MedaPhor Group plc

("MedaPhor" or the "Group" or the "Company")

 

Unaudited Preliminary Results

 

MedaPhor Group plc (AIM: MED), the intelligent ultrasound software and simulation company, announces its preliminary results for the year ended 31 December 2017, a pivotal year where the Company expanded into the larger clinical ultrasound software market.

 

Financial highlights

•      Revenues increased 27% to £4.2m (2016: £3.3m)

-      North America sales double to £1.7m

-      Rest of World sales up 44% to £1.8m, with 83% growth for sales into China

•      Raised £5.4m net of costs by way of placing of shares

•      Year-end cash at £4.3m (2016: £1.8m)

 

Operational highlights

•      Acquired Intelligent Ultrasound Limited bringing artificial intelligence expertise to the Group

•      Won UK Government grant of £0.5m for NeedleGuide development

 

Post year-end events

•      First pilot of artificial intelligence-based software in UK hospital

•      Commenced NeedleGuide development

•      Launched Bodyworks Eve, our third simulator platform, aimed at the Emergency Medicine market

 

Commenting on the results, Riccardo Pigliucci, Chairman of MedaPhor said:

"2017 has been an important year for the Group. We had encouraging growth in a number of important simulation markets and the acquisition of Intelligent Ultrasound and their artificial intelligence technology and know-how has expanded our business into machine learning software that has the potential to support and guide sonographers and doctors undertaking ultrasound scanning and clinical needling. We look forward to the year ahead with considerable enthusiasm."

 

This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulations which came into effect on 3 July 2016.

 

A copy of this announcement is available on the Company's website: www.investors.medaphor.com

 

Enquiries:

 

MedaPhor Group plc		www.investors.medaphor.com
Stuart Gall, CEO		Tel: +44 (0)29 2075 6534
Cenkos Securities		Tel:  +44 (0)20 7397 8900
Camilla Hume/Bobbie Hilliam ( Nominated Advisor )
Michael Johnson / Julian Morse (Corporate Broking)
Walbrook PR	Tel: +44 (0)20 7933 8780 or [email protected]
Paul McManus / Anna Dunphy	Mob: +44 (0)7980 541 893 / Mob: +44 (0)7876 741 001

 

About MedaPhor ( www.investors.medaphor.com )

 

MedaPhor (AIM: MED), the intelligent ultrasound software and simulation company, develops artificial intelligence-based clinical image analysis software tools, augmented reality-based needle guidance software and advanced hi-fidelity haptic and manikin-based training simulators for medical practitioners.

 
Based in Cardiff and Oxford in the UK and Atlanta in the US and Hong Kong in Asia, MedaPhor operates two divisions:

Intelligent Ultrasound Simulation Division

 

Focuses on hi-fidelity ultrasound education and training through simulation.  Its three main products are the ScanTrainer OBGYN and General Medical simulator training platform, the HeartWorks echocardiography simulator platform and the BodyWorks Eve Point of Care and Emergency Medicine Simulator.  Over 500 MedaPhor simulators have been sold to over 300 medical institutions in over 30 countries around the world.

Intelligent Ultrasound Clinical Division

 

Focuses on augmented reality and deep-learning based algorithms to make ultrasound machines smarter and more accessible. Products in development include ScanNav which uses machine-learning based algorithms to automatically identify and grade ultrasound images to provide scan assessment and audit of obstetric scanning. NeedleGuide   aims to simplify ultrasound-guided needling by using deep learning and augmented reality to provide the user with pathway guidance and automated tracking for a range of medical procedures.

 

Some products in the pipeline may require US FDA approval, as such this material should be considered informational only and does not constitute an offer to sell, or infer claims or benefits.

 

 

CHAIRMAN'S STATEMENT

 

I am pleased to present MedaPhor's results for the year ended 31 December 2017.

 

This has been a pivotal year for the Group: with the important fund raising and acquisition of Intelligent Ultrasound (IUL) that is enabling our expansion into the new area of clinical ultrasound image analysis using artificial intelligence; the successful integration of HeartWorks into the product range; the growth of sales in the key market of China; the settlement of the legal action in the US; and the recovery of our simulator sales in the key market of North America.

 

Financial performance

Summary financial results from continuing operations were:

 

	Unaudited 2017	Audited 2016
	£	£
Revenue	4,180,630	3,286,147
Gross profit	2,522,865	2,112,082
Gross margin	60%	64%
Other income	28,225	-
Administrative expenses excluding exceptional costs	(5,228,211)	(3,897,652)
Operating loss before tax and exceptional items	(2,677,121)	(1,785,570)
Exceptional administrative items	(2,860,774)	(698,435)
Loss after exceptional items	(5,537,895)	(2,484,005)
Finance costs	(7,833)	(3,341)
Loss before tax	(5,545,728)	(2,487,346)
Income tax credit	127,609	73,201
Loss after tax	(5,418,119)	(2,414,145)
Cash at bank	4,250,198	1,765,863

 

Revenues increased by 27% to £4.2m (2016: £3.3m) and benefited from a full year's contribution from sales of HeartWorks, which was added to the Group's range of ultrasound training simulators with the acquisition of Inventive Medical Limited (IML) in August 2016. While the UK continued to suffer from NHS budgetary restraints, a number of markets showed encouraging growth, particularly North America and China, and we will look to continue to develop these markets in 2018.

 

The loss for the year, before tax and exceptional items, was £2.7m (2016: £1.8m) and reflected the fact that administrative expenses, excluding exceptional items, increased by £1.3m largely because of increased amortisation of intangibles and the consolidation of 12 months of IML's overheads versus 5 months last year and the addition of 3 months of post-acquisition overheads for IUL.

 

Exceptional items of £2.9m comprise:

·      an impairment charge of £3.3m. The Company is required under International Accounting Standard 36 - Impairment of Assets (IAS 36) to test the carrying value of any goodwill for impairment annually.  As the majority of the projected net revenues in the Group's development pipeline extend out beyond the limit allowed by this Standard, the Directors have concluded that the Company should record this impairment charge, which equals the total goodwill which arose on these acquisitions;

·      acquisition costs relating to the purchase of Intelligent Ultrasound Limited (IUL) (see Key Events below) of £0.2m; and

·      a credit of £0.6m in respect of a fair value adjustment on the settlement of contingent consideration in 2017 relating to the acquisition of IML in the prior year.  

 

 

 

 

 

 

 

 

 

Key events

In October 2017 we completed the acquisition of IUL, an artificial intelligence based deep learning company that was spun out of the University of Oxford.  At the same time we raised £5.4m of funds net of costs from new and existing shareholders with the placing of 44,125,324 new ordinary shares in the Company.

 

By the year end we had completed the integration of IUL and re-organised the Group into two divisions - Simulation, based in Cardiff, and Clinical, based in Oxford. As well as working on the Group's new deep learning software for ultrasound image analysis (ScanNav), the Clinical Division will also develop the new augmented reality-based ultrasound needle guidance software (NeedleGuide).  This development was bolstered by winning an Innovate UK Digital Healthcare grant award announced in November 2017.  In February 2018 we announced the commencement of the first pilot of the ScanNav ultrasound image analysis software in St George's Hospital NHS Trust in London. Working with this expert group of sonographers will help shape the development of this new technology. We also announced the launch of our new BodyWorks Eve simulator platform, an ultra-realistic manikin-based simulator to train medical professionals practising Point-of-Care Ultrasound (PoCUS) across emergency medicine and critical care.

 

Summary

2017 has been an important year for the Group and I would like to thank all our shareholders for their continued support, as well as extending the Board's gratitude to all our staff and customers around the world.

 

We had encouraging growth in a number of important simulation markets although the UK market is proving difficult to predict.  We now therefore expect our simulation business to grow at rates similar to those achieved in previous years.  The acquisition of IUL and their artificial intelligence technology and know-how has expanded our business into machine learning software. Although this AI software is not expected to provide material revenue in the current year, the Board believes that it has the potential to generate future revenues through supporting and guiding sonographers and doctors undertaking ultrasound scanning and clinical needling.  The development work required will need further funding during the next 12 months and the Group intends to pursue a number of fund raising options in the second half of 2018. As such the Board has a reasonable expectation that the Group will be able to continue to be solvent as we expand into these new and exciting artificial intelligence markets.

 

We look forward to the year ahead with considerable enthusiasm.

 

Riccardo Pigliucci

Chairman

20 March 2018

 

 

STRATEGIC REPORT - OPERATIONS

 

2017 has been a year of transition in which we took the significant step of expanding our business from ultrasound simulation-based training into the larger clinical ultrasound software market.

 

There are approximately 50 million medical professionals in the world, yet it is estimated that fewer than 2% of these have the ability to use ultrasound, despite it being one of the fastest, cheapest and safest imaging modalities available in medicine.

 

However, it's a dif?cult skill to learn and requires a high level of on-going competence and we believe this is why ultrasound is predominantly carried out only by specialist practitioners.

 

Although there is a growing market for cheaper, more portable ultrasound machines, we believe that this alone is not suf?cient to open up the potential for ultrasound to become a mass-market diagnostic tool that can also be used by unskilled medical practitioners. To achieve this, ultrasound needs to become simpler to use by making ultrasound machines 'smarter', supporting users both in their scanning and with automated decision-making. This will involve integrating image analysis using Arti?cial Intelligence (AI).

 

Our expansion into clinical ultrasound software demonstrates our belief that this technology has the potential to support, guide and speed up ultrasound scanning to make ultrasound accessible to more medical professionals. The technology embraces artificial intelligence and augmented reality and the Group aims to develop products and services that can take advantage of these technologies to open up new global ultrasound related imaging markets, whilst continuing to grow its high-fidelity simulation training markets for ultrasound specialists.

 

Simulation Division

 

Based in Cardiff (UK), Alpharetta (US) and Hong Kong (China), our Simulation Division designs, develops and sells some of the world's leading hi-fidelity ultrasound training simulators for teaching ultrasound scanning to medical professionals.

 

Research & Development

 

During the year, the Simulation R&D team focussed on developing the first female manikin-based simulator specifically developed to meet the educational needs of medical professionals practising Point of Care Ultrasound (PoCUS) across emergency medicine and critical care.

 

BodyWorks Eve combines the normal and pathological hearts from our HeartWorks simulator with the complete upper chest to pelvis real patient scans from our ScanTrainer platform to teach the requirements of the growing PoCUS skills training market, as outlined by the International Federation of Emergency Medicine (IFEM). Complete with over 100 real patient ultrasound cases and over 10,000 patient scenario combinations, BodyWorks Eve replicates learning in a real-life emergency or critical care setting, allowing the tutor to control and change the severity and pathology of the patient in real time.

 

Following its successful debut at the International Meeting on Simulation in Healthcare (IMSH) in Los Angeles, the BodyWorks Eve simulator platform was launched in all regions of the world in February 2018.

 

Territory review

 

Our Simulation Division sales grew by 27% to £4.2m in 2017 (2016: £3.3m), benefitting from a full year's contribution from sales of the HeartWorks echocardiography simulator range, which contributed £2.0m to Group revenues (2016, 5 months post-acquisition: £0.8m).

 

In the global ultrasound simulator market there were a number of encouraging signs that sales momentum is gathering.

 

 

 

 

 

 

North America

 

Revenue in 2017 increased to £1.71m (2016: £0.86m).

 

North America is a key market for medical simulation and we continue to sell into this territory through our direct sales force that now operates out of Alpharetta, Georgia. Following the settlement of the legal action in the US at the beginning of 2017, we expanded the sales and support team and during the year won a number of significant new medical teaching school accounts in the US and Canada for both the ScanTrainer and HeartWorks simulators.

 

Revenue in this key market increased by 98% to £1.7m (2016: £0.9m) of which HeartWorks contributed £1.0m to Group revenues (2016, 5 months post-acquisition: £0.3m).

 

The launch of the BodyWorks Eve simulator platform is expected to increase our presence in the Point of Care Ultrasound (PoCUS) and Emergency Medicine training market during 2018 and beyond.

 

United Kingdom

 

Revenues in 2017 was £0.72m (2016: £1.20m).

 

The UK has been a difficult market for our simulation sales team in 2017, with considerable budgetary restraint in the NHS affecting hospital and teaching schools during the year. Although sales in the second half of the year showed some signs of recovery, UK sales revenue for the year was down 40% to £0.7m of which HeartWorks contributed £0.1m to Group revenues (2016, 5 months post-acquisition: £0.1m).

 

Rest of the World

 

Revenue in 2017 increased to £1.76m (2016: £1.22m).

 

Revenue in the Rest of the World is mainly generated by 31 resellers. During the year sales increased by 44% to £1.8m (2016: £1.2m), of which HeartWorks contributed £0.8m to Group revenues (2016, 5 months post-acquisition: £0.4m), with the important market of China growing by 83% to £0.8m (2016: £0.4m), of which HeartWorks contributed £0.3m to Group revenues (2016, 5 months post-acquisition: £0.2m).

 

These channel sales are supported by two UK based MedaPhor sales support staff. In February 2018 this was increased to three sales support staff, with the opening of an office in Hong Kong and the appointment of a local Channel Support Manager to support the growing Asia-Pacific (APAC) simulation market. 

 

As with the North American market, the launch of the BodyWorks Eve simulator is expected to open up new medical simulator markets in Europe, APAC and the Gulf States.

 

In addition, our recently launched French curriculum ScanTrainer system for obstetrics and gynaecology scanning is expected to enhance our presence in the French speaking markets.

 

Clinical Division

In October 2017 the Company issued new Ordinary Shares to raise £5.4m after costs and at the same time announced the acquisition of Intelligent Ultrasound Limited (IUL), for a total consideration of £3.0m, satisfied by the issue of new Ordinary Shares and warrants in the Company and the payment of £72,000 in cash.

 

IUL is a University of Oxford artificial intelligence spin-out company founded by world leading academic, Professor Alison Noble OBE FREng FRS. IUL develops image analysis software for ultrasound through the development of deep-learning software, based on sophisticated computer algorithms and researched insights into patient, clinician and healthcare provider needs.

 

The acquisition has enabled MedaPhor to expand its existing ultrasound simulator business into the larger clinical ultrasound related software market including the development of IUL's ScanNav artificial intelligence-based image analysis software; and the development the Group's NeedleGuide augmented reality ultrasound needle guiding assistant.

 

 

 

ScanNav

In February 2018, the first pilot of the ScanNav real-time audit image analysis system software was undertaken at the Fetal Medicine Department of St George's University Hospitals NHS Trust, London, UK.

 

ScanNav is believed to be the first artificially intelligent system to carry out an automated, real-time "peer review" of obstetric ultrasound images as the patient is scanned.

 

Monitoring performance by retrospectively auditing images manually is very time consuming, so ScanNav supports clinical staff by instantly confirming that the images they save conform to protocol, meaning that sub-standard images can be re-scanned and replaced straight away if required.

 

ScanNav evaluates each scan by comparing it to over 50 individual criteria to verify that the views required by the NHS Fetal Anomaly Screening Programme (undertaken after 20 weeks of pregnancy) are complete and fit for purpose.

 

The ScanNav software uses deep learning technology to assess the same features that sonographers look for in ultrasound images and has been 'taught' using over 350,000 images that were audited by a panel of experienced sonographers. Initial validation studies have shown that ScanNav's artificial intelligence system is as good as an expert sonographer in assessing scan images and the pilot at St George's is expected to help better understand how our proposed range of ScanNav products could fit into the workflow of a busy fetal medicine department and support sonographers and doctors in ultrasound scanning.

 

NeedleGuide

Having secured Innovate UK grant funding in November 2017, the first phase of the development of NeedleGuide commenced in February 2018. The grant of £466,000 will part-fund this development, which the Company believes has the potential to revolutionise interventional ultrasound-guided needling.

 

Doctors use interventional needling in a variety of medical procedures including tissue biopsy, cannula insertion and administering regional anaesthesia, in a procedure known as peripheral nerve block (PNB).  For many of these procedures, including PNB, the National Institute for Health and Care Excellence recommends that ultrasound guidance should always be used.

 

NeedleGuide aims to combine existing technology developed by MedaPhor, with expertise brought to the Group by the IUL team. The augmented reality headset projects the ultrasound view on to the patient's anatomy, highlighting the pathway the needle needs to follow to the target and then uses artificial intelligence to automatically track the needle tip to ensure that the operator is always aware of the needle's position in relation to the key anatomical structures. This minimises the potential for user error and offers the opportunity for considerable savings to hospitals.

 

STRATEGIC REPORT - FINANCE

 

Revenue

Revenues for the Group increased 27% to £4.2m (2016: £3.3m) and benefited from a full year's contribution to sales from the HeartWorks simulator, which contributed £2.0m to Group revenues in 2017 (2016, 5 months post-acquisition: £0.8m).

 

Gross profit

The gross margin in the year was 60% compared to 64% in 2016.  The reduced margin largely reflects the higher proportion of distributor sales in 2017, at 42% (2016: 26%).

 

Administrative expenses

Administrative expenses, excluding exceptional costs, increased by £1.3m during the year to £5.2m (2016: £3.9m) as we absorbed the first full year of overheads relating to IML acquired in 2016, compared to 5 months post-acquisition overheads which were consolidated in 2016. The increase also included 3 months of post-acquisition overheads relating to IUL and the amortisation of intangibles arising on the acquisitions of IML and IUL.

 

Increase in administrative expenses excluding exceptional items:

 

	£m
Amortisation of intangibles arising on the acquisitions of IML and IUL	0.2
Other amortisation and depreciation increase	0.2
Increase in IML overheads (acquired 8 August 2016)	0.5
IUL overheads (acquired 6 October 2017)	0.2
Movement in exchange differences	0.1
Other	0.1
Total increase in administrative overheads excluding exceptional costs	1.3

 

Research and development costs

During the year the Group expensed through the income statement £0.6m (2016: £0.4m) in relation to research and development costs. In addition, development costs amounting to £0.5m (2016: £0.5m) were capitalised within intangible assets and an amortisation charge of £0.4m (2016: £0.3m) has been recognised against cumulative capitalised development costs.

 

Loss before taxation and exceptional items

The loss for the year before tax and exceptional items was £2.7m (2016: Loss £1.8m).

 

Exceptional items

Goodwill of £3.3m arose on the acquisition of IML and IUL and the Company is required under International Accounting Standard 36 - Impairment of Assets (IAS 36) to test the carrying value of this goodwill for impairment annually, using base cash flow projections that should not extend beyond five years and must exclude net revenues from pipeline products.  As the majority of the Group's projected net revenues arise from its on-going research and development activities which are forecast to contribute more to revenue in later years, the directors have concluded that, while they believe the investments in both IML and IUL will be monetised and yield returns in future years, the goodwill arising on these acquisitions should be treated as impaired under the strict requirements of IAS 36.  Consequently, an impairment charge equal to the total goodwill which arose on these acquisitions of £3.3m has been made to the Income Statement and included in Exceptional Items.

 

Exceptional Items also include acquisition costs relating to the purchase of IUL of £0.2m and a credit of £0.6m in respect of a fair value adjustment on the settlement of contingent consideration relating to the acquisition of IML in the prior year (see note 10 below).  

 

Taxation

The Group claims each year for research and development tax credits and, since it is loss-making, elects to surrender these tax credits for a cash rebate. The amount included within the consolidated income statement in respect of amounts received and receivable for the surrender of research and development expenditure was £55,310 (2016: £45,534). As at 31 December 2017, the Group has cumulative tax losses of approximately £10.8m (2016: £7.5m). The tax credit for the year also includes deferred tax of £72,229 (2016: £27,667) on the fair value of intangible fixed assets acquired with IML and IUL which is being recognised over the life of those assets.

 

Placing and acquisition of IUL

On 6 October 2017 the Company placed 44,125,324 newly issued shares of 1 pence each in the capital of the Company at a price of 12.5 pence per share which raised £5,515,665 before costs of the share issue and £5,390,784 after costs. The share issue costs of £124,881 have been netted off against the share premium arising on the new share issue.

 

On the same day the Company acquired the entire share capital of IUL for a total consideration of £3,039,694.

 

IUL is a University of Oxford spin-out company that develops image analysis software for ultrasound through the development of artificial intelligence/deep-learning software. Acquiring IUL has allowed MedaPhor to expand its existing ultrasound simulator business into the larger ultrasound related software market. The assets and liabilities of IUL as at the date of acquisition are set out in note 10 to the preliminary results below.

 

The £3.0m consideration comprised of the payment of cash of £72,000 plus the issue of 18,527,936 new Ordinary Shares ("the Consideration Shares") and 1,256,692 warrants ("the Consideration Warrants") in MedaPhor Group plc with a combined fair value of £2,967,694 based on the market price of the shares at the time of the completion of the transaction. Two thirds of the Consideration Shares (12,351,961 shares) were admitted to trading and two thirds of the warrants (837,795 warrants) were issued upon completion. The issue of the remaining third of the Consideration Shares and Consideration Warrants was deferred for 12 months from completion as the issue of these shares and warrants is contingent on no seller warranty or indemnity breaches (as specified in the Sale and Purchase Agreement) arising during that 12 month period. The issued warrants at their fair value of £125,669 along with the retained shares at their fair value of £926,396 and the retained warrants at their fair value of £62,835, have been included in creditors due within one year.    

 

Balance sheet

Consolidated net assets increased to £7.1m (2016: £4.8m). Cash at £4.3m was up £2.5m on the prior year (2016: £1.8m). Trade and other payables of £2.4m at 31 December 2017 (2016: £2.6m) include £1.0m in respect of retained consideration relating to the acquisition of IUL and £0.1m of warrants issued as part of that consideration (2016, retained consideration relating to the acquisition of IML: £1m).

 

Cash flow and going concern

Cash at 31 December 2017 stood at £4.3m (2016: £1.8m), with cash flow in the year boosted by the placing of new ordinary shares in the Company which raised £5.4m net of costs (2016: placing raised £3m net of costs). Net cash used in operating activities was £2.2m (2016: £2.2m) and net cash outflows arising from investment activities (excluding cash used or acquired on the acquisition of subsidiaries was £0.7m (2016: £0.6m).

 

In the second half of the current year the Company will commence the process to secure a further round of funds to take the Group through the next stage of growth.  Subject to this, the Board has a reasonable expectation that the Group will continue to be solvent for the foreseeable future.

 

Events since the end of the financial year

Other than as disclosed above, there are no events to report that have occurred since the end of the financial year.

 

 

STRATEGIC REPORT - SUMMARY

 

The extension of the Group business, from simulation-based ultrasound training, into artificial intelligence based software for clinical ultrasound is an exciting development for MedaPhor. The Intelligent Ultrasound AI technology has the potential to develop new products that could provide sonographers and doctors with ultrasound support, guidance and audit tools, as well as in the long-term, opening up new markets for automated ultrasound scanning for all medical professionals. The combination of the new AI clinical support software and our existing revenue generating simulation business enables us to look forward with considerable confidence.

 

This Strategic Report was approved by the Board on 20 March 2018 and signed on its behalf by:

 

 

Stuart Gall

 

Chief Executive

 

MedaPhor Group plc

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2017

 

 

	Note	Unaudited 2017	Audited 2016
		£	£
REVENUE	3	4,180,630	3,286,147
Cost of sales		(1,657,765)	(1,174,065)
Gross profit		2,522,865	2,112,082
Other income		28,225	-
Administrative expenses excluding exceptional costs		(5,228,211)	(3,897,652)
Exceptional administrative costs	4	(2,860,774)	(698,435)
Total administrative costs		(8,060,760)	(4,596,087)
OPERATING LOSS		(5,537,895)	(2,484,005)
Finance costs		(7,833)	(3,341)
LOSS BEFORE INCOME TAX		(5,545,728)	(2,487,346)
Income tax credit	5	127,609	73,201
LOSS ATTRIBUTABLE TO THE EQUITY SHAREHOLDERS OF THE PARENT		(5,418,119)	(2,414,145)

 

 

OTHER COMPREHENSIVE INCOME
Items that will or may be reclassified to profit or loss:
Exchange gain/(loss) arising on translation of foreign operations			31,171	(6,996)
OTHER COMPREHENSIVE INCOME FOR THE YEAR			31,171	(6,996)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO THE EQUITY SHAREHOLDERS OF THE PARENT			(5,386,948)	(2,421,141)
LOSS PER ORDINARY SHARE (PENCE) ATTRIBUTABLE TO THE EQUITY SHAREHOLDERS OF THE PARENT
Basic and diluted	6		(11.70)p	(8.826)p