Creo Medical Regulatory News (CREO)

Creo Medical Group plc

("Creo" or the "Company")

Half-year Report

First use of Speedboat in the US

First commercial orders for Speedboat

Additional European Framework Distribution Agreement with PENTAX Medical

Creo Medical Group plc (AIM: CREO) a medical device company focused on the emerging field of surgical endoscopy, announces its unaudited results for the six-month period ended 30 June 2019, in line with management expectations.

Operational and Recent Highlights

·; Commercial momentum with Creo's first products, Speedboat and the CROMA Advanced Energy platform:

- Successful roll out of the Company's Clinical Education Programme in the United States (US), with procedures successfully carried out on patients by a number of US doctors using Speedboat

- First commercial orders and revenue from US hospitals

- Continued development of the Company's Clinical Education Programme in the UK and EMEA through regular routine clinical education events and follow up mentoring with trainees with their first procedures in patients

- Further shipments under Framework Distribution Agreements with global partners

- Additional European Framework Distribution Agreement with PENTAX Europe GmbH, covering France, Germany and Italy

- Indian Framework Distribution Agreement with MEDITEK SYSTEMS announced post period end

·; Strengthened IP portfolio, with 154 granted patents and 485 pending applications over 87 patent families (as at 4 July 2019)

·; Post period, the Company's Clinical Education Programme has gained traction, moving into phase two of the programme with trained early users of Speedboat delivering training under Creo's Clinical Education Programme with the first US training event led by a leading US clinician taking place

Financial Highlights

·; Total sales in the period was £40,104 (6 months to 30 June 2018: £nil) of which £7,699 was recognised as revenue in relation to direct sales and £32,405 was recognised in relation to Framework Distribution Agreements

·; Cash and cash equivalents of £38.7m at 30 June 2019 (30 June 2018: £6.4m)

·; R&D expenditure increased to £4.5m (6 months to 30 June 2018: £2.3m) to expand the portfolio of products

·; Operating loss of £9.4m for the 6 months to 30 June 2019 (6 months to 30 June 2018: £5.2m) including £0.5m share based payments (6 months to 30 June 2018: £0.5m), in line with management expectations

·; Underlying operating loss of £7.2m for the 6 months to 30 June 2019 (6 months to 30 June 2018: £3.6m) is in line with the anticipated spend profile and reflects the activities described in the operational highlights above

·; Net cash outflow from operating activities of £5.9m for the 6 months to 30 June 2019 (6 months to 30 June 2018: £2.6m)

·; Net assets of £40.5m at 30 June 2019 (2018: £7.3m)

Craig Gulliford, Chief Executive Officer, commented:

"We continue to make progress against our strategic objectives, executing on our education led commercialisation plan, targeting selected clinicians and key opinion leaders to drive clinical adoption. During the period we successfully rolled out our Clinical Education Programme in the US, training leading GI Endoscopists, culminating in successful procedures being performed by a number of US doctors on multiple patients. More importantly, after the period end, initial key opinion leader attendees coming through our programme have moved on to become trainers in the Clinical Education Programme with one already having delivered the training to other US clinicians through the Clinical Education Programme. 

"Furthermore, we added to our agreement with Hoya Group, Pentax Medical with a European framework distribution agreement covering France, Germany and Italy. In the period we had two successful FDA pre sub meetings and remain on track for a suite of cleared GI products during 2019. We continue to invest in our pipeline, positioning us well to become a leading advanced energy, minimally invasive, medical device company."

Notes to Editors

About Creo Medical

Creo Medical is a medical device company focused on the development and commercialisation of minimally invasive surgical devices, bringing advanced energy to endoscopy. The Company's vision is to improve patient outcomes through the development and commercialisation of a suite of electrosurgical medical devices, each based on our groundbreaking CROMA Advanced Energy platform. Creo has developed CROMA, an electrosurgical advanced energy platform that combines bi-polar radiofrequency ("RF") energy for precise localised cutting and microwave energy for controlled coagulation via a single accessory port. This technology provides clinicians with flexible, accurate and controlled surgical solutions.

The Company's strategy is to bring its CROMA Advanced Energy platform to market through a suite of medical devices which the Company has designed, initially for the emerging field of GI therapeutic endoscopy, an area with high unmet needs. Creo is focusing on significant markets where products can be introduced to serve poorly met needs. Creo's initial focus is in the GI tract, GI tract accessible soft tissue (including but not limited to liver, pancreas, kidney) and lung interventions. The Company believes its technology can impact the landscape of surgery and endoscopy by providing a safer, less-invasive and more cost-efficient option of treatment.

For more information about Creo Medical please see our website, investors.creomedical.com

Interim results for six months ended 30 June 2019

Chief Executive Review

Overview

Creo Medical Group plc is a medical device company focused on the emerging field of surgical endoscopy, enabling clinical procedures to be performed minimally and non-invasively. Our vision is to develop and commercialise a suite of electrosurgical medical devices based on our ground-breaking CROMA Advanced Energy platform.

We focus on significant markets where we can introduce products that serve poorly met needs. Our initial focus is in the gastrointestinal ("GI") tract, GI tract accessible soft tissue (including but not limited to liver, pancreas, kidney) and lung interventions. Our initial devices target treatment of colorectal cancer, soft tissue cancers of the liver, pancreas, kidney and lung.

Creo's CROMA Advanced Energy platform combines RF energy for precise localised cutting and microwave energy for controlled coagulation via a single accessory port. This technology provides clinicians with flexible, accurate and controlled surgical solutions. Creo's Speedboat device, powered by the CROMA Advanced Energy platform, is the first product cleared for use in a suite of tools under development by Creo to aid the endoscopist in minimally invasive surgery. Early applications focus on GI procedures where Creo's technology is expected to improve patient outcomes (shorter procedures, hospital stays and recovery times), reduce risk and make procedures easier to perform.

We believe that Creo is at the forefront of a paradigm shift in surgical endoscopy; the new frontier of minimally invasive surgery. Similar paradigm shifts have previously taken place in other fields of medicine. The transition from open surgery to laparoscopic surgery from the early 1990s is the obvious example. In recent years, advances in single-port laparoscopy, robotic surgery, natural orifice transluminal endoscopic surgery and flexible endoluminal endoscopy have heralded a new era of healthcare.

Thought leaders are advocating our solutions and promoting the 'Anything is possible with the right approach' mindset to educate and engender confidence among endoscopists, blurring the lines between these practitioners who have typically specialised in investigative work, and surgeons. This is revolutionary: procedures that previously took place in the operating room can now be undertaken in an endoscopy room, with material advantages in cost, time and patient outcomes.

We believe that Speedboat, together with the suite of devices under development, remains well positioned to be the next generation solution in minimally invasive surgery.

Operational Review

During the period under review, Creo has continued to build on the progress achieved since its Initial Public Offering in December 2016 and its subsequent share placing in August 2018.

Clinical Education Programme progress

Creo's Clinical Education Programme ensures leading clinicians are educated in the use of Speedboat and the CROMA Advanced Energy platform with the aim of ensuring quality control and best patient outcomes.

We have successfully rolled out the Clinical Education Programme to the US, training several leading GI Endoscopists across multiple hospitals during the period. The continued rollout of the clinical education programme throughout Europe and Asia during the period further increased the number of clinicians being trained.

With the signing of an additional European Framework Distribution Agreement with PENTAX Europe GmbH, covering France, Germany and Italy, PENTAX Europe GmbH will collaborate with Creo to continue Creo's education led commercial strategy over an 18-month period across these key European markets. 

Commercial progress

First commercial orders for Speedboat were received during the period from the US, South Africa and Australia. These initial orders are in line with expectations on pricing and volume at this early stage of commercialisation where the focus remains on establishing clinical education centres in all key markets to continue the growth in excellent clinical outcomes and adoption.

Pipeline update

The CROMA Advanced Energy platform has been designed with a single accessory port compatible with a suite of single-use devices that use the microwave and RF energy for cutting, coagulating and ablating in various procedures. The Company's development of a suite of endoscopic products for use with the CROMA Advanced Energy platform remains on track, with management aiming to formally introduce the wider suite of devices to the market before the end of 2019 and remain on track for a suite of cleared GI products during 2019. In addition, the Company continues to investigate other applications for its technology beyond the initial suite of devices. 

Management and Employees

During the period we continued to recruit talented and experienced individuals across all business functions to bolster Creo's expertise and capacity for growth. Creo now employs more than 70 people, working in a creative, innovative and driven environment, with a shared goal of improving clinical outcomes and changing patients' lives.

As we move into the next stage of our development, our management team and staff now have a clearly defined strategy based on three pillars of execution:

1. Our R&D team are focusing on turning projects into products by developing our growing proprietary intellectual property into a widening range of medical devices.

2. Our commercial team are driving clinical adoption by supporting recent trainees as they transition into confident and frequent users of our products.

3. Finally, all the relevant departments and suppliers are supporting the evolution of our current small-scale production into a manufacturing capability appropriate for our growing product range and rising demand from multiple markets.

Current Trading and Outlook

We remain focused on our core principles of execution and mindful that execution with diligence and care is of primary importance. Our long-term success will, in part, be determined by our principal focus on our three pillars of execution.

The Board thanks all members of the Creo team, along with our clinicians and their patients, our customers, suppliers, shareholders and other partners for all their hard work, positive contributions and support during the period as we look forward with confidence to exciting opportunities for the Company during the remainder of 2019 and beyond.

Craig Gulliford

Chief Executive

Financial Review

The Company's financial performance for the period under review was in line with management expectations. Operating expenses reflect the increased clinical and development activities of the Company during the period, together with investment in headcount and business infrastructure to support the transition of the business to a fully integrated specialty medical devices manufacturer with product origination, development and commercialisation capabilities. This continued investment in the business will, we believe, support its anticipated growth and development in the coming periods.

Total sales for the period were £40,104 (6 months to 30 June 2018: £nil) of which £7,699 was recognised as revenue in relation to direct sales and £32,405 was recognised in relation to collaboration agreements and was accounted for within administrative expenses. Cost of sales in relation to direct sales are £3,082 and cost of sales in relation to the collaboration agreements are £25,125 which have been recognised in administration expenses.

Research and development expenditure for the period were £4.5m (6 months to 30 June 2018: £2.3m). Expenditure on product development and clinical costs increased during the period as the business continued to invest in the expansion of its portfolio of products. Administrative expenses for the period increased to £5.0m (6 months to 30 June 2018: £3.0m).

Operating loss

The operating loss for the period of £9.4m (6 months to 30 June 2018: £5.2m), reflected the increased operating expenses outlined above. The underlying operating loss for the period is £7.2m (6 months to 30 June 2018: £3.6m). This is a non-statutory measure which adjusts the operating loss as follows;

*Underlying operating loss is calculated by adjusting operating loss for share based payments, depreciation and amortisation, R&D tax credits.

Tax

The Company has not recognised any deferred tax assets in respect of trading losses arising in the current financial period. At present, the Company recognises tax assets in respect of claims under the UK research and development Small or Medium-sized Enterprise ("SME") scheme, accrued in line with costs with any adjustments being made on submission of a claim.

Where claims have been made under the RDEC scheme these are recognised as other income in line with IAS20 Accounting for government grants.

Earnings per share

Loss per share was 6 pence for the period (6 months to 30 June 2018: 5 pence).

Cash flow and Balance Sheet

Net cash used in operating activities was £5.9m for the 6 months to 30 June 2019 (6 months to 30 June 2018: £2.6m), driven by the increase in investment in research and development during the period. Net cash generated from share issues was £0.2m (6 months to 30 June 2018: £0.05m) reflecting the net proceeds from the issue of new ordinary shares relating to the exercise of share options.

Total assets at 30 June 2019 increased to £45.7m (30 June 2018: £9.6m), reflecting the net proceeds of the share placing in August 2018 less cash used in operating activities during the period. Cash and cash equivalents at 30 June 2019 were £38.7m (30 June 2018: £6.4m). Net assets were £40.5m (30 June 2018: £7.3m).

At 30 June 2019, the debtor position in relation to R&D Tax Credits was £4.0m. Inventory as at 30 June 2019 increased to £0.6m (30 June 2018: £0.1m), representing the increase in stock holding to facilitate current and expected future orders.

Trade and other payables as at 30 June 2019 increased to £4.4m (30 June 2018: £1.8m). This increase is mainly a result of increased accruals and trade payables for ongoing regulatory work as we move future products through relevant regulatory clearance testing. 

The implementation of IFRS 16 at 1 January 2019, which had no impact on total net assets or cash, is summarised as follows;

·; Increase in non-current assets of £463,771 to reflect the recognition of the present value for the right of use assets

·; Increase in non-current liabilities of £310,981 to reflect the non-current recognition of lease liabilities associated with the right of use lease assets

·; Increase in current liabilities of £152,790 to reflect the recognition of lease liabilities associated with the right of use lease assets payable within one year

This is further discussed in Note 1 to the financial statements.

Consolidated statement of profit and loss and other comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

Consolidated statement of cash flows

Notes to the interim financial statements

1. Basis of preparation

This interim financial report, which is unaudited, does not constitute statutory accounts within the meaning of section 434(3) of the Companies Act 2006. These interim financial statements have been prepared in accordance with the AIM rules and the IAS 34.

The accounts of Creo Medical Group plc for the period ended 31 December 2018, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("adopted IFRSs"), have been delivered to the Registrar of Companies. Those accounts were prepared and audited as required by the Companies Act 2006. 

This interim financial report for the six-month period ended 30 June 2019 (including comparatives for the 6 months ended 30 June 2018) was approved by the Board of Directors on 27 September 2019. 

The Company has prepared detailed forecasts and projections for its planned activities up to and beyond December 2022. On the basis of these financial projections the Directors are satisfied that the Company will have adequate resources to continue in operational existence for the foreseeable future and for a period of not less than 12 months from the date of signing this interim financial report. Thus, they continue to adopt the going concern basis of accounting in preparing the interim financial report.

Accounting policies

The same accounting policies and basis of measurement are followed in this interim financial report as published by Creo Medical Group plc in its statutory accounts for the period ended 31 December 2018, as delivered to the registrar of companies.

Changes in accounting policy and disclosures

New standards, amendments and interpretations

The following new standards, amendments and interpretations have been adopted by the Group for the first time for the financial year beginning on 1 January 2019:

·; IFRS 9 'Financial instruments' effective 1 January 2019 (effective date for annual periods beginning on or after 1 January 2018).

·; IFRS 16 'Leases' effective for periods beginning on or after 1 January 2019.

This standard replaces IAS 17 and sets out the principles for the recognition, measurement, presentation and disclosure of leases.

The Group currently leases a number of assets principally relating to the leasing of property and, plant and equipment. The Group has adopted a modified retrospective approach and applied practical expedients where appropriate.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate for that class of asset. Generally, the Group uses the relevant incremental borrowing rate as the discount rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

The implementation of IFRS 16 at 1 January 2019, which had no impact on total net assets or cash, is summarised as follows;

o Increase in non-current assets of £463,771 to reflect the recognition of the present value for the right of use assets

o Increase in non-current liabilities of £310,981 to reflect the non-current recognition of lease liabilities associated with the right of use lease assets

o Increase in current liabilities of £152,790 to reflect the recognition of lease liabilities associated with the right of use lease assets payable within one year

·; IFRS 17 'Insurance contracts' effective for periods beginning on or after 1 January 2019.

·; Amendments to IAS 19 'Employee Benefits' which clarifies the accounting for defined benefit plan amendments, curtailments and settlements. Effective for periods beginning on or after 1 January 2019.

·; Amendment to IAS 28 'Investments in associates and joint ventures' which clarifies the accounting for long-term interests in an associate or joint venture, which in substance form part of the net investment in the associate or joint venture, but to which equity accounting is not applied. Effective for periods beginning on or after 1 January 2019.

·; Amendments to IFRS 10 'Consolidated financial statements' and IAS 28 'Investments in associates and joint ventures' which clarifies the accounting treatment for sales or contribution of assets between an investor and its associates or joint ventures. Effective for periods beginning on or after 1 January 2019.

·; Interpretation 23 'Uncertainty over Income Tax Treatments' which explains how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. Effective for periods beginning on or after 1 January 2019.

The adoption of these standards and amendments has not had a material impact on the interim financial statements except for IFRS 16 'Leases'.

Critical accounting judgments and key sources of estimation uncertainty

The Group is required to make estimates and assumptions concerning the future. These estimates and judgements are based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. Accounting estimates and judgements have been required for the production of these Financial Statements.

Principal risks and uncertainties

The principal risks and uncertainties impacting the Group are described in our 2018 Annual Report and remain unchanged at 30 June 2019.

The risks and uncertainties in relation to the UK's exit from the European Union have been reviewed as part of a wider review into all the risks and uncertainties for the Group at 31 December 2018. Due to the continued uncertainty regarding the terms of the exit from the European Union, our position remains unchanged; we cannot be certain of any impact at this juncture but continue to ensure that we mitigate any potential risk where possible.

Share-based payments

Equity-settled share options are granted to certain officers and employees. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model or the Monte Carlo method where appropriate. Compensation expense is recognised over the tranche's vesting period based on the number of awards expected to vest, through an increase to equity. The number of awards expected to vest is reviewed over the vesting period, with any forfeitures recognised immediately.

Research and development costs

Capitalisation of development costs requires analysis of the technical feasibility and commercial viability of the project concerned. Capitalisation of the costs will only be made where there is evidence that an economic benefit will flow to the Company.

During the period, the Group continued capitalisation of development costs relating to its Speedboat device and CROMA Advanced Energy platform. These products relate to the emerging field of surgical endoscopy, and as such the commercial viability requires a number of factors to be in place following the initial design including regulatory approval, trained physicians, successful in-patient procedures performed and a clear route to market which was achieved in the period ended 31 December 2018.

Other products remain in various stages of development and the Group has determined that although technical feasibility has been achieved, the commercial viability is still to be achieved and therefore all the recognition criteria of IAS 38 to capitalise an internally generated intangible asset has not been met as at the period end.

2. Earnings per share

Earnings per share has been calculated in accordance with IAS 33 - Earnings Per Share using the loss for the period after tax, divided by the weighted average number of shares in issue.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume conversion of all potential dilutive ordinary shares. The potential ordinary shares are considered to be antidilutive on the basis that they reduce the loss per share and are such are not included in the Company's EPS calculation, meaning that diluted EPS is the same as basic EPS.

3. Share capital

4. Cash from share issue

5. Post balance sheet events

There have been no material events subsequent to the period end and up to 27 September 2019, the date of approval of the financial statements by the Board.

Responsibility statement of the directors in respect of the interim report

We confirm that to the best of our knowledge:

·; the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·; the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Richard Rees

CFO

27 September 2019