Surgical Innovations Regulatory News (SUN)

Surgical Innovations Group plc

("SI" or the "Group")

Preliminary Results

Surgical Innovations Group plc (AIM: SUN), the designer and manufacturer of creative solutions for Minimally Invasive Surgery ('MIS'), announces preliminary results for the 12 months ended 31 December 2012, which showed a strong second half performance with good growth in higher margin SI branded products.

Financial highlights

·; Revenue of £7.64m (2011: £7.60m)

§ SI branded sales up 12.9% to £5.33m (2011: £4.73m) - representing 68% of total revenue

·; Gross profit up 7.3% to £3.86m (2011: £3.60m)

·; Gross margins improved to 50.5% (2011: 47.3%)

·; Adjusted EBITDA (excluding exceptional items) of £2.89m (2011: £2.83m)

·; Operating profit reduced to £1.32m (2011: £1.77m) - due to amortisation and exceptional costs

·; Pre-tax profit reduced to £1.23m (2011: £1.71m)

·; Adjusted earnings per share of 0.35p (2011: 0.44p)

·; Net cash from operating activities of £612,000 (2011: £1.78m) - reflecting increase in working capital as a result of significant sales in December 2012

Operational highlights

·; Strong second half sales with contracted orders in H2 of £5.62m up 85% on H1 (with c. £1m to be recognised in y/e 31 December 2013)

·; US direct sales up 21.9% to £2.15m (2011: £1.76m) and are now 28.1% of total revenue (2011: 23.2%)

·; 33% increase in unit sales of YelloPort+plus™ valves and swingtops

·; YelloPort+plus™ cannula sales increased to 10,124 units (2011: 5,272 units) - will drive long term valve sales

·; RGF grant of up to £5.05m to fund capital expansion strategy

·; FDA approvals and US contracts provide a solid base for development of US strategy

·; UK SI branded sales up 34.3% as more NHS hospitals convert to cost-saving Resposable® products

·; New areas of MIS progressing well, particularly ultra-MIS (3mm) and hip arthroscopy

Commenting on Outlook, Doug Liversidge, Chairman, said: 

"We remain confident about the future growth prospects of the business as our existing SI branded products continue to gain international clinical recognition. The US remains our largest opportunity where we have established multiple routes to market. Continued investment in developing these routes will provide quicker and easier access to this key market for both current and future products. We expect to see a regular flow of new products throughout the year, which will help to drive future revenues, as well as the development of new and existing relationships with our strategic OEM partners, whilst retaining our primary strategic objective of growing our SI Brand."

Chairman's statement

Results

We have made good progress throughout the year and the second half was particularly strong, with substantially improved trading across both SI Brand and OEM segments against the first half. As a result we saw a considerable increase in contracted orders in the second half of £5.62 million, which represented an 85% improvement on our first half performance (H1 2012: £3.02 million).

However, as explained in our February trading update, £1 million of these orders will be recognised as revenue in the first week of the financial year ending 31 December 2013. If the additional orders had have been recognised in the year under review I am confident that we would have seen strong double digit growth in revenues, adjusted EBITDA and pre-tax profits for that period. Whilst it is frustrating that the tremendous efforts of the team at the end of the year are not being recognised in this financial year it does mean that we will start the current financial year with a sound platform to build on.

As a result of the recognition discussed above, Revenue for the period was £7.64 million (2011: £7.60 million) and Adjusted EBITDA (excluding exceptional items) was ahead of the previous year at £2.89 million (2011: £2.83 million).

The majority of sales continue to come from our higher margin SI branded products where we saw revenues increase by 12.9% to £5.33 million (2011: £4.73 million). Again we experienced particularly strong sales in the final quarter of the year and this growth was driven by our flagship Resposable® products. SI branded products now represent 70% of overall revenues (2011: 62%). OEM sales for the year decreased 21.5% to £2.20 million (2011: £2.81 million), reflecting our policy to focus purely on our strategic OEM partners whilst allocating resources to promotion of the SI Branded products. The Industrial business continues to operate at historic levels with sales of £101,000 (2011: £70,000).

We continue our focus on the development of US opportunities as we further increase revenue streams in this important market. Direct sales to the US increased by nearly 22% to £2.15 million (2011: £1.76 million) and now account for 28.1% of total revenue (2011: 23.2%).

An important measure of our performance is the growth in sales of the higher margin consumable element of our Resposable® products. Total sales of these SI branded consumables increased by 6.7% to £3.17 million (2011: £2.97 million) which now represents 59% of SI Brand sales (2011: 63%). There is a clear correlation between long-term valve sales and the number of reusable cannulas in the market. I am delighted to report that YelloPort+plus™ cannula sales increased to 10,124 units (2011: 5,272 units) and this provides the platform for longer-term high margin revenues from the disposable elements.

Gross profit increased by 7.3% to £3.86 million (2011: £3.60 million) with Gross margins improving to 50.5% (2011: 47.3%). Due to the exceptional items and increased amortisation and depreciation costs, operating profit reduced to £1.32 million (2011: £1.77 million). As a result profit before tax was £1.23 million (2011: £1.71 million). Earnings per share adjusted for exceptional items and deferred tax adjustments decreased to 0.35p (2011: 0.44p).

Cash flow and investment

The Group generated net cash from operating activities of £612,000 (2011: £1.78 million) which reduced due to an increase in working capital of £1.96 million arising primarily as a result of significant sales in December 2012. As expected, investment in capitalised intangible and tangible assets reduced during the year to £1.98 million (2011: £2.84 million).

At 31 December our net debt stood at £2.63 million (2011: £1.11 million). In addition to existing finance lease facilities, the Group secured a £2 million overdraft facility from HSBC and at 31 December 2012, £1.42 million of this facility was utilised.

Dividend

The Board maintains the belief that at this stage in the Group's development it would be more appropriate to continue its focus on strong inward investment and does not intend to pay a dividend for the year ended 31 December 2012.

Regional Growth Fund (RGF)

In 2012 we announced Government approval to our final bid for RGF monies of £5.05 million. These funds are specifically allocated to our capital expansion strategy comprising a new R&D and training facility within the Leeds City Region. We are aware that any capital build programme must be in the best interests of Surgical Innovations and we are in the process of working with our professional advisers on both site location and specification. I will be providing further updates over the course of the year as the project progresses.

Outlook

Trading in the period since the year end has been encouraging and is in line with our expectations for the first quarter.

Our strategy of focused innovation and product development within new growth areas of laparoscopy, fluid delivery and 3mm ultra-MIS, coupled with our move into new therapeutic markets such as hip arthroscopy, ensures that we remain at the forefront of MIS. It also provides a solid platform from which we have a growing pipeline of new products to be launched, which will drive additional growth in the coming year and beyond.

We remain confident about the future growth prospects of the business as our existing SI branded products continue to gain international clinical recognition. The US remains our largest opportunity where we have established multiple routes to market. Continued investment in developing these routes will provide quicker and easier access to this key market for both current and future products. We expect to see a regular flow of new products throughout the year, which will help to drive future revenues, as well as the development of new and existing relationships with our strategic OEM partners, whilst retaining our primary strategic objective of growing our SI Brand.

I would like to thank the Board and staff for their hard work in 2012 and their undoubted contribution to the strong performance of the business, particularly in the second half of the year. We start 2013 well positioned to take full advantage of the opportunities that are available to us and I look forward to reporting on the continuing success of the Group over the coming year.

Doug Liversidge CBE

Chairman

8 April 2013

Operating review

Operationally, we divide the Group into three segments:

SI Brand - our own branded laparoscopic minimally invasive devices. These include our port access systems: YelloPort® and YelloPort+plus™; our instrument ranges: Logi® Range, Logic® Reusable andQuick® Range; as well as our retraction systems: FastClamp™ and PretzelFlex®. New products are under development to move the business into other areas of MIS beyond laparoscopy.

OEM - original equipment manufacturercontracts with third party medical device companies to supply minimally invasive technology products through either own label or co-branding.

Industrial - provides minimally invasive technology for industrial applications. This remains a non-core element of our business.

SI Brand

Revenues from SI branded products increased over the period by 12.9% to £5.33 million (2011: £4.73 million). This growth was driven by SI's flagship Resposable® products YelloPort+plus™ and Logi®Range.

We continue to see strong demand for our Resposable® instruments, where some elements are disposable and others reusable. The success of this approach reflects a culture change within the medical device industry and provides cost-saving solutions within an increasingly cost-conscious environment. We believe that, whilst the laparoscopic market remains highly competitive, demand for our cost-effective SI Branded products is being driven by the widespread austerity measures now experienced within the general surgery environment.

Our "razor / razor blade" model continues to provide us with growing recurring revenues from the on-going sales of consumables. In 2012 we saw unit sales of our YelloPort+plus™ valves and swingtops (the higher margin disposable elements) increase by 33%, in direct relation to the increased placing of the cannula units (the reusable element) sold in the previous year. In 2012 we sold a total of 10,124 YelloPort+plus™ cannula units, up 92% on the previous year (2011: 5,272 units). As a result, we expect to see a consistent pattern of rising consumable revenues in 2013 and beyond.

The SI branded products are now sold through a network of specialist laparoscopic distributors across 31 countries. As part of our sales strategy we have established strategic alliances with ten key distributors. As a consequence we have seen revenues from these particular distributors increase by 51%. These alliances will provide improved clinical feedback with links to the International Clinical Advisory Board, greater focus on device solutions for the "clinical need" in each specific market together with enhanced sales and marketing support and attendance at local clinical meetings.

In February we received approval from the US Food and Drug Administration ("FDA") for our Logic®range of reusable instruments and our US master dealer, SI USA Inc., was awarded a three year contract by the Premier Healthcare Alliance ('Premier') for the sale of our Resposable® Logi® Range, and Logic® Reusable range of instruments. Importantly this provides SI USA Inc. with the opportunity to present our technologies to the 2,800 plus hospitals and 90,000 other sites within the Premier Alliance and is a significant benefit to any perspective sub distributor of SI USA Inc. We remain committed to driving our US business and with cost saving at the very heart of US procurement thinking, we believe the US will remain our key market in the foreseeable future.

Our advanced laparoscopic retractor, PretzelFlex®, was launched in Europe at the end of 2011. We have received positive clinical feedback from surgeons and distributors on the product and it has sold well. As a reusable device we will experience revenue growth from new markets, both geographical and clinical, supplemented by new PretzelFlex®line extensions. It was pleasing to announce the launch of the new 3mm PretzelFlex® at the end of 2012, this adds value to the range and enhances our move into 3mm surgery.

Following the recent five year extension to our distribution agreement with our UK distributor, Elemental Healthcare, we have seen extremely strong growth in UK sales of SI Branded products, up 34.3% on the previous year. This increase in sales has been driven by a greater penetration of the UK hospital market with a number of hospitals converting to SI branded products. In the last year seven UK hospitals converted to using YelloPort+plus™ and eight hospitals converted to using Logi™Cut scissors.

With the NHS having to report future annual savings in the region of £20 billion, our cost-effective devices are beginning to make a positive impression with both procurement management and clinicians prepared to support the UK healthcare industry. One NHS hospital in West London changed to SI's Resposable® instrumentation and this has brought savings of £250,000 in the first year alone, compared with the previous year's cost of using fully disposable instruments.

Our 3mm instrument range has been developed in response to the continuing trend to less invasive surgery within the MIS space. The benefits of 3mm surgery are identified through smaller incisions, thus reducing collateral damage to the abdominal wall, negating the need for port site closure with sutures and ultimately providing near "scarless" surgery. SI's objective is to become a leader in 3mm surgery; we are well positioned to do so with our unique offering of 3mm ports, instruments and PretzelFlex®. 

Our UK Clinical Advisory Board is a key element within our growth strategy. By addressing the "clinical need" within each area of laparoscopic surgery through our clinical relationships we are able to develop devices that will be widely accepted within the surgical community, both national and international. We are proud of our close links with UK clinicians and highly value their feedback and input which has enabled us to launch several new product line extensions over the final quarter of 2012.

OEM

Revenues from OEM decreased 21.5% to £2.20 million (2011: £2.81 million), reflecting our focus on strategic OEM partners whilst focussing resources on the promotion of SI branded products.

Our OEM contracts business, whereby we license our intellectual property over fixed periods and manufacture the products on our customer's behalf, is very much reliant on our partners driving business on our behalf and it can, on occasion, be unpredictable in terms of initial product launches, supply chain inventory requirements and clinical adoption of new device technology.

In the US we sell the PretzelFlex® laparoscopic retractor through an OEM partnership with CareFusion. Following FDA 510(k) clearance in March 2012 the first batch of PretzelFlex® devices were shipped under this agreement with a second batch shipped in December. In addition we received FDA 510(k) clearance for our reusable 3mm PretzelFlex™ device in January 2013, which will enable CareFusion to address the growing 3mm general surgery market as well as paediatric surgery. We have shipped a number of these instruments to CareFusion for evaluation purposes with their key opinion leaders. Following the successful conclusion of these evaluations sales to the US have now commenced.

2012 also saw the launch of the Vikon branded laparoscopic instrument range for Integrated Medical Systems Inc. (IMS) and we expect to see stronger sales of this product line with a full contribution in 2013, with the opportunity to develop further line extensions thus enhancing the overall Vikon product portfolio.

In September 2011 we signed a development agreement with Advanced Medical Solutions Group plc ('AMS') to develop a novel device for internal deployment of their branded adhesive, Liquiband. This product, described by AMS as their 'Hernia Mesh Fixation device', is still on track for a late 2013 launch initially focusing on key European laparoscopic hernia markets.

Industrial

Revenues for our non-core Industrial business remain at historic levels at £101,000 (2011: £70,000). These revenues relate to the use of technology in on-wing inspection of jet engines, as well as a feasibility project for a possible bespoke solution for a device delivery system.

Product Development & New Product Pipeline

New product development and product enhancement for the SI Brand continues apace and is driven by the R&D team's close working relationship with our Clinical Advisory Boards.

We have continued to invest significantly in new products with a total investment of £2.23 million relating to product development (2011: £2.90 million) to generate a regular flow of innovative products to bring to market.

The Concept and Development teams have been working on a number of new products which will launch under the SI brand during 2013. Our main focus has been on the development of our 3mm ultra-MIS range, delivery systems - the AMS device being the first for glue deployment, as well as our efforts to diversify our product portfolio from laparoscopy into new clinical areas and in the first instance the hip arthroscopy market. We are already working with our Clinical Advisory Board ('CAB') members to create a gold standard in 3mm surgery by developing best practices in laparoscopic cholecystectomy (gallbladder removal) and hernia surgery.

A dedicated team within our R&D department continue to work with our CAB arthroscopy specialists and having launched pre-production devices for evaluation at the end of 2012 we are confident that will be in a position to have ports and instruments available for clinical use in 2013. It is believed that hip arthroscopy is the fastest growing area within orthopaedic surgery and as surgeon proficiency and patient outcomes improve we look forward to being able to service the increasing demand for the required high quality, cost-effective instrumentation.

Our product development roadmap has been well documented and we continue to explore possibilities of technology transfer from laparoscopic to other areas of MIS. We commenced with hip arthroscopy and this will be followed with moves into thoracic, cardiac and spinal surgery. Thoracic MIS techniques centre around video assisted thoracic surgery (VATS) and we have commenced discussions with key opinion leaders on how we can utilise our technologies in this innovative area of surgery.

Clinical Advisory Boards

The UK CAB now consists of eight highly-experienced laparoscopic surgeons covering a wide range of specialisms within laparoscopy together with three key opinion leaders in hip arthroscopy and spinal surgery. This structure ensures that SI is able to both address the clinical need in all areas of laparoscopy and implement the strategy to transfer our core MIS technology into new areas of the body across a broad range of clinical disciplines.

We have also started to develop the International Clinical Advisory Board, ('ICAB'), a group of key opinion leaders around the world who can offer advice about their local markets and feedback on our products. In March this year we announced the appointment to the ICAB of Sean Barnett a US paediatric and thoracic surgeon specialising in core trauma and bariatric surgery. This appointment is significant given the launch of our new 3mm laparoscopic devices which are aimed at all areas of general surgery, but which could be particularly advantageous for minimal invasive surgery in children.

Manufacturing

We continue to implement our programme of gross margin improvements throughout the manufacturing process. As part of this process we have commenced working with the Manufacturing Advisory Service (MAS) on a long-term lean manufacturing programme. This has already provided tangible benefits in 2013 and will be a key driver in our manufacturing objectives for further in-house manufacture of critical, yet currently outsourced components.

Following substantial investment in 2011 to ensure the continued growth and optimisation of our manufacturing arm, 2012 saw a planned reduction in this investment to £117,000 (2011: £1.24 million).

Post Period End Events

In January 2013 we formally signed the Regional Growth Fund ("RGF") Final Grant Offer Letter. This provides us with up to £5.05m in Government funding and will be used to develop a state-of-the-art research and development facility and clinical training centre.

We expect that the RGF grant will provide infrastructure funding to implement our long term strategy for growth through enhanced product development in new clinical areas of MIS. It will also enable the creation of a clinical training centre which we believe will act as a magnet for pioneering surgeons looking to develop new skills and instrumentation in minimal invasive surgery.

Outlook

Our strategy remains firmly in place to become a leading innovator within the laparoscopic surgery field and to continue to focus on product development for our existing markets as well as new therapeutic markets within MIS.

We continue to work with our partners to bring our technology to market, be it through OEM agreements with major medical devices companies or through our extensive international distribution network that promotes our own SI branded products.

The R&D team continues to work on generating both a wider range of new products and enhancements to existing product lines. We expect to see a regular flow of these in 2013 particularly within the 3mm ultra-MIS range, as well as the launch of our new hip arthroscopy products.

We continue to receive interest from global medical device companies to develop innovative laparoscopic products on an exclusive OEM basis. Such enquiries are testament to the high regard in which our design team is held, we assess each enquiry on its merits, taking into consideration the impact on our own SI Branded products against the strategic positioning of SI with the potential partner.

We expect to see further sales in the US of our PretzelFlex® through our exclusive arrangement with CareFusion, and with the planned 2013 launch of the laparoscopic 'Hernia Mesh Fixation' device for Advanced Medical Solutions we should see the commencement of a revenue stream in the final quarter of 2013 and the full benefit in 2014 as the clinical benefits of glue fixation become accepted across the MIS space.

We continue to be well placed to drive further growth in the business and to capitalise particularly on the opportunities that are presented to us in the US, which is our largest target market. We will continue to promote SI branded products through our master dealer for instruments and through specialist tray companies for our ports. It is our intention to allocate resources to support the promotion of our US business, thereby ensuring we fully capitalise on the current opportunities opening up to SI as a result of the economic pressures being applied to the US healthcare system.

We remain confident about the future growth prospects of the business, particularly from our SI branded products which offer an attractive value proposition to both clinicians and procurement managers in these times of austerity. With the increased placement of cannula units in 2012 we anticipate the benefit of pull through of higher margin consumable sales in 2013. UK sales for SI branded products have started well in 2013 and already in the first quarter nine UK hospitals have converted to using YelloPort+plus™ and a further three hospitals have started using Logi™Cut scissors.

The strong performance in the final quarter of the year was a great achievement by the team and I would like to thank my colleagues for their hard work and support in all areas of the business.

We remain confident in both our sales and product development strategies. There needs to be a fine balance between developing routes to market and the development of new products that ultimately feed into these routes. It takes many years to create a robust international sales network capable of promoting our specifically positioned medical devices. We believe this balance will be achieved in 2013 as we invest within the US market and I look forward to providing further updates during 2013 as we focus on US revenue generation in the current financial year.

Graham Bowland

Chief Executive Officer

8 April 2013

FINANCIAL review

Revenue

Reported revenue for 2012 increased 0.5% to £7.64 million (2011: £7.60 million).  A segmental analysis of revenue is provided below which illustrates the strong growth performance from the SI brand, offset by a decline in sales of OEM products. Further commentary on performance by segment in provided in the Operating review.

Gross margin

Gross margin from the core MIS business increased to 49.9% (2011: 47.1%). This improvement is a consequence of manufacturing improvements and favourable shifts towards higher margin consumable elements of the Resposable® range. For 2012 SI Brand represented 70% of MIS business (2011: 67%).

Operating expenses

Operating expenses increased by £709,000 during the period to £2.54 million (2011: £1.83 million). This increase primarily resulted from exceptional items in the period (£294,000, see below), increased amortisation of product development intangible assets (£150,000), charges for share based payments (£66,000) and initial investment into new areas of MIS (£123,000). Notwithstanding this increase, the Group continues to rigorously control costs.

Exceptional items

During the first half of 2012 we incurred one-off costs of £294,000 (2011: £nil) as a consequence of restructuring various operational areas of the business. In order to provide a more accurate picture of the underlying performance of the business the profitability figures quoted below and in the Chairman's statement and Operating Review are adjusted to exclude these non-recurring costs.

Finance costs

As noted below, we utilised an overdraft provided by our bankers for the majority of 2012 and accordingly finance income was negligible. Interest payable on the bank overdraft amounted to £31,000 (2011: £15,000).

The majority of the finance cost of £94,000 arose in respect of finance lease obligations where the charge for the year totalled £63,000 (2011: £58,000). Following the major investment of recent years, capital expenditure in 2012 was minimal and this cost is expected to reduce next year.

EBITDA and operating profit

We are pleased to report that EBITDA (excluding exceptional items) increased from £2.83 million to £2.89 million in line with the slight increase in revenue which represents a strong signal that we are continuing to carefully manage our costs.

We believe EBITDA is the most appropriate measure of profitability for the business as it excludes the impact of significant non-cash charges for depreciation and amortisation which mask underlying performance at operating profit level.

Operating profit for the year reduced to £1.32 million (2011: £1.77 million) due to the increase in amortisation of product development costs of £150,000 and the exceptional items of £294,000.

Taxation

The Group recognised a tax charge of £547,000 (2011: £33,000 credit) reflecting a deferred tax charge of £834,000 offset by a corporation tax credit of £287,000. The effective rate of tax of 44% is distorted by a one-off adjustment to the deferred tax asset in respect of trading losses of £441,000. The underlying effective tax rate is below the headline rate of corporation tax and we expect this to be the case in the future due to the Patent Box and Research and Development regimes.

During 2012 the Group submitted enhanced Research and Development claims in respect of 2011 and 2010 and elected to exchange tax losses for a cash refund. At 31 December the balance sheet included an asset of £287,000, the majority of which has been received at the date of these financial statements.

Earnings per share (EPS)

The Group achieved 0.17p (2011: 0.44p) basic EPS in 2012 which is distorted by the exceptional items in the period of £294,000 and the adjustment to deferred tax of £441,000 referred to above. Adjusting for these, underlying EPS would be 0.35p.

Intangible and tangible assets

As in previous years, we have continued our investment in product development. The Board is confident with this investment strategy and, accordingly, £1.85 million (2011: £2.50 million) of costs have been capitalised during the year, increasing the total amount of capitalised costs to £8.33 million (2011: £6.48 million).

The amortisation charge against capitalised costs increased significantly to £700,000 (2011: £550,000) reflecting that products developed in recent years are now launched and selling to customers. The amortisation charge will undoubtedly continue to increase in future reporting periods, reducing reported profits. No impairments have been identified at 31 December 2012 following review by the Board.

Capital expenditure during the year was minimal at £183,000 (2011: £1.41 million) following the major investment programme during 2010 and 2011 to implement our strategy of in-house manufacturing.

Foreign currency

During 2012 the Group has continued to generate significant surplus US Dollars through sales to customers. These have either been sold into Sterling at spot rates or market risk has been eliminated through the use of forward contracts. In respect of the Euro, the Group has largely achieved a natural hedge with Euro denominated receipts being in line with Euro payments. The Group will continue to monitor the need for forward contracts depending upon the level of natural hedging achievable and the extent to which surplus currencies are expected to be generated.

Cashflow and net debt

Cash flows generated from operations before working capital movements were strong at £2.66 million (2011: £2.83 million). However, the significant working capital increase during the year of £1.96 million (see below) reduced cash generated from operations to £706,000 (2011: £1.85 million). As expected, cash used in investment activities reduced during the year to £1.98 million (2011: £2.84 million).

At 31 December net debt, which is defined as cash and cash equivalents less bank overdraft and obligations under finance leases, stood at £2.63 million (2011: £1.11 million). In addition to existing finance lease facilities, the Group secured a £2 million overdraft facility from HSBC for the period through to 30 September 2013. At 31 December 2012, £1.42 million of this facility was utilised.

Working capital

Working capital increased by £1.96 million to £6.60 million (2011: £4.64 million). £747,000 of this increase is attributable to inventory levels, however approximately £0.5 million of this increase reversed in the first week of 2013 when the sales referred to in the Chairman's statement were recognised. Trade receivables increased by £1.28 million compared to the prior year which reflects the impact of sales of YelloPort+plus™ on extended credit (£637,000) and also the phasing of sales with significant revenue recognised in December 2012.

We are committed to improving our manufacturing processes through lean manufacturing, and we believe that this will yield benefits over the course of the year. Our distributors operate in many different countries where credit terms and local practices vary significantly. Consequently, relatively high trade receivables are a feature of our business that we do not expect to change in the short term.

Mike Thornton

Chief Financial Officer

8 April 2013

Consolidated statement of comprehensive income

for the year ended 31 December 2012

The Consolidated statement of comprehensive income above relates to continuing operations.

* Adjusted EBITDA means earnings before interest, taxation, depreciation, amortisation and exceptional items.

Consolidated statement of changes in equity

for the year ended 31 December 2012

Consolidated balance sheet

as at 31 December 2012

Consolidated cash flow statement

for the year ended 31 December 2012

Notes to the financial statements

1. Reporting Entity

Surgical Innovations Group plc ('the Company') is a public limited company incorporated and domiciled in England and Wales (registration number 2298163). The Company's registered address is Clayton Wood House, 6 Clayton Wood Bank, Leeds LS16 6QZ.

The Company's ordinary shares are traded on the AIM market of the London Stock Exchange. The financial statements of the Company for the twelve months ended 31 December 2012 comprise the Company and its subsidiaries (together referred to as the 'Group').

The Group is primarily involved in the design, development and manufacture of devices for use in Minimally Invasive Surgery (MIS) and industrial markets. Surgical devices are targeted at the operating theatre environment in both public and private hospitals. In international markets, the Group sells through independent healthcare distributors, through Original Equipment Manufacture (OEM) and licensing contracts with major suppliers of medical equipment.

2. Basis of Preparation

This preliminary announcement has been prepared in accordance with the accounting policies set out in the annual report for the year ended 31 December 2012 and those to be adopted at 31 December 2012 (see note 3).

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), as adopted for use in the EU, this announcement does not itself contain sufficient information to comply with IFRSs. The Group expects to publish full financial statements that comply with IFRSs in May 2012.

3. Accounting policies

The same accounting policies, presentations and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements. The annual financial statements of Surgical Innovations Group plc are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

4. Publication of non-statutory financial statements

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Sections 434 and 435 of the Companies Act 2006.

The consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated balance sheet at 31 December 2012 and the consolidated cash flow statement have been extracted from the Group's financial statements upon which the auditor's opinion is unqualified and does not include any statement under section 498(2) or 498(3) of the Companies Act 2006. Those financial statements have not yet been delivered to the Registrar.

The audited accounts will be posted to all shareholders in due course and will be available on request by contacting the Company Secretary at the Company's Registered Office.

5. Segmental reporting

Information reported to the Board and for the purpose of assessing performance and making investment decisions is organised into three operating segments. The Group's operating segments under IFRS 8 are as follows:

The measure of profit or loss for each reportable segment is gross margin less amortisation of product development costs.

Assets and working capital are monitored on a Group basis, with no separate disclosure of asset by segment made in the management accounts, and hence no separate asset disclosure is provided here.

The following segmental analysis has been produced to provide a reconciliation between the information used by the key decision maker within the business and the information as it is presented under IFRS.

Included within the segment/operating results are the following significant non-cash items:

Included within the segment/operating results are the following significant non-cash items:

Unallocated expenses include those costs that cannot be split between segments and which are not separately analysed in the management accounts including concept department, sales and marketing, and head office overheads.

Geographical analysis of revenues

Revenues are allocated geographically on the basis of where revenues were received from and not from the ultimate final destination of use. During 2012, £843,000 (11%) of the Group's revenue depended on a single customer in the SI Brand segment (2011: £1,050,000 (14%) within the OEM segment). No other single customer accounted for more than 10% of the Group's revenue in either year.

6. Earnings per ordinary share

Basic earnings per ordinary share

The calculation of basic earnings per ordinary share for the year ended 31 December 2012 was based upon the profit attributable to ordinary shareholders of £686,000 (2011: £1,738,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2012 of 402,200,875 (2011: 392,716,121).

Diluted earnings per ordinary share

The calculation of diluted earnings per ordinary share for the year ended 31 December 2012 was based upon the profit attributable to ordinary shareholders of £686,000 (2011: £1,738,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2012 of 415,283,787 (2011: 410,691,902).

Adjusted earnings per ordinary share

The calculation of adjusted earnings per ordinary share for the year ended 31 December 2012 was based upon the adjusted profit attributable to ordinary shareholders of £1,421,000 (2011: £1,738,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2012 of 402,200,875 (2011: 392,716,121).

7. Share Capital

8. Annual General Meeting

The Annual Report will be available from the Company's website, www.sigroupplc.com and posted to shareholders by 14 May 2013. The Annual Report contains notice of the Annual General Meeting of the Company which will be held at 2pm on 19 June 2013 at Clayton Wood House, 6 Clayton Wood Bank, Leeds, LS16 6QZ.