Episurf — Interim / Quarterly Report 2018

Feb 8, 2019

Dr. med. Johannes Holz at the DKOU Congress in Berlin, October 2018

Year-end report, 1 October–31 December 2018

Fourth quarter 2018 compared to 2017, Group

• » Gross order intake amounted to SEK 1.5m (0.9), an increase of 62.7%
• » Order backlog amounted to SEK 1.2m (0.9)
• » 67.7% increase in orders for Episealer® knee implants during the quarter with 60 (36) approved orders
• » Group net sales increased by 24.3% to SEK 1.1 m (0.9)
• » Loss before tax amounted to SEK –15.4m (–15.5)
• » Earnings per share amounted to SEK –0.49 (–0.51)

Twelve months 2018 compared to 2017, Group

• » Gross order intake amounted to SEK 4.4m (3.1) an increase of 48.4%
• » Group net sales increased by 59.8% to SEK 4.0 m (2.5)
• » Loss before tax amounted to SEK –57.8m (–61.1)
• » Earnings per share amounted to SEK –1.87 (–2.18)
• » Equity per share amounted to SEK 1.42 (2.80)
• » Equity ratio amounted to 81.8% (91.7)

Significant events during the fourth quarter

• » Episurf Medical announced that the company had received approval from the US Food and Drug Administration (FDA) for its Investigational Device Exemption (IDE) application to initiate a clinical study on the Episealer® knee implant in the United States
• » Episurf Medical executed a directed share issue, raising SEK 13.2m. Through the directed share issue, the company gained a US shareholder among the largest shareholders and several existing shareholders increased their holdings
• » Niles Noblitt was appointed Senior Advisor to Episurf Medical
• » Episurf Medical announced the start of a new investigator-initiated clinical study conducted by Prof. H. Vandenneucker at the University hospital in Leuven, Belgium
• » Clinical outcome for Episealer® was presented presented at the annual meeting of the Danish Orthopaedic Society (DOS) in Copenhagen in October
• » New Chinese and US patent approvals for Episurf Medical
• » Episurf Medical was informed about the intention of its largest shareholder Serendipity Ixora AB to wind-up its operations and in conjunction thereto distribute its holdings of Episurf shares to its

Significant events after the fourth quarter

» Episurf Medical announced the start of a comparative investigator-initiated clinical study performed at the Julius Wolff Institute, Charité University Hospital, Berlin

Gross order intake Revenue

Pål Ryfors, CEO

Message from the CEO

Dear shareholders,

In 2018, Episurf has enjoyed positive trends in almost every aspect of its operations, and in several of our regions we can say with confidence that we have established commercial businesses. By the fourth quarter of 2018, Episealer® implant orders were arriving at a rate of one per working day, and show every sign of continuing to accelerate.

• » The order book amounted to SEK 1.5 million during the fourth quarter 2018, representing an increase of 64% compared to the fourth quarter of 2017.
• » The development is driven by the German market where the growth in the fourth quarter 2018 amounts to about 187% compared to the fourth quarter of 2017.

Despite the positive development above, our growing order book still only scratches the surface of the potential for Episurf's products.

We are following our strategy, and we are taking the necessary steps

Successfully growing a new product category in the medical technology industry means keeping many balls in the air at the same time. We must of course continue to reach

Orthopaedic surgeons are naturally conservative, and different customers will adopt new technologies at a different pace, but they all seem to agree that Episurf Medical's targeted patient group lacks adequate treatment alternatives. It is our view that given the performance of the Episealer® implant, our technology can bridge this treatment gap.

The proof of concept

Although it is still early in our journey, we have reached our goal of becoming a standardised part of the treatment algorithm with certain customers. We are generating revenues, and orthopaedic surgeons are repeatedly ordering Episealer® implants. There are peer-reviewed results available and our groups of patients who have gone longer than 2, 3 and 4 years since surgery have now grown to 162, 71 and 23 respectively. We believe that the strong results we have seen will be repeated in larger clinical trials and that the performance of the Episealer® will continue to show good results over many years for these patients. At this point, we see no obstacle to continuing to grow the business to a much larger scale in all important markets.

"By the fourth quarter of 2018, Episealer implant orders were arriving at a rate of one per working day, and show every sign of continuing to accelerate."

out to the market to expand the reach of our products to a growing list of customers. To support these efforts, we need to perform directly or sponsor clinical studies, whose results are essential to enter and grow in key markets. We also must continue to improve our products and processes to successfully scale for growth and prepare to meet future opportunities and challenges. As well, we devote resources to preparing to seek entry to the major markets of North America and Asia. But we are encouraged by continual improvements in our business environment, and the excellent clinical results and growing acceptance of our products.

We are closely monitoring the revenue per customer and the figures are highly encouraging.

The success factor

Most importantly, our success depends on demonstrating the strength and performance of the Episealer® technology in published peer-reviewed clinical studies.

» The Episealer® technology is now involved in several clinical trials. In 2019, we expect results from the large European multicenter study that is ongoing, involving 100 patients and 11 surgeons in 7 European countries.

"The establishment of a larger clinical pipeline and the future flow of results from these studies are critical success factors for growth."

• » It was recently announced that an investigator-initiated clinical study was started at the Julius Wolff Institute at the Charité University Hospital in Berlin. The study will follow up patients who have undergone an Episealer® procedure during 2015-2017. This study is particularly interesting for two reasons: first, because this is the first comparative study of the Episealer®, and, second, because we expect to see results already in 2019.
• » There are also other clinical studies ongoing in Sweden and in Belgium.

The establishment of a larger clinical pipeline and the future flow of results from these studies are critical success factors for growth. When summarizing the clinical studies that are ongoing, or are about to start in the near future, it adds up to about 350 patients involved in various clinical studies of the Episealer® technology. In our opinion, this is a very strong figure.

The last piece of the puzzle

While the clinical activities in Europe have increased, the largest anticipated clinical study is the one planned for the US. At the end of 2018, the US FDA (Food and Drug Administration) approved our application to initiate a clinical trial in the US for the Episealer® knee implant. This was a significant milestone for us, the culmination of a three-year effort. The results from the study will later form the basis for our PMA application for market approval in the US. The so-called IDE (Investigational Device Exemption) study is designed as a prospective, multicentre, randomized and controlled trial. The study will be conducted both at US and European clinical centres. It is aimed to show non-inferiority in clinical status improvement at 24 months as compared to microfracture, the surgical standard of care technology. Further, the study aims to show superiority in return to weight-bearing compared to microfracture. 180 total subjects will be randomized at a 2:1 ratio to either the Episealer® group or the control group.

We are enthusiastic about this study, which is to be referred to as the EPIC Knee study. Site recruitment is currently ongoing, and the first enrolment can be performed once ethical approvals are granted by the hospitals. We are expecting the first surgery to take place during Q2. Combined with the comprehensive ongoing clinical activities, this large, comparative, prospective multicentre study feels like the last piece of the puzzle.

Next steps

In the coming year, we will seek to drive new orders and continued growth by engaging with our customers with compelling clinical evidence as it emerges. To date, we have needed to rely on anecdotal evidence and one small clinical study with 10 patients. Understandably, the market has been asking for more evidence, and we will finally be able to respond to this demand.

We continue to consider new applications for our core technologies, and, are disappointed that CE-approval has

not yet been granted for our ankle implant; we hope to be able to update investors and the market on this project in the near future.

We will continue to prepare for the US market, carrying on with our clinical trial in the US, but also assessing partnering opportunities that could speed our entry into that crucial market.

We are continuing to benefit from efficiencies in our European business, while we are increasing investments in our US project. Since early 2017, we have decreased the staff size approximately 20%, and we will continue to ensure that we run the business as efficiently as possible.

The strong shareholders

During the fourth quarter, we were happy to announce that we had executed a directed share issue to Mr Niles Noblitt, making him one of our largest shareholders. Mr Noblitt is one of the founders of Biomet (now a part of orthopaedic global market leader Zimmer Biomet), and we are very pleased that he has accepted an appointment as Senior Advisor to Episurf.

In the directed issue, previous shareholder Rhenman Partners, together with several other investors, chose to increase their ownership share. In addition to Rhenman Partners and Niles Noblitt, we are pleased to have as shareholders such renowned institutional investors as Öhman Fonder, AMF, LMK and Stena Sessan. We also have significant ownership by the founder and management of Episurf Medical, as well as about 3,500 retail investors. We are very proud of our large and high quality shareholder base, and are grateful that they share our confidence in the future of the company.

Our recent directed share issue was executed at about the same time as it was communicated that our largest historical shareholder, Serendipity Ixora, had decided to wind up its operations and distribute its holdings to its own shareholders. This distribution will take place during 2019, and we will communicate more once we know more about the specific timetable of this process. We want to thank Serendipity for their support for almost 10 years. Serendipity was the first investor in Episurf Medical, and they have been instrumental in helping the company to its current position with a commercialised technology in Europe and an FDA approved clinical strategy towards an FDA approval. We look forward to welcoming the shareholders of Serendipity Ixora as new direct shareholders of Episurf Medical.

Stockholm, February 2019

Business update and forward–looking statements

By the reporting date on February 8 2019, Episurf Medical's implants had been used in 432 surgeries. Another 45 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 432 implants, we now have 23 patients who have had their implants for more than 4 years and 162 patients have now had their implants for more than 2 years since the surgery date. During the fourth quarter,

34 surgeries were performed with the Episealer® knee implant and we continued to make progress in all of our key markets. 60 orders were approved for surgery during the fourth quarter. We continue to note a demand for the Episealer® Femoral Twin implant as 71% of the surgeries performed in the fourth quarter were of this product. This clearly shows that there is a demand for treating the more elongated lesions and the Episurf technology and the Episealer® Femoral Twin implant meets this demand in a very good way.

Implant surgeries in quarter

Cumulative implants as of the reporting date

Approved orders in quarter

As of the reporting day, 432 surgeries have been performed with the Episealer® implant and 71 patients have had their implant for more than 3 years, and 162 patients have had the implant for more than 2 years since surgery.

Financial information

Group

Net sales and operating profit/loss

Group net sales amounted to SEK 1.1m (0.9) in the quarter and to SEK 4.0m (2.5) for the financial year. Loss before tax amounted to SEK –15.4m (–15.5) for the quarter and SEK –57.8m (–61.1) for the financial year. Initial costs for entering the US market amounts to 2.0m SEK (0.5) for the full year.

Financial position

Group cash and cash equivalents at end of period amounted to SEK 28.3m (71.3). To assure 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 36month period of which SEK 7m was utilised during the second quarter 2018. See more information about the financing agreement below and on the Company's website.

During the fourth quarter, the company carried out a directed share issue to a number of selected investors, including Niles Noblitt (one of the founders of Biomet) and the existing shareholder Rhenman Healthcare Equity L/S. In total, SEK 13,2m before transaction costs was contributed to Episurf.

The Board of Directors is continuously reviewing the company's financial need and financial position, as well as the optimal capital structure for the company. Should there be additional capital needs, the Board is of the opinion that the company is in a good position to secure future financing either within the existing credit facility or by way of a directed common share issue.

The equity ratio was 81.8% (91.7). Group investments in intangible assets amounted to SEK 2.2m (2.2) for the quarter of which SEK 0.7m (1.4) are related to capitalised development costs and for the financial year investments in intangible assets amounted to SEK 9.7m (7.4) of which SEK 4.3m (3.7) are related to capitalised development costs, remaining investments relates to patents. Investments in tangible assets amounted to SEK – (–) for the quarter and for the financial year – (0.0).

Human resources

Number of employees in the Group at end of the period was 24 (26).

Parent Company

Net sales and operating profit/loss

Net sales amounted to SEK 0.1m (0.2) in the quarter and for financial year to SEK 0.4m (0.2). Loss before tax amounted to SEK –7.9m (–6.9) for the quarter and SEK –29.7m (–29.7) for the financial year.

Financial position

Cash and cash equivalents at the end of period for the Parent Company amounted to SEK 17.6m (62.5). The equity ratio was 95.6% (97.7). Investments in intangible assets, capitalised development costs, amounted to SEK 0.7m (1.4) for the quarter and SEK 4.3m (3.7) for the financial year. Investments in tangible assets amounted to SEK –m (–) for the quarter and the financial year.

Human resources

Number of employees in the Parent Company at end of the period was 11 (13).

Directed share issue

Episurf Medical has during the fourth quarter 2018 completed a directed share issue to a number of selected investors, including Niles Noblitt, one of the founders of Biomet, and the current shareholder Rhenman Healthcare Equity L/S. The shares of series B were issued at the subscription price of SEK 4.00 per share. In total, 3,290,210 shares of series B and all 2,252,210 warrants were subscribed for. The share issue was consequently not fully subscribed. In total, SEK 13.2 m before transaction costs was contributed to Episurf. Through the share issue, Episurfs share capital was increased by SEK 1.0m. The total number of shares thus increased by 3,290,210 B-shares and the same number of votes. The directed share issue was registered at the Swedish Companies Registration Office January, 9 2019.

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 attrac-

tive margins

Technological and clinical relevance through a high degree of innovation

Warrants

During the period a number of warrants was issued to employees within the group.

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 0.6m (0.7).

As a technical measure in order to meet European Select Growth Opportunities Funds demand for immediate access to its shares, certain shareholders, during a transitional period, lend shares to the issuing agent engaged for this agreement.

The Chairman and Members of the board's fees were agreed by the AGM and is shown below. The Chairman receive SEK 0.4. Wilder Fulford and Laura Shunk receive remuneration of SEK 0.2. Leif Ryd and Christian Krüeger receive remuneration of SEK 0.1 respectively. In total, the board fees amount to SEK 1.0 (1.1).

Rounding

.

Due to rounding, the sum of numbers may differ.

Financing Agreement

To assure financing of continued operations, a financing agreement with European Select Growth Opportunities Fund ("ESGOF") was entered into in February and approved at the Annual General Meeting in April 2018. The agreement provides the company with access to SEK 70m over a 36month period in form of convertible debt securities divided into a number of tranches.

In connection with each tranche of convertibles, warrants are also issued to ESGOF.

When convertibles and warrants are issued to ESGOF, warrants are also issued free of charge to existing shareholders. Full utilization of these warrants would entail an additional SEK 70 million being added to the company.

Key terms of the financing agreement

• » 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.
• » Episurf Medical pay to the investor a commitment fee 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 will accrue interest at a rate of 15%.

Main characteristics of the warrants issued to ESGOF

• » ESGOF receives warrants without further remuneration in connection with the issuance of a tranche of convertibles. The number is determined based on the current stock price in connection with the execution of the tranche.
• » 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

Follow-up table, financing agreement

Financing, SEKm			Total	Used	Remaining
	European Select Growth Opportunities Fund		70.0	7.0	63.0
Convertibles
Tranch	Amount before costs	Date	Number of notes	Number utilised	Number of outstanding notes
KV1	SEK 7m	2018-05-23	140	82	58
Summary of transactions
	Received cash from issue of convertible debentures		7.0
Transaction costs			–0.3
Net proceeds			6.7
Amount classified as equity			–0.5
Converted debentures			–4.1
Accrued interest			0.6
	Reported value of debt as at December 31, 2018		2.8

Warrants

Tranch	Registration date	Term to maturity	Strike price	Number of warrants outstanding	Number of utilised	Number of outstanding
KV1/TO4B	2018-05-23	5 year	6,10	2,279,002	0	2,279,002

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.

Key terms of warrants issued to existing shareholders

• » In connection with the issue of convertible bonds and warrants to ESGOF, warrants are also issued free of charge to existing shareholders, the number is determined on the basis of the current share price in connection with the completion of the tranche.
• » The shareholder options have the same characteristics as the warrants and are admitted to public trading.

Use of convertibles and warrants

» The first tranche was conducted in the second quarter of 2018 as a targeted issue of SEK 7m through the issuance of 140 convertibles of 1,147,540 associated warrants to ESGOF. In connection with this, 1,131,462 warrants were also issued to the shareholders. All warrants have a redeeming price of SEK 6.10. See table below for follow-up of number of outstanding and utilised convertibles and warrants.

Dividend

The Board of Directors proposes that Episurf Medical does not pay a dividend for the financial year 2018.

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 directed share issue, which was carried out in December 2018, was registred at the Swedish Companies Registration Office on January 9, 2019, and the company's shares and votes increased by 3,290,210.

31 December 2018

A-shares	5,221,662
B-shares	26,409,507
Total number of shares	31,631,169
Total number of votes	42,074,493

The ten largest shareholders in Episurf Medical AB at December 31 2018*

	No. of A-shares	No. of B-shares	Share capital in %	Voting rights, %
Serendipity Ixora AB	4,601,519	–	14.6	32.8
UBS Switzerland AG; W8IMY	112,066	2,439,616	8.1	6.6
Försäkringsaktiebolaget, Avanza Pension	–	1,526,515	4.8	3.6
Skandinaviska Enskilda Banken, W8IMY	–	1,376,356	4.4	3.3
AMF Aktiefond småbolag	–	1,164,448	3.7	2.8
Gile Medicinkonsult AB	279,945	142,954	1.3	2.3
LMK Forward AB	–	938,000	3.0	2.2
Nordnet Pensionsförsäkring AB	–	755,903	2.4	1.8
Pål Ryfors	–	666,393	2.1	1.6
BNY Mellon SA/NV (Former BNY), W8IMY	–	630,194	2.0	1.5
Total, 10 largest shareholders	4,993,530	9,640,379	46.3	58.5
Summary, other	228,132	16,769,128	53.7	41.5
Total	5,221,662	26,409,507	100.0	100.0

*As stated in the information above, the shares issued in the directed share issue, including the shares issued to Mr Niles Noblitt, was registered in the beginning of January, hence not included in the table above. Pål Ryfors has lent out 350,000 shares to the European Select Growth Opportunities Fund and owns a total of 1,016,393 shares. No interest expires.

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, 7 February 2019

Board chairman Board member

Dennis Stripe Wilder Fulford

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 Note	Oct–Dec 2018	Oct–Dec 2017	Jan–Dec 2018	Jan–Dec 2017
Operating income
Net sales 3	1.1	0.9	4.0	2.5
Other operating income	0.0	0.4	0.3	0.6
Total operating income	1.1	1.2	4.3	3.1
Operation expenses
Merchandise	–0.9	–0.8	–3.3	–2.3
Other expenses	–9.0	–8.7	–36.1	–31.9
Personnel costs	–7.1	–8.4	–27.3	–33.3
Capitalised development expenditure	2.2	2.2	9.7	7.4
Depreciation of equipment
and non-current assets	–1.4	–1.1	–4.8	–4.2
Total operating expenses	–16.2	–16.8	–61.8	–64.2
Operating loss	–15.1	–15.6	–57.5	–61.2
Financial items
Financial income, other	0.0	0.0	0.3	0.1
Financial expenses, other	–0.3	–0.0	–0.7	–0.0
Results from net financial items	–0.3	0.0	–0.3	0.1
Loss before tax	–15.4	–15.5	–57.8	–61.1
Tax on income for the period	0.0	0.1	–0.0	0.0
Loss for the period	–15.3	–15.5	–57.8	–61.1
Net loss attributable to:
Parent company shareholders	–15.3	–15.5	–57.8	–61.1
Earnings per share before and after dilution	–0.49	–0.51	–1.87	–2.18
Average number of shares	31,337,687	30,549,495	30,869,741	27,987,331

Consolidated statement of comprehensive income

SEKm	Note	Oct–Dec 2018	Oct–Dec 2017	Jan–Dec 2018	Jan–Dec 2017
Loss for the period		–15.3	–15.5	–57.8	–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		–0.1	–0.1	–0.1	–0.0
Total comprehensive income for the period		–15.4	–15.5	–57.9	–61.1

Consolidated balance sheet

SEKm	Note	31 Dec 2018	31 Dec 2017
ASSETS
Non-current assets
Intangible assets
Capitalised development costs		9.5	6.8
Patents		11.6	9.3
Total intangible assets	5	21.1	16.0
Property, plant and equipment
Equipment		0.1	0.2
Total property, plant and equipment		0.1	0.2
Total non–current assets		21.2	16.3
Current assets
Inventories		1.5	1.7
Trade receivables		0.8	1.0
Other receivables		1.7	1.2
Deferred expenses and accrued income		1.3	1.8
Cash and bank balances		28.3	71.3
Total current assets		33.6	77.0
TOTAL ASSETS		54.8	93.3
EQUITY AND LIABILITIES
Equity		44.8	85.6
Liabilities
Non-current liabilities
Non-current liabilities		0.0	0.0
Total non-current liabilities		0.0	0.0
Current liabilities
Trade payables		1.6	2.5
Current interest-bearing liabilities	4	2.8	–
Other liabilities		1.6	1.4
Accrued liabilities and deferred income		4.0	3.8
Total current liabilities		9.9	7.7
Total liabilities		10.0	7.7
TOTAL EQUITY AND LIABILITIES		54.8	93.3
Equity ratio, %		81.8	91.7
Equity per share, SEK		1.42	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 January 1, 2017	4.8	237.0	0.6	–193.7	48.7
Total
Total comprehensive income for the period			–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 Total	9.2	330.4	0.6	–254.6	85.6
Total comprehensive income for the period			–0.1	–57.8	–57.9
Total comprehensive income			–0.1	–57.8	–57.9
Transactions with shareholders
Directed share issue, net after issue expenses**	1.0	11.3			12.3
Warrant issued		0.5			0.5
Issue in-kind, for conversion of debt***	0.3	3.8			4.1
Options issued to staff				0.3	0.3
Total transactions with shareholders	1.3	15.6		0.3	17.2
Closing equity December 31 2018	10.5	346.0	0.5	–312.1	44.8

* Issue expenses amounts to SEK 11.8m.

** Issue expenses amounts to SEK 0.9m. The directed share issue, which was carried out in December 2018, was registred at the Swedish Companies Registration Office on January 9, 2019, and the company's shares and votes increased by 3,290,210.

*** See more information about the financing agreement under financial information on page 6–7.

Cash flow statement

SEKm Note	Oct–Dec 2018	Oct–Dec 2017	Jan–Dec 2018	Jan–Dec 2017
Operating activities
Operating loss	–15.1	–15.6	–57.5	–61.2
Adjustments for items not included in cash flow
Depreciation	1.4	1.1	4.8	4.2
Employee stock option expenses	–0.1	0.0	0.2	0.1
Interest received	–0.1	0.0	0.3	0.1
Interest paid	0.0	0.0	0.0	0.0
Cash flow from operating activities before change in working capital	–13.9	–14.4	–52.2	–56.8
Change in working capital
Decrease/increase in inventory	0.3	–0.2	0.2	–0.6
Decrease/increase in trade receivables	–0.3	–0.3	0.2	–0.4
Decrease/increase in current receivables	0.4	0.0	0.8	0.3
Decrease/increase in current liabilities	1.8	0.9	–1.3	–3.9
Change in working capital	2.3	0.3	–0.2	–4.6
Cash flow from operating activities	–11.6	–14.0	–52.3	–61.4
Investing activities
Investments of intangible fixed assets	–2.2	–2.2	–9.7	–7.4
Investments of property, plant and equipment	–	–	–	–
Cash flow from investing activities	–2.2	–2.2	–9.7	–7.5
Financing activities
Investment in warrants	–	0.0	0.1	0.1
New share issue	12.3	–	12.3	97.7
Emission of convertibles*	–	–	6.7	–
Cash flow from financing activities	12.3	0.0	19.1	97.8
Cash flow for the period	–1.6	–16.3	–43.0	29.0
Cash and cash equivalents at beginning of period	29.9	87.5	71.3	42.3
Cash and cash equivalents at end of period	28.3	71.3	28.3	71.3

* Refers to the utilised part of the financing agreement net for transaction costs.

Income statement, Parent Company

SEKm	Note	Oct–Dec 2018	Oct–Dec 2017	Jan–Dec 2018	Jan–Dec 2017
Operating income
Net sales		0.1	0.2	0.4	0.2
Other operating income		0.0	0.0	–	–
Total income		0.1	0.2	0.4	0.2
Operating expenses
Other external expenses		–4.8	–4.7	–19.0	–19.2
Personnel costs		–3.2	–3.5	–12.6	–13.2
Capitalised development expenditure		0.7	1.4	4.3	3.7
Amortisation of intangible assets and depreciation of property, plant and equipment		–0.6	–0.4	–2.1	–1.4
Total operating expenses		–7.9	–7.2	–29.4	–30.0
Operating loss		–7.7	–7.0	–29.0	–29.7
Financial items
Financial income, other		0.0	0.0	0.0	0.1
Financial expenses, other		–0.2	–0.0	–0.7	–0.0
Loss from net financial items		–0.2	0.0	–0.7	0.1
Loss before contribution and tax		–7.9	–6.9	–29.7	–29.7
Loss before tax		–7.9	–6.9	–29.7	–29.7
Tax on income for the period		–	–	–	–
Loss for the period		–7.9	–6.9	–29.7	–29.7

Parent Company statement of comprehensive income

SEKm	Note	Oct–Dec 2018	Oct–Dec 2017	Jan–Dec 2018	Jan–Dec 2017
Net profit		–7.9	–6.9	–29.7	–29.7
Other comprehensive income for the period: Other comprehensive income
for the period, net of tax Total comprehensive income for the period		– –7.9	– –6.9	– –29.7	– –29.7

Balance sheet, Parent Company

ASSETS Fixed assets Intangible fixed assets Capitalised development costs 5 9.5 7.1 Total intangible fixed assets 9.5 7.1 Tangible fixed assets Equipment 0.0 0.1 Total tangible fixed assets 0.0 0.1 Financial assets Shares in group companies 106.8 78.3 Long-term receivables from group companies 24.0 20.0 Total financial assets 130.8 98.2 Total fixed assets 140.3 105.5 Current assets Short term receivables Other receivables 1.3 0.5 Prepaid expenses and accrued income 0.6 0.8 Total short term receivables 1.9 1.3 Cash and bank balances 17.6 62.5 Total current assets 19.5 63.8 TOTAL ASSETS 159.7 169.3 EQUITY AND LIABILITIES Equity 152.6 165.3 Liabilities Long-term liabilities – 0.0 Total long–term liabilities – 0.0 Current liabilities Trade payables 0.4 0.9 Current interest-bearing liabilities 4 2.8 – Other liabilities 0.7 0.6 Accrued liabilities and deferred income 3.3 2.5 Total current liabilities 7.1 4.0 Total liabilities 7.1 4.0 TOTAL EQUITY AND LIABILITIES 159.7 169.3	SEKm	Note	31 Dec 2018	31 Dec 2017

Statement of changes in equity, Parent Company

SEKm	Share capital	Develop ment fund	Other contributed capital	Loss brought forward	Loss for the period	Total equity
Opening equity 1 January 2017	4.8	1.1	235.8	–110.4	–34.1	97.2
Comprehensive loss for the period
Loss for the period					–29.7	–29.7
Disposition according to AGM
Loss brought forward				–34.1	34.1	0.0
Development fund		3.5		–3.5		0.0
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					–29.7	–29.7
Disposition according to AGM
Loss brought forward				–29.7	29.7	0.0
Development fund		3.3		–3.3		0.0
Total comprehensive loss for the period	9.2	7.9	329.3	–181.0	–29.7	135.7
Transactions with shareholders
Directed share issue, net after issue expenses**	1.0		11.3			12.3
Warrant issued			0.5			0.5
Issue in-kind, for conversion of debt***	0.3		3.8			4.1
Options issued to staff				0.1		0.1
Total transactions with shareholders	1.3		15.6	0.1		16.9
Closing equity December 31 2018	10.5	7.9	344.9	–180.9	–29.7	152.6

* Issue expenses amounts to SEK 11.8m.

** Issue expenses amounts to SEK 0.9m. The directed share issue, which was carried out in December 2018, was registred at the Swedish Companies Registration Office on January 9, 2019, and the company's shares and votes increased by 3,290,210.

*** See more information about the financing agreement under financial information on page 6–7.

Cash flow statement, Parent Company

SEKm Note	Oct–Dec 2018	Oct–Dec 2017	Jan–Dec 2018	Jan–Dec 2017
Operating activities
Operating loss	–7.7	–7.0	–29.0	–29.7
Adjustments for items not included in cash flow
Depreciation	0.6	0.4	2.1	1.4
Interest received	0.0	0.0	0.0	0.1
Interest paid	–0.0	–0.0	–0.0	–0.0
Change in non-current liabilities	–0.0	–0.0	–0.0	–0.0
Cash flow from operating activities before change in working capital	–7.2	–6.6	–26.9	–28.3
Change in working capital
Decrease/increase in current receivables	0.1	0.0	0.1	0.1
Decrease/increase in current liabilities	1.6	0.5	–0.4	–6.6
Total changes in working capital	1.7	0.5	–0.2	–6.5
Cash flow from operating activities	–5.5	–6.1	–27.2	–34.8
Cash flow from investing activities
Investments of intangible assets	–0.7	–1.4	–4.3	–3.7
Changes in financial assets	–8.4	–9.0	–32.5	–36.9
Cash flow from investing activities	–9.1	–10.3	–36.8	–40.6
Cash flow from financing activities
Investment in warrants	–	0.0	0.1	0.1
New share issue	12.3	–	12.3	97.7
Issue of convertibles*	–	–	6.7	–
Cash flow from financing activities	12.3	0.0	19.1	97.8
Cash flow for the period	–2.3	–16.4	–44.9	22.4
Cash and cash equivalents at beginning of period	19.9	78.9	62.5	40.1
Cash and cash equivalents at end of period	17.6	62.5	17.6	62.5

*Refers to the utilised part of the financing agreement net for transaction costs.

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 from 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 both for the group and the parent company.

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 transition has had no effect for 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.

IFRS 16, Leases that replace the current IAS 17, Leases and related interpretations came into force for the financial year that started on January 1, 2019. The standard requires lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.

Episurf Medical will apply the new standard by using the modified retroactive transition method, which means that the comparative figures will not be recalculated. The cumulative effect of applying IFRS 16 will be reported on 1 January 2019. Longterm operational leases will be reported as fixed assets and financial liabilities in the Group's balance statement. Instead of operational leasing costs, Episurf Medical will report depreciation and interest expenses in the Group's income statement.

Lease liabilities that have previously been classified as operational leases according to IAS 17 will be valued at the present value of the remaining lease payments. Episurf Medical will report a right of use to an amount corresponding to the lease liability. As a result, the transition to IFRS 16 will not have any significant impact on equity. Episurf Medical will apply the practical exemptions regarding reporting payments attributable to short-term leases and leases for assets of a low value as a cost in the income statement. Episurf Medical will not apply IFRS 16 for intangible assets. Non-lease components will be expensed and are not reported as part of the right of use or the lease liability. The transition to IFRS 16 will have the following preliminary impact on the Group's balance statement at the time of the transition, i.e. 1 January 2019:

Right of use SEK 8m Financial lease liability SEK 8m

Episurf Medical has identified leases attributable to properties, machines and vehicles. When determining the above amounts, the most significant assessments are attributable to the establishment of the term of the leases. The majority of Episurf Medical's leases include options to either extend or terminate the agreement. When the term of the lease is being established, Episurf Medical takes into consideration all facts and circumstances that provide a financial incentive to utilise an extension option or not to utilise an option to terminate an agreement. Examples of factors that are considered include strategic plans, restructuring programmes, the importance of the underlying asset to Episurf Medical's activities and/or costs attributable to not extending or terminating leases.

As regards other accounting principles that are applied, these correspond with the accounting principles that were used in the preparation of the most recent Annual Report.

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 recognized 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 therefor 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 0.6m (0.7). The Board Chairman, Dennis Stripe, received SEK 0.3m as compensation during 2017 as working Chairman in connection with Pål Ryförs being appointed as acting CEO. No such compensation was paid in 2018.

As a technical measure in order to meet the Investor's demand for immediate access to its shares, certain shareholders, during a transitional period, lend shares to the issuing agent engaged for this agreement.

Board, SEKm	2018	2017
Dennis Stripe, Chairman of the board	0.4	0.4
Wilder Fulford, Member	0.2	0.2
Laura Shunk, Member	0.2	0.2
Christian Krüeger, Member	0.1	0.1
Leif Ryd, Member	0.1	0.1
Saeid Esmaeilzadeh, Member	–	0.1
Total Board	1.0	1.1

Note 3 Breakdown of net sales by country is as follows

SEKm	Okt–Dec 2018 Okt–Dec 2017 Jan–Dec 2018 Jan–Dec 2017
Germany	0.5	0.3	2.0	1.1
Sweden	0.0	0.1	0.3	0.2
Other countries in Europe	0.6	0.5	1.6	1.1
Other countries outside of Europe	–	–	–	0.1
Total net sales	1.1	0.9	4.0	2.5

Note 4 Financial assets and financial liabilities

Current interest-bearing liabilities

Summary of transactions, SEKm		Oct–Dec 2018 Oct–Dec 2017 Jan–Dec 2018 Jan–Dec 2017
Opening net proceeds	6.7	–	–	–
Received cash from issue of convertible debentures	–	–	7.0	–
Transaction costs	–	–	–0.3	–
Net proceeds	6.7	–	6.7	–
Opening other transactions	–2.4	–	–	–
Amount classified as equity	–	–	–0.5	–
Converted debentures	–1.7	–	–4.1	–
Accrued interest	0.1	–	0.6	–
Total other transactions	–4.0	–	–4.0	–
Reported value of debt as December 31, 2018	2.7	–	2.7	–

Other financial assets and liabilities in the balance sheet are reported as acquisition value, which is judged to be a good approximation to the fair value of the items.

Note 5 Intangible assets

MSEK		Jan–Dec 2018 Jan–Dec 2017
Patents, group
Opening cost	20.5	16.7
Purchases	5.4	3.7
Closing accumulated depreciation	25.9	20.5
Opening depreciation	–11.2	–8.5
The year's depreciation	–3.0	–2.8
Closing accumulated depreciation	–14.2	–11.2
Closing carrying amount	11.6	9.3
Devevlopment expenses
Closing cost	8.6	4.9
The year's capitalisation	4.7	3.7
Closing accumulated cost	13.3	8.6
Opening depreciation	–1.8	–0.6
The year's depreciation	–2.0	–1.3
Closing accumulated depreciation	–3.9	–1.8
Closing carrying amount	9.5	6.8
Closing carrying amount patents and development expenses	21.1	16.0

Definitions

General: All amounts in the tables are presented in SEK millions unless otherwise stated. All amounts in brackets () represent comparative figures for the same period of the prior year, unless otherwise stated.

Net debt/equity ratio: Net debt at the end of the period divided by equity at the end of the period.

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.

Reimbursement: Reimbursement is the collective term for the financial reimbursement systems which are critical for how payments are settled for various medical procedures.

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

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 140 patents and patent applications worldwide, distributed over more than 20 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

AGM	8 april 2019
Interim Report January–March 2019	26 april 2019
Interim Report April–June 2019	19 juli 2019
Interim Report July–September 2019	25 oktober 2019
Year-End Report 2019	7 februari 2020

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 8 February 2019 at 08.30 (CEST).

Annual general meeting 2019

The 2019 annual general meeting will be held at 10.00 CET on Monday 8 April 2019 in Episurf Medical's office at Karlavägen 60 in Stockholm.

Annual report 2018

The annual report and the corporate governance report are expected to be published on 8 March 2019 on www.episurf.com and will be sent out by post to shareholders that have so requested. The documents will also be available at the company's head office.

The following analysts follow Episurf Medical's development: DNB

Analyst: Patrik Ling

Erik Penser Bank Analyst: Johan Lochen

Redeye Analyst: Anders Hedlund

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

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