Episurf — Interim / Quarterly Report 2018

Jul 20, 2018

Episealer® surgery in Basel, Switzerland with Prof. Markus Arnold, spring 2018

Interim Report, 1 April–30 June 2018

Second quarter 2018 compared to 2017, Group

• » Gross order intake increased by 104% and amounted to SEK 1.1m (0.6)
• » Order backlog amounted to SEK 1.1m (0.5)
• » 54% growth in orders for Episealer® knee implants during the quarter with 43 (28) approved orders
• » Group net sales increased by 33% to SEK 0.8m (0.6)
• » Loss before tax amounted to SEK –16.2m (–13.0)
• » Earnings per share (weighted average) amounted to SEK –0.53 (–0.42)

Significant events during the second quarter

• » IDE application filed to the US FDA and FDA has indicated quick feedback
• » Strategic decision to enter the Indian market and regulatory preparations for India initiated
• » Strong commercial development in Germany
• » Promising clinical results, including 2-year follow-up data, accepted for presentations at several clinical congresses
• » 45 patients have now had their implant for more than 3 years and 15 patients more than 4 years
• » Appointment of Dr. Michael A Kelly as special study advisor for the US IDE study

Revenues and gross order intake

• » Episurf Medical's knee products were approved for marketing and sale in Spain
• » Episurf Medical entered into a distribution agreement in Hong Kong and established subsidiary in the US
• » Katarina Flodström assumed the position Chief Regulatory Officer with responsibility for regulatory affairs, quality affairs and Intellectual property

Significant events after the second quarter

» New Japanese patent approval for Episurf Medical

Pål Ryfors, CEO

Message from the CEO

Dear shareholders,

We are continuing to be optimistic on Episurf Medical's progress. First and foremost, our business in Europe is growing, driven by Germany which now starts to show signs of real commercial progress. In parallel, we have developed a robust clinical strategy targeting a US FDA approval and have taken a significant step in US by the filing of our IDE application. Moreover, our excellent clinical results are becoming well known among orthopaedic surgeons in Europe. All of this, topped with a growing interest for mini implants in the orthopaedic industry and an interesting development in new markets outside of Europe and the US, indicates that our positioning in the orthopaedic industry is very good.

Key highlights during the quarter

During the second quarter, the company achieved one of its biggest milestones when we filed our IDE application to the US Food and Drug Administration (FDA). An approved IDE application will allow Episurf Medical to initiate a clinical trial in the US that will form the basis for a future final application for FDA approval. We are expecting feedback

analysed the demographic factors driving the US orthopaedic market, and our conclusion is that the Episealer® knee implant meets a significant unmet and a major commercial opportunity. An FDA approval would also have big positive impact for us outside of the US because many other countries look to FDA for regulatory guidance.

During the quarter we took the important step of appointing Dr. Michael A Kelly, currently Chairman of the Department of Orthopaedic Surgery at the Hackensack University Medical Center in New Jersey, as special study advisor. Dr. Kelly has extensive experience in the global orthopaedic markets, and was previously President of the American Knee Society. We want to "hit the ground running" once we receive clearance to go ahead with the clinical trial, and Dr. Kelly plays an important role in positioning us for this.

Another key highlight in the quarter was the performance of our German business, which now stands out as a great market example, and promises to be a commercial success. More than 50 surgeries were planned in Germany alone during the first six months of the year, which barely

"Our business in Europe is growing, driven by Germany which now starts to show signs of real commercial progress. In parallel, we have developed a robust clinical strategy targeting a US FDA approval and have taken a significant step in US by the filing of our IDE application."

from the FDA on our IDE application shortly, and we hope to conclude the study design and all the study details soon. The preparations have been intense and we have discussions with several potential study sites, both in the US as well as in Europe. The interest to participate in our study has been very positive.

The US market represents the biggest orthopaedic market in the world, and the knee segment is the single biggest market segment, with an estimated market value of USD 9 billion annually. Further, there are about 30,000 certified orthopaedic surgeons in the US, of whom about a third have knee as their main sub-speciality. We have also

scratches the surface of the market potential. Our peer reviewed clinical results were only recently published and we are still only working with a small fraction of all the surgeons that we think we will now be able to reach with our data in hand.

Germany is the country in which we have come the farthest in terms of clinical acceptance, re-imbursement and market penetration, and we are starting to see that in the numbers. Germany will continue to be a highly important market for us and it's starting to act as a proof of concept that the Episealer® technology is a viable part of the treatment algorithm.

New opportunities

Readers may recall that earlier in 2018 we visited several Asian countries to assess their potential as markets for our products. After careful review we have worked through our priorities. We announced that we were launching in Hong Kong with a local partner in April 2018, and I am now happy to announce that the next country in which we will initiate activities is India. India represents an attractive opportunity for us. All the major international orthopaedic players are already present in India, which has an orthopaedic market growing more quickly than the US and Western European markets. The Indian population is aging and the potential osteoarthritis patient base is growing. A few weeks ago, we held a workshop with about 35 orthopaedic surgeons from India, who showed great interest in our technology. We have initiated the process of establishing a legal entity in India which is a necessary first step and the regulatory filing is expected to take several months.

Continued clinical progress

When we updated our strategy earlier in 2018, we emphasized the importance of clinical data supporting the Episealer® technology, and this remains our most important strategic activity. In line with this, in the second quarterit was announced that no fewer than three scientific abstracts had been accepted for presentations at important clinical congresses.

The first one was the scientific abstract "Clinical results of an individualized mini-metal implant for focal cartilage lesions in the knee" by Johannes Holz, Tim Spalding, Karl Eriksson, Tobias Jung, Peter Verdonk and Clemens Kösters. This abstract covers interim results from a European multicentre study and was accepted for presentation at the 7th Annual Congress of the Deutschen Kniegesellschaft (DKG, the German Knee Society). Further, the abstract "Clinical 2 years results after implantation of patient-specific mini-metal implants in the middle-aged patients after previous frustrane cartilage surgery" by Priv.-Doz. Dr. med. Clemens Kösters was also accepted for presentation at the same meeting. In June, it was also announced that clinical results from the use of Episealer® were to be presented at the annual meeting of the Swedish Orthopaedic Association, as the scientific abstract "Clinical results of an individualized mini-metal implant" by Ass. Prof. Karl Eriksson was accepted for presentation.

One cannot overstate the importance of this to Episurf Medical, and the fact that more and more 2-year follow-up data is being presented is extremely encouraging. We are also continuing to see a growing interest in the industry for mini implants as an alternative for patients in the treatment gap, which was best exemplified during the quarter by the publication of the agenda for the upcoming "Combined Bristol & Oxford Unicompartmental Knee Arthritis Symposium 2018". This is a very important meeting and the founders and organisers are closely tied to the arrival and growth of partial knee replacements in the world. Mini implants for isolated defects are an important topic for discussion this year, and we have been happy to see Episealer® on the agenda. As a last point on our clinical process, we note that as of now 45 patients have had their implant for more than 3 years and 15 patients have now had the implant for more than 4 years.

What do we have ahead of us?

In the coming months, we look forward to publication and presentation of additional clinical evidence supporting the Episealer® technology. We are also expecting to receive feedback and ultimately a decision from the FDA on our proposed IDE study. We are expecting continued growth in Europe, especially in Germany. We hope that the regulatory review of our ankle implant will be concluded and we have planned surgeon meetings in our new markets in Israel and Hong Kong. We have previously announced that we are running preliminary discussions regarding potential partnerships for the US market, and these discussions are continuing and we will update investors once anything is formalised.

The financial results for the first six months are SEK 2.4 million better than the same period last year and we are continuing to work with a disciplined expense strategy. The result in the second quarter was negatively impacted by expenses related to the IDE filing. We are continuing to experience a growing order book, and we expect growth to continue. We have a total of SEK 107.9 million in available financing.

Stockholm, July 2018

Pål Ryfors, CEO

Business update and forward–looking statements

By the reporting date on July 20 2018, Episurf Medical's implants had been used in 341 surgeries. The company is approaching 400 implantation since another 51 orders are approved for surgery in the coming weeks. Episurf Medical's patients are experiencing significant improvements in pain and mobility. Furthermore, they are also experiencing a short recovery time. Out of the total implant portfolio of 341 implants, we now have 15 patients who have had their implants for more than 4 years and 104 patients have now had their implants for more than 2 years since the surgery date. During the second quarter,

32 surgeries were performed with the Episealer® knee implant and we continued to make progress in all of our key markets. 43 orders were approved for surgery during the second quarter. We continue to note a demand for the Episealer® Femoral Twin implant as 84% of the surgeries performed in the second quarter were of this product. This clearly shows that there is a demand for treating the more elongated lesions and the Episurf Medical technology and the Episealer® Femoral Twin implant meets this demand in a very good way

Implant surgeries in quarter

Financial information

Group

Net sales and operating profit/loss

Group net sales amounted to SEK 0.8m (0.6) in the quarter and to SEK 1.9m (1.1) for the first six months. Loss before tax amounted to SEK –16.2m (–13.0) for the quarter and SEK –29.6m (–32.0) for the first six months. The higher costs in the second quarter of 2018 are due primarily to increased costs for the US, amounting to 1.6m SEK (0.3) and the company has previously communicated that work is being carried out to secure international markets.

Financial position

Group cash and cash equivalents at end of period amounted to SEK 44.9m (103.1). To secure financing of continued operations, a financing agreement with European Select Growth Opportunities Fund was entered into in February and decided on the Annual General Meeting in April 2018. The agreement provides the company with access to SEK 70m over a 36 month period of which SEK 7m was acquired during the second quarter 2018. See more information about the financing agreement below and on the Company's website. The equity ratio was 81.4% (93.0). Group investments in intangible assets amounted to SEK 2.5m (1.6) for the quarter of which SEK 1.0m (0.7) are related to capitalised development costs and for the first six months investments in intangible assets amounted to SEK 5.4m (4.0) of which SEK 2.9m (1.7) are related to capitalised development costs, remaining investments relates to patents. Investments in tangible assets amounted to SEK – (0.0) for the quarter and the first six months.

Human resources

Number of employees in the Group at end of the period was 25 (28).

Parent Company

Net sales and operating profit/loss

Group net sales amounted to SEK 0.1m (–) in the quarter and for the first six months to SEK 0.2m (–). Loss before tax amounted to SEK –8.4m (–6.1) for the quarter and SEK –14.9m (–17.0) for the first six months.

Financial position

Cash and cash equivalents at the end of period for the Parent Company amounted to SEK 35.0m (93.2). The equity ratio was 94.7% (98.0). Investments in intangible assets, capitalised development costs, amounted to SEK 1.0m (0.7) for the quarter and SEK 2.9m (1.7) for the first six months. Investments in tangible assets amounted to SEK –m (–) for the quarter and the first six months.

Human resources

Number of employees in the Parent Company at end of the period was 12 (13).

Transactions with closely related parties

Shareholder and Board member Leif Ryd has received consulting fees for ongoing work as well as work for the Clinical Advisory Board during the period of SEK 0.3m (0.3). Serendipity Communications AB has received consulting fees of SEK –m (0.1) and Serendipity Legal AB of SEK –m (0.0). Serendipity Communications AB and Serendipity Legal AB are related parties to Episurf Medicals largest shareholder Serendipity Ixora AB.

Episurf Medical's strategy rests on four key pillars:

Clinical and health economical data supporting the Episealer® technology

Large user base of orthopaedic surgeons and KOL's

Secure reimbursement and production enabling high margins

Technological and clinical relevance through a high degree of innovation

Key terms of the financing agreement

Highlights about the financing agreement

• » The first tranche was carried out during the second quarter as a directed issue of SEK 7 m through the issuance of notes with warrants attached to the investor.
• » Upon the full exercise of the warrants and the shareholders warrants of the first tranche Episurf Medical will receive an additional SEK 7m.
• » Maximum additional potential financing of up to SEK 63m (plus approximately SEK 63m upon exercise of all the warrants and the shareholders warrants) through similar directed issues in subsequent tranches over the next 36 months, subject to fulfilment of certain conditions.
• » As a technical measure in order to meet the Investor's demand for immediate access to its shares, shareholders, during a transitional period, lend shares at no cost.
• » Episurf Medical pay a commitment fee to the investor equal to 4% of the aggregate principal amount of the notes issued under the requested tranche.
• » In case of an event of default, each outstanding note shall accrue interest at a rate of 15%.

Main characteristics of the notes, the warrants and the shareholders warrants:

» The notes have a principal amount of SEK 50,000 each. they bear no interest and have a maturity of 12 months from the date of the registration of their issuance with the Swedish Companies Registration Office. During their term, the investor may request to convert some or all of the notes at a variable conversion price representing an

8% discount to the lowest daily volume weighted average price over the last 15 trading days during which the investor has not sold any share on the market prior to the conversion date.

• » Upon such conversion request, Episurf Medical has the option to remit, at its discretion, cash, shares in Episurf Medical or a combination of both. This characteristic will enable Episurf Medical to manage the potential dilution resulting from the notes.
• » The warrants have a term of five (5) years from the date of the registration of their issuance with the Swedish Companies Registration Office and will immediately be detached from the notes. Each warrant gives right to subscribe for one (1) new share (subject to standard adjustments in accordance with the terms and conditions of the warrants) in Episurf Medical at a fixed strike price representing a 120% premium to the reference price on the date of the request from Episurf Medical to issue a new tranche.
• » The strike price for warrants under the first tranche was set at 120% of the lowest reference price on the following two dates: (i) the day of issuance of the first tranche by the board of directors and (ii) 8 January 2018, the date of signature of the term sheet between Episurf Medical and the investor (being SEK 5.1132). Episurf Medical publicly announced the strike price of the warrants in connection with the issuance of the first tranche which amounted to 6.10.
• » The shareholders warrants have the same characteristics as the warrants and is admitted to public trading.

Follow-up table, financing agreement

Tranches	Date	Number of Notes	Number of warrants
First Tranche (KV1/TO4B)	2018-05-23	140	2,279,002
		Shares	Registration

Date	Series	Number	Shares issued	Registration date	SEK volume	Conversion price	Increase of share capital
2018-06-08	Kv1	20	204,081	2018-06-19	1,000,000	4.90	61,216

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.

30 June 2018

A-shares	5,257,078
B-shares	25,496,498
Total number of shares	30,753,576
Total number of votes	41,267,732

The ten largest shareholders in Episurf Medical AB at June 30 2018

	No. of A-shares	No. of B-shares	Share capital in %	Voting rights, %
Serendipity Ixora AB	4,601,519	0	15.0	33.5
JP Morgan Bank, Luxemburg	112,066	2,162,916	7.4	6.1
Försäkringsaktiebolaget, Avanza Pension	0	1,631,000	5.3	4.0
SEB London- Luxemburg, (SICAV Fond)	0	1,376,356	4.5	3.3
AMF Aktiefond småbolag	0	1,164,448	3.8	2.8
Gile Medicinkonsult AB	279,945	142,954	1.4	2.4
LMK Forward AB	0	938,000	3.1	2.3
Swedbank Försäkring AB	0	714,052	2.3	1.7
Pål Ryfors	0	666,393	2.2	1.6
Nordnet Pensionsförsäkring AB	0	639,381	2.1	1.5
Total, 10 largets shareholders	4,993,530	9,435,500	46.9	59.2
Summary, other	263,548	16,060,998	53.1	40.8
Total	5,257,078	25,496,498	100.0	100.0

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, the possibility to obtain the correct reimbursement for the Group's products and dependence on key personnel and partners. The Company does not see any new material risks for the upcoming three 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, 20 July 2018

Dennis D. Stripe Wilder Fulford Board chairman Board member

Christian Krüeger Leif Ryd Laura Shunk Board member Board member Board member

Pål Ryfors CEO

The information in this interim report has not been reviewed by the company's auditors.

Consolidated income statement

SEKm	Apr–Jun 2018	Apr–Jun 2017	Jan–Jun 2018	Jan–Jun 2017	Jan–Dec 2017
Operating income
Net sales	0.8	0.6	1.9	1.1	2.5
Other operating income	0.1	0.1	0.2	0.1	0.6
Total operating income	0.9	0.7	2.1	1.2	3.1
Operation expenses
Merchandise	–0.8	–0.6	–1.6	–0.9	–2.3
Other expenses	–10.0	–7.0	–18.6	–16.6	–31.9
Personnel costs	–7.5	–6.9	–15.0	–17.7	–33.3
Capitalised development expenditure	2.5	1.8	5.4	4.0	7.4
Depreciation	–1.3	–1.0	–2.1	–2.0	–4.2
Total operating expenses	–17.0	–13.7	–31.9	–33.3	–64.2
Operating loss	–16.0	–13.0	–29.8	–32.0	–61.2
Financial items
Financial income, other	0.1	0.0	0.5	0.0	0.1
Financial expenses, other	–0.3	–0.0	–0.3	–0.0	0.0
Results from net financial items	–0.2	0.0	0.2	0.0	0.1
Loss before tax	–16.2	–13.0	–29.6	–32.0	–61.1
Tax on income for the period	0.0	0.0	0.0	0.0	0.0
Loss for the period	–16.3	–13.0	–29.6	–32.0	–61.1
Net loss attributable to:
Parent company shareholders	–16.3	–13.0	–29.6	–32.0	–61.1
Earnings per share before and after dilu
tion are consistent with the rules in IAS 33	–0.53	–0.42	–0.97	–1.26	–2.18
Average number of shares	30,617,614	30,571,627	30,594,747	25,401,088	28,007,606

Consolidated statement of comprehensive income

SEKm	Apr–Jun 2018	Apr–Jun 2017	Jan–Jun 2018	Jan–Jun 2017	Jan–Dec 2017
Loss for the period	–16.3	–13.0	–29.6	–32.0	–61.1
Other comprehensive income for the period: Other comprehensive income that may be reclassified subsequently
to profit or loss for the period, net of tax	0.0	0.0	0.0	0.1	0.0
Total comprehensive income for the period	–16.3	–13.0	–29.6	–31.9	–61.1

Consolidated balance sheet

SEKm	30 Jun 2018	30 Jun 2017	31 Dec 2017
ASSETS
Non-current assets
Intangible assets
Capitalised development costs	9.1	5.4	6.8
Patents	10.3	9.2	9.3
Total intangible assets	19.4	14.6	16.0
Property, plant and equipment
Equipment	0.2	0.3	0.2
Total property, plant and equipment	0.2	0.3	0.2
Total non–current assets	19.6	14.9	16.3
Current assets
Inventories	1.9	1.1	1.7
Trade receivables	0.9	0.6	1.0
Other receivables	1.3	1.7	1.2
Deferred expenses and accrued income	1.8	1.6	1.8
Cash and bank balances	44.9	103.1	71.3
Total current assets	50.8	108.2	77.0
TOTAL ASSETS	70.4	123.1	93.3
EQUITY AND LIABILITIES
Equity	57.3	114.4	85.6
Liabilities
Non-current liabilities
Non-current liabilities	0.1	0.0	0.0
Total non-current liabilities	0.1	0.0	0.0
Current liabilities
Trade payables	3.0	1.7	2.5
Other liabilities	6.2	2.1	1.4
Accrued liabilities and deferred income	3.8	4.8	3.8
Total current liabilities	13.0	8.7	7.7
Total liabilities	13.1	8.7	7.7
TOTAL EQUITY AND LIABILITIES	70.4	123.1	93.3
Equity ratio, %	81.4	93.0	91.7
Equity per share, SEK	1.86	3.75	2.80

Consolidated statement of changes in equity

	Attributable to equity holders of the parent
SEKm	Share capital	Other contributed capital	Reserves	Accumulated deficit incl. loss for the year	Total equity
Opening equity 1 January 2017	4.8	237.0	0.6	–193.7	48.7
Total comprehensive income
Loss for the year			–0.0	–61.1	–61.1
Total comprehensive income			–0.0	–61.1	–61.1
Transactions with shareholders
New share issue, net after issue expenses*	4.4	93.3			97.7
Options issued to staff				0.3	0.3
Total transactions with shareholders	4.4	93.3		0.3	98.0
Closing equity 31 December 2017	9.2	330.4	0.6	–254.6	85.6
Opening equity 1 January 2018	9.2	330.4	0.6	–254.6	85.6
Total comprehensive income
Loss for the period			–0.2	–29.6	–29.8
Total comprehensive income			–0.2	–29.6	–29.8
Transactions with shareholders
Financing agreement**	0.1	1.4			1.4
Options issued to staff				0.1	0.1
Total transactions with shareholders	0.1	1.4		0.1	1.5
Closing equity 30 June 2018	9.2	331.8	0.4	–284.0	57.3

* Issue expenses amounts to SEK 11,769,732.

** See more information about the financing agreement under financial information on pages 5–6.

Cash flow statement

SEKm	Apr–Jun 2018	Apr–Jun 2017	Jan–Jun 2018	Jan–Jun 2017	Jan–Dec 2017
Operating activities
Operating loss	–16.0	–13.0	–29.8	–32.0	–61.2
Adjustments for items not included in cash flow
Depreciation	1.3	1.0	2.1	2.0	4.2
Employee stock option expenses	0.0	0.0	0.1	0.0	0.1
Interest received	0.1	0.0	0.5	0.0	0.1
Interest paid	–0.3	–0.0	–0.3	–0.0	–0.0
Cash flow from operating activities before change in working capital	–15.0	–12.0	–27.3	–30.0	–56.8
Change in working capital
Decrease/increase in inventory	–0.3	0.1	–0.3	–0.0	–0.6
Decrease/increase in trade receivables	–0.2	–0.2	0.1	–0.0	–0.4
Decrease/increase in current receivables	0.6	0.1	–0.0	0.0	0.3
Decrease/increase in current liabilities	4.1	–9.8	5.2	–2.9	–3.9
Change in working capital	4.1	–9.8	5.0	–2.9	–4.6
Cash flow from operating activities	–10.9	–21.8	–22.4	–32.9	–61.4
Investing activities
Investments of intangible fixed assets	–2.5	–1.6	–5.4	–4.0	–7.4
Investments of property, plant and equipment	–	–	–	–0.0	–0.0
Cash flow from investing activities	–2.5	–1.6	–5.4	–4.0	–7.5
Financing activities
Investment in warrants	0.1	–	0.1	–	0.1
New share issue	–	–0,8	–	97,7	97,7
Part of the financing agreement	1,4	–	1,4	–	–
Cash flow from financing activities	1.4	–0.8	1.4	97.7	97.8
Cash flow for the period	–11.9	–24.2	–26.4	60.8	29.0
Cash and cash equivalents
at beginning of period	56.8	127.3	71.3	42.3	42.3
Cash and cash equivalents at end of period	44.9	103.1	44.9	103.1	71.3

Income statement, Parent Company

SEKm	Apr–Jun 2018	Apr–Jun 2017	Jan–Jun 2018	Jan–Jun 2017	Jan–Dec 2017
Operating income
Net sales	0.1	–	0.2	–	0.2
Other operating income	0.0	–0.0	0.0	–0.0	–
Total income	0.1	–0.0	0.2	–0.0	0.2
Operating expenses
Other external expenses	–5.0	–3.4	–9.5	–11.4	–19.2
Personnel costs	–3.7	–3.3	–7.2	–6.7	–13.2
Capitalised development expenditure	1.0	1.0	2.9	1.7	3.7
Amortisation of intangible assets and depreciation of property, plant and
equipment	–0.5	–0.3	–1.0	–0.6	–1.4
Total operating expenses	–8.2	–6.1	–14.8	–17.0	–30.0
Operating loss	–8.1	–6.1	–14.6	–17.0	–29.7
Financial items
Financial income, other	0.0	0.0	0.0	0.0	0.1
Financial expenses, other	–0.3	–0.0	–0.3	–0.0	0.0
Loss from net financial items	–0.3	0.0	–0.3	0.0	0.1
Loss before contribution and tax	–8.4	–6.1	–14.9	–17.0	–29.7
Loss before tax	–8.4	–6.1	–14.9	–17.0	–29.7
Tax on income for the period	–	–	–	–	–
Loss for the period	–8.4	–6.1	–14.9	–17.0	–29.7

Parent Company statement of comprehensive income

SEKm	Apr–Jun 2018	Apr–Jun 2017	Jan–Jun 2018	Jan–Jun 2017	Jan–Dec 2017
Net profit	–8.4	–6.1	–14.9	–17.0	–29.7
Other comprehensive income for the period:
Other comprehensive income for the period, net of tax	–	–	–	–	–
Total comprehensive income for the period	–8.4	–6.1	–14.9	–17.0	–29.7

Balance sheet, Parent Company

SEKm	30 Jun 2018	30 Jun 2017	31 Dec 2017
ASSETS
Fixed assets
Intangible fixed assets
Capitalised development costs	9.1	5.8	7.1
Total intangible fixed assets	9.1	5.8	7.1
Tangible fixed assets
Machinery and equipment	0.1	0.2	0.1
Total tangible fixed assets	0.1	0.2	0.1
Financial assets
Shares in group companies	91.3	61.1	78.3
Long-term receivables from group companies	23.4	19.4	20.0
Total financial assets	114.7	80.5	98.2
Total fixed assets	123.8	86.5	105.5
Current assets
Short term receivables
Other receivables	0.6	1.1	0.5
Prepaid expenses and accrued income	1.0	0.8	0.8
Total short term receivables	1.6	1.9	1.3
Cash and bank balances	35.0	93.2	62.5
Total current assets	36.6	95.1	63.8
TOTAL ASSETS	160.4	181.6	169.3
EQUITY AND LIABILITIES
Equity	151.9	177.9	165.3
Liabilities
Long-term liabilities	0.0	0.0	0.0
Total long–term liabilities	0.0	0.0	0.0
Current liabilities
Trade payables	0.5	0.6	0.9
Other liabilities	5.5	1.2	0.6
Accrued liabilities and deferred income	2.5	1.8	2.5
Total current liabilities	8.5	3.6	4.0
Total liabilities	8.5	3.6	4.0
TOTAL EQUITY AND LIABILITIES	160.4	181.6	169.3

Statement of changes in equity, Parent Company

SEKm	Share capital	Develop ment fund	Other contribut ed capital	Loss brought forward	Loss for the period	Total equity
Opening equity 1 January 2017 Comprehensive loss for the period	4.8	1.1	235.8	–110.4	–34.1	97.2
Loss for the period Disposition according to AGM					–29.7	–29.7
Loss brought forward				–34.1	34.1	–
Development fund		3.5		–3.5		–
Total comprehensive loss for the period		4.5		–148.0	–29.7	67.5
Transactions with shareholders
New share issue net after issue expenses*	4.4		93.3			97.7
Warrants			0.1			0.1
Total transactions with shareholders	4.4		93.5			97.8
Closing equity 31 December 2017	9.2	4.5	329.3	–148.0	–29.7	165.3
Opening equity 1 January 2018	9.2	4.5	329.3	–148.0	–29.7	165.3
Comprehensive loss for the period Loss for the period					–14.9	–14.9
Disposition according to AGM
Loss brought forward				–29.7	29.7	–
Development fund		2.5		–2.5		–
Total comprehensive loss for the period		7.0		–180.2	–14.9	150.5
Transactions with shareholders
Financing agreement**	0.1		1.4			1.4
Total transactions with shareholders	0.1		1.4			1.4
Closing equity 31 March 2018	9.2	7.0	330.7	–180.2	–14.9	151.9

* Issue expenses amounts to SEK 11,769,732.

** See more information about the financing agreement under financial information on pages 5–6.

Cash flow statement, Parent Company

SEKm	Apr–Jun 2018	Apr–Jun 2017	Jan–Jun 2018	Jan–Jun 2017	Jan–Dec 2017
Operating activities
Operating loss	–8.1	–6.1	–14.6	–17.0	–29.7
Adjustments for items not included in cash flow
Depreciation	0.5	0.3	1.0	0.6	1.4
Interest received	0.0	0.0	0.0	0.0	0.1
Interest paid	–0.3	–0.0	–0.3	–0.0	–0.0
Change in non-current liabilities	–0.0	0.0	–0.0	–0.0	–0.0
Cash flow from operating activities before change in working capital	–7.9	–5.8	–13.9	–16.4	–28.3
Change in working capital
Decrease/increase in current receivables	0.9	–0.1	–0.3	–0.5	0.1
Decrease/increase in current liabilities	3.4	–8.5	4.6	–6.9	–6.6
Total changes in working capital	4.3	–8.7	4.3	–7.4	–6.5
Cash flow from operating activities	–3.6	–14.5	–9.6	–23.8	–34.8
Cash flow from investing activities
Investments of intangible assets	–1.0	–0.7	–2.9	–1.7	–3.7
Changes in financial assets	–9.1	–15.7	–16.4	–19.2	–36.9
Cash flow from investing activities	–10.1	–16.4	–19.3	–20.9	–40.6
Cash flow from financing activities
Investment in warrants	0.1	–	0.1	–	0.1
New share issue	–	–0.8	–	97.7	97.7
Part of the financing agreement	1.4	–	1,4	–	–
Cash flow from financing activities	1.4	–0.8	1.4	97.7	97.8
Cash flow for the period	–12.2	–31.6	–27.5	53.1	22.4
Cash and cash equivalents
at beginning of period	47.2	124.8	62.5	40.1	40.1
Cash and cash equivalents at end of period	35.0	93.2	35.0	93.2	62.5

Notes

Note 1 Accounting policies

The interim report for the Group has been prepared in accordance with IAS 34 Interim Reports and the Annual Accounts Act. The interim report for the Parent Company has been prepared in accordance with the Annual Accounts Act.

The Group's accounting policies are unchanged from previous year except for changes below and that the company has chosen to clarify costs for capitalised development expenditure and commercial goods and has therefore changed comparison figures in the income statement.

Changes in significant accounting policies

IFRS 9, Financial Instruments and IFRS 15 Revenue from contracts with customers were adopted 1 January 2018.

IFRS 9 deals with classification, recognition and measurement of assets and liabilities. IFRS 9 replaces the parts of IAS 39 that are related to recognition and measurement of financial in struments. IFRS 9 states that financial assets are classified in three measurement categories: amortised cost, fair value through other comprehensive income or fair value through profit or loss. The classification depends on the company's business model and instrument's cash, accounting policies and notes flow characteristics. The standard does not have effect on the company.

IFRS15 specifies how and when to recognise revenue. According to IFRS 15, revenue is recognised when control of the promised good or service have been transferred to the customer and the customer can use and benefit from the good or service. The standard introduces increased disclosure requirements for reporting of information about the nature, amount, timing and uncertainty of revenue, and the cash flows arising from the company's contracts with customers. IFRS 15 replaces IAS 18 "Revenue" and IAS 11 "Construction Contracts". The Company has assessed that the standard currently does not affect the company. It can be changed in the future when the company change its current contract structure at a higher revenue.

Capitalised 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 recognised 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 capitalised 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 recognised as an asset in subsequent periods. The group has assessed all the above criteria to be fulfilled during the period, the costs for development that has been incurred is therefore activated.

Note 2 Transactions with related parties

Shareholder and Board member Leif Ryd has received consulting fees for ongoing work as well as work for the Clinical Advisory Board of SEK 0.3m (0.3).The Board Chairman, Dennis D. Stripe has received SEK –m (0.3) as compensation for the work during the year as working Chairman.

Serendipity Communications AB has received consulting fees of SEK –m (0.1), Serendipity Legal AB of SEK –m (0.0).

Glossary

Approved orders: Orders which have been approved for surgery, are in production and will be invoiced.

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).

Artificial intelligence (AI): The theory and development of computer systems able to perform tasks normally requiring human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.

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: X-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.

Gross order intake: Gross order intake represents the aggregated value of Episealer orders recevied and approved by responsible surgeon during the relevant period.

Hyaline cartilage: Natural articular cartilage.

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

Indication: In medicine, an indication is a valid reason to use a certain test, medication, procedure, or surgery.

Invasive treatment alternative: Treatments that require a surgical procedure.

Investigational Device Exemption (IDE): An exemption that allows the investigational device to be used in a clinical study in order to collect safety and effectiveness data.

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

KOOS: Knee injury and Osteoarthritis Outcome Score, a questionnaire used to assess the patient's opinion about their knee and associated problems.

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.

Order backlog: Order backlog represents all orders that have been booked but where no revenue has been recognized.

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.

Premarket Approval (PMA) application: FDA's process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices. A successful PMA submission results in US market approval of the device.

Principal investigator (PI): The person who is responsible for the scientific and technical direction of the entire clinical study (for example, for all sites of a multisite study).

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.

VAS: Visual Analogue Scale, a psychometric response scale which is used as a pain scale in questionnaires.

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 design of implants and surgical instruments. By combining advanced 3D imaging technology with the latest manufacturing technologies, 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 individualised treatment for a more active and healthy life.

A proprietary web-based IT platform for individualised design and surgical pre-planning

Episurf Medical's scalable μiFidelity® system has been developed for damage assessment, surgical pre-planning and cost-effective patient customisation of implants and associated surgical instruments. In a first step, the company's main focus is on early stage arthritic changes in the knee joint.

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

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

• » Episealer® Condyle Solo for the treatment of localised cartilage and underlying bone defects on the femoral condyles of the knee joint.
• » Episealer® Trochlea Solo for the treatment of localised cartilage and underlying bone defects in the area behind the patella (the trochlea area).
• » Episealer® Femoral Twin for the treatment of elongated localised cartilage and underlying bone defects both on the femoral condyles and in the trochlea area of the knee joint.

Episealer® Condyle Solo

Episealer® Trochlea Solo

Episealer® Femoral Twin

Individualised surgical instruments

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 surgery for treatment of cartilage and deep underlying bone defects in the knee joint.

Patents and patent applications

The generation of new intellectual property and the ongoing maintenance of current IP is of paramount importance for Episurf Medical to ensure that Episurf Medical's proprietary, existing technologies and future innovations are well protected. In total Episurf Medical has approximately 120 patents and patent applications worldwide, distributed over more than 22 patent families.

• » Episurf Medical's head office is located in Stockholm and the company has an in-house sales organisation in Europe.
• » The share (EPIS B) has been listed on Nasdaq Stockholm since June 2014.

Financial calendar

Interim report July–September 2018	26 October 2018
Year–End Report 2018	8 February 2019

This is a translation of the original Swedish interim report. In the event of a discrepancy between this translation and the Swedish original, the Swedish interim report takes precedence.

This information is information that Episurf Medical AB (publ) is obliged to make public, pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out below, on 20 July 2018 at 08.30 (CEST).

IR contact

Pål Ryfors

CEO Phone: +46 (0) 709 623 669 e-mail: pal.ryfors@episurf.com

Veronica Wallin

CFO Phone: +46 (0) 700 374 895 E-mail: veronica.wallin@episurf.com

The following analysts follow Episurf Medical's development:

Erik Penser Bank Analyst: Johan Lochen

Redeye Analyst: Anders Hedlund

Episurf Medical AB (publ) Corp. ID no. 556767-0541 Karlavägen 60, 114 49 Stockholm, Sweden www.episurf.com