Vertiv
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2016 ANNUAL REPORT 2018 ABN 80 129 643 492 LEADING MINDS LEADING SCIENCE Virtus Health is one of the most successful medical collaborations of its kind in the world. We combine the strength of clinical collaboration with advanced scientific techniques to deliver the best  possible outcomes for our patients. Contents Chairman’s Statement 2 Chief Executive’s Overview 4 Board of Directors 14 Directors’ Report 16 Auditor’s Independence Declaration 47 Statement of Comprehensive Income  48 Statement of Financial Position 49 Statement of Changes in Equity 50 Statement of Cash Flows 51 Notes to the Financial Statements 52 Directors’ Declaration 101 Independent Auditor’s Report to the members of Virtus Health Limited 102 Shareholder Information 108 Glossary of Terms 111 Corporate Directory IBC VIRTUS HEALTH“ Introducing Ivy: an innovative Artificial  Intelligence tool pioneered by Virtus scientists to increase success rates in IVF pregnancies.” NETWORK OF CARE FERTILITY SPECIALISTS 126 FRESH IVF CYCLES 18,496 SCIENTISTS 241 NURSE, COUNSELLOR AND PATIENT SUPPORT 977 FERTILITY CLINICS 45 DAY HOSPITALS 7 1 ANNUAL REPORT 2018“ FY18 resulted in Virtus Health delivering a consistent Australian performance, continued growth in diagnostic and international activities supported by effective cost management.” The results for the financial year ended   30 June 2018 reflect a challenging year in our core  Australian fertility operations and continued growth from our international activities reaffirming the  strategic vision of Virtus Health. FY18 resulted in Virtus Health delivering a consistent Australian performance, continued growth in diagnostic and international activities supported by effective cost management despite softening in the Australian Assisted Reproductive Services (“ARS”) market in the second half. Group revenue increased 2.2% to $262.1 million. Revenue growth was impacted by market volume weakness and price pressure in a competitive Australian market where Virtus Australia revenue declined by 0.5%. International revenue increased by 17.6% assisted by a favourable foreign exchange translation impact on our euro earnings, growth in Singapore, the full year contribution of Aagaard Fertility Clinic, Denmark and a three month contribution from Complete Fertility Centre, Southampton UK. For the year ended 30 June 2018 the Directors are pleased to announce a final dividend of  12.0 cents  per share fully franked and this results in a full year dividend payout of 26.0 cents per share fully franked; this is an increase on the prior year reflecting increased earnings. The Virtus International presence continues to grow with targeted acquisitions in the UK and Denmark  consistent with our international growth strategy. We continued to drive further improvement from our international activities with EBITDA growing 30% to $9.2 million with Ireland continuing to deliver solid results. In Singapore financial performance  continued to improve and we achieved a full year positive EBITDA for the first time. Virtus welcomed Complete Fertility (UK) and Trianglen (Denmark) to the group and these clinics are forecast to be earnings enhancing in FY19. Each of these acquisitions provide  an important extension of our international diversification strategy. In the Australian eastern state markets in which we operate there was an overall market volume decrease of 0.7% for Assisted Reproductive Services. Underlying cycle volume in Virtus Australian clinics decreased 3.4% and reflected the impact of low  cost fertility competitors in both the economically challenged Queensland market and the Tasmanian market where volume contracted by 7%. Whilst the New South Wales and Victorian markets both saw volumes decline slightly in FY18, Virtus premium and low cost clinics outperformed the market and our Sydney and Melbourne metropolitan based IVFAustralia, Melbourne IVF and “The Fertility Centre” (“TFC”) branded clinics experienced an improvement in volumes and growth in market share. Management continues to develop the range of services offered by several regionally positioned clinics with recent changes made in the NSW Hunter region and Tasmania. The underlying demographic drivers of ARS remain favourable in all markets with the key factors stimulating volume growth being the impact of GROUP REVENUE INCREASED 2.2% TO $262.1m NET PROFIT AFTER TAX INCREASED 9.4% TO $30.8m 2 CHAIRMAN’SSTATEMENTVIRTUS HEALTHManagement will also be focused on the integration of our new international clinics and the delivery of greater synergies across our six European clinics. Changes to federal and territory legislation are an important feature of the future landscape for ARS across the world although they can be slow in eventuating. In Australia the Federal Health department continues its review of the Medicare Benefits Schedule; to date there have been   no announcements regarding the ARS sector. In Europe changes to donor services are expected in Ireland and our European management team are continually assessing the opportunities to expand our donor services in our chosen territories. Peter Turner, who joined the Board at our IPO in 2013 has indicated that he will not seek re-election at the AGM in November and I would like to thank Peter for his contribution and diligent service to the company over the last five years. Finally, I would like to thank all our staff, fertility specialists and management teams who contribute daily to the success of Virtus Health. Their flexibility   in a changing clinical and business environment is essential to the continued success of Virtus Health. Peter Macourt Chairman “ Virtus’ international presence continues to grow with targeted acquisitions in the UK and Denmark consistent with our international growth strategy.” rising maternal age, the impact of underlying medical conditions on fertility, and increasing demand from same sex couples and single women accessing donor sperm and ARS to start a family. However, the Virtus Board also recognises that the Australian ARS market continues to evolve and we are focused on service delivery to support patients across a range of social and economic demographics, as well as meeting the full range of clinical demands essential to the sustainability of the Virtus business. Our diagnostic revenue increased by over 3.6% in FY18, largely driven by greater internal utilisation of genetic testing and screening in reproductive medicine. The strong improvement in financial  performance in a rapidly evolving diagnostic sector is an important feature of our ARS service. The day hospitals experienced a quiet year with  weakness in non-IVF revenue the major reason for our relatively flat financial performance. As  our Maroubra site prepared to relocate its IVF laboratory, clinic and day hospital to a new facility at Alexandria the “wind down” impacted financial   performance in the last quarter. Alexandria is one   of two major relocations and facility upgrades currently in progress; we will also be relocating our Hobart facility in September and adding a small two theatre day hospital capability to further develop our Tasmanian business. As shareholders will recall we made significant   changes to our Victorian operations last year and we are pleased to report that, following a period of reorganisation we have seen significant improvements in clinical and financial  performance; credit for this improvement goes to the Victorian senior management team and all the employees who have embraced the need for change. In the Chief Executive’s review Sue Channon provides further details on the evolution of the group’s activities, research and development, and our strategies to ensure the continued development of Virtus Health. One particular achievement is the development of the “Ivy” artificial intelligence software and we believe  this will provide major improvements in clinical performance as we progressively adopt the technology in all Virtus laboratories. The Board continues to work closely with management to identify international opportunities in the UK and Europe. The new financial year   provides Virtus with opportunities for continued expansion, with full year contributions from Complete Fertility and Trianglen, as well as the business development opportunities that our new facilities in Alexandria and Hobart provide. 3 ANNUAL REPORT 2018“ We remain relevant to the patients we treat and the markets in which we operate and expect the disciplined evolution of our three key pillars of fertility, diagnostics and day hospitals to deliver continued growth.” As the market-leading Assisted Reproductive Services (“ARS”) provider in Australia and Ireland and with a growing presence globally, we are proud to offer our patients the highest levels of clinical and scientific expertise in fertility treatments and associated technologies. Our market leading ARS offering continues to develop through the introduction of new technologies and added services, all designed to improve outcomes for patients and reinforce Virtus as the provider of choice for those seeking to create the families they desire. In line with our stated strategy for diversification,  our international presence expanded in FY18 with two additional IVF clinics joining the Virtus group; Complete Fertility in Southampton (UK) and Trianglen in Copenhagen (Denmark). Both patient centric fertility clinics providing a natural cultural fit   with Virtus. Our focus on diversification has also led  to expanded diagnostic and day hospital services. It is this strategy that has sustained us through a period of Australian ARS volume decline. Our teams completed 18,496 fresh IVF cycles in FY18, 35,286 ARS treatments and 32,749 day hospital procedures across our network. The expansion of our diagnostic services under the brand “Virtus Diagnostics” saw us perform an increasing number of general pathology and specialised genetic testing episodes. As one of the world’s most successful medical collaborations, we now have 126 fertility specialists (103 in Australia) increasing from 122 in June FY17 supported by more than 1,300 professional staff including scientists, nurses, researchers and administrators, all with the ultimate goal of providing the highest standards of clinical care and patient outcomes. This year our leading minds, 80% 13% 7% FY12 MULTIPLE SOURCES OF REVENUE • Australian ARS • Australian Diagnostic • Day Hospitals • International ARS 17% 8% 68% 7% FY18 4 VIRTUS HEALTHCHIEFEXECUTIVE’SOVERVIEWAUSTRALIAN EBITDA $66.8m INTERNATIONAL EBITDA $9.2m leading science expertise was further strengthened with the appointment of internationally renowned reproductive biologist Professor David Gardner as Virtus Health Director of Assisted Reproductive Technology, Scientific Innovation and Research  to drive our organisation’s level of scientific  research capability for continued improvement in patient outcomes. During FY18 we have undertaken two significant  infrastructure development projects. The first an  investment in a new site for our patients with the relocation of our IVFAustralia fertility clinic and City East Specialist Day Hospital from Maroubra to a new purpose-built facility in Alexandria; this site will be commissioned on 24th August 2018. The new Alexandria Specialist Day Hospital facility features four operating theatres (an increase from three operating theatres at the Maroubra site); an IVFAustralia fertility clinic, embryology and andrology laboratories including two transfer rooms and three andrology collection rooms; Virtus Diagnostics pathology collection centre; sessional consulting rooms; pharmacy; ultrasound care; and on-site café. This is by far the largest investment that Virtus has made in a single site and will deliver significantly advanced ARS and day hospital  services to the Eastern, Southern, Inner West and Central Sydney communities. Our second development is in Hobart, Tasmania where we are relocating TasIVF from our current site to a new purpose-built facility in the city centre. This site, which is due to be commissioned in early September, includes: TasIVF fertility clinic, andrology laboratory and collection rooms, an embryology laboratory including one transfer room; sessional consulting rooms; and the new Hobart Specialist Day Hospital, a two theatre multi- purpose day hospital. For the first  time Virtus will  provide day surgery facilities in Tasmania, an area where we have previously outsourced this activity. This investment increases the Virtus Day Hospital portfolio to seven with an additional three operating theatre suites. We appointed a Group Procurement Manager in November 2017 to continue our focus on removing cost from the business. This activity has delivered in excess of $1 million in annual savings to date. Virtus Health’s core values, our Medical Leadership capability, our commitment to clinical sovereignty, our ‘leading minds, leading science’ philosophy and our uncompromising commitment to quality health  outcomes and service, will ensure that we continue to offer women and men aspiring to have a child the best possible chance of creating the family they desire. Virtus Health Australia – Fertility The Australian fertility market continued to evolve with the ongoing expansion of low cost providers in the sector. Within this challenging environment, Virtus has maintained its strong and sustainable competitive position as a market leader. This has been achieved through our commitment to our diversification and vertical integration strategy  as we continue to develop a service model that provides care for patients across the whole ARS value chain. Virtus offers consultation and advice, simple diagnostic pathology, early stage assisted reproductive services such as IUI and our simplified  low cost IVF service model, through to the more complex IVF/ICSI and advanced sciences and technologies including high-end genetic services. Virtus is the only provider in Australia that delivers the most comprehensive and complete level of Assisted Reproductive Services for its patients within the one organisation. This strategy has sustained us through FY18 and further work throughout FY19 to consolidate this position will continue. The Australian ARS markets in which Virtus operates declined 0.7% to June 2018. The biggest impact was felt in our Queensland and Tasmanian markets. Virtus cycle activity in Australia declined by 3.4% impacted by two key issues, the first  being the impact of low cost competitors in Queensland which resulted in a decline of the Virtus Queensland market share. However we have seen an improvement in our Queensland market share in the second half of FY18 over the first half on the back of revised pricing and clinical   models. The second area of impact has been a new competitor entering the Tasmanian market for the first time leading to a reduction in market  share. In addition, the Tasmanian market for FY18 was very soft, down 7% to June 2018. Advanced diagnostic services (PGD/PGS, Cytogenetics) are now available to patients in Tasmania as well as a multi service model of bulk bill, blended care model and premium services. Virtus acquired a further   15% of TasIVF in FY18. Our two largest markets of New South Wales and Victoria continued to gain momentum with Virtus New South Wales outperforming the market for the second year in a row. Virtus New South Wales has continued to focus on ensuring services are aligned to the needs of patients in specific   local communities for example our Hunter and Wollongong clinics now provide both premium and low cost fertility services. These developments together with the Alexandria development will all create a platform for improved market penetration. 5 ANNUAL REPORT 2018“ Our two largest markets of New South Wales and Victoria continued to gain momentum with Virtus New South Wales outperforming the market for the second year in a row.” Virtus Victoria’s market share also increased. The cost out activities that have been the focus for Victoria through FY17 and FY18 have delivered significant benefits with an EBITDA margin  improvement achieved in the year. Virtus Victoria has also relaunched a revised TFC model which is delivering benefits in terms of market share and  volume growth. We have continued with our strategy to have our regional domestic clinics provide a full range of fertility treatments at different price points. We remain committed to operating both our premium brand and our low cost fertility specialist driven model to provide our patients with more options and achieve our strategic ambition for diversification. We remain heavily committed to  our integrated and diversified business model  as it provides the platform to participate in all market segments. Management has continued to work on delivering a more streamlined approach to drive efficiencies  across the whole business including: the “One Lab” approach; customer service standardisation; procurement rationalisation; finance efficiencies  through a greater use of the business intelligence tool; and reorganisation of the marketing team to a group-wide structure. The business has also focused on some of the key risk issues of information security, business continuity planning and cyber security and work will continue on these activities through FY19. On the political front there are no legislative or proposed changes to IVF before Parliament or currently under consideration by the Federal Minister. The MBS review is progressing and the IVF profession is participating in this discussion. Virtus Health International Our focus on driving the Virtus collaborative model in carefully selected international markets is achieving results, and we will continue to pursue acquisition opportunities in the UK and Europe in   support of our strategic expansion objectives. Two further acquisitions were completed in FY18 as   noted previously, bringing the Virtus international portfolio to six clinics in the Northern Hemisphere and one in Singapore. International revenue now sits at 17% of total revenue. On 23 February 2018 we completed the acquisition   of 90% of the ordinary share capital of Complete Fertility Limited (“CFL”) based at the Princess Anne Hospital Southampton for a cash free debt free consideration of £5.3 million (AUD $9.6 million). CFL performed 125 fresh IVF cycles in the year ended 31 March 2018. These services are provided from a well-appointed facility located within the Princess Anne Hospital in Southampton. Our second acquisition in FY18 was the Trianglen  Fertility Centre in Copenhagen, Denmark which was added to the European portfolio in June 2018 for a maximum consideration of Kr198 million (AUD $42.0 million). The addition of Trianglen brings our market share in Denmark to approximately 15%. Trianglen performed 1,292 cycles resulting in egg retrieval and 366 frozen embryo transfers in FY17. Both Complete Fertility Clinic and Trianglen offer a full and comprehensive range of fertility treatments and advanced scientific technologies. Our Irish clinics have maintained their position as the leading provider in the Irish market. Our network ensures Virtus Ireland is positioned appropriately to support the growing demands of the community. While the introduction of pre-implantation genetic screening (PGS), an increase in numbers of frozen embryo transfers (FETs) and a strong donor program positively contributed to revenue lines in Dublin, the FY18 full year position for all three Irish clinics resulted in a 3% cycle deficit over the  prior year. 6 VIRTUS HEALTHCHIEFEXECUTIVE’SOVERVIEW One Lab: the Virtus Health scientific vision “ Our goal is to provide the framework for a standard Virtus laboratory methodology across every embryology lab.” We are proud of our position as number one in fertility and strive to uphold this title through the implementation of services that provide the best in scientific methods, research, facilities, equipment and most importantly, staff. Hence, it is our ambition to have all of our laboratories performing at the highest possible standard, and to lead the world in delivering the very best in patient outcomes through our ART scientific research program. In 2018 we launched our “One Lab” strategy under the leadership of Professor David Gardner as Group Director of ART, Scientific Innovation and Research. Our goal is to provide the framework for a standard Virtus laboratory methodology across every embryology lab. This framework will be developed over the next five years and is designed to meet the highest international standard in embryology, enabling us to benchmark and improve upon these results. 7 ANNUAL REPORT 2018In early FY18 we expanded the European management team to include the appointment of a European Managing Director. This role has delivered a greater ability to quickly  integrate and  gain synergies within the acquired entities and  strengthened the Virtus leadership capabilities in the Northern hemisphere. A market review has allowed the European Managing Director to set some key opportunities for growth in Ireland and the appointment of a clinic director for the Sims group, due to commence in August 2018, offers an opportunity for the business to focus on its strategic objectives for enhanced performance. Virtus acquired a further 15% of the Irish business  through FY18. The performance of our Singapore operation continued to improve through the year delivering a positive EBITDA of SG $363,000 (AUD $346,000) compared to a prior year EBITDA loss of SG $120,000 (AUD $111,000). The number of contracted doctors within our Singapore entity has increased to five in FY18 from 4 in FY17. Our international partnerships have facilitated positive flow-on effects including collaboration  on research and science, sharing best practice treatment options for patients, attracting the best fertility specialists and providing international opportunities for career advancement for staff. We are seeing the value of the Virtus collaborative network in action with staff moving across jurisdictions from Australia to Europe and vice-versa. Diagnostics Virtus has continued to expand its position in the Australian diagnostic market through Virtus Diagnostics. Our ongoing investment in general pathology and advanced genetics platforms has delivered positive growth in referral volume and financial performance in FY18. Our focus over the past 3 years on growing our footprint and testing capability has set the framework to support ongoing growth and synergistic benefits for Virtus. Following the expansion and restructure of Virtus Diagnostics in FY17, FY18 continued with a positive performance which delivered revenue growth of 3.6% and EBITDA growth of 9.1% over the prior year. Pathology requests have grown year on year by  4.5% incorporating over 600,000 test schedules for the financial year, an 8.5% increase year on  year. Our commitment and continued focus on delivering specialist diagnostic testing in reproductive health and obstetrics whilst having the capability and expertise to deliver general pathology continues to enhance performance. Genetic testing is fast becoming a science for the future and the capabilities already developed within Virtus Diagnostics positions the business as a significant and high-quality player in this  field in Australia. Our laboratory capability in Pre-  Implantation Genetic screening (10% increase in revenue on pcp) and Pre-Conception Genetics on Next Generation Sequencing (79% increase in  revenue on pcp) is growing significantly, and Virtus   is becoming a prominent provider in the sector. Further investment by Virtus Diagnostics in this area is planned for FY19. Patient service and safety standards The Virtus Board, risk committee and management teams have continued to focus on the company’s risk profile and service standards with  a number  of key initiatives rolled out across FY18 in support of our ambition to provide the highest level of care and outcomes to our patients in the safest environment. As leaders in fertility, it is our goal to have all of our laboratories performing at the highest possible standard, and to lead the world in delivering the very best in patient outcomes through our clinical and scientific research programs. In 2018 we launched  our “One Lab” strategy under the leadership of Professor David Gardner as Group Director of ART, Scientific Innovation and Research at Virtus Health.  Our goal is to provide the framework for a standard Virtus laboratory methodology across every embryology lab. This framework will be designed to meet the highest international standard in embryology and enable us to benchmark and improve upon patient outcomes. DIAGNOSTIC REVENUE INCREASED 3.6% INTERNATIONAL REVENUE INCREASED 17.6% $44m 8 VIRTUS HEALTHCHIEFEXECUTIVE’SOVERVIEW New Fertility Clinics UNITED KINGDOM DENMARK Complete Fertility Centre based in Southampton Trianglen Fertility Clinic in Copenhagen Trianglen Fertility Clinic, Copenhagen In June 2018, Trianglen Fertility Clinic in Copenhagen became our second clinic in Denmark. Led by Kåre Rygaard, Medical Director and founder, the team of seven doctors, seven scientists and 21 nursing and support specialists provide a highly regarded, full and comprehensive range of fertility treatments and advanced scientific technologies. The clinic’s comprehensive patient service and leading success rates contribute to Trianglen’s strong reputation in the Danish market. Trianglen was established in 1993 and is one of the leading fertility clinics in Copenhagen, Denmark, performing 1,292 cycles resulting in egg retrieval and 366 frozen embryo transfers in FY17. This partnership expands our network in Denmark with Trianglen and Aagaard now representing approximately 15% of the Danish fertility market. Complete Fertility Centre, Southampton Our entry into the English fertility market began in February 2018 with Complete Fertility Centre based in Southampton joining Virtus Health. Established in 2011, Complete Fertility is the leading fertility clinic on the south coast of Britain holding approximately 50 per cent of the regional market share. Complete Fertility offers a full and comprehensive range of fertility treatments and advanced scientific technologies including time lapse imaging of embryos, a highly successful egg donation program and innovative procedures including ovarian tissue cryopreservation. Led by Professor Ying Cheong and Julia Paget, founding directors, the centre is recognised as one of the National Training centres for Assisted Reproductive Services and hosts training programs for reproductive scientists and clinicians. Complete Fertility has established a professional patient-centric service which provides a natural cultural fit with Virtus Health. 9 ANNUAL REPORT 2018All of our facilities maintained their accreditation status through the year with many achieving commendations through the external quality  auditing process. To support both the internal audit and compliance activities within the organisation, we appointed in June FY18 a Group Risk and Quality Manager to develop and oversee the strategic risk management within the organisation. The electronic platform “Riskman” continues to be utilised by the organisation for the management and reporting of both patient and employee incidents as well as providing a platform for the identification and profiling of the organisation’s risk  and ensuring appropriate management of that risk. Virtus Health remains committed to the highest quality health care and outcomes for the increasing   number of patients we care for every year. Our core value, to ensure the needs of patients come first,   has guided our commitment to enhanced patient service and safety in parallel with our investment strategy into key technologies in support of this goal. In FY17, we introduced a standard global patient satisfaction survey tool to measure our Net Promoter Score (NPS) in order to enhance service standards for all patients. This tool has continued to be the method by which we measure our performance against patient expectations on a quarterly basis. Overall our NPS in FY18 was positive   with a score of +43. Information technology The Virtus Patient System (VPS) is now delivering clinicians and staff across all Australian fertility clinics with immediate access to patient information, whilst providing opportunities for improved communications between patients and their clinical team across multiple platforms. Work on this platform continues to enhance performance and ensure we meet the needs of our patients and key stakeholders. The implementation of VPS enabled the launch of the Virtus Patient App in FY17 which provides patients with direct and secure access to their treatment schedule. Work has continued through FY18 to enhance the performance of the app and to ensure its relevance to patients. This is the world’s first integrated app to support patients’  undergoing IVF treatment. With the inclusion of our patient forum, additional patient information and support for newer mobile platforms, the Virtus Patient App has continued to be accepted by patients undergoing IVF treatment and with further value enhancing additions to become available during FY19 we expect that this will become the future single online source of information for patients complementing the clinical team care and supporting patients during treatment cycles. A comprehensive review of our current Information and Communication Technology (“ICT”) operations was completed during the year, this review adds further confidence that our ICT strategy  will  ultimately deliver our vision of creating exceptional digitally-enabled experiences for Virtus Health patients, families, clinicians and staff. Towards the end of FY18, we began the process of recruiting the position of Chief Information Officer (“CIO”)  to support development of our ICT strategy and we are entering the final stages of  this  recruitment activity. Our Laboratory Information Management System (“LIMS”) has continued to be deployed across Virtus Diagnostic units, providing a standardised platform for the delivery of secure electronic results to both internal and external stakeholders, whilst providing a consolidated view of activities within Virtus Diagnostics. The IT team have continued to integrate and standardise our recent international acquisitions,  providing our expanding staff and doctor base with access to our internal communication, induction and training platforms whilst delivering improved reliability through refreshed technologies to support clinical teams in the delivery of patient care. Research Research has continued to remain a key focus for Virtus through FY18 with some very exciting opportunities explored to support our commitment to improving patient outcomes and ensure we remain abreast of the most current technology and treatment options. Our clinicians and scientists have been pioneers in fertility care for over 30 years and we continue to be a leader in this advanced field of healthcare through our  ARS TREATMENTS 35,286 DAY HOSPITAL PROCEDURES 32,749 10 VIRTUS HEALTHCHIEFEXECUTIVE’SOVERVIEW“ With a greater use of technology and digital platforms we will continue to improve our patient experience and drive further efficiencies within the business.” scientific and clinical research activities with an  annual research and development investment of approximately $2 million. The Virtus Research Grant committee was first  established in FY17 and oversees the funds available to support PhD students and researchers for specific projects that meet the Virtus vision and  support our key strategic imperative and ambition to be a leading global provider of ARS based on clinical and scientific effectiveness and the   improvement of IVF outcomes. Ivy Artificial Intelligence System One of the most exciting projects this year has been our investment into research to improve patient outcomes by ensuring that the very best embryo is selected to transfer. Virtus Health has been working in conjunction with a software developer to produce an exciting new Artificial Intelligence (“AI”)  tool known as ‘Ivy’. Ivy uses large amounts of data captured from Embryoscope time-lapse imaging and deep learning networks to teach itself how to select the embryos that will most likely result in a fetal heartbeat. Early trials indicate that the success rates afforded by this technology will enhance our present capability, and Ivy will potentially bring significant  benefits to our patients in terms of outcomes and  our clinicians in assisting them select the best embryo for transfer. The Australian laboratories, Sims IVF Dublin, along with Complete Fertility in Southampton and Aagaard Klinik in Denmark have all contributed to the development of Ivy in what has been Virtus Health’s first major international  collaboration. Virtus in partnership with the software developer submitted and was successful in achieving an Abstract for Oral presentation at the American Society of Reproductive Medicine 2018 Scientific Congress that will be held in Denver,  Colorado, 6-10 October 2018. A multi-centre randomised controlled trial validation of this AI is ongoing. Virtus has five staff members completing a PhD   and one completing their Masters as they work alongside our scientists and clinicians on various INTERNATIONAL REVENUE NOW SITS AT 17% OF TOTAL REVENUE TRIANGLEN BRINGS OUR MARKET SHARE IN DENMARK TO ~15% research programs. One of our staff members completed their PhD in FY18 and a former staff member is finishing their PhD studies in Adelaide   using Virtus New South Wales data. The R&D Committees across Virtus continue to oversee a range of in-house research projects and desk top audits evaluating the success, safety and efficacy of our programs. We are pleased to   note that our clinics are well within the national benchmarks for safety and efficacy. Fertility specialists and employees Virtus fertility specialists and scientists continue to contribute to innovation and development within the fertility profession in Australia and internationally. We continue to collaborate with universities and public hospitals through the academic appointments of our clinicians. This collaboration between Virtus, academia and the public health system ensures a solid training profile for new   specialists and provides strong support for our succession program and ensures we are able to attract and retain fertility specialists, scientists, nurses, counsellors and administrative professionals for the delivery of exceptional patient care. Our fertility specialists have the ability to create the practice they desire, combining private practice with public appointments, research and academic activities dependant on their individual aspirations. The average age of our fertility specialists is 52 and has remained relatively stable over FY18 reflecting  the recruitment of new specialists to balance the retirement of established specialists. Our medical and scientific teams have assisted in  the creation  of over 70,000 babies since our inception. All of our fertility specialists are qualified obstetricians and  gynaecologists many of whom have subspecialty training in infertility and have achieved the highest possible level of qualification in this field, obtaining  a Certificate of Reproductive Endocrinology and  Infertility (“CREI”), and its worldwide equivalents. As our workforce grows we have seen an increasing need to provide a more coordinated approach to the delivery of our strategic plan as it pertains to people. As such we have appointed a strategic human resource advisor to support Virtus in the preparation for the future through the development and implementation of a “people plan” which will support management and staff in the delivery of high quality health care services. 11 ANNUAL REPORT 2018  Ivy: artificial intelligence technology in IVF “ Ivy has taught itself to identify those embryos with the highest potential of developing a fetal heart and allocates them with an ‘EmbryoScore’.” Our scientists are pioneering an innovative technology using artificial intelligence (“AI”) to predict the likelihood of a viable pregnancy prior to transferring an embryo in a woman undergoing IVF. Called Ivy, our artificial intelligence allows embryologists to identify the embryo with the best chance of achieving a successful pregnancy as quickly as possible. By performing a comprehensive three-dimensional assessment of the growth of embryos through all stages of development and then relating this data to the corresponding pregnancy outcomes, Ivy has taught itself to identify those embryos with the highest potential of developing a fetal heart and allocates them with an ‘EmbryoScore’. The embryo with the highest score can then be selected and transferred, accelerating the chance of a healthy baby. Testing of Ivy occurred from more than 8,300 embryo video outcomes in eight Virtus laboratories across four countries. Preclinical validation of the technology is being conducted. With a patent application lodged, we will further evaluate Ivy and its EmbryoScore in a multicentre randomised controlled trial across our Australian and European laboratories, enabling its rapid introduction to patient care. Aengus Tran, Chief Data Scientist at Harrison-AI and Dr Simon Cooke, Scientific Director at IVFAustralia, led the development of this technology. 12 VIRTUS HEALTH“ Globally Virtus Health is positioned to benefit from the ongoing increase in demand for ARS and is well placed for future growth.” Our “people plan” will provide a solid foundation for ensuring Virtus is not only a healthcare provider of choice but also an employer of choice; where all staff are empowered to be the best they can be and provide a service that exceeds our patient’s expectations. Through utilising the power of communication and collaboration, it is our goal to create a more positive workplace for our people. We believe that creating a strong employee and doctor experience will drive the delivery of extraordinary patient experiences. An investment in our culture begins with our collective commitment to more open, collaborative and robust communication. Throughout FY19 we plan to develop and execute group-wide communication initiatives that will unite our network, drive internal engagement and support our people in the delivery of exceptional patient care, all of which will ultimately lead to the growth of patient advocacy and referral-based business across our international markets. Outlook Infertility continues to affect 1 in 6 couples of reproductive age worldwide; the social and demographic factors contributing to this global dynamic continue to drive demand for Assisted Reproductive Services. Virtus remains focused on our patients’ experience and we will use our leading minds to drive leading science and patient outcomes. We are setting the scene to ensure that our service and patient outcomes are accelerated through the advancement of technologies and digital platforms to drive efficiencies and continue to transform   the way we provide care and communicate with our patients. As noted above our journey through FY18 to meet our goal to be a leading global provider of ARS has seen Virtus continue to invest in scientific  and diagnostic systems, facilities, international expansion and research to establish the platform for further growth in FY19. Our two new day hospital facilities, our “One Lab” strategy and our investment in AI and other digital technologies and resources all support our vision to ensure continuing evolution of our services to suit the scientific and clinical   needs of our patients. It is this technically advanced platform that is one of the key drivers to growth and ensures we are able to diagnose and treat a full range of reproductive and fertility issues thus maintaining our competitive advantage. We continue to evolve our approach and models to ensure we remain relevant to the patients we treat and the markets in which we operate, expanding services across our network to meet all patient demographics and expect the disciplined evolution of our three key pillars of fertility, diagnostics and day hospitals to deliver continued growth. While it has been a challenging year for the ARS sector, overall the market variability we have experienced through FY18 was foreseen and Virtus’ patient-centric approach to strategy has proactively driven our diversified model reducing  dependence on any one segment of the market. Our diversified model has provided a solid platform,   sustained us through a year where market growth has been flat and provided the flexibility to deal with   the impact of market conditions as they arise. Globally Virtus Health is well positioned to benefit  from the ongoing increase in demand for ARS and is well placed for future growth. We have the platforms available to care for all patients in any market with any treatment preference in a way no other organisation can. Our model has sustained us in a soft Australian market through FY18 and will continue to be the key point of difference for Virtus. Finally, we trust this report gives you an understanding of our achievements and a sense of our focus and future which we believe to be solid and with significant opportunity. I would like to  thank the Board of Virtus and our National Advisory Committee who guide our strategy, the Virtus Executive and management teams who assist in executing our strategy and all of our doctors and staff around the world for their support and ongoing commitment to our patients, the organisation and the work they do to ensure our future. We take this opportunity to also thank the patients who place their care in our hands. Thank you everyone for your continued effort and commitment to our vision and values. Leading Minds, Leading Science Sue Channon Group CEO 13 ANNUAL REPORT 2018Peter Macourt Chairman BCom.; ACA; GAICD Peter is a former director and Chief Operating Officer of  News Limited. Whilst at News Limited, he served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a number of subsidiaries and associated companies of The News Corporation Limited. Other current directorships: Chairman of SKY Network Television Limited (since August 2002); Director of Prime Media Limited Former directorships (last 3 years): None Special responsibilities: Member of the Audit Committee and the Nomination and Remuneration Committee. Susan Channon Chief Executive Officer Registered Nurse Div1; OR Management Certificate Susan (Sue) has held senior management positions in various Australian healthcare organisations for over 20 years. Before her appointment to Chief Executive Officer  (“CEO”) of the company in November 2010, Sue was CEO of IVFAustralia Pty Ltd. Prior to joining the company, Sue was State Manager for NSW and ACT for Medical Imaging Australia, the National Director of Nursing for Mayne Group (now part of Ramsay Health Care), CEO of Kareena Private Hospital, CEO of Castlecrag and Mosman Private Hospital and CEO and Director of Nursing for Castlecrag Private Hospital. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Risk Committee 14 BOARD OF DIRECTORSVIRTUS HEALTHGreg Couttas Non-Executive Director Lyndon Hale Executive Director Peter Turner Non-Executive Director Sonia Petering Non-Executive Director BCom.; FCA; MAICD MBBS; FRACOG; CREI BSc.; MBA; GAICD LLB; BCom; FAICD Lyndon has been the Medical Director of Melbourne IVF Pty Ltd since 2008. He is also director of Reproductive Surgery at The Women’s Hospital, and is a board member of the Fertility Society of Australia. Lyndon is highly regarded for his knowledge and proactive approach and brings extensive experience in assisted reproduction treatments to the care of his patients. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Risk Committee Prior to joining the company, Peter served as Executive Director and Chief Operating Officer of CSL Limited and  was the founding President of CSL Behring LLC. Peter is currently Chairman of NPS MedicineWise. Other current directorships: Bionomics Limited Former directorships (last 3 years): Ashley Services Group Limited Special responsibilities: Chair of the Risk Committee and a member of the Nomination and Remuneration Committee and member of the Audit Committee. Sonia is a corporate lawyer who brings extensive experience as a Director. She also served as Chair of the Rural Finance Corporation of Victoria and a Non-Executive Director of Victoria’s Transport Accident Commission until July 2016. Sonia is also a director of TAL, Day-Ichi Life Australia Pty Limited and Qantm IP Limited. Other current directorships: Qantm IP Limited Former directorships (last 3 years): None Special responsibilities: Chair of the Nomination and Remuneration Committee and member of the Risk Committee Greg is a highly experienced audit partner having spent 40 years with Deloitte including 28 years as partner. During his formative years he worked in audit across various sectors, specialising in ASX100 clients. Greg’s expertise includes accounting, finance, auditing,  risk management, corporate governance, capital markets and due diligence. Additionally, Greg held a number of management roles at Deloitte including being the Managing Partner for NSW from 2005 to 2008, chairing the Audit and Risk Committee for 11 years, and was a member of the Board of Partners for Deloitte Australia from 2005 to 2016. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Chair of the Audit Committee 15 ANNUAL REPORT 2018The directors present their report, together with  the financial statements, on the consolidated entity (referred to hereafter as the  ‘consolidated entity’) consisting of Virtus Health Limited (referred to hereafter as the ‘company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2018. Directors The following persons were directors of  Virtus Health Limited during the whole of the financial year and up to the date of this report,   unless otherwise stated: Peter Macourt – Chairman Susan Channon Lyndon Hale Peter Turner Sonia Petering Greg Couttas Principal activities During the financial year the principal continuing activities of the consolidated entity  were the provision of healthcare services which  included fertility services, medical day procedure services and medical diagnostic services. Dividends Dividends paid during the financial year were as follows: Interim ordinary dividend for the year ended 30 June 2018 of 14.0 cents (2017: 13.0 cents) per fully paid ordinary share paid in April 2018 Final ordinary dividend for the year ended 30 June 2017 of 12.0 cents (2016: 15.0 cents) per fully paid ordinary share paid in October 2017 Consolidated 2018 $’000 2017 $’000 11,255 10,450 9,646 20,901 12,057 22,507 A final dividend of 12.00 cents per share, fully franked, will be paid on 12 October 2018 to the shareholders on  the register at  14 September 2018. 16 DIRECTORS’ REPORTVIRTUS HEALTH Review of operations The profit for the consolidated entity  after providing for income tax and non-controlling interest  amounted to $30,753,000  (30 June 2017: $28,103,000). A reconciliation of Segment EBITDA to profit before tax for the year is as follows: Segment EBITDA Share-based payment expense Other non-trading expenses Fair value adjustment to put liabilities and contingent consideration EBITDA (reported excluding impairment of goodwill) Depreciation, amortisation and impairment expense EBIT Interest revenue Interest expense Interest on other financial liabilities – non-cash  interest Amortisation of bank facility fee Consolidated 2018 $’000 76,018 (881) (11,199) 1,089 65,027 (12,496) 52,531 136 (6,615) (981) (207) 2017 $’000 72,875 (440) (11,447) 3,846 64,834 (14,035) 50,799 127 (6,684) (1,202) (207) Profit before income tax from continuing activities 44,864 42,833 The consolidated entity continued to engage in its principal activities, the results of which are disclosed in the attached financial  statements. Key features of the results are: • Revenue increased by 2.2% to $262.1m; • Group EBITDA increased by 0.3% to $65.0m; • Segment EBITDA increased by 4.3% to $76.0m; • Australian segment EBITDA increased by 1.6% to $66.8m; • • Net profit after tax (“NPAT”) attributable to equity  holders increased by 9.4% to $30.8m. International segment EBITDA increased by 29.5% $9.2m; and NPAT for FY18 included the following non-recurring gains, non-recurring expenses and non-cash  acquisition related items: • Acquisition transaction costs of $1,031,000 (FY17: $773,000); • Non-cash put interest expense of $981,000 (FY17: $1,202,000) related to put option  liabilities to acquire non-controlling interests  and contingent consideration liabilities; • Fair value gain of $1,089,000 (FY17: $3,846,000) on the put option liabilities relating to Sims and contingent consideration of the Aagaard Fertilitetsklinik ApS acquisition. 17 ANNUAL REPORT 2018Operating overview Australia segment There was an overall annual market volume decrease in the New South Wales, ACT, Queensland, Tasmania and Victoria markets of 0.7% for Assisted Reproductive Services (“ARS”). (Note: market volume reflects fresh  and cancelled cycles). Volumes decreased by   7.5% in H2FY18 after strong first half growth of 6.1% although the first half growth and second half decline was largely confined to the   Queensland market. Virtus fresh cycle activity in Australia decreased by 3.4% on a like for like basis, impacted by two main issues: • the impact of low cost competition has contributed to market share losses in Queensland; and • a combination of new competition and general market weakness has contributed to a volume decline in Tasmania. Virtus market share (in New South Wales, ACT, Queensland, Tasmania and Victoria) decreased to 40.9% from 42.0% because of the increased competition in Queensland. It should be noted however that the Virtus market share improved in the second half of FY18 as the market settled in Queensland. Additionally, during FY18 Virtus volume growth in NSW and Victoria exceeded state market growth due to improved performance in NSW full service and TFC activity in NSW and Victoria. Specialist diagnostic revenue increased by 3.6% in FY18 compared to FY17 reflecting further increases in  genetic testing utilisation.  Revenue growth in our PGD/PGS activity was 10.3% on pcp and this activity represents higher utilisation of this capability in our full service clinics at 17.7% of fresh cycles (FY17:13.9%). The level of general endocrinology testing also increased slightly. In day hospitals Virtus revenue stable. Improved demand for IVF procedures was offset by a decline in Non-IVF procedure revenue by 5.3% across all day hospitals. Non-IVF revenue accounts for 51.2% of total day hospital revenue. Overall the Australian segment EBITDA increased by 1.6% to $66.8m as a consequence of cost reduction  initiatives, strong  performance from Diagnostics, New South Wales and Victoria ARS which was partially offset by the Queensland and Tasmania IVF volume weakness. International The company’s international activities continue to expand in line with our international growth strategy achieving a segment EBITDA growth of 29.5% to $9.2m from $7.1m in the prior year. Whilst Ireland delivered a steady result, EBITDA was €0.2m lower compared to prior year at €4.1m mostly resulting from a slightly weaker H1. The Danish clinic, Aagaard, acquired during FY17 delivered EBITDA of  Krone 10.5m during FY18. Our recent acquisition  of Trianglen  Fertility Clinic in June 2018 will further enhance our Danish presence and market share going forward (see note 43 for details). Complete Fertility Clinic (UK), delivered EBITDA of £0.1m in  the three months since acquisition. Volumes in Singapore reflected continued improvement during FY18 and the business achieved an EBITDA of SG$350,000 compared   to a pcp EBITDA loss of SG$144,000 in FY17. Capital expenditure Total expenditure on tangible and intangible assets was $15.5m in FY18 (FY17; $9.8m). The largest investment relates to the development of a greenfield site in Alexandria to which we will relocate and expand our existing day hospital services and IVFAustralia   fertility clinic from Maroubra; this facility will be completed and operational in late August 2018. Acquisitions On 1 April 2018, Virtus acquired 90%  of Complete Fertility Limited (“CFL”), based in Southampton England for a consideration of  $9,641,000. On 28 June 2018, Virtus also acquired Fertilitesklinikken Trianglen Aps (“Trianglen”), based in  Copenhagen Denmark for an  estimated consideration of $41,996,000. Outlook The long term trend of women over 30 delaying the birth of children remains a key factor in each of our geographic markets and demand for ARS is expected to grow. In  Australia the median age of the first time mother in 2015 increased slightly to 31.0 years  (2014: 30.9). Despite the softening of the market in H2 of FY18, market compound average growth rate (“CAGR”) for fresh cycles in the eastern state markets over the last four years has been 2.0%. 18 DIRECTORS’ REPORT continuedVIRTUS HEALTHVirtus believes that demand for ARS will continue to be supported by a range of social and demographic drivers continued improvements in success rates, the application of specialist diagnostic services (PGD, PGS) and the demand from same sex couples and single females for donor services. This position is largely unchanged from previous years. Although the Australian ARS market has become more competitive in the last two years with  increased price competition a significant  factor, Virtus remains well positioned to deliver an integrated range of ARS, diagnostics, genetic screening and day hospital procedures to a broad range of patients. Debt and interest expense At 30 June 2018, total facilities drawn were $181m in cash and $4.7m in guarantees. Cash balances at the end of June 2018 were $21.7m. Net debt increased by $32.2m resulting from acquisitions during the year. The company  continued to comply with the  financial covenants of its facility agreement. Other financial liabilities ($24.1m) The non-controlling interests of Sims Clinic Limited and TasIVF Pty Limited each hold a put option established at the time of acquisition. Consequently in accordance with accounting standards the group is required to recognise liabilities for the estimated   consideration to acquire the non-controlling interests. The liabilities have been  discounted at the date of acquisition  and the  corresponding entry is included in the business combinations reserve. The unwinding of the inherent discounting within the liabilities has resulted in a non-cash interest expense in FY18 of $0.9m (FY17: $1.1m). The first put  options in relation to 15% of both these entities  were exercised during FY18 and resulted in consolidated payments of $10.2m. At 30 June 2018 the carrying value of  the put option liabilities was $12.2m (shown  as a non-current other financial liability).  The  remaining $11.9m of the balance of other non-current financial liabilities relates to contingent consideration and the non-current   portion of a vendor loan note in relation to the acquisition of Fertilitesklinikken  Trianglen Aps (see note 43 for details). Amortisation of borrowing costs Amortisation of borrowing cost expense for FY18 was $207,000, (FY17: $207,000). Taxation The effective tax rate on operating earnings for FY18 was 28.7% (FY17: 29.9%). FY17 included a true up in respect of R&D tax concession claims from the prior year increasing the effective income tax rate. Earnings per share Basic earnings per share increased by 9.3% to 38.26 cents per share (FY17: 35.00 cents per share). Diluted earnings per share increased by 9.2% to 37.98 cents per share (FY17: 34.79 cents per share). Dividend A final dividend of 12.00 cents per share fully franked (2017:12.00 cents per share) will be paid on 12 October 2018 to shareholders on   the register at 14 September 2018. Significant changes in the state of affairs On 1 April 2018, Virtus acquired Complete Fertility Limited (“CFL”), based in  Southampton England for a consideration of $9,641,000.  On the 28 June 2018, Virtus also acquired Fertilitesklinikken  Trianglen Aps (“Trianglen”), based in Copenhagen Denmark for an  estimated consideration of $41,996,000. These acquisitions add to Virtus’ international growth  strategy reaffirming its vision for  diversification and expansion of the Virtus model in carefully  selected international markets. (refer to note 43 for details). There were no other significant changes in the state of affairs of the consolidated entity during the financial year. Matters subsequent to the end of the financial year No matter or circumstance has arisen since 30 June 2018 that has significantly  affected, or may significantly affect the consolidated  entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in  future financial years. 19 ANNUAL REPORT 2018Likely developments and expected results of operations Based on the long term trend of women in Australia delaying the birth of children and the fertility rate among Australian women aged over 30 continuing to increase as a consequence of a range of social and economic demographic factors, we expect that  demand for  assisted reproductive services and the associated diagnostic testing and day hospital procedures will continue to increase. We will continue to invest in  our network of fertility clinics and also the clinical and scientific services offered to patients to enable   the consolidated entity to meet the demand from the Australian market. Recognising that the dem ographic drivers influencing the   demand for fertility services are also prevalent internationally we will consider further investment in our international network of fertility clinics. Business sustainability risks The consolidated entity is faced with certain material business risks that could have an effect on the financial prospects of the  consolidated entity. These include but not limited to: Change in Commonwealth Government funding/increasing patient out of pocket expenses Patients receive partial reimbursement for the consolidated entity’s services through Commonwealth Government programs, including the Medicare Benefits Schedule (‘MBS’) and the Extended Medicare Safety Net (‘EMSN’). We anticipate that  each of these  programs will be reviewed in the next twelve months. If the level of reimbursement provided by these programs for the consolidated entity’s services were to change, the consolidated entity’s patients may face higher out-of-pocket expenses for Assisted Reproductive Services. This may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. Availability of fertility specialists The consolidated entity relies on maintaining its relationship with existing fertility specialists, as well as contracting with and growing In-Vitro Fertilisation (‘IVF’) cycles for new fertility specialists to assist in capturing market growth, increasing market share and replacing any retiring fertility specialists. If the consolidated entity cannot successfully maintain its relationship with existing fertility specialists or contract and grow IVF cycles for new fertility specialists this may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. Variability of growth The growth in patient demand and IVF cycles has historically experienced variability over short-term periods notwithstanding the long-term social and demographic trends driving patient demand for Assisted Reproductive Services. Variability in the historic growth in IVF cycles over short-term periods has been attributable to changes in local economic conditions, natural disasters and regulatory changes. Whilst Virtus is diversified across regional and international markets, the consolidated entity’s revenue generation and   profitability can be positively and negatively affected in  the short term by variability in the growth in IVF cycles in the regional and  international markets in which it operates. Increased competition The consolidated entity may face increased competition from new IVF providers and this may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. (For further details refer to Corporate Governance Statement at www.virtushealth.com.au/corporategovernance). Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. 20 DIRECTORS’ REPORT continuedVIRTUS HEALTHInformation on directors Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Peter Macourt Chairman BCom.; ACA; GAICD Peter is a former director and Chief Operating Officer of News Limited. Whilst at News Limited,  he served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a number of subsidiaries and associated companies of The News Corporation Limited. Chairman of SKY Network Television Limited (since August 2002); Director of Prime Media Limited None Member of the Audit Committee and the Nomination and Remuneration Committee. 18,485 ordinary shares held directly None Susan Channon Chief Executive Officer Registered Nurse Div1; OR Management Certificate Susan (Sue) has held senior management positions in various Australian healthcare organisations for over 20 years. Before her appointment to Chief Executive Officer (‘CEO’)  of the company in November 2010, Sue was CEO of IVF Australia Pty Ltd. Prior to joining the company, Sue was State Manager for NSW and ACT for Medical Imaging Australia, the National Director of Nursing for Mayne Group (now part of Ramsay Health Care), CEO of Kareena Private Hospital, CEO of Castlecrag and Mosman Private Hospital and CEO and Director of Nursing for Castlecrag Private Hospital. None None Member of the Risk Committee 448,633 ordinary shares 116,050 options over ordinary shares Greg Couttas Non-Executive Director B Com.; FCA; MAICD Greg is a highly experienced audit partner having spent 40 years with Deloitte including 28 years as partner. During his formative years he worked in audit across various sectors, specialising in ASX100 clients. Greg’s expertise includes accounting, finance, auditing, risk  management, corporate governance, capital markets and due diligence. Additionally, Greg held a number of management roles at Deloitte including being the Managing Partner for NSW from 2005 to 2008, chairing the Audit and Risk Committee for eleven years, and was a member of the Board of Partners for Deloitte Australia from 2005 to 2016. None None Chair of the Audit Committee 5,000 ordinary shares None 21 ANNUAL REPORT 2018Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Lyndon Hale Executive Director MBBS; FRACOG; CREI Lyndon has been the Medical Director of Melbourne IVF Pty Ltd since 2008. He is also director of Reproductive Surgery at The Women’s Hospital, and is a board member of the Fertility Society of Australia. Lyndon is highly regarded for his knowledge and proactive approach and brings extensive experience in assisted reproduction treatments to the care of his patients. None None Member of the Risk Committee 823,694 ordinary shares None Peter Turner Non-Executive Director BSc.; MBA; GAICD Prior to joining the company, Peter served as Executive Director and Chief Operating Officer of  CSL Limited and was the founding President of CSL Behring LLC. Peter is currently Chairman of NPS MedicineWise. Bionomics Limited Ashley Services Group Limited Chair of the Risk Committee and a member of the Nomination and Remuneration Committee and member of the Audit Committee. 50,000 ordinary shares None Sonia Petering Non-Executive Director LLB; BComm; FAICD Sonia is a corporate lawyer who brings extensive experience as a Director. She also served as Chair of the Rural Finance Corporation of Victoria and a Non-Executive Director of Victoria’s Transport Accident Commission until July 2016. Sonia is also a director of TAL, Day-Ichi Life Australia Pty Limited and Qantm IP Limited. Qantm IP Limited None Chair of the Nomination and Remuneration Committee and member of the Risk Committee 8,066 ordinary shares None ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other   types of entities, unless otherwise stated. ‘Former directorships (in the last 3 years)’ quoted above are directorships held in  the last 3 years for listed entities only  and excludes  directorships of all other types of entities, unless otherwise stated. 22 DIRECTORS’ REPORT continuedVIRTUS HEALTHCompany secretary Glenn Powers joined Virtus as Chief  Financial Officer (‘CFO’) and Company Secretary  in August 2008. Prior to joining Virtus, Glenn  was  CFO and Company Secretary of Tower Software Limited. Glenn has a broad range of experience in  private equity backed businesses,  working in a range of engineering, electronics, software and service businesses. Glenn has also been a Director for both main and AIM market listed businesses in the UK. Glenn is a Chartered Management Accountant (CMA). Meetings of directors The number of meetings of the company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2018, and the number of meetings attended by each director were: Peter Macourt – Chairman Susan Channon Greg Couttas Lyndon Hale Peter Turner Sonia Petering Peter Macourt – Chairman Susan Channon Greg Couttas Lyndon Hale Peter Turner Sonia Petering Full Board Attended 9 9 8 9 9 9 Nomination and Remuneration Committee Held 9 9 9 9 9 9 Attended 2 2 – – 2 2 Audit Committee Risk Committee Attended 4 4 4 – 4 – Held 4 4 4 – 4 – Attended – 3 – 3 3 3 Held 2 2 – – 2 2 Held – 3 – 3 3 3 Held: represents the number of meetings held during the time the director held office or was a member of the relevant  committee. Remuneration report (audited) The directors present the remuneration report, which outlines the key management personnel (‘KMP’) remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. The information provided in this remuneration report, which forms part of the directors’ report has been audited as required by  Section 308(3C) of the Corporations Act 2001. The remuneration report is set out under the following main headings: A. Executive summary; B. Role of the Nomination and Remuneration Committee; C. Executive remuneration framework; D. Link between remuneration and consolidated entity performance; E. Executive services agreements; F. Remuneration, share and option disclosures for FY2018; G. Non-executive director remuneration; and H. Fertility specialist performance rights incentives. 23 ANNUAL REPORT 2018A. Executive summary Remuneration framework update and key management personnel There were no changes made to the remuneration framework in FY2018. The objective of our remuneration framework is to attract and retain high calibre, talented Executives while ensuring that pay outcomes are aligned to building long term shareholder value. The remuneration framework must also be fair to our shareholders. The Board has determined that the KMP, as defined by AASB 124 ‘Related Party  Disclosures’ are as follows: Non-Executive Directors Peter Macourt – Chairman, non executive director Peter Turner – Non executive director Greg Couttas – Non executive director Sonia Petering – Non executive director A profile of each director is provided in the Directors’ Report. Executive KMP Sue Channon – Managing Director and Chief Executive Officer  Glenn Powers – Chief Financial Officer Lyndon Hale – Executive Director and Medical Director, Victoria Jade Phelan – Managing Director, Victoria, Nadia Stankovic – Managing Director, New South Wales Steve Zappia – Managing Director, Queensland and Virtus Health Diagnostics Richard Banks – Managing Director, Europe (appointed August 2017) Anthony Walsh – Executive Chairman, Ireland Peter Illingworth – Medical Director, New South Wales David Molloy – Medical Director, Queensland William Watkins – Medical Director, Tasmania For the year ended 30 June 2018 the KMP base salaries show an increase of  7.4% on FY2017 which reflects the inclusion of the  European Managing Director; the underlying movement would have shown a decrease reflecting reductions in the vacation leave  accrual for certain individuals in FY2018 compared to FY2017. None of  the KMPs received an increase in fixed remuneration in FY2018. The short term incentives (“STI”) achieved in FY2018 are set out in Section D. The long term incentives (“LTI”) achieved in FY2018 are set out in Section D. The performance hurdles tested in FY2018 of the LTIs granted in November 2014 and November 2015 were not achieved and accordingly 122,263 performance rights lapsed during the financial year. Total KMP remuneration for FY18 increased by $812,705 (28.7%). Of the increase, $335,512 relates to appointment of the European Managing Director, $295,960 relates to improved STI performance and $279,430 relates to increases in share based payments expense. After adjusting for non-cash share based payment accruals, cash remuneration payable to KMPs increased by 3.5%, primarily due to the addition of European Managing Director Richard Banks to the KMP. 24 DIRECTORS’ REPORT continuedVIRTUS HEALTHB. Role of the Nomination and Remuneration Committee The Board of Directors (“the Board”) maintains a combined Nomination and Remuneration Committee (the ‘Committee’). The members of the Committee are: Sonia Petering (Chairman), Peter Macourt and Peter Turner. Details of the qualifications and   experience of the members of the Committee are provided in the ‘Information on directors’ section of the directors’ report. The Committee assists and advises the Board on remuneration policies and practices for the Board, the CEO, the CFO, senior executives and other key management personnel whose activities, individually or collectively, affect the financial soundness of   the consolidated entity. The responsibilities of the Committee are encapsulated in the Nomination and Remuneration Committee Charter which may be found on the Investor Centre page of the Virtus Health website. The number of Committee meetings held and attended by each member is disclosed in the ‘Meetings of directors’ section of the directors’ report. Use of remuneration consultants When considered necessary, the Committee may obtain external advice from independent consultants in determining the consolidated entity’s remuneration practices including remuneration levels, independent benchmarking data and information regarding best practice, trends and regulatory developments. The Committee and Board consider this input, along with several other factors when making decisions regarding remuneration. The Committee has engaged the human  resource consulting firm, Mercer, to provide recommendations on  the following matters  for FY2019: • Short and long term incentive arrangements for KMPs; and • CEO and CFO remuneration benchmarking. In FY2018 the Committee elected not to increase remuneration for KMPs and non-executive directors due to the financial   performance in FY2017. The Chairman of the Committee is also satisfied that  the recommendation relating to non-executive director fees, including the fees   for the Chairman, has not been subject to any undue influence by the Chairman or other independent directors. Remuneration framework review for FY2019 The Board continually monitors the effectiveness of the remuneration framework in terms of alignment with shareholder interests and market practice. The external advice on the STI plan recommended that the calculation of an STI bonus pool derived from EPS growth averaged over a three year period does not align to the executive performance period of one year and consideration should be given to aligning the funding calculation and the individual assessment period. The Committee decided to replace the current STI program with an annual individual target based scheme. The payment of STIs remains linked to the achievement of positive EPS growth; this will be the gateway for the payment of incentives, hence the STI remains linked to the performance of the Company and alignment is maintained with shareholder interests. Key features of the STI arrangements are as follows: • the maximum potential aggregate size of the STIs for the KMPs is $850,000. The pool size has been increased in FY2019 to include the European Managing Director and the Tasmanian Managing Director who also holds responsibilities for certain Australian business development projects; and • a minimum of 60% of individual incentives will be payable on the achievement  of individual financial KPIs and the balance of the STI   will be payable on the achievement of individual KPIs established by the Nomination and Remuneration Committee. Increase in state or territory EBIT over prior year; The financial KPIs include: • • • Reductions in OPEX against budget expenditure. Increase in NPAT over prior year (applicable to CEO and CFO); and 25 ANNUAL REPORT 2018C. Executive remuneration framework Remuneration philosophy and principles The objective of the consolidated entity’s executive remuneration framework is to ensure that reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and conforms to market  best practice. The Board seeks to ensure that  executive reward satisfies  the following key criteria for good reward governance practices: • competitiveness and reasonableness; • acceptability to shareholders; • performance linkage / alignment of executive compensation; and • transparency. The executive remuneration and reward framework has four components: • base pay and non-monetary benefits; • STIs; • LTIs; and • other remuneration such as superannuation and long service leave. The Nomination and Remuneration Committee has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the consolidated entity. The key objective of the remuneration framework is the alignment to shareholder interests and this is achieved by ensuring that: • profit is a major component of plan design; • the framework focuses on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on equity as well as focusing the executive on  key non-financial drivers of value; • the remuneration framework attracts and retains high calibre executives; • the framework rewards capability and experience; • the framework reflects competitive reward for contribution  to growth in shareholder wealth; and • the framework provides a clear structure for earning rewards. Fixed remuneration Fixed remuneration comprises base salary, superannuation and other short term benefits such as annual leave and long service leave.   Fixed remuneration is targeted to be similar to the median of the market for positions and roles in ASX listed companies of a similar size. The Nomination and Remuneration Committee will consider variations to the remuneration benchmark where market demand or superior performance may be factors which could influence remuneration. 26 DIRECTORS’ REPORT continuedVIRTUS HEALTHShort term incentive plan – STI The STI program is designed to align the targets of the business units with the targets of those executives in charge of meeting those targets. STI payments are granted to executives based on specific annual targets and key  performance indicators (‘KPIs’) being  achieved. Financial and non-financial KPIs are reviewed and amended annually  by the Nomination and Remuneration Committee  to ensure STI payments are aligned with the short term objectives of the business. STIs are not made available to the group’s Medical Directors. The STI KPIs, which are set by the Nomination and Remuneration Committee and the CEO, will normally include: • NPAT KPI for CEO and CFO; • Cost reduction targets; • EBIT margin improvement targets; • Segment EBIT KPI for senior state and territory management; and • Individual objectives for all STI participants which may be non-financial in nature. Such objectives could include KPIs related to: – Risk management; – Net promoter score; – Corporate governance objectives; and – Other individual personal goals The STI plan provides for cash settlement where successful performance against KPIs has been achieved. Performance is assessed by the immediate manager of the STI participant and for KMPs the cash settlements are approved by the Nomination and Remuneration Committee after completion of the annual group audit. Hence, STI cash settlements are normally paid to recipients in the month following the announcement of the group’s financial results. The KPI structure for FY2019, established by the Nomination and Remuneration Committee, is as follows: • Applicable to Sue Channon and Glenn Powers – 40% of STI relates to the achievement of  Net Profit after Tax (‘NPAT’) attributable   to the company’s shareholders, 20% of STI relates to the achievement of consolidated Australian EBIT and 40% of the STI relates to individual management objectives set by the Board. • Applicable to Simon Barker, Jade Phelan, Steve Zappia and Nadia Stankovic – 15% of STI relates to the achievement of consolidated Australian EBIT; 45% of STI relates to the achievement of relevant State EBIT; and 40% of STI relates to the achievement of individual management objectives. • Applicable to Richard Banks – 60% of STI relates to the achievement of consolidated European EBIT; 15% of STI relates to the achievement of European return on capital employed; and 25% of STI relates to the achievement of individual management objectives. EBIT and NPAT targets include individual interpolation schedules for national and territory percentage growth which normally provides for payment of bonus as follows: • For achievement of 5% growth, 50% of relevant STI component is payable; • For achievement of 10% growth, 100% of relevant STI component is payable; and • For achievement of growth between 50% and 100%, straight line interpolation of the relevant STI component is payable. The Remuneration Committee may apply variations to these targets after consideration of local market conditions which may result in higher or lower profit growth expectations. 27 ANNUAL REPORT 2018Long term incentive plans – LTI The company has adopted an option plan (‘Plan’) to assist in the reward, motivation and retention of personnel including executive directors, eligible employees and fertility specialists (see Section H). The Plan is also designed to recognise the abilities, efforts and contributions of participants to Virtus’ performance and success and provide the participants with an opportunity to acquire or   increase their ownership interest in the company. The LTI plan provides Virtus executives with grants of performance rights that vest over three year performance periods. Performance rights are granted annually and vested performance rights convert into shares. Holders of unvested performance rights do not receive dividends until rights have vested and converted into shares. Generally, vesting conditions attaching to grants of options or performance rights made to senior executives will relate to the performance of the consolidated entity over the prior performance period of three years, as well as continued employment. Options or performance rights may also be granted to other employees from time to time subject to consideration by the Board. There is no ability for the company to provide any cash equivalent on exercise. In the event of a future change of control the Board has the discretion to allow for vesting of options or performance rights and in the event of failure to meet vesting hurdles or objectives there is no facility to allow retesting of vesting conditions. Eligibility to participate in the Plan and the number of options or performance rights offered to each individual participant is determined by the Board. Currently there are four executive performance grants in operation as follows: 1. Senior executives – FY2015 grant On 10 November 2014, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Anthony Walsh The performance rights vest subject to the following performance hurdles: • Relative TSR and earnings per share (‘EPS’) growth. Each hurdle applies to 50% of the grant. TSR is measured on the company’s TSR relative to a peer group of companies in both the S&P ASX 200 Index and the S&P ASX 200 Healthcare Index (weighted 50% each) over the three year performance period. TSR is a measure of the return on investment in a company’s shares, including dividends and all other returns to shareholders notionally invested over the relevant performance period. Performance Hurdle Percentile less than Percentile at Percentile range Relative TSR S&P ASX 200 50 50 50-75 TSR Base share price % CAGR less than % CAGR at % CAGR range $7.88 3 Year EPS CAGR 7.5% 7.5% 7.5%-10% Relative TSR S&P ASX 200 Health 50 50 50-75 $7.88 Rights Vesting % Notes 0% 12.5% 12.5-25% 0% 25% 25-50% For each hurdle Progressive pro-rata vesting for the range for each hurdle Progressive pro-rata vesting for the range Calculations of the company’s TSR and EPS were determined at the end of the three year vesting period by  the Board with verification  of relative TSR performed by an external party. The annual AASB 2 ‘Share-Based Payments’ accounting charge of this scheme is $14,031. The TSR performance hurdle tested on 15 September 2017 (three years after the grant of performance rights) and the EPS performance hurdle, tested on 30 June 2017 were not achieved. This grant has now lapsed. 28 DIRECTORS’ REPORT continuedVIRTUS HEALTH2. Senior executives – FY2016 grant On 10 November 2015, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Anthony Walsh The performance rights vest subject to the following performance hurdles: • Relative TSR and average annual return  on equity attributable to shareholders (‘ROE’). Each hurdle applies to 50% of the   grant. TSR is measured on the company’s TSR relative to a peer group of companies in both the S&P ASX 200 Index and the S&P ASX 200 Healthcare Index (weighted 50% each) over the three year performance period. TSR is a measure of the return on investment in a company’s shares, including dividends and all other returns to shareholders notionally invested over the relevant performance period. Performance Hurdle Percentile less than Percentile at Percentile range Relative TSR S&P ASX 200 50 50 50-75 TSR Base share price % ROE less than % ROE at % ROE range $5.13 3 Year average ROE 15.0% 15.0% 15.0-17.5% Relative TSR S&P ASX 200 Health 50 50 50-75 $5.13 Rights Vesting % Notes 0% 12.5% 12.5-25% 0% 25% 25-50% For each hurdle Progressive pro-rata vesting for the range for each hurdle Progressive pro-rata vesting for the range Calculations of the company’s TSR and ROE will be determined at the end of the three year vesting period by the Board with verification performed by an external party. As at 30 June 2018, it is expected that the TSR performance hurdle, to be tested on 15 September 2018 is unlikely to be achieved. The ROE performance hurdle, tested on 30 June 2018 was not achieved. The annual AASB 2 accounting charge of this scheme is currently $85,248 and the maximum potential earnings dilution to existing shareholders is 0.11%. 29 ANNUAL REPORT 20183. Senior executives – FY2017 grant On 10 November 2016, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Anthony Walsh The performance rights vest subject to the following performance hurdles: • Relative TSR and average annual return  on equity attributable to shareholders (‘ROE’). TSR is measured on  the company’s  TSR relative to a peer group of companies in both the S&P ASX 200 Index and the S&P ASX 200 Healthcare Index (weighted 50% each) over the three year performance period. TSR is a measure of the return on investment in a company’s shares, including dividends and all other returns to shareholders notionally invested over the relevant performance period. Performance Hurdle Percentile less than Percentile at Percentile range Relative TSR S&P ASX 200 50 50 50-75 TSR Base share price % ROE less than % ROE at % ROE range $8.05 3 Year average ROE 15.0% 15.0% 15.0-17.5% Relative TSR S&P ASX 200 Health 50 50 50-75 $8.05 Rights Vesting % Notes 0% 12.5% 12.5-25% 0% 25% 25-50% For each hurdle Progressive pro-rata vesting for the range for each hurdle Progressive pro-rata vesting for the range Calculations of the company’s TSR and ROE will be determined at the end of the three year vesting period by the Board with verification performed by an external party. The annual AASB 2 accounting charge of  this scheme is currently $55,274 and the  maximum earnings dilution to existing shareholders is 0.12%. 30 DIRECTORS’ REPORT continuedVIRTUS HEALTH4. Senior executives – FY2018 grant On 10 November 2017, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Jade Phelan The performance rights vest subject to the following performance hurdles: • Relative TSR and average annual return  on equity attributable to shareholders (‘ROE’). TSR is measured on  the company’s  TSR relative to a peer group of companies in both the S&P ASX 200 Index and the S&P ASX 200 Healthcare Index (weighted 50% each) over the three year performance period. TSR is a measure of the return on investment in a company’s shares, including dividends and all other returns to shareholders notionally invested over the relevant performance period. Performance Hurdle Percentile less than Percentile at Percentile range Relative TSR S&P ASX 200 50 50 50-75 TSR Base share price % ROE less than % ROE at % ROE range $5.58 3 Year average ROE 15.0% 15.0% 15.0-17.5% Relative TSR S&P ASX 200 Health 50 50 50-75 $5.58 Rights Vesting % Notes 0% 12.5% 12.5-25% 0% 25% 25-50% For each hurdle Progressive pro-rata vesting for the range for each hurdle Progressive pro-rata vesting for the range Calculations of the company’s TSR and ROE will be determined at the end of the three year vesting period by the Board with verification performed by an external party. The annual AASB 2 accounting charge of  this scheme is currently $68,548 and the  maximum earnings dilution to existing shareholders is 0.17%. Other remuneration KMPs who are Australian employees receive superannuation contributions, in accordance with statutory provisions, and long service leave benefits in accordance with the Australian state where they are employed. 31 ANNUAL REPORT 2018D. Link between remuneration and consolidated entity performance Consolidated entity performance and link to remuneration Remuneration for certain individuals is directly linked to performance of the consolidated entity. A portion of bonus and incentive payments are dependent on defined earnings per share targets being met. Assuming that  all performance conditions are met the  proportion of remuneration linked to performance and the fixed proportion  is as follows: Name Non-Executive Directors: P Macourt P Turner S Petering G Couttas Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers J Phelan N Stankovic S Zappia R Banks A Walsh P Illingworth D Molloy W Watkins Fixed remuneration 2018 2017 At risk – STI 2018 2017 At risk – LTI 2018 2017 100% 100% 100% 100% 48% 100% 48% 58% 58% 58% 88% 100% 100% 100% – 100% 100% 100% 100% 48% 100% 48% 77% 58% 58% – 71% 100% 100% – – – – – 24% – 24% 18% 18% 18% 9% – – – – – – – – 24% – 24% 23% 18% 18% – – – – – – – – – 28% – 28% 24% 24% 24% 3% – – – 100% – – – – 28% – 28% – 24% 24% – 29% – – – The proportion of the cash bonus paid/payable or forfeited is as follows: Name Executive Directors: S Channon Other Key Management Personnel: G Powers J Phelan S Zappia N Stankovic R Banks Cash bonus paid/payable 2017 2018 Cash bonus forfeited 2018 2017 51% 79% 51% 23% – 40% – 49% 100% – 100% – – – 21% 49% 77% 100% 60% 100% – 100% 100% – 32 DIRECTORS’ REPORT continuedVIRTUS HEALTHAccordingly the actual proportion of remuneration linked to performance and the fixed proportion  in FY2018 is as follows: Fixed remuneration 2018 2017 At risk – STI 2018 2017 At risk – LTI 2018 2017 Name Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers J Phelan N Stankovic S Zappia R Banks A Walsh P Illingworth D Molloy 70% 100% 65% 84% 89% 85% 88% 84% 100% 100% 96% 100% 96% 77% 97% 94% – 94% 100% 100% 18% – 25% 13% – 6% 9% – – – – – – 23% – – – – – – 12% – 10% 3% 11% 9% 3% 16% – – The earnings of the consolidated entity that are considered to affect  total shareholders return (‘TSR’) for the five years to   30 June 2018 are summarised below: Revenue EBITDA EBIT Profit after income tax NPAT attributable to Virtus shareholders Share price at financial year end ($) Total dividends paid (cents per share) Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 2018 $’000 262,061 65,027 52,531 32,009 30,753 2018 5.75 26.00 38.26 37.98 2017 $’000 256,518 64,834 50,799 30,004 28,103 2017 5.38 28.00 35.00 34.79 2016 $’000 261,210 68,916 57,736 34,865 32,918 2016 6.87 28.00 41.18 40.79 2015 $’000 234,142 61,355 51,361 30,441 29,434 2015 5.37 27.00 36.86 36.54 4% – 4% – 3% 6% – 6% – – 2014 $’000 201,249 59,404 51,212 30,957 30,885 2014 8.16 12.00 38.80 38.48 Remuneration outcomes for FY2018 The following is a summary of the key KMP remuneration outcomes for FY2018: Total KMP remuneration for FY18 increased by $812,705, (28.7%). Of the increase, $335,512 relates to the recruitment of the European Managing Director, $295,960 relates to improved STI performance and $279,430 relates to increases in share based payments. 33 ANNUAL REPORT 2018 STI Outcomes for FY2018 The Board applied its pooled STI plan  for all qualifying KMPs in FY2018. Participants in the STI plan receive a share of the STI pool  based on the performance of the Australian and European segments respectively and their own individual territory or functional responsibility (Europe, New South Wales, Victoria, Queensland, Tasmania or Diagnostics). Key features of the STI pool arrangements as applied in FY18 are as follows: • the potential maximum aggregate size of the STI pool for the KMPs (including the Tasmanian Managing Director who was not designated as a KMP during FY 2018) was $771,200. The pool did not include Richard Banks in FY2018 as he joined the group during the year • the actual size of the pool was determined with reference to the annual increase in earnings per share of Virtus Health Limited as follows: – 1% EPS growth on prior year will generate a pool equal to 10% of the maximum aggregate ($77,120); – 10% EPS growth on prior year will generate a pool equal to 100%  of the maximum aggregate ($771,200); and – pool size between 1% and 10% EPS growth will be determined by straight line interpolation. A minimum of 60% of this pool will be payable on  the achievement of individual financial KPIs and the balance of  this pool will be  payable on the achievement of individual KPIs established by the Nomination and Remuneration Committee. The financial KPIs include: • • Increase in territory EBIT over prior year. Increase in NPAT over prior year (applicable to CEO and CFO); and In FY2018 in accordance with the previously approved STI plan, the STI pool was calculated as an average of the pools earned for the two years ending 30 June 2018. The value of the pool earned in FY2017 was nil and the value of the pool earned in FY2018 was $715,674, hence the maximum value of the pool payable for FY2018 was $357,837. Based on the achievements of the consolidated entity this year the Committee determined that  as a consequence of the increase in   EPS of 9.28% (based on the increase in EPS of 9.28%), and considering other KPIs, executives have achieved the following percentages of their overall STI targets: Susan Channon – 51%; Glenn Powers – 79%; Jade Phelan – 51%; Steve Zappia – 23%; Nadia Stankovic – 0%; Richard Banks – 40%; and Anthony Walsh – no STI as he is incentivised by way of his minority shareholder interest in the business of Sims Clinic. LTI outcomes for FY2018 In FY2018 the following performance hurdles were tested in respect of the performance rights grant dated 10 November 2015 and 10 November 2014: • Performance rights grant dated 10 November 2015: from a potential total of 50% of the performance rights available, 0% of available rights vested in respect of average ROE over the three year performance period; accordingly 75,288 of the performance options granted on 10 November 2015 did not vest and have lapsed; and • Performance rights grant dated 10 November 2014: from a potential total of 50% of the performance rights available, 0% of available rights vested in respect of relative TSR over the three year performance period; accordingly 46,974 of the performance options granted on 10 November 2014 did not vest and have lapsed. 34 DIRECTORS’ REPORT continuedVIRTUS HEALTHE. Executive service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Lyndon Hale Executive Director and Medical Director, Victoria 11 June 2013 No fixed end date The Executive may terminate the fertility specialist contract by giving a minimum of 6 months’ notice or maximum of 12 months’ notice in writing. The company may terminate by giving 12 months’ notice in writing. Upon the termination of the fertility specialist contract, the fertility specialist will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Susan Channon Chief Executive Officer 11 June 2013 No fixed end date The Executive may terminate the employment contract by giving 3 months’ notice in writing. The company may terminate by giving 12 months’ notice in writing or by making a payment in lieu of notice. In the event of serious misconduct or other specific circumstances warranting  summary dismissal, the company may terminate the employment contract immediately by notice in writing and without payment in lieu of notice. Upon the termination of the employment contract, the Executive will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Glenn Powers Chief Financial Officer and Company Secretary 11 June 2013 No fixed end date The Executive may terminate the employment contract by giving 3 months’ notice in writing. The company may terminate by giving 6 months’ notice in writing or by making a payment in lieu of notice. In the event of serious misconduct or other specific circumstances warranting  summary dismissal, the company may terminate the employment contract immediately by notice in writing and without payment in lieu of notice. Upon the termination of the employment contract, the Executive will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. 35 ANNUAL REPORT 2018Other Key Management Personnel Jade Phelan, Steve Zappia, Nadia Stankovic, Richard Banks and Anthony Walsh are employed under individual executive services agreements; these agreements include provisions for: • total compensation including a base salary, superannuation contribution and incentive arrangements; • variable notice and termination provisions of up to six months; • • restraint provisions; and • confidentiality provisions. leave entitlements, as a minimum, as per the National Employment Standard (applicable to Australia based employees); The company’s remaining Australian state Medical Directors, Peter Illingworth, David Molloy and William Watkins are contracted under fertility specialist agreements. The individual may terminate their fertility specialist contract by giving a minimum of six months’ notice or maximum of twelve months’ notice in writing. The company may terminate by giving 12 months’ notice in writing and upon the termination of the fertility specialist contract the fertility specialist will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. 36 DIRECTORS’ REPORT continuedVIRTUS HEALTHF. Remuneration, share and option disclosures for FY2018 Amounts of remuneration – accruals basis Details of the remuneration of key management personnel of the consolidated entity  are set out in the following tables. The first  two  tables are calculated in accordance with Australian accounting standard AASB 2 on an accruals basis and therefore take account of movements in leave accruals and provisions: Short-term benefits Post- employment benefits Long-term benefits Share-based payments Salary, leave and fees $ Bonus $ Non- monetary and termination $ Super- annuation $ Long Service Leave $ Equity- settled $ 2018 Non-Executive Directors: P Macourt P Turner S Petering G Couttas Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers N Stankovic J Phelan S Zappia R Banks A Walsh P Illingworth D Molloy W Watkins 133,562 92,104 86,986 86,986 – – – – 475,203 161,697 132,865 – 344,594 250,092 252,426 264,126 279,308 42,638 189,428 119,554 – 2,778,704 146,677 – 44,193 19,896 31,265 – – – – 374,896 – – – – – – – – – – – – – – – – 12,688 8,750 8,264 8,264 20,049 6,962 20,049 24,320 27,583 26,210 15,921 – – 11,358 – 190,418 Total $ 146,250 100,854 95,250 95,250 – – – – – – – – 9,329 – 84,495 – 721,941 168,659 15,546 (21,541) 477 3,742 – – – – – 7,553 60,429 30,909 8,668 30,340 9,018 7,910 22,023 – 41,203 294,995 587,295 283,780 333,347 344,314 335,512 50,548 211,451 130,912 41,203 3,646,566 37 ANNUAL REPORT 2018Short-term benefits Post- employment benefits Salary, leave and fees $ Bonus $ Non- monetary $ Super- annuation $ Long-term benefits Share-based payments Long Service Leave $ Equity- settled $ 2017 Non-Executive Directors: P Macourt D O’Neill P Turner S Petering G Couttas Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers N Stankovic A Othen J Phelan S Zappia A Walsh P Illingworth D Molloy 133,562 38,550 102,968 84,703 57,332 475,834 179,400 341,833 256,980 146,869 142,951 265,850 40,036 188,612 119,554 2,575,035 – – – – – – – – – – 47,671 – – – – 47,671 – – – – – – – – – – – – – – – – 12,688 3,662 9,782 8,047 5,446 29,545 8,680 30,632 23,990 13,724 17,624 24,060 – – 11,358 199,237 Total $ 146,250 42,212 112,750 92,750 62,778 – – – – – – – – – – 12,820 – 21,829 – 540,028 188,080 14,874 4,624 (37,133) 162 1,006 – – – (3,647) 15,040 7,748 (39,407) – 7,677 2,678 – – 15,565 402,379 293,342 84,053 208,408 298,593 42,714 188,612 130,912 2,833,861 Greg Couttas joined the Board in October 2016 so the total benefit in  FY2017 does not represent a full year of fees. Similarly, Dennis   O’Neill retired from the Board in November 2016 so the total benefit in  FY2017 does not represent a full year of fees. Jade Phelan joined the group in December 2016 so the total benefit  in FY2017 does not represent a full year salary. Richard Banks   joined the group in August 2017 so the total benefit in  FY2018 does not represent a full year salary. William Watkins did not receive any   remuneration in his capacity as a key management person for the financial year ended 30 June 2017. The value of share-based payments and the long term employee leave represents the accounting charge or accrual and not the cash benefit received by the KMP. Long term leave benefits are the long service leave accruals calculated in  accordance with state  entitlements. The value of share-based payments during the financial year also includes options which  lapsed during the year. The bonus represents the accrual in respect of a KMP’s performance in  the financial year and this is normally  paid in the month  following the publication of the consolidated entity’s financial statements. 38 DIRECTORS’ REPORT continuedVIRTUS HEALTHThe next two tables show the actual cash payments made to KMPs in  the relevant financial years: 2018 Non-Executive Directors: P Macourt P Turner S Petering G Couttas Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers N Stankovic J Phelan S Zappia R Banks A Walsh P Illingworth D Molloy W Watkins 2017 Non-Executive Directors: P Macourt D O’Neill P Turner S Petering G Couttas Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers A Othen N Stankovic J Phelan S Zappia A Walsh P Illingworth D Molloy Salary, leave and fees $ 133,562 92,104 86,986 86,986 503,051 161,697 351,251 256,000 256,000 259,963 279,308 42,638 189,428 119,554 – 2,818,529 Salary, leave and fees $ 133,562 38,551 102,968 84,703 57,332 Bonus $ Super- annuation $ Total $ 146,250 100,854 95,250 95,250 12,688 8,750 8,264 8,264 20,049 6,962 523,100 168,659 20,049 24,320 27,914 24,320 15,921 – – 11,358 – 188,858 371,300 280,320 331,585 284,283 295,229 42,638 189,428 130,912 – 3,055,058 – – – – – – – – 47,671 – – – – – – 47,671 Bonus $ Super- annuation $ – – – – – 12,688 3,662 9,782 8,047 5,447 Total $ 146,250 42,213 112,750 92,750 62,778 493,245 179,401 57,420 – 35,000 8,680 585,665 188,081 340,447 149,425 252,522 139,052 254,973 40,036 188,612 130,912 2,585,742 45,975 – 34,952 – 27,128 – – – 165,475 35,000 14,482 27,310 13,095 26,637 – – 11,358 199,831 421,423 163,907 314,784 152,148 308,738 40,036 188,612 130,912 2,951,048 39 ANNUAL REPORT 2018Additional disclosures relating to key management personnel: Shareholding The number of ordinary shares in the company held during the financial year by each  director and other members of key  management  personnel of the consolidated entity, including their personally related parties, is set out below: Peter Macourt Susan Channon Sonia Petering Greg Couttas Lyndon Hale Peter Turner Glenn Powers Peter Illingworth David Molloy Balance at the start of the year 18,485 448,633 5,966 3,748 823,694 50,000 114,150 354,020 364,207 2,182,903 Received as part of remuneration – – – – – – – – – – Disposals/ other – – – – – – – (30,000) – (30,000) Balance at the end of the year 18,485 448,633 8,066 5,000 823,694 50,000 114,150 324,020 364,207 2,156,255 Additions – – 2,100 1,252 – – – – – 3,352 Option holding The number of options and performance rights over ordinary  shares in the company held during the financial year by each  director  and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Options over ordinary shares Susan Channon Glenn Powers Jade Phelan Nadia Stankovic Steve Zappia Richard Banks Anthony Walsh Peter Illingworth William Watkins Balance at the start of the year Granted Exercised/ cancelled Expired/ forfeited/ other Balance at the end of the year 116,050 82,373 – 41,497 41,816 – 15,304 – – 297,040 56,247 39,925 20,095 20,095 20,095 20,908 – 17,921 28,674 223,960 – – – – – – – – – – (47,649) (33,821) – (17,064) (17,292) – (6,437) – – (122,263) 124,648 88,477 20,095 44,528 44,619 20,908 8,867 17,921 28,674 398,737 40 DIRECTORS’ REPORT continuedVIRTUS HEALTHShare based compensation Issue of shares There were no shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2018. Options or performance rights The terms and conditions of each grant over ordinary shares affecting remuneration of directors and other key management personnel in this financial year or future reporting years are as follows: Grant date 10 November 2014 10 November 2015 10 November 2016 10 November 2017 Vesting date and exercisable date 10 November 2017 10 November 2018 10 November 2019 10 November 2020 Expiry date 10 November 2024 10 November 2025 10 November 2026 10 November 2027 Exercise price $0.00 $0.00 $0.00 $0.00 Fair value per option at grant date $6.90 $4.41 $4.52 $3.79 Options or performance rights do not carry any voting or dividend rights. Shares issued or transferred to participants on exercise of an option carry the same rights and entitlements as other issued shares, including dividend and voting rights. Refer to section C of this report for details of the KMP LTI arrangements. The number of options or performance rights over ordinary shares granted to and vested by directors and other key management personnel as part of compensation during the years ended 30 June 2018 and 30 June 2017 are set out below: Name Susan Channon Glenn Powers Jade Phelan Nadia Stankovic Steve Zappia Richard Banks Anthony Walsh Peter Illingworth William Watkins Number of options granted during the year 2018 Number of options granted during the year 2017 Number of options vested during the year 2018 Number of options vested during the year 2017 56,247 39,925 20,095 20,095 20,095 20,908 – 17,921 28,674 38,989 27,675 – 13,929 13,929 – 4,969 – – – – – – – – – – – – – – – – – – – – Fair values of options and performance rights over ordinary shares granted, exercised and lapsed for directors and other key management personnel as part of compensation during the year ended 30 June 2018 are set out below: Name Susan Channon Glenn Powers Nadia Stankovic Steve Zappia Richard Banks Anthony Walsh Peter Illingworth William Watkins Fair value of options granted during the year $ 213,176 151,316 76,160 76,160 79,241 – 71,505 114,409 Net market value of options exercised during the year $ – – – – – – – – Number of options lapsed during the year 47,649 33,821 17,064 17,292 – 6,437 – – Note: Of the options lapsing 46,974 were granted on 10 November 2014 and 75,288 were granted on 10 November 2015. 41 ANNUAL REPORT 2018G. Non-executive director remuneration Overview of non-executive director remuneration In accordance with best practice corporate governance, the structure of non-executive directors’ and executive remunerations are different. Fees and payments to non-executive directors reflect the demands which  are made on, and the responsibilities   of, the directors. Non-executive directors’ fees and payments are reviewed annually by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to determination of his own remuneration. Non-executive directors do not receive share options or other incentives. Under the Constitution, the directors decide the total amount paid to each director as remuneration for their services as a director to the company. However, under the listing rules of the ASX (‘ASX Listing Rules’), the total amount paid to all non-executive directors for their services must not exceed in  aggregate in any financial year the amount approved by the shareholders. Aggregate annual  directors’ fees paid to directors for the financial year ended 30 June 2018 were $437,604. Details of the fees payable to each director   are set out in section F of this report. The maximum authorised amount payable including superannuation to all non-executive directors for their services approved by the shareholders is currently $600,000 per annum. Non-executive director fees comprise a base director fee and an additional payment to reflect  a director’s involvement in Board  committees as follows: • Chairman of Audit Committee receives an additional fee of $15,000; • Chairman of Risk Committee receives an additional fee of $15,000; • Chairman of Nomination and Remuneration Committee receives an additional fee of $10,000; • Member of Audit or Risk Committee receives an additional fee of $7,500 per committee; and • Member of Nomination and Remuneration Committee receives an additional fee of $5,000. Other information about directors’ remuneration Directors may also be reimbursed for expenses reasonably incurred in attending to the company’s affairs. Non-executive directors may be paid such additional or special remuneration as the directors decide is appropriate where a director performs extra work or services which are not in the capacity as a director of the company or a subsidiary. There is no contractual redundancy  benefit  for directors. H. Fertility specialist performance rights incentives Grants of performance rights – fertility specialists During FY2018 the Committee in consultation with the Board and the Australian  Medical Directors conducted a review of the equity   incentive arrangements for the fertility specialists focusing on the following areas: • Vesting of grants made before September 2016; • initial grants made to new fertility specialists; • standard performance grants; and • high performance grants. Performance rights are granted on an annual basis to existing fertility specialists who achieve a benchmark level of IVF cycles above a base or adjusted base number of  IVF cycles established in one of the financial years ending after June 2008 up to June 2017.   All incentive schemes are administered in accordance with the plan rules established in the Virtus Health Limited Specialist Option Plan approved by the Board in June 2013. Grants made before 1 September 2016 Vesting is dependent on achievement of performance and share price hurdles. Upon the satisfaction of the vesting conditions and any other conditions to exercise, each performance right will be exercisable into a variable number of shares based on the terms of issue of the performance rights. The number of shares to be issued will be calculated by multiplying the applicable component of the offer value of the grant by the amount of the increase in the share price between the share price at vesting compared to the price at grant all divided by the share price at vesting. At 30 June 2018 the potential number of unvested performance rights subject to these arrangements is estimated to be 129,717. 42 DIRECTORS’ REPORT continuedVIRTUS HEALTHGrants made after 1 September 2016 The Committee reviewed the performance right grant and vesting conditions of all fertility specialist incentive arrangements in September 2016 and made three significant changes to the schemes effective for all grants made with  effect from 1 September 2016: • the requirement for the share price at vesting to be greater than the share price at grant was removed; • The number of performance rights granted to a fertility specialist is derived using the average closing share price for the previous 15 business days immediately following the announcement of the Company’s results to the ASX for the financial periods ending   31 December and 30 June and accordingly  the number of performance rights granted will be fixed at  grant; and • Amendments were made to the high performance scheme including the removal of  the requirement for the company’s  ordinary share price at exercise to be higher than the base price set at the time of incentive commencement and the number of performance rights to be fixed at  grant. Grants of rights are made twice a year as follows: • March grants for new fertility specialists contracting in the 6 month period ending 31 December; and • September grants for standard and high performance rights in relation to KPI achievement in the 12 month period ending 30 June and new fertility specialists contracting in the 6 month period ending 30 June. Key of the grants are as follows: • For new fertility specialists who join the consolidated entity, performance rights will generally  vest equally in three tranches  on the third, fourth and fifth anniversary of the grant of the performance rights, subject to the fertility specialist achieving the   relevant benchmark (currently 50 IVF cycles) in a 12 month period during the two years post commencement of the contractual relationship with the consolidated entity; and • For existing fertility specialists, performance rights are awarded for incremental increases in practice cycles of 50, up to a limit of 200 cycles and rights will generally vest  equally in three tranches on the third, fourth and fifth anniversary  of the grant of the  performance rights, conditional upon the fertility specialist performing a number of IVF cycles in the immediately preceding year not less than 75% of the relevant benchmark in the year pursuant to which the performance rights were awarded. High performance options – fertility specialists The Board recognises those fertility specialists that achieve a high level of  fresh cycles over a defined period acknowledging the value   they generate for shareholders. The High Performer Share Incentive Scheme (“HPSIS”) rewards fertility specialists who consistently delivered more than 400 cycles per annum for a consecutive three year period. For FY2017 the hurdle was adjusted to 300 cycles per annum. There have been four issues of HPSIS details of which are as follows: • the first incentive period commenced on  1 January 2014 and ended on 31 December 2016; no fertility specialists met the   performance criteria and this grant has now lapsed; • the second incentive period commenced on 1 January 2015 and ended on 31 December 2017; no fertility specialists met the share price hurdle and this grant has now lapsed; • the third incentive period commenced on  1 July 2016 and runs for a four year period ending 30 June 2020 with  the first year being  the qualifying period. There is no share price hurdle applicable to this grant; and • the fourth incentive period commenced on 1 July 2017 and runs for a four year period ending 30 June 2021 with  the first year being  the qualifying period. There is no share price hurdle applicable to this grant. The key performance features of the third and fourth issues of HPSIS are as follows: • a specialist can only participate in one HPSIS grant at any point in time; and • award values converting into VRT ordinary shares are as follows: – $80,000 of performance rights for > 299 average cycles per annum over 4 year period; or – $100,000 of performance rights for > 324 average cycles per annum over 4 year period; or – $120,000 of performance rights for > 349 average cycles per annum over 4 year period; or – $140,000 of performance rights for > 374 average cycles per annum over 4 year period; or – $160,000 of performance rights for > 399 average cycles per annum over 4 year period; or – $180,000 of performance rights for > 424 average cycles etc. In FY17, 11 fertility specialists qualified for the third issue of  HPSIS. In FY18, 2 fertility specialists qualified for the fourth issue of HPSIS. 43 ANNUAL REPORT 2018Vesting conditions Performance rights will vest and become exercisable to the extent that the applicable performance, service, or other vesting conditions specified at the time of the grant are satisfied. Vesting conditions may include conditions relating to continuous service and  the individual performance of the participant in the Plan. The Board has the discretion to set the value, terms and conditions on which it will offer performance rights under the Plan, including the vesting conditions and different terms and conditions which apply to different participants in the Plan Participants will not be required to pay any money to be granted performance rights under the Plan. Review of fertility specialist schemes – key outcomes. The Nominations and Remuneration Committee in conjunction with the Board and the Medical Directors is proposing the following fertility specialist incentive structure to be applicable for FY19: • • performance right grants to specialists will be maintained in accordance with current scheme arrangements up to the achievement initial right grants to new specialists will remain unchanged; of 200 cycles per annum; • the high performance scheme will be replaced by a loyalty option scheme with effect from FY19; and • all existing grants run out in accordance with existing arrangements. Loyalty option scheme – fertility specialists The existing high performance incentives provide an incentive to only a small number of specialists and does not recognise the contribution made by many established specialists who provide a consistent service to patients. The Nomination and Remuneration Committee, in conjunction with the Virtus Australian Medical Directors wished to recognise the continued contribution of the top quartile of specialists on an annual basis whilst at the same time maintaining the same cost  to the company. The revised loyalty  option  scheme also recognises that individual specialist practice activity does vary periodically and also by territory. The key features of the revised loyalty option scheme are as follows: • value of award is variable and dependent on individual number of personal cycles adjusted for a loading ratio to recognise a higher award for specialists making a higher contribution to the business. • award per loaded cycle for FY19 is $50, hence awards would be as follows: – 200 cycles, = 200 *1.0 * $50 = $10,000 worth of shares; – 250 cycles, = 250 *1.1 * $50 = $13,750 worth of shares; – 300 cycles, = 300 *1.2 * $50 = $18,000 worth of shares; – 350 cycles, = 350 *1.3 * $50 = $22,750 worth of shares; – 400 cycles, = 400 *1.4 * $50 = $28,000 worth of shares; • Loading ratios per cycle: – >399 cycles, 1.4 – >349 cycles, 1.3 – >299 cycles, 1.2 – >249 cycles, 1.1 – >199 cycles, 1.0 • Annual Qualifying hurdle is 200 cycles; • Annual vesting, no wait period, no escrow; • Other considerations; – annual loyalty award replaces all standard performance awards for improvement above 200 cycles; and – awards would be payable in shares; conversion from award value would be at the Virtus share price on the 15th business day following the group’s annual result announcement (normally mid-September); – annual pool value for FY19 is capped at $500,000 (assessed annually by Remuneration Committee); this cost is consistent with the cost of the scheme it replaces. This concludes the remuneration report which has been audited. 44 DIRECTORS’ REPORT continuedVIRTUS HEALTHShares under option Unissued ordinary shares of Virtus Health Limited under option at the date of this report are as follows: Grant date 21 January 2014* 03 October 2014* 13 May 2015* 13 May 2015* 13 May 2015* 13 May 2015* 11 November 2015* 21 August 2015* 28 October 2015* 16 December 2015* 21 September 2016* 21 September 2016* 11 November 2016 21 June 2017* 24 October 2017 24 October 2017* 24 October 2017* 24 October 2017* 22 November 2017* 22 November 2017* Expiry date 21 January 2024 03 October 2024 13 May 2025 13 May 2025 13 May 2025 13 May 2025 11 November 2025 21 August 2025 28 October 2025 16 December 2025 21 September 2026 21 September 2026 11 November 2026 21 June 2027 24 October 2027 24 October 2027 24 October 2027 24 October 2027 22 November 2027 22 November 2027 Exercise or base price $6.40 $8.57 $7.16 $7.53 $7.94 $7.94 $0.00 $5.67 $5.01 $6.17 $8.05 $8.05 $0.00 $5.35 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Number under option or shares to be issued 29,448 71,029 2,757 912 794 343 87,763 7,434 11,491 5,509 8,616 4,332 99,491 3,129 171,199 72,580 116,128 43,548 229,391 136,508 1,102,402 * The consolidated entity grants performance rights to fertility specialists as a dollar value; for the purpose of calculating the estimated number of shares under option, estimates of the share price at the time of vesting are forecast to facilitate an estimate of the number of shares to be issued at vesting. No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the company or of any other body corporate. Shares issued on the exercise of options During the financial year 1,444 ordinary shares were issued on  the exercise of options. No share options were cancelled during the   financial year. There were no shares of  Virtus Health Limited issued on the exercise of options from 1 July 2018 up to and including the   date of this report. Indemnity and insurance of officers The company has indemnified the directors and executives of  the company for costs incurred, in  their capacity as a director or  executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the company  paid a premium in respect of a contract to insure the directors and executives of  the company  against a liability to the extent permitted by the Corporations Act 2001. It is a condition of the insurance contract that its limits of indemnity, the nature of the liability indemnified, and the amount of the premium, not be disclosed. Indemnity and insurance of auditor The company has not, during or since the financial year, indemnified or agreed to indemnify  the auditor of the company or any related  entity against a liability incurred by the auditor. 45 ANNUAL REPORT 2018 During the financial year, the company  has not paid a premium in  respect of a contract to insure the auditor of  the company or any  related entity. Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by  the auditor are  outlined in note 38 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by  the auditor (or by another  person or firm on the auditor’s behalf), 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 38 to the financial statements do not compromise the external   auditor’s independence requirements of the Corporations Act 2001 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 issued by the Accounting Professional and Ethical Standards Board, 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. Officers of the company who are former partners of PricewaterhouseCoopers There are no officers of the company who are former partners of PricewaterhouseCoopers. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 follows this report. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors signature Peter Macourt Chairman 21 August 2018 Sydney 46 DIRECTORS’ REPORT continuedVIRTUS HEALTH Auditor’s Independence Declaration As lead auditor for the audit of Virtus Health Limited for the year ended 30 June 2018, I declare that to the best of my knowledge and belief, there have been: (a) (b) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Virtus Health Limited and the entities it controlled during the period Mark Dow Partner PricewaterhouseCoopers Sydney 21 August 2018 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 47 AUDITOR’S INDEPENDENCE DECLARATIONANNUAL REPORT 2018 Revenue Share of profits of associates accounted for using the equity method Other income Expenses Fertility specialists, consumables and associated costs Employee benefits expense Depreciation and amortisation expense Impairment of goodwill Occupancy expense Advertising and marketing Practice equipment expenses Professional and consulting fees Other expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity, net of tax Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Non-controlling interest Owners of Virtus Health Limited Total comprehensive income for the year is attributable to: Non-controlling interest Owners of Virtus Health Limited Basic earnings per share Diluted earnings per share Consolidated 2018 $’000 262,061 570 1,844 (71,717) (89,044) (12,496) – (17,694) (4,427) (2,213) (2,562) (11,655) (7,803) 2017 $’000 256,518 483 4,849 (71,204) (86,594) (12,165) (1,870) (16,227) (4,343) (2,227) (2,518) (13,776) (8,093) 44,864 42,833 (12,855) (12,829) 32,009 30,004 306 2,833 3,139 554 425 979 35,148 30,983 1,256 30,753 1,901 28,103 32,009 30,004 1,040 34,108 1,972 29,011 35,148 30,983 Cents 38.26 37.98 Cents 35.00 34.79 Note 4 5 6 7 7 7 8 31 32 50 50 The above statement of comprehensive income should be read in conjunction with the accompanying notes 48 STATEMENT OF COMPREHENSIVE INCOMEfor the year ended 30 June 2018VIRTUS HEALTH Note Consolidated 2018 $’000 2017 $’000 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other Total current assets Non-current assets Investments accounted for using the equity method Property, plant and equipment Intangibles Deferred tax Other Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Derivative financial instruments Income tax Provisions Other financial liabilities Other Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Deferred tax Provisions Other financial liabilities Other payables Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Equity attributable to the owners of Virtus Health Limited Non-controlling interest Total equity 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 The above statement of financial position  should be read in conjunction with the accompanying notes 21,713 12,491 752 3,035 37,991 1,489 34,477 465,436 5,468 517 507,387 27,337 12,341 758 2,434 42,870 1,489 28,989 411,483 4,551 531 447,043 545,378 489,913 24,468 420 4,337 4,169 397 14,779 48,570 180,773 107 866 6,415 23,757 1,340 213,258 261,828 20,925 527 378 3,768 14,044 8,169 47,811 153,564 437 585 6,063 11,755 1,327 173,731 221,542 283,550 268,371 242,251 2,837 27,979 273,067 10,483 242,001 (11,416) 18,127 248,712 19,659 283,550 268,371 49 STATEMENT OF FINANCIAL POSITIONas at 30 June 2018ANNUAL REPORT 2018Consolidated Balance at 1 July 2016 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 30) Payment of partly paid shares Dividends payable by subsidiaries to non-controlling interests Share-based payments Dividends paid (note 34) Issued capital $’000 238,829 – – – 2,504 668 – – – Reserves $’000 (12,764) – 908 908 – – – 440 – Retained profits $’000 Non- controlling interest $’000 Total equity $’000 12,531 28,103 – 28,103 – – – – (22,507) 19,448 1,901 71 1,972 – – (1,761) – – 258,044 30,004 979 30,983 2,504 668 (1,761) 440 (22,507) Balance at 30 June 2017 242,001 (11,416) 18,127 19,659 268,371 Consolidated Balance at 1 July 2017 Profit after income tax expense for the year  Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Non-controlling interest on acquisition of subsidiary Dividends payable by subsidiaries to non-controlling interests Put option exercise Settlement of partly paid shares Share-based payments Dividends paid (note 34) Issued capital $’000 242,001 – – – Reserves $’000 (11,416) – 3,355 3,355 Retained profits $’000 Non- controlling interest $’000 Total equity $’000 18,127 30,753 – 30,753 19,659 1,256 (216) 1,040 268,371 32,009 3,139 35,148 – – – 250 – – – – 1,013 1,013 – 10,017 – 881 – – – – – (20,901) (1,212) (10,017) – – – (1,212) – 250 881 (20,901) Balance at 30 June 2018 242,251 2,837 27,979 10,483 283,550 The above statement of changes in equity  should be read in conjunction with the accompanying notes 50 STATEMENT OF CHANGES IN EQUITYfor the year ended 30 June 2018VIRTUS HEALTHNotes Consolidated 2018 $’000 2017 $’000 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Other revenue Interest and other finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payment of acquisition of non-controlling interest Final payment for prior period’s business acquisition Payments for acquisition of subsidiaries and businesses, net of cash acquired Payments for property, plant and equipment and intangibles Payment of security deposits Proceeds from disposal of property, plant and equipment Proceeds from release of security deposits Interest received Associate distributions received Net cash used in investing activities Cash flows from financing activities Proceeds from partly paid shares Proceeds from issue of shares Payment of dividends Dividend paid to non-controlling interest in subsidiaries Repayment of borrowings Proceeds from borrowings Payment for finance lease facility Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 48 43 43 30 30 260,757 (191,637) 69,120 2,502 (6,615) (10,040) 54,967 (10,220) (4,152) (36,402) (15,500) – – 14 136 875 (65,249) 250 – (20,901) (2,112) (6,000) 33,000 – 4,237 (6,045) 27,337 421 255,569 (202,363) 53,206 2,761 (6,560) (10,701) 38,706 – (826) (9,965) (9,849) (196) 26 – 127 500 (20,183) 668 2,504 (22,507) – – 6,000 (22) (13,357) 5,166 22,215 (44) Cash and cash equivalents at the end of the financial year 9 21,713 27,337 The above statement of cash flows should be read in  conjunction with the accompanying notes 51 STATEMENT OF CASH FLOWSfor the year ended 30 June 2018ANNUAL REPORT 2018Note 1. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have  been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance  or position of the consolidated entity. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Basis of preparation These general purpose financial statements have been  prepared  in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Virtus Heath Limited is a for-profit entity for the purpose of preparing the financial  statements. The consolidated financial statements of the Virtus   Health Limited group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). At 30 June 2018 the consolidated entity’s current liabilities exceeded its current assets by $10,579,000 (June 2017: $4,941,000). The current liabilities include unearned income of $14,779,000 as well as employee leave liabilities of $10,010,000. Whilst, the leave liabilities are required to be disclosed as a   current liability, a large portion of this liability is expected not to be settled within 12 months. The consolidated entity also has unused and available debt facilities of $24,509,000 that do not expire until September 2019 and a cash balance of $21,713,000 as at 30 June 2018. The Directors continually monitor the group’s working capital position, including forecast working capital requirements  and have ensured that there are appropriate refinancing  strategies and adequate committed funding facilities in  place to  accommodate financial obligations as and when  they fall due. The financial report therefore has been prepared on a going  concern basis. Historical cost convention The financial statements have been prepared under the historical  cost convention, except for, where applicable, the revaluation of available-for-sale financial assets, financial assets and liabilities   at fair value through profit or loss, investment properties and   derivative financial instruments. Critical accounting estimates The preparation of the financial statements requires the   use of certain critical accounting estimates. It  also requires  management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial   statements, are disclosed in note 2. Parent entity information In accordance with the Corporations Act 2001, these financial  statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 42. Principles of consolidation The consolidated financial statements incorporate the  assets and liabilities of all subsidiaries of Virtus Health Limited (‘company’ or ‘parent entity’) as at 30 June 2018 and the results of all subsidiaries for the year then ended. Virtus Health Limited and its subsidiaries together are referred to in these financial   statements as the ‘consolidated entity’. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity 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 consolidated entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries and businesses are accounted   for using the acquisition method of accounting. A change in   ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the  consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity  attributable to the parent. Non-controlling interest in the results and equity of subsidiaries  are shown separately in the statement of comprehensive income, statement of financial position and statement of  changes in equity of the consolidated entity. Losses incurred  by the consolidated entity are attributed to the non-controlling interest in full, even if that results in a deficit balance. 52 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHWhere the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non- controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated  entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in  Australian  dollars, which is Virtus Health Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and  liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency translation reserve in equity. The foreign currency translation reserve is recognised in profit or  loss when the foreign operation or net investment is disposed of. Revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity  and the revenue can  be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Rendering of services Revenue from the rendering of services is recognised upon the delivery of the service to a patient or customer. Revenue is recognised on completion of a medical procedure, on supply of drugs, or on completion of an analytical test. If payments received from patients exceed the revenue recognised the difference is disclosed as deferred revenue. Deferred revenue Fees for fertility treatment cycles paid in advance are recognised as deferred revenue until the service has been provided whereupon the fees are recognised as revenue. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest   income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net   carrying amount of the financial asset. Rent Rent revenue is recognised on a straight-line basis over the lease term. Lease incentives granted are recognised as part of the rental revenue. Contingent rentals are recognised as income in the period when earned. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Income tax The income tax expense or benefit for the period is the tax   payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the   carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover   the asset. 53 ANNUAL REPORT 2018Note 1. Significant accounting policies  (continued) Income tax (continued) Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Virtus Health Limited (the ‘head entity’) and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax  consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Current and non-current classification Assets and liabilities are presented in  the statement of financial  position based on current and non-current classification. An asset is classified as current when: it is either expected to be   realised or intended to be sold or consumed in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless  restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to   be settled in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified   as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held  at call with financial institutions, other short-term, highly liquid  investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective  interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant   financial difficulties of the debtor, probability that the debtor   will enter bankruptcy or financial reorganisation and default  or delinquency in payments (more than 60 days overdue) are   considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective  interest rate. Cash flows relating to short-term receivables are   not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Inventories Stock on hand consists of donor gametes held to provide donor fertility treatments and medical supplies used in the diagnostic fertility procedures performed in the consolidated entity’s fertility clinics. Stock on hand is stated at the lower of cost and net realisable value. Cost comprises purchase and delivery costs, net of rebates and discounts received or receivable. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently   remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on   whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on  the expected period of realisation. 54 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHCash flow hedges Cash flow hedges are used to cover the consolidated entity’s   exposure to variability in cash flows that is attributable to a  particular risk associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The   effective portion of the gain or loss on the hedging instrument is recognised directly in equity, whilst the ineffective portion  is recognised in profit or loss. Amounts taken to equity  are  transferred out of equity and included in the measurement of the   hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis   both retrospectively and prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected  to occur, the amounts recognised in  equity are transferred to  profit or loss. If the hedging instrument is sold, terminated, expires, exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast  transaction occurs. Associates Associates are entities over which the consolidated entity has significant influence but not control or joint control.   Investments in associates are accounted for using the equity   method. Under the equity method, the share of the profits  or losses of the associate is recognised in  profit or loss and  the share of the movements in  equity is recognised in other  comprehensive income. Investments in associates are carried in the statement of financial position at cost plus post-acquisition  changes in the consolidated entity’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Dividends received or receivable from associates reduce the carrying amount of the investment. When the consolidated entity’s share of losses in an associate equals or exceeds its interest in  the associate, including any  unsecured long-term receivables, the consolidated entity does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The consolidated entity discontinues the use of the equity  method upon the loss of significant influence over the associate   and recognises any retained investment at its fair value. Any difference between the associate’s carrying amount, fair value of the retained investment and proceeds from disposal is recognised in profit or loss. Property, plant and equipment Property, plant and equipment is stated at historical cost  less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their  expected useful lives as follows: Leasehold improvements Shorter of the useful and the Furniture and fittings Office equipment Medical equipment expected life of the lease 2 to 10 years 2 to 5 years 2 to 5 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment under lease  are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon  disposal or when there is no future economic benefit to the   consolidated entity. Leases The determination of whether an arrangement is or contains a lease is based on the substance of  the arrangement and requires  an assessment of whether the fulfilment of the arrangement  is dependent on the use of  a specific asset or assets and the   arrangement conveys a right to use the asset. A distinction is made between finance leases, which  effectively  transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and   operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of  interest  on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated   over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on  a straight-line basis  over the term of the lease. 55 ANNUAL REPORT 2018Note 1. Significant accounting policies  (continued) Intangible assets Intangible assets acquired as part of a business combination,   other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately   are initially recognised at cost. Indefinite life intangible assets  are not amortised and are subsequently  measured at cost less  any impairment. Finite life intangible assets are subsequently   measured at cost less amortisation and any impairment. The gains or losses recognised in  profit or loss arising from  the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The amortisation method and useful lives of finite life intangible assets are reviewed annually.   Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not   amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate   that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Software Significant costs associated with software are deferred and  amortised on a straight-line basis over the period of their expected benefit, being their finite life of 3 to 5 years. Brand names Brand names are amortised on a straight-line basis over the period of their expected benefit, being their finite life of   10 – 15 years. Impairment of non-financial assets Goodwill and other intangible assets that have an  indefinite  useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in  circumstances indicate that they might be impaired. Other non- financial assets are reviewed for impairment whenever events   or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash  flows relating to  the asset using a pre-tax discount rate specific to the asset or   cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a   cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term   nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective  interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, t he loans or borrowings are classified as non-current. Finance costs Finance costs attributable to qualifying assets are capitalised   as part of the asset. All other finance costs are expensed in  the  period in which they are incurred. Provisions Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to   settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the  present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the   provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave where there is   no unconditional right to defer settlement of the liability are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and  currency that match, as closely as possible, the estimated future cash outflows. 56 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHDefined contribution superannuation expense Contributions to defined contribution superannuation plans are  expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided  to employees and fertility specialists. Equity-settled transactions are awards of shares, options or  performance rights over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at  fair  value on grant date. Fair value is independently determined using option pricing models that take into account the exercise price, the term of the option, the impact of dilution, 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, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the recipient to receive payment. The fair value excludes the impact of any service or non-market performing vesting conditions. The cost of equity-settled transactions are recognised as an   expense with a corresponding increase in equity over the vesting  period. The cumulative charge to profit or loss is calculated   based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount  recognised in profit  or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an   expense is recognised as if the modification has not been  made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair  value of the share-based compensation benefit as at the date  of modification. If the non-vesting condition is within the control of the consolidated entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the consolidated entity or employee and is not satisfied during the vesting period, any  remaining expense for the  award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has  vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Profit sharing and bonus plans The consolidated entity recognises a liability and an expense for bonuses and profit sharing based on a formula that takes  into consideration the profit attributable to the company’s  shareholders after certain adjustments. The consolidated entity recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. Fair value measurement When an asset or liability, financial or non-financial, is measured   at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non- financial assets, the fair value measurement  is based on its  highest and best use. Valuation techniques that are appropriate  in the circumstances and for which  sufficient data are available  to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified,  into three levels, using a fair value hierarchy  that reflects the  significance of the inputs used in  making the measurements.  Classifications are reviewed at each reporting date and transfers  between levels are determined based on a reassessment of the lowest level of input that is significant to the fair  value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant.   External valuers are selected based on market knowledge and reputation. Where there is a significant  change in fair value of  an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs  applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the   proceeds. Dividends Dividends are recognised when declared during the financial year. 57 ANNUAL REPORT 2018Note 1. Significant accounting policies  (continued) Business combinations The acquisition method of accounting is used to account  for  business combinations regardless of whether equity instruments  or other assets are acquired. Earnings per share Basic earnings per share Basic earnings per share is calculated by  dividing the profit  attributable to the owners of Virtus Health Limited, excluding any costs of servicing equity other than ordinary shares, by the  weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in  ordinary shares  issued during the financial year. The consideration transferred is the sum of the acquisition-date  fair values of the assets transferred, equity  instruments issued  or liabilities incurred by the acquirer to former owners of  the  acquiree and the amount of any non-controlling interest in the  acquiree. For each business combination, the non-controlling  interest in the acquiree is measured at either fair value or at the  proportionate share of the acquiree’s identifiable net assets. All  acquisition costs are expensed as incurred to profit  or loss. 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 shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of  the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components   of cash flows arising from investing or financing activities which   are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. On the acquisition of a business, the consolidated entity   assesses the financial assets acquired and liabilities assumed for   appropriate classification and designation in accordance with  the contractual terms, economic conditions, the consolidated entity’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity  interest in the acquiree at the acquisition-date fair value and  the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer  is recognised at the acquisition-date fair value. Subsequent   changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss.   Contingent consideration classified as equity is not remeasured  and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets   acquired, liabilities assumed and any non-controlling interest in  the acquiree and the fair value of the consideration transferred   and the fair value of any  pre-existing investment in the acquiree  is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than  the fair value of the identifiable  net assets acquired, being a bargain  purchase to the acquirer, the  difference is recognised as a gain directly  in profit or loss by the  acquirer on the acquisition-date, but only after a reassessment  of the identification and measurement of the net assets  acquired, the non-controlling interest in the acquiree, if any, the  consideration transferred and the acquirer’s previously held   equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional   amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period  ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information   possible to determine fair value. 58 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNew Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entities for the annual reporting period ended 30 June 2018. The consolidated entity’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, is set out below. AASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of IFRS 9 and completes the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. AASB 9 introduces new classification and measurement models for  financial assets. A financial asset shall be measured at amortised  cost, if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, which  arise on specified dates and are solely principal and interest.  All other financial instrument assets are to be classified and   measured at fair value through profit or loss unless the entity   makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for- trading) in other comprehensive income (‘OCI’). For financial   liabilities, the standard requires the portion  of the change in fair  value that relates to the entity’s own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more   closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an  ‘expected credit loss’ (‘ECL’) model to recognise an allowance. Impairment will be measured under a 12-month ECL method unless the credit risk on a financial instrument has increased  significantly since initial recognition in which case the lifetime  ECL method is adopted. The standard introduces additional new disclosures. The consolidated entity has assessed the effects of applying the new standard on the consolidated entity’s financial statements   and does not expect the new standard to have a material impact on transition. This new standard will first  be adopted for the  financial year ending 30 June 2019. AASB 15 Revenue from Contracts with Customers AASB 15 Revenue from Contracts with Customers, which replaces AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts, addresses the recognition of revenue. The standard is applicable for annual reporting periods beginning on or after 1 January 2018. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach  for the  adoption. Under this approach entities will recognise transitional adjustments in retained earnings on the date of initial application (e.g. 1 July 2018),( i.e. without restating the comparative period). They will only need to apply the new rules to contracts that are not completed as of the date of initial application. The consolidated entity has assessed the effects of applying the new standard on the consolidated entity’s financial statements  and does not expect the new standard to have a material impact on transition. This new standard will first  be adopted for the  financial year ending 30 June 2019. AASB 16 Leases In February 2016 the AASB issued AASB 16, ‘Leases’, which replaces the current guidance in AASB 117 ‘Leases’. The standard is applicable for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted if AASB 15, ‘Revenue from Contracts with Customers’, is also applied. The standard requires lessees to bring all leases on balance   sheet as the distinction between operating and finance leases  has been eliminated. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are   recognised. The only exceptions are in respect of short term leases and leases of low value assets. Lessor accounting remains largely unchanged. The standard will affect primarily the accounting for the consolidated entities operating leases. As at reporting date, the consolidated entity’s non-cancellable operating lease commitments are $71,210,000, see note 40. The present value of the consolidated entity’s operating lease payments as defined   under the new standard will be recognised as lease liabilities on the balance sheet and included in net debt. There are a number of differences between the two standards. The Segment EBITDA, as disclosed in note 3 will increase as the operating lease cost is charged against EBITDA under AASB 117 whilst under AASB 16 the charge will be included in depreciation and interest expense which are excluded from EBITDA (although included in overall earnings). Operating cash  flows will increase  under AASB 16 as the element of cash paid under leases attributable to the repayment of principal will be included in financing cash flows. The overall increase/decrease in cash and   cash equivalents will however remain the same. 59 ANNUAL REPORT 2018Note 1. Significant accounting policies  (continued) New Accounting Standards and Interpretations not yet mandatory or early adopted (continued) AASB 16 Leases (continued) The consolidated entity had previously conducted reviews of the impact of AASB 16 and performed some detailed work on a sample of its material leases. Significant progress has been made   in the last six months where the consolidated entity has: • Identified the population of leases for evaluation and classified  its population into different types of lease arrangements. The majority of the consolidated entity’s current operating lease commitments relate to property leases; • Assessed its current policies, controls, processes and systems and identified where we can leverage our existing processes  and have now implemented a contract management system for lease data and a lease software to electronically manage the lease portfolio and perform lease calculations as required   by the new lease standard; and • Reached an advanced stage of on boarding all of its leases onto the lease software and reviewing preliminary output. The standard must be implemented retrospectively, either with a complete restatement of comparatives under the full retrospective approach or with the cumulative financial impact   of application of the new standard recognised as at 1 July 2019 under a modified retrospective approach. Initial indications   are that the consolidated entity will apply the full retrospective approach however, a final decision is yet to be made. It  is too  early to properly quantify the overall impacts on the results and  financial position for the 2019 and 2020 financial years and   work will continue during 2019 to assess the full impacts on the consolidated entity. The consolidated entity will not adopt the new standard before its normal application date of 1 July 2019. AASB 16 is expected to be the most significant of  the new  accounting standards for the consolidated entity in terms of impact on the financial statements and on its systems   and processes. Other amending accounting standards issued are not considered to have a significant impact  on the financial  statements of the consolidated entity as their amendments provide either clarification of existing accounting treatment  or  editorial amendments. Note 2. Critical accounting judgements,  estimates and assumptions The preparation of the financial statements requires  management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements.   Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal   the related actual results. The judgements, estimates and assumptions that have a significant risk of  causing a material  adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within  the next financial year are  discussed below. Share-based payment transactions The consolidated entity measures the cost of equity-settled  transactions by reference to the fair value of the equity   instruments at the date at which they are granted. The fair value is determined by using option-pricing models taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact   on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Goodwill and other indefinite life intangible assets The consolidated entity tests annually, or more frequently  if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have   suffered any impairment in accordance with the accounting policy stated in note 1. The recoverable amounts of cash- generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions,   including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The consolidated entity assesses impairment of non-financial  assets other than goodwill and other indefinite life intangible   assets at each reporting date by evaluating conditions specific to  the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Business combinations As discussed in note 1, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially  estimated by the consolidated entity taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination  accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. The determination of the liability relating to put options and contingent consideration linked to business combinations requires estimations to be made of  the future profitability of the  acquired entity and the discount rates used. 60 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 3. Operating segments Identification of reportable operating segments AASB 8 ‘Operating Segments’ requires operating segments to be identified on the basis of internal reports about components of  the  consolidated entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The board of  directors and senior management are identified as the chief operating decision  makers in  assessing performance and in determining the allocation of resources. The consolidated entity currently has six operating segments being New South Wales, Queensland, Victoria, Tasmania, Australian Diagnostics and International. The consolidated entity has determined that the disclosure of two segments, being an Australian aggregated healthcare services segment and an International healthcare services segment is most appropriate. Disclosure of an aggregated segment for Australia is considered appropriate due to the similar economic characteristics faced by the operating segments and the similar nature of the products and services being delivered to a similar customer base. Segment revenue Sales between segments are carried out at arm’s length and are eliminated on consolidation. The revenue from external parties reported to the Board of Directors is measured in a manner consistent with that in the statement of comprehensive income. Revenue from external customers is derived from the provision of healthcare services. A breakdown of revenue and results is provided below: Segment EBITDA Segment performance is assessed on the basis of Segment EBITDA. Segment EBITDA comprises expenses which are incurred in the normal trading activity of the segments and excludes the impact of corporate costs, depreciation, amortisation, goodwill impairment, interest, share-based payments and other items which are determined to be outside of the control of the respective segments. Consolidated – 2018 Revenue Sales to external customers Other revenue Interest revenue Total revenue Segment EBITDA Share based payment expense Corporate costs Foreign exchange (loss) Transaction costs Fair value adjustments to put liabilities and contingent consideration Depreciation and amortisation expense Interest revenue Interest expense Interest on other financial liability – non-cash interest Amortisation of bank facility fee Profit before income tax expense Income tax expense Profit after income tax expense Total assets includes: Investments in associates Acquisition of non-current assets Healthcare Services Australia $’000 Healthcare Services International $’000 Intersegment eliminations/ unallocated $’000 215,969 1,747 123 217,839 66,822 44,209 – – 44,209 9,196 – – 13 13 – 1,489 14,675 – 53,824 – – Total $’000 260,178 1,747 136 262,061 76,018 (881) (10,104) (64) (1,031) 1,089 (12,496) 136 (6,615) (981) (207) 44,864 (12,855) 32,009 1,489 68,499 61 ANNUAL REPORT 2018Note 3. Operating segments (continued) Consolidated – 2017 Revenue Sales to external customers Other revenue Interest revenue Total revenue Segment EBITDA Share based payment expense Corporate costs Foreign exchange (loss) Transaction costs Fair value adjustments to put liabilities and contingent consideration Depreciation and amortisation expense Impairment of goodwill Interest revenue Interest expense Interest on other financial liability – non-cash interest Amortisation of bank facility fee Profit before income tax expense Income tax expense Profit after income tax expense Total assets includes: Investments in associates Acquisition of non-current assets Healthcare Services Australia $’000 Healthcare Services International $’000 Intersegment eliminations/ unallocated $’000 217,054 1,757 123 218,934 65,776 37,580 – – 37,580 7,099 – – 4 4 – 1,489 9,210 – 15,797 – – Total $’000 254,634 1,757 127 256,518 72,875 (440) (10,557) (117) (773) 3,846 (12,165) (1,870) 127 (6,684) (1,202) (207) 42,833 (12,829) 30,004 1,489 25,007 62 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 4. Revenue Sales revenue Rendering of services Other revenue Interest Rent Revenue Consolidated 2018 $’000 2017 $’000 260,178 254,634 136 1,747 1,883 262,061 127 1,757 1,884 256,518 Note 5. Share of profits of associates accounted for using the equity  method Share of profits – associates Note 6. Other income Fair value gain on put liabilities Fair value gain on contingent consideration Other income Other income Consolidated 2018 $’000 570 2017 $’000 483 Consolidated 2018 $’000 891 198 755 1,844 2017 $’000 3,317 529 1,003 4,849 63 ANNUAL REPORT 2018Consolidated 2018 $’000 2017 $’000 3,025 409 2,439 2,879 8,752 2,167 1,577 3,744 12,496 3,236 366 2,450 2,914 8,966 1,696 1,503 3,199 12,165 – 1,870 6,615 981 207 7,803 6,684 1,202 207 8,093 13,677 12,422 5,885 5,836 2,000 2,918 625 256 881 416 24 440 Note 7. Expenses Profit before income tax includes the following specific expenses: Depreciation Leasehold improvements Furniture and fittings Office equipment Medical equipment Total depreciation Amortisation Software Brand names Total amortisation Total depreciation and amortisation Impairment Impairment of goodwill Finance costs Interest and finance charges paid/payable Interest on other financial liability – non-cash interest Amortisation of bank facility fees Finance costs expensed Rental expense relating to operating leases Minimum lease payments Superannuation expense Defined contribution superannuation expense Research costs Research costs Share-based payments expense Share-based payments expense – fertility specialists Share-based payments expense – employee benefits Total share-based payments expense 64 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 8. Income tax expense  Income tax expense Current tax Deferred tax – origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense Deferred tax included in income tax expense comprises: Decrease/(increase) in deferred tax assets (note 16) Decrease in deferred tax liabilities (note 26) Deferred tax – origination and reversal of temporary differences Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Impairment of goodwill Share-based payments Research and development Fair value gain on Put Liabilities and Contingent Consideration Acquisition transaction costs Tax losses (recognised)/not recognised Other Difference in overseas tax rates Adjustment recognised for prior periods Income tax expense Amounts charged directly to equity Deferred tax assets (note 16) Tax losses not recognised Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 17% Consolidated 2018 $’000 13,933 (1,072) (6) 12,855 (1,048) (24) (1,072) 2017 $’000 10,795 1,556 478 12,829 1,649 (93) 1,556 44,864 42,833 13,459 12,850 – 256 – (327) 295 (311) 444 13,816 (955) (6) 12,855 561 132 (173) (1,154) 179 282 466 13,143 (792) 478 12,829 Consolidated 2018 $’000 2017 $’000 131 238 1,106 188 3,778 642 The above potential tax benefit for tax losses has not  been recognised in the statement of financial position. These tax losses relate to  Singapore and can be utilised in the future. 65 ANNUAL REPORT 2018Note 9. Current assets – cash and cash  equivalents Cash at bank and on hand Note 10. Current assets – trade and other receivables Trade receivables Less: Provision for impairment of receivables Other receivables Consolidated 2018 $’000 21,713 2017 $’000 27,337 Consolidated 2018 $’000 11,994 (1,470) 10,524 1,967 12,491 2017 $’000 12,260 (1,944) 10,316 2,025 12,341 Impairment of receivables The consolidated entity has recognised an expense of $746,000 (2017: $424,000) in profit or loss in  respect of impairment of  receivables for the year ended 30 June 2018. The ageing of the impaired receivables provided for above is as follows: 3 to 6 months overdue Over 6 months overdue The nominal value of the impaired receivables is $1,765,000 (2017: $2,792,000). Movements in the provision for impairment of receivables are as follows: Opening balance Additional provisions recognised Additions through business combinations Receivables written off during the year as uncollectable Unused amounts reversed Closing balance Consolidated 2018 $’000 295 1,175 1,470 2017 $’000 847 1,097 1,944 Consolidated 2018 $’000 1,944 803 – (1,220) (57) 1,470 2017 $’000 1,816 779 28 (324) (355) 1,944 66 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHPast due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $1,909,000 as at 30 June 2018 ($2,021,000 as at 30 June 2017). The consolidated entity did not consider the credit risk to be material on the aggregate balances after reviewing credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: 1 to 3 months overdue No collateral is held in relation to the above receivables. Note 11. Current assets – inventories Stock on hand – at cost Note 12. Current assets – other Prepayments Consolidated 2018 $’000 1,909 2017 $’000 2,021 Consolidated 2018 $’000 752 2017 $’000 758 Consolidated 2018 $’000 3,035 2017 $’000 2,434 Note 13. Non-current assets – investments accounted for using the equity  method Investment in associates Refer to note 45 for further information on interests in associates. Consolidated 2018 $’000 1,489 2017 $’000 1,489 67 ANNUAL REPORT 2018Note 14. Non-current assets – property, plant and equipment Leasehold improvements – at cost Less: Accumulated depreciation Plant and equipment under lease – at cost Less: Accumulated depreciation Furniture and fittings – at cost Less: Accumulated depreciation Office equipment – at cost Less: Accumulated depreciation Medical equipment – at cost Less: Accumulated depreciation Consolidated 2018 $’000 48,220 (28,932) 19,288 1,990 (1,990) – 3,510 (2,006) 1,504 17,581 (12,137) 5,444 30,695 (22,454) 8,241 34,477 2017 $’000 39,281 (25,811) 13,470 1,990 (1,990) – 3,143 (1,607) 1,536 15,977 (10,212) 5,765 26,964 (18,746) 8,218 28,989 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set  out below: Leasehold improvements $’000 13,944 2,844 Plant and equipment under lease $’000 – – Furniture and fittings $’000 1,489 423 Office equipment $’000 5,865 1,939 Medical equipment $’000 9,022 2,179 – – (82) (3,236) 13,470 8,534 254 55 (3,025) 19,288 – – – – – – – – – – – – (10) (366) 1,536 350 – 26 (409) 1,503 417 (9) 3 (2,450) 5,765 2,086 – 32 (2,439) 5,444 – (17) (52) (2,914) 8,218 2,329 486 88 (2,879) 8,242 Total $’000 30,320 7,385 417 (26) (141) (8,966) 28,989 13,299 740 201 (8,752) 34,477 Consolidated Balance at 1 July 2016 Additions Additions through business combinations (note 43) Disposals Exchange differences Depreciation expense Balance at 30 June 2017 Additions Additions through business combinations (note 43) Exchange differences Depreciation expense Balance at 30 June 2018 68 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 15. Non-current assets – intangibles Goodwill – at cost Less: Impairment Software – at cost Less: Accumulated amortisation Brand names – at cost Less: Accumulated amortisation Consolidated 2018 $’000 453,437 – 453,437 22,053 (16,553) 5,500 17,504 (11,005) 6,499 465,436 2017 $’000 401,577 (1,870) 399,707 19,824 (14,387) 5,437 15,775 (9,436) 6,339 411,483 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set  out below: Consolidated Balance at 1 July 2016 Additions Additions through business combinations (note 43) Exchange differences Impairment Transfers in/(out) Amortisation expense Balance at 30 June 2017 Additions Additions through business combinations (note 43) Exchange differences Amortisation expense Balance at 30 June 2018 Goodwill $’000 387,453 – 13,600 391 (1,870) 133 – 399,707 – 50,748 2,982 – 453,437 Software $’000 4,673 2,464 – (4) – – (1,696) 5,437 2,201 – 29 (2,167) 5,500 Brand names $’000 6,874 – 1,140 (39) – (133) (1,503) 6,339 – 1,511 226 (1,577) 6,499 Total $’000 399,000 2,464 14,740 348 (1,870) – (3,199) 411,483 2,201 52,259 3,237 (3,744) 465,436 69 ANNUAL REPORT 2018Note 15. Non-current assets – intangibles (continued) Impairment tests for goodwill Goodwill is allocated to the group’s cash generating units (‘CGUs’) identified according to operating segment: New South Wales Victoria Queensland Tasmania Australian Diagnostics International Consolidated 2018 $’000 111,807 122,294 66,626 20,461 26,719 105,530 453,437 2017 $’000 111,807 122,294 66,626 20,461 26,719 51,800 399,707 The recoverable amount of a CGU is determined based on  value in use calculations. These calculations use cash  flow projections  based on financial budgets approved by  management covering a one year period. Cash  flows beyond the one year period are   extrapolated using the estimated growth rates. The terminal growth rate does not exceed the long term average growth rate for the business. Key assumptions used for value in use calculations Terminal growth rate: New South Wales – 2.5% (2017: 2.5%) Victoria – 2.5% (2017: 2.5%) Queensland – 2.5% (2017: 2.5%) Tasmania – 1.0% (2017: 1.0%) International – 2.5% (2017: 2.5%) Australian Diagnostics – 2.0% (2017: 2.0%) Pre-tax discount rate New South Wales – 12.0% (2017: 12.0%) Victoria – 12.0% (2017: 12.0%) Queensland – 12.0% (2017: 12.0%) Tasmania – 14.0% (2017: 14.1%) International – 10.3% (2017: 9.8%) Australian Diagnostics – 12.0% (2017 12.0%) Management believes that reasonable changes in key assumptions on which the recoverable amount of the cash generating units is based will not cause the cash-generating unit’s carrying amounts to exceed their recoverable amount. The recoverable amounts of the Tasmanian and Queensland cash-generating units are however sensitive to the annual projected growth rates and the discount rates used and as disclosed in note 2, the directors have made judgements and estimates in respect of impairment testing of goodwill. Queensland and Tasmania are price sensitive markets and have been impacted by new entrants and low cost providers. Management believes that a review of pricing performed during the year and efforts to contain costs will help the businesses achieve their revenue and growth targets for FY2019 and beyond. Should these judgements and estimates not occur the goodwill carrying amount may become impaired. The key sensitivities for the Tasmanian and Queensland cash generating units are as follows: Tasmania: (a) If forecast EBITDA that drives the terminal value decreases by more than 11.8% for the Tasmania division, goodwill would need to be impaired, with all other assumptions remaining constant (b) If the discount rate increases more than 1% for the Tasmania division, goodwill would need to be impaired, with all other assumptions remaining constant Queensland: (a) If forecast EBITDA that drives the terminal value decreases by more than 5.5% for the Queensland division, goodwill would need to be impaired, with all other assumptions remaining constant (b) If the discount rate increases more than 1% for the Queensland division, goodwill would need to be impaired, with all other assumptions remaining constant 70 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 16. Non-current assets – deferred tax Deferred tax assets comprise temporary differences attributable to: Amounts recognised in profit or loss: Impairment of receivables Property, plant and equipment Employee benefits Provision for lease make good Accrued expenses Tax losses Intangible assets Other Amounts recognised in equity: Other Deferred tax assets Amount expected to be recovered within 12 months Amount expected to be recovered after more than 12 months Movements: Opening balance Credited/(charged) to profit or loss (note 8) Charged to equity (note 8) Closing balance Note 17. Non-current assets – other Security deposits Note 18. Current liabilities – trade and other payables Trade payables Other payables Refer to note 35 for further information  on financial risk management. Consolidated 2018 $’000 2017 $’000 287 (169) 3,198 1,168 383 370 (347) 420 5,310 158 5,468 2,951 2,517 5,468 4,551 1,048 (131) 5,468 339 (474) 3,277 1,058 318 – (605) 349 4,262 289 4,551 2,456 2,095 4,551 6,438 (1,649) (238) 4,551 Consolidated 2018 $’000 517 2017 $’000 531 Consolidated 2018 $’000 10,341 14,127 24,468 2017 $’000 8,880 12,045 20,925 71 ANNUAL REPORT 2018 Note 19. Current liabilities – derivative financial instruments Interest rate swap contracts – cash flow hedges Refer to note 35 for further information  on financial risk management.  Refer to note 36 for further information on fair value measurement. Note 20. Current liabilities – income tax Provision for income tax Note 21. Current liabilities – provisions Employee benefits – long service leave Consolidated 2018 $’000 420 2017 $’000 527 Consolidated 2018 $’000 4,337 2017 $’000 378 Consolidated 2018 $’000 4,169 2017 $’000 3,768 Amounts not expected to be settled within the next 12 months The current provision for long service leave includes all unconditional entitlements where employees have completed the required   period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. However, based on past experience, the consolidated entity does not expect all employees to take the full amount of accrued long service leave or require   payment within the next 12 months. The following amounts reflect leave that is not expected to be taken within  the next 12 months: Long service leave obligation expected to be settled after 12 months Note 22. Current liabilities – other financial liabilities Other financial liability Loan note Consolidated 2018 $’000 3,752 2017 $’000 3,391 Consolidated 2018 $’000 – 397 397 2017 $’000 14,044 – 14,044 The other financial liability represented the fair value of the put options held by the non-controlling interests in Sims Clinic Limited and  TAS IVF Pty Limited and the contingent consideration in  relation to the acquisition of Aagaard Fertilitetsklinik ApS. These liabilities were   settled during the current year. Loan note reflects the current portion of a loan owing to the vendors of Fertilitesklinikken Trianglen  Aps (Refer to note 42 for details). 72 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTH Note 23. Current liabilities – other Unearned income Note 24. Non-current liabilities – borrowings Bank loans (net of borrowing costs) Refer to note 35 for further information  on financial risk management. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans (net of borrowing costs) Consolidated 2018 $’000 14,779 2017 $’000 8,169 Consolidated 2018 $’000 180,773 2017 $’000 153,564 Consolidated 2018 $’000 180,773 2017 $’000 153,564 Assets pledged as security The bank loans are secured by  guarantees by all Australian group companies and fixed and floating charges over the consolidated   entity’s assets. Guarantees are not provided by subsidiaries which are not  based in Australia and there are no fixed or floating charges   over the assets of the international subsidiaries of the consolidated entity. However, the shares representing the ownership interest in the international subsidiaries are included in the charges over the consolidated entity. The carrying amounts of assets pledged as security for current and non-current borrowings are: Cash and cash equivalents Receivables Inventories Other current assets Investments Plant and equipment Intangible assets (excluding goodwill) Deferred tax assets Other financial assets Consolidated 2018 $’000 10,856 7,726 529 2,098 81,465 28,732 5,451 4,711 56 141,624 2017 $’000 16,838 8,511 585 1,990 40,780 23,676 6,264 4,286 58 102,988 73 ANNUAL REPORT 2018 Note 24. Non-current liabilities – borrowings (continued) Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank loans ( excluding capitalised borrowing costs) Working capital facilities Used at the reporting date Bank loans ( excluding capitalised borrowing costs) Working capital facilities Unused at the reporting date Bank loans ( excluding capitalised borrowing costs) Working capital facilities Consolidated 2018 $’000 2017 $’000 200,000 10,000 210,000 200,000 10,000 210,000 181,000 4,718 185,718 19,000 5,282 24,282 154,000 5,148 159,148 46,000 4,852 50,852 The consolidated entity has complied with the financial covenants of its borrowing liabilities during the financial year ended   30 June 2018 and 30 June 2017. Working capital facilities utilised consist of $4,718,000 (2017: $5,148,000) of bank guarantees. Total Credit facilities expire in September 2019. Note 25. Non-current liabilities – derivative financial instruments Interest rate swap contracts – cash flow hedges  Refer to note 35 for further information  on financial risk management.  Refer to note 36 for further information on fair value measurement. Consolidated 2018 $’000 107 2017 $’000 437 74 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 26. Non-current liabilities – deferred tax Deferred tax liability comprises temporary differences attributable to: Amounts recognised in profit or loss: Property, plant and equipment Impairment of receivables Employee benefits Provision for lease make good Intangible assets Other Deferred tax liability Amount expected to be settled within 12 months Amount expected to be settled after more than 12 months Movements: Opening balance Credited to profit or loss (note 8) Additions through business combinations (note 43) Closing balance Note 27. Non-current liabilities – provisions Employee benefits – long service leave Lease make good Consolidated 2018 $’000 2017 $’000 29 – – (34) 855 16 866 468 398 866 585 (24) 305 866 66 (57) (11) (56) 644 (1) 585 463 122 585 423 (93) 255 585 Consolidated 2018 $’000 1,454 4,961 6,415 2017 $’000 1,780 4,283 6,063 Lease make good The provision represents the present value of the estimated costs to make good the premises leased by the consolidated entity at the end of the respective lease terms. Movements in provisions Movements in each class of provision during the current financial year, other than employee benefits, are set  out below: Consolidated – 2018 Carrying amount at the start of the year Additional provisions recognised Additions through business combinations Exchange differences Unwinding of discount Carrying amount at the end of the year Lease make good $’000 4,283 328 252 45 53 4,961 75 ANNUAL REPORT 2018 Note 28. Non-current liabilities – Other financial liabilities Other financial liabilities Loan note Consolidated 2018 $’000 20,975 2,782 23,757 2017 $’000 11,755 – 11,755 Refer to note 35 for other information  on financial instruments. The other financial liabilities represent the fair value of  the consideration to acquire the non-controlling interests in  Sims Clinic Limited  and Tas IVF Pty Limited on the assumption that the put options held by the non-controlling interests are exercised and also the fair value of the contingent consideration arising from the acquisition of Fertilitesklinikkeb Trianglen  Aps. Loan note reflects the non-current portion of a loan owing to the vendors of Fertilitesklinikken Trianglen  Aps (Refer to note 42  for details). Note 29. Non-current liabilities – other payables Other payables Consolidated 2018 $’000 1,340 2017 $’000 1,327 76 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTH Note 30. Equity – issued capital Ordinary shares – fully paid Movements in ordinary share capital Details Balance Balance Settlement of partly paid shares Settlement of partly paid shares Share issued– exercise of options Balance Date 30 June 2017 30 June 2017 11 October 2017 17 April 2018 28 March 2018 30 June 2018 Consolidated 2018 Shares 80,389,938 2017 Shares 80,388,494 2018 $’000 242,251 2017 $’000 242,001 Shares 80,388,494 80,388,494 – – 1,444 80,389,938 Issue price $0.00 $0.00 $0.00 $’000 242,001 242,001 115 135 – 242,251 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. All shares on issue are fully paid apart from 1,919,869 shares which are partly paid. The 1,919,869 shares were issued at $4.71 per share and are unpaid up to the extent of $2.51 per share at 30 June 2018. Share buy-back There is no current on-market share buy-back. Capital risk management The consolidated entity’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain  an optimum capital structure to reduce the cost   of capital. Capital is regarded as total equity, as recognised in the statement  of financial position, plus net debt. Net debt is calculated as total  borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current parent entity’s share price at the time of the investment. 77 ANNUAL REPORT 2018Note 31. Equity – reserves Foreign currency translation reserve Cash flow hedges reserve Share-based payments reserve Put option business combination reserve Consolidated 2018 $’000 3,549 (372) 13,468 (13,808) 2,837 2017 $’000 501 (678) 12,586 (23,825) (11,416) Foreign currency translation reserve The reserve is used to recognise exchange differences arising from the translation  of the financial statements of foreign  operations to  Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Cash flow hedges reserve The reserve is used to recognise the effective portion  of the gain or loss of cash flow hedge instruments that is determined to be an   effective hedge. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and directors as part  of their remuneration, and  other parties as part of their compensation for services. Put option business combination reserve The reserve is used to recognise the impact of the non-controlling interest put options relating to the Sims Clinic Limited and Tas IVF Pty Limited acquisitions. The reduction is for the exercise of the first  put option in relation to both these entities. Movements in reserves Movements in each class of reserve during the current  and previous financial year are set  out below: Foreign currency translation reserve $’000 147 – 354 – 501 – 3,048 – – 3,549 Cash flow hedges reserve $’000 (1,232) 554 – – Share-based payments reserve $’000 12,146 – – 440 (678) 306 – – – (372) 12,586 – – 882 – 13,468 Put option business combination reserve $’000 (23,825) – – – (23,825) – – – 10,017 (13,808) Total $’000 (12,764) 554 354 440 (11,416) 306 3,048 882 10,017 2,837 Consolidated Balance at 1 July 2016 Revaluation – net Foreign currency translation Option expense Balance at 30 June 2017 Revaluation – net Foreign currency translation Option expense Put option exercise Balance at 30 June 2018 78 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 32. Equity – retained profits Retained profits at the beginning of the financial year Profit after income tax expense for the year Dividends paid (note 34) Retained profits at the end of the financial year Note 33. Equity – non-controlling interest Issued capital Reserves Retained profits Note 34. Equity – dividends Dividends Dividends paid during the financial year were as follows: Interim ordinary dividend for the year ended 30 June 2018 of 14.0 cents (2017: 13.0 cents) per fully paid ordinary share paid in April 2018 Final ordinary dividend for the year ended 30 June 2017 of 12.0 cents (2016: 15.0 cents) per fully paid ordinary share paid in October 2017 Consolidated 2018 $’000 18,127 30,753 (20,901) 27,979 2017 $’000 12,531 28,103 (22,507) 18,127 Consolidated 2018 $’000 1,842 5,423 3,218 10,483 2017 $’000 1,842 14,642 3,175 19,659 Consolidated 2018 $’000 2017 $’000 11,255 10,450 9,646 20,901 12,057 22,507 A final dividend of 12.00 cents per share, fully franked, will be paid on 12 October 2018 to the shareholders on  the register at  14 September 2018. Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated 2018 $’000 20,534 2017 $’000 16,880 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: • franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date • franking debits that will arise from the payment of dividends recognised as a liability at the reporting date • franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date 79 ANNUAL REPORT 2018Note 35. Financial risk management Financial risk management objectives The consolidated entity’s activities expose it  to a variety of financial risks: market risk (including foreign currency risk, price risk  and interest rate risk), credit risk and liquidity risk. The consolidated entity’s overall risk management program focuses on  the  unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the consolidated   entity. The consolidated entity uses derivative financial instruments such as forward foreign exchange contracts to hedge   certain risk exposures. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments. The consolidated entity uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ageing analysis for credit risk. Risk management is carried out by senior finance executives (‘finance’) under policies approved by  the Board of Directors (‘the  Board’). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures,  controls and risk limits. Finance identifies, evaluates and hedges financial risks within  the consolidated entity’s operating units. Finance   reports to the Board on a monthly basis. Market risk Foreign currency risk The group operates internationally and is exposed to foreign currency risk from various currency exposures, primarily with respect to the Euro, Singapore dollars and Danish Krone. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated   in a currency that is not the entity’s functional currency. The risk is measured using sensitivity  analysis and cash flow forecasting. Price risk The consolidated entity is exposed to changes in Commonwealth Government funding for the healthcare services the consolidated entity provides which may impact patient out-of-pocket expenses and thus demand. Interest rate risk The consolidated entity’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the consolidated entity to interest rate risk. Borrowings issued at fixed rates expose the consolidated entity  to fair value interest rate risk.  The policy is to maintain approximately 30% of borrowings at fixed rate using interest rate swaps to achieve this when  necessary. As at the reporting date, the consolidated entity had the following variable rate borrowings and interest rate swap contracts outstanding: Consolidated Bank loans Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 2018 Weighted average interest rate % 3.85% – 2017 Weighted average interest rate % 3.67% – Balance $’000 181,000 (50,000) 131,000 Balance $’000 154,000 (50,000) 104,000 80 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHAn analysis by remaining contractual maturities is shown  in the ‘liquidity and interest rate risk management’ section below. Consolidated – 2018 Bank loans Consolidated – 2017 Bank loans Basis points increase Basis points decrease Basis points change 100 Effect on profit after tax $’000 (917) Effect on equity $’000 (917) Basis points change (100) Effect on profit after tax $’000 917 Effect on equity $’000 917 Basis points increase Basis points decrease Basis points change 100 Effect on profit after tax $’000 (728) Effect on equity $’000 (728) Basis points change (100) Effect on profit after tax $’000 728 Effect on equity $’000 728 Credit risk Credit risk refers to the risk that a counterparty  will default on its contractual obligations resulting in  financial loss to the consolidated  entity. The consolidated entity has a strict code of credit, including obtaining agency  credit information, confirming references and  setting appropriate credit limits. The consolidated entity obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net  of any provisions for impairment  of those assets, as disclosed in the statement of financial position and notes to the financial statements. The consolidated entity  does  not hold any collateral. Receivables balances and ageing analysis are monitored on an on-going basis. In order to minimise the consolidated entity’s exposure to bad debts, processes are in place to send reminder notices, demands for repayment and ultimately to refer to debt collection agencies. Liquidity risk Vigilant liquidity risk management requires the consolidated entity to maintain  sufficient liquid assets (mainly cash and cash  equivalents) and available borrowing facilities to be able to pay debts as and when  they become due and payable. The consolidated entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by   continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements Unused borrowing facilities at the reporting date: Bank loans ( excluding capitalised borrowing costs) Working capital facilities Credit facilities expire in September 2019. Consolidated 2018 $’000 19,227 5,282 24,509 2017 $’000 46,436 4,852 51,288 81 ANNUAL REPORT 2018 Note 35. Financial risk management (continued) Remaining contractual maturities The following tables detail the consolidated entity’s remaining contractual maturity  for its financial instrument liabilities. The tables  have been drawn up based on the undiscounted cash  flows of financial liabilities based on the earliest date on which the financial  liabilities are required to be paid. The tables include both  interest and principal cash flows disclosed as remaining contractual  maturities and therefore these totals may  differ from their carrying amount in  the statement of financial position. Consolidated – 2018 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing – variable Bank loans Other financial liabilities Loan note Total non-derivatives Derivatives Derivative financial instruments Total derivatives Consolidated – 2017 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing – variable Bank loans Other financial liabilities Total non-derivatives Derivatives Derivative financial instruments Total derivatives Weighted average interest rate % – – 4.28% 3.85% 4.00% – Weighted average interest rate % – – 4.05% 3.67% – Between 1 and less than 2 years $’000 – – 182,848 – 898 183,746 107 107 Between 1 and less than 2 years $’000 – – 6,035 – 6,035 350 350 1 year or less $’000 10,341 14,127 7,393 – 461 32,322 420 420 1 year or less $’000 8,880 12,045 6,035 14,206 41,166 527 527 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – – 20,516 2,106 22,622 – – – – – – – – – – 10,341 14,127 190,241 20,516 3,465 238,690 527 527 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – 155,509 12,738 168,247 87 87 – – – – – – – 8,880 12,045 167,579 26,944 215,448 964 964 The cash flows in the maturity analysis above are not expected to occur significantly  earlier than contractually disclosed above. Fair value of financial instruments Unless otherwise stated, the carrying amounts of  financial instruments reflect their fair value. 82 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 36. Fair value measurement Fair value hierarchy The following tables detail the consolidated entity’s assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly  or indirectly Level 3: Unobservable inputs for the asset or liability Consolidated – 2018 Liabilities Derivative financial liabilities Other financial liabilities Total liabilities Consolidated – 2017 Liabilities Derivative financial liabilities Other financial liabilities Total liabilities Level 1 $’000 Level 2 $’000 – – – 527 – 527 Level 1 $’000 Level 2 $’000 – – – 964 – 964 Level 3 $’000 – 20,975 20,975 Level 3 $’000 – 25,799 25,799 Total $’000 527 20,975 21,502 Total $’000 964 25,799 26,763 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of other financial liabilities is estimated by  discounting the remaining contractual maturities at the current market   interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 Derivative financial instruments have been valued using quoted market rates. This valuation  technique maximises the use of  observable market data where it is available and relies as little as possible on  entity specific estimates. Other financial liabilities have   been valued using a forecast earnings model, discounted using specific borrowing rates. 83 ANNUAL REPORT 2018Note 36. Fair value measurement (continued) Fair value hierarchy (continued) Level 3 assets and liabilities Movements in level 3 assets and liabilities during the current  and previous financial year are set  out below: Consolidated Balance at 1 July 2016 Additions Foreign exchange impact Amounts paid during the period Interest on unwinding Fair value adjustment Balance at 30 June 2017 Additions Foreign exchange impact Amounts paid during the period Amounts paid in exercise of put option Interest on unwinding Fair value adjustment Balance at 30 June 2018 Contingent Consideration $’000 1,355 3,816 129 (826) 77 (529) Put Option $’000 24,130 – (103) – 1,067 (3,317) 4,022 8,817 223 (4,152) – 105 (198) 8,817 21,777 – 669 – (10,220) 823 (891) 12,158 Total $’000 25,485 3,816 26 (826) 1,144 (3,846) 25,799 8,817 892 (4,152) (10,220) 928 (1,089) 20,975 The unobservable inputs and sensitivity of level 3 assets and liabilities are as follows: Description Other financial liabilities Unobservable inputs Discount rate EBITDA Sensitivity a 1% change would increase/decrease the fair value by $132,789/($129,937) a 1% change would increase/decrease the fair value by $108,841/($108,026) Note 37. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below: Consolidated 2018 $ 3,153,600 190,418 7,553 294,995 3,646,566 2017 $ 2,622,706 199,237 (3,647) 15,565 2,833,861 Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments 84 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 38. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by  PricewaterhouseCoopers, the auditor of the  company, and its network firms: Audit services – PricewaterhouseCoopers Audit or review of the financial statements Other services – PricewaterhouseCoopers Due diligence Tax compliance services Non-statutory audits and reviews relating to acquisitions Audit services – network firms Audit or review of the financial statements Other services – network firms Tax services Other Consolidated 2018 $ 2017 $ 467,300 498,613 208,500 7,500 – 216,000 683,300 112,945 7,650 1,000 121,595 620,208 119,692 121,760 68,792 20,782 89,574 209,266 49,704 – 49,704 171,464 It is the consolidated entity’s policy to utilise appropriate accounting and consulting resource for other services which may include tax advice and due diligence reporting on acquisitions, and it  is the consolidated entity’s policy to seek competitive tenders for such   assignments as appropriate. 85 ANNUAL REPORT 2018Note 39. Contingent liabilities Claims The consolidated entity is currently involved in litigations which may result in future liabilities and legal fees up to an insurance excess of $25,000 per claim. The consolidated entity has disclaimed liability and is defending the actions. It is not practical to estimate the potential effect of these claims but advice indicates that any liability that may arise in the unlikely event that the claims are successful will not materially affect the financial position of the entity and it is expected that the claims will be covered by the consolidated   entity’s insurance policies. Guarantees Drawdowns of $4,718,000 (2017: $5,148,000) in the form of  financial guarantees have been made against the working capital facility.   Subject to the continued compliance with debt covenants, the bank facilities may be drawn at any time and have an average maturity of 1 year (2017: 2 years). Note 40. Commitments Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Consolidated 2018 $’000 2017 $’000 12,748 32,330 26,132 71,210 10,704 30,821 21,197 62,722 Operating lease commitments includes contracted amounts for various offices and medical centres under non-cancellable operating   leases expiring within 2 to 8 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Excess office space is sub-let  to third parties also under non-cancellable operating leases.   These leases have future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases of $286,874 (2017: $419,277). Capital Commitments The consolidated entity had $4,707,000 (FY17: $nil) in capital commitments for property, plant and equipment  as at 30 June 2018. 86 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTH Note 41. Related party transactions Parent entity Virtus Health Limited is the parent entity and ultimate controlling party. Subsidiaries Interests in subsidiaries are set out in note 44. Associates Interests in associates are set out in note 45. Key management personnel Disclosures relating to key management personnel are set out in note 37 and the remuneration report included in the directors’ report. Transactions with related parties The following transactions occurred with related parties: Other revenue: Rental income(i) Other transactions: Provider fees(ii) Consolidated 2018 $ 2017 $ 285,004 274,783 3,062,921 3,305,382 (i) The following key management personnel paid rent for the use of leased space in Virtus : Lyndon Hale, Peter Illingworth and David Molloy. (ii) The following key management personnel received provider fees for IVF services delivered to patients: Lyndon Hale, Peter Illingworth, David Molloy and William Watkins (30 June 2016: Lyndon Hale, Peter Illingworth, David Molloy and William Watkins). Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current receivables: Trade receivables from associates Other receivables Current payables: Other payables for provider fees Other payables for dividends Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Consolidated 2018 $ 2017 $ 675,245 11,062 975,757 14,959 377,048 – 320,024 900,000 87 ANNUAL REPORT 2018Note 42. Parent entity information Set out below is the supplementary information about the parent entity. Statement of comprehensive income Profit after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Net assets Equity Issued capital Share-based payments reserve Retained profits Total equity Parent 2018 $’000 26,669 26,669 2017 $’000 26,309 26,309 Parent 2018 $’000 41,642 293,750 6,992 8,341 285,409 242,251 7,485 35,673 285,409 2017 $’000 34,627 282,100 2,101 2,853 279,247 242,001 7,340 29,906 279,247 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2018 and 30 June 2017 apart from being a party to the deed of cross guarantee as detailed in note 46. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2018 and 30 June 2017. Capital commitments – property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at  30 June 2018 and 30 June 2017. Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 1, except for the following: • • • Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Investments in associates are accounted for at cost, less any impairment, in the parent entity. impairment of the investment. 88 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 43. Business combinations Fertilitesklinikken Trianglen Aps On the 28 June 2018, Virtus Health  Europe Limited acquired 100% of the ordinary share capital in Fertilitesklinikken  Trianglen Aps  (Trianglen), based in Copenhagen Denmark for an estimated consideration of $41,996,000. The values identified in relation to the   acquisition of the entity are provisional as at  30 June 2018. Cash and cash equivalents Trade receivables Property, plant and equipment Brand names Trade payables Other payables Deferred tax liability Employee benefits Other provisions Other liabilities Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid Contingent consideration Loan note Acquisition costs expensed to profit or loss Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: cash and cash equivalents acquired Less: contingent consideration Less: loan note Net cash used Fair value $’000 2,838 280 595 366 (168) (232) (87) (503) (540) (2,177) 372 41,624 41,996 30,000 8,817 3,179 41,996 177 41,996 (2,838) (8,817) (3,179) 27,162 The goodwill is attributable to the workforce and the expected profitability  of the acquired entity. Contingent consideration In the event Trianglen achieves the forecast normalised earnings before interest, tax, depreciation and amortisation (‘EBITDA’) for the Financial year ending 30 June 2020, then additional consideration of $8,817,000 will be payable. Virtus Health Europe Limited has the discretion to settle the total additional consideration payable in cash or a combination of ordinary shares of Virtus Health and cash during September 2020. The fair value of the consideration of $8,817,000 was estimated with reference to the expected EBITDA of Trianglen from management forecasts. Loan note Reflects a loan from the vendor to Virtus Health  Europe Limited of $3,179,000 with a coupon of 4% and repayable over four years. 89 ANNUAL REPORT 2018 Note 43. Business combinations (continued) Complete Fertility Limited On 1 April 2018, Virtus Health Europe Limited acquired 90%  of the ordinary share capital in  Complete Fertility Limited (CFL), based in  Southampton England. The consideration transferred amounted to $9,641,000. The values identified in  relation to the acquisition of  the entity are provisional as at 30 June 2018. Details of the acquisition are as follows: Cash and cash equivalents Trade receivables Plant and equipment Brand name Trade payables Other payables Deferred tax liability Other provisions Other liabilities Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Non-controlling interest Acquisition costs expensed to profit or loss Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: cash and cash equivalents acquired Less: Non-controlling interest Net cash used Fair value $’000 401 449 144 1,145 (90) (17) (218) (7) (277) 1,530 9,124 10,654 9,641 1,013 10,654 849 10,654 (401) (1,013) 9,240 The goodwill is attributable to the workforce and the expected profitability  of the acquired entity. Aagaard Fertilitetsklinik ApS (Aagaard) acquired in the prior financial year Aagaard did not achieve its full earn-out targets and hence only $4,152,000 of the contingent consideration of $4,350,000 was paid during 2018. The balance of $198,000 was reversed to profit and loss. 90 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTH Note 44. 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: Ownership interest Name IVF Finance Pty Limited IVFA Sub-Holdings Pty Ltd IVF Australia Pty Ltd Melbourne IVF Holdings Pty Ltd Melbourne I.V.F. Pty. Ltd. The Heptarchy Trust North Shore Specialist Day Hospital Pty Ltd Queensland Fertility Group Pty. Ltd. Spring Hill Specialist Day Hospital Pty Limited The QFG Day Theatres Unit Trust Hunter Fertility Pty Limited Hunter Fertility Unit Trust Bremiera Pty Limited Queensland Fertility Group Gold Coast Pty Ltd Gold Coast Obstetrics & Gynaecology Specialist Services Pty Ltd Mackay Specialist Day Hospital Pty Limited Maroubra Day Surgery Trust City East Specialist Day Hospital Pty Ltd Virtus Health Singapore Pte Ltd Virtus Health Europe Limited Virtus Health Ireland Limited SIMS Clinic Limited Xentra Pharm Limited IVF Sunshine Coast Limited Human Assisted Reproduction Ireland (HARI) Limited TAS IVF Pty Limited Virtus Andrology Laboratory Singapore Pte. Ltd Virtus Fertility Centre Singapore Pte Limited Virtus Health Specialist Diagnostics Pty Limited Lab Services Pty Limited Lab Services Unit Trust Aagaard Fertilitetsklinik Aps Complete Fertility Limited Fertilitesklinikken Trianglen Aps Principal place of business/ Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Singapore United Kingdom Ireland Ireland Ireland Australia Ireland Australia Singapore Singapore Australia Australia Australia Denmark United Kingdom Denmark 2018 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 85.00% 85.00% 100.00% 85.00% 85.00% 90.00% 90.00% 100.00% 100.00% 100.00% 100.00% 90.00% 100.00% 2017 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 70.00% 70.00% 100.00% 70.00% 70.00% 90.00% 90.00% 100.00% 100.00% 100.00% 100.00% – – 91 ANNUAL REPORT 2018Note 44. Interests in subsidiaries (continued) The consolidated financial statements incorporate the assets, liabilities and results of  the following subsidiaries with non-controlling  interests in accordance with the accounting policy described in note 1: Name Sims Clinic Limited and its controlled entities Tas IVF Pty Limited Principal place of business/Country of incorporation Ireland Australia Virtus Fertility Centre Singapore Pte Limited and its controlled entities Complete Fertility Limited United Kingdom Singapore Principal activities provision of healthcare services provision of healthcare services provision of healthcare services provision of healthcare services Parent Ownership interest 2018 % 85.00% Ownership interest 2017 % 70.00% Non-controlling interest Ownership interest 2018 % 15.00% Ownership interest 2017 % 30.00% 85.00% 70.00% 15.00% 30.00% 90.00% 90.00% 10.00% 10.00% 90.00% – 10.00% – Summarised financial information Set out below is the summarised financial information of  the non-controlling interests that are material to the consolidated entity.   The amounts disclosed are before inter-company eliminations. Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Summarised statement of comprehensive income Revenue Expenses Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Total comprehensive income Statement of cash flows Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Net decrease in cash and cash equivalents Other financial information Profit attributable to non-controlling interests Dividends paid to non-controlling interests Accumulated non-controlling interests at the end of reporting period 92 SIMS Clinic Limited 2018 $’000 2017 $’000 5,365 12,245 17,610 4,978 1,161 6,139 11,471 34,991 (29,580) 5,411 (680) 4,731 – 4,731 6,498 (293) (6,345) (140) 899 1,212 6,207 5,638 11,858 17,496 4,182 1,113 5,295 12,201 31,480 (26,187) 5,293 (673) 4,620 – 4,620 3,239 (307) (2,972) (40) 1,386 861 12,919 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHTransactions with non-controlling interests Dividends paid/payable to non-controlling interest Consolidated 2018 $’000 (1,212) 2017 $’000 (861) Note 45. Interests in associates Interests in associates are accounted for using the equity  method of accounting. Information relating to associates that  are material  to the consolidated entity are set out below: Principal place of business/ Country of incorporation Australia Australia Name Obstetrics & Gynaecological Imaging Australia Pty Ltd City West Specialist Day Hospital Pty Ltd Summarised financial information Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Summarised statement of comprehensive income Revenue Expenses Profit before income tax Other comprehensive income Total comprehensive income The above reflects 50% of the total assets, liabilities and comprehensive income of  the associate entities. Ownership interest 2018 % 50.00% 50.00% 2017 % 50.00% 50.00% 2018 $’000 2017 $’000 724 906 1,630 527 20 547 1,083 3,562 (2,992) 570 – 570 766 1,090 1,856 851 – 851 1,005 3,523 (3,037) 486 – 486 93 ANNUAL REPORT 2018Note 46. Deed of cross guarantee The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: Virtus Health Limited IVF Finance Pty Limited IVFA Sub-Holdings Pty Ltd IVF Australia Pty Ltd Melbourne IVF Holdings Pty Ltd Queensland Fertility Group Pty. Ltd. Virtus Health Specialist Diagnostics Pty Limited Lab Services Pty Limited By entering into the deed, the wholly-owned entities have been  relieved from the requirement to prepare audited financial statements   and directors’ report under Corporations Instrument 2016/785 issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Corporations Instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Virtus Health Limited, they also represent the ‘Extended Closed Group’. Set out below is a consolidated statement of comprehensive income and statement  of financial position of the ‘Closed Group’. Statement of comprehensive income Revenue Share of profits of associates accounted for using the equity method Trust distributions received Other income Fertility specialists, consumables and associated costs Employee benefits expense Depreciation and amortisation expense Occupancy expense Advertising and marketing Practice equipment expenses Professional and consulting fees Other expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Net change in the fair value of cash flow hedges taken to equity, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Equity – retained profits Retained profits at the beginning of the financial year Profit after income tax expense Dividends paid Retained profits at the end of the financial year 94 2018 $’000 125,439 570 22,835 2,151 (32,149) (48,263) (7,312) (7,895) (3,437) (942) (949) (6,240) (7,218) 36,590 (11,508) 2017 $’000 124,923 483 16,924 3,886 (32,589) (46,054) (6,855) (6,931) (2,438) (939) (1,137) (5,700) (7,321) 36,252 (10,880) 25,082 25,372 306 306 25,388 2018 $’000 25,327 25,082 (20,901) 29,508 554 554 25,926 2017 $’000 22,462 25,372 (22,507) 25,327 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHStatement of financial position Current assets Cash and cash equivalents Trade and other receivables Income tax refund due Other Non-current assets Investments accounted for using the equity method Other financial assets Property, plant and equipment Intangibles Deferred tax Other Total assets Current liabilities Trade and other payables Derivative financial instruments Income tax Provisions Other financial liabilities Other Non-current liabilities Borrowings Derivative financial instruments Provisions Other financial liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity 2018 $’000 6,189 18,840 – 1,782 26,811 1,489 221,776 22,002 206,615 3,530 77 455,489 482,300 8,776 420 3,058 2,661 – 5,005 19,920 180,743 107 2,941 3,695 187,486 207,406 274,894 242,251 3,135 29,508 274,894 2017 $’000 11,246 25,237 327 1,679 38,489 1,489 181,090 15,874 207,426 2,992 76 408,947 447,436 7,492 527 – 2,429 2,764 4,613 17,825 153,536 437 2,810 3,343 160,126 177,951 269,485 242,001 2,157 25,327 269,485 95 ANNUAL REPORT 2018Note 47. Events after the reporting period No matter or circumstance has arisen since 30 June 2018 that has significantly  affected, or may significantly affect the consolidated  entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in  future financial years. Note 48. Reconciliation of profit after income tax to net  cash from operating activities  Consolidated 2018 $’000 32,009 2017 $’000 30,004 12,496 – 881 207 (1,089) (1,029) – 981 (592) 6 (941) 5,043 3,756 (428) 3,667 54,967 12,165 1,870 440 207 (3,846) 205 10 1,202 (1,545) (119) 1,762 (3,181) 366 16 (850) 38,706 Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Impairment of goodwill Share-based payments Amortisation of bank facility fees Net fair value gain on other financial liabilities Other non-cash items Net (gain)/loss in disposal of non-current assets Interest on other financial liabilities – non-cash interest Change in operating assets and liabilities: Increase in trade and other receivables Decrease/(increase) in inventories Decrease/(increase) in deferred tax assets Increase/(decrease) in trade and other payables Increase in provision for income tax Increase/(decrease) in other provisions Increase/(decrease) in other operating liabilities Net cash from operating activities 96 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHNote 49. Changes in liabilities arising from financing activities Consolidated Balance at 1 July 2016 Net cash from financing activities Repayment of borrowings Proceeds from borrowings Exchange differences Balance at 30 June 2017 Net cash used in financing activities Repayment of borrowings Proceeds from borrowings Exchange differences Balance at 30 June 2018 Note 50. Earnings per share Profit after income tax Non-controlling interest Profit after income tax attributable to the owners of Virtus Health Limited Add: interest savings on conversion of options Profit after income tax attributable to the owners of Virtus Health Limited  used in calculating diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Options over ordinary shares Estimated Issuable shares Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share Cash/Bank overdraft $’000 22,215 5,166 – – (44) 27,337 (6,045) – – 421 21,713 Borrowings $’000 (147,537) – 5,000 (11,000) – (153,537) – 6,000 (33,000) – (180,537) Total $’000 (125,322) 5,166 5,000 (11,000) (44) (126,200) (6,045) 6,000 (33,000) 421 (158,824) Consolidated 2018 $’000 32,009 (1,256) 30,753 97 2017 $’000 30,004 (1,901) 28,103 89 30,850 28,192 Number 80,388,866 Number 80,304,581 828,823 – 81,217,689 567,226 165,297 81,037,104 Cents 38.26 37.98 Cents 35.00 34.79 97 ANNUAL REPORT 2018Note 51. Share-based payments Virtus Health Limited Executive Option Plan and Specialist Option Plan (‘Virtus Health Limited Share Option Plan’) The Virtus Health Limited Share Option Plan was adopted by the Board on 11 June 2013. The Virtus Health Limited Share Option Plan was established to reward, retain and motivate fertility specialists and senior executives. Participation in the Virtus Health Limited Share Option Plan is at the Board’s discretion and no individual has a contracted right to participate in the Virtus Health Limited Share Option Plan or to receive any guaranteed benefits. Further details are provided in  the remuneration report. Set out below are summaries of options and performance rights granted under the plans: Expiry date 21/01/2024 21/01/2024 03/10/2024 10/11/2024 13/05/2025 13/05/2025 13/05/2025 13/05/2025 13/05/2025 10/11/2025 21/08/2025 28/10/2025 16/12/2025 16/12/2025 16/12/2025 21/09/2026 21/09/2026 11/11/2026 21/06/2027 24/10/2027 24/10/2027 24/10/2027 24/10/2027 22/11/2027 22/11/2027 Exercise or base price $5.68 $6.40 $8.57 $0.00 $7.16 $7.53 $7.94 $7.94 $8.01 $0.00 $5.67 $5.01 $6.07 $6.17 $6.28 $8.05 $8.05 $0.00 $5.35 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Balance at the start of the year 8,808 63,573 106,536 55,095 3,686 912 794 343 262 175,526 7,434 16,406 6,197 5,509 4,776 8,616 4,332 99,491 3,129 – – – – – – 571,425 Exercised/ cancelled/ other – – – – – – – – – – – (1,444) – – – – – – – – – – – – – (1,444) Expired/ forfeited/ other (8,808) (34,125) (35,507) (55,095) (929) – – – (262) (87,763) – (3,471) (6,197) – (4,776) – – – – – – – – – – (236,933) Balance at the end of the year – 29,448 71,029 – 2,757 912 794 343 – 87,763 7,434 11,491 – 5,509 – 8,616 4,332 99,491 3,129 171,199 72,580 116,128 43,548 229,391 136,508 1,102,402 Granted – – – – – – – – – – – – – – – – – – – 171,199 72,580 116,128 43,548 229,391 136,508 769,354 2018 Effective grant date 01/07/2013 01/07/2013 03/10/2014 10/11/2014 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 10/11/2015 21/08/2015 28/10/2015 16/12/2015 16/12/2015 16/12/2015 21/09/2016 21/09/2016 11/11/2016 21/06/2017 24/10/2017 24/10/2017 24/10/2017 24/10/2017 22/11/2017 22/11/2017 98 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTH2017 Grant date 11/06/2013 01/07/2013 01/07/2013 01/07/2013 03/10/2014 10/11/2014 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 10/11/2015 21/08/2015 28/10/2015 16/12/2015 16/12/2015 16/12/2015 21/09/2016 21/09/2016 11/11/2016 21/06/2017 Expiry date 11/06/2018 27/01/2017 21/01/2024 21/01/2024 03/10/2024 10/11/2024 13/05/2025 13/05/2025 13/05/2025 13/05/2025 13/05/2025 10/11/2025 21/08/2025 28/10/2025 16/12/2025 16/12/2025 16/12/2025 21/09/2026 21/09/2026 11/11/2026 21/06/2027 Exercise or base price $5.68 $5.68 $5.68 $6.40 $8.57 $0.00 $7.16 $7.53 $7.94 $7.94 $8.01 $0.00 $5.67 $5.01 $6.07 $6.17 $6.28 $8.05 $8.05 $0.00 $5.35 Balance at the start of the year 177,788 263,000 22,568 96,238 88,948 126,457 7,372 912 794 343 262 201,111 7,434 16,406 6,197 5,509 4,776 – – – – 1,026,115 Granted – – – – – – – – – – – – – – – – – 8,616 4,332 99,491 3,129 115,568 Exercised (177,788) (263,000) (4,800) (6,968) – – – – – – – – – – – – – – – – – (452,556) Expired/ forfeited/ other – – (8,960) (25,697) 17,588 (71,362) (3,686) – – – – (25,585) – – – – – – – – – (117,702) Balance at the end of the year – – 8,808 63,573 106,536 55,095 3,686 912 794 343 262 175,526 7,434 16,406 6,197 5,509 4,776 8,616 4,332 99,491 3,129 571,425 The weighted average exercise price is $0.99 (2017: $3.08). The weighted average remaining contractual life of  options and performance rights outstanding at the end of the financial year was   8.7 years (2017: 7.9 years). For the options and performance rights granted during the current financial year, the valuation model inputs used to determine the   fair value at the grant date, are as follows: Grant date 24/10/2017 24/10/2017 24/10/2017 24/10/2017 22/11/2017 22/11/2017 Expiry date 24/10/2027 24/10/2027 24/10/2027 24/10/2027 22/11/2027 22/11/2027 Share price at grant date $5.52 $5.52 $5.52 $5.52 $5.28 $5.28 Exercise price or base price $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Expected volatility 27.00% 27.00% 27.00% 27.00% 27.00% 27.00% Dividend yield 4.33% 4.33% 4.33% 4.33% 4.33% 4.33% Risk-free interest rate 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% Fair value at grant date $3.79 $3.92 $3.92 $3.92 $3.99 $3.99 99 ANNUAL REPORT 2018Note 51. Share-based payments (continued) Grants of options and performance rights – fertility specialists Details of the grant of options and performance rights to fertility specialists is included in Section H of the remuneration report which forms part of the Directors’ report. Vesting Conditions Options and performance rights will vest and become exercisable to the extent that the applicable performance, service, or other vesting conditions specified at the time of the grant are satisfied. Vesting conditions may  include conditions relating to continuous  employment or service, the individual performance of the participant in the Plan or the company’s performance. The Board has the discretion to set the terms and conditions on which it will offer options and performance rights under the Plan, including the vesting conditions and different terms and conditions which apply to different participants in the Plan. Upon the satisfaction of the vesting conditions and any other conditions to exercise, each option and performance right will be exercisable into a variable number of shares based on the terms of issue of the options or performance rights. 100 NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2018VIRTUS HEALTHIn the directors’ opinion: • the attached financial statements and notes comply with  the Corporations Act 2001, the Accounting Standards, the   Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and notes comply with  International Financial Reporting Standards as issued by  the  International Accounting Standards Board as described in note 1 to the financial statements; • the attached financial statements and notes give a true and fair view of the consolidated entity’s financial position  as at  30 June 2018 and of its performance for the financial year ended on  that date; • there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and • at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group will be able to meet any obligations or liabilities to which they are, or may become liable, subject by virtue of the deed of cross guarantee described in note 46 to the financial statements. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors Peter Macourt Chairman 21 August 2018 Sydney 101 DIRECTORS’ DECLARATIONANNUAL REPORT 2018Independent auditor’s report to the members of Virtus Health Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Virtus Health Limited (the Company) and its controlled entities (together the Group), is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial performance for the year then ended b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: • • • • • • the consolidated statement of financial position as at 30 June 2018 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 102 102 INDEPENDENT AUDITOR’S REPORTto the members of Virtus Health LimitedVIRTUS HEALTHOur audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality • For the purpose of our audit we applied an overall Group materiality of $2.2 million which represents approximately 5% of the Group’s profit before tax. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose Group profit before tax because, in our view, it is the key measure used by members to assess the performance of the Group. • We selected 5% based on our professional judgement, noting that it is within the range of commonly acceptable quantitative profit related thresholds. Audit scope • Our audit focused on: - - subjective judgements made by the Group; and significant accounting estimates involving assumptions and inherently uncertain future events. • The Group comprises businesses in New South Wales, Queensland, Victoria, Tasmania, Denmark, United Kingdom, Ireland and Singapore, with the most financially significant operations being those in Australia and Ireland. Accordingly we structured our audit as follows: - The Group audit was led by our team from the Australian PwC firm (“Group audit team”). The Group audit team conducted an audit of the special purpose financial information of selected Australian businesses used to prepare the consolidated financial statements. - The Component auditor in Ireland, under instructions from the Group audit team, performed an audit of the special purpose financial information for Virtus Health Ireland used to prepare the consolidated financial statements. - The Group audit team decided on their level of involvement needed in the work performed by the component auditor, to be satisfied that sufficient appropriate evidence had been obtained for the purpose of our opinion. Review of the work undertaken by the component team and regular dialogue between the 103 103 ANNUAL REPORT 2018teams up to the reporting date supplemented the specific direct written instruction provided by PwC Australia and augmented the reporting provided by the component auditor. - The Group audit team undertook the remaining audit procedures, including over significant financial statement items controlled at the Group level, the Group consolidation and the audit of the financial report and remuneration report. - The combination of all these procedures provided us with sufficient and appropriate audit evidence to express an opinion on the Group’s financial report as a whole. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit Committee. Key audit matter How our audit addressed the key audit matter Estimated recoverable amount of goodwill assets (Refer to notes 2 and 15) Goodwill of $453 million is recognised on the consolidated statement of financial position. Under Australian Accounting Standards, the Group is required to test the goodwill annually for impairment, irrespective of whether there are indicators of impairment. This assessment is inherently complex and judgemental. It requires judgement by the Group in forecasting the operational cash flows of its cash generating units, and determining discount rates and terminal value growth rates to be used in the discounted cash flow models used to assess impairment (the models). The recoverable amount of goodwill was a key audit matter given the: - - financial significance of the intangible assets to the consolidated statement of financial position; and judgement applied by the Group in completing the impairment assessment. We focused our efforts on developing an understanding and testing the overall calculation and methodology of the Group’s impairment assessment, including identification of the cash generating units of the Group for the purposes of impairment testing, and the attribution of net assets, revenues and costs to those units. In obtaining sufficient audit evidence, our procedures included, amongst others: - - - - - assessing the cash flow forecasts included in the models with reference to actual historical earnings; testing the mathematical calculations within the models; assessing the terminal value growth rates and discount rates applied in the models by comparing to external information sources; performing sensitivity analyses over the key assumptions used in the models; and assessing the related financial statement disclosures for consistency with Australian Accounting Standards requirements. 104 104 INDEPENDENT AUDITOR’S REPORTto the members of Virtus Health LimitedVIRTUS HEALTHKey audit matter How our audit addressed the key audit matter Accounting for financial liabilities relating to put options (Refer to notes 2, 6, 28 and 36) Financial liabilities of $12.2m in respect of the put option arrangements exercisable in 2019 relating to the acquisitions of the SIMS Clinic Limited and TasIVF Pty Ltd are recognised on the consolidated statement of financial position. The financial liabilities are based upon a multiple of earnings before interest, tax, depreciation and amortisation. The Group’s re-assessment of the fair value of the put options reduced the associated liabilities by $0.9 million and resulted in a fair value gain of $0.9 million being recognised in other income. The accounting for these financial liabilities was assessed as a key audit matter given: - - the financial significance of the liability to the statement of financial position; and the judgement applied by the Group in assessing the assumptions deriving the liabilities. Accounting for financial liabilities relating to put options (Refer to notes 2, 6, 28 and note 36) Our procedures included evaluating the analysis conducted by the Group for judgements made in respect of the ultimate amounts expected to be paid in respect of the put option arrangements. In obtaining sufficient audit evidence, our procedures included, amongst others: - - - - - - reading the agreed underlying terms of the option arrangements and checking that the basis and composition of the liabilities recognised was consistent with the accounting principles applied to derive the liabilities; assessing the liability valuation models and the process by which they were developed; compared current year trading performance to the forecasted performance of the businesses; tested the mathematical accuracy of the calculations; agreed amounts settled in the period to bank statements; and assessing the appropriateness of the Group’s disclosure in the financial report in light of the requirements of the Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Directors’ report, the Chairman’s Statement, the Chief Executive’s Overview, the Corporate Governance Statement and the Corporate directory. We expect the remaining other information to be made available to us after the date of this auditor's report, including the Shareholder Information. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or 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. 105 105 ANNUAL REPORT 2018When we read the other information not yet received as identified above, 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 to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters 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 has 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 aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 23 to 44 of the Directors’ report for the year ended 30 June 2018. In our opinion, the remuneration report of Virtus Health Limited, for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001. 106 106 INDEPENDENT AUDITOR’S REPORTto the members of Virtus Health LimitedVIRTUS HEALTHResponsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Mark Dow Partner Sydney 21 August 2018 107 107 ANNUAL REPORT 2018The shareholder information set out below was applicable as at 14 September 2018. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Size of Holding 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Distribution of Options The distribution of unquoted options on issue are: Size of Holding 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Number of Shareholders 70 306 680 3,698 4,388 9,142 Ordinary Shares 55,996,278 7,939,792 5,078,918 9,126,271 2,248,679 80,389,938 % of Issued Capital 69.7 9.9 6.3 11.3 2.8 100.0 Number of Holders 2 32 4 12 7 57 Unlisted Options 276,570 758,851 27,353 35,278 4,350 1,102,402 % of Issued Capital 25.1 68.8 2.5 3.2 0.4 100.0 108 SHAREHOLDER INFORMATIONfor the year ended 30 June 2018VIRTUS HEALTHEquity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Number of fully paid Ordinary Shares % of Issued Capital 1 2 3 4 5 6 7 8 9 10 11 12 13 Merlon Capital Partners Dimensional Fund Advisors Montgomery Investment Mgt NovaPort Capital Auscap Asset Mgt BlackRock Investment Mgt - Index Vinva Investment Mgt Norges Bank Investment Mgt Selector Funds Mgt Acadian Asset Mgt (Australia) Realindex Investments Vanguard Group Vanguard Investments Australia 14 JPMorgan Securities Australia 15 16 17 18 19 Allan Gray Investment Mgt Mr Lyndon G Hale Omega Global Investors Segall Bryant Hamill Investment Counsel Mr Francis Quinn 20 Arrowstreet Capital Total 4,681,339 3,577,415 3,314,612 3,182,612 2,635,000 2,051,404 2,007,143 1,903,935 1,562,219 1,546,753 1,410,744 1,332,867 1,201,102 1,042,807 893,616 823,694 802,151 696,919 684,663 650,557 36,001,552 5.8 4.5 4.1 4.0 3.3 2.6 2.5 2.4 1.9 1.9 1.8 1.7 1.5 1.3 1.1 1.0 1.0 0.9 0.9 0.8 44.8 109 ANNUAL REPORT 2018Unquoted equity securities There are no unquoted equity securities. Substantial holders The names of the Substantial Shareholders listed in the Company’s Register as at 14 September 2018: Merlon Capital Partners Voting rights The voting rights attached to ordinary shares are set out below: Number of Ordinary Fully Paid Shares 4,681,339 % of Issued Capital 5.8 Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 8,359,571 shares are held under Escrow arrangements with variable release dates linked to the age and retirement dates of the fertility specialists. There are no other classes of  equity securities. Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 21 August 2018 and can be found at www.virtushealth.com.au/corporategovernance 110 SHAREHOLDER INFORMATIONfor the year ended 30 June 2018VIRTUS HEALTHTerm Meaning AH (Assisted Hatching) The procedure in which the outer layer of the embryo (called the zona) is thinned by a laser to help the embryo implant more easily. Andrology Andrology is a sub-specialty in urology that is devoted to problems concerning the male reproductive system, male urology and male infertility. Assisted Reproductive Services / Assisted Reproductive Technology (ART) A collective term for fertility treatments. Treatments that involve the application of laboratory or clinical techniques to gametes and/or embryos for the purpose of  reproduction. Common treatments include IVF Cycles, frozen embryo transfers, cryostorage of frozen embryos and intra-uterine insemination. Blastocyst Cytogenetics The term for an embryo five days after fertilisation which has now developed a special shape  with different parts identifiable and a fluid-filled cavity. Cytogenetics is a branch of genetics that focuses on the microscopic analysis of chromosomes in individual cells. Donor insemination The use of sperm from a male donor in order to achieve a pregnancy. Egg collection The stage of an IVF treatment cycle where the woman’s eggs are collected under vaginal ultrasound. Embryo Once the egg has joined with the sperm it is called an embryo. Embryo Transfer (ET) The stage of an IVF treatment cycle where the embryo is transferred back to the woman’s uterus via a fine catheter. EMSN Endocrinology hCG The Australian Government’s Extended Medicare Safety Net. Endocrinology is a branch of biology and medicine dealing with the endocrine system, its diseases, and hormones, including hormones that relate to the reproductive system. The hormone that is produced by the embryo and is measured in a pregnancy test. Injections of hCG can be used to trigger maturation of the egg followed by ovulation. Injections of hCG may also be used to maintain hormone levels in the second half (luteal phase) of the cycle. ICSI (Intracytoplasmic Sperm Injection) The fertility technique where a single sperm is selected and directly injected into an egg. High  Magnification ICSI uses extremely high magnification to help sperm selection for specific  patients. Implantation The embedding of the embryo in the lining of the uterus 6-7 days after fertilisation. Intra-uterine Insemination (IUI) Treatment that involves inserting the partner’s concentrated semen through the neck of the womb into the uterus itself close to the time of ovulation. IVF (In Vitro Fertilisation) The procedure, by which an egg and sperm are joined together outside the body, in a specialised laboratory. The fertilised egg (embryo) is allowed to grow in a protected environment for some days before being placed back (transferred) into the uterus. MBS The Commonwealth Government’s Medicare Benefits Schedule. Medicare Levy Surcharge Levy on payers of Australian tax who do not have private health insurance with hospital cover and who earn above a certain income. 111 GLOSSARY OF TERMSANNUAL REPORT 2018Term Meaning National Association of Testing Authorities (NATA) Authority responsible for accreditation of laboratories, inspection bodies, calibration services, producers of certified reference materials and proficiency testing scheme  providers throughout Australia. NIPT Oocyte OPU Non-Invasive Prenatal Testing (NIPT), available for women who are at least 9 weeks pregnant, analyses the baby’s DNA within the mother’s blood sample for certain chromosome conditions that could affect the baby’s health. The fully mature egg produced from the ovary each month. Oocyte Pick Up Ovarian Hyperstimulation Syndrome (OHSS) A condition where women over-respond to the fertility drugs and can develop severe fluid  retention and abdominal swelling. Pre-implantation Genetic Diagnosis (PGD/PGT) Pre-implantation Genetic Screening (PGS) Testing the genetic makeup of the embryo before it is transferred back into the woman. Screening all 24 chromosomes in a developing embryo prior to implantation in an IVF cycle. 112 GLOSSARY OF TERMSVIRTUS HEALTHDirectors Peter Macourt – Chairman Susan Channon Lyndon Hale Peter Turner Sonia Petering Greg Couttas Company secretary Glenn Powers Notice of annual general meeting The details of the annual general meeting of Virtus Health Limited are: Wednesday, 21 November 2018 at the Hilton Hotel Sydney at 2pm 488 George Street NSW 2000 Registered office Level 3 176 Pacific Highway Greenwich NSW 2065 Phone: (02) 9425 1722 Fax: (02) 9425 1633 Principal place of business Level 3 176 Pacific Highway Greenwich NSW 2065 Share register Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Phone: 1300 554 474 Auditor PricewaterhouseCoopers One International Towers Sydney Watermans Quay, Barangaroo NSW 2000 Solicitors Minter Ellison Governor Macquarie Tower 1 Farrer Place Sydney NSW 2000 Bankers Westpac Banking Corporation Level 3, 275 Kent Street, Sydney NSW 2000 Commonwealth Bank of Australia Ground floor, Tower 1,  201 Sussex Street Sydney NSW 2000 Siemens Financial Services Inc 170 Wood Avenue, South Iselin New Jersey 08830, United States of America National Australia Bank Level 19, NAB House, 255 George Street, Sydney NSW 2000 HSBC Bank Level 36, Tower 1, International Towers 100 Barangaroo Avenue, Sydney NSW 2000 Australia and New Zealand Banking Group Limited 242 Pitt Street, Sydney NSW 2000 Stock exchange listing Virtus Health Limited shares are listed on the Australian Securities Exchange (ASX code: VRT) Website www.virtushealth.com.au Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 21 August 2018 and can be found at http://virtushealth.com.au/about-us/corporate-governance CORPORATE DIRECTORYANNUAL REPORT 2018

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