Desane Group Holdings Limited
Annual Report 2020

Plain-text annual report

2020 ANNUAL REPORT G R O U P H O L D I N G S L I M I T E D CONTENTS Chairman’s Report Chief Executive’s Report Directors’ Report Auditor’s Independence Declaration Financial Statements 3 5 19 32 33 Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 65 66 71 73 Investing for tomorrow, today. We are focused on creating wealth for our shareholders by specialising in property development and property investment. Our in-depth knowledge of these sectors, together with our intimate understanding of our clients and customers allows us to transform add value opportunities into long term earnings and growth ensuring consistent returns for shareholders. CHAIRMAN’S REPORT It gives me great pleasure to introduce the Annual Report of Desane Group Holdings Limited for 2020. COVID-19 pandemic lockdowns may be less damaging to the domestic economy than as originally thought. Finally, I can report to shareholders that this annual report is the 33rd such report of Desane Group Holdings Limited. Your Company has continued to maintain its profitability due to the superb quality of its senior management and the invaluable contribution of its current Board. Importantly, I need to record my appreciation, on behalf of both the Board and Desane staff, of Mr Peter Krejci, who joined the Board on 8 July 2019. Since joining the Board in this financial year, Peter has contributed his significant financial and corporate expertise which currently includes Chair of the Group’s Audit and Risk Committee. Your Board remains confident the current prudent strategies of investment and cash retention will continue to result in I can report to shareholders that the Group’s earnings before interest and tax, for the financial year ending 30 June 2020, was $3.4m and the Group’s total assets are $82.5m. The Group’s net tangible assets (NTA) now stand at $1.44 per security accounting for the proposed dividend payment. The Board has resolved to declare a final dividend of 2.25 cents per security, unfranked, to be paid in October 2020. This will bring the total dividend for FY20 to 4.5 cents per security. Notwithstanding the obvious uncertainty that COVID-19 has raised in property investment, and indeed the larger economy, the Group has unsurprisingly remained minimally effected by such events. The maintenance of the Group’s now established robust financial results continue whilst at the same time ensuring that the current cash and financial assets stand at a very healthy $19m. These reserves have placed the Group in the somewhat envious position of being markedly well placed to take advantage of opportunities over the next financial year, which will doubtless arise. The three industrial/logistics property assets held by the Group in Wacol and in Lane Cove continue to perform well, and are in a property investment sector which has been increasingly sought after in these COVID-19 impacted times. The proposed additional floor space in the Wacol property reveals the very strength of the sector, which continues to outperform other property markets, notably retail and some residential classes. Notwithstanding the obvious uncertainty that COVID-19 has raised in property investment, and indeed the larger economy, the Group has unsurprisingly remained minimally effected by such events. responsible asset growth and further earnings for shareholders. I congratulate both the Group Executives and the employees of Desane Group Holdings Limited for the solid and as always, prudent management of the Group. Finally, I would like to welcome those shareholders who have recently joined the Company. The Board looks forward to a rewarding and fruitful association with those new shareholders during the coming years. PROFESSOR JOHN SHEEHAN AM Chairman As mentioned in my report last year, the continuing deterioration of the relationship between the USA and China, with the uncertainty arising from the forthcoming exit of the United Kingdom from the European Community (EU), has continued to reinforce perceptions of the Australian economy as being robust but calm. In such parlous international environments, Australian domestic equities and certain local property classes continue to be regarded by overseas investors as a desirable haven for their funds. The Reserve Bank of Australia has maintained historically low official interest rates, whilst at the same time benchmark Australian Government bond yields have continued to be sought after, given their arguably less risk and heightened security for investors. With the current restrictions with overseas and even interstate travel, there is now increasing evidence household cash reserves are rising, albeit modestly. The anticipated easing of such restrictions at least domestically, has led a number of commentators to observe that the domestic travel market is poised to grow perhaps even dramatically, due to increased domestic spending, replacing international demand. This paradox suggests that the recovery phase from the ANNUAL REPORT 2020 ANNUAL REPORT 2020 3 $ $19m CASH AND FINANCIAL ASSETS DESANE GROUP HOLDINGS ANNUAL REPORT 2020 4 DESANE GROUP HOLDINGSANNUAL REPORT 2020 5 DESANE GROUP HOLDINGSCHIEF EXECUTIVE’S REPORT I am pleased to report that despite the uncertainty that COVID-19 has placed on the economy and the property market since March 2020, our Company has remained fully operational, ensuring shareholders’ capital would be minimally affected by the economic impact of COVID-19. Notwithstanding the economic impact and uncertainty caused by the first phase of COVID-19, the Group’s management has remained focused on: Desane at its 1.2ha property located in the Sydney suburb of Penrith, will achieve significant medium to long term returns for shareholders. • • • • Ensuring the health and safety of our employees and customers; Continuing to engage with our tenants to provide an appropriate level of support; Preservation of cash reserves and capital; and Adding value to our existing property investment portfolio. Following the sale and settlement of our Company’s Rozelle flagship property in the 2019 financial year, our Company has begun the process of re-stocking its investment property assets in 2020. In November 2019, Desane completed the purchase of a fully leased 21,750m² investment asset, located in the Brisbane suburb of Wacol for $9.5m. The Brisbane asset is leased on a medium term basis to the Brisbane City Council. In July 2020, Desane lodged a Development Application with the relevant authority to expand its existing industrial property. The proposed additional facility will add 3,250m² of net lettable floor space to the existing 5,039m² facility, creating a total of 8,289m² of warehouse and logistics facilities. Subject to applicable authority consent, favourable market conditions and a pre-lease commitment of the proposed facility, construction is anticipated to commence in 2021. Combined with Desane’s two existing industrial and logistic property assets located on Sydney’s north shore, the three investment assets have a combined value of $27.0m and are generating an average return of 7% net pa, providing our Company the opportunity, in this financial year, for valuation uplift to reflect current market yields for similar assets. Management is confident that all three properties are highly sought after as investor demand remains robust. Desane will continue to review its portfolio and look to recycle capital from assets where it has already added significant value. Desane’s ability to re-stock its property portfolio remains strong. The Company currently has $19.0m in cash and financial assets with an historically low gearing level of 28%. The Company’s diversified $9.0m financial asset pool, secured by first registered mortgages against quality property assets, is yielding an average of 7% pa interest revenue. Over the past six (6) years, Desane has rewarded shareholders with just under $19.0m paid in dividends. Our management’s focused approach, in the adversity of the first phase of COVID-19, has ensured that shareholder’s asset value has been protected. The next 12 to 24 months will be challenging for the property industry in Australia. Our Company’s investment property assets are performing well, in line with industrial and logistic assets across the major capital cities. The COVID-19 pandemic has pushed consumers to change the way they spend and has accelerated Australia’s e-commerce market resulting in a healthy demand for properties that offer warehousing, logistics and distribution facilities. Desane’s investment assets fall into the highly sought after industrial asset class, providing stability of income during these challenging times. Our Company’s strong balance sheet, coupled with the availability of substantial cash reserves, will deliver the Group the ability to acquire additional investment property assets in 2021. I wish to thank the executive team and all our dedicated staff for their hard work in producing a stable result in very difficult times. Finally, I would like to acknowledge the support of our Company’s shareholders, in particular for the confidence they have placed in the Company’s management over the past twelve months. In September 2019, Desane’s inner Sydney development pipeline received a boost following development approval for the 46 residential apartment project located at 159 Allen Street, Leichhardt. PHIL MONTRONE OAM Managing Director & CEO In November 2019, Desane acquired a DA approved boutique development project at 318-322 Norton Street, Leichhardt for $3.2m. Both projects are located 5km from Sydney’s CBD and within short walking distance to light rail stations, public transport, local schools, parks and numerous sought after amenities. We are confident that Desane’s investment and development property assets, combined with the work being undertaken by ANNUAL REPORT 2020 6 $19.0m PAID IN DIVIDENDS OVER THE PAST 6 YEARS DESANE GROUP HOLDINGS DESANE GROUP HOLDINGS Photo: 16 Industrial Avenue, Wacol QLD ANNUAL REPORT 2020 7 DESANE GROUP HOLDINGS A NEW ERA Widening our reach, Brisbane is set to deliver great gains for shareholders ANNUAL REPORT 2020 8 16 INDUSTRIAL AVENUE, BRISBANE LOCATION Wacol, QLD DISTANCE TO CBD 20 kms SIZE 21,750m² PROPERTY TYPE PROPERTY STATUS Industrial Investment An outstanding industrial property, strengthening and expanding our investment portfolio 16 Industrial Avenue is a 21,750m2 industrial site comprising of a 5,039m2 warehouse, ample on-site parking and excellent truck access. The property is fully leased to a high quality local government tenant on a medium term basis. ANNUAL REPORT 2020 9 DESANE GROUP HOLDINGS Desane has recently lodged a Development Application with Brisbane City Council, to construct an additional 3,250m2 industrial facility on the site. Construction is anticipated to begin in 2021, subject to council approval and pre-lease. ANNUAL REPORT 2020 10 DESANE GROUP HOLDINGS322 NORTON STREET, LEICHHARDT LOCATION DISTANCE TO CBD Leichhardt, NSW 5 km SIZE 607m² PROPERTY TYPE PROPERTY STATUS Mixed Use Approved Creating the community through a boutique development. Located just 5 kms from Sydney’s CBD, and set amongst the buzzing Norton Street district The 607m2 site at Norton Street was previously used as an auto-electrical shop and has an existing development approval for a 9-unit, mixed-use development. Desane is currently finalising a new Development Application for the property. The property is located approximately 5 kilometres from the CBD and is zoned B2 Mixed-Use. Situated 200 metres from Leichhardt North Light Rail Station, the property is in walking distance to transport as well as Leichhardt’s vibrant cafes, dining and shopping scene. ANNUAL REPORT 2020 11 DESANE GROUP HOLDINGS ANNUAL REPORT 2020 12 DESANE GROUP HOLDINGSDESANE GROUP HOLDINGS 159 ALLEN STREET, LEICHHARDT LOCATION DISTANCE TO CBD Leichhardt, NSW 5 km SIZE 2,782m² PROPERTY TYPE PROPERTY STATUS Residential Approved 159 Allen Street Leichhardt is a 2,782m², R1 General Residential zoned site. The property is located approximately 5 kilometres from the CBD, less than 200 metres from Hawthorne Light Rail Station and is a rare development opportunity in Sydney’s City fringe. The property is in short distance to local schools, amenities and other public services, including the University of Sydney and the Royal Prince Alfred Hospital at Camperdown. Desane has recently attained planning approval from the Inner West Council for a 5-storey apartment complex, comprising of 46 residential apartments. ANNUAL REPORT 2020 13 DESANE GROUP HOLDINGS Lifestyle at the doorstep of the city fringe. A short 5 km from the city and less than 200 metres from Hawthorne Light Rail Station, Allen Street is located in close proximity to local schools, amenities and other public services ANNUAL REPORT 2020 14 7 SIRIUS ROAD, LANE COVE LOCATION DISTANCE TO CBD Lane Cove, NSW 12 km SIZE 2,700m 2 PROPERTY TYPE PROPERTY STATUS Industrial & Commercial Investment The limited availability of highly sought after acquisition options will continue to drive investor demand in the area 7 Sirius Road is a 2,700m2 industrial and commercial property. Located in the Lane Cove West industrial precinct, the property is approximately 12 kilometres north of the Sydney CBD. The property is fully leased to a long term tenant and is situated within 100 metres from another asset owned by Desane. ANNUAL REPORT 2020 15 DESANE GROUP HOLDINGS 13 SIRIUS ROAD, LANE COVE LOCATION DISTANCE TO CBD Lane Cove, NSW 12 km SIZE 2,400m² PROPERTY TYPE PROPERTY STATUS Industrial & Commercial Investment 13 Sirius Road is a 2,400m² commercial, high-tech building with 50 secure basement parking spaces. This property is fully leased to two high-quality tenants on a long term basis. The property is located within the Lane Cove West precinct and is approximately 12 kilometres north of the Sydney CBD. ANNUAL REPORT 2020 16 DESANE GROUP HOLDINGS 91 THORNTON DRIVE, PENRITH LOCATION Penrith, NSW DISTANCE TO CBD 60 km SIZE 1.2ha PROPERTY TYPE PROPERTY STATUS Mixed Use Awaiting Approval Located within 400 metres of Penrith Railway Station, 500 metres of Westfield Penrith Plaza, the Penrith CBD and with easy access to the new WestConnex Motorway, the Penrith Nepean Hospital and the future Western Sydney Airport ANNUAL REPORT 2020 17 DESANE GROUP HOLDINGS 91 Thornton Drive, Penrith has an area of approximately 1.2 hectares, with an 88m frontage to Thornton Drive. The site is located within 400 metres of Penrith Railway Station and 500 metres of Westfield Penrith Plaza and the Penrith CBD. The property falls within the ‘Thornton’ Masterplan Urban Transformation and will form part of the urban transformation area. The NSW Government has announced an $8.0 billion investment into the Western Sydney Airport at Badgerys Creek, a $1.0 billion upgrade to the Nepean Hospital and anticipates 40,000 new jobs will be created in the Penrith area by 2021. ANNUAL REPORT 2020 18 DESANE GROUP HOLDINGSANNUAL REPORT 2020 19 DESANE GROUP HOLDINGSDirectors’ Investment Report Property Review ANNUAL REPORT 2020 20 DESANE GROUP HOLDINGSANNUAL REPORT 2020 21 DESANE GROUP HOLDINGS Board of Directors From left to right: Peter Krejci, John Sheehan, Rick Montrone, Jack Sciara and Phil Montrone ANNUAL REPORT 2020 22 DIRECTORS’ REPORT The Directors of Desane Group Holdings (“Desane” and “the Company”) present their report, together with the financial report of the company and its controlled entities for the financial year ended 30 June 2020. Directors And Directors’ Interests Expertise and Experience Prof. John Sheehan, a Life Fellow member of the Australian Property Institute (NSW Division), has over 30 years experience and expertise in property compensation law, town and country planning and environmental law. He has been a board member since the Company’s incorporation in 1987 and was appointed as Chairman in 1992, which he currently serves. Special Responsibilities Prof. John Sheehan AM Independent Non-Executive Director and Chairman • Chairman of the Renumeration & Nomination Committee • Chairman of the Environmental, Occupational Health and Safety Committee • Member of the Risk Management & Audit Committee • Member of the Finance & Operations Committee Interests in Desane Ordinary shares: 168,735 Expertise and Experience Phil Montrone has over 30 years experience and expertise in property investment, acquisitions, development and project management. He has been a significant board member since the Company’s incorporation in 1987 and was appointed Managing Director in 1987, which he currently serves. Special Responsibilities • Member of the Risk Management & Audit Committee • Member of the Finance & Operations Committee • Member of the Environmental, Occupational Health & Safety Committee Interests in Desane Ordinary Shares: 14,314,418 Expertise and Experience Rick Montrone, who was appointed as Director and Head of Property in 2015, has over 15 years experience in property investment, acquisitions, developments and management. Mr Montrone is a licensed real estate agent and an Associate member of the Australian Property Institute. Special Responsibilities • Member of the Risk Management & Audit Committee • Member of the Finance & Operations Committee • Member of the Environmental, Occupational Health & Safety Committee Interests in Desane Ordinary Shares: 213,221 ANNUAL REPORT 2020 23 Phil Montrone OAM Managing Director Rick Montrone Director DESANE GROUP HOLDINGSDIRECTORS’ REPORT- Continued Expertise and Experience Mr Krejci has over 20 years experience and expertise in corporate management and is a founding Principal of BRI Ferrier. His professional experience covers financial services, property and construction, retail, logistics, manufacturing and mining. Mr Krejci was appointed as a board member on 8 July 2019. Special Responsibilities Peter Krejci Independent Non-Executive Director • Chairman of the Risk Management & Audit Committee • Member of the Remuneration & Nomination Committee • Member of the Finance & Operations Committee • Member of the Environmental, Occupational Health & Safety Committee Interests in Desane Ordinary Shares: Nil Expertise and Experience Jack Sciara joined Desane in 2001, and has over 20 years experience and expertise in corporate accounting and taxation. Jack was appointed as Company Secretary in 2016. His role in the Company includes developing financial and tax strategies for the Group, investor relations, ASX compliance, corporate governance and overseeing the financial operations and financial reporting of all controlled entities. Jack is a member of the Institute of Public Accountants and a registered Tax Agent. Jack Sciara Company Secretary and Chief Financial Officer Special Responsibilities • Chief Financial Officer and Company Secretary Interests in Desane Ordinary Shares: 258,030 From left to right: Kylie Cook, Peter Krejci, Jack Sciara, John Sheehan, Rick Montrone, Kenji Nakamura, Sandra Skerl and Phil Montrone. ANNUAL REPORT 2020 24 DESANE GROUP HOLDINGSDESANE GROUP HOLDINGS DIRECTORS’ REPORT- Continued Meeting Of Directors The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the company during the fi nancial year are: Directors’ Meetings and Finance & Operations Committee Meetings Risk Management and Audit Committee Meetings No. of Meetings Attended No. of Meetings Held No. of Meetings Attended No. of Meetings Held 12 13 12 13 13* 13 13 13 13 13 1 2 2 2 2* 2 2 2 2 2 Renumeration & Nomination Committee Meetings Environmental & Occupational Health & Safety Committee Meetings No. of Meetings Attended No. of Meetings Held No. of Meetings Attended No. of Meetings Held 1 - - 1 1* 1 1 1 1 1 1 1 1 - 1* 1 1 1 1 1 Directors J.B Sheehan P. Montrone R. Montrone P. Krejci J. Sciara Directors J.B Sheehan P. Montrone R. Montrone P. Krejci J. Sciara * As Company Secretary John Sheehan, Peter Krejci, Rick Montrone ANNUAL REPORT 2020 25 DIRECTORS’ REPORT- Continued Principal Activities There were no significant changes in the principal activities of the Company during the financial year, which were: • • Property investment; and Property development (residential and mixed use). Operating and Financial Review The Group recorded a consolidated statutory net profit after tax for the year of $2.3m (2019: $27.3). Statutory net profit after tax has been prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards, which comply with International Financial Reporting Standards. The profit of the consolidated group, after providing for income tax amounted to 2020 $’000 2,257 2019 $’000 27,297 A summary of consolidated financial results by operational segments is set out below: Total Revenue Segment Result Gain on sale of investment - net Property development expenses Property investment - rental Property services Property management Property investment - net revaluations Interest income Less: Unallocated expenses Operating profit Income tax (expense)/benefit Attributable to operating profit Deferred tax attributable to operating profit Operating profit after income tax attributable to members of Desane Group Holdings Limited 2020 $’000 - (33) 311 - 49 3,461 793 4,581 (1,349) 3,232 - (975) 2019 $’000 38,947 (783) 376 1,054 75 - 860 40,529 (1,663) 38,866 - (11,569) 2,257 27,297 2020 $’000 - - 1,468 - 49 3,461 793 5,771 2019 $’000 38,947 - 2,163 1,054 75 - 860 43,099 ANNUAL REPORT 2020 26 DESANE GROUP HOLDINGS DIRECTORS’ REPORT- Continued Financial Review In November 2019, Desane completed the purchase of a fully leased 21,750m² investment asset located in the Brisbane suburb of Wacol. The Brisbane asset, combined with Desane’s two existing commercial property assets in Sydney, is generating a combined average return of 7% pa. In July 2020, Desane lodged a compliant Development Application with Brisbane City Council to expand its existing industrial property asset located in Wacol. The proposed additional facility will add 3,250m² of net lettable floor space to the existing 5,039m² facility, creating a total of 8,289m² of net lettable area. Subject to Council approval, favourable market conditions and pre-lease commitment of the proposed facility, construction is anticipated to commence in 2021. Notwithstanding the economic impact and uncertainty caused by the first phase of COVID-19, since March 2020, the Group’s management has remained focused on: 1. 2. 3. 4. Ensuring the health and safety of our employees and customers; Continuing to engage with our tenants to provide an appropriate level of support; Preservation of cash reserves and capital; and Adding value to our existing industrial property portfolio. Capital Gains Tax Deferral Included in the deferred tax liability of $16.4m is approximately $13.9m of capital gains tax (CGT) deferral pertaining to the sale of the Rozelle property. The Rozelle property was sold to the Roads and Maritime Services in September 2018 involuntarily as part of the compulsory acquisition process and triggered a CGT event. Dividends Paid or Recognised 2019 $’000 920 1,227 2020 $’000 920 920 Dividends paid or declared for payment are as follows: Interim dividend of $0.0225 franked, per share, paid on 29 March 2019 Ordinary dividend of $0.03 partially franked, per share, paid on 25 October 2019 Interim dividend of $0.0225 unfranked, per share, paid on 27 March 2020 Ordinary dividend of $0.0225 unfranked, per share, declared by the directors from retained earnings payable on 23 October 2020 Dividend Reinvestment Plan (DRP) The DRP has been suspended until further notice. Significant Changes in State of Affairs There was no significant change in the state of affairs of the Group. Events Subsequent to Balance Date Since the balance date, COVID-19 has continued to spread internationally. As a result of the uncertainty surrounding possible future impacts of the virus, a reasonable assessment of the effects on the operation and statement of affairs for the Group cannot presently be made with absolute assurance. With this exception, there were no events subsequent to the balance date. Likely developments The Group continues to pursue its strategy of focusing on its core operations, utilising a strengthened balance sheet to provide support to grow and develop these operations. ANNUAL REPORT 2020 27 DESANE GROUP HOLDINGSDIRECTORS’ REPORT- Continued Environmental Regulation The consolidated group complies with all relevant legislation and regulations in respect to environmental matters. No matters have arisen during the year in connection with Desane’s obligations pursuant to Commonwealth and State environmental regulations. Occupational Health and Safety Regulations The consolidated group complies with all relevant legislation and regulations in respect to occupational health and safety matters. COVID-19 The Federal Government introduced complusory measures in March 2020 to reduce the spread of COVID-19 and consequently, Desane’s workplace environment and practices were reviewed to ensure that the safety of its staff and visitors was a priority and that Desane was in compliance with Government policies. Appropriate COVID-19 safety measures have been initiated since March 2020, which included the restriction of non- essential meetings at the head office, all staff members being given the option and equipment to work from home and all Board members being given the option to attend Board meetings remotely. All properties owned and managed by Desane, both in NSW and QLD, also adhere to Occupational Health and Safety requirements. Staff members and contractors (on behalf of Desane) attending properties ensured that all site COVID-19 safety measures were followed and that Government COVID-19 policies were complied with. Audited Remuneration Report This report details the nature and amount of remuneration for each director of Desane Group Holdings Limited, and for the executives receiving the highest remuneration. Remuneration Policy The remuneration policy of Desane Group Holdings Limited has been designed to align director and executive objectives with shareholder and business objectives. The board of Desane Group Holdings Limited believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best executives and directors to run and manage the consolidated group, as well as create goal congruence between directors, executives and shareholders. Approach to Remuneration The Group is committed to applying fair and equitable remuneration practices, taking into account the Company’s corporate strategy, objectives and shareholder returns. The Group’s current remuneration framework includes: 1. 2. 3. Fixed remuneration Incentive schemes Executive agreements Fixed Remuneration Fixed remuneration includes a base salary, statutory superannuation and all other statutory entitlements. Fixed remunerations are reviewed annually by the Remuneration Committee and are based upon performance, qualification, experience and current market practices. The Remuneration Committee accesses external independent advice if required. Incentive Schemes (Discretionary Remuneration) Short Term Incentives A discretionary Short Term Incentive (“STI”) cash bonus may be offered to executives and key management personnel (“KMP”) at the discretion of the Remuneration Committee. STIs align the achievement of strategic short term objectives for the long term benefit of the Company and its shareholders. The total potential STI available is set at a level that provides sufficient incentive to the executive to achieve the operational targets at a cost to the Group that is reasonable. ANNUAL REPORT 2020 28 DESANE GROUP HOLDINGSDIRECTORS’ REPORT- Continued Approved STIs depend on the extent to which specific targets set by the Board at the beginning of the financial year (or shortly thereafter) are achieved. The targets consist of a number of Key Performance Indicators (“KPI”) which are linked to the Company’s strategic business objectives such as (but not limited to): • • • • • Dividends paid; Earnings before interest and tax (“EBIT”); Net profit after tax (“NPAT”); Share price performance; and Net tangible asset (“NTA”) per share. On an annual basis, after consideration of the Group’s performance against KPIs, the remuneration committee determines the amount, if any, of the STI to be paid to KMP. For the financial year ended 30 June 2020, there was no approval or payment of an STI bonus to KMP (2019: $175,000). Consequences of Performance on Shareholder Wealth In considering the Group’s performance and benefits for shareholder wealth, the remuneration committee have regard to the following indices in respect of the current and previous financial years. NPAT for the year at 30 June Dividends paid per share (cents) Closing share price at 30 June Earnings/(loss) per share (cents) at 30 June 2020 $2.3m 4.50 $1.350 5.52 2019 $27.3m 5.25 $1.405 66.73 2018 $0.7m 4.50 $1.125 1.78 Ordinary shares on issue at 30 June 40,909,990 40,909,990 37,190,900 NTA per share at 30 June $1.44 $1.43 $0.79 Executive Agreements Executive agreements are formal legal agreements between the Company and all executives and KMP. The agreements are executed in line with the Corporations Act and will define terms of employment, role and responsibilities, performance expectations, specify termination payment arrangements, provide provisions for performance related bonuses and ensure transparency for the Company and its shareholders. Executive agreements are generally reviewed every three years (unless required earlier) by the executive, KMP and the Remuneration Committee to ensure that they are adequate and updated if required. Termination benefits are within the limits set by the Corporations Act 2001 such that they do not require shareholder approval. Name Commencement Date Term of Agreement & Notice Period Base Salary Including Superannuation $’000 Termination Payments / Benefits $’000 P. Montrone R. Montrone J. Sciara 1 September 1987 No fixed term & 12 months 2 November 2003 No fixed term & 12 months 3 September 2001 No fixed term & 12 months 403 411 257 - - - ANNUAL REPORT 2020 29 DESANE GROUP HOLDINGS DIRECTORS’ REPORT- Continued Non Executive Directors Total compensation for all non executive directors, last voted on at the 2015 Annual General Meeting, is not to exceed $300,000 per annum. Currently, non executive directors are compensated to a total of $144,225 per annum (2019: $108,000), inclusive of superannuation. The 2020 non executive director fees are 48% (2019: 36%) of the aggregate maximum sum approved by shareholders. The base fee for the Chairman is $84,000 per annum and $55,000 per annum for other non executive directors. Base fee cover all main board activities and membership of all board committees. Non executive directors are not provided with retirement benefits apart from statutory superannuation if applicable. Details of Remuneration for year ended 30 June 2020 The remuneration for each director and the executive officer of the consolidated entity receiving the highest remuneration during the year was as follows: Directors John B. Sheehan (non-executive) Peter Krejci (non-executive) (appointed 8 July 2020) Phil Montrone Rick Montrone Chief Financial Officer/Company Secretary Jack Sciara Short Term Benefits Salary & Fees $’000 STI Cash Bonus $’000 Superannuation $’000 Total $’000 84 55 368 375 235 1,117 - - - - - - - 5 35 36 22 98 84 60 403 411 257 1,215 Indemnifying Officers or Auditor The company or consolidated group has not, during or since the financial year, in respect of any person who is or has been an officer or auditor of the company or a related body corporate, indemnified or made any relevant agreement for indemni- fying against a liability incurred as an officer, including costs and expenses in successfully defending legal proceedings. The company paid a premium of $17,287 to insure the directors of the company and controlled entities. The policy provides cover for individual directors and officers of the company, in respect of claims made and notified to the insurer during the policy period for losses and expenses incurred in defence of claims for any alleged wrongful acts arising out of their official capacities. It will also reimburse the company for any liability it has to indemnify the directors or officers for such losses. It is noted that the company’s Constitution allows an officer or auditor of the company to be indemnified by the company against any liability incurred by him in his capacity of officer or auditor in defending any proceedings in which judgement is given in his favour. Options No options have been granted over unissued shares during the financial year and there are no outstanding options at 30 June 2020. Proceedings on Behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings. The company was not a party to any such proceedings during the 2020 financial year. ANNUAL REPORT 2020 30 DESANE GROUP HOLDINGSDESANE GROUP HOLDINGS DIRECTORS’ REPORT- Continued Non-audit Services The board of directors, in accordance with the advice from the Audit Committee, is satisfi ed that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfi ed that the services disclosed below did not compromise the external auditor’s independence for the following reasons: • • All non-audit services are reviewed and approved by the Audit Committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and The nature of the services provided does not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. The following fees for non-audit services were paid/payable to the external auditors during the year ended 30 June 2020. Taxation services $’000 3 Auditor’s Independence Declaration The lead auditor’s Independence Declaration for the year ended 30 June 2020, has been received and can be found on page 33 of the Financial Report. ASIC Class Order 98/100 Rounding of Amounts The company is an entity to which ASIC Class Order 98/100 applies and accordingly, amounts in the fi nancial statements and directors’ report have been rounded to the nearest thousand dollars. Corporate Governance Statement Desane is committed to implementing sound standards of corporate governance. The Group has taken into consideration the ASX Corporate Governance Council’s Corporate Governance principles and Recommendations (4th Edition) (“ASX Recommendations”). The Group’s corporate governance statement outlines the key principles and practices of the Company. A copy of the Group’s Corporate Governance Statement has been placed on the Group’s website under the About Us tab in the Corporate Governance Section - desane.com.au/about/corporate-governance/ This Report of the Directors, incorporating the Remuneration Report, is signed in accordance with a resolution of the Board of Directors, at Sydney, this 20th day of August, 2020. J B SHEEHAN DIRECTOR SYDNEY P MONTRONE DIRECTOR SYDNEY ANNUAL REPORT 2020 31 DESANE GROUP HOLDINGS AUDITOR’S INDEPENDENCE DECLARATION GCC Business & Assurance Pty Ltd ABN 61 105 044 862 GPO Box 4566, Sydney NSW 2001 Telephone: (02) 9231 6166 Facsimile: (02) 9231 6155 Suite 807, 109 Pitt Street, Sydney NSW 2000 AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF DESANE GROUP HOLDINGS LIMITED AND CONTROLLED ENTITIES I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: (i) The auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) Any applicable code of professional conduct in relation to the audit. GCC BUSINESS & ASSURANCE PTY LTD (Authorised Audit Company) GRAEME GREEN Director 20 August 2020 Liability limited by a scheme approved under Professional Standards Legislation ANNUAL REPORT 2020 32 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2020 Consolidated Group Note 2020 $’000 2019 $’000 2 2a 2 2 4 8 8 1,517 793 3,461 - (33) 3,292 860 - 38,947 (783) (1,313) (1,344) (53) (149) - (35) (377) (32) (991) (1,662) 3,232 (975) 38,866 (11,569) 2,257 27,297 - - 2,257 27,297 - - 2,257 27,297 5.52 5.52 5.52 5.52 66.73 66.73 66.73 66.73 Continuing Operations Revenue Other income Gain/(loss) on revaluation of investment properties Gain on sale of investment property – net Property development expenses Employee benefits expense Depreciation and amortisation expense Finance costs Doubtful debt Other expenses from ordinary activities Profit before income tax Income tax (expense)/benefit Profit from continuing operations Other comprehensive income Net Profit (after income tax) Profit attributable to minority equity interest Profit attributable to members of the parent entity Earnings per Share: Overall Operations Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Continuing Operations Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The accompanying notes form part of these financial statements. ANNUAL REPORT 2020 33 DESANE GROUP HOLDINGSConsolidated Group Note 2020 $’000 2019 $’000 9 10 11 12 13 14 15 12 13 16 18 17 19 22 20 21 10,203 45,576 189 3,540 285 8,323 79 - 261 101 22,540 46,017 57,043 43,398 2,409 2,432 2 550 60,004 82,544 341 1,047 1,388 5,900 89 16,356 22,345 23,733 58,811 21,213 37,598 58,811 2 - 45,832 91,849 10,718 1,369 12,087 5,900 86 15,381 21,367 33,454 58,395 21,213 37,182 58,395 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2020 Current Assets Cash and cash equivalents Trade and other receivables Inventory – development property Other current assets Other financial assets Total Current Assets Non-current Assets Investment properties Property, plant and equipment Other assets Other financial assets Total Non-current Assets Total Assets Current Liabilities Trade and other payables Provisions Total Current Liabilities Non-current Liabilities Borrowings Provisions Deferred tax liability Total Non-current Liabilities Total Liabilities Net Assets Equity Issued capital Retained earnings Total Equity The accompanying notes form part of these financial statements. ANNUAL REPORT 2020 34 DESANE GROUP HOLDINGSCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2020 Balance as at 1 July 2019 Shares issued during the year Profit attributable to members of the parent entity Dividends paid or recognised for the year Balance at 30 June 2020 Balance as at 1 July 2018 Shares issued during the year Profit attributable to members of the parent entity Dividends paid or recognised for the year Balance at 30 June 2019 The accompanying notes form part of these financial statements. Consolidated Group Issued Capital $,000 Retained Earnings $,000 21,213 - - 21,213 - 21,213 37,182 - 2,257 39,439 (1,841) 37,598 Total $,000 58,395 - 2,257 60,652 (1,841) 58,811 Consolidated Group Issued Capital $,000 Retained Earnings $,000 17,308 3,905 - 21,213 - 21,213 12,032 - 27,297 39,329 (2,147) 37,182 Total $,000 29,340 3,905 27,297 60,542 (2,147) 58,395 ANNUAL REPORT 2020 35 DESANE GROUP HOLDINGSNet cash provided by (used in) operating activities 29 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2020 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Refund of company income tax Property development expenditure Interest received Finance costs Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of plant and equipment Proceeds from sale of properties Purchase of development properties Purchase of investment properties Purchase of financial assets Proceeds from matured financial assets Capital costs of investment properties Net cash provided by (used in) investing activities Cash flows from financing activities Proceeds from issue of shares Dividends paid by parent entity Repayments of borrowings Rental bonds repaid Net cash provided by (used in) financing activities Net increase/(decrease) in cash held Cash at beginning of financial year Cash at end of financial year The accompanying notes form part of these financial statements. Consolidated Group Note 2020 $,000 2019 $,000 1,591 5,484 (2,401) (4,226) - (33) 793 (149) (199) 24 (783) 860 (377) 982 (30) (2,443) - - 4 51,839 (3,540) (20,594) (6,464) (8,772) - (91) (100) 1,213 (767) (33,027) 43,282 - (2,147) - - (2,147) (35,373) 45,576 10,203 9 3,905 (1,841) (5,250) (2) (3,188) 41,076 4,500 45,576 ANNUAL REPORT 2020 36 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES when it is exposed to or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Basis of Preparation The financial report covers the economic entity of Desane Group Holdings Limited and its controlled entities. The separate financial statements of the parent entity, Desane Group Holdings Limited, have not been presented within this financial report, as permitted by the Corporations Act, 2001. Desane Group Holdings Limited is a listed public company, incorporated and domiciled in Australia. The consolidated financial statements are presented in Australian dollars, which is the functional currency for the parent company and its controlled entities. The financial statements were authorised for issue on 20 August 2020 by the directors of the Company. The financial statements are a general purpose financial report, that have been prepared in accordance with the Corporations Act, 2001, Australian Accounting Standards and Interpretations of the Australian Accounting Standards Board (“AASB”) and the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”). The Group is a for-profit entity for financial reporting purposes under Australian Accounting Standards. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards, as issued by IASB. Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. The following is a summary of the material accounting policies adopted by the consolidated group in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. The accounting policies set out below have been consistently applied to all years presented. Accounting Policies a. Principles of Consolidation The consolidated financial statements incorporate all of the assets, liabilities and results of the parent entity controlled by Desane Group Holdings Limited and all of its controlled entities. Desane Group Holdings Limited controls an entity A list of controlled entities is contained in note 30 to the financial statements. All controlled entities have a 30 June financial year end. All inter-company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of controlled entities have been changed where necessary to ensure consistencies with those policies applied by the parent entity. Where controlled entities have entered or left the economic entity during the year, their operating results have been included/excluded from the date control was obtained or until the date control ceased. Non-controlling interests, being the equity in a controlled entity not attributable, directly or indirectly, to a parent, are reported separately within the equity section of the consolidated statement of financial position and statement of other comprehensive income. The non-controlling interests in the net assets comprise their interests at the date of the original business combination and their share of changes in equity since that date. b. Income Tax The income tax expense (benefit) for the year comprises current income tax expense and deferred tax expense (benefit). Current income tax expense charged to the profit or loss is the tax payable on taxable income calculated using the applicable income tax rates enacted, or substantially enacted, as at reporting date. Current tax liabilities (assets) are therefore measured at the amount expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses. Deferred tax assets and liabilities are ascertained based on the temporary differences arising between the tax base of the assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or a liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax assets or liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates enacted or substantively enacted at reporting date. Their measurement also reflects the manner in which ANNUAL REPORT 2020 37 DESANE GROUP HOLDINGSmanagement expects to recover or settle the carrying amount of the related asset or liability. signing of an unconditional contract of sale if significant risks and rewards, effective control and legal title over the property passes to the purchaser at this point. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Inventory is classified as current when development is expected to be developed and available for sale in the next twelve months, otherwise it will be classified as non-current. Where temporary differences exist in relation to investments in subsidiaries, branches, associates and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that the net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Tax Consolidation Desane Group Holdings Limited and its wholly owned Australian controlled entities have formed an income tax consolidated group under tax consolidation legislation. Each entity in the Group recognises its own current and deferred tax assets and liabilities. Such taxes are measured using the ‘stand-alone taxpayer’ approach to allocation. Current tax liabilities (assets) and deferred tax assets arising from unused tax losses and tax credits in the controlled entities are immediately transferred to the head entity. The Group notified the Australian Taxation Office that it had formed an income tax consolidated group to apply from 1 July 2003. The tax consolidated group has entered a tax funding arrangement whereby each company in the Group contributes to the income tax payable by the Group in proportion to their contribution to the Group’s taxable income. c. Inventories Development Property Land held for development and sale is measured at the lower of cost and net realisable value. Net realisable value is determined on the basis of sales in the ordinary course of business. Costs include the cost of acquisition, development, borrowing costs and holding costs until the completion of development. Gains and losses are recognised in the statement of profit and loss on the If applicable, the carrying value will include revaluations applied to the asset during the period the property was classified as an investment property. d. Property, Plant and Equipment Property Freehold land and buildings are carried at their fair value (being the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction), based on periodic, but at least triennial, valuations by external independent valuers, less accumulated impairment losses and accumulated depreciation for buildings. Increases in the carrying amount arising on revaluation of land and buildings are credited to a revaluation surplus in equity. Decreases that offset previous increases of the same asset are recognised against revaluation surplus directly in equity; all other decreases are recognised in profit or loss. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Plant and Equipment Each class of plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses. Plant and equipment are measured on a cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the assets employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Depreciation The depreciable amount of plant and equipment is depreciated on a straight line basis over their useful lives to the economic entity commencing from the time the asset is held ready for use. ANNUAL REPORT 2020 38 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued The depreciation rates used for each class of depreciable assets are: Class of Fixed Asset Motor vehicles Plant and equipment Office and computer equipment Depreciation Rate 15% 1%-37.5% 10%-33% present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term. Lease incentives under operating leases are recognised as a liability and amortised on a straight line basis over the lease term. g. Financial Instruments The Group has adopted AASB 9: Financial Instruments. The assets’ residual values and useful lives are reviewed and adjusted if appropriate, at each reporting date. Initial recognition and measurement An asset’s carrying value is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the consolidated statement of profit and loss and other comprehensive income. e. Investment Properties Investment properties, comprising freehold office and industrial complexes, are held to generate long-term capital gains and rental yields. All tenant leases are on an arm’s length basis. The fair value model is applied to all investment property and each property is reviewed at each reporting date. The fair value is defined as the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction. Each property is independently valued at least every three years by registered valuers who have recognised and appropriate professional qualifications, and recent experience in the location and category of investment property being valued. Changes to fair value are recorded in the statement of profit and loss as revenue from non operating activities. Investment properties under construction are measured at the lower of fair value and net realisable value. Cost includes the cost of acquisition, development and interest on financing during development. Interest and other holding charges after practical completion are expensed as incurred. Investment properties are maintained at a high standard and, as permitted by accounting standards, the properties are not depreciated. Rental revenue from the leasing of investment properties is recognised in the statement of profit and loss in the periods in which it is receivable, as this represents the pattern of service rendered through the provision of the properties. All tenant leases are on an arms length basis. f. Leases Finance leases and operating leases are capitalised by recognising an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the entity commits itself to either the purchase or sale of the asset (ie. trade date accounting is adopted). Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified “at fair value through profit or loss”, in which case transaction costs are expensed to profit or loss immediately. Classification and subsequent measurement Financial instruments are subsequently measured at fair value, amortised cost using the effective interest method, or cost. The Group has interests in the following financial assets: (i) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets that have fixed maturities and fixed or determinable payments, and it is the Group’s intention to hold these investments to maturity. Interest income is recognised in profit or loss when received. On maturity, the financial asset is derecognised and re-classified as cash at bank. h. Impairment of Assets At each reporting date, the group reviews the carrying values of its tangible assets to determine whether there is any indication that those assets have been impaired. The assessment will include the consideration of external and internal sources of information. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less cost to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of profit and loss. i. Investments in Associates Associates are companies in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the entity but is not control or joint control of those policies. ANNUAL REPORT 2020 39 DESANE GROUP HOLDINGSProfits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the associate. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group discontinues recognising its share of further losses unless it has incurred legal or constructive obligations or made payments on behalf of the associate. When the associate subsequently makes profits, the Group will resume recognising its share of those profits once its share of the profits equals the share of the losses not recognised. Investments in associate companies are recognised in the financial statements by applying the equity method of accounting, whereby the investment is initially recognised at cost and adjusted thereafter for the post acquisition change in the Group’s share of net assets of the associate company. In addition, the Group’s share of the profit or loss of the associate is included in the Group’s profit or loss. Other long-term employee benefits are measured at the present value of the expected future payments to be made to employees. Expected future payments incorporate anticipated future wage and salary levels, durations of service and employee departures and are discounted at rates determined by reference to market yields at the end of the reporting period on government bonds that have maturity dates that approximate the terms of the obligations. Any remeasurements for changes in assumptions of obligations for other long-term employee benefits are recognised in profit or loss in the periods in which the changes occur. The Group’s obligations for long-term employee benefits are presented as non-current provisions in its statement of financial position, except where the Group does not have an unconditional right to defer settlement for at least 12 months after the end of the reporting period, in which case the obligations are presented as current provisions. j. Interests in Joint Arrangements l. Provisions Joint arrangements represent the contractual sharing of control between parties in a business venture where unanimous decisions about relevant activities are required. Joint venture operations represent arrangements whereby joint operators maintain direct interests in each asset and exposure to each liability of the arrangement. The Group’s interests in the assets, liabilities, revenue and expenses of joint operations are included in the respective line items of the consolidated financial statements. Gains and losses resulting from sales to a joint operation are recognised to the extent of the other party’s interest. When the Group makes a purchase from a joint operation, it does not recognise its share of the gains and losses from the joint arrangement until it resells the goods and services to a third party. k. Employee Benefits Short-term Employee Benefits Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. m. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the statement of financial position. n. Revenue and Other Income The Group has applied AASB 15: Revenue from Contracts with Customers. Revenue from the rendering of property services is recognised upon delivery of the service to customers. Provision is made for the Group’s obligation for short- term employee benefits. Short-term employee benefits (other than termination benefits) that are expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service, including wages, salaries and sick leave. Short- term employee benefits are measured at the (undiscounted) amounts expected to be paid when the obligation is settled. Investment property revenue is recognised on a straight-line basis over the period of the lease term so as to reflect a constant periodic rate of return on the net investment. The Group derives revenue from investing in properties for rental and capital appreciation over time. There are no changes to the measurement or timing of investment property rental revenue that have arisen from adoption of AASB 15. The Group’s obligations for short-term employee benefits such as wages, salaries and sick leave are recognised as part of current trade and other payables in the statement of financial position. The Group’s obligations for employees’ annual leave and long service leave entitlements are recognised as provisions in the statement of financial position. Revenue from sale of properties held for resale and non- current property or other assets is brought to account on the settlement of a contract of sale. Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. Other Long-term Employee Benefits Provision is made for employees’ long service leave and annual leave entitlements not expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service. Dividend revenue is recognised when the right to receive a dividend has been established. Dividends received from associates and joint venture entities are accounted for in accordance with the equity method of accounting. All revenue is stated net of the amount of goods and services tax (GST). ANNUAL REPORT 2020 40 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued t. Rounding of Amounts o. Trade and Other Receivables Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets. p. Trade and Other Payables Trade and other payables represent the liabilities for goods and services received by the entity that remain unpaid at the end of the reporting period. The balance is recognised as a current liability with the amounts normally paid within 30 days of recognition of the liability. q. Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are expensed in the period in which they are incurred. r. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financial activities, which are disclosed as operating cash flows. s. Comparative Figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in the presentation in the financial year. When the Group retrospectively applies an accounting policy and makes a retrospective restatement or reclassifies items in its financial statement, an additional (third) statement of financial position as at the beginning of the preceding period in addition to the minimum comparative financial statement is presented. The parent entity has applied the relief available to it under ASIC Class Order 98/100. Accordingly, amounts in the financial statements and directors’ report have been rounded off to the nearest $1,000. u. Critical Accounting Estimates and Judgements The preparation of the financial reports requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial reports. Management bases its judgements and estimates on historical experience and other various factors it believes to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the results of which form the basis of the carrying value of assets and liabilities. The resulting accounting estimates may differ from actual results under different assumptions and conditions. Key estimates and assumptions that have a risk of causing adjustment with the next financial year to the carrying amounts of assets and liabilities recognised in these financial reports are: (i) Impairment – property valuations Critical judgements are made by the Group in respect of the fair values of investment properties. The fair value of these investments are reviewed regularly by management with reference to external independent property valuations and market conditions existing at reporting date, using generally accepted market practices. Then critical assumptions underlying management’s estimates of fair values are those relating to the passing rent, market rent, occupancy, capitalisation rate, terminal yield and discount rate. If there is any change in these assumptions or economic conditions (refer to note 31), the fair value of the property investments may differ. Assumptions used in valuation of property investments are disclosed in note 14. (ii) Impairment – general The Group assesses impairment at the end of each reporting period by evaluating conditions and events specific to the Group that may be indicative of impairment triggers. Recoverable amounts of relevant assets are reassessed using value-in-use calculations which incorporate various key assumptions. ANNUAL REPORT 2020 41 DESANE GROUP HOLDINGSNote Note 6 Consolidated Group 2020 $’000 1,468 49 - 1,517 2019 $’000 2,163 75 1,054 3,292 793 793 860 860 2,310 4,152 - 38,947 3,461 3,461 - 38,947 Consolidated Group 2020 $’000 2019 $’000 79 53 81 35 149 377 (12) 33 333 42 15 410 NOTE 2: REVENUE AND OTHER INCOME Revenue from Continuing Operations Property rental income Property management fees Property Services Total Revenue from Continuing Operations Other Revenue a. Interest revenue from: - other persons Total Other Revenue Total Revenue Other Income Gain on sale of investment property – net Property investment – net revaluations Total Other Income NOTE 3: PROFIT FOR THE YEAR Profit before income tax from continuing operations includes the following specific expenses: Expenses Auditors’ remuneration Depreciation of plant and equipment Finance costs: - External Transfer to/(from) provisions for: - Employee entitlements Rental expenses relating to operating leases Direct property expenditure from investment property generating rental income ANNUAL REPORT 2020 42 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 4: INCOME TAX EXPENSE Consolidated Group a. The components of tax expense comprise: Current tax Deferred tax Under provision prior year Note 22 2020 $’000 - 975 - 975 2019 $’000 - 11,569 - 11,569 Consolidated Group b. The prima facie tax on profit from ordinary activities before income tax is reconciled to income tax as follows: Note 2020 $’000 2019 $’000 Prima facie tax payable on profit from ordinary activities before income tax at 30% (2019: 30%) - consolidated group Add: The tax effect of: - adjustment for prior year tax provision - other accruals/provisions - other non-allowable items - other items not included in taxable income Income tax attributable to entity The applicable weighted average effective tax rates 970 11,659 16 6 1 (18) 975 30.2% - 23 2 (115) 11,569 29.8% The amount of benefits brought to account or which may be realised in the future, is based on the assumption that no adverse change will occur in the income tax legislation, the anticipation that the Group will derive sufficient future assessable income to enable the benefit to be realised and continue to comply with the conditions of deductibility imposed by the law. NOTE 5: KEY PERSONNEL COMPENSATION a. Names and position held of economic and parent entity key personnel in office at any time during the financial year are: Key Personnel Prof. John B. Sheehan AM Mr Phil Montrone OAM Mr Peter Krecji Mr Rick Montrone Mr Jack Sciara Mr John W Bartholomew Position Chairman (non-executive director) Managing Director Director (non-executive) (from 8 July 2019) Director – Head of Property Company Secretary and Chief Financial Officer Director (non-executive) (resigned 8 July 2019) ANNUAL REPORT 2020 43 DESANE GROUP HOLDINGSb. Compensation Practices The board’s policy for determining the nature and amount of compensation of key personnel for the group is as follows: The compensation structure for key personnel is based on a number of factors, including length of service, particular experience of the individual concerned, and the overall performance of the company. Employment is on a continuing basis the terms of which are not expected to change in the immediate future. Upon retirement key personnel are paid employee benefit entitlements accrued to the date of retirement. c. Key Personnel Compensation The company may terminate any employee without cause by providing adequate written notice or making payment in lieu of notice based on the individual’s annual salary component. Termination payments are generally not payable on resignation or dismissal for serious misconduct. In the instance of serious misconduct the company can terminate employment at any time. All remuneration packages are set at levels that are intended to attract and retain executives capable of managing the economic entity’s operations. Refer note 5c. 2020 Key Personnel John B. Sheehan Peter Krejci Phil Montrone Rick Montrone Jack Sciara 2019 Key Personnel John B. Sheehan John W. Bartholomew Phil Montrone Rick Montrone Jack Sciara d. Shareholdings Salary & Fees Superannuation $’000 $’000 Short Term Incentives $’000 84 55 368 375 235 1,117 - 5 35 36 22 98 - - - - - - Salary & Fees Superannuation $’000 $’000 Short Term Incentives $’000 84 24 365 335 230 1,038 - - 35 32 22 89 - - - 150 25 175 Total $’000 84 60 403 411 257 1,215 Total $’000 84 24 400 517 277 1,302 Number of shares held by parent entity directors and specified executives. Key Personnel John B. Sheehan Phil Montrone John W. Bartholomew Rick Montrone Peter Krejci Jack Sciara * “Net Change Other” refers to shares purchased or sold during the financial year. # Balance to 8 July 2019. ^ Balance from 8 July 2019. ANNUAL REPORT 2020 44 Balance 30.06.19 148,735 14,201,683 672,635 166,821 -^ 258,030 Net Change Other* 20,000 112,735 - 46,400 - - Balance 30.06.20 168,735 14,314,418 672,635# 213,221 - 258,030 15,447,904 179,135 15,627,039 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 6: AUDITORS’ REMUNERATION Remuneration of the auditor for the parent entity: Michael Chau & Associates - auditing or reviewing the financial report GCC Business Assurance Pty Ltd - auditing or reviewing the financial report - taxation services NOTE 7: DIVIDENDS Dividends paid a. Interim dividend of $0.0225 franked, per share, paid on 31 March 2019 Ordinary dividend of $0.03 partially franked, per share, paid on 25 October 2019 Interim dividend of $0.0225 unfranked, per share, paid on 27 March 2020 Ordinary dividend of $0.0225 unfranked, per share, declared by directors from retained earnings payable on 23 October 2020 b. The Group has $nil (2019 - $0.3m) franking credits available before the final dividend for 2020 is provided. NOTE 8: EARNINGS PER SHARE Reconciliation of earnings used in the calculation of earnings per share Operating profit after income tax Consolidated Group 2020 $’000 2019 $’000 3 73 3 79 6 72 3 81 Consolidated Group 2019 $’000 920 1,227 2020 $’000 920 920 Consolidated Group 2020 $’000 2019 $’000 2,257 27,297 Consolidated Group Reconciliation of weighted average numbers of ordinary shares used in the calculation of earnings per share 2020 2019 Weighted average number of ordinary shares used in the calculation of basic earnings per share 40,909,990 40,909,990 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Conversion, call, subscription or issue after 30 June 2020 5.52 5.52 66.73 66.73 There has been no conversion to, calls of, or subscription for ordinary shares since the reporting date and before the completion of these accounts. ANNUAL REPORT 2020 45 DESANE GROUP HOLDINGSNOTE 9: CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash at bank and in hand Interest bearing short term deposits The effective interest rate on cash at bank was nil (2019 – nil). The effective interest rate on short term bank deposits was an average of 1.5% (2019 – 2.0%). These deposits have a weighted average maturity of 90 days. Reconciliation of cash Cash at the end of the financial year as shown in the cash flow statement is reconciled to items in the balance sheet as follows: Cash as above Less: Bank overdraft (refer to note 17) NOTE 10: CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables NOTE 11: CURRENT ASSETS – INVENTORY (DEVELOPMENT PROPERTY) 322 Norton Street, Leichhardt – acquisition cost 322 Norton Street, Leichhardt – development costs NOTE 12: OTHER ASSETS (a) Current Assets Prepayments and GST receivables (b) Non Current Assets Formation costs ANNUAL REPORT 2020 46 Consolidated Group 2020 $’000 10,203 - 10,203 2019 $’000 76 45,500 45,576 10,203 10,203 45,576 45,576 Consolidated Group 2020 $’000 189 2019 $’000 79 Consolidated Group 2020 $’000 3,379 161 3,540 2019 $’000 - - - Consolidated Group 2020 $’000 2019 $’000 285 285 2 2 261 261 2 2 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 13: OTHER FINANCIAL ASSETS (a) Current Interest bearing deposit Held-to-maturity investments Fixed interest securities Provision for doubtful debt b) Non Current Held-to-maturity investments Fixed interest securities The effective interest rate on fixed interest securities is an average of 7.5% pa. These securities have a weighted average maturity of 365 days. NOTE 14: NON-CURRENT ASSETS – PROPERTIES Investment properties: 13 Sirius Road, Lane Cove NSW 7 Sirius Road, Lane Cove NSW 91 Thornton Drive, Penrith NSW 159 Allen Street, Leichhardt NSW 16 Industrial Avenue, Wacol QLD Valuation overview Consolidated Group 2020 $’000 2019 $’000 - - 8,355 (32) 8,323 133 (32) 101 Consolidated Group 2020 $’000 2019 $’000 550 550 - - Consolidated Group 2020 $’000 7,907 9,000 7,171 2019 $’000 5,911 7,504 7,219 22,861 22,764 10,104 - 57,043 43,398 Note 14a 14b 14c 14d 14e The basis of the directors’ valuation of the investment properties (non-current) is a fair market value as defined in note 1e. In arriving at their opinion, the directors have reviewed and adopted the following three approaches and methodologies: 1. 2. 3. Capitalisation of current net rental income; Discounted cash flow (“DCF”); and Direct comparison to market sales evidence. The properties are being valued independently at least every three years. The Group has no restrictions on the realisability of an investment property nor any contractual obligations to construct, develop, perform, repair or enhance an investment property. a. The directors’ valuation, as at 30 June 2020. An independent valuation was undertaken in June 2018 by a certified practicing valuation company. The directors have based the value on the valuation report, together with current direct comparison market sales evidence. b. The directors’ valuation as at 30 June 2020. An independent valuation was undertaken in June 2018 by a certified practicing valuation company. The directors have based the value on the valuation report, together with current direct comparison market sales evidence. ANNUAL REPORT 2020 47 DESANE GROUP HOLDINGSc. The directors’ valuation, as at 30 June 2020. An independent valuation was undertaken in December 2017 by a certified practicing valuation company. The directors have based the value on the valuation report, together with current direct comparison market sales evidence. d. The directors’ valuation as at 30 June 2020. The purchase of the property was settled in October 2019. The property is located 5km from Sydney’s CBD and is zoned R1 General Residential and has Development Approval for 46 residential apartments. e. Valued at cost expenditure as at 30 June 2020. The property was purchased in November 2019, on market. Investment properties: 2020 13 Sirius Road, Lane Cove NSW 7 Sirius Road, Lane Cove NSW 91 Thornton Drive, Penrith NSW 159 Allen Street, Leichhardt NSW 16 Industrial Avenue, Wacol QLD Investment properties: 2019 13 Sirius Road, Lane Cove NSW 7 Sirius Road, Lane Cove NSW 91 Thornton Drive, Penrith NSW 159 Allen Street, Leichhardt NSW Acquisition Cost Construction Cost Interest Capitalised $’000 $’000 $’000 2,900 672 2,950 1,137 4,149 22,280 10,073 - - - 42,352 1,809 - - - - - - Acquisition Cost Construction Cost Interest Capitalised $’000 $’000 $’000 2,900 672 2,950 1,137 4,149 22,260 - - 32,259 1,809 - - - - - Other Capital Costs $’000 1,198 312 821 581 31 2,943 Other Capital Costs $’000 1,183 295 869 504 2,851 Units Sold/ to be Sold Revaluation $’000 $’000 Carrying Value 30.06.2020 $’000 - - - - - - 3,137 7,907 4,601 9,000 2,202 7,171 - - 22,861 10,104 9,940 57,043 Units Sold/ to be Sold Revaluation $’000 $’000 Carrying Value 30.06.2019 $’000 - - - - - 1,156 5,911 3,122 7,504 2,201 7,219 - 22,764 6,479 43,398 ANNUAL REPORT 2020 48 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 15: NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Suite 4, 26-32 Pirrama Road, Pyrmont – land and buildings Less: Accumulated depreciation Capital works Less: Accumulated depreciation Depreciable plant and equipment Less: Accumulated depreciation Leasehold improvements Less: Accumulated depreciation Office furniture and equipment – at cost Less: Accumulated depreciation Motor vehicle – at cost Less: Accumulated depreciation In-house software Less: Accumulated depreciation Consolidated Group 2020 $’000 1,834 - 2019 $’000 1,834 - 1,834 1,834 351 (22) 329 21 (5) 16 104 (4) 100 114 (56) 58 69 (16) 53 23 (4) 19 351 (8) 343 21 (2) 19 104 (2) 102 106 (36) 70 69 (5) 64 - - - Total non-current assets 2,409 2,432 Movements in Carrying Amounts Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year: Consolidated Group Land and Buildings $’000 Balance at the beginning of year 1,834 Additions Disposals/write offs Depreciation expense Carrying amount at the end of the year - - - 1,834 Capital Works $’000 343 - - (14) 329 Leasehold Improvements $’000 Plant & Equipment $’000 102 - - (3) 99 153 30 - (36) 147 Total $’000 2,432 30 - (53) 2,409 ANNUAL REPORT 2020 49 DESANE GROUP HOLDINGSNOTE 16: CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Unsecured liabilities Trade payables Sundry payables and accrued expenses 159 Allen Street, Leichhardt – settlement commitment NOTE 17: BORROWINGS (a) Current Secured: Bank overdraft a. Bank overdraft secured over Lane Cove properties (refer to note 29). (b) Non Current Secured liabilities – Bank Loans Finance for property 13 Sirius Road, Lane Cove Finance for property 7 Sirius Road, Lane Cove Consolidated Group 2020 $’000 2019 $’000 173 168 - 341 134 84 10,500 10,718 Consolidated Group Note 2020 $’000 2019 $’000 a - - Note 17 i ii 17 Consolidated Group 2020 $’000 2,950 2,950 5,900 2019 $’000 2,950 2,950 5,900 i. First mortgage finance secured over 13 Sirius Road, Lane Cove property (note 14a). Covenants imposed by mortgagor require total debt not to exceed 60% of the property value and the EBITDA is required to exceed interest expense by at least 1.9 times. ii. First mortgage finance secured over 7 Sirius Road, Lane Cove property (note 14b). Covenants imposed by mortgagor require total debt not to exceed 60% of the property value and the EBITDA is required to exceed interest expense by at least 1.9 times. iii. All covenants imposed on secured loan agreements have been met. Interest Rates (average) 2.5% pa Consolidated Group 2020 $’000 2019 $’000 5,900 5,900 5,900 5,900 Maturity Schedule 26 July 2021 ANNUAL REPORT 2020 50 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 18: CURRENT LIABILITIES – PROVISIONS Current company tax Dividends Employee entitlements* * Movement represents net increase in provision set aside Number of employees at year end NOTE 19: NON CURRENT LIABILITIES – PROVISIONS Employee long service leave entitlement* * Movement represents net increase in provision set aside Consolidated Group 2020 $’000 - 920 127 1,047 2019 $’000 - 1,227 142 1,369 Consolidated Group 2020 $’000 6 2019 $’000 6 Consolidated Group 2020 $’000 89 2019 $’000 86 The provision for employee entitlements represent amounts accrued for annual leave and long service leave. The current position for the employee entitlement includes the total amount accrued for annual leave entitlement and long service leave that have been vested due to employees having completed the required period of service. NOTE 20: ISSUED CAPITAL 40,909,990 (2019: 40,909,990) Ordinary Shares fully paid Consolidated Group 2020 $’000 2019 $’000 21,213 21,213 ANNUAL REPORT 2020 51 DESANE GROUP HOLDINGSOrdinary Shares Fully Paid At beginning of the year Shares Issued During the Year Dividend reinvestment plan Share purchase plan Rights issue Consolidated Group Consolidated Group 2020 shares 2019 shares 2020 $’000 2019 $’000 40,909,990 37,190,900 21,213 17,308 - - - - - 3,719,090 - - - - - 3,905 21,213 Ordinary Shares fully paid at reporting period 40,909,990 40,909,990 21,213 a. Movements in Ordinary Share Capital of the Company No shares were issued during 2020 (2019: 3,719,090). b. Authorised Capital 500,000,000 Ordinary Shares of no par value. c. Capital Management Management controls the capital of the Group in order to maintain a good debt to equity ratio, provide the shareholders with adequate returns and ensure that the Group can fund its operations and continue as a going concern. The Group’s debt and capital include ordinary share capital and financial liabilities, supported by financial assets. There are no externally imposed capital requirements. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. There have been no significant changes in the strategy adopted by management to control and manage the capital of the Group since the prior year. NOTE 21: RETAINED EARNINGS Retained earnings at beginning of financial year Net profit attributable to members of parent entity Dividends provided for or paid Retained earnings at end of financial year Consolidated Group 2020 $’000 37,182 2,257 (1,841) 37,598 2019 $’000 12,032 27,297 (2,147) 37,182 ANNUAL REPORT 2020 52 DESANE GROUP HOLDINGS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 22: DEFERRED TAXES Non-current Deferred tax liability comprises: Tax allowances relating to property and equipment Revaluation of investment properties Deferred tax asset attributable to tax and capital losses Provisions Reconciliation Gross Movement The overall movement in the deferred tax account is as follows: Opening balance Charge to statement of profit and loss Closing balance Deferred Tax Liability Tax allowance relating to property, plant and equipment Opening balance Adjustment to previous year’s provision Charged to the statement of profit and loss Closing balance Revaluation of investment properties Opening balance Net revaluation during the current period Transfers on property sale Closing balance Deferred Tax Assets Tax and capital losses Opening balance Prior year adjustment Tax and capital losses utilised Closing balance Provisions Opening balance Credited to statement of profit and loss Closing balance ANNUAL REPORT 2020 53 Consolidated Group Note 2020 $’000 2019 $’000 14,285 14,232 2,982 (829) (82) 1,944 (707) (88) 16,356 15,381 4 15,381 975 16,356 3,812 11,569 15,381 14,232 1,123 - 53 14,285 1,944 1,038 - - 13,109 14,232 3,314 (1,370) - 2,982 1,944 (707) 16 (138) (829) (88) 6 (82) (685) - (22) (707) (75) (13) (88) DESANE GROUP HOLDINGSNOTE 23: FINANCIAL INSTRUMENTS a. Financial Risk Management b. Credit Risk Exposure The group’s financial instruments consist mainly of deposits with banks, mortgage loans with banking institutions, accounts receivable and payable, and loans to and from controlled entities. The credit risk on financial assets of the consolidated entity which has been recognised in the statement of financial position is generally the carrying amount, net of any provisions for doubtful debts. Desane’s Board of Directors and management are responsible for the monitoring and managing of financial risk exposures on a monthly basis. The consolidated group does not have any material credit risk exposure to any single receivable or group of receivables under financial instruments entered into by the economic entity. The main risks the group is exposed to through its financial instruments are liquidity risk and interest rate risk. c. Net Fair Values Liquidity Risk Statement of Financial Position: Liquidity risk arises from the possibility that the group might encounter difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities. Desane manages this risk through the following mechanisms: The net fair value of cash and cash equivalents and non- interest bearing monetary financial assets and financial liabilities approximates their carrying value. Statement of Financial Position: The parent entity and certain controlled entities have potential financial liabilities which may arise from certain contingencies disclosed in note 30. No material losses are anticipated in respect of any of these contingencies. • Preparing forward looking cash flow analysis in relation to its operational, investing and financing activities; • Monitoring undrawn credit facilities; • Obtaining funding from a variety of sources; and • Investing surplus cash with major financial institutions. Interest Rate Risk Exposure to interest rate risks arises on financial assets and financial liabilities recognised at the end of the reporting period whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. Interest rate risk is managed using a mix of fixed and floating rate debt. At 30 June 2020, approximately 100% of the Group’s debt is with a floating interest rate and any balance is fixed interest rate debt. The group entity’s exposure to interest rate risk and the effective weighted average interest rate by maturity periods are set out in the following table (note 23d). For interest rates applicable to each class of asset or liability, refer to individual notes to the financial statements. Exposures arise predominantly from assets and liabilities bearing variable interest rates as the consolidated entity intends to hold fixed rate assets and liabilities to maturity. The contractual maturities of the financial liabilities are set out below. The amounts represent the future undiscounted principal and interest cash flows relating to the amounts drawn at reporting date. ANNUAL REPORT 2020 54 DESANE GROUP HOLDINGS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 23: FINANCIAL INSTRUMENTS-CONTINUED d. Carrying Amount and Net Fair Values There is no material difference between the carrying amounts and the net fair values of financial assets and liabilities. 2020 Note Financial Assets Cash and deposits Receivables Other financial assets Weighted average interest rates Financial Liabilities Trade and other creditors Interest bearing liabilities Weighted average interest rate Net financial assets (liabilities) 9 10, 12 13 16 17 2019 Note Financial Assets Cash and deposits Receivables Other financial assets Weighted average interest rates Financial Liabilities Trade and other creditors Interest bearing liabilities Weighted average interest rate Net financial assets (liabilities) 9 10,12 13 16 17 Floating Interest Rate $’000 Floating Interest Maturing within 1-5 years $’000 Fixed Interest Maturing within 1 year $’000 Fixed Interest Maturing within 1-5 years $’000 Non Interest Bearing Total $’000 $’000 - - - - -% - - - -% - - - - - 10,203 - 8,323 18,526 - - 550 550 - 10,203 476 - 476 8,873 476 19,552 -% 3.42% 6.5% -% 3.7% - 5,900 5,900 2.5% - - - -% (5,900) 18,526 - - - -% 550 341 - 341 -% 135 341 5,900 6,241 2.5% 13,311 Floating Interest Rate $’000 Floating Interest Maturing within 1-5 years $’000 Fixed Interest Maturing within 1 year $’000 Fixed Interest Maturing within 1-5 years $’000 Non Interest Bearing Total $’000 $’000 - - - - -% - - - -% - - - - - 45,576 - 101 45,677 -% 2.36% - 5,900 5,900 3.8% - - - -% (5,900) 45,677 ANNUAL REPORT 2020 55 - - - - -% - - - -% - - 45,576 340 - 340 101 340 46,017 -% 2.36% 10,718 10,718 - 5,900 10,718 16,618 -% 3.8% (10,378) 29,399 DESANE GROUP HOLDINGSSensitivity Analysis The following table illustrates sensitivities to the Group’s exposure to changes in interest rates. The table indicates the impact on how profit and equity values reported at balance date would have been affected by change in the relevant risk variable that management considers to be reasonably possible. These sensitivities assume that the movement in a particular variable is independent of other variables. The net effective variable interest rate borrowings (floating interest rate) expose the Group to interest rate risk which will impact future cash flows and interest charges, are indicated in the above figures. All interest bearing liabilities and their weighted interest rate is shown below. There are no financial liabilities maturing over 5 years. Consolidated Group Profit $’000 Equity $’000 +/- 118 +/- 118 Consolidated Group Profit $’000 Equity $’000 +/- 118 +/- 118 Year ended 30 June 2020 - interest rate sensitivity calculated at an average of +/- 2%pa. Year ended 30 June 2019 - interest rate sensitivity calculated at an average of +/- 2%pa. NOTE 24: RELATED PARTY TRANSACTIONS All transactions are under normal commercial terms and conditions. The Group’s main related parties are as follows: i. Key management personnel: Any person(s) having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity, are considered key management personnel. ii. Other related parties: Other related parties include entities controlled by the parent entity and entities over which key management personnel have control. Related parties of Desane Group Holdings Limited (parent entity) fall into the following categories: a. Controlled Entities Information relating to controlled entities is set out in note 30. Other transactions between related parties consist of: Desane Properties Pty Ltd: Dividend paid Desane Contracting Pty Ltd: Dividend paid ANNUAL REPORT 2020 56 Consolidated Group 2020 $’000 1,500 - 2019 $’000 1,300 - DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 24: RELATED PARTY TRANSACTIONS- Continued b. Directors The names of the persons who were directors of the parent entity during the financial year are as follows: • • • • • Phil Montrone John Blair Sheehan John William Bartholomew (resigned 8 July 2019) Rick Montrone Peter Krejci (appointed 8 July 2019) Information on the remuneration of directors and executives is set out in note 5. The Managing Director and all executives are permanent employees of Desane Group Holdings Limited. Trafalgar Contracting Pty Ltd, which is a company owned by Mr Phil Montrone’s brother, has provided maintenance and project management services totalling $58,259 at properties owned by the Group on an arm’s length basis. Mr Jack Sciara provided professional tax services to the Group for the amount of $4,723 on an arm’s length basis. Mr Rick Montrone’s spouse was paid $4,860 on market terms for website design services. Other than the above transactions, no director has entered into a material contract since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. NOTE 25: COMMITMENTS FOR EXPENDITURE As at 30 June 2020, the Group has no contractual commitments for expenditure. NOTE 26: SUPERANNUATION COMMITMENTS In the case of employees of the holding company, the company contributed 9.50% of each member’s salary into the fund nominated by each member. Group companies contribute a minimum amount equal to 9.50% of each member’s salary, plus the cost of the insurance coverage, if required, to insure the provision of all benefits to the Fund. The benefits provided by the accumulation fund are based on the contributions and income thereon held by the Fund on behalf of the member. The 9.50% contribution made by group companies is legally enforceable. The company and its controlled entities have a legally enforceable obligation to contribute to the funds. The directors are not aware of any other changes in circumstances which would have a material impact on the overall financial position of the funds. Employer contributions to the plans; consolidated $116,185 (2019 - $98,350), parent entity $77,562 (2019 - $65,993). NOTE 27: CONTINGENT LIABILITIES a. The parent entity has given a letter of support to each of its two controlled entities, to the effect that it will not require repayment of the loan funds advanced in the coming year (refer note 30(ii)). The shareholders’ funds as at 30 June 2020, in the controlled entities concerned were: 159 Allen Street Leichhardt Pty Ltd - net assets Desane Contracting Pty Limited - net assets Desane Properties Pty Limited - net assets ANNUAL REPORT 2020 57 2020 $’000 (169) (1,859) 47,580 2019 $’000 (86) (1,777) 45,309 DESANE GROUP HOLDINGS b. 7 Sirius Road Property Segment Assets The parent entity has guaranteed the repayment of the first mortgage finance secured over the 7 Sirius Road property (note 17). c. 13 Sirius Road Property The parent entity has guaranteed the repayment of the first mortgage finance secured over the 13 Sirius Road property (note 17). NOTE 28: OPERATING SEGMENTS – CONSOLIDATED GROUP Segment Information Where an asset is used across multiple segments, the asset is allocated to that segment that receives majority economic value from that asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location. Segment Liabilities Liabilities are allocated to segments where there is a direct nexus between the incurrence of the liability and the operations of the segment. Borrowings and tax liabilities are generally considered to relate to the Group as a whole and are not allocated. Segment liabilities include trade and other payables and certain direct borrowings. Identification of Reportable Segments Unallocated Items The Group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors in assessing performance and determining the allocation of resources. The following items of revenue, expenses, assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment: • Net gains on disposal of available for sale investments; • Impairment of assets and other non recurring items of revenue or expenses; • Income tax expense; • Deferred tax assets and liabilities; • Current tax liabilities; • Other financial liabilities; • Retirement benefit obligations; and • Administration expenses. Geographical Segments The consolidated group operates in two geographical segments being New South Wales and Queensland, Australia. Inter-segment Transactions Inter-segment pricing is based on what would be realised in the event the sale was made to an external party at arm’s- length basis. Reportable segments disclosed are based on aggregating operating systems where the segments are considered to have similar economic characteristics and are also similar to the operations and or services provided by the segment. Types of Operations and Services by Segment Revenue is derived by the industry segments from the following activities: i. Property Development Development projects (residential, commercial or industrial). ii. Property Investment Rental income from prime real estate investments. iii. Property Project Management and Resale Property project management and resale of commercial, industrial and residential properties, principally in Sydney metropolitan areas. iv. Property Services Property and related services. Accounting Policies Adopted Unless stated otherwise, all amounts reported to the Board of Directors, with respect to operating segments, are determined in accordance with accounting policies that are consistent to those adopted in the annual financial statements of the Group. ANNUAL REPORT 2020 58 DESANE GROUP HOLDINGS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 28: OPERATING SEGMENTS- CONSOLIDATED GROUP- continued 2020 Property Investment Property Development $’000 1,468 - 1,468 3,921 $’000 - - - (33) External sales Other segments Total revenue Segment result Unallocated expenses Finance costs Profit/(loss) before income tax Income tax expense Profit/(loss) after income tax 2020 Segment Assets Property Investment Property Development $’000 $’000 43,398 - 2019 opening balance Unallocated Assets Deferred tax assets Segment Asset Increases/ (Decreases) for the Period Acquisitions 10,093 3,379 3,461 91 - - - 161 - - 57,043 3,540 Revaluations/ (devaluations) Capital expenditures Depreciation and capital allowance Net movement in other segments Unallocated Assets Deferred Tax Assets Total Group Assets Property Project Management and Resale $’000 Property Services Plant and Equipment Consolidated Group Other $’000 $’000 $’000 - - - - 49 - 49 49 - - - - 793 - 793 793 $’000 2,310 - 2,310 4,730 (1,349) (149) 3,232 (975) 2,257 Property Project Management and Resale $’000 Property Services Plant and Equipment Consolidated Group Other $’000 $’000 $’000 $’000 - - - - - - - - - - - - - - 2,432 46,019 91,849 30 - - (53) - - - - 13,502 3,461 252 (53) - (26,467) (26,467) 2,409 19,552 82,544 82,544 ANNUAL REPORT 2020 59 DESANE GROUP HOLDINGS2020 Segment Liabilities Property Investment Property Development $’000 16,400 (10,500) 5,900 $’000 - - - 2019 opening balance Unallocated Liabilities Deferred tax liabilities Segment Liabilities Increases/ (Decreases) for the Period Net movement in other segments Unallocated Liabilities Deferred Tax Liabilities Total Group Liabilities 2019 Property Investment Property Development $’000 41,110 - 41,110 39,700 $’000 - - - (783) External sales Other segments Total revenue Segment result Unallocated expenses Finance costs Profit/(loss) before income tax Income tax expense Profit/(loss) after income tax Property Project Management and Resale $’000 Property Services Plant and Equipment Consolidated Group Other $’000 $’000 $’000 - 1,673 $’000 18,073 - - - - - - 15,381 15,381 - - (196) (10,696) 16,858 22,758 - 975 23,733 Property Services Plant and Equipment Consolidated Group Other $’000 1,129 - 1,129 1,129 $’000 $’000 - - - - 860 - 860 860 $’000 43,099 - 43,099 40,906 (1,663) (377) 38,866 (11,569) 27,297 Property Project Management and Resale $’000 - - - - ANNUAL REPORT 2020 60 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 28: OPERATING SEGMENTS- CONSOLIDATED GROUP- continued 2019 Segment Assets Property Investment Property Development $’000 38,560 $’000 - 16,964 (12,893) 2018 opening balance Unallocated Assets Deferred tax assets Segment Asset Increases/(Decreases) for the Period Acquisitions Proceeds from sale of properties Revaluations/ (devaluations) Capital expenditures 767 Property Project Management and Resale $’000 Property Services Plant and Equipment Consolidated Group Other $’000 $’000 $’000 - - 25 7,806 2,443 (1) (35) $’000 46,391 - 19,407 (12,894) - 767 - - (35) Development expenditures Asset held for sale Depreciation and capital allowance Asset Reclassification Net movement in other segments Unallocated Assets Deferred Tax Assets Total Group Assets 43,398 - - - 2,432 46,019 91,849 38,213 38,213 - 91,849 ANNUAL REPORT 2020 61 DESANE GROUP HOLDINGSProperty Project Management and Resale $’000 Property Services Plant and Equipment Consolidated Group Other $’000 $’000 $’000 - 2,089 2019 Segment Liabilities Property Investment Property Development $’000 - - $’000 11,150 2018 opening balance Unallocated Liabilities Deferred tax Liabilities Segment Liabilities Increases/(Decreases) for the Period Repayments (5,250) 10,500 16,400 New borrowings Net movement in other segments Unallocated Liabilities Deferred Tax Liabilities Total Group Liabilities - - - - NOTE 29: CASH FLOW INFORMATION a. Reconciliation of Cash Flow from Operations with Profit After Income Tax Profit/(loss) after income tax Non-cash flows in profit/(loss) Doubtful debts Depreciation and amortisation (Gain)/loss on asset revaluation (Profit)/loss on sale of investment property Gain on disposal of fixed asset Changes in assets and liabilities (Increase)/decrease in trade receivables (Increase)/decrease in other receivables and other assets (Increase)/decrease in prepayments (Decrease)/increase in trade payments and accruals (Decrease)/increase in other payables (Decrease)/increase in provisions Increase/(decrease) in deferred taxes payable Transfer to financing activities Cash flow from operations ANNUAL REPORT 2020 62 $’000 13,239 - 3,812 (5,250) - (416) 10,084 - 1,673 21,885 - 11,569 33,454 Consolidated Group 2020 $’000 2,257 - 53 (3,461) 2019 $’000 27,297 33 35 - - - (38,947) (2) (110) - (24) 207 130 1,522 66 (334) (10,584) 10,071 (12) 975 42 11,569 10,500 (10,500) (199) 982 DESANE GROUP HOLDINGSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2020- Continued NOTE 29: CASH FLOW INFORMATION- continued Credit Standby Arrangements with Banks Credit facility Amount utilised Consolidated Group 2020 $’000 100 - 2019 $’000 100 - Bank overdraft facility is arranged with one bank and the general terms and conditions are set and agreed annually. Interest rates are variable and subject to adjustment. Please refer to note 17. Loan Facilities with Financial Institutions Loan facilities Amount utilised For more details on the loan facilities, please refer to note 17. NOTE 30: PARENT ENTITY DISCLOSURES Consolidated Group 2020 $’000 5,900 2019 $’000 5,900 (5,900) (5,900) The following information has been extracted from the books and records of the parent entity and has been prepared in accordance with Accounting Standards. Consolidated Group STATEMENT OF COMPREHENSIVE INCOME Result of Parent Entity Profit for the period Other comprehensive income Total comprehensive income for the period STATEMENT OF FINANCIAL POSITION Current Assets Cash Trade and other receivables Other assets Non-current Assets Trade and other receivables – loans to controlled entities Investment – controlled entities Property, plant and equipment Total Assets Current Liabilities Trade and other payables Short term provisions Total Liabilities Net Assets Total Equity Issued capital Retained earnings/(accumulated losses) Total Equity ANNUAL REPORT 2020 63 Note 2020 $’000 2019 $’000 151 - 151 13 - 60 140 - 140 5 - 49 ii i 14,197 16,211 490 129 490 134 14,889 16,889 25 1,115 1,140 37 1,413 1,450 13,749 15,439 21,213 (7,464) 13,749 21,213 (5,774) 15,439 DESANE GROUP HOLDINGSi. Controlled Entities Investments in controlled entities are unquoted and comprise: Controlled Entities Desane Properties Pty Ltd Desane Contracting Pty Ltd 159 Allen Street Leichhardt Pty Ltd Parent Entity Class of Shares Ordinary Ordinary Ordinary 2020 2019 Holding % Investment $’000 Holding % Investment $’000 100 100 100 490 - - 490 100 100 100 490 - - 490 All controlled entities are incorporated in Australia. Desane Properties Pty Ltd declared a dividend of $1.5m out of retained profits (2019: $1.3m). Desane Contracting Pty Ltd declared a dividend of $nil (2019: $nil). 159 Allen Street Leichhardt Pty Ltd declared a dividend of $nil (2019: $nil). Contribution to profit/(loss) after tax: Desane Group Holdings Limited Desane Properties Pty Limited Desane Contracting Pty Limited 159 Allen Street Leichhardt Pty Ltd ii. Loans to Controlled Entities Desane Properties Pty Limited Desane Contracting Pty Limited 159 Allen Street Leichhardt Pty Ltd Guarantees 2020 $’000 (1,349) 3,771 (82) (83) 2019 $’000 (1,160) 29,345 (802) (86) 2,257 27,297 2020 $’000 (10,622) 1,857 22,962 14,197 2019 $’000 2,092 1,770 12,349 16,211 Desane Group Holdings Limited has not entered into any guarantees, in the current or previous financial year, in relation to the above debts of its controlled entities. Capital Commitments Desane Group Holdings has no capital commitments to note. NOTE 31: EVENTS AFTER THE REPORTING DATE Since the balance date, COVID-19 has continued to spread internationally. As a result of the uncertainty surrounding possible future impacts of the virus, a reasonable assessment of the effects on the operations and statement of affairs for the Group cannot presently be made with absolute assurance. With this exception, there were no events subsequent to the balance date. Contractual Commitments NOTE 32: ECONOMIC DEPENDENCY At 30 June 2020, Desane Group Holdings Limited had not entered into any contractual commitments for the acquisition of property, plant and equipment or any other affairs (2019: Nil). A portion of all the Group’s investment properties are under financial loans. ANNUAL REPORT 2020 64 DESANE GROUP HOLDINGSDESANE GROUP HOLDINGS DIRECTORS’ DECLARATION In accordance with a resolution of the directors of Desane Group Holdings Limited, the directors of the company declare that: 1. The fi nancial statements and notes, as set out on pages 33 to 64 are in accordance with the Corporations Act 2001 and; a. Comply with Australian Accounting Standards, which, as stated in accounting policy note 1 to the fi nancial statements, constitutes compliance with International Financial Reporting Standards (IFRS); and b. Give a true and fair view of the fi nancial position as at 30 June 2020 and of the performance for the year ended on that date of the consolidated group; In the directors’ opinion 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 The directors have been given the declarations required by a 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Offi cer. 2. 3. This declaration is made in accordance with a resolution of the Board of Directors. J B Sheehan Director Sydney P Montrone Director Sydney 20 August 2020 ANNUAL REPORT 2020 65 DESANE GROUP HOLDINGS INDEPENDENT AUDITOR’S REPORT GCC Business & Assurance Pty Ltd ABN 61 105 044 862 GPO Box 4566, Sydney NSW 2001 Telephone: (02) 9231 6166 Facsimile: (02) 9231 6155 Suite 807, 109 Pitt Street, Sydney NSW 2000 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DESANE GROUP HOLDINGS LIMITED REPORT ON THE AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS Report on the Financial Report Opinion We have audited the financial report of Desane Group Holdings Limited and Controlled Entities (the Group), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion: - the accompanying financial report of Desane Group Holdings Limited and Controlled Entities is in accordance with the Corporations Act 2001; including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. Our responsibilities under those standards are further disclosed in the Auditor’s Responsibilities for the Audit of the Financial Report We are independent of the Group in accordance with the auditor independence section of our report. 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 confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the year ended 30 June 2020. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide an opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation ANNUAL REPORT 2020 66 DESANE GROUP HOLDINGS INDEPENDENT AUDITOR’S REPORT-continued GCC Business & Assurance Pty Ltd ABN 61 105 044 862 GPO Box 4566, Sydney NSW 2001 Telephone: (02) 9231 6166 Facsimile: (02) 9231 6155 Suite 807, 109 Pitt Street, Sydney NSW 2000 Description of Key Audit Matter How Our Audit Addressed the Key Audit Matter 1. Valuation of Investment Properties – non current refer note 1(e) and note 14 to the consolidated financial statements. Our procedures included, but were not limited to the following: 7 Sirius Road, Lane Cove NSW 13 Sirius Road, Lane Cove NSW 91 Thornton Drive, Penrith NSW 159 Allen Street, Leichhardt NSW 16 Industrial Avenue, Wacol QLD $,000 9,000 7,907 7,171 22,861 10,104 The properties were valued by the directors based on the methodologies used by licensed valuers. The uplift in the values of the property investment portfolio were predominantly recorded in the first half of the financial year. Commercial property valuations are sensitive to the key assumptions applied in valuations. In particular, rates of capitalisation of net rental income, market rentals, vacancy levels, average lease expiring dates, the inputs to determine d i s c o u n t e d c a s h i n appropriately assessing market sales evidence in the property sector and location under review. f l o w o u t c o m e s a n d In reference to market sales it is noted that the onset of COVID-19 has resulted in a marked reduction of transactions in the commercial property sector where the Desane Group specialises. Ordinarily market sales provide an important source of evidence regarding property fair values. 1. We considered the valuation methods used b y the directors to ensure their approach and methodologies accorded with the industry norm for valuations of this nature and that all commonly accepted valuation methods were considered. 2. We checked the reliability of the underlying assumptions used in the directors’ assessments to supporting lease agreements and other documents. 3. We compared the inputs in the valuations, including capitalisation rates, discount rates and rental yields to historical data and available industry data. We reviewed a range of published reports and analysis and commentary provided by industry experts to gain a current understanding of the property market. The relative sensitivity of the inputs was discussed with the directors. 4. We considered the adequacy of the disclosures in the financial statements. We confirmed that the directors’ valuations were in accordance with generally acceptable market valuations with the key assumptions being within the range of current market data. We found no material evidence of impairment indicators as at 30 June 2020. We found the disclosures in the financial statements to be adequate. 2. Investment Property Purchased – refer note 14. Our procedures included, but were not limited to the following: 16 Industrial Avenue, Wacol QLD 10,104 $,000 1. We verified the purchase of the property to the purchase contract, solicitor’s detailed statement, title certificates and other documentation. A contract of purchase was entered into on 2 The settlement date was 13 October 2019. November 2019. 2. The payments for the purchase were agreed to Desane’s banking records. 3. We checked that the purchase was executed under normal commercial terms. Purchase of the property verified. Liability limited by a scheme approved under Professional Standards Legislation ANNUAL REPORT 2020 67 DESANE GROUP HOLDINGS GCC Business & Assurance Pty Ltd ABN 61 105 044 862 GPO Box 4566, Sydney NSW 2001 Telephone: (02) 9231 6166 Facsimile: (02) 9231 6155 Suite 807, 109 Pitt Street, Sydney NSW 2000 Description of Key Audit Matter How Our Audit Addressed the Key Audit Matter 3. Inventory (Development Property) Purchased Our procedures included, but were not limited to the following: 322 Norton Street, Leichhardt NSW $,000 3,540 1. We verified the purchase of the property to the purchase contract, solicitor’s detailed statement, title certificates and other documentation. A contract for purchase was entered into on 4 October 2019. The settlement date was 13 November 2019. 2. The payments for the purchase were agreed to Desane’s banking records. 3. We checked that the purchase was executed under normal commercial terms. Purchase of the property verified. Information Other than the Financial Report and Auditors Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Group’s financial report for the year ended 30 June 2020, but does not include the financial report and our auditor’s report. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters 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. 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 be reasonably 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 judgement 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. Liability limited by a scheme approved under Professional Standards Legislation ANNUAL REPORT 2020 68 DESANE GROUP HOLDINGS INDEPENDENT AUDITOR’S REPORT-continued GCC Business & Assurance Pty Ltd ABN 61 105 044 862 GPO Box 4566, Sydney NSW 2001 Telephone: (02) 9231 6166 Facsimile: (02) 9231 6155 Suite 807, 109 Pitt Street, Sydney NSW 2000 • • 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. 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 with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period 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 Remuneration We have audited the remuneration report included in the directors’ report for the year ended 30 June 2020. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with s 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. Responsibilities The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with s 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 Australia Auditing Standards. Liability limited by a scheme approved under Professional Standards Legislation ANNUAL REPORT 2020 69 DESANE GROUP HOLDINGS GCC Business & Assurance Pty Ltd ABN 61 105 044 862 Auditor’s Opinion GPO Box 4566, Sydney NSW 2001 Telephone: (02) 9231 6166 Facsimile: (02) 9231 6155 Suite 807, 109 Pitt Street, Sydney NSW 2000 In our opinion, the remuneration report of Desane Group Holdings Limited, for the year ended 30 June 2020, complies with s 300A of the Corporations Act 2001. GCC BUSINESS & ASSURANCE PTY LTD (Authorised Audit Company) GRAEME GREEN Director Sydney 20 August 2020 Liability limited by a scheme approved under Professional Standards Legislation ANNUAL REPORT 2020 70 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 5 August 2020. 1. SHAREHOLDING Distribution of equitable securities: Category (size of holding) Number of Ordinary Shares* Number of Holders of Ordinary Shares % of Issued Capital 1- 1,000 1,001- 5,000 5,001- 10,000 10,001- 100,000 100,001- and over 29,235 364,789 366,388 5,267,894 34,881,684 40,909,990 121 139 48 142 58 508 0.07 0.89 0.90 12.88 85.26 100.00 There were 84 holders of less than a marketable parcel of ordinary shares. * The number of Ordinary Shares on issue as at 30 June 2020 was 40,909,990. 2. TWENTY LARGEST QUOTED EQUITY SECURITY HOLDERS The names of the 20 largest security holders are listed below: Name 1. Cupara Pty Ltd 2. J P Morgan Nominees Australia Pty Limited 3. Montevans Pty Ltd 4. Horrie Pty Ltd 5. Glencairn Pty Limited 6. PFPT Management Pty Ltd 7. Horrie Pty Ltd 8. Cordato Partners (Superannuation) Pty Ltd 9. National Nominees Limited 10. Hillmorton Custodians Pty Ltd 11. John & Judith Pty Ltd 12. Keiser Investments Pty Ltd 13. Dotnric Pty Ltd 14. Oakmount Nominees Pty Ltd 15. Mr Peter Howells 16. Kelpador Investments Pty Ltd 17. Mocorb Pty Ltd 18. Joe Scardino & Felicia Scardino 19. Whimplecreek Pty Ltd 20. Waratah Property Services (No 1) Pty Ltd Ordinary Shares % Held to Issued Capital 11,270,878 4,350,500 2,729,374 1,550,000 1,174,751 938,831 815,578 790,409 740,875 689,285 582,677 556,158 342,874 330,000 294,195 283,770 282,131 273,555 273,000 261,082 27.55 10.63 6.67 3.79 2.87 2.29 1.99 1.93 1.81 1.68 1.42 1.36 0.84 0.81 0.72 0.69 0.69 0.67 0.67 0.64 28,529,923 69.72 ANNUAL REPORT 2020 71 DESANE GROUP HOLDINGS3. SUBSTANTIAL SHAREHOLDERS Substantial holders in the Company are set out below: Name Cupara Pty Ltd Greig & Harrison Pty Ltd Phoenix Portfolios Pty Ltd Montevans Pty Ltd Ordinary Number 10,246,252 5,480,418 4,560,206 2,729,374 % 28.27 14.74 12.36 6.67 4. VOTING RIGHTS The voting rights attaching to each class of shares are set out below: Ordinary Shares No restrictions. Every member present or by proxy shall have one vote and upon a poll, each share shall have one vote. There are no other classes of equity securities. ANNUAL REPORT 2020 72 DESANE GROUP HOLDINGSCOMPANY PARTICULARS Directors & Key Personnel Prof. John Blair Sheehan AM – Chairman (non-executive director) Phil Montrone OAM – Managing Director Rick Montrone – Director Peter Krejci – Director (non-executive) (appointed 8 July 2019) Jack Sciara – Company Secretary and Chief Financial Officer Principal Registered Office in Australia Suite 4, 26-32 Pirrama Road, Pyrmont NSW 2009 Other Company Details Postal address: PO Box 331, Leichhardt NSW 2040 Telephone: (02) 9555-9922 Facsimile: (02) 9555-9944 E-mail Address: info@desane.com.au Website: desane.com.au Share Register Shareholders with questions about their shareholdings should contact Desane’s external share registrar: Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street, Adelaide SA 5000 Postal Address: GPO Box 2975, Melbourne VIC 3001 Telephone enquiries within Australia: 1300-556-161 Telephone enquiries outside Australia: 61-3-9415-4000 Website: www.computershare.com Auditor GCC Business & Assurance Pty Ltd Suite 807, 109 Pitt Street, Sydney NSW 2000 Bankers Commonwealth Bank of Australia Securities Exchange Listing Desane Group Holdings Limited shares are listed on the Australian Securities Exchange. The ASX code is DGH. Notice of Annual General Meeting The Annual General Meeting of Desane Group Holdings Limited will be held at Doltone House – Tribeca, Ground Floor, 26- 32 Pirrama Road, Pyrmont NSW on Wednesday, 28 October 2020 commencing at 10.00 am. ANNUAL REPORT 2020 73 DESANE GROUP HOLDINGSANNUAL REPORT 2020 74 DESANE GROUP HOLDINGS

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