ASX asks litigation funder to approach the bench and explain cashflows

The ASX has asked a litigation funder to approach the bench and explain its negative cash flows.

Litigation Capital Management (ASX:LCA) reported negative cash flow of $2.8 million at the end of the third quarter, and is expecting a similar sum this quarter.

The company, which is bankrolling a class action against sandalwood farmer Quintis and another against KPMG on behalf of Discovery Metals shareholders, has a $4 million loan to supplement its $3 million cash balance and is looking for more.

“LCM does expect to continue to have negative operating cash flows for the time being,” it said, arguing this was a litigation funder’s modus operandi.

“Such periods of negative cash flow are planned for and managed through internal and external sources of capital.”

LCM, which has been contacted for comment, was trading at 51c on Monday.

LCM’s share price over the past 12 months. Source: Investing.com

By contrast, larger rival IMF Bentham (ASX:IMF) has a cash stockpile of $163 million to fund suits against Australian giants such as Commonwealth Bank and Woolworths.

Litigation funders only get paid when a suit is finished. For the more complex cases and class actions this can be a years-long process.

Tough year for ASX legal eagles

It’s been a tough year for some of the ASX’s listed legal eagles.

Law firm Slater & Gordon agreed on a recapitalisation plan to avoid insolvency, which will wipe out its existing shareholders who will own only 5 per cent of the company after the rescue.

The plan values shares at 0.3c and 1.1c, valuing the company between $1-4 million, and will be consolidated on a 1 for 100 basis.

Its shares were still trading on Monday at 5.4c.

Its $761 million debt load at the end of the June was greater than its market cap of $18 million. On a positive note, its $546.8 million annual loss was half that of last year’s.

The law firm spent $1.3 billion on British professional services firm Quindell in 2015, which resulted in two class actions by irate shareholders. One of these was settled in July for $36.5 million.

Litigation funder JustKapital has undergone a revamp to get its house in order after it posted negative cash outflows of $2.9 million on similar revenues, and expected cash outflows for this quarter of $8.2 million.

Not only has founder Philip Kapp resigned as chairman and managing director, saving the company $1.3 million, bonuses are being slashed, excess office space is being given up, and $430,000 of consultancy fees are out.

The company slashed directors’ fees and salaries in September, heading off criticism from shareholders.

JustKapital has been contacted for comment.