Litigation Cap. Regulatory News (LIT)

15 March 2022

Litigation Capital Management Limited

("LCM" or the "Company")

Interim results for the half year ended 31 December 2021

Strong H1 results bolstered by increase in resolution of direct investment

Litigation Capital Management Limited (AIM:LIT), a leading international alternative asset manager of disputes financing solutions, is pleased to announce its unaudited interim results for the half year ended 31 December 2021, delivering a significant improvement on the prior year.

Operations

KPIs

Financials

Post period events and outlook

1metrics based on final AUD cashflows

Commenting on the results, Patrick Moloney, CEO of Litigation Capital Management, said: "We have achieved great progress during the period despite disruption as a result of COVID-19 lockdowns and unprecedented restrictions in the areas we operate.

"I am pleased with the progress in our Fund Management business, which is now well established, with our first US$150m Fund now fully committed and the US$200m first close of Fund II with a final close target of US$300m by the period end. Equally, our portfolio of direct investments has performed well given the difficult external circumstances impacting our industry, with a number of ongoing investments resolved and awaiting payment, or awaiting judgment in the second half.

"As conditions normalise and with the core executive team now in place in our London office, LCM is now in a stronger position to grow both divisions, enabling us to access greater amounts of capital and facilitate the expansion of our portfolio of investments. The countercyclical nature of our industry suggests that economic and market conditions at present, represent a growing opportunity for the Company which will be realised over the long-term. We look to the second half and beyond with optimism and confidence."

An overview of the interim results from Patrick Moloney, CEO is available to view on this link: https://bit.ly/LIT_H122_overview_video.

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

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

The Interim Financial Report is available at:

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

Enquiries

NOTES TO EDITORS

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

LCM has an unparalleled track record driven by disciplined project selection and robust risk management.

Currently headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker LIT.

www.lcmfinance.com

Chief Executive's Statement

Market and environment 

Whilst the past two years have been impacted by the global pandemic, the past interim period has been particularly disrupted for two main reasons: First is the impact on the progression of disputes through the courts or the arbitral process as a result of a backlog of postponed and delayed cases. While these systems are now much more efficient than pre-COVID, there is inevitably a long process to work through in order to expedite the cases.

The second key impact is our ability to source investment opportunities. Between July and December 2021 each of the offices we operate; London, Singapore and Australia, experienced prolonged lockdowns and/or guidance against travel and office work. Those measures varied from approximately one and a half months of restrictions and home-working guidance in the UK, through to three to four months of lockdowns in Australia and almost the entire six months of lockdown in Singapore. These lockdowns prevented LCM from operating its usual business of origination.

Whilst there will always be external factors which cause increases and decreases in the timing and number of new applications, we are now seeing increased momentum since the start of the new calendar year with a return to more normal operating conditions.

The restricted market conditions during the interim period resulted in our new applications being down by 26% compared to the prior period. That reduction was almost exclusively consequent upon our investment managers in all offices being home bound due to lockdowns. That reduction was not solely due to the constraints upon LCM's staff but also insolvency professionals and lawyers also being subject to the same restrictions. Those lockdowns had a significant impact on our referral lines in all jurisdictions in which we operate in. Notwithstanding this, we generated 196 new applications during the period. Pleasingly we are already seeing a strong and increased demand for our capital, with an acceleration in applications in the first two months of the current period in which we have already received 89 new applications which indicates a return to more normal and positive operating conditions.

The level of commitment was also comparatively lower, noting the prior period contained commitments which were ultimately discontinued due to risks created through a sale and change of ownership in LCM's contracting party. Taking this into consideration, following this adjustment, the level of commitments improved against the prior period. Importantly and encouragingly, as with new applications, we have seen a sharp correction in the market in the first two months of this period with total assets under management increasing from A$343m as at 31 December 2021 to A$386m in early March.

We saw a reduction in capital invested during the interim period. This is due to a series of factors and is neither a trend nor a matter for concern. This will always vary because capital invested is a part of our dispute investments that we manage closely but do not control, and the characteristics of our investments are unusual in that they involve a progressive monthly capital deployment over the life of the dispute on a monthly basis.

Another key factor is the investments have their own life which are managed and brought to an end by the Court or Tribunal and as a result capital investment in a given period depends on the individual investment cycles.

In general terms the capital investment is not linier but rather follows the work levels of the underlying disputes. The investment cycle tends to follow a U curve with increased investment at the beginning and end of the dispute. The investment cycle can fluctuate the volume of capital invested in a given financial period. The other factor at play is the transition from a 100% direct investment strategy from LCM's balance sheet to a co-funding model alongside our fund management business.

Overall, we are very happy with the progress of our portfolio of dispute investments, particularly given the challenging market conditions in the June to December 2021 period.

Asset Management

Our Fund Management business continues to gain traction and achieve strong growth. We are pleased to confirm we have now fully committed our US$150m Global Alternative Returns Fund ("Fund I"), with diversity across jurisdictions, industry sector, claim type and capital commitment. This achievement is notable as the entire fund has been committed in markets adversely affected by Covid. In addition, the Fund has been fully committed inside the 24 month commitment period.

In October, we achieved a US$200m first close of Global Alternative Returns Fund II (Fund II) with a final close target of US$300m which we expect to achieve before the end of the current financial period. We were encouraged that all existing investors in Fund I have increased their commitments in Fund II. The establishment of Fund II and its strong first close of US$200m in October provides LCM with significant capital to continue its growth.

Revenue profile

The business of litigation finance involves a series of investments into disputes and for LCM this has historically ranged, on average, from 25-27 months to complete. Those investments may mature before or after that monthly average and it is important to note that as we invest in larger and more profitable disputes we expect that the investment cycle will lengthen more in line with the estimate we have previously provided ranging between 36 and 42 months. We continue to expect that the time to resolution of investments moving forward will be within that range.

As a result of this, 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 often does not fall neatly within the half or full year results which, therefore, results in profit fluctuations from one period to the next rather than an even and smooth increase in profits from period to period. Therefore emphasis should not be placed on comparing performance from one period to the next in the early stages of growth.

Investment performance

In terms of measuring our ongoing investment performance we measure each investment completed over the past 10 and a half years, including losses, as if they comprised one portfolio irrespective of capital source. These performance metrics are not just the financial result of our investments but a reflection of our thorough and robust due diligence processes and our ability to underwrite and manage risk.

During the 10 and a half year period we have evolved from being a private company to a public company and have utilised our own balance sheet capital as well as managing third party capital. Encouragingly at the ten-and-a-half-year mark we have seen an increase in our investment performance metrics achieving a cumulative Return on Invested Capital (ROIC) of 162%, [including losses] and a cumulative IRR of 79% (HY 2021: 78%).

This demonstrates the clear direction of travel and delivery of consistent growth achieved by LCM. This performance sits within a tight parameter from period-to-period and is a direct reflection of LCM's disciplined project selection and robust risk management processes and systems.

A final point on investment performance which is important to note, and as previously outlined, is that as LCM's business increases in scale we would expect to see a reduction in these performance metrics.

Business fundamentals and building scale

In terms of building LCM's business as an alternative investment manager in the asset class of disputes, there are three fundamental and essential elements. These must not only be present to ensure success, but they must also be achieved in a methodical order.

Underwriting - The first essential element is underwriting expertise. That is the ability to undertake a rigorous due diligence exercise to determine which investments to make and which not to pursue. Underwriting experience cannot be acquired overnight. It is developed over many years of sometimes bitter experience. LCM is fortunate to have been a pioneer in the disputes finance industry with over 23 years' experience. We have made some bad investments in the past, albeit not many, that have helped us learn the craft of selecting which disputes will be successful. The true measure of our underwriting expertise is our track record. Through hard work we have one of the best track records in the industry. Notwithstanding this, we continue to learn and improve our knowledge and systems and will continue to do so into the future.

Access to capital - Investing in disputes is a very capital intensive enterprise. Once an investment is entered into and a commitment made sufficient capital is necessary to see that dispute to its conclusion. The investment is illiquid and there is currently no mature secondary market. In order to build a portfolio of disputes which is diversified by industry sector and jurisdiction and is not attended with concentration risk, sufficient capital is necessary. A disputes financier cannot construct a diversified portfolio without adequate capital.

LCM has in the past years added to its capital structure which has facilitated growth. Most significant is the establishment of our Asset Management business, which has given LCM access to meaningful pools of capital enabling us to not only build out a portfolio of dispute investments but also and importantly create diversification. Increasing our portfolio size will in time smooth our revenue line, while the diversification aids in reducing risk.

We have been fortunate to have attracted the very best long term sophisticated and experienced investors in our asset class. From the support received on Fund II, we expect that those investors will continue to support LCM with their investment capital in future funds. Indeed, our cornerstone fund investors have negotiated entrenched rights to participate in our next two funds.

We will never be complacent about the quality of our fund investors and expect to enjoy long standing relationships well into the future.

Origination - The third element which is fundamental to the success of our business is the ability to originate the highest quality dispute investments globally. The building of a scalable origination platform cannot be achieved without first gaining the experience and secondly attracting the right capital. LCM has best in class skills when it comes to origination. Testament to this is our ability to raise a fund of US$150m in March 2020 and fully commit that fund inside the two year commitment period mandate entirely during Covid.

One of LCM's strategic objectives has been to build out its origination capability such that it can continue to commit current and future funds. Our ability to build out our origination platform will be accelerated by our executive management team being centralised in our London office. That recent development, which had previously been delayed by Covid, will allow that expansion.

Board and Management update

In December 2021, I completed my relocation to London in a strategic move originally planned for 2020, in order to manage LCM's growth from our London office. This has brought our core executive team in one location, with LCM's CEO and CFO now both operating from our London office.

In December 2021, we also announced the departure of Nick Rowles-Davies from the business. From this point, I have been working with the investment managers at our London headquarters. Origination from the London office remains strong and our ability to capitalise on the pipeline ahead is unchanged.

Post-period, in February 2022, we were pleased to announce the appointment of Chief Financial Officer, Mary Gangemi to the Board. Mary joined the Company in April 2020 as Chief Financial Officer, working from the London office and her extensive experience is proving to be extremely valuable as we continue to build out the LCM platform and extend both our own balance sheet commitments and our fund management business.

Outlook

Global markets are still yet to fully stabilise from the shock and uncertainty of Covid. Whilst Covid risks are easing, there is a sharp increase in geo-political risks with the atrocity of the Russian invasion of Ukraine.

Ongoing economic conditions result in businesses operating outside their normal terms of trade. Economic and operational disruption are an ongoing feature of global markets. The economic trade conditions which have and continue to dominate markets create an increased number of disputes. Those disputes have to a large extent not yet been resolved. The same economic conditions that create the disputes also constrain the allocation of budgets to resolve those disputes and recover losses sustained. Businesses tend, in such conditions, to reserve capital for core business activities. Such market conditions will inevitably lead to an increased number of insolvencies, restructuring and bankruptcies. The market is yet to experience those trends due largely to government constraints and economic stimulus. This is further impacted as stimulus packages have concluded and interest rates in most developed economies are set to rise, adding significant pressure to businesses who are likely to be impacted by the lifting of moratoriums preventing the winding up of insolvent companies.

Demand for disputes finance exists in all economic cycles, however, our industry can operate countercyclically. That is, economic and market conditions at present, create opportunity. That opportunity may not be immediate, however, it will occur.

LCM has significant experience in financing complex commercial disputes, insolvencies and restructuring disputes. Additionally, we are well capitalised to fund the opportunities that will follow. We look forward with optimism to the year ahead.

Patrick Moloney

Chief Executive Officer

15 March 2022

Consolidated Statement of Profit or Loss and other Comprehensive Income

For the six months ended 31 December 2021

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

Consolidated statement of financial position

As at 31 December 2021

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

Consolidated statements of changes in equity

For the period ended 31 December 2021

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

Consolidated statements of cash flows

For the period ended 31 December 2021

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

Notes to the financial statements

Note 1

General Information

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

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

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

Level 12, The Chifley Tower

2 Chifley Square

Sydney NSW 2000

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

The financial statements were authorised for issue, in accordance with a resolution of Directors, on 15 March 2022. The Directors have the power to amend and reissue the financial statements.

Note 2

Significant accounting policies

These consolidated financial statements are general purpose financial statements for the interim reporting period ended 31 December 2021 have been prepared in accordance with the Corporations Act 2001 and Australian Accounting Standard AASB 134 Interim Financial Reporting.

These interim financial statements do not include all the notes of the type normally included in annual financial statements. Accordingly, these financial statements are to be read in conjunction with the annual report for the year ended 30 June 2021 and any public announcements made by the Company during the interim reporting period.

Basis of preparation

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

Historical cost convention

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

Critical accounting estimates

The critical accounting judgements, estimates and assumptions that have been applied in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group's annual report for the year ended 30 June 2021.

Operating segments

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

Note 3

Revenue

Note 4

Segment information

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

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

Major customers

During the period ended 31 December 2021 there was 1 major external customer (2020: 4 customers, unrelated to those in 2021) where revenue exceeded 10% of the consolidated revenue. Revenue from each customer for the period ended 31 December 2021 amounted to $18,401,000 (2020: $2,520,000, $1,796,000, $1,259,000 and $1,108,000).

Note 5

Profit/loss before tax

Profit/loss before income tax expense includes the following specific expenses:

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.

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

Leases

Adjusted operating profit/loss

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

Non-operating expenses

Management have opted to separately present these items as it better reflects the Groups underlying performance.

Non-operating expenses includes the following items:

Note 6

Income tax expense 

Statutory tax rate of 25% is applicable to Australian entities with aggregated turnover below $50 million for the period ended 30 June 2022. The Group's turnover is expected to be above the threshold of $50 million in the future reporting periods which will attract a statutory tax rate of 30%. As a result, recognition of deferred tax asset is made by applying a 30% statutory rate instead of the lower 25% tax rate.

Deferred tax asset/(liability)

Deferred tax asset/(liability) comprises temporary differences attributable to:

Note 7

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 8

Trade and other receivables

1Receivables relate to the recovery of litigation projects that have successfully completed which may not have a specified time frame for settlement

2Receivables which form part of a portfolio of litigation projects and settlement of the receivable can be made upon an additional resolution of another litigation project within the portfolio which may not be within a specified contractual due date

Allowance for expected credit losses

The Group has recognised a loss of $nil (June 2021: $nil) in profit or loss in respect of the expected credit losses for the period ended 31 December 2021.

Note 9

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:

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

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

Third-party interests in contract assets

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

Note 10

Borrowings

Reconciliation of borrowings of third-party interests in consolidated entities:

Reconciliation of borrowings of LCM:

On 22 February 2021 the Group entered into a credit facility with with Northleaf Capital Partners for an aggregate amount of US$50,000,000, AUD equivalent of $68,964,000 (the "Facility"). The Facility carries interest of a LIBOR based rate of 8 per cent together with a profit participation calculated by reference to the profitability of a defined category of the Group's investments, and a non-utilisation margin of 1 per cent for the first two years. The Facility is available to be drawn down during the first two years, has an overall term of four years and is secured against the Group's assets. As at 31 December 2021, the Group's outstanding utilisation amounted to US$20,000,000, an AUD equivalent of $27,586,000.

The Group agreed to various debt covenants including a minimum effective net tangible worth, borrowings as a percentage of effective net tangible worth, minimum liquidity, a minimum consolidated EBIT and a minimum multiple of invested capital on concluded contract assets over a specified period. There have been no defaults or breaches related to the Facility during the period ended 31 December 2021. Should the Group not satisfy any of these covenants, the outstanding balance of the Facility may become due and payable.

The Group incurred costs in relation to arranging the Facility of $1,288,000 which were reflected transactions costs and will be amortised over the 4 year term of the borrowings. As at 31 December 2021 $1,035,000 of the loan arrangement fees remained outstanding.

Note 11

Equity - issued capital

Ordinary shares

Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital.

On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.

Ordinary shares - under loan share plan ('LSP')

The Company has an equity scheme pursuant to which certain employees may access a LSP. The acquisition of shares under this LSP is fully funded by the Company through the granting of a limited recourse loan. The shares under LSP are restricted until the loan is repaid. The underlying options within the LSP have been accounted for as a share-based payment. Refer to note 15 for further details. When the loans are settled the shares are reclassified as fully paid ordinary shares and the equity will increase by the amount of the loan repaid.

Ordinary shares - partly paid

As at 31 December 2021, there are currently 1,433,022 partly paid shares issued at an issue price of $0.17 per share. No amount has been paid up and the shares will become fully paid upon payment to the Company of $0.17 per share. As per the terms of issue, the partly paid shares have no maturity date and the amount is payable at the option of the holder.

Partly paid shares entitle the holder to participate in dividends and the proceeds of the Company in proportion to the number of and amounts paid on the shares held. The partly paid shares do not carry the right to participate in new issues of securities. Partly paid shareholders are entitled to receive notice of any meetings of shareholders. The partly paid shareholders are entitled to vote in the same proportion as the amounts paid on the partly paid shares bears to the total amount paid and payable.

Capital risk management

The Group's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital.

Capital is regarded as total equity as recognised in the statement of financial position.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The capital risk management policy remains unchanged from the 30 June 2019 Annual Report.

Note 12

Contingent liabilities

The majority of the Group's funding agreements contain a contractual indemnity from the Group to the funded party that the Group will pay adverse costs awarded to the successful party in respect of costs incurred during the period of funding, should the client's litigation be unsuccessful. The Group's position is that for the majority of litigation projects which are subject to funding, the Group enters insurance arrangements which lessen or eliminate the impact of such awards and therefore any adverse costs order exposure.

Note 13

Third-party interests in consolidated entities

AASB requires the Group to consolidate fund investment vehicles over which it has exposure to variable returns from the fund investment vehicles. As a result, third party interests in relation to the Fund have been consolidated in the financial statements.

As at 31 December 2021, the financial liability due to third-party interests is $57,996,000 (June 2021: $39,764,000), recorded at amortised cost and net of transaction costs. The net amount due comprises cash and cash equivalents, contract costs and trade payables. Third-party interests exclude the 25% co-investment made by Litigation Capital Management Limited and its wholly owned subsidiaries ("LCM"). The third-party interests in the Fund carry an entitlement to receive an 8% soft return hurdle. Upon satisfaction of the third-party interests soft return hurdle, LCM is entitled to performance fees as fund manager on the basis of a deal by deal waterfall. The residual net cash flows are to be distributed 25% to LCM and 75% to the third-party interests until a IRR of 20% is achieved by the third-party interests, thereafter the net residual cash flows are distributed 35% to LCM and 65% to the third-party interests.

The following tables reflect the impact of consolidating the results of the Fund with the results for LCM to arrive at the totals reported in the consolidated statement of comprehensive income and consolidated statement of financial position. The Fund column in the table below presents the interests of third-party investors comprising both the investment in the litigation contracts made on their behalf and costs of administering the fund. The LCM column includes the 25% co-investment in these litigation contracts.

Consolidated Statement of Comprehensive Income