Litigation Cap. Regulatory News (LIT)

19 September 2023

Litigation Capital Management Limited

("LCM" or the "Company")

Full year audited results for the year ended 30 June 2023

Highlights

· LCM delivered record results during the year with realised income of A$181m with A$84m directly attributable to LCM

· Transition to Fair Value accounting, providing greater transparency with respect to the underlying value of our portfolio of investments now valued at A$428m1

· Material resolutions achieved in Fund I delivered strong performance metrics and increased the cash balance of LCM to A$83m as at 30 June 2023

· Fund II had a final close of US$291m with capital commitment at A$123m as at 30 June 2023 and A$148m as at 31 August 2023

· Total Funds under Management stand at A$0.66bn

· Assets under Management (AuM) were A$484m at 30 June 2023 with further commitments in Fund II bringing our AuM to A$553m at 31 August 2023

· Overall Capital commitments were up significantly on the same prior year period at A$176m

· The Company ended the period with A$104.5m of gross cash of which A$83m was attributable to LCM compared with FY22 A$50m of gross cash of which A$29m was attributable to LCM

· LCM declares a dividend of 2.25p per share for the full year ended 30 June 2023

· PFAS settlement approved by the Court post period end will contribute a further c. A$10m realised income which translates to cash directly attributable to LCM into FY24

(Capital commitment means the total estimate of an investment)

1 A$428m inclusive of A$37m legacy investments held at cost

Other

· The Company also announces that it intends to commence a A$10 million share buyback programme covering an aggregate contract term of approximately twelve months. The Company will continue to assess how best to provide value to shareholders.

· Given the improved financial position of the Company's balance sheet over the past two years, LCM is exploring a sterling retail eligible bond listed on the ORB at the London Stock Exchange. The Company expects to announce a fixed income roadshow in due course. Proceeds raised from the retail bond will optimise our cost of capital and allow us to take advantage of opportunities we see in the market. 

Commenting on the results, Patrick Moloney, CEO of Litigation Capital Management, said: "Our fund management strategy is delivering third party capital for investment. Our referral network in Europe and APAC is delivering the high-quality investment opportunities that will underpin our generation of value and cash to Fund investors and LCM shareholders. As we continue to grow, increased activity levels will not need to be matched with proportionate increases in overall costs and this in turn means greater profitability and cash generation. This is a critical differentiator for LCM"

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

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

A webinar presentation for analysts will take place at 9.30am (BST). Analysts wishing to attend should contact lcm@tavistock.co.uk to register.

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

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

The Financial Report is available at:

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

Enquiries

NOTES TO EDITORS

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

LCM has an unparalleled track record driven by disciplined project selection and robust risk management. Currently headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker LIT.

www.lcmfinance.com

Chairman's Statement

The year under review was LCM's most successful 12 months since inception. This is a testament to the hard work of our management team and staff, and the foundations that have been laid by the team over the past few years.

The Financial review details an income statement prepared under the historical accounting standard and the newly adopted AASB 9 to provide readers with a bridge of financial performance through this period of transition. Realised income for the year compared to revenue as previously disclosed in the prior year was AUD$181m, A$84m of which was attributable to the shareholders of LCM (FY22 AUD$47m), an increase of 285% on a consolidated basis and 78% attributable to LCM. Adjusted operating profit of AUD$54m was in line with the prior year (FY22 adjusted operating profit AUD$54m), and basic earnings per share of 29.5 cents (FY22 32.7 cents). These record results meant that the company ended the period with AUD$104.5m of cash (A$83m attributable to LCM) compared with FY22 AUD$50.0m of which A$29m was attributable to LCM. More information on the restatement of the Group's results following the adoption of Fair Value accounting can be found in the CFO report and the notes to the financial statements.

As a result of the above performance, the Board was pleased to declare a final dividend to shareholders for the financial year ending 30 June 2023 of 2.25p per share. The dividend will be paid on 27 October 2023 to shareholders on the register on 29 September 2023 being the record date. The ordinary shares will be marked ex-dividend on 28 September 2023. As we have set out, the Board is always looking at ways to return value to shareholders and will continue to do so.

LCM's experience in the sector has enabled it to navigate the uncertain economic and political environment which has been in place since the emergence of the Covid pandemic, and which continues today due to high levels of inflation and the ongoing war in Ukraine.

As the year progressed, we began to see courts and tribunals in jurisdictions across the globe begin to tackle the case backlogs associated with Covid 19, which has seen more cases settle, a trend we hope to see continue and accelerate during the next 12 months. As ever, the timing of resolutions of disputes is out of our hands, but we will continue to provide market updates to investors in a timely manner and when it is possible to do so.

During the year LCM has seen the benefits of its move to its third-party asset management business model, with the first case investments from Fund I reaching their conclusion, leading to above average returns for the LCM balance sheet. The Board is confident that this is the right business model for the Company and will allow LCM to leverage our capital extremely effectively and build scale.

In March 2023, Fund II was closed following US$291m of committed funds and we have already begun to deploy capital within this structure. We expect this to be a strong driver of growth in the business in the years to come, and continue to receive interest from investors looking to commit further.

As the numbers bear out, the performance this year has been extremely strong, which as ever has been led by strong case selection and the experience within the Company of originating high quality deals. We have bolstered our origination business with key hires in APAC and EMEA, highlighting the increasingly global nature of our business.

This was CEO Patrick Moloney's first full year based in the UK, a move driven by our belief in the opportunity for growth in the UK and Europe. Coupled with the building out of our London team, we continue to believe that the litigation financing market in EMEA is set for expansion. This is notwithstanding the recent UK Supreme Court decision which will have very limited or no impact on LCM's portfolios of dispute investments in terms of future value. Additionally, our presence in Singapore has continued to grow, and we are seeing more and more opportunities in the jurisdiction. We see these locations as natural complements to each other, diversifying and de-risking our investment portfolio.

As a business LCM has always been conservative in the way it apportions value to its portfolio of investments. We will maintain this conservative approach. However, the Group has reassessed its classification of the funding of its litigation funding agreements. This involved a detailed review which resulted in a significant change to the way in which we report results this year. The change provides more relevant information on the value of the litigation funding agreements and reflects the evolution of the primary business model and changing geographic split of business. This is a significant change which follows a third-party review and lengthy and thorough board discussions. We are confident this is the right move for the business as it continues its shift towards a third-party asset management business model and will enable investors more easily to compare us with our peers. More information about the change to Fair Value Accounting can be found in the CEO and CFO reports.

In conclusion, this has been an excellent period for LCM, and can act as a platform from which to continue to expand our asset management business and develop scale. The litigation funding market continues to grow, and we expect the quality of opportunities presented us to expand in line with this.

Jonathan Moulds

Non-Executive Chairman

CEO Review

Introduction

The year to 30 June 2023 was transformational for LCM as we started to realise the benefits of the asset management business model and the successful execution of our strategy to grow a third-party fund management business. The resolution of a number of Fund I investments has translated into enhanced organic cash generation, allowing us to scale the business through further investment into Fund II.

We welcomed an expanded team in London by recruiting additional, highly experienced litigation finance professionals and have selectively enhanced our already strong teams in Australia and in Singapore, which is increasingly a strong hub of opportunities for the Company. In London and the APAC region our enhanced teams will help us to continue to take full advantage of the current favourable market conditions.

As noted in the Chairman's Statement and as set out in more detail in the Financial Review, the Board evaluated and considered the appropriate accounting framework with respect to our portfolio of investments given the business' evolution over recent years. The outcome being the transition to fair value accounting for litigation funding assets, which we believe will provide relevant information on the value of the underlying portfolio and better reflects our business model.

Operational Review

During the year LCM delivered its strongest set of results to date, both in terms of financial performance and commitments, supported by a strong cash position. As a result, we are pleased to be able to recommend a 2.25p dividend per ordinary share for shareholders.

We continue to operate against a backdrop of ongoing disruption caused by high inflation, rising interest rates, geo-political tension and wider economic uncertainty. Our strong cash position will enable us to meet the ever growing demand for funding, arising from the increased level of disputes globally as a consequence of these external factors. In the current environment, this means increased demand for capital allocation to fund disputes. This market demand, together with our ability to deliver superior uncorrelated returns, places us well for future growth.

We continue to grow and scale our fund management business which aligns the interests of LCM with our third-party investors through our co-investment model. Each matter selected for investment will see us invest our own capital alongside that of the managed funds - normally on a 25:75 basis. Supported by our track record and underwriting capabilities, this model allows Fund investors to benefit from our ability to deliver high returns while LCM shareholders benefit from performance fees and capital leverage.

Investment Portfolios and Performance

In terms of investment performance metrics, LCM continues to deliver outstanding returns. With respect to every investment completed during the past 12 years, inclusive of losses, LCM has generated a return on invested capital (ROIC) of 1.78x. On a three year rolling basis, LCM's investment performance, again including every completed investment inclusive of losses, has generated an IRR of 76% and a ROIC of 2.09x. These performance metrics underpin the high calibre of our investment managers and their underwriting capabilities with respect to investment selection. LCM has consistently provided amongst the highest returns in our industry over a long period of time. 

As previously announced, LCM achieved a final close on its second fund (Global Alternative Returns Fund II) ("Fund II") in March 2023. Progress in terms of commitments entered into for Fund II has been strong and we currently enjoy an advanced pipeline of significant disputes, which we expect to sign into investments in the near future. Given current demand and levels of enquiry, we expect we will reach full commitment within the next 12 months. As with our historical approach, as evidenced by our investment performance metrics, we continue to build our portfolios of dispute investments in a manner that maintains diversity across claim type, industry sector and jurisdiction whilst avoiding concentration risk. We are at all times focused upon the quality of the investments that we make, rather than the quantity. 

People

Since relocating to the London market in late 2021, I have focused on both building out the skillset and experience of our London team, as well as expanding our origination function. LCM now has the benefit of six highly experienced investment managers in London, the majority of whom have a deep understanding of the litigation funding industry both in the UK and Europe. LCM now boasts the most experienced London team of investment managers which positions us exceptionally well given the level of enquiry for our capital being received from the London market.

In terms of the Australian market, we will always consider adding to our team on an opportunistic basis, however we are satisfied that the current team is capable of meeting the demands to perform in that market. We also take a very practical approach towards our level of operating expenses in each region, ensuring that in markets where we are not seeing an expansion in the level of enquiry, that we meet that demand with an appropriate level of personnel and operating expenses generally. We constantly monitor market conditions and are in a position to react swiftly to any changes.

In terms of the Asian markets, we are pleased to report an increase in activity. Whilst LCM has invested in the Asian market for many years, we first established a permanent presence with our Singapore office in 2018. In accordance with LCM's disciplined approach, we commenced that office with a single experienced investment manager. Since that time, we have expanded those operations, such that we now have four investment managers operating in Singapore. Most recently, we have employed an investment manager with a focus on insolvency disputes with experience in the UK, Cayman Islands and Asia. We expect to see increased activity in the insolvency and restructuring space as markets continue in a higher interest rate environment and with continuing economic uncertainty. 

Market Environment

Market conditions across the various jurisdictions in which we operate continue to develop favourably. The economies in which we operate are seeing central banks continuing with their policy of increasing official rates in an effort to bring inflation under control. We continue to see disruption across many industries, some resulting from Covid hangover, some from geopolitical instability and some from economic issues. What is clear right across the markets that we service is that the economic conditions and the general uncertainty is increasing the number of quality investment opportunities we see. At one end of the spectrum, we see very significant increases in the number of liquidations, both voluntary and court appointed, whereby an insolvency practitioner is appointed to an insolvent corporation. That dynamic over time will see an increase in opportunities from that sector. That is of particular interest to LCM given its extensive experience in insolvency related disputes and our deep relationships with insolvency practitioners. At the other end of the market we service, we have large sophisticated and well capitalised corporates. Those within the corporates who manage finance, and in particular disputes budgets, as well as risk, have a more sympathetic disposition toward exploring litigation finance as a tool to manage capital and risk in current markets.

Having now worked directly in the UK market for almost two years, I can make some informed observation regarding opportunity. I came to the London market with 18 years' experience in the litigation finance industry, predominantly in the Australian and Asian markets. The litigation finance market has developed quite differently in the Australian market than elsewhere in the world. That experience gives me particular insight into parts of the market which remain either undeveloped or underserviced in the United Kingdom. Having now had the opportunity to obtain a direct insight from referral sources, in particular the dominant dispute lawyers, I can say that there remains significant opportunity for LCM in this region. LCM is now very well placed to address the UK market with a highly experienced London team and an exceptional working culture.

I have also observed, particularly in the past 12 months, a contraction in available capital within the litigation financers operating in this region. There is certainly less competition with respect to applications than there was two years ago when I arrived. This leverages this great opportunity for us.

In July of this year and post year end, the Supreme Court of the United Kingdom delivered a judgment which resulted in certain litigation funding arrangements being subject to the Damages-Based Agreement Regulations 2013 in the UK. The Damages-Based Agreement Regulations 2013 prescribe certain requirements for fee arrangements between solicitors and their client whereby their remuneration for the provision of legal services is determined as a percentage of the financial benefit comprising the outcome of the dispute. Whilst most commentators accept that the Regulations were passed to regulate the relationship between a solicitor and client, the Supreme Court decision has made those Regulations relevant to litigation funding arrangements whereby the funder's returns are calculated by reference to a percentage of damages. That decision has affected the market in the UK in different ways. Some litigation financers have been affected more than others. LCM is fortunate to be affected only in a very minor way. First, there are a very small number of litigation funding arrangements in the UK, which will require small amendments. Overwhelmingly, our fee structure is calculated by reference to a multiple of invested capital rising over time. With respect to the small number of funding arrangements which are affected by the decision, a minor component to the funding arrangement involves a percentage. LCM is in the process of renegotiating that small number of arrangements and we are very confident that the decision will not impact LCM's existing portfolio, or its business moving forward. Secondly, and importantly, LCM does not have any funding arrangement which has been concluded in the United Kingdom involving a percentage which might be the subject of an argument that amounts ought to be repaid. Therefore, overall, LCM's existing and future business will be almost completely unaffected by the decision.

Accounting Standards

As previously announced, we conducted a review of our accounting approach following the evolution of our business over recent years. This led to a transition in the way we value our portfolio of investments to Fair Value accounting.

We managed this task with discipline and rigour. We believe the benefit of this transition will facilitate a better understanding of the underlying value in our portfolio of investments. As funded matters progress over time, value is attributed to each of the investments based upon that progress and certain observable milestones, providing a greater degree of transparency.

In developing a valuation methodology, LCM can draw upon not only a large pool of data but its many years of experience in the litigation finance industry. LCM's business has been investing in disputes for approximately 25 years. Very few of our peers can point to experience of that nature or duration. The model, which has been developed to value Litigation Funding Assets on an individual investment level, considers, among other things, discounting future investment cash outflows and realisations to reflect a cost of capital, time and risk. LCM worked with external advisers at EY in developing the model.

Strategy

LCM's future strategy is to continue building the scale of its business. That is achieved by three important building blocks. Over the years I have made reference to the three building blocks necessary to establish a successful litigation finance business, which also provide the foundation for building scale. The first is maintaining the strict discipline of our due diligence and underwriting processes. LCM has an exceptionally strong track record when it comes to investment performance. It is important that we maintain the discipline of our due diligence processes as we build scale.

Secondly, there is the need for adequate capital to fund growth, that is capital to invest. Fundamental to our success, is our ability to construct our portfolios of disputes with diversity across industry sector, dispute type and jurisdiction, whilst avoiding concentration risk. To a certain extent, that requires a degree of scale. LCM continually considers the diversity of its capital structure. In 2020, we commenced our funds management business, and we are now actively committing Fund II. During the next financial period, LCM will take steps towards launching Fund III and will carefully consider the appropriate size of that fund. Additionally, we will continue to review other aspects of our capital structure, such as debt, in order to optimise our cost of capital.

Finally, in order to effectively build the scale of LCM's business, we need to continually monitor and refine the way we gain access to quality investments through our origination platform. As noted above, we have already taken steps to bolster the skillset and capacity of our London team to take advantage of market opportunity. We have also expanded both our team and the particular skillsets in our Singapore office so as to accommodate increasing demand for capital and increasing applications in the area of insolvency and restructuring.

We have considered new territories and jurisdiction over a number of years. We think about expansion into new territories very carefully and with discipline. With signs of a contracting market in the litigation finance industry, we are seeing an increased volume of applications coming from the US market as well as Canada. We are also receiving inward enquiries to represent LCM's interest in those jurisdictions by experienced teams. This is an ongoing process and in circumstances where we are sufficiently comfortable about having a presence in jurisdictions and territories in which we currently do not operate, we will take advantage of those opportunities.

Outlook

As set out above and reported to the market together with our interim results, the prevailing market conditions in all of the territories and jurisdictions in which we operate, are conducive to growing our business and are driving demand for LCM's capital. We expect those market conditions to continue into the medium term. We also expect that there will be a significant increase in the number of appointments of external administrators and liquidators in insolvency, which will translate into increased applications in the future. That is of particular benefit to LCM given its long history funding disputes arising from insolvency and restructuring. We are also able to draw upon the experience gained following the global financial crisis, which generated many disputes seeking a source of finance.

Secondly, we are seeing a tightening and contraction of the competitive landscape in the litigation finance industry. We see this in several markets, including the United Kingdom, the US and Canada. Having built LCM's expertise and capacity in the London market, as well as having access to capital through our funds management business, LCM is well placed to capitalise on those industry conditions.

LCM's Fund I has enjoyed a number of resolutions in the preceding financial period. The performance of those investments has been very strong. In addition, we are seeing more opportunities in the market and expect to materially achieve commitments in LCM Fund II in the financial period ahead. Both of those factors will position LCM well for launching its third Fund.

Our fund management strategy is delivering third party capital for investment. Our referral network in Europe and APAC is delivering the high-quality investment opportunities that will underpin our generation of value and cash to Fund investors and LCM shareholders. What this means is that, as we continue to grow, increased activity levels will not need to be matched with proportionate increases in overall costs and this in turn means greater profitability and cash generation.

Patrick Moloney

Chief Executive Officer

Financial Review

We have delivered our strongest results to date, demonstrating the capability our asset management model has in delivering accelerated organic growth.

We have delivered meaningful value through our business model which will continue to create increased long-term shareholder value.

This year was a defining year for LCM as we delivered our strongest results to date. The asset management business has demonstrated our ability to deliver strong returns not only for our third-party investors but for our underlying equity shareholders. Leveraging third party capital provides us with a platform to scale and grow organically, through the use of alternative sources of capital. 

LCM's brand continues to strengthen, as we demonstrate, year-on-year, our ability to deliver strong and meaningful accretive returns, with metrics that outperform industry peers. Our unparalleled track record and investment selection capabilities are underpinned by the strength of our Investment Managers and Executive team. Our ability to scale through our asset management business, coupled with our proven track record, have delivered a record year in terms of profits and commitments which places us well for accelerated growth.

During the year ended 30 June 2023, we generated record income from the realisation of investments of A$181 million on a consolidated basis and A$84 million on an LCM stand-alone basis. Commitments increased to A$176m.

We successfully completed a third and final close of Fund II at US$291 million in a difficult fundraising environment with continued interest rate rises and started to deliver meaningful returns from investments in Fund I which places us in a strong position for subsequent fund raises. We maintained our strong financial performance with a 12 year ROIC of 1.78x. We are pleased with the momentum the portfolio has made during the year and expect further legacy matters to crystalise in the coming year, providing us with meaningful organic capital for further investment.

Transition to Fair Value accounting

The evolution of the business over recent years has necessitated the need for our Board to review the Company's accounting policies to ensure they provide an appropriate representation of the underlying business model. In careful consultation with our advisors, a decision was made to transition to Fair Value accounting to provide investors with a greater level of information that better reflects both the current business model and the intrinsic value of our portfolio of investments.

In developing our framework we also looked to industry peers for alignment in methodology, the benefit being that adopting a similar methodology provides a level of comparability.

The precise timing and proceeds of the outcomes are difficult to predict accurately and therefore the actual outcome is inherently uncertain and likely to differ from the fair value assessment. The Group has developed a framework that addresses the litigation or arbitral process across the various jurisdictions, taking into consideration the varying degrees of risk associated with each stage and jurisdiction. A Discounted Cash Flow approach is then applied to each underlying investment on an individual basis.

LCM standalone results, comparatives and restatement

Following the evolution of our business model and the launch of the Funds Management business in March 2020, which led to a shift towards an Asset Management model, this necessitated a transition to Fair Value accounting. Consequently, the consolidated financial statements for the Statement of Financial Position for the period ended 30 June 2021 as well as the Consolidated Statement of Profit and Loss and Other Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity and the Consolidated statement of Cash flows together with the accompanying notes for the 12 month period ended 30 June 2022 have been restated to reflect the impact of the adoption of AASB 9 in those periods.

The performance of the business presented below has been presented in accordance with the Australian Accounting Standards (AASB) and the International Financial Reporting Standards (IFRS).

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

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

The tables following provide a full reconciliation of the consolidated statement of comprehensive income and consolidated statement of financial position both under our historical accounting policies and the newly adopted fair value accounting, to provide investors with meaningful financials and to bridge the transition from one accounting standard to the next. Note that these are non-AASB measures and may not be directly comparable with adjusted measures of other companies. They are not a substitute for or replacement of AASB measures.

Historical accounting under IFRS 15

* Third party interests.

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

Fair Value accounting under IFRS 9

A financial liability at fair value through the income statement is recognised in the parent entity in relation to the transactions entered into with certain Fund structures to support the financing of LFAs. These arrangements fail the derecognition principles in IFRS 9 and represents the net share of the overall LFA at fair value apportioned to the Funds.

The performance of the business should be assessed together with our key performance metrics such as growth in commitments and assets under management, to provide a more holistic representation of the performance of the business during the year and a more accurate indication of the scale of growth in our underlying portfolio of investments.

The business of litigation finance involves a series of investments into disputes which historically take, on average, approximately 29 months to complete. Those investments may resolve before or after that monthly average and our expectation is that time to resolution will increase to between 36 and 42 months in the future. While a review of the business model resulted in a transition to fair value accounting which better reflects the underlying value of the portfolio of investments as they progress, cash flow fluctuations from one year to the next will continue as a consequence of the actual timing of resolutions.

Adjusted profit before tax inclusive of third party interests was A$53.9m million in line with the prior period under our restated financials.

A reconciliation of adjusted profit is provided below:

Historical accounting under IFRS 15

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

Fair Value accounting under IFRS 9

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

Cash

LCM only cash on balance sheet as at 30 June 2023 was $83.0m million and long-term borrowings was $69.0m, compared with $29.3m and $54.9m respectively for the same period in 2022.

LCM cash generated from the resolution of matters during the period was $96.8 million, as compared to $26.6 million in FY22, reflecting the benefits of leveraging third-party capital through our asset management business model to generate organic cash flows for further investment. Payments related to capital invested was $36.3 million, compared to the same prior period in FY22 of $29.8 million. The following waterfall is exclusive of third party fund interests.

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

· Inclusive of third party funds, Realisations from the resolution of investments increased to A$180.8m compared to A$47.4m in the prior period, the resolution of investments directly attributable to LCM increased by 78% to A$84.2 million from A$47.2 million in the prior year;

· Investment Commitment was A$176 million inclusive of third party funds, increasing from A$104 million in FY22;

· 12 year cumulative portfolio Return on Invested Capital (ROIC) was 1.78x;

· LCM operating expenses (exclusive of third-party funds of A$13.9m increasing from A$10.9m in the prior period;

· Applications received were 434 from 442 in FY22 a decrease of 2%;

· Statutory profit before tax and adjusted operating profit on an LCM only basis in line with the prior period under the restated financials of $A42.7m and A$53.9m respectively.

Portfolio update

Capital invested during FY23 was A$95m inclusive of A$58m third party fund investments, compared to $68 million in FY22, inclusive of $38.5 million of third party fund investment on a cash basis.

LCM's ability to originate deals and deploy capital is a measure of its growth and future performance as the value of our future profits are derived from the capital we deploy in our investments at the time a resolution is achieved. 

LCM's portfolio of investments comprises 52 investments as at 30 June 2023 with 20 direct balance sheet investments, 20 Fund I co-investments and 12 Fund II investments. Total LCM commitments at the period end were A$183m comprising A$73.7m 100% direct investments, A$59.5 million Fund I commitments and A$49.8m Fund II commitments.

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

Financial performance

During the year we had a number of significant resolutions from our Fund which translated into meaningful cash returns for LCM and fund investors. 

The Group's overall realisations from investments was $180.8m, A$84.2m of which is directly attributable to LCM. This compares with A$47.4m and A$47.2 million respectively in the prior period.

Adjusted operating profit directly attributable to LCM was A$53.9 million, in line with the prior period and statutory profit before tax was A$42.7 million compared with A$45.8 million in the prior period.

The Group's portfolio of Investments at the period end had a value of A$428.7m, A$203m exclusive of third party funds but inclusive of A$37m of legacy investments held as contract assets. Gains during the period was A$67.7mm of which A$16.2m was related to unrealised gains attributable to LCM. 

Operating expenses directly attributable to LCM of A$13.9 million for the period ended 30 June 2023 increased by 27% compared to A$10.9 million in FY22. We continue to expect to see an increase in operating costs as we expand, however these are expected to remain appropriate relative to the size of the portfolio under management.

Non-operating expenses of $3 million include; A$1.9 million of costs related to fund administration, $0.8 million of share-based payment expenses and $0.3m related to other non-recurring expenses (see note 7). (FY22: A$3.5m)

We have delivered a record set of results.

Finance costs

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

Dividend

As previously announced and following the financial performance of the business in the period ended 30 June 2023, the Board has decided to pay a dividend of 2.25p per ordinary share to Shareholders. The Board remains committed to returning value to shareholders while also maintaining a disciplined approach to preserving the right levels of cash to meet any increase in demand for investments in order to accelerate growth in our portfolio. 

Mary Gangemi

Chief Financial Officer

Consolidated statement of profit or loss and other comprehensive income

For the period ended 30 June 2023

Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3.

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

Consolidated statement of financial position

As at 30 June 2023

Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3.

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

Consolidated statements of changes in equity

For the period ended 30 June 2023

Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3.

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

Consolidated statements of cash flows

For the period ended 30 June 2023

Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3.

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

Notes to the financial statements

1. General information

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

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

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

Level 12, The Chifley Tower

2 Chifley Square

Sydney NSW 2000

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

The financial statements were authorised for issue, in accordance with a resolution of Directors, on 19 September 2023. The Directors have the power to amend and reissue the financial statements.

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.

Where necessary, comparative amounts have been reclassified and repositioned for consistency with current year accounting policy and disclosures. Further details on the nature and reason for amounts that have been reclassified and repositioned for consistency with current year accounting policy and disclosures, where considered material, are referred to separately in the financial statements or notes thereto.

New or amended Accounting Standards and Interpretations adopted

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

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

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

Basis of preparation

These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). The financial report has been prepared on a historical cost basis, except for the financial assets and liabilities that have been measured at fair value.

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 4.

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 24.

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 2023 and the results of all subsidiaries for the year then ended. Litigation Capital Management Limited and its subsidiaries together are referred to in these financial statements as the 'Group'.

The Group includes fund investment vehicles over which the Group has the right to direct the relevant activities of the fund under contractual arrangements and has exposure to variable returns from the fund investment vehicles. See Note 26.

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

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

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

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

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

Operating segments

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

Foreign currency translation

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

Foreign currency transactions

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

Foreign operations

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

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

Fair value measurement

The Group measures its financial instruments such as litigation funding agreements and financial liabilities related to third-party interests at fair value at each balance sheet date.

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.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

• Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities

• Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable

• Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

The Group's Executive Leadership Committee determines the policies and procedures for fair value measurement, including the litigation funding agreements. The Committee is comprised of the Chief Executive Officer, Chief Financial Officer and Head of Investments or equivalent.

The level of involvement of external valuers or specialist valuation experts is determined annually by the Committee after discussion with and approval by the Company's Audit Committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. 

At each reporting date, the Committee analyses the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Group's accounting policies. For this analysis, the Committee verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents. 

The Committee also compares the change in the fair value of each asset and liability with any relevant external sources to determine whether the change is reasonable.

Fair-value related disclosures for financial instruments and non-financial assets that are measured at fair value or where fair values are disclosed, are summarised in the following notes:

• Disclosures for valuation methods, significant estimates and assumptions Note 20

• Quantitative disclosures of fair value measurement hierarchy Note 20

• Financial instruments Note 19

Revenue recognition

The Group recognises revenue as follows:

Revenue from contracts with customers

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

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

Litigation service revenue

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

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

Revenue, which includes amounts in excess of costs incurred and the reimbursement for all invested capital, is not recognised as revenue until the successful completion of the litigation project ie, complete satisfaction of the performance obligation, which is generally at the point in time when a judgment 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 include only external costs of funding the litigation, such as solicitors' fees, counsels' fees and experts' fees.

The terms and duration of each settlement or judgment 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.

Interest

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

Income tax

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

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

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

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

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

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

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

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

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

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

Cash and cash equivalents

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

Trade and other receivables

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

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

Due from resolution of financial assets

Amounts due from the settlement of financial assets relate to the realisation of litigation funding assets that have been successfully concluded and where there is no longer any litigation risk remaining and represent the expected cash flow to be received by the Group. The settlement terms and timing of realisations vary by litigation funding asset. The majority of settlement balances are received shortly after the period end in which the litigation funding asset has concluded, and all settlement balances are generally expected to be received within 12 months after completion.

Contract costs

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

Financial assets at fair value through profit or loss

Financial assets are recognised at fair value through profit or loss and are fair valued using an income approach. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the statement of profit or loss. This category includes the Group's litigation funding assets. The litigation funding assets are primarily derecognised when the underlying litigation resolves and transfers to Due from resolution of financial assets.

Financial liabilities related to third-party interests in consolidated entities

Non-controlling interests where the Group does not own 100% of a consolidated entity are recorded as financial liabilities related to third-party interests in consolidated entities. Financial liabilities related to third-party interests in consolidated entities are initially recognised at the fair value. Gains or losses on liabilities held at fair value through profit or loss are recognised in the statement of profit or loss as 'Net gains/(losses) relating to third-party interests in financial liabilities at fair value through profit or loss'. They are subsequently measured at fair value using an income approach. Amounts included in the consolidated statement of financial position represent the net asset value of the third-parties' interests. These amounts have been elected to be measured at fair value to reduce the accounting mismatch between the related financial asset measured at fair value through profit or loss.

Financial liabilities are derecognised when the obligation to settle through cash flows has expired or been transferred.

Leases

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

Impairment of non-financial assets

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

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

Trade and other payables

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

Borrowings

Borrowings are initially recognised at fair value net of transaction costs incurred. Subsequent to initial recognition, borrowings are stated at amortised cost.

Employee benefits

Short-term employee benefits

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

Other long-term employee benefits

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

Defined contribution superannuation expense

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

Share-based payments

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

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

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

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

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

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

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

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

Issued capital

Ordinary shares are classified as equity.

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

Dividends

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

Earnings per share

Basic earnings per share

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

Diluted earnings per share 

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

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

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

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

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

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

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.

3. Restatement of comparative

The Group has reassessed its classification of the funding of its litigation funding agreements. This involved a detailed review of the terms and conditions of these contracts and a qualitative assessment of the evolution of the Group's business model. The Group carefully considered and formed their opinion for the appropriate accounting based on the composition of the portfolio of funded claims, the activities performed by the business, the transition to an asset management model, management's business judgement as to this analysis and the relevant accounting standards. The change provides more relevant information on the value of the litigation funding agreements and reflects the evolution of the primary business model and changing geographic split of business.

Historically the revenue receipted from the successful resolution of funded litigation funding agreements has been considered under AASB 15 as revenue with customers. AASB 15 was adopted for these arrangements and reflected our legacy business model, which was to provide a bundle of financial and risk management services related to the resolution of disputes. This resulted in a litigation asset, or contract asset classification for all bundle of services under AASB 15. As the Group has evolved, the supporting rationale for AASB 15 has diminished with a significant reduction in the concept of a bundle of services. There remain a small number of legacy contracts where this bundle of services remains implicit in the contract and therefore AASB 15 has been retained.

As a result of this reassessment, the majority of the Group's litigation funding assets will now be recognised under AASB 9. Under this change, litigation funding agreements and third-party interest in consolidated entities are accounted for as financial instruments under AASB 9. The following principles have been adopted where the underlying litigation funding arrangements satisfy the conditions of a financial instrument:

- due to the nature of the expected returns the financial instruments fail the solely payments of principal and interest test (the 'SPPI test') in AASB 9 and are classified at fair value through the income statement

- management have established a fair value framework to appropriately account for the underlying instruments at fair value

- further details on the fair value methodology as shown in Note 20

- any transaction costs (i.e., directly attributable due diligence and closing costs) would be expensed in the profit and loss as they are incurred

- third-party interests in consolidated entities have been fair valued using the same fair value framework for the litigation funding assets

As a result of implementing this accounting for litigation funding agreements for relevant contracts, the Group has restated the Statement of financial position as at 30 June 2021 and 30 June 2022, and the Statement of profit or loss, Statement of other comprehensive income for the year ended 30 June 2022 for comparative purposes.

The restatement of each of the affected financial statement line items for the prior periods, as follows:

Impact on equity (increase/(decrease) in equity)

Impact on statement of profit and loss (increase/(decrease) in profit)

Statement of cashflows

The change did not have a net impact on the Group's operating, investing and financing cash flows but did require some change to components within each cash flow class.

The Group has also adopted the liquidity based presentation of its balance sheet after the restatement under AASB 9 as it provides information that is reliable and more relevant. On adoption, the Group present all assets and liabilities in order of liquidity. A presentation of assets and liabilities in increasing or decreasing order of liquidity provides information that is reliable and more relevant than a current/non-current presentation because the Group does not supply goods or services within a clearly identifiable operating cycle.

4. 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 has a small number of legacy litigation service contracts where 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'. AASB 15 was adopted for these arrangements and reflected our legacy business model, which was to provide a bundle of financial and risk management services related to the resolution of disputes. This resulted in a litigation asset, or contract asset classification for all bundle of services under AASB 15. As the Group has evolved, the supporting rationale for AASB 15 has diminished with a significant reduction in the concept of a bundle of services. There remain a small number of legacy contracts where this bundle of services remains implicit in the contract and therefore AASB 15 been retained.

Performance obligations and recognition of revenue

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

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

The Group has assessed the entities in which it has an interest to determine whether or not control exists and the entity is, therefore, consolidated into the Group (refer note 25). Where the Group does not own 100% of interests, the Group makes judgements to determine whether to consolidate the entity in question by applying the factors set forth in AASB 10, including but not limited to the Group's equity and economic ownership interest, the economic structures in use in the entity, the level of control the Group has over the entity through the entity's structure or any relevant contractual agreements, and the rights of other investors.

Recovery of deferred tax assets

Deferred tax assets includes an amount relating to carried-forward tax losses in Australia. The Group only recognises the deferred tax asset if it is probable that future taxable amounts of the Group's business in Australia will be available to utilise those losses and therefore they are assessed as recoverable (refer to note 8). The extent to which these amounts are recognised is based on an estimate of future taxable amounts which is key estimate in relation to this balance. The tax losses can be carried forward indefinitely and have no expiry date.

Net gains/(losses) on financial assets & liabilities at fair value through profit or loss

The Group carries its financial assets and liabilities at fair value, with changes in fair value being recognised in the statement of profit or loss. A valuation methodology based on an income approach.

The fair values of these financial assets and liabilities cannot be measured based on quoted prices in active markets, and as a result a fair value methodology is utilised. The measurement valuation technique includes a discounted cash flow (DCF) model based on the Group's estimated, risk adjusted future cash flows. The adopted discount rate reflects the funding cost of deploying capital, and is intended to capture the time value of money and market factors such as interest rates and foreign exchange rates.

The fair value framework incorporates assumptions, including the discount rate, the timing and amount of expected cash inflows and additional funding, and a risk-adjustment factor reflecting the inherent uncertainty in the cash flows due to litigation risk, which is dependent on observable case progression and milestones.

The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as case progress, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments.

The key assumptions used to determine the fair value of the litigation funding agreements, financial liabilities related to third-party interests in consolidated entities and sensitivity analyses are provided in note 20.

5. Income

Total income as reported on the consolidated statements of profit or loss attributable to LCM represents realised and unrealised gains that relate to LCM's funded proportion of litigation contracts. The gain and loss related to third party interests in consolidated entities represents realised and unrealised gains and losses that relate to third party funded proportions from LCM controlled entities. Realised gains relate to amounts where litigation risk has concluded and amounts are expected to be received by LCM. Unrealised gains or losses relate to the fair value movement of assets and liabilities associated with litigation contracts.

6. Segment information

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

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

7. Profit before tax

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

Leases

Adjusted operating profit

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

Non-operating expenses

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