2020 ANNUAL REPORT 02 09 20 21 45 50 51 INVESTMENT REPORT DIRECTORS’ REPORT AUDITOR’S INDEPENDENCE DECLARATION FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT ADDITIONAL ASX INFORMATION ADDITIONAL ASX REPORTING Corporate Directory Katana Capital Limited ABN 56 116 054 301 Board of Directors Mr Dalton Gooding Chairman, Non-Executive Director Mr Peter Wallace Non-Executive Director Mr Giuliano Sala Tenna Non-Executive Director Mr Gabriel Chiappini Company Secretary Solicitors Steinepreis Paganin Level 4, The Read Buildings 16 Milligan Street Perth WA 6001 Auditors Ernst & Young 11 Mounts Bay Road Perth WA 6000 Share Registry Computershare Investor Services Pty Ltd Level 2, Reserve Bank Building 45 St Georges Terrace Perth WA 6000 Registered Office Level 9, The Quadrant Building 1 William Street Perth WA 6000 Stock Exchange ASX LIMITED 152-158 St Georges Terrace Perth WA 6000 ASX Code: KAT Katana Capital combines its listed investment company structure with the proven ability of its Manager (“KATANA ASSET MANAGEMENT LTD”) to provide investors with access to comprehensive investment techniques aimed at providing capital and income returns. The Company and the Manager share similar investment philosophies. The role of the Company is to assess and monitor the Manager and liaise with the Manager with respect to its Mandate as detailed in the Management Agreement. Our investment philosophy As an ‘All Opportunities’ fund, the underlying goal of the Manager is to assess the risk adjusted return of every potential opportunity identified by the Manager. The Manager’s approach includes selectively and modestly taking higher-risk positions, provided that the potential return exceeds the additional risk – preferably in terms of both value and time. Whilst the Manager intends to combine the best principles of value investing, fundamental and technical analysis, it does not wish to be constrained by the constructs of any one approach. The key to the longterm success of the Company is seen as the capacity of the Manager to integrate the best principles of each discipline with the extensive and varied experiences of the Manager. This is achieved by encouraging flexibility and adaptability, but within the confines of an overall framework that controls risk. 01 KATANA CAPITAL LIMITED2020 ANNUAL REPORT Katana Outperformance VS ALL ORDS INDEX YEAR ENDING 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 E G A R E V A Katana Gross Investment Return All Ords Index % % 9.20 49.05 -6.41 -23.57 24.54 19.10 -11.19 8.84 26.78 -1.57 4.98 6.23 26.27 -0.43 9.30 9.41 6.91 25.36 -15.49 -25.97 9.55 7.75 -11.25 15.47 12.70 1.28 -2.58 8.54 9.12 6.51 -10.42 2.50 Outperformance % 2.29 23.69 9.08 2.40 14.99 11.35 0.07 -6.63 14.07 -2.85 7.56 -2.31 17.15 -6.94 19.72 6.91 Percentage of portfolio valuation AS AT 30 JUNE 2020 R R L / 3 . 0 1 % 6 % C C L / 2.6 MIN / 2.44% ALL / 2.35% INA / 2.30% MQG / 2.28% O Z L / 2 . 2 4 % 2 . 2 3 % L / 2 . 1 L L C / H S 8 % Z / 2 .1 N A 02 5 1 . 9 REM AIN I N % G E Q U I T I E S S S G IN D L O H 0 1 P O T C % 5 A S H & EQUIVA L E N T 24.3% KATANA CAPITAL LIMITED2020 ANNUAL REPORT 2020 FINANCIAL YEAR REVIEW FY20 Katana Asset Management Ltd (‘The Manager’) has completed a report on the performance of Katana Capital Limited’s (Katana) portfolio for the 12 months to 30 June 2020. In what was an unusually challenging and unique period, the fund generated a gross investment return of 9.41% versus -10.42% for the All Ordinaries index. This represented a gross investment out-performance of +19.72% (before expenses). Despite all of the machinations around the China-US trade war, US election posturing, tech valuations and government and corporate debt levels, the 2020 financial year will only be remembered for one thing: Covid-19. How a fund responded to that event is the primary determinant of relative and absolute performance. Prior to the crisis, the Manager’s key thesis was that the record low interest rates combined with highly accommodative central bank settings, would see an extension and indeed acceleration of the yield trade. As investors progressively came to terms with ever dwindling rates, there would be an inevitable migration into risk assets; predominantly equities. This migration of funds from fixed interest to equities would create a pronounced level of marginal buying. Reluctant at first but a tsunami in the end. In a market void of tangible earnings growth, our expectation was that PERs would expand and yields contract. Accordingly the manager had deployed capital in quality businesses with above average yields that were assessed as sustainable and ideally increasing (albeit by very modest amounts). The Manager began tracking Covid-19 in late December 2019. The initial assessment was that in line with SARS and MERS, the corona virus would be contained ‘off-shore’. Whilst we anticipated a modest dip in the market based on fear/sentiment, for 2 months our base case was that there would be limited economic impact. By mid-February we were still of the view that the damage would be contained within China. However we became increasingly nervous that the US market had made no provision whatsoever for the impact on the Chinese economy and the subsequent indirect flow on globally. Indeed the US powered to a series of new highs. Whilst at that time we still did not understand the magnitude of what was about to unfold, we did modestly increase our cash weighting, review all positions with a new fervor and consciously reduce illiquid holdings. By mid-March, the market had fallen 27%. During the GFC the market took 10 months to fall 27%; during the Covid-19 crisis the same decline occurred in under 3 weeks, making it the fastest crash on record. 03 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 2020 FINANCIAL YEAR REVIEW As the crisis unfolded, there were numerous factors driving markets on any given day. The challenge was to rise above the noise and hone in on the singular most important factor or factors. To this end, the team identified early in the crisis that the actions of the US Federal Reserve would be the singular most important determinant of how markets responded to the crisis. More important than the speed of transmission, fatalities or even economic impact. On the 13th of March we published a piece titled ‘Perspective’ (https://www. livewiremarkets.com/wires/perspective); in which we wrote the following: There is a New Safety Net The 2008/09 GFC was a watershed era for a host of reasons. But front and center was that it established a new playbook for global central bank coordination. In 2008/09, the US Federal Reserve System set out on a journey which would ultimately involve the People’s Bank of China (PBC), the European Central Bank (ECB), the Bank of Japan and even the Bank of England. It would be a journey that would re-define monetary policy (negative interest rates), lead to record FISCAL policy and ultimately end in Quantitative Easing (QE). In effect, coming out of the GFC, Central Banks agreed that moving forward they would insulate the wider community from the effects of economic mismanagement, cyclical downturns and general panic. How this ultimately ends in the coming decades is the discussion for another day. But the salient point for us right here right now, is that there is a new playbook and Central Banks will do whatever it takes to prevent contagion. We should therefore expect to see ‘shock and awe’ followed by more ‘shock and awe’, until confidence and stability is returned. This was a significant call to make, but to date has largely proven to be correct. It is the primary reason as to why Covid-19 did not morph into a much larger crisis, which was always on our radar. During the GFC, the market fell a further 27% in the 6 months following the initial fall. That was front and center in our thinking from early March. Absent of meaningful US Federal Reserve intervention, we would have expected the indices to slide away further. However our assessment that we would indeed see ‘shock and awe’ followed by more ‘shock and awe’ led us to deploy capital during the early part of March and maintain our nerve during the ensuing volatility. To date this approach has proven to be well founded, and was instrumental in enabling the fund to build on its long term track record of out-performance. The Manager held an average of approximately 55 individual stock positions and a relatively high level of cash throughout FY20. The Manager is committed to maintaining a diversified portfolio, which it believes provides better risk adjusted returns compared to achieving that same outcome with a concentrated portfolio. It is rare for any position to exceed 5% of the portfolio, and as at the 30th June, no position made up more than 3%. To further demonstrate this inherent conservatism, it is revealing that the total of the Top 10 positions represented just 23.8% of the portfolio. This is below the bottom end of the range that we would normally expect to see through the cycle of 25-30%. Despite the often quoted benefits of a ‘Concentrated Fund’, the Manager continues to believe and demonstrate that holding a larger number of smaller positions is a better risk-adjusted approach for achieving long term returns. The current portfolio has transformed significantly just in the past 3 months. The Manager took an overweight position in the healthcare and technology sectors on the expectations that they would be the first to rebound. Companies included Altium, Appen, CSL, Tyro, Catapult and Pointsbet. These sectors did indeed rebound strongly through April and May and the positions progressively sold as valuations quickly became ‘optimistic’. The current portfolio is more thematically diverse than previously, with a stronger bottom-up flavor. Outlook Notwithstanding the challenges we faced in March, by comparison the present time is an order of magnitude more difficult to navigate. During the March sell down, there were clear indications that panic had yielded to capitulation. Valuations had contracted to the point where the risk-return equation was clearly in favor of deploying capital. Since that time, the strong recovery in the key indices has made the upside less pronounced in respect to the many and varied risks. 04 KATANA CAPITAL LIMITED2020 ANNUAL REPORT Risks Whilst not wanting to over-simplify matters, we have attempted to document some key risks that currently entertain our thoughts. Virus Related Covid-19 infections are still accelerating (globally). The economic impact is enormous and as yet only partially quantified. Government and central bank stimulus have insulated investors to this point, but in time we will see widespread bankruptcies, corporate failures and at the very least a collapse in corporate earnings. 2nd Wave infections are now progressing through countries and regions that were previously ‘under control’. Despite the rhetoric, countries are less able to cope with a 2nd wave as re-closing an economy is not a realistic policy option in all but extreme circumstances. Effective treatments and vaccinations may prove more elusive than current expectations . US Related US policy (both domestic and foreign) is more erratic and potentially damaging than at any time in the modern era. US- China trade rhetoric has escalated further and relations have regressed considerably. The US election is shaping as a growing risk: the Democratic nominee Joe Biden is the favorite to win the election. Biden and the Democrats are running on a platform that is ‘detrimental’ to Wall Street, including higher corporate taxes (from 21 to 28%); increasing the capital gains tax rate (from 20% to as high as 39.6%), higher personal tax rates (top rate from 37% to 39.6%); increased death duties etc etc. President Trump and the current US Regime, have exerted undue pressure on the US Federal Reserve which in our assessment has led to the Fed acting more forcefully than it otherwise may have. A Democrat Government is more likely to observe and respect true independence, which is likely to lead to less Central Bank ‘shock and awe’ (a central tenet in our current thesis). Record corporate debt at a time of the lowest interest rates on record. Approaching record Government debt as a percentage of GDP. US driven Nationalism is escalating and if left unchecked will detract from global trade, growth and synergies/efficiencies. ‘Robinhood’ / day trading bubble. Tech mega cap stocks (FAANGM) are up 500% in 7 years and now represent 24% of the total market capitalization of the S&P500. Stock / Market Valuations are not cheap across the board and over-inflated in some sectors. Genuine earnings growth is rarer than at any point in our careers (hence the tsunami of money that has overrun the technology and healthcare sectors). There may be increasing anxiety and volatility as we approach the September rollover for: • Interest rate and capital payments; • Jobkeeper/seeker subsidies. Australia Positives Against this backdrop, we have the 3 same drivers we saw in 2019. The first of these is the ‘Powell Put’. The US Federal Reserve Chairman Jerome Powell, ‘succumbed’ to the significant pressure that fell on his shoulders from everyone from Wall Street to President Trump. This may in fact be a little harsh, as whilst the popular view is that Powell succumbed to equity market pressures, the reality may be that he got a glimpse of how fragile the debt markets are, and turned dovish to prevent debt contagion. Whatever the case, what this episode demonstrated, is that the US Fed and US Government stand ready to ‘do what it takes’ to soothe the local markets. This twin put, is the most powerful backstop we see. However as outlined above, what has now changed in the past 12 months, is the distinct possibility if not probability that the Democrats will win the election. This would notably undermine the impact of both of these backstops. 05 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 2020 FINANCIAL YEAR REVIEW Secondly, there remains a large amount of cash sitting on the sidelines and the majority of investors would appear to be cautious -if not nervous- and positioned accordingly. Anecdotally, investors in our circle remain underweight equities. The chart on the following page from Goldman Sachs clearly demonstrates the enormous amount of money that has recently flowed into cash and bonds. In fact in the past 2 years alone, more than US$1.5trillion has flowed into these assets in addition to the already substantial weightings. The market rarely moves in line with consensus: if the majority of investors believe in a certain outcome then they will position accordingly. If the majority of investors believe that the market will sell-off, then they will position themselves by being overweight cash and defensives and underweight equities. In this scenario who is the marginal seller? And on the flipside the marginal buyer is every fund and investor who is underweight. All that is required is a change in confidence. Thirdly, we may be on the cusp of one of the most ‘reluctant rallies’ in history, but it will be a rally nonetheless. As we can see below, the average equity-bond yield gap has just reached the highest level on record. A level higher than that seen just after the Second World War. Since 1875 Number of Years % of Years Average return Source: Katana Asset Management Negative returns 29 20.1% -10.4% Positive returns 115 79.9% 16.2% TOTAL 144 100.0% 10.8% This fear supports the thesis outlined in point 2 above. But it also has created a situation whereby the differential between bond yields and equity dividends will in time drive investors to switch at least a portion of their capital. And there is an additional (related) point to consider. Not only is the relative difference likely to drive investors to increase their equity exposure, but the absolute cash/bond rates are also at a level that will –reluctantly or otherwise – force investors to take on more risk. When the dust settles, investors will wake to the reality that the RBA has an official rate of 0.25% (at best) which means that deposit rates will be 1.00% (at best) which means that after inflation and tax, investors will receive a return of negative 1% (at best). Some Perspective on Market Volatility The old adage ‘volatility is the price you pay for a seat at the table’ has rarely been so true. Equities are the most volatile asset class. But they also provide the best long term returns. Whilst it is always possible that this market ‘crash’ may morph into something even more dramatic (such as we saw during the GFC), we need to play probabilities not possibilities. We need to understand what is normal. And we need to understand that even if this crash does get worse, in the fullness of time the market will recover. As we can see above, over the past 145 years, the ASX has generated a positive return in 4 out of 5 years, by an overall average of 10.8%. Source: RBA, Katana Asset Management 06 KATANA CAPITAL LIMITED2020 ANNUAL REPORT And history sounds out loud and clear, that following periods of volatility and losses, markets inevitably recover. In the 2008 GFC, many investors panicked and sold at the bottom. And what was the subsequent outcome? In 2009 the market was up by 39.6% and rose in 9 of the 11 years following the crash, including by 18.8% in 2012, 19.7% in 2013 and 24.1% in 2019. This is not to say that we will not have any further days where our heart is in our mouth! And it is possible that by the time the Covid-19 crisis runs its course, the market may fall further – even by 30% or more (in total). But if it does, it would only be the second time in history that we have experienced a fall in one year of this magnitude. And after the first time this occurred (2008), the market rebounded very solidly for more than a decade. Market Outlook and Portfolio Positioning Where does this leave us? One of our favorite adages is that in the long term the market is inevitable, in the short term the market is unknowable. Let’s deal with the long term first. There is only one long term trend: up. And as we saw from the above examination of volatility, markets inevitably recover. So the long term is ‘assured’, and if we are going to get our assessment of the short term wrong, then we need to err on the side of being positive, as 145 years of data has demonstrated. Unfortunately, investors do not place money with us to get it right in the ‘long term’. We are required to form views on the short term which as we mentioned already is uncertain. In this regard we can do no more than back probabilities, as opposed to possibilities. In terms of probabilities, Mr. Market will ultimately have the final say but as we sit here today, some likely developments include: • Heightened volatility, with prices range bound and vacillating frequently as investors react to alternate bouts of positive and negative news flow. • Negative aggregate growth, hence a pre-disposition towards high PER stocks that actually have any level of growth (technology /healthcare). • • Abnormally low interest rates, leading to PER expansion and yield contraction in sustainable payers such as infrastructure, industrial conglomerates and yes in time the banks. Escalating fiscal stimulus, leading to a robust environment for gold equities. Source: Katana Asset Management 07 KATANA CAPITAL LIMITED2020 ANNUAL REPORT On behalf of all of the staff at Katana Asset Management, we take this opportunity to once again thank Katana Capital’s valued shareholders for your support. Brad Shallard Romano Sala Tenna INVESTMENT MANAGERS Katana Asset Management Limited 2020 FINANCIAL YEAR REVIEW These different thematics require diverse skill sets to identify and trade. In this regard, we believe that we are well equipped to capitalize, given our style-agnostic approach and diverse investment orientations. Beyond this time frame (>6 months) we are confident that (for the reasons outlined above) we will see net capital flowing into not out of equities. And marginal buying is what drives asset prices. Corporate Katana Capital Ltd finished FY20 with 38,275,174 shares on issue. During the period from 1 July 2019 to 30 June 2020, 3,464,499 shares were bought back on market and were subsequently cancelled. The shares were acquired at an average price of $ 0.78 with the price ranging from $0.57 to $ 0.85 per share. The buyback also provided liquidity and increased the underlying net asset backing for all existing shareholders. Katana paid four quarterly dividends, otaling two and a quarter (2.25) cents during FY20. Once again, the dividends were all fully franked. The Manager remains committed to outperforming its benchmark and rewarding shareholders with solid dividends. The Fund has declared and paid a 0.5 cent fully franked dividend subsequent to the year end. 08 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 DIRECTORS’ REPORT Your directors present their report with respect to results of Katana Capital Limited (the “Company” or “Katana Capital”) and its controlled entities (the “Group” or “the Consolidated Entity”) for the year ended 30 June 2020 and the state of affairs for the Company at that date. Directors The following persons were directors of Katana Capital Limited during the whole of the financial year and up to the date of this report: Information on Directors Dalton Gooding – Bbus, FCA (Non-Executive Chairman) Peter Wallace – SF Fin, FAICD, AFAIM. (Non-Executive Director) Giuliano Sala Tenna – Bbus (Distinctions) (Non-executive Director) Dalton Gooding is a Fellow of the Institute of Chartered Accountants in Australia and he is the Senior Partner of Gooding Partners, which was established in 1998 after 14 years as a partner at Ernst and Young and has over 40 years’ experience in business advisory and corporate finance related services. Mr Gooding also has a number of other directorships of companies in many different segments of business. Giuliano Sala Tenna has worked in the Finance Industry for over 20 years in various fields including Credit, Business Development, Product Structuring, Funds Management, Investment Management and Corporate Advisory. Mr Sala Tenna has completed a Bachelor of Commerce degree at Curtin University of Technology with a double major in Economics and Finance (With Distinctions). Giuliano has also completed the Graduate Diploma in Financial Planning at the Securities Institute of Australia, the Company Directors Course at the Australian Institute of Company Directors and is an ASX Derivatives Accredited Adviser. Mr Sala Tenna is a Member of the Golden Key National Honour Society, Fellow of FINSIA and a Graduate Member of the Australian Institute of Company Directors. He is regularly quoted in the West Australian, Sunday Times and Australian Financial Review alongside appearing on the ABC News and Business Program. Prior to his retirement in 2007 Mr Wallace was the Head of Corporate (Western Australia) for Bell Potter Securities Ltd, Australia’s largest retail broking house. Mr Wallace has also previously held senior executive positions with Challenge Bank Limited including Chief Operating Officer and Chief Credit Officer roles. He held numerous directorships in Companies controlled by Challenge Bank Ltd including those holding the Bank’s Securities Dealers License (the R.E. for Financial Advisory activities) as well as a joint venture payments business with the U.S. banking group Chase Manhattan. Mr Wallace is currently a director of Blossomvale Holdings Ltd (formerly Neptune Marine Services Ltd) and Chairman of Icon Engineering Pty Ltd. He is a Senior Fellow of the Financial Services Institute of Australia, a Fellow of the Australian Institute of Company Directors and an Associate Fellow of the Australian Institute of Management. Mr Wallace brings to the Company 42 years in the Banking and Finance industry with experience gained in all aspects of debt and equity raising. During the past three years Mr Wallace has also served as a director of the following other listed companies: > Neptune Marine Services Limited – appointed 8 July 2011 > Goldfields Money Ltd – appointed 7 August 2014 09 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 DIRECTORS’ REPORT Company Secretary Gabriel Chiappini – BBus, GAICD, CA Mr Chiappini is a Chartered Accountant and member of the Australian Institute of Company Directors with over 19 years’ experience in the commercial sector. Over the last 14 years Gabriel has held positions of Director, Company Secretary and Chief Financial Officer in public and private companies with operations in Australia, the United Kingdom and the United States. He has assisted a number of companies to list on the ASX and been involved with equity raisings exceeding AUD $300 million. Gabriel has a sound understanding of the ASX Listing Rules and in-depth knowledge of the Corporations Act. Gabriel is currently a director at Invictus Energy Ltd (ASX.IVZ), Eneabba Gas Ltd (ASX:ENB) and Black Rock Mining (ASX.BKT) and Company Secretary at Adriatic Metals plc (ASX:ADT) and Black Dragon Gold Corporation (ASX:BDG). Directors’ Meetings The numbers of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 30 June 2020, and the numbers of meetings attended by each director were: Dalton Gooding Peter Wallace Giuliano Sala Tenna A = Number of meetings attended DIRECTORS’ MEETINGS AUDIT & COMPLIANCE COMMITTEE MEETING A 6 6 6 B 6 6 6 A 2 2 2 B 2 2 2 B = Number of meetings held during the time the director held office or was a member of the committee during the year Committee membership As at the date of this report the Company had an Audit and Compliance Committee. Members acting on the Audit and Compliance Committee of the Board at the date of this report are: • Peter Wallace (Chairman of Committee) • Dalton Gooding • Giuliano Sala Tenna Directors’ interest in Shares and Options As at the date of this report, the interest of the directors in the shares and options of the Company are: Dalton Gooding Peter Wallace Giuliano Sala Tenna Earnings Per Shares NO. OF SHARES 30-JUN-20 NO. OF SHARES 30-JUN-19 91,476 300,000 - 89,542 300,000 - YEAR ENDED 30 JUNE 2020 CENTS YEAR ENDED 30 JUNE 2019 CENTS Basic and diluted earnings per share Basic earnings from continuing operations attributable to the ordinary equity holders of the company 3.92 (1.47) The weighted average number of ordinary shares on issue used in the calculation of basic (loss)/earnings per share was 38,275,174 (2019: 42,570,041). 10 KATANA CAPITAL LIMITED2020 ANNUAL REPORT Dividends The following dividends have been paid by the Company or declared by the directors since the commencement of the financial year ended 30 June 2020: Dividend paid during 1st Quarter of the year Dividend paid during 2nd Quarter of the year Dividend paid during 3rd Quarter of the year Dividend paid during 4rd Quarter of the year Total Paid ($’000) Cents per share Total Paid ($’000) Cents per share Total Paid ($’000) Cents per share Total Paid ($’000) Cents per share Total Paid ($’000) YEAR ENDED 30 JUNE 2020 YEAR ENDED 30 JUNE 2019 208 0.5 cents 203 0.5 cents 295 0.75 cents - - 706 430 1 cents 321 0.75 cents 106 0.25 cents 210 0.5 cents 1,067 Corporate Information The Company was incorporated on 19 September 2005. During the 30 June 2007 financial year it incorporated a wholly owned subsidiary Kapital Investments (WA) Pty Ltd. Katana Capital Limited is incorporated and domiciled in Australia. The registered office is located at Level 9, The Quadrant Building, Perth, Western Australia. Principal activity The principal activity of the Group is that of an Investment Company with an ‘all opportunities’ investment strategy. Employees As at 30 June 2020, the Group did not have any full time employees (2019: Nil). Operating and Financial Review Company overview Katana Capital was incorporated in September 2005 as a listed investment company providing shareholders with access to the investment services of Katana Asset Management Ltd (“Fund Manager”). The Fund Manager employs a benchmark unaware long only Australian Equities investment philosophy with active use of cash holdings as a defensive mechanism within the portfolio to deploy into market weakness. The portfolio does not incorporate gearing or short selling of securities. The All Ordinaries Index started FY20 at 6,897 points and decreased by 12.99% during the course of the year to close at 6,001 points on 30 June 2020. FY20 was characterized by a unique and challenging period dealing with COVD-19 and volatility in the market. Pre-Covid-19, the major theme was record low interest rates combined with highly accommodative central bank settings, would see an extension and indeed acceleration of the yield trade. As investors progressively came to terms with ever dwindling rates, there would be an inevitable migration into risk assets; predominantly equities. Covid-19 impact started to influence sentiment in late December 2019. The initial assessment was that in line with SARS and MERS, the corona virus would be contained ‘off-shore’. By mid-March, the market had fallen 27%. During the GFC the market took 10 months to fall 27%; during the Covid-19 crisis the same decline occurred in under 3 weeks, making it the fastest crash on record. However through a coordinated central bank fiscal, economic support and welfare support, governments took a ‘whatever it takes’ approach to ensuring key economies did not collapse. It is the primary reason as to why Covid-19 did not morph into a much larger crisis, which was always on our radar. During the GFC, the market fell a further 27% in the 6 months following the initial fall. Absent of meaningful US Federal Reserve intervention, we would have expected the indices to slide away further. As a result we have seen markets rebound and the Company deliver a positive return for FY20. The net profit after tax for the year ended 30 June 2020 was $1,569,860 (2019: loss $627,166). 11 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 DIRECTORS’ REPORT Operating and Financial Review (CONTINUED) Investments for future performance The Manager is committed to maintaining a diversified portfolio, which it believes, provides better risk adjusted returns compared to achieving that same outcome with a concentrated portfolio. The Company held an average of approximately 55 individual stock positions and a relatively high level of cash throughout FY20. The Company is committed to maintaining a diversified portfolio, which it believes provides better risk adjusted returns compared to achieving that same outcome with a concentrated portfolio. The current portfolio has transformed significantly in the past 3 months. The Fund has an overweight position in the healthcare and technology sectors on the expectations that they would be the first to rebound. Companies included Altium, Appen, CSL, Tyro, Catapult and Pointsbet. These sectors did indeed rebound strongly through April and May and the positions progressively sold as valuations quickly became ‘optimistic’. The current portfolio is more thematically diverse than previously, with a stronger bottom-up flavor. Cash from operations Net cash inflows from operations were $2,627,000 (2019: outflows $306,611) during the year which reflects the Group’s investment from the Australian equities market. Due to the expected continuation in market volatility it is difficult to assess the Company’s relative weighting in cash and defensive liquid positions. Liquidity and funding The Company foresees no need to raise additional equity and will use its remaining cash reserves to invest into the Australian equities market along with continuing dividend payments and share buy-backs. Risk management The Board is responsible for overseeing the establishment and implementation of an effective risk management system and reviewing and monitoring the Group’s application of that system. Implementation of the risk management system and day to day management of risk is the responsibility of the Fund Manager. The Fund Manager is primarily responsible for all matters associated with risk management associated with the Equity Markets and Investment of the Group’s funds and has formalised an Investment Committee that meets on a regular basis to review the Group’s investments. Significant Changes In State Of Affairs In the opinion of the directors, there were no significant changes in the state of affairs of the consolidated entity that occurred during the year. Significant Changes After Balance Date Other than the events below, the Directors are not aware of any matter or circumstance that has significantly or may significantly affect the operation of the Company or the results of those operations, or the state of affairs of the Company in subsequent financial years. On 7 July 2020, the company announced a fully franked 0.50 cent per share dividend. 12 KATANA CAPITAL LIMITED2020 ANNUAL REPORT Likely Developments and Expected Results In the long term, there is only one long term trend and that is up and as we saw from the past 12 months in volatility, markets inevitably recover. So the long term is ‘assured’, and if we are going to get our assessment of the short term wrong then we stay focused on the long term trends. Investors however do not place money with the Company to get the long term trend right, therefore we form views on the short term which as we mentioned already is uncertain. In this regard we can do no more than back probabilities, as opposed to possibilities. In terms of probabilities, the market will ultimately have the final say but as we sit here today, some likely developments include: • Heightened volatility, with prices range bound and vacillating frequently as investors react to alternate bouts of positive and negative news flow. • Negative aggregate growth, hence a pre-disposition towards high PER stocks that actually have any level of growth (technology /healthcare) • • Abnormally low interest rates, leading to PER expansion and yield contraction in sustainable payers such as infrastructure, industrial conglomerates and yes in time the banks. Escalating fiscal stimulus, leading to a robust environment for gold equities. These different thematics require diverse skill sets to identify and trade. In this regard, we believe that we are well equipped to capitalize, given our style-agnostic approach and diverse investment orientations. Beyond this time frame (>6 months) we are confident that (for the reasons outlined above) we will see net capital flowing into not out of equities. And marginal buying is what drives asset prices. Environmental Regulation and Performance The principal activities of the Group are not subject to any significant environmental regulations. Rounding The financial report is presented in Australian dollars and all values are rounded to the nearest thousand ($000), except when otherwise indicated under the option available to the company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The Company is an entity to which this legislative instrument applies. Share Options Unissued shares There were no options outstanding as at 30 June 2020. Shares issued on the exercise of Options There were no options exercised during the financial year to acquire fully paid ordinary shares in the Group. Options granted as remuneration There were no options granted as remuneration. 13 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 DIRECTORS’ REPORT REMUNERATION REPORT (Audited) This remuneration report outlines the director and executive remuneration arrangements of the Company and Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report, key management personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any director (whether executive or otherwise). This report outlines the remuneration arrangements in place for directors of Katana Capital. Katana Capital, at this stage of its development does not employ executive directors and does not have a Managing Director or a Chief Executive Officer. The Company has outsourced the management of the investment portfolio to the Fund Manager, Katana Asset Management Ltd. Katana Asset Management Ltd reports directly to the Board and is invited to attend all Board meetings to present its investment strategy and to discuss and review the financial performance of the Group. (a) Details of Key Management Personnel The following persons were directors of Katana Capital Limited during the financial year: (i) Chairman – non-executive Dalton Gooding (ii) Non-executive directors Peter Wallace Giuliano Sala Tenna (b) Key management services – Katana Asset Management Ltd In addition to the Directors noted above, Katana Asset Management Ltd, the Fund Manager for the Group provides the Group with key management services. The directors of Katana Asset Management Ltd are Brad Shallard and Romano Sala Tenna. Officer The Company Secretary is an officer of the Company but is not considered to be a key management person as he does not have the authority and responsibility for planning, directing or controlling the activities of the Group and is not involved in the decision making process, with his main duties being aligned to his compliance function. Remuneration philosophy The performance of the Group depends upon the quality of its directors. To prosper, the Group must attract, motivate and retain skilled non-executive directors. As a result of the independence and separation of Non-Executive Directors’ role of providing guidance and overview, the remuneration policy of the directors is not linked to company performance. However, Katana Asset Management Ltd’s performance fees and management fees are linked directly to the performance of the Company. The Company does not have a remuneration committee. The Board of Directors acts as the Remuneration Committee and is responsible for determining and reviewing compensation arrangements for the Company. The Board will assess the appropriateness of the nature and amount of emoluments of such officers on a periodic basis, by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board. 14 KATANA CAPITAL LIMITED2020 ANNUAL REPORT REMUNERATION REPORT (Audited) (CONTINUED) Remuneration structure In accordance with best practice corporate governance, the structure of non-executive director and senior management remuneration is separate and distinct. (i) Non-executive director remuneration Objective The Board seeks to set aggregate remuneration at a level which provides the Group with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The constitution and the ASX listing rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. At present the aggregate remuneration totals $200,000 per year in respect of fees payable to non-executive directors. This amount was approved by shareholders at the annual general meeting held on 10 November 2005. The amount of aggregate remuneration, including the issue of options sought to be approved by shareholders and the manner in which it is apportioned amongst directors, is reviewed annually. The Board considers advice from external consultants as well as the fees paid to non-executive directors of comparable companies when undertaking the annual review process. During the year there were no external consultants utilised to provide remuneration recommendation. The Board considers that the majority of the Group’s performance lies with the Fund Manager. Each director receives a fee for being a director of the Group and includes attendance at Board and Committee meetings. Any additional services provided are charged at a daily rate agreed in advance by the Chairman. The remuneration of non-executive directors for the year ended 30 June 2020 is detailed on page 17 of this report. (ii) Senior manager and executive director remuneration As previously noted the Company at present does not employ any executive directors or senior management. If the Company chooses in the future to employ executive directors the Company will review the remuneration packages. Employment contracts As noted above the Group does not currently employ any executive directors or senior management, it does however have an agreement in place with Katana Asset Management Ltd to provide the Group with investment management services. (iii) Compensation of Katana Asset Management Ltd No amount is paid by the Group directly to the directors of Katana Asset Management Ltd. Consequently, no compensation is paid by the Group to the Directors of Katana Asset Management Ltd as Key Management Personnel. Compensation is paid to the Fund Manager in the form of fees and the significant terms of the agreement and the amount of compensation is disclosed below. The Company has entered into the Management Agreement with the Fund Manager with respect to the management of the Portfolio. The main provisions of the Management Agreement are summarised below. The Management Agreement is for an initial period of 10 years from its commencement date (Initial Term) unless earlier terminated in accordance with its terms. The commencement date (Commencement Date) is the date on which the Company listed on the Australian Stock Exchange - 23 December 2005. The initial Management Agreement was due to expire at the end of 2015, however the agreement was renewed at the shareholder’s Annual General Meeting held on 24 November 2015 for a further period of 5 years and was renewed on the following basis. the renewal is approved by Shareholders of the Company, such approval being sought by ordinary resolution; the Fund Manager is not in breach of the Management Agreement; and the Fund Manager has not in the reasonable opinion of the Board, materially breached the Management Agreement. 1. 2. 3. 15 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 DIRECTORS’ REPORT REMUNERATION REPORT (Audited) (CONTINUED) Remuneration structure (CONTINUED) (iii) Compensation of Katana Asset Management Ltd (CONTINUED) The Fund Manager may terminate the Management Agreement at any time by providing a written notice at least three months prior to termination, if: 1. at any time during the term: (a) the Company fails to make payment of the remuneration in accordance with the Management Agreement and the failure continues for 21 days from the delivery of a written notice by the Fund Manager to the Company requesting payment; (b) the Company enters into liquidation (except voluntary liquidation for the purpose of reconstruction); (c) the Company is guilty of any gross default, breach, non-observance or non-performance of any of the terms and conditions contained in the Management Agreement; or (d) a receiver or receiver and manager is appointed to the whole or part of the undertakings of the Company; 2. such notice is given not less than two years after the commencement of the Initial Term. The Company may immediately terminate the Management Agreement if: (a) the Fund Manager or any of its directors or servants are found guilty of grave misconduct in relation to the affairs of the Company; (b) the Fund Manager’s AFSL is suspended or cancelled at any time for any reason; (c) the Fund Manager commits a fundamental default or breach of its obligations under the Management Agreement or is in breach of any conditions of its AFSL and such default or breach is not remedied within 30 days after the Company has notified the Fund Manager in writing to remedy that default or breach; (d) the Fund Manager enters into liquidation (except voluntary liquidation for the purpose of reconstruction); (e) a receiver or receiver and manager is appointed to the whole or part of the undertaking of the Fund Manager; (f ) a change in control of the Fund Manager occurs without the Fund Manager obtaining at least 30 days prior written consent from the Company; (g) the Fund Manager is guilty of any gross default, breach, non-observance or non-performance of any of the terms and conditions contained in the Management Agreement; (h) the Fund Manager fails to remedy a breach of the Management Agreement within the time period reasonably specified in a notice from the Company requiring it to do so; (i) (j) the Fund Manager persistently fails to ensure that investments made on behalf of the Company are consistent with the investment strategy applicable to the Company at the time the relevant investment is made; or the Fund Manager is not lawfully able to continue to provide services to the Company pursuant to the terms of the Management Agreement. The Company may, by written notice to the Fund Manager at any time within six months after the end of any five year period during the term, terminate the Management Agreement if Shareholders pass an ordinary resolution to terminate and the average Portfolio return for the five 12 month periods comprising the relevant five year period is less than the average percentage increase in the ASX All Ordinaries Index for those five 12 month periods. The Board on a regular basis reviews the Management Agreement and Mandate to ensure compliance with the terms of the agreement. Management and performance fees Total management and performance fees paid and accrued by the Group to Katana Asset Management Ltd for the year ended 30 June 2020 was $830,638 (30 June 2019: $438,699) as follows: (i) Management fee The Fund Manager receives a monthly management fee equal to 0.08333% (2019: 0.08333%) of the Portfolio value calculated at the end of each month. The fee for 2020 was $313,312 (2019: was $438,699). The directors and shareholders of Katana Asset Management Ltd are also shareholders of Katana Capital Limited. (ii) Performance fee Performance fee to be paid in respect of each performance calculation period of 15% (2019: 15%) of the amount by which the Fund Manager outperforms the ASX All Ordinaries during the calculation period (calculated annually for the 12 month period ending 30 June). The Fund Manager was qualified to receive a performance fee of $517,326 for the financial year ended 30 June 2020 (2019: $nil). 16 KATANA CAPITAL LIMITED2020 ANNUAL REPORT REMUNERATION REPORT (Audited) (CONTINUED) Company performance The profit/(loss) after tax for the group from 2016 is as follows: Profit/(loss) after tax expense $’000 Earnings/(loss) per share - cents Share Price 30 June 2020 $1,571 3.92 0.80 2019 $(628) (1.47) $0.75 2018 $5,645 12.85 $0.77 2017 $935 2.10 $0.71 2016 $598 1.34 $0.79 Remuneration of directors and key management personnel of the Group SHORT-TERM EMPLOYEE BENEFITS POST- EMPLOYMENT BENEFITS LONG- TERM BENEFITS SHARE- BASED PAYMENTS N O I T A U N N A $ - R E P U S 6,650 3,800 3,800 14,250 N O I I T A N M R E T S T I F E N E B $ - - - - S N O I T P O $ - - - - POST- EMPLOYMENT BENEFITS LONG- TERM BENEFITS SHARE- BASED PAYMENTS I N O T A U N N A $ - R E P U S 6,650 3,800 3,800 14,250 I N O T A N M R E T I S T I F E N E B $ - - - - S N O T P O I $ - - - - F O E G A T N E C R E P L A T O T $ 76,650 43,800 43,800 164,250 D E S A B E C N A M R O F E P F O E G A T N E C R E P N O I T A R E N U M E R S I H C I H W % L A T O T $ 76,650 43,800 43,800 164,250 I I H C H W N O T A R E N U M E R - - - - D E S A B E C N A M R O F E P S I % - - - - H S A C $ - - - - H S A C $ - - - - 2020 NAME Non-executive directors Dalton Gooding Peter Wallace Giuliano Sala Tenna Total non-executive directors & KMP D N A Y R A L A S S E E F $ 70,000 40,000 40,000 150,000 * R E H T O $ - - - - * insurance premiums have not been included in other remuneration 2019 NAME Non-executive directors Dalton Gooding Peter Wallace Giuliano Sala Tenna Total non-executive directors & KMP SHORT-TERM EMPLOYEE BENEFITS S E E F D N A Y R A L A S $ 70,000 40,000 40,000 150,000 R E H T O $ - - - - * insurance premiums have not been included in other remuneration 17 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 DIRECTORS’ REPORT REMUNERATION REPORT (Audited) (CONTINUED) Equity instrument disclosures relating to key management personnel (i) Option holdings The following options were granted and held by the directors or key management personnel during the financial year: • Mr Dalton Gooding nil (2019: nil) • Mr Peter Wallace nil (2019: nil) • Mr Giuliano Sala Tenna nil (2019: nil) (ii) Shareholdings The numbers of shares in the Company held during the financial year by each director of Katana Capital Limited and other key management personnel of the Group, including their personally related parties, are set out below. All equity transactions with key management personnel, other than those arising from the exercise of remuneration options, have been entered into under terms and conditions no more favourable that those the Group would have adopted if dealing at arm’s length. 2020 NAME Directors of Katana Capital Limited Ordinary shares Dalton Gooding Peter Wallace Giuliano Sala Tenna BALANCE AT THE START OF THE YEAR RECEIVED DURING THE YEAR IN THE EXERCISE OF OPTIONS OTHER CHANGES DURING THE YEAR (PURCHASES/DISPOSALS) BALANCE AT THE END OF THE YEAR 89,542 300,000 - - - - 1,934 - - 91,476 300,000 - Other transactions and balances with key management personnel Dalton Gooding is a partner of Gooding Partners Chartered Accounting firm and as part of providing taxation advisory services, Gooding partners received $37,510 (2019: $49,363) for tax services provided. END OF REMUNERATION REPORT (Audited) 18 KATANA CAPITAL LIMITED2020 ANNUAL REPORT Indemnification of Directors and Officers During or since the financial year, the Company has paid premiums in respect of a contract insuring all the directors of the Company and the Group against legal costs incurred in defending proceedings for conduct other than (a) a wilful breach of duty and (b) a contravention of sections 182 or 183 of the Corporations Act 2001, as permitted by section 199B of the Corporations Act 2001. During the year the Company paid for Directors’& Officers’ insurance in the normal course of business, this amount has not been included in Directors remuneration. Indemnification of Auditors To the extent permitted by law, the Company agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. Auditor Independence The Directors have obtained an independence declaration from the Company’s auditors, Ernst & Young, as presented on page 20 of this Annual report. Non-Audit Services Ernst & Young did not receive any amounts for the provision of non-audit services. Signed for and on behalf of the Directors in accordance with a resolution of the Board. Dalton Gooding CHAIRMAN Perth, Western Australia 29 September 2020 19 KATANA CAPITAL LIMITED2020 ANNUAL REPORT AUDITOR’S INDEPENDENCE DECLARATION Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Auditor’s independence declaration to the directors of Katana Capital Limited As lead auditor for the audit of the financial report Katana Capital Limited for the financial year ended 30 June 2020, I declare to the best of my knowledge and belief, there have been: a. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Katana Capital Limited and the entities it controlled during the financial year. Ernst & Young Fiona Drummond Partner Perth 29 September 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation FD:LC:KAT:028 20 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 FINANCIAL STATEMENTS 22 23 24 25 26 44 45 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOW NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT 21 KATANA CAPITAL LIMITED2020 ANNUAL REPORT NOTE YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 3 4 830 18 81 2,858 3,787 (313) (77) (36) (405) (70) (172) (517) (171) 2,026 (455) 1,571 - 1,571 3.92 1,191 109 - (1,217) 83 (439) (120) (91) (314) (69) (189) (59) (171) (1,369) 741 (628) - (628) (1.47) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Revenue Dividends Interest Other income Investment income Total net investment income Expenses Management fees Custody and administration fees Insurance fees Other expenses Listing and registry costs Legal, accounting and professional costs Performance fees Directors’ remuneration expense Profit/(Loss) before income tax expense Income tax (expense)/benefit Profit/(loss) for the year attributable to shareholders of the Company Other comprehensive income for the year Total comprehensive income for the year attributable to shareholders of the Company Basic and diluted earnings/(loss) per share (cents per share) 18 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 22 KATANA CAPITAL LIMITED2020 ANNUAL REPORT CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Current assets Cash and cash equivalents Receivables Prepaid insurance Income tax receivable Financial assets at fair value through profit or loss Total current assets Non-current assets Deferred tax assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Total current liabilities Non-current liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued Capital Accumulated losses Reserves Total equity NOTE AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 5 6 7 8 9 10 11 12 12 8,483 294 26 - 30,600 39,403 - - 9,268 389 - 82 29,069 38,808 351 351 39,403 39,159 (2,464) (2,464) (104) (104) (2,568) 36,835 39,635 (4,829) 2,029 36,835 (483) (483) - - (483) 38,676 42,341 (6,400) 2,735 38,676 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 23 KATANA CAPITAL LIMITED2020 ANNUAL REPORT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY NOTE Balance at 1 July 2018 Profit for the year Transfer to profits reserve Dividends paid Shares issued under Dividend Re- investment Plan Issue of shares Shares bought back from shareholders Tax effect on capital raising cost ISSUED CAPITAL $’000 43,254 - - - - - (983) 70 PROFITS RESERVES $’000 ACCUMULATED LOSSES $’000 3,802 - - (1,067) - - - - (5,772) (628) - - - - - - TOTAL $’000 41,284 (628) - (1,067) - - (983) 70 Balance at 30 June 2019 11 42,341 2,735 (6,400) 38,676 Balance at 1 July 2019 Profit for the year Transfer to profits reserve Dividends paid Shares issued under Dividend Re- investment Plan Issue of shares Shares bought back from shareholders Tax effect on capital raising cost 42,341 - - - - - (2,706) - 2,735 - - (706) - - - (6,400) 1,571 - - - - - 38,676 1,571 - (706) - - (2,706) - Balance at 30 June 2020 11 39,635 2,029 (4,829) 36,835 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 24 KATANA CAPITAL LIMITED2020 ANNUAL REPORT NOTE YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 15 (113,174) 115,867 (1,046) 18 799 82 81 2,627 (2,706) (706) (3,412) (785) 9,268 8,483 - (74,612) 75,043 (1,952) 109 1,308 (266) 63 (307) (983) (1,067) (2,050) (2,357) 11,625 9,268 - CONSOLIDATED STATEMENT OF CASH FLOW Cash flows from operating activities Payments for purchases of financial assets Proceeds on sale of financial assets Payments to suppliers and employees Interest received Dividends and distributions received Tax (paid) Other revenue Net cash provided by/(used in) operating activities Cash flows from financing activities Payments for buyback of shares Dividend paid net of amounts reinvested Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 5 Non cash activities - Dividend reinvestment The above consolidated statement of cash flow should be read in conjunction with the accompanying notes. 25 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Corporate information The financial report of Katana Capital Limited (the ‘’Company’’) and its subsidiaries (the “Group” or the “Consolidated Entity”) for the year ended 30 June 2020 was authorised for issue in accordance with a resolution of the directors on 29 September 2020. The Company was incorporated on 19 September 2005. In July 2006 it incorporated a wholly owned subsidiary - Kapital Investments (WA) Pty Ltd. Katana Capital Limited is a company limited by shares, incorporated and domiciled in Australia and whose shares are publicly traded on the Australian Securities Exchange. The nature of the operations and principal activities are described in the Directors’ report. The Company and its subsidiary are for-profit entities. 2 (a) Summary of significant accounting policies Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis except for certain financial instruments, which have been measured at fair value. The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report comprises the financial statements of Katana Capital Limited and its subsidiaries. The financial report is presented in Australian dollars. (b) Statement of compliance The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. New standard adopted as at 1 July 2019 AASB 16 Leases became mandatorily effective on 1 July 2019. Accordingly, this standard applies for the first time to this set of financial statements. AASB 16 supersedes AASB 117 Leases and AASB Interpretation 4 Determining whether an Arrangement contains a Lease. AASB 16 introduces a single lessee accounting model that eliminates the requirement for leases to be classified as operating or finance leases. The Company is not a lessee and there is no impact of adopting this standard. Accounting standards and interpretations issued but not yet effective A Conceptual Framework for Financial Reporting, and relevant amending standards (effective 1 July 2020) The revised Conceptual Framework includes some new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. It is arranged in eight chapters, as follows: > Chapter 1 – The objective of financial reporting > Chapter 2 – Qualitative characteristics of useful financial Information > Chapter 3 – Financial statements and the reporting entity > Chapter 4 – The elements of financial statements > Chapter 5 – Recognition and de-recognition > Chapter 6 – Measurement > Chapter 7 – Presentation and disclosure > Chapter 8 – Concepts of capital and capital maintenance Amendments to References to the Conceptual Framework in IFRS Standards has also been issued, which sets out the amendments to affected standards in order to update references to the revised Conceptual Framework. The changes to the Conceptual Framework may affect the application of IFRS in situations where no standard applies to a particular transaction or event. In addition, relief has been provided in applying AASB 3 and developing accounting policies for regulatory account balances using AASB 108, such that entities must continue to apply the definitions of an asset and a liability (and supporting concepts) in the 2010 Conceptual Framework, and not the definitions in the revised Conceptual Framework. 26 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 2 (b) Summary of significant accounting policies (CONTINUED) Statement of compliance (CONTINUED) AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material (effective on annual periods beginning on or after 1 January 2020) This standard amends AASB 101 Presentation of Financial Statements and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of “material” across the standards and the clarify certain aspects of the definition. The amendments clarify that materiality will depend on the nature or magnitude of information. An entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current (effective for annual reporting periods beginning on or after 1 January 2022) A liability is classified as current if the entity has no right at the end of reporting period to defer settlement for at least 12 months after the reporting period. The AASB recently issued amendments to AASB 101 to clarify the requirements for classifying liabilities as current or non-current. Specifically: • The amendments specify that the conditions which exist at the end of the reporting period are those which will be used to determine if a right to defer settlement of a liability exists. • Management intention or expectation does not affect classification of liabilities. • In cases where an instrument with a conversion option is classified as a liability, the transfer of equity instruments would constitute settlement of the liability for the purpose of classifying it as current or non-current. (c) Principle of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 30 June 2020. Control is achieved when the Group is exposed, or has the rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only the Group has: • • • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • The contractual arrangement with the other vote holders of the investee Rights arising from other contractual agreements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: • De-recognises the assets (including goodwill) and liabilities of the subsidiary • De-recognises the carrying amount of any non-controlling interests • De-recognises the cumulative translation differences recorded in equity Recognises the fair value of the consideration received Recognises the fair value of any investment retained Recognises any surplus or deficit in profit or loss Reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities. • • • • 27 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 (d) Summary of significant accounting policies (CONTINUED) Investments and other financial assets Financial assets are classified as either amortised cost or fair value depending on the Group’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. A financial asset is measured at amortised cost only if both of the following conditions are met: • • the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The assessment of the Group’s business model was made as of the date of initial application, 1 July 2018 and then applied retrospectively to those financial assets that were not derecognised before 1 July 2018. The assessment of whether contractual cash flows are solely comprised of principal and interest was made based on the facts and circumstances as at the initial recognition of the assets. Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Trade Receivable and other receivables Receivables may include amounts for dividends, interest and securities sold where settlement has not yet occurred. Receivables are recognised and carried at the original invoice amount and interest accrues (using the effective interest rate method, which is the rate that discounts estimated future cash receipts through the effective life of the financial instrument) to the net carrying amount of the financial asset. Amounts are generally received within 30 days of being recorded as receivables. Trade receivable (without a significant financing component) is initially recognized at their transaction price and all other receivables are initially measured at fair value. Receivables are measured at amortised cost if it meets both of the following conditions and is not designated as at fair value through profit or loss: • • It is held within a business model with the objective to hold assets to collect contractual cash flows; and Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. For the purposes of the assessment whether contractual cash flows are solely payments of principal and interest, ‘principal” is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Group considers: • • • • contingent events that would change the amount or timing of cash flows; terms that may adjust the contractual coupon rate, including variable ate features; prepayment and extension features; and terms that limit the Group’s claim to cash flows from specified assets (e.g. non-recourse features). For all other receivables measured at amortised cost, the Group recognized lifetime expected credit losses when there has been a significant increase in credit risk since initial recognition. If on the other hand the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to expected credit losses within the next 12 months. Expected credit losses are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). Expected credit losses are discounted at the effective interest rate of the financial asset. The Group considers an event of default has occurred when a financial assets is more than 90days past due or external sources indicate that the debtor is unlikely to pay its creditors, including the Group. A financial asset is credit impaired when there is evidence that the counterparty is in significant financial difficulty or a breach of contract, such as a default or past due event has occurred. The Group writes off a financial asset when there is information indicating the counterparty is in severe financial difficulty and there is no realistic prospect of recovery. 28 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 2 (e) Summary of significant accounting policies (CONTINUED) Other income recognition (i) Interest income Interest income is recognised on an accruals basis using the effective interest method, which is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument to the net carrying amount of the financial instrument. Interest on cash on deposit is recognised in accordance with the terms and conditions that apply to the deposit. (ii) Dividends and distributions Dividends and distributions are recognised as revenue when the right to receive payment is established. (f) Income tax The income tax expense or revenue for the year is tax payable on the current year’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences between the carrying amount and tax losses to the extent that it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (g) Cash and cash equivalents Cash and cash equivalents in the statement of financial position may comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. For the purposes of the statement of cash flow, cash and cash equivalents includes deposits held at call with banks or financial institutions. (h) Trade and other payables Liabilities for creditors and other amounts are carried at amortised cost, which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Group. Payables include outstanding settlements on the purchase of investments and distributions payable. The carrying period is dictated by market conditions and is generally less than 30 days. Management fees, including performance fees, are calculated in accordance with the contractual arrangements and are payable in the year in which the returns are generated. (i) Goods and Services Tax (GST) Incomes, expenses and assets, with the exception of receivables and payables, are recognised net of the amount of GST, to the extent that GST is recoverable from the Australian Tax Office (ATO). Where GST is not recoverable it is recognised as part of the cost of the asset or as part of the expense item as applicable. Reduced input tax credits (RITC) recoverable by the Group from the ATO are recognised as receivables in the statement of financial position. Cash flows are included in the statement of cash flow on a gross basis and the GST component of the cash flows arising from investing and financing activities, which is recoverable from or payable to the taxation authority are classified as operating cash flows. 29 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 (j) Summary of significant accounting policies (CONTINUED) Earnings per share Basic earnings per share (EPS) are calculated as net profit attributable to shareholders divided by the weighted average number of shares. Diluted earnings per share are calculated as net profit attributable to members of the parent, adjusted for: > costs of servicing equity (other than dividends) and preference share dividends; > other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (k) Derivative financial instruments The Group may use derivative financial instruments such as exchange traded options to manage its risks associated with share price fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to fair value. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to net profit or loss for the year. Exchange traded options From time to time, the Group writes and then trades Exchange Traded Options (‘ETO’s’), the Group’s policy for managing its risk for ETO’s is to ensure it only writes ETO’s against shares that it physically holds. ETO’s are governed by the Australian Stock Exchange (“ASX”) and are traded on the ASX. ETO’s are recognised as liabilities at fair value. Any gains or losses arising from changes in the fair value of ETO’s, are taken directly to net profit or loss for the year. (l) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. (m) Pension benefits Defined contribution plan Contributions to superannuation funds are charged to the statement of comprehensive income when incurred. (n) Parent entity financial information The financial information for the parent entity, Katana Capital Limited, disclosed in note 22 has been prepared on the same basis as the consolidated financial statements. (o) Segment reporting Operating segment are reporting in a manner consistent with internal reporting provided to the Board of Directors. The Board of Directors is the Chief Operating Decision Maker (CODM) and monitors operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. (p) Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectation of future events that may have a financial impact on the Company and that are believed to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the result of which forms the basis of the carrying values of assets and liabilities. As such, actual results could differ from those estimates. The Company’s significant accounting estimates and judgements include fair value measurement of financial assets and liabilities that are not traded in an active market. Details on the determination of fair value are provided in Note 16(h). 30 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 3 Investment (loss)/income Realised gains on financial assets at fair value through profit or loss Unrealised losses on financial assets at fair value through profit or loss Other income Total income 4 Income tax expense (a) (b) (c) Income tax expense Total Income tax expense/(benefit) results in a: Current tax expense Under/(over) provision of prior year tax Change in deferred tax liability Change in deferred tax asset Deferred tax asset recognised through equity Prior year under/(over) Reconciliation of income tax expense to prima facie tax payable Prima facie income tax expense calculated at 30% Less the tax effect of : Imputation credit gross up Franking credit offset Under/(over) provision of prior year tax Tax losses not previously brought to account Non Deductible Expenditure 5 Current assets - Cash and cash equivalents Cash at banks 31 YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 3,413 (555) - 2,858 819 (2,099) 63 (1,217) YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 - - (114) 569 455 - - 608 66 (219) - - - 455 - - (353) (388) (741) (70) (70) (411) 138 (459) - - (9) (741) AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 8,483 9,268 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6 Current assets - Receivables Other receivables Unsettled trades receivable Total AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 108 186 294 45 344 389 There are no receivables past due or impaired. Due to the short-term nature of these receivables, their carrying value approximates their fair value. 7 Current assets – Financial assets at fair value through profit or loss Investment in listed equities Investment in unlisted equities Investments in certificates of deposit Investment in listed unit trusts Total financial assets at fair value through profit or loss 30 JUNE 2020 $’000 30 JUNE 2019 $’000 27,116 - 707 2,777 30,600 27,021 534 - 1,514 29,069 The above investments consist primarily of investments in ordinary shares and therefore have no fixed maturity date or coupon rate. For fair value measurements refer to Note 16(h). 8 Non-current assets - Deferred tax assets Investments and unsettled shares Provisions Tax Losses Other Set-off of deferred tax liabilities pursuant to set-off provisions (Note 10) Net deferred tax assets AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 544 194 173 2 913 (913) - 77 79 643 - 799 (448) 351 32 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 9 Current liabilities - Payables Unsettled trades payable Management fees Performance fee payable Other payables AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 1,813 98 517 36 2,464 258 172 - 53 483 Due to the short-term nature of these payables, their carrying value approximates their fair value. 10 Non-current liabilities - Deferred tax liabilities The balance comprises temporary differences attributable to : Investments and unsettled shares Dividends receivable Other Set-off of deferred tax liabilities pursuant to set-off provisions (Note 8) Net deferred tax liabilities AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 999 18 1,017 (913) 104 439 9 - 448 (448) - 11 Issued capital 30 JUNE 2020 30 JUNE 2019 NO. OF SHARES $’000 NO. OF SHARES $’000 Issued and paid up capital - Ordinary shares 38,275,174 39,635 41,739,670 42,341 (a) Movements in ordinary share capital: DATE DETAILS NO. OF SHARES $’000 Opening balance Shares bought back from shareholders, net of Dividend Re-investment Plan Tax effect on capital raising cost Closing balance Opening balance Shares bought back from shareholders, net of Dividend Re-investment Plan Closing balance 43,080,100 (1,340,430) - 41,739,670 41,739,670 (3,464,496) 38,275,174 43,254 (983) 70 42,341 42,341 (2,706) 39,635 01 July 2018 30 June 2019 01 July 2019 30 June 2020 33 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11 Issued capital (CONTINUED) (a) Movements in ordinary share capital: (CONTINUED) Fully paid ordinary shares carry one vote per share and carry the right to dividends. During the period from 1 July 2019 to 30 June 2020, 3,464,496 shares were bought back on market and were subsequently cancelled. The shares were acquired at an average price of $0.78 with the price ranging from $0.57 to $0.85 per share. The Company has a dividend reinvestment plan (DRP) for its dividend distribution, which shareholders have the discretion to join or exit. The DRP shares are managed via an on-market buy-back of shares that are then re-distributed to shareholders. During the year as part of the DRP the Company issued nil new shares to meet the DRP shortfall for buy-back shares acquired on-market. (b) Capital management When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Management is constantly adjusting the capital structure to take advantage of favorable costs of capital or high returns on assets. The Group defines its capital as the total funds under management, being $39,402,541 at 30 June 2020 (30 June 2019: $39,158,582), including equities and cash reserves. The Group does not have any additional externally imposed capital requirements however has as a goal the ability to continue to grow assets under management and maintain a sustainable dividend return to shareholders. To assist with meeting its internal guidelines, Katana Asset Management Limited holds regular Investment Committee meetings to assess the equity portfolio. 12 Reserves and accumulated losses (a) Profit reserve The profit reserve is made up of amounts allocated from retained earnings / (accumulated losses) that are preserved for future dividend payments. Movement in profit reserve was as follows: Opening balance Transfer from retained earnings Dividends paid Balance at the end of the year (b) Accumulated losses Movements in accumulated losses were as follows: Balance at the beginning of the year Transfer to profits reserve Transfer from options reserve Profit/(Loss) for the year attributable to the members of the company Balance at the end of the year 34 AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 2,735 - (706) 2,029 3,802 - (1,067) 2,735 AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 (6,400) - - 1,571 (4,829) (5,772) - - (628) (6,400) KATANA CAPITAL LIMITED2020 ANNUAL REPORT 13 Key management personnel disclosures (a) Key management personnel compensation Short-term employee benefits Director fees Post-employment benefits 14 Related party transactions (a) Directors YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 150 14 164 150 14 164 The names of persons who were Directors of the Katana Capital Limited at any time during the financial year and at the date of this report are as follows: Mr Dalton Gooding, Mr Giuliano Sala Tenna and Mr Peter Wallace. (b) Related party transactions All related party transactions are made at arm’s length on normal commercial terms and conditions. Outstanding balances at period end are unsecured and settlement occurs in cash. Related parties during the year are outlined below: Director related: Dalton Gooding is a partner of Gooding Partners Chartered Accounting firm and as part of providing taxation advisory services, Gooding Partners received $37,510 (2019: $49,363) for tax services provided. Other Key management services - Katana Asset Management Ltd: Katana Asset Management Ltd, the Fund Manager for the Group, provides the Group with Key Management Services. The directors of Katana Asset Management Ltd are Brad Shallard and Romano Sala Tenna. Katana Capital incurred management fees of $313,312 to the Fund Manager for management services provided during the year (2019: $438,699). There was performance fee of $517,326 due to the Fund Manager for the year (2019: $nil). The Fund Manager and its directors have the following shareholdings: 2020 NAME Brad Shallard Romano Sala Tenna 2019 NAME Brad Shallard Romano Sala Tenna BALANCE AT THE START OF THE YEAR CHANGES DURING THE YEAR BALANCE AT THE END OF THE YEAR 4,557,503 5,350,180 98,417 169,131 4,655,920 5,519,311 BALANCE AT THE START OF THE YEAR CHANGES DURING THE YEAR BALANCE AT THE END OF THE YEAR 4,266,494 4,784,765 291,009 565,415 4,557,503 5,350,180 Wholly owned group transactions There are no transactions with companies within the wholly owned group. 35 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15 Reconciliation of profit after income tax to cash inflow from operating activities Profit/(loss) for the year attributable to shareholders after tax Adjustments for: Change in financial assets at fair value through profit/loss Decrease in trade and other receivables Decrease/(increase) in deferred tax assets Increase/(decrease) in trade and other payables Increase/(decrease) in deferred tax liabilities Decrease/(increase) in current tax receivable Net cash provided by (used in) operating activities YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 1,571 (1,531) 69 351 1,981 104 82 2,627 (628) 2,057 117 (281) (846) (460) (266) (307) 16 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on ensuring compliance with the Company’s Investment Mandate and seeks to maximise the returns derived for the level of risk to which the Company is exposed. Financial risk management is carried out by the Investment Manager under policies approved by the Board of Directors (the “Board”). The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ratings analysis for credit risk. (a) Mandate The Fund Manager must manage the Portfolio in accordance with guidelines for management set out in the Mandate, which may be amended by written agreement between the Company and the Fund Manager from time to time. The mandate provides that the Portfolio will be managed with the following investment objectives: to achieve a pre-tax and pre expense return which outperforms the ASX All Ordinaries Index; and the preservation of capital invested. The Mandate permits the Fund Manager to undertake investments in: (i) (ii) (iii) listed securities; rights to subscribe for or convert to listed securities (whether or not such rights are tradable on a securities exchange); any securities which the Fund Manager reasonably expects will be quoted on the ASX within a 24 month period from the date of investment; listed securities for the purpose of short selling; (iv) (v) warrants or options to purchase any investment and warrants or options to sell any investment; (vi) discount or purchase of bills of exchange, promissory notes or other negotiable instruments accepted, drawn or endorsed by any bank or by the Commonwealth of Australia, any State or Territory of Australia, or by any corporation of at least an investment grade credit rating granted by a recognised credit rating agency in Australia; (vii) deposits with any bank or corporation declared to be an authorised dealer in the short term money market; (viii) debentures, unsecured notes, loan stock, bonds, promissory notes, certificates of deposit, interest bearing accounts, certificates of indebtedness issued by any bank or by the Commonwealth of Australia, any State or Territory of Australia, any Australian government authority, or a corporation of at least an investment grade credit rating granted by a recognised credit rating agency in Australia; units or other interest in cash management trusts; underwriting or sub-underwriting of securities as and where permitted by relevant laws and regulations and the Fund Manager’s AFSL; and any other investment, or investment of a particular kind, approved by the Company in writing as and where permitted by the Fund Manager’s AFSL. (ix) (x) (xi) > > 36 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 16 Financial risk management (CONTINUED) (a) Mandate (CONTINUED) The Mandate specifies the following risk control features: The Portfolio may comprise securities in up to 80 companies from time to time. > no investment may represent more than 10% of the issued securities of a company at the time of investment. > > total cumulative gearing on the Portfolio may not exceed 50% of the total value of the net tangible assets of the Group after tax. the Fund Manager will adhere to the parameters on a pre stock basis as set out in the table below unless the prior approval of the Board is received to do otherwise. (b) Portfolio composition and management The aim of the Fund Manager is to build for the Group a portfolio of 20 to 60 companies, with an emphasis towards holding a larger number of smaller positions. Under the current Mandate, the Group’s Portfolio may vary from between 0 to 80 securities, depending upon investment opportunities and prevailing market conditions. The Fund Manager may construct a Portfolio comprising of any combination of cash, investment and debt, subject to gearing limits in the Mandate. Under the Mandate, total cumulative gearing on the Portfolio may not exceed 50% of the total value of the net tangible assets of the Group after tax. The capacity to short sell securities, as well as employ debt, allows the Fund Manager the flexibility to implement an absolute return strategy. It should also be noted that, despite the focus on emerging and green chip companies, in periods of overly negative market of stock sentiment, the best investment opportunities on a risk return basis are often found in the ASX S&P Index top 20 and ASX S&P Index top 100 stocks by market capitalisation. Often the larger stocks rebound first, hence providing not just safer returns, but quicker returns. Under the current Mandate, the following parameters will apply to individual investments unless the prior approval of the Directors is received to do otherwise: SIZE OF COMPANY MINIMUM INVESTMENT PER SECURITY INDICATIVE BENCHMARK INVESTMENT PER SECURITY MAXIMUM INVESTMENT PER SECURITY AS A PERCENTAGE OF TOTAL PORTFOLIO ASX S&P Top 20 ASX S&P Top 100/Cash Hybrids ASX S&P Top 500 Outside of ASX S&P Top 500/Other Instruments 1.0% 1.0% No Minimum No Minimum 5.0% 3.0% 2.0% 1.0% 12.5% 10.0% 7.5% 5.0% (c) Asset allocation The Fund Manager’s allocation of the Portfolio will be weighted in accordance with various macro economic factors. These factors will invariably impact the medium and long term Performance of the Group. These factors include: > global economy; > Australian economy and positioning within the economic cycle; > sectors within the Australian market; > phase of the interest rate cycle; and > state of the property market (e.g. comparative investment merit). The Fund Manager may form views on the factors outlined above, may re-weight the Portfolio accordingly. 37 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16 Financial risk management (CONTINUED) (d) Market risk Market risk is the risk that changes in foreign exchange rates, interest rates and prices will affect the Group income or the carrying value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. (i) Price risk The Group is exposed to equity securities, convertible notes and derivative securities price risk. This arises from investments held by the Group for which prices in the future are uncertain. The paragraph below sets out how this component of price risk is managed and measured. Investments are classified in the statement of financial position as financial assets at fair value through profit/loss. All securities investments present a risk of loss of capital. Except for equities sold short, the maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. Possible losses from equities sold short can be unlimited. The Investment Manager mitigates price risk through diversification and a careful selection of securities and other financial instruments within specified limits set by the Board. The table on page 39 summarises the impact of an increase/decrease in the Australian Securities Exchange All Ordinaries Index on the Group’s net assets attributable to shareholders at 30 June 2020. The analysis is based on the assumptions that the index increased/decreased by 10% (2019: 10%) with all other variables held constant and that the fair value of the Group’s portfolio of equity securities and derivatives moved according to the historical correlation with the index. The impact mainly arises from the possible change in the fair value of listed equities, unlisted unit trusts and equity derivatives with combined value of $30,600,188 (2019: $29,069,390) that represented the maximum exposure as at reporting date. (ii) Foreign exchange risk The Group does not hold any monetary and non-monetary assets denominated in currencies other than the Australian dollar. (iii) Interest rate risk The Group’s interest bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The risk is measured using sensitivity analysis. Compliance with the Group’s policy is reported to the Board on a monthly basis. The Group may also enter into derivative financial instruments to mitigate the risk of future interest rate changes. The table below summarises the Group’s exposure to financial assets/liabilities at the balance sheet date. WEIGHTED AVERAGE INTEREST RATE (% P.A.) 30/06/2020 $’000 30/06/2019 $’000 Financial Assets Cash and short term deposits - floating 0.95% 8,483 9,268 The table above summarises the impact of an increase/decrease of interest rates on the Group’s operating profit and net assets attributable to shareholders through changes in fair value or changes in future cash flows. The analysis is based on the assumption that interest rates changed by +/- 50 basis points (2019: +/- 50 basis points) from the year end rates with all other variables held constant. The impact mainly arises from changes in the interest rates of fixed interest securities. 38 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 16 Financial risk management (CONTINUED) (e) Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s operating profit and other comprehensive income to interest rate risk and other price risk. The reasonably possible movements in the risk variables have been determined based on management’s best estimate, having regard to a number of factors, including historical levels of changes in interest rates, historical correlation of the Group investments with the relevant benchmark and market volatility. However, actual movements in the risk variables may be greater or less than anticipated due to a number of factors, including unusually large market shocks resulting from changes in the performance of the economies, markets and securities in which the Group invest. As a result, historic variations in risk variables should not be used to predict future variations in the risk variables. PRICE RISK 30 June 2020 30 June 2019 INTEREST RATE RISK -10% 10% -10% 10% IMPACT ON OPERATING PROFIT IMPACT ON OTHER COMPREHENSIVE INCOME (3,060) (2,907) 3,060 2,907 - - - - “-50BPS” “+50BPS” “-50BPS” “+50BPS” IMPACT ON OPERATING PROFIT IMPACT ON OTHER COMPREHENSIVE INCOME 30 June 2020 30 June 2019 (42) (46) 42 46 - - - - (f) Credit risk Credit risk primarily arises from investments in debt securities and from trading derivative products. Other credit risk arises from cash and cash equivalents, deposits with banks and other financial institutions and amounts due from brokers. None of these assets are impaired nor past due but not impaired. As at 30 June 2020 the Group does not hold any debt securities (30 June 2019: nil). The Group does trade in Exchange Traded Options (“ETO’s”). The Investment Manager has established limits such that, at any time, such that options are not traded without holding the physical security in the portfolio and contracts are with counterparties included in the Board’s Approved Counterparties list. As at 30 June 2020 the Group held no Exchange Traded Options (30 June 2019: nil). Compliance with the Group’s policy is reported to the Board on a monthly basis. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets. The majority of cash assets are held with one bank, which has a credit rating of A-1, which is the significant concentration risk. (g) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financial instruments. To control liquidity, the Group invests in financial instruments which under normal market conditions are readily convertible to cash. The Group held no derivatives (ETO’s), as at 30 June 2020 (30 June 2019: $nil). Financial liabilities of the Group comprise trade and other payables and dividends payable. Trade and other payables have no contractual maturities but are typically settled within 30 days. 39 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16 Financial risk management (CONTINUED) (h) Fair value measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The Group uses various methods in estimating the fair value of a financial instrument. The methods comprise: (a) Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities. (b) Level 2 - valuation technique for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. (c) Level 3 - valuation technique for which the lowest level input that is significant to the fair value movement that is not observable. For instruments for which there is currently no active market, the Company uses valuation methods generally accepted in the industry. Some of the inputs to those method may not be market observable and are therefore estimated based on assumptions. In the case of unlisted equities, recent transactional evidence has been obtained that supported current valuation. If, in the future, similar transactions occur at significantly different values, the fair value of unlisted equities will be revised appropriately. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The following table presents the Company’s assets and liabilities measured and recognised at fair value at reporting date. 30 JUNE 2020 LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 Financial assets Investment in listed equities Investments in certificates of deposit Investment in listed unit trusts Total financial assets designated at fair value through profit or loss 30 JUNE 2019 Financial assets Investment in listed equities Investment in unlisted equities Investments in convertible preferred shares Investment in listed unit trusts Total financial assets designated at fair value through profit or loss 27,116 707 2,777 30,600 - - - - - - - - 27,116 707 2,777 30,600 LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 27,021 - - 1,514 28,535 - - - - - - 534 - - 534 27,021 534 - 1,514 29,069 The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available for sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Company is the current bid price. These instruments are included in Level 1. The fair value of financial instruments that are not traded in an active market (for example, unlisted investments) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. Quoted market prices or dealer quotes for similar instruments are used to estimate fair value for long term debt for disclosure purposes. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. In determining the fair value of the securities the company holds in the unlisted investments, the company referred to the Net Tangible Assets of the investee, recent trading in units of the investment and all other market factors associated with the unlisted investment. Financial assets at fair value through profit or loss are dependent on the change of input variables used to determine fair value, namely changes in market prices of equity securities. The majority of the investments are invested in shares of companies listed on the Australian Stock Exchange which are valued based on market observable information. There were no transfers between level 1 and level 2 during the year. There were no transfers of level 3 instruments for the year ended 30 June 2020 (2019: $nil). The fair values of the investment in unlisted entities have been estimated using the redemption prices as at reporting date. 40 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 17 Segment reporting For management purposes, the Group is organised into one main operating segment, which invests in equity securities, debt instruments, and related derivatives. All of the Group’s activities are interrelated, and each activity is dependent on the others. Accordingly, all significant operating disclosures are based upon analysis of the Group as one segment. The financial results from this segment are equivalent to the financial statements of the Group as a whole. The Group operates from one geographic location, being Australia, from where its investing activities are managed. The Group does not derive revenue of more than 10% from any one of its investments held. 18 Earnings per share (a) Basic earnings per share: Basic and diluted earnings per share 3.92 (1.47) YEAR ENDED 30 JUNE 2020 CENTS YEAR ENDED 30 JUNE 2019 CENTS (b) Reconciliation of earnings used in calculating earnings per share Profit/(loss) from continuing operations Profit/(loss) attributable to the ordinary equity holders of the Company used in the calculation of basic and diluted earnings per share (c) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Options YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 1,571 1,571 (628) (628) YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 40,015,890 42,570,041 - - Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 40,015,890 42,570,041 Basic earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. 19 Events occurring after reporting date Other than the events below, the directors are not aware of any matter or circumstance that has significantly or may significantly affect the operations of the company or the results of those operations, or the state of affairs of the company in subsequent financial years. On 7 July 2020, the company announced a fully franked 0.5 cent per share dividend. 41 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20 Remuneration of auditors (a) Audit Services E&Y Australia Audit and review of financial reports Total (b) Non-Audit Services Other services 21 Dividends Dividend paid during 1st Quarter of the year Dividend paid during 2nd Quarter of the year Dividend paid during 3rd Quarter of the year Dividend paid during 4rd Quarter of the year Total Paid ($’000) Cents per share Total Paid ($’000) Cents per share Total Paid ($’000) Cents per share Total Paid ($’000) Cents per share Total Paid ($’000) Franking credits available for subsequent financial years based on a tax rate of 30% (2019: 30%) YEAR ENDED 30 JUNE 2020 $ YEAR ENDED 30 JUNE 2019 $ - 40,500 40,500 - 40,500 - 47,000 47,000 - 47,000 PARENT ENTITY YEAR ENDED 30 JUNE 2020 YEAR ENDED 30 JUNE 2019 208 0.5 cents 203 0.5 cents 295 0.75 cents - - 706 430 1 cents 321 0.75 cents 106 0.25 cents 210 0.5 cents 1,067 30 JUNE 2020 $’000 30 JUNE 2019 $’000 338 421 The above amounts represent the balance of the franking account as at the reporting date, adjusted for: (a) franking credits that will arise from the payment of the amount of the current tax liability; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date; and (d) franking credits that may be prevented from being distributed in subsequent financial years. The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. 42 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 22 Parent entity financial information PARENT ENTITY Assets Liabilities Net Assets Equity Profit/(loss) for the year Total comprehensive income/(loss) for the year Investment in controlled entity at cost AS AT 30 JUNE 2020 $’000 AS AT 30 JUNE 2019 $’000 39,403 2,568 36,835 36,835 39,077 401 38,676 38,676 YEAR ENDED 30 JUNE 2020 $’000 YEAR ENDED 30 JUNE 2019 $’000 1,571 1,571 (628) (628) The investment in the controlled entity is for 100% of the issued capital of Kapital Investments (WA) Pty Ltd. Tax consolidation legislation Katana Capital Limited and its wholly owned Australian controlled entities implemented the tax consolidation legislation from 1 July 2007. (i) Members of the tax consolidated Group and the tax sharing arrangement. Katana Capital Limited and its 100% owned Australian resident subsidiaries formed a tax consolidated Group from 1 July 2007. Katana Capital Limited is the head entity of the tax consolidated Group. Members of the Group have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement on the basis that the possibility of default is remote (see Note 4). (ii) Tax effect accounting by members of the tax consolidated Group Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences are recognised in the separate financial statements of the members of the tax consolidated Group using the Group allocation method. Current tax liabilities and assets and deferred tax assets arising from the unused tax losses and tax credits of the members of the tax consolidated Group are recognised by Katana Capital Limited, the head entity of the tax consolidated Group. Members of the tax consolidated Group have entered into a tax funding agreement. Amounts are recognised as payable to or receivable by the Company and each member of the consolidated Group in relation to tax contribution amounts paid or payable between the parent entity and other members of the tax consolidated Group in accordance with this agreement. Where the tax contribution amount recognised by each member of the tax consolidated Group for a particular period is different to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period, the distribution is recognised as a contribution from (or distribution to) equity participants. 23 Commitments and contingencies There are no outstanding contingent liabilities or commitments as at 30 June 2020 (30 June 2019: Nil). 43 KATANA CAPITAL LIMITED2020 ANNUAL REPORT 30 JUNE 2020 DIRECTORS’ DECLARATION In accordance with a resolution of the directors of Katana Capital Limited, I state that: (a) The financial statements and notes of the consolidated entity set out on pages 22 to 43 are in accordance with the Corporations Act 2001, including (i) Giving a true and fair view of the financial position as at 30 June 2020 and of its performance for the year ended on that date of the consolidated entity. (ii) Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2011; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2(b). (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. (d) this declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2011 for the financial year ended 30 June 2020. On behalf of the Board Katana Capital Limited Dalton Gooding CHAIRMAN 29 September 2020 Perth, Western Australia 44 KATANA CAPITAL LIMITED2020 ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Independent auditor's report to the members of Katana Capital Limited Report on the audit of the financial report Opinion We have audited the financial report of Katana Capital Limited (the Company) and its subsidiary (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a. giving a true and fair view of the consolidated financial position of the Group as at 30 June 2020 and of its consolidated financial performance for the year ended on that date; and b. complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation FD:LC:KAT:027 45 KATANA CAPITAL LIMITED2020 ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT Page 2 We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. 1. Investment valuation Why significant How our audit addressed the key audit matter We assessed the fair value of significant investments in the portfolio held at 30 June 2020 by reference to independent pricing sources. We assessed the adequacy of the associated disclosures in Note 7 of the financial report. The Group has a significant investment portfolio consisting primarily of listed equities. As at 30 June 2020, the value of these financial assets, as set out in Note 7 of the financial report, was $30.6 million, which represents 78% of the total assets held by the Group at that date. The Group’s accounting policy, described in Note 2(d) of the financial report, recognises these financial assets at fair value through profit or loss in accordance with Australian Accounting Standards. Volatility and other market drivers can have a significant impact on the value of these financial assets; therefore, valuation of the investment portfolio was considered a key audit matter. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 46 KATANA CAPITAL LIMITED2020 ANNUAL REPORT Page 3 2. Management and performance fees Why significant How our audit addressed the key audit matter Management and performance fees paid to the investment manager, Katana Asset Management Ltd, are significant expenses to the Group. For the year ended 30 June 2020, management and performance fees totalled $0.830 million which represents 47% of total expenses. We assessed the Group’s performance fee eligibility calculations. We recalculated management and performance fees in accordance with contractual arrangements, assessing whether contract rates were correctly applied. We tested the inputs to the performance fee calculation by ensuring the key inputs were consistent with the financial report. We assessed the adequacy of the disclosures in Note 14(b) of the financial report. The Group’s accounting policy for management and performance fees is described in Note 2(h) of the financial report. All expenses are recognised on an accrual basis, with performance fees recognised in the financial report if the performance hurdles for the Group have been met at the end of the relevant measurement period, which is the date where certainty exists that the criteria has been met and the liability has been crystallised. The quantum of these expenses and the impact that the volatility in the market prices of investments can have on the recognition and payment of performance fees resulted in this being a key audit matter. The disclosure of these amounts is included in Note 14(b) of the financial report. Information other than the financial report and auditor’s report thereon The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 47 KATANA CAPITAL LIMITED2020 ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT Page 4 Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 48 KATANA CAPITAL LIMITED2020 ANNUAL REPORT Page 5 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. 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, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the audit of the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in pages 14 to 18 of the directors' report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Katana Capital Limited for the year ended 30 June 2020, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Fiona Drummond Partner Perth 29 September 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 49 KATANA CAPITAL LIMITED2020 ANNUAL REPORT ADDITIONAL ASX INFORMATION Net tangible assets per security Net tangible asset backing per ordinary security (after tax and provision) 30 JUNE 2020 $0.962 30 JUNE 2019 $0.927 Ordinary Fully Paid Shares - AS AT 20 AUGUST 2020 Range of Units RANGE TOTAL HOLDERS 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 Over Rounding Total 56 41 38 138 62 UNITS 11,897 120,698 319,837 5,207,572 32,615,170 335 38,275,174 Unmarketable Parcels Minimum $ 500.00 parcel at $ 0.8150 per unit 614 45 MINIMUM PARCEL SIZE HOLDERS Top 20 Shareholders RANK NAME 7 1 2 3 4 5 6 WONDER HOLDINGS PTY LTD KATANA ASSET MANAGEMENT LTD CLASSIC CAPITAL PTY LTDJOVE PTY LTD COOLAH HOLDINGS PTY LTD MR ROMANO SALA TENNA + MRS LINDA SALA TENNA MR BRAD JOHN SHALLARD + MRS LISA MAREE DUPEROUZEL BS CAPITAL PTY LTD PULO RD PTY LTD MRS LINDA SALA TENNA AUXILIUM CAPITAL PTY LTD MR RONALD WILLIAM JAMES + MRS ELIZABETH JANET JAMES CAMBO INVESTMENTS PTY LTD COLLORI PTY LTD METHUEN HOLDINGS PTY LTD MR MARK JOHN BAHEN + MRS MARGARET PATRICIA BAHEN MRS ELSIE DA SILVA 17 KEFIR PTY LTD 18 BLU BONE PTY LTD 19 WFF PTY LTD 20 Top 20 holders of ORDINARY FULLY PAID SHARES (TOTAL) 8 9 10 11 12 13 14 15 16 UNITS 2,518,139 2,294,806 2,000,993 1,497,422 1,474,096 1,371,523 1,321,419 1,283,766 1,204,400 883,964 868,737 830,000 759,603 740,756 655,910 600,000 530,706 500,000 495,539 473,288 22,305,067 % UNITS 0.03 0.32 0.84 13.61 85.21 - 0.01 100.00 UNITS 3,117 % OF UNITS 6.58 6.00 5.23 3.91 3.85 3.58 3.45 3.35 3.15 2.31 2.27 2.17 1.98 1.94 1.71 1.57 1.39 1.31 1.29 1.24 58.28 Substantial Shareholders NAME WONDER HOLDINGS PTY LTD Brad Shallard Romano Sala Tenna 50 SHARES 2,518,139 1,321,419 1,371,523 % OF SHARES 6.58 3.45 3.58 KATANA CAPITAL LIMITED2020 ANNUAL REPORT ADDITIONAL ASX REPORTING (a) List of Investments Held at 30 June 2020 Katana Investment Portfolio AERIS RESOURCES ORD AMA GROUP ORD AMP ORD ARISTOCRAT LEISURE ORD AUSTRALIA NEW ZEALAND BANKING ORD BANK OF QUEENSLAND ORD BEACH ENERGY ORD BELL FINANCIAL GROUP ORD BENDIGO AND ADELAIDE BANK ORD BETASHARES AUSTRALIAN HIGH ETF BORAL ORD CADENCE CAPITAL ORD CATAPULT GROUP INTERNATIONAL ORD CHARTER HALL GRP UNT COCA COLA AMATIL ORD COMMONWEALTH BANK OF AUSTRALIA ORD CSL ORD EMECO HOLDINGS ORD GOLD ROAD RESOURCES ORD GOODMAN GROUP UNT INGENIA COMMUNITIES UNT INVEX THERAPEUTICS PVT PL ORD ISENTIA GROUP ORD KAROON GAS AUSTRALIA ORD KINA SECURITIES ORD KINGSGATE CONSOLIDATED ORD L1 LONG SHORT FUND ORD LENDLEASE GROUP UNT MACQUARIE GROUP ORD MINERAL RESOURCES ORD NATIONAL AUSTRALIA BANK ORD NEWCREST MINING ORD NEXTDC ORD NRW HOLDINGS ORD ORTHOCELL ORD OZ MINERALS ORD POINTSBET HOLDINGS ORD PRAEMIUM ORD QANTM INTELLECTUAL PROPERTY ORD REA GROUP ORD REGIS RESOURCES ORD RESMED CDI RESOLUTE MINING ORD SARACEN MINERAL HOLDINGS ORD SCENTRE GROUP ORD SEVEN GROUP HOLDINGS ORD SEVEN WEST MEDIA ORD SONIC HEALTHCARE ORD SYDNEY AIRPORT UNT SYNLAIT MILK ORD TELSTRA CORPORATION ORD TYRO PAYMENTS ORD UNIBAIL-RODAMCO-WESTFIELD CDI UNITI GROUP ORD VICINITY CENTRES RES VIRGIN MONEY UK CDI WESFARMERS ORD WESTPAC BANKING CORPORATION ORD (b) Total Number of Transactions during the report period Total number of transactions during the 12 months to 30 June 2020 was 1401 with brokerage fees of $352,986 (c) Total management fees paid or accrued and summary of agreement Please refer to disclosure made in Remuneration Report. (d) Corporate Governance Statement Please refer to www.katanaasset.com 51 KATANA CAPITAL LIMITED2020 ANNUAL REPORT www.katanaasset.com