Interim Results

16 March 2021

Litigation Capital Management Limited

("LCM" or the "Company")

Interim results for the half year ended 31 December 2020

Litigation Capital Management Limited (AIM:LIT), an alternative asset manager specialising in dispute financing solutions internationally, announces its interim results for the half year ended 31 December 2020.

Commenting on the results, Patrick Moloney, CEO of Litigation Capital Management, said: "LCM has made significant progress in building scale across the business in the first half of the year. As our strategic alliances with global law firms strengthen, we are receiving an increased flow of quality applications. In addition, the market conditions are increasing the demand for disputes finance.

"The US$50m credit facility, which we secured in February, increases the flexibility of our capital structure allowing us to both increase our portfolio of direct investments in addition to increasing our asset management business.

"LCM now manages a mature portfolio of direct investments, a significant proportion of which is 100% balance sheet funded. We are moving into the period where those investments will reach maturity and are very pleased with the way that the portfolio is maturing into realisation.

"The nature of our business is reliant on parties agreeing to settle a dispute or reaching a court resolution. Consequently, and in line with our conservative revenue recognition, income will flow through at irregular intervals, in line with the timing of these resolutions. That said, LCM continues to deliver consistent returns commensurate with our long-term track record. We expect over time as our portfolio of investments increases for our revenue line to smooth somewhat."

Building scale across all KPIs

Operations

Financials

*exclusive of third party fund consolidation

Post period events and Outlook

An overview of the interim results from Patrick Moloney, CEO is available to view on this link: http://bit.ly/LCM_H1_overview

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

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

The Interim Financial Report is available on https://www.lcmfinance.com/shareholders/annual-reports-financial-reports/

Enquiries

Chief Executives Statement

Market and environment

The last twelve months have, of course, been dominated by the effect of the COVID-19 pandemic and lockdowns in various countries. There has been extraordinary instability in global markets and economies and these conditions are driving increased demand for LCM's capital. In recent months, in all jurisdictions in which we operate and through all offices, we have continued to see an uplift in applications. There is no doubt such uncertainty and instability will continue until the pandemic is brought under control and economies return to a sense of normality.

The challenge of adapting to the new, unprecedented and unusual circumstances has been met and the steady state in the 'new normal' world of disputes is healthy and encouraging. Certain quarters of the legal profession may post very good results this year, despite the pandemic, but the realisation by most law firms that their clients are thinking differently about legal spend and legal budgets has been addressed and disputes finance has been one way to deal with the challenge.

Against the current backdrop of economic pressure caused by the pandemic, industry forecasts suggest there will be a significant increase in insolvency events which is likely to persist for many years. LCM has both significant experience and long-standing and deep referral relationships with insolvency practitioners which presents the Company with a significant opportunity.

Revenue profile

The business of litigation finance involves a series of investments into disputes which historically take, on average 25-27 months to complete. Those investments may mature before or after that monthly average and we expect that the investment cycle will lengthen slightly as we invest in larger and more profitable disputes. 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 often does not fall within the half or full year results, which results in profit fluctuations from one period to the next rather than an even and smooth increase in profits from period to period.

Portfolio by maturity

LCM's entire portfolio comprises a range of maturities with the direct investments, where LCM is funding 100% from balance sheet, being the most mature portion. In the past nine and a half years, LCM's average time to completion is 27 months.

Maturity is based on the length of time lapsed from execution of the Litigation Funding Agreement ("LFA") to 28 February 2021. The number of investments included are only those with an executed LFA.

Portfolio by claim size

LCM's entire portfolio comprising both direct and asset management investment is well balance by individual claim size:

Review of H1

Gross revenue of A$8.10m includes the resolution of two single case investments as well as two investments in our acquisitions of claims strategy.

The statutory loss for the Group after adjusting for income tax and non-controlling interest amounted to A$1.17m (31 December 2019: Profit A$4.81m). Adjusted loss before tax was A$0.18m (31 December 2019: Profit A$6.91m). While there are still some delays resulting from the impact of COVID, these simply shift the expected completion date and consequently revenue, into the following period. This has not led to any impairments.

Cash on balance sheet was A$15.41m as at 31 December 2020 (30 June 2020: A$31.75m). Of this, A$9.57m relates to third-party cash which is restricted cash as it relates to balances held within the fund investment vehicles which have been consolidated with the Group numbers (30 June 2020: A$6.81m). The Group continues to deploy capital into its direct investments as part of its growing portfolio.

Cash generated during the period increased by 15% to A$10.61m (31 December 2019: A$9.20m), including the resolution of two completed matters in addition to resolutions in our two corporate portfolios.

Total invested capital as at 31 December 2020 was A$99.45m inclusive of A$28.04m of third party fund investments (30 June 2020: A$62.52m inclusive of $10.69m third party fund investments).

With A$56m third party capital available (currently uncommitted) in addition to our balance sheet capital and a steady flow of quality investment opportunities, we expect to have the third party fund fully committed by the end of the current financial year.

Direct Investments

Current capital commitment of $171m reflects LCMs direct investments portfolio under management, which now comprises 30 separate investments following the resolution of two matters in H1. We continue to see significant progress with a further four resolutions in the aviation portfolio and one in construction. Both portfolios continue to deliver metrics in line with management expectations.

Asset Management

At 31 December LCM committed 64% of the US$150m Fund across 18 projects since closing its first third party Fund in March 2020. This is now 70% committed following the addition of two conditional investments. The portfolio remains well balanced across commercial litigation (A$27m), insolvency disputes (A$26m), class actions (A$54m) and arbitration (A$38m), evenly split between the APAC (A$88m) and EMEA ($83m) regions. Management expects the Fund will be fully deployed well within the investment period. This reflects LCMs unique solutions based approach to origination which continues to attract a large number of good quality applications. We continue to invest only in a small percentage of the applications that we receive by strictly adhering to high level case selection.

Returns

Across the entire spectrum of investments, LCM has reached a nine and a half year period in terms of evaluating its rolling performance in which it has achieved a cumulative Return on Invested Capital (ROIC) of 135%, including losses, and in the same period has achieved a cumulative IRR of 78%, which highlights it is delivering clear growth. This performance sits within a tight parameter from period-to-period. It is a direct reflection of LCM's disciplined project selection and robust risk management processes and systems.

Strategic Alliances

LCMs approach to origination has been to work closely with certain global law firms and their clients. These relationships are very important both to LCM and to the global law firms. The legal market is extremely competitive. In the current financial climate, law firms not only have to address the requirements of those commercial and corporate clients, but they need to set themselves apart from the competition. The firms that have made arrangements with us are benefitting from the ability to do this and are gaining more work from existing clients and winning new clients with the benefit of their associations with litigation funders. Used appropriately, litigation finance is an excellent business development tool for law firms.

These alliances go much further than simply being a response to in house corporate demands or the business development needs of law firms. Whilst the regular referral of cases is a benefit to LCM, there is also real value both to us and to law firms in the knowledge and experience gained by working closely together, understanding the methodology and then adopting the processes and the thinking that we undertake, even using similar terminology and document precedents.

This exchange of information means the law firms better understand our investment criteria for funding disputes. That leads to a better result for their clients. There is no time and money wasted in non-compliant applications and disputes that can be funded are executed more swiftly whilst those that cannot be funded rejected swiftly, or do not make it past the law firm's triage process.

This is a significant benefit to LCM in terms of efficiency. The task of an Investment Manager within LCM comprises three specific roles; origination, underwriting of potential investment and monitoring of investments. As outlined above, over time our relationships with our strategic law firm partners mean that many hundreds of disputes lawyers, in many jurisdictions, are acting as outsourced Investment Managers to LCM, thus extending our reach and influence around the international disputes world.

Management update

As COVID continues to cause disruption globally, Australia has enforced some of the toughest travel restrictions since the start of the pandemic. As a result I have had to defer my relocation until there is more clarity on when restrictions are likely to be lifted and we continue to monitor the situation closely.

Across all territories, the LCM team works through a cloud-based solution, therefore retain the flexibility to continue to provide high levels of service should they need to work remotely. The safety and wellbeing of our staff is paramount to us.

In August 2020, LCM appointed Gerhard Seebacher as a non-executive, whose experience in global financial services and his breadth of financial relationships will be extremely valuable as LCM continues to expand its global portfolio.

Current trading and outlook

Update on near term strategies

At the year end, we identified the following priorities on which we expect to focus and achieve in the near term:

· In light of the uncertainty of global markets and the impact COVID is having on economies globally and the changing investment landscape, we are considering either an upsize of the existing third-party fund or a new second fund. We are well advanced in those considerations and in discussions with relevant stakeholders

· Following the recently observed growth in opportunities and portfolio investments, we identified at the year end the possibility of supplementing LCM's balance sheet capital to meet the increasing demand. In February 2021 we secured a US$50 million credit facility which enables us to accelerate growth and provide us with a flexible capital structure for the foreseeable future in order to meet our most conservative needs while giving us the opportunity to consider larger investments

· The expected increase in insolvency and restructuring disputes over the next 12 to 18 months, presents LCM with a significant opportunity as we have both significant experience and long-standing and deep referral relationships with insolvency practitioners.

· Increased resolution of investments in the near term as LCM is moving into a period where a significant number of matters are nearing the 27 month average time to completion.

We continue to focus on our longer-term goals and evolve them in line with current market conditions to ensure we maintain our innovative approach to growth.

Patrick Moloney

Chief Executive Officer

Consolidated Statement of Profit or Loss and other Comprehensive Income

For the six months ended 31 December 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 31 December 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 31 December 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 31 December 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 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 16 March 2021. 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 2020 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 2020 and any public announcements made by the Company during the interim reporting period.

In addition to the accounting policies outlined in the Group's annual report for the year ended 30 June 2020, the following policy has been adopted during the half year ended 31 December 2020:

Financial assets and liabilities at amortised cost

Financial assets and liabilities held at amortised cost includes third party interests in consolidated entities and portfolio costs. Financial assets and liabilities are initially recognised at fair value, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method, less any allowances for expected credit losses.

Basis of preparation

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 2020.

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 2020 there were 4 major external customers (2019: 4 customers, unrelated to those in 2020) where revenue exceeded 10% of the consolidated revenue. Revenue from each customer for the period ended 31 December 2020 amounted to $2,520,000, $1,796,000, $1,259,000 and $1,108,000 (2019 $8,560,000, $6,500,000 $4,052,000 and $3,426,000).

Note 5 (Loss)/profit before tax

1 Includes employers pension contributions for UK staff

Adjusted operating (loss)/profit

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

Non-operating expenses

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

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 6 Income tax expense

Statutory tax rate of 26% is applicable to Australian entities with aggregated turnover below $50 million for the period ended 30 June 2021. 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 26% tax rate.

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

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 (June 2020: $nil) in profit or loss in respect of the expected credit losses for the year ended 31 December 2020.

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

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:

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 of litigation contracts:

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

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

· The discount rate applied to the cash flow projections is based on the Group's weighted average cost of capital and other factors relevant to the particular litigation contract. The discount rate applied was 15% (June 2020: 15%).

Based on the above, the Group has recognised impairment losses of $nil (June 2020: $nil) in profit or loss on contract costs for the year ended 31 December 2020.

Note 10 Portfolio costs - litigation contracts

Portfolio costs

Portfolio costs are assets measured at amortised cost that relate to the provision of law firm funding.

Note 11 Equity - issued capital

Note 12 Equity - Share-based payments reserve

Share-based payments reserve

The reserve is used to recognise the value of equity benefits provided to employees and Directors as part of their remuneration, and other parties as part of their compensation for services.

Movements in reserves

Movements in each class of reserve during the current and previous financial year are set out below:

Note 13 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 14 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 2020, the financial liability due to third-party interests is $31,532,000 (June 2020: $12,600,000), 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.

1 During the period LCM incurred placement fees and other costs in relation to the LCM Global Alternative Returns Fund. The amounts are reflected as transaction costs and reflected in the LCM statement of financial position above.

Note 15 (Loss)/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. As at 31 December 2020, there were 5,284,501 shares calculated for inclusion in diluted earnings per share, however these were not included due to their anti-dilutive effect.

Note 16 Share-based payments

The share-based payment expense for the year was $240,000 (2019: $210,000).

Employee share option scheme

A share option plan has been established by the Group and approved by shareholders at a general meeting, whereby the Group may, at the discretion of the Nomination and Remuneration Committees, grant options over ordinary shares in the Company to certain key management personnel of the Group. The options are issued for nil consideration and are granted in accordance with performance guidelines established by the Nomination and Remuneration Committees.

Set out below are summaries of options granted under the employee share option plan:

2020

Loan Funded Share Plans (LSP)

The Group has an equity scheme pursuant to which certain employees may access a LSP. The shares under LSP are issued at the exercise price by granting a limited recourse loan. The LSP shares are restricted until the loan is repaid. These shares are recorded as treasury shares representing a deduction against issued capital. Accordingly, the underlying options have been accounted for as a share-based payments. The options are issued over a 1-3 year vesting period. Vesting conditions include satisfaction of customary continuous employment with the Group and may include a share price hurdle.

During the period the Group granted 616,520 (2019: 2,002,700) shares under the LSP.

Set out below are summaries of shares/options granted under the LSP:

2020

For the options under LSP granted during the period, the valuation model inputs used in the Black-Scholes option pricing model to determine the fair value at the grant date, are as follows:

1 AUD amount. GBP equivalent £0.14356.

The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome.

Note 17 Events after the reporting period

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

Directors' Declaration

31 December 2020

In the Directors' opinion:

1. the attached financial statements and notes comply with the Corporations Act 2001, Australian Accounting Standards and other mandatory professional reporting requirements;

a. complying with Accounting Standard AASB 134: Interim Financial Reporting; and

b. the attached financial statements and notes give a true and fair view of the consolidated entity's financial position as at 31 December 2020 and of its performance for the period ended on that date;

2. there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of Directors.

On behalf of the Directors

Patrick Moloney

Chief Executive Officer

Director

16 March 2021