CS Disco
Annual Report 2018

Plain-text annual report

2018 Annual Report for the six months ended 31 December 2018 ABN 72 088 749 008 LawFinance Limited (formerly JustKapital Limited) Contents 31 December 2018 Corporate directory Chief Executive Officer's Letter Directors' report Auditor's independence declaration Statement of profit or loss and other comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements Directors' declaration Independent auditor's report to the members of LawFinance Limited Shareholder information 2 3 4 19 20 21 22 23 24 70 71 76 1 LawFinance Limited (formerly JustKapital Limited) Corporate directory 31 December 2018 Directors Tim Storey - Non-Executive Chairman Diane Jones - Chief Executive Officer, Executive Director Anthony Murphy - Non-Executive Director David Wattel - Executive Director Company secretary Dean Jagger Registered office Share register Auditor Solicitors Level 16 56 Pitt Street Sydney NSW 2000 Tel: +61 2 9696 0220 Fax: +61 2 9252 3430 Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Tel: 1300 554 474 Fax: +61 2 9287 0303 Stantons International Level 2 22 Pitt Street Sydney NSW 2000 Corrs Chambers Westgarth Level 17 8-12 Chifley Square Sydney NSW 2000 Stock exchange listing LawFinance Limited shares are listed on the Australian Securities Exchange (ASX code: LAW) Website www.lawfinance.com.au Corporate Governance Statement The corporate governance statement which is approved at the same time as the Annual Report can be found at: http://www.lawfinance.com.au/investor- centre/governance/ The directors support and adhere to the principles of corporate governance, recognising the need for the highest standard of corporate behaviour and accountability. 2 LawFinance Limited (formerly JustKapital Limited) Chief Executive Officer's Letter 31 December 2018 Dear Shareholders This has been a very demanding period for LawFinance Limited. We finalised the purchase of National Health Finance, Holdco, LLC and its subsidiaries (“NHF”) on 28 September 2018, following approval by you, our shareholders, on 26 September 2018. The purchase of NHF for US$53M (plus acquisition costs) was funded by a mixture of new debt (US$42M) which is repayable 4 years from now, and new equity (US$18M). The transaction was supported by debt and equity from several well-known institutions and family offices including cornerstone funding from Washington H Soul Pattinson Limited and two of our major shareholders: EGP Capital and Lucerne Investment Partners. NHF funds personal injury liens related to medical expenses incurred by an accident victim which are covered by the at fault and/or the victim’s automobile insurer. The business is very similar to our disbursement funding operation in Australia, which also operates in the personal injury area. We are now a much bigger Group with operations in Australia and the US. We expect our two books of debtors to collect approximately US$123M over the next three or so years. The integration of the two organisations is well underway and we have developed strong working relationships across the Group. There have been a number of key achievements that I wanted to highlight: • • • • • The Australian disbursement funding business has US$27M of Net Loan Receivables (or expected cash collections) as at 31 December 2018. This represents year on year growth of 21%. The Australian disbursement funding business achieved cash collections of US$10M in CY2018, a 30% growth rate from CY2017. The US medical lien funding business has US$96M of Net Loan Receivables (or expected cash collections) as at 31 December 2018. The US medical lien funding business generated cash collections of US$6M for the three months to 31 December 2018. There have now been four case settlements in the litigation portfolio. The remaining 7 cases will be funded to their conclusion, which is expected over the next 12 to 18 months. The litigation portfolio is expected to generate further cash to the Group of over US$16M in this period. Although the above highlights are extremely positive, as a fellow shareholder, I am disappointed with the loss we have delivered in this period. There are no excuses for underperformance but there were a number of factors that contributed to this outcome. The Group incurred significant costs of US$5.8M undertaking this transformation and a number of one-off expenses, including a US$3.5M write-down of our litigation funding assets. Due to the application of the accounting standards, the US operations contributed a loss during the one quarter of our ownership of US$1.8M (as we were only able to record 9% of expected profit from the sales achieved in the quarter). We do not believe that this is a meaningful reflection of the operations value to LawFinance. After a long journey completing this transaction we are very excited about the future. We have substantial cashflow; US dollar earnings; and a business that is cyclically resilient. I feel confident that the business is well placed to take advantage of the exciting opportunities that lie ahead. Diane Jones Chief Executive Officer 3 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'Group') consisting of LawFinance Limited (referred to hereafter as the 'Company' or 'parent entity') and the entities it controlled at the end of, or during, the period ended 31 December 2018. Directors The following persons were directors of LawFinance Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Tim Storey Anthony Murphy Diane Jones David Wattel (Appointed 26 September 2018) Nature of operations and principal activities During the financial period the Group purchased National Health Finance Holdco, LLC and its subsidiaries ('NHF'). NHF operates a medical lien funding business in the United States. NHF purchases medical treatment receivables associated with a personal injury case (a car accident) from medical practitioners at a discount from the full value of the invoice. NHF’s return is realised upon payment by the at-fault party or their insurance carrier. Due to its size, this business has now become the most significant component of the Group’s operations. The principal activities of the Group consisted of: ● Medical lien funding; ● ● ● Disbursement funding and short-term funding; Insurance broking for after the event insurance, which has now ceased operations; and Litigation funding, which is being wound down. Medical lien funding Established in 1999, the NHF business is an Arizona based medical lien funding business with operations in 19 states in the United States. The medical liens purchased generally relate to the not at fault personal injury victims involved in motor vehicle accidents. NHF purchases a lien or obtains a letter of protection over medical receivables associated with personal injury cases from healthcare providers and hospitals. The return to NHF is realised upon payment by the at-fault party or their insurance carrier on conclusion of the litigation either by settlement or judgment. NHF provides a funding solution for the victim of a motor vehicle accident by facilitating access to medical care they would likely not otherwise receive. NHF’s funding solution enables medical providers to obtain quick liquidity and reduce the administrative burden by managing the medical claims through the litigation process. Medical providers working on a lien basis who do not use the NHF solution are required to wait for a successful conclusion of the legal proceeding before being paid. Disbursement funding and short-term funding The disbursement funding division and short-term funding division have been merged and are referred to as 'JustKapital Finance'. 4 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 JustKapital Finance provides finance to law firms to fund the legal disbursements required by lawyers to progress the claims of their clients which the client generally cannot fund themselves. The deferred payment structure offered by JustKapital Finance addresses the immediate and growing market requirement whereby the client or firm cannot, nor may not be willing to, fund disbursements directly. The Group does not fund the legal fees related to the case. The Group pays the disbursements directly, charges a standardised mark-up and immediately invoices the law firm once the disbursements are paid. The Group’s invoice becomes payable upon completion of the underlying case, which on average is in about 18 months' time. Discounts may be provided from the invoiced cost if the case concludes quickly or in other exceptional circumstances. The key business driver of the disbursement funding business is to ensure that the law firm client progresses the case within normal parameters. In any given financial period, the profitability of the disbursement funding business is dependent upon revenue and discount levels. Legislative, regulatory, judicial and policy changes may have an impact on future profitability. JustKapital Finance also provides short-term working capital finance to law firms for a duration of less than 12 months. There appears to be demand for this funding structure, which is otherwise unavailable to the law firm. The short-term facility is only provided to law firms who use JustKapital exclusively for their disbursement funding requirements (where the client of the law firm cannot pay their disbursements). The short-term funding division was established in July 2016 and has been tested successfully since its inception. The Group continues to assess whether there is a large market requirement for this product. Insurance broking This business line provides insurance broking services to place policies for Adverse Costs Order Insurance and Security for Costs Deeds, earning broker fees and commissions. This business line was established in September 2016. The key business driver of this business line is the negotiation with Insurers and the placement of Adverse Costs Order Insurance policies and Security for Costs Deeds for applicants. This operation has not developed as was anticipated and therefore the Board determined this division should be closed down during the period. Litigation funding During the 2018 financial year the Board resolved to exit the litigation funding division. The litigation funding division is capital intensive which created a strain on the Group’s working capital resources. Therefore, the Board determined that the best use of the Group’s limited resources was to invest in its profitable businesses. The litigation funding division provided investigation and management services, as well as providing finance to claimants to progress their claim. These services and funding are provided pursuant to a contract with a claimant. The Group does not provide legal advice to any claimant. The key business driver is to manage and fund the litigation to a successful conclusion. If the litigation is successful, the Group earns a fee and will also be reimbursed the costs paid to progress the litigation, both of which are payable from the sums recovered in the litigation. The fee is generally a percentage of the settlement or judgement proceeds. If the litigation is unsuccessful, the Group does not generate any income. In certain jurisdictions, the litigation funding agreement contains an undertaking to the contracted parties that the Group will pay any adverse costs ordered in respect of the costs incurred by the defendant(s) during the period of funding. Since its inception the has Group funded 11 cases. Four of these cases have been successfully concluded. The remaining 7 cases will continue to be funded until their conclusion. Dividends There were no dividends paid, recommended or declared during the current or previous financial period. Review of operations The loss for the Group for the six months ended 31 December 2018 after providing for income tax and non-controlling interest amounted to US$11,227,000 (year ended 30 June 2018: US$5,142,000). The contribution from the medical lien funding business included in this result was for the period 1 October 2018 to 31 December 2018, reflecting the Group’s commencement of effective control. The Group changed its financial year from 30 June to 31 December in order to synchronise its financial year with that of its US subsidiaries. The financial statements have been prepared for the 6 months ended 31 December 2018. The comparative accounting period is for the 12 months ended 30 June 2018, therefore the results are not directly comparable. During the period, the Group changed the currency in which it presents its financial statements from Australian dollars to US dollars, in order to better reflect the underlying performance of the Group. 5 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Significant changes in the state of affairs Effective 1 October 2018, the Company obtained control of the medical lien funding business in the United States. Following completion of this acquisition, the Group now operates in 5 states in Australia and 19 states in the United States, becoming an international operation. Prior to the acquisition, the Group was an Australian based business. The acquisition was approved by shareholders at an extraordinary shareholders meeting held on 26 September 2018. On 1 October 2018, the Company changed its name from JustKapital Limited to LawFinance Limited. As noted in the last annual report, the litigation funding division has agreed not to fund any new cases and the existing cases are continuing to be funded to their completion. During the period the Board decided to cease operating the insurance broking operations as this operation had not developed as was anticipated. There were no other significant changes in the state of affairs of the Group during the financial period. Matters subsequent to the end of the financial period No matter or circumstance has arisen since 31 December 2018 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. Likely developments and expected results of operations Information on likely developments in the operations of the Group and the expected results of operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Experience and expertise: Other current directorships: Tim Storey Non-Executive Chairman, Non-Executive Director Tim holds a number of directorships in various private and public companies. He is a barrister and solicitor and was a partner at one of New Zealand’s premier law firms through to 2006 and has practised in both Australia and New Zealand, focusing on corporate, commercial and property transactions. He is a member of the Institute of Directors (NZ) and the Financial Services Institute of Australasia. Chairman of Stride Property Group (NZX: SPG) and Director of Investore Property Limited (NZX: IPL). Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options/warrants: Interests in rights: Member of the Remuneration Committee and Chairman of the Audit and Risk Committee 6,603,014 ordinary shares Nil options/warrants over ordinary shares Nil performance rights over ordinary shares 6 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Name: Title: Experience and expertise: Anthony Murphy Non-Executive Director Anthony is the Chief Executive Officer of Lucerne Investment Partners and is responsible for overseeing and leading both Group strategy and ongoing management at Lucerne Investment Partners. Anthony founded and led the Australian Wealth Management business at Canaccord Genuity – a global investment bank. Anthony holds a Bachelor of Economics and Bachelor of Commerce degrees from Australian National University. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Chairman of the Remuneration Committee and member of the Audit and Risk Committee 1,015,000 ordinary shares Nil options/warrants over ordinary shares Nil performance rights over ordinary shares Interests in shares: Interests in options/warrants: Interests in rights: Name: Title: Experience and expertise: Diane Jones Chief Executive Officer, Executive Director Prior to joining LawFinance Limited in 2016, Diane was the Chief Operating Officer, Chief Financial Officer and Company Secretary of Australia’s largest litigation funder IMF Bentham Limited (ASX: IMF). None Other current directorships: Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options/warrants: Interests in rights: Contractual rights to shares: Diane retained the role of Group Company Secretary up to 15 November 2018. 3,574,098 ordinary shares Nil options/warrants over ordinary shares Nil performance rights over ordinary shares 500 convertible bonds Name: Title: Experience and expertise: David Wattel Executive Director David graduated from the University of Illinois in 1984 with a degree in economics before obtaining his Juris Doctor (JD) in 1988 from Arizona State University College of Law. He has practiced personal injury law ever since graduating. He founded Wattel & York; a multi-state personal injury and medical malpractice law firm. He speaks at numerous conferences in the area of personal injury and litigation. David has been actively managing and overseeing the growth of NHF. Other current directorships: None Former directorships (last 3 years): None None Special responsibilities: 107,548,701 ordinary shares Interests in shares: 61,431,818 warrants over ordinary shares; Nil options over ordinary shares Interests in options/warrants: Nil performance rights over ordinary shares Interests in rights: 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company secretary Dean Jagger was appointed Company Secretary on 15 November 2018. Dean works in the company secretarial division of Automic Group, a professional services company providing company secretarial, legal, registry and accounting services to Australian entities. Dean provides company secretarial and corporate compliance services to several listed and private companies. Dean has over 10 years’ experience in the financial services sector. The previous Company Secretary was Diane Jones who resigned from the position on 15 November 2018. 7 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Meetings of directors The number of meetings of the Company's Board of Directors ('the Board') held during the period ended 31 December 2018, and the number of meetings attended by each director were: Tim Storey Anthony Murphy Diane Jones David Wattel Full Board Attended Held 6 6 6 3 6 6 6 4 Held: represents the number of meetings held during the time the director held office. The Audit and Risk Committee and Remuneration Committee meetings were combined with Board meetings as detailed above. Remuneration report (audited) The remuneration report details the key management personnel ('KMP') remuneration arrangements for the Group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: ● ● ● ● ● ● Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation General performance and link to remuneration policy Additional disclosures relating to KMP Details of the KMP The KMP currently comprise of the following directors and other senior executives of the Group. Name Title Non-Executive Directors Tim Storey Anthony Murphy Non-Executive Chairman, Non-Executive Director Non-Executive Director Executive Director Diane Jones David Wattel Senior Executives Anthony Hersch Craig Beatton Sarika Merchant Richard Cruz Chief Executive Officer, Executive Director Chief Executive Officer - NHF, Executive Director (Appointed on 26 September 2018) Chief Operating Officer Chief Financial Officer Chief Financial Officer - NHF (Appointed on 1 October 2018)* Chief Operating Officer - NHF (Appointed on 1 October 2018)* * Date of effective control of NHF 8 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Principles used to determine the nature and amount of remuneration Remuneration & Nominations Committee ('R&NC') Due to changes to the size and composition of the Board, the responsibilities of the R&NC continued to be performed by the full Board during the financial period ended 31 December 2018. Therefore, during the financial period ended 31 December 2018 the Board was responsible for the following in relation to the remuneration policy and practices of the Group: ● determining and reviewing remuneration arrangements for the Board of Directors ('the Board') and the senior executives; and assessing the appropriateness of the nature and amount of the emoluments of the directors and senior executives by reference to relevant employment market conditions, with the overall objective of ensuring the best stakeholder benefit from the Board and executive team ● Remuneration policy The remuneration policy of the Group has been designed to align KMP objectives with shareholder and business objectives by providing a fixed remuneration component and offering specific short term and long term incentives based on key performance areas affecting the Group’s financial results. During the financial period ended 31 December 2018, the Board’s policy for determining the nature and amount of remuneration for KMP of the Group was developed by the R&NC and approved by the Board prior to the financial period ended 31 December 2018. This is detailed below: ● ● ● ● senior executives receive a fixed remuneration component; senior executives may receive a variable remuneration component via performance incentives; performance incentives are paid once predetermined key performance indicators ('KPIs') have been met; incentives paid in the form of options or rights are intended to align the interests of the Group and senior executives with those of the shareholders. In this regard, KMP are prohibited from limiting risk attached to those instruments by use of derivatives or other means; and senior executive packages are reviewed annually by reference to the Group’s performance, executive performance and comparable information from industry sectors. ● Non-executive directors remuneration Non-executive directors' fees and payments are reviewed annually. Usually, this review will be undertaken by the R&NC, however, due to the current structure of the Board, this responsibility has currently moved to the Board. The chairman's fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The chairman is not present at any discussions relating to the determination of his own remuneration. Non-executive directors may be offered the opportunity, and encouraged, to participate in the Group’s equity plan arrangements to align their interests with shareholder interests. Non-executive director fees Role US$ Chairman Non-Executive Director 75,905 54,218 ASX listing rules require the aggregate non-executive director remuneration be determined periodically by a general meeting. The most recent determination was at the Annual General Meeting held on 30 November 2011, where the shareholders approved a maximum annual aggregate remuneration of US$216,870 (A$300,000). Executive remuneration The Group aims to reward executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. The executive remuneration and reward framework has the following components, the combination of these comprise the executive's total remuneration. Fixed remuneration Fixed compensation, consisting of base salary, superannuation and non-monetary benefits, is reviewed annually by the R&NC. The process consists of a review of Group and individual performance, relevant comparative compensation in the market and internally and, where appropriate, external advice on policies and practices. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the Group and provides additional value to the executive. 9 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Variable remuneration The objective of the variable compensation incentive is to reward executives in a manner that aligns this element of their compensation with the objectives and internal KPIs of the Group. The total potential incentive available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and such that the cost to the Group is reasonable in the circumstances. The variable component is delivered in two parts: a) Short Term Incentive Plan ('STIP') The STIP is a discretionary annual bonus payment available to participants who are senior executives of the Company and is based on a percentage (up to 30% for the financial period ended 31 December 2018) of the senior executive participants total fixed remuneration ('TFR'), payable in cash or ordinary shares of the Company at the discretion of the Board. The purpose of the STIP component is to provide an annual 'at risk' incentive to senior executive participants that is linked to the achievement of specific financial and non-financial objectives. Participants are eligible to participate in the STIP from the beginning of each financial year, which is also when financial and non-financial performance objectives are set for each Executive Participant. At the end of the financial year, the financial objectives are reassessed for the following financial year, and may include stretch targets where the Board thinks this is consistent with enhancing Total Shareholders Return ('TSR'). b) Long Term Incentive Plan ('LTIP') The LTIP is a discretionary bonus available to directors and senior executives and complements the STIP. The LTIP encourages equity ownership and gives participants the opportunity to be rewarded for shareholder value creation. options; The LTIP comprises any one, or a combination of the following: (i) (ii) performance rights (or, in certain circumstances, a cash payment in lieu of shares); and/or (iii) plan loan under the Loan Agreement (for the purpose of funding the issue price of the shares offered Use of remuneration consultants During the financial period ended 31 December 2018, the Board engaged HRascent to review and advise on KMP remuneration, for both directors and senior executives. The fees paid for this review and advice was US$19,880. Voting and comments made at the Company's 2018 Annual General Meeting ('AGM') At the 2018 AGM held on 15 November 2018, 98.68% of the votes received supported the adoption of the remuneration report for the year ended 30 June 2018. 10 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Details of remuneration Amounts of remuneration Remuneration for the period 1 July 2018 to 31 December 2018. Short-term benefits EIP and bonuses Salary and fees Post- employment benefits Super- Long-term benefits Long service leave Share- based payments Equity- settled Non- monetary annuation 6 months ended 31 December 2018 Executive directors: Diane Jones David Wattel (i) Non-Executive Directors: Tim Storey (ii) Anthony Murphy Other KMP: Anthony Hersch Craig Beatton Sarika Merchant (iii) Richard Cruz (iii) US$ US$ US$ US$ US$ US$ 164,268 100,833 72,290 2,298 27,651 20,301 - - - - - - 7,421 - - 1,929 119,086 74,271 56,400 57,500 620,310 - - 27,298 52,298 154,184 - - 983 1,135 2,118 7,421 7,056 - - 23,827 - - - - - - - - - - - - - - - - - - Total US$ 243,979 103,131 27,651 22,230 126,507 81,327 84,681 110,933 800,439 (i) From date of appointment, 26 September 2018 to 31 December 2018. The short-term benefits paid in the period related to liabilities assumed as part of the purchase of NHF. (ii) Prolex Limited, an entity associated with Tim Storey, was paid US$27,651 for directors fees and bonuses (2018: US$65,056). (iii) From date of appointment, 1 October 2018 to 31 December 2018 (date of effective control of NHF). The short-term benefits paid in the period related to liabilities assumed as part of the purchase of NHF. Remuneration for the period 1 July 2017 to 30 June 2018. 12 months ended 30 June 2018 Executive Directors: Philip Kapp (i), (viii) Diane Jones (ii) Non-Executive Directors: Tim Storey (iii), (ix) Michael Hill (iv) Anthony Murphy (v) Other KMP: Anthony Hersch (vi) Craig Beatton (vii) Short-term benefits EIP and bonuses Salary and fees Post- employment benefits Super- Long term benefits Long service Leave Share- based payments Equity- settled Non- monetary annuation US$ US$ US$ US$ US$ US$ Total US$ 329,806 318,105 - 116,040 47,963 24,020 22,608 - - - 255,250 144,829 1,142,581 58,020 38,680 212,740 - - - - - - - - - 15,510 - 2,282 2,148 15,510 13,759 49,209 - - - - - - - - 93,233 73,810 423,039 523,465 17,093 - - 65,056 26,302 24,756 38,847 - 367,627 197,268 222,983 1,627,513 11 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 (i) (ii) (iii) Philip Kapp resigned as Executive Chairman and Managing Director on 31 October 2017. He received a payment of US$147,695 inclusive of notice on termination which is included in Salaries and fees above. Diane Jones was appointed interim Chief Executive Officer on 31 October 2017 and appointed Executive Director and Chief Executive Officer on 27 November 2017. Tim Storey was appointed Non-executive Chairman on 31 October 2017, prior to which he was a Non-Executive Director. Michael Hill resigned as Non-Executive Director on 27 November 2017. Anthony Murphy was appointed Non-Executive Director on 31 October 2017. Anthony Hersch was appointed Chief Operating Officer on 27 November 2017. (iv) (v) (vi) (vii) Craig Beatton was appointed Chief Financial Officer on 27 November 2017. (viii) Kapp Consulting Pty Limited, an entity associated with Philip Kapp, was paid US$329,806 for directors fees. (ix) Prolex Limited, an entity associated with Tim Storey, was paid US$47,963 for directors fees and bonuses. The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Executive Directors: Philip Kapp Diane Jones David Wattel Non-Executive Directors: Tim Storey Michael Hill Anthony Murphy Other KMP: Anthony Hersch Craig Beatton Sarika Merchant Richard Cruz Fixed remuneration 6 months 31 December 2018 12 months 30 June 2018 Performance related - STIP Performance related - LTIP 12 months 30 June 2018 12 months 30 June 2018 6 months 31 December 2018 6 months 31 December 2018 - 70% 98% 100% - 100% 100% 100% 68% 53% 78% 64% - 74% 100% 100% 73% 80% - - - 30% 2% - - - - - 32% 47% - 22% - - - - 16% 20% - - - - - - - - - - - - 22% 14% - 26% - - 11% - - - Service agreements Remuneration and other terms of employment for KMP are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Tim Storey Non-Executive Chairman, Non-Executive Director 1 April 2015 Ongoing Tim is paid a gross salary of US$75,905 (A$105,000) (US$34,700 (A$48,000) until 30 September 2018) per annum. Anthony Murphy Non-Executive Director 31 October 2017 Ongoing Anthony is paid a gross salary of US$54,218 (A$75,000) (US$34,700 (A$48,000) until 30 September 2018) per annum inclusive of superannuation. 12 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Diane Jones Chief Executive Officer, Executive Director 15 March 2016 Ongoing Diane is paid a gross salary of US$397,595 (A$550,000) (US$289,160 (A$400,000) until 30 September 2018) per annum inclusive of superannuation. Notice period is 6 months by the Company or 3 months by the employee. David Wattel Executive Director 28 September 2018 Ongoing David is paid a gross salary of US$400,000 per annum inclusive of superannuation. Notice period is 1 month by the company, or 3 months by the employee. Refer to details of bonus at the end of this section. Anthony Hersch Chief Operating Officer 18 April 2016 Ongoing Anthony is paid a gross salary of US$253,015 (A$350,000) per annum inclusive of superannuation. Notice period is 3 months. Craig Beatton Chief Financial Officer 9 September 2016 Ongoing Craig is paid a gross salary of US$162,653 (A$225,000) per annum inclusive of superannuation. Notice period is 1 month. Sarika Merchant Chief Financial Officer - NHF 11 April 2018 Ongoing Sarika is paid an annual salary of US$225,000 per annum; No notice period. Richard Cruz Chief Operating Officer - NHF No signed agreement in place NA Richard is paid an annual salary of US$230,000 per annum; No notice period. KMPs have no entitlement to termination payments in the event of removal for misconduct. Details of bonus David Wattel is entitled to receive a US$4.15m non-discretionary bonus paid equally over 5 quarterly payments (US$0.83m per quarter) after satisfaction of the following criteria: (a) US$50m of the acquired book of Net Receivables (Gross Accounts Receivables less provision for discounts) is collected; and (b) Net Receivables (Gross Accounts Receivables less provision for discounts) has achieved the following hurdles: ● ● ● ● ● By 31/03/2020, Net Receivables is at least US$175m By 30/06/2020, Net Receivables is at least US$180m By 30/09/2020, Net Receivables is at least US$190m By 31/12/2020, Net Receivables is at least US$199m By 31/03/2021, Net Receivables is at least US$209m (c) The NHF Founder Promissory Notes of US$9m are repaid in full (Refer to note 19); and 13 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 (d) Both Atalaya Capital Management and Washington H. Soul Pattinson have consented to the payment in writing. Share-based compensation Issue of shares During the period ended 31 December 2018, 1,264,569 ordinary shares were issued to directors and senior executives as a result of performance rights granted through the financial year ended 30 June 2017 LTIP vesting and being exercised. Details are provided in the following tables. Options There were no options over ordinary shares granted to or vested by directors and other KMP as part of compensation during the period ended 31 December 2018. Performance rights There were no performance rights over ordinary shares granted to directors and other KMP as part of compensation during the period ended 31 December 2018. General performance and link to remuneration policy The earnings of the Group for the five years to 31 December 2018 are summarised below: 31 December 2018 30 June 30 June 30 June 30 June 2018 2017 2016 2015 US$'000 US$'000 US$'000 US$'000 US$'000 Total revenue and other income EBITDA (excluding the litigation funding business) Loss after income tax 4,675 5,918 3,570 (675) - 240 (11,427) 2,857 (5,142) 1,929 (4,279) (1,603) (2,034) - (4,965) The factors that are considered to affect TSR are summarised below: 31 December 2018 30 June 30 June 30 June 30 June 2018 2017 2016 2015 Share price at financial year end (A$) Basic loss per share (cents per share) Diluted loss per share (cents per share) 0.074 (4.56) (4.56) 0.070 (3.68) (3.68) 0.200 (3.53) (3.53) 0.230 (1.85) (1.85) 0.190 (10.94) (10.94) Short Term Incentive Plan Financial period ended 31 December 2018 - STIP Diane Jones was paid a short term incentive of $72,290 to reflect her efforts in successfully completing the purchase of NHF. There were no other short term incentives granted during the financial period ended 31 December 2018. Short Term Incentive Plan Financial year ended 30 June 2018 - STIP The following table provides the details of STIP opportunity for directors and KMP’s for performance during the financial year ended 30 June 2018: Name Diane Jones Anthony Hersch Craig Beatton Role Maximum US$ Chief Executive Officer Chief Operating Officer Chief Financial Officer 116,040 58,020 38,680 Long Term Incentive Plan There were no grants of equity under the LTIP during the financial period ended 31 December 2018 and 30 June 2018. 14 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Additional disclosures relating to KMP Shareholding The number of ordinary shares in the Company held during the financial period by each director and other members of KMP of the Group, including their personally related parties, is set out below: Tim Storey Anthony Murphy Diane Jones David Wattel Anthony Hersch Craig Beatton Balance at Received as part of the start of the period 3,218,212 840,000 1,427,366 - 578,614 - 6,064,192 remuneration Additions 3,218,212 - 175,000 - - 1,427,366 - 107,548,701 - - - 50,000 - 112,419,279 Disposals/ other* Balance at the end of the period 166,590 - 719,366 6,603,014 1,015,000 3,574,098 - 107,548,701 957,227 50,000 1,264,569 119,748,040 378,613 - * Includes vesting of previously granted Performance rights. During the financial period ended 31 December 2018, there were no shares in the Company held by directors and KMP’s other than those disclosed in the table above. Performance rights holding The number of performance rights over ordinary shares in the Company held during the financial period by each director and other members of KMP of the Group, including their personally related parties, is set out below: Tim Storey Diane Jones Anthony Hersch Balance at the start of the period Granted 166,590 719,366 378,613 1,264,569 Vested (166,590) (719,366) (378,613) (1,264,569) - - - - Expired/ forfeited/ other Balance at the end of the period - - - - - - - - During the financial period ended 31 December 2018, there were no performance rights over ordinary shares in the Company held by directors and KMP’s other than those disclosed in the table above. Convertible bonds The number of convertible bonds in the Company held during the financial period by each director and other members of KMP of the Group, including their personally related parties, is set below: Balance at Received the start of the period part of remuneration Additions Disposals/ Other Balance at the end of of the period Diane Jones 500 - - - 500 During the financial period ended 31 December 2018, there were no convertible bonds in the Company held by directors and KMP’s other than those disclosed in the table above. Warrants holding The number of warrants over ordinary shares in the Company held during the financial period by each director and other members of KMP of the Group, including their personally related parties, is set out below: David Wattel Balance at the start of the period Granted - 61,431,818 - 61,431,818 Vested Expired/ forfeited/ other Balance at the end of the period - 61,431,818 - 61,431,818 - - 15 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 During the financial period ended 31 December 2018, there were no warrants over ordinary shares in the Company held by directors and KMP’s other than those disclosed in the table above. Other transactions with KMP and their related parties Lucerne Group manages funds on behalf of third parties. Anthony Murphy is the Chief Executive Officer of Lucerne Investment Partners, part of the Lucerne Group. Refer to note 29 for further details. David Wattel is a director of Multus Medical LLC, a company that specialises in creating 3-Dimensional anatomical schematics from standardised MRI data. This company provides services to patients to assist in their personal injury insurance claims, and NHF fund the cost of these services. David is also a founding member of Wattel & York – Attorneys at Law, a personal injury and property damage law firm. Wattel & York have the carriage and conduct over a small number of personal injury matters where NHF holds a medical lien. Refer to note 29 for further details. This concludes the remuneration report, which has been audited. Shares under option There were no unissued ordinary shares of LawFinance Limited under option outstanding at the date of this report. Shares under performance rights There were no unissued ordinary shares of LawFinance Limited under performance rights outstanding at the date of this report. Shares under warrants Unissued ordinary shares of LawFinance Limited under warrants at the date of this report are as follows: Grant date 28/09/2018** 28/09/2018*** Expiry date 28/09/2022 28/09/2022 Exercise price - A$0.14 Warrants issued to other Syndicated Acquisition Facility participants * ** *** Warrants issued to NHF Founders Exercise price* Number under rights US$0.099 329,880,000 US$0.099 122,863,636 452,743,636 Shares issued on the exercise of options There were no ordinary shares of LawFinance Limited issued on the exercise of options during the period ended 31 December 2018 and up to the date of this report. Shares issued on the exercise of performance rights The following ordinary shares of LawFinance Limited were issued during the period ended 31 December 2018 and up to the date of this report on the exercise of performance rights granted: Date performance rights granted 30/11/2016 30/11/2016 Vesting date Exercise date 30/06/2018 30/06/2018 07/11/2018 21/11/2018 Number of Exercise price shares issued US$0.00 US$0.00 545,203 719,366 1,264,569 16 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Shares issued on the exercise of warrants There were no ordinary shares of LawFinance Limited issued on the exercise of warrants during the period ended 31 December 2018 and up to the date of this report. Indemnity and insurance of officers The Company has indemnified the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial period, the Company paid a premium in respect of a contract to insure the directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the financial period, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial period, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial period by the auditor are outlined in note 26 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial period, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 26 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. ● Officers of the Company who are former directors of Stantons International There are no officers of the Company who are former directors of Stantons International. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors' report. 17 LawFinance Limited (formerly JustKapital Limited) Directors' report 31 December 2018 Auditor Stantons International continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Tim Storey Chairman 29 March 2019 Sydney 18 PO Box 1908 West Perth WA 6872 Australia Level 2, 1 Walker Avenue West Perth WA 6005 Australia Tel: +61 8 9481 3188 Fax: +61 8 9321 1204 ABN: 84 144 581 519 www.stantons.com.au Stantons International Audit and Consulting Pty Ltd trading as Chartered Accountants and Consultants 29 March 2019 Board of Directors LawFinance Limited Suite 2, Level 16 56 Pitt Street Sydney NSW 2000 Dear Directors RE: LAW FINANCE LIMITED In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of LawFinance Limited. As Audit Director for the audit of the financial statements of LawFinance Limited for the year ended 31 December 2018, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours faithfully STANTONS INTERNATIONAL AUDIT AND CONSULTING PTY LTD (Trading as Stantons International) (An Authorised Audit Company) Martin Michalik Director Liability limited by a scheme approved under Professional Standards Legislation LawFinance Limited (formerly JustKapital Limited) Statement of profit or loss and other comprehensive income For the period ended 31 December 2018 Revenue Net income from disbursement funding/medical lien funding Other revenue Total revenue Non-supplier related cost of sales Gross margin Other income Foreign exchange gain Expenses Employee benefits expense Depreciation and amortisation expense Impairment of assets Administration and other expenses Business purchase/selling expenses Finance costs Loss before income tax benefit Consolidated 6 months 31 December 2018 12 months 30 June 2018 US$'000 US$'000 Note 5 6 7 7 15 7 7 7 2,149 192 2,341 (278) 4,017 441 4,458 (174) 2,063 4,284 1,744 590 1,460 - (1,727) (82) (2,765) (2,553) (5,768) (5,333) (2,018) (78) (808) (1,630) (2,804) (4,015) (13,831) (5,609) Income tax benefit 8 2,404 467 Loss after income tax benefit for the period (11,427) (5,142) Other comprehensive income/(loss) Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income/(loss) for the period, net of tax Total comprehensive loss for the period Loss for the period is attributable to: Non-controlling interest Owners of LawFinance Limited Total comprehensive loss for the period is attributable to: Non-controlling interest Owners of LawFinance Limited 559 559 (152) (152) (10,868) (5,294) (200) (11,227) - (5,142) (11,427) (5,142) (200) (10,668) - (5,294) (10,868) (5,294) Cents Cents Basic loss per share Diluted loss per share 35 35 (4.56) (4.56) (3.68) (3.68) All amounts presented in respect of prior years have been restated to reflect the change in presentation currency as explained in the accounting policies. The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 20 LawFinance Limited (formerly JustKapital Limited) Statement of financial position As at 31 December 2018 Consolidated 31 December 2018 Note 30 June 1 July 2017 2018 Assets Current assets Cash and cash equivalents Loan and other receivables Prepayments Total current assets Non-current assets Loan and other receivables Investment held in joint operations Property, plant and equipment Goodwill Other intangibles Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Employee benefits Deferred consideration Total current liabilities Non-current liabilities Borrowings Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Equity attributable to the owners of LawFinance Limited Non-controlling interest Total equity US$'000 US$'000 US$'000 9 10 11 12 13 14 15 8 16 17 18 19 20 21 3,696 29,883 67 33,646 69,438 1,166 198 40,539 8,784 6,789 126,914 934 8,959 82 9,975 12,645 1,221 105 4,392 10,999 4,630 33,992 5,867 6,245 161 12,273 12,606 1,243 165 4,571 6,733 4,354 29,672 160,560 43,967 41,945 11,649 19,602 215 - 31,466 3,192 4,744 97 370 8,403 2,656 7,230 463 385 10,734 111,120 111,120 30,929 30,929 23,371 23,371 142,586 39,332 34,105 17,974 4,635 7,840 37,649 5,998 (26,197) 17,450 524 18,421 1,184 (14,970) 4,635 - 16,555 1,113 (9,828) 7,840 - 17,974 4,635 7,840 All amounts presented in respect of prior years have been restated to reflect the change in presentation currency as explained in the accounting policies. The above statement of financial position should be read in conjunction with the accompanying notes 21 LawFinance Limited (formerly JustKapital Limited) Statement of changes in equity For the period ended 31 December 2018 Consolidated Issued capital US$'000 Reserves US$'000 Accumulated losses US$'000 Non- controlling interest US$'000 Total equity US$'000 Balance at 1 July 2017 16,555 1,113 (9,828) Loss after income tax benefit for the year Other comprehensive loss for the year, net of tax Total comprehensive loss for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 20) Share-based payments - - - - (5,142) (152) - (152) (5,142) 1,866 - - 223 - - Balance at 30 June 2018 18,421 1,184 (14,970) - - - - - - - 7,840 (5,142) (152) (5,294) 1,866 223 4,635 Consolidated Issued capital US$'000 Reserves US$'000 Accumulated losses US$'000 Non- controlling interest US$'000 Total equity US$'000 Balance at 1 July 2018 18,421 1,184 (14,970) - 4,635 Loss after income tax benefit for the period Other comprehensive income for the period, net of tax Total comprehensive income/(loss) for the period Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 20) Acquisition of non-controlling interests (note 31) Distributions to NCI Share-based payments - - - - (11,227) (200) (11,427) 559 - - 559 559 (11,227) (200) (10,868) 19,228 - - - - - - 4,255 - - - - - 19,228 903 (179) - 903 (179) 4,255 Balance at 31 December 2018 37,649 5,998 (26,197) 524 17,974 All amounts presented in respect of prior years have been restated to reflect the change in presentation currency as explained in the accounting policies. The above statement of changes in equity should be read in conjunction with the accompanying notes 22 LawFinance Limited (formerly JustKapital Limited) Statement of cash flows For the period ended 31 December 2018 Cash flows from operating activities Cash collections from customers (inclusive of GST) Payments to suppliers and employees Interest received Consolidated 6 months 31 December 2018 12 months 30 June 2018 US$'000 US$'000 Note 10,674 (4,632) 72 9,537 (6,369) 237 Net cash from operating activities 33 6,114 3,405 Cash flows from investing activities Payment for purchase of business, net of cash acquired Payments for property, plant and equipment Payments for joint venture capital invested Receipts/(payments) for other intangibles (net of co-funders contributions) Net proceeds from realisation of investments (case settlements) Payments for disbursement reports and medical liens Loans from other entities Net cash (used in) investing activities Cash flows from financing activities Proceeds from issue of shares Share issue transaction costs Proceeds from borrowings - disbursement funding division Proceeds from borrowings - medical lien funding division Proceeds from borrowings - corporate Repayment of borrowings - disbursement funding division Repayment of borrowings - medical lien funding division Repayment of borrowings - corporate Interest and fees related to loans and borrowings Net cash from financing activities 31 15 20 34 34 34 34 34 34 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial period Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial period 9 (27,520) (158) - 901 1,348 (9,600) 30,546 - (21) (26) (4,916) 2,105 (9,321) - (4,483) (12,179) 5,093 (55) 5,919 4,912 438 (3,840) (4,697) (1,988) (4,954) 1,910 (147) 10,662 - 3,181 (7,677) - (35) (3,717) 828 4,177 2,459 934 303 3,696 (4,597) 5,867 (336) 934 All amounts presented in respect of prior years have been restated to reflect the change in presentation currency as explained in the accounting policies. The above statement of cash flows should be read in conjunction with the accompanying notes 23 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 1. General information The financial statements cover LawFinance Limited (formerly JustKapital Limited) as a Group consisting of LawFinance Limited ('Company' or 'parent entity') and the entities it controlled ('the Group') at the end of, or during, the period. The Group changed its financial year end from 30 June to 31 December in order to synchronise its financial year with that of its US subsidiaries. The financial statements have been prepared for the 6 months ended 31 December 2018. The comparative accounting period is for the 12 months ended 30 June 2018, therefore the results are not directly comparable. LawFinance Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 16 56 Pitt Street 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 29 March 2019. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are consistent with those of the previous financial year. These policies have been consistently applied to all the periods presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group. Australian Accounting Standards AASB 9 ‘Financial Instruments’ and AASB 15 'Revenue from Contracts with Customers' (and their related amendments) which were mandatorily effective for annual periods commencing on or after 1 January 2018 were early adopted by the Group effective from 1 July 2017. 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, modified where appropriate, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. 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. Presentation currency During the period, the Group changed the currency in which it presents its financial statements from Australian dollars to US dollars ('US$' or '$'), in order to better reflect the majority of the Group's revenues and operating expenses which are expected to be denominated in US dollars. A change in presentation currency is a change in accounting policy which is accounted for retrospectively. Statutory financial information included in the Group’s Annual Report for the year ended 30 June 2018 previously reported in Australian dollars has been restated into US dollars using the procedures outlined below: 24 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) ● ● ● assets and liabilities denominated in non-US dollar currencies were translated into US dollars at the closing rates of exchange on the relevant statement of financial position date (31 December 2018: $0.7058, 30 June 2018: $0.7391); non-US dollar income and expenditure were translated at the monthly average rates of exchange prevailing for the relevant period; and issued capital was translated at historic rates. Going concern As at 31 December 2018 the Group had net current assets of $2,180,000 (30 June 2018: $1,572,000). The directors’ have evaluated the Group’s principal operations and expected events and conditions and concluded that the Group will be able to continue as a going concern. The Group does not hold significant cash reserves. However, the directors’ assessment of the significant judgments made by management, including expected cash collections from the medical lien funding business; expected cash collections from the disbursement funding business; and expected case completions from the litigation funding portfolio, as part of the Group’s financial planning processes, has formed part of this assessment. The directors’ have also noted that the Group’s facility providers have historically provided repayment extensions to the Group as required, due to the lumpy nature of the Group’s litigation funding receipts. Although facilities are due to be repaid within 12 months, the litigation portfolio is also expected to mature in that time frame, which is expected to generate sufficient returns to meet these obligations. Should there be delays in receiving settlement proceeds from the litigation funding business, the directors expect to be able to secure favourable extension terms from the Group’s financiers in relation to these maturing facilities. If, which is not expected, the completions of the litigation funding cases do not resolve favourable, the Group will be required to seek additional capital, either by way of additional facilities or equity. Again given the historical ability for the Group to raise such funds, the directors expect to be able to raise this additional capital if it is required. As such, no adjustment is required to the carrying value of the assets or liabilities of the Group to reflect the situation if the Group were not a going concern. 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 30. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of LawFinance Limited as at 31 December 2018 and the results of all subsidiaries for the period then ended. 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. 25 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in United States dollars, which is LawFinance Limited's presentation currency. The functional currency of the Group's Australian operations is Australian dollars and that of its United States operations is United States dollars. Foreign currency transactions Foreign currency transactions are translated into United States dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into United States dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into United States dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Revenue recognition The Group elected to apply AASB 15 'Revenue from Contracts with Customers' on a full retrospective basis as permitted by this standard as if it had been applied since the inception of all its contracts with customers that are presented in the financial statements. The cumulative effect of retrospective application was recognised as an adjustment to the opening accumulated losses or other relevant components of equity as at 1 July 2016. In the Australian disbursement funding business, the Group enters into contracts with law firms to pay, on the law firms’ behalf, legal disbursements to progress their clients’ claims. These disbursements include as independent expert reports and medico-legal reports relating to the client’s injuries. In the US medical lien funding business, the Group purchases a lien or obtains a letter of protection over the medical receivables associated with the personal injury cases from health care providers and hospitals. Under AASB 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard defines a customer as ‘a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration’. Management had undertaken an exercise to assess the Group’s contractual arrangements within its disbursement funding business and medical lien funding business as part of its implementation of AASB 15. The primary factor considered in making this assessment was most notably whether the Group is contractually engaged to provide or deliver a good or service to the law firm. As a result of this assessment, the Group determined that it does not take primary responsibility and does not have any obligation for the supply or accuracy of the underlying expert reports funded by the Group’s Australian disbursement funding business. The Group solely enters into a contract with the law firm to provide financing for legal disbursements in relation to their clients’ legal matters. Considering the nature of the disbursement funding arrangements whereby it does not involve the provision of any good or service to the law firm, the Group had concluded that the arrangement does not meet the definition of a contract with a customer under AASB 15. Further, the Group does not take primary responsibility for the actual medical treatment in the United States nor is it obliged to purchase any medical lien. The Group solely enters into a contract with the medical provider to provide financing for that individual medical treatment and takes a lien over the invoice from the medical provider and notifies the law firm of that medical lien. Considering this arrangement does not involve the provision of any good or service to the law firm, the Group had concluded that the arrangement does not meet the definition of a contract with a customer under AASB 15. 26 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) As both arrangements give rise to a contractual right to receive cash from the law firm, the Group has concluded that the financing arrangements, both in the US and Australia, meets the definition of a financial instrument. Income arising from changes in the fair value of financial instruments is within the scope of AASB 9 'Financial Instruments'. In applying AASB 9, given the final financial outcome of the provision of the financing arrangement is variable, that is the final amount to be received by the Group is conditional upon the decisions of either the relevant Court or the Insurer to the counterparty for whom the financial arrangement has been sought, the financial arrangement has been treated on a fair value through profit or loss basis. The Group recognises revenue as follows: Revenue Revenue is measured at the fair value of the gross consideration received or receivable. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and specific criteria have been met for each of Group’s activities. The amount of revenue is not considered to be reliably measurable until all material contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. The Group’s revenue recognition policy for the disbursement funding business takes into consideration the inherent finance component embedded in that revenue. Refer to the 'financial instruments' policy. The Group’s revenue recognition policy for the medical lien funding business takes into consideration the inherent finance component embedded in that revenue. Refer to the 'financial instruments' policy. The Group’s revenue recognition policy for the short-term loan product is to recognise the interest component attaching to the loan as it is earned under the short-term loan contract. The Group’s revenue recognition policy for the Insurance broking division recognises revenue upon the acceptance of the insurance policy by the customer. For revenue recognition of litigation contracts, refer to 'intangible assets' accounting policy below. Rent Rent revenue is recognised on a straight-line basis over the lease term. Lease incentives granted are recognised as part of the rental revenue. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a ● transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. ● Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. 27 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Loan receivables at fair value through profit or loss Initial recognition and measurement The Group’s financial assets at fair value through profit or loss relates to the loan receivables arising from its disbursement funding business and medical lien funding business. The Group’s loan receivables from these funding businesses are classified, at initial recognition, as financial assets at fair value through profit or loss. The determination is made at initial recognition based on the Group’s business model for managing its financial instruments and the non-contractual cash flow characteristics of its instruments. The Group’s financial asset at fair value through profit or loss is recognised initially at fair value. The best evidence of fair value of a financial instrument at initial recognition is normally the transaction price (i.e. the fair value of the consideration given or received). In the case of a legal disbursement funding arrangement or medical lien funding arrangement, the fair value of the loan receivable at initial recognition may differ from the transaction price. The fair value of the financial asset represents the invoice amount (where the final amount to be received by the Group is subject to change and conditional upon the outcome of decisions made by the relevant Court or the Insurer), adjusted for such factors as time value of money, discounts and write offs, and credit risk. The transaction price of the financial asset is the amount of cash paid to fund the legal disbursement costs. No active market exists for these loans. The difference between the fair value and the transaction price (also known as day 1 margin) is deferred and the Group recognises the deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset. 28 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) Subsequent measurement Loan receivables are carried in the statement of financial position at fair value, with changes in fair value presented in the statement of profit or loss as net gains or losses on loan receivables at fair value. The net gains or losses are calculated based on actuarial assumptions including information on changes to actual and expected write offs, discounts and collections of loan receivables, as well as interest margin, taking into account the time value of money, credit risk, and the amortisation of day 1 margins. The deferred day 1 margin is recognised in the profit or loss on a systematic basis over the term of the arrangement using actuarial methodologies. It is based on the profile of cash collections and the subsequent weighted average calculation of these collections applied to the recognition of the day 1 margin. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e. removed from the Group’s consolidated statement of financial position) when the contractual rights to receive cash flows from the loan receivables have expired. Joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. When a Group entity undertakes its activities under joint operations, the Group as a joint operator recognises in relation to its interest in a joint operation: ● ● ● ● ● its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly. The Group accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the relevant Accounting Standard applicable to the particular assets, liabilities, revenues and expenses. Trade and other receivables Trade receivables, other than loan receivables from its disbursement funding business and medical lien funding business mentioned previously in the Financial instruments note, are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Plant and equipment 3-7 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. 29 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Customer relationships As part of the acquisition of NHF a portion of the business consideration was applied to the value of existing long-standing customer relationships. This value will be amortised over a 10-year period. Website Significant costs associated with the development of the revenue generating aspects of the website, including the capacity of placing orders, are deferred and amortised on a straight-line basis over the period of their expected benefit, being their useful life of 3 years. Litigation contracts in progress Litigation contracts in progress represent future economic benefits controlled by the Group. As Litigation contracts in progress may be exchanged or sold, the Group is able to control the expected future economic benefit flowing from the Litigation contracts in progress. Accordingly, Litigation contracts in progress meet the definition of intangible assets. The carrying value of Litigation contracts in progress includes the capitalisation of external costs of funding the litigation, such as solicitors’ fees, counsels’ fees and experts’ fees, the capitalisation of certain directly attributable internal costs of managing the litigation, such as certain wages and other out of pocket expenses. Litigation contracts in progress are not amortised as the assets are not available-for-use until the determination of a successful judgement or settlement, at which point the assets are realised, and revenue is recognised. The following specific asset recognition rules have been applied to Litigation contracts in progress: Actions still outstanding: When litigation is outstanding and pending a determination, Litigation contracts in progress are carried at cost. Subsequent expenditure is capitalised when it meets all of the following criteria: ● Demonstration of ability of the Group to complete the litigation so that the asset will be available-for-use and the benefits embodied in the asset will be realised; Demonstration that the asset will generate future economic benefits; Demonstration that the Group intends to complete the litigation; Demonstration of the availability of adequate technical, financial and other resources to complete the litigation; and Ability to measure reliably the expenditure attributable to the asset during the Litigation contract in progress. ● ● ● ● 30 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) Successful judgements: Where the litigation has been determined in favour of the Group or a positive settlement has been agreed, this constitutes a derecognition of the intangible asset and accordingly a gain or loss is recognised in profit or loss. Any future costs relating to the defence of an appeal by the defendant are expensed as incurred. Unsuccessful judgement: Where the litigation is unsuccessful at trial, this is a trigger for impairment of the intangible asset and the asset is written down to its recoverable amount. If the claimant, having been unsuccessful at trial appeals against the judgement, then future costs incurred by the Group on appeal are expensed as incurred. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non- financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial period and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Convertible bonds are redeemable at the discretion of the Group and are classified as a liability in the statement of financial position due to the operability of the convertible bond’s anti-dilution clauses. As the convertible bonds include a conversion feature the convertible bonds are considered to represent a liability with an equity conversion option derivative. The conversion feature has been fair valued separately and on initial recognition and deducted from the value of the convertible bonds. The derivative is subsequently measured at fair valued at each reporting date and any movement in fair value is accounted for in profit or loss. The convertible bonds liability is recorded at amortised cost and interest is accreted to the face value of the convertible bonds over the term of the convertible bond. Finance costs All other finance costs are expensed in the period in which they are incurred. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Equity-settled share-based compensation benefits are provided to employees and directors. 31 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) Equity-settled transactions are awards of shares, or options over shares, that are provided to employees and directors in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using the Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, they are treated as if they had vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 32 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree's identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the Group remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of LawFinance Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial period, adjusted for bonus elements in ordinary shares issued during the financial period. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. 33 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 2. Significant accounting policies (continued) Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Comparatives Comparatives have been realigned where necessary, to agree with current year presentation. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 31 December 2018. The Group's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. The standard replaces AASB 117 'Leases' and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a 'right-of-use' asset and lease liability are recognised at the commencement of the lease. The right-of-use asset is recognised at an amount that is equivalent to the initial measurement of the lease liability, adjusted for lease prepayments, lease incentives received, initial direct costs incurred, and an estimate of any future restoration, removal or dismantling costs. The lease liability is recognised at the present value of future lease payments comprising fixed lease payments less incentives, variable lease payments, residual guarantees payable, payment of purchase options where exercise is reasonably certain, and any anticipated termination penalties. The lease payments are discounted at the rate implicit in the lease, or where not readily determinable, the entity’s incremental borrowing rate. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a 'right-of-use' asset is recognised or lease payments are expensed to profit or loss as incurred. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The Group will adopt this standard from 1 January 2019. There is expected to be an accounting impact, but management are yet quantify the impact of its adoption on the Group. IASB revised Conceptual Framework for Financial Reporting The revised Conceptual Framework has been issued by the International Accounting Standards Board ('IASB'), but the Australian equivalent has yet to be published. The revised framework is applicable for annual reporting periods beginning on or after 1 January 2020 and the application of the new definition and recognition criteria may result in future amendments to several accounting standards. Furthermore, entities who rely on the conceptual framework in determining their accounting policies for transactions, events or conditions that are not otherwise dealt with under Australian Accounting Standards may need to revisit such policies. The Group will apply the revised conceptual framework from 1 January 2020 and is yet to assess its impact. Other amending accounting standards Other amending accounting standards issued are not considered to have a significant impact on the financial statements of the company as their amendments provide either clarification of existing accounting treatment or editorial amendments. 34 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Fair value measurement and carrying value measurement of loan receivables When the fair values of loan receivables recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using actuarial valuation techniques that take into account discount rates, credit risk and analysis of discounts and write offs. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values and the deferred day 1 margin. Changes in assumptions relating to these factors could affect the reported fair value and carrying value of loan receivables and its fair value movement through profit or loss. The key assumptions used to determine the fair value of the loan receivables are provided in note 24. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using the Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Allowance for expected credit losses The allowance for expected credit losses assessment requires a degree of estimation and judgement. It is based on the lifetime expected credit loss, grouped based on days overdue, and makes assumptions to allocate an overall expected credit loss rate for each group. These assumptions include recent sales experience and historical collection rates. Goodwill The Group tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2. The recoverable amounts of cash- generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows (refer to note 14). Impairment of non-financial assets other than goodwill The Group assesses impairment of non-financial assets other than goodwill at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. This includes an assessment of each individual Litigation contract in progress as to whether it is likely to be successful, the cost and timing of future expected cash flows to completion and the ability of the defendant(s) to pay upon successful completion. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions (refer to note 15). Provision for adverse costs In the event that litigation funded by the Group is unsuccessful, the Group raises a provision which is based upon the Group’s best estimate of the amount of the adverse costs it will have to remit following consultation with external advisors. Income tax The Group is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on the Group's current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. 35 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 3. Critical accounting judgements, estimates and assumptions (continued) Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Note 4. Operating segments Identification of reportable operating segments Since the purchase of National Health Finance Holdco, LLC and its subsidiaries, the Group has been organised into three operating segments: (i) JustKapital Finance, comprising the Australian disbursement funding business and short-term funding, (ii) National Health Finance, comprising the US medical lien funding business and (iii) all other operations including litigation funding and head office costs. Prior to this, the Group was organised into two operating segments: (i) JustKapital Finance, comprising disbursement funding and short-term funding and (ii) litigation funding, insurance and head office. These 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. Operating segment information Consolidated - 6 months - 31 December 2018 Revenue Net income from disbursement funding/medical lien funding Other revenue Total revenue Other income Total revenue Segment result Depreciation and amortisation Finance costs Profit/(loss) before income tax benefit Income tax benefit Loss after income tax benefit Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities JustKapital Finance US$'000 National Health Finance US$'000 Other Total US$'000 US$'000 2,008 94 2,102 - 2,102 1,185 (25) (1,064) 96 141 - 141 600 741 (945) (6) (1,914) (2,865) - 98 98 1,734 1,832 (8,656) (51) (2,355) (11,062) 26,477 118,175 15,908 21,253 61,158 60,175 2,149 192 2,341 2,334 4,675 (8,416) (82) (5,333) (13,831) 2,404 (11,427) 160,560 160,560 142,586 142,586 36 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 4. Operating segments (continued) Consolidated - 12 months - 30 June 2018 Revenue Net income from disbursement funding Other revenue Total revenue Other income Total revenue Segment result Depreciation and amortisation Finance costs Profit/(loss) before income tax benefit Income tax benefit Loss after income tax benefit Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities Litigation funding, insurance and head office US$'000 Total US$'000 JustKapital Finance US$'000 4,017 394 4,411 1 4,412 2,857 (51) (2,224) 582 - 47 47 1,459 1,506 (4,373) (27) (1,791) (6,191) 26,132 17,835 20,857 18,475 4,017 441 4,458 1,460 5,918 (1,516) (78) (4,015) (5,609) 467 (5,142) 43,967 43,967 39,332 39,332 Segment assets Where an asset is used across multiple segments, the asset is allocated to the segment that receives the majority of economic value from the asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location. Segment liabilities Liabilities are allocated to segments where there is a direct nexus between the incurrence of the liability and the operations of the segment. Accordingly, all liabilities are allocated based on the operations of the segment. Revenue from external customers Geographical non-current assets 6 months 31 December 2018 12 months 30 June 2018 31 December 2018 30 June 2018 Australia United States US$'000 US$'000 US$'000 US$'000 2,200 141 4,458 - 12,279 38,408 16,717 - 2,341 4,458 50,687 16,717 The geographical non-current assets above are exclusive of, where applicable, financial instruments, deferred tax assets, post-employment benefits assets and rights under insurance contracts. 37 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 5. Other revenue Interest received – short-term lending Brokerage commission received – insurance Rental income - office sub-lease Other revenue Note 6. Other income Litigation contracts in progress – settlements and judgements Litigation contracts in progress – expenses Interest income Other income Consolidated 6 months 31 December 2018 12 months 30 June 2018 US$'000 US$'000 94 33 65 192 394 47 - 441 Consolidated 6 months 31 December 2018 12 months 30 June 2018 US$'000 US$'000 4,475 (2,744) 13 2,557 (1,103) 6 1,744 1,460 38 Consolidated 6 months 31 December 2018 12 months 30 June 2018 US$'000 US$'000 34 27 1,666 61 223 1,734 1,727 2,018 80 2 82 135 98 752 925 273 119 251 70 8 78 56 46 853 - 341 103 231 2,553 1,630 5,333 4,015 2,612 3,156 2,804 - 5,768 2,804 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 7. Expenses Loss before income tax includes the following specific expenses: Employee benefits expense Defined contribution superannuation expense Share-based payments expense Employee benefits expense excluding superannuation Depreciation and amortisation Depreciation (note 13) Amortisation (note 15) Administration and other expenses ASIC, ASX and share registry fees Insurance Legal and professional fees Write-off of acquisition costs of litigation assets Rent and office costs Travel and accommodation Other Finance costs and expenses Interest expense and line fees Business purchase/selling expenses Legal and professional fees Warrant costs 39 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 8. Income tax Numerical reconciliation of income tax benefit and tax at the statutory rate Loss before income tax benefit Tax at the statutory tax rate of 27.5% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Expenses not deductible Share-based payments Bad debts Adjustment recognised for prior periods Difference in overseas tax rates Income tax benefit Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Tax losses Property, plant and equipment Other temporary differences Loans and other receivables Set off deferred tax liability Deferred tax asset Deferred tax liability Deferred tax liability comprises temporary differences attributable to: Property, plant and equipment Intangibles Loan and other receivables Prepayments Work in progress Set off deferred tax asset Deferred tax liability 40 Consolidated 6 months 31 December 2018 12 months 30 June 2018 US$'000 US$'000 (13,831) (5,609) (3,804) (1,542) 481 855 80 1 (2,387) (17) 660 50 - 365 (467) - (2,404) (467) Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 4,866 - 1,317 2,559 (1,953) 4,352 2 1,283 2,342 (3,349) 6,789 4,630 Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 2 124 - 2 1,825 (1,953) - 4 1,735 - 1,610 (3,349) - - LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 8. Income tax (continued) The deferred tax assets will only be obtained if: i) Future assessable income is derived of a nature and of an amount sufficient to enable the benefit to be realised; ii) The conditions for deductibility imposed by tax legislation continue to be complied with; and iii) No changes in tax legislation adversely affect the consolidated entity in realising the benefit. Note 9. Current assets - cash and cash equivalents Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 Cash at bank and on hand 3,696 934 Short-term cash deposits are used as bank guarantee security. Refer to note 27. Note 10. Current assets - loan and other receivables Loan receivables - disbursement funding/medical lien funding (gross) Fair value movement Unrecognised day 1 margin Other trade receivables Short-term loans Other receivables Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 56,707 (27,264) (1,983) 27,460 180 488 668 10,920 (2,281) (1,306) 7,333 373 888 1,261 1,755 365 29,883 8,959 Loan receivables are dependent upon a decision in the related matter by the Court or the insurance company if a case is settled. The loan receivables disclosed above are neither past due nor impaired. Other receivables include amounts due to the Group from a completion of a case and its joint venture partner for its share of investments made in co-funded cases. 41 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 11. Non-current assets - loan and other receivables Loan receivables - disbursement funding/medical lien funding (gross) Fair value movement Unrecognised day 1 margin Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 148,541 (76,612) (2,491) 18,646 (3,894) (2,107) 69,438 12,645 Loan receivables are dependent upon a decision in the related matter by the Court or the insurance company if a case is settled. The loan receivables disclosed above are neither past due nor impaired. Note 12. Non-current assets - investment held in joint operations Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 Investment held in joint operation 1,166 1,221 The Group has a material joint operation with Longford Capital Management LP ('Longford Capital') where the Group co- invests with Longford Capital in litigation funding. The joint operation is funding one case in the United States on a 50:50 basis. The Group is entitled to its proportionate share of the Litigation contracts in progress income received and bears a proportionate share of the joint operation’s investment in cases. Note 13. Non-current assets - property, plant and equipment Leasehold improvements - at cost Less: Accumulated depreciation Plant and equipment - at cost Less: Accumulated depreciation Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 57 (57) - 345 (147) 198 198 43 (15) 28 211 (134) 77 105 42 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 13. Non-current assets - property, plant and equipment (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial period are set out below: Consolidated Balance at 1 July 2017 Additions Exchange differences Depreciation expense Balance at 30 June 2018 Additions Additions through business combinations (note 31) Exchange differences Depreciation expense Balance at 31 December 2018 Note 14. Non-current assets - goodwill Goodwill - Australian disbursement funding business Goodwill - US medical lien funding business (note 31) Leasehold improvements US$'000 Plant and equipment US$'000 Total US$'000 37 - - (9) 28 17 - (1) (44) - 122 18 (2) (61) 77 3 157 (3) (36) 198 159 18 (2) (70) 105 20 157 (4) (80) 198 Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 4,194 36,345 4,392 - 40,539 4,392 Goodwill - Australian disbursement funding business Goodwill arose from the acquisition of the Macquarie Medico Legal business in 2016 and is allocated to the Australian operating division ('AOD'). The Group performed its annual impairment test at the reporting date. The Group considers the relationship between its market value, among other factors when assessing impairment. The recoverable amount of the Australian disbursement funding business has been determined based upon a value-in-use calculation using cash flow projections from financial budgets approved by management covering a five-year period. The pre-tax discount rate applied to the cash flow projections was 15% (30 June 2018: 14%) and cash flows beyond the five-year period are extrapolated using a 1% (30 June 2018: 1%) growth rate. It was concluded that the recoverable amount did not exceed its value-in-use. Key assumptions used in value-in-use calculations and sensitivity to changes in assumptions The calculation of value-in-use for the JustKapital Financing is most sensitive to the following assumptions: ● ● Discount rates; and Growth rate estimates. 43 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 14. Non-current assets - goodwill (continued) Discount rates Discount rates represent the current market assessment of the risks specific to the business unit, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and is derived from its weighted average cost of capital ('WACC'). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Group’s investors. The cost of debt is based on the interest- bearing borrowings the Group is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data. Adjustments to the discount rate are made to factor in the specific amount and timing of the future tax flows in order to reflect a pre-tax discount rate. A rise in the pre- tax discount rate to 20% (30 June 2018: 20%) would result in goodwill being impaired. Growth rate estimates Rates are based on management’s estimates. Management recognises that the possibility of new entrants can have a significant impact on growth rate assumptions, however, given this is a relatively new industry, the effect of new entrants is not expected to have an adverse impact on the forecasts. A reduction to negative 4% (30 June 2018: negative 2%) in the long-term growth rate would result in goodwill being impaired. Goodwill – US medical lien funding business Goodwill arose from the acquisition of the National Health Finance business in September 2018 with an effective date of control of 1 October 2018 and is allocated to the US operating division ('USOD'). The Group performed its annual impairment test at the reporting date. The Group considers the relationship between its market value, among other factors when assessing impairment. The recoverable amount of the US medical lien funding business has been determined based upon a value-in-use calculation using cash flow projections from financial budgets approved by management covering a five-year period. The pre-tax discount rate applied to the cash flow projections was 15% (30 June 2018: N/A) and cash flows beyond the five-year period are extrapolated using a 1% (30 June 2018: N/A) growth rate. It was concluded that the recoverable amount did not exceed its value-in-use. Key assumptions used in value-in-use calculations and sensitivity to changes in assumptions The calculation of value-in-use for the National Health Finance business is most sensitive to the following assumptions: ● ● Discount rates; and Growth rate estimates. Discount rates Discount rates represent the current market assessment of the risks specific to the business unit, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and is derived from its weighted average cost of capital ('WACC'). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Group's investors. The cost of the debt is based on the interest-bearing borrowings the Group is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data. Adjustments to the discount rate are made to factor in the specific amount and timing of the future tax flows in order to reflect a pre-tax discount rate. A rise in the pre-tax discount rate to 24% (30 June 2018: N/A) would result in goodwill being impaired. Growth rate estimates Rates are based on management's estimates. Management recognises that the possibility of new entrants can have a significant impact on growth rate assumptions, however, given this is a relatively new industry, the effect of new entrants is not expected to have an adverse impact on the forecasts. 44 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 15. Non-current assets - other intangibles Website - at cost Less: Accumulated amortisation Customer relationships – US medical lien funding business Litigation contracts in progress - capitalised external costs Litigation contracts in progress - capitalised internal costs Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 17 (10) 7 1,913 6,314 550 6,864 13 (8) 5 - 10,237 757 10,994 8,784 10,999 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial period are set out below: Consolidated Balance at 1 July 2017 Additions Disposals Exchange differences Amortisation expense Balance at 30 June 2018 Additions Disposals Exchange differences Amortisation expense Balance at 31 December 2018 Customer relationships US$'000 Litigation contracts in progress US$'000 Total US$'000 Website US$'000 13 - - - (8) 5 4 - - (2) 7 - - - - - - 1,913 - - - 6,722 5,285 (750) (263) - 10,994 3,429 (5,914) (1,645) - 6,735 5,285 (750) (263) (8) 10,999 5,346 (5,914) (1,645) (2) 1,913 6,864 8,784 The recoverable amount of each Litigation contract in progress is determined based upon a value-in-use calculation using cash flow projections based upon financial budgets approved by management. Key assumptions used in value in use calculations and sensitivity to changes in assumptions The following describes each key assumption on which management has based its cash flow projections when determining the value-in-use of Litigation contracts in progress: (i) The estimated cost to complete the Litigation contracts in progress is budgeted, based upon estimates provided by the external legal advisor in charge of the litigation; The value of the Litigation contracts in progress, once completed, is estimated based upon the expected settlement or judgement amount of the litigation and the fees due to the Group under the litigation funding contract; and The discount rate applied to the cash flow projections is based on the Group’s WACC; and other factors relevant to the particular Litigation contract in progress. The discount rate applied was 15.0% (30 June 2018: 13.5%). (ii) (iii) As a result of the impairment testing performed an amount of $2,528,000 was determined to be impaired and was written off during the period. No significant change in the key assumptions would result in any additional impairment charge. 45 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 16. Current liabilities - trade and other payables Trade and other payables Accruals Goods and services tax payable Trade and other payables are paid within the agreed credit terms. Refer to note 23 for further information on financial instruments. Note 17. Current liabilities - borrowings Vendor loan - Australian disbursement funding business (i) Convertible bonds payable (ii) Lucerne Group combined loan (iii) Lucerne Group facility - US medical lien funding business (iv) Lockton insurance financing Credit cards Other NHF subordinated debt (v) Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 7,556 3,992 101 1,936 1,133 123 11,649 3,192 Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 824 3,529 8,548 5,238 49 414 1,000 1,048 3,696 - - - - - 19,602 4,744 Refer to note 23 for further information on financial instruments. (i) Vendor loan - Australian disbursement funding business The loan due to the vendor of the Australian disbursement funding business was repayable on 22 January 2019. Interest is payable at 7.5% (30 June 2018: 7.5%) per annum. The Group has received verbal agreement to extend the facility to 30 June 2019 and is currently documenting that extension. The loan is unsecured. The Vendor may convert the outstanding loan amount to ordinary shares of the Company at a conversion price of A$0.14 per share. (ii) Convertible bonds payable On 15 July 2016, the Company issued 50,000 convertible bonds, each with a face value of A$100. The total consideration received from the convertible bonds was $3,695,500 (A$5,000,000). During the financial year, the bonds maturity date was extended to 29 November 2019. Interest payments are cumulative and payable at 11.5% per annum, quarterly in arrears. The bonds are convertible into ordinary shares of the Company at the option of the holder prior to their maturity. The holder can elect to convert prior to maturity date by providing notice only after the Company’s next annual general meeting. The conversion price, if such an election is made, is A$0.30 per ordinary share, or 80% of the issue price of any future equity issued should the issue price be lower than A$0.30 per ordinary share. The Company undertook a capital raising in November 2018 at A$0.08 per share. As a result of that capital raising the conversion price of the convertible bonds is now A$0.064 per ordinary share. The Company has a right to redeem the bonds earlier than their maturity date at a 10% premium to face value. With the agreement of the Company, the bond holders may partially or fully apply the redemption amount to subscribe for ordinary shares at a price that represents a 10% discount to a 5-day volume weighted average price ('VWAP') determined by the holder within the previous 90 days. 46 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 17. Current liabilities - borrowings (continued) The convertible bonds are categorised as a liability in the statement of financial position due to the terms of the anti-dilution clauses. Due to the conversion feature the convertible bonds are considered to include a derivative liability. As such the convertible bonds are considered to represent a liability with an equity conversion option derivative with the entire instrument being accounted for at fair value through profit or loss. The facility is subject to a number of covenants. A breach of a covenant may require the Group to repay the bond earlier. No covenants have been breached as at 31 December 2018. (iii) Lucerne Group combined loan The Lucerne Finance Pty Limited short-term loan facility and the Lucerne Composite Master Fund loan facility were amalgamated during the year ended 30 June 2018 to become the Lucerne Group combined loan. The loan is repayable on 31 December 2019. Ongoing interest payable is 13.5% per annum (30 June 2018: 16.75% per annum (including establishment fees). The loan is unsecured. During the period the Lucerne Group assigned a portion of this loan to third parties on the same terms and conditions noted. The facility is subject to a number of covenants. A breach of a covenant may require the Group to repay the loan earlier. No covenants have been breached as at 31 December 2018. (iv) Lucerne Group facility - US medical lien funding business Lucerne Finance Pty Limited and the Principis Master Fund have jointly provided facilities totalling $5,238,000 to the medical lien funding business in the US as at 31 December 2018 (30 June 2018: $N/A). The facilities are repayable on 28 September 2019. Interest is payable at 15% per annum with a step up to 19% per annum from 1 April 2019 should the loan remain outstanding at that time. The loan is unsecured. (v) Other NHF subordinated debt A third party has provided a $1,000,000 facility to NHF which remains payable as at 31 December 2018 (30 June 2018: $N/A). The facilities are repayable on demand. Interest is payable at 12% per annum. The loan is unsecured. Note 18. Current liabilities - deferred consideration Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 Deferred consideration - 370 Deferred consideration relates to the acquisition of the litigation funding portfolio and is payable on the successful resolution of one of the cases within the portfolio. Note 19. Non-current liabilities - borrowings Assetsecure Pty Limited loan (i) Atalaya Capital Management (ii) NHF Founder Promissory Notes (iii) Lucerne Group combined loan Syndicated acquisition facility (iv) Vendor loan - NHF Founders (v) 47 Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 20,028 39,902 9,000 - 29,644 12,546 18,844 - - 12,085 - - 111,120 30,929 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 19. Non-current liabilities - borrowings (continued) Refer to note 23 for further information on financial instruments. (i) Assetsecure Pty Limited ('Assetsecure') The loan facility of $24,703,000 (A$35,000,000) (30 June 2018: $25,869,000) (A$35,000,000) is available to fund the Australian disbursement funding business operated by JustKapital Financing Pty Limited. It expires on 30 September 2020. This loan is classified as non-current in the current financial period. However, it is repayable on demand if loan covenants are breached and not rectified. Interest and management fees payable total 7.95% per annum on the drawn down amounts (30 June 2018: 7.95% per annum) and the undrawn line fees are 1%. The facility is subject to a number of covenants. A breach of a covenants may require the Group to repay the loan earlier. No covenants have been breached as at 31 December 2018. The loan is secured by a fixed and floating charge over the assets of JustKapital Financing Pty Limited. The parent entity and other entities within the Group have guaranteed the facility. (ii) Atalaya Capital Management ('Atalaya') The loan facility of $80,000,000 (30 June 2018: $N/A) is available to fund the US medical lien funding business. The facility is repayable on 25 April 2022. However, it is repayable on demand if loan covenants are breached and not rectified. The facility is secured by a first-ranking charge over the assets of NHF SPV I, LLC (being the company which owns the accounts receivables in the US). The interest and fees payable under the drawn down facility total 13.25% per annum and the undrawn line fees are 1%. (iii) NHF Founder Promissory Notes (David Wattel and Mark Siegel) The NHF Founder Promissory Notes were $9,000,000 ($4,500,000 per founder) as at 31 December 2018 and are repayable on 16 January 2020. The loan is interest free and is unsecured. (iv) Syndicated acquisition facility The Syndicated acquisition facility of $29,644,000 (A$42,000,000) (30 June 2018: $N/A) was provided by leading Australian institutions and family offices, including Washington H. Soul Pattinson & Company Limited. The facility is repayable on 28 September 2022 but may be repaid at any time after 28 September 2021. Interest payable under this facility is 13% per annum. The loan is secured over all of the assets of the Group, with second ranking security provided behind the assets secured to Assetsecure and Atalaya (noted above). (v) Vendor loan - NHF Founders A vendor loan facility totalling $12,546,000 (A$17,200,000) (30 June 2018: $N/A) was provided by the NHF Founders David Wattel and Mark Siegel. This facility is repayable on 28 September 2022 but may be repaid any time after 28 September 2021. Interest payable under this facility is 13% per annum. The loan is unsecured. 48 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 19. Non-current liabilities - borrowings (continued) Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Assetsecure Pty Limited loan* Atalaya Capital Management** Lucerne Group combined loan NHF founder promissory notes Syndicated acquisition facility Vendor loan - NHF Founders Used at the reporting date Assetsecure Pty Limited loan* Atalaya Capital Management** Lucerne Group combined loan NHF founder promissory notes Syndicated acquisition facility Vendor loan - NHF Founders Unused at the reporting date Assetsecure Pty Limited loan* Atalaya Capital Management** Lucerne Group combined loan NHF founder promissory notes Syndicated acquisition facility Vendor loan - NHF Founders Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 24,703 80,000 - 9,000 29,644 12,546 155,893 20,028 39,902 - 9,000 29,644 12,546 111,120 4,675 40,098 - - - - 44,773 25,869 - 12,529 - - - 38,398 18,844 - 12,085 - - - 30,929 7,025 - 444 - - - 7,469 * ** The facility can be drawn-down based upon various calculations relating to the underlying disbursement funding receivables. As at 31 December 2018, $20,863 could be drawn down as a result of these calculations (30 June 2018: $37,594). The facility can be drawn-down based upon various calculations relating to the underlying medical lien funding receivables. As at 31 December 2018, $238,530 could be drawn down as a result of these calculations (30 June 2018: $N/A). Note 20. Equity - issued capital Consolidated 31 December 2018 Shares 2018 Shares 31 December 30 June 2018 30 June 2018 US$'000 US$'000 Ordinary shares - fully paid 483,635,467 147,933,598 37,649 18,421 49 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 20. Equity - issued capital (continued) Movements in ordinary share capital Details Date Shares Issue price US$'000 Balance Issue of shares Issue of shares - performance rights Share issue costs 1 July 2017 8 November 2017 21 December 2017 Balance 30 June 2018 7 November 2018 Issue of shares - 1:1 rights issue Issue of shares - founder shares - acquisition of NHF 7 November 2018 7 November 2018 Issue of shares - placement 7 November 2018 Issue of shares - performance rights 21 November 2018 Issue of shares - performance rights 21 November 2018 Issue of shares - employee incentive plan 26 November 2018 Issue of shares - rights issue shortfall Issue of shares - cleansing prospectus 13 December 2018 Share issue costs 125,813,124 18,871,969 3,248,505 - 147,933,598 24,514,797 215,097,403 93,750,000 545,203 719,366 475,000 600,000 100 - US$0.107 US$0.000 US$0.000 US$0.058 US$0.058 US$0.058 US$0.000 US$0.000 US$0.000 US$0.058 US$0.058 US$0.000 Balance 31 December 2018 483,635,467 16,555 2,022 - (156) 18,421 1,425 12,500 5,448 - - - 35 - (180) 37,649 Movements in convertible notes There was no movement in convertible notes during the financial period ended 31 December 2018. Movements in options, performance rights and warrants Refer to note 36. 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. There are 222,430,736 (30 June 2018: 8,764,493) ordinary shares escrowed at 31 December 2018. Options Options do not entitle the holder to participate in dividends or to vote at a meeting of the Company. Performance rights Performance rights do not entitle the holder to participate in dividends or to vote at a meeting of the Company. Convertible bonds Convertible bonds do not entitle the holder to participate in dividends or to vote at a meeting of the Company. Warrants Warrants issued on acquisition of NHF do not entitle the holder to participate in dividends or to vote at a meeting of the Company. Share buy-back There is no current on-market share buy-back. Capital risk management Management controls the capital of the Group in order to maintain a sustainable debt to equity ratio, generate long-term shareholder value and ensure that the Group can fund its operations and continue as a going concern. 50 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 20. Equity - issued capital (continued) The Group’s debt and capital include ordinary share capital and financial liabilities, supported by financial assets. The Group is not subject to any externally imposed capital requirements. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. The capital risk management policy remains unchanged from the 30 June 2018 Annual Report. Note 21. Equity - reserves Foreign currency reserve Share-based payments reserve Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 2 5,996 (557) 1,741 5,998 1,184 Foreign currency reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements into United States dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and directors as part of their remuneration, and other parties as part of their compensation for services. Movements in reserves Movements in reserves during the current and previous financial period are set out below: Consolidated Balance at 1 July 2017 Foreign currency translation Share-based payments Balance at 30 June 2018 Foreign currency translation Share-based payments Foreign currency US$'000 Share-based payments US$'000 Total US$'000 (405) (152) - (557) 559 - 1,518 - 223 1,741 - 4,255 1,113 (152) 223 1,184 559 4,255 Balance at 31 December 2018 2 5,996 5,998 Note 22. Equity - dividends There were no dividends paid, recommended or declared during the current or previous financial period. Note 23. Financial instruments Financial risk management objectives The Group’s principal financial instruments comprise cash and short-term deposits, receivables and payables and its finance facilities. 51 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 23. Financial instruments (continued) The Group manages its exposure to key financial risks in accordance with the Group’s financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst protecting its future financial security. The main risks arising from the Group’s financial instruments are market risk (foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rates and currencies and assessments of market forecasts for interest rates and foreign currencies. Ageing analyses and monitoring of receivables using an expected credit loss matrix are undertaken to manage credit risk. Liquidity risk is monitored through the development of future rolling cash flow forecasts. Market risk Foreign currency risk Foreign currency risk arises from investments and borrowings that are denominated in a currency other than the functional currencies of the entities within the Group. These are Australian dollars and United States dollars based on country of operation of the entities within the Group. In addition, the Group is exposed to non-financial instrument risk on the translation of these entities from their functional currency to the presentation currency of United States dollars. This presentation risk is separate to the foreign currency risk dealt with here. The Group’s does not hedge any foreign currency risks as those currency positions are considered to be long-term in nature. The carrying amount of the Group's foreign currency denominated financial assets at the reporting date was as follows: Consolidated Australian dollars United States dollars Assets Liabilities 31 December 2018 31 December 30 June 2018 2018 30 June 2018 US$'000 US$'000 US$'000 US$'000 17,195 78,931 22,538 - (79,492) (61,056) (38,865) - 96,126 22,538 (140,548) (38,865) The Group had net liabilities denominated in foreign currencies of US$44,422,000 (US$96,126,000 less liabilities of US$140,548,000) as at 31 December 2018 (30 June 2018: net liabilities of US$16,327,000 (US$22,538,000 less liabilities of US$38,865,000)). Consolidated - 31 December 2018 % change Effect on Effect on profit before tax US'000 equity US'000 % change USD strengthened USD weakened Effect on Effect on profit before tax US'000 equity US'000 Australian dollars 10% (8,790) (8,790) 10% (6,230) (6,230) Consolidated - 30 June 2018 % change profit before tax '000 Effect on equity '000 % change profit before tax '000 Effect on equity '000 USD strengthened Effect on USD weakened Effect on Australian dollars 10% 1,484 1,484 10% (1,633) (1,633) The percentage change is the expected overall volatility of the significant currencies, which is based on management's assessment of reasonable possible fluctuations taking into consideration movements over the last 12 months each year and the spot rate at each reporting date. 52 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 23. Financial instruments (continued) Price risk The Group is not exposed to any significant price risk. Interest rate risk The Group's main interest rate risk arises from borrowings and cash and cash equivalents. The Group’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a result of changes in market rates and the effective weighted average interest rates on financial liabilities, is as follows: Consolidated Vendor loan - Australian disbursement funding business Convertible bonds payable Lucerne Group combined loan Lucerne Group - working capital facility Lucerne Group facility - US medical lien funding business Lockton insurance financing Credit cards Other NHF subordinated debt Assetsecure Pty Limited loan Atalaya Capital Management NHF Founder promissory note Syndicated acquisition facility Vendor loan - NHF Founders Cash and cash equivalents Net exposure to cash flow interest rate risk 31 December 2018 31 December 2018 30 June 30 June 2018 2018 Weighted average interest rate % Balance US$'000 Weighted average interest rate % Balance US$'000 7.50% 11.50% 13.50% - 15.00% 10.00% 17.86% 12.00% 8.95% 14.25% - 13.00% 13.00% 0.04% 824 3,529 8,548 - 5,238 49 414 1,000 20,028 39,902 9,000 29,644 12,546 (3,696) 127,026 7.50% 11.50% 13.50% 7.95% - - - - 9.76% - - - - 0.04% 1,048 3,696 9,868 2,217 - - - - 18,844 - - - - (934) 34,739 The weighted average interest rate for the period ended 31 December 2018 was 11.93% (Year ended 30 June 2018: 11.56%). The Group has net interest-bearing liabilities and therefore income and operating cash flows are subject to changes in the market rates. The Group regularly analyses its interest rate exposure. Within this analysis consideration is given to expected interest rate movements and the Group’s future cash requirements, potential renewals of existing positions, alternative financing, and the mix of fixed and variable interest rates. A movement in interest rates of +/-100 basis points will result in less than a +/-US$1,243,000 (2018: US$475,000) impact on the Group’s results and operating cash flows. Credit risk The Group has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using fixed rates of credit loss provisioning. These provisions are considered representative across all customers of the Group based on recent sales experience, historical collection rates and forward-looking information that is available. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s cash and cash equivalents and receivables. Cash and cash equivalents comprise of cash on hand and demand deposits. The Group limits its credit risk by holding cash balances and demand deposits with reputable counterparties with acceptable credit ratings. 53 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 23. Financial instruments (continued) Receivables for the disbursement funding division are with registered solicitors as the counterparty. The Group transacts with in excess of 160 law firms and limits its credit risk by ensuring that there is a credit limit applied to any law firm and that settlement funds are deposited into the law firm’s trust accounts (which are periodically audited by the Law Society). Receivables for the short-term loans division are with registered solicitors as the counterparty. The Group limits its credit risk by ensuring that there is a credit limit applied to any law firm. Personal guarantees are obtained from the principals of the firm and the loans are monitored on a monthly basis. Receivables relating to the litigation funding division are as a result of a funded case concluding. The Group assesses the defendants in the matters funded by the Group prior to entering into any agreement to provide funding and continues this assessment during the course of funding. The Group’s continual monitoring of the defendants’ financial capacity mitigates this risk. Receivables for the US medical lien funding division are held with licensed lawyers who have a fiduciary duty to protect the Receivable. The Group transacts with in excess of 1,060 law firms and limits its credit risk by ensuring that the lawyer has a valid and active license to practice law in their respective state. Settlement funds are required to be deposited into the law firm’s trust accounts where State Bar rules and regulations apply, protecting the funds from mismanagement. Liquidity risk The liquidity position of the Group is managed to ensure sufficient liquid funds are available to meet the Group’s expected financial commitments in a timely and cost effective manner. Management continually reviews the Group’s liquidity position, including the preparation of cash flow forecasts, to determine the forecast liquidity position and to maintain appropriate liquidity levels. The liquidity risk for the Group is the ability to raise equity or debt financing in the future. This risk is mitigated by the headroom available from the following facilities: Assetsecure Pty Limited loan (subject to certain calculations, see note 19) Atalaya Capital Management (subject to certain calculations, see note 19) Lucerne Group combined loan Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 4,675 40,098 - 7,025 - 444 44,773 7,469 54 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 23. Financial instruments (continued) Remaining contractual maturities The following are the remaining contractual maturities as at the reporting date. The amounts are gross and undiscounted and include contractual interest payments and exclude the impact of netting agreements. Weighted average interest rate 1 year or less Between 1 and 2 years Between 2 and 5 years Over 5 years Remaining contractual maturities Consolidated - 31 December 2018 Non-derivatives Non-interest bearing Trade and other payables Interest-bearing Vendor loan - Australian disbursement funding business Convertible bonds payable Lucerne Group combined loan Lucerne Group facility - US medical lien funding business Other NHF subordinated debt Assetsecure Pty Limited loan Atalaya Capital Management NHF Founder Promissory Notes Syndicated acquisition facility Vendor loan - NHF Founders Lockton insurance financing Credit cards Total non-derivatives % US$'000 US$'000 US$'000 US$'000 US$'000 - 7,657 7.50% 11.50% 13.50% 15.00% 12.00% 8.95% 14.25% - 13.00% 13.00% 10.00% 17.86% 855 3,983 9,702 5,435 - 1,793 5,301 - 3,854 1,631 53 455 40,719 - - - - - - 21,374 5,287 9,000 3,864 1,635 - - 41,160 - - - - - 1,600 - 41,568 - 36,348 15,384 - - 94,900 - - - - - - - - - - - - - - 7,657 855 3,983 9,702 5,435 1,600 23,167 52,156 9,000 44,066 18,650 53 455 176,779 Weighted average interest rate 1 year or less Between 1 and 2 years Between 2 and 5 years Over 5 years Remaining contractual maturities Consolidated - 30 June 2018 % US$'000 US$'000 US$'000 US$'000 US$'000 Non-derivatives Non-interest bearing Trade and other payables Deferred consideration Interest-bearing Vendor loan - Australian disbursement funding business Convertible bonds payable Lucerne Group combined loan Lucerne Group - working capital facility Assetsecure Pty Limited loan Total non-derivatives - - 2,059 370 - - 7.50% 11.50% 13.50% 7.95% 9.76% 1,068 4,013 1,332 176 1,687 10,705 - - 10,540 2,312 1,691 14,543 - - - - - - 19,269 19,269 - - - - - - - - 2,059 370 1,068 4,013 11,872 2,488 22,647 44,517 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. 55 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 24. Fair value measurement Fair value measurement hierarchy for assets The following tables detail the Group's assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Consolidated - 31 December 2018 Level 1 US$'000 Level 2 US$'000 Level 3 US$'000 Total US$'000 Assets measured at fair value: Loan receivables - disbursement funding/medical lien funding Total assets - - - - 101,372 101,372 101,372 101,372 Consolidated - 30 June 2018 Level 1 US$'000 Level 2 US$'000 Level 3 US$'000 Total US$'000 Assets measured at fair value: Loan receivables - disbursement funding Total assets - - - - 23,391 23,391 23,391 23,391 The above Loan receivables are shown excluding the adjustment for the unrecognised day 1 margin. There were no transfers between levels during the financial period. Description of significant unobservable inputs to valuation The significant unobservable inputs used in the fair value measurements of loan receivables categorised within Level 3 of the fair value hierarchy, performed by an actuarial firm as at 31 December 2018 and 30 June 2018 are as shown below. The actuarial valuation involves: ● ● Analysis of historical collections data; Setting assumptions based on the experience of historical collections data (including repayment patterns, proportion of write-offs and discounts); Application of assumptions to the open receivables in order to project the future repayments over the expected life of the contracts; Discounting the projected repayments for the open receivables using an appropriate discount rate to the valuation date; Calculation of the fair value of the invoices taking into account the discounted repayments which have allowed for discounts and write-offs and credit risk; and Calculation of the day 1 margin and its systematic recognition within profit and loss over the expected term of the arrangement is based on the profile of cash collections and the subsequent weighted average calculation of these collections applied to the recognition of the day 1 margin. ● ● ● ● Loan receivables fair value measurement – valuation process Valuations are performed on a half-yearly basis by a qualified external actuarial firm. For the purpose of the valuation, Management provides the external actuarial firm with the inputs and data required to be applied in the valuations. Management performs a reconciliation of the fair value based on the valuation results and as part of the reconciliation process, discussions are conducted with the external actuarial firm if there are any unusual movements noted. 56 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 24. Fair value measurement (continued) Reconciliation of fair value measurement of the Loan receivables and deferred day 1 margin Consolidated Balance at 1 July 2017 Cash disbursements in relation to new loans New day 1 margin Cash collections - disbursement funding Gains or losses recognised in profit or loss Amortisation of day 1 margin Exchange differences Balance at 30 June 2018 Additions through business combinations (note 31) Change in assumption Cash disbursements in relation to new loans New day 1 margin Cash collections - disbursement funding Gains or losses recognised in profit or loss Amortisation of day 1 margin Exchange rate movement Fair value US$'000 Deferred day 1 margin US$'000 Total US$'000 19,125 10,005 - (8,969) 4,164 - (934) 23,391 76,003 - 9,445 - (10,378) 3,965 - (1,054) (3,381) - (3,065) - - 2,897 136 (3,413) - 106 - (2,886) - - 1,573 146 15,744 10,005 (3,065) (8,969) 4,164 2,897 (798) 19,978 76,003 106 9,445 (2,886) (10,378) 3,965 1,573 (908) Balance at 31 December 2018 101,372 (4,474) 96,898 This reconciliation excludes other receivables and short-term loans. The loan receivables - disbursement funding/medical lien funding (gross) balance was US$205,248,000 as at 31 December 2018 (30 June 2018: US$29,566,000). Note 25. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel ('KMP') of the Group is set out below: Short-term employee benefits Post-employment benefits Share-based payments Consolidated 6 months 31 December 2018 US$ 12 months 30 June 2018 US$ 776,612 23,827 - 1,355,321 49,209 222,983 800,439 1,627,513 The above figures include amounts paid to companies related to directors for the service and/or director fees payable to directors. 57 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 26. Remuneration of auditors During the financial period the following fees were paid or payable for services provided by Stantons International ('Stantons'), the auditor of the company, and Spielman Koenigsberg & Parker, LLP ('SKP'), the auditor of NHF: Audit services - Stantons Audit or review of the financial statements Other services - Stantons Preparation of the Investigating Accountant’s Report Other accounting services Audit services - SKP Audit or review of the financial statements Note 27. Contingent liabilities Consolidated 6 months 31 December 2018 US$ 12 months 30 June 2018 US$ 125,580 95,932 41,559 6,547 48,106 - - - 173,686 95,932 100,965 - Bank guarantees The Group has given bank guarantees as at 31 December 2018 of $112,000 (30 June 2018: $117,000) to various landlords. The guarantees are secured by an offset arrangement with the short-term cash deposits. Litigation funding agreements In certain jurisdictions litigation funding agreements contain an undertaking from the Group that it 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. It is not possible to predict in which cases such an award might be made or the quantum of such awards. In general terms an award of adverse costs to a defendant will approximate 70% (30 June 2018: 70%) of the amount paid by the plaintiff to pursue the litigation (although in some cases there may be more than one defendant). Accordingly, an estimate of the total potential adverse costs exposure of the Group which has accumulated from time to time may be made by assuming all cases are lost, that adverse costs equal 70% (30 June 2018: 70%) of the amount spent by the plaintiff and that there is only one defendant per case. At 31 December 2018 the total amount spent by the Group where undertakings to pay adverse costs have been provided was $5,750,000 (30 June 2018: $8,780,000). The potential adverse costs orders using the above methodology would amount to $3,883,000 (30 June 2018: $6,267,000). The Group does not currently expect that any of the matters will be unsuccessful. The Group has obtained adverse costs order insurance for these matters which should respond if any matter is unsuccessful and an adverse costs order is payable. Earn out - Litigation funding portfolio The seller of the Litigation funding portfolio, which was acquired by the Group on 11 July 2016, is entitled to receive 50% of all proceeds over A$4,000,000 from the "free carry" component of the litigation funding agreements. There is presently a dispute with the seller in relation to the calculation of the "free carry" entitlement generated by four case settlements in the portfolio (there is one on-going case from this portfolio). The seller of this portfolio claims that amounts are due to be paid by the Company under the "free carry" entitlement. The Company's position is that under the terms of the relevant agreements there is no amount payable. 58 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 27. Contingent liabilities (continued) Litigation commenced by former Executive Chairman The former Executive Chairman of the Group has commenced proceedings against LawFinance Limited in relation to various aspects of his exit from the Group. The Company believes that his claims are un-meritorious and intends to vigorously defend those proceedings. Litigation against NHF Two separate proceedings were commenced against NHF in Florida in 2017. These proceedings relate to a failed medical practice which sold various medical invoices to NHF. The proceedings are being defended as the medical invoices purchased were on an arm’s length basis and are subject to a contract entered into with the now bankrupt medical practice. As such, NHF believes there are no amounts payable to the medical practice or its creditors. Note 28. Commitments Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Consolidated 31 December 2018 30 June 2018 US$'000 US$'000 312 209 521 276 - 276 Operating lease commitments includes contracted amounts for offices under non-cancellable operating leases expiring within one year with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Note 29. Related party transactions Parent entity LawFinance Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 32. Key management personnel Disclosures relating to key management personnel are set out in note 25 and the remuneration report included in the directors' report. 59 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 29. Related party transactions (continued) Transactions with related parties The following transactions occurred with related parties: Other related parties - expenses: Lucerne Group - interest on borrowings Lucerne Group - facility fees Lucerne Group - underwriting fees Multus Medical LLC - cost of sales David Wattel - interest on vendor loan Mark Siegel - interest on vendor loan Other related parties - income: Multus Medical LLC - office rental Multus Medical LLC - staff and administration costs Wattel & York - staff costs Consolidated 6 months 31 December 2018 US$ 12 months 30 June 2018 US$ 946,158 - - 6,850 208,140 208,140 17,500 6,178 3,385 1,565,850 150,489 132,861 - - - - - - Lucerne Group manages funds on behalf of third parties. Anthony Murphy is the Chief Executive Officer of Lucerne Investment Partners, part of the Lucerne Group. David Wattel is a director of Multus Medical LLC, a company that specialises in creating 3-Dimensional anatomical schematics from standardised MRI data – this company provides services to patients to assist in their personal injury insurance claims, and NHF fund the cost of these services. David is also a founding member of Wattel & York – Attorneys at Law, a personal injury and property damage law firm. Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current receivables from other related parties: Multus Medical LLC Current payables to other related parties: Lucerne Group Wattel & York David Wattel Mark Siegel Consolidated 31 December 2018 US$ 30 June 2018 US$ 44,955 - 225,813 3,704 208,140 208,140 123,988 - - - Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date, except for the facilities with the Lucerne Group as detailed in note 19. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. 60 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 30. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive loss Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Net assets Equity Issued capital Foreign currency reserve Share-based payments reserve Accumulated losses Total equity Parent 6 months 31 December 2018 US$'000 12 months 30 June 2018 US$'000 (8,060) (5,980) (8,060) (5,980) Parent 31 December 2018 US$'000 30 June 2018 US$'000 519 574 78,087 23,213 15,222 5,757 57,412 17,843 20,675 5,370 37,649 (3,591) 5,996 (19,379) 18,421 (3,473) 1,741 (11,319) 20,675 5,370 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries Except as described in note 27, the parent entity had no guarantees in relation to the debts of its subsidiaries as at 31 December 2018 and 30 June 2018. Contingent liabilities The parent entity had no contingent liabilities as at 31 December 2018 and 30 June 2018 other than those disclosed in note 27. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 31 December 2018 and 30 June 2018. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2, except for the following: ● ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. 61 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 31. Business combinations On 28 September 2018, JustKapital NHF USA Holdings, LLC, a wholly owned subsidiary of LawFinance Limited, acquired 100% of the ordinary shares of National Health Finance HoldCo, LLC (NHF) for the total consideration transferred of US$53,000,000. NHF is a US medical lien funding business with operations very similar to the Group's Australian disbursement funding business. The acquisition expanded the Group's financing business into the much larger US market. The goodwill paid on acquisition of US$36,345,000 represents the strong brand associated with NHF, reflected in its large book of receivables (over 33,000 active matters). An amount of US$1,913,000 was attributed to existing long-term working relationships with NHF’s network of attorneys and medical providers of over 3,000. The effective date of control of NHF was 1 October 2018. AASB 3 Business Combinations allow the acquirer a reasonable time to obtain the information necessary to identify and measure all the various components of the business combination as of acquisition date. As at the 31 December 2018 the acquisition accounting for the NHF acquisition remains provisional. Details of the acquisition are as follows: Cash and cash equivalents Trade receivables - medical lien funding Other assets Plant and equipment Trade and other payables Notes payables Financing facility Non-controlling interest Net assets acquired Customer relationships Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Shares of the Company issued to vendor NHF vendor loan Acquisition costs expensed to profit or loss Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: shares issued by Company as part of consideration Less: NHF vendor loan Exchange rate movement Pre-acquisition loan provided to NHF at acquisition Net cash used 62 Fair value US$'000 5,081 76,003 180 157 (5,386) (20,703) (39,687) (903) 14,742 1,913 36,345 53,000 26,500 13,250 13,250 53,000 5,768 53,000 (13,250) (13,250) 498 5,603 32,601 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 32. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name JustKapital Financing Pty Limited JustKapital Litigation Pty Limited JustKapital Litigation Insurance Pty Limited JustKapital Co-Funding No 1 Pty Limited JustKapital Portfolio Pty Limited JustKapital STL Pty Limited JustKapital NHF USA Holdings, LLC JustKapital NHF Holdings Pty Limited National Health Finance HoldCo, LLC* JustKapital Litigation Partners (NZ) Limited** JustKapital Insolvency Services Pty Limited*** LongKapital Pty Limited*** JustKapital No 1 Pty Limited*** MML Services Pty Limited*** Subsidiaries of National Health Finance HoldCo, LLC: Accident Medical Funding, LLC* Apex Injury Network, LLC* Arizona Injury Medical Specialists, LLC* Atlanta Health Funding, LLC* Auto Medical Funding, LLC* Balboa Medical Funding, LLC* Bay Area Medical Finance, LLC* Bayou Health Finance, LLC* California Health Finance, LLC* Complete Health Network, LLC* Desert Sky Medical Funding, LLC* DFW Medical Finance, LLC* Fresno Injury Treatment Network, LLC* Georgia Injury Treatment Network, LLC* Great Salt Lake Medical Finance, LLC* HALO Medical Funding, LLC* Illinois Injury Solutions, LLC* Injury Medical Network, LLC* Kentucky Injury Network, LLC* Louisiana HealthNet Solutions, LLC* Lone Star Lien Solutions, LLC* Medical Financial Group, LLC* Metroplex Medical Finance, LLC* Nashville Injury Network, LLC* National Health Finance DM, LLC* National Health Finance of Florida, LLC* National Health Finance of Florida 2, LLC* National Medical Finance & Assistance, LLC* Principal place of business / Country of incorporation Ownership interest 31 December 2018 % 30 June 2018 % Australia Australia Australia Australia Australia Australia USA Australia USA New Zealand Australia Australia Australia Australia USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA 63 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 70.00% 75.00% 75.00% 75.00% 75.00% 75.00% 74.00% 75.00% 50.50% 48.50% 75.00% 90.50% 72.50% 70.00% 88.00% 75.00% 75.00% 67.00% 75.00% 73.00% 55.00% 70.00% 70.00% 75.00% 100.00% 100.00% 60.80% 100.00% - - - - - - - - - - - - - - - - - - - - - - - - - - - - LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 32. Interests in subsidiaries (continued) Name Principal place of business / Country of incorporation Ownership interest 31 December 2018 % 30 June 2018 % Southern California Injury Treatment Network, LLC* Nevada Health Finance, LLC* New Mexico Health Finance, LLC* New Mexico Medical Financing, LLC* North Texas Medical Finance, LLC* Northern Florida Medical Finance, LLC* Nevada Orthopedic and Spinal Financing, LLC* NW Health Network, LLC* Oklahoma Health Finance, LLC* Oklahoma Injury Network, LLC* Old Pueblo Medical Financing, LLC* ONYX Medical Funding Group, LLC* Pikes Peak Medical Funding, LLC* Rocky Mountain Medical Finance, LLC* Silver State Surgical Solutions, LLC* SMD Medical Finance, LLC* USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA 99.00% 60.00% 68.00% 49.00% 69.00% 88.00% 75.00% 66.00% 83.00% 70.00% 50.00% 70.00% 72.50% 71.00% 80.00% 68.00% - - - - - - - - - - - - - - - - Acquired on 28 September 2018. Dormant * ** *** Entities placed into members voluntary liquidation on 21 September 2018, as they did not trade. 64 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 33. Reconciliation of loss after income tax to net cash from operating activities Loss after income tax benefit for the period Adjustments for: Depreciation and amortisation Share-based payments Employee leave provision Interest Commissions payable Write off of acquisition costs of litigation assets Impairment of assets Warrant costs Net foreign exchange differences Change in operating assets and liabilities: Increase in loan and other receivables Decrease/(increase) in deferred tax assets Decrease in prepayments Increase in trade and other payables Increase/(decrease) in provisions or employee benefits Net cash from operating activities Consolidated 6 months 31 December 2018 US$'000 12 months 30 June 2018 US$'000 (11,427) (5,142) 82 27 21 (94) 71 925 2,765 3,156 636 (797) 2,159 15 8,457 118 6,114 78 223 26 (146) 164 - 808 - 678 (3,655) (467) 76 11,126 (364) 3,405 65 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 34. Changes in liabilities arising from financing activities Asset- secure Pty Limited loan US$'000 Lucerne Composite Master Fund loan US$'000 Lucerne Finance Pty Limited short- term loan US$'000 Lucerne Group combined loan US$'000 Lucerne Group – working capital facility US$'000 Vendor loan US$'000 Convertible bonds payable US$'000 Total US$'000 15,679 3,846 5,384 - - 1,846 3,846 30,601 - 10,662 (7,677) (3,771) - - (5,279) - - 9,050 1,012 (35) - 2,169 - - - (741) - - - - 13,843 (8,453) 180 (75) (105) (159) 48 (57) (150) (318) 18,844 - 5,919 (3,840) (895) 20,028 - - - - - - - - - - - - 9,868 2,217 1,048 3,696 35,673 (1,331) 438 - (361) - (1,807) - - (181) - - - (1,692) 6,357 (5,828) (427) (49) (43) (167) (1,581) 8,548 - 824 3,529 32,929 Syndicated acquisition facility US$'000 Vendor loan - NHF Founders US$'000 Atalaya Capital Man- agement US$'000 Other NHF subordin- ated debt US$'000 NHF Founder Promissory Notes US$'000 Lucerne Group facility US$'000 Lockton insurance financing and other US$'000 Total US$'000 - - - - - - - - - - - - - 30,546 - - 12,434 - 39,687 4,912 (4,697) 1,000 - - 9,000 - - - 416 (902) (304) - - - - - - 5,100 - - 138 - - - 335 518 (390) - - - - 55,122 48,410 (5,087) 554 (1,206) 29,644 12,546 39,902 1,000 9,000 5,238 463 97,793 Consolidated Balance at 1 July 2017 Lucerne loans combined Loans received Loans repaid Exchange differences Balance at 30 June 2018 Conversion to shares Loans received Loans repaid Exchange differences Balance at 31 December 2018 Consolidated Balance at 1 July 2017 Balance at 30 June 2018 Changes through business combinations (note 31) Loans received Loans repaid Capitalised interest Exchange differences Balance at 31 December 2018 66 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 35. Earnings per share Loss after income tax Non-controlling interest Consolidated 6 months 31 December 2018 12 months 30 June 2018 US$'000 US$'000 (11,427) 200 (5,142) - Loss after income tax attributable to the owners of LawFinance Limited (11,227) (5,142) Weighted average number of ordinary shares used in calculating basic earnings per share 246,301,947 139,611,768 Weighted average number of ordinary shares used in calculating diluted earnings per share 246,301,947 139,611,768 Number Number Basic loss per share Diluted loss per share Cents Cents (4.56) (4.56) (3.68) (3.68) The Company's 1,500,000 options on issue (30 June 2018: 1,500,000), 50,000 convertible bonds (30 June 2018: 50,000) and 452,743,636 warrants (30 June 2018: nil) have been excluded from the diluted earnings calculations as they are anti- dilutive for the financial period. Note 36. Share-based payments Share options At the 2016 Annual General Meeting held on 30 November 2016, shareholders approved for the Company to adopt the JKL Incentive Plan ('Incentive Plan') and associated Non-Recourse Loan Agreements for directors, officers, employees and consultants ('Participants'). The Incentive Plan, effective from 1 July 2016, replaced the previous Incentive Option Plan and Executive Incentive Plans ('EIP'). The objectives of the Incentive Plan are to: supplement Participant remuneration; ● ensure that the Group's remuneration policy is competitive in retaining and motivating the Participants; ● provide a mechanism for achieving the Group's overarching remuneration objective of aligning the interests of ● Participants and shareholders; and reward Participants based on the Group's overall performance including achieving successful judgements or settlements of individual cases, growth of the disbursements funding business (JustKapital Finance) and other businesses and high performance. ● Set out below are summaries of options granted under the plans: 31 December 2018 Grant date Expiry date price* Exercise Balance at the start of the period Granted Exercised Expired/ forfeited/ other Balance at the end of the period 22/01/2016 22/01/2019 US$0.176 1,500,000 1,500,000 - - - - - - 1,500,000 1,500,000 Weighted average exercise price US$0.176 US$0.000 US$0.000 US$0.000 US$0.176 67 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 36. Share-based payments (continued) * Exercise price - A$0.25 These options lapsed at their expiry date, and were not exercised. 30 June 2018 Grant date Expiry date 10/03/2015 10/03/2015 10/03/2015 27/03/2015 27/03/2015 22/01/2016 10/03/2018 10/03/2018 10/03/2018 27/03/2018 27/03/2018 22/01/2019 Exercise price* US$0.176 US$0.176 US$0.176 US$0.176 US$0.176 US$0.176 Balance at the start of the period 1,200,000 1,195,673 4,000,000 398,558 1,500,000 1,500,000 9,794,231 Granted Exercised - - - - - - - Expired/ forfeited/ other Balance at the end of the period - - - - - - - (1,200,000) (1,195,673) (4,000,000) (398,558) (1,500,000) - (8,294,231) - - - - - 1,500,000 1,500,000 Weighted average exercise price US$0.176 US$0.000 US$0.000 US$0.176 US$0.176 * Exercise price - A$0.25 The weighted average share price during the financial period was US$0.052 (30 June 2018: US$0.074). The weighted average remaining contractual life of options outstanding at the end of the financial period was 0.06 years (30 June 2018: 0.56 years). Performance rights Set out below are summaries of performance rights granted under the plan: 31 December 2018 Grant date Vesting date Exercise price 30/11/2016 30/06/2018 US$0.000 30 June 2018 Grant date Vesting date Exercise price 30/11/2016 30/06/2018 US$0.000 Balance at the start of the period 1,264,569 1,264,569 Balance at the start of the period 4,679,664 4,679,664 Granted Exercised Expired/ forfeited/ other Balance at the end of the period - - (1,264,569) (1,264,569) - - - - Granted Exercised Expired/ forfeited/ other Balance at the end of the period - - (3,248,505) (3,248,505) (166,590) (166,590) 1,264,569 1,264,569 The weighted average remaining contractual life of performance rights outstanding at 30 June 2018 was nil months. 68 LawFinance Limited (formerly JustKapital Limited) Notes to the financial statements 31 December 2018 Note 36. Share-based payments (continued) Warrants Set out below are summaries of warrants granted on acquisition of NHF: 31 December 2018 Grant date Expiry date Exercise price* Balance at the start of the period Granted** Exercised Expired/ forfeited/ other Balance at the end of the period 28/09/2018 28/09/2022 US$0.099 - - 452,743,636 452,743,636 - - - 452,743,636 - 452,743,636 * ** Exercise price - A$0.14 329,880,000 warrants issued to other Syndicated Acquisition Facility participants and 122,863,636 warrants issued to NHF Founders. The weighted average remaining contractual life of warrants outstanding at the end of the financial period was 3.75 years. For the warrants granted during the current financial period, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price at grant date* Exercise price** Expected volatility Dividend yield Risk-free Fair value interest rate at grant date 28/09/2018 28/09/2022 US$0.056 US$0.099 40.00% - 2.08% US$0.000 * ** Share price at grant date - A$0.08 Exercise price - A$0.14 Shares issued During the period the Company issued 1,250,000 shares to Diane Jones in lieu of part of her short-term incentive granted during the period. The shares were issued at US$0.058 cents per share as part of the rights issue undertaken by the Company on 7 November 2018 (Refer to note 20). During the period the Company issued 29,266,700 to Lucerne at US$0.058 cents per share as part of the share placement undertaken by the Company on 7 November 2018 (Refer to note 20). Note 37. Events after the reporting period No matter or circumstance has arisen since 31 December 2018 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. 69 LawFinance Limited (formerly JustKapital Limited) Directors' declaration 31 December 2018 In the directors' opinion: ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; the attached financial statements and notes give a true and fair view of the Group's financial position as at 31 December 2018 and of its performance for the financial period ended on that date; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Tim Storey Chairman 29 March 2019 Sydney 70 Stantons International Audit and Consulting Pty Ltd trading as Chartered Accountants and Consultants PO Box 1908 West Perth WA 6872 Australia Level 2, 1 Walker Avenue West Perth WA 6005 Australia Tel: +61 8 9481 3188 Fax: +61 8 9321 1204 ABN: 84 144 581 519 www.stantons.com.au INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LAWFINANCE LIMITED Report on the Audit of the Financial Report Opinion We have audited the financial report of LawFinance Limited, the Company and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 31 December 2018, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the half year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group's financial position as at 31 December 2018 and of its financial performance for the half year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation Key Audit Matters How the matter was addressed in the audit Going Concern In considering the going concern basis of accounting, management considered whether there are any material uncertainties on the Group’s ability to continue as a going concern. In making this assessment management need to consider the period of at least 12 months from the date our audit opinion is signed. The assessment is largely based on the assumptions made by the management in their cash flow forecasts. These forecasts include management and directors’ assumptions regarding the timing of future cash flows, variations to or extensions of current financing facilities, operating results, capital raising activities (if any) and future settlement of litigation funding cases. its dependence on This is a key audit matter due to the nature of the business, future cashflows, support from financiers and its ability to raise additional funds, as well as the Group’s history of operating losses and negative cashflows. timing of the Acquisition of National Health Finance Holdco LLC /Impairment of Goodwill and Other Intangibles On 28 September 2018, JustKapital NHF USA Holdings, LLC, a wholly owned subsidiary of LawFinance Limited, acquired 100% of the ordinary share capital of National Health Finance Holdco LLC (“NHF”). The acquisition resulted in the Group recognising $38,258,000 of goodwill on acquisition for its US medical lien Cash Generating Unit (CGU). The Group carries Goodwill of $42,452,000 (refer to Note 14) and Other Intangibles of $6,871,000 (refer to Note 15), as per the application of the Group's accounting policy for Intangible assets, set out in Note 2. The carrying value of Goodwill and Other Intangibles is a key audit matter due to:  The significance of the total balance of both Intangibles combined Goodwill and Other (approximately 31% of total assets);  For the Cash Generating Unit (CGU’s) which contain goodwill, the determination of recoverable amount, being the higher of fair value less costs to sell and value-in-use, requires judgement on the part of management in both identifying and then valuing the relevant CGU’s;  Litigation contracts, and their impact upon the the Group’s flows meeting future cash expectations;  The assessment of impairment of the Group’s Goodwill and Other Intangibles balances incorporated significant judgement in respect of factors such as discount rates and growth rates; and  Goodwill is also considered to be a key audit matter as the Group’s value in use model for impairment included appropriate consideration of these factors on their significant estimates and judgements and the selection of key external and internal inputs. Inter alia, our audit procedures included the following: i. ii. iii. iv. Obtaining and reviewing management’s cash flow forecasts to assess whether current cash levels and proposed capital management initiatives can sustain operations for a period of at least 12 months from the proposed date of signing the financial statements; the assumptions Reviewing by management in the going concern forecasts for reasonableness and challenging these where necessary; used in Corroborating, where possible, management’s flow relation assumptions forecasts, including enquiry, verifications of and discussions pertaining to these assumptions; and its cash to Assessing the adequacy of the Group’s related disclosures within the financial report. Inter alia, our audit procedures included the following: i. ii. iii. iv. v. of assessment The management’s determination of the Group’s CGUs based on our understanding of the nature of the Group’s Business and economic environment in which the segments operate. We also analysed the internal reporting of the Group to assess how earnings streams are monitored and reported; The evaluation of management’s process regarding valuation of the Group’s goodwill assets to determine any potential asset impairment. We tested management’s models, review of the preparation and such as forecasts; The audit of the Group’s assumptions and estimates used to determine the recoverable value of its assets, including those relating to the in forecasted receivables book and discount rates used; revenue, costs, growth Checking corroboration of underlying data; and cash the flow models and Performing sensitivity analysis in the main areas. These included the appropriateness of the discount rate used and growth assumptions for the CGUs with a higher risk of impairment. Carrying Value of Disbursement receivables – Current $27,460,000 and Non-Current $69,438,000 As discussed in Note 2 of the financial report the Group has from Contracts with (Revenue adopted AASB 15 Customers). As a result of this adoption, the Group concluded the funding provided by its disbursement funding arrangements does not meet the definition of a contract with a customer under AASB 15 and concluded that the income arising from changes in the fair value of financial instruments is within the scope of AASB 9 (Financial Instruments). The key elements of judgement associated with the application is the calculation of the fair value and day 1 margin and its adjustment to the carrying value of the disbursement receivables (both current and non-current). This area is a key audit matter due to the significance of the total balance (approximately 60% of total assets) as well as the inherent subjectivity that is involved in the Group making judgements as discussed in the paragraph above. Inter alia, our audit procedures included the following: i. ii. iii. iv. v. Review the Group’s new accounting policy and its compliance with AASB 9; Obtained a copy of the valuation report compiled by an independent expert on the fair value and carrying value of the disbursement receivables. Audited the assumptions within the report and questioned the expert on the validity of those assumptions; Testing key controls, approval processes, and performing debtor circularisations on a sample of disbursement receivables; Reviewing management’s assumptions current splitting disbursement receivables; and in non-current and of Assessing the adequacy of disclosures in the financial report. the Group’s Valuation of Deferred Tax assets $6,789,000 The group has recognised a significant amount of deferred tax assets $6,789,000, mainly resulting from net operating losses. The risk exists that future profits will not be sufficient to fully recover the deferred tax assets. Management supports the recoverability of the deferred tax assets by the income projections which include estimates of, and tax strategies for, future taxable income. Changes in the business and its markets and changes in regulations may impact these projections. This area is a key audit matter as the valuation of deferred tax assets required an assessment process is subjective and is based on estimates of future taxable income. Inter alia, our audit procedures included the following: i. ii. iii. iv. Auditing the work of tax specialists in assessing the appropriateness of the level of the deferred tax asset balance recognised in the balance sheet; Auditing the forecasts and critically assessing the assumptions and judgments included in these forecasts by considering the historical accuracy of forecasts; Reviewing management’s key assumptions; and the adequacy of Assessing the Group’s disclosures in respect of the deferred tax assets. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 31 December 2018, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. We conclude on the appropriateness of the Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. We evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. We obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in Internal control that we identify during our audit. The Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the consolidated financial report of the current period and are therefore key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 8 to 16 of the directors’ report for the year ended 31 December 2018. In our opinion, the Remuneration Report of LawFinance Limited for the year ended 31 December 2018 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. STANTONS INTERNATIONAL AUDIT AND CONSULTING PTY LTD (Trading as Stantons International) (An Authorised Audit Company) Martin Michalik Director West Perth, Western Australia 29 March 2019 LawFinance Limited (formerly JustKapital Limited) Shareholder information 31 December 2018 The shareholder information set out below was applicable as at 25 March 2019. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Number of holders of options over ordinary shares Number of holders of ordinary shares 2,070 142 87 284 153 2,736 2,243 - - - - - - - 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Ordinary shares Number held % of total shares issued 107,548,702 107,548,701 43,750,000 42,411,334 35,193,263 15,846,390 7,333,333 5,218,059 4,800,000 4,488,552 3,899,146 3,500,000 3,175,000 2,800,000 2,688,732 2,600,000 2,600,000 2,566,568 2,450,928 2,266,667 402,685,375 22.24 22.24 9.05 8.77 7.28 3.28 1.52 1.08 0.99 0.93 0.81 0.72 0.66 0.58 0.56 0.54 0.54 0.53 0.51 0.47 83.30 Mr Mark Siegel Mr David Wattel Washington H Soul Pattinson & Company Limited Citicorp Nominees Pty Limited National Nominees Limited Mr John Herbert Bannister Litigation Management Pty Limited Prolex Holdings Limited (PHL A/C) Wattle Laboratories Pty Limited (Advanced Culture Systems A/c) BNP Paribas Noms Pty Ltd (IB AU Noms Retail Client DRP) Barbright Australia Pty Ltd (Interquartz Super Fund A/C) Alpha Bronte Pty Limited (The Bronte Carlo A/c) Mr Jason Maxwell Yu Onmell Pty Ltd (ONM BPSF A/C) Diane Lesley Jones Mr Ping Kin Yu & Mrs Wai Ying Elsa Yu (PK and Elsa Super Fund A/c) Mr Alistair David Strong Garrett Smythe Limited BT Portfolio Services Limited Mrs Adele Whyte Unquoted equity securities (options) There are no unquoted equity securities. 76 LawFinance Limited (formerly JustKapital Limited) Shareholder information 31 December 2018 Substantial holders Substantial holders in the Company are set out below: Mr Mark Siegel Mr David Wattel Washington H Soul Pattinson & Company Limited Citicorp Nominees Pty Limited National Nominees Limited Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares Number held 107,548,702 107,548,701 43,750,000 42,411,334 35,193,263 % of total shares issued 22.24 22.24 9.05 8.77 7.28 Ordinary shares 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. Warrants Details Warrants issued to other Syndicated Acquisition Facility participants Warrants issued to NHF Founders Securities subject to voluntary escrow Details Escrowed related party vendor shares related to the purchase of the Litigation funding portfolio Escrowed director and NHF Founders shares related to the purchase of NHF Number of warrants 329,880,000 122,863,636 452,743,636 Number of shares 7,333,333 215,097,403 222,430,736 77 

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