Litigation Capital Management Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 Litigation Capital Management Limited ACN 608 667 509 About LCM Founded in 1998, Litigation Capital Management (LCM) is one of Australia’s most experienced and successful litigation finance companies. LCM is a specialist in providing litigation finance to enable the pursuit and successful recovery of funds in a range of litigation projects, both single-case and portfolio, including class actions, commercial claims, claims arising out of insolvency and international arbitration. LCM provides strategic input and assists with the management of litigation projects to support these projects reaching a successful conclusion. LCM is headquartered in Sydney and has offices in Melbourne and Brisbane. The company has been listed on the Australian Stock Exchange (ASX) since December 2016. Contents STRATEGIC REPORT About LCM FY 2018 Financial Highlights Chairman’s Letter Chief Executive’s Report Market Overview Strategic Review Financial Review Operational Review GOVERNANCE Our Board Corporate and Social Responsibility Directors Report FINANCIAL STATEMENTS Consolidated Financial Statements Notes to the Financial Statements OTHER INFORMATION Shareholder Information IFC 1 2 4 7 8 11 13 16 17 18 35 39 69 2 LCM Annual Report 2018 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK Strategic Report Highlights FY 2018 Financial Highlights i S t r a t e g c R e p o r t LCM has a disciplined approach and methodology employed in assessing claims that will likely result in a successful outcome. This has been reﬁ ned over our 20-year history and is the backbone of our success. FY 2018 Gross income from Litigation Projects A$29.2m 754% on prior year FY 2018 Return on equity 41% FY 2018 Net proﬁ t before tax FY 2018 Equity A$12.0m 518% on prior year A$25.4m 53% on prior year Cumulative IRR 83% 80% in FY 2018 Cumulative ROIC 138% 137% in FY 2018 Cash generation ($ in millions) Net assets ($ in millions) 27.1 25.4 CAGR 159% 0.6 1.6 3.4 CAGR 36% 16.7 7.4 5.6 2015 2016 2017 2018 2015 2016 2017 2018 Financial Year Ended 30 June Financial Year Ended 30 June LCM Annual Report 2018 1 Strategic Report Chairman’s Letter Chairman’s Letter It is our view that it is the robustness of LCM’s processes which make the Company exceptional. Dear Shareholders, I am delighted to present to you the Litigation Capital Management (LCM) 2018 Annual Report - our second as an ASX- listed company and our ﬁ rst reﬂ ecting a full year as a constituent of the ASX - and am I even more delighted to report our strongest ﬁ nancial results to date. It is worth reﬂ ecting on this within the context that the Company is celebrating its 20th anniversary this year and it is the disciplined approach and rigorous selection criteria when selecting litigation ﬁ nance projects that we have honed over that period that has driven this performance. Following the successful IPO of the Company in December 2016 and the completion of FY 2017, our priority has been driving litigation project performance and generating shareholder value while continuing to review potential opportunities for future revenue growth. We are pleased to inform shareholders that in addition to strong ﬁ nancial performance, the details of which are included in the report of our Chief Executive Ofﬁ cer Patrick Moloney, our litigation project performance continues to be outstanding, with the Company’s track record over the past seven ﬁ nancial years providing a 138% return on invested capital over an average 27 month period and a cumulative IRR of 83%. These exceptional ﬁ gures demonstrate a continuation of the performance we reported in 2017’s Annual Report and are testament to the consistent quality of our approach. Our existing portfolio of litigation projects is well diversiﬁ ed in terms of the type and size of projects that we have committed capital to and we are comfortable with our exposure to these. The same is true of the strong pipeline of future projects, which is discussed further in the Chief Executive’s Report. As a Board, a key area of focus for us has been the continuous review of the processes that the Company uses in its determination of which litigation projects to support. We are committed to delivering high standards of corporate governance and embedding the right culture and behaviour throughout the business. We recognize the duty that we have to our shareholders to ensure that robust rules, practices and processes are in place and that these operate efﬁ ciently at all levels of the business. It is our view that it is the robustness of LCM’s processes which make the Company exceptional. It is vital that we maintain and improve on the high standards we’ve set, as we look to capitalize on our position as one of the longest-standing and one of the few listed litigation ﬁ nancing entities in the world. On behalf of the Board, I take this opportunity to recognise the exceptional work that has led us to these record results. I would like to thank my fellow directors and all LCM employees, both existing and new, for their efforts in 2018. I speak for the Board when I say that we are committed to delivering value to our shareholders in the years ahead and I look forward to welcoming those shareholders who can attend our AGM in November. Yours Sincerely, Dr. David King Chairman (cid:2) 2 LCM Annual Report 2018 i S t r a t e g c R e p o r t We are committed to delivering high standards of corporate governance and embedding the right culture and behaviour throughout the business. Strategic Report Chief Executive’s Report Chief Executive’s Report These completions resulted in record results and a strong increase in gross income from Litigation Projects by 754% to A$29.2 million. 2018 was a very successful year for LCM, during which we continued to deliver results for our clients and value for our shareholders. These results demonstrate our highly disciplined approach towards investing in litigation. Our robust performance in FY 2018 is testament to our investment methodology, the strength of the business and team we have built, and the solutions we provide. Our focus on originating high quality litigation projects and successfully completing these projects drive our proﬁ tability. We completed six litigation projects in FY 2018. These completions resulted in record results and a strong increase in gross income from Litigation Projects by 754% to A$29.2 million Proﬁ t before tax was A$12.0 million, an increase of 518% compared to FY 2017 and after movements in deferred taxes we produced a Net Proﬁ t after Tax of A$8.6 million. The seven-year performance metrics outlined in the Chairman’s Letter validate the systems and methodologies developed by LCM over its 20-year history in identifying and managing litigation projects to a proﬁ table conclusion. The seven-year cumulative IRR is 83%, demonstrating that we can consistently produce attractive results within a reasonable investment period. These key metrics generated over a seven-year period are most representative of the business as it will be going forward. As one of the few listed litigation ﬁ nancing entities in the world and combined with our 20-year heritage, LCM is well positioned to capitalise on a global environment which is seeing rapid and dynamic change. We are a business with the ability to scale up quickly and we have a team that can manage a substantial number of additional projects without a material increase to our cost base. While many litigation ﬁ nanciers across the world are discussing the provision of funding and risk management solutions to the corporate world, our understanding is that very few transactions have actually occurred. During FY 2018, we entered into our ﬁ rst conditional corporate portfolio transaction. The provision of a ﬁ nance product across a portfolio of individual litigious disputes represents a very signiﬁ cant opportunity for us as a business. Corporate portfolio transactions are a sector of the potential marketplace which are signiﬁ cant in size and potentially could dwarf the entire current addressable market for litigation ﬁ nance worldwide. As well as an increase in the number of applications for litigation ﬁ nance being received during FY 2018, the number of opportunities by sector also increased. This enabled us to build a strong qualiﬁ ed pipeline (as at 24 October 2018) of future diversiﬁ ed opportunities compromised of 31 litigation projects. Our current portfolio is comprised of 14 litigation projects and we have an additional seven litigation projects which are subject to conditional funding agreements. These seven conditional funding agreements include our ﬁ rst international arbitration and our ﬁ rst corporate portfolio transaction. The opportunities and market for litigation ﬁ nance is set to become increasingly global and we will continually monitor and assess attractive regions for our international expansion ambitions. These future growth markets for LCM must have (i) a legal framework and jurisdiction with similar foundation to Australian law, (ii) a maturing and growing recognition of litigation ﬁ nance as a corporate and risk management tool and (iii) have in place suitable frameworks and rules for the resolution of disputes and enforcements of judgments arbitral awards. 4 LCM Annual Report 2018 i S t r a t e g c R e p o r t Our approach to selecting litigation ﬁ nance projects Our international expansion will be combined with to support is reﬂ ected in our approach to considering a focus on continuing to strengthen our presence in expansion into new markets and products; we are established markets. To capture the growth in our open to capitalising on the opportunities these existing domestic markets we established an ofﬁ ce in markets present, but we are not willing to compromise Melbourne in 2017, the second largest economic hub LCM’s robust and diligent approach to do so simply in Australia. Since establishing the Melbourne ofﬁ ce, for the sake of growth. It is important that as a we have seen an increase in applications for litigation business we approach these opportunities with a level ﬁ nance from the Victorian jurisdiction. head so that future growth is based on the discipline we have practised over the past 20 years and that we continue to create value for our shareholders. Looking forward, we expect the outlook to remain positive for the sector. The nature of litigation funding makes it notoriously difﬁ cult to make It is important to highlight this, as it is with this accurate predictions or forecasts about the timing outlook that we have begun the process of expanding and proﬁ tability of individual litigation projects. the capabilities and operations of our team beyond Notwithstanding this fact, we are expecting nine of Australia and the Asia-Paciﬁ c region. The most the litigation projects in the current unconditional signiﬁ cant growth opportunity we’ve identiﬁ ed is in portfolio to complete during FY 2019 (two of which the United Kingdom and Europe and the Company have already completed). Although, as always, the has over the course of 2018 been considering the resolution of litigation matters is not easy to forecast, provision of litigation ﬁ nance and funding into the the current forecast for litigation projects to complete United Kingdom. We took the step in early 2018 in FY 2019 would represent another signiﬁ cant to retain Queens Counsel in London to assist with increase year-on-year for us (compared to FY 2018). considering applications for funding from that The ﬁ nal litigation project subject to the International jurisdiction as well as to assist with opportunities Litigation Funding Partner Agreement and an arising within Australasia. additional eight projects being funded directly by LCM We have the exciting opportunity to bring on board are all expected to complete during FY 2019. an experienced and functioning team to establish a Our ability to grow our portfolio of Litigation Projects London ofﬁ ce to target the growth markets of the UK is heavily dependent on our capacity to access and Europe. In order to make the most of the growing appropriate and affordable capital sources. As a result, opportunity in one of the most mature litigation we are exploring an initiative to de-list from ASX and ﬁ nance markets, and wider Europe, we have identiﬁ ed seek admission of LCM to AIM, a market for growth Mr Nicholas Rowles-Davies to head up and build LCM’s companies operated by the London Stock Exchange. European ofﬁ ce in London. Nick is a true industry The directors believe the move to AIM will better pioneer, the creator of portfolio litigation ﬁ nance and position us to broaden our shareholder base, access a the author of the seminal text regarding the industry, deeper pool of equity capital to support growth and and his appointment will provide us with an immediate therefore position us for a re-rating. LCM shareholders and considerable presence in the region. Nick will will have an opportunity to vote on proposals relating lead the newly-formed European ofﬁ ce, comprised of to this initiative in the near future. highly-experienced litigation funders, in the origination of litigation ﬁ nance projects and their execution, with a particular focus on portfolio litigation ﬁ nance. Overall, myself and the management team are very pleased with the ﬁ nancial performance of the company during FY 2018. We are very conﬁ dent, given LCM’s ongoing performance metrics, that future years will repeat and build on our current success. It is vital that as LCM grows, we retain our disciplined approach, as this is what has underpinned our previous success and it is what will drive the growth of the business going forward. LCM Annual Report 2018 5 Our robust performance in FY 2018 is testament to our investment methodology, the strength of the business and team we have built, and the solutions we provide. 6 LCM Annual Report 2018 Strategic Report Market Overview Market Overview i S t r a t e g c R e p o r t The signiﬁ cant growth of the litigation ﬁ nance and funding market in recent years has begun to draw the attention of broader market participants and media over the past year – a theme is set to continue as the industry continues to grow and mature at an incredible rate. Any doubts as to the permanence of the litigation ﬁ nance industry in the Australasian marketplace were dispelled with the parliaments in both Hong Kong and Singapore passing legislation establishing a framework for litigation ﬁ nance and funding products to be utilised in association with international arbitral disputes. At the time of passing that legislation, indications were given that, over time, any prohibition with respect to the use of litigation ﬁ nance and both the integrity and transparency of Australian corporate public markets. The litigation ﬁ nance and funding industry has made those securities class actions possible. Without a source of funding and the availability of ﬁ nancial support in the form of indemnities against adverse costs, the vast majority of class actions currently pursued within Australia would not be possible. While litigation ﬁ nancing continues to have signiﬁ cant growth and expansion in single case funding, the market for sophisticated corporates is also becoming increasingly attractive. Ongoing growth of this market is driven by the prohibitive cost of large scale litigation, the desire to avoid signiﬁ cant risks and the recognition of the value of professional management of litigation which ﬁ nanciers provide. funding products in association with other disputes As a result, servicing the sophisticated corporate in addition to international arbitration will be considered. The industry as a whole has embraced those developments and expects that the permissible use of litigation ﬁ nance with respect to commercial disputes being resolved or adjudicated through the market has seen funders diversify further from offering funding for one-off large cases, to considering funding portfolios of litigation. Portfolio funding allows funders to take on multiple cases and minimize risk. One of the ﬁ rst of these deals was reported in the press in 2006 courts of both Hong Kong and Singapore will follow in when British Telecom utilised a USD$45M portfolio future years. funding arrangement. “The Corporations Act provides key avenues for shareholders and consumers to enforce their rights. Where private action can achieve a similar outcome to that which action by ASIC could achieve, it allows ASIC to allocate its enforcement resources to other priorities. Shareholder class actions provide a number of beneﬁ ts to consumers and ﬁ nancial markets and play an important role in shareholder access to justice.” We view the above comment made by the Australian Securities and Investments Commission, Australia’s corporate regulator, in September 20181 as a positive endorsement of the effect that increased securities class actions are having with respect to This market offers a compelling opportunity as it is relatively new and largely under-developed. Geographically, the UK market is fast becoming an attractive region for litigation funders. It is much bigger than any single market in Australia or Asia, is an established center for international arbitration and home to over 200 law ﬁ rms and four of the top 10 global law ﬁ rms. The addition of Nick Rowles-Davies to the LCM team and the opening of a London ofﬁ ce for LCM will uniquely position LCM to take advantage of this market. 1 Australian Law Reform Commission Inquiry into Class Action Proceedings and Third Party Litigation Funders Submission by the Australian Securities and Investments Commission dated September 2018 LCM Annual Report 2018 7 Table 1: LCM’s risk management process in assessing projects 1 Preliminary due diligence by the investment manager 2 3 4 5 6 Investment committee review Board review and approval Conditional ﬁ nancing agreement Additional due diligence Unconditional ﬁ nancing agreement Strategic Report Strategic Review 8 LCM Annual Report 2018 Strategic Report Strategic Review Strategic Review i S t r a t e g c R e p o r t LCM continues to receive an increased number of applications for litigation ﬁ nance and risk management products year on year, both from within the single case funding market and the corporate funding market, across the jurisdictions in which LCM operates. In FY 2018 the total applications increased by 27.6% to 125 applications, compared with 98 applications in FY 2017. Not only has the volume of applications continued to increase, but also the size and quality of the opportunities has improved. Maintaining our disciplined approach and rigorous selection criteria when assessing litigation projects has remained an absolute focus for LCM in 2018, underpinned by thorough due diligence, the active management of investments and the continuity of our experienced team. Moreover, competition in the global marketplace for litigation funding undoubtedly continues to increase – a trend which LCM generally views as a Australia The ongoing maturing of the Australian marketplace for litigation funding has been evidenced by increased competition in the past year. This has been particularly notable within the class action segment of the market, largely due to activity from offshore funders, primarily from the UK. Competition in the high-proﬁ le securities and shareholder class actions segment of the market was notable in 2018; an example of such competition was the three competing shareholder class actions brought against Get Swift Limited and ﬁ ve competing class actions brought against AMP Limited. The funding of class actions in Australia is presently attended with some judicial uncertainty and risk as the courts work their way through resolving the case management issues posed by competing class actions. LCM has, throughout FY 2018, been cautious in its approach to potential investments in the competitive end of the class action market in Australia, given the current backdrop. LCM will maintain its prudent approach and policy until the applicable legal positive indication of the market maturing. Our team principles are settled. has continued to adapt to this theme, focussing on its sourcing pipeline to avoid the intensely competitive areas of the market and instead selecting opportunities in new areas and sectors. LCM is committed to the continuation of this disciplined approach towards its investments as it builds its portfolio of projects into FY 2020 and beyond. Looking forward, ensuring our portfolio of litigation projects is balanced both in terms of the size of claim and by sector is key. By way of an indicative outline: commercial claims lead our pipeline composition2 (42%) with class actions forming a quarter (26%) of future projects. We have a pipeline of insolvency projects (16%) which will grow with an Notwithstanding the market temptation to be involved in the funding of high-proﬁ le claims - whether they be representative of shareholder class actions or otherwise - LCM has adhered strictly to the methodologies of project selection developed over its 20-year history. An important criterion for LCM to provide funding and invest in a litigation project is that the legal principles and jurisprudence be well settled. LCM has maintained its strict discipline in sourcing its pipeline. Rather than focus on this intensely competitive area of securities class actions, LCM’s focus is instead on developing our expertise and the opportunities associated with different and new sectors. economic downturn; and international arbitration During 2018, LCM developed its focus on servicing (16%) which is expected to grow following our the sophisticated corporate landscape both in international expansion. These ﬁ gures do not include the Australasian market and in other developed the pipeline of projects which the addition of the economies and judicial systems. The provision team headed by Nick Rowles- Davies will bring which of ﬁ nancial and risk management solutions to when added, will signiﬁ cantly increase the volume and sophisticated and well-capitalised corporate entities diversity of our pipeline. LCM aims to make further for use in their litigious disputes is relatively new to the balanced investments into insolvency related projects, litigation ﬁ nance industry. complex commercial litigation, international arbitration and class actions. 2 As at 24 October 2018 LCM Annual Report 2018 9 Strategic Report Strategic Review LCM considers the most important aspect of its There is clear alignment between the existing business to be its people who implement its strategy management of LCM and Nick regarding the for the identiﬁ cation and assessment of litigation opportunity and addressable market for corporate projects for ﬁ nancing. In 2018 LCM strengthened its portfolio transactions. The provision of corporate Australian team through the hires of two talented and ﬁ nance products in established economies and experienced investment managers. Siba Diqer joined legal systems throughout the world will become a LCM’s Melbourne ofﬁ ce from Herbert Smith Freehills, signiﬁ cant opportunity for LCM in the future. Creating contributing her considerable experience in litigation new markets such as corporate portfolio transactions and particular expertise in insolvency, corporate and will negate the need for LCM to enter into more ﬁ nancial litigation. Additionally, Philip Lomax will competitive areas of the marketplace. join LCM in late 2018 from another litigation funder. Philip, who has worked in both the UK and Australian markets, brings 4 years’ experience in litigation ﬁ nance. The recruitment of such high-quality candidates is testament to LCM’s increasing proﬁ le and reputation in the litigation ﬁ nance and funding industry. International In addition to the continued growth of LCM’s team Our international expansion strategy also includes opening a new Singapore ofﬁ ce in November 2018, led by Roger Milburn. Roger is an international arbitration specialist with 10 years’ experience; he joins LCM from Bryan Cave Leighton Paisner LLP in Singapore. The ofﬁ ce will service the Singapore and Hong Kong markets for the provision of litigation ﬁ nance. A number of litigation ﬁ nanciers have already in the Australian market, we are very pleased to announced a presence in the Singapore and to a have progressed our review of strategic options in lesser extent the Hong Kong markets. LCM has been the northern hemisphere, where LCM has continued deliberately patient to wait for the right candidate to receive an increased number of applications with deep and relevant experience in the international arbitration market to become available to head up our Asian expansion. LCM has already seen a signiﬁ cant increase in the number of applications for funding relating to international arbitral disputes from the markets of Hong Kong and Singapore. Those markets provide an exciting opportunity for LCM as it continues to expand its funding products and market share. Not only is international arbitration growing as a market for the litigation ﬁ nance industry, but it is also a growing market worldwide as an alternate means by which sophisticated corporations can resolve trade disputes without competing for jurisdiction. When expanding into new markets and jurisdictions, LCM will maintain the strict application of its funding criteria and risk management. All risk management and treasury functions will remain centralised within LCM’s head ofﬁ ce in Sydney. for projects. LCM has been disciplined in its approach to expansion into markets where it does not have the necessary skillset and experience. Despite the desire to explore the markets for the provision of litigation ﬁ nance in the UK and Europe, the focus on growth and expansion is against a backdrop of an industry that has only been in existence for approximately 20 years, resulting in a very small pool of experienced and talented practitioners in the ﬁ eld of litigation ﬁ nance and funding. The introduction of Nick Rowles-Davies and his team in the UK not only gives LCM an extremely experienced and functional team operating in the UK and Europe, it also adds signiﬁ cant expertise in the area of corporate portfolio funding. While at Burford Capital, Nick was responsible for the origination and negotiation of one of the few corporate portfolio transactions completed worldwide. Nick has continued to focus on developing the product of corporate portfolio transactions and has become a leading authority with respect to transactions of that nature. 10 LCM Annual Report 2018 Strategic Report Financial Review Financial Review i S t r a t e g c R e p o r t The two principle performance metrics that are driving In addition to completing more projects than FY current (and future) performance are: 2017, LCM more than doubled its invested capital in (1) Cumulative ROIC of 138% (for 2011-18), and (2) Cumulative IRR3 of 83% (for 2011-18) LCM has provided litigation ﬁ nance and risk management products associated with litigation for approximately 20 years. The last seven years since 2011 are most representative of LCM’s business in terms of the projects LCM supports and will continue to do so going forward. Prior to 2011, LCM was providing funding products to different sectors of the market and was subject to different capital constraints. The management of the business during those years was also signiﬁ cantly different to the systems and methodologies to which LCM now adheres; this period better reﬂ ects the current strategy based on a diverse portfolio of increasing quality as discussed above. The Cumulative ROIC of 138% is evidence of the success of the systems and methodologies employed by LCM when selecting projects, deploying capital, and managing those projects to a proﬁ table conclusion. The IRR of 83% demonstrates LCM’s ability to generate consistently strong returns over a reasonable investment period. Together the ROIC and IRR demonstrate that LCM can continue to provide excellent returns both in the private and public markets, and through the management of third-party funds. Completed Projects LCM’s record results in FY 2018 were driven by the completion of six litigation projects, which helped grow revenue and proﬁ tability. Gross income from Litigation Projects increased by 754% to A$29.2 million and proﬁ t before tax was A$12.0 million, an increase of 518% compared to FY 2017. After the movements in litigation projects to A$14.6 million, helping drive the ﬁ nancial performance we experienced. LCM generated an outstanding Return on Equity of 41% and the net asset backing per share increased from 29.5 cents to 45.1 cents per share. Similarly, the basic earnings per share increased to 15.24 cents, from a negative position the year before. Capital Base LCM grew its capital base organically to A$27.1 million during the ﬁ nancial year, representing an increase of 697% from the prior ﬁ nancial year. This cash was used for growth and expansion of the business, as well as the repayment of the A$4 million debt capital facility which was completed in the ﬁ rst quarter of 2018. LCM increased its net asset position from A$16.7 million to A$25.4 million by the end of FY 2018, reﬂ ecting the successful reinvestment of cash into proﬁ table litigation projects. LCM achieved these results at the same time as reducing its operating costs from A$4.2 million to A$3.7 million. Portfolio Policy LCM increased its portfolio of litigation projects under management in FY 2018, and as at 30 June 2018 was funding 14 unconditional litigation projects had an additional six litigation projects subject to conditional funding arrangements (that ﬁ gure is now seven). LCM grew the aggregated gross claim size of all litigation projects under its management from A$905 million in FY 2017 (of which A$169 million related to the International Funding Partner Arrangement) to A$1.5 billion as at the close of FY2018, including the conditional projects (with only A$55 million relating to the arrangement with the International Funding deferred taxes LCM produced a Net Proﬁ t after Tax of Partner Agreement). A$8.6 million. 3 LCM calculates its Cumulative IRR by treating our entire investment portfolio as one undifferentiated pool of capital and measuring inﬂ ows and outﬂ ows from that pool. Cumulative IRR only includes completed investments and does not include unrealised gains or losses. LCM Annual Report 2018 11 Strategic Report Financial Review As at 24 October 2018 LCM has a pipeline4 of qualiﬁ ed approximately A$108 million. This expanded portfolio, litigation funding projects (subject to due diligence) of with its combination of conditional and unconditional 31 separate opportunities with an aggregate gross claim projects is key to LCM’s diversiﬁ cation policy, allowing it size of approximately A$3.1 billion. This pipeline was to better withstand earnings volatility. estimated to have had an aggregate funding budget of Investment performance A$ in millions Total projects concluded for FY 2012 Total projects concluded for FY 2013 Total projects concluded for FY 2014 Total projects concluded for FY 2015 Total projects concluded for FY 2016 Total projects concluded for FY 2017 Total projects concluded for FY 2018 Total * Multiple on Invested Capital ** Return on Invested Capital Projects concluded Total invested Total recovered MOIC* ROIC** 4 4 5 8 3 2 6 A$0.2 A$1.6 A$1.2 A$3.6 A$3.6 A$0.8 A$15.7 A$26.8 A$0.8 A$0.9 A$3.7 A$10.9 A$7.2 A$2.9 A$37.3 A$63.8 3.80 0.56 3.10 2.98 2.00 3.76 2.38 2.80 (0.44) 2.10 1.98 1.00 2.76 1.38 ROIC high 9.85 2.09 10.27 39.42 6.52 4.12 13.44 ROIC low 1.36 - - - 0.57 2.19 0.49 4 This pipeline represents a set of qualiﬁ ed opportunities at various stages of due diligence. LCM can provide no guarantee or warranty that the opportunities in its pipeline will become projects funded by LCM. These opportunities are subject to due diligence and the negotiation of commercial terms and it is likely that only a proportion of the opportunities in this pipeline will convert into funded projects. 12 LCM Annual Report 2018 Strategic Report Operational Review Operational Review i S t r a t e g c R e p o r t Over its 20 years in business, LCM has established clear best practice and high operational standards which contribute directly to the stability and strength of the company. Finance function & controls LCM centralises its ﬁ nance functions in its head ofﬁ ce in Sydney, enabling ﬁ nance to participate in the review of investment managers’ existing projects and their investment pipeline. This creates alignment between origination, treasury, ﬁ nance and corporate reporting teams and minimizes volatility between forecasting and the completion of projects. 3) Written Evidence – The claim should be supported by clear evidence, which is documentary in nature, not oral. 4) Recoverability – There must be a clear line to recovery for the claim and it must be demonstrated that the defendant has the capacity to meet a judgment of the size which will be brought. 5) Experienced Legal Team – There must be a highly competent and experienced legal team in place with the relevant expertise to pursue the claim. As a result, LCM provides funding to only around 4% of the applications it receives. This process allows LCM to be cautious and to protect itself from risk and LCM has robust controls around payments which the temptation of unnecessary growth. The funding incorporate both internal and external systems. These criteria are applied across all of the core legal claims controls require that all payments, regardless of their sectors that LCM has expertise in: Commercial Claims, size, are loaded into a central system by a member of Class Actions, Insolvency, International Arbitration, and the team that does not have the authority to release Corporate Portfolios. that payment. They also require at least three different people from three different internal teams to provide authorization before any payments leave LCM. The largest payments relate to litigation projects and these are circulated amongst the investment team, risk team and ﬁ nance team ahead of them being loaded into and becoming part of the three-step approval process. Risk management LCM has a proven and robust risk management process. It applies rigorous selection criteria which have been developed over the company’s 20-year history and embody a clear understanding of what is likely to constitute a successful and proﬁ table litigation project. This process is central to the discipline shown when sourcing deal pipeline, which in turn has led directly to the current strong ﬁ nancial position. Investment managers consider applications for ﬁ nancing against LCM’s ﬁ ve key criteria: 1) Proportionality – There must be proportionality between the size of the claim and the funding commitment. Many applications for funding are instantly dismissed on the basis that it would not be commercially viable for LCM to fund them. 2) Clear Legal Principles – The claim must be based on clear legal principles and not any novel points of law. Each Litigation Project LCM funds is managed by an Investment Manager, who is responsible for ensuring that the litigation project continues to meet the key criteria and is expected to achieve the funder’s return as at the likely Completion Date. LCM’s investment managers meet weekly and the status of all litigation projects are reviewed quarterly. Whilst LCM’s business has always had a robust focus on risk management, we will shortly move to appoint a dedicated risk ofﬁ cer. The Head of Risk will conduct a biannual audit of all litigation projects against the following: a. Regulatory Risk b. Portfolio Risk c. Reputational Risk d. Service Provider Risk e. Sovereign Risk f. Foreign Currency Risk g Competition Risk h. Risk in relation to obligations of market disclosure. The Head of Risk will also be required to provide a biannual report to the Board setting out the outcome of his or her audit of the Litigation Projects. LCM Annual Report 2018 13 Strategic Report Operational Review IT & cybersecurity Data security and privacy is very important to LCM. Foreign exchange transaction risk is the risk that LCM’s cash ﬂ ows will be adversely affected by As a manager of litigation assets, LCM is in possession movements in exchange rates that will increase the of highly conﬁ dential information that contains sensitive details about client litigation matters. As Australian dollar (‘AUD’) value of foreign currency payables or will diminish the AUD value of foreign a publicly listed entity, LCM is also in possession of currency receivables. conﬁ dential information that needs to be disseminated in compliance with regulatory frameworks including listing rules, securities licensing regimes and other stakeholders. Data is stored on third party cloud servers and LCM continues to review suppliers of these services to ensure the highest security. Compliance At LCM, we have a very simple philosophy around ethical conduct that is entrenched within our culture. Ethical conduct is of paramount importance to every LCM employee and it is non-negotiable. We do not permit second chances, we do not allow anyone to exploit grey areas and there is zero tolerance towards anyone looking to bend the rules. Our compliance regime has grown in tandem with our international expansion and it addresses the various legal and regulatory obligations LCM has across multiple jurisdictions. Foreign exchange LCM is an AUD reporting business with the majority LCM’s approach to foreign exchange transaction risk management is as follows: • The overall purpose of hedging is to mitigate risks and achieve known outcomes. • Foreign exchange risk management is the responsibility of Treasury • It is the responsibility of Investment Managers to identify foreign exchange risks in their areas of responsibilities and notify Treasury in a timely manner of these exposures through the monthly reporting system established by Treasury The sources of LCM’s foreign exchange transaction exposures are as follows: • Investments in cases which are in a foreign currency • Foreign operating costs, such as salaries, ofﬁ ces and other business expenses in a foreign currency • Capital equipment priced in foreign currency or of our operations occurring in AUD denominated subject to price change due to movements in activities. Going forward, our international expansion exchange rates will see LCM deploy additional capital into litigation assets domiciled outside of Australia. To this end, we have brought into LCM an experienced ﬁ nancial markets advisor, Stephen Conrad, who has over 25 years’ experience working for international investment banks in Singapore, Hong Kong and Sydney in their ﬁ nancial markets divisions. Stephen also has a strong skillset in governance and risk management. LCM has now adopted a dedicated Treasury Policy. • Payments or receipts of royalties, franchise or license fees denominated in a foreign currency 14 LCM Annual Report 2018 i i S S t t r r a a t t e e g g c c R R e e p p o o r r t t It is vital that as LCM grows we retain our disciplined approach, as this is what has underlined our previous success and it is what will drive the growth of the business going forward. LCM Annual Report 2018 15 Governance Our Board Our Board Dr David King Chairman Patrick Moloney Chief Executive Offi cer Steven McLean Non-executive Director Appointed Director and Appointed Director in 2003 Appointed Director in Chairman of LCM in October 2015. David was a founder and non- executive director of Sapex Ltd, Gas2Grid Ltd and Eastern Star Gas Ltd. He has substantial natural resource related experience, having previously served as managing director of North Flinders Mines Ltd and CEO of Beach Petroleum and Claremont Petroleum. David is a Fellow of the Australian Institute of Company Directors, a Fellow of the Australasian institute of Mining and Metallurgy and a Fellow of the Australian Institute of Geoscientists. David is Non- executive Chairman of Cellmid Ltd and African Petroleum Corporation Ltd, and a non- executive director of Galilee Energy Ltd and Tap Oil Ltd and Managing Director in November 2015. Steven has an investment banking background, with over 20 years’ experience, commencing with Ernst & Young Corporate Finance before moving to J.P. Morgan in Australia and Europe. Steven has led equity transactions which have raised in excess of A$50 billion for corporates across various countries including Australia, USA, UK, Switzerland, Finland, Holland, Austria, France, Russia, Singapore and Bermuda. In additional to his role with LCM, Steven is currently the Head of Corporate Finance at FinEx, Chairman of ASX listed ReNu Energy Ltd and holds numerous private company board positions. Steven is a graduate of the University of Sydney with a Bachelor of Economics. December 2013. Patrick has been an executive director of LCM since 1 December 2013. He was a non- executive director from 2003. Patrick was previously the principal of Moloney Lawyers, which he established in 2003 and specialised in commercial litigation and had a diverse client base. Patrick has acted in more than 200 commercial litigation cases for clients in the District Court of NSW, the Supreme Court of NSW, the Federal Court of Australia and the High Court of Australia. Patrick was admitted to practise law in 1996. Patrick is also the Chairman of 101 Capital Pty Ltd, the holder of a current Australian Financial Services Licence, which was formerly the Responsible Entity of a registered Managed Investment Scheme which raised signiﬁ cant monies from investors and operated an enhanced equity income strategy 16 LCM Annual Report 2018 Governance Corporate and Social Responsibility Corporate and Social Responsibility LCM is a partner of the Adverse Costs Order Guarantee Fund (ACO Fund) which has been established by the Public Interest Advocacy Centre (PIAC). The ACO Fund aims to promote access to justice for public interest litigation by responding to the signiﬁ cant barrier that is posed by the risk of an adverse cost order. Under the ACO Fund, LCM has agreed to commit an amount annually of AUD$25,000 by way of guarantee towards protecting PIAC clients from adverse cost orders in public interest cases. LCM reviews the amount of this guarantee regularly as demand is required from PIAC. There is no ﬁ nancial return to LCM from the ACO Fund and our involvement represents our commitment to supporting social justice and public interest litigation. G o v e r n a n c e LCM Annual Report 2018 17 Governance Directors report Directors report The Directors of Litigation Capital Management Limited (LCM) present their report together with Committee membership Audit Committee and Remuneration Committee the annual ﬁ nancial report of the consolidated entity consisting of LCM and its subsidiaries (collectively Patrick Moloney LCM Group or the Group) for the period ended 30 June 2018 and the auditors’ report thereon. Chief Executive Offi cer LLB 1. Directors The Directors of LCM at any time during or since the end of the ﬁ nancial period are: • Dr David King – Chairman • Mr Patrick Moloney • Mr Steven McLean Particulars of the skills, experience, expertise and responsibilities of the Directors at the date of this report are set out below: David King Non-Executive Independent Chairman PhD, MSc, FAusIMM, FAICD Appointed Director and Chairman in October 2015. Experience and expertise David was a founder and non-executive director of Sapex Ltd, Gas2Grid Ltd and Eastern Star Gas Ltd. He has substantial natural resource related experience, having previously served as managing director of North Flinders Mines Ltd and CEO of Beach Petroleum and Claremont Petroleum. Appointed Director in 2003 and Managing Director in December 2013. Experience and expertise Patrick has been an executive director of LCM since 1 December 2013. He was a non-executive director from 2003. Patrick was previously the principal of Moloney Lawyers, which he established in 2003 and specialised in commercial litigation and had a diverse client base. Patrick has acted in more than 200 commercial litigation cases for clients in the District Court of NSW, the Supreme Court of NSW, the Federal Court of Australia and the High Court of Australia. Patrick was admitted to practice law in 1996. Prior to establishing his own ﬁ rm, Patrick was an employed solicitor for 3 years and then a partner in the ﬁ rm of Eddy Moloney for 4 years. Patrick is also the Chairman of 101 Capital Pty Ltd, the holder of a current Australian Financial Services Licence, which was formerly the Responsible Entity of a registered Managed Investment Scheme which raised signiﬁ cant monies from investors and operated an enhanced equity income strategy David is a Fellow of the Australian Institute of Steven McLean Non-executive Director BEc Appointed Director in November 2015. Experience and expertise Steven has an investment banking background, with over 20 years’ experience, commencing with Ernst & Young Corporate Finance before moving to J.P. Morgan both in Australia and Europe. Steven has led equity transactions which have raised in excess of A$50 billion for corporates across various countries including Australia, USA, UK, Switzerland, Finland, Holland, Austria, France, Russia, Singapore and Bermuda. Company Directors, a Fellow of the Australasian institute of Mining and Metallurgy and a Fellow of the Australian Institute of Geoscientists. David is Non- executive Chairman of Cellmid Ltd and African Petroleum Corporation Ltd, and a non-executive director of Galilee Energy Ltd. Directorships of listed companies (last 3 years) Current directorships Galilee Energy Limited (ASX: GLL) – Non-executive Director since 24 September 2013 (Chairman from 30 October 2013 until 7 March 2018). Cellmid Limited (ASX:CDY) – Non-executive Director and Chairman since 18 January 2008 Previous directorships Robust Resources Limited, Republic Gold Limited and Tengri Resources Limited 18 LCM Annual Report 2018 Governance Directors report G o v e r n a n c e In additional to his role with LCM, Steven is currently 4. Meetings of Committees the Head of Corporate Finance at FinEx, Chairman of ASX listed ReNu Energy Ltd and holds numerous private company board positions. Steven is a graduate of the University of Sydney with a Bachelor of Economics. Directorships of listed companies (last 3 years) ReNu Energy Limited (ASX: RNE) – Non-executive Director since 14 March 2017 Committee membership Audit Committee and Remuneration Committee 2. Company Secretaries Steven McLean (whose details appear above) resigned as Company Secretary on 7 September 2016. Both an Audit and Risk Committee and Remuneration Committee were established by the Board on 20 September 2017. The number of meetings of the Audit and Risk Committee together with the meetings attended during the ﬁ nancial period are: Audit and Risk Committee Meetings Number eligible to attend Number attended 2 - 2 2 - 2 Directors David King Patrick Moloney Steven McLean Anna Sandham was appointed Company Secretary of LCM on 7 September 2016. Anna is an experienced The number of meetings of the Remuneration Committee together with the meetings attended company secretary and governance professional with during the ﬁ nancial period are: over 20 years’ experience in various large and small, public and private, listed and unlisted companies. Anna has previously worked for companies including AMP Financial Services, Westpac Banking Corporation, BT Financial Group and NRMA Limited. Anna holds a Bachelor of Economics (University of Sydney), Directors David King Graduate Diploma of Applied Corporate Governance Patrick Moloney (Governance Institute of Australia) and is a Chartered Steven McLean Secretary. Remuneration Committee Meeting Number eligible to attend Number attended 0 - 0 0 - 0 3. Meetings of Directors The number of meetings of the Company’s Board of 5. Principal Activities Litigation Capital Management provides ﬁ nancial and Directors (“the Board”) and the number of meetings risk management services associated with the legal attended by each Director during the ﬁ nancial period services industry and most particularly, litigation. The are: Directors David King Patrick Moloney Steven McLean Number eligible to attend Number attended 10 10 10 10 10 10 company provides service including the funding of contentious commercial litigation and class actions as well as corporate risk management associated with litigation. LCM Annual Report 2018 19 Governance Directors report 6. Operating and ﬁ nancial review Review of LCM’s portfolio of Litigation Projects Overview of the Group Litigation Capital Management is a company limited by shares and was incorporated on 9 October 2015. It listed on the Australian Securities Exchange on 13 December 2016 under the code LCA. Its registered ofﬁ ce and principal place of business is Suite 12.06, Level 12 The Chiﬂ ey Tower, 2 Chiﬂ ey Square Sydney NSW 2000. Litigation Capital Management operates its business through a series of wholly owned subsidiaries. The principal activity of those subsidiaries is the provision of litigation ﬁ nance and risk management associated with individual and portfolios of litigation projects. Review of ﬁ nancial performance The Board of LCM is extremely happy with the performance of the Group and the ﬁ nancial results for FY 2018 being the ﬁ rst full ﬁ nancial year of trade since listing. The Group has transited from a statutory loss in FY 2017 to a healthy cash proﬁ t of $12 million. After the derecognition of LCM’s deferred tax asset in accordance with AASB, the company posted an accounting NPAT of $8.6 million. LCM’s ﬁ nancial performance during FY 2018 represents a signiﬁ cant turnaround in its ﬁ nancial position. It provided the Group with additional organically generated capital which permitted the growth and expansion of its business. The Return on Invested Capital (ROIC) throughout the year was 137% with an Internal Rate of Return (IRR) of 80%. During the FY 2018 year, the Return on Equity (ROE) was 41%. The company’s ﬁ nancial performance was excellent across all metrics. LCM’s running IRR for the past seven years (including losses) is 83% with a ROIC of 138%. The Group’s long running and stable IRR over a sustained period in the low 80% and ROIC of 138% demonstrates LCM’s LCM continues to grow its portfolio of Litigation Projects. During FY 2018, six Litigation Projects were completed (compared with two projects in FY 2017) all of which yielded a proﬁ t for the group. Of these, ﬁ ve were funded from LCM’s own balance sheet and one Litigation Project was funded through the International Funding Partner (IFP) arrangement. As at 30 June 2018, LCM has a portfolio of 14 Litigation Projects (unconditionally funded) with an estimated aggregate gross claim size of approximately $1.25 billion. Of these, 12 projects are expected to resolve during FY 2019 (including a Litigation Project funded through the IFP which has already completed leaving only 1 Litigation Project subject to that IFP arrangement). That portfolio compares with the position as at 30 June 2017 where the portfolio of projects comprised 12 with an aggregate gross claim size of approximately $800 million. That represents an increase in the size of the portfolio (by aggregate claim size) of 56% and an enhanced return proﬁ le. During FY 2018 the number of applications received by LCM for funding increased signiﬁ cantly. There were 125 applications received compared with 98 for FY 2017 representing an increase of 27.6%. In addition, LCM expanded its offering of litigation ﬁ nance into the ﬁ eld of international arbitration. During FY 2017, 24 applications were received in respect of international arbitral disputes. LCM has entered into its ﬁ rst conditional funding arrangement in an international arbitral dispute and is currently conducting due diligence in respect of a number of other applications. LCM has moved to secure the necessary skillsets internally to properly manage those opportunities. Signiﬁ cant Changes in the State of Affairs depth of knowledge and experience in the sector No matters or circumstances have arisen since the end and its ability to select and manage investments over of the ﬁ nancial year which have signiﬁ cantly affected an extended investment period. That said, IRR’s can or could signiﬁ cantly affect the operations of LCM be highly susceptible to cases that experience early or the LCM group, the results of those operations, or settlement. As LCM’s book of Litigation Projects the state of affairs of the consolidated group in future continues to grow, diversity will be the key to ensure ﬁ nancial years. we can maintain a stable and consistent earnings proﬁ le and hence we would expect future IRR’s to reﬂ ect this. 20 LCM Annual Report 2018 Governance Directors report G o v e r n a n c e Future Developments, Prospects and Business Strategies 9. Likely developments The growth and maturation of LCM’s current book The growth and maturing of litigation ﬁ nance as an asset class is seeing a progression by more funders to public listings versus remaining private. Currently LCM is one of three publicly listed litigation ﬁ nance entities worldwide and there are expected to be a number of other litigation ﬁ nance companies listing on the London Stock Exchange during the remainder of this calendar year. LCM is monitoring this situation in relation to these opportunities and how they may apply to the Group. As previously announced to the market, the jurisdictions of Hong Kong and Singapore have recently legislated to permit litigation funding and ﬁ nance products in the international arbitration space. In response to signiﬁ cant numbers of enquiries and applications from those jurisdictions, LCM is currently in the process of establishing an ofﬁ ce in Singapore with initial stafﬁ ng of an investment manager to facilitate project origination and due diligence. The opening of a Singapore branch ofﬁ ce is expected to be completed by the end of this calendar year. All risk management in respect of the Singapore and Hong Kong business will remain under the control of the head ofﬁ ce in Sydney. Capital Management During FY 2018 LCM utilised debt as a capital management tool and has repaid that facility in full. With the signiﬁ cant growth of LCM’s pipeline, the Board expects to source funding for a portion of its future opportunities from a range of sources including managed funds, debt and where appropriate, additional equity. 7. Dividends No dividends were paid during the ﬁ nancial year. 8. Matters subsequent to the end of the ﬁ nancial period In the Directors’ opinion, no matter or circumstance of Litigation Projects is progressing very well and in respect of some Litigation Projects better than anticipated. The individual Litigation Projects which together comprise the portfolio of Litigation Projects presently being managed and funded by LCM are generally tracking as, or better than expected. LCM is looking closely at markets and opportunities in Asia and beyond. The market and the asset class of litigation ﬁ nance and funding is maturing rapidly. The market opportunities are extending well beyond the traditional opportunities where a claimant in litigation is either impecunious or unwilling to use their own funds to pursue their rights into a tool used by sophisticated and well capitalised entities to manage cash ﬂ ow and risk. That development opens very signiﬁ cant opportunities and sectors of the market previously untapped by litigation ﬁ nance. As noted above, LCM is in the process of opening an ofﬁ ce in Singapore. That Singapore ofﬁ ce will service the markets of Singapore and Hong Kong. In respect of each of those jurisdictions, litigation ﬁ nance is available in respect of insolvency based litigation and international arbitration. Neither Singapore nor Hong Kong have opened with respect to mainstream commercial disputes. It is expected that those markets will become available in the future. Whilst LCM believes that there is a viable market available to it in respect of insolvency based litigation projects and international arbitrations immediately, it also believes that the opportunities will increase over time when mainstream commercial disputes become available to the funding market. Given this, we are taking a cautious approach to monetising these opportunities. LCM is receiving an increasing number of applications for litigation ﬁ nance and other related funding products from the Northern Hemisphere and more particularly the United Kingdom and Europe. To address those opportunities, LCM has, for some time, retained a Queen’s Counsel located in the United Kingdom to assist with respect to considering those has arisen since the end of the ﬁ nancial year, that opportunities. The services of that Queen’s Counsel has signiﬁ cantly affected, or may signiﬁ cantly affect, has also been utilised in the evaluation and due the operations of the Group, the results of those diligence of potential projects in Australia and Asia. operations, or the state of affairs of the Group in With the increase in the number of international future years. applications being received, LCM is considering the use of additional resources in the United Kingdom LCM Annual Report 2018 21 Governance Directors report to assist with respect to evaluating opportunities companies to continuously disclose to the market and and conducting due diligence but also originating various other less signiﬁ cant matters. LCM has made a opportunities. LCM has for some time been very submission to the ALRC and this, together with other cautious not to enter markets and invest in litigation industry participants, can be accessed at https://www. projects in jurisdictions in which it does not have a alrc.gov.au/inquiries/class-action-funding/submissions. core skillset. Such issues are likely to be addressed by building or acquiring a suitably qualiﬁ ed and experienced team within the United Kingdom or Europe. LCM continues to assess those markets and consider opportunities. 10. Regulation The Group’s operations are not currently subject to signiﬁ cant regulation under a law of the Commonwealth or of a state or territory. A number of observations should be made in relation to the enquiries which have been completed and/or are pending. First, the Commonwealth Productivity Commission produced a report into Access to Justice in 2014 which commented upon the litigation funding industry. It recommended that litigation ﬁ nanciers and funders be licenced and that certain prudential obligations be put in place. No regulation has resulted from those recommendations. Secondly, even in circumstances where all of the current matters being Notwithstanding that there is no signiﬁ cant regulation considered by the Commonwealth Productivity of the litigation ﬁ nance and funding industry at either Commission were implemented it would not impact a Commonwealth or state level, two law reform signiﬁ cantly on the business model of LCM. Indeed commission enquiries have been initiated. The ﬁ rst issues such as licencing and prudential requirements is an enquiry in the State of Victoria. That enquiry might well create a barrier to entry to new prospective involved consideration as to whether the litigation litigation ﬁ nanciers and make it difﬁ cult for existing ﬁ nance and funding industry should be subject to smaller operators to compete. It is therefore LCM’s greater regulation than is currently in place. That position that regulation of the kind currently subject enquiry could only ever make recommendations with to consideration and debate would be positive and respect to the laws of Victoria. It is widely accepted complimentary to LCM’s business. that if any regulation of the litigation ﬁ nance and funding industry was to take place it would need, for practical reasons, to take place at a Commonwealth level. In addition to the Victorian enquiry, the Australian Law Reform Commission (ALRC) is currently investigating and conducting an enquiry into the litigation ﬁ nance and funding industry insofar as it concerns class or representative actions. That enquiry is yet to be completed and no ﬁ nal recommendations have been made. In a preliminary report for consideration and discussion, various issues have been raised for debate. Those issues include the licensing of litigation ﬁ nanciers or funders, what, if any, restrictions or requirements should be attached to such licensing, whether law ﬁ rms should be permitted to enter into damages based charging agreements in respect of class actions, whether a review should be undertaken in relation to the Commonwealth laws requiring public 22 LCM Annual Report 2018 Governance Directors report G o v e r n a n c e 11. Directors’ interests The relevant interests of each director in the shares and rights or options over shares issued by LCM, as notiﬁ ed by ASX in accordance with s205G(1) of the Corporations Act 2001 (Cth) (Act), at the date of this report is as follows: Directors David King Steven McLean Patrick Moloney Ordinary shares (held directly and indirectly) 1,601,484 577,499 5,212,557 Loan Plan Shares exercisable at $0.5965 issued in 2 tranches and subject to vesting conditions Unlisted options over ordinary shares exercisable at $0.47* Unlisted options over ordinary shares exercisable at $1.00** - - 600,000 - Unlisted partly paid shares - - 2,000,000 1,595,058 900,000 1,433,022 * to acquire fully paid ordinary shares, exercisable on or before 1 December 2018 at an exercise price of $0.47 per option. **to acquire fully paid ordinary shares, exercisable between 1 November 2018 and 1 November 2021 at an exercise price of $1.00 per option. 12. Share Options and Rights outstanding As at the date of this report there are 3,190,116 options outstanding at an exercise price of $0.47 per option and an expiry date of 1 December 2018 and 1,500,000 options outstanding at an exercise price of $1.00 exercisable between 1 November 2018 and 1 November 2021. Option holders do not have the right to participate in any share issue or interest issue of the Company. A Loan Share Plan (“LSP”) was approved by LCM shareholders at the Annual General Meeting in November 2017. Also at the 2017 AGM, the shareholders approved the issue of 2,000,000 Plan Shares to Patrick Moloney. The terms and condition of Plan Shares issued to Patrick Moloney granted during the ﬁ nancial year are summarised below: Tranche Tranche 1: Tranche 2: Grant date Vesting date 4 December 2017 4 December 2019 4 December 2017 4 December 2020 Number of Plan Shares 1,000,000 1,000,000 Issue price $0.5965 $0.5965 Each tranche of Plan Shares will vest if the relevant Vesting Conditions set out below are met: Tranche 1: Vesting conditions a) Mr Moloney has been continuously employed by the Company from the Grant Date to the date that is 24 months after the Grant Date and has been continuously been employed by the Group over that period; and b) The VWAP of the Company’s shares over any 5 trading day period is at least $1.00 per share (or such equivalent price if a capital reconstruction occurs in relation to the Company) (Target Price Condition). Tranche 2: Vesting conditions a) Mr Moloney has been continuously employed by the Company from the Grant Date to the date that is 36 months after the Grant Date and has been continuously been employed by the Group over that period; and b) The Target Price Condition has been met. Further details of the LSP and the issue of shares under the LSP to Mr Moloney are provided in section 1.5 and 2.4 in the Remuneration Report. No ordinary shares have been issued during or since the year end as a result of the exercise of options. LCM Annual Report 2018 23 Governance Directors report 13. Indemnity and insurance of ofﬁ cers and auditors 17. Auditor BDO Audit (SA) Pty Ltd continues in ofﬁ ce in Indemniﬁ cation Under the LCM Constitution, to the maximum extent permitted by the Act, LCM must indemnify each person who is or has been an Ofﬁ cer against any liability incurred as an Ofﬁ cer and may pay a premium for a contract insuring an Ofﬁ cer against that liability. During the ﬁ nancial period, LCM has paid premiums in respect of contracts insuring the directors and ofﬁ cers of LCM against any liability of this nature. accordance with section 327 of the Act. 18. Ofﬁ cers of the Company who are former partners of BDO Audit (SA) Pty Ltd There are no ofﬁ cers of LCM who are former partners of BDO Audit (SA) Pty Ltd. 19. Remuneration Report The Remuneration Report which forms part of this Directors’ Report is presented separately on pages LCM has not, during or since the end of the ﬁ nancial 25 - 32. 20. Rounding of amounts LCM is of a kind referred to the Australian Securities and Investments Commission Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. period, indemniﬁ ed or agreed to indemnify an ofﬁ cer or auditor of LCM or any related entity against a liability as such by an ofﬁ cer or auditor except to the extent permitted by law. Insurance premiums In accordance with normal commercial practices, under the terms of the insurance contracts, the nature of liabilities insured against and the amount of the premiums paid are conﬁ dential. 14. Non-audit services No amounts have been paid or are payable to the Auditor for non-audit services provided during the ﬁ nancial year. 15. Proceedings on behalf of LCM Group No person has applied for leave of court to bring proceedings on behalf of the company or 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 any part of those proceedings. The company was not a party to any such proceedings during the year. 16. Lead Auditor’s independence declaration The Auditor’s independence declaration as required under section 307C of the Act is included on page 33 of the Annual Report. 24 LCM Annual Report 2018 Governance Directors report G o v e r n a n c e 21. Remuneration report The Directors present this Remuneration Report We will provide further detail on the remuneration and reward framework in future reports and the linkages (Report) for Litigation Capital Management Limited this provides with business performance. (“LCM” and together with its controlled entities, the “LCM Group”) for the 12 months ended 30 June 2018 which has been audited in accordance with the Corporations Act 2001 (Cth) (Act) and its regulations, and outlines key aspects of our remuneration framework. 1. Remuneration Framework 1.1 Overview of remuneration framework Relationship between remuneration policy, the company’s performance and shareholder wealth The Board recognises that the performance of LCM depends on the quality and motivation of its people. The objective of LCM’s remuneration policy is to attract, motivate and retain the best available management and employees to operate and manage LCM. Non-executive Director remuneration is designed in a way that supports the retention of their independence. Executive remuneration and incentive policies and practice are performance-based and aligned with LCM The below table illustrates the link to Executive remuneration over the past two ﬁ nancial years (including FY18): Financial Performance Measure Link to Executive Remuneration N/A N/A Group NPAT ($) Dividends per share ($) Share Price as at 30 June ($) Loan Share Plan (refer 1.5) FY18 FY17 AUD $8,637,354 AUD $(2,340,508) N/A N/A 0.72 0.48 1.2 Role of the Remuneration Committee The Remuneration Committee ensures that the remuneration of Directors and senior executives is consistent with market practice and sufﬁ cient to ensure that the LCM Group can attract, develop and retain the best individuals. Group’s vision, values and overall business objectives. The Remuneration Committee ensures that the LCM’s remuneration framework is designed to support and reinforce its vision, value and overall business objectives, with four guiding principles in mind: • Alignment of executive pay with shareholder interests and wealth outcomes; • Motivation of executive behaviour to execute LCM’s strategy through an appropriate mix of ﬁ xed Company’s remuneration philosophy and strategy (as set out above) continues to be designed to: • Attract, develop and retain Board and executive talent; • Create a high performance culture by driving and rewarding executives for achieving the Group’s strategy and business objectives; and and variable pay elements; • Link incentives to the creation of shareholder value. • Delivery of a competitive remuneration framework that assists with attracting and retaining high calibre non-executive and executive talent to ensure business success; and The Remuneration Committee shall meet formally at such frequency as circumstances demands for the purposes referred to above. The Remuneration Committee did not meet during the 2018 year. • Provision of a simple and transparent framework that is clear to participants and external stakeholders. LCM is committed to developing and communicating an effective remuneration framework that assists with attracting, retaining and motivating non-executives and executives 1.3 Key Management Personnel Key Management Personnel (“KMP”) are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, either directly or indirectly, including any director of LCM or the Group. The following persons were KMP’s and that supports the execution of our strategy to during the past ﬁ nancial year: the beneﬁ t of long term value creation. The Board welcomes feedback from external stakeholders around its remuneration practices and disclosures. LCM Annual Report 2018 25 Governance Directors report 1.3.1 Non-executive directors Dr David King Non-executive Chairman Steven McLean Non-executive Director 1.3.2 Executives (also a member of the Board) Patrick Moloney Managing Director 1.4 Remuneration Consultants When and where it is considered necessary, the Board will seek advice from independent experts and advisers including remuneration consultants. No remuneration consultants were used this ﬁ nancial year. 1.5 Long term incentive scheme A Loan Share Plan (“LSP”) was approved by LCM shareholders at the Annual General Meeting in November 2017 (“2017 AGM”). The LSP was adopted to retain, motivate and attract executives and to better align the interests of employees with those of the Company and its shareholders by providing an opportunity for eligible senior executives to acquire shares subject to the terms and conditions of the LSP. Patrick Moloney is currently the only participant in the LSP, and the issue of shares to Mr. Moloney under the LSP was approved by shareholders at the 2017 AGM. Further details of the LSP and the issue of shares under the total amount paid to Non-executive Directors’ may not exceed: (i) The amount ﬁ xed by LCM in general meeting for that purpose; or (ii) If no amount has been ﬁ xed by LCM in general meeting for that purpose, $200,000 per annum. As no amount has been ﬁ xed by LCM in general meeting, the aggregate fee pool limit is $200,000 per annum. There is no intention to seek to increase the Non-executive Director fee pool in the foreseeable future. The Non-executive Director annual fee structure (including superannuation) paid during the 12 months ended 30 June 2018 is as follows: Fee ($ per annum) Non-executive Chairman Non-executive Director 75,000* 50,000 *comprising a base fee of $50,000 and a fee of $25,000 for the role of Chairman Section 4.1 provides details of fees paid during the ﬁ nancial year to each non-executive director. the LSP to Mr. Moloney are provided in section 2.4 below. Following a review of Non-executive Director fees 2 Remuneration Details 2.1 Remuneration payable to Non-executive Directors Annual Directors’ fees Non-executive Directors enter into service agreements through a letter of appointment which are not subject to a ﬁ xed term. Non-executive Directors receive a fee for their contribution as Directors. The following persons acted as Non-executive Directors of the Company in the past ﬁ nancial year and are considered members of Key Management Personnel: Non-executive Directors Dr David King Non-executive Chairman and consideration of the time commitment and responsibilities, Non-executive Director fees (excluding superannuation) were increased effective from 20 July 2018 and are: Non-executive Chairman Non-executive Director 100,000 75,000 Fee ($ per annum) The objective of LCM’s remuneration policies with regard to Non-executive Directors is to ensure the Company is able to attract and retain Non- executive Directors with the skills and experience to ensure the Board is able to discharge its oversight and governance responsibilities in an effective and diligent manner and supports the retention of Steven McLean Non-executive Director their independence. The Board also believes that Fees payable to non-executive directors reﬂ ect the demands which are made on, and the responsibilities of, directors. Directors’ fees are reviewed regularly by the Board. remuneration for Non-executive Directors should reﬂ ect the time commitment and responsibilities of the role as well as taking into account market levels. LCM do not pay lump sum retirement beneﬁ ts to Non-executive Directors. Additionally, Non-executive LCM’s Constitution provides that LCM may remunerate Directors do not receive any bonus payments whilst each Director as the Directors decide, provided that holding ofﬁ ce as a Non-executive Director. 26 LCM Annual Report 2018 Governance Directors report G o v e r n a n c e Dr David King In recognition of his assistance with the Offer to acquire new shares as detailed in the Initial Public Offering (“IPO”) Prospectus dated 17 November 2016, and in recognition of him acting as Chairman of the Company in return for nil Director fees for a considerable period of time in the lead up to the IPO, Dr David King was awarded the following unquoted Incentive Options to acquire shares: Grant date Vesting date 20 Sep 2016 1 Nov 2018 Expiry date 1 Nov 2021 Exercise price Number of Options $1.00 per share 600,000* *all are subject to a 2 year escrow period following LCM’s shares becoming quoted. Further details on the valuation of these Options are contained in sections 2.3 and 4.1 below. Mr. Steven McLean No additional remuneration was received by Mr. Steven McLean or any of his related parties during the last ﬁ nancial year. 2.2 Remuneration payable to Chief Executive Offi cer LCM, via its wholly owned subsidiary, LCM Litigation Fund Pty Ltd, entered into an employment agreement in February 2014 with Patrick Moloney for the performance of his role as Chief Executive Ofﬁ cer. As part of that employment agreement and subsequent reviews, the Chief Executive Ofﬁ cer is entitled to a ﬁ xed salary per annum plus superannuation and is entitled to six weeks paid annual leave per year, details of which are set out in section 4.1. Forming part of the Chief Executive Ofﬁ cer’s remuneration package are the following: Grant date Vesting date Expiry date Exercise price 20 Sep 2016 1 Dec 2013 1 Nov 2018 1 Dec 2013 1 Nov 2021 1 Dec 2018 $1.00 per share $0.47 per share Number of Options 900,000* 1,595,058 Further details on the valuation of these Options are contained in sections 2.3 and 4.1 below. Appropriate benchmarking analysis was undertaken prior to reviewing and ﬁ nalising the Chief Executive Ofﬁ cer’s base remuneration package and beneﬁ ts. 2.3 Share based payment arrangements The terms and condition of each grant of options in existence during the ﬁ nancial year are summarised below: Grant date Vesting date Expiry date Exercise price Value at Grant date Number of Options 20 Sep 2016 1 Nov 2018 1 Nov 2021 $1.00 per share 20 Sep 2016 1 Nov 2018 1 Nov 2021 $1.00 per share 1 Dec 2013 1 Dec 2013 1 Dec 2018 $0.47 per share $75,750 600,000 $113,625 900,000 $201,377 1,595,058 2.4 Loan Share Plan Details of Loan Share Plan As outlined in section 1.5 above, the shareholders of LCM resolved to approve a Loan Share Plan (LSP) at the 2017 AGM. The Board adopted the LSP to retain, motivate and attract executives and to better align the interest of employees with those of the Company and its shareholders by providing an opportunity for eligible senior executives to acquire shares subject to the terms and conditions of the LSP (Plan Shares). The Plan Shares can be either issued or transferred to the participants of the LSP at market value, determined by the Board in its absolute discretion. The Company may provide a limited recourse loan to senior executives who are invited to participate in the LSP to assist them to purchase Plan Shares (Loan). The terms of the LSP are summarised below: Eligibility • A person is eligible to participate in the LSP if he or she is a Director, ofﬁ cer or employee of a group company (Eligible Person). *all are subject to a 2 year escrow period following LCM’s • shares becoming quoted. The tranche of 900,000 options were issued to the Chief Executive Ofﬁ cer in recognition of his assistance with the Offer and in recognition of his ongoing services to LCM. The Board may at any time make invitations to Eligible Persons to participate in the LSP specifying the total number of Plan Shares being offered or the manner for determining that number, the closing date for applications, the issue price, vesting conditions and any other speciﬁ c terms and conditions of issue (Invitation). LCM Annual Report 2018 27 Governance Directors report Plan Shares • Each Plan Share entitles the participation to one Compulsory divestment • Plan Shares may be compulsorily divested in fully paid ordinary Share in the company. a number of circumstances, including non- • • Unless otherwise speciﬁ ed in an Invitation, Plan Shares issued or transferred to a participant will rank equally with all existing shares from the date of issue or transfer. Unless the Board resolves otherwise, the Company will apply for ofﬁ cial quotation of Plan Shares issued. Loan • The Company may provide a limited recourse loan to a participant to allow them to fund the full consideration for the Plan Shares (Loan). The terms of the Loan will be set out in a separate loan agreement. • • A participant’s obligation to repay the Loan will be the lesser of the Loan balance or the market value of the relevant Plan Shares. Any after-tax value of cash distributions (including dividends) received in respect of Plan Shares must be applied to repayment of the Loan. Vesting The Plan Shares will vest of the satisfaction of any application performance condition, service requirement or other conditions speciﬁ ed in an Invitation. Change of control In the event of a change in control of the Company, the Board may in its absolute discretion, determine the manner in which any or all of the participant’s unvested Plan Shares will be dealt with. Disposal conditions • A participant must not dispose of a Plan Share until the Plan Share has vested, the loan balance relating to that Plan Share has been repaid or discharged or any other disposal restrictions set out in the Invitation have expired. • The Company may implement any procedure it deems appropriate to ensure the compliance by the Participant with the disposal restrictions (i.e. may implement a holding lock in respect of the Plan Shares). satisfaction of vesting conditions, fraudulent or dishonest actions, insolvency, termination of employment, non-repayment of a Loan or any other circumstances expressly set out in an Invitation. • Where in the reasonable opinion of the Board, a Plan Share has vested in fraudulent or dishonest circumstances, the Board may take any action to ensure no unfair beneﬁ t is obtained by the participant as a result of those circumstances. Capital events • Bonus issues - If the Company undertakes a pro- rata bonus issue of shares to shareholders and shares are issued to a participant in respect of Plan Shares, those shares are deemed to be Plan Shares for the purposes of the LSP, and will be subject to the same vesting conditions as the Plan Shares to which they relate. • Rights issues – Participants may elect to take up their rights at their cost. Shares allotted to the Participant as a result of exercising such rights are not subject to the vesting conditions or the Plan • Rules. Other variations of capital - If there is a variation of capital, including a capitalisation, sub-division, consolidation or reduction in share capital. The Board may, subject to the Corporations Act and Listing Rules, make such adjustments as it considers appropriate to ensure that the consequences of application are fair as between the participants and other shareholders. Administration The LSP is administered by the Board. The Board may make regulations and determine procedures to administer and implement the LSP and may also terminate or suspend the operation of the LSP at its discretion. Amendment • The Board may at any time amend any rules governing the operation of the LSP or waive or modify the application of the rules in relation to any participant. 28 LCM Annual Report 2018 Governance Directors report • However, the Board may not amend the rules in a Tranche 2: a) Mr Moloney has been continuously way that would decrease a participant’s rights in respect of Shares acquired by them, other than amendments required to comply or conform to legislation or Listing Rules, to correct any manifest error or mistake or to take into account any possible adverse tax implications. Termination The LSP may be terminated or suspended at any time by a resolution of the Board, provided the termination or suspension does not materially adversely affect employed by the Company from the Grant Date to the date that is 36 months after the Grant Date and has been continuously been employed by the Group over that period; and b) The Target Price Condition has been met. Patrick Moloney has entered into an interest-free loan with Litigation Capital Management Limited to acquire a total of 2,000,000 ordinary shares. the rights of persons holding shares or options issued The loan share plan is considered to be a share based G o v e r n a n c e under the plan at that time. Other terms and conditions The LSP contains other customary terms and conditions relating to the operation and administration of the LSP. Issue of shares to Patrick Moloney At the 2017 AGM, the shareholders approved the issue of 2,000,000 Plan Shares to Patrick Moloney. Details of Plan Shares issued to Patrick Moloney following shareholder approval are as follows: Date of grant 4 December 2017 Number of shares granted The total number of Plan Shares issued was 2,000,000, issued in 2 tranches as follows: Tranche 1: 1,000,000 being 50% of the total award Tranche 2: 1,000,000 being 50% of the total award Total: 2,000,000 Issue price $0.5965 Vesting conditions Each tranche of Plan Shares will vest if the relevant Vesting Conditions set out below are met: Tranche Vesting conditions Tranche 1: a) Mr Moloney has been continuously employed by the Company from the Grant Date to the date that is 24 months after the Grant Date and has been continuously been employed by the Group over that period; and b) The VWAP of the Company’s shares over any 5 trading day period is at least $1.00 per share (or such equivalent price if a capital reconstruction occurs in relation to the Company) (Target Price Condition). payment arrangement. The fair value at grant date, of $0.28 per each share issued in December 2017 under the Loan Share Plan, was determined by using an American single barrier option calculation. The key model inputs for the valuation calculation were as follows: • grant date: 04/12/2017 • share price at grant date: $0.58 • exercise price: $0.5965 • option life: 10 years • expected volatility: 45% • expected dividend yield rate: 0% • risk free rate: 2.5% The fair value of the share based payment granted during the period is $565,380. An amount of $32,981 has been expensed during the period, with the remainder to be expensed over the term of the loan. Service Agreement 3 On appointment, all non-executive directors enter into an agreement which outlines obligations and minimum terms and conditions. Remuneration and other terms of employment for the Chief Executive Ofﬁ cer are formalised in an employment agreement. This agreement speciﬁ es the components of remuneration to which he is entitled and outlines base salary, eligibility for incentives and other beneﬁ ts including superannuation. LCM Annual Report 2018 29 Governance Directors report Key terms for the Chief Executive Ofﬁ cer are as follows: Name Term of Agreement Termination arrangements Patrick Moloney Term of 5 years (commencing 1 December 2013) with an automatic extension for a further 5 years unless notice is given at least 1 year before the expiry of the initial term that the agreement will not be extended. LCM can terminate the agreement at any time without cause by making payment of the total remuneration and beneﬁ ts for the unexpired period of the term, unless the remaining term is less than 12 months, in which case the agreement may be terminated by 12 months’ notice in writing or payment in lieu of notice. 4 Remuneration Table 4.1 Remuneration table for year ended 30 June 2018 The table below provides remuneration for KMPs for the 12 months ended 30 June 2018 and comparatives for the year ended 30 June 2017. Short Term Post employment Long Term Share-based Payments Total Salary & Fees1 IPO Bonus2 Annual leave accrual for 12 months STI Total Short Term Superan- nuation Total Post employ- ment Long Service Leave Loan Share Plan Options Total Share- based Payments Total In AUD Directors Non-executive Directors Dr David King Steven McLean 2018 68,493 2017 2018 51,370 45,662 - - - 2017 22,831 512,430 Executive Directors - - - - Patrick Moloney Total Directors' remuneration 2018 450,000 2017 450,000 2018 564,155 - - - 20,769 29,423 20,769 68,493 6,507 6,507 51,370 4,880 4,880 45,662 4,338 4,338 535,261 2,169 2,169 - - - - - - - - 37,440 37,440 112,440 28,080 28,080 84,330 - - - - 50,000 537,430 470,769 42,750 42,750 7,496 32,981 56,160 89,141 610,156 479,423 25,000 25,000 7,475 - 42,120 42,120 554,018 584,924 53,595 53,595 7,496 32,981 93,600 126,581 772,596 - - - - 2017 524,201 512,430 29,423 - 1,066,054 32,049 32,049 7,475 - 70,200 70,200 1,175,778 1 shown gross of tax 2 Includes GST and expenses and was paid to 145 Fleet Pty Limited of which Steven McLean is the sole Director 4.2 Relative proportion of Remuneration 2018 Non-executive directors Dr David King Steven McLean Executive directors Fixed remuneration 2018 % At Risk – Cash Bonus / Other 2018 % At Risk - Securities 2018 % 67 100 - - 33 N/A Fixed remuneration 2018 % At Risk – Cash Bonus / Other 2018 % At Risk - Securities 2018 % 15 Patrick Moloney 85 - 30 LCM Annual Report 2018 Governance Directors report G o v e r n a n c e Performance holdings of key management personnel 4.3 No Performance Rights have been issued to any Key Management Personnel during the current year. 4.4 Shareholdings of key management personnel Fully Paid Ordinary Shares The tables below provide the number of fully paid ordinary shares in the company held by each Non-executive Director and Executive KMP during the period and the previous period ended 30 June 2017: 2018 2018 Dr David King Steven McLean Patrick Moloney Loan Share Plan shares 2018 2018 Dr David King Steven McLean Patrick Moloney Balance as at 1 July 2017 No. 1,601,484 577,499 3,212,557 Shares received during the period on exercise of Performance Options / Rights No. Net other change No. - - - - - - Balance as at 1 July 2017 No. Loan Share Plan shares received during the period No. Net other change No. - - - - - 2,000,000 - - 0 Balance as at 30 June 2018 No. 1,601,484 577,499 3,212,557 Balance as at 30 June 2018 No. - - 2,000,000 Unlisted Options to acquire Shares (exercisable between 1 November 2018 and 1 November 2021) The table below provides the number of unlisted Options to acquire shares in the company held by each Non- executive Director and Executive KMP during the period ended 30 June 2018: 2018 2018 Balance as at 1 July 2017 No. Granted as compensation No. Exercised No. Net other change No. Balance as at 30 June 2018 No. Balance vested as at 30 June 2018 No. Options vested during the year No. Dr David King 600,000 Steven McLean Patrick Moloney Patrick Moloney - 900,000 1,595,058 - - - - - - - - - - - - 600,000 - 900,000 1,595,058 - - - - - - - - Unlisted Partly Paid Shares The table below provides the number of unlisted partly paid shares in the company held by each Non-executive Director and Executive KMP during the period ended 30 June 2018 (issued at an issue price of $0.17 per share, wholly unpaid and will convert to a share upon payment to LCM of $0.17 per share): LCM Annual Report 2018 31 Governance Directors report 2018 2018 Dr David King Steven McLean Patrick Moloney 1,433,022 5 Other Statutory Disclosures Balance as at 1 July 2017 No. Granted as compensation No. Exercised No. Net other change No. Balance as at 30 June 2018 No. Balance vested as at 30 June 2018 No. Options vested during the year No. - - - - - - - - - - - - - 1,433,022 - - - - - - Loans to Non-executive Directors and Executive KMPs No loans were made to Non-executive Directors or Executive KMPs at the end of the ﬁ nancial year. Other transactions with Non-Executive Directors and Executive KMPs No interest was paid to or received since the IPO from Non-executive Directors or Executive KMPs. This concludes the remuneration report, which has been audited. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Act. On behalf of the Directors ___________________________ Dr David King Chairman 20 August 2018 Sydney 32 LCM Annual Report 2018 G o v e r n a n c e LCM Annual Report 2018 33 i F n a n c a i l S t a t e m e n t s Financial Statements Consolidated Statement of Proﬁ t or Loss and Other Comprehensive Income for the year ended 30 June 2018 Revenue Other income Total Income Expenses Finance Costs Depreciation Employment expenses Corporate and ofﬁ ce expenses Legal fees – Litigation Professional fees IPO Listing Expense Foreign exchange loss Proﬁ t/(Loss) Before Income Tax Income tax expense/(beneﬁ t) Net Proﬁ t/(Loss) For the Year NOTE 5 6 7(a) 7(b) 7(c) 7(e) CONSOLIDATED June 2018 $ 542,682 16,453,592 16,996,274 June 2017 $ 13,312 2,182,426 2,195,738 685,888 1,665,149 21,967 2,057,834 1,239,002 822,943 197,107 – 8,063 6,258 1,402,493 1,272,033 143,360 56,973 202,229 310,323 5,032,804 5,058,818 11,963,470 (2,863,080) 8 3,326,116 (522,572) 8,637,354 (2,340,508) Other comprehensive income – – Total comprehensive income for the year 8,637,354 (2,340,508) Proﬁ t/(loss) for the year and total comprehensive income attributable to: Owners of the parent Non-controlling interest 8,596,163 (2,285,183) 18 41,191 (55,325) 8,637,354 (2,340,508) Earnings Per Share for proﬁ t attributable to the owners of the parent entity during the year (cents per share): Earnings per share: Basic (cents per share) Diluted (cents per share) NOTE 9 9 CONSOLIDATED June 2018 June 2017 15.24 (5.01) 15.06 (5.01) The above Consolidated Statement of Proﬁ t or Loss and Other Comprehensive Income should be read in conjunction with accompanying Notes to the Financial Statements. LCM Annual Report 2018 35 Financial Statements Consolidated Statement of Financial Position for the year ended 30 June 2018 CURRENT ASSETS Cash and cash equivalents Other receivables Intangible assets – litigation contracts TOTAL CURRENT ASSETS NON-CURRENT ASSETS Property, plant and equipment Intangible assets – litigation contracts Deferred tax asset TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Employee Beneﬁ ts TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Deferred tax liability Employee Beneﬁ ts TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued Capital Share Based Payments Reserve Retained Earnings Parent interest Non-controlling interest TOTAL EQUITY NOTE 10 11 12 12 13 14 15 13 15 16 17 CONSOLIDATED June 2018 $ June 2017 $ 13,786,949 1,862,645 638,891 43,666 11,048,971 11,683,991 25,474,811 13,590,302 175,114 7,779 2,865,675 786,558 4,837,848 7,766,837 7,878,637 8,561,174 33,353,448 22,151,476 3,816,048 1,926,074 254,481 111,040 4,070,529 2,037,114 3,826,528 3,429,401 34,358 26,862 3,860,886 3,456,263 7,931,415 5,493,377 25,422,033 16,658,099 24,865,111 24,865,111 292,484 238,572 165,903 (8,357,591) 25,396,167 16,673,424 25,866 (15,325) 25,422,033 16,658,099 The above Consolidated Statement of Financial Position should be read in conjunction with accompanying Notes to the Financial Statements. 36 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Consolidated Statement of Changes in Equity for the year ended 30 June 2018 2017 Issued capital Retained earnings Share based payments reserve Non- controlling interests Total Total equity Balance at 1 July 2016 11,546,617 (6,072,408) 95,703 5,569,912 40,000 5,609,912 Proﬁ t/(Loss) for the year – (2,285,183) – (2,285,183) (55,325) (2,340,508) Other comprehensive income Total comprehensive income for the year Equity Transactions: Contributions of equity – – – (2,285,183) – – – – – (2,285,183) (55,325) (2,340,508) (note 16) 13,318,494 Share based payments reserve Distributions – – 13,318,494 – – – – – 13,318,494 – 13,318,494 70,200 70,200 – – 70,200 13,388,694 – – – 70,200 – 13,388,694 Balance at 30 June 2017 24,865,111 (8,357,591) 165,903 16,673,424 (15,325) 16,658,099 2018 Issued capital Retained earnings Share based payments reserve Non- controlling interests Total Total equity Balance at 1 July 2017 24,865,111 (8,357,591) 165,903 16,673,424 (15,325) 16,658,098 Proﬁ t/(Loss) for the year Other comprehensive income Total comprehensive income for the year Equity Transactions: Share based payments expense – 8,596,163 – 8,596,163 41,191 8,637,354 – 8,596,163 – 8,596,163 41,191 8,637,354 – – – – 126,581 126,581 126,581 126,581 – – 126,581 126,581 Balance at 30 June 2018 24,865,111 238,572 292,484 25,396,167 25,866 25,422,033 The above Consolidated Statement of Changes in Equity should be read in conjunction with accompanying Notes to the Financial Statements. LCM Annual Report 2018 37 Financial Statements Consolidated Statement of Cash Flows for the year ended 30 June 2018 Cash ﬂ ows from operating activities Payments to suppliers and employees Receipts from management and performance fees Interest income Interest and other ﬁ nance costs paid NOTE CONSOLIDATED June 2018 $ June 2017 $ (3,065,616) (2,500,437) – 29,544 – 13,312 (685,888) (1,665,149) Net cash (used in)/from operating activities 20(a) (3,721,960) (4,152,274) Cash ﬂ ows from investing activities Proceeds from litigation funding – settlements, fees and reimbursements 20(c) 27,127,894 3,415,084 Payments for litigation funding and capitalised supplier costs 20(c) (11,292,327) (8,147,057) Purchase of property, plant and equipment Net cash (used in)/from investing activities Cash ﬂ ows from ﬁ nancing activities Proceeds from issue of shares Share issue transaction costs Proceeds from borrowings Repayment of borrowings Income and capital distributions paid non controlling interests Net cash (used in)/from ﬁ nancing activities (189,302) (954) 15,646,265 (4,732,927) – – 15,000,000 (2,319,321) 7(a) & 20(b) 7(a) & 20(b) 4,250,000 – (4,250,000) (7,851,698) – – – 4,828,981 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 11,924,304 (4,056,216) 1,862,645 5,918,861 Cash and cash equivalents at end of year 10 13,786,949 1,862,645 The above Consolidated Statement of Cash Flows should be read in conjunction with accompanying Notes to the Financial Statements. 38 LCM Annual Report 2018 Notes to the ﬁ nancial statements 1. Corporate Information The ﬁ nancial report of Litigation Capital Management Limited (“LCA”, “the Company” or “the Parent”) for the year ended 30 June 2018 and its subsidiaries was authorised for issue in accordance with a resolution of the directors on 20 August 2018. Litigation Capital Management Limited (ABN 13 608 667 509) is a for proﬁ t company incorporated and domiciled in Australia and limited by shares that are publicly traded on the Australian Securities Exchange (ASX code: LCA). 2. Accounting policies a) Basis of preparation i F n a n c a i l The consolidated ﬁ nancial report is a general purpose ﬁ nancial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The ﬁ nancial report has also been prepared on a historical cost basis. The consolidated ﬁ nancial report complies with Australian Accounting Standards and International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board. For the purposes of preparing the consolidated ﬁ nancial statements, the Parent is a for proﬁ t entity. S t a t e m e n t s b) New accounting standards and interpretations i) Accounting Standards and Interpretations issued not yet effective The following new or amended accounting standards and interpretations have been issued, but are not mandatory for ﬁ nancial year ended 30 June 2018. They have not been adopted in preparing the ﬁ nancial statements for the year ended 30 June 2018 and are expected to impact the entity in the period of initial application. In all cases, the consolidated entity intends to apply these standards from application date as indicated in the table below. LCM Annual Report 2018 39 Application date of Standard Application date for Group 1 January 2018 1 July 2018 Financial Statements Notes to the ﬁ nancial statements continued AASB reference Title AASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace AASB 139 ‘Financial Instruments: Recognition and Measurement’. AASB 9 introduces new classiﬁ cation and measurement models for ﬁ nancial assets. The main changes are described below: AASB 9 amends the classiﬁ cation and measurement of ﬁ nancial assets: – Financial assets will either be measured at amortised cost, fair value through other comprehensive income (FVTOCI) or fair value through proﬁ t or loss (FVTPL). – Financial assets are measured at amortised cost or FVTOCI if certain restrictive conditions are met. All other ﬁ nancial assets are measured at FVTPL. – All investments in equity instruments will be measured at fair value. For those investments in equity instruments that are not held for trading, there is an irrevocable election to present gains and losses in OCI. Dividends will be recognised in proﬁ t or loss. The following requirements have generally been carried forward unchanged from AASB 139 Financial Instruments: Recognition and Measurement into AASB 9: – Classiﬁ cation and measurement of ﬁ nancial liabilities, and – Derecognition requirements for ﬁ nancial assets and liabilities. However, AASB 9 requires that gains or losses on ﬁ nancial liabilities measured at fair value are recognised in proﬁ t or loss, except that the effects of changes in the liability’s credit risk are recognised in other comprehensive income. AASB 9 is not mandatorily effective for the Group until 1 July 2018. The Group is in the process of assessing the impact of AASB 9 and is not yet able to reasonably estimate the impact on its ﬁ nancial statements. Impairment The new impairment model in AASB 9 is now based on an ‘expected loss’ model rather than an ‘incurred loss’ model. A complex three stage model for recognising impairment losses applies to debt instruments at amortised cost or at fair value through other comprehensive income. A simpliﬁ ed impairment model applies to trade receivables and lease receivables with maturities that are less than 12 months. For trade receivables and lease receivables with maturity longer than 12 months, entities have a choice of applying the complex three stage model or the simpliﬁ ed model. 40 LCM Annual Report 2018 Notes to the ﬁ nancial statements continued AASB reference Title AASB 15 Revenue from contracts from customers AASB 16 Leases The AASB issued AASB 15 in October 2015. The standard is not mandatorily effective for the Group until 1 July 2018. AASB 15 contains new requirements for the recognition of revenue and additional disclosures about revenue. AASB 138 Intangible Assets has been amended to ensure that for reporting periods beginning on or after 1 January 2018, the derecognition of intangible assets are subject to the principles of AASB 15. Consideration for Litigation Contracts is variable with the amount and timing based on factors outside of the control of the Group. On this basis, the Group recognises gains or losses arising from derecognition of Litigation Contracts in Progress only when a judgement has been awarded or a settlement agreement has been agreed. The Group has assessed the impact of the new standard and has not identiﬁ ed any potential material ﬁ nancial impacts and it is expected that this standard will not materially change the revenue recognition criteria of the Group. The Group does not intend to early adopt the Standard. AASB 16 eliminates the operating and ﬁ nance lease classiﬁ cations for lessees currently accounted for under AASB 117 Leases. It instead requires an entity to bring most leases into its statement of ﬁ nancial position in a similar way to how existing ﬁ nance leases are treated under AASB 117. An entity will be required to recognise a lease liability and a right of use asset in its statement of ﬁ nancial position for most leases. There are some optional exemptions for leases with a period of 12 months or less and for low value leases. Lessor accounting remains largely unchanged from AASB 117. AASB 16 is not mandatorily effective until 1 January 2019, with early adoption permitted. The Group is currently assessing the impacts of the new Standard on the ﬁ nancial statements however the Group expects that the impacts will not be material on the Group’s accounting policies or ﬁ nancial statements. The Group does not intend to early adopt the Standard. Application date of Standard Application date for Group 1 January 2018 1 July 2018 i F n a n c a i l S t a t e m e n t s 1 January 2019 1 July 2019 LCM Annual Report 2018 41 Application date of Standard Application date for Group 1 January 2018 1 July 2018 Financial Statements Notes to the ﬁ nancial statements continued AASB reference Title AASB 2016-5 Amendments to Australian Accounting Standards – Classiﬁ cation and Measurement of Share-Based Payment Transactions This Standard amends AASB 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. It is not mandatorily effective for the Group until 1 July 2018. The amendments provide requirements on the accounting for: Vesting and non-vesting conditions The measurement of a cash-settled share-based payment liability takes into account vesting and non- vesting conditions in a similar manner to equity-settled transactions. Net settlement feature for withholding tax obligations Tax laws in some countries require an entity to withhold an amount of equity instruments to settle the employee’s withholding tax obligation, usually in cash. These transactions are classiﬁ ed as equity-settled in their entirety if, without the net settlement clause, it would have been classiﬁ ed as equity-settled, and the entity does not withhold instruments with a value that exceeds the employee’s withholding tax obligation. Changing classiﬁ cations from cash-settled to equity- settled Guidance has been added to clarify that the difference between the carrying amount of the cash-settled liability, and the fair value of the equity instruments granted, is recognised immediately in proﬁ t or loss when a share- based payment transaction changes from being cash- settled, to equity-settled. The Group expects that the impacts will not be material on the Group’s accounting policies or ﬁ nancial statements. ii) New, revised or amending Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any signiﬁ cant impact on the ﬁ nancial performance or position of the consolidated entity. c) Principles of consolidation The consolidated ﬁ nancial statements comprise the ﬁ nancial statements of Litigation Capital Management Limited (LCA, the Company or Parent) and its subsidiaries as at 30 June each year. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through it power over the investee. The ﬁ nancial statements of subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity have been eliminated in full. 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 consolidated entity. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of comprehensive income, statement of ﬁ nancial position and statement of changes in equity of the consolidated entity. Losses incurred by the consolidated entity are attributed to the non-controlling interest in full, even if that results in a deﬁ cit balance. 42 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued d) Critical accounting, judgments, estimates and assumptions The preparation of the Group’s consolidated ﬁ nancial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the ﬁ nancial statements. Management continually evaluates its judgments and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgments on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. The judgments, estimates and assumptions that have a signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the ﬁ nancial year ending 30 June 2018 are included in the following Notes: – Note 8 – Recovery of deferred tax asset – Note 12 – Impairment testing of intangible assets – litigation contracts – Note 12 – Classiﬁ cation of intangible assets – litigation contracts – Note 13 – Recovery of deferred tax assets e) Current and non-current classiﬁ cation Assets and liabilities are presented in the statement of ﬁ nancial position based on current and non-current classiﬁ cation. An asset is classiﬁ ed as current when: it is either expected to be realised or intended to be sold or consumed in 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 classiﬁ ed as non-current. A liability is classiﬁ ed as current when: it is either expected to be settled in 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 classiﬁ ed as non-current. Deferred tax assets and liabilities are always classiﬁ ed as non-current. f) 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 fulﬁ lment of the arrangement is dependent on the use of a speciﬁ c asset or assets and the arrangement conveys a right to use the asset. A distinction is made between ﬁ nance leases, which effectively transfer from the lessor to the lessee substantially all the risks and beneﬁ ts incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and beneﬁ ts. Operating lease payments, net of any incentives received from the lessor, are charged to proﬁ t or loss on a straight-line basis over the term of the lease. g) Foreign Currency Transactions and Balances The Group’s consolidated ﬁ nancial statements are presented in Australian dollars, which is also the Parent’s functional currency. For each entity, the Group determines the functional currency and items included in the ﬁ nancial statements of each entity are measured using that functional currency. Transactions and balances Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction ﬁ rst qualiﬁ es for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in proﬁ t or loss with the exception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognised in other comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassiﬁ ed to proﬁ t or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in other comprehensive income. LCM Annual Report 2018 43 Financial Statements Notes to the ﬁ nancial statements continued Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item (i.e. translation differences on items whose fair value gain or loss is recognised in other comprehensive income or proﬁ t or loss are also recognised in other comprehensive income or proﬁ t or loss, respectively). 3. Financial risk management objective and policies a) Financial risk management and policies The Group’s principal ﬁ nancial instruments comprise cash and short-term deposits, receivables and payables. The Group actively manages its exposure to key ﬁ nancial risks, including interest rate risk. The objective is to support the delivery of the Group’s ﬁ nancial targets whilst protecting its future ﬁ nancial security. The main risks arising from the Group’s ﬁ nancial instruments are interest rate risk, credit risk and liquidity risk. The Group uses different methods to measure and manage difference types of risks to which it is exposed. These include monitoring levels of exposure to interest rates and assessments of market forecasts. Aging analyses and monitoring of speciﬁ c debtors are undertaken to manage credit risk. Liquidity is monitored through the development of future rolling cash ﬂ ow forecasts. b) Risk exposures and responses Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates to the Group’s cash holdings with a ﬂ oating interest rate, and the Group’s borrowings with a ﬁ xed interest rate. At reporting date, the Group had the following ﬁ nancial instruments exposed to interest rate risk. Financial Instruments Cash and cash equivalents CONSOLIDATED June 2018 $ June 2017 $ 13,786,949 1,862,645 13,786,949 1,862,645 The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date. At 30 June 2018, if interest rates had moved as illustrated in the following table, with all other variables held constant, post tax proﬁ t and equity would have been affected as follows: Potential reasonably possible movements: +0.5% (2017: +0.5%) -0.5% (2017: -0.5%) Credit Risk 68,935 (68,935) 9,313 (9,313) Credit risk arises from the ﬁ nancial assets of the Group, which comprises cash and cash equivalents and receivables. The Group’s exposure to credit risk arises from potential default of the counterparty. The maximum exposure equals the carrying amount of these instruments. Exposure at reporting date is addressed in each applicable note. The Group’s cash and cash equivalents are held in ﬁ nancial institutions with a AA credit rating and are subject to the prudential regulation of the Reserve Bank of Australia. 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. Whenever possible the Group ensures that security for settlements sums is provided, or the settlements funds are placed into solicitors’ trust accounts. As at 30 June 2018, no receivables existed in relation to matters funded by the Group. However, the Group’s continual monitoring of the defendants’ ﬁ nancial capacity mitigates this risk. 44 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued Liquidity Risk The liquidity position of the Group is managed to ensure sufﬁ cient liquid funds are available to meet the Group’s expected ﬁ nancial commitments in a timely and cost effective manner. Management continually reviews the Group’s liquidity position, including the preparation of cash ﬂ ow forecasts, to determine the forecast liquidity position and to maintain appropriate liquidity levels. All trade and other payable ﬁ nancial liabilities of the Group are current and payable within 30 days. The maturity proﬁ le of the Group’s ﬁ nancial liabilities based on contractual maturity on an undiscounted basis are: 2018 Financial Liabilities Trade and other payables 2017 Financial Liabilities Trade and other payables Fair Value < 6 months > 6 months Total 3,816,048 3,816,048 1,926,074 1,926,074 – – – – 3,816,048 3,816,048 1,926,074 1,926,074 The methods for estimating fair value are outlined in the relevant notes to the ﬁ nancial statements. 4. Segment information Management has determined the operating segments based on internal reports reviewed by chief operating decision maker, being the Chief Executive Ofﬁ cer and other members of the Board. The Board provide strategic director and management oversight of the entity in terms of monitoring results and approving strategic planning of the business. Each litigation project is an operating segment. However, based on the similarity of the services provided and the nature of the risks and returns associated with each litigation project, the Board consider the business as one reportable segment. Accordingly, all segment disclosures are based upon analysis of the group as one reportable segment. The Group operates in one geographical location, being Australia. The Group’s customers are all commercial litigants with speciﬁ c information disclosed within the Operating and Financial Review of the Directors Report. 5. Revenue Revenue Performance Fees Interest received CONSOLIDATED June 2018 $ 513,138 29,544 542,682 June 2017 $ – 13,312 13,312 Signiﬁ cant Accounting Policies Revenue is recognised at the fair value of consideration received or receivable to the extent that it is probable that the economic beneﬁ ts will ﬂ ow to the Group and the revenue can be reliably measured. The following speciﬁ c recognition criteria must also be met before revenue is recognised: LCM Annual Report 2018 45 Financial Statements Notes to the ﬁ nancial statements continued Performance fees Performance fees are derived from the management of Litigations Projects under externally ﬁ nanced ﬁ nancing arrangements and governed by the agreement in place with external investors. Performance fees are recognised when a judgement has been awarded or a settlement agreement has been agreed on the Litigation Projects. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a ﬁ nancial 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 ﬁ nancial asset to the net carrying amount of the ﬁ nancial asset. 6. Other income Other income Litigation contracts in progress – settlements and judgments Litigation contracts in progress – expenses Litigation contracts – written down Net gain on derecognition of intangible assets Recoveries of legal costs other than in relation to Litigation Contracts in Progress Miscellaneous income CONSOLIDATED June 2018 $ June 2017 $ 29,170,177 3,415,086 (13,135,844) (1,226,016) (37,805) (6,644) 15,996,528 2,182,426 454,064 3,000 457,064 – – – 16,453,592 2,182,426 Recoveries of legal costs relates to the legal fees incurred and subsequently recovered from Mr Patrick Coope under a costs order in favour of the Group which related to proceedings previously brought by the Group against Mr Patrick Coope. Signiﬁ cant Accounting Policies Litigation contracts in progress Gains or losses arising from derecognition of Litigation Contracts in Progress are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the Consolidated Proﬁ t or Loss and Other Comprehensive Income when the asset is derecognised. The carrying amount of Litigation Contracts in Progress is written off when the case is lost by the Group or the Group decides not to pursue cases that do not meet the Group’s required rate of return. When 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 the Consolidated Statement of Proﬁ t or Loss and Other Comprehensive Income. 46 LCM Annual Report 2018 Notes to the ﬁ nancial statements continued 7. Expenses a) Finance costs Interest expense Borrowing expense CONSOLIDATED June 2018 $ June 2017 $ 515,888 170,000 1,460,091 205,058 685,888 1,665,149 i F n a n c a i l The ﬁ nance costs related to a facility provided by Ambro Nominees Pty Ltd on 31 August 2017. The credit facility provided the Group with a line of credit of $4.25 million over a term of 18 months. Interest was incurred at a rate of 15% and a drawdown fee of 4% was incurred on the funds provided. The Group paid down the facility, including interest and borrowing costs, on 22 May 2018. As at 30 June 2018, borrowings is $nil. S t a t e m e n t s b) Depreciation Depreciation expense c) Employment Expenses Employee beneﬁ ts expense Superannuation Provision for employee entitlements Payroll tax Share based payments expense d) Rental expense relating to operating leases Minimum lease payments e) Legal fees - Litigation CONSOLIDATED June 2018 $ June 2017 $ 21,967 6,258 1,684,747 1,165,308 150,533 45,936 50,037 126,581 91,861 52,714 22,410 70,200 2,057,834 1,402,493 343,153 304,003 822,943 143,360 Legal fees relates to the costs of litigation commenced by Australian Insolvency Group Pty Limited against the Group and the recovery of the costs of the proceedings brought by the Group against Mr Patrick Coope. LCM Annual Report 2018 47 Financial Statements Notes to the ﬁ nancial statements continued 8. Income tax The major components of tax expense comprise: Movement in deferred tax assets Movement in deferred tax liabilities Income tax beneﬁ t/(expense) reported in proﬁ t or loss The prima facie income tax expense on pre-tax accounting proﬁ t from operations reconciles to the income tax beneﬁ t in the ﬁ nancial statements as follows: Proﬁ t/(loss) for the year At the Group’s statutory income tax rate of 30% (2017: 27.5%) Non-deductible expenses: – share based payment expense – ﬁ nes and penalties Change in tax rate Income tax expense / (beneﬁ t) Amounts charged/(credited) directly to equity Deferred tax assets (note 13) Franking credit balance for the Group CONSOLIDATED June 2018 $ June 2017 $ (2,928,989) 2,003,701 (397,127) (1,481,129) (3,326,116) 522,572 11,963,470 (2,863,080) 3,589,041 (787,347) 37,974 1,474 (302,374) 3,326,116 – 20 264,755 (522,572) – 637,813 As at 30 June 2018, franking credits available for use in future distribution amounts amount to $nil (2017: $nil). Changes in applicable tax rates A reduced tax rate of 27.5% is available to Australian entities with aggregated turnover below $25 million for the year ended 30 June 2018. As the gross value of settlements and judgements (included in other income) are included in turnover for tax purposes, the group has exceeded this threshold resulting in an increase in tax rate to 30%. The Group’s turnover is expected to be below the threshold of $50 million for the year ending 30 June 2019, and as a result the reduced rate of 27.5% has been applied in determining deferred taxes. Unrecognised temporary differences and tax losses At 30 June 2018 the Group had no (2017:nil) unrecognised temporary differences and tax losses. Signiﬁ cant Accounting Policies The income tax expense or beneﬁ t 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 proﬁ ts; 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. 48 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable proﬁ ts 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 proﬁ ts available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Litigation Capital Management Limited (the ‘head entity’) and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime from 1 July 2003. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or beneﬁ t of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. 9. Earnings per share Earnings per ordinary share: Basic (cents per share) Diluted (cents per share) Reconciliation of earnings used in calculation of earnings per share: Net Proﬁ t/(Loss) For the Year Less: Non-controlling interests CONSOLIDATED June 2018 15.24 15.06 CONSOLIDATED June 2018 $ June 2017 (5.01) (5.01) June 2017 $ 8,637,354 (2,340,508) (41,191) 55,325 Earnings used in calculation of basic / diluted earnings per share 8,596,163 (2,285,183) Weighted average number of ordinary shares used in the calculation of basic earnings per share Effect of dilutive securities1 CONSOLIDATED June 2018 June 2017 56,399,297 46,712,408 665,950 – Weighted average number of ordinary shares used in the calculation of diluted earnings per share 57,065,247 46,712,408 1 Securities that could potentially dilute basic earnings per share in the future. 3,190,116 options granted in December 2013 were included in the calculation of diluted earnings per share. 1,500,000 options held by David King and Patrick Moloney and 2,000,000 loan share plan shares were not included in the calculation of diluted earnings per share as they are antidilutive for the year ended 30 June 2018. LCM Annual Report 2018 49 Financial Statements Notes to the ﬁ nancial statements continued Signiﬁ cant Accounting Policies Basic earnings per share Basic earnings per share is calculated as net proﬁ t attributable to members of the Parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares outstanding during the ﬁ nancial year, adjusted for any bonus element. Diluted earnings per share Diluted earnings per share is calculated as net proﬁ t attributable to members of the Parent, adjusted for: – costs of servicing equity (other than dividends); – the after tax effect of interest dividends associated with dilutive potential ordinary shares that have been recognised; – other non-discretionary changes in revenue or expenses during the period that would result from dilution of potential ordinary shares, divided by the weighted average number of shares and dilutive shares, adjusted for any bonus element. 10. Cash and cash equivalents Cash at Bank Signiﬁ cant Accounting Policies CONSOLIDATED June 2018 $ June 2017 $ 13,786,949 1,862,645 13,786,949 1,862,645 Cash and cash equivalents includes cash on hand, deposits held at call with ﬁ nancial 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 insigniﬁ cant risk of changes in value. Reconciliation to the Consolidated Statement of Cash Flows For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents comprise the following at 30 June: Cash at Bank CONSOLIDATED June 2018 $ June 2017 $ 13,786,949 1,862,645 13,786,949 1,862,645 50 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued 11. Other receivables Other receivables Security Deposit CONSOLIDATED June 2018 $ 513,138 125,753 638,891 June 2017 $ – 43,666 43,666 The other receivables related to performance fees receivable on a litigation project which was managed by the Group and settled during the year. Due to the nature of this receivable, the carrying value of the current receivable reﬂ ects its fair value. 12. Intangible assets (a) Reconciliation of carrying amounts at the beginning and end of the period Year ended 30 June 2017 Balance at 1 July 2016 Additions Litigation contracts in progress - expenses Litigation contracts in progress - written down Balance at 30 June 2017 Balance at 1 July 2017 Additions Litigation contracts in progress - expenses Litigation contracts in progress - written down Balance at 30 June 2018 Current Non Current CONSOLIDATED $ 6,494,243 7,208,966 (1,226,016) (6,644) 12,470,549 12,470,549 14,617,746 (13,135,844) (37,805) 13,914,646 CONSOLIDATED June 2018 $ June 2017 $ 11,048,971 11,683,991 2,865,675 786,558 13,914,646 12,470,549 (b) Description of Group’s intangible assets Intangible assets consist of Litigation Contracts in Progress. 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. No internal costs are considered directly attributable to managing current Litigation Contracts in Progress. (c) Write off of intangible assets The carrying value of Litigation Contracts in Progress is written off when the case is lost by the Group or the Group decides not to pursue cases further. (d) Impairment testing of intangible assets The recoverable amount of each Litigation Contract in Progress is determined based on a value in use calculation using cash ﬂ ow projections based on ﬁ nancial budgets approved by management. LCM Annual Report 2018 51 Financial Statements Notes to the ﬁ nancial statements continued The following describes each key assumption on which management has based its cash ﬂ ow projections when determining the value in use of Litigation Contracts in Progress: – The estimated cost to complete a Litigation Contract in Progress is budgeted, based on estimates provided by the external legal advisors handling the litigation. – The value to the Group of the Litigation Contracts in Progress, once completed, is estimated based on the expected settlement or judgement amount of the litigation and the fees due to the Group under the litigation funding contract. – The discount rate applied to the cash ﬂ ow projections is based on the Group’s weighted average cost of capital and other factors relevant to the particular Litigation Contracts in Progress. The discount rate applied ranged between 13% and 15%. Signiﬁ cant Accounting Policies Litigation Contracts in Progress Litigation Contracts in Progress represent future economic beneﬁ ts controlled by the consolidated entity. As Litigation Contracts in Progress may be exchanged or sold, the consolidated entity is able to control the expected future economic beneﬁ ts, hence meeting the deﬁ nition of intangible assets. Litigation Contracts in Progress are measured at cost on initial recognition and are not amortised as the asset is not available for use until a successful judgement or settlement relating to the project has been determined. It is at this point that the asset is derecognised. 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 the following criteria: – the consolidated entity has the ability and intention to complete the litigation; – the asset is expected to generate a future economic beneﬁ t; – adequate, technical, ﬁ nancial and other resources are available to complete the litigation; and – the expenditure attributable to the litigation during it’s duration can be measured reliably. 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 of the appeal are expensed as incurred. Successful judgement Where the litigation has been favourably determined or a positive settlement has been agreed, this constitutes a derecognition of the intangible asset and accordingly a gain or loss is recognised in the Consolidated Statement of Proﬁ t or Loss and Other Comprehensive Income. Any future costs relating to the defence of an appeal of the defendant are expensed when incurred. Critical Accounting Estimates and Judgements The consolidated entity determines whether intangible assets with indeﬁ nite useful lives are impaired at least on an annual basis. The assumptions used in the estimation of the recoverable amount and the carrying amount of intangibles with indeﬁ nite useful lives are discussed in note 12. Impairment of non ﬁ nancial assets 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 ﬂ ows relating to the asset using a pre-tax discount rate speciﬁ c to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash ﬂ ows are grouped together to form a cash-generating unit. 52 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued Classiﬁ cation of Intangible Assets The classiﬁ cation of Litigation Contracts in Progress is determined by management’s best estimate of resolution of the Litigation Project, with those expected to be resolved in the 12 month period to June 2019 classiﬁ ed as current assets and the balance as non-current assets. Litigation contracts in progress are classiﬁ ed as current assets when the asset is expected to be realised within twelve months after the reporting period. In making this judgement in relation to speciﬁ c assets the directors take into account the circumstances of the associated litigation, including whether a trial date has been set within the twelve months after the reporting date. 13. Deferred tax Deferred tax asset comprises temporary differences attributable to: Property, plant and equipment Employee beneﬁ ts Other Provisions Accrued expenses Tax losses carried forward Transaction costs on share issue CONSOLIDATED June 2018 $ 523 50,556 – 14,591 June 2017 $ 523 37,923 – 12,561 4,331,692 7,100,444 440,486 615,386 4,837,848 7,766,837 Opening Balance (Charged)/ credited to 1 July 2017 proﬁ t or loss $ $ Closing (Charged)/ credited Balance to equity 30 June 2018 $ $ Movements in deferred tax assets – 2018 Property, plant and equipment Employee beneﬁ ts Other Provisions Accrued expenses Tax losses carried forward Transaction costs on share issue Closing balance Movements in deferred tax assets – 2017 Property, plant and equipment Employee beneﬁ ts Accrued expenses Tax losses carried forward Transaction costs on share issue Closing balance 523 – 37,923 12,633 – – 12,561 2,030 7,100,444 (2,768,752) 615,386 (174,900) 7,766,837 (2,928,989) – – – – – – – 523 50,556 – 14,591 4,331,692 440,486 4,837,848 Opening Balance (Charged)/ credited to 1 July 2016 proﬁ t or loss $ $ Closing (Charged)/ credited Balance to equity 30 June 2017 $ $ 895 (372) 25,556 12,367 34,586 (22,025) 4,955,511 2,144,933 – – – – 523 37,923 12,561 7,100,444 108,775 (131,202) 637,813 615,386 5,125,323 2,003,701 637,813 7,766,837 LCM Annual Report 2018 53 Financial Statements Notes to the ﬁ nancial statements continued Deferred tax liability comprises temporary differences attributable to Intangibles 2018 $ 2017 $ 3,826,528 3,429,401 3,826,528 3,429,401 Opening Balance (Charged)/ credited to 1 July 2017 proﬁ t or loss $ $ Closing (Charged)/ credited Balance to equity 30 June 2018 $ $ Movements in deferred tax liabilities – 2018 Intangibles Closing balance 3,429,401 3,429,401 397,127 397,127 – – 3,826,528 3,826,528 Opening Balance (Charged)/ credited to 1 July 2016 proﬁ t or loss $ $ Closing (Charged)/ credited Balance to equity 30 June 2017 $ $ Movements in deferred tax liabilities – 2017 Intangibles Closing balance Signiﬁ cant Accounting Policies Recognition of deferred tax assets $ $ 1,948,273 1,481,128 1,948,273 1,481,128 $ – – $ 3,429,401 3,429,401 Potential deferred tax assets attributable to carried forward tax losses will be recognised and only utilised when: – The Group derives future assessable income of a nature or amount sufﬁ cient to enable the beneﬁ ts from the deductions for the losses to be utilised; – The conditions for deductibility imposed by tax legislation continue to be complied with, and – No changes in tax legislation adversely affect the Group in realising the beneﬁ t. Critical Accounting Estimates and Judgements Recovery of deferred tax assets Deferred tax assets are recognised for tax losses only if the Group considers it is probable that future taxable amounts will be available to utilise those tax losses. The Group has deferred tax assets relating to tax losses arising from prior years totalling of $15,751,608 (2017: $25,819,796). The potential tax beneﬁ t of $4,331,692 (2017: $7,100,444) has been determined using the reduced tax rate of 27.5% which is the rate expected to apply when the asset is realised. Management has performed a prima facie analysis of future taxable proﬁ ts to determine the likelihood of being able to recover the unused tax losses in the short term. Management has concluded that, based on past performance and accuracies of forecast cash ﬂ ow from operations, the Group will generate taxable earnings in the short term in order to utilise recognised deferred tax assets. 54 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued 14. Current liabilities – trade and other payables Trade payables Distribution payable Other payables Signiﬁ cant Accounting Policies CONSOLIDATED June 2018 $ 3,696,208 32,430 87,410 June 2017 $ 1,911,072 32,430 (17,428) 3,816,048 1,926,074 These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the ﬁ nancial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. 15. Current and non-current liabilities – Employee beneﬁ ts Current Employee beneﬁ ts – Annual Leave Employee beneﬁ ts – Bonuses payable Non-current Employee beneﬁ ts – Long Service Leave Signiﬁ cant Accounting Policies Short-term employee beneﬁ ts CONSOLIDATED June 2018 $ 149,481 105,000 254,481 June 2017 $ 111,040 – 111,040 34,358 34,358 26,862 26,862 Liabilities for wages and salaries, including non-monetary beneﬁ ts, annual leave and long service leave expected to be settled 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 beneﬁ ts The liability for long service leave not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. 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 corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outﬂ ows Amounts not expected to be settled within the next 12 months The current provision for employee beneﬁ ts includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. However, based on past experience, the consolidated entity does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. LCM Annual Report 2018 55 Financial Statements Notes to the ﬁ nancial statements continued 16. Equity – Issued capital (a) 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. (b) Partly paid shares Partly paid shares entitle the holder to participate in dividends and the proceeds of the company in proportion to the number of and amounts paid on the shares held. The partly paid shares do not carry the right to participate in new issues of securities. As at 30 June 2018, there are currently 2,866,050 partly paid shares issued at an issue price of $0.17 and will become fully paid upon payment to LCM of $0.17 per share. (c) Ordinary shares - Loan Share Plan On 16 November 2017, Director Patrick Moloney was issued with 2,000,000 ordinary shares under Loan Share Plan. For further details of this transaction refer to Note 17. CONSOLIDATED June 2018 Shares June 2017 Shares June 2018 $ June 2017 $ 53,533,247 53,533,247 24,865,111 24,865,111 2,866,050 2,866,050 – – $ Ordinary shares – fully paid Ordinary shares – partly paid Movements in fully paid ordinary share capital Date No of shares Issue price Opening balance at 1 July 2016 Issue of ordinary shares – fully paid Share issue transaction costs, net of tax Balance at 30 June 2017 Opening balance at 1 July 2017 Balance at 30 June 2018 32,104,675 n/a 11,546,617 Dec-16 21,428,572 $0.70 15,000,000 53,533,247 (1,681,506) 24,865,111 53,533,247 n/a 24,865,111 53,533,247 24,865,111 Movements in partly paid ordinary share capital Date No of shares Issue price Opening balance at 1 July 2016 Balance at 30 June 2017 Opening balance at 1 July 2017 Balance at 30 June 2018 2,866,050 n/a 2,866,050 2,866,050 n/a 2,866,050 Movements in ordinary share capital in relation to Loan Share Plan Opening balance at 1 July 2017 Issue of shares (Refer to Note 17) Balance at 30 June 2018 (d) Capital risk management Date No of shares Issue price – Nov-17 2,000,000 n/a 2,000,000 $ – – – $ – – – The Group considers its capital to comprise its contributed equity, any accumulated retained earnings as well as its credit facility which is classiﬁ ed as a ﬁ nancial liability in the Consolidated Statement of Financial Position. When managing capital, management’s objective is to ensure that the consolidated entity continues as a going concern, has sufﬁ cient capital to meet its growth aspirations and to provide optimal returns to shareholders. The Company is not subject to any regulatory imposed capital requirements. 56 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued In making decisions to adjust its capital structure to achieve these aims, the Group considers not only its short-term position but also its long-term operational and strategic objectives. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The capital risk management policy has not changed during the year. Signiﬁ cant Accounting Policies Ordinary shares are classiﬁ ed 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. 17. Share based payments reserve The share-based payments reserve is used to recognise the fair value of shares and options issued to employees under the Employee Share Option Scheme and Loan Share Plan. Share based payments reserve Movements in share based payments reserve Opening balance Expenses arising from share-based payments transactions during the period: Employee Share Option Scheme Loan Share Plan Closing balance Loan Share Plan CONSOLIDATED June 2018 $ June 2017 $ 292,484 165,903 165,903 95,703 93,600 32,981 292,484 70,200 – 165,903 On 16 November 2017, the shareholders of Litigation Capital Management Limited resolved to approve the Loan Share Plan. Under the plan, Director Patrick Moloney was granted with two tranches of 1,000,000 ordinary shares each on 4 December 2017. Each tranche will vest 24 and 36 months after the grant date respectively given vesting conditions on each tranche are satisﬁ ed by Mr Moloney which include customary continuous employment conditions and a share price hurdle of $1.00. Mr Moloney entered into an interest-free loan with Litigation Capital Management Limited to acquire a total of 2,000,000 ordinary shares. The loan is provided under a limited recourse borrowing arrangement and has a term of 10 years. The loan value is $1,193,000 and is calculated at the issue price of the Plan Shares, being $0.5965, on the issue date of the shares. The entitlement to the plan is lost once the Director is no longer an eligible participant. The cost of share based payment transactions in relation to the Loan Share Plan to Patrick Moloney is measured at fair value at date of grant. The fair value determined at the grant date of these payments are expensed on a straight line basis over the term of the loan, based on the Group’s estimate of shares under Loan Share Plan that will vest, with a corresponding increase in equity. At each balance sheet date, the Group revises its estimates of the number of options that are expected to vest for service and non-market performance conditions. The expense recognised each year takes into account the most recent estimate. Dividends on the shares issued under the Loan Share Plan are to be offset against the outstanding loan balance. LCM Annual Report 2018 57 Financial Statements Notes to the ﬁ nancial statements continued The fair value at grant date, of $0.28 per each share issued under the Loan Share Plan, was determined using a American single barrier option calculation. Key model inputs include: Grant date: 4 December 2017 Share price at grant date: $0.58 Exercise price: $0.5965 Option life: 10 years Expected volatility: 45% Expected dividend yield: 0% Risk free interest rate: 2.5% The fair value of these shares granted during the period is $565,380. An amount of $32,981 has been expensed during the period, with the remainder to be expensed over the term of the loan. Employee Share Option Scheme The Option Plan gives directors David King and Patrick Moloney the opportunity to participate in the plan. The options granted on 1 December 2013 can be exercised to purchase 1 ordinary share in Litigation Capital Management Limited at an exercise price of $0.47. The options granted on 20 September 2016 can be exercised to purchase 1 ordinary share in Litigation Capital Management Limited at an exercise price of $1.00. Details of options outstanding as part of the employee option plan during the period are as follows: 30 June 2018 Grant date Exercise date Expiry date Balance at beginning of the year Granted Exercised Balance during the year during at the end the year of year Exercisable at the end of the year 01/12/2013 01/12/2013 01/12/2018 3,190,116 20/09/2016 01/11/2018 01/11/2021 1,500,000 4,690,116 – – – Weighted average exercise price of those with an exercise price 0.64 – – – – – 3,190,116 3,190,116 1,500,000 – 4,690,116 3,190,116 0.64 0.47 18. Subsidiaries and Transactions With Non-Controlling Interests Interests in Subsidiaries Information relating to the group’s interests in subsidiaries at 30 June 2018 is set out below. All entities are incorporated in and operate within Australia. The ownership of each subsidiary is equal to the voting rights of each entity. Ownership interest Ownership interest held by non-controlling interests 2018 % 100% 100% 100% 100% 100%1 60% 2017 % 100% 100% 100% 100% 0% 60% 2018 % 2017 % – – – – – – – – – – 40% 40% Name of Entity LCM Litigation Fund Pty Ltd LCM Litigation Management Pty Ltd LCM Litigation Investment Fund No 1 Pty Ltd LCM Operations Pty Ltd LCM Corporate Services Pty Ltd LCM Unit Trust 1 entity was incorporated during the year. 58 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Notes to the ﬁ nancial statements continued Non-controlling interests (NCI) The table below sets out the summarised ﬁ nancial information for each subsidiary that has non-controlling interests that are material to the group. Amounts disclosed are before intercompany eliminations. Summarised statement of ﬁ nancial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Summarised statement of proﬁ t or loss and other comprehensive income Revenue Other income Expenses Proﬁ t/(loss) before income tax expense Income tax expense Proﬁ t/(loss) after income tax expense Other comprehensive income Total comprehensive income Statement of cash ﬂ ows Net cash from operating activities Net cash used in investing activities Net cash used in ﬁ nancing activities LCM Unit Trust 2018 $ 2017 $ 536,186 46,063 – 536,186 471,521 – 471,521 64,665 513,138 3,000 413,161 102,977 – – 46,063 84,375 – 84,375 (38,312) – – 138,313 (138,313) – 102,977 (138,313) – – 102,977 (138,313) (23,015) (202,389) – – – – Net increase/(decrease) in cash and cash equivalents (23,015) (202,389) Other ﬁ nancial information Proﬁ t attributable to non-controlling interests Accumulated non-controlling interests at year end Distributions paid to non-controlling interests Transactions with non-controlling interests 41,191 25,866 – (55,325) (15,325) – On 13 February 2014 the LCM Unit Trust was established. The consolidated entity sold rights to performance fees to LCM Unit Trust for $150,000, which this amount contributed back to LCM Unit Trust for a 60% ownership in the entity. The remaining 40% is equally owned by Australian Insolvency Group Pty Ltd of which Patrick Coope is a shareholder and Keli-Saw Holdings Pty Ltd of which Patrick Moloney is a shareholder. LCM Annual Report 2018 59 Financial Statements Notes to the ﬁ nancial statements continued 19. Remuneration of auditors During the ﬁ nancial year the following fees were paid or payable for services provided by BDO Audit (SA) Pty Ltd, the auditor of the company, its network ﬁ rms and unrelated ﬁ rms: CONSOLIDATED June 2018 $ June 2017 $ Audit Services Amounts paid/payable for audit and review of ﬁ nancial statements for 63,199 68,861 the entity or any entity in the Group Taxation Services Amounts paid/payable to a related practice of the auditor for – 11,235 tax compliance and advisory services Other Services Amounts paid/payable to a related practice of the auditor for – 58,470 corporate ﬁ nance services 20. Reconciliation of cash ﬂ ows (a) Reconciliation of proﬁ t after income tax to net cash from operating activities: CONSOLIDATED June 2018 $ June 2017 $ Proﬁ t/(loss) after income tax expense for the year 8,637,354 (2,340,508) Adjustments for: Net (gain)/loss on derecognition of intangible assets included (15,494,528) (2,182,426) in investing activities Depreciation and amortisation Change in operating assets and liabilities: Decrease in trade and other receivables Increase/(decrease) in trade and other payables Increase/(decrease) in deferred taxes Increase in employee beneﬁ ts Increase in share based payments Net cash from operating activities 21,967 6,258 (595,225) 104,838 3,326,116 150,937 126,581 628,979 135,081 (522,572) 52,714 70,200 (3,721,960) (4,152,274) (b) Changes in Liabilities arising from Financing Activities: Short-term borrowings Total liabilities from ﬁ nancing liabilities (c) Non-cash Financing and Investing Activities 2017 Cash inﬂ ows Cash outﬂ ows 2018 – 4,250,000 (4,250,000) – 4,250,000 (4,250,000) – – During the year, proceeds from the settlement of Litigation Projects of $2,042,283 were not received by the Group as they were paid directly from the funded party’s solicitors trust account to the Group’s trade creditors to extinguish outstanding litigation funding costs payable. As the Group did not receive these proceeds, they have not been reﬂ ected in the proceeds or payments of litigation funding within the statement of cash ﬂ ows. 60 LCM Annual Report 2018 Notes to the ﬁ nancial statements continued 21. Related party transactions (a) Parent entity Litigation Capital Management Limited is the parent entity of the Group. Litigation Capital Management Limited was incorporated on 9 October 2015 and is domiciled in Australia. The registered address of Litigation Capital Management Limited is Level 12, The Chiﬂ ey Tower, 2 Chiﬂ ey Square, Sydney, NSW, 2000. Litigation Capital Management Limited acquired 100% of the issued share capital of LCM Litigation Fund Pty Ltd on 16 November 2015. Upon completion of the acquisition, Litigation Capital Management Limited issued 6 shares for every 1 held in LCM Litigation Fund Pty Ltd to existing shareholders as consideration for the share in LCM Litigation Fund Pty Ltd. i F n a n c a i l (b) Subsidiaries Interests in subsidiaries are disclosed in note 18. (c) Key Management Personnel Compensation The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below: S t a t e m e n t s Short-term employee beneﬁ ts Post-employment beneﬁ ts Long term beneﬁ ts Share-based payments CONSOLIDATED June 2018 $ June 2017 $ 584,924 1,066,054 53,595 7,496 126,581 32,049 7,475 70,200 772,596 1,175,778 (d) Transactions with related parties The following transactions occurred with related parties: Patrick Moloney is a director and shareholder of 101 Capital Pty Ltd. 101 Capital Pty Ltd is the Trustee of LCM Litigation Investment Fund and engages LCM Litigation Management Pty Ltd to manage this entity on it’s behalf. Steven McLean is a shareholder and director of 145 Fleet Pty Ltd, which carries out ﬁ nancial advisory services. During the year, 145 Fleet has earned fees of $nil (2017: $512,430). As at 30 June 2018 there were no amounts owing to 145 Fleet (2017: $nil). Transactions with non-controlling interests Director Patrick Moloney has a non-controlling interest in LCM Unit Trust and Basis Partnership. (e) Signiﬁ cant transactions with Director’s and their associates Patrick Moloney was provided with 2,000,000 ordinary shares in Litigation Capital Management Limited under the Loan Share Plan. The details of this transaction is included in Note 17. LCM Annual Report 2018 61 Financial Statements Notes to the ﬁ nancial statements continued 22. Parent entity information Set out below is the supplementary information about the parent entity. Statement of proﬁ t or loss and other comprehensive income Proﬁ t/(loss) after income tax Total comprehensive income Statement of ﬁ nancial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Share based payments reserve Retained proﬁ ts Total equity June 2018 $ June 2017 $ (126,581) (126,581) (272,429) (272,429) – – 24,662,882 24,662,882 – – – – 24,865,111 24,865,111 196,781 70,200 (399,010) (272,429) 24,662,882 24,662,882 The Group has revised this disclosure to reﬂ ect the legal parent entity being, Litigation Capital Management Limited, instead of the accounting parent entity being, LCM Litigation Fund Pty Ltd. The disclosure has been applied retrospectively. Signiﬁ cant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity. 23. Events after the reporting period In the Directors’ opinion, no matter or circumstance has arisen since the end of the ﬁ nancial year, that has signiﬁ cantly affected, or may signiﬁ cantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future years. 24. Commitments and Contingencies (a) Operating lease commitments Leasing Arrangement Operating lease relate to business premises leased in Melbourne, Adelaide, Brisbane, Sydney and Melbourne. The Group has lease terms with between 1 and 6 month cancellation period requirements. CONSOLIDATED June 2018 $ 171,529 193,879 – June 2017 $ 82,496 – – 365,408 82,496 Non-cancellable leases – not later than 12 months – between 12 months and 5 years – greater than 5 years 62 LCM Annual Report 2018 Notes to the ﬁ nancial statements continued (b) Contingencies The majority of the Group’s funding agreements contain a contractual indemnity from the Group to the funded party that the Group will pay adverse costs awarded to the successful party in respect of costs incurred during the period of funding, should the client’s litigation be unsuccessful. The Group’s position is that for the majority of litigation projects which are subject to funding, the Group enters insurance arrangements which lessen or eliminate the impact of such awards and therefore any adverse costs order exposure. i F n a n c a i l S t a t e m e n t s LCM Annual Report 2018 63 Financial Statements Litigation Capital Management Limited ABN 13 608 667 509 Directors’ Declaration In the directors’ opinion: the attached ﬁ nancial statements and notes comply with the Corporations Act 2001, Australian Accounting Standards and other mandatory professional reporting requirements; the attached ﬁ nancial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the ﬁ nancial statements; the attached ﬁ nancial statements and notes give a true and fair view of the consolidated entity’s ﬁ nancial position as at 30 June 2018 and of its performance for the ﬁ nancial year ended on that date; there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and Signed in accordance with a resolution of directors. On behalf of the directors Director Dated this 20 day of August 2018 64 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s LCM Annual Report 2018 65 66 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s LCM Annual Report 2018 67 68 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Shareholder information as at 5 October 2018 Shareholder Information required by the Australian Securities Exchange Limited (ASX) Listing Rules and not disclosed elsewhere in the Report is set out below. 1. In accordance with the 3rd edition ASX Corporate Governance Council’s Principles and Recommendations, the 2017 Corporate Governance Statement, as approved by the Board, is available on the Company’s website at: https://www.lcmﬁ nance.com/. The Corporate Governance Statement sets out the extent to which Litigation Capital Management Limited has followed the ASX Corporate Governance Council’s 29 Recommendations during the 2018 ﬁ nancial year. 2. Substantial shareholders The number of securities held by substantial shareholders and their associates (as notiﬁ ed to the ASX) are set out below: Fully paid Ordinary Shares Name Litigation Capital Management Limited Kanamex Pty Ltd and Mr Patrick John Moloney PFH (NSW) Pty Ltd ATD Paradice Family Trust Number 21,869,407 2,729,452 2,400,000 Collins St Asset Management ATF Collins St Value Fund 4,119,735 % Date of lodgement 40.85 5.41 4.76 7.36% 13/12/2016 13/12/2016 14/12/2016 26/09/2018 3. Number of security holders and securities on issue Litigation Capital Management Limited has issued the following securities: (a) 55,945,219 fully paid ordinary shares held by 398 shareholders; (b) 2,866,050 partly paid ordinary shares held by 3 shareholders; (c) 1,500,000 unlisted options exercisable at $1.00 held by 2 option holders; and (d) 3,190,116 unlisted options exercisable at $0.47 held by 2 option holders. 4. Voting rights Ordinary shares The voting rights attached to ordinary shares are that on a show of hands, every member present, in person or proxy, has one vote and upon a poll, each share shall have one vote for each fully paid share they hold. Partly paid shares The voting rights attached to partly paid shares are that on a show of hands, every member present, in person or proxy, has one vote and upon a poll, a fraction of a vote for each partly paid share they hold. The fraction must be equivalent to the proportion which the amount paid (not credited) is of the total amounts paid and payable (excluding amounts credited). Amounts paid in advance of a call are ignored. Options Option holders do not have any voting rights on the options held by them. LCM Annual Report 2018 69 Financial Statements Shareholder information continued 5. Distribution of security holders (a) Fully Paid ordinary securities Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total (b) Unquoted securities – partly paid shares Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total (c) Unquoted securities – options exercisable at $1.00 Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total (d) Unquoted securities – options exercisable at $0.47 Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Fully paid Ordinary shares Holders 8 77 51 168 94 398 Shares 3,332 220,021 432,296 6,049,319 49,240,251 55,945,219 Partly paid shares Holders Shares 0 0 0 0 4 4 0 0 0 0 2,866,050 2,866,050 Holders $1.00 Options Options 0 0 0 0 2 2 0 0 0 0 1,500,000 1,500,000 Holders $0.47 Options Options 0 0 0 0 2 2 0 0 0 0 3,190,116 3,190,116 % 0.01 0.44 0.77 10.81 88.02 100.00 % 0.00 0.00 0.00 0.00 100.00 100.00 % 0.00 0.00 0.00 0.00 100.00 100.00 % 0.00 0.00 0.00 0.00 100.00 100.00 6. Unmarketable parcel of shares The number of shareholders holding less than a marketable parcel of ordinary shares is nil (0) based on Litigation Capital Management Limited closing share price of $1.00, on 5 October 2018. 70 LCM Annual Report 2018 i F n a n c a i l S t a t e m e n t s Shareholder information continued 7. Twenty largest shareholders of quoted equity securities Fully paid ordinary shares Details of the 20 largest shareholders by registered shareholding are: Name 1 J P MORGAN NOMINEES AUSTRALIA LIMITED 2 KANAMEX PTY LTD 3 BERNE NO 132 NOMINEES PTY LTD 4 PFH (NSW) PTY LTD 5 MR PATRICK MOLONEY 6 UBS NOMINEES PTY LTD 7 MJC PTY LTD 8 VERUSE PTY LTD 9 SEISTEND PTY LTD 10 PJF SUPER PTY LTD 11 MORGAN STANLEY AUSTRALIA SECURITIES (NOMINEE) PTY LIMITED 12 RST SUPER PTY LTD 13 PORTIGON AG 14 MERRIC INVESTMENTS PTY LTD 15 NATIONAL NOMINEES LIMITED 16 F L BRAGG HOLDINGS PTY LTD 17 AUSTRALIAN INSOLVENCY GROUP PTY LTD 18 WOLSELEY (AUSTRALIA) PTY LTD 19 ST JOHN STREET PTY LTD 20 LEMPIP NOMINEES PTY LTD Total for Top 20 Total on Register No. of shares 4,123,735 3,212,557 2,457,143 2,400,000 2,000,000 1,859,698 1,720,002 1,601,484 1,601,484 1,562,688 1,549,024 1,497,523 1,080,000 922,087 920,241 611,121 606,824 557,855 555,033 528,700 % 7.37 5.74 4.39 4.29 3.57 3.32 3.07 2.86 2.86 2.79 2.77 2.68 1.93 1.65 1.64 1.09 1.08 1.00 0.99 0.95 31,852,912 55,945,219 56.94 100 8. The name of the entity’s secretary (in the case of a trust, the name of the responsible entity and its secretary). Ms Anna Sandham 9. The address and telephone number of the Company’s registered ofﬁ ce in Australia; and of its principal administrative ofﬁ ce, if the two are different. Suite 12.06 Level 12, The Chiﬂ ey Tower2 Chiﬂ ey Square, Sydney NSW 2000 T: +61 2 8098 1390 10. The address and telephone number of each ofﬁ ce at which a register of securities, register of depositary receipts or other facilities for registration of transfers is kept. Link Market Services Limited Level 12, 680 George Street, SYDNEY, NSW, AUSTRALIA 2000 T: +61 1300 554 474 11. A list of other stock exchanges on which any of the Company’s securities are quoted. Nil. LCM Annual Report 2018 71 Financial Statements Shareholder information continued 12. The number and class of restricted securities or securities subject to voluntary escrow that are on issue and the date that the escrow period ends. • • 1,128,600 unquoted partly paid ordinary shares; 1,500,000 unquoted options exercisable at $1.00 per option between 1 November 2018 and 1 November 2021; and • 1,595,058 unquoted options exercisable at $0.48 per option on or before 1 December 2018. 13. Unquoted securities Litigation Capital Management Limited have the following unquoted securities on issue: • 2,866,050 unquoted partly paid shares held by 4 shareholders as follows: o Australian Insolvency Group Pty Ltd hold 764,778 shares; o Litigation Support Services Pty Ltd hold 668,250 shares; and o Kanamex Pty Ltd hold 1,433,022 shares. • 1,500,000 unquoted options exercisable at $1.00 per option held by 2 option holders as follows: o Kanamex Pty Ltd hold 900,000 options; and o Seistend Pty Ltd hold 600,000 options. • 3,190,116 unquoted options exercisable at $0.47 per option held by 2 option holders as follows: o Mr Patrick Moloney holds 1,595,058 options; and o Mr Patrick cope hold 1,595,058 options. 14. On market buy-back There is no current on market buy-back. 15. Statement regarding use of cash and assets During the period between 1 July 2017 and 30 June 2018, Litigation Capital Management Limited has used its cash and assets readily convertible to cash that it had at the time of ASX admission in a way consistent with its business objectives set out in the prospectus dated 17 November 2016. 72 LCM Annual Report 2018 Perivan Financial Print 252074 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK SYDNEY Level 12, The Chifley Tower 2 Chifley Square Sydney NSW 2000 T 02 8211 0511 MELBOURNE Level 30, Collins Place 35 Collins Street Melbourne VIC 3000 T 03 9900 6270 BRISBANE Level 54, 111 Eagle Street Brisbane QLD 4000 T 07 3012 6478 lcmfinance.com

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