 million
from $20.3 million.
Revenue by investment strategy:
Litigation Litigation
revenue revenue
30 June 30 June
2020 2019
Number of Number Number of Number
$'000 investments/projects of cases $'000 investments/projects of cases
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
Single cases - completed 13,572 3 3 34,330 6 6
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
Single cases - ongoing 3,285 3 3 250 1 1
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
Corporate portfolios
- ongoing 16,718 2 8 - - -
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
Insolvency - completed 354 1 1 40 1 1
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
Insolvency - ongoing 1,904 2 8 - - -
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
Other 2,608 1 1 87 1 1
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
Total 38,441 12 24 34,707 9 9
------------------------- ---------- --------------------- --------- ---------- --------------------- ---------
The table above illustrates the variability in revenues
generated which reinforces the difficulty faced in accurately
forecasting profitability without the detail supporting the
underlying data specific to each matter. Each case is unique based
on the investment type, duration to completion, jurisdiction, cost
and merits.
Revenue by region
Litigation Litigation
revenue revenue
30 June 30 June
2020 2019
$'000 $'000
------ ---------- ----------
APAC 21,723 34,666
------ ---------- ----------
EMEA 16,718 41
------ ---------- ----------
Total 38,441 34,707
------ ---------- ----------
Portfolio update
Total invested capital during FY20 was A$52.0 million inclusive
of $10.7 million third party fund investments. This compares to
A$27.8 million in the prior financial year. On an adjusted basis,
exclusive of third party investments, the total invested capital
was $41.3 million an increase of 55% on the prior period. This
increase is fundamental to measuring LCM growth. Assuming, as we
do, that we continue to apply the same rigorous due diligence
processes and our investments perform as they have for the past
nine years, the revenue to be generated from these investments will
form part of our financial performance in two to three years
time.
As at 30 June 2020 there were 23 direct balance sheet projects
under management and 17 projects co-invested alongside the fund.
This comprised 32 unconditionally funded and eight conditionally
signed. As at 30 June 2019 there were 29 direct balance sheet
projects under management. This comprised 23 unconditionally funded
and six conditionally signed.
The portfolio continued to maintain diversity across industry
sector, jurisdiction and capital commitment, in line with LCM's
investment philosophy.
Financial performance
LCM's strong results in FY20 were driven by the resolution of
four investments and the partial resolution of seven investments.
The Group's overall gross revenue of A$38.4 million represents an
increase on the prior financial period of 11%. The Group generated
gross profit of A$21.7 million, representing an increase on the
prior period of 7%. The Group produced a statutory profit before
tax of A$8.1 million a decrease of 21% on the prior financial
period, however this is inclusive of third party fund costs of $1.2
million, on an adjusted basis which excludes third party costs,
statutory profit before tax was $9.2 million, a decrease of 9% on
the prior financial period. This statutory profit represents a
solid and pleasing result given the challenges and delays
experienced as a result of the recent COVID-19 pandemic. It should
be noted that delays result in matters being pushed beyond their
expected resolution into the next financial period, it does not
result in a loss of revenue.
Operating expenses of $10.7 million increased by 27% compared to
$8.4 million in 2019 in line with management expectations. As we
continue to expand we expect to see an increase in operating costs,
however these are expected to remain at a similar margin relative
to the size of the portfolio under management, allowing us to
benefit from economies of scale.
Non-operating expenses include; $1.2 million of costs related to
the third party fund which have been consolidated to comply with
AASB standards but are not attributable to LCM; $1.2 million of
litigation fees relating to the costs of litigation commenced by
Australian Insolvency Group Pty Limited ('AIG') against the Group,
and subsequent cross claim by the Group in these proceedings
against Vannin Capital Limited and Mr Patrick Coope, $0.4 million
related to share-based expenses, $0.2 million related to
non-recurring consultancy costs and other expenses (see note
6).
Finance costs
The Group had no debt facilities in place during the reporting
period.
Dividend
Given the ongoing uncertainty in global markets and the number
of quality investments available as well as the countercyclical
nature of our business, the Board has made the difficult decision
that no dividend will be paid, to preserve cash to make further
investments in our portfolio of assets to accelerate growth.
The Board remains committed to returning to the payment of a
dividend as a matter of fiscal discipline. The Board will continue
to assess global market stability to determine the appropriate
level of dividend based on profitability, cash flows, growth and
available capital. Shareholders should not interpret the Board's
current stance as a change in policy relating to dividends. It is
simply a responsible and conservative response to unprecedented
global conditions which are yet to fully play out and
stabilise.
Mary Gangemi
Chief Financial Officer
Consolidated Statement of Profit or Loss and other Comprehensive
Income
For the period ended 30 June 2020
Consolidated
------------------------------------------------ ---- --------------------
2020 2019
Note $'000 $'000
------------------------------------------------ ---- --------- ---------
Revenue from contracts with customers
------------------------------------------------ ---- --------- ---------
Litigation service revenue 4 35,833 34,707
------------------------------------------------ ---- --------- ---------
Performance fees 4 2,608 -
------------------------------------------------ ---- --------- ---------
38,441 34,707
------------------------------------------------ ---- --------- ---------
Litigation service expense (16,723) (14,366)
------------------------------------------------ ---- --------- ---------
Gross profit 21,718 20,341
------------------------------------------------ ---- --------- ---------
Other income 90 311
------------------------------------------------ ---- --------- ---------
Interest income 35 56
------------------------------------------------ ---- --------- ---------
Expenses
------------------------------------------------ ---- --------- ---------
Employee benefits expense 6 (7,611) (6,069)
------------------------------------------------ ---- --------- ---------
Depreciation expense 6 (86) (53)
------------------------------------------------ ---- --------- ---------
Corporate expenses (3,752) (3,757)
------------------------------------------------ ---- --------- ---------
Litigation fees 6 (1,159) (679)
------------------------------------------------ ---- --------- ---------
Fund administration expense 6 (1,183) -
------------------------------------------------ ---- --------- ---------
Total expenses (13,791) (10,558)
------------------------------------------------ ---- --------- ---------
Profit before income tax expense 8,052 10,150
------------------------------------------------ ---- --------- ---------
Analysed as:
------------------------------------------------ ---- --------- ---------
Adjusted operating profit 11,137 12,275
------------------------------------------------ ---- --------- ---------
Non-operating expenses 6 (3,085) (2,125)
------------------------------------------------ ---- --------- ---------
Profit before income tax expense 8,052 10,150
------------------------------------------------ ---- --------- ---------
Income tax expense 7 (2,799) (3,039)
------------------------------------------------ ---- --------- ---------
Profit after income tax expense for the period 5,253 7,111
------------------------------------------------ ---- --------- ---------
Other comprehensive income for the year,
net of tax
------------------------------------------------ ---- --------- ---------
Total comprehensive income for the period 5,253 7,111
------------------------------------------------ ---- --------- ---------
Profit for the period is attributable to:
------------------------------------------------ ---- --------- ---------
Owners of Litigation Capital Management Limited 5,245 7,115
------------------------------------------------ ---- --------- ---------
Non-controlling interest 24 8 (4)
------------------------------------------------ ---- --------- ---------
5,253 7,111
------------------------------------------------ ---- --------- ---------
Total comprehensive income for the period
is attributable to:
------------------------------------------------ ---- --------- ---------
Owners of Litigation Capital Management Limited 5,245 7,115
------------------------------------------------ ---- --------- ---------
Non-controlling interest 8 (4)
------------------------------------------------ ---- --------- ---------
5,253 7,111
------------------------------------------------ ---- --------- ---------
Cents Cents
--------------------------- ----- -----
Basic earnings per share 12 5.02 8.65
--------------------------- ----- -----
Diluted earnings per share 12 4.71 8.07
--------------------------- ----- -----
The above Consolidated Statement of Profit or Loss and Other
Comprehensive Income should be read in conjunction with
accompanying notes to the Financial Statements.
Consolidated Statement of Financial Position
As at 30 June 2020
Consolidated
----------------------------------------------- ---- ----------------
2020 2019
Note $'000 $'000
----------------------------------------------- ---- ------- -------
Assets
----------------------------------------------- ---- ------- -------
Current assets
----------------------------------------------- ---- ------- -------
Cash and cash equivalents 8 31,754 49,119
----------------------------------------------- ---- ------- -------
Trade and other receivables 9 15,298 7,266
----------------------------------------------- ---- ------- -------
Contract costs 10 15,671 8,910
----------------------------------------------- ---- ------- -------
Other assets 439 693
----------------------------------------------- ---- ------- -------
Total current assets 63,162 65,988
----------------------------------------------- ---- ------- -------
Non-current assets
----------------------------------------------- ---- ------- -------
Contract costs 10 46,847 18,476
----------------------------------------------- ---- ------- -------
Property, plant and equipment 204 216
----------------------------------------------- ---- ------- -------
Intangible assets 336 64
----------------------------------------------- ---- ------- -------
Other assets 280 -
----------------------------------------------- ---- ------- -------
Total non-current assets 47,667 18,756
----------------------------------------------- ---- ------- -------
Total assets 110,829 84,744
----------------------------------------------- ---- ------- -------
Liabilities
----------------------------------------------- ---- ------- -------
Current liabilities
----------------------------------------------- ---- ------- -------
Trade and other payables 11 13,162 6,689
----------------------------------------------- ---- ------- -------
Employee benefits 12 376 986
----------------------------------------------- ---- ------- -------
Total current liabilities 13,538 7,675
----------------------------------------------- ---- ------- -------
Non-current liabilities
----------------------------------------------- ---- ------- -------
Deferred tax liability 7 3,559 760
----------------------------------------------- ---- ------- -------
Employee benefits 12 117 70
----------------------------------------------- ---- ------- -------
Third-party interests in consolidated entities 25 12,600 -
----------------------------------------------- ---- ------- -------
Total non-current liabilities 16,276 830
----------------------------------------------- ---- ------- -------
Total liabilities 29,814 8,505
----------------------------------------------- ---- ------- -------
Net assets 81,015 76,239
----------------------------------------------- ---- ------- -------
Equity
----------------------------------------------- ---- ------- -------
Issued capital 13 68,830 68,830
----------------------------------------------- ---- ------- -------
Share-based payments reserve 14 1,001 569
----------------------------------------------- ---- ------- -------
Retained earnings 11,165 6,818
----------------------------------------------- ---- ------- -------
Parent interest 80,996 76,217
----------------------------------------------- ---- ------- -------
Non-controlling interest 19 22
----------------------------------------------- ---- ------- -------
Total equity 81,015 76,239
----------------------------------------------- ---- ------- -------
The above Consolidated Statement of Financial Position should be
read in conjunction with accompanying notes to the Financial
Statements.
Consolidated Statements of Changes in Equity
For the period ended 30 June 2020
Share-based
Issued Retained payments Non-controlling Total
capital earnings reserve Total interests equity
Consolidated $'000 $'000 $'000 $'000 $'000 $'000
----------------------------------- -------- --------- ----------- ------- --------------- -------
Balance at 1 July 2019 68,830 6,818 569 76,217 22 76,239
----------------------------------- -------- --------- ----------- ------- --------------- -------
Profit after income tax expense
for the year - 5,245 - 5,245 8 5,253
----------------------------------- -------- --------- ----------- ------- --------------- -------
Other comprehensive income
for the year, net of tax - - - - - -
----------------------------------- -------- --------- ----------- ------- --------------- -------
Total comprehensive income
for the year - 5,245 - 5,245 8 5,253
----------------------------------- -------- --------- ----------- ------- --------------- -------
Transactions with owners
in their capacity as owners:
----------------------------------- -------- --------- ----------- ------- --------------- -------
Share-based payments (note
28) - - 432 432 - 432
----------------------------------- -------- --------- ----------- ------- --------------- -------
Dividends paid (note 15) - (886) - (886) - (886)
----------------------------------- -------- --------- ----------- ------- --------------- -------
Changes in portion of equity
held by non-controlling interests - (12) - (12) (11) (23)
----------------------------------- -------- --------- ----------- ------- --------------- -------
- (898) 432 (466) (11) (477)
----------------------------------- -------- --------- ----------- ------- --------------- -------
Balance at 30 June 2020 68,830 11,165 1,001 80,996 19 81,015
----------------------------------- -------- --------- ----------- ------- --------------- -------
Share-based
Issued Retained payments Non-controlling Total
capital earnings reserve Total interests equity
Consolidated $'000 $'000 $'000 $'000 $'000 $'000
----------------------------------- -------- --------- ----------- ------- --------------- -------
Balance at 1 July 2018 24,865 239 293 25,397 26 25,423
----------------------------------- -------- --------- ----------- ------- --------------- -------
Profit after income tax expense
for the year - 7,115 - 7,115 (4) 7,111
----------------------------------- -------- --------- ----------- ------- --------------- -------
Other comprehensive income
for the year, net of tax - - - - - -
----------------------------------- -------- --------- ----------- ------- --------------- -------
Total comprehensive income
for the year - 7,115 - 7,115 (4) 7,111
----------------------------------- -------- --------- ----------- ------- --------------- -------
Transactions with owners
in their capacity as owners:
----------------------------------- -------- --------- ----------- ------- --------------- -------
Contributions of equity (note
13) 43,921 - - 43,921 - 43,921
----------------------------------- -------- --------- ----------- ------- --------------- -------
Share-based payments (note
28) - - 320 320 - 320
----------------------------------- -------- --------- ----------- ------- --------------- -------
Transfer on exercise of options 44 - (44) - - -
----------------------------------- -------- --------- ----------- ------- --------------- -------
Dividends paid (note 15) - (536) - (536) - (536)
----------------------------------- -------- --------- ----------- ------- --------------- -------
43,965 (536) 276 43,705 - 43,705
----------------------------------- -------- --------- ----------- ------- --------------- -------
Balance at 30 June 2019 68,830 6,818 569 76,217 22 76,239
----------------------------------- -------- --------- ----------- ------- --------------- -------
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 30 June 2020
Consolidated
-------------------------------------------------- ---- --------------------
2020 2019
Note $'000 $'000
-------------------------------------------------- ---- --------- ---------
Cash flows from operating activities
-------------------------------------------------- ---- --------- ---------
Proceeds from litigation contracts - resolutions,
fees and reimbursements 30,673 26,796
-------------------------------------------------- ---- --------- ---------
Payments to suppliers and employees (50,591) (32,064)
-------------------------------------------------- ---- --------- ---------
Payments to suppliers and employees - third-party
interests (6,891) -
-------------------------------------------------- ---- --------- ---------
Non-operating items paid (1,412) (1,618)
-------------------------------------------------- ---- --------- ---------
Interest received 35 56
-------------------------------------------------- ---- --------- ---------
Other revenue - 311
-------------------------------------------------- ---- --------- ---------
Net cash used in operating activities 13 (28,186) (6,519)
-------------------------------------------------- ---- --------- ---------
Cash flows from investing activities
-------------------------------------------------- ---- --------- ---------
Payments for property, plant and equipment (56) (88)
-------------------------------------------------- ---- --------- ---------
Payments for intangibles (288) (70)
-------------------------------------------------- ---- --------- ---------
Payments for security deposits (1) (75)
-------------------------------------------------- ---- --------- ---------
Net cash used in investing activities (345) (233)
-------------------------------------------------- ---- --------- ---------
Cash flows from financing activities
-------------------------------------------------- ---- --------- ---------
Proceeds from issue of shares - 46,880
-------------------------------------------------- ---- --------- ---------
Share issue transaction costs - (4,279)
-------------------------------------------------- ---- --------- ---------
Transaction costs related to third-party
interests (2,066) -
-------------------------------------------------- ---- --------- ---------
Dividends paid 15 (886) (536)
-------------------------------------------------- ---- --------- ---------
Contributions from third-party interests
in consolidated entities 14,582 -
-------------------------------------------------- ---- --------- ---------
Payments for fund establishment & administration
costs (920) -
-------------------------------------------------- ---- --------- ---------
Net cash from financing activities 10,710 42,065
-------------------------------------------------- ---- --------- ---------
Net decrease in cash and cash equivalents (17,821) 35,313
-------------------------------------------------- ---- --------- ---------
Cash and cash equivalents at the beginning
of the financial year 49,119 13,787
-------------------------------------------------- ---- --------- ---------
Effects of exchange rate changes on cash
and cash equivalents 456 19
-------------------------------------------------- ---- --------- ---------
Cash and cash equivalents at the end of the
financial year 8 31,754 49,119
-------------------------------------------------- ---- --------- ---------
The above Consolidated Statement of Cash Flows should be read in
conjunction with accompanying 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 year (referred to as the Group). The financial
statements are presented in Australian dollars, which is Litigation
Capital Management Limited's functional and presentation
currency.
Litigation Capital Management Limited was admitted onto the
Alternative Investment Market ('AIM') on 19 December 2018.
Litigation Capital Management Limited is a listed public company
limited by shares, incorporated and domiciled in Australia. Its
registered office and principal place of business is:
Level 12, The Chifley Tower
2 Chifley Square
Sydney NSW 2000
A description of the nature of the Group's operations and its
principal activities are included in the Directors' report, which
is not part of the financial statements.
The financial statements were authorised for issue, in
accordance with a resolution of Directors, on 22 September 2020.
The Directors have the power to amend and reissue the financial
statements.
Note 2 Significant accounting policies
Basis of preparation
These general purpose financial statements have been prepared in
accordance with Australian Accounting Standards and Interpretations
issued by the Australian Accounting Standards Board ('AASB') and
the Corporations Act 2001, as appropriate for for-profit oriented
entities. These financial statements also comply with International
Financial Reporting Standards as issued by the International
Accounting Standards Board ('IASB').
Historical cost convention
The financial statements have been prepared under the historical
cost convention.
Critical accounting estimates
The preparation of the financial statements requires the use of
certain critical accounting estimates. It also requires management
to exercise its judgement in the process of applying the Group's
accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates
are significant to the financial statements, are disclosed in note
3.
Parent entity information
In accordance with the Corporations Act 2001, these financial
statements present the results of the Group only. Supplementary
information about the parent entity is disclosed in note 23.
Principles of consolidation
The consolidated financial statements incorporate the assets and
liabilities of all subsidiaries of Litigation Capital Management
Limited ('Company' or 'parent entity') as at 30 June 2020 and the
results of all subsidiaries for the year then ended. Litigation
Capital Management Limited and its subsidiaries together are
referred to in these financial statements as the 'Group'.
The Group includes fund investment vehicles over which the Group
has the right to direct the relevant activities of the fund under
contractual arrangements and has exposure to variable returns from
the fund investment vehicles. See note 25.
Subsidiaries are all those entities over which the Group has
control. The Group controls an entity when the Group is exposed to,
or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its
power to direct the activities of the entity. Subsidiaries are
fully consolidated from the date on which control is transferred to
the Group. They are de-consolidated from the date that control
ceases.
Intercompany transactions, balances and unrealised gains on
transactions between entities in the Group are eliminated.
Unrealised losses are also eliminated unless the transaction
provides evidence of the impairment of the asset transferred.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
The acquisition of subsidiaries is accounted for using the
acquisition method of accounting. A change in ownership interest,
without the loss of control, is accounted for as an equity
transaction, where the difference between the consideration
transferred and the book value of the share of the non-controlling
interest acquired is recognised directly in equity attributable to
the parent.
Non-controlling interest in the results and equity of
subsidiaries are shown separately in the statement of profit or
loss and other comprehensive income, statement of financial
position and statement of changes in equity of the Group. Losses
incurred by the Group are attributed to the non-controlling
interest in full, even if that results in a deficit balance.
Where the Group loses control over a subsidiary, it derecognises
the assets including goodwill, liabilities and non-controlling
interest in the subsidiary together with any cumulative translation
differences recognised in equity. The Group recognises the fair
value of the consideration received and the fair value of any
investment retained together with any gain or loss in profit or
loss.
Operating segments
Operating segments are presented using the 'management
approach', where the information presented is on
the same basis as the internal reports provided to the Chief
Operating Decision Makers ('CODM'). The CODM
is responsible for the allocation of resources to operating
segments and assessing their performance.
Note 3 Critical accounting judgements, estimates and
assumptions
Significant estimates and assumptions
Recovery of deferred tax assets
Deferred tax assets includes an amount relating to
carried-forward tax losses in Australia. The Group only recognises
the deferred tax asset if it is probable that future taxable
amounts of the Group's business in Australia will be available to
utilise those losses and therefore they are assessed as recoverable
(refer to note 7). The tax losses can be carried forward
indefinitely and have no expiry date.
Impairment of non-financial assets other than goodwill
The Group assesses impairment of non-financial assets other than
goodwill at each reporting date, and whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable, by evaluating conditions specific to the Group and to
the particular asset that may lead to impairment. This includes
evaluating the expected outcome pursuant to the contracts,
including consideration of whether each individual litigation
contract is likely to result in a successful outcome, the cost and
timing to completion and the ability of the defendant to pay the
settlement or award. If an impairment trigger exists, the
recoverable amount of the asset is determined. This involves value
in use calculations, which incorporate a number of key estimates
and assumptions.
Note 4 Revenue
Consolidated
--------------------------- ----------------
2020 2019
$'000 $'000
--------------------------- ------- -------
Major service lines
--------------------------- ------- -------
Litigation service revenue 35,833 34,707
--------------------------- ------- -------
Performance fees 2,608 -
--------------------------- ------- -------
38,441 34,707
--------------------------- ------- -------
Geographical regions
--------------------------- ------- -------
Australia 21,723 34,666
--------------------------- ------- -------
United Kingdom 16,718 41
--------------------------- ------- -------
38,441 34,707
--------------------------- ------- -------
Contract duration
--------------------------- ------- -------
Less than 1 year 2,257 3,075
--------------------------- ------- -------
1-4 years 23,277 24,153
--------------------------- ------- -------
More than 4 years 12,907 7,479
--------------------------- ------- -------
38,441 34,707
--------------------------- ------- -------
Note 5 Segment information
The Group's operating segments are based on the internal reports
that are reviewed and used by the Board of Directors (who are
identified as the Chief Operating Decision Makers ('CODM')) in
assessing performance and
in determining the allocation of resources.
The Directors have determined that there is one operating
segment. The information reported to the CODM
is the consolidated results of the Group. The segment result is
as shown in the statement of profit or loss and other comprehensive
income. Refer to statement of financial position for assets and
liabilities.
Major customers
During the year ended 30 June 2020 there were three major
external customers (2019: three customers, unrelated to those in
2020) where revenue exceeded 10% of the consolidated revenue.
Revenue from each customer for the year ended 30 June 2020 amounted
to $13,926,000, $6,534,000, and $4,052,000 (2019 $14,440,000,
$9,713,000, and $7,183,000).
Note 6 Profit before tax
Consolidated
-------------------------------------------------------- ----------------
2020 2019
$'000 $'000
-------------------------------------------------------- ------- -------
Profit before income tax expense includes the following
specific expenses:
-------------------------------------------------------- ------- -------
Depreciation & amortisation
-------------------------------------------------------- ------- -------
Plant and equipment 69 47
-------------------------------------------------------- ------- -------
Intangible assets 17 6
-------------------------------------------------------- ------- -------
Total depreciation and amortisation 86 53
-------------------------------------------------------- ------- -------
Leases
-------------------------------------------------------- ------- -------
Short-term lease payments 764 621
-------------------------------------------------------- ------- -------
Employee benefits expense
-------------------------------------------------------- ------- -------
Salaries and wages 6,222 4,478
-------------------------------------------------------- ------- -------
Directors' fees 449 264
-------------------------------------------------------- ------- -------
Defined contribution superannuation expense1 260 194
-------------------------------------------------------- ------- -------
Payroll tax 102 120
-------------------------------------------------------- ------- -------
Provision for bonuses - 675
-------------------------------------------------------- ------- -------
Share based payments expense 432 320
-------------------------------------------------------- ------- -------
Other employee benefits and costs 146 18
-------------------------------------------------------- ------- -------
Total employee benefits expense 7,611 6,069
-------------------------------------------------------- ------- -------
1 Includes employers pension contributions for UK staff
Adjusted operating profit
Adjusted operating profit excludes non-operating expenses which
includes items which are considered unusual, non-cash or one-off in
nature.
Consolidated
------------------------------------------------------ ----------------
2020 2019
$'000 $'000
------------------------------------------------------ ------- -------
Share-based payments expense 432 320
------------------------------------------------------ ------- -------
Consultancy 182 579
------------------------------------------------------ ------- -------
IPO and other transaction costs 82 250
------------------------------------------------------ ------- -------
Litigation fees 1,159 679
------------------------------------------------------ ------- -------
Other expenses 47 297
------------------------------------------------------ ------- -------
Fund administration - Set-up expenses 938 -
------------------------------------------------------ ------- -------
Fund administration - General administration expenses 245 -
------------------------------------------------------ ------- -------
Total non-operating expenses 3,085 2,125
------------------------------------------------------ ------- -------
Litigation fees
Litigation fees includes fees relating to the costs of
litigation commenced by Australian Insolvency Group Pty Limited
('AIG') against the Group, and subsequent cross claim by the Group
in these proceedings against Vannin Capital Limited and Mr Patrick
Coope, a director of AIG and former employee of the Group. The
proceedings have concluded following reaching a binding settlement
with all parties in April 2020 and as part of the resolution of
these disputes the Group received performance fees which are
disclosed in note 4.
Fund administration expense
Fund administration expenses relate 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.
Note 7 Income tax expense
Consolidated
------------------------------------------------------ -----------------
2020 2019
$'000 $'000
------------------------------------------------------ ------- --------
Numerical reconciliation of income tax expense
and tax at the statutory rate
------------------------------------------------------ ------- --------
Profit before income tax expense 8,052 10,150
------------------------------------------------------ ------- --------
At the Group's statutory income tax rate of 27.5%
(2019: 27.5%) 2,214 2,791
------------------------------------------------------ ------- --------
Tax effect amounts which are not deductible/(taxable)
in calculating taxable income:
------------------------------------------------------ ------- --------
Share-based payments 119 88
------------------------------------------------------ ------- --------
Other non-deductible expenses 325 -
------------------------------------------------------ ------- --------
Unrealised foreign exchange (93) (9)
------------------------------------------------------ ------- --------
Change in tax rate 234 -
------------------------------------------------------ ------- --------
2,799 2,870
------------------------------------------------------ ------- --------
Adjustment to deferred tax balances as a result
of change in statutory tax rate - 169
------------------------------------------------------ ------- --------
Income tax expense/(benefit) 2,799 3,039
------------------------------------------------------ ------- --------
Amounts credited directly to equity
------------------------------------------------------ ------- --------
Deferred tax assets - (1,268)
------------------------------------------------------ ------- --------
Statutory tax rate of 27.5% is applicable to Australian entities
with aggregated turnover below $50 million for the year ended 30
June 2020. 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 27.5% tax rate.
Consolidated
--------------------------------------------------- -------------------
2020 2019
$'000 $'000
--------------------------------------------------- --------- --------
Deferred tax asset/(liability)
--------------------------------------------------- --------- --------
Deferred tax asset/(liability) comprises temporary
differences attributable to:
--------------------------------------------------- --------- --------
Tax losses 10,851 5,761
--------------------------------------------------- --------- --------
Employee benefits 154 316
--------------------------------------------------- --------- --------
Accrued expenses 30 7
--------------------------------------------------- --------- --------
Contract costs - litigation contracts (15,547) (8,216)
--------------------------------------------------- --------- --------
Transaction costs on share issue 953 1,372
--------------------------------------------------- --------- --------
Deferred tax asset/(liability) (3,559) (760)
--------------------------------------------------- --------- --------
Movements:
--------------------------------------------------- --------- --------
Opening balance (760) 1,011
--------------------------------------------------- --------- --------
Charged to profit or loss (2,799) (3,039)
--------------------------------------------------- --------- --------
Credited to equity - 1,268
--------------------------------------------------- --------- --------
Closing balance (3,559) (760)
--------------------------------------------------- --------- --------
Note 8 Cash and cash equivalents
Consolidated
------------------------------------------------------- ----------------
2020 2019
$'000 $'000
------------------------------------------------------- ------- -------
Cash at bank 24,942 49,119
------------------------------------------------------- ------- -------
Cash of third-party interests in consolidated entities 6,812 -
------------------------------------------------------- ------- -------
31,754 49,119
------------------------------------------------------- ------- -------
Cash of third-party interests in consolidated entities is
restricted as it is held within the fund investment vehicles on
behalf of the third-party investors in these vehicles. The cash is
restricted to use cashflows in the litigation contracts made on
their behalf and costs of administering the fund.
Note 9 Trade and other receivables
Consolidated
------------------------------------------ ----------------
2020 2019
$'000 $'000
------------------------------------------ ------- -------
Due from completion of litigation service 15,298 7,266
------------------------------------------ ------- -------
Amounts due from completion of litigation service relate to the
recovery of litigation projects that have successfully
completed.
Allowance for expected credit losses
The Group has recognised a loss of $nil (2019: $nil) in profit
or loss in respect of the expected credit losses for the year ended
30 June 2020.
The ageing of the receivables and allowance for expected credit
losses provided for above are as follows:
Expected
credit Carrying
Allowance
for expected
loss rate amount credit losses
2020 2020 2020
% $'000 $'000
------------ ----------- -------- --------------
Consolidated
------------ ----------- -------- --------------
Not overdue - 15,298 -
------------ ----------- -------- --------------
15,298 -
------------ ----------- -------- --------------
Note 10 Contract costs - litigation contracts
Consolidated
-------------------------------------- ----------------
2020 2019
$'000 $'000
-------------------------------------- ------- -------
Contract costs - litigation contracts 62,518 27,386
-------------------------------------- ------- -------
Reconciliation of litigation contract costs
Reconciliation of the contract costs (current and non-current)
at the beginning and end of the current period and previous
financial year are set out below:
Consolidated
-------------------------------------------------- --------------------
2020 2019
$'000 $'000
-------------------------------------------------- --------- ---------
Opening balance 27,386 13,914
-------------------------------------------------- --------- ---------
Additions during the period 41,330 27,838
-------------------------------------------------- --------- ---------
Additions during the period made by third-party
interests 10,694 -
-------------------------------------------------- --------- ---------
Litigation service expense - successful contracts
1 (16,723) (14,189)
-------------------------------------------------- --------- ---------
Litigation service expense - write down 2 (3) (177)
-------------------------------------------------- --------- ---------
Foreign exchange losses (166) -
-------------------------------------------------- --------- ---------
Closing balance 62,518 27,386
-------------------------------------------------- --------- ---------
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 costs
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:
2020 2019
$'000 $'000
------------------------------ ------- -------
Attributable to owners of LCM 51,824 27,386
------------------------------ ------- -------
Third-party interests 10,694 -
------------------------------ ------- -------
Consolidated total 62,518 27,386
------------------------------ ------- -------
Consolidated
------------ ----------------
2020 2019
$'000 $'000
------------ ------- -------
Current 15,671 8,910
------------ ------- -------
Non-current 46,847 18,476
------------ ------- -------
62,518 27,386
------------ ------- -------
Impairment considerations
The recoverable amount of the Group's contract costs has been
determined by a value in use calculation using a discounted cash
flow model, based on cash flow projections and financial budgets as
approved by management for the life of each litigation
contract.
Key assumptions were used in the discounted cash flow model for
determining the value in use of
litigation contracts:
-- The estimated cost to complete a litigation contract is
budgeted, based on estimates provided by
the external legal advisors handling the litigation;
-- The value to the Group of the litigation contract, once
completed, is estimated based on the expected settlement or
judgement amount of the litigation and the fees due to the Group
under the litigation contract;
-- The discount rate applied to the cash flow projections is
based on the Group's weighted average cost of capital and other
factors relevant to the particular litigation contract. The
discount rate applied was 15% (2019: 15%).
Based on the above, the Group has recognised impairment losses
of $nil (2019: $nil) in profit or loss on contract costs for the
year ended 30 June 2020.
Note 11 Current liabilities - trade and other payables
Consolidated
--------------------- ----------------
2020 2019
$'000 $'000
--------------------- ------- -------
Trade payables 13,042 6,600
--------------------- ------- -------
Distribution payable 32 32
--------------------- ------- -------
Other payables 88 57
--------------------- ------- -------
13,162 6,689
--------------------- ------- -------
Refer to note 16 for further information on financial
instruments.
Note 12 Earnings per share
Consolidated
--------------------------------------------------- ----------------
2020 2019
$'000 $'000
--------------------------------------------------- ------- -------
Profit after income tax 5,253 7,111
--------------------------------------------------- ------- -------
Non-controlling interest (8) 4
--------------------------------------------------- ------- -------
Profit after income tax attributable to the owners
of Litigation Capital Management Limited 5,245 7,115
--------------------------------------------------- ------- -------
Number Number
------------------------------------------------- ------------ -----------
Weighted average number of ordinary shares used
in calculating basic earnings per share 104,580,899 82,235,934
------------------------------------------------- ------------ -----------
Adjustments for calculation of diluted earnings
per share:
------------------------------------------------- ------------ -----------
Amounts uncalled on partly paid shares and calls
in arrears 2,506,679 2,573,409
------------------------------------------------- ------------ -----------
Options over ordinary shares 4,195,207 3,354,864
------------------------------------------------- ------------ -----------
Weighted average number of ordinary shares used
in calculating diluted earnings per share 111,282,785 88,164,207
------------------------------------------------- ------------ -----------
Cents Cents
--------------------------- ----- -----
Basic earnings per share 5.02 8.65
--------------------------- ----- -----
Diluted earnings per share 4.71 8.07
--------------------------- ----- -----
Dilutive potential shares which are contingently issuable are
only included in the calculation of diluted earnings per share
where the conditions are met.
Note 13 Reconciliation of cash flows
Reconciliation of profit after income tax to net cash from
operating activities:
Consolidated
------------------------------------------------------ --------------------
2020 2019
$'000 $'000
------------------------------------------------------ --------- ---------
Profit/(loss) after income tax expense for the
year 5,253 7,111
------------------------------------------------------ --------- ---------
Adjustments for:
------------------------------------------------------ --------- ---------
Depreciation and amortisation 86 53
------------------------------------------------------ --------- ---------
Share-based payments 432 320
------------------------------------------------------ --------- ---------
Other - non-cash items 372 719
------------------------------------------------------ --------- ---------
Change in operating assets and liabilities:
------------------------------------------------------ --------- ---------
Increase in contract costs - litigation contracts (35,132) (13,472)
------------------------------------------------------ --------- ---------
Increase in trade and other receivables (8,032) (8,150)
------------------------------------------------------ --------- ---------
Increase in trade and other payables 6,473 3,585
------------------------------------------------------ --------- ---------
Decrease in deferred tax assets - 1,011
------------------------------------------------------ --------- ---------
Increase in deferred tax liabilities 2,799 2,028
------------------------------------------------------ --------- ---------
Increase in prepayments 255 (492)
------------------------------------------------------ --------- ---------
Decrease in employee benefits (563) 768
------------------------------------------------------ --------- ---------
Decrease in other liabilities (129) -
------------------------------------------------------ --------- ---------
Net cash used in operating activities (28,186) (6,519)
------------------------------------------------------ --------- ---------
Changes in liabilities arising from financing activities
Third-party
interests in
consolidated
entities
$'000
---------------------- --------------
At 1 July 2018 -
---------------------- --------------
Other non-cash items -
---------------------- --------------
At 30 June 2019 -
---------------------- --------------
Proceeds (14,582)
---------------------- --------------
Payments 920
---------------------- --------------
Other non-cash items 1,062
---------------------- --------------
At 30 June 2020 (12,600)
---------------------- --------------
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END
FR SEWSIEESSEIU
(END) Dow Jones Newswires
September 22, 2020 02:00 ET (06:00 GMT)
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