Sphere Medical Holding Regulatory News (SPHR)

28 June 2013

Sphere Medical Holding plc

Final Results for the year ended 31 December 2012

Cambridge, UK, 28 June 2013: Sphere Medical Holding plc (AIM: SPHR.L), ("Sphere" or "Sphere Medical" or the "Company") a leading developer of innovative monitoring and diagnostic devices for the critical care setting, is pleased to announce its audited final results for the year ended 31 December 2012.

Announced today (see separate press release)

·; Entered into global collaboration agreement with Ortho Clinical Diagnostics, Inc. ("OCD"), a subsidiary of Johnson & Johnson ("J&J"), for the development of Proxima 4 and enhancement of Sphere's operational and production capabilities

·; £3.3 million equity investment from Johnson & Johnson Development Corporation ("JJDC"), the investment arm and a subsidiary of J&J

·; Underwritten placing to raise £5.1 million and non-underwritten open offer raising up to £4.2 million

·; £5 million, five year Equity Financing Facility ("EFF") with Darwin Strategic Limited ("Darwin"), a majority owned subsidiary of Henderson Global Investors' Volantis Capital

Period Highlights

·; Significant progress made with Proxima 3 development, preparing for UK launch in H1 2014

·; First sales order received in July from Sorin Group, the Company's distribution partner, for cardiopulmonary bypass monitors and microanalyser consumables

·; Pelorus 1500 achieved European CE Marking in July 2012 as an in-vitro diagnostic medical device

·; Pelorus 1500 received positive results from Point of Care Study in Cardiac Surgery Patients at Papworth Hospital

·; Appointment in June of Finggal Link Co. Limited as the Company's exclusive distributor for the Pelorus propofol measurement system in Japan

Financial Highlights

·; Revenues generated from sales of Pelorus product

·; Cash and cash equivalents and monies held on treasury deposit at period end of £5.4 million (2011: £12.1 million)

Commenting on today's announcement, Dr. Stuart Hendry, Chief Executive Officer of Sphere Medical, said:

"A key focus for Sphere Medical has been achieving the optimal collaboration deal for our core Proxima platform technology and progressing the development of Proxima 3 in order to take the product to market in the UK. We believe that today's announcement of the ground breaking collaboration with OCD, a subsidiary of Johnson & Johnson and accompanying equity investment by JJDC and new and existing investors points to a stronger future for the Proxima platform.

During the coming year, we will focus on the commercialisation of Proxima 3 and on ensuring the successful progression of our collaboration with OCD. We thank our shareholders for their continued support and look forward to updating them of Sphere Medical's progress during 2013."

For further information, please contact:

Notes for Editors

Sphere Medical (AIM: SPHR.L), is a medical device company developing a range of innovative monitoring and diagnostic devices designed to significantly improve patient care.

Sphere Medical's Proxima and Cardiopulmonary Bypass devices deliver real time analysis of blood gases, electrolytes, glucose and drug levels with laboratory accuracy, at the patient's bedside. Globally over 240 million blood gas and electrolyte tests are carried out on patients every year in critical care and there is an unmet need for monitoring products that are small, simple to use and cost effective with improved functionality. Sphere Medical's products can be used in a wide range of medical applications enabling faster clinical decision making and consequently improved patient outcomes, whilst also reducing costs for healthcare payers.

Sphere Medical is headquartered in Cambridge, UK. The Company has existing commercial partnerships with leading global medical device companies.

For further information, please visit www.spheremedical.com

CHAIRMAN'S STATEMENT

Strategic Achievements

Since the time of the IPO in November 2011, the Company has been continuing to develop its lead products, with most attention on finalising Proxima 3. The Board's principal objective is to transition the Group to becoming revenue-generating and ultimately cash-generative through the exploitation of its products and intellectual property. The short term goal has been to complete the development and commercialisation of Proxima 3, Sphere's lead product and to secure a global commercialisation partner for the Proxima technology.

As outlined in the Business Review, the development of Proxima 3 has taken longer than previously anticipated. I am, however, encouraged to report that we are now in advanced preparations for CE Marking of Proxima 3, which will be a major regulatory milestone for the Company. This important European regulatory approval for Proxima 3 will enable us to launch the product into the UK market in H1 2014. This key objective of selling Proxima 3 will give us direct and important customer feedback from UK clinicians which should lead to the refinement of aspects of this and future generations of Proxima through routine "real world" usage. The US regulatory programme for Proxima 3 will continue post-CE Mark with the intention of commencing the UK clinical studies in H1 2014.

Commercial partnering discussions for Proxima began soon after the Company's IPO. For many months we have been actively engaged in extensive due diligence with a number of world-leading medical device companies. These discussions have led to the announcement today that Sphere Medical has entered into a collaboration agreement with Ortho Clinical Diagnostics, Inc. ("OCD"), a subsidiary of Johnson & Johnson, the world's largest and most diverse medical devices and diagnostics company. This agreement covers the development of Proxima 4, a next generation of Proxima and the enhancement of Sphere's operational and production capabilities. The commercial partnering discussions have also identified a possible opportunity with another organisation to utilise the Company's core microanalyser technology.

The Board is confident that the collaboration agreement with OCD, which also provides a framework for the negotiation of a global commercialisation deal for Proxima 4, brings the Company significantly closer to achieving its key strategic objective. The focus of the Company in the coming 12 months will be to launch Proxima 3 in the UK market and to work closely with OCD to develop Proxima 4. Ultimately we aim to transform Sphere into a self-sustaining cash-generative company and potentially a leading UK medical devices group.

Future Funding

In order to fund the Company and the collaboration agreement with OCD, I am pleased to announce that Johnson & Johnson Development Corporation has agreed to invest £3.3 million alongside an investment by new and existing institutional investors of a further £5.1 million as well as an open offer to raise up to £4.2 million. In addition, a £5 million Equity Financing Facility with Darwin Strategic Limited, a majority owned subsidiary of Henderson Global Investors' Volantis Capital, has been secured to help strengthen the Company's balance sheet going forward. The Company will shortly be sending a circular to shareholders setting out details of the collaboration with OCD and associated funding and will also convene a general meeting at which shareholders will be asked to approve various resolutions in connection with these proposals.

Board and employees

Our employees' abilities, hard work and commitment underpin the continued development and commercial progress of your company. Sphere Medical is very fortunate in being able to attract and retain its employees. The Board would like to thank them for their commitment, flexibility and dedication. I would also like to thank the Sphere Medical Advisory Board for their continued support and guidance.

Outlook

2013 has already delivered a more robust Proxima 3 product and the significant announcement of the OCD collaboration agreement and associated fundraising. The remainder of 2013 will be focused on preparing for the commercial launch of Proxima 3 in the UK and work on the OCD collaboration agreement will begin immediately. We thank you for your continued support and look forward to updating our shareholders at regular intervals on progress across the Group's activities.

Dr. Anthony Martin

Non-Executive Chairman

BUSINESS REVIEW

The IPO on AIM in November 2011 provided Sphere Medical with the financial resources to continue the development of Proxima, specifically Proxima 2 and Proxima 3, as well as the Cardiopulmonary bypass monitor ("CPB") and Pelorus 1500 medical devices. We are pleased to report that substantial progress has been made on each of these products, further details of which are provided in this review.

A key strategic objective identified at the time of the IPO was securing a commercial partnering deal for Proxima. As previously announced, a number of world-leading medical device companies have been in discussions with Sphere Medical in connection with Proxima. To this end, we are pleased to announce today that Sphere Medical has entered into a collaboration agreement with Ortho Clinical Diagnostics, Inc. ("OCD"), a subsidiary of Johnson & Johnson ("J&J"), the world's largest and most diverse medical devices and diagnostics company, for the development of Proxima 4, the enhancement of Sphere Medical's operational and production capabilities and provides a framework to negotiate a proposed global commercialisation deal for Proxima 4 with OCD.

As part of this agreement, Johnson & Johnson Development Corporation ("JJDC"), a subsidiary of and the investment arm of J&J, has agreed to invest £3.3 million of equity in Sphere Medical alongside an investment by other investors. We have today announced an underwritten placing of £5.1 million and entered into a £5 million Equity Financing Facility with Darwin Strategic Limited, a majority-owned subsidiary of Henderson Global Investors' Volantis Capital.

The various discussions we have had in connection with Proxima have led to other potential opportunities for the Company's core microanalyser technology in non-patient-dedicated blood gas monitoring applications which could present additional attractive commercial opportunities for the Company in the future.

Proxima 4 is the Company's next generation of patient-dedicated arterial blood gas analyser for use on adults in hospital intensive care units ("ICU"), operating theatres ("OR") and other acute care settings. Subject to the decision of a joint steering group to be formed by both Sphere Medical and OCD personnel, this device will be substantially based on Proxima 3 and will be designed to integrate into existing hospital practices and workflow as well as hospital information technology systems. Sphere Medical will work with OCD over the next two years to develop Proxima 4, which will be suitable for commercial launch across multiple geographies. Upon delivery of certain milestones, set out in the collaboration agreement with OCD, Sphere Medical expects to negotiate a global marketing deal for Proxima 4 with OCD. Furthermore, the collaboration with OCD and the fundraising announced today should provide Sphere Medical with the resources required to enhance its operational and production capabilities to ensure that it is fully prepared for a future launch of Proxima 4.

Shareholders will be aware that Edwards Lifesciences currently has a right of first refusal over Proxima which is due to expire on 17 November 2013 (being two years after our admission to AIM). Under the terms of the collaboration agreement with OCD, the Company has granted OCD a right of first offer over Proxima which will automatically switch to a right of first refusal over Proxima 4 if the Edwards Lifesciences right of first refusal has not been exercised by that time.

Operating review

Proxima System Development

Proxima 3 is Sphere Medical's lead product and is being developed for critical care applications utilising the Company's patented proprietary microanalyser technology. Proxima is a disposable patient-dedicated arterial blood gas analyser for use in hospital ICUs and ORs. The device is integrated into an existing patient's arterial line at the bedside to allow the rapid measurement of a panel of blood parameters, including blood gases and electrolytes, required for the optimum management of critically ill patients.

Rapid feedback will support more efficient and effective control of therapies such as ventilation, which is expected to improve patient outcome and reduce the cost of care.

Proxima 3 will be the first device to be commercialised and it is expected to form the basis of a range of successive generations of Proxima devices with incremental functionality. Proxima 3 will be a "closed system" where the blood samples can be re-infused into the patient after a blood gas measurement is taken, helping to reduce blood loss caused by frequent sampling and decreasing the risk of transmission of blood-borne infections.

The final development of Proxima 3 is progressing satisfactorily. Over the next few months we will be finalising the overall Proxima 3 system, which comprises the microanalyser sensor, the monitor hardware and software, associated tubing and the flush and calibration fluidics. Following the Proxima system finalisation we expect to commence verification and validation of the entire Proxima 3 system in our facility at Harston, Cambridgeshire, UK. Satisfactory completion of verification and validation, which is expected to take approximately four months, will pave the way for the final third party compliance testing which in turn will lead to the European CE Marking of Proxima 3 in H1 2014 and subsequent launch by Sphere Medical of this product in the UK and potentially other approved territories. It is intended that the Proxima 3 sales, utilisation and customer feedback from UK clinicians will form a very important part of the development of next generations of Proxima offerings.

Further detail on the work streams we have been undertaking since January 2012 include:

Microanalyser Sensor

We have been focused on enhancing the performance of the sensor in terms of reliability, continuous use up to 72 hours, shelf life and expanding the sensor analyte panel to include Haematocrit. The sensor will be a Class IIa medical device.

Monitor Hardware and Software

The Proxima monitor serves two important functions: it is the primary user interface for the Proxima system; and it displays the blood gases and electrolyte data from every reading. The development of the dedicated Proxima monitor is now complete and a manufacturing partner has been secured. Our in-house group of software engineers have substantially completed the complex task of writing the monitor software. Further upgrades of the software will be undertaken over the next few months to reflect feedback from on-going usability studies and final verification and validation.

Calibration Solutions

The technically complex development of dedicated flush bag and solution is complete and a manufacturing partner has been secured. A calibration solution supplier has also been identified and work is on-going to bring in-house the manufacture of the calibration solution to be better able to control quality and costs.

Clinical Trials and Usability Studies 

During the last year we have also undertaken a number of clinical and usability studies at Queen Elizabeth Hospital, Birmingham (one of the largest ICUs in Europe) and the West Suffolk Hospital. The clinical studies were designed to validate technical and performance aspects of certain components of the Proxima system within a hospital setting.

The usability studies were designed as a hands-on evaluation of the Proxima system by nursing staff to gain a deeper understanding of actual product usability in real life clinical practice. The Pre-Validation Study resulted in strong positive feedback from the nurses with the majority finding the system "very easy" or "easy" to use after one hour of training. We were also able to identify a number of system design improvements which have been incorporated into the final Proxima system design.

This Pre-Validation Study was followed up with an extensive number of focus meetings with anaesthetists and ICU nurses having a wide range of experience and seniority within a significant number of UK hospitals, both teaching and district general. These focus meetings, which are on-going, have been designed to: validate the use of Proxima within a wider range of clinical settings; refine the use of Proxima within current hospital workflows; and identify those target patient groups to which Proxima would have immediate benefit. This programme will continue throughout the year in order to expand and refine our understanding of the target patient groups as well as the specific purchasing practices within a wide range of hospitals.

Production

We have expended significant time and resources on our production facility at Harston. We have been focused on the scale-up ahead of commercial production, guaranteeing the quality of the finished product and increasing the production yield. Furthermore, to ensure that devices which are delivered to hospitals meet our minimum production quality, we have been developing an in-process quality control testing procedure. A key focus for key components has been building supply chain resilience.

Proxima Regulatory Update

We currently expect the remaining Proxima 3 development timetable to facilitate obtaining European CE Marking in order for Sphere Medical to commence marketing and generating revenues from Proxima 3 during 2014.

In order to achieve CE Marking we have been liaising with The Medicines and Healthcare Products Regulatory Agency ("MHRA") and TÜV SÜD, our Notified Medical Body, to agree the classification of Proxima for the purposes of approval under the EU Medical Devices Directive. Proxima 3 will be classified as a Class III medical device.

In terms of achieving US regulatory approval for Proxima 3, we met with the FDA in Washington for a pre-IDE meeting in September 2012. The feedback from the pre-IDE was positive and we have used the FDA's input to enhance both the clinical trial protocol and the Proxima product design. Since September 2012 we have modified and submitted to the FDA the clinical trial protocol which includes details of the scope of the proposed Proxima 3 clinical trial, including conducting the clinical trial at three leading UK teaching hospitals. These trials are expected to commence following CE Marking of Proxima 3 following which we will be progressing the US regulatory approval.

Cardiopulmonary Bypass Monitor ("CPB")

Sphere Medical is developing an in-line blood monitoring system for cardiopulmonary bypass procedures. In line with our strategy to partner with major CPB companies to market our products, in 2008, we entered into a development and supply agreement with Sorin Group Italia S.r.l. ("Sorin"), a global medical devices company and leader in the treatment of cardiovascular diseases. The CPB product has sensors for pH, potassium, oxygen, carbon dioxide, temperature, oxygen saturation and haematocrit and uses the same core Proxima microanalyser unit, thereby offering future economies of scale.

The development of the CPB microanalyser sensor is moving in parallel with the Proxima sensor. In the last year, work has been focused on increasing production yield and improving the reliability of the performance of the sensor. A dedicated CPB monitor has been developed and is now ready for production. Sorin has undertaken a number of market studies utilising the CPB monitor and proposed system configuration. Based on the feedback from these market studies, Sphere Medical will be reviewing and identifying any modifications to the CPB product specifications to meet the requirements of Sorin. Further software resource is required to update the monitor software to reflect the agreed calibration use model, however, our development priority remains the Proxima project and with the agreement of Sorin, we will be scheduling this work for Q3 2013.

Pelorus

Propofol is one of the world's most widely-used intravenous anaesthetics, used for the induction and maintenance of general anaesthesia in the OR and general sedation in the ICU. Each year, approximately 12 million patients are admitted to the ICU in the developed world, of whom around eight million are sedated during treatment.

Sphere Medical announced the CE Marking of the Pelorus 1500 in July 2012. The Pelorus 1500 is the world's first point-of-care in-vitro diagnostic medical device for the rapid measurement of the concentration of the intravenous anaesthetic propofol in blood samples and has been developed specifically for anaesthetists in the critical care setting.

The Pelorus 1500 will for the first time allow anaesthetists to know the actual rather than predicted concentration of propofol, allowing the personalisation of dosing to the patient.

Since obtaining the CE Mark in July 2012, we have undertaken two studies jointly with Papworth Hospital. The first was a method comparison study demonstrating that the Pelorus 1500 shows equivalent readings to a reference assay. This important study was presented at the Society for Intravenous Anaesthesia (SIVA) Annual Scientific Meeting in Edinburgh, 29th-30th November 2012. The second Papworth Hospital study is an investigation of the propofol levels in patients during cardiopulmonary bypass surgery who are profoundly cooled during the surgery. This study has concluded that such cooling significantly affects the distribution and clearance of propofol and thus the importance of being able to adjust the dose of propofol in relation to an actual concentration reading. The results from this study have been presented at scientific conferences and papers are in preparation for publication in leading clinical journals.

We are also working with the University of Groningen on the proof of principle of an adaptive TCI system i.e. using propofol measurements to personalise the dosing of a computer-controlled pump to the patient. We expect the study to be completed in H2 2013.

Great Ormond Street Hospital is currently undertaking an investigation of propofol levels in children undergoing long spinal surgery cases under propofol anaesthesia.

Other Product Application Areas

Sphere Medical's microanalyser technology is directly applicable to a number of existing application areas and discussions with potential partners are taking place.

Intellectual Property

Our intellectual property portfolio is a key asset and we continue to invest in the maintenance and development of our IP estate. We currently have 26 patent families covering chip design, manufacture of miniaturised sensor arrays, sensor design, monitoring and analytical systems and calibration. During 2012 we filed applications for one new patent family and two new patents were granted. The Group continues to charge its research and development programme to the profit and loss until such time as the criteria for capitalisation are met.

The Sphere Medical Team

The significant achievements over 2012 and to date in 2013 reflect the commitment of all our staff. At present, Sphere Medical has a total of 54 employees and since the IPO we have made selected further appointments across all aspects of our business to ensure that the demanding product development programmes, regulatory milestones and product commercial launches are achieved to timetable.

The Medical Advisory Board (chaired by Dr John Ulatowski, The Johns Hopkins Hospital, Baltimore; Dr Peter Glass, Stony Brook University Hospital, New York; and Dr Tom Clutton-Brock, University Hospitals Birmingham, UK) continues to be instrumental in guiding Sphere Medical's clinical programme and increasingly on preparations for product launches.

Sphere's Quality System

Sphere Medical successfully completed its three yearly re-certification audit of its Quality System in 2012.

Financial Review

In the year ended 31 December 2012 Sphere recorded product revenue of £46,000 (2011: £40,000), representing the sale of a Pelorus propofol device and associated consumables.

Operating expenses were £8.0 million (2011: £5.3 million). Included in operating expenses are research and development and production costs of £5.8 million (2011: £3.8 million) associated with the development of the Proxima disposable patient-dedicated arterial blood gas analyser and the CPB product for Sorin. Administrative, selling and marketing expenses were £2.2 million (2011: £1.2 million) reflecting the increased Proxima clinical trials and studies activity.

Finance income (net) was £265,000 (2011: a finance cost (net) of £1.1 million) representing interest earned on fixed-term deposits.

During the year £410,000 was received in respect of research and development tax claims for 2011 (2011: £359,000 based on 2010 claims). No accrual has been made for any research and development tax claim for the 2012 year.

The loss and total comprehensive income for the year was £7.3 million (2011: £6.0 million). The basic and fully diluted loss per share for the year was 20.0p (2011: 31.1p).

Cash and cash equivalents and monies on treasury deposit as at the end of the year were £5.4 million (2011: £12.1 million).

Outlook

We are firmly focused on creating a profitable and leading developer of innovative monitoring and diagnostic products for the critical care setting.

Throughout 2012 we have been focused on progressing our two core objectives: completing the development of Proxima 3 prior to obtaining CE Mark approval; and securing a commercial partnering deal for Proxima.

On the Proxima 3 development, over the next few months we will be finalising the overall Proxima 3 system which will allow us to complete validation of the entire Proxima 3 System, then verification and validation and, finally, third party compliance testing to facilitate European CE Marking of Proxima 3.

On the securing of a commercial partner for Proxima, we are very pleased to have announced today we have entered into a collaboration agreement with OCD. We believe this collaboration agreement will be instrumental in Sphere Medical becoming a world-class medical device company.

Finally, we would like to thank the Board, management and our employees for their continued dedication to Sphere Medical. We would also like to thank our shareholders for their continuing support and interest in the Group.

Dr. Stuart Hendry Matthew Hall

Chief Executive Officer Chief Financial Officer

Consolidated statement of comprehensive income

For the year ended 31 December 2012

Consolidated statement of financial position

At 31 December 2012

Consolidated statement of cash flow

For the year ended 31 December 2012

Consolidated statement of changes in equity

For the year ended 31 December 2012

Notes to final results announcement

For the year ended 31 December 2011

1. General information

Sphere Medical Holding plc (the "Company" or "Sphere Medical") and its sole subsidiary Sphere Medical Limited (together the "Group") undertake research and development of products within the medical device area. The Group has a manufacturing facility at its Harston site and seeks to commercialise its technology and products within the Eurozone, the US, the UK and Japan.

The Company is a public limited company and is registered in England and Wales. It was incorporated on 14 March 2001 as a private limited company, GG 105 Limited, under the Companies Act 1985. It changed its name to Sphere Medical Holding Limited on 14 January 2004 and on 10 November 2006 the Registrar of Companies issued a certificate of change of name to Sphere Medical Holding plc and the Company became a public limited company. The address of its head office and registered office is Harston Mill, Harston, Cambridge CB22 7GG, UK.

On 17 November 2011 the Company floated on the AIM market of the London Stock Exchange plc.

2. Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the Companies Act 2006.

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of derivative financial liabilities at fair value through profit or loss.

The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a high degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.

The results in the final results announcement are presented in pounds sterling (GBP) because that is the currency of the primary economic environment in which the Company and its subsidiary operate.

The financial information in this final results announcement does not constitute the Group's statutory accounts for the year ended 31 December 2012 or the year ended 31 December 2011 but is derived from those accounts.

Going Concern

At 31 December 2012 the cash balance available to the Group was £5,379,000 including fixed term deposits over 3 months while for the year the cash outflow from operating activities was £(6,623,000).

Sphere Medical's revenues from sales of products are not expected to be sufficient for the Group to become cash generative from commercial operations over the next 12 months. Nevertheless, the Board's confidence that the development and commercialisation of the Group's products, in particular Proxima, will prove to be successful has been increased very considerably with the announcement that the Company has entered into a collaboration agreement with Ortho Clinical Diagnostics, Inc. ("OCD") a subsidiary of Johnson & Johnson (J&J), the world's largest and most diverse medical devices and diagnostics company. The collaboration agreement covers the development of Proxima 4, the enhancement of Sphere Medical's operational and production capabilities and provides a framework to negotiate with OCD a global commercialisation deal for Proxima 4.

Furthermore, the announcement of a £3.3 million equity investment from Johnson & Johnson Development Corporation, the invest arm of Johnson & Johnson together with the underwritten placing for £5.1 million, an open offer raising up to £4.2 million and a £5 million equity financing facility will provide the Group with sufficient funding for the next 12 months

3. Principal accounting policies

The principal accounting policies applied in the preparation of this final results announcement are set out below. These policies have been consistently applied to all the years presented unless otherwise stated.

New accounting standards and interpretations

During the year the following standards and interpretations came into effect:

The adoption of these changes has not had a material impact on the Group's results in this period of initial application.

Basis of consolidation

The Group's results incorporate the results of Sphere Medical Holding plc and its subsidiary undertaking Sphere Medical Limited made up to 31 December each year. Subsidiary undertakings are entities over which the Group has power to control the financial and operating policies. The Group obtains and exercises control through voting rights. Unrealised gains and losses on internal transactions between the Company and its subsidiary are eliminated on consolidation.

Revenue recognition

Revenue represents the fair value of amounts received or receivable for product sales and services provided and royalties earned, net of trade discounts, VAT and other sales-related taxes. The Group's policy is to recognise revenue when:

• there is persuasive evidence that an arrangement exists;

• pricing is fixed or determinable;

• delivery has occurred or services have been provided to the customer;

• collectability is probable; and

• there are no material outstanding conditions or contingencies attaching to the receipt of monies due.

Product sales - Revenue is recognised on delivery of product, ensuring the full specification is satisfied in accordance with the customer's order.

Technology and product licensing - T echnology and product licensing income represents amounts earned for licences provided under licensing agreements, including up-front payments, stage of completion payments and technology access fees. Revenues are recognised where they are non-refundable, the Group's obligations related to the revenues have been discharged and their collection is reasonably assured. Refundable licensing revenue is treated as deferred until such time as it is no longer refundable. In general, upfront payments are deferred and amortised on a systematic basis in line with the period of development. Stage of completion payments related to scientific or technical developments are recognised as income when the stage is accomplished.

Exclusivity payments - income from exclusivity agreements relates to the receipt of payments in return for an agreement by the Group not to negotiate or enter into agreements with parties other than the party paying the exclusivity payment within a particular field, medical indication or geographic territory during a defined period. Income from exclusivity payments is recognised on a straight line basis over the period for which exclusivity is granted.

Share-based payment transactions

The Company issues equity-settled share-based payments to several of its Directors, as well as employees (including Directors) of its subsidiary, Sphere Medical Limited. In accordance with IFRS 2, for all grants of share options and awards the cost of the equity-settled share-based payments is measured at fair value at the date of grant. Where employees are rewarded using share-based payments, the fair values of employees' services are determined indirectly by reference to the fair value of the instrument granted to the employee. The fair value is appraised at the grant date and excludes the impact of non-market vesting conditions. That fair value is expensed on a straight line basis over the vesting period for the related options based upon the Company's estimate of the shares that will eventually vest, with a corresponding credit to "other reserves".

A modification to a share option is accounted for by continuing with the existing accounting for the old options scheme and, in addition, recognising the increment in the fair value of the new share option scheme over the vesting period. The incremental fair value granted is the difference between the fair value of the replacement equity instruments and the net fair value of the cancelled equity instruments at the date the replacement equity instruments are granted.

No expense is recognised for awards that do not ultimately vest as a result of the relevant employee ceasing to be employed by the Group, or that do not vest as a result of non-market performance conditions not being met.

Fair value is measured using the Black Scholes Option Pricing Model. The expected life used in the model is the expiry date of the options.

Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the value of the shares issued are allocated to share capital with any excess being recorded as share premium.

Government grants

Government grants of a revenue nature are credited to profit or loss to match with the expenses incurred.

Foreign currency

Transactions denominated in foreign currencies are recorded in Sterling at the actual exchange rates as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported in Sterling at the then prevailing rates of exchange. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in profit or loss.

Research and development expenditure

Expenditure on research (or the research phase of an internal project) is charged to profit or loss in the period in which it is incurred.

Development expenditure is capitalised when the criteria for recognition as an asset are met, that is when the Group can demonstrate:

• the technical feasibility of completing the project so that it will be able to use the asset for use or sale;

• its intention to complete and its ability to use the asset;

• how the asset will generate future economic benefits;

• the availability of resources to complete;

• that costs associated with the asset and its development can be measured reliably; and

• amortisation is provided to write off the capitalised R&D to its residual value on a straight line basis over its expected useful economic life.

Development expenditure which is not capitalised because it fails to meet one or more of the above criteria for being capitalised is charged to profit or loss in the period in which it occurs.

Management monitors the progress of internal research and development projects by using a project management system.

Property, plant and equipment

Property, plant and equipment are carried at acquisition cost less accumulated depreciation and any provision for impairment. Depreciation is provided to write off the cost of all property, plant and equipment to its residual value on a straight-line basis over its expected useful economic lives as follows:

Plant and equipment 3 - 4 years

Residual values and useful lives are reviewed annually.

Intangible assets

Intangible assets are capitalised on the basis of the costs incurred to acquire. These costs are amortised over the estimated useful life of the asset:

Software 2 years

Residual values and useful lives are reviewed annually.

Impairment of property, plant and equipment

At each balance sheet date the Group reviews the carrying amounts of its property, plant and equipment for any indication that those assets have suffered an impairment loss. For the purpose of this review assets are grouped into cash-generating units. As a result, some assets are tested individually for impairment and some are tested at cash-generating (or potentially cash-generating) unit level. If any indication of impairment exists, an impairment loss is recognised for the amount by which the assets or the cash-generating unit's carrying amount exceeds its recoverable amount. To determine the recoverable amount, management estimates expected future cash flows from each cash-generating unit and determines a suitable interest rate in order to calculate the present value of those cash flows. The data used for the Group's impairment testing are directly linked to the Group's latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancement. Discount factors are determined individually for each cash-generating unit and reflect their respective risk profiles as assessed by management.

Impairment losses are charged pro rata to the assets in the cash-generating unit. All assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment charge that has been recognised is reversed if the cash-generating unit's recoverable amount exceeds its carrying amount.

Financial assets

The Group's financial assets all fall into the category of loans and receivables.

The category of a financial asset is assigned on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument's category is relevant for the way it is measured and whether any resulting income and expenses are recognised in the profit or loss or in other comprehensive income.

Interest receivable is accrued on a daily basis at the interest rate applicable to each deposit.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition these are measured at amortised cost using the effective interest method, less provision for impairment. The Group's trade and other receivables fall into this category of financial instruments. Discounting, however, is omitted where the effect of discounting is immaterial.

Significant receivables are considered for impairment on a case-by-case basis when they are past due at the balance sheet date or when objective evidence is received that a specific counterparty will default. All other receivables are reviewed for impairment in groups, which are determined by reference to the industry and region of counterparty and other available features of shared credit risk characteristics, if any. The percentage of the write down is then based on recent historical counterparty default rates for each identified group.

Inventories

Inventories comprise directly attributable costs on incomplete projects or products and are held in the statement of financial position at the lower of cost and net realisable value. Cost includes all expenses directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Financing costs are not taken into consideration. Costs of ordinarily interchangeable items are assigned using the first in, first out cost formula. Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Inventories are expensed to the consolidated statement of comprehensive income as cost of sales or to the department which acquired them.

Income taxes

Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods that are unpaid at the balance sheet date.

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. Deferred tax is, however, neither provided on the initial recognition of goodwill nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future.

In addition, tax losses available to be carried forward as well as other income tax credits are assessed for recognition as deferred tax assets.

Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the reporting date. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that they will be available to offset against any future taxable income.

Management bases its assessment of the probability of future taxable income on the Group's latest approved budget forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. Specific tax rules in the other legislations in which the Group operates are also taken into account. If a positive forecast of taxable income indicates the probable use of a deferred tax asset, especially when it can be utilised without a time limit, that deferred tax asset is recognised in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties is assessed individually by management based on the specific facts and circumstances.

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in profit or loss, except tax relating to items recognised in other comprehensive income and tax relating to items recognised directly in equity.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value and accrued interest thereon.

Investments

Cash held on long-term deposit of more than three months and therefore not readily converted into cash are recognised as an investment.

Post employment benefits

The Group provides post employment benefits through different defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into an independent entity. The Group has no legal or constructive obligations to pay further contributions after its payment of the fixed contribution.

The Group contributes to defined contribution plans, operated by independent life assurance companies, for the benefit of substantially all employees. Employer's contributions range from 6% to 12% of pensionable payroll dependent upon the age of the employee and are generally contingent upon employees' contributions. The amount charged to the profit or loss is the total of contributions payable in the year.

Financial liabilities

The Group's financial liabilities include borrowings, trade and other payables and derivative financial instruments and on initial recognition they are measured at fair value. Financial liabilities are measured at amortised cost using the effective interest rate method except for derivatives that are measured at fair value.

Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument. All interest-related charges and fair value movements are included in the statement of comprehensive income lines "finance costs" or "finance income". A finance liability is derecognised when it is extinguished, discharged, cancelled or expires.

Within financial liabilities are warrants issued, valued at their fair value. Fair value is measured using the Black Scholes Model. The expected life is the expiry date of the warrant.

Leased assets

In accordance with IAS 17 "Leases", the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is then recognised at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any. A corresponding amount is recognised as a finance leasing liability, irrespective of whether some of these lease payments are payable up-front at the date of inception of the lease.

Subsequent accounting for assets held under finance lease agreements, i.e. depreciation methods and useful lives, correspond to those applied to comparable assets which are legally owned by the Group. The corresponding finance leasing liability is reduced by lease payments less finance charges, which are expensed to finance costs.

The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to profit or loss over the period of the lease.

All other leases are treated as operating leases.

Operating lease agreements

Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged to the profit or loss net of any incentives received from the lessor on a straight line basis over the period of the lease. Associated costs, such as maintenance and insurance, are expensed as incurred.

Share capital

Ordinary Shares and Preferred Ordinary Shares are classified as equity. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. On admission of the Company to AIM, the Preferred Ordinary Shares were automatically converted into new Ordinary Shares.

Share premium

Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of the expenses of the share issue.

Other reserve

The other reserve represents equity-settled share-based payments made to Directors and employees.

Profit and loss account

This represents all current and prior period results as disclosed in profit or loss.

Significant accounting estimates and judgements

i. Share Options and Warrants

The significant inputs into the model are the share price at the date of grant, the exercise price, the expected option life, the expected volatility and the risk-free interest rate. The key estimate in the model, being volatility, is based on the volatility of comparable listed entities. The fair value of options and warrants is determined using the Black-Scholes valuation model, which requires a number of estimates and assumptions.

ii. Research and Development Expenditure

The Board uses its judgement in the assessment of the extent, if any, to which expenditure is identified as development expenditure eligible for capitalisation rather than research expenditure. Key to this judgement is the point at which the technical feasibility and commercial success can be demonstrated.

Notwithstanding the on-going research and development progress, the Board have carefully scrutinised the criteria for capitalisation and remain of the view that, until all regulatory approvals have been obtained and commercialisation agreements signed, the policy of charging expenditure to profit or loss is appropriate.

iii. Deferred Tax Asset

The board uses it judgement as to the timing and levels of future profits to assess as to when sufficient taxable profits will be generated to relieve the losses when providing for the deferred tax asset. No deferred tax asset is recognised at 31 December 2012 due to uncertainty regarding the timing of future profits.

4. Loss per share

Diluted loss per share is calculated after showing the effect of outstanding options in issue. As the effect of the options would be to reduce the loss per share, the diluted loss per share is the same as the basic loss per share.

Calculation of loss per share is based on the following loss and numbers of shares:

5. Share capital

Share issue

No shares were issued in the year.

Further Copies

Copies of this announcement and, on finalisation, the full annual report and accounts will be available, free of charge, for a period of one month from the Company's Nominated Adviser and Broker, Peel Hunt LLP, Moor House, 120 London Wall, London EC2Y 5ET, Tel: 020 7418 8900 or from Sphere Medical Holding plc, Harston Mill, Harston Cambridgeshire CB22 7GG, Tel: 01223 875222. Copies of the full financial statements will be made available to shareholders in due course.