Surgical Innovations : Interim Report 2021

15 September 2021

Surgical Innovations Group plc

("SI", the "Group" or "the Company")

Half-year Report

Interim results for the six-months ended 30 June 2021

Surgical Innovations Group plc (AIM: SUN), the designer, manufacturer and distributor of innovative medical technology for minimally invasive surgery, reports its unaudited financial results for the six-month period ended 30 June 2021 ("2021 H1") and provides an update on current trading and the outlook for the Group's business.

Commercial and Operational highlights:

• Healthcare providers returning towards normal activity levels following Covid-19 pandemic
• Service levels, cost base and R&D output benefiting from streamlined operational and regulatory processes
• Strengthened international market exposure through closer relationships
• Distribution network in key US market re-organised and expanded
• Environmentally sustainable product ranges continued to gain global market traction
• Further strengthened executive team through addition of new Sales & Marketing Director
• CAPEX investment in manufacturing to address current and future demands
• Relocation of UK distribution business ("Elemental") to Leeds facility to be completed in second half

Financial highlights1:

1. • Revenues up 63% on prior at £4.22m and amounted to 83% of the comparable pre-pandemic period in 2019 (H1 2020: £2.59m, 2019H1: £5.10m1)
   • Direct gross margin (before net manufacturing cost) slightly lower at 42.4% (2020H1:44.5%; 2019H1:44.5%1)
   • Adjusted EBITDA2profit of £0.21m (2020H1: £0.46m loss; 2019H1: £0.65m profit1)
   • Adjusted operating loss2 of £0.15m (2020H1: £0.87m loss; 2019H1: £0.22m profit1)
   • Adjusted EPS amounted to a loss2 of 0.004p per share (2020H1: loss of 0.112p; 2019H1: earnings of 0.023p per share1)
   • Planned reflation of working capital; cash used in operations managed at £0.17m (Full year to Dec 2020: cash generated of £1.07m)
   • Net cash3 at end of period of £2.66m (as at 31 Dec 2020: £3.10m)
2. Comparative information is shown for the six months ended 30 June 2020, except where otherwise stated. Further comparative information for the six months ended 30 June 2019 has been included to provide a comparison with pre-pandemic trading.
3. Adjusted EBITDA, adjusted operating (loss)/ profit and Adjusted EPS are stated before deducting non-recurring exceptional costs of £nil (2020 H1: nil, 2019 H1: £0.1m), amortisation and impairment of intangible acquisition costs of £nil (2020 H1: £1.59m, 2019 H1: £0.18m) and share based payment costs of £0.01m (2020 H1 £0.06m, 2019 H1: £0.10m).
4. Net cash equals cash less bank debt only.

Current Trading and Outlook

• Revenues are now recovering towards pre-pandemic levels in most markets
• Group level revenues for the first two months of the second half are approximately 45% above the level seen in the comparable period last year, and slightly ahead of that seen for the same period in 2019 (pre-pandemic) albeit against seasonally low comparables
• Encouraging YTD trading at 88% of the 2019 pre-pandemic level reflects the resilience of the business in light of the returning demand
• The UK is representative of the global healthcare market, with progress back to pre-Covid levels recently, but likely to continue the intermittent growth pattern experienced earlier in 2021 as countries come to terms with managing the longer-term impact of the virus

• The Group continues to trade profitably at the level of adjusted EBITDA, supported by production activity returning to more normal levels and a reduced overhead base
• Further growth in the hospital activity is expected to have a gradual return to pre-pandemic revenue levels going into 2022

Chairman of SI, Nigel Rogers, said:

"A strong recovery in trading is evident from the results for the first half of the year, and this view is further reinforced by the continued improvement in revenues in post-period trading. The steps taken by management last year, initially to protect the business and subsequently to simplify and strengthen our operational and regulatory processes, are having demonstrably positive effects on the financial and commercial effectiveness of the business.

"With a strengthened management team, and further improved distribution network and product range, we firmly believe that the Group is well placed to continue its recovery to pre-pandemic levels in most major markets in the coming months. Our differentiated 'Resposable' product offering is gaining traction and the Board sees encouraging prospects for 2022 and beyond."

About Surgical Innovations Group plc

Strategy

The Group specialises in the design, manufacture, sale and distribution of innovative, high quality medical products, primarily for use in minimally invasive surgery. Our product and business development is guided and supported by a key group of nationally and internationally renowned surgeons across the spectrum of minimally invasive surgical ac- tivity.

We design and manufacture and source our branded port access systems, surgical instruments and retraction devices which are sold directly in the UK home market through our subsidiary, Elemental Healthcare ('Elemental'), and exported widely through a global network of trusted distribution partners. Many of our products in this field are based on a "resposable™" concept, in which the products are part re-usable, part disposable, offering a high quality and environmentally responsible solution at a cost that is competitive against fully disposable alternatives. The opportunity to reduce plastic waste in surgery substantially through the use of resposable products in preference to their single-use plastic equivalents is well established across the UK NHS and many other developed markets. This is increasingly a factor in tender processes, limiting the range and number of suppliers able to offer a comprehensive range of resposable products with similar or, in some cases, better utility whilst delivering significant overall cost savings to healthcare providers.

Our wholly-owned subsidiary, Elemental, also has exclusive UK distribution rights for a select group of specialist products employed in laparoscopy, bariatric and metabolic surgery, hernia repair and breast reconstruction.

In addition, we design and develop medical devices for carefully selected OEM partners utilising our expertise to find innovative solutions to the challenges faced by Surgeons. We have a number of long-term relationships with key partner including the design, development and manufacture of the FIX8 device for AMS. The Group are currently working on a new collaboration with a Robotic Company to design and develop an access device for their unique instrumentation, it is anticipated that this will be launched in Q4 2021.

We aim for our brands to be recognised and respected by healthcare professionals in all major geographical markets in which we operate. We seek to provide by development, partnership or acquisition a broad portfolio of cost effective, procedure-specific surgical instruments and implantable devices that offer reliable solutions to genuine clinical needs in the operating theatre environment.

Operations

The Group currently employs approximately 100 people across two sites in the UK. Product design, engineering and manufacturing are carried out at the SI site in Yorkshire. Elemental Healthcare, based in Berkshire, was acquired by the Group on 1 August 2017, and provides direct sales representation in the UK home market and a range of third- party products for UK distribution. Commercial activities including marketing, UK distribution and international sales and marketing are currently based at Elemental's premises, however consultations are underway to relocate these activities to Leeds to enable the company to operate from a single site.

Further information

Further details of the Group's businesses are available on websites:

www.sigroupplc.com

www.surginno.com, and

www.elementalhealthcare.co.uk

Investors and others can register to receive regular updates by email at si@walbrookpr.com

Surgical Innovations Group plc

Chairman's Statement

For the six-month period ended 30 June 2021

A strong recovery in trading is evident from the results for the first half of the year, and this view is further reinforced by the continued improvement in revenues in post-period trading. The steps taken by management last year, initially to protect the business and subsequently to simplify and strengthen operational and regulatory processes, are having demonstrably positive effects on the financial and commercial effectiveness of the business.

With a strengthened management team, and further improved distribution network and product range, we firmly believe that the Group is well placed to continue its recovery to pre-pandemic levels and beyond in the coming months.

Financial Overview

Trading in the first half of the year continued to build towards pre-pandemic levels, with Group revenues at 83% of the comparable pre-Covid 2019 period at £4.22m (2019 H1: £5.10m), and up 63% on the comparable period last year (2020 H1: £2.59m).

UK revenues from SI branded products were £0.58m (2020 H1: £0.39m, 2019 H1: £0.75m), and UK distribution sales

were £1.30m (2020 H1: £0.84m, 2019 H1: £1.49m), indicating increased activity levels of 52% across the half year compared to 2020 and trending around 84% of the equivalent 2019 period. The impact of the second wave negatively impacted the first quarter with the initial focus on treating more urgent cancer related cases, whilst adapting to manage the Covid-19 infection patients. However, the second quarter has continued to improve, with increased access to hospitals and as a consequence the Group recorded monthly sales in the UK at the highest level since September 2019.

First half revenues in Europe were 88% above the level achieved last year at £0.57m (2020 H1: £0.31m) and around

89% of pre-Covid levels (2019 H1: £0.65m). Elective surgery remains at reduced levels, however there is a slight increase in activity, albeit volumes remain lower.

Revenues from the US in the first half increased to £0.78m (2020 H1: £0.29m, 2019 H1: £0.85m), with substantial stocking orders in the first quarter. Sales activity levels in hospitals continue return to normal as the US team makes progress with significant general procurement organisations ("GPOs") and healthcare providers as operating rooms ("OR") become accessible. New evaluations are anticipated to increase in the second half, however there are some states where access remains restricted as a result of Covid challenges.

The APAC region generated strong revenue growth, and this is continuing in the second half, with revenues doubling to £0.41m from pre-Covid 2019 levels (2019 H1: £0.16m), a 27% increase on the comparable period (2020 H1: £0.32m). Our distributor in Japan continues to gain market share and a substantial stocking order in the first quarter boosted the growth achieved. Strong- sales activity continues with significant interest in the resposable@™ product range.

OEM revenues for the half increased to £0.45m (2020H1: £0.33m) but remain significantly down compared to pre-

Covid levels by 56% (2019 H1: £1.01m), as our key OEM partners in the medical sector experienced similar pressures to those in our own portfolio, and the significant order for non-medical products delivered in 2018 and 2019 were not repeated this year. We anticipate a small recovery in order patterns as the second half progresses.

Commercial margins achieved on sales continued to be within target range of 40-45% overall. The reported gross margin, which reflects the under-recovery of factory overheads due to reduced activity levels, remains lower at 33.9% (2020 H1: 26.5%, 2019 H1: 43.1%). Inventory levels were depleted towards the end of 2020, and manufacturing recoveries remained low during the early months of 2021 until revenue growth trends were better established. The planned increase in manufacturing activity improved the margins in the second quarter, and this will continue to improve throughout the second half of the year as revenue activity increases.

Other operating expenses were reported to show a decrease to £1.62m (2020 H1: £3.54m), however the prior year included a significant goodwill impairment of £1.44m. Excluding the effects of the goodwill impairment adjustment and share based payments, operating expenses decreased by £0.43m to £1.60m. (2020 H1:2.03m). A natural reduction in the sales team, combined with Covid restricted travel and marketing activities, facilitated an adjusted EBITDA profit

for the period of £0.21m (2020 H1: £0.46m loss, 2019H1: £0.65m profit). These costs are anticipated to increase during the second half of the year as Covid restrictions are relaxed and revenues return towards pre-pandemic levels.

Adjusted operating loss before tax (before exceptional and acquisition related costs and share based payment charges) for the period was £0.15m (2020 H1: £0.87m, 2019 H1: profit of £0.22m). The reported net loss before taxation amounted to £0.22m against a net loss before taxation of £2.58m in the corresponding period last year.

The Group reported a tax credit in the period of £0.13m (2020 H1: credit of £0.03m) which related to an enhanced research and development claim for the year ending 2019. In terms of deferred tax, the Group continues to hold substantial corporation tax losses on which management takes a cautious view and consequently the Group does not recognise a corresponding deferred tax asset.

Adjusted net earnings per share amounted to 0.004p (2020 H1: £0.112p, 2019 H1: earnings of 0.023p). The net total

comprehensive income for the period amounted to a loss of £0.09m (2020 H1: loss of £2.55m, 2019 H1: loss of £0.30m).

The Company continues to take sensible precautions to protect the availability of cash resources and ensured a planned approach to the reflation of the working capital which used £0.17m of cash from operations (Full year 2020: £1.07m generated, H1 2020: £0.54m generated). As of 30 June 2021, the Company had available cash balances (ex- cluding the unused £0.5m revolving credit facility) of £4.69m (31 December 2020: £5.28m), net cash resources (taking into account bank loans outstanding) of £2.66m (31 December 2020: £3.10m), and financial headroom (comprising net cash plus undrawn facilities) of £3.16m (31 December 2020: £3.60m). Financial covenants have been complied with in full and will continue to be tested on a quarterly basis. The Board is satisfied that this provides the appropriate platform to support the anticipated recovery in demand in the coming months.

Market landscape

The rate of elective surgery in the UK NHS continued to suffer disruption in the first half of the year, as hospitals dealt with increasing caseloads of Covid patients during the second wave. Covid hospitalisations peaked at almost 40,000 beds in the first quarter of the year but reduced to below 5,000 beds in the second. By the end of the period, hospital access for our sales team was improving, and the activity levels of elective surgery is now estimated to be at around 80% of pre-Covid levels, with cancer treatments a priority. There remains a substantial and growing backlog of elective surgery, diagnosis and treatment across a broad range of procedures, and the UK government and its agencies are taking steps to streamline processes and provide additional funding to tackle this issue.

Our sustainability and commercial advantages relative to single use plastics have resulted in multiple hospital trials. In the current year there have been five successful trials for SI Reposable™ products. Furthermore, it is anticipated that the increase in volumes of elective surgery and greater access to the OR will allow the team to conclude the fifteen ongoing and scheduled evaluations for SI Resposable™ devices. Together, if successful, these new opportunities may represent material growth for the Company.

The UK team at SI has worked hard to strengthen relationships with our suppliers and this has seen a new three-year exclusive UK distribution agreement with Microline Surgical, announced in March 2021, under which SI distributes Microline Surgical's complementary portfolio of high-qualityinstruments also aimed at the MIS market with a focus on the Resposable™ ethos of cost and sustainability. This agreement consolidates this long-term synergistic partnership and further endorses our sustainability messaging for the UK market.

A further extension to the agreement with DistalMotion for exclusive distribution of the Dexter robot in the UK has been recently signed, taking the relationship through to September 2024. The partnership with DistalMotion continues to strengthen and, whilst training has been impacted by travel restrictions, 15 surgeons have evaluated Dexter at the facility in Lausanne, with a further six currently planned before the end of the year. There remains a strong pipeline of opportunities but, with the NHS presently still focused on Covid, the procurement process has been extended. How- ever, progress is being made on this process in a number of NHS Trusts and in time we anticipate product demand to develop as the product supports greater efficiency and control in laparoscopic surgery at a lower price point than other robotic solutions.

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