Episurf — Interim / Quarterly Report 2016

May 17, 2016

Interim Report 1 January–31 March 2016

First quarter

• » Group net sales increased by 81% to SEK 411,834.
• » Significant increase in the number of requests for Epioscopy® Damage marking assessment.
• » Income after financial items for the Group amounted to SEK –11,696,747.
• » Episurf Medical receives CE mark for its fifth product, Epioscopy® Damage Assessment Tool.
• » Episurf Medical has been granted additional US patent.

Q1The period in brief

First quarter 2016 for the Group compared to 2015

• » Group net sales increased by 81% to SEK 411,834 (227,011).
• » Other operating income amounted to SEK 565,286 (1,456,375).
• » Income after financial items amounted to SEK –11,696,747 (–7,533,225).
• » Earnings per share (weighted average) amounted to SEK –0.73 (–0.95).
• » Equity per share amounted to SEK 6.16 (3.94).
• » Equity ratio amounted to 94.1% (86.4).

Significant events during the first quarter

• » Episurf Medical receives CE mark for its fifth product, Epioscopy® Damage Assessment Tool.
• » Episurf Medical has been granted additional US patent.
• » Episurf Medical launches German website and increases marketing efforts in the region.
• » Episurf Medical announces that 100 account milestone has been reached.
• » The scientific abstract "On the attachment of cartilage to HA: Signs of "chondrointegration" Studies on the Episealer® mini-prosthesis in the sheep knee," has been accepted as a poster presentation at the European Society of Sport Traumatology, Knee Surgery and Arthroscopy meeting to be held in Barcelona.

Significant events after the first quarter

• » Episurf Medical announces the appointment of its new European Marketing Director, Dan Griffiths. Dan joined the company on 25 April 2016.
• » Episurf Medical receives reimbursement by private health care providers in the UK and Netherlands and further government reimbursement in Belgium.
• » Episurf Medical has received the recommendation from Experien Group to follow a FDA pre-submission and 510(K) regulatory pathway for a US market entry.

Strategic priorities in 2016

• » Consistent commercial execution.
• » Continued product and service innovation via our proprietary technology platform.
• » Producing scientifically robust clinical evidence.
• » Pursue the relevant regulatory and reimbursement pathways to support geographical expansion including an entry strategy into the US.

Rosemary Cunningham Thomas, President and CEO Episurf Medical.

Message from the CEO

Steadily increasing interest and growing acceptance for the Episurf technology

"The investments we have made are beginning to deliver growth."

Dear Shareholder,

Following four quarters of improving trends in 2015, we ended the first quarter 2016 with growth in the following key ratios:

• » Surgeries performed
• » New connected users
• » CE marked products
• » New Patents
• » Requested and approved Epioscopy® damage marking reports
• » Length of time since implant surgery

This growth is further illustrated in the Business update and forward looking statements section of the report on page 5.

As the business evolves, we are learning there are several key dynamics which affect implant numbers

• » There is a variable lead time between a surgeon identifying a patient, agreeing to do an Episealer® procedure and the implant surgery date. And the reality is that elective hospital surgery dates are largely out of our control. We also experience a seasonal effect during key holiday periods when patients are not keen to have elective surgery.
• » There is an average time of 4 months between a new surgeon's 1st Episealer® implant and the 2nd implant because he or she wait between 3 to 6 months to evaluate the initial clinical performance in the post op Episealer® patient. We consider this to be a normal lead time for a new surgeon to gain confidence with a new technology. We see early evidence of this average decreasing as our procedure numbers grow.

• » We know that µiFidelity® connected accounts have a shorter lead time from firstly identifying a patient to final surgery but there is still no average lead time across all connected accounts.

• » We know that the focused sales activity of Q4 2015 drove growth in the requests for Epioscopy® damage marking and ultimately implants as evidenced by a 50% growth in damage marking requests in Q1 16 vs Q4 15. At the end of Q1, we were averaging 2.6 requests per week and this growth rate continues to increase on a weekly basis.

• » We know our key markets, the UK and Germany are showing solid growth in Epioscopy® damage marking requests and implants over the last 12 months as a result of sales force expansion. Therefore, the investment we have made in these markets is beginning to deliver growth.

For the remainder of 2016, it is our intention to use

Epioscopy® damage marking requests as a key growth metric. We'll continue to refine our forecasting process and projections as we build more data on the

average length of time from the initial Epioscopy® damage marking request to implant surgery.

Episurf Medical had a busy Q1 2016 across the entire business. Our 3rd German sale rep and 2nd Nordic sales rep joined the team. We hired 2 more German sales reps, 2 UK sales reps and our European Marketing Director. This group will start in April and June 2016.

Further to our growing clinical evidence base and combined with the sizeable market for people suffering with knee pain, we intend to develop an upgraded website. Our goal to attract and educate more prospective Episealer® patients via improved media content and search engine optimization. The upgraded site is scheduled for completion in Q2 2016. We also launched our German website to support our growing German business. We are developing an interactive, state of the art, web based surgical training tool to assist our surgeons in learning the Episealer® surgical technique. This is scheduled for launch in Q3 2016.

Episurf Medical's proprietary damage assessment tool, Epioscopy®, received its CE mark. Epioscopy® is an advanced clinical assessment tool intended to provide the physician with decision support information in the form of 3D-vizualizations of the segmented patient knee, visual marking of chondral and osteochondral lesions in the femoral part of the knee and a written assessment of structural deviations. We see the Epioscopy® Damage Assessment Tool as a noninvasive complement to arthroscopy to enhance clinical decision making, with the ambition to further develop this product into a viable diagnostic tool. Therefore, the first step was to obtain an early CE mark.

Our CPL¹ follow up data will soon be collected via a digital platform. This new tool is being developed for Episurf Medical and will make data collection and compliance around data collection much easier for our surgeons and Episealer® patients. It will also function as a surgical registry and enable us to easily analyse the CPL follow up data. This new tool is scheduled to be delivered in July 2016.

Our US entry planning activity started in Q1 with appointing regulatory and reimbursement specialists to assist us through the complex FDA approval and payment landscape that is a feature of the US healthcare market. We are actively preparing an FDA pre-submission dossier for submission in the latter part of Q2 2016.

In line with our global expansion ambitions, we undertook a mini investor roadshow in February and March covering the Stockholm, London and Paris markets.

On a final note, I will shortly complete my first year as CEO. Each day, the role brings new challenges and opportunities to deliver shareholder value. The reality of commercialising a novel technology, in a previously untreated patient group, with a new sales team in a traditionally conservative sector – orthopaedic implants, does not daunt us. We are steady, focused and growing our customer base with each passing week. Most importantly, the strategy we developed in the 2nd half of 2015 is beginning to deliver early, consistent growth and ultimately, shareholder value.

Rosemary Cunningham Thomas, CEO May 2016 London, United Kingdom

1) Clinical follow-up since 2013.

Business update and forward looking statements

By the end of the first quarter 2016, Episurf Medical's implants have been used in 86 surgeries in humans, all with successful outcomes, and Episurf Medical has a 0% revision rate. During the first half of the second quarter, another 7 surgeries were performed, resulting in a cumulative total of 93. Episurf Medical's patients are experiencing significant improvements with pain and mobility. Further, they are experiencing a short recovery time. Episurf Medical believes there is a strengthening correlation between the pre surgical assessment provided by the Epioscopy® damage marking process combined with our proprietary Episealer® implant design and the corresponding 0% revision rate. Use of the Epioscopy® damage marking report offers a form a pre-surgical quality control that contributes to appropriate patient selection and we believe this will be borne out as more Episealer® patients reach yearly milestones.

Episurf Medical is experiencing a significant growth in the number of Epioscopy® damage markings requests coming in via µiFidelity®, which points to the increasing market interest for Episurf Medical's products with surgeons in prioritized markets. This, in turn, leads to a

continued increase of the number of surgeries performed, which in turn generates more clinical evidence.

During 2015, when the commercialisation of Episurf Medical's technology started, an average of 1.6 damage marking requests were submitted to Episurf Medical per week. During 2016, Episurf Medical has experienced a significant increase in the number of requests. On average, Episurf Medical received 2.6 requests per week during the first quarter. During the first 6 weeks of Q2 2016, the equivalent figure amounted to 4.7 requests per week. This corresponds to a significant growth compared to 2015 and Episurf Medical is of the opinion that this growth will continue.

The growth in the number of Epioscopy® damage marking requests is increasing primarily from the existing user base and existing accounts in µiFidelity®, which is a result of increasing clinical acceptance. A high proportion of Epioscopy® damage marking requests convert to surgeon approved Episealer® treatment plans. The final treatment decision is always made by the referring surgeon and after that, it can take some time before the surgery date is fixed.

Financial information

Group

Net sales and operating profit/loss

Group net sales amounted to SEK 411,834 (227,011) in the quarter as a result from increased sales activities in prioritized markets. The increase in personnel expenses compared with the previous year is a direct result of the Company's increased commercial focus. Ten new employees have been hired since last April, seven for Sales and Market two in England, four in Germany and one in Sweden. Seven new employees have also been hired for Management and Administration and four have left the company.

Financial position

Group cash and cash equivalents at end of period amounted to SEK 88,790,487 (25,583,632). The equity ratio was 94.1% (86.4). Group investments in intangible assets amounted to SEK 1,318,950 (1,454,809) for the quarter, of which SEK 553,299 (936,834) are related to capitalized development costs and SEK 765,651 (517,975) to patents. Investments in tangible assets amounted to SEK 16,924 (0) for the quarter.

Human resources

Number of employees in the Group at end of the year was 23 (13). The increase is primarily a result of recruitment in marketing and sales.

Parent Company

Net sales and operating profit/loss

Other operating income amounted to SEK 553,299 (1,460,038) and Income after financial items amounted to SEK –5,814,849 (–3,782,283) for the quarter.

Financial position

Cash and cash equivalents at the end of period for the Parent Company amounted to SEK 85,733,831 (18,794,271). The equity ratio was 97.3% (92.3). Investments in intangible assets, capitalized development costs, amounted to SEK 553,299 (936,834) and Investments in tangible assets amounted to SEK 0 (0) for the quarter.

Human resources

Number of employees in the Parent Company at end of period was 14 (8).

Transactions with closely related parties

Shareholder and Board member Leif Ryd has received consulting fees of SEK 135,000 (135,000).

Share information

There are two types of shares in the Company. Each Class A-share carries three votes, and entitles the holder to three votes at the General Meeting and each class B-share carries one vote and entitles the holder to one vote at the General Meeting. Class B shares have traded on Nasdaq Stockholm's Small Cap segment since 11 June 2014 with the ticker EPIS B.

The total number of shares at of March 31 2016, was 15,963,305, of which 3,437,721 A-shares and 12,525,584 B-shares, and the total number of votes was 22,838,747..

Other information

Significant risks and uncertainty factors

Episurf Medical's material business risks for the Group as well as for the Parent Company, are to obtain regulatory approval and market acceptance, the outcome of clinical studies, the ability to protect intellectual property rights

and dependence on key personnel and partners. The Company does not see any new material risks for the upcoming six months. For a more detailed description of significant risks and uncertainties, refer to Episurf Medical's annual report.

The Board of Directors and the CEO hereby give their assurance that the Interim Report gives a true and fair view of the business activities, financial position and results of operations for the Group and Parent Company, and describes significant risks and uncertainty factors to which the Parent Company and the companies included in the Group are exposed.

Stockholm, May 16, 2016

Saeid Esmaeilzadeh Jeppe Magnusson Board chairman Board member

Leif Ryd Thomas Nortoft Board member Board member

Robert Charpentier Rosemary Cunningham Thomas Board member CEO

Review

This report has not been reviewed by the Company´s auditors.

Consolidated income statement

SEK	Jan–Mar 2016	Jan–Mar 2015	Jan–Dec 2015
Operating income
Net sales	411,834	227,011	1,016,462
Other operating income	565,286	1,456,375	5,628,598
Total income	977,120	1,683,386	6,645,060
Operating costs
Other costs	–5,096,404	–5,533,924	–21,584,339
Personnel costs	–6,765,093	–3,196,796	–26,834,214
Depreciation	–831,162	–495,919	–2,235,026
Total operating costs	–12,692,659	–9,226,639	–50,653,579
Operating loss	–11,715,539	–7,543,253	–44,008,519
Financial items
Financial income, other	18,870	10,044	34,544
Financial expenses, other	–78	–16	–687
Loss after net financial items	–11,696,747	–7,533,225	–43,974,662
Loss before tax	–11,696,747	–7,533,225	–43,974,662
Tax on income for the period	–	–	–
Loss at end of the period	–11,696,747	–7,533,225	–43,974,662

Consolidated statement of comprehensive income

SEK	Jan–Mar 2016	Jan–Mar 2015	Jan–Dec 2015
Net profit	–11,696,747	–7,533,225	–43,974,662
Other comprehensive income for the period:
Other comprehensive income for the period , net of tax	51,548	–	173,229
Total comprehensive income for the period	–11,645,199	–7,533,225	–43,801,433
Net profit and comprehensive income attributable
Parent company shareholders	–11,645,199	–7,533,225	–43,801,433
Earnings per share before and after dilution	–0,73	–0,95	–3,50
Average number of shares	15,949,804	7,956,579	12,504,417

Consolidated balance sheet

SEK	31 Mar 2016	31 Mar 2015	31 Dec 2015
ASSETS
Fixed assets
Intangible fixed assets
Capitalized development costs	4,928,383	1,420,536	4,660,637
Patent	6,646,141	5,465,651	6,385,717
Total intangible fixed assets	11,574,524	6,886,187	11,046,354
Tangible fixed assets
Machinery and equipment	404,846	394,394	423,838
Total tangible fixed assets	404,846	394,394	423,838
Total fixed assets	11,979,370	7,280,581	11,470,192
Current assets
Inventories Finished goods and goods for resale	1,213,707	1,495,640	1,154,578
Accounts receivable	509,700	197,476	199,864
Other receivables	1,038,073	751,338	869,741
Prepaid expenses and accrued income	885,250	941,872	545,064
Cash and bank balances	88,790,487	25,585,632	103,960,776
Total current assets	92,437,217	28,971,958	106,730,023
TOTAL ASSETS	104,416,587	36,252,539	118,200,215
EQUITY AND LIABILITIES
Equity
Equity attributable to owners of the parent
Share capital	4,788,991	2,386,974	4,788,991
Other capital	237,044,614	124,560,235	237,044,614
Reserves	224,777	–	173,229
Earned income including net result	–143,769,042	–95,630,857	–132,072,295
Total equity	98,289,340	31,316,352	109,934,539
Liabilities
Current liabilities
Accounts payable	2,720,941	1,872,830	1,787,912
Other liabilities	1,028,923	695,685	1,745,361
Accrued liabilities and deferred income	2,377,383	2,367,672	4,732,403
Total current liabilities	6,127,247	4,936,187	8,265,676
Total liabilities	6,127,247	4,936,187	8,265,676
TOTAL EQUITY AND LIABILITIES	104,416,587	36,252,539	118,200,215
Equity ratio Equity per share, SEK	94.1% 6.16	86.4% 3.94	93.0% 6.89

Consolidated statement of changes in equity

	Attributable to equity holders of the parent
SEK	Share capital	Other capital	Reserves	Earned income including net result	Total equity
Opening equity Jan 1, 2015	2,386,974	124,560,235	–	–88,097,632	38,849,577
Total		–
Total comprehensive income for the period				–43,801,434	–43,801,434
Total comprehensive income	–	–	–	–43,801,434	–43,801,434
Transactions with shareholders
New share issue, net after issue expenses	2,402,017	112,484,379			114,886,396
Total transactions with shareholders	2,402,017	112,484,379			114,886,396
Closing equity Dec 31 2015	4,788,991	237,044,614		–131,899,066	109,934,539
Opening equity Jan 1, 2016	4,788,991	237,044,614		–131,899,066	109,934,539
Total
Total comprehensive income for the period				–11,645,199	–11,645,199
Total comprehensive income				–11,645,199	–11,645,199
Transactions with shareholders
New share issue, net after issue expenses	–	–			–
Total transactions with shareholders	–	–			–
Closing equity March 31 2016	4,788,991	237,044,614		–143,544,265	98,289,340

Condensed cash flow statement

SEK	Jan–Mar 2016	Jan–Mar 2015	Jan–Dec 2015
Current operations
Operating loss	–11,715,539	–7,543,253	–44,008,519
Adjustments for items not included in cash flow
Depreciation	831,162	495,919	2,235,026
Interest received	18,870	10,044	34,544
Interest paid	–78	–16	–687
Paid taxes	–	–	–
Cash flow from current operations before change in working capital	–10,865,585	–7,037,306	–41,739,636
Change in working capital
Decrease/increase in inventory	–59,129	–21,976	319,086
Decrease/increase in accounts receivables	–309,836	–	–175,520
Decrease/increase in current receivables	–512,984	–937,451	–493,057
Decrease/increase in current liabilities	–2,086,881	547,375	4,050,095
Change in working capital	–2,968,830	–412,052	3,700,604
Cash flow from current operations	–13,834,415	–7,449,358	–38,039,032
Investing activities
Purchase of intangible fixed assets	–1,318,950	–1,454,809	–7,247,777
Purchase of tangible fixed assets	–16,924	–	–128,610
Cash flow from investing activities	–1,335,874	–1,454,809	–7,376,387
Financing activities
New share issue	–	–	114,886,396
Cash flow from financing activities	–	–	114,886,396
Cash flow for the period	–15,170,289	–8,904,167	69,470,977
Cash and cash equivalents at beginning of period	103,960,776	34,489,799	34,489,799
Cash and cash equivalents at end of period	88,790,487	25,585,632	103,960,776

Income statement, Parent Company

SEK	Jan–Mar 2016	Jan–Mar 2015	Jan–Dec 2015
Operating income
Net sales	–	–	754,609
Other operating income	553,299	1,460,038	5,627,648
Total income	553,299	1,460,038	6,382,257
Operating costs
Other costs	–2,448,833	–3,558,899	–12,949,289
Personnel costs	–3,815,411	–1,767,813	–14,968,281
Depreciation	–315,624	–31,167	–589,997
Total operating costs	–6,579,868	–5,357,879	–28,507,567
Operating loss	–6,026,569	–3,897,841	–22,125,310
Financial items
Financial income, other	211,798	115,574	415,906
Financial expenses, other	–78	–16	–405
Loss after net financial items	–5,814,849	–3,782,283	–21,709,809
Loss before contribution and tax	–5,814,849	–3,782,283	–21,709,809
Contribution
Group contributions	–	–	–7,054,000
Loss before tax	–5,814,849	–3,782,283	–28,763,809
Tax on income for the period
Loss at end of the period	–5,814,849	–3,782,283	–28,763,809

Parent Company statement of comprehensive income

SEK	Jan–Mar 2016	Jan–Mar 2015	Jan–Dec 2015
Net profit	–5,814,849	–3,782,283	–28,763,809
Other comprehensive income for the period:
Other comprehensive income for the period , net of tax	–	–	–
Total comprehensive income for the period	–5,814,849	–3,782,283	–28,763,809

Balance sheet, Parent Company

ASSETS Fixed assets Intangible fixed assets Capitalized development costs 4,928,383 1,420,536 4,660,637 Patent – – – Total intangible fixed assets 4,928,383 1,420,536 4,660,637 Tangible fixed assets Machinery and equipment 251,475 377,579 281,547 251,475 377,579 281,547 Total tangible fixed assets Financial assets Shares in group companies 19,753,375 6,100,000 16,128,375 Long-term receivables from group companies 17,495,931 16,888,964 11,770,769 Total financial assets 37,249,306 22,988,964 27,899,144 Total fixed assets 42,429,164 24,787,079 32,841,328 Current assets Short term receivables Other receivables 307,050 545,243 356,533 Prepaid expenses and accrued income 537,161 733,474 277,319 Total short term receivables 844,211 1,278,717 633,852 Cash and bank balances 85,733,831 18,794,271 101,963,730 Total current assets 86,578,042 20,072,988 102,597,582 TOTAL ASSETS 129,007,206 44,860,067 135,438,910 EQUITY AND LIABILITIES Equity Equity Restricted equity Share capital 4,788,991 2,386,974 4,788,991 Total restricted equity 4,788,991 2,386,974 4,788,991 Unrestricted equity Share premium reserve 235,844,614 123,360,235 235,844,614 Loss brought forward –109,310,496 –80,546,687 –80,546,687 Loss for the period –5,814,849 –3,782,283 –28,763,809 Total unrestricted equity 120,719,269 39,031,265 126,534,118 Total equity 125,508,260 41,418,239 131,323,109 Liabilities Current liabilities Accounts payable 1,096,114 1,293,289 640,962 Other liabilities 554,906 295,638 586,574 Accrued liabilities and deferred income 1,847,926 1,852,901 2,888,265 Total current liabilities 3,498,946 3,441,828 4,115,801 TOTAL EQUITY AND LIABILITIES 129,007,206 44,860,067 135,438,910 Pledged assets None None None Contingent liabilities None None None	SEK	31 Mar 2016	31 Mar 2015	31 Dec 2015

Statement of changes in equity, Parent Company

SEK	Share capital	Share premium reserve	Loss brought forward	Loss for the period	Total equity
Opening equity Jan 1, 2015	2,386,974	123,360,235	–53,969,350	–26,577,337	45,200,522
Comprehensive loss for the period
Loss for the period				–28,763,809	–28,763,809
Disposition according to AGM
Loss brought forward			–26,577,337	26,577,337	–
Other			–	–	–
Total comprehensive loss for the period			–80,546,687	–28,763,809	16,436,713
Transactions with shareholders
New share issue, net after issue expenses	2,402,017	112,484,379			114,886,396
Total transactions with shareholders	2,402,017	112,484,379			114,886,396
Closing equity Dec 31 2015	4,788,991	235,844,614	–80,546,687	–28,763,809	131,323,109
Opening equity Jan 1, 2016	4,788,991	235,844,614	–80,546,687	–28,763,809	131,323,109
Comprehensive loss for the period
Loss for the period				–5,814,849	–5,814,849
Disposition according to AGM
Loss brought forward			–28,763,809	28,763,809	–
Other			–	–	–
Total comprehensive loss for the period			–109,310,496	–5,814,849	125,508,260
Transactions with shareholders
New share issue, net after issue expenses	–	–			–
Total transactions with shareholders	–	–			–
Closing equity March 31 2016	4,788,991	235,844,614	–109,310,496	–5,814,849	125,508,260

Condensed cash flow statement, Parent Company

SEK	Jan–Mar 2016	Jan–Mar 2015	Jan–Dec 2015
Current operations
Operating loss	–6,026,569	–3,897,841	–22,125,310
Adjustments for items not included in cash flow
Depreciation	315,624	31,167	–6,464,003
Interest received	211,798	115,574	415,906
interest paid	–78	–16	–405
Cash flow from current operations before change in working capital	–5,499,225	–3,751,116	–28,173,812
Change in working capital
Decrease/increase in current receivables	–210,358	–650,645	–5,779
Decrease/increase in current liabilities	–616,855	370,411	1,040,414
Change in working capital	–827,213	–280,234	1,034,635
Cash flow from current operations	–6,326,438	–4,031,350	–27,139,177
Investing activities
Acquisition of subsidiaries
Acquisition of intangible assets	–553,299	–936,834	–4,643,111
Acquisition of tangible assets	–	–	3,378
Changes in financial assets	–9,350,162	–4,841,244	–9,747,455
Cash flow from investing activities	–9,903,461	–5,778,078	–14,387,188
Financing activities
New share issue	–	–	114,886,396
Cash flow from financing activities	–	–	114,886,396
Cash-flow for the period	–16,229,899	–9,809,428	73,360,031
Cash and cash equivalents at beginning of period	101,963,730	28,603,699	28,603,699
Cash and cash equivalents at end of period	85,733,831	18,794,271	101,963,730

Notes

Note 1 Accounting principles

The consolidated financial statements have been prepared in accordance with the Annual Accounts Act, RFR's (Rådet för finansiell rapportering, the Swedish Financial Reporting Board) recommendation RFR 1 and RFR 2, Supplementary Accounting Rules for Groups and the International Financial Reporting Standards (IFRS) and interpretation statements from the International Financial Reporting Interpretations Committee (IFRIC), as endorsed by the EU.

The group's accounting policies are unchanged from the previous year.

Capitalized expenditures for development of products

Expenditure for development, where research results or other knowledge are applied to achieve new or improved products or processes, is recognized as an asset in the Statement of Financial Position only if the following conditions are satisfied:

• 1) It is technically possible to complete the intangible asset and use or sell it,
• 2) The Company intends to complete the intangible asset and use or sell it,
• 3) The conditions to use or sell the intangible asset are in place,

• 4) The Company demonstrates how the intangible asset will generate likely future economic benefits,

• 5) There are adequate technological, economic and other resources to complete development and to use or sell the intangible asset, and

• 6) The expenditure relating to the intangible asset during its development can be measured reliably.

Directly related expenditure that is capitalized mainly consists of expenditure from subcontractors and expenses for employees.

Other development expenditure that does not satisfy these criteria is expensed when it arises. Development expenditure previously expensed is not recognized as an asset in subsequent periods.

After first-time reporting, capitalized development expenditure is recognized at cost after deducting for accumulated amortization and potential accumulated impairment. Amortization of capitalized expenditure for product development started in October 2014.

Shareholder and Board member Leif Ryd has received consulting fees of SEK 135,000 (135,000).

Glossary

Arthritis: see Osteoarthritis.

Arthroscopy: Inspection of the inside of a joint with the help of an arthroscope. An instrument is introduced through a small cut to investigate the inside of the joint and possibly correct any problems (a type of keyhole surgery).

Cartilage: The smooth, rubbery layer of shiny, white connective tissue that covers the end of bones at the joints. This tissue allows movement with low friction.

Cartilage defect of grade III (ICRS scale): Lesion through the cartilage, exposing the bone.

Cartilage defect of grade IV (ICRS scale): Lesion through the cartilage and in the underlying bone.

CE marking: CE marking is a manufacturer's or importer's declaration that a product meets the EU's fundamental health, environmental and safety requirements. The product in question undergoes a conformity assessment by a Notified Body, which decides whether the product fulfils the applicable product requirements in the EU. A CE mark means that the manufacturer or importer has the formal approvals necessary to market and sell the product in the European Economic Area.

Cobalt: A chemical element commonly occurring in metal alloys used in knee prostheses.

Cobalt chrome: A metal alloy mainly consisting of cobalt and chromium, commonly occurring in metal alloys used in knee prostheses.

CT scan: CX-ray computed tomography scan, a medical imaging technique where a series of X-ray images allows the user to get three-dimensional image data of the patient.

Debridement: Removal of damaged tissue.

Degenerative origin: Conditions in which the cells, tissues or organs deteriorate and lose function. In degenerative joint disease, the deterioration is due to wear, tear or breakdown of cartilage.

FDA: US Food and Drug Administration.

Focal cartilage defect: A cartilage defect in a well defined area.

Hyaline cartilage: Natural cartilage.

Hydroxyapatite: A mineral that is the major component of human bone tissue and the main mineral of dental enamel and dentin.

Invasive treatment alternative: Treatments that require a surgical procedure.

KOL: Key Opinion Leader, prominent and opinion-leading surgeon.

Microfracture: A surgical technique that can be used in treatment of focal cartilage defects (not extensive osteoarthritis) in an attempt to stimulate the growth of new cartilage.

Mosaicplasty: A surgical technique for treatment of cartilage and underlying bone defects where cylindrical bone and cartilage plugs are harvested from less weight-bearing surfaces of the knee joint and inserted into the damaged area.

MRI: Magnetic resonance imaging, a medical imaging technique where images acquired using a strong magnetic field allows the user to get three-dimensional image data of the patient.

Orthopaedics: The medical specialty that focuses on injuries and diseases of the body's musculoskeletal system. This complex system includes bones, joints, ligaments, tendons, muscles and nerves.

Osteoarthritis: Osteoarthritis is type of joint disease that is characterised by loss of joint function with varying destruction of joint cartilage and the underlying bone.

Osteochondral autograft procedure: See Mosaicplasty.

Osteochondral defect: Cartilage and underlying bone defect.

Prosthesis: An artificial device that replaces a missing or injured body part, such as artificial arm or leg. The term prosthesis is also used for certain of the implants that are used to repair joints, such as hip and knee prostheses.

Traumatic damage: Damage caused by an outside force, such as fall injuries.

Episurf Medical

– a unique solution for every patient

Episurf Medical was founded in 2009 on a commitment to offering people with painful joint injuries a more active and healthy life through customised treatment alternatives. We put the patient in the centre of the diagnosis and design of implants and surgical instruments. By combining advanced 3D imaging technology with the latest manufacturing technology, we are able to adapt not only each implant to the patient's injury and anatomy, but also the surgical instruments used. In this way, we can ensure that each patient receives treatment that is perfectly suited to his or her anatomy and, thus, ensure a faster, more secure, and better patient-specific treatment for a more active and healthy life.

A proprietary web-based IT system for patient-specific design and surgical pre-planning

The scalable μiFidelity® system has been developed for diagnostics, surgical pre-planning and cost-effective patient customisation. In a first step, the company's main focus is on early stage arthritic changes in the knee joint.

Epioscopy®

Epioscopy® is an advanced clinical assessment tool intended to provide the physician with decision support information in the form of 3D-vizualizations of the segmented patient knee.

Three different knee implants with a focus on early stages of arthritis

Episurf Medical currently has three types of implants on the market.

• » Episealer® Condyle Solo for the treatment of localised cartilage and underlying bone defects in the knee joint.
• » Episealer® Trochlea Solo for the treatment of localised cartilage and underlying bone defects in the area behind the patella.
• » Episealer® Femoral Twin for the treatment of localised cartilage and underlying bone defects both in the knee joint and in the area behind the patella.

Episealer® Condyle Solo Episealer®

Trochlea Solo Episealer®

Femoral Twin

Drill guides

Every product is delivered with our surgical drill guide Epiguide®. We also offer a surgical drill guide, Epiguide® MOS, that is designed for use in mosaicplasty procedures.

Around 80 patents and patent applications

The technology that creates patient-specific implants and instruments is supported by a strong patent portfolio with approximately 80 patents and patent applications in the areas of image handling, patient-specific implant systems, patient-specific surgical techniques, patient-specific instrumentation and manufacturing for all of the body's joints.

Financial calendar

Interim Report January-June 2016:	August 19, 2016
Interim Report January-August 2016:	November 4, 2016
Year End Report 2016:	February 24, 2017

The AGM will be held in Stockholm on the 24th of May 2016

The information in this Interim Report is such that Episurf Medical AB is required to disclose in accordance with the Securities Markets Act and/or the Financial Instruments Trading Act. The information was published May 17, 2016, at 08:30 am.

IR contact

Pål Ryfors CFO Phone: +46 709 62 36 69 e-mail: pal.ryfors@episurf.com

Rosemary Cunningham Thomas CEO Phone 1: +46 (0) 70 765 5892 Phone 2: +44 (0) 7803 753 603 e-mail: rosemary@episurf.com

Episurf Medical AB (publ) Corp. ID no. 556767-0541 Stora Skuggans Väg 11, SE-115 42 Stockholm, Sweden www.episurf.com