Litigation Capital Management
Annual Report 2023

Plain-text annual report

Annual Report and Financial Statements 2023 Litigation Capital Management Limited ACN 608 667 509 Our Purpose We strive to deliver growth in our asset management business and through disciplined investment we aim to deliver value and performance that stands out amongst our industry peers. Litigation Capital Management Limited Contents Strategic Report Our Business at a Glance Chairman’s Statement Our Principles Our Business Model Group Strategies and KPIs CEO Review Market Overview and Outlook Financial Review Financial Review Risk Management and Internal Controls Sustainability Report Governance Board of Directors The QCA Corporate Governance Code Corporate Governance Statement Directors’ Report Auditor’s Independence Declaration Financial Statements Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statements of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Corporate Directory 8 10 12 16 21 22 27 30 39 46 49 51 56 65 70 72 73 74 75 76 115 116 119 1 Annual Report and Financial Statements 2023FY23 Highlights Underpinned by our strong track record, we have focused on developing our asset management business to create long-term shareholder value and stand out as a market leader. PATRICK MOLONEY CEO 2 A$484m TOTAL ASSETS UNDER MANAGEMENT ($M) For more information on total assets under management, please see page 23 of the CEO Review. 78% 12-YEAR CUMULATIVE PORTFOLIO INTERNAL RATE OF RETURN (IRR) FY23 FY22 FY21 78% 79% 78% 1.78x 12-YEAR CUMULATIVE PORTFOLIO RETURN ON INVESTED CAPITAL (ROIC) FY23 FY22 FY21 1.78x 1.63x 1.53x Litigation Capital Management Limited A$176m CAPITAL COMMITTED IN YEAR ($M) A$180.8m REALISED REVENUE ($M) FY23 FY22 FY21 104 109 176 FY23 FY22 47.4 FY21 37.1 180.8 A$484m TOTAL COMMITTED PORTFOLIO ($M) A$95m CAPITAL INVESTED ($M)1 FY23 FY22 FY21 484 414 336 FY23 FY22 FY21 66 95 88 1. Capital deployed includes A$33.2 million related to the third party fund. 434 NUMBER OF APPLICATIONS FY23 FY22 FY21 $106.6m $2.9m $4.8m $19.2m 572 $45.1m 434 442 $195.9m $171.1m $37.6m  Class action  Commercial disputes  Insolvency  Intellectual Property  Portfolio  Recoveries  Arbitration  Competition DIVERSIFIED PORTFOLIO BY INDUSTRY TYPE AND CAPITAL COMMITMENT (A$M) 3 Annual Report and Financial Statements 20234 Litigation Capital Management Limited SECTION ONE Strategic Report 5 Annual Report and Financial Statements 2023Key Facts Over 20 yrs providing finance solutions since 1998 and delivering improved performance year on year 86% of funded litigation projects are profitable, maintaining a high level of success Leading stand-out performance in portfolio investment 1 of 4 global funders listed on public exchanges 24 1st one of the first proponents of the litigation financing industry, which was first developed in Australia 6 Litigation Capital Management Limited Experience counts 7 Annual Report and Financial Statements 2023Our Business at a Glance Through our two business models we create value through our three primary investment strategies. About LCM Litigation Capital Management (LCM) is an alternative asset manager specialising in disputes financing solutions internationally. Through our two business models, direct balance sheet and funds management, we create value through our three primary investment strategies. These include single-case, portfolios and acquisition of insolvency claims. LCM has an unparalleled track record, driven by effective project selection, and robust risk and project management. Headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker ‘LIT’. Our strategic objectives Balanced portfolio Disciplined underwriting Maintain diversity of cases across industry type, sector and jurisdiction and maintain a healthy split between single cases and portfolios both by value and volume. Consistent and disciplined due diligence and risk management. Sustainable long-term growth Strong and innovative origination of investment opportunities and continually evolving by responding to market trends and demands within the disputes finance market. 8 Litigation Capital Management Limited Our values Transparency We will always act transparently in the best interests of clients, shareholders and staff. Discipline Our investment approach demonstrates the highest levels of ongoing governance and procedural oversight to achieve optimal portfolio outcomes. Innovation We continually drive market evolution through flexible, innovative and competitive client solutions. Integrity We choose to operate to a standard that exceeds regulatory obligations placed upon industry participants in the countries where we operate. Opportunity We are an employer that empowers staff to succeed at every level. Principle business Delivering sustainable growth and shareholder value through: 1. Strong and innovative 2. Consistent and 3. Sufficient and alternate origination of investment opportunities disciplined due diligence and risk management capital to facilitate growth Integrity • Development of skill and discipline of investment selection • Building experience over time • Creation of systems and methodologies for effective due diligence and underwriting risk • The disciplined application of those methodologies has generated a benchmark investment track record Capital • Effective investment disputes is capital intensive • Ability to attract quality investment capital to support investment strategy • Capital is no longer flowing into litigation finance other than that to the most experienced managers with strong track records of past performance Origination • Sourcing and originating the best dispute investments globally • Building scale so that meaningful capital can be put to work • An effective origination platform can only be built once sufficient and long-standing capital is available 9 Annual Report and Financial Statements 2023Chairman’s Statement The year under review was LCM’s most successful 12 months since inception. This is testament to the hard work of our management team and staff, and the foundations that have been laid by the team over the past few years. Dear Shareholder, The Financial review details an income statement prepared under the historical accounting standard and the newly adopted AASB 9 to provide readers with a bridge of financial performance through this period of transition. Realised income for the year compared to revenue as previously disclosed in the prior year was AUD$181 million, AUD$84 million of which was attributable to the shareholders of LCM (FY22 AUD$47 million), an increase of 285% on a consolidated basis and 78% attributable to LCM. Adjusted operating profit of AUD$54 million was in line with the prior year (FY22 adjusted operating profit AUD$54 million), and basic earnings per share of 29.5 cents (FY22 32.7 cents). These record results meant that the Company ended the period with AUD$104.5 million of cash (AUD$83 million attributable to LCM) compared with FY22 AUD$50.0 million of which AUD$29 million was attributable to LCM. More information on the restatement of the Group’s results following the adoption of Fair Value accounting can be found in the CFO report and the notes to the financial statements. As a result of the above performance, the Board was pleased to declare a final dividend to shareholders for the financial year ending 30 June 2023 of 2.25p per share. The dividend will be paid on 27 October 2023 to shareholders on the register on 29 September 2023 being the record date. The ordinary shares will be marked ex-dividend on 28 September 2023. As we have set out, the Board is always looking at ways to return value to shareholders and will continue to do so. LCM’s experience in the sector has enabled it to navigate the uncertain economic and political environment which has been in place since the emergence of the COVID pandemic, and which continues today due to high levels of inflation and the ongoing war in Ukraine. As the year progressed, we began to see courts and tribunals in jurisdictions across the globe begin to tackle the case backlogs associated with COVID-19, which has seen more cases settle, a trend we hope to see continue and accelerate during the next 12 months. As ever, the timing of resolutions of disputes is out of our hands, but we will continue to provide market updates to investors in a timely manner and when it is possible to do so. During the year LCM has seen the benefits of its move to its third party asset management business model, with the first case investments from Fund I reaching their conclusion, leading to above average returns for the LCM balance sheet. The Board is confident that this is the right business model for the Company and will allow LCM to leverage our capital extremely effectively and build scale. In March 2023, Fund II was closed following US$291 million of committed funds and we have already begun to deploy capital within this structure. We expect this to be a strong driver of growth in the business in the years to come, and continue to receive interest from investors looking to commit further. 10 Litigation Capital Management Limited model and changing geographic split of business. This is a significant change which follows a third party review and lengthy and thorough Board discussions. We are confident this is the right move for the business as it continues its shift towards a third party asset management business model; and will enable investors more easily to compare us with our peers. More information about the change to Fair Value Accounting can be found in the CEO and CFO reports. In conclusion, this has been an excellent period for LCM, and can act as a platform from which to continue to expand our asset management business and develop scale. The litigation funding market continues to grow, and we expect the quality of opportunities presented us to expand in line with this. Jonathan Moulds Non-Executive Chairman As the numbers bear out, the performance this year has been extremely strong, which as ever has been led by strong case selection and the experience within the Company of originating high quality deals. We have bolstered our origination business with key hires in APAC and EMEA, highlighting the increasingly global nature of our business. This was CEO Patrick Moloney’s first full year based in the UK, a move driven by our belief in the opportunity for growth in the UK and Europe. Coupled with the building out of our London team, we continue to believe that the litigation financing market in EMEA is set for expansion. This is notwithstanding the recent UK Supreme Court decision which will have very limited or no impact on LCM’s portfolios of dispute investments in terms of future value. Additionally, our presence in Singapore has continued to grow, and we are seeing more and more opportunities in the jurisdiction. We see these locations as natural complements to each other, diversifying and de- risking our investment portfolio. As a business LCM has always been conservative in the way it apportions value to its portfolio of investments. We will maintain this conservative approach. However, the Group has reassessed its classification of the funding of its litigation funding agreements. This involved a detailed review which resulted in a significant change to the way in which we report results this year. The change provides more relevant information on the value of the litigation funding agreements and reflects the evolution of the primary business 11 Annual Report and Financial Statements 2023Our Principles With an unparalleled track record and stand-out performance, we continue to strengthen our position as a market leading funder. Delivering sustainable growth and shareholder value through: Strong and innovative origination of investment opportunities Consistent and disciplined due diligence and risk management Sufficient and alternate capital to facilitate growth 12 Investment selection criteria: Clear legal principles Written evidence Recoverability Proportionality Experienced legal team (Read more about our project selection process in the risk report on pages 39 to 45) Litigation Capital Management Limited Investment selection process Direct Business Development Referrals Others Opportunities Preliminary due diligence Investment committee Executive review Conditional financing Additional due diligence Investment selection process: Opportunities Opportunities come from reactive sources such as solicitors, barristers, insolvency practitioners, experts and brokers as well as proactive sources through business development, leveraging firm- wide relationships, participation in key industry events or sectoral focus. Preliminary due diligence Investment Manager considers applications for financing against LCM’s five key criteria and considers the prospects of successful recovery, budget for the litigation project and relevant documents. Peer review Review by committee of Investment Managers. Preparation of a formal litigation project analysis document. Recommendation may be made to progress a litigation project to Investment Committee, or suggestions made as to further enquiries that need to be made in relation to it. Executive review and Investment Committee Review by CEO, the Investment Manager reviewing the project and two additional Investment Managers. May require independent opinion from King’s Counsel/Senior Counsel (KC/SC). Investment Committee considers the project against LCM’s five criteria, as well as relevant investment restrictions and projects fit for diversification of risk at portfolio level. May approve entry into conditional financing agreement and any due diligence required to confirm that all funding criteria are met. Final due diligence binding LFA Funded opportunity Conditional financing Common conditions may include: • Independent KC/SC opinion that the litigation project has good prospects • Independent opinion on quantum formulation • Further investigation of defendant’s asset position • Detailed budget and solicitors’ retainer and/or deed of priorities • Proceedings to commence or claim prepared to be filed Additional due diligence LCM meets costs of further due diligence but, if it elects to proceed to unconditional financing, these costs are recoverable from the outcome of the project. Unconditional financing The project is again considered by the Investment Committee, which may approve entry into unconditional financing agreement, which will result in LCM being required to pay all costs and on some occasions being required to provide an indemnity and/or security for any adverse cost order that may be made against LCM’s client(s) in respect of the litigation project. LCM reserves the contractual right to terminate the financing arrangement at any time in the instance of a deterioration in prospects or a change to the economic viability of the claim. 13 Annual Report and Financial Statements 2023Our Principles continued Disciplined investment selection is demonstrated by maintaining a strong track record which for the last 12 years has produced IRR 78% ROIC 1.78x. Established first satellite Fund. 2009 2009–2013 inception Established second satellite Fund. 2011 2013 LCM enters into external financing arrangement with international litigation financier. Patrick Moloney joins as a Non-Executive Director. 2014–2015 2014 2015 Patrick Moloney appointed CEO and further A$5m raised for further investment in litigation projects and positioning for IPO. presence t e k r a m g n d i l i u b Equity raise of A$1.4m to invest in people and operations with a further A$3.8m raised to grow the business and strengthen the balance sheet for investment opportunities. 2016 2011 Fund completed and delivers IRR to unit holders of 42.1%. Credit facility secured for US$5.7m. Listed on ASX with A$15m raise. 14 Litigation Capital Management Limited LCM closes LCM Global Alternative Returns Fund I at US$150m. LCM enters a non-exclusive arrangement with global law firm DLA Piper. 2020 2021 LCM diversifies its capital structure by securing US$50m credit facility. LCM establishes an office in London. LCM delists from the ASX and lists on the London Stock Exchange AIM Market. ASX Placement raised A$10m, AIM IPO raised c.A$35m. 2018 2022 Fund II launched with two-thirds raised from existing investors. Parliaments of Hong Kong and Singapore pass legislation to permit litigation finance for international arbitrations. LCM establishes office in Singapore. 2017 h t w o r g d e t a r e e c c a l r o f n o i t i s o p y a d o t – 8 1 0 2 Fund II closed at US$291m. LCM delivers its strongest performance to date demonstrating the strength of the Asset Management model. 2023 15 Annual Report and Financial Statements 2023 Our Business Model This year has demonstrated our ability to deliver enhanced market-leading returns which positions us well for accelerated growth. A leading alternative asset manager in disputes funding. Shareholders Returning value through share price and dividend appreciation Investment discipline Setting strategy Strong management Fund Investors Returning capital and profits through disciplined and successful performance of funds under management Reinvestment Reinvestment Direct Balance Sheet Investments Continuation of existing portfolio Third Party Asset Management Facilitating scalability and accelerated growth Single Case Investment Investment in a single dispute globally Portfolio Investment Funding a bundle of single disputes in which LCM’s capital investment is collaterally secured against the proceeds of the entire portfolio of disputes Acquisition of Claims Investment in smaller disputes (typically insolvency based) through the acquisition or assignment of the underlying cause of action Client Successful and efficient resolution of disputes while managing risk e a r n e d o n d e l i v e r i n g v a l u e P e r f o r m a n c e f e e s a n d p r o fi t s h a r e s t fi o r p h g u o r h t h t w o r g s s e n i s u B 16 Litigation Capital Management Limited Who we serve We are an alternative asset manager specialising in disputes financing. That involves the provision of financing and risk management services to claimants in disputes globally. Our financing products are widely used from claimants that rely upon our capital as a means to justice through to large corporates who use our capital as a corporate finance product through choice. People Our people are our business and the key to long- term sustainability. The size of our business enables us to remain highly engaged with our employees. We aim to provide a culture and environment to support and facilitate performance and have aligned employee incentives with those of our shareholders. How we engage We have long-standing and deep relationships with referral sources, insolvency practitioners and law firms. Our proven track record ensures we continue to attract recurring business through our strong network, which we continue to expand; and realise new opportunities. We create value By providing our customers with financing solutions to pursue matters which would otherwise be costly, therefore taking on their risk and preserving their capital to pursue their own business opportunities. On successful completion of litigation cases we recover our investment and earn revenue through a multiple on capital invested, shared proceeds, performance and management fees Market expertise We have extensive experience in complex disputes financing with a proven track record. We are industry pioneers in financing portfolio transactions and continue to explore and develop strategies which allow us to grow and penetrate new markets. 17 Annual Report and Financial Statements 2023Our Business Model continued Our investment selection capability has enabled us to deliver market-leading returns. This positions us well amongst our industry peers and provides us with a gateway to new opportunities as we expand on our existing network. Direct investments These investments are made directly by LCM through its balance sheet. These investments comprise: • investments made by LCM where 100% of the capital commitment is made from balance sheet capital; and • direct investment where LCM co-funds together with third party funds under management (see further detail below under Asset Management Business). Upon maturity LCM receives 100% of the profits derived from the direct investment and in respect of co-funded investments a percentage of profits referable to the co-funding contribution. Asset management business Our second and larger fund has further enhanced our position as an alternative asset management business specialising in disputes financing. All qualifying investment opportunities generated by LCM are offered to the Fund and to LCM’s balance sheet on a co-funding basis. The investment is generally structured as 75% to the Fund and 25% to LCM as a direct investment, applicable for both Fund I and II. In line with our strategic objectives, this provides both LCM and our underlying Investors with a valuable opportunity to diversify significantly the disputes into which investments are made as well as allowing access to a greater part of the disputes funding market through increased capital backing. In the event that LCM continues to generate returns consistent with its 12-year track record, we expect to continue to receive out- performance fees on the majority of investments. The fee structure was supported by investors in the Fund as providing a genuine alignment between LCM’s balance sheet direct investments and Fund investments. INVESTMENT OPPORTUNITY LCM sourced THIRD PARTY FUND LCM CO-INVESTMENT 75% investment contribution 25% investment contribution MULTIPLE ON INVESTED CAPITAL (‘MOIC’) = 100% return of capital + Return on Invested Capital (‘ROIC’) RETURN TO FUND: 75% investment contribution + ROIC Performance fees: 25% LCM/75% Fund (IRR<=20%) Outperformance fees: 35% LCM/65% Fund (IRR>20%) 18 RETURN TO LCM: 25% investment contribution + ROIC Litigation Capital Management Limited Investment cycle It is important to understand the investment cycle in order to understand and measure LCM’s growth properly. The starting point for consideration is the investment period. Historically, from first capital investment through to realisation, the time for completion of LCM’s investments has on average taken 28 months. As LCM invests in larger and more complicated global disputes, that duration is expected to elongate slightly. The practical reality is that people fight longer and harder over larger amounts. Consequently, LCM’s performance on a fiscal basis relates to investments entered into some two-and-a-half years prior, with the corresponding operational expenses incurred during that same period. As a result the revenue cycle tends to flow through to profits approximately 28 months following the initial investment cycle regardless of whether the capital investment was through direct balance sheet or through third party funds. Investments previously made 100% direct from balance sheet are now reaching the end of their maturity cycle and as these approach their completion dates and materialise into liquidity events, this will generate organic cash which will be co-invested alongside our third party Fund investors, further diversifying the portfolio of investments. Fundraising Sourcing opportunity and investment commitment RE-INVESTMENT Deployment of capital and asset/portfolio management Realised returns on maturity of investments RETURN ON INVESTED CAPITAL (‘ROIC’) Cumulative net cash flow Realisation of investments Deployment of capital w o fl h s a C 0 ASSETS UNDER MANAGEMENT (‘AUM’) Opex Revenue Generation Time 19 Annual Report and Financial Statements 2023 Our Business Model continued Our Funds management model has demonstrated our ability to deliver strong returns and we remain focused on delivering further value in the future. Key performance indicators The financial year ended 30 June 2023 demonstrated our ability to deliver strong returns and grow our capital organically. Our disciplined investment selection has resulted in our strongest performance to date. We continue to focus on building out our portfolio and delivering accelerated growth across our key performance measures, enabling us to deliver long-term sustainable value in the future. We completed a final close of our second Fund at US$291 million and our first Fund has now started to deliver significant returns. We continue to witness a turbulent economy, with high inflation and interest rates. During the year we delivered meaningful growth across the majority of our key metrics which placed us in a strong position for future value creation. With our proven track record and strong underwriting skills, the outlook for the growth of our assets management business is extremely positive. Our Assets under Management grew from $414 million to $500 million and we are now progressing with committing our second larger fund. We remain committed to strategically innovating and developing finance solutions with the aim of creating sustainable long-term value for our shareholders and investors while also serving our clients’ needs. Strategic objectives: Balanced portfolio Disciplined underwriting Sustainable long-term growth through strategic innovation and evolution Our Key Performance Indicators are the metrics which provide the best reflection of growth for our business at this stage. While we place importance on measures such as revenue and operating profit, given the nature of our investments, particularly when our portfolio was at its earlier stage combined with our historical approach to recognising revenue under IFRS 15, revenue and profit have not always reflected underlying growth. This is primarily due to the timing of revenue recognition. It is equally important to understand the disparity between operating expenses incurred in one year measured against revenue recorded in that same period. Our historical average of the maturity of investments (28 months currently) means that operating expenses incurred during one financial period are better measured against the maturity of investments made in that same period, which are largely recognised as revenue some two years or more later. Management believes the following indicators are key measures of growth and shareholder value specifically relevant to LCM. These indicators should not be looked at in isolation, but rather considered together and with LCM’s financial reporting generally. 20 Litigation Capital Management Limited Group Strategies and KPIs Funds under management Link to strategy Performance FY23 FY22 FY21 150 Number of applications Link to strategy Performance Cumulative portfolio internal rate of return Link to strategy Performance 441 350 FY23 FY22 FY21 434 442 572 FY23 FY22 FY21 78% 79% 78% 0 10 20 30 40 50 60 70 80 • Fund I of US$150 million fully committed with material resolutions recognised • Final close of Fund II of US$291 million • Strong interest from new investors following a number of significant returns in Fund I Outlook • Focus on growth of our asset • management business Increase portfolio of investments under management • Targeting commitment of Fund II • Number of applications received in the last financial year was 434 commensurate with the prior year • • Conversion rate maintained at 3% is the result of a disciplined and rigorous due diligence and investment selection process Increased demand coming from larger and more sophisticated clients • Outlook • Expected increase in the number of applications as a result of the current economic environment • Expected increase in the conversion rate over time as experience of investment managers continues to develop further 12 year cumulative IRR inclusive of losses at 78% consistent with the prior year demonstrates LCM’s ability to generate consistently strong returns over a reasonable investment period -29.583 mm • Performance is a reflection of LCM’s disciplined project selection Outlook • Performance metrics will fluctuate from period to period, but expectation is that they still exhibit similar characteristics to the running portfolio metrics • Aim to deliver performance metrics within an acceptable range of historical performance Capital committed Link to strategy Performance (A$) Capital invested Link to strategy Performance (A$) Cumulative portfolio return on invested capital Link to strategy Performance FY23 FY22 FY21 104 109 176 FY23 FY22 FY21 95.5 FY23 1.78x 66 88 FY22 FY21 1.63x 1.53x • Capital committed in year • was $164 million compared to $104 million in FY22 • Total AUM increased from $414 million in FY22 to $500 million FY23 (inclusive of third party investments of $301 million) • Fund I fully committed across 26 projects with two further commitments in Fund II • 24 further direct investment projects exclusive of recoveries matters Outlook • Realisations of maturing direct balance sheet portfolio • Realisations of significance in Fund I • Continue to maintain a balanced portfolio through industry sector, geography, jurisdiction • Minimise concentration risk in individual capital commitment per investment Investment of capital was $95.9 million comprising $28.9 million direct balance sheet and $33.2 million third party fund vs $66.2 million in FY22 • Demonstrates our commitment in putting capital to work to maximise returns • Generation of organic cash further supplements our balance sheet, facilitating growth • Continued innovative finance solutions Outlook • Growth in portfolio of assets under management • The quantum of capital invested in a given period should increase over time Increased capital investments will generate organic capital through the maturing of investments over time • 0 50 100 150 200 • Consistent performance reflected in 12-year portfolio ROIC, inclusive of losses, of 1.78 compared to 1.63 in FY22 • Performance is a reflection of LCM’s disciplined project selection Outlook • Performance metrics will fluctuate from period to period, but expectation is that they still exhibit similar characteristics to the running portfolio metrics • Aim to deliver performance metrics within an acceptable range of historical performance 21 Annual Report and Financial Statements 2023We continue to grow and scale our fund management business which aligns the interests of LCM with our third party investors through our co-investment model. Each matter selected for investment will see us invest our own capital alongside that of the managed funds – normally on a 25:75 basis. Supported by our track record and underwriting capabilities, this model allows Fund investors to benefit from our ability to deliver high returns while LCM shareholders benefit from performance fees and capital leverage. Investment Portfolios and Performance In terms of investment performance metrics, LCM continues to deliver outstanding returns. With respect to every investment completed during the past 12 years, inclusive of losses, LCM has generated a return on invested capital (ROIC) of 1.78x. On a three-year rolling basis, LCM’s investment performance, again including every completed investment inclusive of losses, has generated an IRR of 76% and a ROIC of 2.09x. These performance metrics underpin the high calibre of our investment managers and their underwriting capabilities with respect to investment selection. LCM has consistently provided amongst the highest returns in our industry over a long period of time. As previously announced, LCM achieved a final close on its second fund (Global Alternative Returns Fund II) (‘Fund II’) in March 2023. Progress in terms of commitments entered into for Fund II has been strong and we currently enjoy an advanced pipeline of significant disputes, which we expect to sign into investments in the near future. Given current demand and levels of enquiry, we expect we will reach full commitment within the next 12 months. As with our historical approach, as evidenced by our investment performance metrics, we continue to build our portfolios of dispute investments in a manner that maintains diversity across claim type, industry sector and jurisdiction whilst avoiding concentration risk. We are at all times focused upon the quality of the investments that we make, rather than the quantity. CEO Review Introduction The year to 30 June 2023 was transformational for LCM as we started to realise the benefits of the asset management business model and the successful execution of our strategy to grow a third party fund management business. The resolution of a number of Fund I investments has translated into enhanced organic cash generation, allowing us to scale the business through further investment into Fund II. We welcomed an expanded team in London by recruiting additional, highly experienced litigation finance professionals and have selectively enhanced our already strong teams in Australia and in Singapore, which is increasingly a strong hub of opportunities for the Company. In London and the APAC region our enhanced teams will help us to continue to take full advantage of the current favourable market conditions. As noted in the Chairman’s Statement and as set out in more detail in the Financial Review, the Board evaluated and considered the appropriate accounting framework with respect to our portfolio of investments given the business’ evolution over recent years. The outcome being the transition to fair value accounting for litigation funding assets, which we believe will provide relevant information on the value of the underlying portfolio and better reflects our business model. Operational Review During the year LCM delivered its strongest set of results to date, both in terms of financial performance and commitments, supported by a strong cash position. As a result, we are pleased to be able to recommend a 2.25p dividend per ordinary share for shareholders. We continue to operate against a backdrop of ongoing disruption caused by high inflation, rising interest rates, geo-political tension and wider economic uncertainty. Our strong cash position will enable us to meet the ever growing demand for funding, arising from the increased level of disputes globally as a consequence of these external factors. In the current environment, this means increased demand for capital allocation to fund disputes. This market demand, together with our ability to deliver superior uncorrelated returns, places us well for future growth. 22 Litigation Capital Management Limited Portfolio of Direct Investments Portfolio by Industry Sector (Estimated A$ Capital Commitment)1 Portfolio by Industry Sector (Number of Projects) Portfolio by Region (Estimated A$ Capital Commitment)1  Class action $69m  Arbitration $33m  Commercial disputes $22m  Competition $31m  Insolvency $17m  Intellectual Property $8m  Recoveries $3m  Portfolio $2m  Class action 23%  Arbitration 17%  Commercial disputes 17%  Competition 6%  Insolvency 21%  Intellectual Property 4%  Recoveries 8%  Portfolio 4%  APAC $100m  EMEA $84m 1 . Capital commitment denotes the total estimated budget of the portfolio of projects as at 30 June 2023 converted to AUD as at the date of litigation funding agreement LCM Global Alternative Returns Fund I Portfolio by Industry Sector2 (Estimated A$ Capital Commitment)1 Portfolio by Industry Sector (Estimated A$ Capital Commitment)1  Class action $88m  Arbitration $52m  Insolvency $12m  Commercial disputes $11m  Intellectual Property $12m  Portfolio $3m  Concluded $43m  Class action $15m  Arbitration $21m  Insolvency $17m  Commercial disputes $4m  Competition $65m 1 . Capital commitment denotes the total estimated budget of the portfolio of projects as at 30 June 2023 converted to AUD as at the date of litigation funding agreement. 2. Includes Resolved matters. 23 Annual Report and Financial Statements 2023CEO Review continued People Market Environment Since relocating to the London market in late 2021, I have focused on both building out the skillset and experience of our London team, as well as expanding our origination function. LCM now has the benefit of six highly experienced investment managers in London, the majority of whom have a deep understanding of the litigation funding industry both in the UK and Europe. LCM now boasts the most experienced London team of investment managers which positions us exceptionally well given the level of enquiry for our capital being received from the London market. In terms of the Australian market, we will always consider adding to our team on an opportunistic basis; however we are satisfied that the current team is capable of meeting the demands to perform in that market. We also take a very practical approach towards our level of operating expenses in each region, ensuring that in markets where we are not seeing an expansion in the level of enquiry, that we meet that demand with an appropriate level of personnel and operating expenses generally. We constantly monitor market conditions and are in a position to react swiftly to any changes. In terms of the Asian markets, we are pleased to report an increase in activity. Whilst LCM has invested in the Asian market for many years, we first established a permanent presence with our Singapore office in 2018. In accordance with LCM’s disciplined approach, we commenced that office with a single experienced investment manager. Since that time, we have expanded those operations, such that we now have four investment managers operating in Singapore. Most recently, we have employed an investment manager with a focus on insolvency disputes with experience in the UK, Cayman Islands and Asia. We expect to see increased activity in the insolvency and restructuring space as markets continue in a higher interest rate environment and with continuing economic uncertainty. Market conditions across the various jurisdictions in which we operate continue to develop favourably. The economies in which we operate are seeing central banks continuing with their policy of increasing official rates in an effort to bring inflation under control. We continue to see disruption across many industries, some resulting from COVID hangover, some from geopolitical instability and from some economic issues. What is clear right across the markets that we service is that the economic conditions and the general uncertainty are increasing the number of quality investment opportunities we see. At one end of the spectrum, we see very significant increases in the number of liquidations, both voluntary and court appointed, whereby an insolvency practitioner is appointed to an insolvent corporation. That dynamic over time will see an increase in opportunities from that sector. That is of particular interest to LCM given its extensive experience in insolvency related disputes and our deep relationships with insolvency practitioners. At the other end of the market we service, we have large sophisticated and well capitalised corporates. Those within the corporates who manage finance, and in particular disputes budgets, as well as risk, have a more sympathetic disposition toward exploring litigation finance as a tool to manage capital and risk in current markets. Having now worked directly in the UK market for almost two years, I can make some informed observation regarding opportunity. I came to the London market with 18 years’ experience in the litigation finance industry, predominantly in the Australian and Asian markets. The litigation finance market has developed quite differently in the Australian market than elsewhere in the world. That experience gives me particular insight into parts of the market which remain either undeveloped or underserviced in the United Kingdom. Having now had the opportunity to obtain a direct insight from referral sources, in particular the dominant dispute lawyers, I can say that there remains significant opportunity for LCM in this region. LCM is now very well placed to address the UK market with a highly experienced London team and an exceptional working culture. 24 Litigation Capital Management Limited I have also observed, particularly in the past 12 months, a contraction in available capital within the litigation financers operating in this region. There is certainly less competition with respect to applications than there was two years ago when I arrived. This leverages this great opportunity for us. In July of this year and post year end, the Supreme Court of the United Kingdom delivered a judgment which resulted in certain litigation funding arrangements being subject to the Damages-Based Agreement Regulations 2013 in the UK. The Damages-Based Agreement Regulations 2013 prescribe certain requirements for fee arrangements between solicitors and their clients whereby their remuneration for the provision of legal services is determined as a percentage of the financial benefit comprising the outcome of the dispute. Whilst most commentators accept that the Regulations were passed to regulate the relationship between a solicitor and client, the Supreme Court decision has made those Regulations relevant to litigation funding arrangements whereby the funder’s returns are calculated by reference to a percentage of damages. That decision has affected the market in the UK in different ways. Some litigation financers have been affected more than others. LCM is fortunate to be affected only in a very minor way. First, there are a very small number of litigation funding arrangements in the UK, which will require small amendments. Overwhelmingly, our fee structure is calculated by reference to a multiple of invested capital rising over time. With respect to the small number of funding arrangements which are affected by the decision, a minor component to the funding arrangement involves a percentage. LCM is in the process of renegotiating that small number of arrangements and we are very confident that the decision will not impact LCM’s existing portfolio, or its business moving forward. Secondly, and importantly, LCM does not have any funding arrangement which has been concluded in the United Kingdom involving a percentage which might be the subject of an argument that amounts ought to be repaid. Therefore, overall, LCM’s existing and future business will be almost completely unaffected by the decision. Accounting Standards As previously announced, we conducted a review of our accounting approach following the evolution of our business over recent years. This led to a transition in the way we value our portfolio of investments to Fair Value accounting. We managed this task with discipline and rigour. We believe the benefit of this transition will facilitate a better understanding of the underlying value in our portfolio of investments. As funded matters progress over time, value is attributed to each of the investments based upon that progress and certain observable milestones, providing a greater degree of transparency. In developing a valuation methodology, LCM can draw upon not only a large pool of data but also its many years of experience in the litigation finance industry. LCM’s business has been investing in disputes for approximately 25 years. Very few of our peers can point to experience of that nature or duration. The model, which has been developed to value Litigation Funding Assets on an individual investment level considers, among other things, discounting future investment cash outflows and realisations to reflect a cost of capital, time and risk. LCM worked with external advisors at EY in developing the model. Strategy LCM’s future strategy is to continue building the scale of its business. That is achieved by three important building blocks. Over the years I have made reference to the three building blocks necessary to establish a successful litigation finance business, which also provide the foundation for building scale. The first is maintaining the strict discipline of our due diligence and underwriting processes. LCM has an exceptionally strong track record when it comes to investment performance. It is important that we maintain the discipline of our due diligence processes as we build scale. Secondly, there is the need for adequate capital to fund growth; that is, capital to invest. Fundamental to our success is our ability to construct our portfolios of disputes with diversity across industry sector, dispute type and jurisdiction, whilst avoiding concentration risk. To a certain extent, that requires a degree of scale. LCM continually considers 25 Annual Report and Financial Statements 2023CEO Review continued the diversity of its capital structure. In 2020, we commenced our funds management business; and we are now actively committing Fund II. During the next financial period, LCM will take steps towards launching Fund III and will carefully consider the appropriate size of that fund. Additionally, we will continue to review other aspects of our capital structure, such as debt, in order to optimise our cost of capital. Finally, in order to effectively build the scale of LCM’s business, we need to continually monitor and refine the way we gain access to quality investments through our origination platform. As noted above, we have already taken steps to bolster the skillset and capacity of our London team to take advantage of market opportunity. We have also expanded both our team and the particular skillsets in our Singapore office so as to accommodate increasing demand for capital and increasing applications in the area of insolvency and restructuring. We have considered new territories and jurisdiction over a number of years. We think about expansion into new territories very carefully and with discipline. With signs of a contracting market in the litigation finance industry, we are seeing an increased volume of applications coming from the US market as well as Canada. We are also receiving inward enquiries to represent LCM’s interest in those jurisdictions by experienced teams. This is an ongoing process and in circumstances where we are sufficiently comfortable about having a presence in jurisdictions and territories in which we currently do not operate, we will take advantage of those opportunities. Outlook As set out above and reported to the market together with our interim results, the prevailing market conditions in all of the territories and jurisdictions in which we operate are conducive to growing our business and are driving demand for LCM’s capital. We expect those market conditions to continue into the medium term. We also expect that there will be a significant increase in the number of appointments of external administrators and liquidators in insolvency, which will translate into increased applications in the future. That is of particular benefit to LCM given its long history of funding disputes arising from insolvency and restructuring. We are also able to draw upon the experience gained following the global financial crisis, which generated many disputes seeking a source of finance. Secondly, we are seeing a tightening and contraction of the competitive landscape in the litigation finance industry. We see this in several markets, including the United Kingdom, the US and Canada. Having built LCM’s expertise and capacity in the London market, as well as having access to capital through our funds management business, LCM is well placed to capitalise on those industry conditions. LCM’s Fund I has enjoyed a number of resolutions in the preceding financial period. The performance of those investments has been very strong. In addition, we are seeing more opportunities in the market and expect to materially achieve commitments in LCM Fund II in the financial period ahead. Both of those factors will position LCM well for launching its third Fund. Our fund management strategy is delivering third party capital for investment. Our referral network in Europe and APAC is delivering the high quality investment opportunities that will underpin our generation of value and cash to Fund investors and LCM shareholders. What this means is that, as we continue to grow, increased activity levels will not need to be matched with proportionate increases in overall costs and this in turn means greater profitability and cash generation. Patrick Moloney Chief Executive Officer 26 Litigation Capital Management Limited Market Overview and Outlook In Australia our status as a market leader with longevity operating as a funder of class actions, commercial claims and insolvency claims positions us for continued success. SUSANNA TAYLOR HEAD OF INVESTMENTS APAC Australia • Class actions continue to be a profitable investment for LCM with new areas arising for class action claims. • Economic conditions likely to result in increase in insolvency related claims • Increased opportunity for funding of commercial disputes in particular in the areas of mining, trade credit insurance and construction and infrastructure disputes Class Actions Australia has one of the most developed class actions regimes in the world. The significant body of jurisprudence which has developed in Australian class actions since 2012 means that outcomes are predictable and LCM can make sound investment decisions based on this developed jurisprudence. Litigation funding is an entrenched part of the class actions landscape in Australia with the courts having an understanding of how it operates and what an acceptable return is for a funder investing in a class action. In December 2022, the current federal government effectively reversed the regulatory changes which were introduced in 2020 requiring litigation funders involved in class actions to hold an Australian Financial Services Licence (AFSL) and for class actions to be registered as managed investment schemes effectively removing any legislative regulation of class actions. Class actions of course continue to be regulated by the courts; in particular in the exercise of their supervisory jurisdiction to approve the settlement of class actions. In May 2023, LCM announced the settlement of a class action it had funded against the Commonwealth of Australia on behalf of persons who are alleged to have suffered loss and damage as the result of the contamination of their land at seven sites around Australia in proximity to Department of Defence military bases. This settlement is subject to court approval and following that approval, LCM will announce the details of its financial performance of this investment. A number of other Australian class actions which LCM has invested in are significantly advanced and are likely to be concluded either in FY24 or in early FY25. 27 Annual Report and Financial Statements 2023Market Overview and Outlook continued Asia • LCM is a market leader in Singapore with a growing team • Increasing number of applications for funding in diversified claim types LCM has now been operating in Singapore since 2018 being one of the first litigation funders to open following the legislative changes to allow the funding of international arbitration. That was extended to domestic arbitration and certain proceedings in the Singapore International Commercial Court in 2021. LCM funded the first domestic arbitration commenced in 2021 and the first SICC funded proceeding in 2021. LCM is recognised as a market leader in Singapore with Roger Milburn being recognised as Band 1 for litigation funding in South East Asia (together with only one other individual). We have also built out our Singapore office adding three further investment managers, bringing the headcount of this office to four. These four investment managers are highly experienced disputes lawyers who are uniquely placed to take advantage of the rising number of disputes in this region. They have a breadth of experience as litigators with our latest investment manager to join the Singapore team being an insolvency disputes lawyer with significant experience in complex cross-border insolvency, corporate restructuring and recovery, shareholder disputes, and a wide range of distressed funds work. In FY2023, the Singapore office considered 116 applications for funding. This was an increase from 94 in FY2022. We are also seeing an increased diversity in the claim types being considered by this office. What was originally mostly commercial arbitration has now expanded to treaty arbitration, insolvency claims, intellectual property claims, shareholder disputes and insurance disputes. We are anticipating a significant increase in the number of funded claims generated by our Singapore office and we have a significant portion of our second managed Fund earmarked for the funding of disputes from Singapore. We are seeing new areas for class actions develop beyond the traditional areas of shareholder class actions against companies for breaches of continuous disclosure obligations, environmental torts and product liability claims. These developing areas include class actions seeking damages for data breaches, class actions against big tech for anti-competitive conduct resulting in inflated prices for consumers and class actions against providers of complex financial products. These new grounds for class actions will provide fertile ground for investment and LCM with its close relationships with plaintiff law firms is extremely well placed to receive these opportunities. Tightened economic conditions Global economic conditions of inflation, increased interest rates and cost of living and economic pressure are being keenly felt in Australia where the rate of insolvencies is continuing to increase. We have seen significant companies fail particularly in the construction and property development and retail industries. LCM has a long history of the funding of insolvency related disputes in Australia and this experience coupled with its deep relationships means that it is uniquely placed to take advantage of these economic conditions over the next financial period. Commercial disputes We are seeing an increase in commercial disputes in Australia requiring funding in a number of specific areas. One is providers of trade credit with claims against their insurers for the default by the underlying commodities traders on their finance arrangements. The disruption to the global supply chain caused by the pandemic placed significant pressure on commodities traders and there is a vast volume of these insurance disputes many of which are to be litigated in the Australian courts. Another area where we are seeing increased interest in the funding of commercial disputes is in the mining sector. Australia has a significant number of small cap mining companies who may find themselves in significant disputes but without the capital to fund these disputes. Some of these disputes are bilateral treaty claims where a mining asset has been appropriated by a sovereign nation and others are contractual disputes with larger operators particularly in the mining services sector. We anticipate that commercial claims in these areas and others will increase in Australia over the coming period providing significant investment opportunity for LCM. 28 Litigation Capital Management Limited SECTION TWO Financial Review Financial Review Risk Management and Internal Controls Sustainability Report 30 39 46 Financial Review We have delivered our strongest results to date, demonstrating the capability our asset management model has in delivering accelerated organic growth. This year was a defining year for LCM as we delivered our strongest results to date. The asset management business has demonstrated our ability to deliver strong returns not only for our third party investors but for our underlying equity shareholders. Leveraging third party capital provides us with a platform to scale and grow organically, through the use of alternative sources of capital. LCM’s brand continues to strengthen, as we demonstrate, year-on-year, our ability to deliver strong and meaningful accretive returns, with metrics that outperform industry peers. Our unparalleled track record and investment selection capabilities are underpinned by the strength of our Investment Managers and Executive team. Our ability to scale through our asset management business, coupled with our proven track record, has delivered a record year in terms of profits and commitments which places us well for accelerated growth. During the year ended 30 June 2023, we generated record income from the realisation of investments of A$181 million on a consolidated basis and A$84 million on an LCM stand-alone basis. Commitments increased to A$176 million. We successfully completed a third and final close of Fund II at US$291 million in a difficult fundraising environment with continued interest rate rises and started to deliver meaningful returns from investments in Fund I which places us in a strong position for subsequent fund raises. We maintained our strong financial performance with a 12-year ROIC of 1.78x. We are pleased with the momentum the portfolio has made during the year and expect further legacy matters to crystalise in the coming year, providing us with meaningful organic capital for further investment. Transition to Fair Value accounting The evolution of the business over recent years has necessitated the need for our Board to review the Company’s accounting policies to ensure they provide an appropriate representation of the underlying business model. In careful consultation with our advisors, a decision was made to transition to Fair Value accounting to provide investors with a greater level of information that better reflects both the current business model and the intrinsic value of our portfolio of investments. In developing our framework we also looked to industry peers for alignment in methodology, the benefit being that adopting a similar methodology provides a level of comparability. The precise timing and proceeds of the outcomes are difficult to predict accurately and therefore the actual outcome is inherently uncertain and likely to differ from the fair value assessment. The Group has developed a framework that addresses the litigation or arbitral process across the various jurisdictions, taking into consideration the varying degrees of risk associated with each stage and jurisdiction. A Discounted Cash Flow approach is then applied to each underlying investment on an individual basis. LCM standalone results, comparatives and restatement Following the evolution of our business model and the launch of the Funds Management business in March 2020, which led to a shift towards an Asset Management model, this necessitated a transition to Fair Value accounting. Consequently, the consolidated financial statements for the Statement of Financial Position for the period ended 30 June 2021 as well as the Consolidated Statement of Profit and Loss and Other Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated 30 Litigation Capital Management Limited Statement of Changes in Equity and the Consolidated Statement of Cash flows together with the accompanying Notes for the 12-month period ended 30 June 2022 have been restated to reflect the impact of the adoption of AASB 9 in those periods. The performance of the business presented below has been presented in accordance with the Australian Accounting Standards (AASB) and the International Financial Reporting Standards (IFRS). AASB requires the consolidation of our managed Funds as LCM has exposure, or rights, to variable returns from its co-investment with the Funds. Consequently, third party interests have been consolidated in the financial statements. Both management and the Board believe that the Funds should be excluded from the presentation of our financial performance to provide a clearer understanding of the underlying performance attributable to LCM and its shareholders. The tables following provide a full reconciliation of the Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position both under our historical accounting policies and the newly adopted Fair Value accounting, to provide investors with meaningful financials and to bridge the transition from one accounting standard to the next. Note that these are non-AASB measures and may not be directly comparable with adjusted measures of other companies. They are not a substitute for or replacement of AASB measures. We have delivered meaningful value through our business model which will continue to create increased long-term shareholder value. MARY GANGEMI CHIEF FINANCIAL OFFICER 31 Annual Report and Financial Statements 2023Financial Review continued Historical accounting under IFRS 15 Income Statement AASB as reported 30 June 2023 $’000 Fund interests* $’000 LCM-only 30 June 2023 $’000 AASB as reported 30 June 2022 $’000 Fund interests* $’000 LCM-only 30 June 2022 $’000 Revenue from contracts with customers Litigation service revenue Performance fees 156,191 24,598 96,591 59,600 47,350 180,789 96,591 – 24,598 84,198 53 47,403 Litigation service expense (53,255) (21,965) (31,290) (16,343) Gross profit Other income Interest income Expenses Employee benefits expense Depreciation expense Corporate expenses Finance costs 127,534 74,626 52,908 31,060 18 178 (9,474) (166) – 129 – – 18 49 – 1 (9,474) (8,841) (166) (65) (3,547) (673) (4,220) (8,268) (144) (8,124) (3, 229) (4,703) 207 1 208 (81) 127 – – – – – – Fund administration expense (2,368) (1,178) (1,190) (3,169) (2,099) Foreign currency (gains)/losses (5,081) (3,904) (1,177) (370) (270) 47,143 52 47,195 (16,262) 30,933 – 1 (8,841) (65) (3,499) (4,703) (800) (100) Total expenses (28,904) (4,553) (24,351) (20,377) (2,369) (18,008) Profit before income tax 98,827 70,202 28,625 10,684 (2,242) 12,926 Analysed as: Adjusted operating profit 110,633 71,524 39,109 Non-operating expenses (3,539) (1,178) (2,360) Finance costs (8,268) (144) (8,124) Profit before income tax expense 98,827 70,202 28,625 20,164 (4,778) (4,703) 10,684 127 20,037 (2,369) (2,409) – (4,703) (2,242) 12,926 Income tax expense (6,864) – (6,864) (4,040) – (4,040) Profit/(loss) after income tax expense for the period Profit for the period is attributable to: 91,963 70,202 21,761 6,644 (2,242) 8,886 Third party interests in the Fund 70,202 70,202 – (2,242) (2,242) – Owners of Litigation Capital Management Limited Other comprehensive income for the year, net of tax Total comprehensive income for the period 21,761 – 21,761 8,886 – 8,886 91,963 70,202 21,761 6,644 (2,242) 8,886 1,513 (673) 2,187 (2,535) (432) (2,103) 93,476 69,528 23,948 4,109 (2,674) 6,783 * Elimination of third party interests Fund I and Fund II. 32 Litigation Capital Management Limited Fair Value accounting under IFRS 9 Consolidated Statement of Comprehensive Income Note Gain on financial assets at fair value through profit or loss Movement in financial liabilities related to third party interests in consolidated entities Total income Other income Interest income Employee benefits expense Depreciation expense Corporate expenses Finance costs Fund administration expense 5 5 7 7 7 7 Restated AASB as reported 30 June 2023 $’000 Fund interests* $’000 LCM- only 30 June 2023 $’000 AASB as reported 30 June 2022 $’000 Fund interests* $’000 LCM- only 30 June 2022 $’000 184,735 117,051 67,684 103,852 39,041 64,811 (111,953) (111,953) – (36,672) (36,672) – 72,782 5,098 67,684 67,180 2,369 64,811 18 178 – 129 18 49 (9,474) (166) (4,220) – – – (9,474) (166) (4,220) – 1 (8,841) (65) (3,499) – – – – – – 1 (8,841) (65) (3,499) (8,268) (144) (8,124) (5,037) (334) (4,703) (3,028) (1,178) (1,850) (3,618) (1,765) (1,853) Foreign currency (gains)/losses (5,081) (3,905) (1,176) (370) (270) (100) Total expenses Profit before income tax expense Analysed as: Adjusted operating profit Non-operating expenses Finance costs Profit before income tax expense Income tax expense 8 Profit after income tax expense Other comprehensive income for the year, net of tax Total comprehensive income for the period (30,237) (5,227) (25,010) (21,430) (2,369) (19,061) 42,741 53,885 (3,020) (8,124) 42,741 (11,256) 31,485 2,187 33,672 – – – – – – – – – 42,741 45,751 53,885 (3,020) (8,124) 53,916 (3,462) (4,703) 42,741 45,751 (11,256) 31,485 (11,141) 34,610 – – – – – – – 45,751 53,916 (3,462) (4,703) 45,751 (11,141) 34,610 2,187 (2,103) (2,103) 33,672 32,507 – 32,507 * A financial liability at fair value through the income statement is recognised in the parent entity in relation to the transactions entered into with certain Fund structures to support the financing of LFAs. These arrangements fail the derecognition principles in IFRS 9 and represent the net share of the overall LFA at fair value apportioned to the Funds. 33 Annual Report and Financial Statements 2023 Financial Review continued The performance of the business should be assessed together with our key performance metrics such as growth in commitments and assets under management, to provide a more holistic representation of the performance of the business during the year and a more accurate indication of the scale of growth in our underlying portfolio of investments. The business of litigation finance involves a series of investments into disputes which historically take, on average, approximately 29 months to complete. Those investments may resolve before or after that monthly average and our expectation is that time to resolution will increase to between 36 and 42 months in the future. While a review of the business model resulted in a transition to fair value accounting which better reflects the underlying value of the portfolio of investments as they progress, cash flow fluctuations from one year to the next will continue as a consequence of the actual timing of resolutions. Adjusted profit before tax inclusive of third party interests was A$53.9 million in line with the prior period under our restated financials. A reconciliation of adjusted profit is provided below: Statutory profit before tax Add: Other transaction costs Share-based payments Other expenses Non-recurring consultancy fees Litigation fees Finance costs Fund administration costs Adjusted operating profit AASB as reported 30 June 2023 $’000 AASB as reported 30 June 2022 $’000 42,741 45,751 56 867 57 0 190 8,124 1,850 53,885 401 256 80 183 689 4,703 1,853 53,916 34 Litigation Capital Management Limited Historical accounting under IFRS 15 Statement of Financial Position Current assets AASB as reported 30 June 2023 $’000 Fund interests* $’000 LCM only 30 June 2023 $’000 AASB as reported 30 June 2022 $’000 Fund interests* $’000 LCM only 30 June 2022 $’000 Cash and cash equivalents 104,457 21,484 82,973 49,964 20,711 29,253 Trade and other receivables Contract costs Other assets 21,934 47,199 617 – 21,934 21,141 26,058 34,491 21,634 – – 75 542 614 (624) 34,491 21,634 1,238 Total current assets 174,207 42,700 131,507 106,703 20,087 86,616 179,922 102,804 77,118 162,763 83,130 79,633 211 356 492 – – – 211 356 492 182 646 249 – – – Total non-current assets 180,981 102,804 78,177 163,840 83,130 355,188 145,504 209,684 270,543 103,217 182 646 249 80,710 167,326 68 – 700 7,791 11,513 54,915 227 7,535 7,769 – 623 3,214 – – – 4,321 7,769 – 623 12,840 5,817 7,023 68 – 14,494 14,494 700 28,102 – 20,311 9,148 68,976 283 – – – 9,148 68,976 283 11,513 54,915 227 – – – 70,773 76,447 (5,674) 81,780 86,794 (5,014) 149,180 165, 107 76,447 79,661 72,733 85,446 148,435 176,537 87,694 107,105 61,641 69,432 190,081 65,843 124,238 94,006 (3,888) 97,894 Non-current assets Contract costs Property, plant and equipment Intangible assets Other assets Total assets Liabilities Current liabilities Trade and other payables Tax payable Borrowings Employee benefits Non–current liabilities Deferred tax liability Borrowings Employee benefits Third party interests in consolidated entities Total non-current liabilities Total liabilities Net assets Total current liabilities 15,927 3,214 12,713 * Elimination of third party interests in Fund I and Fund II. 35 Annual Report and Financial Statements 2023Financial Review continued Fair Value accounting under IFRS 9 Restated AASB as reported 30 June 2023 $’000 Fund interests* $’000 LCM only 30 June 2023 $’000 AASB as reported 30 June 2022 $’000 Fund interests* $’000 LCM only 30 June 2022 $’000 Consolidated Statement of Financial Position Note Assets Cash and cash equivalents 9 104,457 21,484 82,973 49,964 20,711 29,253 Trade and other receivables Due from resolution of financial assets Financial assets at fair value through profit or loss Contract costs Property, plant and equipment Intangible assets Other assets Total assets Liabilities Trade and other payables Tax payable Employee benefits Borrowings Third party interests in consolidated entities 2,209 11,873 – – 2,209 11,873 2,298 24,340 – – 2,298 24,340 391,410 225,642 165,768 296,980 142,403 154,577 37,277 31,782 37,277 211 356 1,110 – – – 211 356 78 1,032 – – – 31,782 182 646 (623) 1,489 182 646 866 548,903 247,204 301,699 407,058 162,491 244,567 7,535 7,769 906 68,976 3,214 – – – 4,321 7,769 906 12,840 5,817 7,023 68 927 – – 68 927 68,976 69,409 14,494 54,915 10 11 12 13 14 15 26, 29 243,990 243,990 – 142,180 142,180 – Deferred tax liability 8 36,259 – 36,259 32,704 – 32,704 Total liabilities Net assets 365,435 247,204 118,231 258,128 162,491 95,637 183,468 – 183,468 148,930 – 148,930 * Elimination of third party interests in Fund I and Fund II. 36 Litigation Capital Management Limited Cash LCM only cash on balance sheet as at 30 June 2023 was $83.0 million and long-term borrowings was $69.0 million, compared with $29.3 million and $54.9 million respectively for the same period in 2022. LCM cash generated from the resolution of matters during the period was $96.8 million, as compared to $26.6 million in FY22, reflecting the benefits of leveraging third party capital through our asset management business model to generate organic cash flows for further investment. Payments related to capital invested was $36.3 million, compared to the same prior period in FY22 of $29.8 million. The following waterfall is exclusive of third party fund interests. 96.8 (36.3) (11.5) (0.2) (0.2) (6.0) 9.6 (1.8) 3.3 83.0 29.3 Cash balance at beginning of period Cash generated from Litigation Investments Capital deployed in Litigation Investments Expenses Property, plant and equipment Exceptional items Interests Proceeds from borrowings Payments for placement fees FX Cash balance at end of period The following financial and non-financial KPIs are measures we believe are relevant to the performance of our business and reflect progress in the growth of our assets under management, portfolio of investments and shareholder value. During the year: • Inclusive of third party funds, Realisations from the resolution of investments increased to A$180.8 million compared to A$47.4 million in the prior period, the resolution of investments directly attributable to LCM increased by 78% to A$84.2 million from A$47.2 million in the prior year; • Investment Commitment was A$176 million inclusive of third party funds, increasing from A$104 million in FY22; • 12-year cumulative portfolio Return on Invested Capital (ROIC) was 1.78x; • LCM operating expenses (exclusive of third party funds, of A$13.9 million increasing from A$10.9 million in the prior period; • Applications received were 434 from 442 in FY22, a decrease of 2%; and • Statutory profit before tax and adjusted operating profit on an LCM only basis in line with the prior period under the restated financials of A$42.7 million and A$53.9 million respectively. 37 Annual Report and Financial Statements 2023Non-operating expenses of A$3 million include; A$1.9 million of costs related to fund administration, A$0.8 million of share-based payment expenses and A$0.3 million related to other non-recurring expenses (see Note 7) (FY22: A$3.5 million). We have delivered a record set of results. Finance costs On 22 February 2021, the Company entered into a credit facility with Northleaf Capital Partners to provide the Company with additional investment capital. Northleaf is a global private markets investment firm, with experience in the litigation finance sector. The Credit Facility, which is secured against LCM’s assets, is available for general corporate purposes, and has an overall term of four years. The coupon comprises a base rate of 8% per annum together with a profit participation calculated by reference to the profitability of LCM’s direct investments. In all circumstances, the overall cost of the facility is capped at 13% per annum. The Credit Facility was available to be drawn down during the first two years. The facility otherwise contains the usual financial covenants and reporting conditions of a facility of this nature. Dividend As previously announced and following the financial performance of the business in the period ended 30 June 2023, the Board has decided to pay a dividend of 2.25p per ordinary share to Shareholders. The Board remains committed to returning value to shareholders while also maintaining a disciplined approach to preserving the right levels of cash to meet any increase in demand for investments in order to accelerate growth in our portfolio. Mary Gangemi Chief Financial Officer Financial Review continued Portfolio update Capital invested during FY23 was A$95 million inclusive of A$58 million third party fund investments, compared to A$68 million in FY22, inclusive of A$38.5 million of third party fund investment on a cash basis. LCM’s ability to originate deals and deploy capital is a measure of its growth and future performance as the value of our future profits is derived from the capital we deploy in our investments at the time a resolution is achieved. LCM’s portfolio of investments comprises 52 investments as at 30 June 2023 with 20 direct balance sheet investments, 20 Fund I co-investments and 12 Fund II investments. Total LCM commitments at the period end were A$183 million comprising A$73.7 million 100% direct investments, A$59.5 million Fund I commitments and A$49.8 million Fund II commitments. We continued to maintain diversity across our portfolio across industry sector, jurisdiction and capital commitment, in line with LCM’s investment philosophy. Financial performance During the year we had a number of significant resolutions from our Fund which translated into meaningful cash returns for LCM and fund investors. The Group’s overall realisations from investments was A$180.8 million, A$84.2 million of which is directly attributable to LCM. This compares with A$47.4 million and A$47.2 million respectively in the prior period. Adjusted operating profit directly attributable to LCM was A$53.9 million, in line with the prior period and statutory profit before tax was A$42.7 million compared with A$45.8 million in the prior period. The Group’s portfolio of Investments at the period end had a value of A$428.7 million, A$203 million exclusive of third party funds but inclusive of A$37 million of legacy investments held as contract assets. Gains during the period was A$67.7 million of which A$16.2 million was related to unrealised gains attributable to LCM. Operating expenses directly attributable to LCM of A$13.9 million for the period ended 30 June 2023 increased by 27% compared to A$10.9 million in FY22. We continue to expect to see an increase in operating costs as we expand, however these are expected to remain appropriate relative to the size of the portfolio under management. 38 Litigation Capital Management Limited Risk Management and Internal Controls An integral part of our business’ success is our ability to identify and manage risk. Risk management Understanding the risks our business faces is fundamental to our long-term viability. We aim to continually and proactively monitor developments in the industry ahead of time to ensure we have in place the appropriate processes to manage them. Litigation funding as an industry is evolving each year with developments, particularly in England, gaining attention from the wider market. The recent Supreme Court ruling created uncertainty in the market as investors endeavoured to understand its wider implications on the litigation funding industry. This turn of events demonstrated the control systems we have in place as the potential risks associated with this potential decision were identified ahead of time allowing us to assess the impact on our business and mitigate accordingly. We continue to monitor all risks associated with our business and portfolio of disputes, including the changing landscape in each jurisdiction we operate in. We continue to enhance our approach to risk management each year. Our ability to identify, assess, manage and monitor risk is a key component to our success. We continually acquire new skills over time which further develops our investment approach, enabling us to continue to make effective investment decisions which translate to returns, allowing us to reinvest and grow. The controls we have aim to manage and mitigate risk but they do not eliminate risk entirely nor do they provide an absolute assurance against loss. Risk management framework The Board retains ultimate responsibility of risk management and sets the Group’s risk appetite. The Board delegates responsibilities to the Risk and Audit Committee and day to day oversight to the Executive Management team. The Executive Management team, led by the Group CEO, monitor and manage the risks appropriate for the business within the boundaries set by the Board. The Board also recognises that effective risk management requires commitment of people throughout the business and encourages a culture of open communication. The Board continues to develop and implement a comprehensive conduct framework which focuses on mitigating the risk of poor performance or other conduct risks. Our proven risk management process involves applying our rigorous investment selection criteria to each and every investment not only at the outset but continuously throughout the life of each investment. This process has developed over our history and demonstrates a clear understanding of what is likely to constitute a successful and profitable dispute project. This process is central to the discipline LCM has shown when sourcing deals, which has been fundamental to our financial strength. Across all core legal claim sectors we operate in; commercial claims, class actions, insolvency, arbitration and corporate portfolios, LCM’s investment managers consider applications for financing against our five 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 or uncertain points of law; 3. written evidence – the claim should be supported by clear evidence that 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 or respondent has the capacity to meet a judgment or award of the size that will be sought; and 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 of following these criteria, LCM only provides funding to between 3 – 7% of applicants received. This process forces restraint when making investments and mitigates the risk of financial loss and the temptation of an unnecessary acceleration of growth. Our portfolio of investments are overseen by our investment managers who are responsible for ensuring that each disputes project continues to meet the five key criteria and is expected to achieve the funder’s return at the likely completion date. 39 Annual Report and Financial Statements 2023Risk Management and Internal Controls continued Financial reporting processes We maintain policies and procedures to facilitate accurate and timely record keeping which provides a true and fair view of our business performance. We review these policies and procedures on an ongoing basis to ensure they remain appropriate as the business grows and evolves. Our strong Internal control and risk management framework ensures the integrity of our business and the quality of the information we produce. Finance members in our Sydney and London offices provide an additional layer of oversight across various finance functions and provide frequent reporting to help assess the business’ actual performance against anticipated performance. Finance work closely alongside the investment management teams to provide them with timely and relevant information with respect to their existing investments as well as their pipeline enabling the team to participate in the review of our portfolios’ performance on an ongoing basis. LCM has robust controls around payments that incorporate both internal and external systems and ensure accurate and timely maintenance of records. We have further enhanced our financial systems platform over the years to provide efficiencies and allow for scalability. These controls provide reasonable assurance that payments have been approved through the correct authorisation channels and we continue to look at ways to strengthen our existing controls to deal with the increasing threats of cyber security. Our internal policies and procedures also ensure that transactions are recorded in the necessary manner to enable compliance with International Financial Reporting Standards (IFRS) and the Australian Accounting Standards Board (AASB). LCM maintains its AML/KYC function through an online global onboarding and monitoring software system which streamlines our already robust function and allows us to better manage our global requirements. Principal risks and uncertainties The table following outlines the principal risks and uncertainties facing LCM together with mitigation measures which are intended to provide a reasonable but not definite level of protection. This is not a complete list of all the risks, as matters or events not currently known to the Board or management could emerge. 40 Litigation Capital Management Limited Effective risk management is integral to the success of the business and requires involvement of people at every level. Risk Mitigation Movement Strategic risk Effects of competition The effects of competition could reduce margins if competition drives a reduction in pricing. During the past year, we have seen some compression in the market as smaller operators have failed due to the tightened availability of credit.  The larger funders who LCM considers to be its direct competitors continue to compete with LCM for opportunities in the regions in which we operate. That said, we have not seen this competition have any downward pressure on pricing which may be the result of the increase in funding opportunities globally coupled with less funders operating in the market. In addition we differentiate ourselves from our competitors through our three primary strategies which allow us to diversify our offering. Continuous innovation allows us to operate across the entire spectrum and provide funding solutions to counterparties who use funding out of both choice and necessity. Each finance arrangement is bespoke and tailored to meet the specific needs of the funded party. Our experience, which is reflected in our long-standing track record, puts us in a good position against other peers in the market particularly as against newer players. The global addressable market for disputes financing is extremely large and remains hugely underpenetrated. Ability to raise third party capital Failure to raise third party capital could significantly impede growth opportunities potentially presenting competitors with an advantage to monetise on missed opportunities. Alongside our credit facility, we have, through the resolution of matters in our mature portfolio, adequate balance sheet capital to grow our investment portfolio. Additionally, we continue to look at innovative solutions and attractive investment options to expand our investor reach. We have fully committed Fund I and have started to realise significant returns within this portfolio of investments. Additionally, we closed our second Fund at US$291 million prior to the realisation of significant resolutions in Fund I. These attractive performance returns place us in a strong position for future growth and fund raises. Deployment of capital Failure to invest capital in a timely manner can have an adverse effect on the performance of our portfolio and the returns to our underlying investors. It could also be detrimental to our ability to raise further capital. Our robust investment process is fundamental to our success. We regularly monitor the performance of each of our investments to ensure delivery against our own internal expectations. In terms of capital commitment, we monitor all investments on a regular basis to ensure that the portfolio does not suffer from concentration risk in any one project.   41 Annual Report and Financial Statements 2023Risk Management and Internal Controls continued Risk Mitigation Movement Investment risks Failure to originate investment opportunities and invest capital selectively and successfully can lead to reputational damage and may cause adverse financial losses. Operational risk Loss of key personnel Our employees are fundamental to our success. Failure to attract and retain highly skilled and experienced investment managers could have a negative impact on the success of our investments. Additionally, the loss of staff could cause disruptions to our ability to deliver to our strategic objectives. Loss of key relationships The risk of financial loss as a result of losing key relationships. This could have an adverse effect on our ability to generate new business through our long- standing relationships with law firms and insolvency practitioners. LCM continues to maintain a robust and disciplined investment selection process. LCM provides funding to only between 3 - 7% of the applications it receives.  LCM places great significance on maintaining performance in line with our historical levels. Our rigorous investment process includes peer review by our team of highly experienced investment managers as well as external expert advice to ensure strict adherence to our investment criteria. This process demonstrates LCM’s restraint from the temptation of unnecessary growth which may not create long term value for shareholders and investors. LCM measures all investment opportunities against its environmental, social and corporate governance statement. We also limit our investment risk by ensuring we maintain a balanced portfolio of investments by jurisdiction, industry sector and capital commitment. Current instability in global markets is likely to lead to increased insolvency and bankruptcy. This is a factor that continues to attract attention. Executives remain focused on achieving high levels of staff satisfaction and regularly consider succession planning. Staff are encouraged to take relevant training or professional development throughout the year. We continue to invest in our workforce and look to hire talent that can contribute to the success of our business.  We have a robust recruitment process in place and offer competitive remuneration alongside long-term incentive schemes which we monitor and develop to remain competitive. We continuously carry out peer reviews and appraise the due diligence and underwriting techniques as well as investment monitoring. In addition, LCM monitors the performance of all staff including investment managers to ensure the highest level of performance, integrity and diligence. Our clients, shareholders and investors are at the heart of everything we do. We continue to develop and cultivate relationships with existing clients and we place great value on their importance to LCM. We also continuously seek to develop new alliances.  We serve clients fairly and always maintain a transparent relationship. Equally, the skill and experience of service providers and, in particular, law firms providing legal services, is fundamental to our successful performance and delivering on our objectives. LCM continues to monitor service provider risk through its investment managers and through its due diligence and underwriting policies. Additionally, we have observed that during times of market instability people tend to rely greatly on existing relationships. 42 Litigation Capital Management Limited Risk Mitigation Movement Disruption to systems Disruptions to our systems could impact our ability to operate. It could also result in a reduced level of service to our clients. An attack on our systems could jeopardise the security of the firms and/or client data which in turn could cause reputational damage. LCM operates on a cloud based system providing flexibility and operational resilience.  Our business continuity and disaster recovery plan has been proven to deliver a stable platform for all staff globally, in light of the challenges faced over recent years and the shift towards providing flexibility to work from home. We monitor and test our continuity and disaster recovery plan to ensure it operates effectively and in line with our requirements. We have continued to invest in and upgrade our information technology systems to ensure that we continue to work efficiently with minimal risk of disruption or loss of data. Cybercrime, fraud or security breaches The risk of failure to protect our Information Technology systems and confidential information related to our clients and litigation matters, which could lead to a breach in our data protection obligations or cause loss of data or financial loss. Regulatory risk Regulatory risk arises as a result of both the regulations specific to the jurisdictions in which we operate and the laws in those jurisdictions. Additionally, each country in which we operate may look to further regulating the industry in which we operate, which could lead to disruption of our business operations and have adverse impact on the potential to generate profits. We continue to monitor and assess our compliance with requirements of the General Data Protection Regulation (GDPR) for privacy issues.  Our servers are held externally with a major global cloud based vendor to better align with our global expansion and comply with requirements of the GDPR for privacy issues. We continue to upgrade our defences for cyber security as the threat of cybercrime continues to challenge businesses globally. We adhere to all AML (Anti Money Laundering) and KYC (Know Your Customer) checks required and continue to monitor these with real-time data and feedback on customers and investors. In many jurisdictions, with the exception of Singapore and Hong Kong, litigation financing is almost entirely unregulated or regulation is light touch. In Singapore and Hong Kong, there is a light regulatory regime which is monitored for continued compliance.  The previous regulation in Australia requiring funders to hold an Australian Financial Services Licence and class actions to be registered as managed investment schemes has been wholly reversed by the current federal government. Management continues to monitor the changing regulatory landscape to ensure it remains in a position to operate without hindrance. The UK Supreme Court Ruling in relation to Damage Based Awards will have some impact on the industry. We continue to monitor the evolving landscape in the UK market to ensure we are aware of risks before they emerge, and develop appropriate mitigating factors. Management actively monitors changes in the law in various jurisdictions on an application by application basis; and if there are legal issues which arise particular to a jurisdiction, external advice is obtained. 43 Annual Report and Financial Statements 2023Risk Management and Internal Controls continued Risk Financial risk Liquidity Liquidity risk is the risk the Company has a lack of sufficient resources, readily realisable assets or access to capital at commercially viable terms to continue to make investments or meet its current obligations. This could have an adverse effect on the value of investment assets. FX risk Foreign exchange risk is the risk that LCM will sustain losses due to adverse movements in currency exchange rates which may arise from transactions and investments denominated in foreign exchange currencies. Credit risk Exposure to financial losses to LCM as a result of a client’s inability or unwillingness to pay LCM its contractual entitlement. Mitigation Movement Finance closely monitors liquidity and cash flow to ensure the Company continues to operate within the risk appetite set by the Board.  The Finance function actively monitors and manages working capital to enable the Company to meet its obligations as they fall due. The Company utilises its credit facility to supplement the balance sheet. Finance closely manages all financial covenant and reporting requirements with respect to the facility, to ensure compliance is maintained at all times. LCM maintains a strong balance sheet with organic cash generation from investments reaching maturity beginning to materialise and expected to continue in the short to mid term. Additionally, LCM has significant control over its investments including the contractual right to cease funding where the prospects of the claim have changed or the economic viability of the investment has deteriorated. Finance monitors the currency risk associated with respect to the timing for both the budget deployment for litigation projects and the expected return of those costs and our contractual return.  Additionally, consequent to entering into a USD credit facility, Finance regularly reviews its overall FX exposure and assesses any hedging requirements needed to mitigate FX risk. We keep a proportion of our cash in the currencies in which we expect the majority of these expenses to occur, to best manage the impact of foreign exchange risk caused by rate movements. LCM does not hedge the expected return from litigation projects given the tenor of this exposure.  As part of the initial stages of LCM’s investment process Investment managers ensure there is 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 that will be brought. This is a detailed analysis which may involve obtaining an asset tracing report or considering the detailed terms of an insurance policy. In addition, all of LCM’s litigation funding contracts require that any recovery on the investment be paid into a solicitor’s trust account or escrow account. The funded client is not entitled to be paid any part of this recovery until LCM has been paid the amount it is owed on its investment. The solicitors directly contract with LCM to distribute the funds in accordance with these terms. 44 Litigation Capital Management Limited Risk Mitigation Movement Adverse costs In certain jurisdictions in which LCM operates, it provides an indemnity against an adverse costs result. That means that LCM underwrites the risk of an unsuccessful litigant being ordered to pay the successful litigant’s legal costs. Key business process risk On most occasions, in those jurisdictions where that service is offered, the risk is laid off through after the event insurance (‘ATE’). This is an insurance policy taken out in the name of LCM which covers it for this adverse cost risk.  Where there is no risk of a costs order being made for which LCM would be liable to pay, LCM expressly disclaims any liability for adverse costs in its litigation funding contract. We face the risk of errors arising from processes around the valuation of our portfolio of Litigation Assets which could compromise our financial reporting or expose the Group to unanticipated financial loss, or damage to our reputation. This could in turn reduce our profitability. We manage this risk through an established framework which has been developed, whereby key inputs into the valuation process go through various stages of review and are challenged and assessed as appropriate by the CEO, CFO, Head of Investments APAC and Head of Underwriting EMEA. Regular monitoring of the progress of the investment is reviewed on a quarterly basis by the CEO alongside senior Investment Managers. Where a significant change in expectations has been identified, it is reviewed and verified by the CEO. The Group operates within a system of internal controls that provides oversight of business processes. 45 Annual Report and Financial Statements 2023Sustainability Report Environmental, Social and Governance (ESG) Our commitment towards positively contributing towards social matters is supported by our recent success in matters achieving financial redress for those affected by unjust practices. People We place great value on our staff who are fundamental to our success. We aim to attract and retain highly talented staff who generate value and create a sustainable business. We treat all our employees fairly and ethically and we aim to provide an environment in which all our employees feel valued, engaged, and safe and can perform to the utmost of their abilities. We conduct appraisals and encourage an open dialogue with management at all times. The appraisal process is designed to improve performance by articulating individual goals and providing feedback on performance. Professional development is encouraged and ensures employees remain motivated, incentivised and working. During the past year our staff’s ongoing commitment to the long-term success of our business delivered our strongest financial performance to date. We invested further in expanding our investment team and welcomed Fiona Heyes as Head of Underwriting EMEA, Timothy Mayer as Senior Investment Manager EMEA and Adam Erusalimsky as Investment Manager in EMEA. In our Singapore office we welcomed two new investment managers, Carolina Carlstedt and Niall Hanna. We believe we have a highly motivated and experienced team who will enhance our ability to grow the asset management business, creating long-term sustainable value. Diversity and inclusion At LCM we ensure that everyone is treated equally and foster an equal opportunities approach to hiring. Our work environment is one that supports diversity and we aim to recruit the most suitable candidates with the right skill sets for the roles, regardless of their gender, nationality or ethnic background. Corporate governance LCM adopts the Quoted Companies Alliance Code (‘QCA Code’) which applies a principles based approach to good Corporate Governance. LCM has an independent Chairman and Board who are responsible for ensuring we operate ethically and transparently. LCM’s business continues to evolve and we aim to strengthen and develop our governance framework to ensure it is relevant to the business as it grows. More details on our Board, Committees and how we comply with the QCA Code can be found on pages 51 to 54. Strong Corporate Governance is crucial to the success of our business. Community and charities Our people are involved both at an individual and Company level in various charities supporting the broader communities in which we operate. Contributing to our community Walk for Justice During the period a number of our Investment Managers based out of our Australian offices participated in, and raised money for, Walk for Justice. Walk for Justice is a community event held on National Pro Bono Day. Members and supporters of the legal community walk together in a public celebration of the positive impact of pro bono legal work which helps create a safer and more just society. Redfern Legal Centre and Aboriginal Legal Service In November 2022, the court handed down a successful judgment in a case for which LCM had provided a Deed of Guarantee to cover any adverse costs. The claim was pursued by Redfern Legal Centre for a number of people who were 46 Litigation Capital Management Limited incorrectly issued with fines between $1,000 to $3,000 for an offence under the Public Health Act 2010 for failure to comply with restrictions imposed during COVID-19. The judgment resulted in the cancellation of 33,000 fines issued during COVID (many to disadvantaged or homeless people). This year, LCM again agreed to provide a further Deed of Guarantee to cover any adverse costs which will be incurred by a further client of Redfern Legal Centre who is seeking to challenge the fine issued to her during COVID for being out of greater Sydney (she was homeless at the time). It is hoped that if this legal challenge is successful it may result in the cancellation of all remaining COVID fines. Public Interest Advocacy Centre The Public Interest Advocacy Centre (PIAC) is a leading social justice and policy centre. PIAC works with people and communities who are marginalised and facing disadvantage to build a fairer, stronger society by helping to change laws, policies and practices that cause injustice and inequality. LCM supports PIAC’s Adverse Costs Order (ACO) Guarantee Fund. The ACO Fund provides protection for individual clients, to make it possible for them to bring cases that will change the system. ACO Guarantee Fund Partners make a commitment to protecting PIAC clients from adverse cost orders for cases commenced each year. In the last financial year, the ACO Fund has provided support for a test case seeking to improve conditions in immigration detention by securing fair access to essential healthcare and ending the excessive use of force in onshore immigration detention. The existence of the ACO Fund has also enabled the development of strategic litigation strategies across PIAC’s core program areas, which would otherwise be prohibited due to the costs risks presented by their scale and complexity, including: • Scoping legal interventions relating to disability rights. This work has included seeking to ensure equal access to air travel for people with disability, and ensuring equal access to rideshare services for people with disability. • Scoping a class action on the excessive and arbitrary use of handcuffs and other restraints on vulnerable people in immigration detention centres. • Investigating the use of the Racial Discrimination Act to challenge systemic over-representation of Aboriginal and Torres Strait Islander people in the child protection, youth justice and criminal justice systems. Clients and stakeholders We strive to develop and improve relationships with our clients and stakeholders. This is evident in the strong referral network we have built over the years with our law firms. We work hard to foster these relationships, which have contributed to our success over the years. We are proud that our clients and stakeholders have participated in the successful outcomes that they engage us to pursue and this is evident in our track record. We continue to work on improving the way we work in order to maintain high standards of risk management and compliance. We continue to monitor and develop our policies and procedures for data protection, anti-money laundering, and anti-bribery and corruption, as well as our regulatory obligations of being a listed entity; and provide adequate training to our staff as these develop. This ensures the interests of our clients and shareholders are always at the centre of what we do. Shareholders We place significant importance on our relationship with shareholders. We strive to maintain an open and transparent dialogue with our investors as often as practicable. Our shareholders are fundamental to the long-term success of our business. We aim to meet with Shareholders to develop an understanding of their concerns and allow them the opportunity to have an open dialogue with management. We do this predominantly through one to one meetings and investor roadshows. Environmental The nature of our business is to help facilitate claimants in achieving justice. As part of our investment criteria we ensure that we pursue cases that will be given a fair trial (read more on our legal principles in our risk report on page 39) and don’t disadvantage the claimant as a result of receiving funding (read more on proportionality in our risk report on page 39). This year we were pleased to have achieved a favourable outcome in a class action brought on behalf of land owners who have suffered diminution in the value of their land as the result of contamination with the chemical PFAS used in nearby defence bases. This would not have been possible without of the use of our funding. Our portfolio currently also includes a class action brought on behalf of the Queensland fishing industry for loss and damage resulting from environmental damage resulting from the dredging of the Gladstone port. We remain committed to developing our ESG framework to promote environmental sustainability. 47 Annual Report and Financial Statements 2023SECTION THREE Governance Board of Directors The QCA Corporate Governance Code Corporate Governance Statement Directors’ Report Auditor’s Independence Declaration 49 51 56 65 70 48 Litigation Capital Management Limited Board of Directors Jonathan Moulds Non-Executive Chairman Jonathan has extensive experience in financial services and has worked in the UK, US and Asia during his 25+ year executive career. He currently chairs Citi’s largest global subsidiary CGML and is the chair of the Financial Markets Standards Board. He is also the Senior Independent Director of IG, the listed global leveraged trading business. Jonathan spent the majority of his career at Bank of America where he became head of Bank of America’s International businesses and subsequently European President of Bank of America Merrill Lynch and the CEO of Merrill Lynch International following the merger of the two companies in 2009. He was most recently Group Chief Operating Officer at Barclays Plc. Jonathan has served on key industry associations, including the International Swaps and Derivatives Association (ISDA) as Chair, Association for Financial Markets in Europe (AFME) as Director, and Capital Markets Senior Practitioners of the UK Financial Services Authority and the Global Financial Markets Association as a member. He has a first-class honours in Mathematics from the University of Cambridge, and was awarded a CBE in the 2014 Honours List for services to philanthropy. Term of office Independent Joined the Board December 2018 Yes Committee membership Rem, Nom External directorships and commitments Chair of Citigroup Global Markets Limited (CGML) a subsidiary of Citi Group Inc. Non-Executive Director of IG Group Holdings Plc Member of AFME’s Advisory Board. David has a doctorate in geophysics/seismology, and was a founder and Executive Director of Eastern Star Gas Ltd. He has substantial natural resource related experience, having previously served as Managing Director of North Flinders Mines Ltd and CEO/ Director of Beach Petroleum and Claremont Petroleum. David is a Fellow of the Australasian Institute of Mining and Metallurgy, and a Fellow of the Australian Institute of Geoscientists. Dr David King Non-Executive Director Term of office Independent Joined the Board October 2015 Yes Committee membership ARC (Chair), Nom External directorships and commitments Non-Executive Director Renergen Ltd. Gerhard brings to LCM’s Board a long career in financial services and fund management. He has worked extensively in Europe and the US, including a 20-year-plus career at Bank of America in a number of senior management roles within the global investment bank. Gerhard was more recently a partner at Brevan Howard Asset Management, a leading global macro hedge fund. Term of office Independent Joined the Board August 2020 Yes Committee membership Rem Com (Chair) ARC (Chair), Nom External directorships and commitments Chief Investment Officer and owner of Boulder Hill LLC Gerhard Seebacher Non-Executive Director 49 Annual Report and Financial Statements 2023Board of Directors continued Patrick Moloney is a veteran of the disputes funding industry with 20 years’ experience in the space. Patrick has been a Director of LCM since 2003 and the Chief Executive Officer of the Group since December 2013. He is responsible for overseeing all litigation projects in which LCM has an investment and (as a Board member) for approving new litigation projects for funding. He has been involved in all aspects of the business including devising strategy for future growth, investor relations and corporate affairs. Patrick is one of the most experienced litigation financiers globally. Patrick Moloney Executive Director Prior to joining LCM, he was the principal of Moloney Lawyers, which he established in 2003; and specialised in commercial litigation. Patrick was admitted to practise law in 1996 and has acted in more than 200 commercial litigation disputes for clients in the Australian superior Courts. Term of office Independent Committee membership External directorships and commitments Joined the Board 2003 No n/a n/a Mary has extensive senior management experience in financial services, having managed finance functions in the UK, Europe and Asia. Mary has extensive listed company experience and has been involved with a number of corporate transactions (both buy and sell side); and her involvement in several restructures provides her with a strong background in change and people management. Mary has a Bachelor of Commerce (Accounting and Finance), is qualified as a Certified Practising Accountant (CPA Australia), and has completed the Transition to General Management programme through Executive Education at INSEAD. Mary Gangemi Executive Director Mary’s previous roles at Investment Banks and Brokers include: Bridgewell, Creditex and Canaccord. Most recently, she worked for IFG Group PLC, where she was part of the key management team that successfully sold the business to Epiris-Private Equity. Term of office Independent Committee membership External directorships and commitments Joined the Board February 2022 No n/a n/a Our Board ensures the effectiveness of Corporate Governess and offers extensive experience across various industries, to enable the company to deliver our strategy and growth objectives. 50 Litigation Capital Management Limited The QCA Corporate Governance Code The Board of LCM places great emphasis on the duty we have to our shareholders in ensuring we have a strong corporate governance framework in place. Corporate governance operates at all levels throughout the business to enable the business to operate efficiently. The Board is committed to delivering high standards of corporate governance and embedding the right practices and behaviour throughout the business. We are committed to enhancing and developing our practices to ensure they remain appropriate for our business at it evolves. The Quoted Companies Alliance has published a corporate governance code for small and mid-sized quoted companies, which includes a standard of minimum best practice for AIM companies, and recommendations for reporting corporate governance matters. From admission to the Alternative Investment Market (AIM), we have adopted the QCA Corporate Governance Code, having previously reported on our compliance with the ASX Corporate Governance Council’s Principles and Recommendations. A description of the Company’s corporate governance practices from admission are set out below. Governance principles Compliant Application of code    Principle 1: Establish a strategy and business model which promotes long-term value for shareholders. Principle 2: Seek to understand and meet shareholder needs and expectations Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long- term success LCM’s Strategy focuses principally on growth and is built around four core principles: • Maintaining a balanced portfolio • Providing funding for new claim types • Focus on expansion • Ensuring access to capital and funding match LCM’s current and future pipeline LCM considers the most important aspect of its business to be its people, who implement its strategy through the identification and assessment of litigation projects for financing. Further reading Full disclosure of the Strategy is detailed in LCM’s Strategic Report on pages 25 to 26. The Board acknowledges the importance of relationships with shareholders and seeks regular interaction with major shareholders to ensure their requirements and opinions are conveyed to the Board. Our shareholders are fundamental to the long-term success of our business and we place significant importance on our relationship with them. We strive to maintain an open and transparent dialogue with our investors as often as practicable, ensuring they understand our overall strategies and how we are delivering against them. We do this through one to one meetings, capital market days and investor roadshows. LCM intends to continue to use its annual general meeting (‘AGM’) as an opportunity to engage with its shareholders and seek their input on the management of LCM. LCM undertakes a number of steps to seek to maximise shareholders’ ability to participate in the AGM process. LCM gives serious consideration to the impact our business activities may have, not only on our clients and employees, but also in the local communities in which we operate. It goes without saying that our people are our business and are fundamental to LCM’s long-term success and to delivering shareholder value. We treat all our employees fairly and ethically and we aim to provide an environment in which all our employees feel valued, engaged, safe and can perform to the utmost of their abilities. Staff retention is important at LCM and we continue to focus on the development of our employees and ensure that they remain motivated and incentivised. We ensure that everyone is treated equally and foster an equal opportunities approach to hiring. Our work environment is one that supports diversity and we aim to recruit the most suitable candidates with the right skill sets for the roles, regardless of their gender, nationality or ethnic background. There is no financial return to LCM from the ACO Fund and our involvement represents our commitment to supporting social justice and public interest litigation. 51 Annual Report and Financial Statements 2023The QCA Corporate Governance Code continued Governance principles Compliant Application of code   Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long- term success continued Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation Principle 5: Maintain the Board as a well-functioning, balanced team led by the Chair  The Board has a significant role to play in ensuring longevity of the business through sustainable long-term growth and development strategies. The Group’s strategy means that it will rely on the networking ability of executive and senior management as well as employees to maintain active contacts and communications with legal professionals, other professionals and business and financial parties in order to provide it with Litigation Projects. LCM takes feedback from its stakeholders into account when making decisions and taking actions. Further reading See further information on our involvement in PIAC on page 47. LCM has a proven and robust risk management process. When considering new Litigation Projects, LCM applies a rigorous selection criteria, referred to as LCM’s five pillars. Once a Litigation Project has passed these initial selection criteria, LCM then applies an established investment approval process to manage and mitigate the risks associated with its Litigation Projects. The Company has established an Audit and Risk Committee which provides advice and assistance to the Board in fulfilling its corporate governance and oversight responsibilities in relation to internal and external audit, risk management systems, financial and market reporting, internal accounting, financial control systems and other items as requested by the Board. The primary objective of the Audit and Risk Committee is to assist the Board in overseeing the systems of internal control and external financial reporting of the Group. It performs this role by ensuring that the external and internal audit arrangements are appropriate and effective; the compliance arrangements are appropriate and effective fraud prevention and whistleblowing arrangements are established which minimise potential for fraud and financial impropriety; and the annual report and accounts, related internal control disclosures and any other publicly available financial information are reviewed and scrutinised. The Audit and Risk Committee Chairman shall report formally to the Board on its proceedings after each meeting on all matters within the Audit and Risk Committee’s duties and responsibilities and shall make whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed. Further reading Read more about LCMs investment risk assessment on pages 39 to 45. The Board is responsible for the overall management of the Group. The Board comprises five Directors; two Executive Directors and three Non-Executive Directors. The Company believes that it has an appropriate balance between Executive and Non-Executive Directors and meets the criteria for at least two Independent Non-Executive Directors. The board is led by the Chairman, Jonathan Moulds and the roles of Chairman and CEO are distinct. The Board has specific Audit and Risk, Remuneration and Nomination Committees covering three of the areas of the Group’s operation which the Board views as having key importance to the Group’s stakeholders. Each of these Committees have their own terms of reference which provide the necessary authorities for them to operate as they consider appropriate. Further reading Read more on our Board and Committees on pages 49 to 50. 52 Litigation Capital Management Limited Governance principles Compliant Application of code   Principle 6: Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement The Board believes its members collectively possess the appropriate balance of skills to allow it to discharge its duties and responsibilities effectively. Further reading Read more about the skills and experience of the Board on pages 49 to 50. The Board will review the effectiveness of the Board and its composition to ensure it has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively and to otherwise manage Board succession issues. The Company has established the Nomination Committee which is delegated the responsibility to lead the process for Board appointments and to ensure that the Board and its committees have an appropriate balance of skills, experience, availability, independence and knowledge of the Company to enable them to discharge their respective responsibilities effectively. The Nomination Committee has adopted formal terms of reference under which the Nomination Committee shall, amongst other matters: a. regularly review the structure, size and composition (including the skills, knowledge, experience and diversity) (including gender) of the Board and make recommendations to the Board with regard to any changes; b. give full consideration to succession planning for Directors and other senior managers in the course of its work, taking into account the challenges and opportunities facing the Group, and the skills and expertise needed on the Board in the future; c. be responsible for identifying and nominating for the approval of the Board, candidates to fill Board vacancies as and when they arise; d. be responsible for the induction of new appointments to the Board; e. make recommendations to the Board regarding membership of the Audit and Remuneration Committees, and any other Board Committees as appropriate, in consultation with the Chairmen of those Committees; and f. make recommendations to the Board regarding the re-appointment of any Non-Executive Director at the conclusion of their specified term of office (in particular, for any term beyond six years) having given due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required. The Nomination Committee Chairman shall report formally to the Board on its proceedings after each meeting on all matters within the Nomination Committee’s duties and responsibilities and shall make whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed. Further reading Read more on our Board and Committees on pages 49 to 50. 53 Annual Report and Financial Statements 2023The QCA Corporate Governance Code continued Governance principles Compliant Application of code Principle 8: Promote a corporate culture that is based on ethical values and behaviours Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board Principle 10: Communicate how LCM is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders    LCM has a very simple philosophy around ethical conduct that is entrenched within its 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. LCM’s compliance regime has grown in tandem with our international expansion and it addresses the various legal and regulatory obligations LCM has across multiple jurisdictions. The Directors have zero tolerance towards bribery and corruption and the Board has adopted an anti- bribery and corruption policy. The policy applies to all personnel of the Group including Directors, officers and employees. The policy prohibits both ‘active bribery’ (such as offering or promising to a third party benefits such as gifts, donations or awards) and ‘passive bribery’ (such as requesting, soliciting or agreeing to receive a bribe from a third party). As part of implementing the policy, the Company has a system for recording hospitality and gifts (both received and made to others) and sets out in detail guidelines for providing and accepting hospitality. The policy condemns tax evasion, whether it involves evading UK taxes or foreign taxes; and expressly prohibits the Group’s employees, consultants and agents from facilitating tax evasion by any third party. Further reading Read more on Anti-Bribery and Corruption on pages 47. The Board is responsible for the overall management of the Group. The Board has established a Remuneration Committee, a Nomination Committee and an Audit and Risk Committee and has adopted the Share Dealing Code. The Group also operates an Anti-Bribery and Corruption Policy. The Board and its Committees have an appropriate balance of skills, experience, availability, independence and knowledge of the Company to enable them to discharge their respective responsibilities effectively. Further reading Read more on our Board and committees on pages 49 to 50. The Board endeavours to keep all interested shareholders informed by regular announcements and update statements. The Directors intend to meet regularly with new and existing institutional shareholders to understand their needs and expectations. The Company invites shareholder feedback and will report it back to the Board. LCM uses its annual general meeting (AGM) as an opportunity to further engage with its shareholders. The Chairperson of the Board is ultimately responsible for shareholder communication. As soon as practicable following any general meeting has been concluded, the results of the meeting will be released through a regulatory news service and a copy of the announcements placed on the Company’s website. In the event that a significant proportion of votes was cast against any resolution at a general meeting, an explanation of the actions proposed to be taken in response would be outlined. LCM’s website is one of its key information tools and LCM endeavours to keep its website up to date, complete and accurate. Documents produced that communicate key information to shareholders will include the annual and interim financial statements, announcements released to the London Stock Exchange and investor presentations. Further reading Read more about LCM’s investment risk assessment on pages 39 to 45. 54 Litigation Capital Management Limited Corporate Governance Statement Delivering value to our shareholders through strong leadership and governance We have successfully navigated our way through a challenging market and emerged with a strengthened position that has enabled us to return value to shareholders and provide a pathway to accelerated growth. JONATHAN MOULDS CHAIRMAN Annual Report and Financial Statements 2023 55 Corporate Governance Statement effective fraud prevention and whistleblowing arrangements are established which minimise potential for fraud and financial impropriety; and the annual report and accounts, related internal control disclosures and any other publicly available financial information are reviewed and scrutinised. The Audit and Risk Committee has adopted formal terms of reference under which the Audit and Risk Committee shall, amongst other matters: a. monitor the integrity of the financial statements of the Group, including its annual and half-yearly reports, and any other formal announcement relating to its financial performance, reviewing and reporting to the Board on significant financial reporting issues and judgements which they contain having regard to the matters communicated to it by the Group’s external auditor; b. review the content of the annual report and accounts and advise the Board on whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy; c. monitor and keep under review the adequacy and effectiveness of the Group’s internal financial controls and internal control and risk management systems; d. review the adequacy and security of the Group’s arrangements for its employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters; e. review the Group’s procedures for detecting fraud; f. monitor and review the need for an internal audit function in the context of the Group’s overall risk management system; and g. oversee the relationship and matters with the external auditor and make recommendations to the Board regarding the same. The Audit and Risk Committee Chairman shall report formally to the Board on its proceedings after each meeting on all matters within the Audit and Risk Committee’s duties and responsibilities and shall make whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed. The Board The Board is responsible for the overall management of the Group. The Board meets formally and aims to meet not less than four times per year and meets informally on a more regular basis to discuss the Company’s business. In the 2023 reporting year, the Board held five meetings virtually through video conferencing and in person. Matters specifically reserved for the Board include matters relating to strategy, management structure and appointments, review of performance, corporate finance and approval of any major capital expenditure and the framework of internal controls. The Board has established a Remuneration Committee, a Nomination Committee and an Audit and Risk Committee and has adopted the Share Dealing Code. The Group also operates an Anti- Bribery and Corruption Policy, details of each are described further (see page 64). Audit and Risk Committee The Company has established an Audit and Risk Committee which provides advice and assistance to the Board in fulfilling its corporate governance and oversight responsibilities in relation to internal and external audit, risk management systems, financial and market reporting, internal accounting, financial control systems and other items as requested by the Board. The Audit and Risk Committee Charter states that this Committee shall comprise at least three members. To the extent practicable given the size and composition of the Board from time to time the Committee will consist of three Directors. Currently the Audit and Risk Committee consists of two members who during the year were Gerhard Seebacher and Dr David King who chairs the Audit and Risk Committee. The composition of the Audit and Risk Committee will be reviewed and additional members appointed as considered necessary by the Board. The Audit and Risk Committee endeavours to meet at least three times a year. In the 2023 reporting year, the Audit and Risk Committee met three times. The Committee members (and Directors when considered appropriate) are in regular contact to discuss any relevant audit and risk matters. The primary objective of the Audit and Risk Committee is to assist the Board in overseeing the systems of internal control and external financial reporting of the Group. It performs this role by ensuring that the external and internal audit arrangements are appropriate and effective; the compliance arrangements are appropriate and 56 Litigation Capital Management Limited LCM’s Audit and Risk Committee plays a critical role in ensuring adequate controls are in place and the integrity of financial reporting is maintained. Nomination Committee The Company has established the Nomination Committee which is delegated the responsibility to lead the process for Board appointments and to ensure that the Board and its Committees have an appropriate balance of skills, experience, availability, independence and knowledge of the Company to enable them to discharge their respective responsibilities effectively. The Nomination Committee shall comprise at least two members; at present the nominations committee consists of three members being Jonathan Moulds, Dr David King and Gerhard Seebacher who will chair the Nomination Committee. The Nomination Committee aims to meet at least once a year. In the 2023 reporting year, the Nomination Committee did not meet. The Nomination Committee has adopted formal terms of reference under which the Nomination Committee shall, amongst other matters: a. regularly review the structure, size and composition (including the skills, knowledge, experience and diversity (including gender)) of the Board and make recommendations to the Board with regard to any changes; b. give full consideration to succession planning for Directors and other senior managers in the course of its work, taking into account the challenges and opportunities facing the Group, and the skills and expertise needed on the Board in the future; c. be responsible for identifying and nominating for the approval of the Board, candidates to fill Board vacancies as and when they arise; d. be responsible for the induction of new appointments to the Board; e. make recommendations to the Board regarding membership of the Audit and Remuneration Committees, and any other Board Committees as appropriate, in consultation with the Chairmen of those committees; and f. make recommendations to the Board on the re- appointment of any Non-Executive Director at the conclusion of their specified term of office (in particular, for any term beyond six years) having given due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required. The Nomination Committee Chairman shall report formally to the Board on its proceedings after each meeting on all matters within the Nomination Committee’s duties and responsibilities and shall make whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed. LCM’s Remuneration Committee ensures alignment between achieving the Group’s objectives and incentivising high performance and maintaining staff retention through a balanced incentive scheme. Remuneration Committee The Board seeks to ensure that LCM adopts remuneration practices which will enable it to attract and retain high calibre and suitably qualified employees, Executives and Directors whose interests are aligned with those of shareholders. The Company has established a Remuneration Committee which is delegated the responsibility of advising the Board on developing an overall remuneration policy that is aligned with business strategy and objectives, risk appetite, values and long-term interests of the Company, recognising the interests of all stakeholders. The Remuneration Committee comprises two members who during the year were Jonathan Moulds and Gerhard Seebacher who chaired the Remuneration Committee. The Remuneration Committee aims to meet at least two times a year. 57 Annual Report and Financial Statements 2023Corporate Governance Statement continued e. review the design of all share incentive plans for approval by the Board and shareholders; f. ensure that contractual terms on termination, and any payments made, are fair to the individual, and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised; g. oversee any major changes in employee benefits structures throughout the Group; and h. agree the policy for authorising claims for expenses from the Company’s Chief Executive and Chairman of the Board. The Remuneration Committee Chairman shall report to the Board on its proceedings after each meeting on all matters within its duties and responsibilities and shall ensure appropriate disclosure of information, ensuring pensions are fulfilled, and produce a report of the Company’s remuneration policy and practices to be included in the Company’s annual report. In the 2023 reporting year the Remuneration Committee met twice, with both meetings being held virtually. Committee members are in regular contact to discuss any remuneration matters. The Remuneration Committee has adopted formal terms of reference under which the Remuneration Committee shall, amongst other matters: a. have responsibility for setting remuneration policy for all Executive Directors, the Chairman and such other members of the executive management as it is designated to consider, including pension rights and any compensation payments; b. recommend and monitor the level and structure of remuneration for senior management; c. review the on-going appropriateness and relevance of the remuneration policy; d. within the terms of the remuneration policy and in consultation with the Chairman of the Board and/or Chief Executive, as appropriate, determine the total individual remuneration package of each Executive Director of the Company, the Chairman of the Board and the designated members of executive management, including bonuses, incentive payments and share options or other share awards and in determining such packages and arrangements, give due regard to any relevant legal requirements; 58 Litigation Capital Management Limited Remuneration Report The Directors present this Remuneration Report (Report) for Litigation Capital Management Limited (LCM and together with its controlled entities, the LCM Group) for the 12 months ended 30 June 2023, of which certain tables have been audited (as noted below), and outlines key aspects of our remuneration framework. It contains the following sections:1 1. Remuneration framework 2. Remuneration details 3. Service agreement 4. Remuneration table (audited) 5. Directors’ interests (audited) 6. Other disclosures Remuneration framework Overview of remuneration framework 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. Employee remuneration and incentive policies and practice are performance-based and aligned with LCM Group’s vision, values and overall business objectives, with five guiding principles in mind: • alignment of employee pay with shareholder interests and wealth outcomes; • alignment of employee pay with fund interests and wealth outcomes; • motivation of employee behaviour to execute LCM’s strategy through an appropriate mix of fixed and variable pay elements; • delivery of a competitive remuneration framework that assists with attracting and retaining high calibre Non-Executive and employee talent to ensure business success; and • provision of a simple and transparent framework that is clear to participants and external stakeholders. 1. Audited where referenced in this report means that the relevant tables have been extracted directly from the audited 2022 financial statements and notes. Role of the Remuneration Committee The Remuneration Committee ensures that the remuneration of Directors and senior employees is consistent with market practice and sufficient to ensure that the LCM Group can attract, develop and retain the best individuals and is designed to: • attract, develop and retain Board and executive talent; • create a high-performance culture by driving and rewarding employees for achieving the Group’s strategy and business objectives; and • link incentives to the creation of shareholder and fund value. The Remuneration Committee shall meet formally at such frequency as circumstances demand for the purposes referred to above. Principal terms of the share plans During the prior year, the Committee decided it was appropriate to move away from the legacy Loan Share Plan (LSP) and Company Share Option Plan (CSOP) to the current Deferred Bonus Share Plan (DBSP) and Executive Long Term Incentive Plan (‘LTIP’), in line with other listed peers. This ensures LCM remains competitive in retaining and attracting new talent. The principal terms of the current Share Plans, determined by the Remuneration Committee, are set out below. Eligibility Deferred Share Bonus Plan (DSBP) Awards may be made to Directors and employees of the Group and its subsidiaries, at the discretion of the Remuneration Committee. Executive Long Term Incentive Plan (LTIP) Awards may be made only to Senior Executives of the Group and its subsidiaries, at the discretion of the Remuneration Committee. Timing Awards will normally only be granted after the end of a closed period (typically following the announcement of the Group’s results for any period). In exceptional circumstances, awards may be granted at other times provided that no awards may be granted during a closed period. 59 Annual Report and Financial Statements 2023Remuneration Report continued Performance conditions The Group attaches considerable importance to the role of appropriate performance-based incentives to drive sustainable long-term growth and align Directors’ and employees’ interests with the interests of shareholders and Fund investors. Accordingly, awards to Directors and senior management will ordinarily be subject to the achievement of performance conditions set by the Remuneration Committee at the date of grant. Plan limits In any 10-year period, not more than 10% of the issued ordinary share capital of the Group may be issued or be issuable under the Share Plans. These limits do not include awards which have lapsed, which are satisfied by shares purchased in the market; or include shares which are used to pay dividend equivalents. As disclosed in the AIM Admission Document, shares granted under the existing Australian Loan Share Plan prior to listing on AIM will not form part of the limits for the Share Plans nor the shares granted under the Joint Share Ownership Plan post Admission. Satisfaction of awards Options will be subject to the satisfaction of performance conditions. The Executive LTIP plan for senior executives is awarded with vesting conditions linked to fund performance over a three-to-five year period. Holding period Awards may be granted on the basis that some or all of the shares in respect of which the award vests will be held for a further period post-vesting. Awards granted under the Executive LTIP plan have a holding period up to the fifth anniversary of grant. Malus and clawback The Remuneration Committee will have the ability to reduce the number of shares subject to an unvested award (including to zero) in certain circumstances or impose additional conditions on the awards and/or require that the participant has to either return some or all of the shares acquired under the award or make a cash payment to the Company in respect of any shares delivered. The circumstances which may lead to a clawback are where the award is determined to have been granted or vested on the basis of materially inaccurate information or where the Remuneration Committee determines that the participant has committed a material breach of their contract of employment which would include, without limitation: where the participant has contributed to a material loss or reputational damage to the Group; the participant has materially breached any compromise agreement entered into in relation to their cessation of employment; or, where applicable, the participant has materially breached any of their fiduciary duties. Leaving employment If a participant leaves employment, unvested awards will normally lapse. If the participant leaves for one of the following reasons: disability, ill-health, injury, redundancy, or in other circumstances if the Remuneration Committee allows, their award will normally continue in effect and vest on the original vesting date or, if applicable, will be released at the end of the holding period. Takeovers, reorganisations, etc Awards will generally vest early on a takeover, or other change of control event, or on a voluntary winding-up of the Group. The applicable rules of the Share Plans may also contain provisions to allow for awards to be made to participants based in jurisdictions outside of Australia and the UK and to allow for the Remuneration Committee to agree special terms to allow for awards to be granted in those jurisdictions in order to comply with local practice or to avoid adverse tax, legal or regulatory consequences. Any shares issued following the vesting of awards will rank equally with shares of the same class in issue on the date of allotment except in respect of rights arising by reference to a prior record date. Remuneration details Remuneration payable to Non-Executive Directors Non-Executive Directors enter into service agreements through a letter of appointment which are not subject to a fixed term. Non- Executive Directors receive a fee for their contribution as Directors. Fees payable to Non-Executive Directors’ reflect the demands which are made on, and the responsibilities of, Directors. Directors’ fees are reviewed regularly by the Board. 60 Litigation Capital Management Limited The maximum amount of the incentive able to be earned by an Eligible Employee in any year is as follows: 1. a cash payment of up to 35% of the base salary of the Eligible Employee (Cash Incentive); and 2. an invitation to participate in the Share Plan up to a value of 65% of the base salary of the Eligible Employee. During periods of exceptional performance and at the discretion of the Remuneration Committee and Board, Eligible Employees can earn an additional award under the Share Plan. Service agreement All Executive Directors have contracts of employment. Remuneration and other terms of employment are formalised in that agreement, including components of remuneration and base salary to which they are entitled, eligibility for incentives and other benefits including superannuation and pensions. Key terms of Patrick Moloney’s employment agreement are as follows: • term of five years (commencing December 2018) with an automatic extension for a further five years unless notice is given at least one year before the expiry of the initial term that the agreement will not be extended; • a fixed salary per annum plus superannuation and is entitled to six weeks paid annual leave per year, details of which are set out in the remuneration tables below; and • LCM can terminate the agreement at any time without cause by making payment of the total remuneration and benefits 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. On appointment, all Non-Executive Directors enter into an agreement which outlines obligations and minimum terms and conditions. LCM’s Constitution provides that LCM may remunerate each Director as the Directors decide, provided that the total amount paid to Non- Executive Directors’ may not exceed: i. the amount fixed by LCM in general meeting for that purpose; or ii. if no amount has been fixed by LCM in general meeting for that purpose, A$700,000 per annum. An amount has been fixed by LCM in the Annual General Meeting of 21 November 2019 for the aggregate fee pool limit to be A$700,000 per annum. The objective of LCM’s remuneration policies with regard to Non-Executive Directors is to ensure the Group 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 their independence. LCM does not pay bonus payments or lump sum retirement benefits to Non-Executive Directors. Details of fees paid during the financial year to each Non-Executive Director are detailed below. Remuneration Details for Employees Employees of LCM are contracted under an employment agreement which incorporates a probation period generally of six months, a salary as well as an ability after 12 months of service for the employee to be eligible for a performance award discretionary bonus and participate in an incentive scheme (Eligible Employees). Each Eligible Employee will be entitled to participate in the LCM incentive scheme, the rules of which may be subject to change by LCM at any time. The award of an incentive will be discretionary and will be determined based on: 1. the financial performance of LCM as a whole; 2. the performance review of the Eligible Employee in each full financial year the Eligible Employee is employed by LCM; and 3. the financial performance of any fund managed by LCM. The performance review of each Eligible Employee will be undertaken at the end of each financial year and during that performance review each Eligible Employee will be assessed in accordance with the Eligible Employee’s Role Description (the Performance Conditions). 61 Annual Report and Financial Statements 2023Remuneration Report continued Remuneration table Remuneration table for year ended 30 June 2023 (un-audited) The table below provides remuneration for KMPs for the 12 months ended 30 June 2023 and comparatives for the year ended 30 June 2022 (audited). Cash salaries and fees $ Bonus $ Benefits $ Accrued leave Superannuation/pension Long service leave Share-based payments $ $ $ $ Total $ 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 – – – – – – – – – – 10,500 10,000 10,500 10,000 – – – – 49,111 49,111 59,611 – – 18,905 1,211 27,500 47,615 57,615 (29,023) 187,678 (29,023) 187,678 (29,023) 187,678 110,500 110,000 178,586 183,319 111,356 103,488 400,443 396,807 – – – – – – – – – – – – – – – – – – – – – – 122,721 15,546 803,581 223,947 – 518,205 13,145 13,145 13,145 63,210 252,293 241,583 1,431,891 1,518,788 63,210 375,014 257,129 2,235,472 2,260,941 63,210 375,014 257,129 2,635,914 2,657,748 Non–Executive Directors Dr David King Jonathan Moulds Gerhard Seebacher Executive Directors Mary Gangemi1 Nick Rowles–Davies Patrick Moloney Total 100,000 100,000 178,586 111,356 389,943 491,112 – 1,071,517 183,319 103,488 386,807 189,048 513,294 998,817 – – – – 140,637 – 118,249 1,562,629 1,701,158 258,886 1,952,572 2,087,966 258,886 – – – – – – – – – – – – – – – 5,709 5,709 5,709 – – – – 449 3,701 – 4,150 4,150 1. From 14 February 2022 to 30 June 2022 for the prior period. Directors’ interests Fully paid ordinary shares and unlisted partly paid shares The table below provides the number of fully paid ordinary shares and unlisted partly paid shares in the Company held by each Non-Executive Director and Executive KMP during the period ended 30 June 2023 and the previous period ended 30 June 2022: Name of the Director Description of shares Jonathan Moulds Dr David King Patrick Moloney Patrick Moloney Mary Gangemi Fully paid ordinary shares Fully paid ordinary shares Fully paid ordinary shares Unlisted partly paid shares1 Fully paid ordinary shares Gerhard Seebacher N/A 30 June 2023 Number 30 June 2022 Number 5,250,000 2,080,000 1,951,484 1,951,484 4,204,813 3,970,971 1,433,022 1,433,022 27,500 27,500 – – 1. Unlisted partly paid shares in the Company were issued at a price of $0.17 per share, wholly unpaid and will convert to a share upon payment to the Company of $0.17 per share. Further details provided in Note 15 to the financial statements. No changes took place in the interests of the Directors between 30 June 2023 and 19 September 2023. 62 Litigation Capital Management Limited Cash salaries and fees $ Bonus $ Benefits $ Accrued leave $ Superannuation/pension $ Long service leave $ Share-based payments $ Total $ 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 Non–Executive Directors Dr David King Jonathan Moulds Gerhard Seebacher Executive Directors Mary Gangemi1 Nick Rowles–Davies Patrick Moloney Total 100,000 100,000 178,586 111,356 389,943 491,112 – 1,071,517 183,319 103,488 386,807 189,048 513,294 998,817 – – – – – 140,637 118,249 1,562,629 1,701,158 258,886 1,952,572 2,087,966 258,886 – – – – – – – – – – – – – – – 5,709 5,709 5,709 – – – – – 449 3,701 4,150 4,150 – – – – – – – – – – (29,023) 187,678 (29,023) 187,678 (29,023) 187,678 10,500 10,000 – – – – 10,500 10,000 49,111 – – 49,111 59,611 18,905 1,211 27,500 47,615 57,615 – – – – – – – – – – – – – – – – – – – – 110,500 110,000 178,586 183,319 111,356 103,488 400,443 396,807 122,721 15,546 803,581 223,947 – – – 518,205 13,145 13,145 13,145 63,210 252,293 241,583 1,431,891 1,518,788 63,210 375,014 257,129 2,235,472 2,260,941 63,210 375,014 257,129 2,635,914 2,657,748 63 Annual Report and Financial Statements 2023Remuneration Report continued Other disclosures Share options The table below provides the number of options over ordinary shares in the Company held by each Non-Executive Director and Executive KMP during the financial year: Name of the Director Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Patrick Moloney 19/11/2018 25/11/2028 $0.47 1,595,058 Patrick Moloney 04/12/2017 04/12/2027 $0.60 1,000,000 Patrick Moloney 04/12/2017 04/12/2027 $0.60 1,000,000 Patrick Moloney 01/11/2019 01/11/2029 £0.7394 1,166,400 Patrick Moloney 13/10/2020 13/10/2030 £0.6655 Patrick Moloney 27/10/2021 27/10/2031 Patrick Moloney1 27/10/2021 27/10/2031 Mary Gangemi 27/10/2021 27/10/2031 Mary Gangemi 27/10/2021 27/10/2031 Patrick Moloney 07/10/2022 07/10/2023 Patrick Moloney 07/10/2022 07/10/2023 Mary Gangemi 07/10/2022 07/10/2023 Mary Gangemi 07/10/2022 07/10/2023 £1.06 £1.06 £1.06 £1.14 – – – – – – – – – – – – – 291,597 279,232 900,000 93,585 26,315 – – – – 3,303,796 169,276 1,266,455 201,325 6,352,187 4,940,852 Balance at the end of the year 1,595,058 1,000,000 1,000,000 1,166,400 291,597 279,232 900,000 93,585 26,315 3,303,796 169,276 1,266,455 201,325 11,293,039 – – – – – – – – – – – – – – 1. On 27 October 2021 Patrick Moloney, Chief Executive Officer of the Company, exercised 900,000 options (the ‘Executive Options’) at an exercise price of A$1.00. The Company has agreed to issue and allot in total 900,000 new Ordinary Shares (‘Ordinary Shares’) in the capital of the Company to Patrick Moloney which were granted under the Loan Share Plan for the sole purpose to fund the Aggregate Exercise Price of the 900,000 unlisted options. Share Dealing Code The Share Dealing Code adopted by the Company from admission to AIM applies to any person discharging management responsibility, which will apply to all the Directors, any closely associated persons and applicable employees (as each is defined in the Code). The Share Dealing Code sets out their responsibilities under the AIM Rules, FSMA and MAR and other relevant legislation. The Share Dealing Code addresses the share dealing restrictions as required by the AIM Rules and, where applicable, MAR. The Share Dealing Code’s purpose is to ensure that Directors and other relevant persons do not abuse, or place themselves under suspicion of abusing, inside information that they may have or be thought to have, especially in periods leading up to an announcement of results. The Share Dealing Code sets out a notification procedure which is required to be followed prior to any dealing in the Company’s securities. Anti-Bribery and Corruption policy The Directors have zero tolerance towards bribery and corruption and the Board has adopted an Anti- Bribery and Corruption Policy. The policy applies to all personnel of the Group including Directors, officers and employees. The policy prohibits both ‘active bribery’ (such as offering or promising to a third party benefits such as gifts, donations or awards) and ‘passive bribery’ (such as requesting, soliciting or agreeing to receive a bribe from a third party). As part of implementing the policy, the Company has a system for recording hospitality and gifts (both received and made to others) and sets out in detail guidelines for providing and accepting hospitality. The policy condemns tax evasion, whether it involves evading UK taxes or foreign taxes; and expressly prohibits the Group’s employees, consultants and agents from facilitating tax evasion by any third party. 64 Litigation Capital Management Limited Directors’ Report 1. Directors The Directors of LCM at any time during or since the end of the financial period are set out below: Jonathan Moulds Patrick Moloney Dr David King Gerhard Seebacher Mary Gangemi Further information on the current Directors in office are disclosed on page 49 of the Corporate Governance section within the Annual Report. 2. Company Secretary Anna Sandham was appointed Company Secretary of LCM in September 2016. Anna is an experienced company secretary and governance professional with 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), Graduate Diploma of Applied Corporate Governance (Governance Institute of Australia) and is a Chartered Secretary. 3. Officers who were previously partners of the audit firm There were no officers of the Group during the financial year who were previously partners of the current audit firm, BDO Audit Pty Ltd. 4. Meetings of Directors During the 2023 financial year, four Board meetings were held (not counting circular resolutions passed outside regular meetings). The following table sets out the number of Board and Committee meetings each Director attended and the number they were eligible to attend. Director David King Patrick Moloney Jonathan Moulds Gerhard Seebacher Mary Gangemi * Not a member of the Committee. Meetings Attended/Meetings Eligible to Attend Audit & Risk Board Committee Remuneration Nominations 5/5 5/5 5/5 5/5 5/5 3/3 * * 3/3 * * * 2/2 2/2 * – * – – * 5. Principal activities LCM is a global provider of disputes finance which operates two business models. The first is direct investments made from LCM’s permanent balance sheet capital and the second is fund and/or asset management. Under those two business models, LCM currently pursues three investment strategies: Single-case funding, Corporate portfolio funding and Acquisition of claims. LCM generates its revenue from both its direct investments and also performance fees through asset management. LCM has an unparalleled track record, driven by effective project selection, active project management and robust risk management. Currently headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker ‘LIT’. 65 Annual Report and Financial Statements 2023Directors’ Report continued 6. Operating and financial review Overview of the LCM Group LCM is a company limited by shares and was incorporated on 9 October 2015. LCM was admitted to trade on the Alternative Investment Market (AIM) of the London Stock Exchange on 19 December 2018 under the ticker ‘LIT’. LCM was formerly listed on the Australian Securities Exchange (ASX) between 13 December 2016 and 21 December 2018. Its registered office and principal place of business is Level 12, The Chifley Tower, 2 Chifley Square, Sydney NSW 2000, Australia. Operations LCM operates its business through a series of wholly owned subsidiaries. The principal activity of those subsidiaries is the provision of litigation finance and risk management associated with individual and portfolios of litigation projects. Information on the Group’s operations is disclosed in the Strategic Report within the Annual Report. Review of financial performance The statutory profit for the Group after providing for income tax amounted to $31,485,000 (30 June 2022 restated: $34,610,000). Further details on restatement of comparatives is provided in Note 3 to the financial statements. Further commentary on the financial results are disclosed in the Financial Review by the Chief Financial Officer in the Strategic Report within the Annual Report. Significant changes in the state of affairs The evolution of the business over recent years has necessitated the need for our Board to review the Company’s accounting policies to ensure they provide an accurate representation of the underlying business model. In careful consultation with our advisors, the Company has transitioned to Fair Value accounting, which we believe will also provide investors with a greater level of information that better reflects both the current business model and the intrinsic value of our underlying portfolio of investments. In developing our framework, we also looked to industry peers for alignment in methodology; the benefit being that adopting a similar approach provides a level of comparability. As previously conveyed, the precise timing and proceeds of the outcomes are difficult to predict accurately and therefore the actual outcome is inherently uncertain and likely to differ from the fair value assessment. The Group has developed a framework that addresses the litigation or arbitral process across the various jurisdictions, taking into consideration the varying degrees of risk associated with each stage and jurisdiction. A Discounted Cash Flow approach is then applied to each underlying investment on an individual basis. 7. Dividends Declared after end of year On 18 July 2023, the Directors declared an unfranked final dividend for the year ended 30 June 2023 of 2.25 pence per ordinary share, to be paid on 27 October 2023 to eligible shareholders on the register as at 28 September 2023. This equates to a total estimated distribution of £2,571,364, AUD equivalent as at reporting date of $4,901,96411. The financial effect of dividends declared after the reporting date is not reflected in the 30 June 2023 financial statements and will be recognised in subsequent financial reports. 1. Converted at the functional currency spot rates of exchange at the reporting date. 66 Litigation Capital Management Limited 8. Matters subsequent to the end of the financial period On 4 September 2023, LCM announced the resolution of a class action investment that forms part of LCM’s managed Global Alternative Returns Fund (‘Fund I’) and was funded directly from LCM’s balance sheet (25%) and Fund I Investors (75%). As announced previously on 15 May 2023, the class action was brought in the Federal Court of Australia against the Commonwealth of Australia on behalf of persons who are alleged to have suffered loss and damage as the result of the contamination of their land at seven sites around Australia in proximity to Department of Defence military bases. The Commonwealth has agreed to pay the sum of A$132.7 million in order to resolve the class action. A confidential deed of settlement was executed and has now been approved by the court – allowing the disbursement of funds, subject to the unlikely event of appeal. LCM expects to receive revenue of approximately A$10.6 million. That amount includes capital invested of approximately A$3.4 million together with an expected gross profit of approximately A$7.2 million. The Company’s final revenue and profit figures are subject to change pending final distribution of settlement monies. 9. Likely developments As previously disclosed, the Company took out a credit facility in February 2021 to accelerate growth and provide a bridge in a period where the resolution of matters was delayed due to impact of the pandemic. During the second half of the fiscal year 2023, a number of matters, previously delayed by COVID, resolved, strengthening the Company’s financial and cash position. Management is now exploring a number of alternative capital options to ensure we are leveraging this strength and benefiting from the most attractive terms available in the market. 10. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. 11. Directors’ interests in shares and options The relevant interests of each Director in the shares and rights or options over shares issued by LCM at the date of this report are as follows: Director Dr. David King Patrick Moloney Jonathan Moulds Gerhard Seebacher Mary Gangemi Ordinary shares1 1,951,484 Unlisted partly paid shares2 Loan Plan Shares3 and Loans Long Term Executive Plan3 Deferred Bonus Share Plan3 – – – – 4,204,813 1,433,022 6,232,287 3,303,796 169,276 5,250,000 – 27,500 – – – – – – – – – 119,900 1,266,455 201,325 1. Directors, including associated parties, interests held directly and indirectly. 2. Unlisted partly paid shares in the Group were issued at a price of $0.17 per share, wholly unpaid and will convert to a share upon payment to the Group of $0.17 per share. 3. Plans exercisable at various prices and subject to vesting conditions. 67 Annual Report and Financial Statements 2023Directors’ Report continued 12. Share Options Loan Funded Share Plan (‘LSP’) During the year the Group granted nil (2022: 1,912,489) shares under the LSP. As at the date of this report there were 7,890,408 LSPs outstanding subject to various vesting and performance conditions. There were 6,869,211 LSPs vested and exercisable as at 30 June 2023 (2022: 6,318,671). Deferred Bonus Share Plan (‘DBSP’) During the year the Group granted 1,132,692 (2022: nil) options under the DBSP. As at the date of this report there were 1,132,692 DBSPs outstanding subject to various vesting and performance conditions. There were nil DBSPs vested and exercisable as at 30 June 2023 (2022: nil). Executive Long Term Incentive Plan (‘LTIP’) During the year the Group granted 5,671,516 (2022: nil) options under the LTIP. As at the date of this report there were 5,671,516 LTIPs outstanding subject to various vesting and performance conditions. There were nil LTIPs vested and exercisable as at 30 June 2023 (2022: nil). Further details on each Plan are provided in Note 28 to the financial statements. 13. Indemnity and insurance of officers and auditors Indemnification Under the LCM Constitution, to the maximum extent permitted by the Act, LCM must indemnify each person who is or has been an Officer against any liability incurred as an Officer and may pay a premium for a contract insuring an Officer against that liability. During the financial period, LCM has paid premiums in respect of contracts insuring the Directors and officers of LCM against any liability of this nature. LCM has not, during or since the end of the financial period, indemnified or agreed to indemnify an officer or auditor of LCM or any related entity against a liability as such, by an officer 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 confidential. 14. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in Note 22 to the financial statements. The Directors are satisfied that the provision of non-audit services during the financial period, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Act. The Directors are of the opinion that the services disclosed in Note 22 to the financial statements do not compromise the external auditor’s independence requirements of the Act for the following reasons: • All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • None of the services undermine the general principles relating to auditor independence as set out in the APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Group, acting as an advocate for the Company or jointly sharing economic risks and rewards. 68 Litigation Capital Management Limited 15. Proceedings on behalf of LCM Group No person has applied for leave of a 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 in LCM’s financial statements. 17. Auditor BDO Audit Pty Ltd continues in office in accordance with section 327 of the Act. 18. Rounding of amounts LCM is of a kind referred to in 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. 19. Corporate Governance The Corporate Governance Statement can be found here: https://www.lcmfinance.com/shareholders/corporate-governance/. 20. Remuneration report The Remuneration Report can be found in the Corporate Governance section within the Annual Report. 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 Jonathan Moulds Chairman 19 September 2023 69 Annual Report and Financial Statements 2023Auditor’s Independence Declaration Tel: +61 8 7324 6000 Fax: +61 8 7324 6111 www.bdo.com.au BDO Centre Level 7, 420 King William Street Adelaide SA 5000 GPO Box 2018 Adelaide SA 5001 Australia DECLARATION OF INDEPENDENCE BY ANDREW TICKLE TO THE DIRECTORS OF LITIGATION CAPITAL MANAGEMENT LIMITED As lead auditor of Litigation Capital Management Limited for the year ended 30 June 2023, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Litigation Capital Management Limited and the entities it controlled during the period. Andrew Tickle Director BDO Audit Pty Ltd Adelaide, 19 September 2023 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. 70 Litigation Capital Management Limited SECTION FOUR Financial Statements Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statements of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report 72 73 74 75 76 115 116 71 Annual Report and Financial Statements 2023Consolidated Statement of Profit or Loss and Other Comprehensive Income For the period ended 30 June 2023 Income Gain on financial assets at fair value through profit or loss 5 184,735 103,852 Movement in financial liabilities related to third party interests in consolidated entities 5 (111,953) (36,672) Consolidated Note 2023 $’000 Restated 2022 $’000 Total income Other income Interest income Expenses Employee benefits expense Depreciation expense Corporate expenses Finance costs Fund administration expense Foreign currency (gains)/losses Total expenses Profit before income tax expense Analysed as: Adjusted operating profit Non-operating expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Items that may be subsequently reclassified to profit and loss: Movement in foreign currency translation reserve Total comprehensive income for the period Profit for the period is attributable to: Owners of Litigation Capital Management Limited Total comprehensive income for the period is attributable to: Owners of Litigation Capital Management Limited Basic earnings per share Diluted earnings per share 72,782 67,180 18 178 – 1 (9,474) (8,841) (166) (65) (4,220) (3,499) (8,268) (5,037) (3,028) (5,081) (3,618) (370) (30,237) (21,430) 42,741 45,751 53,885 53,916 (3,020) (3,462) (8,124) (4,703) 42,741 45,751 (11,256) (11,141) 31,485 34,610 2,187 (2,103) 33,672 32,507 31,485 34,610 31,485 34,610 33,672 32,507 33,672 32,507 Cents 29.53 28.33 Cents 32.65 31.64 7 7 7 7 7 7 8 27 27 Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3. The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying Notes to the Financial Statements. 72 Litigation Capital Management Limited Consolidated Statement of Financial Position As at 30 June 2023 Assets Cash and cash equivalents Trade and other receivables Due from resolution of financial assets Financial assets at fair value through profit or loss Contract costs Property, plant and equipment Intangible assets Other assets Total assets Liabilities Trade and other payables Tax payable Employee benefits Borrowings Financial liabilities related to third party interests in consolidated entities Deferred tax liability Total liabilities Net assets Equity Issued Capital Reserves Retained earnings Parent interest Total equity Consolidated Restated 2022 $’000 Restated As at 1 July 2021 $’000 Note 2023 $’000 9 10 11 12 13 14 15 104,457 49,964 49,736 2,209 11,873 2,298 2,242 24,340 4,408 391,410 296,980 176,838 37,277 31,782 28,633 211 356 1,110 182 646 866 186 391 881 548,903 407,058 263,315 7,535 7,769 906 12,840 12,308 68 927 84 601 68,976 69,409 50,424 26, 29 243,990 142,180 62,870 8 36,259 32,704 21,632 365,435 258,128 147,919 183,468 148,930 115,396 16 17 69,674 69,674 68,904 1,042 (2,012) (165) 112,753 81,268 46,657 183,468 148,930 115,396 183,468 148,930 115,396 Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3. The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying Notes to the Financial Statements. 73 Annual Report and Financial Statements 2023Consolidated Statement of Changes in Equity For the period ended 30 June 2023 Consolidated Balance at 1 July 2021 Adjustment on restatement of litigation funding assets (Note 3) Issued capital $’000 Retained earnings $’000 Share- based payments reserve $’000 Foreign currency translation $’000 Total equity $’000 68,904 20,028 1,317 (1,377) 88,872 26,629 (105) 26,524 Balance at 1 July 2021 (restated) 68,904 46,657 1,317 (1,482) 115,396 Profit after income tax expense for the year (restated) Other comprehensive income for the year Total comprehensive income for the year Equity Transactions: Share-based payments (Note 28) Contributions of equity (Note 16) – – – – 770 770 34,610 – 34,610 – – – – – – 256 – 256 – 34,610 (2,103) (2,103) (2,103) 32,507 – – – 256 770 1,026 Balance at 30 June 2022 (restated) 69,674 81,268 1,573 (3,585) 148,930 Consolidated Issued capital $’000 Retained earnings $’000 Share- based payments reserve $’000 Foreign currency translation $’000 Total equity $’000 Balance at 1 July 2022 (restated) 69,674 81,268 1,573 (3,585) 148,930 Profit after income tax expense for the year Other comprehensive income for the year Total comprehensive income for the year Equity Transactions: Share-based payments (Note 28) – – – – – 31,485 – 31,485 – – – – 31,485 2,187 2,187 2,187 33,672 – – 867 867 – – 867 867 Balance at 30 June 2023 69,674 112,753 2,440 (1,398) 183,468 Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3. The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying Notes to the Financial Statements. 74 Litigation Capital Management Limited Consolidated Statements of Cash Flows For the period ended 30 June 2023 Cash flows from operating activities Profit after income tax expense for the period Adjustments for: Note Consolidated 2023 $’000 Restated 2022 $’000 31,485 34,610 Gain on financial assets at fair value through profit or loss (72,782) (67,180) Depreciation and amortisation of intangibles Share-based payments Finance costs reclassified to financing activities Income tax expense Exceptional items Foreign exchange rate movements Change in operating assets and liabilities: (Funding) of financial assets Proceeds from resolution of financial assets Decrease/(Increase) in trade and other receivables (Increase) in contract costs – litigation contracts (Decrease)/Increase in trade and other payables (Decrease)/Increase in employee benefits Income Tax paid Net cash from/(used in) operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Refunds of security deposits Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from borrowings Repayments of borrowings Payments of finance costs Payments of transaction costs related to third party interests Contributions from third party interests in consolidated entities Distributions to third party interests in consolidated entities Payments for fund establishment and administration costs Net cash (used in)/from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 166 867 8,268 11,256 1,200 11,601 284 256 5,038 11,141 800 517 11 10 (89,049) (65,139) 192,623 26,792 (89) (5,494) (5,305) (21) (139) 56 (3,150) 516 327 (85) 84,587 (55,217) (90) (57) (51) (198) (38) (278) (19) (335) – 770 9,636 13,298 (14,848) (6,171) (1,832) – (4,637) (1,853) 74,980 45,465 (94,373) – (406) (778) (32,608) 51,859 51,781 (3,693) 49,964 49,736 2,712 3,921 15 15 29 29 Cash and cash equivalents at the end of the financial year 9 104,457 49,964 Where applicable, comparative information has been restated to reflect a change in accounting for litigation funding agreements. Refer to Note 3. The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying Notes to the Financial Statements. 75 Annual Report and Financial Statements 2023Notes to the Financial Statements 30 June 2023 Note 1. General Information The financial statements cover Litigation Capital Management Limited (the ‘Company’) as a Group consisting of Litigation Capital Management Limited and the entities it controlled at the end of, or during, the year (referred to as the ‘Group’). The financial statements are presented in Australian dollars, which is Litigation Capital Management Limited’s functional and presentation currency. Litigation Capital Management Limited was admitted onto the Alternative Investment Market (‘AIM’) on 19 December 2018. Litigation Capital Management Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 12, The Chifley Tower 2 Chifley Square Sydney NSW 2000 A description of the nature of the Group’s operations and its principal activities are included in the Directors’ Report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 19 September 2023. The Directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Where necessary, comparative amounts have been reclassified and repositioned for consistency with current year accounting policy and disclosures. Further details on the nature and reason for amounts that have been reclassified and repositioned for consistency with current year accounting policy and disclosures, where considered material, are referred to separately in the financial statements or notes thereto. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new or amended 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 significant impact on the financial performance or position of the Group. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). The financial report has been prepared on a historical cost basis, except for the financial assets and liabilities that have been measured at fair value. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in Note 24. 76 Litigation Capital Management Limited Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Litigation Capital Management Limited (‘Company’ or ‘parent entity’) as at 30 June 2023 and the results of all subsidiaries for the year then ended. Litigation Capital Management Limited and its subsidiaries together are referred to in these financial statements as the ‘Group’. The Group includes fund investment vehicles over which the Group has the right to direct the relevant activities of the fund under contractual arrangements and has exposure to variable returns from the fund investment vehicles. See Note 26. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interests in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the Group. Losses incurred by the Group are attributed to the non-controlling interest in full, even if that results in a deficit balance. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non- controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Maker (‘CODM’). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in Australian dollars, which is Litigation Capital Management Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into the entity’s functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. 77 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Fair value measurement The Group measures its financial instruments such as litigation funding agreements and financial liabilities related to third party interests at fair value at each balance sheet date. When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The Group’s Executive Leadership Committee determines the policies and procedures for fair value measurement, including the litigation funding agreements. The Committee is comprised of the Chief Executive Officer, Chief Financial Officer and Head of Investments or equivalent. The level of involvement of external valuers or specialist valuation experts is determined annually by the Committee after discussion with and approval by the Company’s Audit Committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. At each reporting date, the Committee analyses the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Group’s accounting policies. For this analysis, the Committee verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents. The Committee also compares the change in the fair value of each asset and liability with any relevant external sources to determine whether the change is reasonable. Fair value related disclosures for financial instruments and non-financial assets that are measured at fair value, or where fair values are disclosed, are summarised in the following notes: • Disclosures for valuation methods, significant estimates and assumptions Note 20 • Quantitative disclosures of fair value measurement hierarchy Note 20 • Financial instruments Note 19 78 Litigation Capital Management Limited Revenue recognition The Group recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the Group is expected to be entitled in exchange for transferring services to a customer. For each contract with a customer, the Group: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the services promised. Variable consideration within the transaction price, if any, reflects the variability of potential outcomes in awards or settlements of the litigation and any other contingent events. Such estimates are determined using either the ‘expected value’ or ‘most likely amount’ method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. Litigation service revenue The performance of a litigation service contract by the Group entails the management and progression of the litigation project during which costs are incurred by the Group over the life of the litigation project. As consideration for providing litigation management services and financing of litigation projects, the Group receives either a percentage of the gross proceeds of any award or settlement of the litigation, or a multiple of capital deployed, and is reimbursed for all invested capital. Revenue, which includes amounts in excess of costs incurred and the reimbursement for all invested capital, is not recognised as revenue until the successful completion of the litigation project i.e. , complete satisfaction of the performance obligation, which is generally at the point in time when a judgment has been awarded or on an agreed settlement between the parties to the litigation, and therefore when the outcome is considered highly probable. On this basis, revenue is not recognised over time and instead recognised at the point in time when the Group satisfies the performance obligation. Costs include only external costs of funding the litigation, such as solicitors’ fees, counsels’ fees and experts’ fees. The terms and duration of each settlement or judgment varies by litigation project. Payment terms are not defined by the Group’s litigation contracts however upon successful completion of a litigation project, being the satisfaction of the single performance obligation, funds are generally paid into trust within 28 days. The funds will remain in trust until the distribution amounts have been determined and agreed by the relevant parties, after which payment will be received by the Group. Interest Interest income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Income tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. 79 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amounts of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. 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. 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 benefit 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. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and other short- term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables generally do not have a specifically defined time frame for settlement; additionally, when the receivable is due from part of the portfolio of litigation projects, the settlement of the receivable is generally made upon an additional resolution of another litigation project within the portfolio which also may not be within a specifically defined time frame. The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. 80 Litigation Capital Management Limited Due from resolution of financial assets Amounts due from the settlement of financial assets relate to the realisation of litigation funding assets that have been successfully concluded and where there is no longer any litigation risk remaining, and represent the expected cash flow to be received by the Group. The settlement terms and timing of realisations vary by litigation funding asset. The majority of settlement balances are received shortly after the period end in which the litigation funding asset has concluded, and all settlement balances are generally expected to be received within 12 months after completion. Contract costs Contract costs are recognised as an asset when the Group incurs costs in fulfilling a contract and when all the following are met: (i) the costs relate directly to the contract; (ii) the costs generate or enhance resources of the Group that will be used to satisfy future performance obligations; and (iii) the costs are expected to be recovered. Refer to the Group’s revenue recognition policy for further information. Financial assets at fair value through profit or loss Financial assets are recognised at fair value through profit or loss and are fair valued using an income approach. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the statement of profit or loss. This category includes the Group’s litigation funding assets. The litigation funding assets are primarily derecognised when the underlying litigation resolves and transfers to Due from resolution of financial assets. Financial liabilities related to third party interests in consolidated entities Non-controlling interests where the Group does not own 100% of a consolidated entity are recorded as financial liabilities related to third party interests in consolidated entities. Financial liabilities related to third party interests in consolidated entities are initially recognised at the fair value. Gains or losses on liabilities held at fair value through profit or loss are recognised in the statement of profit or loss as ‘Net gains/(losses) relating to third party interests in financial liabilities at fair value through profit or loss’. They are subsequently measured at fair value using an income approach. Amounts included in the consolidated statement of financial position represent the net asset value of the third parties’ interests. These amounts have been elected to be measured at fair value to reduce the accounting mismatch between the related financial asset measured at fair value through profit or loss. Financial liabilities are derecognised when the obligation to settle through cash flows has expired or been transferred. Leases Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight- line basis over the lease term. The short-term lease recognition exemption applies to those leases that have a lease term of 12 months or less from the commencement date. It also applies to leases over assets that are considered of low value. Impairment of non-financial assets Non-financial assets are reviewed for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial 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. 81 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Borrowings Borrowings are initially recognised at fair value net of transaction costs incurred. Subsequent to initial recognition, borrowings are stated at amortised cost. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date, are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liabilities for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The costs of equity-settled transactions are measured at fair value on grant date. Fair value is determined using either the Monte Carlo or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non- vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The costs of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If an equity-settled award is cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. 82 Litigation Capital Management Limited Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Litigation Capital Management Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars; or in certain cases, the nearest dollar. 83 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 3. Restatement of comparative The Group has reassessed its classification of the funding of its litigation funding agreements. This involved a detailed review of the terms and conditions of these contracts and a qualitative assessment of the evolution of the Group’s business model. The Group carefully considered and formed its opinion for the appropriate accounting based on the composition of the portfolio of funded claims, the activities performed by the business, the transition to an asset management model, management’s business judgement as to this analysis and the relevant accounting standards. The change provides more relevant information on the value of the litigation funding agreements and reflects the evolution of the primary business model and changing geographic split of business. Historically the revenue receipted from the successful resolution of funded litigation funding agreements has been considered under AASB 15 as revenue with customers. AASB 15 was adopted for these arrangements and reflected our legacy business model, which was to provide a bundle of financial and risk management services related to the resolution of disputes. This resulted in a litigation asset, or contract asset classification, for all bundles of services under AASB 15. As the Group has evolved, the supporting rationale for AASB 15 has diminished with a significant reduction in the concept of a bundle of services. There remain a small number of legacy contracts where this bundle of services remains implicit in the contract and therefore AASB 15 has been retained. As a result of this reassessment, the majority of the Group’s litigation funding assets will now be recognised under AASB 9. Under this change, litigation funding agreements and third party interest in consolidated entities are accounted for as financial instruments under AASB 9. The following principles have been adopted where the underlying litigation funding arrangements satisfy the conditions of a financial instrument: • due to the nature of the expected returns the financial instruments fail the solely payments of principal and interest test (the ‘SPPI test’) in AASB 9 and are classified at fair value through the income statement • management has established a fair value framework to appropriately account for the underlying instruments at fair value • further details on the fair value methodology are shown in Note 20 • any transaction costs (i.e. directly attributable due diligence and closing costs) would be expensed in the profit and loss as they are incurred • third party interests in consolidated entities have been fair valued using the same fair value framework for the litigation funding assets As a result of implementing this accounting for litigation funding agreements for relevant contracts, the Group has restated the Statement of financial position as at 30 June 2021 and 30 June 2022, and the Statement of profit or loss and Statement of other comprehensive income for the year ended 30 June 2022 for comparative purposes. The restatement of each of the affected financial statement line items for the prior periods is as follows: Impact on equity increase/(decrease) Trade and other receivables Due from resolution of financial assets Contract costs Financial assets at fair value through profit or loss Other assets Total Assets Third party interests in consolidated entities Deferred tax liability Total Liabilities Net impact on equity 84 Consolidated 30 June 2022 $’000 1 July 2021 $’000 (32,193) 24,340 (11,601) 4,408 (152,615) (105,925) 296,980 176,838 2 136,514 60,400 21,191 81,591 54,924 – 63,720 23,106 14,090 37,196 26,524 Litigation Capital Management Limited Impact on statement of profit and loss (increase/(decrease) in profit) Income Litigation service revenue Litigation service expense Net gains/(losses) on financial assets at fair value through profit or loss Net gains/(losses) on financial liabilities related to third party interests in consolidated entities Total expenses Income tax expense Net impact on profit for the year Attributable to: Equity holders of the parent Non-controlling interests Other comprehensive income Net impact on total comprehensive income for the period Consolidated 30 June 2022 $’000 (47,350) 16,343 103,853 (36,672) (1,054) (7,101) 28,019 28,019 – 432 28,451 Impact on basic and diluted earnings per share (EPS) (increase/(decrease) in EPS) Earnings per share Basic, profit for the year attributable to ordinary equity holders of the parent Diluted, profit for the year attributable to ordinary equity holders of the parent Consolidated 30 June 2022 $’000 26.37 25.55 Statement of cash flows The change did not have a net impact on the Group’s operating, investing and financing cash flows but did require some change to components within each cash flow class. The Group has also adopted the liquidity based presentation of its balance sheet after the restatement under AASB 9 as it provides information that is reliable and more relevant. On adoption, the Group presents all assets and liabilities in order of liquidity. A presentation of assets and liabilities in increasing or decreasing order of liquidity provides information that is reliable and more relevant than a current/non-current presentation because the Group does not supply goods or services within a clearly identifiable operating cycle. 85 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 4. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Revenue from contracts with customers The entity has a small number of legacy litigation service contracts where the service provided and accordingly the litigation funding contracts are within the scope of AASB 15 ‘Revenue from Contracts with Customers’, and so are excluded from the scope of AASB 9 ‘Financial Instruments’. AASB 15 was adopted for these arrangements and reflected our legacy business model, which was to provide a bundle of financial and risk management services related to the resolution of disputes. This resulted in a litigation asset, or contract asset classification, for all bundles of services under AASB 15. As the Group has evolved, the supporting rationale for AASB 15 has diminished with a significant reduction in the concept of a bundle of services. There remain a small number of legacy contracts where this bundle of services remains implicit in the contract and therefore AASB 15 has been retained. Performance obligations and recognition of revenue In the provision of litigation management services and financing of litigation projects, management has determined that there is a single performance obligation and that complete satisfaction of that performance obligation occurs at the point in time when the Group achieves a successful resolution for the client as it is the predominant purpose of the service provided. On this basis, revenue is not recognised over time and only recognised at the point in time when the Group satisfies that performance obligation. Consolidation of entities in which the Group holds less than 100% of interests The Group has assessed the entities in which it has an interest to determine whether or not control exists and the entity is, therefore, consolidated into the Group (refer to Note 25). Where the Group does not own 100% of interests, the Group makes judgements to determine whether to consolidate the entity in question by applying the factors set forth in AASB 10, including but not limited to the Group’s equity and economic ownership interest, the economic structures in use in the entity, the level of control the Group has over the entity through the entity’s structure or any relevant contractual agreements, and the rights of other investors. Recovery of deferred tax assets Deferred tax assets includes an amount relating to carried-forward tax losses in Australia. The Group only recognises the deferred tax asset if it is probable that future taxable amounts of the Group’s business in Australia will be available to utilise those losses and therefore they are assessed as recoverable (refer to Note 8). The extent to which these amounts are recognised is based on an estimate of future taxable amounts which is a key estimate in relation to this balance. The tax losses can be carried forward indefinitely and have no expiry date. Net gains/(losses) on financial assets and liabilities at fair value through profit or loss The Group carries its financial assets and liabilities at fair value, with changes in fair value being recognised in the Statement of profit or loss. A valuation methodology based on an income approach. The fair values of these financial assets and liabilities cannot be measured based on quoted prices in active markets, and as a result a fair value methodology is utilised. The measurement valuation technique includes a discounted cash flow (DCF) model based on the Group’s estimated, risk adjusted future cash flows. The adopted discount rate reflects the funding cost of deploying capital, and is intended to capture the time value of money and market factors such as interest rates and foreign exchange rates. 86 Litigation Capital Management Limited The fair value framework incorporates assumptions, including the discount rate, the timing and amount of expected cash inflows and additional funding, and a risk-adjustment factor reflecting the inherent uncertainty in the cash flows due to litigation risk, which is dependent on observable case progression and milestones. The inputs to these models are taken from observable markets where possible; but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as case progress, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. The key assumptions used to determine the fair value of the litigation funding agreements, financial liabilities related to third party interests in consolidated entities and sensitivity analyses are provided in Note 20. Note 5. Income Realised gains on Litigation Funding assets Realised performance fees Fair value adjustment during the period Foreign exchange gains Total income as reported on the consolidated statements of profit or loss attributable to LCM Gain on financial assets related to third party interests in consolidated entities Consolidated 2023 $’000 26,879 24,598 11,134 5,073 Restated 2022 $’000 30,117 53 29,782 4,859 67,684 64,811 117,051 39,041 184,735 103,852 Movement in financial liabilities related to third party interests in consolidated entities (111,953) (36,672) Total income as reported on the consolidated statements of profit or loss 72,782 67,180 Total income as reported on the consolidated statements of profit or loss attributable to LCM represents realised and unrealised gains that relate to LCM’s funded proportion of litigation contracts. The gain and loss related to third party interests in consolidated entities represents realised and unrealised gains and losses that relate to third party funded proportions from LCM controlled entities. Realised gains relate to amounts where litigation risk has concluded and amounts are expected to be received by LCM. Unrealised gains or losses relate to the fair value movement of assets and liabilities associated with litigation contracts. Note 6. Segment information The Group’s operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers (‘CODM’)) in assessing performance and in determining the allocation of resources. The Directors have determined that there is one operating segment. The information reported to the CODM is the consolidated results of the Group. The segment result is as shown in the Statement of profit or loss and other comprehensive income. Refer to Statement of financial position for assets and liabilities. 87 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 7. Profit before tax Profit before income tax expense includes the following specific expenses: Employee benefits expense Salaries and wages Directors’ fees Superannuation and pension Share-based payments expense Other employee benefits and costs Depreciation Plant and equipment Intangible assets Interest on borrowings (Note 15) Finance costs of third party interests Other finance costs Fund administration expense General administration expenses Set-up expenses Placement fees Consolidated 2023 $’000 Restated 2022 $’000 7,337 7,337 393 287 867 590 390 254 256 604 9,474 8,841 63 103 166 41 24 65 7,689 4,376 144 435 334 327 8,268 5,037 988 209 1,831 3,028 276 1,489 1,853 3,618 Fund administration expenses relates to costs associated with the set-up and administration of the LCM Global Alternative Returns Funds which are wholly attributable to the third party interest in consolidated entities. Leases Short-term lease payments Adjusted operating profit 777 639 Adjusted operating profit excludes non-operating expenses which includes items which are considered unusual, non-cash or one-off in nature. 88 Litigation Capital Management Limited Non-operating expenses Management has opted to separately present these items as it better reflects the Group’s underlying performance. Non-operating expenses includes the following items: Share-based payments expense Consultancy Other transaction costs Litigation fees Other expenses Fund administration expenses Total non-operating expenses Note 8. Income tax expense Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense At the Group’s statutory income tax rate of 25% (2022: 25%) Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Foreign tax rate adjustments Share-based payments Other assessable income Other non-deductible expenses Unrealised foreign exchange Change in tax rate Adjustment for tax effect of loss attributable to third party interests Adjustment in respect of deferred tax of previous years Income tax expense/(benefit) Consolidated 2023 $’000 Restated 2022 $’000 867 – 56 190 57 1,850 3,020 256 183 401 689 80 1,853 3,462 Consolidated 2023 $’000 2022 $’000 42,741 45,751 10,685 11,438 (1,718) 217 143 – – (26) 64 98 – – 1,929 (433) – 11,256 – 11,141 89 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Statutory tax rate of 25% is applicable to Australian entities with aggregated turnover below $50 million for the period ended 30 June 2023. The Group’s turnover is expected to be above the threshold of $50 million in the future reporting periods which will attract a statutory tax rate of 30%. As a result, recognition of deferred tax asset is made by applying a 30% statutory rate instead of the lower 25% tax rate. Current tax Deferred tax Adjustment recognised for prior periods Income tax expense/(benefit) Deferred tax asset/(liability) Deferred tax asset/(liability) comprises temporary differences attributable to: Tax losses Employee benefits Accrued expenses Deductible funding on contract costs and financial assets Fair value adjustments to financial assets Transaction costs on share issue Deferred tax asset/(liability) Movements: Opening balance Charged to profit or loss Closing balance Note 9. Cash and cash equivalents Cash at Bank Cash of third party interests in consolidated entities Consolidated 2023 $’000 7,769 3,555 (68) 11,256 2022 $’000 59 11,072 10 11,141 Consolidated Restated 2022 $’000 Restated As at 1 July 2021 $’000 2023 $’000 14,197 13,425 273 929 279 255 (23,374) (25,195) (28,284) (21,736) – 268 (36,259) (32,704) (32,704) (21,632) (7,543) (3,555) (11,072) (14,089) (36,259) (32,704) (21,632) Consolidated 2023 $’000 2022 $’000 82,973 29,253 21,484 20,711 104,457 49,964 Cash of third party interests in consolidated entities is restricted as it is held within the fund investment vehicles on behalf of the third party investors in these vehicles. The cash is restricted to use cash flows in the litigation funding assets made on their behalf and costs of administering the fund. 90 Litigation Capital Management Limited Note 10. Due from resolution of financial assets At start of period (as restated) Transfer from realisation of litigation funding assets Proceeds from litigation funding assets Foreign Exchange gain/(losses) At end of period Consolidated Restated 2022 $’000 Restated As at 1 July 2021 $’000 4,408 50,571 2023 $’000 24,340 150,447 (192,623) (26,792) 29,708 (3,848) 11,873 24,340 4,408 Note 11. Litigation Funding Assets at fair value through profit or loss At start of period (as restated) Deployments Deployments – third party interests Realisations of Litigation Funding assets Unrealised gains for the period Foreign exchange gains/(losses) At end of period Consolidated Restated 2022 $’000 Restated As at 1 July 2021 $’000 2023 $’000 296,980 176,838 30,756 26,675 58,293 38,464 (150,447) (50,571) 136,638 101,225 19,190 4,349 391,410 296,980 176,838 Litigation Funding assets at fair value through income statement 165,768 154,577 Litigation Funding assets at fair value through income statement – third party interests 225,642 142,403 Total Litigation Funding Assets 391,410 296,980 176,838 Litigation Funding assets are financial instruments that relate to the provision of capital in connection with legal finance. The Group funds through both direct investments as well as using third party funders via a Fund model. The table above sets forth the changes in LFA at the beginning and end of the relevant reporting periods. Note 12. Contract costs – litigation contracts Contract costs – litigation contracts Consolidated 2023 $’000 2022 $’000 37,277 31,782 There are a small number of legacy investments which are still being recorded under IFRS 15 due to the timing the contracts were entered into. These are expected to resolve in the short to medium term. 91 Annual Report and Financial Statements 2023 Notes to the Financial Statements continued Reconciliation of litigation contract costs Reconciliation of the contract costs at the beginning and end of the current period and previous financial year are set out below: Opening balance Additions during the period Closing balance Consolidated Restated 2022 $’000 Restated As at 1 July 2021 $’000 28,633 28,633 3,150 – 31,783 28,633 2023 $’000 31,783 5,494 37,277 The Group has recognised impairment losses of $nil (2022: $nil) in profit or loss on contract costs for the year ended 30 June 2023. Note 13. Trade and other payables Consolidated 2023 $’000 7,001 534 7,535 2022 $’000 12,562 278 12,840 Consolidated 2023 $’000 2022 $’000 623 283 906 700 227 927 Consolidated 2023 $’000 – 68,976 2022 $’000 14,494 54,915 68,976 69,409 Trade payables Other payables Refer to Note 19 for further information on financial instruments. Note 14. Employee benefits Annual Leave Long Service Leave Note 15. Borrowings Borrowings of third party interests in consolidated entities Borrowings 92 Litigation Capital Management Limited Reconciliation of borrowings of third party interests in consolidated entities: Balance 1 July Proceeds from borrowings Repayment of borrowings Net accrued interest Payments for borrowing costs Amortisation of borrowing costs Other non-cash items Balance as at 30 June Reconciliation of borrowings of LCM: Balance 1 July Proceeds from borrowings Payments for borrowing costs Amortisation Other non-cash items Balance as at 30 June Consolidated 2023 $’000 2022 $’000 14,494 13,253 – (14,848) (16) – 34 336 – – 17 (185) 230 1,179 – 14,494 Consolidated 2023 $’000 2022 $’000 54,915 37,171 9,636 13,298 (256) 2,441 2,240 (259) 919 3,786 68,976 54,915 On 22 February 2021, LCM entered into a credit facility with Northleaf Capital Partners for an aggregate amount of US$50,000,000, AUD equivalent of $75,017,5171 (the ‘Facility’). The Facility carries interest with reference to SOFR as a benchmark based rate of 8% together with a profit participation calculated by reference to the profitability of a defined category of LCM’s investments, and a non-utilisation margin of 1% which expired after the first two years. The overall cost of the Facility is capped at 13% per annum. The Facility was available to be drawn down during the first two years, has an overall term of four years and is secured against LCM’s assets. As at 30 June 2023, LCM has nil outstanding utilisation. LCM agreed to various debt covenants including a minimum effective net tangible worth, borrowings as a percentage of effective net tangible worth, minimum liquidity, a minimum consolidated EBIT and a minimum multiple of invested capital on concluded contract assets over a specified period. There have been no defaults or breaches related to the Facility during the year ended 30 June 2023. Should LCM not satisfy any of these covenants, the outstanding balance of the Facility may become due and payable. LCM incurred costs in relation to arranging the Facility of $1,649,000 which were reflected transactions costs and will be amortised over the four-year term of the borrowings. As at 30 June 2023, $825,000 of the loan arrangement fees remained outstanding. 1. Converted at the functional currency spot rates of exchange at the reporting date. 93 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 16. Equity – issued capital Consolidated 2023 Shares 2022 Shares 2023 $’000 2022 $’000 Ordinary shares – fully paid 106,613,927 106,613,927 69,674 69,674 Ordinary shares – under loan share plan 12,586,405 12,586,405 – – 119,200,332 119,200,332 69,674 69,674 Movements in ordinary share capital Balance Date Shares $’000 30 June 2021 105,014,157 68,904 Conversion of partly paid shares paid up at $0.17 per share 22 October 2021 Conversion of options paid up at $1.00 per share 5 November 2021 Conversion of partly paid shares paid up at $0.17 per share 16 December 2021 498,583 600,000 501,187 85 600 85 Balance 30 June 2022 106,613,927 69,674 30 June 2023 106,613,927 69,674 Movements in ordinary shares issued under loan share plan (‘LSP’): Balance Issue of shares under loan share plan Issue of shares under loan share plan Balance Date Shares $’000 30 June 2021 27 October 2021 5 November 2021 30 June 2022 30 June 2023 11,073,767 612,638 900,000 12,586,405 12,586,405 – – – – – Reconciliation of ordinary shares issued under LSP: Total shares allocated under existing LSP arrangements with underlying LSP shares (Note 28) Less shares allocated under existing LSP arrangements without underlying LSP shares (Note 28) Shares held by LCM Employee Benefit Trust for future allocation under employee share and option plans 2023 2022 7,890,408 8,134,929 (221,467) (465,988) 4,917,464 4,917,464 12,586,405 12,586,405 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. 94 Litigation Capital Management Limited Ordinary shares – under loan share plan (‘LSP’) The Company has an equity scheme pursuant to which certain employees may access a LSP. The acquisition of shares under this LSP is fully funded by the Company through the granting of a limited recourse loan. The shares under LSP are restricted until the loan is repaid. The underlying options within the LSP have been accounted for as a share-based payment. Refer to Note 28 for further details. When the loans are settled the shares are reclassified as fully paid ordinary shares and the equity will increase by the amount of the loan repaid. Ordinary shares – partly paid As at 30 June 2023, there are currently 1,433,022 partly paid shares issued at an issue price of $0.17 per share. No amount has been paid up and the shares will become fully paid upon payment to the Company of $0.17 per share. As per the terms of issue, the partly paid shares have no maturity date and the amount is payable at the option of the holder. Partly paid shares entitle the holder to participate in dividends and the proceeds of the Company in proportion to the number of and amounts paid on the shares held. The partly paid shares do not carry the right to participate in new issues of securities. Partly paid shareholders are entitled to receive notice of any meetings of shareholders. The partly paid shareholders are entitled to vote in the same proportion as the amounts paid on the partly paid shares bears to the total amount paid and payable. Capital risk management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity as recognised in the statement of financial position. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The capital risk management policy remains unchanged from the 30 June 2022 Annual Report. Note 17. Equity – reserves Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 30 June 2021 Movements in reserves during the period Balance at 30 June 2022 Movements in reserves during the period Balance at 30 June 2023 Share-based payments reserve Share-based payments reserve $’000 Foreign currency translation reserve $’000 1,317 256 1,573 867 2,440 (1,482) (2,103) (3,585) 2,187 (1,398) Total reserves $’000 (165) (1,847) (2,012) 3,054 1,042 The reserve is used to recognise the value of equity benefits provided to employees and Directors as part of their remuneration, and other parties as part of their compensation for services. Foreign currency translation reserve This reserve is used to record differences on the translation of the assets and liabilities of foreign operations. 95 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 18. Equity – dividends There were no dividends declared or paid for the year ended 30 June 2023 (2022: nil cents per share). On 18 July 2023, the Directors declared an unfranked final dividend for the year ended 30 June 2023 of 2.25 pence per ordinary share, to be paid on 27 October 2023 to the shareholders on the register on 29 September 2023, being the record date. The ordinary shares will be marked ex-dividend on 28 September 2023. This equates to a total estimated distribution of £2,571,364, AUD equivalent as at reporting date of $4,901,9641. The financial effects of dividends declared after the reporting date are not reflected in the 30 June 2023 financial statements and will be recognised in subsequent financial reports. Franking credits Franking credits available for subsequent financial years based on a tax rate of 25% (2022: 25%) Note 19. Financial instruments Financial risk management objectives Consolidated 2023 $’000 2022 $’000 338 338 The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ageing analysis for credit risk. Risk management is carried out by senior finance executives (‘finance’) under policies approved by the Board of Directors (‘the Board’). These policies include identification and analysis of the risk exposure of the Group and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within the Group’s operating units. Finance reports to the Board on a monthly basis. Market risk Foreign currency risk The carrying amounts of the Group’s foreign currency denominated financial assets and financial liabilities at the reporting date were as follows: Restated Assets 2023 $’000 Liabilities 2023 $’000 Assets 2022 $’000 Liabilities 2022 $’000 203,912 (314,923) 73,582 (214,821) 173,064 (2,542) 153,762 (4,857) 1 5,614 28,087 489 – (744) – (1) 1,819 5,478 8,521 631 – (718) – (567) 411,167 (318,210) 243,793 (220,963) Consolidated US dollars Pounds Sterling New Zealand dollars United Arab Emirates Dirham Hong Kong dollars Other 96 Litigation Capital Management Limited The Group had net assets denominated in foreign currencies of $92,956,000 (assets of $411,167,000 less liabilities of $318,210,000) as at 30 June 2023 (2022 restated: net assets $22,830,000). Based on this exposure, had the Australian dollar weakened or strengthened by 10% against these foreign currencies with all other variables held constant, the Group’s profit before tax for the year would have increased and decreased respectively by $9,296,000 (2022 restated: $2,283,000). The percentage change is the expected overall volatility of the significant currencies, which is based on management’s assessment of reasonable possible fluctuations taking into consideration movements over the last 12 months. The actual realised foreign exchange loss for the year ended 30 June 2023 was $2,892,000 (2022: loss of $100,000). The movement in the foreign currency translation reserve for the year ended 30 June 2023 was a gain of $2,187,000 (2022 restated: loss $2,103,000). The restatement of litigation funding agreements and third party interest in consolidated entities as financial instruments under AASB 9 has resulted in a material increase in foreign currency risk than in previous years; however the value is predominately unrealised. Foreign exchange risk arises mainly from litigation funding assets and borrowings which are denominated in a currency that is not the functional currency in which they are measured. The risk is monitored using sensitivity analysis and cash flow forecasting. The Group’s contract cost assets are not hedged as those currency positions are considered to be long-term in nature. Interest rate risk Aside from the litigation funding agreements at fair value, the Group’s main interest rate risk arises from interest on cash at bank. An official increase/decrease in interest rates of 50 (2022: 50) basis points would have a favourable/adverse effect on profit before tax of $522,000 (2022: $250,000) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysts’ forecasts. Credit risk Credit risk refers to the risk that on becoming contractually entitled to a settlement or award a defendant will default on its contractual obligation to pay resulting in financial loss to the Group. 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. However, the Group’s continual monitoring of the defendants’ financial capacity mitigates this risk. The maximum credit risk exposure represented by cash, cash equivalents and trade and other receivables, due from resolution of financial assets and financial assets at fair value through profit or loss, is specified in the consolidated statements of financial position. The exposure for financial assets held at amortised cost is the carrying amount, net of any provisions for impairment of those assets, which includes cash, cash equivalents and trade and other receivables. The Group does not hold any collateral. To mitigate credit risk on cash and cash equivalents, the Group holds cash with Australian and American financial institutions with at least an AA- credit rating. The Group applies the simplified approach to recognise impairment on settlement and receivable balances based on the lifetime expected credit loss at each reporting date. The Group reviews the lifetime expected credit loss rate based on historical collection performance, the specific provisions of any settlement agreement, assessments of recoverability during the due diligence process and a forward-looking assessment of macro-economic factors; however note that the Group’s operations are generally uncorrelated to market conditions and therefore this has little to no impact on the recoverability of the Group’s financial assets. Financial assets are generally considered to be in default when amounts are more than 90 days past due or if sufficient indicators exist that the debtor is unlikely to pay. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than one year. 97 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Liquidity risk Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Remaining contractual maturities The maturity profiles of the Group’s financial liabilities based on contractual maturity on an undiscounted basis are: Less than 1 year $’000 Between 1 and 5 years $’000 No contractual maturity date $’000 Remaining contractual maturities $’000 Over 5 years $’000 Third party interest in consolidated entities – – Total non-derivatives 16,562 75,988 – 243,990 336,540 7,001 241 – – 9,320 75,988 – – – – – – – 7,001 241 85,308 243,990 243,990 Restated Less than 1 year $’000 Between 1 and 5 years $’000 No contractual maturity date $’000 Remaining contractual maturities $’000 Over 5 years $’000 Consolidated – 2023 Non-derivatives Non-interest bearing Trade payables Other payables Borrowings Consolidated – 2022 Non–derivatives Non–interest bearing Trade payables Other payables Borrowings 12,562 190 – – 21,047 74,414 – – – – – – – 12,562 190 95,461 142,180 142,180 Third–party interest in consolidated entities – – Total non–derivatives 33,799 74,414 – 142,180 250,393 98 Litigation Capital Management Limited Note 20. Fair value measurement The fair value measurements used for all assets and liabilities held by the Group listed below are Level 3: Assets Litigation funding assets APAC EMEA Total Level 3 assets Liabilities Financial liabilities related to third party interests in consolidated entities Total Level 3 liabilities Consolidated 2023 $’000 2022 $’000 158,836 82,203 232,574 214,777 391,410 296,980 243,990 142,180 243,990 142,180 Refer to Note 11 for movements in level 3 assets. There were no transfers into or out of level 3 during the periods ended 30 June 2023 or 30 June 2022. Sensitivity of Level 3 Valuations The key risk and sensitivity across all of the litigation funding agreement assets (‘LFA assets’) relates to the underlying litigation associated with each case that is underwritten and financed. The sensitivity to this Level 3 input is therefore considered to be similar across the different types of LFA assets and is expressed as a portfolio- wide stress. The Group implemented a new valuation methodology for LFA assets during the year ended 30 June 2023. LFA assets are fair valued using an income approach which is the technique adopted for LFA assets. Under the income approach, future cash flows associated with; cash outflows, including investments and deployments, and cash inflows such as settlements or resolutions, are converted to a single current (discounted) amount, reflecting current market expectations about those future amounts. That is, the amount that could reasonably be expected to be paid to acquire the asset at that point in time. In developing our framework we also looked to Industry peers for alignment in methodology, the benefit being that adopting a similar methodology provides a level of comparability. Similar to industry peers, the framework developed applied probabilities based on observable milestones for each investment within the portfolio as well as making informed assumptions around inputs such as discount rates, timing and risk factors, all of which are considered Level 3 inputs. In cases where cash flows are denominated in a foreign currency, forecasts are developed in the applicable foreign currency and translated to Ausralian dollars. A Discounted Cash Flow approach is then applied to each underlying investment on an individual basis to arrive at a net present value of the future expected cash flows. The cash flow forecast is updated each reporting period, based on the best available information on progress of the underlying matter at the time. These objective events could include, among others: • stage of the investment • ongoing developments • progress • recovery or sovereign risk • legal team expertise • other factors impacting the expected outcome Each reporting period, the updated risk-adjusted cash flow forecast is then discounted at the then current discount rate to measure fair value. The discount rate includes an applicable risk-free rate and credit spread to incorporate both market and idiosyncratic asset-class risk. 99 Annual Report and Financial Statements 2023Notes to the Financial Statements continued The Group’s fair value policy provides for ranges of percentages to be applied against the risk adjustment factor to more than 159 discrete objective litigation events. The tables below set forth each of the key unobservable inputs used to value the Group’s LFA assets and the applicable ranges and weighted average by relative fair value for such inputs. 2023 Item Valuation technique Unobservable Input Litigation funding asset Discounted cash flow Discount rate Duration (years) Adjusted risk premium Significant ruling or other objective event prior to trial court judgement Trial court judgement or tribunal award Appeal judgement Settlement Enforcement Other 2022 Item Valuation technique Unobservable Input Litigation funding asset Discounted cash flow Discount rate Duration (years) Adjusted risk premium Significant ruling or other objective event prior to trial court judgement Trial court judgement or tribunal award Appeal judgement Settlement Enforcement Other Min Max Weighted Ave 12.80% 12.80% 12.80% 0.42 0% 5% 25% 65% 70% 75% 0% 4.00 80% 2.94 37% 50% 80% 85% 85% 85% 45% 50% 2% 23% 11% 80% 16% Min Max Weighted Ave 9.80% 9.80% 9.80% 0.42 0% 4.00 80% 2.63 31% 5% 25% 65% 70% 75% 0% 50% 80% 85% 85% 85% 45% 58% 12% 0% 0% 80% 17% At each reporting period, the Group reviews the fair value of each litigation funding asset in connection with the preparation of the consolidated financial statements. A fair value of 10% higher or lower, while all other variables remain constant, in financial assets at fair value through profit or loss would have increased or decreased the Group’s income and net assets by $39,141,000 as at 30 June 2023 (2022 restated: $29,698,000, 1 July 2021 restated: $17,684,000). Similarly, a fair value of 10% higher or lower, while all other variables remain constant, in financial liabilities at fair value through profit or loss would have increased or decreased the Group’s income and net assets by $24,399,000 as at 30 June 2023 (2022 restated: $14,218,000, 1 July 2021 restated: $6,287,000). 100 Litigation Capital Management Limited At 30 June 2023, should interest rates have been 50 bps or 100 bps higher or lower than the actual interest rates used in the fair value estimation, while all other variables remained constant, consolidated income and net assets would have increased and decreased by the following amounts: Hypothetical Change 100 bps lower interest rates 50 bps lower interest rates 100 bps higher interest rates 50 bps higher interest rates 30 Jun 2023 $’000 2,182 1,084 (2,126) (1,070) Reasonably possible alternative assumptions The determination of fair value for litigation funding assets involves significant judgements and estimates. While the potential range of outcomes for the assets is wide, the Group’s fair value estimation is its best assessment of the current fair value of each asset, as applicable. Such estimate is inherently subjective, being based largely on an assessment of how individual events have changed the possible outcomes of the asset, as applicable, and their relative probabilities and hence the extent to which the fair value has altered. The aggregate of the fair values selected falls within a wide range of reasonably possible estimates. In the Group’s opinion, there is no useful alternative valuation that would better quantify the market risk inherent in the portfolio and there are no inputs or variables to which the values of the assets are correlated other than interest rates which impact the discount rates applied. Note 21. Key management personnel disclosures Compensation The aggregate compensation made to Directors and other members of key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated 2023 $ 2022 $ 2,188,144 2,279,794 59,611 13,145 57,615 63,210 375,014 257,129 2,635,914 2,657,748 101 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Details of the remuneration of key management personnel of the Group are set out in the following tables. Cash salaries and fees $ 100,000 178,586 111,357 389,943 2023 Non-Executive Directors Dr David King Jonathan Moulds Gerhard Seebacher Executive Directors Bonus $ Benefits $ Accrued leave $ Super- annuation/ Pension $ Long service leave $ Share- based payments $ Total $ – – – – – – – – – – – – 10,500 – – 10,500 – – – – – – – – 110,500 178,586 111,357 400,443 Patrick Moloney 1,071,517 118,249 5,709 (29,023) – 13,146 252,293 1,431,891 Mary Gangemi 491,112 140,637 – – 49,111 – 122,721 803,581 1,562,629 258,886 5,709 (29,023) 49,111 13,146 375,014 2,235,472 1,952,572 258,886 5,709 (29,023) 59,611 13,146 375,014 2,635,915 2022 Cash salaries and fees $ Bonus $ Benefits $ Accrued leave $ Super- annuation/ Pension $ Long service leave $ Share- based payments $ Total $ Non-Executive Directors Dr David King Jonathan Moulds 100,000 183,319 Gerhard Seebacher 103,488 Executive Directors Nick Rowles-Davies Patrick Moloney Mary Gangemi 386,807 513,294 998,817 189,048 1,701,159 2,087,966 – – – – – – – – – – – – – 3,701 – – – – – 10,000 – – 10,000 1,211 – – – – – – – – – 110,000 183,319 103,488 396,807 – 518,206 – 187,678 27,500 63,210 241,583 1,518,788 449 – 18,904 – 15,546 223,947 4,150 187,678 47,615 63,210 257,129 2,260,941 4,150 187,678 57,615 63,210 257,129 2,657,748 102 Litigation Capital Management Limited Directors’ share options The details of options over ordinary shares in the Company held during the financial year by each Director are set out below: Name of the Director Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year Patrick Moloney2 19/11/2018 25/11/2028 $0.47 1,595,058 Patrick Moloney2 4/12/2017 4/12/2027 $0.60 1,000,000 Patrick Moloney2 4/12/2017 4/12/2027 $0.60 1,000,000 Patrick Moloney2 1/11/2019 1/11/2029 £0.7394 1,166,400 Patrick Moloney2 13/10/2020 13/10/2030 £0.6655 291,597 Patrick Moloney2 27/10/2021 27/10/2031 £1.06 279,232 Patrick Moloney1,2 27/10/2021 27/10/2031 £1.06 900,000 Mary Gangemi2 27/10/2021 27/10/2031 £1.06 93,585 Mary Gangemi2 27/10/2021 27/10/2031 £1.14 26,315 – – – – – – – – – Patrick Moloney2 7/10/2022 7/10/2032 Patrick Moloney2 7/10/2022 7/10/2032 Mary Gangemi2 7/10/2022 7/10/2032 Mary Gangemi2 7/10/2022 7/10/2032 £0.00 £0.00 £0.00 £0.00 – 169,276 – 3,303,796 – – 201,325 1,266,455 6,352,187 4,940,852 – – – – – – – – – – – – – – – 1,595,058 – 1,000,000 – 1,000,000 – – – – – – – 1,166,400 291,597 279,232 900,000 93,585 26,315 169,276 – 3,303,796 – – 201,325 1,266,455 – 11,293,039 1. On 27 October 2021, Patrick Moloney exercised 900,000 unlisted options at an exercise price of A$1.00 which were granted under the Employee share option scheme. Upon exercise, the Group issued 900,000 new ordinary shares in the capital of the Group to Patrick Moloney which have been granted under the Loan Share Plan with the sole purpose to fund the exercise price of the 900,000 unlisted options. 2. Outstanding share options as disclosed in Note 28. Directors’ interests The number of shares in the Company held at the end of the financial year by each Director is set out below: Name of the Director Description of shares Jonathan Moulds Fully paid ordinary shares Dr David King Patrick Moloney Patrick Moloney Fully paid ordinary shares Fully paid ordinary shares Unlisted partly paid shares Gerhard Seebacher N/A Mary Gangemi Fully paid ordinary shares 30 June 2023 Number 30 June 2022 Number 5,250,000 2,080,000 1,951,484 4,204,813 1,951,484 3,970,971 1,433,022 1,433,0221 – – 27,500 27,5002 1. Unlisted partly paid shares in the Company were issued at a price of $0.17 per share, wholly unpaid and will convert to a share upon payment to the Company of $0.17 per share. Further details provided in Note 16 to the financial statements. 2. Directorship commenced effective 14 February 2022. No changes took place in the interests of the Directors between 30 June 2023 and 19 September 2023. 103 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 22. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by BDO Audit Pty Ltd, the auditor of the Company, and its network firms: Audit Services – BDO Audit Pty Ltd Audit or review of financial report Audit Services – Firms related to BDO Audit Pty Ltd Audit of statutory report of controlled entities Audit Services – Unrelated Firms Audit of statutory report of controlled entities Note 23. Contingent liabilities Consolidated 2023 $ 2022 $ 149,700 112,500 149,700 112,500 124,113 93,554 124,113 93,554 27,904 27,904 2,750 2,750 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. 104 Litigation Capital Management Limited Note 24.  Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Share-based payments reserve Retained profits Total equity Consolidated 2023 $’000 2022 $’000 943 943 (256) (256) – – 70,274 68,404 – – – – 69,674 69,674 2,440 1,573 (1,840) (2,843) 70,274 68,404 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries Litigation Capital Management Limited (as holding entity), LCM Operations Pty Ltd, LCM Litigation Fund Pty Ltd, LCM Corporate Services Pty Ltd, LCM Recoveries Pty Ltd, LCM Funding Pty Ltd, LCM Singapore Pty Ltd, LCM Funding SG Pty Ltd and LCM Group Holdings Pty Ltd are parties to a deed of cross guarantee under which each company guarantees the debts of the others. The specified subsidiaries represent a ‘closed group’ for the purposes of the guarantee, and as there are no other parties to the Deed that are controlled by the Group, they also represent the ‘extended closed group’. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2023 and 30 June 2022. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2023 and 30 June 2022. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in Note 2, except for the following: • Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. • Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. 105 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 25. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 2: Principal place of business/Country of incorporation Ownership Interest 2023 % 2022 % Name LCM Litigation Fund Pty Ltd LCM Operations Pty Ltd LCM Corporate Services Pty Ltd LCM Singapore Pty Ltd LCM Recoveries Pty Ltd LCM Advisory Limited LCM Funding Pty Ltd LCM Funding SG Pty Ltd LCM Corporate Services Pte. Ltd. LCM Operations UK Limited LCM Corporate Services UK Limited LCM Recoveries UK Limited LCM Funding UK Limited LCM Group Holdings Pty Ltd Australia Australia Australia Australia Australia Australia Australia Australia Singapore United Kingdom United Kingdom United Kingdom United Kingdom Australia LCM Global Alternative Returns Fund LCM Global Alternative Returns Fund GP Limited LCM Global Alternative Returns Fund (Special Partner) LP Jersey Jersey LCM Global Alternative Returns Fund II1 LCM Global Alternative Returns Fund II GP Limited Jersey LCM Global Alternative Returns Fund II (Special Partner) LP Jersey 1. The Group launched the LCM Global Alternative Returns Fund II (‘Fund II’) on 14 October 2021. The Fund comprises two partnerships, the LCM Global Alternative Returns Fund II LP and the LCM Global Alternative Returns Feeder Fund II LP. The partnerships are between the LCM Global Alternative Returns Fund II GP Limited, LCM Global Alternative Returns Fund II (Special Partner) LP (which are both 100% owned by the Group as reflected within this note), and fund investors i.e., third party interests. The Group is deemed to control the Fund from an accounting perspective on the basis that the Group has exposure, or rights, to variable returns from its involvement with the Fund. As a result, the LCM Global Alternative Returns Fund II entities have been consolidated into the Group. Further information is disclosed in Note 26. Note 26. Third party interests in consolidated entities AASB requires the Group to consolidate fund investment vehicles over which it has exposure to variable returns from the fund investment vehicles. As a result, third party interests in relation to the Funds have been consolidated in the financial statements. As at 30 June 2023, the financial liability due to third party interests is $243,990,000 (2022 restated: $142,180,000), recorded at fair value as represented per Note 3. Amounts included in the consolidated statement of financial position represent the fair value of the third party interests in the related financial assets and the amounts included in the consolidated statement of profit or loss and other comprehensive income represent the third party share of any gain or loss during the period. Third party interests exclude the 25% co-investment made by Litigation Capital Management Limited and its wholly owned subsidiaries (‘LCM’). The third party interests in the Funds carry an entitlement to receive an 8% soft return hurdle. Upon satisfaction of the third party interests soft return hurdle, LCM is entitled to performance fees as fund manager on the basis of a deal by deal waterfall. 106 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Litigation Capital Management Limited The residual net cash flows are to be distributed 25% to LCM and 75% to the third party interests until a IRR of 20% is achieved by the third party interests; thereafter the net residual cash flows are distributed 35% to LCM and 65% to the third party interests. The following tables reflect the impact of consolidating the results of the Funds with the results for LCM to arrive at the totals reported in the consolidated statement of comprehensive income and consolidated statement of financial position. The Fund column in the table below presents the interests of third party investors comprising both the investment in the litigation funding assets made on their behalf and costs of administering the funds. The LCM column includes the 25% co-investment in these litigation contracts. Consolidated Statement of Comprehensive Income LCM $’000 Fund $’000 Consolidated $’000 LCM $’000 Fund $’000 Consolidated $’000 2023 Restated 2022 Income Gain on financial assets at fair value through profit or loss Movement in financial liabilities related to third party interests in consolidated entities Total income Other income Interest income Expenses Employee benefits expense Depreciation expense Corporate expenses Finance costs 67,684 117,051 184,735 64,811 39,041 103,852 – (111,953) (111,953) – (36,672) (36,672) 67,684 5,098 72,782 64,811 2,369 67,180 18 49 – 129 18 178 – 1 (9,474) (166) (4,220) – – – (9,474) (8,841) (166) (65) (4,220) (3,499) – – – – – (8,124) (144) (8,268) (4,703) (334) – 1 (8,841) (65) (3,499) (5,037) (3,618) (370) Fund administration expense (1,850) (1,178) (3,028) (1,853) (1,765) Foreign currency (gains)/losses (1,176) (3,905) (5,081) (100) (270) Total expenses (25,010) (5,227) (30,237) (19,061) (2,369) (21,430) Profit before income tax expense 42,741 Analysed as: Adjusted operating profit Non-operating expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income for the year, net of tax Total comprehensive income for the period 53,885 (3,020) (8,124) 42,741 (11,256) 31,485 2,187 33,672 – – – – – – – – – 42,741 45,751 53,885 53,916 (3,020) (3,462) (8,124) (4,703) 42,741 45,751 (11,256) (11,141) 31,485 34,610 2,187 (2,103) 33,672 32,507 – – – – – – – – – 45,751 53,916 (3,462) (4,703) 45,751 (11,141) 34,610 (2,103) 32,507 107 Annual Report and Financial Statements 2023Notes to the Financial Statements continued 2023 Restated 2022 Consolidated Statement of Financial Position LCM $’000 Fund $’000 Consolidated $’000 LCM $’000 Fund $’000 Consolidated $’000 Assets Cash and cash equivalents 82,973 21,484 104,457 29,253 20,711 Trade and other receivables Due from resolution of financial assets 2,209 11,873 – – 2,209 2,298 11,873 24,340 – – 49,964 2,298 24,340 Financial assets at fair value through profit or loss Contract costs Property, plant and equipment Intangible assets Other assets Total assets Liabilities 165,768 225,642 391,410 154,577 142,403 296,980 37,277 211 356 – – – 1,032 78 37,277 31,782 182 646 211 356 1,110 1,489 (623) – – – 31,782 182 646 866 301,699 247,204 548,903 244,567 162,491 407,058 Trade and other payables 4,321 3,214 Tax payable Employee benefits Borrowings Third party interests in consolidated entities Deferred tax liability Total liabilities Net assets 7,769 906 68,976 – – – 7,535 7,769 906 7,023 5,817 12,840 68 927 – – 68 927 68,976 54,915 14,494 69,409 – 243,990 243,990 – 142,180 142,180 36,259 – 36,259 32,704 – 118,231 247,204 365,435 95,637 162,491 32,704 258,128 183,468 – 183,468 148,930 – 148,930 A financial liability at fair value through the income statement is recognised in the parent entity in relation to the transactions entered into with certain Fund structures to support the financing of LFAs. These arrangements fail the derecognition principles in IFRS 9 and represent the net share of the overall LFA at fair value apportioned to the Funds. 108 Litigation Capital Management Limited Consolidated Statement of Cash Flows LCM $’000 Fund $’000 Consolidated $’000 LCM $’000 Fund $’000 Consolidated $’000 2023 Restated 2022 Cash flows from operating activities Profit/(loss) after income tax expense for the year Adjustments for: 31,485 – 31,485 34,610 – 34,610 Fair value adjustments to financial assets (67,684) (5,098) (72,782) (64,811) (2,369) (67,180) Depreciation and amortisation of intangibles Share-based payments Finance costs reclassified to financing activities Income tax expense Exceptional items Foreign exchange rate movements Change in operating assets and liabilities: 166 867 – – 166 867 65 256 219 – 284 256 8,124 144 8,268 4,704 334 5,038 11,256 1,200 7,094 – – 4,507 11,256 1,200 11,601 11,141 800 586 – – (68) (Funding) of financial assets (30,756) (58,293) (89,049) (26,675) (38,464) Proceeds from resolution of financial assets 96,815 95,808 192,623 26,585 207 Decrease/(Increase) in trade and other receivables (Increase) in contract costs – litigation contracts (Decrease)/Increase in trade and other payables (89) (5,494) – – (89) 56 (5,494) (3,150) – – (2,702) (2,603) (5,305) (923) 1,439 (Decrease)/Increase in employee benefits Increase/(Decrease) in tax payable (21) (139) – – (21) (139) 327 (85) – – 11,141 800 518 (65,139) 26,792 56 (3,150) 516 327 (85) Net cash from/(used in) operating activities 50,121 34,465 84,587 (16,514) (38,702) (55,217) Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Payments of security deposits Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from borrowings Repayments of borrowings Payments of finance costs Payments of transaction costs related to third party interests Contributions from third party interests in consolidated entities Distributions to third party interests in consolidated entities Payments for fund establishment and administration costs (90) (57) (51) (198) – 9,636 – – – – – – (90) (57) (51) (198) (38) (278) (19) (335) – 770 9,636 13,298 – (14,848) (14,848) – – – – – – – – (6,039) (132) (6,171) (4,127) (511) (1,832) – (1,832) (1,853) – (38) (278) (19) (335) 770 13,298 – (4,638) (1,853) – 74,980 74,980 – 45,465 45,465 – (94,373) (94,373) – – – – – (406) (779) (406) (779) 51,857 Net cash (used in)/from financing activities 1,766 (34,372) (32,608) 8,088 43,770 Net Increase/(Decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year 51,689 92 51,781 (8,761) 5,068 (3,693) 29,253 20,711 49,964 35,526 14,210 49,736 2,031 681 2,712 2,488 1,433 3,921 82,973 21,484 104,457 29,253 20,711 49,964 109 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 27. Earnings per share Profit after income tax Profit after income tax attributable to the owners of Litigation Capital Management Limited Consolidated 2023 $’000 Restated 2022 $’000 31,485 34,610 31,485 34,610 Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 106,613,927 106,015,738 Adjustments for calculation of diluted earnings per share: Amounts uncalled on partly paid shares and calls in arrears Options over ordinary shares 1,252,018 1,229,103 3,257,392 2,140,866 Weighted average number of ordinary shares used in calculating diluted earnings per share 111,123,337 109,385,707 Basic earnings per share Diluted earnings per share Cents 29.53 28.33 Cents 32.65 31.64 Dilutive potential shares which are contingently issuable are only included in the calculation of diluted earnings per share where the conditions are met. Note 28. Share-based payments The share-based payment expense for the year was $867,000 (2022: $256,000). Loan Funded Share Plans (‘LSP’) As detailed in Note 16, the Group has an equity scheme pursuant to which certain employees may access a LSP. The shares under LSP are issued at the exercise price by granting a limited recourse loan. The LSP shares are restricted until the loan is repaid. Options under this scheme can be granted without an underlying LSP share until they have been exercised and on this basis, do not form part of the Group’s issued share capital. The underlying options have been accounted for as share-based payments. The options are issued over a 1-3 year vesting period. Vesting conditions include satisfaction of customary continuous employment with the Group and may include a share price hurdle. During the year the Group granted nil (2022: 1,912,489) shares under the LSP. 110 Litigation Capital Management Limited Set out below are summaries of shares/options granted under the LSP: 2023 Grant date Expiry date Exercise Price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 4/12/2017 4/12/2027 $0.60 2,000,000 31/8/2018 31/8/2028 19/11/2018 25/11/2028 3/12/2018 3/12/2028 $0.77 $0.47 $0.89 411,972 1,595,058 100,000 1/11/2019 1/11/2029 £0.7394 1,432,753 1/11/2019 1/11/2029 13/10/2020 13/10/2030 27/10/2021 27/10/2031 27/10/2021 27/10/2031 27/10/2021 27/10/2031 £0.7730 £0.6655 £1.06 £1.06 £1.14 66,137 616,520 1,512,638 269,044 130,807 8,134,929 2,000,000 411,972 1,595,058 100,000 1,432,753 (66,137) 0 616,520 1,512,638 99,0371 122,4301 (170,007) (8,377) – – (244,521) 7,890,408 Weighted average exercise price $1.059 $0.000 $0.000 $1.386 $1.049 1. Options granted without an underlying LSP share until exercised i.e., do not form part of the Group’s issued share capital. 2022 Grant date Expiry date Exercise Price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 4/12/2017 4/12/2027 $0.60 2,000,000 31/8/2018 31/8/2028 19/11/2018 25/11/2028 3/12/2018 3/12/2028 $0.77 $0.47 $0.89 411,972 1,595,058 100,000 2,000,000 411,972 1,595,058 100,000 6/3/2019 6/3/2029 £0.5200 4,528,664 (4,528,664) –1 1/11/2019 1/11/2029 1/11/2019 1/11/2029 4/11/2019 4/11/2029 13/10/2020 13/10/2030 27/10/2021 27/10/2031 27/10/2021 27/10/2031 27/10/2021 27/10/2031 £0.7394 £0.7730 £0.7394 £0.6655 £1.06 £1.06 £1.14 1,432,753 66,137 388,800 616,520 – – – 1,512,638 269,044 130,807 1,432,753 66,1372 (388,800) –1 616,520 1,512,638 269,0442 130,8072 11,139,904 1,912,489 – (4,917,464) 8,134,929 Weighted average exercise price $0.885 $1.953 $0.000 $0.985 $1.091 1. As announced on 17 December 2021, the employment of a former Executive Director was terminated and his performance related shareholding did not vest. That benefit comprised 4,917,464 shares held through the Group’s Joint Share Ownership Plan (‘JSOP’). These JSOP awards are held by the LCM Employee Benefit Trust, and were due to vest 19 December 2021 subject to continued employment and performance conditions including a share price target of 175 pence being achieved at any time during the vesting period. The JSOP award was subject to malus and clawback provisions. Although the JSOP awards did not vest by reason of the termination of employment for cause, the awards had not vested at the date of termination due to the share price of LCM not trading at 175 pence at any point during the vesting period. The awards remain held by the Group in the LCM Employee Benefit Trust. 2. Options granted without an underlying LSP share until exercised i.e., do not form part of the Group’s issued share capital. 111 Annual Report and Financial Statements 2023 Notes to the Financial Statements continued There were 6,869,211 options vested and exercisable as at 30 June 2023 (2022: 6,318,671). The weighted average remaining contractual life of options under LSP outstanding at the end of the financial year was 1.01 years (2022: 0.92 years). Deferred Bonus Share Plan (‘DBSP’) The Company has in place a DBSP. Options granted under the DBSP reflect past performance and are in the form of nil cost options and will vest in three equal tranches from the date of issue and are subject to continued employment over the three-year period. In addition, the Options granted under the DBSP are subject to malus and clawback provisions. In the event of a change of control of the Company, unvested awards will vest to the extent determined by the Board, taking into account the proportion of the period of time between grant and the normal vesting date that has elapsed at the date of the relevant event. During the period the Group granted 1,132,692 (2022: nil) shares under the DBSP. Set out below are summaries of options granted under the DBSP: 2023 Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the period 7/10/2022 7/10/2032 $1.1816 – – 1,132,692 1,132,692 – – – – 1,132,692 1,132,692 Weighted average exercise price $0.000 $1.182 $0.000 $0.000 $1.182 There were nil DBSPs vested and exercisable as at 30 June 2023. The weighted average remaining contractual life of options under DBSP outstanding at the end of the financial year was 1.265 years. Executive Long Term Incentive Plan (‘LTIP’) The Company has in place an Executive LTIP. Options over ordinary shares in the capital of the Company (‘Ordinary Shares’) are issued to recipients under the LTIP plan. The options set out above have been granted under the LTIP in the form of nil cost options and are subject to performance conditions which require the growth of Funds under Management (‘FuM’) over a five-year performance period. The performance conditions associated with the options are set out below: 1. 50% vesting on reaching a minimum of FuM of US$750 million; and 2. 100% vesting on reaching FuM of US$1 billion. The vesting date of options granted is the later of: 1. the third anniversary of the Grant Date; 2. the satisfaction of the Performance Condition; or 3. the date of any adjustment under the Plan rules of the Plan at the Board’s discretion. Any awards made to the participants are subject to a five-year holding period from the grant date. In the event of a change of control of the Company, unvested awards will vest to the extent determined by the Board, taking into account the proportion of the period of time between grant and the normal vesting date that has elapsed at the date of the relevant event and the extent to which any performance condition has been satisfied at the date of the relevant event. During the period the Group granted 5,671,516 (2022: nil) shares under the LTIP. 112 Litigation Capital Management Limited Set out below are summaries of shares/options granted under the LTIP: 2023 Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 7/10/2022 7/10/2032 $1.1816 – – 5,671,516 5,671,516 – – – – 5,671,516 5,671,516 Weighted average exercise price $0.000 $1.182 $0.000 $0.000 $1.182 There were nil LTIPs vested and exercisable as at 30 June 2023. The weighted average remaining contractual life of options under DBSP outstanding at the end of the financial year was 4.266 years. For the options under LSP granted during the current financial year, the valuation model inputs used in the Black- Scholes pricing model, to determine the fair value at the grant date, are as follows: Grant date Expiry date 4/10/2022 4/10/2032 4/10/2022 4/10/2032 1. AUD amount. GBP equivalent £0.726. Share price at grant date Exercise price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date1 £0.73 £0.73 £0.00 £0.00 35.00% 35.00% 0.00% 0.00% 3.19% 3.21% $1.287 $1.287 The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome. Note 29. Financial liabilities related to third party interests in consolidated entities Reconciliation to balance sheet without FV: Note that these balances do not include the LCM placement fees anymore – fund only. Balance 1 July Proceeds – capital contributions from Limited Partners Payments – distributions to Limited Partners Other non-cash items Movement on financial liabilities related to third party interests in consolidated entities (Note 5) Balance as at 30 June Consolidated Restated 2022 $’000 Restated As at 1 July 2021 $’000 2023 $’000 (142,180) (62,870) (43,725) (74,980) (45,465) 94,373 (9,250) 406 2,421 (111,953) (36,672) (19,145) (243,990) (142,180) (62,870) 113 Annual Report and Financial Statements 2023Notes to the Financial Statements continued Note 30. Events after the reporting period On 4 September 2023, LCM announced the resolution of a class action investment that forms part of LCM’s managed Global Alternative Returns Fund (‘Fund I’) and was funded directly from LCM’s balance sheet (25%) and Fund I Investors (75%). As announced previously on 15 May 2023, the class action was brought in the Federal Court of Australia against the Commonwealth of Australia on behalf of persons who are alleged to have suffered loss and damage as the result of the contamination of their land at seven sites around Australia in proximity to Department of Defence military bases. The Commonwealth has agreed to pay the sum of AUD$132.7 million in order to resolve the class action. A confidential deed of settlement was executed and has now been approved by the court, allowing the disbursement of funds, subject to the unlikely event of appeal. LCM expects to receive income of approximately A$10.6 million. That amount includes capital invested of approximately A$3.4 million together with an expected net gain of approximately A$7.2 million. The Company’s final income and gain figures are subject to change pending final distribution of settlement monies. 114 Litigation Capital Management Limited Directors’ Declaration In the Directors’ opinion: • the attached financial statements and notes comply with the Corporations Act 2001, Australian Accounting Standards and other mandatory professional reporting requirements; • the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 2 to the financial statements; • the attached financial statements and notes give a true and fair view of the consolidated entity’s financial position as at 30 June 2023 and of its performance for the financial year ended on that date; and • there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. Signed in accordance with a resolution of Directors. On behalf of the Directors Jonathan Moulds Director Dated this 19th day of September 2023 115 Annual Report and Financial Statements 2023Independent Auditor’s Report Tel: +61 8 7324 6000 Fax: +61 8 7324 6111 www.bdo.com.au BDO Centre Level 7, 420 King William Street Adelaide SA 5000 GPO Box 2018 Adelaide SA 5001 Australia INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF LITIGATION CAPITAL MANAGEMENT LIMITED Report on the Audit of the Financial Report Opinion We have audited the financial report of Litigation Capital Management Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2023, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the directors’ declaration. In our opinion the accompanying financial report of Litigation Capital Management Limited, is in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the Group’s financial position as at 30 June 2023 and of its financial performance for the year ended on that date; and (ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. 116 Litigation Capital Management Limited Restatement of comparative KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT As disclosed in Note 3 of the financial Our procedures included, but were not limited to the following; report for the year ended 30 June 2023, during the year the Group restated comparative information in relation to the classification and subsequent accounting for litigation funding agreements and third party interests in consolidated entities. This represents a key audit matter as it related to a significant re-presentation  Obtaining and evaluating management’s assessment of the classification and subsequent accounting for litigation funding agreements  Obtaining independent evidence to corroborate management’s assessment to confirm the significant reduction in the concept of a bundle of services   Extending our sample for the testing of litigation funding agreements to those impacted by the restatement Evaluating the adequacy of disclosures in relation to the of previous financial reports. restatement Fair value measurement KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT As disclosed in Note 10, 19, 26 and 29 Our procedures included, but were not limited to the following;  Obtaining and evaluating the valuation model including reperformance of the calculations    Analysing and challenging the key assumptions applied within the valuation model for a sample of litigation funding assets Analysed and evaluated the fair value allocated to the financial liabilities related to third party interests in consolidated entities Evaluating the adequacy of disclosures in relation to fair value of the financial report for the year ended 30 June 2023, the Group holds litigation funding assets and financial liabilities related to third party interest in consolidated entities at fair value. This represents a key audit matter as it relates to a significant proportion of the Group’s assets and liabilities and involves estimation of the Group’s risk adjusted future cash flows. Other information The directors are responsible for the other information. The other information comprises the information contained in director’s report for the year ended 30 June 2023, but does not include the financial report and our auditor’s report thereon, which we obtained prior to the date of this auditor’s report, and the Strategic report and Governance report, which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. 117 Annual Report and Financial Statements 2023Independent Auditor’s Report continued If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the Strategic report and Governance report report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and will request that it is corrected. If it is not corrected, we will seek to have the matter appropriately brought to the attention of users for whom our report is prepared. Responsibilities of the directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at: http://www.auasb.gov.au/auditors_responsibilities/ar3.pdf This description forms part of our auditor’s report. BDO Audit Pty Ltd Andrew Tickle Director Adelaide, 19 September 2023 118 Litigation Capital Management Limited Corporate Directory Sydney Level 12, The Chifley Tower, 2 Chifley Square Sydney NSW 2000 T +61 2 8098 1390 London Bridge House 181 Queen Victoria Street London EC4V 4EG T +44 203 955 5260 Singapore 1 Marina Boulevard Level 20-43 Singapore 018989 T +65 9858 7493 Melbourne Level 50 120 Collins Street Melbourne VIC 3000 T +61 418 815 863 Brisbane Level 38 71 Eagle Street Brisbane QLD 4000 T +61 7 3218 7359 119 Annual Report and Financial Statements 2023

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