Desane Group Holdings Limited
Annual Report 2021

Plain-text annual report

2021 ANNUAL REPORT ... G R O U P H O L D I N G S L IM I T E D CONTENTS ... Chairman’s Report 3 Chief Executive’s Report 5 Directors’ Report 21 Auditor ’s Independence Declaration 30 Financial Statements 31 Directors’ Declaration 66 Independent Auditor ’s Report 67 Shareholder Information 72 Corporate Director y 74 1 Desane Group HoldingsInvesting in 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. 2 AR 2021 Chairman’s REPORT The Group’s traditional base of industrial and logistic property assets have continued to perform well and are clearly positioned in a property investment sector which has been increasingly sought after. The recent planning approval obtained from Brisbane City Council to expand the Wacol logistics centre by a further 3,250m² of net lettable high clearance floor space is further evidence of the Group’s continuing objective to expand such assets across the eastern seaboard of Australia. Such industrial and logistic assets continue to grow as a reliable source of income for Desane. The Reserve Bank of Australia has continued to maintain historically low official interest rates, with benchmark Australian Government bond yields being sought after, arguably due to their less risk and heightened investment security. Current restrictions on overseas and now even interstate travel have revealed that household savings have risen, with a concomitant uplift in household consumption, replacing domestic and international travel expenditure. It is apparent the availability of domestic savings has flowed through to domestic equities and property as investment opportunities. “...securing a prudent residential pipeline of three significant sites across the inner Sydney suburb of Leichhardt.” ... The Group has further added to the development pipeline through the acquisition, as mentioned in my report last year, of 1.2ha on Thornton Drive, Penrith, which is well positioned to take advantage of the Western Sydney Airport now under construction. This area of Sydney is increasingly being recognised as the northern administrative and logistic gateway to the new airport. As mentioned in my report last year, the continuing deterioration of the relationship between the USA and China has paradoxically reinforced investor perceptions that the Australian economy has an underlying robustness in such parlous times. Whilst the international environment is clearly more fluid, nevertheless over the past 12 months, Australian domestic equities and industrial and logistic properties, as an investment vehicle, have been and remain well-regarded by local and overseas investors. Finally, I can report to shareholders that this annual report is the 34th such report of Desane Group Holdings Limited. Your Company has continued to maintain its profitability due to the quality of its senior management and the invaluable contribution of its current Board. Your Board remains confident the current prudent strategies of investment and cash retention will continue to result in 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 It gives me great pleasure to introduce the Annual Report of Desane Group Holdings Limited for 2021. I can report to shareholders that the Group’s earnings before interest and tax, for the financial year ending 30 June 2021, was $2.7m and the Group’s total assets are $87.7m. 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 2021. This will bring the total dividend for FY21 to 4.5 cents per security. Notwithstanding the continuing uncertainty from COVID-19, the Group has been minimally affected, with a pleasing increase in operational revenue of 14%, driven by rising rental income year-on-year, with steady operational costs. In this environment the Group has maintained continuing robust financial results, whilst at the same time ensured that the current cash and financial assets stand at a healthy $13.2m. As mentioned in my report last year, these reserves have continued to place the Group in a position to take advantage of opportunities over the next financial year. Indeed, such opportunities have arisen with the Group securing a prudent residential pipeline of three significant sites across the inner Sydney suburb of Leichhardt. Opportunities created by COVID-19 have highlighted the benefit of inner suburbs having the benefit of easy access to the CBD. Of the three properties, one is located near the Hawthorne Light Rail Station, and the remaining two properties are close to the Leichhardt North Light Rail Station and express bus services to the CBD. 3 Desane Group Holdings 4 AR 20215 Desane Group HoldingsChief Executive’s REPORT I am pleased to report that Desane Group Holdings Limited has reported its tenth consecutive yearly profit result for FY21 and is rewarding shareholders with a 4.5 cents per share full year dividend. The Group’s net tangible assets, over the past five (5) years, has increased by 75% and shareholders have been rewarded with over $12.9m in dividends. Our management’s focused approach has ensured that shareholder’s asset value has been protected and enhanced. The Group’s operational revenue increased by 14%, driven by increased rental income year-on-year. The Group’s total assets increased by 4% to $87.7m over the corresponding period. Desane’s cash position remains strong with $13.2m in cash and financial assets. The Company’s diversified $7.0m loan portfolio, secured by first registered mortgages against quality property assets, is yielding an average of 7% pa interest revenue. Notwithstanding the economic impact and uncertainty caused by the first phase of COVID-19, the Group’s management has remained focused on: •Adding value to our existing investment property portfolio; •Creating value through obtaining planning approvals to our residential development properties; •Preservation of cash reserves and capital; and •Ensuring the health and safety of our employees and customers. In October 2020, Desane received development approval from Brisbane City Council to expand its existing industrial property asset located in the Brisbane suburb of Wacol. The existing 5,039m² facility is leased to Brisbane City Council and serves as the Council’s vehicle and fleet maintenance headquarters. The approved facility will add 3,250m² of net lettable high clearance floor space to the existing 5,039m² facility, creating a total of 8,289m² of net lettable area. Subject to State Government COVID-19 restrictions being eased and finalising pre-leasing commitments, construction of the facility is anticipated to commence in 2022. On completion, the combined facilities will generate over $1.1m per annum of net rental income for the Group. In October 2020, Desane formalised the renewal of leases with three existing tenants at its Lane Cove NSW industrial investment properties, with two of the tenants agreeing to a 5-year lease term. Desane’s Lane Cove industrial investment property portfolio is expected to generate over $4.0m of net rental income for the Group over the next 5 years. In June 2021, Desane received development approval for a boutique 4 storey residential development, comprising 9 residential apartments, 1 ground floor retail commercial space and 10 basement car spaces. The property is located in Norton Street’s vibrant restaurant, café and cinema precinct and is 200m from Leichhardt North Light Rail Station. The approval of the Norton Street project complements our Company’s existing nearby 46 apartment project in Allen Street, which was approved by Inner West Council in September 2019. The property is located 200m from Hawthorne Light Rail Station and is a short distance from local schools and other amenities. On completion, the combined Norton Street and Allen Street residential developments will yield an estimated end value of $70.0m to $75.0m in gross revenue for the Group. In June 2021, as part of Desane’s property investment restocking, Desane exchanged contracts for the purchase of a prime commercial property in the Sydney suburb of Leichhardt for $7.25m. The property, zoned B2-Local Centre, has ample onsite parking and is located in the heart of Norton Street, Leichhardt’s commercial, retail and residential district. The building currently includes multiple diverse tenancies over 1,800m² of net lettable area, which on a fully leased basis is expected to return approximately $0.5m net rent per annum. Settlement is expected to occur on or before June 2022. Over the next 12 months, the economic impact of COVID-19 will become evident. The investment policies and measures implemented by Desane should provide a level of protection against a negative economic impact. Desane’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 continue to acquire investment property assets in 2022. I wish to thank the executive team and all our dedicated staff for their hard work in producing a steady 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. Phil Montrone OAM Managing Director & CEO 6 AR 2021 Leichhardt North Lightrail Hawthorne Parade Lightrail 159 Allen Street Leichhardt 7 Desane Group Holdings322 Norton Street Leichhardt 270-278 Norton Street Leichhardt A return T O HERITAGE ... Desane’s Legacy Our knowledge and expertise in property investment and development passed down through two generations permeates every level of business. Our long standing involvement in the inner Sydney real estate market gives us unparalleled insight in locating value and investment security, and a keen eye for predicting local trends and demands. We are well positioned to match commercial investment opportunities creating shareholder value over the coming years. 8 AR 2021 LOCATION DISTANCE TO CBD Leichhardt, NSW 5 kms SIZE 607m² PROPERTY TYPE PROPERTY STATUS Mixed Use Approved Development 9 Desane Group Holdings322 Norton Street LEICHHARDT Creating the community through a boutique development. Located just 5 kms from Sydney’s CBD, and set amongst the buzzing Norton Street district. The 607m 2 site at Norton Street was previously used as an auto-electrical shop and has development approval for a 9-unit, mixed-use development. The propert y is located approximately 5 kilometres from the CBD and is zoned B2 Mixed- Use. Situated 200 metres from Leichhardt North Light Rail Station, the propert y is in walking distance to transport as well as Leichhardt’s vibrant cafes, dining and shopping scene. Concept images of proposed project. 10 AR 2021 270-278 Norton Street LEICHHARDT A family legacy for almost four decades in the heart of the inner west. This propert y generates income through multiple tenancies, is ideally placed in leafy surrounds and has been known for over fort y years for the joy it provided when run as the function venue, Villa Rosa. Situated just 400 metres from Leichhardt North Light Rail and in the heart of bustling Norton Street, this propert y will generate approximately $0.5 million net rental for the Group when fully leased. Zoned B2 (Leichhardt LEP) the propert y has an FSR of 1.5:1 and can be converted to residential apartments in the future (subject to council approval). 11 Desane Group Holdings LOCATION DISTANCE TO CBD Leichhardt, NSW 5 kms SIZE 929m² PROPERTY TYPE PROPERTY STATUS Mixed Use Investment /Development 12 AR 2021LOCATION DISTANCE TO CBD SIZE PROPERTY TYPE PROPERTY STATUS Leichhardt, NSW 5 kms 2,782m² Residential Approved Development 13 Desane Group Holdings159 Allen Street LEICHHARDT Lifestyle at the doorstep of the city fringe 159 Allen Street, Leichhardt is a 2,782m², R1 General Residential zoned site. The propert y is located approximately 5 kilometres from the CBD, less than 200 metres from Hawthorne Light Rail Station and is a rare development opportunit y in Sydney ’s c it y fringe. The propert y is in short distance to local schools, amenities and other public services, including the Universit y 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. Concept images of proposed project. 14 AR 2021 16 Industrial Avenue BRISBANE 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 propert y is fully leased to a high qualit y local government tenant on a long term basis. Desane has recently had approved a Development Application with Brisbane Cit y Council, to construct an additional 3,250m² industrial facilit y on the site. Construction is anticipated to begin in 2022. a 15 Desane Group Holdings a LOCATION Wacol, QLD DISTANCE TO CBD SIZE PROPERTY TYPE PROPERTY STATUS 20 kms 21,750m² Industrial Investment / Approved Development Concept images of proposed project. 16 AR 2021LOCATION DISTANCE TO CBD SIZE PROPERTY TYPE PROPERTY STATUS Lane Cove, NSW 12 kms 2,700m² Industrial & Commercial Investment 17 Desane Group HoldingsLOCATION DISTANCE TO CBD SIZE PROPERTY TYPE PROPERTY STATUS Lane Cove, NSW 12 kms 2,400m² Industrial & Commercial Investment 7 &13 Sirius Road LANE C OVE The limited availability of highly sought after acquisition options will continue to drive investor demand in the area. 7 Sirius Road, Lane Cove 13 Sirius Road, Lane Cove A 2,700m² industrial and commercial propert y. Located in the Lane Cove West industrial precinct, the propert y is approximately 12 kilometres north of the Sydney CBD. The propert y is fully leased to a long term tenant and is situated within 100 metres from another asset owned by Desane. A 2,400m² commercial, high-tech building with 50 secure basement parking spaces. This propert y is fully leased to t wo high-qualit y tenants on a long term basis. The propert y is located within the Lane Cove West precinct and is approximately 12 kilometres north of the Sydney CBD. 18 AR 2021 91 Thornton Drive PENRITH 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. 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 NSW Government has announced an $8.0 billion investment into the Western Sydney Airport at Badger ys 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. The propert y falls within the ‘Thornton’ Masterplan Urban Transformation and will form part of the urban transformation area. Concept image of proposed project. 19 Desane Group Holdings LOCATION Penrith, NSW DISTANCE TO CBD 60 kms SIZE 1.2ha PROPERTY TYPE PROPERTY STATUS Mixed Use Unimproved Land 20 AR 2021Directors’ REPORT ... The Directors of Desane Group Holdings Limited (“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 2021. Prof. John B Sheehan AM Independent Non-Executive Director and Chairman Directors and Directors’ Interests EXPERTISE AND EXPERIENCE Prof. Sheehan, a Life Fellow member of the Australian Propert y Institute (NSW division), has over 30 years experience and expertise in propert y compensation law, town and countr y 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 Chairman of the Remuneration & Nomination Committee Chairman of the Environmental, Occupational Health and Safet y Committee Member of the Risk Management & Audit Committee Member of the Finance & Operations Committee INTERESTS IN DESANE Ordinar y shares 168,735 EXPERTISE AND EXPERIENCE Mr P Montrone has over 30 years experience and expertise in propert y investment, acquisitions, development and project management. He has been a significant board member since the Company ’s incorporation in 1987 and was appointed as 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 & Safet y Committee Mr Phil Montrone OAM Managing Director INTERESTS IN DESANE Ordinar y shares 14,330,444 21 Desane Group Holdings AR 2021 EXPERTISE AND EXPERIENCE Mr R Montrone, who was appointed as Director in 2015, has over 15 years experience in propert y investment, acquisitions, developments, management, leasing, sales and project management. Mr Montrone is a licensed real estate agent and an associate member of the Australian Propert y Institute. SPECIAL RESPONSIBILITIES Member of the Risk Management & Audit Committee Member of the Finance & Operations Committee Member of the Environmental, Occupational Health & Safet y Committee Mr Rick Montrone Director INTERESTS IN DESANE Ordinar y shares 283,721 Mr Peter Krejci Independent Non-Executive Director Mr Jack Sciara Company Secretar y 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, propert y and construction, retail, logistics, manufacturing and mining. Mr Krejci was appointed as a board member on 8 July 2019. SPECIAL RESPONSIBILITIES 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 & Safet y Committee INTERESTS IN DESANE Ordinar y shares Nil Company Secretar y The following person held the position of company secretar y at the end of the financial year: EXPERTISE AND EXPERIENCE Mr J Sciara joined Desane in 2001, and has over 20 years experience and expertise in corporate accounting and taxation. Jack was appointed as Company Secretar y in 2016. His role in the Company includes developing financial and tax strategies for the Group, investor relations, ASX compliance and 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 Practitioner. SPECIAL RESPONSIBILITIES Chief Financial Officer and Company Secretar y INTERESTS IN DESANE Ordinar y shares 258,000 22 Directors’ REPORT 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 financial year are: Directors ’ Meetings and Finance & Operations Commit tee Meetings Risk Management & Audit Commit tee Meetings No.of Meetings At tended No.of Meetings Held No.of Meetings At tended No. of Meetings Held 12 12 11 12 12* 12 12 12 12 12* 2 2 2 2 2 2 2 2 2 2 Remuneration & Nomination Commit tee Meetings Environmental & Occupational Health & Safety Commit tee Meetings No. of Meetings At tended No. of Meetings Held No.of Meetings At tended 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 Secretar y 23 Desane Group Holdings Principal Activities There were no significant changes in the principal activities of the Company during the financial year, which were: • • Propert y investment; and Propert y development (residential and mixed use). Operating and Financial Review The Group recorded a consolidated statutor y net profit after tax for the year of $1.8m (2020: $2.3m). Statutor y 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 A summar y of consolidated financial results by operational segments is set out below: 2021 $’000 1,806 2020 $’000 2,257 Total Revenue Segment Result Propert y development expenses Propert y investment – rental Propert y management Propert y investment – net revaluations Interest income Less: Unallocated expenses Operating profit Income tax (expense)/benefit attribut- able to operating profit Deferred tax attributable to operating profit Operating profit after income tax attributable to members of Desane Group Holdings Limited 2021 $’000 - 2,080 47 2,522 498 5,147 2020 $’000 - 1,468 49 3,461 793 5,771 2021 $’000 (40) 644 47 2,522 498 3,671 (1,0 95) 2,576 2020 $’000 (33) 311 49 3,461 793 4,581 (1,349) 3,232 - - (770) (975) 1,806 2,257 Financial Review Despite the challenging propert y market and economic hurdles due to the COVID-19 pandemic, Desane achieved a solid financial result for the 2021 financial year and continues to deliver on its core business objectives. The Group’s operational revenues increased 14% on the previous corresponding period whilst the Group’s remuneration and employee benefits decreased by 14%. In October 2020, Desane received development approval from Brisbane Cit y Council to expand its existing industrial propert y asset located in the Brisbane suburb of Wacol. The existing 5,039m² facilit y is leased to Brisbane Cit y Council and serves as the Council’s vehicle and fleet maintenance headquarters. The approved facilit y will add 3,250m² of net lettable high clearance floor space to the existing 5,039m² facilit y, creating a total of 8,289m² of net lettable area. 24 AR 2021 Directors’ REPORT Construction of the approved facilit y is anticipated to commence in 2022, subject to Government COVID-19 restrictions being eased and finalising pre -leasing commitments. On completion, the combined facilities will generate over $1.1m per annum of net rental income for the Group. and residential district. The building currently includes multiple diverse tenancies over 1,800m² of net lettable area, which on a fully leased basis is expected to return approximately $0.5m net rent per annum. Settlement is scheduled to occur on or before June 2022. Also in October 2020, Desane formalised the renewal of leases with three existing tenants at its Lane Cove NSW industrial investment properties, with t wo of the tenants agreeing to a 5- year lease term. With the lease renewals, Desane’s Lane Cove industrial investment propert y portfolio is expected to generate over $4m of net rental income for the Group over the next 5 years. Following the lease renewals of the Lane Cove NSW industrial properties, Desane formalised the renewal of its $6m loan facilit y with the Commonwealth Bank for a further 3 years at 1.9% pa variable. Despite the challenging economic climate ahead, Desane will continue to focus on three main objectives into the new financial year and beyond: 1. 2. 3. Strategic investment acquisitions which will bolster ROE and rental income streams; Evaluate its development projects with an eye to achieving maximum value outcomes; and R eview capital management strategies to ensure capacit y to grow and continued shareholder dividends. Capital Gains Tax Deferral In June 2021, as part of its propert y investment portfolio restocking, Desane exchanged contracts for the purchase of a prime commercial propert y in the Sydney suburb of Leichhardt for $7.25m. The propert y, zoned B2-Local Centre, has ample onsite parking and is located in the heart of Norton Street, Leichhardt’s commercial, retail Included in the deferred tax liabilit y of $17.1m is approximately $13.9m of capital gains tax (CGT) deferral, pertaining to the involuntar y sale of the Rozelle propert y in September 2018, as part of the compulsor y acquisition by NSW Roads & Maritime Services which triggered a CGT event. Dividends Paid or Recognised 2020 $’000 920 920 2021 $’000 920 920 Dividends paid or declared for payment are as follows: Interim dividend of $0.0225 unfranked, per share, paid on 27 March 2020 Ordinar y dividend of $0.0225 unfranked, per share, paid on 23 October 2020, declared in the 2020 financial year Interim dividend of $0.0225 unfranked, per share, paid on 26 March 2021 Ordinar y dividend of $0.0225 unfranked, per share, declared by the directors from retained earnings payable on 25 October 2021 Dividend Reinvestment Plan (DRP) The DRP has been suspended until further notice. Significant Changes in State of Af fairs There was no significant change in the state of affairs of the Group. Events Subsequent to Balance Date 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 statement of financial position to provide support to grow and develop these operations. 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 safet y matters. 25 Desane Group Holdings COVID-19 The Government initiated enforceable lockdowns in June 2021 to reduce the spread of COVID-19 and consequently, Desane’s workplace environment and practices were reviewed to ensure that the safet y of its staff and visitors was a priorit y and that Desane was in compliance with Government policies. Appropriate COVID-19 safet y measures have been implemented 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 Safet y requirements. Staff members and contractors (on behalf of Desane) attending properties ensured that all site COVID-19 safet y measures were followed and that Government COVID-19 policies were complied with. Desane has not applied for, nor received, Federal Government COVID-19 financial assistance such as JobKeeper. 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 abilit y to attract and retain the best executives and directors to run and manage the consolidated group, as well as create goal congruence bet ween 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 salar y, statutor y superannuation and all other statutor y 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 (Discretionar y Remuneration) Short Term Incentives A discretionar y 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. 26 AR 2021Directors’ REPORT 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 2021, there was no approval or payment of an STI bonus to KMP (2020:$-). 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 2021 $1.8m 4.5 $1.180 4.42 2020 $2.3m 4.5 $1.350 5.52 2019 $27.3m 5.25 $1.405 66.73 Ordinar y shares on issue at 30 June 40,909,990 40,909,990 40,909,990 NTA per share at 30 June Executive Agreements $1.44 $1.44 $1.43 Executive agreements are formal legal agreements bet ween 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 ever y 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 limited set by the Corporations Act 2001 such that they do not require shareholder approval. Commencement Date Term of Agreement & Notice Period Base Salar y Including Superannuation $’000 Termination Payments / Benefits $ 1 September 1987 No fixed term & 12 months 2 November 2003 No fixed term & 12 months 3 September 2001 No fixed term & 12 months 222 395 223 - - - Name P Montrone R Montrone J Sciara Non Executive Directors Total compensation for all non executive directors, last voted on at the 2015 Annual General Meeting, is not to exceed $0.3m per annum. Currently, non executive directors are compensated to a total of $0.1m per annum (2020: $0.1m), inclusive of superannuation. The 2021 non executive director fees are 48% (2020: 48%) of the aggregate maximum sum approved by shareholders. 27 Desane Group Holdings 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 statutor y superannuation if applicable. Details of Remuneration for year ended 30 June 2021 The remuneration for each director and the executive officer of the consolidated entit y receiving the highest remuneration during the year was as follows: Shor t Term Benefits Salar y & Fees $’000 STI Cash Bonus $’000 Superannuation $’000 Total $’000 84 55 203 361 204 907 - - - - - - - 5 19 34 19 77 84 60 222 395 223 984 Directors John B. Sheehan (non-executive) Peter Krejci (non-executive) Phil Montrone Rick Montrone Chief Financial Of ficer/Company Secretar y Jack Sciara Indemnif ying Of ficers 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 indemnifying against a liabilit y incurred as an officer, including costs and expenses in successfully defending legal proceedings. The company paid a premium of $20,918 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 liabilit y 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 liabilit y incurred by him in his capacit y 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 2021. Proceedings on Behalf of the Company The Owners Corporation of 47-51 Lilyfield Road, Rozelle, no longer having the abilit y to pursue the project builder, who is in liquidation, for alleged building defect rectification works, has commenced legal proceedings in the NSW Supreme Court against Desane Contracting Pt y Ltd. Refer to Note 27d for further details. 28 AR 2021Directors’ REPORT Non-audit Services The board of directors, in accordance with the advice from the Audit Committee, is satisfied 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 satisfied 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 integrit y and objectivit y 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 2021. Taxation services Auditor’s Independence Declaration $'000 3 The lead auditor ’s Independence Declaration for the year ended 30 June 2021, has been received and can be found on page 30 of the Financial Report. ASIC Class Order 98/100 Rounding of Amounts The company is an entit y to which ASIC Class Order 98/100 applies and accordingly, amounts in the financial 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 23rd day of August, 2021. P Montrone Director Sydney J B Sheehan Director Sydney 29 Desane Group Holdings Auditor’s Independent 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 2021 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 23 August 2021 Liability limited by a scheme approved under Professional Standards Legislation 13 30 AR 2021 Consolidated Statement of Profit or Loss FOR THE YEAR ENDED 30 JUNE 2021 Continuing Operations Revenue Other Income Gain/(loss) on revaluation of investment properties Propert y development expenses Employee benefits expense Depreciation and amortisation expense Finance costs Other expenses from ordinar y activities Profit before income tax Income tax (expense)/benefit Profit from continuing operations Other comprehensive income Net Profit (af ter income tax) Profit attributable to minorit y equit y interest Profit attributable to members of the parent entit y 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. Consolidated Group Note 2 2a 2 4 8 8 2021 $’000 2,127 498 2,522 (40) (1,121) (53) (133) (1,224) 2,576 (770) 1,806 - 1,806 - 1,806 4.42 4.42 4.42 4.42 2020 $’000 1,517 793 3,461 (33) (1,313) (53) (149) (991) 3,232 (975) 2,257 - 2,257 - 2,257 5.52 5.52 5.52 5.52 31 Desane Group Holdings Consolidated Statement of Financial Position FOR THE YEAR ENDED 30 JUNE 2021 Current Assets Cash and cash equivalents Trade and other receivables Inventor y – development propert y Other current assets Other financial assets Total Current Assets Non-current Assets Investment properties Propert y, 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 liabilit y Total Non-current Liabilities Total Liabilities Net Assets Equity Issued capital Retained earnings Total Equity The accompanying notes form part of these financial statements Consolidated Group Note 2021 $’000 2020 $’000 9 10 11 12 13 14 15 12 13 16 18 17 19 22 20 21 353 298 4,00 9 386 12,637 17,683 67,350 2,367 75 170 69,962 87,645 4,70 9 1,075 5,784 5,900 59 17,126 23,085 28,869 58,776 21,213 37,563 58,776 10,203 189 3,540 285 8,323 22,540 57,043 2,409 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 32 AR 2021 Consolidated Statement of Changes in Equity FOR THE YEAR ENDED 30 JUNE 2021 Balance as at 1 July 2020 Shares issued during the year Profit at tributable to members of the parent entity Consolidated Group Issued Capital $'000 21,213 - - Retained Earnings $'000 37,598 - 1,806 21,213 39,404 Total $'000 58,811 - 1,806 60,617 Dividends paid or recognised for the year - (1,841) (1,841) Balance at 30 June 2021 21,213 37,563 58,776 Balance as at 1 July 2019 Shares issued during the year Profit attributable to members of the parent entit y Dividends paid or recognised for the year Balance at 30 June 2020 The accompanying notes form part of these financial statements. Issued Capital $'000 21,213 - - 21,213 - 21,213 Retained Earnings $'000 37,182 - 2,257 39,439 (1,841) 37,598 Total $'000 58,395 - 2,257 60,652 (1,841) 58,811 33 Desane Group Holdings Consolidated Statement of Cashflows FOR THE YEAR ENDED 30 JUNE 2021 Consolidated Group Note 2021 Inflows (Out flows) $’000 2020 Inflows (Out flows) $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Propert y development expenditure Interest received Finance costs Net cash provided by (used in) operating activities 29 Cash flows from investing activities Purchase of propert y, plant and equipment Purchase of development properties Purchase of investment properties Purchase of financial assets Capital costs of investment properties 2,176 (2,381) (40) 498 (133) 120 (11) (468) (3,630) (3,934) (86) 1,591 (2,401) (33) 793 (149) (199) (30) (3,540) (20,594) (8,772) (91) Net cash provided by (used in) investing activities (8,129) (33,027) Cash flows from financing activities Dividends paid by parent entit y 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. (1,841) (1,841) (9,850) 10,203 353 (2,147) (2,147) (35,373) 45,576 10,203 9 34 AR 2021 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Preparation The financial report covers the economic entit y of Desane Group Holdings Limited and its controlled entities. The separate financial statements of the parent entit y, 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 23 August 2021 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 entit y 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 summar y 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 other wise 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 35 of the assets, liabilities and results of the parent entit y controlled by Desane Group Holdings Limited and all of its controlled entities. Desane Group Holdings Limited controls an entit y when it is exposed to or has rights to, variable returns from its involvement with the entit y and has the abilit y to affect those returns through its power over the entit y. 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 bet ween entities in the economic entit y, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of controlled entities have been changed where necessar y to ensure consistencies with those policies applied by the parent entit y. Where controlled entities have entered or left the economic entit y 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 equit y in a controlled entit y not attributable, directly or indirectly, to a parent, are reported separately within the equit y section of the consolidated statement of financial position. 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 equit y 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 authorit y. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liabilit y balances during the year as well as unused tax losses. Deferred tax assets and liabilities are ascertained based on the temporar y differences arising bet ween the tax base of the assets and liabilities and their carr ying 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 liabilit y, 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 liabilit y is settled, Desane Group Holdings based on the tax rates enacted or substantively enacted at reporting date. Their measurement also reflects the manner in which management expects to recover or settle the carr ying amount of the related asset or liabilit y. Deferred tax assets relating to temporar y 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. Where temporar y 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 temporar y 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 liabilit y 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 authorit y on either the same taxable entit y or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liabilit y 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 entit y 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 entit y. 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 Propert y 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 ordinar y 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 signing of an unconditional contract of sale if significant risks and rewards and effective control over the propert y passes to the purchaser at this point. Inventor y is classified as current when development is expected to be developed and available for sale in the next t welve months, other wise it will be classified as non-current. If applicable, the carr ying value will include revaluations applied to the asset during the period the propert y was classified as an investment propert y. d. Pr operty, Plant and Equipment Propert y Freehold land and buildings are carried at their fair value (being the amount for which an asset could be exchanged bet ween 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 carr ying amount arising on revaluation of land and buildings are credited to a revaluation surplus in equit y. Decreases that offset previous increases of the same asset are recognised against revaluation surplus directly in equit y; all other decreases are recognised in profit or loss. Any accumulated depreciation at the date of revaluation is eliminated against the gross carr ying 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 carr ying 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. 36 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and, as permitted by accounting standards, the properties are not depreciated. Depreciation The depreciable amount of plant and equipment is depreciated on a straight line basis over their useful lives to the economic entit y commencing from the time the asset is held ready for use. 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 arm's length basis. The depreciation rates used for each class of depreciable assets are: f. Leases Class of Fixed Asset Depreciation Rate Motor vehicles Plant and equipment Office and computer equipment 15% 2.5%-33% 10%-33% The assets’ residual values and useful lives are reviewed and adjusted if appropriate, at each reporting date. An asset’s carr ying value is written down immediately to its recoverable amount if the asset’s carr ying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carr ying amount. These gains and losses are included in the consolidated statement of profit and loss. e. In vestment Properties Finance leases are capitalised by recognising an asset and a liabilit y at the lower of the amounts equal to the fair value of the leased propert y or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated bet ween the reduction of the lease liabilit y 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 payments for operating leases, where substantially all the risks and benefits remain with the lessor, as recognised as expenses in the periods in which they are incurred. Lease incentives under operating leases are recognised as a liabilit y and amortised on a straight line basis over the lease term. Investment properties, comprising freehold office and industrial complexes, are held to generate long-term rental yields and capital gains. All tenant leases are on an arm’s length basis. The fair value model is applied to all investment propert y and each propert y is reviewed at each reporting date. The fair value is defined as the price at which the propert y could be exchanged bet ween knowledgeable, willing parties in an arm’s length transaction. Each propert y is independently valued ever y three years by registered valuers who have recognised and appropriate professional qualifications, and recent experience in the location and categor y of investment propert y being valued. Changes to fair value are recorded in the statement of profit and loss as revenue from non operating activities. Acquired investment properties are recognised in the statement of financial position when control over the propert y is attained and the Group derives the benefits of ownership. 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 g. Financial Instruments The Group has adopted AASB 9: Financial Instruments. Initial recognition and measurement Financial assets and financial liabilities are recognised when the entit y becomes a part y to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the entit y 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: 37 Desane Group Holdings Held-to-maturit y investments (i) Held-to-maturit y 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 maturit y. Interest income is recognised in profit or loss when received. On maturit y, the financial asset is derecognised and re -classified as cash at bank. h. Impairment of Assets At each reporting date, the group reviews the carr ying 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 carr ying value. Any excess of the asset’s carr ying value over its recoverable amount is expensed to the consolidated statement of profit and loss. i. In vestments 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 entit y but is not control or joint control of those policies. Profits and losses resulting from transactions bet ween 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 equit y 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. j. Interests in Joint Arrangements Joint arrangements represent the contractual sharing of control bet ween 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 liabilit y 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 part y ’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 part y. k. Employee Benefits Short-term Employee Benefits 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. 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. 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. 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 salar y 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 maturit y 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. 38 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) period are classified as current assets. All other receivables are classified as non-current assets. l. Provisions p. T rade and Other Payables 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 Trade and other payables represent the liabilities for goods and services received by the entit y that remain unpaid at the end of the reporting period. The balance is recognised as a current liabilit y with the amounts normally paid within 30 days of recognition of the liabilit y. 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. The Group has applied AASB 15: Revenue from Contracts with Customers. All other borrowing costs are expensed in the period in which they are incurred. Revenue from the rendering of propert y services is recognised upon deliver y of the service to customers. Investment propert y 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 propert y rental revenue that have arisen from adoption of AASB 15. Revenue from sale of properties held for resale and non-current propert y or other assets is brought to account on the signing of an unconditional contract of sale if the significant risks and rewards and effective control over the propert y passes to the purchaser at this point. 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 statement of financial position 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 Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. 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 equit y method of accounting. 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. All revenue is stated net of the amount of goods and services tax (GST). t. Rounding of Amounts o. T rade and Other Receivables Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinar y course of business. Receivables expected to be collected within 12 months of the end of the reporting The parent entit y 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. The preparation of the financial reports requires Critical Accounting Estimates and Judgements 39 Desane Group Holdings 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 carr ying 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 carr ying amounts of assets and liabilities recognised in these financial reports are: (i) Impairment – propert y 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 propert y 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, the fair value of the propert y investments may differ. Assumptions used in valuation of propert y 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. NOTE 2: REVENUE AND OTHER INCOME Revenue from Continuing Operations Propert y rental income Propert y management fees Total Revenue from Continuing Operations Other Revenue Interest revenue from: - other persons Total Other Revenue Total Revenue Other Income Propert y investment – net revaluations Total Other Income Consolidated Group 2021 $’000 2020 $’000 2,080 47 2,127 1,468 49 1,517 498 498 793 793 2,625 2,310 2,522 2,522 3,461 3,461 40 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 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 propert y expenditure from investment propert y generating rental income NOTE 4: INCOME TAX EXPENSE a. The components of tax expense comprise: Deferred tax b. income tax is reconciled to income tax as follows: The prima facie tax on profit from ordinar y activities before Prima facie tax payable on profit from ordinar y activities before income tax at 30% (2020: 30%) - consolidated group Add: 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 entit y Note 6 Consolidated Group 2021 $’000 2020 $’000 80 53 133 (2) 5 613 79 53 149 (12) 33 333 Note 22 Consolidated Group 2021 $’000 2020 $’000 770 770 975 975 773 970 1 5 2 (11) 770 16 6 1 (18) 975 The applicable weighted average effective tax rates 29.9% 30.2% 41 Desane Group Holdings 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 deductibilit y imposed by the law. NOTE 5: KEY PERSONNEL COMPENSATION Names and position held of economic and parent entity key personnel in of fice at any time during the a. financial year are: Key Personnel Position Prof. John B. Sheehan AM Mr Phil Montrone OAM Mr Peter Krejci Mr Rick Montrone Mr Jack Sciara b. Compensation Practices Chairman (non-executive director) Managing Director Director (non-executive) Director – Head of Propert y Company Secretar y and Chief Financial Officer 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. 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 salar y 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 entit y ’s operations. Refer note 5c. c. Key Personnel Compensation 2021 Key Personnel Prof. John B. Sheehan Mr Peter Krejci Mr Phil Montrone Mr Rick Montrone Mr Jack Sciara Salar y & Fees Superannuation Shor t Term Incentives Total $’000 $’000 $’000 $’000 84 55 203 361 204 907 - 5 19 34 19 77 - - - - - - 84 60 222 395 223 984 42 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 5: KEY PERSONNEL COMPENSATION (CONTINUED) 2020 Key Personnel Prof. John B. Sheehan Mr Peter Krejci Mr Phil Montrone Mr Rick Montrone Mr Jack Sciara d. Shareholdings Salar y & Fees Superannuation Shor t Term Incentives Total $’000 $’000 $’000 $’000 84 55 368 375 235 1,117 - 5 35 36 22 98 - - - - - - 84 60 403 411 257 1,215 Number of shares held by parent entit y directors and specified executives Key Personnel Prof. John B. Sheehan Mr Phil Montrone Mr Rick Montrone Mr Peter Krejci Mr Jack Sciara Balance 30.06.20 ’000 169 14,314 213 - 258 14,954 Net Change Other* ’000 - 16 71 - - 87 Balance 30.06.21 ’000 169 14,330 284 - 258 15,041 * “Net Change Other” refers to shares purchased or sold during the financial year. 43 Desane Group Holdings NOTE 6: AUDITORS’ REMUNERATION Remuneration of the auditor for the parent entity: Michael Chau & Associates - auditing or reviewing the financial report GCC Business Assurance P ty Ltd - auditing or reviewing the financial report - taxation services NOTE 7: DIVIDENDS Dividends Paid a. Interim dividend of $0.0225 unfranked, per share, paid on 27 March 2020 Ordinar y dividend of $0.0225 unfranked, per share, paid on 23 October 2020, declared in the 2020 financial report Interim dividend of $0.0225 unfranked, per share, paid on 26 March 2021 Ordinar y dividend of $0.0225 unfranked, per share, declared by directors from retained earnings payable on 25 October 2021 Consolidated Group 2020 $’000 2021 $’000 3 73 3 79 Consolidated Group 2020 $’000 920 920 - 77 3 80 2021 $’000 920 920 b . The Group has $nil (2020 - $nil) franking credits available before the final dividend for 2021 is provided. 44 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 8: EARNINGS PER SHARE Consolidated Group 2021 $’000 2020 $’000 Reconciliation of earnings used in the calculation of earnings per share Operating profit after income tax 1,806 2,257 Reconciliation of weighted average numbers of ordinar y shares used in the calculation of earnings per share Consolidated Group 2021 2020 Weighted average number of ordinar y shares used in the calculation of basic earnings per share 40,90 9,990 40,909,990 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Conversion, call, subscription or issue af ter 30 June 2021 4.42 4.42 5.52 5.52 There has been no conversion to, calls of, or subscription for ordinar y shares since the reporting date and before the completion of these accounts. 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 (2020 – nil). The ef fective interest rate on shor t term bank deposits was an average of 0.1% (2020 – 1.0%). 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 statement of financial position as follows: Cash as above Less: Bank overdraft (refer to note 17) 45 Consolidated Group 2021 $’000 178 175 353 2020 $’000 10,203 - 10,203 353 - 353 10,203 - 10,203 Desane Group Holdings 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 Lease payment plan Consolidated Group 2021 $’000 2020 $’000 298 189 Consolidated Group 2021 $’000 3,379 630 4,00 9 2020 $’000 3,379 161 3,540 Consolidated Group 2021 $’000 386 386 2020 $’000 285 285 Consolidated Group 2021 $’000 2020 $’000 2 73 75 2 - 2 46 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 13: OTHER FINANCIAL ASSETS (a) Current Assets Interest bearing deposit Held-to-maturity investments Fixed interest securities Provision for doubtful debt (b) Non Current Assets Held-to-maturity investments Fixed interest securities The ef fective interest rate on fixed interest securities is an average of 7% 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 270-278 Norton Street, Leichhardt NSW 47 Consolidated Group 2021 $’000 6,000 6,669 (32) 12,637 2020 $’000 - 8,355 (32) 8,323 Consolidated Group 2021 $’000 2020 $’000 170 170 550 550 Note 14a 14b 14c 14d 14e 14f Consolidated Group 2021 $’000 8,600 10,511 7,503 22,861 10,176 7,699 67,350 2020 $’000 7,907 9,000 7,171 22,861 10,104 - 57,043 Desane Group Holdings Valuation overview The basis of the directors’ valuation of the investment properties (non-current) is a fair market value as defined in note 1e. The directors have based the value on the valuation report, together with current direct comparison market sales evidence. c. The directors’ valuation, as at 30 June 2021. An independent valuation was undertaken in December 2020 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 2021. The purchase of the propert y was settled in October 2019. The propert y 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 as at 30 June 2021. The propert y was purchased in November 2019, on market terms. f. The contract for the propert y was exchanged in June 2021, with 50% payment of $3,625,000 and the balance payable at settlement on or before June 2022. The title on the propert y will pass to the Group on settlement. 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 ever y three years. The Group has no restrictions on the realisabilit y of an investment propert y nor any contractual obligations to construct, develop, perform, repair or enhance an investment propert y. a. The directors’ valuation, as at 30 June 2021. An independent valuation was undertaken in December 2020 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 2021. An independent valuation was undertaken in December 2020 by a certified practicing valuation company. INVESTMENT PROPERTIES 2021 Acquisition Cost Construction Cost Interest Capitalised $’000 $’000 $’000 Other Capital Costs $’000 Units Sold/ to be Sold $’000 Revaluation $’000 Carr ying Value $’000 13 Sirius Rd, Lane Cove NSW 7 Sirius Rd, Lane Cove NSW 91 Thornton Dr, Penrith NSW 159 Allen St, Leichhardt NSW 16 Industrial Ave, Wacol QLD 270-278 Nor ton St, Leichhardt NSW 2,900 672 2,950 1,137 4,149 22,280 10,073 7,699 - - - - 50,051 1,80 9 - - - - - - - 1,198 323 824 581 103 - 3,029 - - - - - - - 3,830 8,600 6,101 10,511 2,530 7,503 - - - 22,861 10,176 7,699 12,461 67,350 48 AR 2021Acquisition Cost Construction Cost Interest Capitalised $’000 $’000 $’000 Other Capital Costs $’000 Units Sold/ to be Sold $’000 Revaluation $’000 Carr ying Value $’000 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 14: NON-CURRENT ASSETS - PROPERTIES (CONTINUED) 2020 13 Sirius Rd, Lane Cove NSW 7 Sirius Rd, Lane Cove NSW 91 Thornton Dr, Penrith NSW 159 Allen St, Leichhardt NSW 16 Industrial Ave, Wacol QLD 2,900 672 2,950 1,137 4,149 22,280 10,073 - - - 42,352 1,809 - - - - - - 1,198 311 821 581 31 2,943 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 soft ware Less: Accumulated depreciation Total non-current assets 49 - - - - - - 3,137 7,907 4,601 9,000 2,201 7,171 - - 22,861 10,104 9,940 57,043 Consolidated Group 2020 $’000 1,834 - 1,834 2021 $’000 1,834 - 1,834 351 (36) 315 21 (7) 14 104 (7) 97 125 (76) 49 69 (26) 43 23 (8) 15 351 (22) 329 21 (5) 16 104 (4) 100 114 (56) 58 69 (16) 53 23 (4) 19 2,367 2,409 Desane Group Holdings Movements in Carr ying Amounts: Movement in the carr ying amounts for each class of propert y, plant and equipment bet ween the beginning and the end of the current financial year Land & Buildings $’000 Capital Works $’000 Leasehold Improvements $’000 Plant & Equipment $’000 Total $’000 Consolidated Group Balance at the beginning of year 1,834 329 Additions Disposals/write offs Depreciation expense Carr ying amount at the end of the year - - - 1,834 - - (13) 315 NOTE 16: CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Unsecured liabilities Trade payables Sundr y and accrued expenses 270-278 Norton Street, Leichhardt – settlement commitment NOTE 17: BORROWINGS Secured: Bank overdraf t a. (refer to note 29). Bank overdraft secured over Lane Cove properties (b) Non Current Secured Liabilities – Bank Loans Finance for propert y 13 Sirius Road, Lane Cove Finance for propert y 7 Sirius Road, Lane Cove 100 - - (3) 97 146 2,40 9 11 - 11 - (37) (53) 121 2,367 Consolidated Group 2020 $'000 173 168 - 341 2021 $'000 554 85 4,070 4,70 9 Consolidated Group Note 2021 $'000 2020 $'000 a - - 17i 17ii 2,950 2,950 5,900 2,950 2,950 5,900 50 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 17: BORROWINGS (CONTINUED) i. ii. First mortgage finance secured over 13 Sirius Road, Lane Cove propert y (note 14a). Covenants imposed by mortgagor require total debt not to exceed 50% of the propert y value and the EBITDA is required to exceed interest expense by at least 2.0 times. First mortgage finance secured over 7 Sirius Road, Lane Cove propert y (note 14b). Covenants imposed by mortgagor require total debt not to exceed 50% of the propert y value and the EBITDA is required to exceed interest expense by at least 2.0 times. iii. All covenants imposed on secured loan agreements have been met. Maturity Schedule 27 July 2024 NOTE 18: CURRENT LIABILITIES – PROVISIONS 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 provision set aside. Interest Rates (average) 2.25% pa Consolidated Group 2020 $'000 5,900 5,900 Consolidated Group 2020 $'000 920 127 1,047 Consolidated Group 2020 No 6 2021 $'000 5,900 5,900 2021 $'000 920 155 1,075 2021 No 6 Consolidated Group 2021 $'000 59 2020 $'000 89 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. 51 Desane Group Holdings NOTE 20: ISSUED CAPITAL 40,909,990 (2020: 40,909,990) Ordinar y Shares fully paid Consolidated Group 2021 $'000 21,213 2020 $'000 21,213 Consolidated Group Consolidated Group Ordinar y Shares Fully Paid 2021 Shares 2020 Shares At beginning of the year 40,90 9,990 40,909,990 Ordinar y Shares fully paid at reporting period 40,90 9,990 40,909,990 2021 $'000 21,213 21,213 2020 $'000 21,213 21,213 a. Movements in Ordinar y Share Capital of the Company No shares were issued during 2021 (2020: nil). b. Authorised Capital 500,000,000 Ordinar y Shares of no par value. c. Capital Management Management controls the capital of the Group in order to maintain a good debt to equit y ratio, provide the share - holders 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 ordinar y 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 entit y Dividends provided for or paid Retained earnings at end of financial year 2021 $'000 37,598 1,806 (1,841) 37,563 Consolidated Group 2020 $'000 37,182 2,257 (1,841) 37,598 52 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 22: DEFERRED TAXES Non-current Deferred tax liabilit y comprises: Consolidated Group Note 2021 $’000 2020 $’000 Tax allowances relating to propert y and equipment 14,348 14,285 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 4 Closing balance Deferred Tax Liability Tax allowance relating to propert y, 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 propert y 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 53 3,739 (879) (82) 17,126 2,982 (829) (82) 16,356 16,356 770 17,126 15,381 975 16,356 14,285 14,233 - 63 - 53 14,348 14,285 2,982 757 - 3,739 (829) - (50) (879) (82) - (82) 1,944 1,038 - 2,982 (707) 16 (138) (829) (88) 6 (82) Desane Group Holdings NOTE 23: FINANCIAL INSTRUMENTS a. Financial Risk Management 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. Desane’s Board of Directors and management are responsible for the monitoring and managing of financial risk exposures on a monthly basis. The main risks the group is exposed to through its financial instruments are liquidit y risk and interest rate risk. Liquidit y Risk Liquidit y risk arises from the possibilit y that the group might encounter difficult y in settling its debts or other wise meeting its obligations related to financial liabilities. Desane manages this risk through the following mechanisms: • • • • Preparing for ward looking cash flow analysis in relation to its operational, investing and financing activities; Monitoring undrawn credit facilities; Obtaining funding from a variet y 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 2021, approximately 100% of the Group’s debt is with a floating interest rate and any balance is fixed interest rate debt. The group entit y ’s exposure to interest rate risk and the effective weighted average interest rate by maturit y periods are set out in the following table (note 23d). For interest rates applicable to each class of asset or liabilit y, refer to individual notes to the financial statements. Exposures arise predominantly from assets and liabilities bearing variable interest rates as the consolidated entit y intends to hold fixed rate assets and liabilities to maturit y. 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. b. Credit Risk Exposure The credit risk on financial assets of the consolidated entit y which has been recognised in the statement of financial position is generally the carr ying amount, net of any provisions for doubtful debts. 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 entit y. c. Net Fair Values On Statement of Financial Position: The net fair value of cash and cash equivalents and non-interest bearing monetar y financial assets and financial liabilities approximates their carr ying value. Off Statement of Financial Position: The parent entit y 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. 54 AR 2021 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 23: FINANCIAL INSTRUMENTS (CONTINUED) d. Carr ying Amount and Net Fair Values There is no material difference bet ween the carr ying amounts and the net fair values of financial assets and liabilities 2021 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) Note Floating Interest Rate Floating Interest Maturing within 1-5 years Fixed Interest Maturing within 1 year Fixed Interest Maturing within 1-5 years Non Interest Bearing Total $’000 $’000 $’000 $’000 $’000 $’000 9 - - 10, 12 13 - - - - - - 353 - 12,637 12,990 - - 170 170 - 353 759 759 - 12,807 759 13,919 - - 3.8% 7.0% - 3.8% 16 17 - - - 5,900 - 5,900 - 2.25% - - - - - - - - 4,70 9 4,70 9 - 5,900 4,70 9 10,60 9 - 2.25% - (5,900) 12,990 170 (3,950) 3,310 55 Desane Group Holdings Note Floating Interest Rate Floating Interest Maturing within 1-5 years Fixed Interest Maturing within 1 year Fixed Interest Maturing within 1-5 years Non Interest Bearing Total $’000 $’000 $’000 $’000 $’000 $’000 - - - - -% - - - -% - - - - - -% - 5,900 5,900 2.5% 10,203 - 8,323 18,526 - - 550 550 - 10,203 476 476 - 8,873 476 19,552 3.7% 7.0% -% 3.7% - - - - - - 341 - 341 341 5,900 6,241 -% -% -% 2.5% (5,900) 18,526 550 135 13,311 2020 Financial Assets Cash and deposits Receivables Other financial assets Weighted average interest rates Financial Liabilities 9 10, 12 13 Trade and other creditors Interest bearing liabilities 16 17 Weighted average interest rate Net financial assets (liabilities) Sensitivit y 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 equit y values reported at reporting 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 in note 23(d). There are no financial liabilities maturing over 5 years. Year ended 30 June 2021 - interest rate sensitivit y calculated at an average of +/- 2%pa. Year ended 30 June 2020 - interest rate sensitivit y calculated at an average of +/- 2%pa. Consolidated Group Profit $'000 +/- 118 Equity $'000 +/- 118 Consolidated Group Equit y $'000 +/- 118 Profit $'000 +/- 118 56 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 24: RELATED PARTY TRANSACTIONS All transactions are under normal commercial terms and conditions. The Group’s main related parties are as follows: i. K ey management personnel: Any person(s) having authorit y and responsibilit y for planning, directing and controlling the activities of the entit y, directly or indirectly, including any director (whether executive or other wise) of that entit y, are considered key management personnel. ii. Other related parties: Other related parties include entities controlled by the parent entit y and entities over which key management personnel have control. Related parties of Desane Group Holdings Limited (parent entit y) fall into the following categories: a. Controlled Entities Information relating to controlled entities is set out in note 30. Other transactions bet ween related parties consist of: Desane Properties Pt y Ltd: Dividend paid b. Directors Consolidated Group 2021 $'000 1,250 2020 $'000 1,500 The names of the persons who were directors of the parent entit y during the financial year are as follows: • • • • Phil Montrone John Blair Sheehan Rick Montrone Peter Krejci 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 Pt y Ltd, which is a company owned by Mr Phil Montrone’s brother, has provided maintenance and project management services totalling $6,050 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 $4,000 on an arm’s length basis. Mr Rick Montrone’s spouse was paid $9,875 on market terms for the design and production of annual financial reports and the AGM presentation. 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 The contract for 270-278 Norton Street, Leichhardt was exchanged in June 2021, with 50% payment of $3,625,000 and the balance of $3,625,000 payable on or before June 2022. 57 Desane Group Holdings NOTE 26: SUPERANNUATION COMMITMENTS In the case of employees of the holding company and controlled entities, the company contributed 9.50% of each member ’s salar y into the fund nominated by each member. Group companies contribute a minimum amount equal to 9.50% of each member ’s salar y, 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 $97,220 (2020 - $116,185), parent entit y $38,143 (2020 - $77,562). NOTE 27: CONTINGENT LIABILITIES a. not require repayment of the loan funds advanced in the coming year (refer note 30(ii)). The parent entit y has given a letter of support to each of its t wo controlled entities, to the effect that it will The shareholders’ funds as at 30 June 2021, in the controlled entities concerned were: 159 Allen Street Leichhardt Pt y Ltd Desane Contracting Pt y Limited – net assets Desane Properties Pt y Limited – net assets b. 7 Sirius Road Property Consolidated Group 2020 $'000 (169) (1,859) 47,580 2021 $'000 (304) (1,898) 49,406 The parent entit y has guaranteed the repayment of the first mortgage finance secured over the 7 Sirius Road pr opert y (note 17). c. 13 Sirius Road Property The parent entit y has guaranteed the repayment of the first mortgage finance secured over the 13 Sirius R oad propert y (note 17). d. In 2 015, Ozzy States Pt y Ltd, the builder (now in liquidation), completed a mixed residential development in Rozelle contracted by Desane Contracting Pt y Ltd. The Board has been advised that the project builder has been placed in liquidation. The Owners Corporation for the Rozelle propert y, no longer having th e abilit y to pursue the project builder for alleged building defect rectification works, has commenced legal proceedings in the NSW Supreme Court against Desane Contracting Pt y Ltd. Desane Contracting Pt y Ltd has engaged legal representation to defend the alleged claim and consequently the Board and Directors have been legally advised that providing detailed information and disclosures regarding this matter could prejudice the position of the entit y in satisfactorily resolving the dispute. This note is also in accordance with accounting standards AASB 137 (92) and IAS137. 58 AR 2021 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 28: OPERATING SEGMENTS – CONSOLIDATED GROUP Segment Information Identification of Reportable Segments 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. 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 industr y segments from the following activities: i. Pr opert y Development Development projects (residential, commercial or industrial). Segment Liabilities Liabilities are allocated to segments where there is a direct nexus bet ween the incurrence of the liabilit y 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. Unallocated Items 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. ii. Pr opert y Investment Geographical Segments R ental income from prime real estate investments. iii. Pr opert y Project Management and Resale The consolidated group operates in one geographical segment being New South Wales, Australia. Pr opert y project management and resale of commercial, industrial and residential pr operties, principally in Sydney metropolitan areas. Inter -segment Transactions Inter-segment pricing is based on what would be realised in the event the sale was made to an external part y at arm’s-length basis. iv. Pr opert y Services Pr opert y and related services. Accounting Policies Adopted Unless stated other wise, 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. Segment Assets Where an asset is used across multiple segments, the asset is allocated to that segment that receives majorit y economic value from that asset. In the majorit y of instances, segment assets are clearly identifiable on the basis of their nature and physical location. 59 Desane Group Holdings 2021 Proper ty Investment Proper ty Development Proper ty Project Management & Resale Proper ty Ser vices Plant & Equipment Other Consolidated Group $’000 2,080 - 2,080 3,299 $’000 $’000 $’000 $’000 $’000 - - - (40) - - - - 47 - 47 47 - - - - 498 - 498 498 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 $’000 2,625 - 2,625 3,804 (1,0 95) (133) 2,576 (770) 1,806 2021 Segment Assets Proper ty Investment Proper ty Development Proper ty Project Management & Resale Proper ty Ser vices Plant & Equipment Other Consolidated Group $’000 $’000 $’000 $’000 - 2,40 9 19,551 2020 opening balance $’000 57,043 $’000 3,540 Unallocated Assets Deferred tax assets Segment Asset Increases/(Decreases) for the Period Acquisitions Revaluations/ (devaluations) Capital expenditures Development expenditures Depreciation and capital allowance Net movement in other segments 7,699 2,522 86 - - - - - - 469 - - 67,350 4,00 9 Unallocated Asset Deferred Tax Assets Total Group Assets - - - - - - - - $’000 82,543 - 7,710 2,522 86 469 (53) 11 - - - (53) - - - - - - - - - - - - - (5,632) (5,632) 2,367 13,919 87,645 - 87, 645 60 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 28: OPERATING SEGMENTS – CONSOLIDATED GROUP (CONTINUED) 2021 Segment Liabilities Proper ty Investment Proper ty Development Proper ty Project Management & Resale Proper ty Ser vices Plant & Equipment Other Consolidated Group $’000 $’000 $’000 $’000 $’000 $’000 5,900 2020 opening balance Unallocated Liabilities Deferred tax liabilities Segment Liabilities Increases/(Decreases) for the Period Net movement in other segments - 5,900 Unallocated Liabilities Deferred Tax Liabilities Total Group Liabilities - - - - - - - - - - 1,477 $’000 7,377 16,356 16,356 4,366 4,366 22,199 28,0 99 770 28,869 2020 Propert y Investment Propert y Development Propert y Project Management & Resale Propert y Services Plant & Equipment Other Consolidated Group $’000 1,468 - 1,468 3,921 $’000 $’000 $’000 $’000 $’000 - - - (33) - - - - 49 - 49 49 - - - - 793 - 793 793 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 61 $’000 2,310 - 2,310 4,730 (1,349) (149) 3,232 (975) 2,257 Desane Group Holdings 2020 Segment Assets Propert y Investment Propert y Development Propert y Project Management & Resale Propert y Services Plant & Equipment Other Consolidated Group $’000 $’000 $’000 $’000 $’000 $’000 43,398 - 2019 opening balance Unallocated Assets Deferred tax Assets Segment Assets 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 - - - - - - - - - - - - - - 2,432 46,019 30 - - (53) - - - - $’000 91,849 - 13,502 3,461 252 (53) - (26,467) (26,467) 2,409 19,552 82,544 - 82,544 2020 Segment Liabilities Propert y Investment Propert y Development Propert y Project Management & Resale Propert y Services Plant & Equipment Other Consolidated Group $’000 $’000 $’000 $’000 $’000 $’000 2019 opening balance 16,400 Unallocated Liabilities Deferred tax Liabilities Segment Liabilities Increases/(Decreases) for the Period Net movement in other segments (10,500) 5,900 Unallocated Liabilities Deferred Tax Liabilities Total Group Liabilities - - - - - - - - - - 1,673 $’000 18,073 15,381 15,381 - - (196) (10,696) 16,858 22,758 975 23,733 62 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 29: CASH FLOW INFORMATION a. Reconciliation of Cash Flow from Operations with Profit Af ter Income Tax Profit/(loss) after income tax Non-cash flows in profit/(loss) Depreciation and amortisation (Gain)/loss on asset revaluation Changes in assets and liabilities (Increase)/decrease in trade receivables (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 investing activities Cash flow from operations Credit Standby Arrangements with Banks Credit facilit y Amount utilised Consolidated Group 2020 $'000 2,257 53 (3,461) (110) (24) 207 2021 $'000 1,806 53 (2,522) (183) (101) 299 4,069 (10,584) (2) 770 (4,069) 120 (12) 975 10,500 (199) Consolidated Group 2021 $'000 100 - 2020 $'000 100 - Bank overdraft facilit y 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 Consolidated Group 2021 $'000 5,900 2020 $'000 5,900 (5,900) (5,900) Loan facilities Amount utilised For more details on the loan facilities, please refer to note 17 63 Desane Group Holdings NOTE 30: PARENT ENTITY DISCLOSURES The following information has been extracted from the books and records of the parent entit y and has been prepared in accordance with Accounting Standards. 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 Other assets Non-current Assets Trade and other receivables – loans to controlled entities Investment – controlled entities Propert y, 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 i. Controlled Entities Investments in controlled entities are unquoted and comprise: Parent Entity Note 2021 $’000 2020 $’000 ii i 155 - 155 8 52 151 - 151 13 60 12,557 14,197 490 107 490 129 13,214 14,889 36 1,115 1,151 25 1,115 1,140 12,063 13,749 21,213 (9,150) 12,063 21,213 (7,464) 13,749 Desane Properties Pt y Ltd Desane Contracting Pt y Ltd 159 Allen Street Leichhardt Pt y Ltd Class of Shares Ordinar y Ordinar y Ordinar y Parent Entity 2021 2020 Holding % Investment $’000 Holding % Investment $’000 100 100 100 490 - - 490 100 100 100 490 - - 490 64 AR 2021Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 NOTE 30: PARENT ENTITY DISCLOSURES (CONTINUED) All controlled entities are incorporated in Australia. Desane Properties Pt y Ltd declared a dividend of $1.25m out of retained profits (2020: $1.5m). Desane Contracting Pt y Ltd declared a dividend of $nil (2020: $nil). 159 Allen Street Leichhardt Pt y Ltd declared a dividend of $nil (2020: $nil). Contribution to profit/(loss) after tax: Desane Group Holdings Limited Desane Properties Pt y Limited Desane Contracting Pt y Limited 159 Allen Street Leichhardt Pt y Ltd ii. Loans to Controlled Entities Desane Properties Pt y Limited Desane Contracting Pt y Limited 159 Allen Street Leichhardt Pt y Ltd Guarantees 2021 $'000 (1,0 95) 3,076 (40) (135) 1,806 2020 $'000 (1,349) 3,771 (82) (83) 2,257 (12,643) (10,622) 1,882 23,318 12,557 1,857 22,962 14,197 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. Contractual Commitments At 30 June 2021, Desane Group Holdings Limited had not entered into any contractual commitments for the acquisition of propert y, plant and equipment or any other affairs (2020: Nil). NOTE 31: EVENTS AFTER THE REPORTING DATE There were no material events subsequent to reporting date. NOTE 32: ECONOMIC DEPENDENCY A portion of all the Group’s investment properties are under financial loans. 65 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 financial statements and notes, as set out on pages 31 to 65 are in accordance with the Corporations Act 2001 and; a. b. Comply with Australian Accounting Standards, which, as stated in accounting policy note 1 to the financial statements, constitutes compliance with International Financial Reporting Standards (IFRS); and Give a true and fair view of the financial position as at 30 June 2021 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 Officer. 2. 3. This declaration is made in accordance with a resolution of the Board of Directors. J B Sheehan Director Sydney 23 August 2021 P Montrone Director Sydney 66 AR 2021 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 2021, 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 2021 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 section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110: Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We 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 2021. 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 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 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 10,511 8,600 7,503 22,861 10,176 The properties were valued by the directors based on independent valuations undertaken by a firm of licensed valuers. the methodologies used by Independent valuations were undertaken for the Lane Cove properties in December 2020 and in October 2020 for the Penrith property. 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 discounted cash flow outcomes and in appropriately assessing market sales evidence in the property sector and location under review. 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 confirmed that the independent valuations were undertaken in accordance with both International Financial Reporting Standards (IFRS) 13 and the Australian Property Institute Standards to determine the fair value of the properties. 2. We considered the valuation methods used by the directors to ensure their approach and methodologies accorded with the industry norm for valuations of this nature and that all commonly accepted been valuation methods considered. had 3. We checked the continued reliability of the underlying assumptions used in the valuations to supporting lease agreements and other documents. 4. We compared the inputs in the valuations, including capitalisation rates, discount rates and rental yields to historical data and available industry data. The relative sensitivity of the inputs was discussed with the directors. 5. Where applicable, we reviewed possible future development the reasonableness of commerciality of the plans and consequent reasonableness of the current values disclosed in the financial statements. assess plans to 6. Title/ownership was confirmed. 7. 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 the range of current market data. We disclosures to be the adequate. financial statements found in Liability limited by a scheme approved under Professional Standards Legislation 68 AR 2021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 Description of Key Audit Matter How Our Audit Addressed the Key Audit Matter 2. Investment Property Purchased (refer note 14) Our procedures included, but were not limited to the following: $,000 270-278 Norton Street, Leichhardt, NSW 7,699 A contract of purchase was entered into on 4 June, 2021 and accompanied by a payment of $3,625. The balance of $3,625 is payable on settlement on or before June 2022. 1. We verified the purchase of the property to the purchase contract, solicitor’s detailed statement, and other documentation. 2. The payment for the purchase instalment in June 2021 was agreed to Desane’s banking records. 3. We checked that the purchase was executed under normal commercial terms. 4. We reviewed the adequacy of the disclosures in the financial statements. Purchase of the property verified. 3. Inventory (development Property) $,000 Our procedures included, but were not limited to the following: 322 Norton Street, Leichhardt, NSW 4,009 1. Title/ownership was confirmed. 2. Possible future plans for development of the property together with the underlying assumptions and were reasonableness. commerciality assessed for Reasonable grounds exist to believe that the current value is ultimately financial statements recoverable from future developments and sales. the in Information Other than the Financial Reports and Auditors Report thereon The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2021, 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. Liability limited by a scheme approved under Professional Standards Legislation 69 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 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. 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 pages 26 to 28 of the directors’ report for the year ended 30 June 2021. 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. Liability limited by a scheme approved under Professional Standards Legislation 70 AR 2021Independent AUDITOR’S REPORT GCC Business & Assurance Pty Ltd ABN 61 105 044 862 Responsibilities GPO Box 4566, Sydney NSW 2001 Telephone: (02) 9231 6166 Facsimile: (02) 9231 6155 Suite 807, 109 Pitt Street, Sydney NSW 2000 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. Auditor’s Opinion In our opinion, the remuneration report of Desane Group Holdings Limited, for the year ended 30 June 2021, complies with s 300A of the Corporations Act 2001. GCC BUSINESS & ASSURANCE PTY LTD (Authorised Audit Company) GRAEME GREEN Director Sydney 23 August 2021 Liability limited by a scheme approved under Professional Standards Legislation 71 Desane Group Holdings Shareholder INFORMATION The shareholder information set out below was applicable as at 5 August 2021. 1. SHAREHOLDING Distribution of equitable securities: Categor y (size of holding) 1- 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - and over Number of Ordinar y Shares* Number of Holders of Ordinar y Shares 27,307 352,947 381,318 5,149,214 34,999,204 40,909,990 120 134 49 136 55 494 There were 86 holders of less than a marketable parcel of ordinar y shares. * The number of Ordinar y Shares on issue as at 30 June 2021 was 40,909,990. 2. TWENTY LARGEST QUOTED EQUITY SECURITY HOLDERS The names of the 20 largest securit y holders are listed below: Name 1. Cupara Pt y Ltd 2. J P Morgan Nominees Australia Pt y Limited 3. Montevans Pt y Ltd 4. Trafalgar Custodians Pt y Ltd 5. Glencairn Pt y Limited 6. PFPT Management Pt y Ltd Ordinar y Shares 11,270,878 4,347,701 2,745,400 2,451,165 1,250,000 938,831 7. Cordato Partners (Superannuation) Pt y Ltd 790,409 8. National Nominees Limited 9. Hillmorton Custodians Pt y Ltd 10. Dotnric Pt y Ltd 11. John & Judith Pt y Ltd 12. Keiser Investments Pt y Ltd 13. Mr Peter Howells 14. Oakmount Nominees Pt y Ltd 15. Kelpador Investments Pt y Ltd 16. Woodtrone Pt y Ltd 17. Mocorb Pt y Ltd 18. Waratah Propert y Services (No 1) Pt y Ltd 19. Joe Scardino & Felicia Scardino 20. Whimplecreek Pt y Ltd 740,875 637,871 593,579 582,677 556,158 380,000 330,000 283,770 283,721 282,131 276,512 273,555 270,000 % of Issued Capital 0.07 0.86 0.93 12.59 85.55 100.00 % Held to Issued Capital 27.55 10.63 6.71 5.99 3.06 2.29 1.93 1.81 1.56 1.45 1.42 1.36 0.93 0.81 0.69 0.69 0.69 0.68 0.67 0.66 29,285,233 71.58 72 AR 2021 Shareholder INFORMATION 3. SUBSTANTIAL SHAREHOLDERS Substantial holders in the Company are set out below: Cupara Pt y Ltd Greig & Harrison Pt y Ltd Phoenix Portfolios Pt y Ltd Montevans Pt y Ltd Ordinar y Number 10,246,252 5,497,762 4,560,206 2,729,374 % 28.27 13.44 12.36 6.67 4. V OTING RIGHTS The voting rights attaching to each class of shares are set out below: Ordinar y Shares No restrictions. Ever y 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 equit y securities. 73 Desane Group Holdings Comapny 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) Jack Sciara – Company Secretar y 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 Pt y 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 Please advise the share registrar if you have a new postal address. Auditor GCC Business & Assurance Pt y 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 virtually, on Friday, 29 October 2021, commencing 10:00 am AEDT. 74 AR 2021 

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