Omni Bridgeway Limited
Annual Report 2018

Plain-text annual report

Annual Report 2018 IMF Bentham Limited is a leading global litigation funding company with an unparalleled record of success, achieved over 17 years since listing on the Australian Securities Exchange in 2001. IMF operates globally from 14 offices in Australia, USA, Canada, Singapore, Hong Kong and the United Kingdom providing funding to plaintiffs, law firms and corporations for legal disputes. Our highly experienced team of investment managers ensures the strongest cases receive funding and are managed to facilitate their successful resolution. Contents Highlights ....................................................................... 2 Track Record of Success ............................................... 3 Chairman’s and Managing Director’s Report .................. 4 Directors’ Report .......................................................... 35 Auditor’s Independence Declaration ............................ 61 Statement of Comprehensive Income .......................... 62 Statement of Financial Position .................................... 63 Statement of Cash Flows ............................................. 64 Statement of Changes in Equity ................................... 65 Notes to the Financial Statements ................................ 66 About this Report ......................................................... 66 Significant Accounting Judgments, Estimates and Assumptions ......................................... 68 A. RESULTS FOR THE YEAR 69 Note 1: Segment information .................................... 69 Note 2: Revenue ....................................................... 72 Note 3: Other income .............................................. 72 Note 4: Expenses ..................................................... 73 Income tax ................................................... 74 Note 5: Note 6: Earnings per share ....................................... 76 Note 7: Dividends paid and proposed ..................... 78 Note 8: Statement of cash flows reconciliation ......... 79 B. INTANGIBLE ASSETS 80 Note 9: Intangible assets .......................................... 80 C. CAPITAL STRUCTURE 82 Note 10: Financial risk management objective and policies .................................................. 82 Note 11: Cash and cash equivalents .......................... 86 Note 12: Debt Securities ............................................. 86 Note 13: Contributed equity........................................ 87 Note 14: Retained earnings and reserves ................... 88 D. WORKING CAPITAL, OTHER ASSETS AND OTHER LIABILITIES 89 Note 15: Trade and other receivables ........................ 89 Note 16: Other assets ................................................. 90 Note 17: Plant and equipment .................................... 90 Note 18: Trade and other payables ............................. 92 Note 19: Provisions ..................................................... 92 Note 20: Commitments and contingencies ................. 94 E. THE GROUP, MANAGEMENT AND RELATED PARTIES 95 Note 21: Key management personnel......................... 95 Note 22: Share-based payment plan .......................... 96 Note 23: Parent entity information ............................. 98 Note 24: Material partly-owned subsidiaries .............. 99 Note 25: Discontinued operations ............................ 101 Note 26: Related party disclosure ............................. 101 Note 27: Auditor’s remuneration ............................... 101 Note 28: Events after the reporting date ................... 101 Directors’ Declaration ................................................. 102 Independent Auditor’s Report .................................... 103 Shareholder Information ............................................. 109 Corporate Information ................................................ 112 1 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Highlights Cash ($ Million) Investments ($ Million) 2 . 0 6 1 5 . 2 4 1 9 . 4 4 1 1 . 0 3 1 6 . 5 0 1 3 . 1 2 3 9 . 0 9 1 6 . 5 4 1 6 . 8 9 5 . 9 9 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Net Assets ($ Million) Portfolio ($ Million) 8 . 7 6 3 4 . 1 0 2 3 . 6 0 2 1 . 1 9 1 9 . 5 8 1 3 4 6 , 5 2 8 7 , 3 8 3 4 , 3 7 6 0 , 2 2 0 0 , 2 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2 Track Record of Success 144 d e l t t e S Delivering results for over 17 years 14 W o n L o s t 17 Investments funded to completion at 30 June 2018. Does not include withdrawn investments. $2.2 billion total recoveries 2.6 years average investment length 90% success rate $1.4 billion returns for funded claimants 1.5x return on invested capital 175 investments funded to completion A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 3 Chairman’s and Managing Director’s Report Introduction We are now three years into the five-year Strategic Business Plan we commenced in 2015. We are delighted to report the progress and completion of many of the significant objectives in that plan. Over the past three years, our focus has been to mitigate business risk through diversification. Our risk diversification strategy has involved expanding our geographic footprint and growing our team, increasing the number and variety of cases in which we invest and seeking alternative sources of capital. Before we delve into the detail of what we have achieved in each of these areas, we set out the underlying principles of our decision-making. Our company values are transparency, innovation, entrepreneurship, fairness, partnership and rigour. It is therefore important to us that our stakeholders are clear about what underpins our approach to doing business. – We will take the long-term view over the short-term, every time This means preferring to maximise the value of future cashflow over an immediate uplift in profitability. It involves assessing risk and reward differently from some other businesses. It necessarily means analysing the industry and its continuing transformation and making changes now that will deliver value over time. Some of the decisions we have implemented recently may not assist with short term profitability but success in business, as in life, usually comes down to choosing the pain of discipline over the ease of short-term rewards. And that’s what we are prepared to do. Andrew Saker Andrew Saker MANAGING DIRECTOR AND MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER CHIEF EXECUTIVE OFFICER – Fortune favours the bold… and wise We will make bold decisions where it is prudent to do so. Our Investment Committee (“IC”) is the forum in which potential investments are analysed and debated with rigour in the context of our corporate strategy. Last financial year we welcomed to our IC former Justice of the Supreme Court of South Australia, Mr John Sulan QC, and former Chief Judge of the Northern District of California, Mr Vaughn Walker. Along with our in-house members, including Hugh McLernon and Clive Bowman who have served since the company was founded, our IC is a formidable assembly where case merits and strategies are discussed openly and robustly. It is the collective heart of the company’s investment decisions. – We are prioritising growth for long-term profitability We need to maintain strong positions in existing markets while encouraging growth in emerging areas of the rapidly evolving market. We are growing our capacity through team and geographic expansion and also growing our capability through new product and service development. If we continue to execute our services at the highest level and educate the market about new developments and offerings we are confident that long-term profitability will follow. – Only the best will do To be an Investment Manager or Legal Counsel at IMF Bentham requires an exceptional formal education, commercial acumen and a breadth and depth of experience in law (particularly litigation and alternative dispute resolution). Investment Managers make decisions every day that involve risk, and often carry some combination of financial, legal, reputational, and personal repercussions. They must be adept negotiators, because they are frequently required to negotiate funding terms, pricing, legal strategy, conditions of settlement and more. Similarly, to be a member of IMF Bentham’s central management team requires dedication to your field of expertise and to the mission of building a business and an industry. Each new addition to our team is an occasion for celebration because each person contributes to the ongoing shaping of our company culture and its continued growth. And now we turn to the details of this year’s activities and outcomes. 4 Michael Kay NON-EXECUTIVE CHAIRMAN Capital Diversification In February 2017, we established Bentham IMF 1 LLC (“Fund 1”) solely for US investments. This year, we sold the majority of our US investment portfolio to Fund 1 and, at the same time, upsized Fund 1 to US$166.3 million (with the potential to upsize further in future). The upsized Fund 1 provided additional capital for US investments without creating significant adverse deployment pressure. This capital markets strategy converted the risk in our US investments from balance sheet to a portfolio and converted intangible assets to cash, enabling the cash to be deployed elsewhere. Options for use of the remaining sales proceeds include retiring debt, retaining cash for management of existing large idiosyncratic risks, expansion into Europe, or return of capital. In October 2017, we launched two new investment vehicles: IMF Bentham (Fund 2) Pty Ltd and IMF Bentham (Fund 3) Pty Ltd. The two new funds, collectively known as the Rest of World (“RoW”) Funds, provide non- recourse leveraged capital for funding investments in jurisdictions outside of the US. The RoW Funds will underwrite investments in Australia, Asia, Canada and Europe, and have a combined capacity of $150 million. Although these decisions have had a short-term impact on our profitability our long-term strategy should enable us to more efficiently fund future growth and increase our Return on Equity and Return on Assets. Given the rate of commitment in both Fund 1 and the RoW Funds, our focus for FY19 will be to launch new funds for investments before we reach capacity in the existing funds or the expiry of the Commitment Periods. Each of these initiatives reflects our transition from investing entirely on our own balance sheet to investing in, and managing, fund structures and increasing our capital resources to grow our investment portfolio. Funding Applications (number of applications) 900 800 700 600 500 400 300 200 100 0 446 264 170 12 FY15 669 309 301 59 FY16 827 371 345 104 7 FY17 866 356 302 127 55 26 FY18 Consolidated Australia USA Canada Asia Europe Financial Year A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 5 Chairman’s and Managing Director’s Report continued Product Diversification Over the past 17 years, we have built a successful business providing access to justice for claimants, most commonly the impecunious and the ill-matched ‘David versus Goliath’, and we will continue to do so. However, progress requires innovation, and we see potential in expanding our product offering to include financing commercial disputes for solvent businesses who wish to pursue their legal claims without resorting to their own balance sheet. Today’s businesses are under pressure to do more with less. Management teams must constantly innovate to reduce risks and expenses while at the same time build a sustainable organisation, improve profits, and maximise value for stakeholders. In-house corporate legal teams report their most significant challenge is resource and budget limitations and legal expenditure is under review. We know that litigation, arbitration and alternative dispute resolution are one of the largest categories of legal expense and one of the most likely areas of work to be outsourced by businesses. Accordingly, we are fielding enquiries and discussing dispute financing options with corporates who are intrigued by the possibility of de-risking their balance sheet and monetising their legal claims. Dispute financing for corporates may grow worldwide as commercial enterprises become familiar with alternative financing options and recognise the value of unlocking the monetary value in their disputes and assuaging the risks. It is difficult to reliably quantify the addressable market for our range of products and services. Independent research reports suggest the global market for legal services exceeds $800 billion per annum, with litigation representing approximately 40% of that figure. The portion which comprises commercial disputes for plaintiffs represents an attractive potential serviceable market. And these estimates only factor in actual activity. Market participants suggest there is an untapped market of potential litigation which might be pursued if costs and risks could be defrayed by a dispute financier. The magnitude of the potential ‘shadow market’ for our products and services is encouraging and our team is engaging with corporate stakeholders to raise awareness and progress opportunities. We recognise that making, rather than taking, a new market is a long-game which will require patience and hard work and we will continue to work on this pursuit throughout FY19 and beyond. Litigation is now a permanent fixture in the top five areas of in-house legal work as businesses deploy legal means as a business strategy tool 1 1. 2017, Benchmarks & Leading Practices Report, Association of Corporate Counsel Australia, p 117 6 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Geographic Diversification This year we expanded our geographic footprint with the opening of new offices and the recruitment of new talent in Hong Kong, Montreal and London. We also expanded our teams in existing locations with new hires in Australia, Canada and the USA. We now have 78 people across 14 offices world-wide. Detailed biographies for our people are available on our website. Toronto Montreal London San Francisco Los Angeles New York Houston 80 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Hong Kong Singapore Brisbane Perth Sydney Adelaide Melbourne O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 7 Chairman’s and Managing Director’s Report continued Australia In the Australian market, IMF Bentham enjoys a pre-eminent position, and has done so since its inception almost 17 years ago. We have played a leadership role in the development of the dispute finance industry and continue to do so as the industry adapts to its dynamic landscape. During the year we sought qualitative feedback from key stakeholders in our market and were delighted and humbled by the endorsement of our market leadership, the loyalty to our brand and the acknowledgement of our differentiators. Our team was applauded for its expertise, integrity and likability - all essential ingredients for a business delivering a product-service hybrid to a sophisticated clientele. We continue to experience an increase in multi-party (class action) proceedings in the Australian market. Competition for opportunities to finance shareholder class actions is intensifying and it is becoming common in the Australian landscape in these cases for multiple law firms, each with a different litigation funder, to back proceedings against the same defendant (known as “multiplicity”). There are a number of factors potentially fuelling this dynamic. In Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148 the Federal Court of Australia granted a “Common Fund” order directing all group members of the class action to pay a portion of any recoveries to a litigation funder as consideration for the funder’s financing of the class action, even if they had not already signed a funding agreement. This has arguably encouraged more open classes (where the class is not limited to persons who have signed a funding agreement) and increased the likelihood of competing class actions, as there is no material threshold in respect of claim size to satisfy before commencing a shareholder class action. The Courts are grappling with how to deal with multiple claims against a common defendant for essentially the same or similar sets of claims and we have seen one case (the Get Swift case) Perera v GetSwift Limited [2018] FCA 732 (currently on appeal) where the Court has applied a number of factors to choose one funder/lawyer group over others. This case did not involve IMF Bentham. We believe IMF Bentham is well placed to win these types of beauty parades. This year we assessed 302 new investment opportunities and invested in 7 class actions – an increase over previous periods. In December 2017, the Australian Government initiated a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Commission is uncovering misconduct in the financial services sector which is pointing to potential class actions. The first example of this is a number of class actions against Australian financial services giant, AMP, one of which IMF Bentham is financing. Retail and institutional investors in AMP are seeking damages for alleged disclosure contraventions by AMP. Four class actions have been filed in the Federal Court and one has been filed in the NSW Supreme Court, against AMP. In addition to AMP, IMF Bentham is funding cases against the Australian Government (contamination from RAAF Base Tindal in Katherine, Northern Territory), Brambles (an ASX-listed supply chain logistics company), the Commonwealth Bank of Australia (Australia’s largest retail bank), Murray Goulburn (one of Australia’s largest dairy foods companies) and Sirtex Medical Limited (an Australian-based medical device company), among others. During the year, the class action against Treasury Wine Estates Limited (a global winemaking and distribution business with headquarters in Melbourne, Australia) was successfully settled for $49 million inclusive of costs and interest. The trial in the Westgem investment (a Perth- based property development company) commenced and concluded in July 2018 and the Wivenhoe trial (a compensation claim for financial loss or damage caused by the alleged negligent operation of Wivenhoe and Somerset dams in Queensland, Australia) is continuing. Mediations were held in a number of cases, which ultimately did not settle and those actions continue. Total Estimated Addressable Market for Australia Total Estimated Annual Market Legal Spend: $19.7b 81% 9% 19% 8 Estimated Litigation Portion of Total Legal Spend Estimated Total Addressable Market as % of Total Legal Spend To meet demand, our Australian team welcomed a new Investment Manager, Gavin Beardsell, who brings a wealth of expertise particularly in the insurance sector. We are witnessing the internationalisation of the dispute finance industry in Australia. Domestic law firms are increasingly becoming part of larger international operations and off-shore funders and After-the-Event (“ATE”) insurers (which typically provide coverage for adverse costs) are increasingly pursuing Australian-based opportunities. This can be interpreted as an endorsement of the potential in the Australian market. Australia’s legal services market is estimated at $19.7 billion2 per annum of which approximately 19%3 is attributed to litigation and dispute resolution. On these figures, this translates into a potential plaintiff pool of almost $1.9 billion annually - an attractive potential market for funders given that estimated penetration rates are likely to be no more than 5%. In spite of increased competition in the Australian market, IMF Bentham is very well placed to win the conduct of matters it wishes to fund and to respond to the changing dynamics in the shareholder class action space. Clive Bowman CHIEF EXECUTIVE – AUSTRALIA AND ASIA Do, K, 2017. IBISWorld Industry Report M6931, Legal Services in Australia, IBISWorld, p 5 2. 3. 2017 Australia: State of the Legal Market, Thomson Reuters & Melbourne Law School, p 11 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 9 Chairman’s and Managing Director’s Report continued Asia Since the launch of our regional head office in Singapore in early 2017, we have experienced increasing interest in dispute finance across Asia. Demand is evident from a range of jurisdictions including China, Europe, Hong Kong, India, Japan, Korea, Malaysia, Thailand, the Philippines and Vietnam, as well as local Singaporean parties. Singapore is a leading global hub for international dispute resolution (including international arbitration, insolvency and restructuring, as well as international commercial litigation). This year we financed our first international commercial arbitration in Singapore, one of the first known examples since the city-state passed new laws in 2017 allowing the use of third-party dispute finance. We have also signed our first Singapore insolvency funding agreement (subject to Court approval). As in other markets, we are increasingly working with solvent corporates to help manage the risk and costs associated with complex commercial disputes. Building on the success of our Singapore experience, in January 2018 we opened an office in Hong Kong (another leading regional disputes hub) and welcomed new Associate Investment Manager Cheng-Yee Khong (formerly Director of Secretariat of the International Chamber of Commerce (ICC) International Court of Arbitration in Asia). We are currently the only significant dispute financier with resources permanently on the ground in Hong Kong. In recent years, we have had success in funding Hong Kong insolvency matters, and this continues to be a focus. This year, international arbitration financing has been expressly endorsed in Hong Kong under new legislation expected to come into force shortly. We have also been involved in the first known application for approval on access to justice grounds of a funding agreement in Hong Kong commercial litigation. Led by Tom Glasgow in Singapore and supported by resources in Australia, our Asia team assesses and manages investments across Asia. They traverse the region to educate the market and forge relationships, regularly presenting on third-party dispute finance to law firms and at legal and industry conferences and publishing in respected journals and media outlets. Our Asia team is actively pursuing opportunities to fund commercial parties, law firms and insolvency practitioners, with a brief to build institutional relationships with global law firms and multinational corporations. Having Investment Managers assessing investments on the ground in Singapore and Hong Kong means we can respond quickly to business opportunities across the region, build strong relationships through face to face interaction, and provide superior service to funding applicants and their legal advisers. This has helped us to quickly become one of the leading brand names for dispute finance in Asia. It is particularly difficult to accurately assess the size of the potential market for dispute finance in Asia, as it is not a homogenous legal market. Perhaps one apposite measure for part of our Asia business is the volume of international arbitration cases appearing in the Singapore and Hong Kong arbitral institutions. In 2017 arbitral institutions in Singapore and Hong Kong managed arbitration cases with total claim value approximating $22.76 billion4. Adding China and India’s potential demand for dispute finance would increase estimates for Asia significantly. China’s legal services market is estimated to be growing at a compound annual growth rate of 8.5%5 and liberalisation, and an appetite for international arbitration, make this a potentially fertile ground for our arbitration financing. India’s legal services market has an estimated compound annual growth rate of 11.93%6, mainly driven by foreign investments and cross-border transactions with foreign companies - also fertile ground, particularly for arbitration financing. We have cemented our position as a leading brand for international dispute finance in Hong Kong and Singapore, especially among law firms and insolvency practitioners, and we continue to build an understanding of our business model among corporates and key legal services contacts across the wider Asia region, including in developing markets such as India and China. SIAC (Singapore International Arbitration Centre), HKIAC (Hong Kong International Arbitration Centre), ICC (International Chamber of Commerce International Court of Arbitration) 2018, Legal Services Global Market Report, The Business Research Company, p 156 2018, Legal Services Global Market Report, The Business Research Company, p 167 4. 5. 6. 10 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d This is an enormously exciting time to be part of the third-party finance industry in Asia. This is a very large and diverse market, where dispute finance is relatively new but the speed of growth is incredible. The potential opportunities for the business are immense. Tom Glasgow INVESTMENT MANAGER HEAD OF IMF BENTHAM ASIA O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 11 Chairman’s and Managing Director’s Report continued Canada We are enjoying the challenge of parlaying the lessons learned from Australia and other markets to the Canadian market, a jurisdiction which shares some similarities to the Australian justice system, language and culture. We are applying decades of experience in dispute funding to develop our Canadian presence and have recruited a strong team to meet growing demand. This year, the Canadian team welcomed three new members. In Montreal, seasoned litigator emeritus George Hendy, Ad.E, joined the team as a Senior Adviser, Nickolas Tzoulas joined our Toronto office as Legal Counsel and Geoff Moysa joined as an Investment Manager & Legal Counsel. At the start of FY19, we will also welcome senior litigation practitioner, Pierre-Jérôme Bouchard, as Investment Manager and Legal Counsel to head the Montreal office. In addition to servicing our active investments and those in the pipeline, our newest team members have brought with them referral sources and new business opportunities. This year we received 127 applications for funding. Not only is the volume of referrals increasing, but they are also of higher quality, reflecting the refined understanding among law firms of the types of cases best suited to dispute finance. The cases we funded during the year came from across the country and from diverse sources spanning leading national law firms (the ‘Seven Sisters’) to smaller litigation boutique practices. Most of the cases involve risk-sharing arrangements with clients and law firms. Amongst the funded cases is a claim against a global pharmaceutical company for alleged patent infringement. Two of the cases – a class action and an insolvency related mater – are funded on a conditional basis pending court approval. We currently have another 30 cases in various stages of due diligence. It is fair to say the dispute finance industry in Canada is in the ‘introduction’ phase of its lifecycle. Accordingly, one of our team’s priorities is to explain our products and services and their uses to clients and their legal advisors. Generating curiosity and demonstrating opportunity are important precursors to new business leads, and these activities are best done face to face. This year our team delivered presentations extensively to our target audience via bespoke events and broader industry conferences and gatherings. We are generating significant positive coverage in respected business and legal media - a reflection of the growing interest in dispute funding - and are establishing our brand in Canada as the pioneer in the market. Having expanded our footprint this year to include Montreal, there are sound reasons to consider establishing a permanent presence in additional provinces across Canada in the coming years. Our business model is distinguished by Investment Managers being on-the- ground close to funded parties and their lawyers and we are exploring the merits of being more dispersed around Canada, as we have in our other geographic markets. Analysts estimate the value of the Canadian legal services market at $25.72 billion7 per annum, of which approximately $3.52 billion8 annually is litigation, rendering an estimated $1.76 billion to plaintiff-side claims. While there continues to be ad-hoc dispute financing activity from US hedge funds, venture-capital firms and off- shore funders, there are few systemic competitors on the observable horizon and no other international funder has a physical presence in Canada. Total Estimated Addressable Market for Canada Total Estimated Annual Market Legal Spend: $25.72b 86.4% 7% 13.7% Estimated Litigation Portion of Total Legal Spend Estimated Total Addressable Market as % of Total Legal Spend 7. 8. Morea, S, 2017, IBISWorld Industry Report 54111CA. Law Firms in Canada, IBISWorld, p 5 Morea, S, 2017, IBISWorld Industry Report 54111CA, Law Firms in Canada, IBISWorld, p 13 12 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d It is gratifying to see the germination of the seeds of the early work we have done educating the Canadian legal and corporate communities about litigation funding. I am proud of what our team has achieved in the two and a half short years that we have been operating in Canada. Clients and law firms are increasingly seeing the many and varied benefits of working with a litigation funder to deal with complex cost and risk mitigation issues. I am excited to continue the work we have started and to see Bentham’s business and the industry mature in Canada. Tania Sulan CHIEF INVESTMENT OFFICER CANADA O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 13 Chairman’s and Managing Director’s Report continued USA Since commencing in 2011, our US business has expanded rapidly in a sophisticated dispute finance market. We bring a methodology and corporate wisdom road- tested in Australia and we are one of the only funders offering a multi-office regional approach, with offices in New York, Houston, Los Angeles and San Francisco. We have been building relationships across the legal industry for many years and are now a preferred funder for many leading law firms. We have active relationships with 114 of the ‘AmLaw 1-200’ firms (70 of which are in the AmLaw 100) and 113 of those 1-200 firms have approached us or met with us for funding opportunities (69 of those firms are in the AmLaw 100). In May, the US team achieved a Tier 1 ranking from Chambers and Partners9, reflecting the experience of our Investment Managers and Legal Counsel, who source and investigate investment opportunities through to funding. This year we launched a new specialised bankruptcy dispute finance practice to assist stakeholders involved in insolvency-related matters and welcomed Investment Manager and Legal Counsel, Ken Epstein, to lead this practice. There are stresses appearing in numerous industry sectors and this is an appropriate time to devote more resources and capital to investment devote more resources and capital to investment opportunities in this area. opportunities in this area. Charlie Gollow CHIEF EXECUTIVE – US 14 Our US team also welcomed Corporate Counsel Christopher Young who advises our US and international staff on US corporate legal issues. We also expanded the team with two new Legal Counsel appointments - Amy Geise in Houston and Sarah Jacobson in New York. As FY19 commences, we will be augmenting our Los Angeles team with new Legal Counsel, Connor Williams and a new Investment Manager. At 30 June 2018 our US team is managing 42 investments comprising 219 separate cases constituting over $187.3 million in capital commitments. These investments (the details of which remain confidential) comprise law firm portfolios and direct investments in commercial disputes (with legal claims covering personal injury, consumer class actions, intellectual property, anti-trust, insurance, whistleblower and qui tam cases and anti- terrorism to name a few). We are sometimes asked about the ideal balance for our business, between investing in single-party cases versus investing in portfolios of cases. Portfolio investing allows costs and risks to be collateralised across the cases within the portfolio, with a commensurate reduction in return. Investing in single-party cases generally involves greater risk, given the binary nature of the outcome, but concurrently delivers greater returns. Our Investment Managers and Legal Counsel in the US have the skill set to be able to identify single-party cases that meet our investment criteria, and with our robust IC process we will approve those single-party cases that satisfy our risk parameters. As such, we are comfortable in being able parameters. As such, we are comfortable in being able to continue to invest in single-party cases, where others to continue to invest in single-party cases, where others may fear to tread, seeking those higher returns. However, may fear to we will continue to balance risk and returns for our we will continue to balance risk and returns for shareholders by investing in both types of investment shareholders by investing in both types of investment opportunities opportunities The US is the largest market in the world for legal The US is the largest market in the world for legal services and litigation, representing approximately services and litigation, representing approximately 40%10 of the global legal market. The US legal services 40%10 of the global legal market. The US legal services market is estimated at $357.6 billion annually11, of which market is estimated at $357.6 billion annually approximately 36% is attributed to commercial litigation. approximately 36% is attributed to commercial litigation. Furthermore, US spending on litigation reportedly rose in Furthermore, US spending on litigation reportedly rose in 2017 and is expected to grow an additional 5.1% in 2018. 2017 and is expected to grow an additional 5.1% in 2018. The potential of this market is energising and with every The potential of this market is energising and with every addition to our team, we increase our capacity to harness addition to our team, we increase our capacity to harness this opportunity. this opportunity. 9. 9. Independent global ranking Agency, benchmarking legal industry Independent global ranking Agency, benchmarking legal industry participants since 1990. Now participants since 1990. Now covering 185 jurisdictions 10. 2018, Legal Services Global Market Report 2018, The Business 10. 2018, Legal Services Global Market Report 2018, The Business Research Company, p Research Company, p 69 11. 2018, Report on the State of the Legal Market, Thomson Reuters 11. 2018, Report on the State of the Legal Market, Thomson Reuters Peer Monitor & Peer Monitor & Georgetown Law, p 15 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Five or ten years ago this industry barely existed in the USA. Now it’s thriving and Bentham is at the forefront of the industry. Allison Chock CHIEF INVESTMENT OFFICER US LEGAL COUNSEL Total Estimated Addressable Market for United States Total Estimated Annual Market Legal Spend: $357.6b 64% 36% 18% Estimated Litigation Portion of Total Legal Spend Estimated Total Addressable Market as % of Total Legal Spend O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 15 Chairman’s and Managing Director’s Report continued United Kingdom and Europe Following the dissolution of our joint venture arrangement in Europe and the expiry of our twelve-month restraint on operating in the region, we resumed activity in the UK and EU in July 2017. This year Alistair Croft joined the company, and is based in London, to source and manage investment opportunities throughout the UK and Europe. In addition, US-based Noah Wortman joined our team as a Business Development Manager (Global Investor Recoveries) responsible for institutional investor relationships across Europe, as well as other parts of our international network. Over recent years, high-profile, multi-party matters have become a prominent feature of the EU market. Examples include the Volkswagen emissions case in Germany, the Tesco accounting scandal and the shareholder litigation against Royal Bank of Scotland over its 2008 rights issue. Our objective is to apply our global expertise in multi-party matters to re- establish our brand and financing activity across the UK and Europe. Another key element of our growth plan is to provide dispute finance for corporates (including for commercial and investment arbitration) and we are engaged in discussions with companies in sectors ranging from energy and telecommunications to insurance. The UK legal services market is the second largest in the world, after the US, with an estimated value of $54.9 billion12. Approximately 26%13 of this is attributed to areas of law relevant to our business, presenting a sizable addressable market for our products and services. Over the next five years, the legal services market is expected to grow at a compound annual rate of approximately 6.5%14, largely due to the impact of Brexit, globalisation and increased M&A activity related to its large financial centre in London. Market size and potential for the wider EU is harder to quantify, but we believe that significant opportunities exist. As we move into FY19, we look forward to expanding our continental footprint via organic growth and via strategic partnerships with businesses in civil law jurisdictions who offer the civil law expertise and cultural and linguistic capabilities necessary to succeed in those markets. Total Estimated Addressable Market for United Kingdom Total Estimated Annual Market Legal Spend: $54.9b 74% 13% 26% Estimated Litigation Portion of Total Legal Spend Estimated Total Addressable Market as % of Total Legal Spend 12. Clutterbuck, E, 2017, IBISWorld Industry Report M69.10, Legal Activities in the UK, IBISWorld, p 4 13. Clutterbuck, E, 2017, IBISWorld Industry Report M69.10, Legal Activities in the UK, IBISWorld, p 13 14. 2018, Legal Services Global Market Report, The Business Research Company, p 95 16 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d FY18 has been a reboot for our European business, following the end of the joint venture arrangement. The UK funding market is becoming increasingly competitive, but we still see significant upside potential for our business in certain key sectors. FY19 should be an exciting year as we look to grow our portfolio and invest in personnel and strategic partnerships. Oliver Gayner INVESTMENT MANAGER O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 17 Chairman’s and Managing Director’s Report continued Investment Portfolio We are encouraged by our experience of year-on-year growth in new funding applications across our investment categories and (conditional and unconditional) funding commitments, as evidenced in the accompanying diagrams. Our focus on transitioning away from idiosyncratic risk to the systemic risk of a portfolio, is reflected in the increased number of investments in our portfolio, across a broader range of case types, sizes and jurisdictions. As at 30 June 2018, our global investment portfolio comprised 75 active investments spread between balance sheet and fund structures. These investments (42 US and 33 RoW) total $229 million in capital commitments. We also have a strong pipeline with a further 5 matters conditionally approved for funding, and opportunities in all jurisdictions. This year we set a target to invest in 64 new cases and deploy $138.0 million across our global portfolio. Whilst we did not meet the first metric with 26 new investments and funding extended on a further 14 investments, we surpassed the second, with the total dollar value of new investments including IC approved and conditionally funded investments exceeding $147.0 million. The cases in which we invest vary in size and overall, we are witnessing an increase in the average size of those cases. In the future, we propose to set a target for funds committed for deployment, as the fund structures in which we now operate impose concentration limits for individual and portfolio investments, meaning that the diversification targets we set in terms of case numbers is now less relevant. EPV by Investment Type ($m) 545 36 237 221 529 392 2,039 248 1,396 Group Commercial Patent Appeal Insolvency Arbitration Whistleblower Law Firm Other IP 18 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Actual and Budgeted Investments and Commitments15 ) m $ ( d e t t i m m o c s d n u F 250 200 150 100 50 0 Actual FY2015 Actual FY2016 Actual FY2017 Actual FY2018 Budgeted FY2019 Budgeted FY2020 Funds committed ($m) Number of investments IC approved and conditionally funded 90 80 70 60 50 40 30 20 10 0 s t n e m t s e v n i f o r e b m u N O v e r v e w i D i r e c t o r s ’ R e p o r t Since commencing the US Fund in February 2017, we have committed US$137.6 million in investments (86.2% of Fund 1), and already deployed US$110.5 million. Since commencing the RoW Funds in October 2017, we have committed $65.7 million in investments (53.4%) and deployed $7.3 million. We are ahead of schedule in terms of commitments, which has accelerated the need to commence the consideration of new funds to meet future investment opportunities. When we embarked upon our new Strategic Plan three years ago, our investment commitments totalled $54.0 million per annum. In this short period of time we have grown our Estimated Portfolio Value16 (“EPV”, as defined in our quarterly portfolio announcements) from $2.0 billion to $5.6 billion - a compounded annual growth rate of 40.9%. i F n a n c a i 15. Invested and committed capital is equal to the total capital either invested or committed to investments, translated to Australian dollars at the foreign exchange spot rate prevailing on the reporting date. Actual and budgeted investments and commitments is categorised as non-IFRS information prepared in accordance with ASIC Regulatory Guidance 230 – Disclosing non-IFRS financial information, issued in December 2011. This information has not been audited or reviewed. 16. EPV is IMF’s current best estimate (in Australian dollars) of a claim’s recoverable amount, which takes into account the perceived capacity of the defendant to meet the claim. It is not necessarily the amount being claimed by the funded claimants in the investment and is not the estimated return to IMF from the investment if it is successful. An EPV is subject to change over time for a number of reasons, including changes in circumstances and knowledge relating to an investment, partial recovery and, where applicable, fluctuations in exchange rates between the applicable local currency and the Australian dollar. EPV is categorised as non-IFRS information prepared in accordance with ASIC Regulatory Guidance 230 – Disclosing non-IFRS financial information, issued in December 2011. This information has not been audited or reviewed. 19 l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Finally, the VLRC recommended that the Victorian State Government should advocate for stronger national regulation and supervision of the third-party dispute finance industry (also currently under consideration by the ALRC, discussed below). The Victorian Government is presently considering all of the VLRC’s recommendations. In addition to the VLRC Inquiry, in December 2017 the ALRC commenced a Federal Inquiry into Class Action proceedings and third-party Litigation Funders. A Discussion Paper was published at the beginning of June 2018, stakeholder consultation followed and the ALRC invited submissions by 30 July 2018. The ALRC is due to report to the Commonwealth Attorney-General by 21 December 2018. Chairman’s and Managing Director’s Report continued Regulatory Landscape The dispute financing industry is in the process of reform in many of the jurisdictions in which we operate. We expect and embrace change and so we have welcomed the regulatory reviews and oversight that are taking place, and indeed have long called for appropriate regulation as our industry matures and expands to the mainstream. Australia In Australia, two regulatory reviews were underway during FY18. The Victorian Law Reform Commission (VLRC) commenced an Inquiry into Litigation Funding and Group Proceedings in January 2017, delivered its report (‘Access to Justice: Litigation Funding and Group Proceedings’) to the Victorian State Attorney-General in April 2018 and published the report on 19 June 2018. The VLRC Inquiry considered a number of issues related to the use of dispute financing, particularly in class actions (currently under consideration by the Australian Law Reform Commission (ALRC), discussed below). The VLRC recommended that Victorian lawyers be permitted to charge contingency fees in class actions and also recommended legislative amendments to provide the Court with power to review and vary legal costs, dispute finance fees and charges, and settlement distribution costs to ensure they are fair and reasonable. IMF Bentham has submitted to the VLRC that the Courts consider introducing a costs budgeting procedure, (similar to part of the UK Jackson civil procedure reforms) requiring claimant and defendant lawyers to file their estimated costs in court at an early stage. We will continue to participate in the debate surrounding this important industry development. 20 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d In its Discussion Paper, the ALRC proposed that litigation funders be licensed. We strongly support this proposal, which we have advocated for many years. We are now seeing increasing competition for class action funding as new (mainly overseas) funders have entered the market. These funders often hold very few assets in Australia and, where they are unlisted private entities, their financial position is opaque. It is important that dispute financiers can honour the financial promises they make, including to pay adverse costs if the litigation is lost. We believe that a proportionate and effective licensing regime could ensure these standards are met and reduce costs for litigants by minimising the need for bespoke management of funding arrangements by the courts. For many years IMF Bentham operated under the licensing regime of the Australian Securities and Investments Commission (ASIC) and previously endorsed the 2014 Productivity Commission’s recommendation to introduce minimum capital adequacy requirements. The ALRC also proposed that lawyers be permitted to charge contingency fees in class actions. IMF Bentham contributed a detailed submission to the ALRC. Asia Demand for commercial financing of litigation, arbitration and insolvency cases is growing across Asia. In some jurisdictions, third-party dispute finance is neither expressly permitted nor expressly prohibited. As demand for litigation finance increases, we expect further judicial and legislative reforms to expand permission for funding. Singapore expressly endorsed third party financing in international arbitration (and related proceedings) in March 2017. The Singapore arbitration funding market looks set to grow as a result and the Singapore International Arbitration Centre (SIAC) reports an ever-increasing caseload. We recently provided feedback to the Singapore Ministry of Law as part of its industry feedback-gathering to assess the impact of the new legislation. The legal community is positive about the benefits of third-party dispute financing and we expect this to lead to further opportunities to fund commercial litigation cases as well as international arbitration and insolvency matters. In Hong Kong, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 was passed in June 2017, paving the way for third-party dispute finance of international arbitration in Hong Kong. The Department of Justice is now preparing a Code of Practice, and once the Code is finalised, we anticipate the provisions permitting third-party dispute finance in international arbitration will come into effect in late 2018. IMF Bentham participates actively, and respectfully, in discussions around regulatory reform and development in each of the Asian jurisdictions in which we operate. We also take a leadership position in the development of case law around dispute financing. In Hong Kong we have been involved in an application to the High Court, believed to be a market first, seeking approval for funding of a commercial proceeding on the grounds of access to justice. Canada The third-party dispute financing industry is unregulated in Canada with no proposed reform on the horizon. This reflects the nascent status of the industry. Consistent with our position in other jurisdictions, we would welcome appropriate and well-formulated regulation. There have been a number of Canadian legal industry studies and consultations released this year relevant to our business, including the October 2017 British Columbia Law Institute Study Paper on Financing Litigation, the 2018 Law Society of Ontario Contingency Fee Reform Consultation Paper, the March 2018 Law Commission of Ontario Consultation Paper on Class Actions: Objectives, Experiences and Reform for which our company was interviewed and made a submission. This year there have been four Canadian reported decisions on third-party dispute financing. These decisions all arise from cases we have funded. This new and evolving jurisprudence is shaping the landscape and will determine how funders conduct business in Canada in the future. USA In May 2018, a bill was introduced into the Senate (The Litigation Funding Transparency Act of 2018), proposing the disclosure of litigation funding arrangements (including the funding agreements themselves) in any federal class actions and federal multi-jurisdiction litigation. Without accompanying privilege protections, such disclosure would not be in the best interests of claimants. Our assessment is that the proposed legislation arguably imposes more barriers to entry for claimants who are trying to bring meritorious lawsuits against well-resourced opponents (often massive corporations) as it is likely that such disclosure will result in additional, and significant, interlocutory procedures resulting in further costs for plaintiffs, and a significant use of Court resources. As the issue of litigation finance disclosure is already under examination by the Federal Advisory Committee on Rules of Civil Procedure, and there are existing ethical rules governing attorney-client relationships to avoid conflicts of interest, it remains to be seen whether the Senate will accede to the Advisory Committee in this instance. 21 O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Chairman’s and Managing Director’s Report continued We have contributed a submission to the Federal Advisory Committee on Rules of Civil Procedure on this issue and we continue to speak to and lobby parties with vested interests. In a non-binding advisory opinion, the New York City Bar Association recently opined that non-recourse third party funding of law firm portfolios breaches the New York Rules of Professional Conduct Rule 5.4(a) (designed to preserve lawyers’ independence and prevent lawyers sharing fees or forming partnerships with non- lawyers). The advice we have obtained from legal ethics experts and which is shared by others in the industry, is that this opinion is a very literal reading of the Rule which is incorrect and is contrary to various New York court decisions. Law firm portfolio funding also forms a minor part of Bentham’s funding in New York. United Kingdom and Europe In the UK, third-party dispute finance is growing as investment capital flows into the sector. Under English law, a dispute finance agreement is generally not considered champertous, and whilst funders can be held liable to pay adverse costs, the so-called “Arkin Cap” (after Arkin v Borchard Lines & Others 2005 EWCA Civ 655) limits that exposure to the amount of the funder’s investment. A voluntary code of conduct was introduced as part of the Jackson civil procedure reforms by the Association of Litigation Funders (ALF Code). A wide range of financing options are permitted under English law. There were no material changes to the regulatory climate in the UK during this financial year. In the context of international arbitration, a comprehensive report by the International Council for Commercial Arbitration and The School of Law at Queen Mary University of London embraced the use of third- party financing in arbitration and made a number of recommendations for arbitration tribunals to follow. In continental Europe, third-party financing is permitted and growing in many civil law countries. Competitive Landscape In the ‘emergence’ phase of our industry’s life cycle, we were rewarded with the high margins and low competition that came with being a first-mover. As our industry enters its next phase of growth, it is natural to expect increased competition and some price pressure. However we do not expect significant price compression as returns promised by newly-launched competitor funds are high and they will strive to maintain the margins they have promised their investors. In addition, IMF Bentham has a differentiated business model - in addition to providing capital, we bring recognised value to each investment, enabling us to earn higher margins. 22 In some of our markets we are the pioneer and market leader and in others we are among an exclusive set of leading players. Competition has generally increased in each of the jurisdictions in which we operate. Our competitors include domestic and international funders as well as substitutes such as contingency law firms and hedge funds. Some fields, such as securities class actions in Australia, are experiencing healthy competition at present (for reasons covered earlier), while other domains, such as Canada, are still relatively unrecognised by potential competitors. Competition will always emerge, but success in this industry requires the confluence of many factors, and some of the most critical (financial and human resources) are also the most challenging for competitors to master. It is a delicate recipe to invest wisely and profitably in litigation, and we have seen numerous market entrants come and go. New operators can be lured by the promise of a growth industry and attractive financial returns, but ultimately, they can become submerged by the significant challenges. Over the years, only a coterie of legitimate competitors has risen to the top. Although we are never complacent or hubristic, we are very aware of the significant barriers to entry in this industry, as we have faced and surmounted each one. Our diversification strategy has involved deliberately and steadily developing defensive positions on each front. – Financial Capital: Significant capital reserves are necessary to invest in large claims whose returns are potentially significant, but perhaps more importantly, a sizeable war chest is essential to achieve portfolio diversification. We believe that portfolio diversification is essential to off-setting the risks associated with dispute financing. In addition to the quantum of capital, the way we have structured our capital in funds enables us to be flexible in the way we deploy that capital. – Human Capital: Evaluating and determining which disputes to invest in requires skills that are not easily replicable. It takes years to build a talented team and, once established, there is no facsimile. Not only is IMF Bentham home to one of the founders of the industry, but we have been amassing an entire team over 17 years, whose collective wisdom is now a comparative advantage. – Global Coverage: In an increasingly global industry, having an expansive geographic footprint is essential. The diversification assists with risk mitigation and the local presence facilitates jurisdictional understanding and relationships which in turn drive new business. We have been assiduously expanding our global presence for a number of years and are now well- resourced on the ground in each of the important funding jurisdictions, with more to come in the growth markets. A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d – Relationships: Dispute financing requires relationships across commerce, finance, insurance, academia, government, media, and of course all layers of the legal industry (including private practice, the Bar and the judiciary). Good relationships take time, patience and commitment and we have been cultivating ours over a lifetime (individually and institutionally), forming a deep and broad global network of ‘clients’, referrers, expert advisers and suppliers. – Innovation and Product Development: From our early days of insolvency funding, we have expanded our market offering to include financing for group/ class actions, arbitration, law firm portfolios and all manner of commercial disputes and are now actively engaged in developing dispute financing solutions for corporates. – Technology and Systems: We have developed our own proprietary technology platforms and business processes for case evaluation and management and leverage these every day, as well as continually improving them for future return. Risk Management We are in the business of risk assessment, management and mitigation, and we are comfortable with this mantle. Every day we navigate risk on behalf of others - balancing caution with entrepreneurialism to achieve commercial, legal and ethical objectives - and as a result, we have become an entrusted ‘safe pair of hands’ for many. For our own organisation, we face some risks that are unique to our industry and some that are common across sectors. We have systems to identify and address each one. Portfolio Concentration There is always the risk that a case in which we invest may be lost. Despite the best case-selection, case strategy and execution, litigation is not a perfect science and is sometimes subject to the vagaries of economics, emotions, judicial proclivities and other influences. The first step of our risk mitigation here is to have a skilled Investment Management team and experienced Investment Committee who identify and select the cases in which to invest. We have achieved a 90% success rate, across 175 cases over our 17-year history because we understand the above ingredients in litigation and are good at identifying and accounting for the nuances of litigation. We minimise the risk of exposure to potential individual case losses through portfolio diversification - increasing the size and geographic spread of our global portfolio and varying the type of cases we fund. Although we currently have portfolio concentration risk associated with investments in Wivenhoe and Westgem, our diversification strategy has reduced concentration risk for future periods. Our views on the prospects of those two cases have been communicated to investors throughout the year and have not changed. However, if one or both cases were to be lost, they would have a material impact on IMF Bentham’s financial results and its cash position. We have taken steps, including co-funding and ACO insurance cover, to mitigate in part these impacts but IMF Bentham retains material adverse cost risk on these investments. Our diversification strategy has sought to reduce portfolio concentration risk in future periods. We are mitigating the impact of potential case losses in the future by switching to funding vehicles to finance our investments. We have robust internal risk management protocols which are reviewed and pressure-tested periodically by external independent consultants. From there we are able to make educated and calculated decisions of what insurable risks are deemed necessary to be transferred to insurance policies where available and what retentions are to be carried. Whether negotiating insurance for our global portfolio or other aspects of our operations, we team with the best in the business to achieve world-class cover. The collaboration and ongoing dialogue between our highly experienced team and our strategic insurance partners often results in innovative approaches and bespoke insurance solutions, not previously conceived or available to others on the market. Competition ‘If you build it they will come’… When you conceive a new industry and demonstrate its viability, it is inevitable, almost flattering, that competition will follow. The proper response to competition is differentiation and innovation. Fortunately, our business has many differentiators, including our track record, capital adequacy, adverse costs coverage and provision of security for costs, transparency through public listing, reputation for integrity and fairness (and the brand equity that follows), talented people who bring strategic insights and hands-on project management to each investment and our Perth-based Client Liaison Team who run class action administration. Innovation is also a mindset we have exhibited since inception. Although what it meant to innovate seventeen years ago when we started is different to what it means to innovate today, it is in our corporate DNA to develop products, services and methodologies that never existed before and in so doing define the market and the industry. 23 O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Chairman’s and Managing Director’s Report continued We are not building a business, we are building an industry. Hugh McLernon EXECUTIVE DIRECTOR 24 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Regulatory Reform Reform and disruption are inevitable in every industry today and ours is no different. Regulation in our key markets may change in the future and impact our business model. Indeed there are proposed regulatory reforms in several of our markets right now. Common law developments can also alter the landscape. Our best response to change is awareness, involvement and leadership - to keep abreast of potential changes, to have a seat at the table in any discussions and to continue to innovate. We are doing all of these. Key-person dependency We are privileged to have one of the industry’s pioneers as an executive director and many senior executives whose skills and industry knowledge are unparalleled. We value the contribution of our executive directors, senior management and key personnel to oversee the day-to-day operations and the strategic management of the company and protect our corporate know-how. We like to think of each of our people as a ‘key person’ as everyone plays a role in our business’s overall success. Our business has now reached a size and sophistication that the whole is greater than the sum of its individual parts. Today it is our combined know-how and business processes that are key to our performance. Of course, we protect ourselves with the usual non- compete, confidentiality and IP protection agreements for our people and we actively engage in coaching, mentoring, professional development and other measures to build, transfer and safe-guard our corporate knowledge, plus we have an attractive Long Term Incentive Plan (“LTIP”) which rewards loyalty and engagement. We are fortunate to experience low turnover, high engagement and loyalty and our recipe stays within the family. IT and Data Security We invest in security hardware, software, systems and policies to remain abreast of constantly-evolving IT threats. We undergo audits by external security and IT providers and continuously adjust our approaches. We are also careful to protect the confidentiality of our IT security systems and consequently, provide only an outline here. What we can say, is that IT and data security today focuses as much on threats from social engineering as it does on threats posed by external penetration or ‘hacking’. Those who seek to illegally obtain or corrupt the confidential or competitive information of others, often now do so by inveigling themselves into the world of unsuspecting innocents (including customers, employees, suppliers and the like). Accordingly, in addition to the security measures taken by our IT team, everyone in our organisation is tasked with responsibility for protecting data and commercially-sensitive know-how. Vigilance cannot be delegated. From our Board of Directors to our newest recruit, all of our people are part of our armour and we conduct ongoing awareness and training campaigns to ensure our people are cognisant of potential threats and their role in protecting our organisation. IT threats are ever-present in today’s world and we are committed to doing everything we can to protect our organisation. Fortunately, our business captures very limited information about claimants, so our obligations under privacy and data protection regulations are minimal. This year Europe’s new Global Data Protection Regulations (GDPR) impacted many global businesses and, like others, we reviewed our procedures but as our EU footprint is presently confined, the new regulations had minimal impact for our business. Brand and Reputation Every business is exposed to the threat of damage to its reputation, name or brand, and ours is not immune. The sources can be multifarious but the impact is often homogenous - when an institution’s reputation is sullied, stakeholder trust and loyalty is eroded and brand equity and financial value is usually compromised. The effects can be long-lasting - trust can be lost quickly but can take a lifetime to regain and will never be as robust. Given the nature of some of the cases we fund, we regularly see the impact of institutional reputational damage and are acutely aware of the risk facing every business. We have a strong risk management culture and numerous policies and practices in place to safe- guard our reputation including escalation procedures throughout our organisation structure and regular and clear communication with all stakeholders. 25 O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Chairman’s and Managing Director’s Report continued They’re really diligent. They master their brief. Engage on a case in a way that’s informed. [We] feel like partners. PARTNER, AUSTRALIAN LAW FIRM Corporate Governance and Compliance As a publicly-traded company on the Australian Securities Exchange, and a business with experienced financiers and lawyers at the helm, we are acutely aware of our legal and regulatory obligations. Full details of our Corporate Governance program are available on our website. Tax Our business is predominantly tax-domiciled in Australia and the United States and contributes via taxes to the communities in which we live and work. Naturally, as a publicly-listed, for-profit organisation, we seek to meet our tax obligations while maximising the interests of our shareholders. Accordingly, we welcomed recent tax reform in the United States, which reduced our corporate tax rate there for the second half of the financial year. Realised and Unrealised Gains IMF’s investments in litigation assets are recognised in our financial statements as intangible assets. This means our investments are recorded at cost as funds are outlaid on each investment, and do not include any movements in the embedded value of the assets. At an investment’s conclusion, the associated intangible asset is derecognised and is offset by the proceeds (if any) from the investment, resulting in a profit or loss on the investment. Some litigation funders’ accounting policies allows for fair value adjustments over the investment’s life, resulting in unrealised gains and losses being recognised in the profit and loss statement and associated movements in the carrying value of the investment in the balance sheet. 26 Our People Our business sits neatly on the continuum between finance and professional services. We provide a monetary product accompanied by a service which is delivered by sophisticated knowledge workers. And like all knowledge- based, service businesses, our people are our key asset and competitive advantage. We are fortunate to be able to attract and retain talented people who are best-of-breed in their field. Our investment managers are typically graduates from leading universities, who then go on to develop successful careers at top-tier law firms, as in-house corporate counsel, barristers, business leaders and company directors. The role requires people who can straddle the unique skills of financier, legal strategist and portfolio manager, carrying significant accountability in doing so. Investment mandates are determined by our Investment Committee, a formidable ‘brains trust’ comprising our most senior and seasoned executives as well as former members of the judiciary and legal profession. Our investment team is supported by dedicated experts in finance, marketing and technology, including our market-leading Client Group who manage book-builds and settlement administrations for multi-party actions. Overseeing the entire talent pool are Executive and Non-Executive Directors whose international careers span investment banking, finance and capital markets, insurance, law, education, human rights, public health, overseas aid and development, conservation, heritage and media. We recognise and incentivise our people with a combination of extrinsic and intrinsic rewards that acknowledge team performance and individual contribution. These include competitive remuneration, long and short-term incentive plans (detailed later in our Directors’ Report), investments in their learning and development and career progression. We also know that to sustain peak performance and retain talent requires an alignment of individual and organisational values so we work hard to foster a culture that reflects our values. We want our people to feel valued and inspired every day. A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 27 We recruit and promote on merit, while striving for inclusion and diversity (in its many forms). Women occupy many of our senior leadership positions, including two Board Directors, our Chief Financial Officer, our Chief Investment Officers for Canada and the USA, the heads of our Hong Kong and Adelaide offices, our two Chief Marketing Officers, the head of our Client Liaison Team, lawyers in our corporate in-house legal team, 35% of our Investment Managers and Legal Counsel, as well as Managers in our finance team. One of the reasons I joined this company and continue to love this job is being part of an organisation that is ethically trying to create a sustainable dispute financing industry and making a positive difference in the world. I continue to be impressed with our senior people in terms of character, talent, and creativity. Being intellectually challenged every day is hugely rewarding. There’s never a dull moment. Allison Chock CHIEF INVESTMENT OFFICER, USA Chairman’s and Managing Director’s Report continued Corporate Social Responsibility Across the jurisdictions in which we operate, we are actively involved in thought leadership and the advancement of the industry. We contribute to research initiatives about access to justice and the effective operation of civil litigation. We believe this is an important social investment as well as being good for our own business. University of New South Wales, Sydney, Australia In Australia, we have a strategic alliance with the University of New South Wales (UNSW) Class Action Research Initiative, which explores and solves key issues in class actions practice through academic research and analysis. During FY18 our alliance with the UNSW generated research and publications in relation to class actions settlement distributions and achieving finality in class actions. We collaborated on continuing education workshops for leading industry members (including the judiciary, private legal practice, academia and corporate counsel). At the end of FY17 we co-hosted with UNSW an industry Class Actions Conference and will do so again in FY19. Civil Justice Research Initiative, University of California, USA In the US we are a founding supporter of the Civil Justice Research Initiative (CJRI), a ‘think tank’ chaired by Erwin Chemerinsky, Dean of Berkeley Law School and Founding Dean of the UC Irvine School of Law. The CJRI’s goal is to ensure that leaders, legislators and courts have the factual research and data they need to set policy to ensure continued access to the courts, by systematically identifying and producing highly credible, unbiased research on critical issues concerning the civil justice system. Allison Chock, Chief Investment Officer- US, is a member of the CJRI’s Advisory Board, which also includes prominent attorneys in private practice from around the United States as well as established legal scholars and researchers from prominent law schools around the country. Monash University, Melbourne, Victoria, Australia As we have done for several years, we also supported substantial, independent empirical research conducted by academics at Monash University in Victoria, Australia. Research conducted during FY18 explored the use of ‘opt-in’ devices for claimants in funded class actions in Australia. The research explored the proportion of claimants who fail to register as members in a funded action, and consequently impact the value of the overall claims pursued in the class action. Public Counsel, Los Angeles, California, USA We are also an ongoing supporter of Public Counsel, the United States’ largest pro bono law firm. Public Counsel’s activities are far-ranging and impact a wide spectrum of people, many of whom live at or below the poverty level. Allison Chock is a member of the Board of Directors. Osgoode Hall Law School, York University, Toronto, Ontario, Canada Our team in Canada lectures to J.D. and LLM students at Osgoode Hall Law School (at York University), including students involved in the Investor Protection Clinic and also supports the University of Ottawa’s 2018 career day for tomorrow’s legal leaders. 28 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Financing Cases which advance Public Interest IMF Bentham also supports a number of cases which promote wider public interest. For example, we are funding cases seeking redress for property damage in the Australian towns of Williamtown, Oakey and Katherine, due to PFAS chemical contamination of water supplies. It is intrinsically rewarding to finance claims which advance public interest and deliver recompense for aggrieved parties who are representative of the wider community. Laura Maytom ASSOCIATE INVESTMENT MANAGER O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Laura Maytom, Associate Investment Manager on funded case seeking redress for chemical contamination in Williamtown NSW Australia 29 Chairman’s and Managing Director’s Report continued FY18 Results Our financial results this year are reflective of executing the final phases of our business transition strategy. This year we actioned key elements of that transition strategy and understandably, our actions had a financial impact for FY18. By selling assets into the newly-established Fund 1, any income to us from those investments will be deferred to future reporting periods. Had we retained those assets on our own balance sheet, the short-term scenario might look quite different. However, we anticipated and accept the immediate consequence of our long-term strategic approach. Our FY18 financial results were also impacted by the loss of a US-funded case, ‘Case 003’, the deferred completion of a number of significant investments (including Wivenhoe) and a number of case completions whose returns were modest. The case prospects on one of our investments in Hong Kong changed, as can happen in the ‘art’ of litigation, and we were required to modify our financial expectations accordingly, salvaging a narrower margin than initially forecast. These case situations resulted in unusually high expenses for the period and also impacted our Return on Invested Capital (ROIC)17. Our ROIC for US matters decreased from 1.0x to 0.8x (reflecting the loss of ‘Case 003’ and a small sample of completions in US investments) and our ROIC for completions since 2011 of non-US investments has remained stable at 1.5x. Net profit after tax Add litigation contracts - expenses Add depreciation Net cash increase from sale of US portfolio to US Fund 1 Distributions to non-controlling interests 2014 $’000 9,868 50,638 223 – – Some of the key investments in our portfolio are yet to achieve resolution and therefore the potential earnings have been deferred to future years. On average, the cases in which we invest typically have a gestation period of 2.6 years between the initial commitment of funds to the time of resolution and return on our investment. Our financial performance in any given year is therefore reflective of investment commitments made years earlier, and our most current investment decisions will not come to fruition for several years. Our employee benefits expense increased this reporting period, compared to last, due to growing our team. On the other hand, these expenses were off-set by a corresponding decrease in corporate and office expenses. This year we also incurred and booked an accounting adjustment for tax expense associated with a one-off adjustment in the US tax rate. Although we reported a net loss in our P&L this year, our operating cash flows before new investments were the highest they have been in the past five years and we generated the second-best free cashflow after investments. This achievement reflects that we are also transitioning to a capital light position, as we can grow investments materially, without using all of our own capital. Free Cash Flow Reconciliation 2015 $’000 8,580 77,755 228 – – 2016 $’000 20,760 46,826 451 – – 2017 $’000 15,440 59,206 591 – – 2018 $’000 (7,847) 54,703 621 61,271 (9,694) Working capital (27,317) (6,133) 5,470 (9,861) (16,209) Operating Cash Flow, including receipts from litigation contracts, net of distributions to NCI Net investments in litigation18 Capital expenditure Free Cash Flow19 33,412 (57,085) (171) (23,844) 80,430 (49,199) (406) 30,825 73,507 (82,605) (1,109) (10,207) 65,376 (84,240) (979) (19,843) 82,845 (59,834) (236) 22,775 17. ROIC (return on invested capital) is calculated as gross income to IMF (litigation contracts – settlements and judgements) less all reimbursed costs, divided by total expenditure (excluding overheads but including any adverse costs on lost cases). ROIC is categorised as non-IFRS information prepared in accordance with ASIC Regulatory Guidance 230 – Disclosing non-IFRS financial information, issued in December 2011. This information has not been audited or reviewed. 18. Net investments in litigation is calculated as investments in litigation less receipts from non-controlling interests funding. Net investments in litigation is categorised as non-lFRS information prepared in accordance with ASIC Regulatory Guidance 230 – Disclosing non-IFRS financial information, issued in December 2011. This information has not been audited or reviewed. 19. Free cash flow represents our IFRS operating cash flow combined with our cash flows from litigation, non-controlling interests and capital expenditures. Movements in free cash flow highlight the increases and decreases in cash from our core operations that are attributable to ordinary shareholders. Our long term focus is to generate growth in free cash flow, which is primarily driven by growth in earnings, effective management of working capital and leveraging our transition to a funds management operation. Free cash flow is categorised as non-IFRS information prepared in accordance with ASIC Regulatory Guidance 230 – Disclosing non-IFRS financial information, issued in December 2011. This information has not been audited or reviewed. 30 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d We have experienced a significant increase in net assets during the period, reflecting a material increase in investments and a material decrease in deferred tax liability. Following the sale of assets into Fund 1, cash and net assets increased on a pro-forma basis to $193.5 million and $299 million respectively. As a result, the net asset backing per share increased by 76% during FY18. Earnings versus free cash flow s n o i l l i m $ 34 34 24 24 14 14 4 4 -6 -6 -16 -16 -26 -26 30.8 9.9 8.6 20.8 (10.2) (23.8) 2014 2015 2016 22.8 (7.8) 2018 15.4 (19.8) 2017 Earnings from continuing operations Free Cash Flow O v e r v e w i D i r e c t o r s ’ R e p o r t Intangible Assets ($ Million) Total Assets ($ Million) EPV ($ Million) 3 . 1 2 3 3 . 9 3 5 9 . 1 9 3 5 . 9 3 3 9 . 0 8 2 2 . 1 8 2 9 . 0 9 1 6 . 5 4 1 6 . 8 9 5 . 9 9 3 4 6 , 5 2 8 7 , 3 8 3 4 , 3 7 6 0 , 2 2 0 0 , 2 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 31 Chairman’s and Managing Director’s Report continued As Managing Director, my focus is on setting and executing strategy. We have a truly wonderful, magnificent team. If we focus on executing our strategy to the best of our ability, the results will take care of themselves. Andrew Saker MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER 32 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Future Initiatives And now we turn our focus and energy to the year ahead. New Funding Vehicles FY19 will see us launch additional funding vehicles to facilitate the funding of new investments in the jurisdictions in which we operate. We expect to complete the roll out of these new funds by the end of FY19 in a continuation of our strategy to move from balance-sheet investing to investing via fund structures. For our new ‘Fund 4’ (for US investments), we are targeting a total of US$500 million in capital for deployment. Once Fund 4 is established, we will be targeting additional funding in a new RoW Fund (for non-US investments). Geographic Expansion We will continue to build our presence and strengthen our foothold in the developing markets of Asia and Canada, both of which provide extraordinary and exciting investment opportunities. We are equally passionate about our return to the European market and are exploring options for growth via organic means, or mergers and acquisitions. FY19 will see us execute that strategy and round out the completion of our diversification agenda by filling our last points of geographic expansion. Building on our existing strengths, we will actively be pursuing opportunities for investments in multi-party actions in jurisdictions such as Australia, Canada and Europe. Proprietary Infrastructure Over the years we have invested in creating proprietary IT, infrastructure and know-how for the cost-effective and efficient administration of multi-party group actions. Our infrastructure and business processes provide a cost advantage over other dispute financiers and also deliver time and expertise benefits to the law firms we team with. We will continue to refine and enhance this important business platform in FY19. Corporate Financing Today’s high performing businesses are starting to explore new financing models. As the dispute finance industry continues to mature and transition from the fringe to the mainstream, corporate decision makers are increasingly aware of the utility of third-party dispute finance. From our discussions with corporates and their legal advisers, a portrait is emerging of the type of business ideally suited to dispute financing and, for those businesses, the upside can be transformational. Our finance enables commercial enterprises to pursue legal claims while preserving their cash for business-as-usual or growth, helps them level the playing field against well-resourced opponents, enables them to finance their disputes without depressing their financial results or inhibiting their company’s valuation, manage the risk associated with litigating, derive independent strategic input from our team and relieve the workload of their in- house legal teams. Although the legal industry has a reputation for being conservative and slow to change, today’s decision- makers are increasingly seeking innovation. We hope to work with today’s corporate influencers and their legal advisers to help them pursue their legal rights, unlock the monetary value in their disputes and de-risk their balance sheets. We are working on building this part of our business in each of our markets. Conclusion On behalf of the Board, we would like to thank our shareholders for their continued support and endorsement and we would like to thank our dedicated team who work tirelessly to achieve our strategic objectives. FY19 will be another busy and demanding year for our team and we are excited and energised by the challenge. We look forward to the year ahead and the exciting opportunities FY19 presents. O v e r v e w i D i r e c t o r s ’ R e p o r t Andrew Saker Managing Director and Chief Executive Officer Michael Kay Michael Kay Non-Executive Chairman i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 33 Financial Report Directors’ Report .......................................................... 35 Auditor’s Independence Declaration ............................ 61 Statement of Comprehensive Income .......................... 62 Statement of Financial Position .................................... 63 Statement of Cash Flows ............................................. 64 Statement of Changes in Equity ................................... 65 Notes to the Financial Statements ................................ 66 About this Report ......................................................... 66 Significant Accounting Judgments, Estimates and Assumptions ......................................... 68 A. RESULTS FOR THE YEAR 69 Note 1: Segment information .................................... 69 Note 2: Revenue ....................................................... 72 Note 3: Other income .............................................. 72 Note 4: Expenses ..................................................... 73 Income tax ................................................... 74 Note 5: Note 6: Earnings per share ....................................... 76 Note 7: Dividends paid and proposed ..................... 78 Note 8: Statement of cash flows reconciliation ......... 79 B. INTANGIBLE ASSETS 80 Note 9: Intangible assets .......................................... 80 C. CAPITAL STRUCTURE 82 Note 10: Financial risk management objective and policies .................................................. 82 Note 11: Cash and cash equivalents .......................... 86 Note 12: Debt Securities ............................................. 86 Note 13: Contributed equity........................................ 87 Note 14: Retained earnings and reserves ................... 88 D. WORKING CAPITAL, OTHER ASSETS AND OTHER LIABILITIES 89 Note 15: Trade and other receivables ........................ 89 Note 16: Other assets ................................................. 90 Note 17: Plant and equipment .................................... 90 Note 18: Trade and other payables ............................. 92 Note 19: Provisions ..................................................... 92 Note 20: Commitments and contingencies ................. 94 E. THE GROUP, MANAGEMENT AND RELATED PARTIES 95 Note 21: Key management personnel......................... 95 Note 22: Share-based payment plan .......................... 96 Note 23: Parent entity information ............................. 98 Note 24: Material partly-owned subsidiaries .............. 99 Note 25: Discontinued operations ............................ 101 Note 26: Related party disclosure ............................. 101 Note 27: Auditor’s remuneration ............................... 101 Note 28: Events after the reporting date ................... 101 Directors’ Declaration ................................................. 102 Independent Auditor’s Report .................................... 103 Shareholder Information ............................................. 109 Corporate Information ................................................ 112 34 Directors’ Report The directors of IMF Bentham Limited (“IMF” or “the Company” or “the Parent”) submit their report for the year ended 30 June 2018. Directors The names and details of the Company’s directors in office during the financial year and until the date of this report are noted below. Directors were in office for the entire period unless otherwise stated. Names, qualifications, experience and special responsibilities Andrew Saker Managing Director and CEO Andrew Saker was appointed Managing Director and CEO on 5 January 2015. Mr Saker holds a Bachelor of Commerce degree in Accounting and Finance. He is a Member of the Institute of Chartered Accountants and was an Official Liquidator of the Supreme and Federal Courts until his appointment at IMF. Mr Saker was a partner at a leading provider of corporate recovery, insolvency management and restructuring services throughout Australia and Asia for 16 years. Mr Saker is a member of the nomination committee. During the past three years he has not served as a director of any other listed company. Michael Kay Non-Executive Chairman Michael Kay was appointed the Company’s Non-Executive Chairman on 1 July 2015. Mr Kay holds a Bachelor of Laws degree from the University of Sydney. Mr Kay brings a wealth of commercial experience to IMF. Most recently he was Chief Executive Officer and managing director of listed salary packaging company McMillan Shakespeare Ltd, a position he held for six years. Previously Mr Kay had been CEO of national insurer AAMI after serving in a variety of senior roles with that company. Prior to joining AAMI he had spent 12 years in private legal practice. Mr Kay: – is a non-executive director of RAC Insurance Pty Limited (appointed 20 February 2009); – is chairman and non-executive director of Lovisa Holdings Limited (appointed 13 April 2016); and – is chairman and executive director of ApplyDirect Limited (appointed 6 March 2015). Mr Kay is a member of the audit and risk committee, remuneration committee, corporate governance committee and nomination committee. During the past three years he has not served as a director of any listed company other than IMF Bentham Limited, Quintis Limited, Lovisa Holdings Limited, ApplyDirect Limited and McMillan Shakespeare Ltd. A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 35 Directors’ Report continued Hugh McLernon Executive Director Hugh McLernon is a lawyer by training. He holds a Bachelor of Laws degree from the University of Western Australia. After graduation he worked as a Crown Prosecutor for eight years and then as a barrister at the independent bar for a further nine years, before joining Clayton Utz for three years as a litigation partner. In 1988, Mr McLernon retired from legal practice and introduced the secondary life insurance market into Australia through the Capital Life Exchange. He also pioneered the funding of large-scale litigation into Australia through McLernon Group Limited. From 1996 to 2001, Mr McLernon was the managing director of the Hill Group of companies which operates in the finance, mining, property, insurance and investment arenas of Australia. Michael Bowen Non-Executive Director Michael Bowen graduated from the University of Western Australia with Bachelors of Laws, Jurisprudence and Commerce. He has been admitted as a barrister and solicitor of the Supreme Court of Western Australia and is a Certified Practicing Accountant of CPA Australia. Mr Bowen is a partner of the law firm DLA Piper practicing primarily corporate, commercial and securities law with an emphasis on mergers, acquisitions, capital raisings and resources. Mr Bowen was appointed to the board as a non-executive director in December 2001 and is chair of the remuneration committee, chair of the audit and risk committee and a member of the corporate governance committee and nomination committee. Mr McLernon has been an executive director of IMF since December 2001 and was the inaugural managing director through to December 2004. He became the managing director again on 18 March 2009 and retired from that role on 5 January 2015. Mr Bowen is also a non-executive director of Trek Metals Limited (appointed 22 February 2017). During the past three years he has not served as a director of any listed company other than IMF Bentham Limited and Trek Metals Limited. During the past three years he has not served as a director of any other listed company. 36 Directors’ Report continued Karen Phin Non-Executive Director – Appointed 25 August 2017 Karen Phin was appointed to the board as a non-executive director in August 2017. Ms Phin holds a Bachelor of Arts/ Law (Honours) from the University of Sydney and is a graduate of the Australian Institute of Company Directors. Ms Phin brings a vast array of experience in capital markets and the financial services industry, including experience with regulators and assessing regulatory frameworks, corporate advisory, and broad expertise in capital management. Ms Phin has over 20 years’ experience analysing and advising Australian listed companies on capital management, capital raisings and mergers and acquisitions. Until 2014, Karen was Managing Director and Head of Capital Management Advisory at Citigroup in Australia and New Zealand. From 1996 to 2009, she worked at UBS where she was also a Managing Director and established and led the Capital Management Group. Prior to joining Citigroup, Karen spent 12 months at ASIC as a Senior Specialist in the Corporations group. Ms Phin is a member of IMF’s audit and risk committee, remuneration committee, corporate governance committee and nomination committee. Ms Phin is also a non-executive director of Magellan Financial Group Ltd (appointed 23 April 2014) and has been a member of the Takeovers Panel since 2015. Wendy McCarthy AO FAICDLIFE Non-Executive Director Wendy McCarthy AO started her career as a secondary school teacher, graduating from the University of New England with a Bachelor of Arts and Diploma of Education. She moved out of the classroom into public life in 1968 and since then has worked for change across the business, government and not-for-profit sectors, in education, family planning, human rights, public health, overseas aid and development, conservation, heritage, and media. She has held many significant leadership roles in key national and international bodies including eight years as deputy chair of the Australian Broadcasting Corporation, ten years as Chancellor of the University of Canberra, and 12 years of service to Plan Australia as chair, with three years as global deputy chair for Plan International. From 2008 to 2016 she was chair of headspace, the National Youth Mental Health Foundation. Ms McCarthy recently retired from her role as chair of Circus Oz., Australia’s leading circus. She is currently the deputy-chair of Goodstart Early Learning, Patron of the Sydney Women’s Fund and Ambassador for 1 Million Women. Ms McCarthy was appointed an Officer of the Order of Australia for outstanding contributions to community affairs, women’s affairs and the Bicentennial celebrations, and received a Centenary of Federation Medal for business leadership. She was also awarded an Honorary Doctorate from the University of South Australia. In March 2017 the Australian Institute of Company Directors awarded her a life Fellow. Ms McCarthy was appointed to the board as a non- executive director in December 2013 and is chair of the corporate governance committee, chair of the nomination committee and a member of the audit and risk committee and remuneration committee. During the past three years she has not served as a director of any other listed company. 37 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Alden Halse Non-Executive Director – Retired 24 November 2017 Alden Halse is a Chartered Accountant and was a long- term principal of national chartered accountancy firm, Ferrier Hodgson. Over the last 30 years he has lectured and written extensively in relation to directors’ duties, corporate governance issues and corporate and personal insolvency issues. Mr Halse: – is an associate member of the Institute of Chartered Accountants and the Australian Institute of Company Directors; – is a past president and current councillor of the Royal Automobile Club of WA (Inc); – is a non-executive chairman of RACWA Holdings Pty Ltd; and – is non-executive chairman of RAC Insurance Pty Limited, Western Australia’s largest home and motor insurer. Mr Halse was appointed to the board as a non-executive director in December 2001 and until 24 November 2017 was chair of the audit and risk committee and nomination committee and a member of the remuneration committee and corporate governance committee. During the past three years he has not served as a director of any other listed company. 38 Officers Julia Yetsenga Chief Financial Officer Julia Yetsenga has been a member of Chartered Accountants Australia and New Zealand for over 25 years. She holds a Bachelor of Economics from the Australian National University and a graduate diploma in Applied Finance and Investment from FINSIA. She has a wealth of experience in senior finance roles for private and ASX listed companies both in Australia and overseas. Jeremy Sambrook General Counsel and Company Secretary Jeremy Sambrook is an experienced corporate lawyer having practised in the United Kingdom, Hong Kong and the Channel Islands before moving to Australia. He holds a Bachelor of Laws degree from the University of Bristol, United Kingdom, and has a broad based in-house legal and private practice background. Following seven years working at a leading London law firm, Mr Sambrook moved to one of Europe’s largest international hedge fund managers as Corporate Legal Counsel with responsibility for a wide variety of corporate group projects, becoming a partner in 2010 and going on to manage the off-shore head office prior to moving with family to Australia in 2013. Immediately prior to joining IMF, Mr Sambrook was a Special Counsel in the Corporate team at DLA Piper Australia in Perth. Directors’ Report continued Interests in shares, bonds and performance rights of the Company As at the date of this report, the interests of the directors in shares, IMF Bentham Bonds, Fixed Rate Notes and share performance rights of the Company were: Michael Kay Andrew Saker Hugh McLernon Alden Halse Michael Bowen Wendy McCarthy Karen Phin Total Number of ordinary shares Number of IMF Bentham Bonds Number of Fixed Rate Notes Number of performance rights 307,692 163,506 5,299,045 879,780 1,009,264 – 23,256 – – 7,500 750 1,500 – – – – 100 1,438,271 – – – – – 1,356,276 – – – – 7,682,543 9,750 100 2,794,547 Further details of the interests of the Directors in the shares, bonds and options of the Company as at the date of this report are set out in the Remuneration Report included within the Directors’ Report. Dividends Dividends paid in the year: Interim for the year On ordinary shares Final for 2017, as recommended in the 2017 financial report Declared date Record date Payment date Cents $m 22/2/18 26/3/18 24/4/18 3.0 5.188 On ordinary shares 24/8/17 26/9/17 20/10/17 4.0 6.882 Shareholders were able to elect to participate in the dividend reinvestment plan in relation to these dividends. The directors have determined they will consider, and where appropriate, implement, a regular semi-annual dividend which reflects the cash position of the Company at the time of the dividend and the likely demand for cash over the ensuing 12-month period. The Company has put in place a dividend reinvestment plan and, on appropriate occasions, may arrange underwriting to reduce the impact a particular dividend might otherwise have on cash. 39 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Operating and financial review Principal activities The principal activities of the entities within the consolidated group during the financial year were the investigation, management and funding of litigation. The Group enters into funding agreements with claimants or law firms to provide these services. The Group does not provide legal advice. The key business driver is to manage and fund the litigation to a successful conclusion. If the litigation is successful, the Group earns a fee from the recovery amount and, depending on the jurisdiction, may also be reimbursed the costs it has paid during the course of the funded litigation. The fee is structured as either a multiple of funds provided or a percentage of the settlement or judgment proceeds and may be lower the earlier the litigation is resolved. If the litigation is unsuccessful the Group does not generate any income and will write off its investment in the litigation. In certain jurisdictions the litigation funding agreement contains an undertaking to the client that the Group will pay any adverse costs ordered in respect of the costs incurred by the defendant(s) during the period of funding. Nature of operations The Group undertakes these activities through 14 offices in six countries around the world. Originating in Australia in 2001, the Group expanded into the USA opening an office in New York in 2011. Since that time, IMF has also opened offices in Los Angeles in 2014, San Francisco in 2015 and Houston in early 2017. In January 2016, the Group expanded into Canada opening an office in Toronto followed by a presence in Quebec in early 2018. A Singapore branch was established early in 2017 following the introduction of legislation permitting litigation funding for international arbitration, and a Hong Kong office was added in early 2018. The Group had a 50% interest in a jointly controlled entity principally involved in the funding of litigation through Europe but primarily in the United Kingdom and the Netherlands in which it sold its interest in June 2016. The 12 month restriction on operating in the region expired in July 2017 and the Group resumed activity there in July 2017. In February 2017, the Group launched its first fund, Bentham Fund No 1 for US investments. The Group and affiliated entities of Fortress Credit Advisers LLC committed up to US$200.0 million to this Fund to be deployed on US cases over a three year period. US Fund 1 was initially sized at US$133.3 million with commitments of US$100.0 million from Fortress and US$33.3 million from IMF. While IMF retains control over the Fund’s investments, Fortress is entitled to a priority return on invested capital and a further preferred return on committed but undrawn capital, after which IMF is entitled to a manager return. 40 The residual net cash flows are to be distributed 85% to IMF and 15% to Fortress. Benefits to IMF include diversification of risk through a larger investment portfolio while leveraging this portfolio with non-recourse capital and freeing up IMF capital for redeployment into other jurisdictions. In February 2018, IMF sold the majority of existing cases funded by its US subsidiary into Fund 1, generating cash for the Group of $61.3 million. At the same time, the Fund was upsized from US$133.3 million to US$166.3 million. At 30 June 2018, the Fund was committed to 86.2% of available capacity as shown graphically below. As the rate of deployment is significantly ahead of the target three-year deployment, IMF is focused on establishing a new US fund in the 2019 financial year. US$5.9m US$22.9m US Fund 86.2% Committed Start Date – 10 Feb 2017 Fund Size – US$ 166.3m US$110.5m US$137.5m Remaining Investment Commitments Investment Deployments Other Costs The RoW Funds were launched in October 2017. The RoW Funds’ investment partners include Partners Capital Phoenix Fund II Limited, a fund managed by Partners Capital, and a special purpose vehicle advised and managed by Amitell Capital Pte Ltd, a Singapore based private investment firm. The RoW Funds will invest in litigation in Australia, Asia, Canada and Europe and have a combined capacity of $150.0 million. The Funds’ return profile is similar to US Fund 1, but the residual net cash flows are distributed 80% to IMF and 20% to the investment partners. Directors’ Report continued Operating and financial review (continued) At 30 June 2018, the RoW Funds were committed to 53.4% of capacity as shown diagrammatically below: Total Committed Amount by Region ($m) $14.4m $7.3m $69.9m 2% 1% Funds 2 & 3 53.4% Committed Start Date – 3 Oct 2017 Fund Size – $150m 42% 55% $65.7m Remaining I/C Approved Commitments Investment Commitments $9.5m Investment Deployments Other Costs In any given year, the Group’s profitability is dependent upon the outcome of funded investments resolved in that year, however the successful completion of an investment and the timing of that completion is not ultimately within the Group’s control. Legislative, regulatory, judicial and policy changes may have an impact on future profitability. The Group endeavours to have a mix of cases it is funding at any one time. These can broadly be categorised as law firm portfolios, patent and intellectual property claims, commercial, insolvency and arbitration claims, appeal and whistleblower claims and group actions. The expansion overseas also creates diversification across jurisdictions. The Group discloses the material investments it funds to the ASX as those cases are funded and material settlements as they occur. The Group also provides, on a quarterly basis, an investment portfolio report providing information about the composition and structure of its investment portfolio and its Funds. For investments in the USA, IMF reports information based on committed and deployed capital as investments in that jurisdiction are generally for capped amounts and usually earn revenue by reference to a multiple of investment. Australia Canada United States Asia For investments in other jurisdictions, IMF reports on the EPV as investments are generally uncapped and revenues are based on a percentage of proceeds. The EPV is IMF’s current best estimate of the claim’s recoverable amount (or remaining recoverable amount if there has been partial recovery). It considers, where appropriate, the perceived capacity of the defendant to meet the claim. It is not necessarily the same as the amount being claimed by the funded claimants in the case and it is also not the estimated return to the Group from the case if it is successful. IMF also provides case updates on its website: www.imf.com.au/cases. 41 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Operating and financial review (continued) Investment portfolio report at 30 June 2018 Global Estimated Portfolio Value IMF Group (RoW), Fund 2 and Fund 3 IMF Group (USA) and Fund 1 Total portfolio IMF Group (RoW), Fund 2 and Fund 3 Estimated Portfolio Value IMF Group (RoW) Fund 2 and Fund 3 Total portfolio IMF Group (USA) and Fund 1 Invested Capital IMF Group (USA) Fund 1 Total Remaining Commitment to be deployed IMF Group (USA) Fund 1 Total Total Invested and Committed Capital Number of investments Estimated portfolio value $m Percentage of total estimated portfolio value 33 42 75 2,832 2,811 5,643 50% 50% 100% Number of investments Estimated portfolio value $m Percentage of total estimated portfolio value 24 9 33 1,520 1,312 2,832 54% 46% 100% Number of investments Estimated capital value $m Percentage of total estimated capital value 5 37 42 5 37 42 42 8.5 146.5 155.0 – 32.3 32.3 187.3 5% 95% 100% 0% 100% 100% IMF commenced 26 new investments during the year and extended funding on a further 14 investments. The 15 new non- USA investments had a total Estimated Portfolio Value at 30 June 2018 of $1.4 billion. The 11 new USA investments had capital commitments of $60.1 million at 30 June 2018. During the financial year, IMF concluded 16 investments (2017: 11). 11 were settled (2017: 10), there were no wins (2017: 1), two losses (2017: 0) and three withdrawals (2017: one withdrawn). Two investments are currently on appeal (2017: 3). 42 Directors’ Report continued Operating and financial review (continued) While the Group has implemented a risk mitigation and diversification strategy by expanding geographically and diversifying its product offering across jurisdictions, case updates to its two largest investments are below: The trial in the Wivenhoe Dam class action commenced on 4 December 2017 and is continuing. The investment concerns the persons who suffered loss in the Brisbane floods of 2011, who allege the increased flooding was caused by the negligence of the Dam operators. There is a participation agreement between IMF and the co-funder to share equally the costs (including any adverse costs) of and any return from this claim. The Westgem investment concerns a property developer alleging improper conduct in relation to loans for a property development by a bank. The trial commenced in April 2018 and concluded in July 2018. Judgment is reserved. USA The Group’s US operations (Bentham) funded 11 new investments (2017: 13) in the US during the reporting period, all in the US Fund (2017: 8). Bentham has now funded a total of 64 investments since being established in August 2011, with 42 current investments. Seven US investments were resolved during the year (2017: 2), one of which was a loss (2017: 0), and one withdrawn (2017: 0). There is currently one case in the US on appeal. Income was also received in relation to seven continuing investments (2017: 9 investments) involving funding law firms across a portfolio of investments. Gross income generated from these investments during the current financial year was $4.0 million (2017: $1.0 million). The US business now has 18 staff including six investment managers and six legal counsel (2017: 15). The investment managers are all former senior litigation attorneys, each of between 15 to 25 years’ legal experience. This enables significant case analysis to be performed in-house, whilst providing great networks to attract new business. Although uncertainty in US law concerning whether funders’ communications are protected from disclosure inhibits IMF’s usual transparency about the investments it funds, we can say that Bentham’s US business now contains a diverse group of litigation and arbitration investments. These involve commercial, patent and multi-party cases across a variety of different jurisdictions. It is worth noting that there are clear signs of growing competition in the US market, but market knowledge of litigation funding remains at a relatively early stage and so we consider there remain good prospects for the future growth of our US business. Employees At 30 June 2018, IMF employed 73 permanent staff (full time equivalents), including the two executive directors, providing investigative, information technology, accounting and management expertise (2017: 63 full time equivalent permanent staff). Operating results for the financial year The following summary of operating results reflects the Group’s performance for the year ended 30 June 2018: Shareholder Returns Basic (loss)/earnings per share (cents per share) Diluted (loss)/earnings per share (cents per share) Return on assets (NPAT/average assets) Return on equity (NPAT/average equity) Net debt/equity ratio %* 2018 (6.40) (6.40) (1.7%) (2.7%) nil 2017 9.04 8.68 4.2% 7.6% nil * Net debt (cash and short term deposits less total debt) is positive as cash and short term deposits are greater than total debt. 43 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Operating and financial review (continued) Six investments (2017: six) generated income greater than $0.5 million during 2018. A summary of the investment completions is below: Litigation contract investment name Treasury Wine Estates Confidential settlement USA Fund Case 006 Canada Case 001 USA Case 036 Confidential Hong Kong Matter ROW Fund Case 006 ROW Fund Case 002 USA Case 028 USA Fund Case 022 USA Fund Case 037 USA Case 044 ASAS (Smith) USA Fund Case 003 Other – 2 investments Further recoveries on completed investments Further recoveries on continuing investments Other1 Total litigation contract expenses (including capitalised overheads) Net gain/ (loss) on disposal of intangible asset Total litigation contract income $’000 $’000 $’000 22,479 (11,051) 11,428 4,151 3,652 2,776 2,917 (648) (1,477) (938) (1,180) 17,370 (16,580) 152 319 – 2,100 2,228 1,559 – – – 3,650 7,861 9 (26) (198) (93) (2,274) (2,505) (2,027) (1,834) (4,036) (690) (811) (7,643) (905) 3,503 2,175 1,838 1,737 790 126 121 (93) (174) (277) (468) (1,834) (4,036) (690) 2,839 218 (896) 71,223 (54,916) 16,307 The Group has finalised 175 (2017: 162) investments since listing, excluding withdrawals, with an average investment period of 2.6 years (2017: 2.6 years). The Group has generated a return of 1.47 times (excluding overheads) (2017: 1.55 times) on invested capital. MF has a target to complete cases within 2.5 years and to generate a return on every dollar invested of 2 times (excluding overheads). The investment portfolio as at 30 June 2018 has a mixture of both mature and new investments, with 44% of the investment portfolio estimated to finalise over the next 12 months (2017: 31%). IMF is focused on replacing and growing the investment portfolio within its conservative investment protocols. 1. Other investments include due diligence expenses for cases not funded. 44 Directors’ Report continued Operating and financial review (continued) IMF’s share price closed at $3.00 per share on 30 June 2018 (2017: $1.89). IMF entered the ASX top 300 companies on 20 March 2009, when its share price was $1.15. Since entering the index, IMF has outperformed the major indices on an annualised basis from 30 June 2011 to 30 June 2018 as detailed below: IMF, ASX200 and All Ordinaries Annualised Return 30 June 2011 – 30 June 2018 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% s n r u t e R d e s i l a u n n A 2.0% 0.0% IMF Share Price ASX 200 AXIO ASX All Ordinaries AORD Annualised Return with Dividend Reinvestment 17.5% 9.2% 9.1% Liquidity and capital resources The consolidated Statement of Cash Flows illustrates that there was an increase in cash and cash equivalents for the year ended 30 June 2018 of $9.9 million (2017: increase of $4.4 million). Operating activities used $63.6 million of net cash outflows (2017: net cash outflow of $50.9 million), whilst cash flows used in investing activities were $23.5 million (2017: net cash inflow of $22.2 million), and financing activities raised $97.1 million (2017: $33.0 million) principally as a result of cash inflows from non-controlling interests in 2018 and the Fixed Rate Note capital raise in 2017. A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n 45 Directors’ Report continued Operating and financial review (continued) Asset and capital structure Cash and short term deposits Total debt1 Net debt Total equity Working Capital Ratio2 2018 $’000 160,231 (120,462) 39,769 367,836 2.3:1 2017 $’000 Change % 144,891 (119,469) 25,422 206,253 4.2:1 11% 1% 56% 78% (44%) In April 2014, the Company issued 500,000 IMF Bentham Bonds at $100 each. The interest is paid to bondholders quarterly at a variable rate based on the Bank Bill Rate plus a fixed margin of 4.2% per annum. The Bonds are due to mature on 30 June 2019 and are secured by a security interest over all present and after-acquired property of IMF. In April 2017, the Company issued 40,000 Fixed Rate Notes with a face value of $1,000 each raising $40.0m to form a single series with the Notes issued in the prior financial year. In April 2016, the Company issued 32,000 Fixed Rate Notes with a face value of $1,000 each, raising $32.0m. Interest of 7.4% per annum is payable to Noteholders half yearly. The Fixed Rate Notes are due to mature on 30 June 2020 and are secured by a security interest over all present and after-acquired property of IMF. IMF has an early redemption option on these Notes at 30 June 2019. Profile of debts The profile of the Group’s debt finance is as follows: Current IMF Bentham Bonds Non-current IMF Bentham Bonds Fixed Rate Notes Total debt1 2018 $’000 2017 $’000 Change % 49,553 49,553 – 70,909 70,909 120,462 – – 49,104 70,365 119,469 119,469 100% 100% (100%) (41%) (41%) 1% 1. Total debt is $122.0 million. $50.0 million relates to the IMF Bentham Bonds issued in April 2014, while during the 2017 financial year, the Company issued Fixed Rate Notes to the value of $40.0 million to form a single series with $32.0 million issued in the prior financial year. The carrying value of the debt is net of $1.5 million of unamortised transaction costs and debt premium (See Note 12). 2. The working capital ratio is calculated by dividing current assets by current liabilities. The ratio is categorised as non-IFRS information prepared in accordance with ASIC Regulatory Guidance 230 – Disclosing non-IFRS financial information, issued in December 2011. This information has not been audited or reviewed. 46 Directors’ Report continued Operating and financial review (continued) Shares issued during the year On 24 April 2018, the Company issued 916,449 shares at $2.3510 per share and on 20 October 2017, the Company issued 900,253 shares at $2.0239 per share under its Dividend Reinvestment Plan. Capital expenditure There has been a decrease in capital expenditure during the year ended 30 June 2018 to $0.2 million from $1.0 million in the year ended 30 June 2017. The capital expenditure in 2018 relates primarily to computer and office equipment while in the prior year, new offices in Sydney and New York were fitted out. Risk management The Group’s major risk continues to be the choice of cases to be funded. The extent of the mitigation of that risk can best be identified by reference to the fact that in its 17 years of operation IMF has lost only 17 cases out of 175 investments funded and completed (excluding withdrawals). The Company has an investment protocol in relation to case selection and a rigorous due diligence process which ensures that only cases with very good chances of success are accepted for funding. The Group also insures a portion of the adverse costs order exposure in relation to investments on its own balance sheet and all investments in the RoW Funds are covered by an After- The-Event insurance policy. Another risk which requires constant management is liquidity. IMF’s strategic plan addresses this risk through the introduction of innovative fund structures reducing IMF’s direct capital exposure to potential investment losses. The board of directors has authorised management to identify options for raising capital to fund further expansion of IMF’s business, as required. Although there is currently portfolio concentration risk associated with the Wivenhoe and Westgem investments, the company’s diversification strategy has reduced this risk for future periods. In addition, IMF constantly monitors proposed legislative, regulatory, judicial and policy changes that may affect litigation funding in the markets in which it operates. The Australian Law Reform Commission (ALRC) is conducting an enquiry into class action proceedings and third- party litigation funders. IMF has provided a submission in the consultation phase. The ALRC is due to report by 21 December 2018. At the present time, although the review is not expected to result in any changes which would have a material impact on IMF’s Australian operations, it is too early to be definitive. The Victorian Law Reform Commission (VLRC) also commenced an enquiry into Litigation Funding and Group Proceedings in January 2017. The Victorian State Government is currently considering the VLRC’s recommendations which include; that Victorian lawyers be permitted to charge contingency fees in class actions and that the Court has the power to review and vary legal costs and dispute finance fees and charges and settlement distribution costs. In September 2015, IMF responded to a letter from the United States Senate Committee on the Judiciary seeking information in relation to third party litigation financing. IMF is not aware of any further developments since that letter was issued. State based legislation in the area of litigation funding remains a risk factor for IMF to monitor. While a number of legislative initiatives have focused on consumer related actions, there remains potential for these to have a non-material impact on IMF’s US operations. More recent activity in the US includes the introduction of a bill which was introduced into the Senate in May 2018 proposing the disclosure of litigation funding arrangements in any federal class actions and federal multi-jurisdiction litigation. We continue to speak with and lobby the relevant parties as IMF believes that such disclosure is not in the best interests of claimants. Legislation introduced in Singapore in March 2017 abolished champerty and maintenance in relation to arbitration funding and similar legislation is being codified in Hong Kong. IMF, like all businesses, faces the risk of damage to its reputation, name or brand which could materialise from various sources. The Group aspires to maintain an excellent reputation for strong risk management discipline, a client-centric approach and an ability to be flexible and innovative. The Group recognises the serious consequences of any adverse publicity or damage to reputation, whatever the underlying cause. We have various policies and practices to mitigate reputational risk, including strong values that are regularly and proactively reinforced. Strategic and reputational risk is mitigated as much as possible through detailed processes and governance involving escalation procedures from investment managers to management and from management to the board, and from regular, clear communication with shareholders, clients and all stakeholders. Whilst seeking to clearly differentiate itself in the industry, IMF may suffer indirect reputational damage from the actions of other participants that draw criticism of the industry more broadly. The Company has considered its exposure to economic, environmental and social responsibility risks and further detail of this assessment and the mitigations in place is included in the Directors’ Report. The Company has determined that it does not, at this time, have a material exposure to environmental or social sustainability risks but will continue to monitor this position. 47 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Significant changes in the state of affairs Total equity increased 78% to $367.8 million from $206.3 million at 30 June 2017. There have been no significant changes in the Company’s state of affairs during this reporting period other than as is disclosed in this report. Significant events after reporting date There have been no significant events after reporting date. Likely developments and expected results Approximately 44% of the investment portfolio at 30 June 2018 is expected to complete over the next 12 months. The estimated completion period is IMF’s current best estimate of the period in which the case may be finalised. The case may finalise earlier or later than the identified period for various reasons. Completion means finalisation of the litigation by either settlement, judgment or arbitrator determination, for or against the funded client. It may not follow that the financial result will be accounted for in the year of finalisation. Completion period estimates are prepared at case inception and reviewed and updated where necessary on a quarterly basis. The Group does not provide forecasts in light of the difficulty in estimating the finalisation of its investments, but provides an indication of its view of the possible completion dates and estimated recoverable amounts in the quarterly portfolio reports. IMF expects demand for its funding to continue in Australia, particularly as we are the leading funder in this market. The establishment of our subsidiaries in the United States of America, Canada and Singapore has resulted in increased funding opportunities. Competition, however, is increasing and is expected to increase further in the coming years with new entrants coming into the Australian market and new entrants in overseas markets. Litigation funding is considered non-cyclical or uncorrelated to underlying economic conditions. Environmental regulation and performance The consolidated entity’s operations are not presently subject to significant environmental regulation under the laws of the Commonwealth and the States. Share options Unissued shares As at the date of this report there were 14,355,887 share performance rights on issue. Indemnification and insurance of directors and officers During the financial year the Company has paid premiums in respect of an insurance contract insuring all the directors and officers of the Group against any legal costs incurred in defending proceedings for conduct other than, amongst others: (a) wilful breach of duty; or (b) contravention of sections 182 or 183 of the Corporations Act 2001, as may be permitted by section 199B of the Corporations Act 2001. The total amount of premiums paid under the insurance contract referred to above was $456,000 during the current financial year (2017: $449,700). Indemnification of auditors To the extent permitted by law, the Company has agreed to indemnify its auditors, EY, as part of the terms of its audit engagement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify EY during or since the financial year. 48 Directors’ Report continued Dear Shareholder, On behalf of the board and as Chairman of the Remuneration Committee, I am pleased to present IMF’s 2018 Remuneration Report. Following the initiation of our five-year Strategic Business Plan in 2015, we implemented a new variable remuneration framework designed to align executive reward and shareholder value and to incentivise the achievement of our strategic vision over the longer term. This framework was outlined to shareholders in the 2015 annual report and approved as required by shareholders at our AGM in November 2015. We have continued to monitor our remuneration structure and policies and while we remain comfortable with the overarching framework introduced in 2015, in light of the developments in our business the Remuneration Committee has fine-tuned the specific performance hurdles in the Short Term Incentive Plan (“STIP”) for the coming financial year. Further detail is provided in the following report. The levels of fixed remuneration of IMF’s senior employees are reflective of the private practice professional services market within which the company competes for talent. Investment managers are invariably at or around the partner level prior to joining IMF. The variable remuneration framework applies to the whole Group and was developed to reflect industry standards. Under these remuneration arrangements, a material portion of remuneration is ‘at-risk’ and linked to both short-term and long-term performance. The structure is designed to ensure that Key Management Personnel (“KMP”) and executives are rewarded for delivering sustained Group performance. The Group’s variable remuneration framework for KMP, senior executives and investment managers (collectively “Senior Staff”) consists of two components: – A Short Term Incentive Plan which provides for an annual cash payment, subject to the achievement of key financial and non-financial performance objectives. The target STIP payment has been amended for the 2019 financial year from 35% to 40% of an employee’s Total Fixed Remuneration (“TFR”), but with the removal of the potential for stretch performance. – An equity-based Long Term Incentive Plan (“LTIP”) that provides for an annual grant of performance rights. Vesting of awards is contingent on performance against two metrics, positive relative Total Shareholder Return (“TSR”) and Compound Annual Growth Rate (“CAGR”) of the intangible asset balance (“Funds Deployed”), both measured over a three-year performance period. The LTIP for Senior Staff, adjusted for FY2019 from 65% to 60% of TFR, is designed to complement the STIP as a form of ‘at-risk’ remuneration tied to long-term performance for the key contributors to the business. The LTIP directly aligns shareholders and participants interests. We are pleased to report that the metrics for the performance rights granted in the first year of the plan’s rollout for FY2016, have been well exceeded and we anticipate 100% vesting will occur. IMF’s result for the 2018 financial year reflects our continuing commitment to the long term growth and development of our business and our position at the midpoint of our five year strategic plan. As a result of the financial loss, no STIP has been awarded to our Senior Staff for the current financial year, notwithstanding the achievement of some major strategic milestones. The board is confident that IMF’s remuneration policies support the Group’s financial and strategic goals and we will continue to review the target metrics to ensure the consistent alignment of employees’ and business focus with those of shareholders. We are committed to transparency and an ongoing dialogue with shareholders on remuneration. On behalf of the board, I invite you to review the full report and thank you for your continued interest. Yours faithfully Michael Bowen Chairman of the Remuneration Committee 49 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Remuneration Report (Audited) This Remuneration Report outlines the director and KMP remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report KMP of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of the Company. The Group embodies the following principles in its remuneration framework: – determination of appropriate market rates for the fixed remuneration component recognising that the majority of investment professionals are most comparable to partners in private practice professional services business; and – establishment of appropriate performance hurdles for the variable remuneration component. Remuneration structure In accordance with best practice corporate governance, the structure of non-executive director and KMP remuneration is separate and distinct. In 2015, the Committee engaged an external remuneration consultant to assist with a review of our variable remuneration structure. The STIP and LTIP are the product of that review and are reflective of industry standards. Non-executive director remuneration Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the non-executive directors. Non-executive directors’ fees and payments totalled $517,500 (including superannuation), as disclosed in the following tables. At the 2016 Annual General Meeting shareholders approved payments up to $700,000 to non-executive directors. There are no retirement allowances for non-executive directors, nor do they participate in any incentive programs. Non-executive directors may, however, elect to have a portion of their remuneration paid into their personal superannuation plans. Executive remuneration Objective The Company aims to reward executives with a level and mix of compensation elements commensurate with their position and responsibilities, within the following framework: – reward executives for company and individual performance against targets set to appropriate benchmarks; – align the interests of executives with those of shareholders; – link rewards with the internal strategic goals of the Company; and – ensure total compensation is competitive by market standards. Key management personnel Details of IMF’s Key Management Personnel are: (i) Directors Michael Kay Andrew Saker Chairman and Non-Executive Director Managing Director and Chief Executive Officer Hugh McLernon Executive Director Michael Bowen Non-Executive Director Alden Halse Non-Executive Director (resigned 24 November 2017) Wendy McCarthy Non-Executive Director Karen Phin Non-Executive Director (appointed 25 August 2017) (ii) Executives Clive Bowman Chief Executive – Australia and Asia Charlie Gollow Chief Executive – USA There were no other changes to IMF’s Key Management Personnel after the reporting date and before the financial report was authorised for issue. Remuneration Committee The Remuneration Committee of the board of directors of the Company is responsible for determining and reviewing remuneration arrangements for the board and KMP. The Remuneration Committee assesses the appropriateness of the nature and amount of the emoluments of the directors and KMP on a periodic basis by reference to relevant employment market conditions, with the overall objective of ensuring the best stakeholder benefit from the board and KMP. Remuneration philosophy The performance of the Group is heavily dependent upon the quality of its directors and KMP. Accordingly, the Company must attract, motivate and retain highly skilled directors and executives. 50 Directors’ Report continued Remuneration Report (Audited) (continued) Structure It is the Remuneration Committee’s policy that employment contracts are entered into with all Key Management Personnel. Details of these contracts are provided below (see Executive Employment Contracts). Compensation consists of the following key elements: – fixed remuneration; and – variable remuneration. Fixed remuneration The levels of fixed remuneration of IMF’s senior employees are reflective of the private practice professional services market within which the company competes for talent. Investment managers are invariably at or around the partner level prior to joining IMF. Fixed compensation is reviewed annually by the Remuneration Committee. The process consists of a review of group and individual performance, relevant comparative compensation in the market and internally and, where appropriate, external advice on policies and practices. There have been no changes in the fixed remuneration for the KMPs for this financial year. Variable remuneration Objective The objective of the variable compensation incentive is to reward executives in a manner that aligns this element of their compensation with the objectives and internal key performance indicators of the Company. The total potential incentive available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and such that the cost to the Group is reasonable in the circumstances. Structure Short Term Incentive Plan The purpose of STIP is to provide an annual ‘at-risk’ incentive to participants linked to the achievement of specific financial and non-financial performance objectives. Key features of the STIP include: – All applicable employees will be eligible to be considered by the Remuneration Committee to participate in the STIP, which will be delivered as an annual cash payment. – Each participant will have their STIP opportunity expressed as a percentage of their total fixed remuneration. – At the beginning of the financial year, financial and non- financial performance objectives will be set. – The non-financial objectives will be specific to the role of the individual. – At the end of the financial year, actual performance will be assessed against the pre-set financial and non- financial performance objectives set at the beginning of the year. The target STIP payment was initially set at 35% of TFR with the possibility of earning a further 10% if growth in global net profit before tax and bonus, exceeded 15%. The STIP metrics for the 3 years since the implementation of the Plan and including the year ended 30 June 2018 comprised 4 objectives as follows: – Target 1 – 30% of the STIP opportunity (or 10.5% of the employees’ salary) will be awarded to employees if the Group achieves 5% growth in global net profit before tax (before bonus), – Target 2 – 30 % of the STIP opportunity (or 10.5% of the employees’ salary) will be awarded if the employees’ region achieves 5% growth in net profit before tax (before bonus), – Target 3 – 20% of the STIP opportunity (or 7% of the employees’ salary) will be awarded if the Group achieves 5% growth in the total claim value of the investment portfolio, – Target 4 – 20% of the STIP opportunity (or 7% of the employees’ salary) will be awarded if they achieve their individual non-financial objectives, – Target 1 attracted an additional outperformance stretch payment if growth in global net profit before tax (before bonus) exceeded 5%. This additional award was up to 10% of the employees’ salary if growth in global net profit before tax (before bonus) exceeds 15%. In light of the Group’s continued geographic expansion into new markets and the initiation of Fund structures across geographic lines, the Remuneration Committee has simplified the targets and adjusted the maximum STIP incentive to 40% of TFR. The STIP metrics set for the 2019 financial year are: – Target 1 – 50% of the STIP opportunity (or 20% of the employees’ salary) will be awarded to employees if the Group achieves 5% growth in global net profit before tax (before bonus), – Target 2 – 50% of the STIP opportunity (or 20% of the employees’ salary) will be awarded if employees achieve their non-financial objectives (which are set individually). Long Term Incentive Plan The LTIP complements the STIP as a form of ‘at-risk’ remuneration tied to long-term performance. The LTIP encourages equity ownership and directly aligns shareholders’ and participants interests. 51 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Remuneration Report (Audited) (continued) Key features of the LTIP include: – Only key senior employees are eligible to participate in the LTIP. This will generally be investment managers and above. – Awards will be granted annually as performance rights over IMF ordinary shares. – The LTIP opportunity will be expressed as a percentage of TFR. – The Remuneration Committee has adjusted the value of the LTIP opportunity from 65% to 60% applicable from the start of the 2019 financial year. – Awards will vest subject to performance against two metrics over a three-year period, which are ascribed equal weighting: 1. Relative TSR; and 2. CAGR of the Funds Deployed The LTIP metrics set for the performance rights granted during the 2018 financial year, which are unchanged from the 2017 and 2016 financial years, are as follows: – The LTIP opportunity has been set at 65% of TFR calculated on face value by reference to a volume weighted average share price at the start of the applicable period. – For the first time, senior executives now have the option of foregoing their STIP allocation and electing to receive 100% of their at risk remuneration in performance rights, under the same terms as the existing LTIP structure. – Two performance metrics have been set and the performance rights, or a portion thereof, will vest in three years if: – Target 1 – TSR measurements will comprise 50% of the LTIP opportunity: – TSR must be positive overall between the issuance of the performance rights and the vesting date. – The Company’s TSR will then be compared to a peer group, which will include ASX-listed entities in the Diversified Financials industry group, which are between 50% and 200% of IMF’s market capitalisation. – The TSR component will vest in accordance with the following vesting schedule: TSR Percentile Ranking Percentage Vesting Less than the 50th percentile Nil vesting Equal to the 50th percentile 50% vesting Between the 50th and 75th percentile Equal to the 75th percentile or above Between 50% and 100%, determined on a straight-line basis 100% vesting – Target 2 – The Group will measure the compound annual growth rate of Funds Deployed which will comprise 50% of the LTIP opportunity: – CAGR of the Funds Deployed component will vest in accordance with the following schedule: Funds Deployed CAGR Percentage Vesting Below 5% CAGR At 5% CAGR Between 5% CAGR and 7% CAGR Nil vesting 50% vesting Between 50% and 100%, determined on a straight-line basis 7% CAGR and above 100% vesting These performance conditions have been chosen to ensure the remuneration of executives are aligned with the Group’s strategy to increase the IMF portfolio, invest in future income and potential earnings capacity, and creation of shareholder wealth. Group Performance The objectives and philosophy of the Remuneration Committee are based upon aligning the performance of the Group’s employees with increasing value to shareholders. The graph on page 45 shows the performance of the Group as measured by its share price and compared to other shares listed on the ASX. 52 Directors’ Report continued Remuneration Report (Audited) (continued) The following is a summary of the Group’s earnings per share (shown as cents per share) over the last five years. IMF share price at 30 June Earnings/(loss) per share (cents per share) Diluted earnings/(loss) per share (cents per share) Executive Employment Contracts Andrew Saker, Managing Director and CEO: 2014 1.84 6.56 6.56 2015 1.72 3.78 2016 1.53 12.38 3.78 12.38 2017 1.89 9.04 8.68 2018 3.00 (6.40) (6.40) – rolling 12 month contract commenced 5 January 2015; – gross salary package of $1,200,000 pa plus super; – salary may be reviewed by the board from time to time; – notice period by the employee is 6 months and 12 months’ notice by the Company; and – no other termination payment arrangements (excluding statutory entitlements) apply other than the notice periods specified above. Hugh McLernon, Executive Director: – rolling 12 month contract commenced 1 July 2007; – gross salary package of $1,150,000 pa including super; – salary to be reviewed annually, with the 2018 review determining there should be a 0% increase in salary (2017: 0% increase); – notice period is 12 months; and – no other termination payment arrangements (excluding statutory entitlements) apply other than the notice period specified above. Clive Bowman, Chief Executive – Australia and Asia: – rolling 12 month contract commenced 1 July 2012; – gross salary package of $925,000 pa including super; – salary to be reviewed annually, with the 2018 review determining there should be a 0% increase in salary (2017: 0% increase); – notice period is 12 months; and – no other termination payment arrangements (excluding statutory entitlements) apply other than the notice period specified above. Charlie Gollow, Chief Executive - USA: – contract commenced 22 April 2003; – gross salary package of $600,000 pa including super; – salary to be reviewed annually, with the 2018 review determining there should be a 0% increase in salary (2017: 0% increase); – notice period by the employee is 3 months and 6 months’ notice by the Company; and – no other termination payment arrangements apply other than the notice periods specified above. 53 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Remuneration Report (Audited) (continued) (a) Remuneration of Key Management Personnel Table 1: Remuneration for the year ended 30 June 2018 Short-term benefits Salary & fees $ Cash bonus accrued1 $ Post- employment Long term benefits Share based payments Super- annuation $ Long service leave $ Share performance rights $ Termination payments $ Total Remuneration $ Performance related % 2018 Directors Michael Kay Andrew Saker 205,384 1,200,000 Hugh McLernon 1,129,951 82,192 36,426 Michael Bowen Alden Halse Wendy McCarthy Karen Phin 82,192 66,409 Executives Clive Bowman Charlie Gollow 904,951 579,951 Total 4,287,456 – – – – – – – – – – 19,616 20,049 20,049 7,808 3,460 7,808 6,309 – 13,202 35,039 – – – 576,323 543,456 – – – – – – 20,049 20,049 25,684 19,223 432,783 280,723 – – – – – – – – 225,000 1,809,574 1,728,495 90,000 39,886 90,000 72,718 1,383,467 899,946 0% 32% 31% 0% 0% 0% 0% 31% 31% 125,197 93,148 1,833,285 – 6,339,086 1. No bonus in respect of the 2018 financial year has been accrued for key management personnel. Table 2: Remuneration for the year ended 30 June 2017 Short-term benefits Salary & fees $ Cash bonus accrued2 $ Post- employment Long term benefits Share based payments Super- annuation $ Long service leave $ Share performance rights $ Termination payments $ Total Remuneration $ Performance related % 2017 Directors Michael Kay Andrew Saker 205,384 1,200,000 Hugh McLernon 1,130,384 88,373 82,192 Michael Bowen Alden Halse – 170,746 161,000 – – 19,616 19,616 19,616 1,627 7,808 – 7,460 17,211 – – – 389,517 367,375 – – Wendy McCarthy Executives Clive Bowman Charlie Gollow 82,192 – 7,808 – – 905,384 580,384 129,500 78,000 19,616 19,616 15,771 9,952 291,152 188,855 Total 4,274,293 539,246 115,323 50,394 1,236,899 2. The accrued 2017 bonus was paid in the 2018 financial year. 54 – – – – – – – – – 225,000 1,787,339 1,695,586 90,000 90,000 90,000 1,361,423 876,807 6,216,155 0% 31% 31% 0% 0% 0% 31% 30% Directors’ Report continued Remuneration Report (Audited) (continued) The following table outlines the proportion of maximum STIP earned by KMP in the 2018 financial year. Andrew Saker Hugh McLernon Clive Bowman Charlie Gollow Maximum STIP opportunity (% of TFR) % of maximum earned 45% 45% 45% 45% 0% 0% 0% 0% In light of the financial performance of the Group, the Remuneration Committee has determined that no STIP is payable for the financial year. (b) Share performance rights awarded, vested and lapsed during the year Tranche 1 performance rights awarded during the year Number Fair value of Tranche 1 performance rights at award date1 $ Tranche 2 performance rights awarded during the year Number Fair value of Tranche 2 performance rights at award date1 $ Total performance rights awarded during the financial year Number Value of performance rights granted during the year $ Award date Vesting date Expiry Date 2018 Directors Michael Kay Andrew Saker Hugh McLernon Michael Bowen Wendy McCarthy Karen Phin Executives Clive Bowman Charlie Gollow – – – – – – – – – 210,052 0.948 210,052 1.720 420,104 24 Nov 2017 30 Jun 2020 1 Jul 2032 560,419 197,992 0.948 197,992 1.720 395,984 24 Nov 2017 30 Jun 2020 1 Jul 2032 528,243 – – – – – – – – – – – – – – – – – – – – – – – – – – – 159,255 0.948 159,255 1.720 318,510 24 Nov 2017 30 Jun 2020 1 Jul 2032 424,892 103,300 0.948 103,300 1.720 206,600 24 Nov 2017 30 Jun 2020 1 Jul 2032 275,604 Total 670,599 670,599 1,341,198 1,789,158 1. The fair value of performance rights is determined at the time of grant as prescribed in AASB 2. For details on the valuation of performance rights, including models and assumptions used, refer to Note 22. 55 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Remuneration Report (Audited) (continued) Tranche 1 performance rights awarded during the year Number Fair value of Tranche 1 performance rights at award date 1 $ Tranche 2 performance rights awarded during the year Number Fair value of Tranche 2 performance rights at award date 1 $ Total performance rights awarded during the financial year Number Value of performance rights granted during the year $ Award date Vesting date Expiry Date 2017 Directors Michael Kay Michael Bowen Alden Halse Wendy McCarthy Executives Clive Bowman Charlie Gollow Total Andrew Saker 271,794 Hugh McLernon 256,344 – – – – – 1.188 1.188 – 271,793 256,344 – – – – – – 206,190 133,745 868,073 1.188 1.188 206,190 133,745 868,072 – 1.553 1.553 – – – 1.553 1.553 – – – – – 543,587 18 Nov 2016 30 Jun 2019 1 Jul 2031 744,987 512,688 18 Nov 2016 30 Jun 2019 1 Jul 2031 702,639 – – – – – – – – – – – – – – – 412,380 18 Nov 2016 30 Jun 2019 1 Jul 2031 565,167 267,490 18 Nov 2016 30 Jun 2019 1 Jul 2031 366,595 1,736,145 2,379,388 1. There have been no alterations to the terms and conditions of the performance rights awarded as remuneration since their award date. (c) Share performance rights holdings of Key Management Personnel Performance rights holdings of KMP Balance 1 July 2017 Number Granted as remuneration Number Performance rights exercised Number Balance 30 June 2018 Number Exercisable Number Not exercisable Number – 1,018,167 960,292 – – – – 420,104 395,984 – – – 772,410 501,022 318,510 206,600 3,251,891 1,341,198 – – – – – – – – – – 1,438,271 1,356,276 – – – – 474,580 447,604 – – – – 963,691 908,672 – – – 1,090,920 707,622 360,030 233,532 730,890 474,090 4,593,089 1,515,746 3,077,343 2018 Directors Michael Kay Andrew Saker Hugh McLernon Michael Bowen Wendy McCarthy Karen Phin Executives Clive Bowman Charlie Gollow Total 56 Directors’ Report continued Remuneration Report (Audited) (continued) 2017 Directors Michael Kay Andrew Saker Hugh McLernon Michael Bowen Alden Halse Wendy McCarthy Executives Clive Bowman Charlie Gollow Total Balance 1 July 2016 Number Granted as remuneration Number Performance rights exercised Number Balance 30 June 2017 Number Exercisable Number Not exercisable Number – 474,580 447,604 – – – – 543,587 512,688 – – – 360,030 233,532 412,380 267,490 1,515,746 1,736,145 – – – – – – – – – – 1,018,167 960,292 – – – 772,410 501,022 3,251,891 – – – – – – – – – – 1,018,167 960,292 – – – 772,410 501,022 3,251,891 (d) Shareholdings of Key Management Personnel 2018 Directors Michael Kay Andrew Saker Hugh McLernon Michael Bowen Alden Halse Wendy McCarthy Karen Phin Executives Clive Bowman Charlie Gollow Total Balance 1 July 2017 Received as remuneration Share performance rights exercised Net change other1 Balance 30 June 2018 307,692 158,317 5,299,045 977,234 879,780 – – – 533,172 467,058 8,622,298 – – – – – – – – – – – – – – – – – – – – – 5,189 – 32,030 – – 23,256 307,692 163,506 5,299,045 1,009,264 879,780 – 23,256 – – 533,172 467,058 60,475 8,682,773 57 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Remuneration Report (Audited) (continued) 2017 Directors Michael Kay Andrew Saker Hugh McLernon Michael Bowen Alden Halse Wendy McCarthy Executives Clive Bowman Charlie Gollow Total Balance 1 July 2016 Received as remuneration Share performance rights exercised Net change other1 Balance 30 June 2017 307,692 149,254 7,299,045 921,289 879,780 – – 1,013,941 467,058 11,038,059 – – – – – – – – – – – – – – – – – – – 9,063 (2,000,000) 55,945 – – 307,692 158,317 5,299,045 977,234 879,780 – (480,769)2 – 533,172 467,058 (2,415,761) 8,622,298 1. Net changes relate to shares obtained or sold on market. 2. Adjusted in 2018 financial report to include associated holdings. All equity transactions with KMP other than those arising from the exercise of share performance rights have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. (e) Loans to Key Management Personnel There have been no loans provided to Key Management Personnel in 2018 (2017: nil). (f) Transactions with Key Management Personnel During the year the Group obtained legal advice from DLA Piper, a legal firm associated with Michael Bowen, totalling $470,272 (2017: $160,797). The legal advice was obtained at normal market prices. Refer to Note 26 for details. – End of Remuneration Report – 58 Directors’ Report continued Directors’ Meetings Committee membership As at the date of this report, the Company had an Audit and Risk Committee, a Remuneration Committee, a Nomination Committee and a Corporate Governance Committee. Directors acting on committees of the board during the year were as follows: Audit and Risk Committee Remuneration Committee Nomination Committee Corporate Governance Committee M Bowen (Chair)3 M Bowen (Chair) W McCarthy (Chair)4 W McCarthy (Chair) M Kay W McCarthy K Phin1 A Halse2 M Kay W McCarthy K Phin1 A Halse2 M Kay M Bowen K Phin1 A Saker A Halse2 M Kay M Bowen K Phin1 A Halse2 The number of meetings of directors held during the period under review and the number of meetings attended by each director were as follows: Total number of meetings held: Meetings Attended: M Kay A Saker H McLernon M Bowen W McCarthy K Phin1 A Halse2 Board Meetings Audit and Risk Committee Remuneration Committee Nomination Committee Corporate Governance Committee 8 8 8 8 8 6 7 3 2 2 – – 2 2 1 1 3 3 – – 3 2 2 3 2 2 2 – 2 2 2 – 2 2 – – 2 2 1 1 1. 2. Ms Phin was appointed as a director on 25 August 2017 and was appointed to the Audit & Risk Committee, Remuneration Committee, Nomination Committee and Corporate Governance Committee on the same date. Mr Halse retired as director on 24 November 2017. Mr Halse retired as Chair of the Audit & Risk Committee and the Nomination Committee and as a member of the Remuneration Committee and Corporate Governance Committee on the same date. 3. Mr Bowen was appointed as Chair of the Audit & Risk Committee on 24 November 2017. 4. Ms McCarthy was appointed as Chair of the Nomination Committee on 24 November 2017. Rounding The amounts contained in this report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Corporations Instrument 2016/191. The Company is an entity to which the Instrument applies. Auditor’s Independence Declaration EY, the Company’s auditors, have provided a written declaration to the directors in relation to its audit of the Financial Report for the year ended 30 June 2018. This Independence Declaration can be found at page 61. 59 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t S h a r e h o d e r l I n f o r m a t i o n Directors’ Report continued Non-audit services The directors are satisfied that the provision of non-audit services by EY to the Group is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. EY received or are due the following amounts for the provision of non-audit services: – Tax compliance services and other non-audit services $60,000 (2017: $149,000). Corporate Governance The Company has an extensive Corporate Governance Manual which enables the Company to interact with its clients and the public in a consistent and transparent manner. For further information on corporate governance policies and procedures adopted by the Company please refer to our website http://www.imf.com.au/shareholders/corporate- governance. Signed in accordance with a resolution of the directors. Michael Kay Chairman Perth, 22 August 2018 Andrew Saker Managing Director 60 Auditor’s Independence Declaration A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Auditor’s Independence Declaration to the Directors of IMF Bentham Limited As lead auditor for the audit of IMF Bentham Limited for the financial year ended 30 June 2018, I declare to the best of my knowledge and belief, there have been: a) b) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of IMF Bentham Limited and the entities it controlled during the financial year. Ernst & Young Robert A Kirkby Partner 22 August 2018 O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RK:DA:IMF:045 l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 61 Statement of Comprehensive Income for the year ended 30 June 2018 Continuing Operations Revenue Other income Total Income Finance costs Depreciation expense Employee benefits expense Corporate and office expense Other expenses (Loss)/Profit Before Income Tax from Continuing Operations Income tax (benefit)/expense Net (Loss)/Profit from Continuing Operations Attributable to: Equity holders of the parent Non-controlling interests Other Comprehensive Income Movement in foreign currency translation reserve Other comprehensive income net of tax Total Comprehensive Income for the Year Attributable to: Equity holders of the parent Non-controlling interests Note 2 3 4(a) 4(b) 4(c) 4(d) 4(e) 5 24 14(b) Consolidated 2018 $’000 2017 $’000 6,610 16,520 23,130 86 621 2,985 54,123 57,108 90 591 22,055 20,968 7,212 1,516 (8,360) (513) (7,847) 8,646 1,077 25,736 10,296 15,440 (11,017) 3,170 15,440 – 6,027 6,027 (1,820) (4,932) (4,932) 10,508 24 (4,990) 3,170 10,508 – Earnings per share attributable to the ordinary equity holders of the Company (cents per share) Basic profit (cents per share) Diluted profit (cents per share) Earnings per share attributable for continuing operations (cents per share) Basic profit (cents per share) Diluted profit (cents per share) 6 6 6 6 (6.40) (6.40) (6.40) (6.40) 9.04 8.68 9.04 8.68 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 62 Statement of Financial Position as at 30 June 2018 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Other assets Income tax receivable Total Current Assets Non-Current Assets Trade and other receivables Plant and equipment Intangible assets Other assets Deferred tax assets Total Non-Current Assets TOTAL ASSETS LIABILITIES Current Liabilities Trade and other payables Income tax payable Provisions Debt securities Other liabilities Total Current Liabilities Non-Current Liabilities Provisions Debt securities Deferred income tax liabilities Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained earnings Equity attributable to equity holders of the parent Non-controlling interests TOTAL EQUITY Consolidated 2018 $’000 2017 $’000 Note 11 15 16 15 17 9 16 5 18 19 12 19 12 5 160,231 25,690 1,411 5,455 144,891 45,205 1,260 – 192,787 191,356 – 1,332 1,580 1,700 321,268 190,876 11,509 12,355 346,464 539,251 388 6,037 200,581 391,937 18,047 – 14,656 49,553 658 22,141 4,341 18,672 – 531 82,914 45,685 277 70,909 17,315 88,501 171,415 240 119,469 20,290 139,999 185,684 367,836 206,253 13 14(b) 14(a) 127,630 123,654 16,110 48,592 8,554 71,679 192,332 203,887 24 175,504 2,366 367,836 206,253 The above Statement of Financial Position should be read in conjunction with the accompanying notes. 63 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Statement of Cash Flows for the year ended 30 June 2018 Consolidated 2018 $’000 2017 $’000 Note Cash flows from operating activities Payments to suppliers and employees Interest income Interest paid Income tax paid Net cash flows (used in) operating activities 8 Cash flows from investing activities Proceeds from litigation funding - settlements, fees and reimbursements Payments for litigation funding - external costs Payments for litigation funding - capitalised overhead and employee costs Purchase of plant and equipment Loans made to third parties Fund establishment costs Investment in joint venture Net cash flows from/(used in) investing activities Cash flows from financing activities Dividends paid Notes proceeds Cost of issuing notes Distributions to non-controlling interests Contributions from non-controlling interests Net cash flows from financing activities Net increase in cash and cash equivalents held Net foreign exchange difference Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The above Cash Flow Statement should be read in conjunction with the accompanying notes. 64 (44,316) (35,136) 2,225 (8,303) (13,231) (63,625) 2,742 (6,919) (11,567) (50,880) 94,893 116,256 (106,999) (85,540) (6,419) (5,909) (236) (521) (4,226) – (23,508) (8,093) – – (9,694) 114,855 97,068 9,935 5,405 (979) (9) (7,450) 5,850 22,219 (13,311) 40,400 (1,253) – 7,209 33,045 4,384 (2,022) 144,891 142,529 11 160,231 144,891 Statement of Changes in Equity for the year ended 30 June 2018 CONSOLIDATED As at 1 July 2017 Profit for the year Other comprehensive income Total Comprehensive Income for the Year Equity Transactions: Dividend paid Share based payments – – – – – Shares issued under the Dividend Reinvestment Plan 3,976 Contributions from non-controlling interests Distributions to non-controlling interests Changes in the proportion of equity held by non-controlling interests Transaction costs - disposal of non-controlling interest, net of tax – – – – Share based payments reserve $’000 Foreign currency translation reserve $’000 Issued capital $’000 Other capital reserves $’000 Retained earnings $’000 Non- controlling interest $’000 Total $’000 Total equity $’000 123,654 5,962 (4,644) 7,236 71,679 203,887 2,366 206,253 – – – 6,027 – 6,027 – 9,289 – – – – – – – – – – – – – – – – – – – – (7,760) – (11,017) – (11,017) 3,170 (7,847) 6,027 – 6,027 (11,017) (4,990) 3,170 (1,820) (12,070) (12,070) – – – (12,070) 9,289 3,976 175,017 175,017 (9,694) (9,694) 9,289 3,976 – – (7,760) 7,760 – – (3,115) (3,115) – – – – – – As at 30 June 2018 127,630 15,251 1,383 (524) 48,592 192,332 175,504 367,836 As at 1 July 2016 119,122 658 288 7,236 74,084 201,388 – 201,388 Profit for the year Other comprehensive income Total Comprehensive Income for the Year Equity Transactions: Dividend paid Share based payments – – – – – Shares issued under the Dividend Reinvestment Plan 4,532 Contributions from non-controlling interests Transaction costs - disposal of non-controlling interest – – – – – – 5,304 – – – – (4,932) – – 15,440 15,440 – (4,932) – – 15,440 (4,932) (4,932) – 15,440 10,508 – 10,508 – – – – – – – – – – (17,845) (17,845) – 5,304 – 4,532 – – – – – – – (17,845) 5,304 4,532 7,209 7,209 (4,843) (4,843) As at 30 June 2017 123,654 5,962 (4,644) 7,236 71,679 203,887 2,366 206,253 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. 65 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements for the year ended 30 June 2018 About this Report The financial report of IMF Bentham Limited (“IMF”, “the Company” or “the Parent”) for the year ended 30 June 2018 and its subsidiaries (“the Group” or “consolidated entity”) was authorised for issue in accordance with a resolution of the directors on 22 August 2018. IMF Bentham Limited (ABN 45 067 298 088) is a for profit company incorporated and domiciled in Australia and limited by shares that are publicly traded on the Australian Securities Exchange (ASX code: IMF). IMF Bentham Limited is not economically dependent on any other entity. This section sets out the basis upon which the Group’s Financial Statements are prepared. Specific accounting policies are described in their respective notes to the Financial Statements. This section also shows information on new or amended accounting standards and their impact on the financial position and performance of the Group. a. Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis. The financial report is presented in Australian dollars, being the functional currency of the Parent. The amounts contained within this report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Corporate Instrument 2016/191. b. Compliance with IFRS The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board. c. New accounting standards and interpretations The accounting policies adopted are consistent with those of the previous financial year. The following accounting standards relevant to the Company and/or the Group have been issued but are not yet effective and have not been applied in these financial statements. 66 AASB 9 Financial Instruments (‘AASB 9’) The AASB issued the final version of AASB 9 in December 2014. When operative, this standard will replace AASB 139. Financial Instruments: Recognition and Measurement. AASB 9 addresses recognition and measurement requirements for financial assets and financial liabilities, impairment requirements that introduce an expected credit loss impairment model and general hedge accounting requirements which more closely align with risk management activities undertaken when hedging financial and non-financial risks. AASB 9 is not mandatorily effective for the Group until 1 July 2018. The Group has assessed the impact of AASB 9 and does not envisage it will have a material impact on the Group’s current financial assets and liabilities as at 30 June 2018. AASB 15 Revenue from Contracts with Customers (‘AASB 15’) The AASB issued AASB 15 in October 2015. The standard is not mandatorily effective for the Group until 1 July 2018. AASB 15 contains new requirements for the recognition of revenue and additional disclosures about revenue. AASB 138 Intangible Assets has been amended to ensure that for reporting periods beginning on or after 1 January 2018, the derecognition of intangible assets are subject to the principles of AASB 15. It is expected that this standard will not materially change the revenue recognition of the Group, except where cases have become under appeal. AASB 15 may disallow the recognition of revenue where cases are under appeal due to the more prescriptive requirements within the standard for recognition of revenue. Refer to Note 15 for details of revenue receivable at 30 June 2018 where cases are still under appeal. AASB 16 Leases (‘AASB 16’) The AASB issued the final version of AASB 16 in February 2016. The standard is not mandatorily effective for the Group until 1 July 2019. AASB 16 requires a lessee to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases. The Group is in the process of assessing the impact of AASB 16 and is not yet able to reasonably estimate the impact on its financial statements. AASB Interpretation 23 Uncertainty over Income Tax Treatments (“Interpretation 23”) Interpretation 23 is applicable for reporting periods beginning on or after 1 January 2019 and therefore will be effective for the Group for its reporting period beginning 1 July 2019. Interpretation 23 clarifies the application of the recognition and measurement criteria in AASB 112 Income Taxes where there is uncertainty over income tax treatments. It requires assessment of each uncertain tax position as to whether it is probable that a taxation authority will accept the position. Notes to the Financial Statements continued About this Report (continued) Where it is not probable, the effect of the uncertainty will be reflected in determining the relevant taxable profit or loss, tax bases, unused tax losses, unused tax credits or tax rates. The amount will be determined as either the single most likely amount or the sum of the probability weighted amounts in a range of possible outcomes, whichever better predicts the resolution of the uncertainty. Judgements will be reassessed as and when new facts and circumstances come to light. The Group is in the process of assessing the impact of Interpretation 23 and is not yet able to reasonably estimate the impact on its financial statements. AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share- based Payment Transactions This Standard amends AASB 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. It was not mandatorily effective for the Group until 1 July 2018. The amendments provide requirements on the accounting for: – The effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments – Share-based payment transactions with a net settlement feature for withholding tax obligations – A modification to the terms and conditions of a share- based payment that changes the classification of the transaction from cash-settled to equity-settled. The Group has reviewed the impact of the amendments and do not believe it will have a material impact on the current financial statements. d. Basis of consolidation The consolidated financial statements comprise the financial statements of IMF Bentham Limited and its subsidiaries as at 30 June 2018. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group includes fund investment vehicles which invest in litigation over which IMF Bentham Ltd controls the related activities and has exposure to variable returns from the fund investment vehicles. See Note 23. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profits and losses resulting from intra-group transactions have been eliminated in full. e. Foreign currency The Group’s consolidated financial statements are presented in Australian dollars, which is also the Parent’s functional currency. For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The Group uses the direct method of consolidation and on disposal of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method. Transactions and balances Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognised in other comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item (i.e. translation differences on items whose fair value gain or loss is recognised in other comprehensive income or profit or loss are also recognised in other comprehensive income or profit or loss, respectively). Group companies On consolidation, the assets and liabilities of foreign operations are translated into Australian dollars at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation purposes are recognised in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss. 67 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Significant Accounting Judgments, Estimates and Assumptions The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgments and estimates in relation to assets, liabilities, contingent liabilities, revenues and expenses. Management bases its judgments on historical experience and on other factors it believes to be reasonable under the circumstances, the results of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Management has identified the following critical accounting policies for which significant judgments have been made as well as the following key estimates and assumptions that have the most significant impact on the financial statements. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements. Taxation The Group’s accounting policy for taxation requires management’s judgment in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the Statement of Financial Position. Deferred tax assets, including those arising from un-recouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. These depend on estimates of future income, operating costs, capital expenditure, dividends and other capital management transactions. Judgments and assumptions are also required about the application of income tax legislation. These judgments and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised in the Statement of Financial Position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the Statement of Comprehensive Income. 68 Intangible Assets - Litigation Contracts In Progress Litigation Contracts in Progress are recognised by the Group as an intangible asset in the financial statements as the Group does not have an unconditional right to receive cash. Rather, it provides the entity with a right to a share of litigation proceeds which may be in the form of cash or other non-financial asset. Impairment of non-financial assets other than goodwill The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. This includes an assessment of each individual Litigation Contract In Progress as to whether it is likely to be successful, the cost and timing to completion and the ability of the defendant to pay upon completion. If an impairment trigger exists the recoverable amount of the asset is determined. This involves value in use calculations, which incorporate a number of key estimates and assumptions (refer to Note 9). Share based payments Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share performance right, volatility and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled transactions with employees at the grant date, the Group uses the Monte-Carlo simulation model for Tranche 1 grants, and the Black-Scholes model for Tranche 2 grants. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 22. Long service leave provision As discussed in Note 19, the liability for long service leave is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at balance date. In determining the present value of the liability, attrition rates and pay increases through promotion and inflation have been taken into account. Provision for adverse costs The Group raises a provision for adverse costs when it has lost an investment which it has funded. When an investment is lost and an appeal is lodged, the Group raises a provision. The provision raised is the Group’s best estimate of the amount of adverse costs it will have to remit following consultation with external advisors. Measurement of non-controlling interests (“NCI”) Profits and losses are allocated to non-controlling interests in line with the allocation of profit distributions under the terms of the respective agreements. Therefore, at the end of each reporting period, the allocation of non-controlling interests will be represented by the Class B shareholders’ share of net assets, as would be distributed under the agreements. Notes to the Financial Statements continued A. RESULTS FOR THE YEAR Note 1: Segment information The Group provides only one service, being litigation funding. For management purposes, the Group is organised into operating segments comprising wholly owned operations and the Group’s fund structures. – The Group’s wholly owned subsidiaries manage historical wholly owned investments and employ personnel who provide investment management services to the Group’s fund structures in the following locations: – Australia – United States – Canada – Asia – Europe – Funds – The Group’s Fund investment vehicles include: – US Fund – This comprises the consolidated group of Bentham IMF 1 LLC, Security Finance 1 LLC and HC 1 LLC. The US Fund invests in litigation in the United States; and – ROW Funds – This comprises IMF Bentham (Fund 2) Pty Ltd and IMF Bentham (Fund 3) Pty Ltd. The two entities jointly invest in litigation in all jurisdictions IMF operates, except for the United States. The funds comprise Class A and B stock. The non-controlling interest comprises Class B stock which carries an entitlement to receive a priority return on invested capital and a further preferred return on committed but undrawn capital. IMF retains control and ownership of the Funds via its interest in Class A stock. Upon satisfaction of the Class B priority returns, the Class A stock held by IMF is entitled to a manager return. After satisfaction of the priority return and the manager return residual net cash flows are to be distributed 85% to IMF and 15% to Class B for the US Fund and 80% to IMF and 20% to Class B for the RoW Funds. Wholly owned operations Funds Consolidation Australia $’000 United States $’000 Canada $’000 Asia $’000 US Fund $’000 ROW Funds $’000 Adjustments and eliminations $’000 Consolidated $’000 Summarised statement of profit or loss for 2018 Revenue Other income Total Income 10,411 (309) 13,382 (3,232) 23,793 (3,541) 166 (62) 104 Expenses 29,173 15,895 2,376 (Loss)/profit before tax (5,380) (19,436) (2,272) Income tax 1,948 1,820 501 36 – 36 763 (727) 133 (1) 1,178 1,177 25 2,979 3,004 (3,718) 2,275 (1,443) 6,610 16,520 23,130 35 55 (16,807) 31,490 1,142 2,949 (36) (885) 15,364 (2,968) (8,360) 513 Net (loss)/profit from Continuing Operations Attributable to: (3,432) (17,616) (1,771) (594) 1,106 2,064 12,396 (7,847) Equity holders of the parent (3,432) (17,616) (1,771) (594) – – 12,396 (11,017) Non-controlling interests – – – – 1,106 2,064 – 3,170 69 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 1: Segment information (continued) Wholly owned operations Funds Consolidation Australia $’000 United States $’000 Canada $’000 Asia $’000 US Fund $’000 ROW Funds $’000 Adjustments and eliminations $’000 Consolidated $’000 Summarised statement of financial position as at 30 June 2018 Current assets 153,586 4,582 Non-current assets 224,838 49,465 Total assets 378,424 54,047 Current liabilities Non-current liabilities Total liabilities Net assets Equity attributable to: 78,145 84,320 162,465 1,264 (1,738) (474) 1,184 1,431 2,615 273 6,393 6,666 94 1 95 58 804 862 13,504 20,994 (1,157) 192,787 193,744 19,205 (142,220) 346,464 207,248 40,199 (143,377) 539,251 1,000 3,331 (1) 8 999 3,339 (1,157) (1,285) (2,442) 82,914 88,501 171,415 215,959 54,521 (4,051) (767) 206,249 36,860 (140,935) 367,836 Equity holders of the parent 215,959 54,521 (4,051) (767) 59,298 8,307 (140,935) Non-controlling interest – – – – 146,951 28,553 – 192,332 175,504 Total equity 215,959 54,521 (4,051) (767) 206,249 36,860 (140,935) 367,836 Wholly owned operations Funds Consolidation Australia $’000 United States $’000 Canada $’000 Asia $’000 US Fund $’000 ROW Funds $’000 Adjustments and eliminations $’000 Consolidated $’000 Summarised statement of profit or loss for 2017 Revenue Other income Total Income 6,180 53,173 2,154 942 59,353 3,096 (156) (93) (249) Expenses 26,926 16,259 2,419 Profit/(loss) before tax 32,427 (13,163) (2,668) Income tax (9,317) 1,969 1,013 – – – 249 (249) 42 Net profit/(loss) from Continuing Operations Attributable to: 23,110 (11,194) (1,655) (207) Equity holders of the parent 23,110 (11,194) (1,655) (207) Non-controlling interests – – – – – 155 155 34 121 – 121 121 – – – – – – – – – – (5,193) (54) (5,247) (14,515) 9,268 (4,003) 2,985 54,123 57,108 31,372 25,736 (10,296) 5,265 15,440 5,265 15,440 – – 70 Notes to the Financial Statements continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Note 1: Segment information (continued) Wholly owned operations Funds Consolidation Australia $’000 United States $’000 Canada $’000 Asia $’000 US Fund $’000 ROW Funds $’000 Adjustments and eliminations $’000 Consolidated $’000 Summarised statement of financial position as at 30 June 2017 Current assets 180,800 3,329 Non-current assets 218,220 92,401 Total assets 399,020 95,730 Current liabilities 39,897 3,841 Non-current liabilities 138,605 13,079 Total liabilities 178,502 16,920 1,496 330 1,826 427 3,959 4,386 88 – 88 – 295 295 5,561 10,332 15,893 1,438 – 1,438 Net assets 220,518 78,810 (2,560) (207) 14,455 – – – – – – – 82 191,356 (120,702) 200,581 (120,620) 391,937 82 45,685 (15,939) 139,999 (15,857) 185,684 (104,763) 206,253 Equity attributable to: Equity holders of the parent 220,518 78,810 (2,560) (207) 12,089 – (104,763) 203,887 Non-controlling interest – – – – 2,366 Total equity 220,518 78,810 (2,560) (207) 14,455 – – – 2,366 (104,763) 206,253 Geographically, other income can be represented geographically as follows: O v e r v e w i D i r e c t o r s ’ R e p o r t Australia United States Canada Europe Asia Total other income Non-current assets, excluding financial assets, can be represented geographically as follows: Australia United States Canada Europe Asia Net exposure Consolidated 2018 $’000 14,185 (342) 1,825 (18) 870 2017 $’000 53,173 1,043 (93) – – 16,520 54,123 Consolidated 2018 $’000 2017 $’000 116,631 211,776 5,717 48 783 94,744 102,535 1,334 – – 334,955 198,613 71 i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 2: Revenue Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (i) Interest income Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Interest received from National Australia Bank Ltd of $473,453 (2017: $906,481), Bankwest of $339,473 (2017: $924,518), and Westpac Banking Group Ltd of $1,384,320 (2017: $909,658) contributed more than 99% of the Group’s bank interest revenue (2017: 99%). (ii) Dividends Revenue is recognised when the Group’s right to receive the payment is established. (iii) Fees Revenue is recognised when the Group’s right to receive the fee is established. Revenue Bank interest received and accrued Foreign exchange gain Note 3: Other income Other income Litigation contracts - settlements and judgments Litigation contracts - expenses Litigation contracts - written-down1 Net gain on derecognition of intangible assets Loss on derecognition of intangible assets/receivables as a result of losing an investment or appeal2 Other income Consolidated 2018 $’000 2017 $’000 2,299 4,311 6,610 2,684 301 2,985 Consolidated 2018 $’000 2017 $’000 71,223 (48,141) (769) 22,313 (6,006) 113,329 (51,073) (2,924) 59,332 (5,233) 213 24 16,520 54,123 This balance includes costs related to the Group’s initial assessment of the case and cases not pursued by the Group due to the cases not meeting the Group’s required rate of return. This balance includes costs related to cases lost by the Group. Further, it includes any adverse costs provision raised when a litigation contract in progress has been written off due to it being lost. 1. 2. 72 Notes to the Financial Statements continued Note 4: Expenses (a) Finance costs Other finance charges (b) Depreciation Depreciation expense (c) Employee benefits expense Wages and salaries Superannuation expense Directors’ fees Payroll tax Share based payments Long service leave provision (d) Corporate and office expense Insurance expense Network expense Marketing expense Occupancy expense Professional fees expense Recruitment expense Telephone expense Travel expense (e) Other expenses ASX listing fees General expenses Postage, printing and stationery Repairs and maintenance Share registry costs Staff training, development and conferences Consolidated 2018 $’000 2017 $’000 86 86 90 90 621 591 14,758 15,200 1,305 486 1,346 4,134 26 1,123 431 1,324 2,775 115 22,055 20,968 885 592 1,455 1,119 1,556 576 153 876 1,070 619 1,378 1,370 2,651 432 130 996 7,212 8,646 103 435 385 7 95 491 1,516 94 324 485 20 111 43 1,077 Finance costs Borrowing costs directly attributable to the acquisition and development of a qualifying asset (i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of that asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. 73 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 5: Income tax Income tax and other taxes Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred income tax is provided on all temporary differences at the Statement of Financial Position reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: – when the deferred income tax liability arises from the initial recognition of goodwill or of 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 profit nor taxable profit or loss; or – when the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except: – when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or – when the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in other comprehensive income are recognised in equity and not in profit or loss. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Other taxes Revenues, expenses and assets are recognised net of the amount of GST, except: – when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable; and – receivables and payables, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. 74 Notes to the Financial Statements continued Note 5: Income tax (continued) Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as part of cash flows from operating activities. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Consolidated statement of profit & loss The major components of income tax expense are: Current income tax Current income tax charge Adjustment in respect of current income tax expense of previous year Refund of foreign state-based taxes Current year losses moved to deferred tax asset Deferred tax: Relating to origination and reversal of temporary differences Other Current year losses moved to deferred tax asset Change in federal tax rate in United States Adjustment in respect of deferred income tax of previous year Income tax (benefit)/expense reported in the Statement of Comprehensive Income Accounting (loss)/profit before income tax from continuing operations At the Group’s statutory income tax rate of 30% (2017: 30%) Adjustment in respect of income and deferred tax of previous years Expenditure not allowable for income tax purposes Non-assessable income Foreign tax rate adjustment State income tax Change in federal tax rate in United States Relating to origination and reversal of temporary differences Other Income tax (benefit)/expense reported in the Statement of Comprehensive Income Consolidated 2018 $’000 2017 $’000 (7,882) 2,598 (130) 9,993 3,217 (83) (9,993) 4,000 (2,233) (513) 5,505 1,990 – 3,270 1,369 265 (3,270) – 1,167 10,296 Consolidated 2018 $’000 (8,360) (2,508) 365 787 (400) (132) (1,241) 4,000 (1,262) (122) (513) 2017 $’000 25,736 7,720 3,157 1,588 (754) (63) (1,095) – (482) 225 10,296 75 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 5: Income tax (continued) Deferred income tax at 30 June relates to the following: CONSOLIDATED Deferred income tax liabilities Intangibles Accrued interest & unrealised foreign exchange differences Other Statement of Financial Position Statement of Comprehensive Income 2018 $’000 2017 $’000 2018 $’000 2017 $’000 32,880 29,411 (3,469) (3,642) 87 5 134 – 46 5 15 – Gross deferred income tax liabilities 32,972 29,545 (3,418) (3,627) Deferred income tax assets Intercompany loans Accruals and provisions/bond raising costs Share based payments Expenditure deductible for income tax over time Gross deferred income tax assets Net deferred income tax liabilities Foreign deferred tax assets Accruals and provisions Intercompany loans Expenditure deductible for income tax over time Share based payments Deferred tax assets - Foreign net operating losses - federal and state Deferred tax assets 4,575 4,467 4,275 2,340 15,657 17,315 115 538 – 2,700 9,002 12,355 – 5,527 2,818 910 9,255 20,290 79 568 1,475 – 3,915 6,037 4,575 (1,060) – 1,430 4,945 36 (30) (1,475) 2,700 5,087 6,318 – 68 1,347 (249) 1,166 79 568 – – 2,192 2,839 Unrecognised temporary differences and tax losses At 30 June 2018 the Group had no (2017: nil) unrecognised temporary differences and tax losses. Note 6: Earnings per share Basic earnings per share is calculated as net profit attributable to members of the Parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares outstanding during the financial year, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to members of the Parent, adjusted for: – costs of servicing equity (other than dividends); – the after tax effect of interest dividends associated with dilutive potential ordinary shares that have been recognised; – other non-discretionary changes in revenue or expenses during the period that would result from dilution of potential ordinary shares; and – divided by the weighted average number of shares and dilutive shares, adjusted for any bonus element. At 30 June 2018, 14,355,887 performance rights (2017: 11,177,055) were on issue as detailed in Note 22. Upon meeting certain performance conditions over the three year performance period, the vesting of each right will result in the issue of 1 ordinary share. The performance shares are contingently issuable and are therefore not considered dilutive. 76 Notes to the Financial Statements continued Note 6: Earnings per share (continued) The following reflects the income and share data used in the basic earnings per share computation: (a) Earnings used in calculating earnings per share For basic and diluted earnings per share Total net (loss)/profit attributable to ordinary equity holders of the Parent (11,017) 15,440 Consolidated 2018 $’000 2017 $’000 Consolidated 2018 $’000 2017 $’000 For basic and diluted earnings per share Total net (loss)/profit attributable to continuing operations (11,017) 15,440 (b) Weighted average number of shares Number ‘000 2018 2017 Weighted average number of ordinary shares outstanding 172,839 170,818 Effect of dilution: Performance rights1 Weighted average number of ordinary shares – 6,993 172,839 177,811 1. Performance rights granted under the Long Term Incentive Plan are only included in diluted earnings per ordinary share where the performance hurdles are met as at year end and they do not have an anti-dilutive effect. As at 30 June 2018 there were 12,126,000 performance rights calculated as meeting the performance criteria for inclusion in diluted earnings per share, however these were not included due to their anti-dilutive effect. There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares outstanding between the reporting date and the date of completion of these financial statements. (c) Information on the classification of securities (i) Options As at 30 June 2018 there were no options issued over shares in the Company (2017: nil). (ii) Bonds and Notes The bonds and notes are not considered to be dilutive. A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 77 Notes to the Financial Statements continued Note 7: Dividends paid and proposed (a) Cash dividends on ordinary shares declared and paid Final dividend for 2017: 4.0 cents per share (2016: 7.5 cents per share) Interim dividend for 2018: 3.0 cents per share (2017: 3.0 cents per share) Consolidated 2018 $’000 2017 $’000 6,882 5,188 12,070 12,709 5,136 17,845 (b) Proposed dividends for ordinary shares: Final dividend for 2018: Nil cents per share (2017: 4.0 cents per share) – 6,882 The Directors have determined not to pay a final dividend for the year ended 30 June 2018. On 22 February 2018 the Directors declared a fully franked interim dividend of 3.0 cents per share totalling $5,188,000. The record date for this dividend was 26 March 2018 and the payment date was 24 April 2018. Shareholders were able to elect to participate in the dividend reinvestment plan in relation to this dividend. On 24 August 2017, the directors declared a final fully franked dividend of 4.0 cents per share for the 2017 financial year, totalling $6,882,000. The record date for this dividend was 26 September 2017 and the payment date was on 20 October 2017. Shareholders were able to elect to participate in the dividend reinvestment plan in relation to this dividend. (c) Franking credit balance The amount of franking credits for the subsequent financial year are: – Franking account balance as at the end of the previous financial year at 30% – Franking debits arising from the payment of last year’s final dividend – Franking debits arising from the payment of current year’s interim dividend – Franking credits arising from the payment of income tax instalments paid during the financial year – Franking credits that will arise from the (refund)/payment of income tax (receivable)/ payable as at the end of the financial year – Impact of franking debits that will arise from the payment of the final dividend (d) Tax rates The tax rate at which paid dividends have been franked is 30% (2017: 30%). IMF Bentham Limited 2018 $’000 2017 $’000 10,239 (2,949) (2,224) 13,990 19,056 (5,830) – 13,226 6,732 (5,447) (2,201) 11,155 10,239 5,799 (2,949) 13,089 78 Notes to the Financial Statements continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Note 8: Statement of cash flows reconciliation (a) Reconciliation of net profit after tax to net cash flows used in operations: Net (loss)/profit after tax from continuing operations Adjustments for: Net impact of the reclassification of litigation intangibles related cashflows to cashflows to/(from) investing activities Depreciation Share based payments Unrealised foreign exchange loss/(gain) Loss/(gain) on disposal of fixed assets Lease incentive adjustments Changes in assets and liabilities Decrease/(increase) in receivables Decrease/(increase) in other current assets Decrease/(increase) in intangibles, net of non-cash movements Increase/(decrease) in trade creditors and accruals Increase/(decrease) in provisions Increase/(decrease) in deferred tax assets and liabilities Increase/(decrease) in current income tax liability / (receivable) Net cash (used in) operating activities (b) Disclosure of financing facilities Refer to Note 11 and Note 12. Consolidated 2018 $’000 2017 $’000 (7,847) 15,440 12,106 (24,806) 621 5,525 (4,311) – (182) 591 2,775 (334) 80 159 21,094 (151) (6,049) (521) (72,000) (43,373) (4,094) (3,979) (9,293) (1,114) 6,891 (623) (378) (732) (63,625) (50,880) O v e r v e w i D i r e c t o r s ’ R e p o r t (c) Significant non-cash transactions During the year, an investment was made by one of the Group’s subsidiaries, through a combination of cash and a $60,352,000 increase in the non-controlling interest of the subsidiary. i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 79 Notes to the Financial Statements continued B. INTANGIBLE ASSETS Note 9: Intangible assets (a) Description of Group’s intangible assets Litigation Contracts In Progress Litigation Contracts In Progress represent future economic benefits controlled by the Group. As Litigation Contracts In Progress may be exchanged or sold, the Group is able to control the expected future economic benefit flowing from the Litigation Contracts In Progress. Accordingly, Litigation Contracts In Progress meet the definition of intangible assets. Litigation Contracts In Progress are measured at cost on initial recognition. Litigation Contracts In Progress are not amortised as the assets are not available for use until the determination of a successful judgment or settlement, at which point the assets are realised. Gains or losses arising from derecognition of Litigation Contracts in Progress are measured as the difference between the net disposed proceeds and the carrying amount of the asset and are recognised in the profit or loss when the asset is derecognised. The following specific asset recognition rules have been applied to Litigation Contracts In Progress: (A) Actions still outstanding: When litigation is outstanding and pending a determination, Litigation Contracts In Progress are carried at cost. Subsequent expenditure is capitalised when it meets all of the following criteria: (a) demonstration of ability of the Group to complete the litigation so that the asset will be available for use and the benefits embodied in the asset will be realised; (b) demonstration that the asset will generate future economic benefits; (c) demonstration that the Group intends to complete the litigation; (d) demonstration of the availability of adequate technical, financial and other resources to complete the litigation; and (e) ability to measure reliably the expenditure attributable to the intangible asset during the life of the Litigation Contracts in Progress. (B) Successful judgment: Where the litigation has been determined in favour of the Group or a positive settlement has been agreed, this constitutes a derecognition of the intangible asset and accordingly a gain or loss is recognised in the Statement of Comprehensive Income. Any future costs relating to the defence of an appeal by the defendant are expensed as incurred. (C) Unsuccessful judgment: Where the litigation is unsuccessful at trial, this is a trigger for impairment of the intangible asset and the asset is written down to its recoverable amount. If the claimant, having been unsuccessful at trial, appeals against the judgment, then future costs incurred by the Group on the appeal are expensed as incurred. (D) Write off of intangible assets The carrying amount of Litigation Contracts In Progress is written off when the case is lost by the Group or the Group decides not to pursue cases that do not meet the Group’s required rate of return. 80 Notes to the Financial Statements continued Note 9: Intangible assets (continued) (b) Reconciliation of carrying amounts Balance at 1 July, net of accumulated amortisation and impairment Additions - Litigation expenditure Additions - Capitalised borrowing costs Additions - Capitalised employee costs Additions - Capitalised overheads Disposals Write-down of Litigation contracts Consolidated 2018 $’000 2017 $’000 190,876 145,634 167,974 85,151 9,327 6,781 1,090 (48,141) (6,639) 6,940 6,670 778 (51,073) (3,224) Balance at 30 June, net of accumulated amortisation and impairment 321,268 190,876 The carrying value of Litigation Contracts In Progress includes the capitalisation of external costs of funding the litigation, such as solicitors’ fees, counsels’ fees and experts’ fees, the capitalisation of certain directly attributable internal costs of managing the litigation, such as certain wages, occupancy costs, other out of pocket expenses and the capitalisation of borrowing costs as described below. The capitalised wages in 2018 equated to approximately 26.4% of the total salary costs (2017: 26.8%). The other internal capitalised expenses equated to approximately 49.3% of related overhead costs (2017: 36.2%). The Group has determined that Litigation Contracts In Progress meet the definition of qualifying assets and that 100% of borrowing costs are eligible for capitalisation. The carrying value of Litigation Contracts In Progress can be summarised as follows: Capitalised external costs Capitalised internal costs Capitalised borrowing costs Balance at 30 June Consolidated 2018 $’000 2017 $’000 276,575 158,723 25,268 19,425 19,179 12,974 321,268 190,876 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i (c) Impairment testing of intangible assets The recoverable amount of each of the Litigation Contracts In Progress is determined based on a value in use calculation using cash flow projections based on financial budgets approved by management. Based on the below assumptions, the value in use calculation of the Group’s portfolio of intangible assets results in a net present value which has headroom of $530 million to $555 million over its carrying value. Headroom in a value in use analysis does not constitute a valuation, but is the output from a calculation in assessing the impairment of the intangible assets. The following describes each key assumption on which management has based its cash flow projections when determining the value in use of Litigation Contracts In Progress: – The estimated cost to complete a Litigation Contract In Progress is budgeted based on estimates provided by the external legal advisors handling the litigation. – The value to the Group of the Litigation Contracts In Progress, once completed, is estimated based on the successful conclusion and the resulting expected settlement or judgment amount of the litigation and the fees due to the Group under the litigation funding contract. – The discount rate applied to the cash flow projections is based on the Group’s weighted average cost of capital and other factors relevant to the particular Litigation Contracts In Progress. The discount rate applied ranged between 10.0% and 11.5% (2017: between 9.0% and 10.5%). No material impairment has been identified as a result of impairment testing performed. 81 l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued C. CAPITAL STRUCTURE Note 10: Financial risk management objective and policies The Group’s principal financial instruments comprise cash and short-term deposits, receivables, payables, bonds and fixed rate notes. The Group manages its exposure to key financial risks, including interest rate risk and currency risk in accordance with the Group’s financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst protecting its future financial security. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rates and currencies and assessments of market forecasts for interest rates and foreign currencies. Aging analyses and monitoring of specific credit allowances are undertaken to manage credit risk. Liquidity risk is monitored through the development of future rolling cash flow forecasts. Risk exposures and responses Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to: – the Group’s cash holdings with a floating interest rate; and – the Group has a $50,000,000 variable rate bond debt outstanding as at 30 June 2018. These IMF Bentham Bonds require that the Group make a quarterly coupon payment based on the Bank Bill Rate plus a fixed margin of 4.20% per annum. At reporting date the Group had the following financial instruments exposed to variable interest rate risk: Financial instruments Cash and cash equivalents IMF Bentham Bonds Net exposure Consolidated 2018 $’000 2017 $’000 160,231 144,891 (49,553) 110,678 (49,104) 95,787 The Group regularly analyses its interest rate exposure. Within this analysis consideration is given to expected interest rate movements and the Group’s future cash requirements, potential renewals of existing positions, alternative financing available, and the mix of fixed and variable interest rates. 82 Notes to the Financial Statements continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Note 10: Financial risk management objective and policies (continued) The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date. At 30 June 2018, if interest rates had moved with all other variables held constant, post-tax profit and equity would have been affected as follows: +0.25% (25 basis points) (2017: +0.25%) -0.25% (25 basis points) (2017: -0.25%) Post Tax Profit Higher/(Lower) Equity Higher/(Lower) 2018 $’000 194 (194) 2017 $’000 168 (168) 2018 $’000 194 (194) 2017 $’000 168 (168) Credit risk Credit risk arises from the financial assets of the Group, which comprises cash and cash equivalents and receivables. The Group’s exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Exposure at reporting date is addressed in each applicable note. The Group assesses the defendants in the investments funded by the Group prior to entering into any agreement to provide funding and continues this assessment during the course of funding. Wherever possible the Group ensures that security for settlement sums is provided, or the settlement funds are placed into solicitors’ trust accounts. The Group’s continual monitoring of the defendants’ financial capacity mitigates this risk. Liquidity risk The liquidity position of the Group is managed to ensure sufficient liquid funds are available to meet the Group’s expected financial commitments in a timely and cost effective manner. Management continually reviews the Group’s liquidity position, including the preparation of cash flow forecasts, to determine the forecast liquidity position and to maintain appropriate liquidity levels. All financial liabilities of the Group, except the IMF Bentham Bonds and Fixed Rate Notes, are current and payable within 30 days. The maturity profile of the Group’s financial liabilities based on contractual maturity on an undiscounted basis are: < 6 months $’000 6-12 months $’000 1-5 years $’000 >5 years $’000 Total $’000 O v e r v e w i D i r e c t o r s ’ R e p o r t 2018 Financial Liabilities Trade and other payables Bonds and Notes – principal Bonds and Notes interest 2017 Financial Liabilities Trade and other payables Bonds and Notes – principal Bonds and Notes interest 18,047 – 4,223 22,270 22,141 – 4,202 26,343 – 50,000 4,223 54,223 – – 4,202 4,202 – 72,000 5,328 77,328 – 122,000 13,733 135,733 i F n a n c a i – – – – – – – – 18,047 122,000 13,774 153,821 22,141 122,000 22,137 166,278 83 l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 10: Financial risk management objective and policies (continued) Fair value The methods for estimating fair value are outlined in the relevant notes to the financial statements. The carrying amounts of financial assets and liabilities of the Group approximate their fair values, except for the IMF Bentham Bonds and Fixed Rate Notes. The IMF Bentham Bonds fair value has been determined using the quoted market price at 30 June 2018, and the Fixed Rate Notes fair value has been determined using the price from Austraclear. Under AASB 13 the fair value measurements used for the Bonds and Notes are both level 1 on the fair value hierarchy. At 30 June 2018: IMF Bentham Bonds Fixed Rate Notes Carrying Value $’000 49,553 70,909 Principal $’000 Fair Value $’000 50,000 72,000 51,150 74,745 Foreign currency risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises from commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The Group is also exposed to foreign exchange risk arising from the translation of its foreign operations. The Group’s investments in its subsidiaries are not hedged as those currency positions are considered to be long term in nature. In addition, the parent entity has intercompany receivables from its subsidiaries denominated in Australian Dollars which are eliminated on consolidation. The gains or losses on re-measurement of these intercompany receivables from foreign currencies to Australian Dollars are not eliminated on consolidation as the loans are not considered to be part of the net investment in the subsidiary. 2018 Financial Assets Cash and cash equivalents Trade and other receivables1 Total assets Financial Liabilities Trade Payables Total liabilities USD $’000 GBP $’000 Euro $’000 SGD $’000 CAD $’000 HKD $’000 43,772 11,675 55,447 1,244 1,244 81 2 83 5 5 3,632 – 3,632 – – 498 1,002 1,500 4 4 1,529 10,294 11,823 434 434 11,734 – 11,734 107 107 84 Notes to the Financial Statements continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Note 10: Financial risk management objective and policies (continued) 2017 Financial Assets Cash and cash equivalents Trade and other receivables1 Total assets Financial Liabilities Payables Total liabilities USD $’000 GBP $’000 Euro $’000 SGD $’000 CAD $’000 HKD $’000 34,727 20,020 54,747 2,842 2,842 24 2 26 6 6 3,660 – 3,660 – – 68 44 112 – – 2,967 716 3,683 1,977 48,612 50,589 99 99 15,840 15,840 1. Trade and other receivables balance includes the intercompany loan receivable that IMF Bentham Limited has with Bentham Holdings Inc (USD), Bentham IMF Capital Limited (CAD) and IMF Bentham Pte Limited (SGD). Sensitivity The following table summarises the sensitivity of financial instruments held at balance date to movement in the exchange rate of the AUD to the listed currencies, with all other variables held constant excluding the impact of the foreign exchange movement on the inter-company loans of $16,901,000 (2017: $23,370,000). The sensitivity is based on management’s estimate of reasonably possible changes over the financial year. 2018 2017 Impact on profit or loss before tax ($’000) USD GBP +10% -10% +10% -10% (6,412) 6,412 (6,763) 6,763 (14) 14 (3) 3 Euro (573) 573 (545) 545 SGD (49) 49 10 (10) CAD (382) 382 (359) 359 HKD 2 (2) (580) 580 O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 85 Notes to the Financial Statements continued Note 11: Cash and cash equivalents Cash and cash equivalents in the Statement of Financial Position and Statement of Cash Flows comprise cash at bank and in hand, and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash on hand and which are subject to an insignificant risk of changes in value. Cash and cash equivalents comprise the following at 30 June: Cash at bank Short-term deposits Consolidated 2018 $’000 2017 $’000 58,449 38,583 101,782 106,308 160,231 144,891 Cash at bank earns interest at floating rates based on daily bank deposit rates. The carrying amounts of cash and cash equivalents represent fair value. Short-term deposits are made for varying periods depending on the immediate cash requirements of the Group. As at 30 June 2018, all short term deposits are due to mature in less than 90 days from inception and earn interest at the respective short-term deposit rates. Bank Guarantees Bank guarantees have been issued by the Group’s bankers as security for leases over premises, banking facilities and as security for adverse costs orders for investments funded under litigation contracts. As at 30 June 2018 guarantees of $1,114,000 were outstanding (2017: $1,059,000). The Group has a total guarantee facility limit of $1,439,000 (2017: $1,433,000) that is secured by an offset arrangement with deposits of $1,639,000 (2017: $1,633,000). Note 12: Debt Securities All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities that are yield related are included as part of the carrying amount of the loan and borrowings. The borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance date. Current IMF Bentham Bonds1 Non-Current IMF Bentham Bonds1 Fixed Rate Notes1 1. Includes net carrying value of transaction costs and debt premium of $1,538,000. 86 Consolidated 2018 $’000 2017 $’000 49,553 49,553 – 70,909 70,909 – – 49,104 70,365 119,469 Notes to the Financial Statements continued Note 12: Debt Securities (continued) On 18 April 2016, the Company issued 32,000 Fixed Rate Notes with a face value of $1,000 each (“Tranche 1 Notes”). The interest rate payable to Noteholders is 7.40% per annum payable half yearly. The Fixed Rate Notes are due to mature on 30 June 2020 and are secured by a security interest over all present and after-acquired property of IMF. IMF has an early redemption option on these Fixed Rate Notes on 30 June 2019. The issuer may redeem some or all of the Notes on the optional redemption date by payment of 101 percent of the outstanding principal amount of each Note being redeemed together with any accrued interest, if any, to, but excluding, the date of redemption. No fair value has been attributed to the early redemption option. On 6 April 2017, the Company issued 40,000 Fixed Rate Notes with a face value of $1,000 each (“Tranche 2 Notes”). Tranche 2 Notes were consolidated and formed a single series with the existing Tranche 1 Notes. The terms and conditions of the Tranche 2 Notes are identical to the conditions on Tranche 1 Notes. The IMF Bentham Bonds issued in April 2014 have a variable rate of interest based on the Bank Bill rate plus a fixed margin of 4.20% per annum, paid quarterly. The maturity date is 30 June 2019. The application of AASB 123 Borrowing Costs (revised 2007) has resulted in the capitalisation of $9,327,000 (2017: $6,940,000) during the current financial year as part of the Litigation Contracts in Progress intangible assets which are deemed to be qualifying assets post the application date of AASB 123 (revised) of 1 July 2009 (refer to Note 9). Note 13: Contributed equity Contributed equity 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. Contributed equity Issued and fully paid ordinary shares (a) Ordinary shares Fully paid ordinary shares carry one vote per share and the right to dividends. Movement in ordinary shares As at 30 June 2016 Shares issued under the Dividend Reinvestment Plan As at 30 June 2017 Shares issued under the Dividend Reinvestment Plan As at 30 June 2018 Consolidated 2018 $’000 2017 $’000 127,630 123,654 Number ‘000 $’000 169,456 119,122 2,591 4,532 172,047 123,654 1,816 3,976 173,863 127,630 On 24 April 2018, the Company issued 916,449 shares at $2.3510 per share, and on 20 October 2017 the company issued 900,253 shares at $2.0239 per share under its Dividend Reinvestment Plan. On 21 April 2017, the Company issued 855,956 shares at $1.7398 per share, and on 21 October 2016 the company issued 1,734,555 shares at $1.7550 per share under its Dividend Reinvestment Plan. (b) Share options At 30 June 2018, there were 14,355,887 share performance rights over unissued ordinary shares (2017: 11,177,055). 87 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 13: Contributed equity (continued) (c) Capital management Capital includes bonds, notes and equity attributable to the equity holders of the Parent. When managing capital, management’s objective is to ensure the Group continues as a going concern while maintaining optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the Group. The earnings of the Group are lumpy and this is expected to continue into the future. Management’s policy is to pay dividends to shareholders from earnings where there is capital surplus to the needs of the business. The Group is not subject to any externally imposed capital requirements. However, if the cash and receivables balances of IMF fall below 75% of the Group financial indebtedness or retained earnings are less than $52,000,000, or an event of default is subsisting under the IMF Bentham Bonds or Fixed Rate Notes, the Company is not permitted to pay a dividend to ordinary shareholders (this calculation is to be undertaken both before and after the proposed dividend). Note 14: Retained earnings and reserves (a) Movements in retained earnings were as follows: Balance 1 July Net profit for the year Dividend paid Balance 30 June (b) Movements in reserves were as follows: At 1 July 2016 Movements in reserves during the period At 30 June 2017 Movements in reserves during the period At 30 June 2018 (c) Nature and purpose of reserves i. Share based payment reserve Consolidated 2018 $’000 71,679 (11,017) (12,070) 48,592 2017 $’000 74,084 15,440 (17,845) 71,679 Share based payment reserve Foreign currency translation reserve Other capital reserves Total reserves $’000 $’000 $’000 $’000 658 5,304 5,962 9,289 15,251 288 (4,932) (4,644) 6,027 1,383 7,236 – 7,236 (7,760) (524) 8,182 372 8,554 7,556 16,110 The share based payments reserve is used to recognise the value of equity-settled share-based payments provided to employees, including key management personnel as part of their remuneration. Refer to Note 22 for further details of this plan. ii. Foreign currency translation reserve This reserve is used to record differences on the translation of the assets and liabilities of overseas subsidiaries. 88 Notes to the Financial Statements continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Note 14: Retained earnings and reserves (continued) iii. Other capital reserves Other capital reserves comprise: a) Option premium reserve This reserve is used to record the value of equity benefits provided to employees and directors, including Key Management Personnel, as part of their remuneration. This reserve relates to the previous plan for options already vested. b) Convertible note reserve This reserve was used to record the equity portion on the convertible notes (issued on 13 December 2010), which were fully redeemed by the Company during December 2013. c) Fund equity reserve This reserve is used to record changes in the proportion of equity held by non-controlling interests within the Group. D. WORKING CAPITAL, OTHER ASSETS AND OTHER LIABILITIES Note 15: Trade and other receivables Trade receivables are recognised initially at fair value and subsequently remeasured at amortised cost using the effective interest rate method, less an allowance for any uncollectible amounts. Collectability of trade receivables is reviewed on an ongoing basis. Debts that are known to be uncollectible are written off when identified. An impairment loss is recognised when there is objective evidence that the Group will not be able to collect the debt. Financial difficulties of the debtor and loss of cases on appeal are considered to be objective evidence of impairment. O v e r v e w i D i r e c t o r s ’ R e p o r t Current Trade receivables1 Other receivables2 Non-current Trade receivables3 Consolidated 2018 $’000 2017 $’000 21,529 4,161 25,690 – – 37,202 8,003 45,205 1,580 1,580 1. 2. 3. Trade receivables are non-interest bearing and generally on 30-90 day terms. There is $2,958,000 included in current trade receivables which is subject to appeal at 30 June 2018 (2017: $2,870,000), which was received in August 2018. Other receivables comprise interest receivable upon the maturity of the Group’s short term deposits (between 30 and 90 days), receivables from co-funders of litigation contracts in progress, short term loans and deposits receivable. Non-current trade receivables occur either as a result of settlements with a repayment plan greater than 12 months or where a judgment is subject to appeal and the appeal is not expected to be heard within the next 12 months. 89 i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 15: Trade and other receivables (continued) At 30 June, the aging analysis of trade and other receivables is as follows: 2018 Consolidated 2017 Consolidated 0-30 days $’000 14,947 38,923 31-90 days $’000 1,265 396 91-180 days $’000 – – +180 days $’000 9,478 7,466 Total $’000 25,690 46,785 (a) Fair value and credit risk Due to the nature of these receivables, the carrying value of the current receivables approximates its fair value. The carrying value of the non-current receivables is adjusted to reflect future cash flows and it is this adjusted carrying value that approximates its fair value. The maximum exposure to credit risk is the carrying value of receivables. Collateral is not held as security, nor is it the Group’s policy to transfer (on-sell) receivables. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Note 16: Other assets Current Prepayments Rental deposits Lease incentive receivable Non-current Prepayments Lease incentive receivable Consolidated 2018 $’000 2017 $'000 694 598 119 670 661 (71) 1,411 1,260 11,242 267 11,509 – 388 388 Note 17: Plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing parts is incurred. All other repairs and maintenance are recognised in the profit or loss as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, that have been estimated between 2 to 9 years for both 2018 and 2017. The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end. Derecognition An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. 90 Notes to the Financial Statements continued Note 17: Plant and equipment (continued) Reconciliation of carrying amounts at the beginning and end of the year Cost Accumulated depreciation Net carrying amount Cost Balance as at 1 July 2016 Additions Disposals At 30 June 2017 Additions Disposals At 30 June 2018 Accumulated depreciation Balance as at 1 July 2016 Depreciation charge for the year Disposals At 30 June 2017 Depreciation charge for the year Disposals At 30 June 2018 Net book value At 30 June 2018 At 30 June 2017 Consolidated 2018 $’000 3,119 (1,787) 1,332 2017 $’000 2,895 (1,195) 1,700 Consolidated Plant and equipment $'000 3,967 961 (2,033) 2,895 259 (35) 3,119 2,561 591 (1,957) 1,195 621 (29) 1,787 1,332 1,700 Plant and Equipment of the Company is subject to a fixed charge to secure the Company’s debt due to Bondholders. See Note 12 for further details. 91 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 18: Trade and other payables Trade payables and other payables are carried at amortised cost. Due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. Trade payables Wage accruals Interest accruals Consolidated 2018 $'000 16,100 1,167 780 18,047 2017 $'000 20,335 1,057 749 22,141 (a) Fair value Due to the nature of trade and other payables, their carrying value is assumed to approximate their fair value. Note 19: Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance date using a discounted cash flow methodology. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. Consolidated 2018 $'000 2017 $'000 2,521 12,135 – 14,656 86 191 277 2,325 14,500 1,847 18,672 86 154 240 Current Annual leave and long service leave Adverse costs Bonus Non-Current Make good Long service leave 92 Notes to the Financial Statements continued Note 19: Provisions (continued) (a) Movement in provisions As at 1 July 2017 Arising during the year Utilised As at 30 June 2018 Current 2018 Non-current 2018 Current 2017 Non-current 2017 Adverse costs $'000 Annual leave $'000 Employee bonus/STIP $'000 Long service leave $'000 Make good $'000 14,500 135 (2,500) 12,135 12,135 – 12,135 14,500 – 14,500 1,265 1,666 (1,459) 1,472 1,472 – 1,472 1,265 – 1,265 1,847 202 (2,049) – – – – 1,847 – 1,847 1,214 26 – 1,240 1,049 191 1,240 1,060 154 1,214 86 – – 86 – 86 86 – 86 86 Total $'000 18,912 2,029 (6,008) 14,933 14,656 277 14,933 18,672 240 18,912 (b) Nature and timing of provisions Adverse costs During the financial year 2018 the Group raised a further provision of $135,000 for estimated adverse costs obligations in relation to a withdrawn investment. The provision raised is the Group’s best estimate of the amount of adverse costs it will have to remit. The adverse costs provision raised for the Bank of Queensland investment, recognised in 2015 was paid in the current year. Employee benefits (i) Wages, salaries, and annual leave Provision is made for employee benefits accumulated as a result of employees rendering services up to the end of the reporting period. These benefits include wages, salaries, annual leave, long service leave and bonuses. Liabilities in respect of employees’ services rendered that are not expected to be wholly settled within one year after the end of the periods in which the employees render the related services are recognised as long-term employee benefits. These liabilities are measured at the present value of the estimated future cash outflow to be made to the employees using the projected unit credit method. Liabilities expected to be wholly settled within one year after the end of the period in which the employees render the related services are classified as short-term benefits and are measured at the amount due to be paid. (ii) Long service leave Long service leave is measured at the present value of benefits accumulated up to the end of the reporting period. The liability is discounted using an appropriate discount rate. Management exercises judgement to determine key assumptions used in the calculation including future increases in salaries and wages, future on-costs rates and future settlement dates of employees’ departures. (iii) Bonuses Under the IMF Short-Term Incentive Plan, eligible participants have the opportunity to receive an annual cash bonus, subject to performance against clearly defined and measurable financial and non-financial objectives. Make Good The make good provision relates to amounts recognised for make good requirements on operating leases of office space. 93 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 20: Commitments and contingencies Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in the profit or loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Operating lease payments are recognised as an expense in the profit or loss on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability. (a) Operating lease commitments – Group as lessee The Group has entered into commercial leases for its premises. These leases have a life of between one and nine years with renewal options included in the contracts. There are no restrictions placed upon the lessee by entering into these leases. Future minimum rentals payable under non-cancellable operating leases as at 30 June are as follows: Within one year After one year but no more than five years After more than five years Total minimum lease payments (b) Remuneration commitments Commitments for the payment of salaries and other remuneration under long-term employment contracts in existence at the reporting date but not recognised as liabilities payable: Within one year After one year but no more than five years Consolidated 2018 $’000 1,794 4,118 2,192 8,104 2017 $’000 1,910 5,198 2,804 9,912 Consolidated 2018 $’000 2017 $’000 4,963 – 4,963 4,390 – 4,390 Amounts disclosed as remuneration commitments also include commitments arising from the service contracts of, and bonuses payable to, directors and executives referred to in the Remuneration Report of the Directors’ Report that are not recognised as liabilities and are not included in the compensation of Key Management Personnel. 94 Notes to the Financial Statements continued Note 20: Commitments and contingencies (continued) (c) Contingencies As at 30 June 2018, the Group has two cases under appeal (2017: three cases). No income has been recognised by the Group from the cases remaining on appeal in the current financial year (2017: $2,870,000). The total current and non- current receivables as at 30 June 2018 relating to the cases under appeal is nil (2017: $2,870,000). In certain jurisdictions litigation funding agreements contain an undertaking from the Company to the client that the Company will pay adverse costs awarded to the successful party in respect of costs incurred during the period of funding, should the client’s litigation be unsuccessful. It is not possible to predict in which cases such an award might be made or the quantum of such awards. In addition, the Company has insurance arrangements which, in some circumstances, will lessen the impact of such awards, including an after-the-event (“ATE”) insurance policy that will respond to claims for adverse costs in excess of $7.5m for litigation in ROW Funds 2 and 3. In general terms, an award of adverse costs to a defendant will approximate 40% to 70% (depending on jurisdiction) of the amount paid by the plaintiff to pursue the litigation (although in some cases there may be more than one defendant). Accordingly, an estimate of the total potential adverse costs exposure of the Group which has accumulated from time to time may be made by assuming all cases are lost, that adverse costs equal 40% to 70% of the amount spent by the plaintiff and that there is only one defendant per case. At 30 June 2018, the total amount spent on currently funded investments by the Company where undertakings to pay adverse costs have been provided was $88,702,000 (2017: $70,309,000) divided between those funded directly on IMF’s balance sheet of $83,845,000 and those funded through the RoW Funds of $4,857,000. The potential adverse costs orders using the above methodology would amount to $68,709,000 for investments on IMF’s balance sheet, and $2,483,000 for RoW Fund investments. The Company does not currently expect that any of the investments will be unsuccessful. The Company maintains a large cash holding in the event that one or more investments are unsuccessful and an adverse costs order is made which is not covered by its insurance arrangements. On 30 June 2016, the Group sold its 50% interest in Bentham Ventures B.V., a jointly controlled entity principally involved in the funding of litigation throughout Europe but primarily in the United Kingdom. Refer to Note 25 for further details of the sale. As a result of the termination of the joint venture arrangements, IMF will no longer have an interest in the Tesco and VW cases, but will remain as a joint and several guarantor for current clients’ exposure for the costs of the litigation and any adverse costs exposure, to the extent not covered by applicable insurance, with IMF being indemnified by certain affiliates of its former joint venture partner with respect to certain of these contingent liabilities. E. THE GROUP, MANAGEMENT AND RELATED PARTIES Note 21: Key management personnel (a) Details of Key Management Personnel There were no changes to Key Management Personnel after the reporting date and before the date the financial report was authorised for issue. (b) Compensation of Key Management Personnel Short-term employee benefits - salaries and wages Short-term employee benefits - accrued and unpaid Post-employment benefits Long service leave accrued during the year Share based payments Consolidated 2018 $’000 4,288 – 125 93 1,833 6,339 2017 $’000 4,274 540 115 50 1,237 6,216 95 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 22: Share-based payment plan Share-based payment transactions (i) Equity-settled transactions The Company’s LTIP awards share performance rights to key senior employees. The cost of equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined using a Monte Carlo or Black Scholes Model depending on the type of LTIP. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of IMF (i.e. market conditions) if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in the share-based payment reserve, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). The charge to the profit or loss for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding credit to equity. Equity-settled awards granted by IMF to employees of subsidiaries are recognised in the Parent’s separate financial statements as an additional investment in the subsidiary with a corresponding credit to equity. These amounts are eliminated through consolidation. As a result, the expenses recognised by IMF in relation to equity-settled awards only represents the expense associated with grants to employees of the Parent. The expense recognised by the Group is the total expense associated with all such awards. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and an expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. (ii) Cash-settled transactions The Group does not provide cash-settled share-based benefits to employees or senior executives. Long Term Incentive Plan LTIP awards are delivered in the form of performance rights over shares which vest after a period of three years subject to meeting performance measures. The Group uses relative TSR and CAGR of Funds Deployed as the performance measures. For the portion of the LTIP subject to the relative TSR performance measure, the fair value of share performance rights granted is estimated at the date of grant using a Monte-Carlo simulation model, taking into account the terms and conditions upon which the share performance rights were granted. For the portion of the LTIP based on the achievement of CAGR of Funds Deployed, the Black-Scholes model is used. 96 Notes to the Financial Statements continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Note 22: Share-based payment plan (continued) 5,122,146 share performance rights were issued during 2018 (2017: 6,365,969). Specific assumptions are below: Valuation Date 5-day Volume Weighted Average Price at commencement of measurement period 1 July 2017 18 November 2016 24 February 2016 20 November 2015 $1.89 $1.46 $1.67 $1.67 Expected Volatility (%) Dividend yield (%) Risk-free rate (%) Performance period Models used 20% 3.20% 1.94% 25% 4.32% 1.86% 32% 5.00% 1.77% 28% 5.00% 2.10% 3 years ending 30 June 2020 3 years ending 30 June 2019 3 years ending 30 June 2018 3 years ending 30 June 2018 Monte Carlo & Black Scholes Monte Carlo & Black Scholes Monte Carlo & Binomial Monte Carlo & Binomial Tranche1 - relative TSR (value per right $) Tranche 2 - CAGR (value per right $) $0.95 $1.72 $1.19 $1.55 $0.33 $1.00 $0.58 $1.21 The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share performance rights during the year: Movements during the year Outstanding at 1 July Granted during the year Forfeited during the year Outstanding at 30 June Exercisable at 30 June 2018 Number 2018 WAEP 2017 Number 2017 WAEP 11,177,055 5,122,146 (1,943,314) 14,355,887 4,125,409 – – – – – 4,811,086 6,365,969 – 11,177,055 – – – – – – O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 97 Notes to the Financial Statements continued Note 23: Parent entity information Information relating to IMF Bentham Limited: Current assets Total assets Current liabilities Total liabilities Net assets Issued capital Retained earnings Reserves Total shareholders’ equity Profit or loss of the Parent Total comprehensive income of the Parent 2018 $’000 2017 $’000 147,673 372,511 180,789 356,326 (72,233) (156,552) 215,959 (39,897) (178,501) 177,825 127,630 123,654 68,165 20,164 40,975 13,196 215,959 177,825 39,261 39,261 23,104 23,104 The Parent has not entered into any guarantees with any of its subsidiaries. Details of the contingent liabilities of the Parent are contained in Note 20(c). Details of the contractual commitments of the Parent are contained in Notes 20(a) and 20(b). The consolidated financial statements include the financial statements of IMF and the subsidiaries listed in the following table: Name Financial Redress Pty Ltd1 IMF Bentham (Fund 2) Pty Ltd2 IMF Bentham (Fund 3) Pty Ltd2 Bentham Holdings Inc Bentham Capital LLC Security Finance LLC Bentham IMF Holdings 1 LLC3 Bentham IMF 1 LLC3 Security Finance 1 LLC3 HC 1 LLC4 Bentham IMF Capital Limited Lien Finance Canada Limited IMF Bentham Pte. Limited5 Country of Incorporation Australia Australia Australia USA USA USA USA USA USA USA Canada Canada Singapore Percentage owned 2018 % – 20 20 100 100 100 100 27 27 7 100 100 100 2017 % 100 – – 100 100 100 100 50 50 – 100 100 100 1. This entity was deregistered on 9 May 2018. 2. These entities were incorporated on 13 September 2017. 20% ownership became effective on 3 October 2017. 3. These entities were incorporated 3 November 2016. 50% ownership became effective on 13 February 2017. Ownership has decreased during the year to 27%. 4. This entity was incorporated on 30 May 2018. 5. This entity was incorporated on 8 March 2017. 98 Notes to the Financial Statements continued Note 24: Material partly-owned subsidiaries Financial information of subsidiaries that have material non-controlling interests is provided below: Non-controlling interest Country of Incorporation 2018 % 2017 % Proportion of equity interest held by non-controlling interests: Bentham IMF 1 LLC1 Security Finance 1 LLC1 HC 1 LLC1 IMF Bentham (Fund 2) Pty Ltd2 IMF Bentham (Fund 3) Pty Ltd2 USA USA USA AUS AUS Accumulated balances of material non-controlling interest: Bentham IMF 1 LLC1 HC 1 LLC1 IMF Bentham (Fund 2) Pty Ltd2 IMF Bentham (Fund 3) Pty Ltd2 Transaction costs, net of tax - disposal of non-controlling interest Profit/(loss) allocated to material non-controlling interest: Bentham IMF 1 LLC IMF Bentham (Fund 2) Pty Ltd2 IMF Bentham (Fund 3) Pty Ltd2 73 73 93 80 80 2018 $'000 105,799 47,086 22,933 7,644 (7,958) 175,504 1,106 1,548 516 3,170 50 50 – – – 2017 $'000 7,209 – – – (4,843) 2,366 – – – – 1. The results and non-controlling interest of these entities comprise the results of the US Fund, included in Note 1 Segment Information. 2. The results and non-controlling interest of these entities comprise the results of the ROW Funds, included in Note 1 Segment Information. Bentham IMF 1 LLC HC 1 LLC IMF Bentham (Fund 2) Pty Ltd IMF Bentham (Fund 3) Pty Ltd Total 2018 $'000 2017 $'000 2018 $'000 2017 $'000 2018 $'000 2017 $'000 2018 $'000 2017 $'000 2018 $'000 2017 $'000 Balance at 1 July 2,366 – – 100,096 7,209 47,086 Contributions Distributions Change in net assets attributable to NCI (9,694) 8,188 – – Balance at 30 June (1,091) (4,843) Total 99,865 2,366 47,086 – – – – – – – – – – 20,877 – 2,056 (1,518) 21,415 – – – – – – – 6,958 – 686 (506) 7,138 – – – – – – 2,366 – 175,017 7,209 (9,694) 10,930 – – (3,115) (4,843) 175,504 2,366 99 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Notes to the Financial Statements continued Note 24: Material partly-owned subsidiaries (continued) ROW Funds On 13 September 2017 the Group established IMF Bentham (Fund 2) Pty Ltd and IMF Bentham (Fund 3) Pty Ltd (collectively the “ROW Funds”). On 3 October 2017, the Group undertook a transaction to dispose of a non-controlling interest in the ROW Funds. At date of disposal the change in equity of the Group was recorded as follows: Change in equity on disposal of non-controlling interest: IMF Bentham (Fund 2) Pty Ltd IMF Bentham (Fund 3) Pty Ltd Transaction costs net of tax - disposal of non-controlling interest US Fund 2018 $'000 2017 $'000 – – (2,024) (2,024) – – – – On 3 November 2016 IMF established Bentham IMF 1 LLC and its subsidiary Security Finance 1 LLC (collectively “the US Fund”). The Fund has been part of the Group and consolidated into the results since this time as it was controlled by IMF. On 10 February 2017, the Group undertook a transaction to dispose of a non-controlling interest in the US Fund. The change in equity of the Group resulting from this disposal was recorded as follows: Change in equity on disposal of non-controlling interest: Bentham IMF 1 LLC Security Finance 1 LLC Transaction costs net of tax - disposal of non-controlling interest 2018 $'000 2017 $'000 – – (1,091) (1,091) – – (4,843) (4,843) The summarised financial information provided below is based on amounts prior to intercompany eliminations: US Fund ROW Funds 2018 $'000 2017 $'000 2018 $'000 2017 $'000 Summarised statement of cash flows Operating Investing Financing Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Foreign exchange (71) (102,594) 104,570 1,905 5,561 – (1,648) – 7,209 5,561 – – (3) (18,921) 34,796 15,872 – 17 Cash and cash equivalents at the end of the period 7,466 5,561 15,889 – – – – – – – 100 Notes to the Financial Statements continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d Note 25: Discontinued operations The Bentham Ventures B.V. joint venture was incorporated in March 2014 and on 30 June 2016, the Group announced the sale of its 50% interest in Bentham Ventures B.V. for $5,986,000, with an effective date of 30 June 2016. IMF recognised $nil profit before tax on the sale at 30 June 2018 (30 June 2017: $nil). The impact on the Group’s results from the discontinued operation is set out below: Summarised Statement of Cash Flows of Bentham Ventures B.V. Investing Net cash (outflow)/inflow Note 26: Related party disclosure 2018 $'000 – – 2017 $'000 5,850 5,850 Transactions with director related entities The following table provides the total amount of transactions that were entered into with related parties for the relevant financial year. Transactions with related parties1 Consolidated 2018 $'000 470 470 2017 $'000 161 161 1. During the year the Group obtained legal advice from DLA Piper, a legal firm associated with director Michael Bowen. The legal advice was obtained at normal market prices. Note 27: Auditor’s remuneration The auditor of IMF Bentham Limited is EY. O v e r v e w i D i r e c t o r s ’ R e p o r t Amounts received or due and receivable by EY for: An audit or review of the financial report of the Parent and any other entity in the Group Other services in relation to the Parent and any other entity in the consolidated Group: Tax compliance Other Consolidated 2018 $’000 2017 $’000 276 – 60 336 235 118 31 384 Note 28: Events after the reporting date Apart from that disclosed in this report, no other circumstances have arisen since 30 June 2018 that have significantly affected, or may significantly affect the consolidated entities’ operations, the results of those operations, or the consolidated entities state of affairs in the future financial years. 101 i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Directors’ Declaration In accordance with a resolution of the Directors of IMF Bentham Limited, we state that: In the opinion of the Directors: (a) the financial statements and notes of IMF Bentham Limited for the financial year ended 30 June 2018 are in accordance with the Corporations Act 2001, including: i. ii. giving a true and fair view of its financial position as at 30 June 2018 and performance for the year ended on that date; and complying with Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in the notes to the financial statements; (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (d) this declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2018. On behalf of the board Michael Kay Non-Executive Director Perth, 22 August 2018 Andrew Saker Managing Director 102 Independent Auditor’s Report Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Independent Auditor's Report to the Members of IMF Bentham Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of IMF Bentham Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RK:DA:IMF:046 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 103 Independent Auditor’s Report continued Impairment assessment of intangible assets Why significant How our audit addressed the key audit matter Litigation contracts in progress are recognised as intangible assets and assessed for impairment by the Group using cash flow forecasts. We evaluated the Group’s assessment of the carrying value of intangible assets. Our audit procedures included the following: The carrying value of litigation contracts are contingent on future cash flows and there is a risk that if these cash flows do not meet the Group’s expectations, or if significant judgments such as the discount rates change, the assets will be impaired. This was a key audit matter because it requires a high level of judgment and changes in these assumptions might lead to a significant change in the carrying values of the related assets.  Assessed the effectiveness of the Group’s controls in relation to the review of carrying values for intangible assets, including controls over the valuation model and assumptions applied.  Examined the Group’s impairment assessment model and tested the reasonableness of key assumptions including cash flow forecasts, estimated completion dates and discount rates, with the involvement of our valuation specialists. Refer to Note 9 of the financial report for the amounts recognised by the Group as at 30 June 2018 and related disclosures.  Conducted sensitivity analyses to ascertain the impact of reasonably possible changes to key assumptions on the available headroom.  Discussed significant case matters with the Chief Executives of Australia and the USA and respective Case Investment Managers, with the involvement of our legal specialists, in order to assess related judgements made by the Group that impacted the impairment model.  Considered the Group’s intention and ability to continue to fund the relevant matters. Income recognition Why significant How our audit addressed the key audit matter During the year ended 30 June 2018, a number of cases were successfully resolved in the Group’s favour and a net gain on de-recognition of intangible assets of $17.3 million was recorded in the consolidated statement of comprehensive income. The Group’s accounting policies set out a number of strict guidelines as to the manner in which income can be recognised following outcomes on litigation matters funded by the Group. Given the magnitude and judgment involved in the timing of income recognition, income recognition was a key audit matter. Refer to Note 2 of the financial report for the amounts recognised by the Group as at 30 June 2018 and related disclosure. We evaluated the Group’s assessment of case outcomes and income recognised for the year. Our audit procedures included the following:  Assessed the timing of income recognition based on settlement terms agreed with the counterparties including liquidators where applicable, court rulings and inquiries with legal representatives.  Examined a sample of settlement agreements to determine whether criteria for recognition had been satisfied.  Agreed a sample of income recognised to payments received. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RK:DA:IMF:046 104 Independent Auditor’s Report continued Existence and collectability of trade receivables Why significant How our audit addressed the key audit matter At 30 June 2018, the Group had trade receivables of $20.4 million which were significant to the Group. The collectability of trade receivables is a key element of working capital management. Given the magnitude and judgment involved in the collectability assessment of trade receivables, existence and collectability of trade receivables was a key audit matter. Refer to Note 15 of the financial report for the amounts recognised by the Group as at 30 June 2018 and related disclosure. We evaluated the Group’s assessment of the carrying value of trade receivables at 30 June 2018. Our audit procedures included the following:  Selected a sample of balances to determine based on settlement terms, if the right to record a receivable had been satisfied;  Selected a sample of balances to assess whether there were indicators that a provision should be recognised;  Considered collection timing assumptions to determine whether receivables were appropriately classified as current or non-current.  Considered whether receivables had been collected subsequent to year end.  Reviewed historical payment patterns and any correspondence with counterparties including liquidators where applicable. Provision for adverse costs Why significant How our audit addressed the key audit matter Adverse costs arise where the Group is instructed by the court to settle the costs incurred by the defendant in litigation matters. The Group records a provision for adverse costs when a matter which it has funded is lost and that matter was in a geographic location where adverse costs exist. We focused on this area because it requires a high level of judgment to determine the adverse cost likely to be incurred and changes in these assumptions might lead to a significant change in the amount of adverse costs the Group will be required to pay. Refer to Note 19 of the financial report for the amounts recognised by the Group as at 30 June 2018 and related disclosure. We evaluated the Group’s assessment of the provision for adverse costs. Our audit procedures included the following:  Compared assumptions to evidence, including estimates provided by the Group’s legal experts.  Considered the consistency of the application of policy for recognising provisions with the prior year. Specifically we considered both the value of the prior years’ provision utilised for payments of adverse costs during the current year and the value of prior year provision amounts not utilised and released. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RK:DA:IMF:046 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 105 Independent Auditor’s Report continued Recoverability of deferred tax assets Why significant How our audit addressed the key audit matter At 30 June 2018, the Group had deferred tax assets including tax losses of $12.3 million recorded in the statement of financial position. The Group’s accounting policies outline the requirements necessary to recognise a deferred tax asset. The recoverability of the deferred tax assets is reliant on taxable profits being earnt by Group subsidiaries. Given the magnitude and judgment involved in determining the recoverability of deferred tax assets, it was considered as a key audit matter. Refer to Note 5 of the financial report for the amounts recognised by the Group as at 30 June 2018 and related disclosure. We evaluated the Group’s assessment of the recoverability of recognised deferred tax assets. Our audit procedures included the following:  Examined the Group’s deferred tax asset recoverability assessment and evaluated the reasonableness of key assumptions including forecast taxable profits of Group subsidiaries. Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2018 Annual Report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating 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 have no realistic alternative but to do so. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RK:DA:IMF:046 106 Independent Auditor’s Report continued Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:       Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RK:DA:IMF:046 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 107 Independent Auditor’s Report continued We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 50 to 58 of the directors' report for the year ended 30 June 2018. In our opinion, the Remuneration Report of IMF Bentham Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Robert A Kirkby Partner Perth 22 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RK:DA:IMF:046 108 Shareholder Information The information set out below is current as at 31 July 2018. (a) Distribution of Shareholders Ordinary Share Capital 173,863,277 fully paid ordinary shares are held by 4,698 individual shareholders. All issued ordinary shares carry one vote per share and carry the right to dividends. IMF Bentham Bonds There are 500,000 bonds issued held by 976 individual bond holders. The IMF Bentham Bonds do not carry the right to vote. Options There are no options issued over ordinary shares. Share Performance Rights 14,355,887 share performance rights were issued to 37 rights holders. Fixed Rate Notes There are 72,000 Fixed Rate Notes. Distribution of Securities The number of shareholders by size of holding, in each class are as at 31 July 2018: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Fully paid ordinary shares 463,791 4,615,304 6,449,911 Number 1,005 1,621 857 1,129 28,987,915 86 133,346,356 4,698 173,863,277 976 Non-marketable Parcels There were 275 holders of less than a marketable parcel of ordinary shares. (b) Substantial Shareholders The names of the substantial shareholders listed in the Company’s register as at 31 July 2018 are: Shareholder Perpetual Investment Management Eley Griffiths Group Celeste Funds Management Limited Kabouter Management, LLC Number of ordinary Shares ‘000 14,788 11,115 10,488 10,720 47,111 Number Bonds 934 34 3 4 1 129,856 69,757 22,825 163,674 113,888 500,000 % of issued capital 8.51 6.39 6.03 6.17 27.10 109 A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n Shareholder Information continued (c) 20 Largest Holders of Quoted Equity Securities as at 31 July 2018 Ordinary Shares 1. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 2. J P MORGAN NOMINEES AUSTRALIA LIMITED 3. UBS NOMINEES PTY LTD 4. CITICORP NOMINEES PTY LIMITED 5. NATIONAL NOMINEES LIMITED 6. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA 7. MCLERNON GROUP SUPERANNUATION PTY LTD 8. BNP PARIBAS NOMS PTY LTD 9. CITICORP NOMINEES PTY LIMITED 10. BNP PARIBAS NOMINEES PTY LTD 11. MR DENNIS JOHN BANKS 12. MR HUGH MCLERNON 13. BNP PARIBAS NOMINEES PTY LTD 14. BOUCHI PTY LTD 15. B F A PTY LTD 16. HALSE HOLDINGS PTY LTD 17. AUST EXECUTOR TRUSTEES LTD 18. LEBIKA PTY LTD 19. MR CLIVE NORMAN BOWMAN 20. MUTUAL TRUST PTY LTD (d) Options as at 31 July 2018 – unquoted There are no options issued. (e) Securities subject to escrow There are no securities subject to escrow. Number of ordinary Shares ‘000 30,085 23,361 15,359 13,316 10,057 9,266 3,862 3,220 2,828 2,177 1,899 1,201 929 636 586 500 473 467 443 417 % of issued capital 17.30 13.44 8.83 7.66 5.78 5.33 2.22 1.85 1.63 1.25 1.09 0.69 0.53 0.37 0.34 0.29 0.27 0.27 0.25 0.24 121,082 69.63 110 Shareholder Information continued A n n u a l R e p o r t 2 0 1 8 I M F B e n t h a m L m i i t e d (f) 20 Largest Holders of Quoted IMF Bentham Bonds as at 31 July 2018 Bond Holders 1. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 2. CITICORP NOMINEES PTY LIMITED 3. J P MORGAN NOMINEES AUSTRALIA LIMITED 4. BNP PARIBAS NOMS PTY LTD 5. NETWEALTH INVESTMENTS LIMITED 6. NAMANGI PTY LIMITED 7. MCLERNON GROUP SUPERANNUATION PTY LTD 8. NATIONAL NOMINEES LIMITED 9. ST HEDWIG VILLAGE 10. MR SIMON PETER PRICE & MS RACHEL EMMA FERGUSON 11. BESSFAM PTY LTD 12. CONTEMPLATOR PTY LTD 13. FERNANE PTY LTD 14. FORETELLER PTY LTD 15. TWENTY SECOND NATRO PTY LTD 16. BJM INCOME INVESTMENTS PTY LTD 17. DYSPO PTY LTD 18. LEVIEN FOUNDATION PTY LTD 19. SPACE DOOR PTY LTD 20. CONTINENTAL HOLDINGS PTY LTD Number of Bonds ‘000 114 70 65 18 11 8 8 7 5 5 4 4 4 3 3 3 3 2 2 2 % of units 22.78 13.97 13.02 3.51 2.23 1.60 1.50 1.47 1.00 1.00 0.81 0.81 0.81 0.60 0.51 0.50 0.50 0.40 0.40 0.40 341 67.82 O v e r v e w i D i r e c t o r s ’ R e p o r t i F n a n c a i l R e p o r t (cid:54) (cid:75) a r e (cid:75) o (cid:71) e r l (cid:44) n (cid:73) o r (cid:80) a t i o n 111 Corporate Information This annual report covers both IMF Bentham Limited as an individual entity and the consolidated entity comprising IMF Bentham Limited and its subsidiaries. The Group’s functional and presentation currency is AUD ($). A description of the Group’s operations and of its principal activities is included in the review of operations and activities in the Directors’ Report. The Directors’ Report is not part of the financial report. Directors Michael Kay Andrew Saker Hugh McLernon Michael Bowen Wendy McCarthy Karen Phin Company Secretary Jeremy Sambrook Non-Executive Chairman Managing Director Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Registered office and principal place of business in Australia Level 18, 68 Pitt Street Sydney NSW 2000 Phone: (02) 8223 3567 Fax: (02) 8223 3555 Solicitors DLA PIPER Level 31, Central Park 152-158 St George’s Terrace Perth WA 6000 Share registry LINK MARKET SERVICES Locked Bag A14 Sydney South NSW 1235 Phone: 1300 554 474 Auditors EY The EY Building 11 Mounts Bay Road Perth WA 6000 Bankers NATIONAL AUSTRALIA BANK LIMITED 255 George Street Sydney NSW 2000 Internet address www.imf.com.au The Company is listed on the Australian Securities Exchange with Sydney, Australia as its home exchange. Its ASX code is “IMF” and its shares were trading as at the date of this report. 112 Australia United States Canada Asia Europe New York +1 212 488 5331 Toronto +1 416 583 5720 Singapore +65 6622 5396 437 Madison Avenue 19th Floor New York NY 10022 250 The Esplanade Suite 127 Toronto ON M5A 1J2 Suite 59, Level 42 Six Battery Road Singapore 049909 London +44 203 878 8760 1 Fetter Lane London EC4A 1BR Los Angeles +1 213 550 2687 Montreal +1 514 779 1041 555 West Fifth Street Suite 3310 Los Angeles CA 90013 500 Place d’Armes Suite 1800 Montreal QC H2Y 2W2 Hong Kong +852 3978 2629 +852 3978 2300 Level 17 China Building 29 Queen’s Road Central Hong Kong San Francisco +1 415 231 0363 Two Rincon Center 121 Spear Street Suite 405 San Francisco CA 94105 Houston +1 713 965 7920 Lyondell Basell Tower 1221 McKinney Street Suite 3840 Houston TX 77010 Sydney +61 2 8223 3567 Level 18 68 Pitt Street Sydney NSW 2000 GPO Box 5457 Sydney NSW 2001 Perth +61 8 9225 2300 Level 6 37 St George’s Terrace Perth WA 6000 PO Box Z5106 Perth WA 6831 Brisbane +61 7 3108 1310 Level 4 320 Adelaide Street Brisbane QLD 4000 Melbourne +61 3 9913 3301 Level 3 Bourke Place 600 Bourke Street Melbourne VIC 3000 Adelaide +61 8 8122 1010 50 Gilbert Street Adelaide SA 5000 www.imf.com.au 

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