Litigation Cap. Regulatory News (LIT)

22 September 2020

Litigation Capital Management Limited

("LCM" or the "Company")

Final Results

Transitioning into an Alternative Asset Manager following the launch if its first Fund

Litigation Capital Management Limited (AIM:LIT), an alternative asset manager specialising in dispute financing solutions internationally, announces its financial results for the year ended 30 June 2020.

In 2019 LCM refined its business platform and in 2020 it experienced substantial growth.

Operations

· Launched asset management division following close of US$150m Global Alternative Returns Fund ('GAR'), which was oversubscribed, of which 61% is committed to date

· Good progress in Portfolio financing

- Eight resolutions across the two Corporate Portfolios, which are tracking in line with expectations

- Entered into the Group's largest corporate portfolio transaction: 20+ disputes with a capital commitment up to USD$34m

· Single case funding applications increased as a result of the prevailing economic conditions

· Mary Gangemi appointed as Chief Financial Officer, bringing considerable public company experience

KPIs

· Total assets under management of $250m at 30 June 2020 increased to $304m by September

· 522 applications received, a 25% increase on the prior year as a result of broader geographic reach and greater pools of capital

· Investment Commitment increased 50% to $147m, inclusive of third party funds

· Total invested capital increased by 87% to A$52m, inclusive of third party funds

· Cumulative 134% ROIC and IRR of 78% over the past 9 years

Financials

· Gross profit increase of 7% to A$21.7m*

· Profit before tax A$9.2m, decreased as a consequence of three investments shifting into FY21*

· Statutory profit before tax of $8.0m

· Cash of A$31.8m at 30 June 2020 (A$24.9m exclusive of third party fund consolidation). The Group continues to deploy capital into its direct investments as part of its growing portfolio

· A$84m third party capital available (currently uncommitted)

· Cash receipts from the completion of litigation investments of A$30.7m, up 14% on the prior year*

· Prudent decision taken not to pay a year-end dividend payment to maximise deployment in the increased pool of investment opportunities currently available

· Total equity of A$82.2m*

(*exclusive of third party fund consolidation)

Post period events

· Established a tailored Disputes finance facility with DLA Piper, significantly expanding LCM's reach into major global disputes hubs and strengthening its presence in markets currently under-penetrated by litigation finance

· Appointed Gerhard Seebacher, based in the US, as a non-executive director who brings significant international experience in fund management and financial services

Patrick Moloney, CEO of Litigation Capital Management, commented: "LCM has seen significant growth in demand for investment opportunities over the period, further increasing our market opportunity. This has been demonstrated in the increased number of applications received, growth in portfolio investments, and the increase in capital committed.

"Our growth opportunity has also been further accelerated following the most significant development in the year; the establishment of LCM's asset management division. This allows us greater pools of capital to invest, in turn providing greater returns. It also enables us to expand our global footprint, and we are pleased to have seen increasing traction across all our regions, in particular in the EMEA region, with a strong performance from the London office. 

"We are known for our innovation and the range of solutions we offer, particularly in regard to portfolio funding, which are testament to our ability to be progressive in the industry. We see our approach resonating well with the shifting legal market dynamics and are pleased to see the market respond with an increased demand for these solutions.

"The COVID-19 pandemic presented a challenge during the last year, and the health and wellbeing of our team remains of paramount importance. I would like to take this opportunity to thank all the LCM staff across the globe who adapted quickly and who have worked hard to contribute to the continued growth of LCM."

An overview of the final results from Patrick Moloney, CEO is available to watch http://bit.ly/LCM_FY20_overview.

The Company's results presentation slides can be found here.http://www.rns-pdf.londonstockexchange.com/rns/6996Z_1-2020-9-22.pdf

The Annual Report is available at https://www.lcmfinance.com/wp-content/uploads/2020/09/2020-Annual-Report.pdf.

Enquiries

Chairman's Statement

In a year that has been marred by disruption to many of the world's economies and impacted many lives and livelihoods, LCM's business remains robust. On a personal level as I write I am pleased to note that no member of our staff has been directly impacted by COVID-19. We have though used this period to continue to diversify the LCM business model.

One of the key highlights of our year has been the launch of our first third-party fund. Many of our shareholders will have seen the news release earlier this year. This fund is a co-investment partnership with a number of key blue chip investors and marks a major milestone for LCM. It positions the Company well on its journey to develop its experience as an alternative asset manager focusing on disputes finance globally. Over the course of the next 12 months we will be focusing on the launch of a second and larger third party fund, reflecting the very significant growth in disputes finance we are seeing.

As our CEO Patrick Moloney details in his report, we are particularly pleased with the growth of our business outside Australia. In particular the UK team is now seeing some excellent origination opportunities and has been originating opportunities at a similar volume to our traditional home market of Australia over the course of 2019 under the development of Nick Rowles-Davies, one of the veterans of the disputes finance industry. We continue to see attractive opportunities in other European markets as well as in Middle Eastern markets, as will be very evident from reading this year's annual report.

To that end, as has been notified to the market earlier this year, we are planning to relocate Patrick Moloney to London. This move would already have occurred by now without the challenges of COVID-19. We do, though, expect to complete this move in coming months as soon as the global pandemic situation allows. This will be another important step for LCM and our ability to capitalise on the growing interest in disputes resolution within the EMEA region as well as the broader sources of investment capital. Supporting our build-out of our London office, we appointed Mary Gangemi as Chief Financial Officer based in London earlier this year - another important signal of our commitment to building our EMEA presence.

With LCM seeing a greater demand for its investment capital, and an expansion of geographic opportunities, it is important that the Board of LCM has the breadth of experience to appropriately represent the shareholder. I am pleased that we have recently announced the addition of Gerhard Seebacher to the LCM Board. Gerhard brings over 20 years of global banking and capital markets experience as well as a strong understanding of the fund sector having been recently a partner at one of the world's largest hedge funds Brevan Howard based in the US. As we continue to evaluate future business development opportunities, I will ensure the experience of our Board fully reflects our business profile. Further additions and changes to strengthen our Board are thus possible over the coming 12 months. I would also like to take this opportunity to thank Steve McClean, a long-standing Director of LCM and Stephen Conrad former Chief Financial Officer who both stepped down in the second half of this financial year following our re-balancing of our business model towards EMEA.

I am fully aware of the challenges faced by a number of participants in the sector of disputes finance. While LCM strives to be an innovator in this sector, the Board remains fully committed to both the appropriate level of transparency and disclosure for our shareholders to reliably assess the underlying performance of the business. Our focus remains on long-term shareholder value creation and as such both our investments and remuneration schemes I strongly believe reflect this emphasis. I am also confident that our work culture and practices remain at the highest levels, at a time when we have been able to attract some of the industry's top talent over the past 18 months as we have diversified our business model.

As I reflect on my first 15 months as Chairman, I have these key observations. The UK listing was a major milestone for the Company, allowing us to capitalise on the much larger markets in EMEA. The build out of our teams have reflected this. The importance of our first successful third-party fund launch was a critical step forward. The coming months will see our key executive team working out of London. It will also see a continued diversification of our business model from single case funding to portfolio financing and our development of our alternative asset management model. Much of the foundations for future growth are now in place. The next year promises to be an exciting one in the development and expansion of LCM.

Jonathan Moulds

Non-Executive Chairman

CEO Review

LCM achieved a number of our planned objectives, notwithstanding that a large part of the financial period just past was significantly disrupted. The most significant was the introduction of an asset management division to supplement the capital available for investment. This begins LCM's transition into an alternate asset manager specialising in disputes finance investment globally.

The instability being experienced in global markets and economies tends to focus attention on investment strategies. Characteristics of certain asset classes become important. With interest rates at historical lows and general instability in global markets, alternate investment classes become important and sought after. As an asset class, disputes financing possesses two characteristics important to current market conditions. Firstly, it is uncorrelated, meaning that dispute resolution or adjudication by courts or tribunals is unaffected by general market conditions, global economies or political influence. Lawyers, judges and arbitrators do not apply different legal principles to the adjudication of a commercial dispute, class action or other dispute depending upon what investment cycle or prevailing economic conditions may exist. Therefore, subject to collection risk, which LCM is accustomed to evaluating, the expected returns of a balanced portfolio of investments in disputes are largely immune to the fluctuations experienced by other, more mainstream, asset classes. The second characteristic is that the demand for disputes finance, and consequently the number of quality investment opportunities available to LCM, increases in times of economic uncertainty and instability. Whilst the desirability of investments in uncorrelated and countercyclical markets is recognised, alternate investment classes such as disputes finance have been brought into sharp focus by the current prevailing economic conditions brought about by COVID-19.

There has been considerable evolution of the disputes finance industry and of LCM, from its inception as a source of funding and risk management to insolvency practitioners through prior market downturns and recessions. Over this significant period LCM has always been presented with a greater number of quality investments than it has had capital to invest. With the introduction of the asset management business and with it, access to greater pools of capital, we have never been better positioned to benefit from the opportunities that will arise from current and emerging global economic conditions.

LCM Global Alternative Returns Fund

LCM's most significant development during the financial period was the establishment of our asset management business. In March 2020, we closed a US$150 million fund with LCM acting as Fund Manager. This underpins our expansion as an asset manager in the alternatives sector. LCM now pursues two separate but interactive business models being Direct Investments and Asset Management. Across those two business models, LCM adoptsthree investment strategies. The first investment strategy is Single Case Funding, the second is Portfolios and the third is the Acquisition of Claims.

We carefully considered our move into Asset Management, previously preferring to develop our investment origination strategies through direct balance sheet investments as well as establishing our experience and track record. LCM's performance metrics have consistently delivered strong returns.

LCM's third party fund was oversubscribed and attracted the highest quality of institutional investors. The largest investor in the Fund is a large US university endowment and the second largest investor is an international investment bank. The balance of smaller institutional and fund investors are highly experienced in the disputes funding sector. All investors in LCM's Fund had prior experience in the disputes funding industry indirectly through managed funds. Most encouragingly, the two cornerstone investors negotiated entrenched rights in the next two of LCM's future funds. LCM is in a strong position and well placed to pursue its strategy to grow the asset management business.

2020 in review

After a period of integration, LCM's London team is now originating quality investment opportunities at a volume similar to that of our longstanding market in Australia, through both investment business models namely, direct balance sheet investments attributable to LCM and contribution to the Global Alternative Returns Fund ('GAR Fund', 'the Fund').

LCM's direct balance sheet investments portfolio is more mature and was partially originated in the Asia Pacific region ('APAC') prior to LCM's expansion into the UK, European and Middle Eastern markets ('EMEA'). Approximately 70% of those direct balance sheet investments were originated through the APAC team and 30% in EMEA through our London office. By comparison the breakdown of origination is more even in the recently established GAR Fund with 53% of investments committed at the period end originated in APAC and 47% in EMEA. These trends demonstrate that LCM's market presence in the EMEA region is increasing. We expect, over time, that more opportunities will arise for LCM from the larger economies globally, simply because those larger economies have more economic activity and thus generate a greater number of disputes presenting investment opportunities.

We are pleased to have achieved our goal of expanding our global footprint as well as introducing new capital in the form of asset management in a disciplined, yet progressive manner. In the regions in which we operate, LCM is perfectly placed to deal with the increased demand expected for disputes financing products.

We continue to observe sustained growth in Asia. The number of applications for finance received through our Singapore office has increased considerably compared to the prior year. We believe there are a number of reasons for that growth. One is the general increase in the number of parties utilising Singapore as a seat to resolve global trade and other disputes through arbitration, positioning Singapore as the leading disputes hub for Asia. In addition, Singapore has also implemented legislative changes to position itself as an Asian centre for cross-border insolvencies. With an increasing trend in opting for Singapore as a jurisdiction to resolve disputes, we expect to see greater opportunity for LCM's Singapore office in future years.

In the Australian market, LCM continues to see a steady increase in its business, mainly brought about by our increased access to capital. The Australian business continues to perform solidly, contributing the majority of LCM's revenue based upon its more mature investments, however, as previously highlighted, this is set to shift in future years. Changes to the class action landscape are likely to present opportunities for LCM as a result of having an Australian Financial Services Licence ('AFSL'). (See further below under Industry regulation.)

Over the past nine years, including every investment as part of one entire portfolio, LCM's Return on Invested Capital ('ROIC'), inclusive of losses, is 134%. Over the same period, inclusive of losses, LCM generated an Internal Rate of Return ('IRR') of 78%. Whilst demonstrating buoyant performance metrics, those metrics are achieved by a disciplined adherence to strict and comprehensive due diligence processes.

Overall LCM is observing a greater demand for its investment capital. The number of applications received in the last financial year was 522, representing a 25% increase on the prior year. Not only has LCM observed an increase in the overall number of applications but those applications are increasing in quality. This results from a number of factors but they include the expansion of our geographical reach and our access to greater pools of capital with the introduction of our asset management business.

Disputes finance is an asset class going through a period of exponential growth and development. It is a sector that is almost unrecognisable from five years ago. LCM has mirrored that growth and as a company operating in the industry is also unrecognisable from what it was just a few years ago.

LCM prides itself in being an innovator in its sector. Unlike many of its peers in the disputes financing industry globally, LCM focuses on a solutions based approach to providing disputes funding to its clients. We do not operate, like many of our competitors, on a rigid and inflexible model of providing template products. It is through that solutions based approach to the disputes finance market that has enabled LCM to develop new and innovative solutions for our clients and become an early global leader in the development of corporate disputes financing strategies.

Performance metrics

LCM has enjoyed strong performance metrics with respect to the various underlying investments which make up its litigation finance business over the past nine years. We believe assessing our metrics on a cumulative basis as being the most representative of our historical performance to date. Those metrics should be considered not only from a financial perspective but also as a measure of the effectiveness of LCM's due diligence and underwriting processes for determining which disputes should be funded and those that will deliver a positive result and return on LCM's investment. While useful in providing guidance on performance historically, we do expect that over time there will be a natural downward shift in some of these metrics. This will be a combination of; growing our portfolio funding investments which have a tendency to reduce risks and consequently returns, investments in matters that require a longer period of time to reach a resolution due to the size of the claim, increased competition in the industry and the scale of the business. Our aim is, and always has been, to achieve sustainable growth for our shareholders and investors through disciplined investment. No single metric alone can be relied on to quantify the success of achieving our business strategies. Instead a number of KPIs should be looked at collectively to give a better representation of that growth and its contribution towards the delivery of our strategic objectives.

We expect that our investments will continue to perform with meaningful returns and are not concerned about fluctuations as these are in line with our expectations as we continue to diversify our investment portfolio and the sectors we invest in.

Our win: loss ratio

Since it was founded in 1998, LCM has enjoyed an exceptional record when it comes to its litigation investments. Of 226 separate investments into underlying cases LCM has suffered a loss on only 11 and just six of those have been adjudicated by a court or tribunal unfavourably. The number of cases which were adjudicated against LCM's anticipated outcome is an important metric because it demonstrates that out of 226 separate investments LCM only adopted an incorrect position in respect of six.

The other five investments where LCM suffered a financial loss could have been for reasons which were utterly unanticipated and outside the knowledge and control of LCM and its investment managers. To put it another way, LCM's ability to predict the outcome of disputes is exceptional.

It is important however, to be mindful that losses are a feature of LCM's business model. It is unreasonable to expect that LCM will not suffer losses in the future. Shareholders should not be concerned if one of LCM's investments proves to be unprofitable or suffers a loss. It is simply part of LCM's business in the same way that an investment fund which invests in equities is not expected to be successful with every stock it selects.

Forecasting and guidance

LCM has extensive experience in the provision of litigation funding and finance products to the market. Indeed that experience extends right back to the inception of the industry in the late 1990s. That experience enables LCM to observe, with some confidence, that accurate forward forecasting is exceptionally difficult to achieve. It requires the financier to accurately predict when a particular project, or portfolio of projects, will come to a conclusion either through a negotiated settlement of the dispute or an adjudication by a court or tribunal. Secondly, it requires the financier to predict what the quantum of a resolution might be either as a negotiated settlement or as an award by the court. Given the myriad of outcomes possible in respect of an investment into litigation, it is simply not reasonable or responsible for us to provide forward forecasting other than providing a likely range. The approach and position which is adopted by our listed peers is to provide no forecast.

Strategy

We have identified the following priorities on which we expect to focus and achieve in the shorter term:

· To launch a second and larger third party fund to further support and increase our asset management business. In circumstances where demand continues, which we expect, the process of closing a second fund should commence before the end of calendar year 2020.

· It is our continual aim to increase the number and the quality of applications we receive. As our Investment Managers gain greater experience, we have observed an increase in the quality of applications they receive which we expect to continue. Additionally, the increase in capital available to LCM, generated both organically through its balance sheet and through third party capital also increases the size of applications and therefore the size of investments that we can consider.

· In line with the increasing volume of applications received, we also aim to increase the percentage of applications converted to investments. This metric can appear counterintuitive to outside observers. Ordinarily, commercial drivers would dictate that a business aims for a higher conversion rate but in disputes financing the investment selection is crucial. A low conversion rate is the result of disciplined and rigorous due diligence processes, yet it is certainly possible to increase the conversion rate without affecting the quality of investments made. A comfortable balance needs to be struck. Our most experienced Investment Managers convert a much higher number of their applications into profitable and high returning investments. This is the result of their ability to attract applications which are more likely to satisfy our investment criteria and their experience. Through the education of both the market, which drives a better quality of application, and of Investment Managers, a higher conversion rate can be achieved safely without sacrificing quality.

· LCM has experienced significant growth in investment opportunities over the past six months. This has been observed in the number of applications received, growth in portfolio investments, an increase in capital commitments and an increase in invested capital. That growth is expected to continue. Current instability in global markets is creating favourable conditions for the litigation finance industry. This opportunity has prompted LCM's Board to look at supplementing LCM's balance sheet capital to meet the increasing demand. Whilst LCM's newly established asset management business gives us access to significant capital to fund a substantial portion of current and expected growth, there will likely be a need for additional capital to match third party managed funds. LCM's Board is at an advanced stage of exploring a number of options which would supplement LCM's balance sheet capital through debt, securitisation, or a combination of both.

We have identified the following longer term goals:

· Expansion into new regions remains one of our aims. As with all expansion undertaken to date, we shall continue to maintain a disciplined and considered approach to ensure that ahead of expanding into a new region, we can be satisfied that the appropriate skill set can be put in place to manage investment opportunities.

· Increasing the level of assets under management is a principal focus area for LCM over the long-term. We intend to raise further third party pools of capital and to grow our asset management business. We also aim to increase the size of those funds and the portfolio of investments under management which in turn will increase returns to shareholders and diversify LCM's direct investments. The increase in the overall size of the portfolios under management will smooth LCM's revenues over time.

· We continue to look at ways to innovate and to increase the range of solutions we offer to the market. This goal is aimed at addressing two markets. First, the investment community who contribute to our third party pools of capital. Secondly, the market for disputes finance solutions. LCM has a history of innovation in the marketplace and we shall continue to test and challenge the existing market with our innovative approach.

Since March 2020, when global markets began to feel the instability that COVID-19 had created, LCM observed an increase in the number of applications and a swift change in demand by corporate clients eager to explore funding their disputes off balance sheet. This demonstrates that corporates globally are keen to allocate their financial resources towards core business as opposed to non core activities such as legal disputes spending. We expect that position to continue until economies return to a state pre COVID-19.

Given the increased demand, LCM expects to commit the Fund fully, well inside the two year period the Fund allowed for that purpose. Indeed, if demand levels continue as they have since March, which is anticipated, LCM expects to commit the Fund fully by the end of calendar year 2020. Once the Fund is 75% committed, LCM is free to commence marketing for its second fund.

Investment strategies

Single case funding

The single case funding strategy has been pursued by LCM since its inception in 1998. It is an investment in a single dispute whether that dispute is being pursued through the court system or the arbitral process. Single case investments, by their nature, represent the most challenging investment strategy given that the outcome tends to be binary. That said, the vast majority of single case investments that have been made by LCM to date, have been resolved through commercial negotiation which has the effect of reducing the binary nature of the outcome. LCM has extensive experience in single case funding and its systems and methodologies for underwriting risk and undertaking due diligence were developed through single case funding. LCM's performance metrics are generated overwhelmingly through single case investments and it continues to represent a significant ongoing part of LCM's investment strategy. LCM is seeing increasing numbers of applications for single case funding year in, year out and most recently an increased demand as a consequence of the prevailing economic conditions. We expect to see a significant increase in the demand for insolvency and restructuring funding globally as governments bring stimulus measures to an end. Those insolvency and restructuring investment opportunities are likely to persist for a number of years. LCM sees this as a significant opportunity in the future.

Portfolio financing

LCM is a market leader in Portfolio financing which involves the provision of a finance facility across a bundle, or portfolio, of single cases. The strategy can apply to the financing of a bundle of single disputes for a corporate client referred to as corporate portfolios, to a portfolio of single cases in an insolvency situation or through a law firm.

As at the period end, LCM is providing finance with respect to two separate corporate portfolios as part of its direct investment portfolio. The total of underlying separate disputes in those two corporate portfolios exceeds 40 disputes. The first of those corporate portfolios was in the building and construction sector and has seen the resolution of four separate disputes during the financial period. Until the portfolio has completed, it is not possible to calculate its overall financial performance, however, it is currently tracking in line with expectation. LCM expects that portfolio to resolve in the current financial period.

The second corporate portfolio investment came from the aviation industry and originally comprised some 36 separate disputes. It has subsequently increased in size. During the relevant financial period, the portfolio saw four resolutions, both of which contributed to LCM's EBITDA for the period.

Acquisition of claims

This strategy involves LCM acquiring or taking an assignment of a cause of action and pursuing that claim through the court system as the principal. It is a strategy created through opportunity and the circumstances which led to the evolution of the strategy were twofold. First LCM observed that it was considering a number of quality applications for disputes funding which did not meet our funding criteria due to their value. The economics of the investment, being the relationship between legal spend and anticipated recovery, created a misalignment between interests. That misalignment occurs where the funded party becomes entitled to a disproportionately small amount of the recovery. Those applications were generally arising in situations of insolvency. That left LCM in a situation where it had significant experience in assessing the risks associated with the investment but could not proceed to investment in the opportunity.

The second factor was a change in the law in both Australia and the United Kingdom which permitted insolvency practitioners to sell or assign causes of action, including statutory causes of action, which previously would have vested solely in them. Prior to those legislative changes the insolvency practitioners were restricted to a more traditional funding model. Those two factors led LCM to develop its acquisition or assignment strategy.

The acquisition or assignment strategy tends to operate in that part of the market that was previously unavailable to LCM for the reasons described above. It allows LCM to participate in investments across the spectrum. LCM expects that the smaller investments which are acquired or assigned will have an investment cycle of 12 and 18 months and will generate metrics commensurate or better than its historical record. LCM will act as principal in these claims and will have complete control over the claims as they travel through the court system.

LCM has seen that strategy develop over the financial period. Our ability to offer this product as an alternative enhances our reputation with insolvency practitioners as an innovative solutions based disputes finance provider. We have had a number of small resolutions however we have not had sufficient resolutions of investments in this strategy to report separate performance metrics to market. We anticipate being in a position to do so in the future.

As with insolvency based opportunities generally, LCM anticipates that there will be a considerable increase in the demand for its acquisitions and assignment strategy with the general instability in global markets and the expected increase in insolvencies and restructuring in the markets in which we operate.

The acquisition of the claims and pursuing as principal means that LCM has complete control and autonomy as to how the claim is pursued. Furthermore, LCM does not have a funded party to consider in terms of returns.

Our people and culture

LCM operates a small, but high performing, global team. Our headcount has grown with the business and we remain disciplined about expanding our workforce against the increase in the size of the overall portfolio of investments under management. LCM has expanded its team of Investment Managers through a small number of opportunistic hires during the year. That has boosted LCM's capacity both to originate and to undertake due diligence on an increased number of applications and in specific sectors in which we have observed growth, such as building and construction and insolvency. The interface between LCM's business and its clients, to whom disputes financing solutions are supplied, are the Investment Managers. LCM's Investment Managers typically come from a legal background, having practised in disputes. The talent pool from which experienced disputes finance practitioners can be selected is limited which is not surprising in an industry which has been operating at scale for little more than a decade. An effective Investment Manager must not only possess legal, litigation or arbitration experience, but also a level of commercial acumen rarely developed through legal practice and an ability to evaluate and assume risk.

LCM is known in the industry as having an exceptional work culture and a desired career destination in disputes finance. Not all Investment Managers achieve the transition from legal practice despite their abilities in a former position as a disputes lawyer. LCM has a very low turnover of Investment Managers. We work continuously towards maintaining an inclusive and supportive work culture, notwithstanding the high performance expectations we place on Investment Managers. We acknowledge the importance of identifying internal successors and developing talent to maintain the long-term success of our business.

We have also added Mary Gangemi to our global team as our new Chief Financial Officer coming from a public markets background in the funds management sector. Mary brings considerable experience as we move into asset management. Mary has also been a great cultural fit and has moved our finance focus to the London office. We expect to observe increased efficiency in the Finance department as Mary implements new financial systems and accounting programmes moving forward.

LCM operates a staff incentive scheme which allows staff to acquire shares in the Company efficiently as distinct from receiving a cash bonus. The evaluation criteria for participating in the scheme involves not only personal achievement measured through the origination of investment opportunities and successful investments but also the overall performance of LCM. A shareholding acquired through the incentive scheme vests over a period of years to encourage loyalty and longevity of employment. The scheme is designed to balance the interests of LCM and the employee and to align the interests of staff, executives and shareholders effectively.

I am pleased to report that no LCM staff member has been directly affected by the COVID-19 virus.

Market and environment

Resilient business model and operations

The last financial year was significantly interrupted by the COVID-19 pandemic. The effects of the pandemic were felt in every region and through every office maintained by LCM. To their credit, LCM staff adapted quickly and smoothly to remote operations. Unsurprisingly, LCM's first priority was the safety of its employees. Necessary changes were made to LCM's systems and implemented to permit remote operations. Fortunately for LCM, those changes and alterations were not significant as the global team previously worked through a cloud-based solution.

The most significant change to LCM's business model was in the area of business development where traditionally, face to face meetings, including attendances and speaking at industry conferences was a regular feature. As with many businesses we adapted to virtual meetings and adopted digital technology. Overall, the productivity of our various teams remained at very high levels.

The one area that was affected by the global pandemic was the completion of mature investments. That is, investments made by LCM in litigation disputes fixed for a final hearing and adjudication before a court. The most affected jurisdiction was Australia given that, for historical reasons, Australia was the location of our most mature investments. As businesses and economies went into shut down, for a short period, so did the court system. Although the superior courts in most jurisdictions in Australia moved swiftly to provide facilities for virtual hearings, the introduction of such a new process resulted in delays. Those delays were not so much occasioned by the introduction of the new system itself but rather the speed with which both judges and members of the legal profession picked up the new processes. As a consequence, hearing times for cases were extended and courts ran out of time to hear, and adjudicate, all listed disputes. As a further consequence, three of LCM's mature investments were postponed until the following financial period. Such postponement does not affect the overall prospects or merits of the investment, but merely shifts their resolution from one financial period to the next. LCM may see some further delays depending upon market factors.

Industry regulation

Disputes financing is an industry with a light regulatory touch globally. In the United Kingdom, the industry implemented a form of self-regulation through an industry body. In the US, the market is largely unregulated. In Hong Kong and Singapore, the industry has a light regulatory touch with capital adequacy requirements which tend to restrict the market to the larger operators. In Australia, where the industry started, there has been debate over the past few years including a Law Reform Commission Inquiry and more recently a Parliamentary Inquiry. Those inquiries have almost exclusively involved that part of the market involving class actions. Many LCM shareholders will be familiar with the cautious approach LCM has taken to the class action segment in Australia over the last few years. That part of the market has seen increased competition, mainly from litigation funders outside Australia.

In May of this year, the Commonwealth Treasurer announced the introduction of two changes which would operate to regulate the disputes finance industry insofar as it concerns class actions in Australia. The first was the introduction of a requirement that litigation financiers wishing to fund class actions would need to obtain an Australian Financial Services License ('AFSL'). Having anticipated the potential for regulation LCM acquired an AFSL which meant we were the only industry member with the required licence at the time of implementation. The second change brought by the regulation was to bring certain class actions under the Managed Investment Scheme ('MIS') regime. That change will place a considerable administrative burden upon those disputes financiers wishing to invest in class actions. Australia's corporate regulator charged with the responsibility for administering both the licensing and investment scheme changes for class actions, did not establish a separate regime in which class actions (despite their particular features) will operate. Therefore, the practical operation of those requirements is currently uncertain. What appears clear, at this point, is that the changes are likely to reduce competition for LCM in that part of the market. A likely consequence of the changes is that the smaller operators and offshore funders will find it more difficult and a far greater regulatory burden to invest in class actions within the jurisdiction of Australia. Given that LCM is a listed disputes financier, it is not unfamiliar with regulation and compliance generally. LCM's size and its access to capital will place it in a favourable position when it comes to regulation of class actions in Australia, whatever their form. We are not seeing signs of any intention to further regulate the industry in other regions in which we operate.

Outlook

By any measure, LCM's business continues to grow at a brisk rate. Applications, assets under management, portfolio of investments and available capital have all increased over the past financial period significantly and growth in all of those areas is set to continue.

We are regularly requested to provide some form of guidance or forecasting as to expected earnings for the upcoming financial period. Shareholders have, from time to time, expressed a difficulty in assessing LCM's value as a business without the benefit of forward estimates on revenue. That position is, to some extent, made more difficult due to LCM adopting a conservative accounting standard which recognises revenue only when it is earned in contrast to ascribing a fair value to its book of investments from time to time. That very conservative position is recognised by the market as a cautious and reserved method of accounting however it gives little insight to investors as to how LCM's portfolio of investments may perform in future years.

As previously disclosed, LCM expects that as its portfolio of investments grows globally and the business evolves, we will need to reconsider the most appropriate accounting standard in relation to revenue recognition, including the possible adoption of fair value accounting. In any case, we remain committed to reporting both conservatively and transparently.

Notwithstanding the obvious limitations associated with accurate forecasting as described above, we have decided to give shareholders some guidance as to future gross profits by providing a range in the forthcoming financial period. Gross profit is revenue derived from disputes investments net of the repayment of the capital investment itself. LCM expects the resolution of seven investments in the financial period ending 30 June 2021. Those resolutions are expected to generate gross profit between A$30 million and A$47 million. Certain investments are significant in size. As a consequence, LCM's gross profit for the period can move considerably simply on the basis of one single investment moving from one financial period to the next.

To date, the effect of COVID-19 on the maturation of LCM's portfolio of investment has been limited. In FY20 three investments were delayed due to the inability of court systems to facilitate hearing dates which had previously been fixed. The investments which LCM expects to complete in FY21 are in various jurisdictions. We are currently not able to adequately forecast the adverse impacts that second or third waves of COVID-19 may have on the resolution of those projects. Any such impact would likely delay the realisation of the investments. It is therefore with some caution that we provide the range.

As also noted above, LCM's business tends to observe increased opportunity in times of economic instability. We expect the changed sentiment of corporate clients in utilising external capital to fund non-core business such as disputes to continue beyond the stabilisation of global economies. Economic conditions merely provide the catalyst for corporates to recognise other significant benefits such as accounting, risk management and enhanced efficiency. In terms of insolvency and restructuring, LCM possesses very considerable experience in investments from that sector. LCM also enjoys long and deep referral relationships which will be invaluable into the future. Based upon experience from prior periods of significant economic disruption, the quality of investment opportunities arising from the insolvency and restructuring sector will continue well beyond the stabilisation of global markets.

Over many years, LCM has built and developed the systems and methodologies to select the most profitable investment opportunities in the disputes sector. LCM's success in that regard is demonstrated through its performance metrics over the past nine years. LCM is exceptionally well placed amongst its global peers to take advantage of the opportunities which it will receive in the future. We are excited at what the immediate future will bring.

Patrick Moloney

Chief Executive Officer

Market Overview and Outlook

Market overview

The last 12 months have seen the continued growth of the disputes financing industry. The uncorrelated returns and counter cyclical nature of the industry are increasingly of interest to investors with the addition of several new market entrants as well as a number of new potential funders seeking investment.

Whilst the market for disputes financing continues to grow, the education process of lawyers and corporate clients has also continued at pace. This has led to more demand from law firms and their corporate clients, whether funding out of choice or necessity. The understanding of disputes finance, its evolution, and how it can be used as a corporate finance tool has begun to change the way the industry is viewed. That said, the demand for traditional single case funding remains high and still accounts for the majority of the global disputes financing market.

The growth of the industry has been seen first-hand at LCM with a record number of applications in the last financial year. This trend has increased significantly since the beginning of 2020 and has been driven by the effect of the pandemic. This has materialised in three specific ways.

First, those corporate clients who find themselves in the midst of a dispute and are reviewing their budgets to decide whether to continue with the litigation or arbitration given the need to consider focusing their financial resources on their core business.

Second, those corporates who were contemplating the launch of a dispute and are now reconsidering how they spend their money.

Third, the law firms who are witnessing this reassessment and seeing that they need to provide an alternative solution to the traditional monthly cash drain that disputes brings to the finances of a corporate client. A number of firms have realised that now is a good time to learn how better to understand the economics of law. This will allow them to offer clients a financial alternative and help them to distinguish themselves in a crowded and competitive market.

The industry continues to grow rapidly and existing funders have continued to raise more capital. There have been a number of new reported legal decisions in the UK on the use and acceptance of funding which clarified specific areas of the law relating to disputes financing in the UK, but provided no shocks in what is a fast maturing industry. Despite the fast-growing nature of our industry and our continued innovation, the majority of the industry is still single case, template driven traditional third party funding.

LCM remains the global market leader in corporate portfolio financing. The lack of competition in that space is both helpful and unhelpful.

The education of lawyers and corporate clients creates an increased awareness of the benefits of our solutions for corporates. We rarely see a competitive situation in the discussion of corporate portfolio investments, but increased competition and more funders offering solutions rather than the rigid single case templates would assist in the ongoing education process and improve understanding of the offering and the potential of disputes financing as a corporate finance tool. As the understanding of what is possible with disputes financing and the exposure to more and more portfolio style investments, this will change.

There are only four full service, publicly listed disputes financiers. The rest of the market remains privately held and therefore performance metrics and reporting are very limited. However, a comparison of LCM's performance metrics against the other two listed peers is favourable. LCM distinguishes itself from its peers by providing an entirely solutions-based approach rather than a rigid template-driven single case model which is the preference of much of the market.

A successful disputes finance business requires three key pillars.

First, adequate capital to invest. The closing of our recent Global Alternatives Fund has enhanced the level of capital that LCM has available to invest. The fund is a significant achievement, given the timing of the closing, in the midst of a global pandemic and the quality of the investors.

Second, high quality underwriting and case assessment. Despite increasing the number of applications in the last 12 months by 25% from 419 to 522, LCM maintained its strict discipline and underwriting criteria, by investing in only 3.5% of those applications.

The third element is quality origination and business development. LCM thinks very carefully about the route to market, the sales channels and the methods of origination. Our methods of origination are ever evolving. We continually adopt new strategies and adapt existing strategies to make the best use of our resources and in response to what we see and hear in the market.

It is that evolution and innovation which has driven the origination methods for our portfolio strategy.

We have been very pleased with the corporate portfolio strategy, both in the new transactions we are reviewing and in the way in which the two existing portfolio investments are maturing. Whilst these investments are relatively new, they are beginning to demonstrate the characteristics that we have anticipated they would in terms of returns and duration as well as the evergreen nature of the relationship with the corporate client. That ongoing relationship with a corporate client is important. We had anticipated that once a corporate client was accustomed to the use of external capital for the financing of their disputes budget, it would be a method that was embraced and maintained. The increase in the number of disputes within the aviation portfolio is an indication of that.

Market Outlook

The negative effects of the pandemic are already being felt in all aspects of life, but the economic downturn it had caused will continue for some time. Over the next 12 months many corporates will be capital constrained and forced to reconsider the allocation of their budgets. It is widely accepted that an economic downturn fuels a rise in disputes. Accordingly, we expect that there will be an equal growth in the use of funding to finance those cases as corporate clients turn to the use of external capital in the form of disputes finance.

In the coming 12-18 months, there will be a significant rise in insolvency related litigation in all jurisdictions in which we operate is better. The regulation in Australia in the class action regime, may well provide an opportunity for LCM, given our expertise in those matters and the fact we hold an AFSL. Singapore is an area of growth for our industry. The increasing number of applications coupled with a growing understanding of what can be done with disputes financing suggests that Singapore will continue to be an important hub for Asia.

In the UK and Europe, the growth of the industry will accelerate. The UK is the most advanced jurisdiction in which we operate, as regards disputes funding. There is a growing understanding by the lawyers that disputes funding is a tool they can use in many ways. The current economic situation will accelerate the education of law firm management and force them to think differently about billing. In house teams have been asking for more flexibility and innovation for some time but the coming year is likely to see the better firms make those changes.

The lack of liquidity in certain industries changes budgetary priorities and engenders a change of mindset. The financial and accounting benefits to corporations of the use of disputes financing is unarguable. Those corporate clients with high volumes and low margins such as building and construction, infrastructure, energy, outsourcing and aviation as well as those directly affected by the pandemic will drive the change in law firm thinking and demand a new approach.

The demand for disputes financing will be fuelled by those corporations and by law firms recognising and understanding what we offer. The accelerated learning of those law firms and their understanding that the financial solutions we provide can help lawyers to provide those flexible billing regimes and help them distinguish themselves and assist them in keeping existing clients as well as gaining new ones. There will be an increased use of portfolio financing whether direct to corporates or for law firms.

The outlook for the coming year in the global disputes financing market is extremely positive.

Nick Rowles-Davies

Executive Vice Chairman

CFO Review

During the year LCM delivered a strong performance despite the challenges and disruption to the global economy as a result of the COVID-19 pandemic. We are pleased to have closed our first third party fund in March 2020 at US$150 million. This supports our strategy of becoming a leading operator in the alternative asset management space, specialising in disputes financing. The fund supplements our own balance sheet, significantly increasing our ability to invest in new opportunities and accelerating growth.

LCM standalone results

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

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

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

The tables following provide a full reconciliation of the consolidated statement of comprehensive income and consolidated statement of financial position so that investors are able to relate our performance discussion with our financial report. Note that these are non-AASB measures and may not be directly comparable with adjusted measures of other companies. They are not a substitute for or replacement of AASB measures.

* Third party interests. There was no consolidation in the prior period as the Fund was launched 10 March 2020

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

Revenue from contracts with customers reflects the consideration to which the Group is expected to be entitled in exchange for transferring services to a customer.

LCM continues to recognise revenue in line with AASB 15 Revenue from Contracts with Customers. Revenue is recognised at the point we achieve a successful resolution for the client and have satisfied our performance obligations. At this stage we have an unconditional right to consideration. As the portfolio is still relatively modest in size, the impact of one or two investments shifting into the next financial reporting period can have a material impact. As the portfolio grows, the expected impact will have a less significant effect on yearly profitability.

Litigation service revenue - as consideration for providing litigation management services and financing of litigation projects, the Group receives either a percentage of the gross proceeds of any award or settlement of the dispute, or a multiple of capital deployed, and is reimbursed for all invested capital. Revenue, which includes amounts in excess of capital deployed and the reimbursement for all invested capital, is not recognised as revenue until the successful completion of the litigation project i.e., complete satisfaction of the performance obligation, which is generally at the point in time when a judgment has been awarded or on an agreed settlement between the parties to the litigation, and therefore when the outcome is considered highly probable.

Litigation service expense - are contract costs amortised upon the successful resolution of the litigation contract and generally include external costs of funding the dispute, such as solicitors' fees, counsels' fees and experts' fees.

The business of litigation finance involves a series of investments into disputes which historically take on average, approximately 25-27 months to complete. Those investments may mature before or after that monthly average. Consequently, it is exceptionally difficult to predict the timing of when such realisations take place. They are largely controlled by the underlying parties to the dispute and the court or tribunal adjudicating their dispute. LCM's investments vary in size and through industry sector and jurisdiction, therefore the revenue recognised can be infrequent and can be lumpy. This may result in profit fluctuations from one year to the next rather than an even and smooth increase in profits from year to year. The fact that profits do not increase in a linear fashion from year to year should not be interpreted as a reflection on either the level of growth from year to year or the profitability. It is simply a feature of the conservative accounting policies adopted. As LCM's portfolio of investments grows in size the volatility of earnings are expected to smooth out.

Adjusted profit before tax is A$11.1 million which was down 9% on the prior period. That modest reduction results from the reconciliation of three litigation projects being delayed due to COVID-19. That revenue is not lost but simply pushed to the next financial period. A reconciliation is provided below:

Cash on balance sheet as at 30 June 2020 was $24.9 million, down 49% on the same period in 2019 at A$49.1 million. This is a direct reflection of the growth in LCMs direct investments as well as the incremental investment into that growing portfolio.

* Elimination of third party interests

Cash flow

We generated cash of $30.7 million from the resolution of matters compared to $26.8 million in FY19. With payments related to capital deployed of $39.7 million compared to $27.8 million in FY19. The following waterfall is exclusive of third-party fund interests.

We continue to focus on our approach of reporting financial and non-financial KPIs which we believe are measures of growth, performance and shareholder value. During the year:

· Investment Commitment was $147 million inclusive of third party funds, increasing from $98 million in FY19

· The nine year cumulative portfolio Internal Rate of Return ('IRR') was 78%

· Nine year cumulative portfolio Return on Invested Capital ('ROIC') was 134%

· Applications received increased to 522 from 419 in FY19 and increase of 25%

· Gross income increased by 7% to $21.7 million from $20.3 million

· Statutory profit before tax decreased by 21% to $8.1 million from $10.2 million with the main reason beingthe inclusion of $1.2 million of third party fund related costs as well as the shift of three investments intothe following financial period. On an adjusted basis (excluding third party interests) profit before tax decreased by 9% to $9.2 million from $10.2 million

· Adjusted operating profit decreased by 9% to $11.1 million from $12.3 million

Revenue

Gross revenue increased by 11% to $38.4 million, inclusive of $2.6 million in performance fees, from $34.7 million in 2019. Litigation service expenses (investments in realised disputes) increased by 16% to $16.7 million from $14.4 million in 2019, resulting in an increase of 7% in gross profit to $21.7 million from $20.3 million.

Revenue by investment strategy:

The table above illustrates the variability in revenues generated which reinforces the difficulty faced in accurately forecasting profitability without the detail supporting the underlying data specific to each matter. Each case is unique based on the investment type, duration to completion, jurisdiction, cost and merits.

Revenue by region

Portfolio update

Total invested capital during FY20 was A$52.0 million inclusive of $10.7 million third party fund investments. This compares to A$27.8 million in the prior financial year. On an adjusted basis, exclusive of third party investments, the total invested capital was $41.3 million an increase of 55% on the prior period. This increase is fundamental to measuring LCM growth. Assuming, as we do, that we continue to apply the same rigorous due diligence processes and our investments perform as they have for the past nine years, the revenue to be generated from these investments will form part of our financial performance in two to three years time.

As at 30 June 2020 there were 23 direct balance sheet projects under management and 17 projects co-invested alongside the fund. This comprised 32 unconditionally funded and eight conditionally signed. As at 30 June 2019 there were 29 direct balance sheet projects under management. This comprised 23 unconditionally funded and six conditionally signed.

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

Financial performance

LCM's strong results in FY20 were driven by the resolution of four investments and the partial resolution of seven investments. The Group's overall gross revenue of A$38.4 million represents an increase on the prior financial period of 11%. The Group generated gross profit of A$21.7 million, representing an increase on the prior period of 7%. The Group produced a statutory profit before tax of A$8.1 million a decrease of 21% on the prior financial period, however this is inclusive of third party fund costs of $1.2 million, on an adjusted basis which excludes third party costs, statutory profit before tax was $9.2 million, a decrease of 9% on the prior financial period. This statutory profit represents a solid and pleasing result given the challenges and delays experienced as a result of the recent COVID-19 pandemic. It should be noted that delays result in matters being pushed beyond their expected resolution into the next financial period, it does not result in a loss of revenue.

Operating expenses of $10.7 million increased by 27% compared to $8.4 million in 2019 in line with management expectations. As we continue to expand we expect to see an increase in operating costs, however these are expected to remain at a similar margin relative to the size of the portfolio under management, allowing us to benefit from economies of scale.

Non-operating expenses include; $1.2 million of costs related to the third party fund which have been consolidated to comply with AASB standards but are not attributable to LCM; $1.2 million of litigation fees relating to the costs of litigation commenced by Australian Insolvency Group Pty Limited ('AIG') against the Group, and subsequent cross claim by the Group in these proceedings against Vannin Capital Limited and Mr Patrick Coope, $0.4 million related to share-based expenses, $0.2 million related to non-recurring consultancy costs and other expenses (see note 6).

Finance costs

The Group had no debt facilities in place during the reporting period.

Dividend

Given the ongoing uncertainty in global markets and the number of quality investments available as well as the countercyclical nature of our business, the Board has made the difficult decision that no dividend will be paid, to preserve cash to make further investments in our portfolio of assets to accelerate growth.

The Board remains committed to returning to the payment of a dividend as a matter of fiscal discipline. The Board will continue to assess global market stability to determine the appropriate level of dividend based on profitability, cash flows, growth and available capital. Shareholders should not interpret the Board's current stance as a change in policy relating to dividends. It is simply a responsible and conservative response to unprecedented global conditions which are yet to fully play out and stabilise.

Mary Gangemi

Chief Financial Officer

Consolidated Statement of Profit or Loss and other Comprehensive Income

For the period ended 30 June 2020

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

Consolidated Statement of Financial Position

As at 30 June 2020

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

Consolidated Statements of Changes in Equity

For the period ended 30 June 2020

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

Consolidated Statements of Cash Flows

For the period ended 30 June 2020

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

Note 1 General information

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

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

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

Level 12, The Chifley Tower2 Chifley SquareSydney NSW 2000

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

The financial statements were authorised for issue, in accordance with a resolution of Directors, on 22 September 2020. The Directors have the power to amend and reissue the financial statements.

Note 2 Significant accounting policies

Basis of preparation

These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB').

Historical cost convention

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

Critical accounting estimates

The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3.

Parent entity information

In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 23.

Principles of consolidation

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Litigation Capital Management Limited ('Company' or 'parent entity') as at 30 June 2020 and the results of all subsidiaries for the year then ended. Litigation Capital Management Limited and its subsidiaries together are referred to in these financial statements as the 'Group'.

The Group includes fund investment vehicles over which the Group has the right to direct the relevant activities of the fund under contractual arrangements and has exposure to variable returns from the fund investment vehicles. See note 25.

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

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

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

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

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

Operating segments

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

Note 3 Critical accounting judgements, estimates and assumptions

Significant estimates and assumptions

Recovery of deferred tax assets

Deferred tax assets includes an amount relating to carried-forward tax losses in Australia. The Group only recognises the deferred tax asset if it is probable that future taxable amounts of the Group's business in Australia will be available to utilise those losses and therefore they are assessed as recoverable (refer to note 7). The tax losses can be carried forward indefinitely and have no expiry date.

Impairment of non-financial assets other than goodwill

The Group assesses impairment of non-financial assets other than goodwill at each reporting date, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. This includes evaluating the expected outcome pursuant to the contracts, including consideration of whether each individual litigation contract is likely to result in a successful outcome, the cost and timing to completion and the ability of the defendant to pay the settlement or award. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves value in use calculations, which incorporate a number of key estimates and assumptions.

Note 4 Revenue

Note 5 Segment information

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

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

Major customers

During the year ended 30 June 2020 there were three major external customers (2019: three customers, unrelated to those in 2020) where revenue exceeded 10% of the consolidated revenue. Revenue from each customer for the year ended 30 June 2020 amounted to $13,926,000, $6,534,000, and $4,052,000 (2019 $14,440,000, $9,713,000, and $7,183,000).

Note 6 Profit before tax

1 Includes employers pension contributions for UK staff

Adjusted operating profit

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

Litigation fees

Litigation fees includes fees relating to the costs of litigation commenced by Australian Insolvency Group Pty Limited ('AIG') against the Group, and subsequent cross claim by the Group in these proceedings against Vannin Capital Limited and Mr Patrick Coope, a director of AIG and former employee of the Group. The proceedings have concluded following reaching a binding settlement with all parties in April 2020 and as part of the resolution of these disputes the Group received performance fees which are disclosed in note 4.

Fund administration expense

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

Note 7 Income tax expense

Statutory tax rate of 27.5% is applicable to Australian entities with aggregated turnover below $50 million for the year ended 30 June 2020. The Group's turnover is expected to be above the threshold of $50 million in the future reporting periods which will attract a statutory tax rate of 30%. As a result, recognition of deferred tax asset is made by applying a 30% statutory rate instead of the lower 27.5% tax rate.

Note 8 Cash and cash equivalents

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

Note 9 Trade and other receivables

Amounts due from completion of litigation service relate to the recovery of litigation projects that have successfully completed.

Allowance for expected credit losses

The Group has recognised a loss of $nil (2019: $nil) in profit or loss in respect of the expected credit losses for the year ended 30 June 2020.

The ageing of the receivables and allowance for expected credit losses provided for above are as follows:

Note 10 Contract costs - litigation contracts

Reconciliation of litigation contract costs

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

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

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

Third-party interests in contract costs

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

Impairment considerations

The recoverable amount of the Group's contract costs has been determined by a value in use calculation using a discounted cash flow model, based on cash flow projections and financial budgets as approved by management for the life of each litigation contract.

Key assumptions were used in the discounted cash flow model for determining the value in use oflitigation contracts:

· The estimated cost to complete a litigation contract is budgeted, based on estimates provided bythe external legal advisors handling the litigation;

· The value to the Group of the litigation contract, once completed, is estimated based on the expected settlement or judgement amount of the litigation and the fees due to the Group under the litigation contract;

· The discount rate applied to the cash flow projections is based on the Group's weighted average cost of capital and other factors relevant to the particular litigation contract. The discount rate applied was 15% (2019: 15%).

Based on the above, the Group has recognised impairment losses of $nil (2019: $nil) in profit or loss on contract costs for the year ended 30 June 2020.

Note 11 Current liabilities - trade and other payables

Refer to note 16 for further information on financial instruments.

Note 12 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 13 Reconciliation of cash flows

Reconciliation of profit after income tax to net cash from operating activities:

Changes in liabilities arising from financing activities