ANNUAL REPORT For the year ended 30 June 2022 Terragen Holdings Limited and Controlled Entity | ABN 36 073 892 636 www.terragen.com.au TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY CHAIRMAN’S REPORT On behalf of the Directors of Terragen Holdings Limited (Terragen) I am pleased to provide you the following annual report, for your Company for the financial year ended 30 June 2022. Terragen is a biological agriculture company, changing the face of global agriculture by developing products that reduce agriculture’s reliance on chemicals. Terragen creates proprietary biological products that amplify nature to improve animal wellbeing, soil quality and crop growth. Our current product portfolio comprises a feed supplement for ruminant animals, such as dairy cows and beef cattle, called MYLO®, plus a soil conditioner called GREAT LAND PLUS®. Using Terragen’s products gives farmers an advantage with a natural, sustainable and chemical-free way to farm that increases productivity, is cost-effective, and is good for animal and soil health. It will come as no surprise that I note that the FY22 financial year was one of the most challenging years for business in living memory. As a relatively young enterprise trying to make an impact on agriculture, the restrictions that the Covid-19 lockdowns imposed throughout Australia had a negative effect on Terragen. Endeavouring to break through with a revolutionary new product was made difficult due to the inability to foster customer relationships in the farming communities of Australia and New Zealand. That said, despite this tough operating environment, there are reasons for optimism in the future of Terragen. The role of sustainability in agriculture is undeniable. Animal health and the health of the environment more broadly is bringing pressure on agricultural companies to operate more sustainably. The reduction of greenhouse gas (GHG) emissions from livestock and nitrogen fertiliser usage now forms a key component in many countries’ responses to global warming. In this context, Terragen provides commercially viable options that are available now for farmers seeking solutions to these generational challenges. In April 2022, Terragen was pleased to announce that MYLO®, its direct fed microbial product for livestock, had been shown to meaningfully reduce methane emissions from dairy cattle. This study took place at the internationally respected Ellinbank SmartFarm of the Victorian government, not in a laboratory but with a cohort of working dairy cattle. Pleasingly, the study reinforced previous studies that showed MYLO® also increases productivity in dairy cattle. The focus of Terragen throughout the year has been to position itself for future growth. This has centred on the following key pillars: maintaining the scientific heritage that elevates Terragen above its competitors, developing a sales methodology in readiness for the lifting of lockdown restrictions and implementing cash preservation strategies to extend Terragen’s cash runway. This has all been incremental to the underlying requirement to execute Terragen’s business in accordance with good corporate governance. I am pleased to report solid progress against each of these goals. The results of the Ellinbank SmartFarm study were presented to the 8th International Greenhouse Gas and Animal Agriculture Conference in Orlando, Florida in early June 2022. This further established Terragen’s credentials at the forefront of the biological agriculture movement. The sales team has been renewed and reinvigorated, with an emphasis on the technical requirements of scientific product sales. I am pleased to note that Management has also implemented measures to reduce unnecessary cash burn during this period. In terms of governance, the Management team continues to improve the operational approach to safety management and develop fit for purpose reporting systems and sales analytics. During the FY22 financial year, Dr Paul Schober retired from the Board. Dr Schober had a long association with Terragen, having first joined the Board in 2017 before becoming the inaugural Chair of listed Terragen in December 2019. On behalf of the entire Board, I thank Paul for his time and effort over the years, which included the journey to and through the successful IPO process, and we wish him well for the future. I look forward to leading the Board of Terragen and to guide the Company to success in its role of growing sustainable agriculture and farm productivity. Travis Dillon | Chair of the Board of Directors Melbourne, 28 September 2022 1 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 MANAGING DIRECTOR AND CEO’S REPORT I am pleased to provide you the following report, for your Company, Terragen Holdings Limited, for the year ended 30 June 2022. Terragen has continued to implement its strategy to be a leading biological agriculture company, with developments in methane reduction technology, a renewed sales team distributing products to the market, improved marketing through a new website, and considerably increased social media activity, all whilst navigating the difficulties of lock-down caused by the global pandemic. MYLO®, Terragen’s direct fed microbial product for livestock, grew in sales revenue in the second half of the year, after reduced sales in the first half caused by lock-down. At year end, 4.4% of the Australian dairy cow market were supplemented with MYLO® daily for its productivity and health benefits. In late April 2022, Terragen announced to the market positive news confirming that MYLO® reduces methane emissions in dairy cattle. These results were delivered from an independent study conducted at the Ellinbank SmartFarm, operated by the Victorian Government Department of Agriculture. Scientists from the Ellinbank SmartFarm presented the methane reduction results in June 2022 at the 8th Greenhouse Gas in Animal Agriculture Conference held in Orlando, Florida. This event is the primary global venue to see the latest research on the mitigation of greenhouse gases. I attended this conference and left the week with heightened confidence that Terragen is well-placed in the methane reduction ecosystem. The key observation to share with investors is that, distinct from other “methane busting” products, MYLO® was the only product presented which also increased productivity through better feed conversion efficiency and increased milk production. During the year, the price of urea fertiliser continued to increase, putting significant upward pressure on input costs for dairy farmers. This resulted in renewed interest in the use of GREAT LAND PLUS® as a biological soil stimulant, which can reduce the need for nitrogen fertiliser such as urea. Terragen is addressing this demand with renewed efforts to increase sales of GREAT LAND PLUS®, including increased technical training for the sales team and agents and improved marketing materials for customers. A continued priority for Terragen was to build capability to underpin strategy and execution. This resulted in the appointment of six sales managers across Australia and New Zealand, replacing the existing sales team, with an emphasis on technical sales to farmers, agronomists and farm nutritionists. A Vet Scientist was appointed during the year to lead the technical product support required by Terragen’s customers. In New Zealand, Terragen agreed a distribution agreement with Fonterra Farm Source for selling MYLO® to dairy farmers. With a large network of stores throughout the north and south island, and most dairy farmers in New Zealand members of the Fonterra cooperative, this arrangement was a significant step for Terragen increasing sales in New Zealand. Terragen continues to run its major 18-month study on an operating dairy farm at Harrisville, Queensland which is building on Terragen’s existing research and development knowledge, and providing further evidence of the benefits of MYLO® for dairy cows, including the potential of MYLO® to reduce methane emissions. The study has been running since July 2021 and the on farm component is scheduled to finish in January 2023. Material findings from the study will be reported to the market when they become available. On behalf of the team at Terragen I would like to thank all shareholders for your on-going support of the company. Jim Cooper | Managing Director and CEO Melbourne, 29 August 2022 3 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 CONTENTS Directors’ Report Auditor’s Independence Declaration Independent Auditor’s Report Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Shareholder Information Corporate Directory 5 25 25 30 31 32 33 35 62 63 66 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 DIRECTOR’S REPORT The directors of Terragen Holdings Limited (the “Company” or “Terragen”) submit herewith the financial report of the Company and the entity it controlled for the year ended 30 June 2022 (collectively “Group”). To comply with the provisions of the Corporations Act 2001, the directors report as follows. DIRECTORS The following persons were directors of Terragen Holdings Limited during the whole of the year and up to the date of this report, unless otherwise stated: » » » » » Travis Dillon Dr Paul Schober Sam Brougham Ingrid van Dijken Jim Cooper Non-Executive Chair Non-Executive Director (resigned 28 February 2022) Non-Executive Director Non-Executive Director Managing Director Information on directors and key management personnel in office during the financial year and to the date of this report. Particulars of interests in shares and options of Terragen Holdings Limited Shares# Options 350,000 held indirectly Nil Name and Position Travis Dillon Non-Executive Chair Appointed Non- Executive Chair on 27 July 2020 Qualifications and Experience Mr Dillon holds extensive commercial and strategic expertise in the agricultural distribution channel. Mr Dillon was the CEO and Managing Director of Ruralco Holdings Limited until its acquisition by Nutrien in September 2019. Prior to becoming Ruralco’s Managing Director in 2015, he was the Executive General Manager of Ruralco’s Operations. Over a career in Agriservices, spanning nearly 3 decades, Mr Dillon has held many positions including Branch Manager, Agronomist, and numerous Category Manager roles. Travis is a Non-Executive Director of Lifeline Australia. Other directorships in past three years: Ruralco Holdings Limited; Lifeline Australia; Dillon Consulting Company Pty Ltd; Clean Seas Seafood Limited; S&W Seeds Australia; Select Harvest Dr Paul Schober Non-Executive Director Resigned on 28 February 2022 Dr Schober has had a 30-year career in the animal health industry, including senior executive positions in which he established global distribution agreements and implemented commercial rigour for biotechnology research companies including Peptech Animal Health, Anatara Lifesciences and Apex Laboratories. Dr Schober attained PhD and MBA degrees at the University of Sydney. 81,000 held directly and 152,000 held indirectly at the time of ceasing to be a director 80,000 (investment options) held indirectly at the time of ceasing to be a director Other directorships in past three years: Nil 5 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 Name and Position Qualifications and Experience Sam Brougham Non-Executive Director Mr Brougham has an economics degree from the University of Adelaide. He has over thirty years’ experience in private and public investment and is currently a director of Ellerston Global Investments and Ceres Capital, a private global equity investment firm he cofounded in 1999. Mr Brougham also co- founded Structured Asset Management in 1993. After receiving an economics degree from the University of Adelaide, he spent his early career with Price Waterhouse, and as a partner at JB Were. Sam is a Director of Ellerston Asian Investments Limited. Other directorships in past three years: Ellerston Global Investments Limited; Ellerston Asian Investments Ltd; Crofton Park Developments Pty Ltd; Ceres Capital Pty Ltd; Stamina Pty Ltd Particulars of interests in shares and options of Terragen Holdings Limited Shares# Options 15,178,718 held indirectly 1,600,000 (investment options) held indirectly Ingrid van Dijken Non-Executive Director Ms van Dijken holds a Masters’ degree in International Relations from the Graduate Institute in Geneva and an undergraduate degree from the Universiteit Utrecht, in the Netherlands. 970,000 held indirectly 100,000 (investment options) held indirectly Ms van Dijken has more than 20 years’ experience in private banking and funds management both in Australia and Switzerland. During these years she held senior management positions and acquired an in-depth understanding of wealth management for high-net-worth individuals. Ms van Dijken currently works at a privately held funds management firm. From early 2014 until September 2018, she worked at the Impact Investment Group (IIG) in Melbourne, an Australian impact investment funds manager. She joined as the General Manager and became the Chief Operating Officer & Head of Investor Relations. Ingrid was instrumental in driving the transformation from a start-up in 2014 to a medium sized funds management business four years later. Ms van Dijken is a Trustee of the St Peters Eastern Hill Melbourne Charitable Foundation. She has been a non- executive board member of Escala Partners, a Melbourne based wealth management firm from 2015 until March 2019. Other directorships in past three years: Nil 6 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 Name and Position Qualifications and Experience Jim Cooper Company Secretary and Chief Financial Officer Mr Cooper is an experienced agribusiness, infrastructure, and supply chain CEO with expertise in business development, stakeholders, sustainability, and strategy. Jim’s experience in infrastructure and supply chain comes from 13 years managing privatised shipping ports in Portland and Melbourne. Particulars of interests in shares and options of Terragen Holdings Limited Shares# Options 500,000 held indirectly Nil He has policy experience with 6 years as a Board member of Ports Australia, and he has been a member of numerous Government committees and advisory boards. Other directorships in past three years: Ports Australia Limited – Director and Deputy Chairman Mr Grave has had an extensive agricultural career with dairy giant Fonterra across legal, commercial, and senior management roles. He was Director of Global Dairy Trade, growing the business from start up to electronically trading dairy products in over 100 countries, and the Head of Farm Source Waikato, leading a high performing team driving engagement across 5,000 farmers. Mr Grave was also a Director of Milk Test NZ. He holds a Bachelor of Laws (LLB) and a Bachelor of Commerce (B.Com) (Economics) from the University of Otago, New Zealand. Mrs King is a highly commercial senior finance and accounting executive. Prior to joining Terragen, Mrs King was at Port of Portland for 9 years, most recently as Financial Controller managing the overall financial activities of the organisation. Prior to that role she was the Business Development Manager, responsible for the commercial growth of the business. Mrs King has extensive experience managing projects and implementing new systems and processes in growing organisations. She is CPA qualified and holds a Bachelor of Commerce and Masters of Professional Accounting. Mr Brennan was appointed Chief Financial Officer in August 2021. Prior to joining Terragen, Miles enjoyed a long finance leadership career across a variety of highly successful businesses in the FMCG industry, including Simplot Australia, Treasury Wine Estates and Red Bull UK. Miles is a member of CIMA (Chartered Institute of Management Accountants) and CPA Australia. Paul Grave General Manager New Zealand Kara King Company Secretary and Chief Financial Officer Resigned on 29 August 2021 Miles Brennan Company Secretary and Chief Financial Officer Appointed on 30 August 2021 8,000,000 (Incentive Options) held directly Nil Nil Nil Nil # Includes shares in which the Director has an indirect interest through associated entity. Company secretaries Kara King (resigned 29 August 2021) Miles Brennan (appointed 30 August 2021) 7 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 MEETINGS OF DIRECTORS The number of meetings of the Group’s board of directors and each board committee held during the year ended 30 June 2022, and the numbers of meetings attended by each director were as follows: Number of meetings held Number of meetings eligible to attend Number of meetings attended BOARD MEETINGS: 10 Travis Dillon Dr Paul Schober Sam Brougham Ingrid van Dijken Jim Cooper 10 6 10 10 10 10 5 10 10 10 The members of the Audit and Risk Committee and the Remuneration and Nomination Committee during the financial year were: » Audit and Risk Committee: Dr Paul Schober (Chairperson), Ingrid van Dijken and Travis Dillon. Following Dr Paul Schober’s resignation on 28 February 2022, Ingrid van Dijken became Chairperson of the Audit and Risk Commit- tee. No meetings were held since that time. Remuneration and Nomination Committee: Ingrid van Dijken (Chairperson), Sam Brougham and Travis Dillon. » The numbers of meetings attended by each committee member were as follows: Number of Audit and Risk Committee meetings held Dr Paul Schober Ingrid van Dijken Travis Dillon Number of Remuneration and Nomination Committee meetings held Sam Brougham Ingrid van Dijken Travis Dillon PRINCIPAL ACTIVITIES Number of meetings eligible to attend Number of meetings attended MEETINGS: 2 2 2 2 2 2 2 Number of meetings eligible to attend Number of meetings attended MEETINGS: 2 2 2 2 2 2 2 The consolidated entity’s principal activities during the financial year were research, development, and early market development of biological products in the agriculture sector. There were no significant changes in the nature of these activities during the financial year. CORPORATE ACTIVITIES During the year, the Group: » » Issued 2,605,000 shares on the exercise of options. Made the following Board and Management Changes: • Dr Paul Schober resigned from his position as Non-executive Director on 28 February 2022 Kara King resigned as Company Secretary and Chief Financial Officer on 29 August 2021 • Appointed Miles Brennan as the Company Secretary and Chief Financial Officer effective 30 August 2021 • 9 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 OPERATING AND FINANCIAL REVIEW REVIEW OF FINANCIAL RESULTS The Group reported a loss after tax for the year of $5,407,130 (2021: loss of $6,100,151). The significant items affecting the operating result were: » Revenues of $2,890,716 (2021: $3,652,301) from the sale of the Company’s two products Mylo® and Great Land Plus® in Australia and New Zealand. The Group’s performance was adversely impacted in the first half of the year (“H1”) by two key factors: Covid lockdowns significantly limiting sales activity and a restructure of the sales team. These factors eased in the second half of the year (“H2”) with lockdown restrictions lifting and the completion of the restructure in late-2021. Part of the restructure was to have permanent sales presence in Tasmania, which also limits any adverse impacts of any future restrictions. This easing of the headwinds in the second half of the year allowed a return to growth for the company’s core product, the direct fed microbial, Mylo®. H2 net revenues of Mylo® were +6.1% versus prior year comparative, after H1 net revenue had been -6.9% versus prior year comparative. The company’s soil conditioner Great Land Plus® was given a lower priority in FY22, as Terragen focussed resource on the larger market for Mylo®. In late FY21, Terragen implemented a re-formulation of Great Land® and launched at a new price point as Great Land Plus®. FY21 benefitted from additional sales volumes due to the customer buy-up of the previous formulation prior to de-listing. Great Land Plus® also suffered from the same issues of Covid lockdowns and sales restructure, but showed signs of recovery in H2, with net revenues for the half +13% vs H1. Income tax benefit of $893,430 (2021: $580,692) comprising the accrued research and development tax benefit in relation to research and development expenditure incurred by the Group during the year. Operating expenses of $9,286,538 in the year have decreased by 13% from the prior year operating expenses of $10,726,707. Expenditure consists principally of: • Direct research expenditure of $840,396 (2021: $871,232) Employee benefits expense $4,498,319 (2021: $3,816,687) • Sales commissions to Retail Agents of $694,786 (2021: $972,999) • Advertising and marketing expenditure of $511,501 (2021: $622,593). • » » REVIEW OF FINANCIAL POSITION » » Net cash flows used in operating activities increased by 6% to $(4,805,134) (2021: $(4,523,949)). Terragen Group’s net assets have decreased from $13,023,288 to $7,761,261 which is consistent with and largely attributable to the current year’s loss after tax. The Group’s receivables and cash flow management continue to support overall strength in working capital. Terragen Group’s borrowings relate only to lease liabilities for the Group’s rental premises and small motor vehicle fleet. The Group currently has no other financing facilities. Consequently, the Group’s gearing ratio at period end, defined as net debt over net debt plus equity, is negligible at <1% and in line with prior year. » REVIEW OF OPERATIONS Terragen develops and markets probiotics for agricultural applications. Each product uses a unique combination of naturally occurring live microbe strains selected to help boost the productivity, welfare and resilience of farm production animals and address soil health. Terragen’s aim is to increase farm productivity through the use of these products, whilst providing improved environmental sustainability that will be attractive to consumers. Terragen has two products on the market in Australia and New Zealand: a microbial feed supplement for animals known as Mylo®, and a soil conditioner called Great Land Plus®. 10 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 PRINCIPAL RISKS The Group’s growth and success depends on its ability to understand and respond to the challenges of an uncertain and changing world. This uncertainty generates risk, with the potential to be a source of both opportunities and threats. By understanding and managing risks, we provide greater certainty and confidence for all shareholders. The material business risks that could adversely impact the Group’s financial prospects in future periods and the broad approach Terragen takes to manage these risks are outlined below. These risks are not a complete or exhaustive list of the risks the Group is exposed to. DESCRIPTION MITIGATION RISK Financial risks Operational risks Cyber risks Terragen is exposed to a variety of financial risks, including credit risk, adverse movements in interest rates as well as liquidity risk. These risks may have an adverse effect on the Company’s operating and financial performance. A prolonged and unplanned interruption to Terragen’s operations could significantly impact the Company’s financial performance and reputation. Terragen is exposed to a variety of operational risks, including risk of site loss or damage, environmental and climatic events, global pandemic risks, technology failure or incompetency and systems security or data breaches. Delivery of Terragen’s strategy includes the ability to continue to build a strong customer base and customer service culture to ensure we retain our customers. Terragen, like any organisation, faces an ever- changing cyber security threat, and needs to prevent, detect and respond to cyber security threats by maintaining a high standard of information security control. EARNINGS PER SHARE Basic loss per share from continuing operations Diluted loss per share from continuing operations The Group has in place Treasury policies that focus on managing these risks. These policies are reviewed by the Board of Directors. Treasury activities are reported to the Board on a regular basis with the ultimate responsibility being borne by the Chief Financial Officer (CFO). Information on how Terragen manages financial risks is included in note 23 to the Financial Statements. Terragen has a range of controls and strategies in place to manage such risks, including inspection and maintenance procedures, compliance programs, training, site and business interruption insurance and systems security testing and improvements. Customer requirements and service level remain a focus area of the business. The Group has in place a Computer and Cyber Security, Digital Information, Internet and Email policy. The policy sets out security controls and standards of behaviour determined as necessary to achieve an appropriate level of information security. 2022 2.80 cents 2.80 cents 2021 3.23 cents 3.23 cents LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Terragen is focused on sales growth of its key products in Australia and New Zealand and is pursuing continued sales growth in the coming year. 11 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 EVENTS SINCE THE END OF THE FINANCIAL YEAR There has been no matter or circumstance which has arisen since the end of the year that has significantly affected, or may significantly affect the Group’s operations, the result of those operations or the Group’s state of affairs. DIVIDENDS No dividends were paid or declared during the year and no recommendation is made as to payment of dividends. SIGNIFICANT CHANGES IN STATE OF AFFAIRS There were no significant changes in the state of affairs of the Group during the financial year. ENVIRONMENTAL REGULATION The Group was not subject to any significant environmental regulation under a law of the Commonwealth or a State or Territory of Australia. SHARES UNDER OPTION Unissued ordinary shares of the Group under option at the date of this report are as follows: Option series Grant Date Expiry Date Exercise price of options Number under options Tranche 7 Tranche 10 Tranche 11 Tranche 12 Tranche 13 Tranche 14 Tranche 15 01/09/2017 13/06/2019 10/07/2019 17/07/2019 4/12/2020 4/12/2020 4/12/2020 16/08/2022 11/12/2022 11/12/2022 11/12/2022 4/12/2025 4/12/2025 4/12/2025 $0.05 $0.25 $0.25 $0.25 $0.25 $0.50 $1.00 600,000 8,100,000 2,000,000 1,145,710 1,000,000 2,000,000 5,000,000 19,845,710 No option holder has any right under the options to participate in any other share issue of the company or any other entity. SHARES ISSUED ON THE EXERCISE OF OPTIONS During the financial year 2,605,000 shares were issued as a result of the exercise of options. 12 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 REMUNERATION REPORT (AUDITED) This remuneration report, which forms part of the Directors’ Report, sets out information about the remuneration of Terragen Holdings Limited’s key management personnel for the financial year ended 30 June 2022. The term ‘key management personnel’ refers to those persons having authority and responsibility for planning, directing, and controlling the activities of the consolidated entity, directly or indirectly, including any director (whether executive or otherwise) of the consolidated entity. The prescribed details for each person covered by this report are detailed below under the following headings: » » » » » Key management personnel Remuneration policy Remuneration, Group performance and shareholder wealth Remuneration of key management personnel Key terms of employment contracts. KEY MANAGEMENT PERSONNEL a. The directors and other key management personnel of the consolidated entity during or since the end of the financial year were: Non-executive directors Travis Dillon Dr Paul Schober Sam Brougham Ingrid van Dijken Position Chair Non-Executive Director (resigned 28 February 2022) Non-Executive Director Non-Executive Director Executive Directors Position Jim Cooper Executive Director, Managing Director Other Key Management Personnel Position Paul Grave Kara King Miles Brennan General Manager New Zealand Company Secretary and Chief Financial Officer (resigned 29 August 2021) Company Secretary and Chief Financial Officer (appointed 30 August 2021) Except as noted, the named persons held their current position for the whole of the financial year and since the end of the financial year. REMUNERATION POLICY b. The Board of Terragen Holdings Limited is responsible for determining and reviewing compensation arrangements for the non-executive directors and the executive director. The Board’s remuneration policy is to ensure that the remuneration package properly reflects the person’s duties and responsibilities, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high-quality board and executive team. Such officers are given the opportunity to receive their base emolument in a variety of forms. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost to the Group. In accordance with best practice corporate governance, the structure of non-executive director and executive remuneration is separate and distinct. 13 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 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 high calibre, whilst incurring a cost which is acceptable to shareholders. STRUCTURE Remuneration of non-executive directors is determined by the Board, within the maximum amount approved by the shareholders from time to time (currently set at an aggregate of $300,000 per annum). The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed annually. The Board considers the fees paid to non-executive directors of comparable companies when undertaking the annual review process. Each non-executive director receives a fee for being a director of the Company. The non-executive Chair receives an annual fee of $54,000, all other non-executive directors receive an annual fee of $36,000. In addition, non-executive directors receive an annual fee of $4,000 for each board sub-committee of which they are a member. Non-executive directors who are the Chair of those sub-committees, receive an additional $4,000 annually. Non-executive directors who are called upon to perform extra services beyond the director’s ordinary duties may be paid additional fees for those services. The following fees were paid to non- executive directors for additional services during the year ended 30 June 2022: » $50,000 to Travis Dillon (2021: $64,000) in relation to consulting services provided to the Sales and Marketing Team during the year. Non-executive directors may also be granted equity incentives from time to time. The options granted are considered by the Board to be an effective means of appropriately compensating directors whilst preserving the Group’s cash reserves and providing an alignment between Director and shareholder interests. No equity incentives were issued to non- executive directors as remuneration during the financial year. EXECUTIVE DIRECTORS AND KEY MANAGEMENT PERSONNEL REMUNERATION OBJECTIVE The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group so as to: » » » » reward executives for Group and individual performance against agreed targets; align the interest of executives with those of shareholders; link reward with the strategic goals and performance of the Group; and ensure total remuneration is competitive by market standards. STRUCTURE In determining the level and make-up of executive remuneration, the Board has had regard to market levels of remuneration for comparable executive roles. It is the Board’s policy that employment contracts are entered into with all senior executives. 14 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 VARIABLE REMUNERATION - SHORT AND LONG-TERM INCENTIVES TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 OBJECTIVE The objectives of the incentive plan are to: » recognise the ability and efforts of the employees of the Group who have contributed to the success of the Group and to provide them with rewards where deemed appropriate; provide an incentive to the employees to achieve the long-term objectives of the Group and improve the performance of the Group; and attract persons of experience and ability to employment with the Group and foster and promote loyalty between the Group and its employees. » » STRUCTURE Long term incentives granted to senior executives are delivered in the form of shares, options or performance rights in accordance with an Employee Incentive Plan. As part of the Group’s annual strategic planning process, the Board and Management agree upon a set of financial and non-financial objectives for the Group. The objectives form the basis of the assessment of Management performance and vary but are targeted directly to the Group’s business and financial performance and thus to shareholder value. REMUNERATION, GROUP PERFORMANCE AND SHAREHOLDER WEALTH c. The development of remuneration policies and structures is considered in relation to the effect on Group performance and shareholder wealth. They are designed by the Board to align director and executive behaviour with improving Group performance and ultimately shareholder wealth. The Board considers at this stage in the Group’s development, that share price growth itself is an adequate measure of total shareholder return. Executives are currently remunerated by a combination of cash base remuneration, options and short-term incentives. The options granted are considered by the Board to provide an alignment between the employees and shareholders interests. The table below shows for the current financial year and previous financial years the total remuneration cost of the key management personnel, earnings per ordinary share (EPS), dividends paid or declared, and the closing price of ordinary shares on ASX at year end. Financial Year Total Remuneration $ 2022 2021 2020 2019 1,111,142 2,500,558 766,416 488,211 EPS (Cents) (2.80) (3.23) (3.27) (3.38) Dividends (cents) Share Price as at 30 June (cents) - - - - 15.5 28.0 17.5 N/A1 1The Company commenced trading on the ASX on 11 December 2019. REMUNERATION OF KEY MANAGEMENT PERSONNEL d. Compensation paid, payable or provided by the Group or on behalf of the Group, to key management personnel is set out below. Key management personnel include all directors of the Group and certain executives who, in the opinion of the Board and Managing Director, have authority and responsibility for planning, directing, and controlling the activities of the Group directly or indirectly. The Company’s Managing Director and other members of senior management are employed under individual contracts of employment with the Company. The contracts set out: » The individual’s total fixed compensation, including fixed cash remuneration and the Company’s superannuation contribution; Notice and termination provisions; and Employee entitlements including leave. » » 15 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 » » » » » » » » » » TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 The Company makes contributions with respect to the senior executives to complying superannuation funds in accordance with relevant superannuation legislation and the individual contracts of employment. Summaries of material service agreements are set out below: JIM COOPER, MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER » Term of Agreement – Commencing from 25 June 2020 and ongoing unless terminated in accordance with its terms. Base Remuneration – Effective 25 June 2020 $301,125 per annum, including superannuation contributions, on a fulltime basis, subject to annual increases at the discretion of the Board of Directors. Additional annual car allowance of $19,495. Termination – By four months’ notice from either party. Incentive benefits – Under the Employee Incentive Plan, to be determined by the Board of Directors after review of the annual company result for the relevant calendar year, and Management’s performance Equity – The Director shall be entitled to participate in the Employee Incentive Plan of the Company. PAUL GRAVE, GENERAL MANAGER NEW ZEALAND » Base Remuneration – Effective 10 May 2021 NZD $257,500 per annum, including KiwiSaver contributions, plus car allowance NZD$25,000, on a fulltime basis, subject to annual increases at the discretion of the Board of Directors. Annual incentive of NZD$100,000 on achievement of Key Performance Indicators set by the Company. Termination – By three months’ notice from either party. MILES BRENNAN, CHIEF FINANCIAL OFFICER AND COMPANY SECRETARIAL SERVICES (APPOINTED 30 AUGUST 2021) » Base Remuneration – Effective 30 August 2021 $250,000 per annum, including superannuation contributions, on a fulltime basis, subject to annual increases at the discretion of the Board of Directors. Termination – By three months’ notice from either party. Incentive benefits – Under the Employee Incentive Plan, to be determined by the Board of Directors after review of the annual company result for the relevant calendar year, and Management’s performance Equity – The employee shall be entitled to participate in the Employee Incentive Plan of the Company. KARA KING, CHIEF FINANCIAL OFFICER AND COMPANY SECRETARIAL SERVICES (RESIGNED 29 AUGUST 2021) » Base Remuneration – Effective 5 October 2020 $195,000 per annum, including superannuation contributions, on a fulltime basis, subject to annual increases at the discretion of the Board of Directors. Termination – By three months’ notice from either party. Incentive benefits – Under the Employee Incentive Plan, to be determined by the Board of Directors after review of the annual company result for the relevant calendar year, and Management’s performance Equity – The employee shall be entitled to participate in the Employee Incentive Plan of the Company. » » » 16 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 17 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 2022 Cash and salary fees Super- annuation Employee entitlementsg Share based payments Other Total remuneration Proportion of remuneration that is performance based $ NON-EXECUTIVE DIRECTORS Travis Dillona 62,000 Dr Paul Schoberb 29,333 Sam Broughamc 44,000 Ingrid van Dijken 44,000 Total Non- Executive Directors 179,333 $ - - - - - - - - - - EXECUTIVE DIRECTORS Jim Cooper 276,931 24,194 37,026 Total Executive Directors 276,931 24,194 37,026 OTHER KEY MANAGEMENT PERSONNEL Paul Graved 225,569 35,592 191,116 7,444h 2,955 19,112 8,589 - 11,229 452,277 29,511 19,818 908,541 53,705 56,844 Kara Kinge Miles Brennanf Total Key Management Personnel Total Director and KMP Compensation $ $ 50,000 112,000 - - - 29,333 44,000 44,000 50,000 229,333 19,495 357,646 19,495 357,646 22,557 - - 264,159 38,547 221,457 22,557 524,163 % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 92,052 1,111,142 0% - - - - - - - - - - - - a Travis Dillon invoices director fees via Dillon Consulting Company Pty Ltd. b Dr Paul Schober invoiced director fees via an ABN. Paul Schober resigned on 28 February 2022. c Sam Brougham invoices director fees via Crofton Park Developments Pty Ltd atf Sam Brougham Family Trust. d Paul Grave’s earnings are paid in NZD and have been translated to AUD for the purposes of this table. e Resigned 29 August 2021 f Appointed 30 August 2021 g Reflects annual and long service leave movements during the year h KiwiSaver contribution of 3% of Gross Earnings 18 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 2021 Cash and salary fees Super- annuation Employee entitlementsi Share based payments Other Total remuneration Proportion of remuneration that is performance based $ NON-EXECUTIVE DIRECTORS Travis Dillona,b 62,000 Dr Paul Schoberc 44,000 Sam Broughamd 44,000 Ingrid van Dijken 44,000 Gregory Robinsone Dr John Ryalse - - Total Non- Executive Directors 194,000 EXECUTIVE DIRECTORS $ - - - - - - - $ $ 64,000 126,000 - - - - - 44,000 44,000 44,000 - - 64,000 258,000 - - - - - - - - - - - - - - Jim Cooper 279,431 21,694 21,494 1,664,734 19,495 2,006,848 Total Executive Directors 279,431 21,694 21,494 1,664,734 19,495 2,006,848 OTHER KEY MANAGEMENT PERSONNEL 33,701 128,567 50,000 1,011h 12,214 - 2,969 3,832 - 212,268 13,225 6,801 - - - - 3,416 - - 41,097 144,613 50,000 3,416 235,710 % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 685,699 34,919 28,295 1,664,734 86,911 2,500,558 0% a Appointed Chair on 27 July 2020 b Travis Dillon invoices director fees via Dillon Consulting Company Pty Ltd. c Dr Paul Schober invoices director fees via an ABN d Sam Brougham invoices director fees via Crofton Park Developments Pty Ltd atf Sam Brougham Family Trust. e Resigned 27 July 2020 f Appointed 10 May 2021. Paul Grave’s earnings are paid in NZD and have been translated to AUD for the purposes of this table. g Resigned 2 December 2020 h KiwiSaver contribution of 3% of Gross Earnings i Reflects annual and long service leave movements during the year 19 Paul Gravef Kara King Stephen Kellyg Total Key Management Personnel Total Director and KMP Compensation TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 SHARE-BASED COMPENSATION On 17 July 2019, Terragen established an employee incentive plan (Employee Incentive Plan) to assist in the motivation, reward and retention of its Directors, executive staff, and other selected employees. Incentives under the Employee Incentive Plan may be offered to an Eligible Employee which means: » » » an employee of a Group Company; an executive director, a non-executive director, or a company secretary of a Group Company; or a contractor or consultant who provides services to a Group Company. In selecting Eligible Employees to apply for, or otherwise receive incentives (Incentives), the Board will have regard to: » » » » » the position in the Terragen Group held or to be held by the Eligible Employee; the Eligible Employee’s length of service with the Terragen Group; the contribution made by the Eligible Employee to the Terragen Group; the potential contribution to be made by the Eligible Employee to the Terragen Group; and any other matters which the Board considers relevant. The following incentives may be issued under the Employee Incentive Plan: » » » a performance right; an option; and a share. A grant of Incentives under the Employee Incentive Plan is subject to both the rules of the Employee Incentive Plan and the terms of the specific grant. Options or performance rights granted under the Employee Incentive Plan may only be exercised if, at the time of exercise: » » » the options or performance rights have vested; the options or performance rights have not been forfeited or lapsed; and the exercise price (for option or performance right (as adjusted if applicable)) has been paid. During the financial year no options were issued under the Employee Incentive Plan. The Board has rules that contain restrictions on removing the ‘at risk’ aspect of the options granted to executives. Executives may not enter into any transactions designed to remove the ‘at risk’ aspect of an instrument before it vests. There are no vesting conditions attached to options issued in previous years. In the event of termination (specified circumstances) only vested options are entitled to be exercised and must be exercised within thirty days of termination or such other period as may be determined by the Board of Directors. The assessed fair value at grant date of options granted to the individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are determined using an option pricing model that takes into account the exercise price, the term of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. SHARES PROVIDED ON EXERCISE OF REMUNERATION OPTIONS No shares were issued to Key Management Personnel or Directors as a result of the exercise of options during the year. 2,605,000 shares were issued, as a result of the exercise of options, to individuals other than Key Management Personnel or Directors. 20 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 UNLISTED OPTION HOLDINGS The numbers of options over ordinary shares in the Group held during the financial year by each director and each key management person of the Group, including their personally related parties, are set out below: 2022 Name Balance at start of year Granted as remunera- tion Acquired other than as remuner- ation Exercised Held at time of ceasing to be KMP Balance at end of year Vested and exercisable - - - - - - - - - - - - - - - - - - - - - - - - - - - - (80,000) - - - - - - - - - - 1,600,000 1,600,000 100,000 100,000 8,000,000 8,000,000 - - - - - - (80,000) 9,700,000 9,700,000 Travis Dillon - Dr Paul Schober 80,000 Sam Brougham 1,600,000 Ingrid van Dijken 100,000 8,000,000 - - - 9,780,000 Jim Cooper Paul Grave Kara King Miles Brennan Total 2021 Name Balance at start of year Granted as remunera- tion Acquired other than as remuner- ation Exercised Held at time of ceasing to be KMP Balance at end of year Vested and exercisable Travis Dillon - Dr Paul Schober 80,000 Sam Brougham 1,600,000 Ingrid van Dijken 100,000 Dr John Ryals Gregory Robinson Jim Cooper Paul Grave Stephen Kelly Kara King Total - - - - - - - - - - - - 8,000,000 - - - 1,780,000 8,000,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 80,000 80,000 1,600,000 1,600,000 100,000 100,000 - - - - 8,000,000 8,000,000 - - - - - - 9,780,000 9,780,000 21 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 SHARE HOLDINGS e. The number of shares in the Group held during the financial year by each director of Terragen Holdings Limited and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation (2021: nil). 2022 Balance at start of year Travis Dillon - Dr Paul Schober 233,000 Sam Brougham 15,178,718 Ingrid van Dijken 970,000 Jim Cooper Paul Grave Kara King Miles Brennan 400,000 - - - 16,781,718 Shares held on appointment as KMP Acquisitions during the year Disposals during the year Options converted Shares held on ceasing to be KMP Balance at the end of the year - - - - - - - - - 350,000 - - - 100,000 - - - 450,000 - - - - - - - - - - - - - - - - - - - 350,000 (233,000) - - - - - - - 15,178,718 970,000 500,000 - - - (233,000) 16,998,718 2021 Balance at start of year Shares held on appointment as KMP Acquisitions during the year Disposals during the year Options converted Shares held on ceasing to be KMP Balance at the end of the year Travis Dillon 219,000 Dr Paul Schober 233,000 Sam Brougham 14,721,616 Ingrid van Dijken 1,290,000 Gregory Robinson 3,758,000 Dr John Ryals - Jim Cooper Paul Grave Kara King 200,000 - - Stephen Kelly 60,000 20,481,616 - - - - - - - - - - - - - 457,102 - - - 200,000 - - - (219,000) - - (320,000) - - - - - - 657,102 (539,000) - - - - - - - - - - - - - - - (3,758,000) - - - - (60,000) - 233,000 15,178,718 970,000 - - 400,000 - - - (3,818,000) 16,781,718 LOANS TO KEY MANAGEMENT PERSONNEL f. There were no loans to key management personnel at any time during the financial year however unpaid director and other fees amounted to $106,778 (2021: $126,091). 22 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Directors’ Report for the year ended 30 June 2022 END OF REMUNERATION REPORT INSURANCE AND INDEMNIFICATION To the extent permitted by law, the Group has indemnified (fully insured) each director and the secretary of the Group. The liabilities insured include costs and expenses that may be incurred in defending civil or criminal proceedings (that may be brought) against the officers in their capacity as officers of the Company or a related body, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. Premiums paid during the year for Directors & Officers liability insurance were $135,651. PROCEEDINGS ON BEHALF OF THE GROUP The Group is not aware that any person has applied to the court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Group, or to intervene in any proceedings in which the Group is a party, for the purpose of taking responsibility on behalf of the Group for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Group with leave of the court under section 237 of the Corporations Act 2001. NON-AUDIT SERVICES The Group may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Group are important. Details of amounts paid or payable to the auditor for audit and non-audit services provided during the year by the auditor are set out in Note 2 to the Financial Statements. The directors are satisfied that the provision of non-audit services, during the year, by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services, as disclosed in note 2 to the financial statements, do not compromise the external auditor’s independence, for the following reasons: » all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 ‘Code of Ethics for Professional Accountants’, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. » Details of the amounts paid or payable to the auditor, Deloitte for audit services provided during the year are set out in note 2 to the financial report. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is attached to this report. AUDITOR Deloitte continues in office in accordance with section 327 of the Corporations Act 2001. ROUNDING OFF OF AMOUNTS The company is a company of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest dollar unless otherwise indicated. This report is made in accordance with a resolution of directors. On behalf of the Directors Jim Cooper | Managing Director Melbourne, 29 August 2022 23 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY 24 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 AUDITOR’S INDEPENDENCE DECLARATION TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Deloitte Touche Tohmatsu ABN 74 490 121 060 477 Collins Street Melbourne, VIC, 3000 Australia Phone: +61 3 9671 7000 www.deloitte.com.au The Board of Directors Terragen Holdings Limited Unit 6, 39 Access Street COOLUM BEACH QLD 4573 29 August 2022 Dear Board Members, Terragen Holdings Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Terragen Holdings Limited. As lead audit partner for the audit of the financial statements of Terragen Holdings Limited for the financial year ended 30 June 2022, I declare to the best of my knowledge and belief, there have been no contraventions of: (i) (ii) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Peter Glynn Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 21 | P a g e 25 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Deloitte Touche Tohmatsu ABN 74 490 121 060 477 Collins Street Melbourne, VIC, 3000 Australia Phone: +61 3 9671 7000 www.deloitte.com.au Independent Auditor’s Report to the members of Terragen Holdings Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Terragen Holdings Limited (the “Company”), and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 30 June 2022, consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (ii) 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 confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material Uncertainty Related to Going Concern We draw attention to Note 1(c) in the financial report, which indicates that the Group incurred a net loss of $5,407,130 and net cash operating cash outflows of $4,805,134 during the year ended 30 June 2022. As stated in Note 1(c), these events and conditions, along with other matters as set forth in Note 1(c), indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Key Audit Matters Except for the matter described in the Material Uncertainty Related to Going Concern section, we have determined that there are no key audit matters to communicate in our report. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 22 | P a g e 26 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Deloitte Touche Tohmatsu ABN 74 490 121 060 477 Collins Street Melbourne, VIC, 3000 Australia Phone: +61 3 9671 7000 www.deloitte.com.au Other Information The directors are responsible for the other information. The other information comprises the Operating and Financial Overview, Directors’ Report and ASX Announcement – Annual Results Announcement which we obtained prior to the date of our auditors report, and also includes the following information which will be included in the Group’s annual report (but does not include the financial report and our auditor’s report thereon): Corporate Directory, Corporate Governance Report and Shareholder Information, which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above 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 on the other information that we obtained prior to the date of this auditor’s report, 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. When we read the Corporate Directory, Corporate Governance Report and Shareholder Information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action. 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 related 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 judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. 23 | P a g e 27 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 Deloitte Touche Tohmatsu ABN 74 490 121 060 477 Collins Street Melbourne, VIC, 3000 Australia Phone: +61 3 9671 7000 www.deloitte.com.au Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 28 24 | P a g e TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 Deloitte Touche Tohmatsu ABN 74 490 121 060 477 Collins Street Melbourne, VIC, 3000 Australia Phone: +61 3 9671 7000 www.deloitte.com.au Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included on pages 11 to 19 of the directors’ report for the year ended 30 June 2022. In our opinion, the Remuneration Report of Terragen Holdings Limited, for the year ended 30 June 2022, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of Terragen Holdings Limited 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. DELOITTE TOUCHE TOHMATSU Peter Glynn Partner Chartered Accountants Melbourne, 29 August 2022 25 | P a g e 29 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2022 Revenue Other income Direct research expenses Raw materials and consumables used Transport costs Commissions Employee benefits expense Motor vehicle costs Occupancy costs Advertising and marketing expenses Accounting and audit expenses Travel and accommodation ASX and share registry expenses Computer costs Consulting costs Insurance costs Finance costs Legal costs Depreciation and amortisation expense Share based payment expenditure Other expenses Loss before income tax expense from continuing operations Income tax benefit Notes 3 3 6 5 2 7 4 9 2022 $ 2,890,716 95,262 (840,396) (274,161) (257,127) (694,786) 2021 $ 3,652,301 393,563 (871,232) (464,417) (263,574) (972,999) (4,498,319) (3,816,687) (85,752) (151,224) (511,501) (214,171) (84,063) (84,572) (106,220) (314,310) (250,090) (18,384) (90,980) (608,923) (73,966) (134,245) (622,593) (194,032) (76,023) (85,221) (110,467) (373,283) (216,739) (22,466) (126,787) (524,310) - (1,664,734) (201,559) (112,932) (6,300,560) (6,680,843) 893,430 580,692 Loss for the year after income tax benefit (5,407,130) (6,100,151) Other comprehensive income Items that may be reclassified subsequently to profit or loss Gain on translation of foreign operations 3,477 317 Total comprehensive loss for the year (5,403,653) (6,099,834) Basic and diluted loss per share (cents per share) 10 (2.80) (3.23) The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 30 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 CONSOLIDATED STATEMENT OF FINANCIAL POSITION TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY AS AT 30 JUNE 2022 Notes 2022 $ 2021 $ Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Current tax asset Total current assets Non-current assets Right of use assets Property, plant, and equipment Intangible assets Other assets Total non-current assets TOTAL ASSETS Current liabilities Trade and other payables Borrowings Employee provisions Total current liabilities Non-current liabilities Borrowings Employee provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Reserves Accumulated losses TOTAL EQUITY 22 11 12 13 14 15 16 17 18 19 18 19 20 21 6,669,478 11,641,681 230,792 144,506 151,551 890,223 322,078 3,409 243,158 1,098,630 8,086,550 13,308,956 336,080 625,928 166,376 1,720 1,130,104 9,216,654 763,555 176,495 314,914 354,581 908,713 149,578 2,560 1,415,432 14,724,388 1,055,830 144,444 219,413 1,254,964 1,419,687 155,767 44,662 200,429 1,455,393 7,761,261 213,513 67,900 281,413 1,701,100 13,023,288 43,004,870 42,438,295 2,290,440 2,801,268 (37,534,049) (32,216,275) 7,761,261 13,023,288 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 31 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 2022 FOR THE YEAR ENDED 30 JUNE 2022 Issued Capital $ Reserves $ Accumulated Losses $ Total Equity $ Balance as at 1 July 2021 42,438,295 2,801,268 (32,216,275) 13,023,288 Loss for the year Other comprehensive income Total comprehensive loss for the year - - - - 3,477 3,477 (5,407,130) (5,407,130) - 3,477 (5,407,130) (5,403,653) Transactions with owners in their capacity as owners: Options exercised or lapsed in relation to employee incentive arrangements Total transactions with owners in their capacity as owners 566,575 (514,305) 89,356 141,626 566,575 (514,305) 89,356 141,626 Balance as at 30 June 2022 43,004,870 2,290,440 (37,534,049) 7,761,261 2021 Issued Capital $ Reserves $ Accumulated Losses $ Total Equity $ Balance as at 1 July 2020 41,560,581 1,636,894 (26,154,920) 17,042,555 Loss for the year Other comprehensive income Total comprehensive loss for the year - - - - 317 317 (6,100,151) (6,100,151) - 317 (6,100,151) (6,099,834) Transactions with owners in their capacity as owners: Options exercised or lapsed in relation to employee incentive arrangements 877,714 (500,677) 38,796 415,833 Fair value of share options issued - 1,664,734 - 1,664,734 Total transactions with owners in their capacity as owners 877,714 1,164,057 38,796 2,080,567 Balance as at 30 June 2021 42,438,295 2,801,268 (32,216,275) 13,023,288 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 32 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 CONSOLIDATED STATEMENT OF CASH FLOWS TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Cash flow from operating activities Receipts from customers Payments to suppliers and employees Interest and other costs of finance paid Interest received Government grants received Research and development tax concessions received FOR THE YEAR ENDED 30 JUNE 2022 2022 $ 2021 $ 2,400,603 2,979,462 (8,322,083) (7,761,435) (18,384) 32,893 - 1,101,837 (22,467) 123,137 157,354 - Net cash flows used in operating activities 22(b) (4,805,134) (4,523,949) Cash flow from investing activities Payments for property, plant, and equipment Proceeds for sale of property, plant, and equipment Payments for intangible assets Net cash used in investing activities Cash flow from financing activities Proceeds from share issue Repayments of borrowings Repayment of lease liabilities Net cash provided by financing activities (142,596) (385,539) 57,302 (32,911) - (22,479) (118,205) (408,018) 20 141,626 - (194,324) (52,698) 415,833 (38,308) (182,601) 194,924 Cash and cash equivalents at the beginning of the year 11,641,681 16,378,408 Net increase in cash and cash equivalents (4,976,037) (4,737,043) Foreign exchange difference on cash and cash equivalents 3,834 316 Cash and cash equivalents at the end of the year 22(a) 6,669,478 11,641,681 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 33 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY 34 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 NOTES TO THE FINANCIAL STATEMENTS The financial report covers Terragen Holdings Limited (the “Company” or “Terragen”) and the entity it controlled for the year ended 30 June 2022 (collectively “Group”). For the purposes of preparing the consolidated financial statements, the Company is a for-profit entity. Terragen Holdings Limited is a listed public company limited by shares, incorporated, and domiciled in Australia. The presentation currency and functional currency of the Company is Australian dollars. The principal activities of the Company during the financial year were research, development, and early market development of biological products in the agriculture sector. The Registered office and principal place of business address of the Company is Unit 6, 39 Access Crescent, Coolum Beach, QLD, Australia, 4573. The financial report was authorised for issue by the Board of Directors of Terragen on the date shown on the Declaration by Directors attached to the Financial Statements. 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies which have been adopted in the preparation of these financial statements are set out below. STATEMENT OF COMPLIANCE a. The financial report is a general-purpose financial report which has been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards, and Interpretations, and complies with other requirements of the law. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB). BASIS OF PREPARATION b. The financial report has been prepared on historical cost basis. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars unless otherwise noted. All values are rounded to the nearest dollar. GOING CONCERN c. The financial report has been prepared on the going concern basis which assumes the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the normal course of business for a period of at least 12 months from the date of authorisation of the financial report for issue. The Group incurred a loss from continuing operations of $5,407,130 and net operating cash outflows of $4,805,134 for the year ended 30 June 2022. The ability of the Group to continue as a going concern is based upon the following: » The ability of the Group to ensure sufficient cash flows are generated through the successful execution of management’s sales strategy, which includes realising additional benefits from strategic partnerships. Receipts from the Federal Government R&D tax incentive programme continue on the basis that the Group continues to qualify for these receipts. The ability to raise additional capital should it be required. » » In the event that the Group is unable to achieve successful outcomes in relation to the matters listed above, a material uncertainty would exist that would cast significant doubt as to whether the Group will be able to continue as a going concern and therefore whether it will realise its assets and discharge its liabilities in the normal course of business and at the amounts stated in the financial report. Having considered all relevant facts the Directors are satisfied that is appropriate to prepare the financial report on the going concern basis. 35 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 EARNINGS PER SHARE d. Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after-income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS e. The Group has adopted all the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current year. None of the new and revised Standards and amendments thereof and Interpretations that became effective for the current year were applicable or material to the Group: » » AASB 2020-8 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2 AASB 2021-3 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions beyond 30 June 2021 NEW AND REVISED IFRS STANDARDS IN ISSUE BUT NOT YET EFFECTIVE The Directors do not consider that the adoption of any new Standards and Interpretations in issue but not yet effective at the date of these financial statements will have a material impact on the financial statements of the Group. f. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group’s accounting policies, which are described below, Management is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making the judgements. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. CRITICAL JUDGEMENTS AND ESTIMATES IN APPLYING THE GROUP’S ACCOUNTING POLICIES The directors have made the following critical judgements and estimations in the process of applying the Group’s accounting policies. IMPACT OF COVID-19 COVID-19 restrictions continued through the first half of the financial year. These lockdowns limited sales activity, throughout the Company’s key sales regions in Victoria, Tasmania and New South Wales. The Group did not receive any grants from the Australian government related to COVID-19 during the year. In preparing the consolidated financial report, Management has considered the impact of COVID-19 on the various balances in the financial report, including the carrying values of trade receivables and finite life non-current assets. Management determined that there was no significant impact of COVID-19 on the abovementioned balances and accounting estimates. 36 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 JUDGEMENTS – RESEARCH & DEVELOPMENT With regard to research and development costs incurred during the financial year it has been determined that the Group has not met the criteria for capitalisation as an asset, as outlined in Note 1(w), as the ability to successfully commercialise Terragen’s products is dependent on broadening the range of uses which is unlikely to occur until Terragen has data to validate the benefits of its products in those wider applications. The research and development expenditure incurred by the Group during the financial year was primarily designed to provide this additional evidence. KEY SOURCES OF ESTIMATION UNCERTAINTY In the following notes are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. ESTIMATION UNCERTAINTY Information about estimates and assumptions that have the most significant effect on recognition and measurement of assets, liabilities, income, and expenses is provided in the following notes: TAX RECEIVABLES I. Management has estimated the amount receivable that can be claimed in respect of Research and Development tax offsets based on application of the rules and requirements of the relevant tax legislation. Refer also to Note 1(q). RECOVERABILITY OF DEFERRED TAX ASSET II. Deferred tax assets have not been recognised as Management and the Directors do not believe that the members of the Group satisfy the recognition criteria set out in paragraph 35 of AASB112 i.e., “that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can be utilised by the entity”. There have been no other significant estimates and judgements made in applying accounting policies that the Directors consider would have a significant effect on the amounts recognised in the financial statements. There have been no key assumptions made concerning the future, and there are no other key sources of estimation uncertainty at the reporting date, that the Directors consider would have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. SUBSIDIARIES g. Subsidiaries are all entities over which the Group has control. The Group controls an entity where the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity and balance sheet, respectively. 37 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 PRINCIPLES OF CONSOLIDATION h. When the Group ceases to consolidate or equity account for an investment because of a loss of control, joint control or significant influence, any retained interest in the entity is re-measured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture, or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in a joint venture or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. FOREIGN CURRENCY TRANSLATION i. In preparing the financial statements of the Group, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within other expenses. BORROWINGS j. Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit and loss over the period of the borrowing using the effective interest rate method. CASH AND CASH EQUIVALENTS k. Cash and cash equivalents comprise cash on hand, cash in banks and investments in money market instruments, net of outstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. EMPLOYEE BENEFITS l. A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long-term employee benefits are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. Payments to defined contribution retirement benefit plans are recognised as an expense when employees have rendered service entitling them to the contributions. m. FINANCIAL INSTRUMENTS RECOGNITION AND DERECOGNITION Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. 38 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 CLASSIFICATION OF FINANCIAL ASSETS Debt instruments that meet the following conditions are measured subsequently at amortised cost: » » The financial asset is held within a business model whose objective is to hold financial 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. Debt instruments that meet the following conditions are measured subsequently at fair value through other comprehensive income (FVTOCI): » » the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and 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. By default, all other financial assets are measured subsequently at fair value through profit or loss (FVTPL). Financial assets are classified according to their business model and the characteristics of their contractual cash flows. In the preparation of these financial statements, all financial assets are measured at amortised cost. IMPAIRMENT OF FINANCIAL ASSETS The Group makes use of a simplified approach for trade and other receivables as well as contract assets and records the loss allowance at the amount equal to the expected lifetime credit losses. In using this practical expedient, the Group uses its historical experience, external indicators, and forward-looking information to calculate the expected credit losses. FINANCIAL LIABILITIES All financial liabilities are measured subsequently at amortised cost using the effective interest method. FINANCIAL LIABILITIES MEASURED AT AMORTISED COST The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost of a financial liability. TRADE PAYABLES n. Trade payables and other accounts payable are recognised when the Group becomes obliged to make future payments resulting from the purchase of goods and services. GOODS AND SERVICES TAX (GST) o. Revenues, expenses, and assets are recognised net of the amount of goods and services tax (GST), except: i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or for receivables and payables which are recognised inclusive of GST. ii. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a net basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. 39 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 IMPAIRMENT OF ASSETS p. At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. q. INCOME TAX CURRENT TAX The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the consolidated statement of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. DEFERRED TAX Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. CURRENT AND DEFERRED TAX FOR THE YEAR Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Management estimates the Research and Development tax refund based on application of the rules and requirements of the legislation. The Group recognises the benefit in the determination of income tax expense/benefit. 40 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 TAX CONSOLIDATION The company and its wholly-owned Australian resident entity are members of a tax-consolidated group under Australian tax law. Terragen Holdings Limited is the head entity within the tax-consolidated group. In addition to its own current and deferred tax amounts, the company also recognises the current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group. Amounts payable or receivable under the tax-funding arrangement between the company and the entities in the tax consolidated group are determined using a ‘separate taxpayer within group’ approach to determine the tax contribution amounts payable or receivable by each member of the tax-consolidated group. This approach results in the tax effect of transactions being recognised in the legal entity where that transaction occurred, and does not tax effect transactions that have no tax consequences to the group. The same basis is used for tax allocation within the tax-consolidated group. INVENTORIES r. Inventories are valued at the lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventory on hand by the method most appropriate to each class of inventory, with the majority being valued on a first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. s. LEASES GROUP AS LESSEE The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right- of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant, and equipment with the exception that they factor in lease renewals where relevant. In addition, the right-of-use assets are periodically reduced by impairment losses in accordance with AASB 136 Impairment of Assets, if any, and adjusted for certain remeasurements of the lease liability. LEASE LIABILITIES The lease liability is initially measured at present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate as the discount rate. The discount rate is generally calculated using incremental borrowing rates for the specific lease terms and currencies. Lease liabilities are disclosed in the Consolidated Statement of Financial Position. Lease payments included in the measurement of the lease liability comprise the following: » » fixed payments, including in substance fixed payments less any lease incentives receivables; variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement rate; amounts expected to be payable under a residual value guarantee; the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option; and payment of penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. » » » The lease liability is measured at amortised cost using the effective interest method. It will be remeasured when there is a change in index rate for future lease payments, a change in the Group’s estimated amount payable under a residual value guarantee or changes in the Group’s assessment of probabilities of exercising a purchase, extension or termination option. 41 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 When the lease liability is remeasured, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group did not make any such adjustment during the period presented. PROPERTY, PLANT, AND EQUIPMENT t. Each class of property, plant and equipment is carried at cost less, where applicable, any accumulated depreciation and any impairment in value. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the profit and loss during the financial period in which they are incurred. The depreciable amounts of all fixed assets including buildings, but excluding freehold land, are depreciated over their estimated useful lives to the Group commencing from the time the asset is held ready for use. The following depreciation rates are used in the calculation of depreciation: Class of Fixed Assets Plant and equipment Furniture & fittings Motor vehicles Plant and Equipment R&D Leasehold improvements Depreciation Rate 10 – 40% 10 – 50% 25% 10 – 33% 10 – 33% Basis Straight line Straight line Straight line Straight line Straight line Right-of-use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. PROVISIONS u. Provisions are recognised when the Group has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, considering the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably. v. REVENUE RECOGNITION SALE OF GOODS AND AGENT COMMISSION Revenue is recognised at the time goods are delivered to the customer as this is the point in time that the Group satisfies its performance obligations. Sales are generally made via Retail Agents who are engaged to sell Terragen product as agent for Terragen. Retail Agents are eligible for sales commissions which are recognised at the point of sale, as an expense. Where sales are made via a Retail Agent, the sales consideration from the customer is paid to the Retail Agent and then paid to Terragen, net of a Base Sales Commission. Performance-based Sales Commissions are paid by Terragen to the Retail Agent subsequent to year end, subject to the Retail Agent meeting certain criteria. Accordingly, included in the Consolidated Statement of Cash Flows, Base Commissions are deducted in determining the net cash included within Receipts from Customers and Bonus Sales Commissions are included in Payment to Suppliers. Included in the Consolidated Statement of Financial Position, the Base Sales Commission is offset against their respective Trade Receivables and Performance-based Sales Commissions are included in Trade & Other Payables. 42 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 GRANT REVENUE Grant revenue is recognised at fair value when there is reasonable assurance that the grants will be received. Grant revenue is recognised in profit or loss in the same period as the relevant expenses. INTEREST REVENUE Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. w. INTANGIBLE ASSETS INTERNALLY-GENERATED INTANGIBLE ASSETS - RESEARCH AND DEVELOPMENT EXPENDITURE Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated: » » » » » » the technical feasibility of completing the intangible asset so that it will be available for use or sale; the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits; the availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset; and the ability to measure reliably the expenditure attributable to the intangible asset during its development The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. 2. REMUNERATION OF AUDITORS During the year, the following fees were paid or payable for services provided by the auditor of the parent entity and its related practices: Deloitte Touche Tohmatsu and related network firms Audit and assurance services Audit and review of financial reports Other services 2022 $ 2021 $ 132,300 142,088 Advice on taxation and other matters and review and lodgement of corporate tax returns 24,435 Professional Research and Development (R&D) taxation services 24,675 49,110 14,700 52,814 67,514 181,410 209,602 43 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 Other auditors and their related network firms Other services Review and lodgement of the fringe benefits tax returns 2022 $ 25,407 25,407 2021 $ - - Total Remuneration 206,817 209,602 3. REVENUE AND OTHER INCOME Sale of goods Other income Grant income Interest received COVID-19 grant received Other income Total Other Income 2022 $ 2021 $ 2,890,716 3,652,301 5,067 32,893 - 57,302 95,262 203,153 123,137 50,000 17,273 393,563 Total revenue and other income 2,985,978 4,045,864 4. DEPRECIATION AND AMORTISATION EXPENSE 2022 $ 181,430 411,368 16,125 2021 $ 145,816 373,302 5,192 608,923 524,310 2022 $ 2021 $ 3,717,402 3,313,825 298,141 94,808 150,632 237,336 266,121 96,571 95,170 45,000 4,498,319 3,816,687 Depreciation of Right-of-use assets (refer to note 14) Depreciation of property, plant, and equipment (refer to note 15) Amortisation of intangible assets (refer to note 16) Total depreciation and amortisation expense 5. EMPLOYEE BENEFIT EXPENSE Salaries and wages Post-employment benefits Termination benefits Employee on-costs Other employee benefits Total employee benefit expense 44 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 6. RESEARCH AND DEVELOPMENT EXPENSE Direct research and development expenses Employee benefits expense Depreciation and amortisation expense Other expenses 2022 $ 840,396 1,192,174 218,725 213,245 2021 $ 871,232 1,079,400 186,772 182,109 Total research and development expense 2,464,540 2,319,513 The above note shows total expenditure for the research and development by function contrasting with the Consolidated Statement of Profit or Loss and Other Comprehensive Income which details expenses by nature. 7. FINANCE COSTS Interest on lease liabilities Other finance costs 2022 $ 12,324 6,060 18,384 2021 $ 13,462 9,004 22,466 8. OPERATING SEGMENTS The Group has identified its operating segments based on the internal reports that were reviewed and used by the Group’s Chief Executive (the Chief Operating Decision Maker (CODM)) in assessing performance and determining the allocation of resources during the year. The Group is managed primarily on a geographic basis, that is, the countries in which products are sold. Operating segments are therefore determined on the same basis. The CODM assesses the performance of the operating segments based on revenue and expenditure that is recognised in the statement of profit or loss in these financial statements. The measurement of gross expenditure does not include non-cash items such as depreciation expense and share based payments expense. Geographic locations from which reportable segments derive their revenues: » » Australia New Zealand Both operating segments generated revenue during the year. Revenue is recognized at the point in time that the Group satisfies its performance obligations by transferring the promised goods to its customers. Commissions are granted to agents who are members of the Retail Agency Partner Network (having signed Retail Agency Partner Agreements). Assets, liabilities, and cash flows are not allocated to segments in the internal reports that are prepared for the CODM. The following tables present revenue and loss information for the Group’s operating segments for year ended 30 June 2022 and 30 June 2021, respectively. 45 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 I. SEGMENT PERFORMANCE 30 June 2022 Total segment revenue Segment other income Segment expenditure Segment result Australia $ 2,723,723 95,262 New Zealand $ TOTAL $ 166,993 2,890,716 - 95,262 (8,639,362) (647,176) (9,286,538) (5,820,377) (480,183) (6,300,560) MAJOR CUSTOMERS Included in revenues arising from the Australian segment, are the following customers where greater than 10% of revenues are generated. » » » Customer A - $490,875 Customer B - $451,374 Customer C - $365,150 No other single customer contributed 10 per cent or more to the Group’s revenue. 30 June 2021 Total segment revenue Segment other income Segment expenditure Segment result Australia $ 3,369,203 393,562 New Zealand $ 283,098 - TOTAL $ 3,652,301 393,562 (8,735,742) (326,230) (9,061,972) (4,972,977) (43,132) (5,016,109) Reconciliation of segment result to Group loss before tax: Share based payment expenditure Net loss before tax (1,664,734) (6,680,843) SEGMENT ASSETS II. The following tables present assets and liabilities information for the Group’s operating segments as at 30 June 2022 and 30 June 2021, respectively. Australia $ 8,903,586 Australia $ 14,258,438 New Zealand $ 313,068 New Zealand $ 465,950 TOTAL $ 9,216,654 TOTAL $ 14,724,388 30 June 2022 Segment assets 30 June 2021 Segment assets 46 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 9. INCOME TAX EXPENSE The income tax expense/benefit can be reconciled to the accounting profit/loss as follows: TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 a. Components of tax benefit Current tax Deferred tax b. Prima facie tax benefit Loss from continuing operations Income tax benefit calculated at 25% (2021: 26%) Non-deductible expenditure Non-recognition of tax losses and temporary differences Research and Development tax offset Income tax benefit c. Current tax asset Opening balance R&D Tax concession received Under/(over) provision of prior year R&D benefit Research and Development tax offset accrual Closing balance 2022 $ 2021 $ (1,890,631) (1,959,538) 997,201 1,378,846 (893,430) (580,692) (6,300,560) (6,680,843) (1,575,140) (1,737,019) 633,232 941,908 399,582 1,337,438 (893,430) (580,692) (893,430) (580,692) 1,098,630 517,938 (1,101,837) - 3,207 (59,308) 890,223 640,000 890,223 1,098,630 Deferred tax assets associated with income tax losses have not been recognised due to uncertainty as to the timing of their recoupment from sufficient future taxable income. Deferred tax assets relating to unused tax losses that may potentially be available to the Group, subject to meeting the requirements under tax legislation, at 25% tax rate is $5,457,586 as at 30 June 2022. 10. LOSS PER SHARE Both the basic and diluted loss per share have been calculated using the loss for the year. The reconciliation of the weighted average number of shares for the purpose of diluted loss per share to the weighted average number of ordinary shares used in the calculation of basic loss per share is as follows: Loss attributable to the owners of the Group 2022 $ 2021 $ (5,407,130) (6,100,151) Number Number Weighted average number of shares used in basic loss per share 192,939,826 188,713,251 Weighted average number of shares used in diluted loss per share (i) 192,939,826 188,713,251 i. There were no potential ordinary shares that are considered dilutive as they did not meet the requirements for inclusion as per AASB 133 Earnings per share since the Group generated losses for the year ended 30 June 2022 and the prior year. 47 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 11. TRADE AND OTHER RECEIVABLES Trade receivables Loss allowance Other receivables 2022 $ 207,859 (26,567) 181,292 49,500 2021 $ 332,043 (36,436) 295,607 26,471 230,792 322,078 The average credit period on sales of goods is 33 days (2021: 40 days). No interest is charged on outstanding trade receivables. The Group measures the loss allowance for trade receivables using the lifetime expected credit loss (“ECL”) simplified approach. The expected credit losses on trade receivables are estimated using a provision matrix by reference to past default experience of the debtor, adjusted for general economic conditions of the industry in which the debtors operate and an assessment of both the current as well as the forecast direction of conditions at the reporting date. The Group has recognised a loss allowance of 100 per cent against all receivables over 120 days past due. The ageing of the Group’s trade receivables at 30 June 2022 was: Not past due Past due 1 – 30 days Past due 31 - 150 days Past due 151 - 330 days TOTAL 12. OTHER CURRENT ASSETS Deposits and guarantees Prepayments 148,897 305,466 54,118 3,768 1,076 8,272 3,999 14,306 207,859 332,043 2022 $ 129,006 22,545 151,551 2021 $ 110,598 132,560 243,158 Deposits and guarantees relate principally to Term Deposits held as security against credit card facilities. 13. CURRENT TAX ASSETS Tax benefit on research and development Movements in the tax benefit due during the year are set out below: Opening balance at 1 July Tax benefit on research and development received Over accrual of prior year research and development offset Accrual of tax benefit for the year Closing balance at 30 June 48 2022 $ 2021 $ 890,223 1,098,630 1,098,630 517,938 (1,101,837) - 3,207 (59,308) 890,223 640,000 890,223 1,098,630 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 14. RIGHT-OF-USE ASSETS Cost At 1 July 2020 Additions Disposals TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 Buildings $ Motor vehicles $ Research equipment $ Total $ 411,244 - - 217,543 102,560 (57,583) 109,289 738,076 - - 102,560 (57,583) Balance at 30 June 2021 411,244 262,520 109,289 783,053 Additions Disposals At 30 June 2022 Accumulated Depreciation At 1 July 2020 Depreciation for the year Disposals Balance at 30 June 2021 Depreciation for the year Disposals At 30 June 2022 - - 168,627 (110,490) - - 168,627 (110,490) 411,244 320,657 109,289 841,190 85,272 99,428 - 149,457 105,510 340,239 42,609 (57,583) 3,779 - 145,816 (57,583) 184,700 134,483 109,289 428,472 99,428 82,002 - (104,792) - - 181,430 (104,792) 284,128 111,693 109,289 505,110 Carrying amount at 30 June 2022 127,116 208,964 - 336,080 The consolidated entity leases several assets including buildings, motor vehicles and plant and equipment used in manufacturing and research and development activities. Refer note 1 for further information on the consolidated entity’s accounting policy for leases as a lessee. During the year, four new lease contracts were entered into for motor vehicles for members of the sales teams in Australia and New Zealand. This resulted in additions to right-of-use assets of $168,627. A further two motor vehicles were disposed. These were vehicles that had reached the end of their lease terms and were subsequently disposed of. The maturity analysis of lease liabilities is presented in note 23. The following amounts were recognised in the loss for the year in relation to right-of-use assets: Depreciation expense on right of use assets Interest expense on lease liabilities The Group does not sub-lease any right-of-use assets. 2022 $ 181,430 12,324 2021 $ 145,816 13,462 49 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 15. PROPERTY, PLANT, AND EQUIPMENT CARRYING AMOUNTS OF Plant and equipment Office equipment Motor Vehicles Research equipment Leasehold improvements Capital works in progress Written down value 2022 $ 2021 $ 197,858 228,632 18,587 34,691 196,612 178,180 - 16,746 58,864 256,165 301,496 46,810 625,928 908,713 IMPAIRMENT In accordance with policy, the Group undertook a formal impairment review for the year ended 30 June 2022. The review was performed at the cash generating unit (CGU) level to which all assets belong. Based on impairment testing performed, the recoverable amount of the CGU exceeds the carrying amount at 30 June 2022. Accordingly, there is no impairment of property, plant and equipment, right-of-use assets or intangible assets. The recoverable amount of the CGU was determined based on value-in-use. In assessing value-in-use the following was included: » Estimated future cash flows based on actual operating results, the budget for the year ending 2023 and a five-year strategic plan adjusted for known developments; Market penetration levels based on history together with conservative growth assumptions; Pre-tax discount rate based on an industry Weighted Average Cost of Capital (WACC) of 29%. » » MOVEMENTS IN CARRYING AMOUNTS Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year: 2022 Plant & equipment $ Office equipment $ Motor vehicles $ Research equipment $ Leasehold improve- ments $ Capital WIP Total $ Cost Balance 1 July 2021 447,641 89,076 90,939 745,541 520,360 46,810 1,940,367 Additions Disposals Transfers 36,881 (16,592) - 5,413 - 3,800 - - - 93,537 6,765 - 43,010 - - - - 142,596 (16,592) (46,810) - Balance 30 June 2022 467,930 98,289 90,939 882,088 527,125 Accumulated depreciation Balance 1 July 2021 (219,009) (72,330) (32,075) (489,376) (218,864) Depreciation Disposals (53,642) (7,372) (24,173) (196,100) (130,081) 2,579 - - - - Balance 30 June 2022 (270,072) (79,702) (56,248) (685,476) (348,945) Written down value 197,858 18,587 34,691 196,612 178,180 - - - - - - 2,066,371 (1,031,654) (411,368) 2,579 (1,440,443) 625,928 50 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 2021 Plant & equipment $ Office equipment $ Motor vehicles $ Research equipment $ Leasehold improve- ments $ Capital WIP Total $ Cost Balance 1 July 2020 Additions 242,450 205,191 66,937 22,139 88,471 2,468 590,975 446,298 - 1,435,131 154,566 74,062 46,810 505,236 Balance 30 June 2021 447,641 89,076 90,939 745,541 520,360 46,810 1,940,367 Accumulated depreciation Balance 1 July 2020 (182,796) (63,893) (9,484) (302,604) (99,575) Depreciation (36,213) (8,437) (22,591) (186,772) (119,289) Balance 30 June 2021 (219,009) (72,330) (32,075) (489,376) (218,864) - - - (658,352) (373,302) (1,031,654) Written down value 228,632 16,746 58,864 256,165 301,496 46,810 908,713 16. INTANGIBLE ASSETS Patents & trademarks Accumulated amortisation Total intangible assets Balance at the beginning of the year Additions from separate acquisitions Amortisation charge for the year Balance at the end of the year 2022 $ 224,107 (57,731) 166,376 2022 $ 149,578 32,923 (16,125) 166,376 Patents and trademarks are amortised over their estimated useful lives, which is on average 20 years. 17. TRADE AND OTHER PAYABLES Trade payables Accrued expenses Other payables 2022 $ 189,607 479,882 94,066 2021 $ 191,184 (41,606) 149,578 2021 $ 132,290 22,480 (5,192) 149,578 2021 $ 147,784 776,487 131,559 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 22 days (2021: 37 days) from invoice date. The carrying values of the trade and other payables are considered to be a reasonable approximation of fair value. 763,555 1,055,830 51 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 18. LEASE LIABILITIES Current – at amortised cost Non-current – at amortised cost 2022 $ 176,495 155,767 2021 $ 144,444 213,513 MOVEMENTS IN LEASE LIABILITIES Movement in the lease liabilities between the beginning and the end of the current financial year: Balance at the beginning of the year New leases entered into during the period Lease payments made Portion of lease payments recognised as finance cost Balance at the end of the year Recognised as: Current Non-current 19. EMPLOYEE PROVISIONS CURRENT Employee benefits NON-CURRENT Employee benefits 2022 $ 2021 $ 357,957 2021 438,285 168,628 102,560 (206,647) (196,350) 12,324 13,462 332,262 357,957 176,495 155,767 144,444 213,513 332,262 357,957 2022 $ 2021 $ 314,914 219,413 2022 $ 2021 $ 44,662 67,900 The provision for employee benefits relates to the Group’s liability for accumulated long service and annual leave entitlements. 52 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 20. ISSUED CAPITAL Ordinary shares - issued and fully paid TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 2022 $ 2021 $ 43,004,870 42,438,295 At shareholder meetings, each ordinary share has the right to attend and vote, one vote for every share held. Each ordinary share has the right to participate in the dividends (if any) declared on that class of share. Beginning of the year Issue of shares Shares issued on the exercise of options (refer note 21(a) and (b)) 2022 shares 2021 shares 2022 $ 2021 $ 190,814,235 186,820,902 42,438,295 41,560,581 - - - - 2,605,000 3,993,333 566,575 877,714 Balance at 30 June 193,419,235 190,814,235 43,004,870 42,438,295 At shareholder meetings, each ordinary share is entitled to attend and vote, one vote for every share held. Shares issued as remuneration are issued at the market value of the shares with reference to recent capital raisings. Shares issued on the exercise of options consisted of 2,605,000 employee options which had a fair value of $424,949 and exercise price proceeds of $141,626. 21. RESERVES Share based payments reserve (a) Equity options reserve (b) Foreign currency translation reserve Total reserves a. SHARE BASED PAYMENT RESERVE OPTIONS ISSUED 2022 $ 2021 $ 1,772,814 2,287,119 513,792 3,834 513,792 357 2,290,440 2,801,268 2022 options 2021 options 2022 $ 2021 $ Outstanding at the beginning of the year 11,715,000 6,895,000 2,287,119 1,123,062 Issued during the year - 8,000,000 - Exercised during the year (i) (2,605,000) (2,925,000) (424,949) Lapsed during the year (510,000) (255,000) (89,356) 1,664,734 (461,881) (38,796) Outstanding at the end of the year 8,600,000 11,715,000 1,772,814 2,287,119 53 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 DETAILS OF THE EMPLOYEE INCENTIVE PLAN (EIP) OF THE GROUP The Group has an EIP for directors, executives, employees, contractors and consultants of the Group and its subsidiaries (Eligible Participants). As approved by the Board, and in accordance with the terms of the EIP, Eligible Participants may be granted options or performance rights to purchase ordinary shares (Awards). Each Award converts into one ordinary share of the Group on exercise. No amounts are paid or payable by the recipient on receipt of the Award. The Awards carry neither rights to dividends nor voting rights. Awards may be exercised at any time from the date of vesting to the date of their expiry. The number of Awards granted is calculated in accordance with service and performance-based criteria approved by the Group and is subject to approval by the Board. i. During the year the following options were exercised which had previously had a cumulative balance within the reserve of $424,950: » » » 150,000 Tranche 5 options. The remainder 170,000 Tranche 5 options lapsed reducing the Tranche to nil. 2,000,000 Tranche 7 options. 455,000 Tranche 9 options. The remainder 340,000 Tranche 9 options lapsed reducing the Tranche to nil. EMPLOYEE SHARES OPTIONS ON ISSUE The following share-based payment arrangements were in existence as at 30 June 2022: Option series Number Grant date Vesting date Expiry date Exercise price Tranche 7 600,000 01/09/2017 01/09/2017 16/08/2022 Tranche 13 1,000,000 04/12/2020 04/12/2020 04/12/2025 Tranche 14 2,000,000 04/12/2020 04/12/2020 04/12/2025 Tranche 15 5,000,000 04/12/2020 04/12/2020 04/12/2025 b. EQUITY OPTIONS RESERVE OPTIONS ISSUED 2022 options 2021 options $0.05 $0.25 $0.50 $1.00 2022 $ Fair Value at grant date $0.1587 $0.2771 $0.2332 $0.1842 2021 $ Outstanding at the beginning of the year 11,245,710 12,314,043 513,792 513,792 Exercised during the year - (1,068,333) - - Outstanding at the end of the year 11,245,710 11,245,710 513,792 513,792 i. During the year the following options were exercised: » » 1,000,000 Tranche 11 options with a nil fair value at grant date. 68,333 Tranche 12 options with a nil fair value at grant date. The following equity options were in existence as at 30 June 2022: Option series Number Grant date Vesting date Expiry date Exercise price Tranche 10 8,100,000 13/06/2019 13/06/2019 11/12/2022 Tranche 11 2,000,000 10/07/2019 10/07/2019 11/12/2022 Tranche 12 1,145,710 17/07/2019 17/07/2019 11/12/2022 $0.25 $0.25 $0.25 Fair Value at grant date $0.0634 $- $- 54 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 22. CASH AND CASH EQUIVALENTS RECONCILIATION OF CASH AND CASH EQUIVALENTS a. For the purposes of the statement of cash flows, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the statement of cash flows can be reconciled to the related items in the statement of financial position as follows: Cash on hand Cash at bank Cash and bank balances 2022 $ - 2021 $ 53 6,669,478 11,641,628 6,669,478 11,641,681 b. RECONCILIATION OF LOSS FOR THE YEAR TO NET CASH FLOWS FROM OPERATING ACTIVITIES Loss for the year Adjustment for non-cash items Depreciation and amortisation Movement in loss allowance Share based payment expenditure Profit on sale of property, plant, and equipment Grant income accrual Changes in net assets and liabilities Trade and other receivables Inventories Other current assets Current tax assets Other non-current assets Trade and other payables Provisions Net cash used in operating activities 2022 $ 2021 $ (5,407,130) (6,100,151) 608,923 - - (32,891) (5,067) 524,310 (56,996) 1,664,734 - - (4,836,165) (3,968,103) 91,286 282,888 (141,097) 91,607 60,747 (57,711) 208,407 (580,692) 840 - (292,275) (274,023) 72,263 12,945 (4,805,134) (4,523,949) 55 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 23. FINANCIAL RISK MANAGEMENT The Group is exposed to credit risk, liquidity risk and market risk. Overall financial risk management focuses on mitigating the potential financial effects to the Group’s financial performance. The Group manages its capital to ensure that the entity will be able to continue as a going concern whilst maximising the return to shareholders through the optimisation of the debt and equity balances. The Group’s capital includes issued capital less any accumulated losses. The Group policy is to maintain a capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Group is not subject to any externally imposed capital requirements. CREDIT RISK a. In order to minimise credit risk, the Group has adopted a policy of only dealing with creditworthy counterparties. For all new customers, credit checks are performed, using publicly available financial information and the Group’s own trading records to rate its major customers. Credit approvals and other monitoring procedures are in place to ensure that follow-up action is taken to recover overdue debts. Furthermore, the Group reviews the recoverable amount of each trade debt on an individual basis at the end of the reporting period to ensure that adequate loss allowance is made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced. Trade receivables consist of a large number of customers, spread across geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable. Of the trade receivables balance at the end of the year, $42,152 (2021: $60,227) is due from Company A, $nil (2021: $5,192) is due from Company B and $45,628 (2021: $82,852) is due from Company C, the Group’s three largest customers disclosed in Note 8. Apart from this, the Group does not have significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are related entities. Concentration of credit risk related to Companies A, B and C did not exceed 38 per cent of trade and other receivables assets at any time during the year. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The Group does not hold any collateral or other credit enhancements to cover its credit risks associated with its financial assets. OVERVIEW OF THE GROUP’S EXPOSURE TO CREDIT RISK Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. As at 30 June 2022, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group, due to failure to discharge an obligation by the counterparties, arises from the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position. The table below details the credit quality of the Group’s financial assets, as well as the Group’s maximum exposure to credit risk by credit risk rating grades: 56 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 30 June 2022 Note Internal credit rating 12-month or lifetime ECL? Gross carrying amount Loss allowance Net carrying amount Trade and other receivables 11 (i) Lifetime ECL (simplified approach) $257,359 $(26,567) $230,792 i. For trade receivables, the Group has applied the simplified approach in IFRS 9 to measure the loss allowance at lifetime ECL. The Group determines the expected credit losses on these items by using a provision matrix, estimated based on historical credit loss experience based on the past due status of the debtors, adjusted as appropriate to reflect current conditions and estimates of future economic conditions. Accordingly, the credit risk profile of these assets is presented based on their past due status in terms of the provision matrix. Note 11 includes further details on the loss allowance for these assets respectively. LIQUIDITY RISK b. Ultimate responsibility for liquidity risk management rests with the board of directors, which has established an appropriate liquidity risk management framework for management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Liquidity and interest risk tables The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. Year ended 30 June 2022 < 6 months $ 6-12 months $ 1-5 years $ Payables Lease liability Net maturities 763,555 96,571 860,126 - 96,571 96,571 - 150,264 150,264 Year ended 30 June 2021 < 6 months $ 6-12 months $ 1-5 years $ Total contractual cash flows $ 763,555 343,406 Carrying amount $ 763,555 332,262* 1,106,961 1,095,817 Total contractual cash flows $ Carrying amount $ Payables Lease liability Net maturities 1,055,830 - - 1,055,830 1,055,830 81,288 1,137,118 74,136 74,136 216,583 372,007 357,957* 216,583 1,427,837 1,413,787 * The difference between total contractual cash flows and carrying amount is interest payable over the lives of the lease agreements. 57 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 MARKET RISK c. Market risk is the risk that the fair value of future cash flows will fluctuate because of changes in market prices. Market risk includes foreign currency risk and interest rate risk. FOREIGN EXCHANGE RISK The Group operates a branch in New Zealand and is exposed to foreign exchange risk arising from currency exposure. The Group’s policy is to convert its local currency to the foreign currency at the time of the transaction. Foreign exchange risk arises from future commercial transactions and recognised financial liabilities denominated in a currency that is not the Group’s functional currency (which is the Australian dollar). The Group manages foreign exchange risk on an as-needs basis. The risk is measured using sensitivity analysis and cash-flow forecasting. The Group’s exposure to foreign currency risk, expressed in Australian dollars at the reporting date, was as follows: At 30 June 2022 Cash and cash equivalents Trade and other receivables Total other financial assets Total assets Trade and other payables Total lease liabilities Net exposure At 30 June 2021 Cash and cash equivalents Trade and other receivables Total other financial assets Total assets Trade and other payables Total lease liabilities Net exposure AUD Denominated Balances in $AUD NZ Denominated Balances converted to $AUD 6,465,693 212,587 133,419 6,811,699 744,341 274,166 5,793,192 203,785 18,205 19,852 241,842 19,214 58,096 164,532 AUD Denominated Balances in $AUD NZ Denominated Balances converted to $AUD 11,167,388 311,278 245,718 11,724,384 1,030,398 357,957 474,293 10,800 - 485,093 25,432 - TOTAL $AUD 6,669,478 230,792 153,271 7,053,541 763,555 332,262 5,957,724 TOTAL $AUD 11,641,681 322,078 245,718 12,209,477 1,055,830 357,957 10,336,029 459,661 10,795,690 The following table details the Group’s sensitivity to a 10% increase and decrease in the Australian dollar against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents an assessment of the reasonably possible change in foreign exchange rates. A negative number in the table represents a decrease in the operating profit before tax and reduction in equity where the Australian dollar strengthens against the relevant currency. For a 10% strengthening of the Australian dollar against the relevant currency, there would be a comparable impact on the loss or equity, and the balances below would be positive. 58 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 Profit / (loss) before tax and equity – 10% increase Profit / (loss) before tax and equity – 10% decrease TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 2022 $ 16,453 2021 $ 45,966 (16,453) (45,966) INTEREST RATE RISK The Group’s exposure to interest rate risk arises predominantly from cash and cash equivalents bearing variable interest rates, as the Group intends to hold any fixed rate financial assets to maturity. At the end of the reporting period the Group maintained the following variable rate accounts: 30 June 2022 30 June 2021 Weighted average interest rate % Balance $ Weighted average interest rate % Balance $ Cash and cash equivalents 0.41% 6,669,478 0.5% 11,641,681 At the end of the reporting period, if the interest rates had changed, as illustrated in the table below, with all other variables remaining constant, after-tax profit and equity would have been affected as follows: +0.41% (41bp) [2021: +0.5% (50bp)] -0.41% (41bp) [2021: -0.5% (50bp)] After-tax loss higher / (lower) Equity higher / (lower) 2022 $ 27,011 (27,011) 2021 $ 58,208 (58,208) 2022 $ 27,011 (27,011) 2021 $ 58,208 (58,208) 24. RELATED PARTY TRANSACTIONS Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. The Group’s related parties include key management, post-employment benefit plans for the Group’s employees and others as described below. Unless otherwise stated, none of the transactions incorporate special terms and conditions and no guarantees were given or received. Outstanding balances are usually settled in cash. The aggregate compensation made to key management personnel of the Group is set out below: Salary Superannuation Director fees – cash Director fees – share based payment expenditure Other TOTAL 2022 $ 729,208 53,705 179,333 2021 $ 491,699 34,919 194,000 - 1,664,734 148,946 115,206 1,111,192 2,500,558 59 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 Director fees for Sam Brougham are invoiced via Crofton Park Developments Pty Ltd atf Sam Brougham Family Trust. Sam Brougham is a director of the trustee and beneficiary of the trust. Fees in 2022 were $44,000 (2021: $44,000). Director fees for Travis Dillon are invoiced via Dillon Consulting Company Pty Ltd. Fees in 2022 were $62,000 (2021: $62,000) comprising $54,000 in Chairman fees and $8,000 in Committee fees. A further $50,000 (2021: $64,000) was paid to Travis Dillon in relation to consulting services provided to the Sales and Marketing Team. 25. COMMITMENTS There were no capital expenditure commitments at 30 June 2022 (2021: $nil). 26. CONTINGENT LIABILITIES There are no contingent liabilities as at 30 June 2022 (2021: nil). 27. SUBSEQUENT EVENTS There has been no matter or circumstance which has arisen since the end of the year that has significantly affected, or may significantly affect the Group’s operations, the result of those operations or the Group’s state of affairs. 28. INTERESTS IN SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities, and results of the following subsidiaries in accordance with the accounting policy described in note 1(g). Name of Subsidiary Country of incorporation Principal activity Terragen Biotech Pty Limited (i) Australia Agricultural biotech Equity holding 2022 % 100 2021 % 100 i. Terragen Biotech Pty Ltd operates in Australia however also operates through a branch in New Zealand. 60 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2022 29. PARENT ENTITY Information relating to Terragen Holdings Limited (‘the Parent Entity’): Statement of financial position Current assets Total assets Current liabilities Total liabilities NET ASSETS Issued capital Reserves Accumulated losses TOTAL EQUITY Statement of profit or loss and other comprehensive income Loss for the year Other comprehensive income TOTAL COMPREHENSIVE INCOME The Parent Entity has no capital commitments at 30 June 2022 (2021: $Nil). The Parent Entity had no contingent liabilities at 30 June 2022 (2021: $Nil). 2022 $ 2021 $ 6,298,323 6,464,800 (282,450) (282,450) 11,027,552 11,177,230 (292,506) (292,506) 6,182,350 10,884,722 43,004,871 42,438,295 2,286,606 2,801,268 (39,109,127) (34,354,841) 6,182,350 10,884,722 (4,843,998) (8,238,440) - - (4,843,998) (8,238,440) 61 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY DIRECTORS’ DECLARATION In the directors’ opinion: a. b. c. d. the attached financial statements and notes are in accordance with the Corporations Act 2001, including: i. ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; and giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its performance, as represented by the results of its operations and its cash flows, for the year ended on that date. the financial report also complies with International Reporting Standards as disclosed in note 1 (a); and there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. The Directors’ have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of directors. Jim Cooper | Managing Director Melbourne, 29 August 2022 62 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY SHAREHOLDER INFORMATION In accordance with ASX Listing Rule 4.10, Terragen Holdings Limited (“Terragen”) provides the following information to shareholders not elsewhere disclosed in the Annual Report. The shareholder information set out below was applicable as of 28 September 2022. CORPORATE GOVERNANCE STATEMENT A. The Company has prepared a Corporate Governance Statement which sets out the corporate governance practices that were in operation in the year ended 30 June 2022. In accordance with ASX Listing Rule 4.10.3, the Corporate Governance Statement will be available for review on Terragen’s website www.terragen.com.au and will be lodged with the ASX at the same time that this Annual Report is lodged with the ASX. DISTRIBUTION AND NUMBER OF HOLDERS OF EQUITY SECURITIES B. The distribution and number of holders of equity securities on issue in the Company as at 28 September 2022, and the number of holders holding less than a marketable parcel of the company’s ordinary shares based on the closing market price as at 28 September 2022 is as follows: Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Listed fully paid ordinary shares Unlisted Options Unlisted Employee Options Number of holders % of securities Number of holders % of securities Number of holders % of securities 26 121 96 286 178 707 0.00 0.19 0.41 6.53 92.86 100.00 - 1 1 9 13 24 - 0.03 0.06 4.81 95.11 - - - - 1 100.00 12 - - - - 100.00 100.00 As at 28 September 2022, the number of shareholders holding less than a marketable parcel of $500 worth of shares, based on the closing market price on that date of $0.13 per share, is 111. The total securities on issue in each class of equity securities as at 28 September 2022 are: Total securities on issue 194,019,235 11,245,710 8,000,000 Listed fully paid ordinary shares Unlisted Options Unlisted Employee Options As of 28 September 2022, there were no equity securities that were subject to restrictions. 63 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY TWENTY LARGEST QUOTED EQUITY SECURITY HOLDERS C. Terragen has only one class of quoted equity securities, being fully paid ordinary shares (ASX: TGH). The names of the twenty largest holders of fully paid ordinary shares, the number of fully paid ordinary shares and the percentage of fully paid ordinary shares on issue as of 28 September 2022 was as follows: Name Units % of Units CITICORP NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED STAMINA PTY LTD UBS NOMINEES PTY LTD CROFTON PARK DEVELOPMENTS PTY LTD ACTION ALWAYS PTY LTD P M DESMOND PTY LTD RUBI HOLDINGS PTY LTD EAST MT ADA PTY LTD STEPHEN MAHKEN MUTUAL TRUST PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 BNP PARIBAS NOMINEES PTY LTD MILNAR PTY LTD MR RODNEY JOHN LOONE & MRS DIANE GAYE LOONE MR T JUSTUS HOMBURG CROFTON PARK DEVELOPMENTS PTY LTD MONTALTO INVESTMENTS PTY LTD RIVERSDALE CAPITAL FUNDING PTY LTD MS KYLIE LYNETTE NUSKE & MR MATTHEW JAMES COOK Total for top twenty holders Balance of register Total 34,218,533 28,881,017 6,627,616 4,650,000 4,557,102 3,547,337 3,195,000 2,979,450 2,920,000 2,662,500 2,600,002 2,500,000 2,439,302 2,300,000 2,270,000 2,263,138 2,250,000 2,000,000 1,852,807 1,845,618 116,559,422 77,459,813 194,019,235 17.64 14.89 3.42 2.40 2.35 1.83 1.65 1.54 1.51 1.37 1.34 1.29 1.26 1.19 1.17 1.17 1.16 1.03 0.95 0.95 60.08 39.92 100.00 64 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY D. HOLDERS OF MORE THAN TWENTY PERCENT OF EACH CLASS OF UNQUOTED SECURITIES Each unlisted option entitles the holder to acquire one fully paid ordinary share subject to the holder paying the exercise price on or before the expiry date. The names of the holders of more than 20% of each class of options or performance shares, other than under an Employee Incentive Scheme, is set out below: Holder Rubi Holdings Pty Ltd Unlisted $0.25 options expiring 11 December 2022 Units 4,200,000 % of units 37.35 VOTING RIGHTS E. At a general meeting of the Company, every holder of ordinary shares present in person or by proxy, attorney or representative has one vote on a show of hands, and on a poll, one vote for each ordinary share held. Options do not carry any voting rights. SUBSTANTIAL SHAREHOLDERS F. As of 28 September 2022, the names of the substantial shareholders of the Company and the number of equity securities in which those substantial shareholders and their associates have a relevant interest, as disclosed in substantial shareholding notices given to the Company were as follows: Name Scobie Dickinson Ward One Funds Management Ltd atf Saville Capital Emerging Companies Fund Sam Brougham Number held 33,345,761 % of issued capital 17.19% 20,000,000 15,178,718 10.31% 7.82% ON-MARKET BUY-BACK G. The Company is not currently conducting an on-market buy-back. ON-MARKET BUY-BACK H. The Company did not purchase securities on market during the reporting period. USE OF INITIAL PUBLIC OFFERING PROCEEDS I. The Company confirms that in the period since its listing on the Australian Stock Exchange on 11 December 2019 it has used its cash and assets in a form readily convertible into cash that it had at the time of its admission to the ASX in a manner consistent with its business objectives as set out in the Prospectus dated 18 October 2019. 65 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 CORPORATE DIRECTORY BOARD OF DIRECTORS Mr Travis Dillon Mr Sam Brougham Ms Ingrid van Dijken Mr Jim Cooper Non-Executive Chairman Non-Executive Director Non-Executive Director Managing Director COMPANY SECRETARY Mr Miles Brennan REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS Unit 6 39 Access Crescent Coolum Beach QLD 4573 PHONE NUMBER 1 300 837 724 POSTAL ADDRESS PO Box 5807 Brisbane QLD 4000 WEBSITE www.terragen.com.au SHARE REGISTRY Link Market Services Pty Ltd Level 12 680 George Street Sydney NSW 2000 PHONE NUMBER 1 300 554 474 STOCK EXCHANGE Australian Securities Exchange 20 Bridge Street Sydney, NSW 2000 ASX CODE TGH AUDITORS Deloitte 66 TERRAGEN HOLDINGS LIMITED AND CONTROLLED ENTITY ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2022 www.terragen.com.au