10 September 2019
Litigation Capital Management Limited
("LCM" or the "Group")
Financial results for the year ended 30 June 2019
Litigation Capital Management Limited (AIM:LIT), a leading international provider of litigation financing solutions, today announces its audited financial results for the year ended 30 June 2019.
Figures in A$ million, unless otherwise stated1
30 June 2019
30 June 2018
Adjusted profit before tax3
Statutory profit before tax
Diluted EPS (cents per share)
Capital deployed on litigation investments
Cash receipts from the completion of litigation investments5
¹ LCM reports on a cash accounting basis (historical cost), there are no fair value adjustments included in its financials
2 Revenue includes the impact of the adoption of AASB 15 Revenue from Contracts with Customers
3 Adjusted for foreign exchange loss, IPO and other transaction expenses, share based payments expense, non-recurring legal fees on litigation, provision for employee entitlements, non-recurring consultancy fees
4 Litigation investments equates to the total of current contracts costs and non-current contract costs on the Consolidated Statement of Financial Position
5 Cash receipts equates to Proceeds from Litigation Contracts as disclosed in the Consolidated Statement of Cashflows (Cash flows from operating activities). The cash receipts of $26.80m does not include revenue pf $7.627m due from the completion of litigation services, of which $7.18m is held in an Escrow Account awaiting orders of the Court for distribution.
§ Strong performance and significant operational expansion to achieve global platform covering Australia, EMEA and Asia Pacific
- Establishment of London office and recruitment of highly experienced team led by Nick Rowles-Davies, Executive Vice Chairman, to service the EMEA region
- Establishment of Singapore office and recruitment of highly experienced team leader to service the growth markets of Singapore and Hong Kong
§ Increased investment pool and achieved significant diversification in our portfolio and pipeline by geography and jurisdiction, as well as sector and capital commitment, whilst maintaining discipline
§ Funded two corporate portfolio transactions; LCM is the clear global leader in this key growth area
§ Initiated a pilot program providing a funding solution for small claims in the insolvency market in Australia and the United Kingdom
§ Continued growth of pipeline with 64 investment opportunities (as at 3 September 2019)
§ 235% increase in applications during FY19; maintaining disciplined focus on due diligence with only 3% of applications converted into an investment
§ Delisted from Australian Securities Exchange and listed on AIM in December 2018; raising circa A$35 million (£20 million) of primary equity, following a raise of A$10 million on the ASX in the period
§ Revenue of A$34.71 million increased by 17% (FY18 A$29.68 million)
§ Gross profit of A$20.34 million increased by 23% (FY18 A$16.51 million)
§ Adjusted profit before tax of A$12.28 million broadly flat against FY18, despite unprecedented growth and expansion across all areas of the business
§ Cash on balance sheet of A$49.12 million (A$52.60 million as at 31 December 2018) and total litigation investments of A$27.39 million (A$20.70 million as at 31 December 2018)
§ Leading performance metrics with cumulative ROIC since FY12 of 135% (including losses) and portfolio IRR, since FY12, of 80% (including losses)
§ Final fully franked dividend of 0.828 cents (Australian) per share; following the interim dividend of 0.506 cents (Australian) per share paid in May 2019
Patrick Moloney, CEO of LCM, said:
"We are pleased to present a strong set of results for FY 2019, which we have delivered alongside unprecedented growth and expansion across all areas of our business. We have continued to invest in the right people who have the appropriate experience to support our growth trajectory.
The results we publish today represent realised revenue and demonstrate our true performance. We remain committed to providing our investors with the disclosure and transparency they need to assess the underlying performance of the business and the basis of our returns.
We are excited about a number of significant growth opportunities for LCM. Notably, corporate portfolio funding, where in the past year we have established ourselves as the global leader for this product. During the year, we originated over 15 applications and funded two corporate transactions. This number might seem small, but it represents more than any other funder globally and corporate portfolio funding remains a key part of our growth strategy going forward."
WEBCAST AND CONFERENCE CALL
LCM will be hosting a live meeting and conference call today at 09:30 (BST). The webcast can be accessed via our website at: www.lcmfinance.com/shareholders/. A conference call is also available for those unable to join the webcast, please register at https://secure.emincote.com/client/lcm/lcm001/vip_connect to get access. There will be a facility to ask questions. A replay of the webcast will be available later today.
Litigation Capital Management
Patrick Moloney, Chief Executive Officer
Nick Rowles-Davies, Executive Vice Chairman
Stephen Conrad, Chief Financial Officer
Canaccord (Nomad and Broker) Tel: 020 7523 8000
Hawthorn Advisors [email protected]
Lorna Cobbett / Zinka MacHale Tel: 020 3745 4960
PROJECT AND PIPELINE UPDATE
As at 30 June 2019, LCM has a portfolio of 29 current projects under management. 23 projects are unconditionally funded and six projects conditionally funded. The portfolio shows significant growth of 45% in the number of projects under management, given LCM was managing 20 projects as at 30 June 2018. In line with LCM's investment philosophy, the portfolio maintained diversity across industry sector, jurisdiction and capital commitment.
Both project and pipeline opportunities are well diversified by litigation type and geography, while maintaining a disciplined process of project selection. LCM has pre-qualified 64 pipeline projects with estimated investment of A$394 million.
During FY19 both the number and quality of applications received by LCM increased significantly. A total of 419 applications were received representing an increase of 235%, compared with 125 applications received in FY18. This application increase was largely due to our expansion into new jurisdictions, but also from LCM realising a higher profile consequent upon its listing on AIM. Notwithstanding that LCM received a significantly larger number of applications, we have not altered or relaxed our due diligence processes or underwriting techniques with respect to investments made. Statistically, LCM has operated largely in line with industry peers at approximately 4% of applications converting into an investment. During FY19, our disciplined focus and considered approach saw 3% of applications being converted into investments that became additions to LCM's current portfolio. It is worth noting that LCM is observing an increase in both the quality and size of its investment opportunities into the disputes space.
A significant portfolio development in FY19 is the entry of LCM into the corporate portfolio market. One of LCM's strategies through recruiting Nick Rowles-Davies as Executive Vice Chairman and our London team was to address the corporate market, which is a key growth area and is presently largely underserviced. LCM has managed to originate in excess of 15 applications for corporate portfolio funding during FY19 of which two corporate portfolios have been funded during the year. While two might seem a small number, it is a figure that represents more than any other funder globally and also represents a large number of underlying claims. The Board is encouraged by our achievements in the early stages of what we recognise is an emerging market sector.
A strategic review was undertaken during FY19 to identify opportunities and skillsets presently being underutilised within LCM. This review resulted in the Group recognising an opportunity to leverage LCM's existing skillset in insolvency. The management saw an opportunity to take advantage of changes to the relevant insolvency laws in both the jurisdictions of Australia and the United Kingdom, which allow insolvency practitioners to assign statutory causes of action. Prior to the insolvency law changes, an insolvency practitioner could not assign statutory rights and was restricted to traditional funding techniques.
LCM initiated a pilot program during H2 FY19 to provide a funding solution for the insolvency market in Australia and the United Kingdom. Although still at an initial stage, the insolvency funding model is proving to be entirely complementary to LCM's existing business and has realised new opportunities for referral relationships that previously did not exist. In Australia, LCM has considered 30 applications and has entered into three agreements for the funding and/or assignment of smaller insolvency-based claims. In the UK a total of 56 applications have been received and are currently subject to due diligence.
Smaller claims arising out of insolvency typically require a less significant funding commitment and have a shorter duration period, which in turn will see potential returns being realised at a faster and more consistent rate. All investments made as part of the pilot program will be subject to LCM's existing rigorous selection criteria and due diligence process. The return metrics for small insolvency matters will be reported separately for transparency. It is expected that the revenue generated from providing a funding solution for smaller insolvency claims, once properly developed, will positively supplement the revenue LCM generates from funding projects, outside of insolvency, that typically have a larger funding size and a longer duration. The smaller insolvency claims are expected to have an investment period of approximately 12-18 months, compared to LCM's core business of funding projects where the duration is currently 25 months on average.
The growth in LCM's portfolio of litigation projects during FY19 is a direct result of the Group expanding its geographical footprint into new jurisdictions. It is worth noting that while we refer to our investment projects as litigation based, this is a term that encompasses arbitration as well as litigation. Future expansion of the portfolio, particularly in the key growth markets for Asia of Singapore and Hong Kong, is expected to include arbitral disputes following the passing of legislation during the 2017 calendar year to permit litigation funding and finance products to be utilised in association with international arbitration projects. Ahead of the legislation being passed, LCM anticipated these changes and began its search for the appropriate team to represent LCM's interest in those jurisdictions.
The current pipeline, as at 3 September 2019, demonstrates the large and diverse pre-qualified investment opportunities within the Group. In addition to seven corporate portfolio transactions, the current pipeline includes projects across the mix of litigation financing: commercial (28), international arbitration (eight), insolvency (nine), class actions (10), enforcement (one) and law firm funding (one).
FY19 was a period of very significant growth and change for LCM. The most significant change involved LCM's expansion into new jurisdictions through the opening of offices in Singapore and London which resulted in significant experience being placed on the ground in those territories. Both the teams in Singapore and London have integrated comfortably into the Group and LCM operates as a global team, albeit with separate investment committee members for the northern and southern hemispheres. All risk however remains centred in LCM's head office in Sydney. LCM's expansion also saw it delist from the ASX and list on AIM; both events were accompanied by separate capital raises which supplemented LCM's permanent source of operating capital. The introduction of new capital allowed LCM to significantly increase its portfolio of litigation investments.
The Board continues to see significant growth in the litigation finance sector. That growth is a direct reflection of a greater acceptance and knowledge of the services provided by the industry to the legal profession and insolvency practitioners.
The use of litigation finance through choice rather than necessity is a far greater addressable market for the industry and is one that remains almost entirely unaddressed. The significant growth opportunity here is for well capitalised corporate entities who currently fund their own disputes on balance sheet using their cash resources. LCM is observing an early, but encouraging, change in attitude from corporates globally as they recognise the value of using an external source of capital rather than shareholders' funds. The corporate area of the market represents a considerable opportunity for LCM, which currently leads the world in this disputes funding product, and in Nick Rowles-Davies we have arguably the pioneer for this corporate finance product.
The Board is also pleased with the measured approach to expansion into new jurisdictions. LCM has been deliberately disciplined in its expansion to date which has resulted in a seamless integration of a fully functioning team in London and the establishment of our first office in Singapore. Both LCM's London and Singapore offices have generated a significant number of quality investment opportunities which has already exceeded the Board's expectations. As with LCM's expansion into the northern hemisphere, senior executives continue to monitor opportunities in alternative jurisdictions closely, including North America. Statistically North America is the largest litigation market globally and the least penetrated by the litigation finance industry. LCM would apply the same disciplined and measured approach to expansion into any new jurisdiction or territories; this includes identifying the right senior hires to support our future growth, as cultural fit and experience is critical.
As previously referenced, LCM has launched a pilot program with respect to a new business line of acquiring small insolvency claims via assignment of statutory causes of action from insolvency practitioners in both Australia and the United Kingdom. Although this strategy is at an initial stage it is showing significant promise. The strategy seeks to leverage LCM's existing skillset and experience as well as its existing referral base. The introduction of this business model has already generated significant opportunity for investment and has given LCM access to larger opportunities which ordinarily form part of our core business but would not have been identified prior to the small insolvency claims strategy being adopted.
The growth and maturation of LCM's current portfolio of litigation projects is progressing very well and, in respect to some litigation projects, better than anticipated. The individual litigation projects which together comprise the portfolio presently being managed are generally tracking as, or better than, expected.
After successfully expanding into new markets during FY19, LCM continues to look for new opportunities in the same measured and disciplined fashion. A successful litigation financing business broadly requires three essential elements:
1. Experience in the field,
2. Access to capital, and
3. An ability to originate quality investment opportunities.
LCM has extensive experience in the disputes sector, having spent the last 21 years refining and creating the systems and methodologies which allow it to skilfully undertake due diligence and underwriting processes to determine what investments should be made in the area of disputes. LCM possesses more experience in the field than almost any other operator globally.
The operation of a disputes funding business is a capital-intensive enterprise that requires access to significant pools of capital. LCM has the benefit of its public listing on AIM and access to other capital markets in order to raise this capital. We have the flexibility to approach investors to raise equity, if deemed appropriate. LCM continues to monitor the sources of capital for its business, including consideration of a third-party fund where we are in advanced discussions with potential investors and will provide an update later this calendar year.
A number of funders have access to sufficient capital, a smaller number have the experience and expertise of LCM, and fewer still have approached origination in the same innovative manner as LCM. We have an ability to originate quality investment opportunities. This is demonstrated most effectively by the move into corporate portfolio funding, where LCM is a global leader.
LCM has recently gone through a significant period of growth. LCM can point to growth in almost all areas of its business over the past 12 months. We have increased our capital base, our investments into litigation projects, the geographies in which we operate and our human capital. LCM continues to monitor the funding industry globally and those geographies and jurisdictions where opportunities exist. In addition, LCM looks at its personnel and opportunistically hires skilled and/or experienced practitioners if and when they become available. LCM undertakes those activities in the same disciplined and measured manner as it has done historically.
LCM's operations are not currently subject to significant regulation under any laws in jurisdictions in which we operate. LCM is supportive of greater regulation, as are other larger litigation financiers. It is vital to the industry for it to mature and increase legitimacy. This is an example that LCM strives to set through supporting and abiding by regulation.
While recognising the need for further regulation, LCM also continues to comply comfortably with regulation. As a listed company we are making a statement about our commitment to transparency and disclosure, especially given how we do not include any fair value accounting in our financial or performance metrics.
In Singapore and Hong Kong, where regulation focuses on capital adequacy and the need for litigation financiers to operate a finance business, rather than one off investments, LCM is in full compliance. There were two government inquiries into litigation finance in Australia in the period which touched upon the regulatory environment - however, neither made recommendations which were adverse or potentially adverse to the business. LCM also complies with all litigation-related regulation in London.
Board and management changes
The Board and management team of LCM was expanded in December 2018, following the Company's listing on AIM and the expansion to create a global platform across Australia, EMEA and Asia Pacific.
Nick Rowles-Davies was appointed Executive Vice Chairman with responsibility for leading the newly formed EMEA team at LCM, based out of the London office. Nick is an industry pioneer and has been involved in the litigation finance and legal expenses insurance industries since 1999; he created and defined the concept of corporate portfolio litigation finance and is the global leader in identifying, creating and executing litigation finance portfolios.
Stephen Conrad was appointed to the Board at the Company's AGM in November 2018 and is responsible for finance, operations, compliance and risk. He has 25 years' Investment Banking experience, specialising in risk management, governance and capital optimisation across a wide variety of industry sectors working for global banks in Singapore, Hong Kong and Sydney. Stephen is an Executive Director and Chief Financial Officer.
LCM appointed Jonathan Moulds as Non-Executive Director in December 2018 and he was appointed Non-Executive Chairman in March 2019. Jonathan is currently Non-Executive Director of IG Group Holdings Plc and recently served as the Chief Operating Officer of Barclays PLC. Prior to his role at Barclays, he was head of Bank of America's European business until 2013 and became Chief Executive Officer of Merrill Lynch International following the merger of the two institutions in 2008.
Those appointments strengthen LCM's executive management team and gives the Group unparalleled leadership under the chairmanship of Jonathan Moulds.
We are pleased with the overall financial performance of the Group for the financial period ending 30 June 2019. Despite a period of unprecedented growth and expansion across all areas of the business - as well as the one-off event of transitioning its listing to AIM - the Group's financial performance was commensurate with the prior period with a statutory profit before tax of A$10.15 million. The net statutory profit represents an outstanding result given the level of growth achieved in the same period, although is marginally down on the prior financial year. Adjusted profit before tax is A$12.28 million. The Group's overall gross revenue of A$34.71 million represents an increase on the prior financial period of 17%. The Group generated a gross profit of A$20.34 million, representing an increase on the prior period of 23%.
The underlying financial metrics for investments realised during the financial period show that LCM's performance improved. The cumulative return on invested capital (ROIC) over the past eight years (inclusive of losses) increased to 135%. The portfolio internal rate of return (IRR) (also inclusive of losses) has increased to 80%. We are very pleased with the Group's overall maintenance of its high standard of performance notwithstanding a period of unprecedented expansion and growth. Our average time to resolve or complete a litigation project is currently 25 months.
Prior to FY19, LCM measured its portfolio using an estimated aggregate gross claim size. In recognition of LCM's business being a corporate finance product, we took the deliberate decision in FY19 to shift our focus towards aggregate investments as opposed to aggregated gross claim size. Given LCM's past performance and its ability to generate returns on invested capital the Board believes that this is a far more useful metric for investors to consider LCM's growth. Total invested capital during FY18 was A$14.62 million. During FY19, LCM's investments increased substantially to A$27.84 million. The increase in capital investment is a direct result of two significant developments during the financial year. The first is greater access to capital through LCM's equity raise on AIM in December 2018. The second is LCM's expansion into new geographies including opening a permanent office in Singapore, for the Asia Pacific region, and the establishment of an office in London, for the EMEA region. Both of those offices have already generated high quality investment opportunities for the Group.
When assessing our actual financial results and performance for LCM's investments realised during the period it is important to note that our financial results and performance metrics represent how the business has actually performed on its concluded investments, as revenue is on a realised basis as opposed to unrealised. Accounting in such a conservative and tangible fashion may result in increased volatility of both earnings and performance but provides investors with the comfort that all revenue and profits have been earned and realised and that LCM's performance metrics are actual as opposed to notional.
LCM has a conservative, cash-based accounting policy. Litigation contracts are recognised at historical cost and we do not adopt fair value accounting in our reporting. In many ways, LCM is the benchmark for conservatism in accounting in respect of all of its listed peers in the litigation finance sector. We should note, however, that there is no inherent issue with the use of fair value accounting but the application of it does matter. The accounting treatment for litigation projects varies in the industry, with some approaches more reliant on subjective judgment by management teams than others.
LCM continues to debate and seek professional expert advice with respect to applicable standards. It may be the case that, as LCM's business continues to grow, the appropriate and applicable standard to apply to our business model may be IFRS 9 and fair value accounting. If LCM were to adopt this accounting standard, it would be alongside cash accounting numbers, and we would only adopt a method of fair valuation that can be scrutinised through a transparent publicly available policy that would provide investors with full disclosure.
LCM's commitment to conservative and transparent disclosure is an important and positive differentiator compared to its peers in the sector. We operate our business with strong processes and values that underpin our robust and diligent approach to risk management. We are committed to providing investors with the disclosure and transparency needed to assess the underlying basis of LCM's returns and to give a true reflection of our financial performance.
The key features of our accounting policy are:
i. Fair value accounting for litigation projects in our portfolio is not used, instead, LCM recognises litigation projects at historical cost.
ii. Historically LCM accounted for its litigation projects under AASB 138 Intangible Assets. With effect from 1 July 2018, LCM adopted AASB 15 Revenue from contracts with customers (which is the equivalent of IFRS 15).
iii. The effect of the revenue recognition policy under AASB 15 simplifies revenue recognition to include revenue solely from settlements and judgments.
iv. The retrospective application of AASB 15 does not have an effect on LCM's net profitability or investment performance.
v. Carrying value includes the capitalisation of external costs of funding the litigation, such as solicitors' fees, barristers' fees and experts' fees. No other overheads are capitalised.
vi. Litigation contract costs are derecognised when a successful judgment or settlement has been determined, at which point the revenue is recognised, and litigation costs derecognised, in the Statement of Profit & Loss and Other Comprehensive Income.
vii. Cash outflows relating to the litigation projects are reflected under Operating Activities on the cash flow statement.
Additional information on updated revenue recognition policy
LCM strives to maintain the highest standards in its financial reporting and the preparation of its financial statements with the upmost transparency and accuracy such as to give a true reflection of the financial performance of the business. On 1 July 2018, LCM was required in accordance with the Australian Accounting Standards and International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board, to transition from applying AASB 138 - Intangible Assets (AASB 138) to AASB 15 - Revenue from Contracts with Customers (AASB 15 is the equivalent to IFRS 15). It has been noteworthy there has been much discussion in recent times on the adoption of IFRS 9 - Financial Instruments (IFRS 9) and its influence on revenue recognition by litigation finance companies.
Along with the transition to AASB 15 and in particular the recognition of LCM's revenue as being revenue resulting from contracts with its customers, LCM was advised on 1 July 2018 to adopt a revenue recognition policy that recognised (in addition to realised revenue from concluded projects) its investments in litigation projects in its profit and loss statement through the revenue line before that revenue was immediately derecognised and posted to the balance sheet as an intangible asset. The effect of this revenue recognition policy was to increase LCM's gross revenue but had no effect on gross margin or profits.
Going forward, LCM has now simplified its revenue recognition to only include revenue from settlements and judgements. Regardless of this new policy, there is no effect on past or future Gross Profit nor Net Profit Before Tax. Further, this does not represent a change to the accounting standard adopted by LCM which remains in accordance with the Australian Accounting Standards and IFRS, as issued by the International Accounting Standards Board.
The following tables provide a comparison between each revenue recognition policy for transparency:
Extract of the Statement of profit or loss and other comprehensive income
For the year ended 30 June 2019
Group's revenue recognition policy under:
New AASB 15
Litigation service revenue
Litigation service expense
Net Profit Before Tax
Net Profit After Tax
1 The net of gross revenue on the successful completion of litigation projects of $34,707 less costs incurred in those litigation projects of $14,366
2 Gross revenue on the successful completion of litigation projects of $34,707 less costs incurred in those litigation projects of $14,366, plus investments into litigation projects during the financial year
3 Equates to investments in litigation projects during the financial year
Extract of the Statement of financial position
As at 30 June 2019
Group's revenue recognition policy under:
New AASB 15
Intangible assets - litigation contracts1
Contract assets - litigation contracts1
Contract costs - litigation contracts1
1Includes current and non-current assets
Statement of cash flows
For the year ended 30 June 2019
There has been no effect on the statement of cash flows for the year.
LCM announces a final fully franked dividend of 0.828 cents (Australian) per share, or A$900,000 based on the issued share capital of the Group as at 30 June 2019, that will be paid in respect of the year ending 30 June 2019. This is in addition to the interim dividend of 0.506 cents (Australian) per share, or A$550,000, paid to eligible shareholders on 21 June 2019.
The ex-dividend date for the final dividend is 14 November 2019 and will be paid on 11 December 2019.
Shareholders on the Australian Register
· The dividend will be paid on 11 December 2019 in Australian dollars to holders on the Australian share register as at 14 November 2019.
Shareholders on the Guernsey Register and Depositary Interest holders
· The dividend will be paid on 11 December 2019 in Sterling to holders on the Guernsey share register and within the Depositary Interest facility as at 14 November 2019. The Sterling rate will be announced in due course.
· The dividend is capable of being paid in Australian dollars, provided that the relevant shareholder has registered to receive their dividend in Australian dollars under the Company's Dividend Currency Election form by the close of business on 21 November 2019.
· A copy of the Dividend Currency Election form, which when completed should be sent to Link Asset Services, The Registry, Beckenham Road, Beckenham, Kent, BR3 4TU, can be found on the Company's website at https://www.lcmfinance.com/.
The Board is currently undertaking a review of its capital allocation policy, including dividends, given the significant growth opportunities that the Group has available. The Company intends to consult major shareholders as part of this review. An update will be provided alongside the half year results for FY2020.
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 1990's. 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 such a resolution might be either as a negotiated settlement or as an award by the court. Given the myriad of outcomes that one might have in respect of such an investment into litigation, it is simply not reasonable or responsible for us to provide forward forecasting. That is an approach and position which is shared with our listed peers.
LCM acknowledges with gratitude the invaluable assistance provided by analysts who diligently prepare research on its business. Having regard to the observations made above concerning the fragility of accurate forward forecasting, investors should take that into account when considering forward forecasting contained in research reports or research notes.
NOTES TO EDITORS
Litigation Capital Management ("LCM") is a leading international provider of litigation financing solutions. This includes single-case and portfolio; across class actions, commercial claims, claims arising out of insolvency and international arbitration. LCM has an unparalleled track record, driven by effective project selection, active project management and robust risk management. Headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker LIT.
The Director's Report, which includes the Auditors Review Report, is available on the Company's website, at www.lcmfinance.com/shareholders/financial-statements/.
Refer to note 4 for detailed information on Restatement of comparatives.
Refer to note 4 for detailed information on Restatement of comparatives.
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:
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 10 September 2019. The Directors have the power to amend and reissue the financial statements.
Note 2. Significant accounting policies
The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
New or amended Accounting Standards and Interpretations adopted
The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period.
Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted.
Other than as described below, the adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group.
The following Accounting Standards and Interpretations are most relevant to the Group:
AASB 9 Financial Instruments (applying transitional rules)
The Group has adopted AASB 9 from 1 July 2018 using the transitional rules not to restate comparatives. The standard introduced new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows which arise on specified dates and that are solely principal and interest. New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment is measured using a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available.
AASB 15 Revenue from Contracts with Customers (full retrospective approach)
The Group has adopted AASB 15 retrospectively from 1 July 2017. The standard provides a single comprehensive model for revenue recognition. The core principle of the standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduced a new contract-based revenue recognition model with a measurement approach that is based on an allocation of the transaction price. This is described further in the accounting policies below. Credit risk is presented separately as an expense rather than adjusted against revenue. Contracts with customers are presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance and the customer's payment. Customer acquisition costs and costs to fulfil a contract can, subject to certain criteria, be capitalised as an asset and amortised over the contract period.
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 26.
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 2019 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'.
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 are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance.
Foreign currency translation
The financial statements are presented in Australian dollars, which is Litigation Capital Management Limited's functional and presentation currency.
Foreign currency transactions
Foreign currency transactions are translated into the entity's functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.
The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity.
The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of.
The Group recognises revenue as follows:
Revenue from contracts with customers
Revenue is recognised at an amount that reflects the consideration to which the Group is expected to be entitled in exchange for transferring services to a customer. For each contract with a customer, the Group: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the services promised.
Variable consideration within the transaction price, if any, reflects the variability of potential outcomes in awards or settlements of the litigation and any other contingent events. Such estimates are determined using either the 'expected value' or 'most likely amount' method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability.
Litigation service revenue
The performance of a litigation service contract by the Group entails the management and progression of the litigation project during which costs are incurred by the Group over the life of the litigation project.
Revenue, which includes amounts in excess of costs incurred and the reimbursement for all invested capital, is not recognised as revenue until the successful completion of the litigation project ie, complete satisfaction of the performance obligation, which is generally at the point in time when a judgement has been awarded or on an agreed settlement between the parties to the litigation, and therefore when the outcome is considered highly probable. On this basis, revenue is not recognised over time and instead recognised at the point in time when the Group satisfies the performance obligation. Costs includes only external costs of funding the litigation, such as solicitors' fees, counsels' fees and experts' fees.
The terms and duration of each settlement or judgement varies by litigation project. Payment terms are not defined by the Group's litigation contracts however upon successful completion of a litigation project, being the satisfaction of the single performance obligation, funds are generally paid into trust within 28 days. The funds will remain in trust until the distribution amounts have been determined and agreed by the relevant parties, after which payment will be received by the Group.
Performance fees are derived from the management of litigation projects under externally financed financing arrangements and governed by the agreement with external investors. Performance fees are recognised at the point in time when a judgement has been awarded or a settlement agreement has been agreed on the litigation projects.
Interest income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.
The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable.
Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for:
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.
The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset.
Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously.
Litigation Capital Management Limited (the 'head entity') and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the 'separate taxpayer within group' approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group.
In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group.
Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity.
Current and non-current classification
Assets and liabilities are presented in the statement of financial position based on current and non-current classification.
An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current.
A liability is classified as current when: it is either expected to be settled in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current.
Deferred tax assets and liabilities are always classified as non-current.
Cash and cash equivalents
Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Trade and other receivables
Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days.
The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue.
Contract costs are recognised as an asset when the Group incurs costs in fulfilling a contract and when all the following are met: (i) the costs relate directly to the contract; (ii) the costs generate or enhance resources of the Group that will be used to satisfy future performance obligations; and (iii) the costs are expected to be recovered. Contract costs are non-financial assets for impairment purposes. Contract costs are amortised upon complete satisfaction of the performance obligation. Refer to the Group's revenue recognition policy for further information.
Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease.
Impairment of non-financial assets
Non-financial assets are reviewed for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount.
Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit.
Trade and other payables
These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition.
Short-term employee benefits
Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled.
Other long-term employee benefits
The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
Defined contribution superannuation expense
Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred.
Equity-settled share-based compensation benefits are provided to employees.
Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services.
The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions.
The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods.
Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied.
If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification.
If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited.
If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification.
Fair value measurement
When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market.
Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement.
For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data.
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Dividends are recognised when declared during the financial year and no longer at the discretion of the Company.
Earnings per share
Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to the owners of Litigation Capital Management Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year.
Diluted earnings per share
Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.
Goods and Services Tax ('GST') and other similar taxes
Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position.
Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows.
Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority.
Rounding of amounts
The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar.
New Accounting Standards and Interpretations not yet mandatory or early adopted
Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2019. The Group's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below.
AASB 16 Leases
This standard is applicable to annual reporting periods beginning on or after 1 July 2019. The standard replaces AASB 117 'Leases' and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a 'right-of-use' asset will be capitalised in the statement of financial position, measured at the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a 'right-of-use' asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The impact of adoption of this standard as at 1 July 2019, using the modified retrospective approach, will result in the recognition of a right-of-use asset of approximately $612,000 with a corresponding increase in lease liability, in respect of the Group's operating leases over premises.
AASB Interpretation 23 Uncertainty over Income Tax Treatments
The Interpretation clarifies the application of the recognition and measurement criteria in AASB 112 Income Taxes where there is uncertainty over income tax treatments. The Interpretation specifically addresses the following: a) whether an entity considers uncertain tax treatments separately, b) the assumptions an entity makes about the examination of tax treatments by taxation authorities, c) how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates and d) how an entity considers changes in facts and circumstances. The application of the Standard is 1 January 2019 (effective for the Group from 1 July 2019). The Group is in the process of assessing the impact of AASB Interpretation 23.
New Conceptual Framework for Financial Reporting
A revised Conceptual Framework for Financial Reporting is applicable for annual reporting periods beginning on or after 1 January 2020. This release impacts for-profit private sector entities that have public accountability that are required by legislation to comply with Australian Accounting Standards and other for-profit entities that voluntarily elect to apply the Conceptual Framework. Phase 2 of the framework is yet to be released which will impact for-profit private sector entities. The application of new definition and recognition criteria as well as new guidance on measurement will result in amendments to several accounting standards. The issue of AASB 2019-1 Amendments to Australian Accounting Standards - References to the Conceptual Framework, also applicable from 1 January 2020, includes such amendments. Where the Group has relied on the conceptual framework in determining its accounting policies for transactions, events or conditions that are not otherwise dealt with under Australian Accounting Standards, the Group may need to revisit such policies. The Group will apply the revised conceptual framework from 1 July 2020 and is yet to assess its impact.
Note 3. Critical accounting judgements, estimates and assumptions
The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below.
Revenue from contracts with customers
The entity's active involvement in litigation service contracts to achieve a successful resolution for the client is the predominant purpose of the service provided and accordingly the litigation funding contracts are within the scope of AASB 15 'Revenue from Contracts with Customers', and so are excluded from the scope of AASB 9 'Financial Instruments' which would require the recognition of a financial asset for each contract, measured at fair value.
Method of measuring progress of completion of performance obligations and recognition of revenue
Management uses judgement to measure its progress towards complete satisfaction of its performance obligations. For the provision of litigation management services and financing of litigation projects, management has determined that there is a single performance obligation and that complete satisfaction of that performance obligation occurs at the point in time when the Group achieves a successful resolution for the client as it is the predominant purpose of the service provided. On this basis, revenue is not recognised over time and only recognised at the point in time when the Group satisfies that performance obligation.
In accordance with the accounting policy in note 2, revenue is now recognised at a point in time at which a successful outcome has been achieved. In the 31 December 2018 interim report, revenue was recognised over time to the extent of costs incurred by the Group. As a result, comparatives in the statement of profit or loss and other comprehensive income of the interim report to 31 December 2019 will be restated in line with the revenue accounting policies outlined in note 2. There is no effect on the net assets or profit for the comparative year ended 30 June 2018.
Impairment of non-financial assets other than goodwill and other indefinite life intangible assets
The Group assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. This includes evaluating the expected outcome pursuant to the contracts, including consideration of whether each individual litigation contract is likely to result in a successful outcome, the cost and timing to completion and the ability of the defendant to pay the settlement or award. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves value in use calculations, which incorporate a number of key estimates and assumptions (refer note 12).
Recovery of deferred tax assets
Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses.
Note 4. Restatement of comparatives
Change in accounting policy
The Group's litigation contracts principally generate revenue on the successful management and financing of litigation projects. The Group assists clients in determining the appropriate specialist team to pursue the litigation claim for clients and works with that team to ensure that the case is being appropriately progressed. The selection of litigation claims to manage and fund is critical to the Group's success. The types of litigation projects funded by the Group are insolvency claims, commercial claims and class actions. However contract terms for each type of litigation project do not vary materially nor does it change the service provided or the price.
The Group only receives payment upon successful completion of a litigation project and when the litigation project is finalised and payment of the claim by the defendant has been paid to the client. On average litigation projects take a period of 25 months from inception to settlement, although this varies depending upon the specific litigation project.
Revenue, which includes amounts in excess of costs incurred and the reimbursement for all invested capital, is only recognised as revenue on the successful completion of the litigation project, which is generally once a judgement has been awarded or on an agreed settlement between the parties to the litigation, and therefore when the outcome is considered highly probable. Previously revenue was recognised on the same basis under AASB 138 Intangible Assets and therefore this has not changed upon adoption of AASB 15, however revenue was previously recognised net of costs incurred whereas it is now recognised on a gross basis in the primary statements.
Costs are incurred and the services are rendered by the Group during the management and progression of the project, however the client only receives a benefit from the services upon the successful completion of the litigation project on the basis that another litigation funder would need to substantially re-perform the work completed to date by the Group.
Previously, under AASB 138 Intangible Assets, costs were capitalised as incurred as an intangible asset. Costs includes only external costs of funding the litigation, such as solicitors' fees, counsels' fees and experts' fees. Under AASB 15 these costs are recognised as a contract costs. When a judgement has been awarded or an agreed settlement between the parties to the litigation, the total consideration is recognised and the contract costs are amortised as litigation service expenses.
The tables below highlight the impact of AASB 15 on the Group's statement of profit or loss and other comprehensive income and statement of financial position for the comparative period:
Statement of profit or loss and other comprehensive income
Performance fees revenue for the year ended 30 June 2018 amounting to $513,000 was unchanged on adoption of AASB 15.
Statement of financial position at the end of the earliest comparative period
Comparative year statement of cash flows
Comparatives in the statement of profit or loss and other comprehensive income, and the statement of financial position have been realigned to current year presentation. There has been no effect on the net assets or profit for the year.
Note 5. Revenue from contracts with customers
Disaggregation of revenue
The disaggregation of revenue from contracts with customers is as follows:
Note 6. Operating segments
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.
During the year ended 30 June 2019 there were 3 major external customers (2018: 3 customers, unrelated to those in 2019) where revenue exceeded 10% of the consolidated revenue. Revenue from each customer for the year ended 30 June 2019 amounted to $14,440,000, $9,713,000, and $7,183,000 (2018: $13,003,000, $8,298,000, $7,127,000.
Note 7. Other income
Note 8. Expenses
Note 9. Income tax
Statutory tax rate of 27.5% is applicable to Australian entities with aggregated turnover below $50 million for the year ended 30 June 2019. 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% used in the previous year.
Note 10. Current assets - cash and cash equivalents
Note 11. Current assets - trade and other receivables
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 (2018: $nil) in profit or loss in respect of the expected credit losses for the year ended 30 June 2019.
The ageing of the receivables and allowance for expected credit losses provided for above are as follows:
Note 12. Contract costs - litigation contracts
1Contract costs amortised upon the successful completion of the litigation contract
2Due diligence costs written off upon determining that the litigation contract would not be pursued further
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% (2018: between 13% and 15%).
Note 13. Current liabilities - trade and other payables
Refer to note 19 for further information on financial instruments.
Note 14. Current liabilities - employee benefits
Note 15. Equity - issued capital
Movements in ordinary share capital
Movements in ordinary shares issued under loan share plan:
Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital.
On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.
Ordinary shares - under loan share plan ('LSP')
The Company has an equity scheme pursuant to which certain employees may access a LSP. The acquisition of shares under this LSP is fully funded by the Company through the granting of a limited recourse loan. The shares under LSP are restricted until the loan is repaid. These shares are recorded as treasury shares separate to the issued capital. The underlying options within the LSP have been accounted for as a share-based payment. Refer to note 30 for further details. When the loans are settled the treasury shares are reclassified as fully paid ordinary shares and the equity will increase by the amount of the loan repaid.
Ordinary shares - partly paid
As at 30 June 2019, there are currently 2,866,050 partly paid shares issued at an issue price of $0.17 per share. No amount has been paid up and the shares will become fully paid upon payment to the Company of $0.17 per share. As per the terms of issue, the partly paid shares have no maturity date and the amount is payable at the option of the holder.
Partly paid shares entitle the holder to participate in dividends and the proceeds of the Company in proportion to the number of and amounts paid on the shares held. The partly paid shares do not carry the right to participate in new issues of securities. Partly paid shareholders are entitled to receive notice of any meetings of shareholders. The partly paid shareholders are entitled to vote in the same proportion as the amounts paid on the partly paid shares bears to the total amount paid and payable.
Capital risk management
The Group's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital.
Capital is regarded as total equity as recognised in the statement of financial position.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The capital risk management policy remains unchanged from the 30 June 2018 Annual Report.
Note 16. Equity - Share-based payments reserve
Share-based payments reserve
The reserve is used to recognise the value of equity benefits provided to employees and Directors as part of their remuneration, and other parties as part of their compensation for services.
Movements in reserves
Movements in each class of reserve during the current and previous financial year are set out below:
Note 17. Equity - retained earnings
Note 18. Equity - dividends
Dividends paid during the financial year were as follows:
On 10 September 2019, the Directors declared a fully franked final dividend for the year ended 30 June 2019 of 0.828 cents per ordinary shares, to be paid on 11 December 2019 to eligible shareholders on the register as at 14 November 2019. This equates to a total estimated distribution of $900,000, based on the number of ordinary shares on issue as at 30 June 2019. The financial effect of dividends declared after the reporting date are not reflected in the 30 June 2019 financial statements and will be recognised in subsequent financial reports.
The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for:
Note 19. Financial instruments
Financial risk management objectives
The Group's activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ageing analysis for credit risk.
Risk management is carried out by senior finance executives ('finance') under policies approved by the Board of Directors ('the Board'). These policies include identification and analysis of the risk exposure of the Group and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within the Group's operating units. Finance reports to the Board on a monthly basis.
Foreign currency risk
The carrying amount of the Group's foreign currency denominated financial assets and financial liabilities at the reporting date were as follows:
The Group had net assets denominated in foreign currencies of $28,715,000 (assets of $30,686,000 less liabilities of $1,971,000) as at 30 June 2019. Based on this exposure, had the Australian dollars weakened by 10%/strengthened by 10% against these foreign currencies with all other variables held constant, the Group's profit before tax for the year would have been $2,872,000 higher/$2,872,000 lower. The percentage change is the expected overall volatility of the significant currencies, which is based on management's assessment of reasonable possible fluctuations taking into consideration movements over the last 12 months. The actual foreign exchange loss for the year ended 30 June 2019 was $100,000 (2018: loss of $8,000).
The Group was not exposed to any significant foreign currency risk in 2018.
The Group is not exposed to any significant price risk.
Interest rate risk
The Group's main interest rate risk arises from interest on cash at bank.
An official increase/decrease in interest rates of 50 (2018: 50) basis points would have an favourable/adverse effect on profit before tax of $249,000 (2018: $69,000) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysts forecasts.
Credit risk refers to the risk that on becoming contractually entitled to a settlement or award a defendant will default on its contractual obligation to pay resulting in financial loss to the Group. The Group assesses the defendants in the matters funded by the Group prior to entering into any agreement to provide funding and continues this assessment during the course of funding. Whenever possible the Group ensures that security for settlements sums is provided, or the settlements funds are placed into solicitors' trust accounts. However, the Group's continual monitoring of the defendants' financial capacity mitigates this risk.
The Group's cash and cash equivalents are held in financial institutions with a AA- credit rating and are subject to the prudential regulation of the Reserve Bank of Australia.
The Group applies the simplified approach to recognise impairment on settlement and receivable balances based on the lifetime expected credit loss at each reporting date. The Group reviews the lifetime expected credit loss rate based on historical collection performance, the specific provisions of any settlement agreement, assessments of recoverability during the due diligence process and a forward-looking assessment of macro-economic factors however note that the Group's operations are generally uncorrelated to market conditions and therefore has little to no impact on the recoverability of the Group's financial assets.
Financial assets are generally considered to be in default when amounts are more than 90 days past due or if sufficient indicators exist that the debtor is unlikely to pay. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year.
Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) to be able to pay debts as and when they become due and payable.
The Group manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities.
Remaining contractual maturities
The following tables detail the Group's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position.
The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above.
Note 20. Fair value measurement
There were no assets and liabilities measured at fair value as at 30 June 2019 and 30 June 2018. The carrying amounts of trade and other receivables and trade and other payables approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities.
Note 21. Key management personnel disclosures
The aggregate compensation made to Directors and other members of key management personnel of the Group is set out below:
Details of the remuneration of key management personnel of the Group are set out in the following tables.
Directors' share options
The details of options over ordinary shares in the Company held during the financial year by each Director is set out below:
¹Outstanding share options as disclosed in Note 30.
1. As at date of appointment on 19 December 2018.
No changes took place in the interest of the directors between 30 June 2019 and 10 September 2019.
Note 22. Remuneration of auditors
During the financial year the following fees were paid or payable for services provided by BDO Audit (SA) Pty Ltd, the auditor of the Company, and its network firms:
Note 23. Contingent liabilities
The majority of the Group's funding agreements contain a contractual indemnity from the Group to the funded party that the Group will pay adverse costs awarded to the successful party in respect of costs incurred during the period of funding, should the client's litigation be unsuccessful. The Group's position is that for the majority of litigation projects which are subject to funding, the Group enters insurance arrangements which lessen or eliminate the impact of such awards and therefore any adverse costs order exposure.
Note 24. Commitments
Operating lease commitments includes contracted amounts for office premises under non-cancellable operating leases expiring within 1 to 5 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated.
Note 25. Related party transactions
Litigation Capital Management Limited is the parent entity.
Interests in subsidiaries are set out in note 27.
Key management personnel
Disclosures relating to key management personnel are set out in note 21.
Transactions with related parties
The following transactions occurred with related parties:
Patrick Moloney is a director and shareholder of 101 Capital Pty Ltd. 101 Capital Pty Ltd is the Trustee of LCM Litigation Investment Fund and engages LCM Litigation Management Pty Ltd to manage this entity on its behalf. There were no payments made to 101 Capital Pty Ltd during the year ended 30 June 2019 and 30 June 2018.
Transactions with non-controlling interests
Receivable from and payable to related parties
There were no trade receivables from or trade payables to related parties at the current and previous reporting date.
Loans to/from related parties
There were no loans to or from related parties at the current and previous reporting date.
Terms and conditions
All transactions were made on normal commercial terms and conditions and at market rates.
Note 26. Parent entity information
Set out below is the supplementary information about the parent entity.
Statement of profit or loss and other comprehensive income
Statement of financial position
Guarantees entered into by the parent entity in relation to the debts of its subsidiaries
The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2019 and 30 June 2018.
The parent entity had no contingent liabilities as at 30 June 2019 and 30 June 2018.
Capital commitments - Property, plant and equipment
The parent entity had no capital commitments for property, plant and equipment as at 30 June 2019 and 30 June 2018.
Significant accounting policies
The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2, except for the following:
Note 27. Interests in subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following wholly-owned subsidiaries in accordance with the accounting policy described in note 2:
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary with non-controlling interests in accordance with the accounting policy described in note 2:
Summarised financial information
Summarised financial information of the subsidiary with non-controlling interests that are material to the Group are set out below:
Note 28. Earnings per share
Dilutive potential shares which are contingently issuable are only included in the calculation of diluted earnings per share where the conditions are met
Note 29. Cash flow information
Reconciliation of profit after income tax to net cash from/(used in) operating activities
Changes in liabilities arising from financing activities
* Other non-cash items represents the proceeds from the settlement of Litigation Projects of $719,000 (2018: $2,042,000) were not received by the Group as they were paid directly from the funded party's solicitors trust account to the Group's trade creditors to extinguish outstanding litigation funding costs payable. As the Group did not receive these proceeds, they have not been reflected in the proceeds or payments of litigation funding within the statement of cash flows.
Note 30. Share-based payments
The share-based payment expense for the year was $320,000 (2018: $127,000).
Employee share option scheme
Set out below are summaries of options granted under the employee share option plan:
Set out below are the options exercisable at the end of the financial year:
The weighted average share price during the financial year was $1.665 (2018: $0.594).
The weighted average remaining contractual life of options outstanding at 30 June 2019 was 2.34 years (2018: 1.36 years).
Loan Funded Share Plans ('LSP')
Set out below are summaries of shares/options granted under the LSP:
There were 102,993 options vested and exercisable as at 30 June 2019 (2018: Nil). These exercisable options relate to those granted on 31 August 2018.
The weighted average remaining contractual life of options under LSP outstanding at the end of the financial year was 1.56 years (2018: 1.93 years).
For the options under LSP granted during the current financial year, the valuation model inputs used in the Black-Scholes or Monte Carlo option pricing model to determine the fair value at the grant date, are as follows:
¹Various vesting dates 1-3 years from grant date
2Share price at grant date £0.745 presented at the equivalent AUD
3Exercise price £0.52 presented at the equivalent AUD
The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome.
Options granted on 6 March 2019 are denominated in Pound Sterling. Information in the report has been converted into Australian dollar functional and presentation currency.
Note 31. Events after the reporting period
Apart from the dividend declared as disclosed in note 18, no other matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years.
In the Directors' opinion:
Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001.
On behalf of the Directors
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