(SPHR) Sphere Medical

Sphere Medical Holding plc

Preliminary Results for the year ended 31 December 2011

Cambridge, UK, 22 March 2012: Sphere Medical Holding plc (AIM: SPHR.L), ("Sphere" or "Sphere Medical" or the "Company") a leading developer of innovative monitoring and diagnostic products for the critical care setting, is pleased to announce its preliminary results for the year ended 31 December 2011.

Key achievements during 2011

·    £14 million fundraising and admission to AIM

·    Proxima Generation 1 achieved FDA 510(k) clearance in March 2011 for use as an in-vitro blood analyser; the first ever multiple use, microchip-based blood analyser to achieve 510(k) clearance

·    Proxima Generation 2 successfully completed a clinical trial in November 2011 demonstrating equivalent performance to laboratory and Point of Care blood gas analysers measuring arterial blood in a clinical setting

·    Proxima Generation 2 achieved European CE Marking in December 2011 as a patient dedicated in-vitro arterial blood diagnostic analyser

·    First sale of Pelorus 1000 achieved to Sapporo Medical University, Japan

·    Sphere Medical wins 'The One to Watch' award at the International Business Innovation Zone event

·    New appointments to the Board of Directors coinciding with the AIM admission

Commenting on these results, Dr. Stuart Hendry, Chief Executive Officer, said:

"2011 has been a highly successful year for Sphere.  Considerable developments within our portfolio have created the opportunity to commercialise a number of products; we have a clear focus on our key development, regulatory and commercialisation objectives. The Board looks forward to updating shareholders on our progress."

A video interview with Dr. Stuart Hendry will be available from today on the Sphere Medical website www.spheremedical.com

For further information, please contact:

Notes for Editors

Sphere Medical commenced trading on AIM, a market operated by the London Stock Exchange (LSE), on 17 November 2011 having raised £14.0m (£12.8m net of expenses) in a placing of ordinary shares.

Sphere Medical is a UK based medical device company completing the development of a range of monitoring and diagnostic products designed to provide significant improvements in patient management in a number of hospital specialities. Sphere Medical's products are expected to allow near real time measurement of blood gases, various electrolytes and drug levels with laboratory accuracy at the patient's bedside. This information can be used in a wide range of medical applications and is intended to enable faster clinical decision making and consequently to improve the care and management of patients.

CHAIRMAN'S STATEMENT

Key Achievements

This has been a landmark year for Sphere Medical, both corporately and for the significant progress in the development of our range of innovative monitoring and diagnostic products for the critical care setting.

After nine years as a privately funded company, we successfully completed the admission of Sphere Medical onto AIM in November 2011 raising £14.0 million before expenses.  The IPO was completed against a background of very difficult equity market conditions. We believe this is a testimony to the quality of our business and the global market opportunities for our products and technologies.

From a product development viewpoint, Proxima, our leading patient-attached arterial blood gas analyser for use in the intensive care unit ("ICU") or operating room ("OR") in hospitals and incorporating our proprietary microanalyser technology, was granted US Food and Drug Administration (FDA) 510(k) clearance in March 2011 for the Proxima Generation 1 device. In November, Proxima Generation 2 successfully met its primary endpoint by demonstrating equivalent performance to laboratory and Point of Care blood gas analysers measuring arterial blood in a clinical setting.  This key clinical trial then enabled Proxima Generation 2 to achieve European CE Marking as an in-vitro diagnostic device in December 2011.

Board

Last October 2011, in preparation for the Company's AIM admission, Ann Simon retired as Director of Corporate Affairs and in November 2011, Richard Lyman, William Mason, Robert Pettigrew and Els Hubloux, a representative of Quest Management NV, all retired as Non Executive Directors.  On behalf of the Company, I would like to thank them all for their input and guidance over the years.

To coincide with the AIM admission, Matthew Hall was appointed Chief Financial Officer having previously been Chief Financial Officer of Sinclair IS Pharma plc; John Gregory joined the Board as Senior Independent Non Executive Director having most recently been Non Executive Chairman of Sinclair IS Pharma plc; and Stephen Mahle also joined the Board as a Non Executive Director, having previously spent 37 years with Medtronic Inc. including as president of the Pacing Business and subsequently as President of Cardiac Rhythm Disease Management.

Employees

The success of any business rests with the ability and commitment of its employees.  Sphere Medical is exceptionally fortunate to have employees whose hard work and contribution has enabled us to achieve the milestones set by the Board for 2011 and to position the Company to meet the considerable opportunities in 2012 and beyond. I would also like to thank the Sphere Medical Advisory Board for their continued support and guidance.

Outlook

The achievements in developing our product portfolio facilitated the Company's successful fundraising and admission to AIM.  This in turn has allowed us to continue with the development of our range of innovative monitoring and diagnostic products, expand our manufacturing operations and increase our business development efforts.  It has also broadened our shareholder base and increased our corporate profile which is helping us execute our corporate strategy.

There remains significant development and regulatory requirements to be managed but we believe we have the management and financial resources to meet these challenges.  The potential market opportunity for our lead products remains very significant which is supported by our potential partners' own assessments.  I am confident that the outlook for the Group and the commercial opportunities for its range of products is very positive.

Dr. Anthony Martin

Non-Executive Chairman

BUSINESS REVIEW

Sphere Medical is making considerable progress towards implementing its vision of becoming a leading innovator, developer, manufacturer and supplier of patient monitoring solutions that have the ability significantly to improve patient care and improve health care economics.  

Sphere Medical has developed a range of products based on its revolutionary platform technology to improve patient management in the critical care setting in hospitals.  Our microanalyser takes multi-parametric readings in blood or other physiological fluids, with data delivered in near real time at the patient's bedside.  This means that clinicians can react to changing situations faster and can control patient treatment better, with corresponding improvements in patient outcome.  The core technology base enables a wide scope of products for a range of applications while retaining the same core chip components.

From an industry recognition viewpoint, we were very pleased to be presented with 'The One to Watch' award in March 2011 at the International Business Innovation Zone event. Sphere Medical was one of 37 companies selected to present at the event by the UK Trade & Investment as the most innovative life science companies in the UK.

Operating review

Proxima

Proxima is Sphere Medical's lead product and is being developed for critical care applications and uses our patented proprietary microanalyser technology.  Proxima is a disposable patient-attached arterial blood gas analyser for use in the intensive care unit ("ICU") and operating room ("OR") in hospitals.  The device is integrated into existing patient fluid lines at the bedside to allow the rapid measurement of a panel of blood parameters, including blood gases and electrolytes required for the optimum management of critically ill patients. 

Rapid feedback will support more efficient and effective control of therapies such as ventilation and glucose control, which is expected to improve patient outcome and reduce the cost of care.

Our strategy is to adopt a sequential approached to the development of Proxima.  The three generations of Proxima development can be summarised as follows:

·    Generation 1 - to gain regulatory validation for the core microanalyser technology;

·    Generation 2 - to establish the effectiveness of the first patient-attached device; and

·    Generation 3 - to develop a commercially attractive and regulatory approved device for sale

Last year we continued to progress our Proxima development programme achieving FDA 510(k) clearance in March 2011 for our Proxima Generation 1, an in-vitro analyser.  This FDA regulatory clearance provides validation of the microanalyser technology and importantly provides a regulatory 'stepping stone' for future patient-attached generations of Proxima.

Development work on Proxima Generation 2 progressed throughout the year culminating in the successful completion of our first patient-attached clinical trial of Proxima.  Seventeen patients were included in the clinical trial and 100 samples were taken. The trial was conducted in the OR and ICU at both the Queen Elizabeth Hospital, Birmingham (one of the largest ICU centres in Europe) and the West Suffolk Hospital.  This clinical trial met its primary endpoint and demonstrated equivalent performance to laboratory and Point of Care blood gas analysers measuring arterial blood in a clinical setting.

This key clinical milestone paved the way for our announcement in December 2011 that Proxima Generation 2 has achieved a European CE Mark as an in-vitro diagnostic device. We now intend to initiate a number of marketing studies in leading UK hospitals which will utilise this CE Marked device to build up substantial feedback on clinical use and product awareness which we believe will be valuable to our overall commercialisation strategy. 

Proxima Generation 3 is expected to be the first widely available commercial device from the Proxima family of devices.  It will be a 'closed system' where the blood samples and calibration solution will be re-infused into the patient after a blood gas measurement is taken thereby helping to reduce blood loss caused by frequent sampling and decrease the risk of transmission of blood borne infections. The final development of Proxima Generation 3 is progressing to plan and we expect to achieve the European CE Marking for Proxima Generation 3 by the end of 2012.

Proxima Generation 3 is attracting a high level of commercial interest from a number of world-leading medical device companies. This level of interest has significantly increased following our IPO and the announcement that Proxima Generation 2 achieved a CE Mark. A key priority for 2012 will be the progression of commercial negotiations with these world-leading medical device companies who are capable of partnering with Sphere Medical and maximising the commercial potential of the Proxima family of products. We are pleased to report that our discussions with potential partners are proceeding well and we are particularly encouraged by their views that the market potential for Proxima is very significant and aligns itself with our view that the peak annual market is in excess of US$200 million at end user prices.  These potential partners have indicated that achieving the CE Mark for Proxima Generation 3 would represent an important commercial milestone.

Proxima US Regulatory Update

Consistent with our stated strategy to bring our Proxima Generation 3 product to market quickly and safely to serve patients in the ICU and OR, towards the end of 2011 we commenced our contact with the FDA with a Pre-Investigational Device Exemption ("Pre-IDE") submission for Proxima Generation 2. 

The response from the FDA has been most encouraging and, in particular, has provided us with an indication of the type of Point of Care clinical trial which may be required for certain aspects of our Proxima Generation 3 510(k) submission. The FDA has requested clinical trials at three Point of Care sites involving 40 patients per site using the Proxima Generation 2 device and it is probable that this would also be the requirement for Proxima Generation 3.  We have now incorporated such a trial in our Proxima Generation 3 regulatory plan and timetable.

Therefore, a benefit of the Pre-IDE response is to make it unnecessary to proceed with a formal 510(k) submission for Proxima Generation 2 - a device we do not intend to sell in the US. Instead, we will bring forward the regulatory timetable on Proxima Generation 3 by initiating direct discussions with the FDA as early as Q2 2012 which will save both time and cost

Cardiopulmonary bypass monitor ("CPB")

Sphere Medical is developing an in-line blood monitoring system for cardiopulmonary bypass procedures.  In line with our strategy for major parties to market our products, in 2008, we entered into a development and supply agreement with Sorin Group Italia S.r.l. ("Sorin"), a global company and a leader in the treatment of cardiovascular diseases. The CPB product has sensors for pH, potassium, oxygen, carbon dioxide, temperature, oxygen saturation and haematocrit and uses the same core Proxima microanalyser unit thereby offering future economies of scale.

Development of the CPB system is on schedule to deliver a European CE Mark in Q3 2012 and first commercial sales later in 2012.  Sorin and Sphere are developing the product to compete in the advanced monitoring market which accounts for approximately 180,000 of the total global CPB procedures conducted annually.

Pelorus

Sphere Medical has also developed Pelorus 1000, the world's first propofol analyser for the rapid measurement of the concentration of the intravenous anaesthetic propofol in blood samples. Pelorus 1000 achieved a European CE Mark, as a research instrument, at the end of 2010 and is now being used by leading anaesthetists in hospitals in the UK, US and Japan.  In October 2011 we achieved our first sale of a Pelorus 1000 to the Sapporo Medical University in Japan.

Propofol is one of the world's most widely used intravenous anaesthetic, used for the induction and maintenance of general anaesthesia in the OR and general sedation in the ICU. Each year, approximately 12 million patients are admitted to the ICU in the developed world, of whom around 8 million are sedated during treatment.

We are currently developing Pelorus 1500 which we now expect to achieve a European CE Mark by the end of 2012 with a US FDA 510(k) to follow thereafter.  This device will then be available to anaesthetists as the world's first point-of-care in-vitro diagnostic device.

Pelorus has attracted interest from leading medical device companies and preliminary discussions are in process.  

Other product application areas

Sphere Medical microanalyser technology is directly applicable to a number of existing application areas and discussions with potential partners are taking place. However, given the importance of securing the successful commercialisation of Proxima as well as CPB and Pelorus, we are not investing development effort or spend on these applications unless a partnering opportunity presents itself.

Intellectual property

Our intellectual property portfolio is a key asset and we continue to invest in the maintenance and development of our IP estate. We currently have 27 patent families covering chip design, manufacture of miniaturised sensor arrays, sensor design, monitoring and analytical systems and calibration. During 2011 we filed applications for two new patent families and one new patent was granted. The Group continues to charge its research and development programme to the profit and loss until such time as the criteria for capitalisation is met.  

The Sphere Medical team

The significant achievements over 2011 and to date in 2012 reflect the commitment of all our staff. At present, Sphere Medical has a total of 49 employees and since the IPO we have made selected further appointments across all aspects of our business to ensure that the demanding product development programmes, regulatory milestones and product commercial launches are achieved to timetable.

The Medical Advisory Board (chaired by Dr John Ulatowski, The Johns Hopkins Hospital, Baltimore; Dr Peter Glass, Stony Brook University Hospital, New York; and Dr Tom Clutton-Brock, University Hospitals Birmingham, UK) continues to be instrumental in guiding Sphere Medical's clinical programme and increasingly on preparations for product launches. 

Sphere Medical facilities

During November 2011 we received formal notification by TÜV SÜD Product Service GmbH, our Notified Body who audits our quality management system, of the extension of our existing EN ISO13485 scope for design and development to include production of medical monitoring systems. This extension now enables us to manufacture our monitoring and diagnostic medical devices, including our Proxima disposable patient-attached arterial blood analyser, at our manufacturing facility in Harston, Cambridge.

Flotation on AIM

In November 2011 Sphere Medical was successfully admitted to AIM at the same time raising £14.0 million before expenses. The IPO was undertaken in very difficult equity market conditions and we were very grateful for the support provided by a number of our longstanding shareholders and are delighted to welcome a number of other leading institutional shareholders onto our register.

Financial Review

In the year ended 31 December 2011 Sphere recorded its first product revenue of £40,000 (2010: £nil), representing the sale of a Pelorus 1000 propofol device and associated consumables. 

Operating expenses were £4.9 million (2010: £5.0 million) before the exceptional items associated with the IPO. Included in operating expenses are research and development and manufacturing costs of £3.2 million (2010: £3.0 million) principally associated with the development of the Proxima disposable patient-attached arterial blood gas analyser. Administrative expenses were £1.1 million (2010: £1.4 million) the reduction reflecting management's cost reduction initiatives.

Finance costs (net) were £1.0 million (2010: £1.3 million) comprising the redemption premium on the Convertible Loan Notes 2012 of £1.3 million (2010: £0.9 million) which were all redeemed on IPO, a reduction in the fair value of the Warrants of £0.4 million (2010: £29,000) and debt interest payable of £0.1 million (2010: £0.5 million).

During the year £359,000 was received in respect of research and development tax claims for 2010 (2009: £575,000). No accrual has been made for any research and development tax claim for the 2011 year. 

The loss and total comprehensive income for the year was £6.0 million (2010: £5.8 million). The basic and fully diluted loss per share for the year was 31.1p (2010: 37p), the reduction reflecting the higher weighted average number of ordinary shares in issue during the year as a result of the Group's equity-based fundraising activities.

Cash and cash equivalents and monies on treasury deposit as at the end of the year were £12.1 million (2010: £0.4 million).

Outlook

We are firmly focused on creating a profitable and leading developer of innovative monitoring and diagnostic products for the critical care setting. The IPO of Sphere Medical in November 2011 has provided the Group with the funds necessary to complete the development and subsequently commercialise our three lead products.  The successful IPO in the face of very difficult public equity market conditions was only possible because of the considerable product and regulatory milestones achieved in 2011. 

The securing of a commercial partnering deal for Proxima Generation 3 remains a core objective for the current year. We have begun the process of identifying suitable partners and discussions with a number of these parties, including Edwards Lifesciences, are proceeding satisfactorily.

From a product development viewpoint, we have begun 2012 as we ended 2011, with a clear focus on the development and regulatory milestones which must be achieved during the year. 

Finally, we would like to thank the Board, management and our employees for their continued dedication to Sphere Medical. We would also like to thank our shareholders for their support and interest which they show in the Group.

Dr. Stuart Hendry                                    Matthew Hall

Chief Executive Officer                            Chief Financial Officer

Consolidated statement of comprehensive income

For the year ended 31 December 2011       

Consolidated statement of financial position

At 31 December 2011

Consolidated statement of cash flow

For the year ended 31 December 2011

Consolidated statement of changes in equity

For the year ended 31 December 2011

Notes to the financial statement

For the year ended 31 December 2011                                                                   

1. General information

Sphere Medical Holding PLC (the "Company") and its sole subsidiary Sphere Medical Limited (together the "Group") undertake research and development of products within the medical device area. The Group has a manufacturing facility at its Harston site and seeks to commercialise its technology and products within the eurozone, the US, the UK and Japan.

The Company is a public limited company and is registered in England and Wales.  It was incorporated on 14 March 2001 as a private limited company, GG 105 Limited, under the Companies Act 1985. It changed its name to Sphere Medical Holding Limited on 14 January 2004 and on 10 November 2006 the Registrar of Companies issued a certificate of change of name to Sphere Medical Holding plc and the Company became a public limited company. The address of its head office and registered office is Harston Mill, Harston, Cambridge CB22 7GG, UK.

On 17 November 2011 the Company floated on the AIM market of the London Stock Exchange plc.

2. Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the Companies Act 2006.

The financial statements have been prepared under the historical cost convention.

The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a high degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.

These financial statements are presented in pounds sterling (GBP) because that is the currency of the primary economic environment in which the Company and its subsidiary operate.  Foreign operations are included in accordance with the policies set out in Note 3. 

The financial information in this preliminary results announcement does not constitute the Group's statutory accounts for the year ended 31 December 2011 or the year ended 31 December 2010 but is derived from those accounts.

Going Concern

At 31 December 2011 the cash balance available to the Group was £12,091,000 including fixed term deposits over 3 months while for the year the cash outflow from operating activities was £(4,789,000).

The Group remains in the development phase for most of its products and does not expect to generate sufficient revenue from product sales during the next 12 months to fund its development plan. Nevertheless, the Board's confidence that the development and commercialisation will prove to be successful has been increased very considerably by progress made during the year and subsequent to the year end, although the eventual outcome remains subject to overcoming further final development phases. The Board has also noted an increasing level of interest from potential commercial partners which underlines the fact that its products are likely, given the right commercialisation route, to bring about major changes to healthcare provision and to be commercially successful.

Sphere's revenues from products are not expected to be sufficient for the Group to become cash generative from commercial operations over the next 12 months.

While Sphere seeks to negotiate development payments in connection with commercial partnerships, it currently has no contracted development payments. Sphere's ability to carry through its development programme and ultimately to become cash generative through commercial operations therefore is and, over the next 12 months, will be from external funding raised by the initial public offering (IPO) on the AIM operated by the London Stock Exchange  in November in 2011 and milestone and other development payments. 

3. Principal accounting policies

The principal accounting policies applied in the preparation of the Group's financial statements are set out below. These policies have been consistently applied to all the years presented unless otherwise stated.

Changes in accounting policy

During the year the Group has adopted the following changes in accounting policy:

The Directors do not consider that the adoption of these changes has had a material impact on the Group's financial statements in this period of initial application.

Basis of consolidation

The Group financial statements incorporate the financial statements of Sphere Medical Holding plc and its subsidiary undertaking Sphere Medical Limited made up to 31 December each year.  Subsidiary undertakings are entities over which the Group has power to control the financial and operating policies. The Group obtains and exercises control through voting rights. Unrealised gains and losses on internal transactions between the Company and its subsidiary are eliminated on consolidation. The results of subsidiary undertakings acquired or sold in the year are included in the consolidated statement of comprehensive income from, or to, the date on which control passed. Acquisitions are accounted for under the acquisition method. The purchase method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the acquired business, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the acquired subsidiary are included in the consolidated balance sheet at their fair values, which are also used as the basis for subsequent measurement in accordance with the Group accounting policies. Goodwill is stated after separating out identifiable intangible assets. Goodwill represents the excess of fair value of consideration transferred over share of net assets of the acquired subsidiary at the date of acquisition. However, in practice the Group has been in existence unchanged throughout the years presented here. Prior to the adoption of IFRS in 2007, business combinations were accounted for under UK GAAP FRS6 "Acquisitions and Mergers".

Revenue recognition

Revenue represents the fair value of amounts received or receivable for product sales and services provided and royalties earned, net of trade discounts, VAT and other sales-related taxes. The Group's policy is to recognise revenue when:

•    there is persuasive evidence that an arrangement exists;

•    pricing is fixed or determinable;

•    delivery has occurred or services have been provided to the customer;

•    collectability is probable; and

•    there are no material outstanding conditions or contingencies attaching to the receipt of monies due. 

Technology and product licensing - Technology and product licensing income represents amounts earned for licences provided under licensing agreements including up-front payments, stage of completion payments and technology access fees. Revenues are recognised where they are non-refundable, the Group's obligations related to the revenues have been discharged and their collection is reasonably assured.  Refundable licensing revenue is treated as deferred until such time as it is no longer refundable. In general, upfront payments are deferred and amortised on a systematic basis in line with the period of development. Stage of completion payments related to scientific or technical developments are recognised as income when the stage is accomplished.

Exclusivity payments - income from exclusivity agreements relates to the receipt of payments in return for an agreement by the Group not to negotiate or enter into agreements with parties other than the party paying the exclusivity payment within a particular field, medical indication or geographic territory during a defined period. Income from exclusivity payments is recognised on a straight line basis over the period for which exclusivity is granted.    

Share-based payment transactions

All share-based payment transactions granted by the Group since 7 November 2002 are recognised in the Group financial statements save for options granted that had already vested by 1 January 2005.

The Company issues equity-settled share-based payments to several of its Directors, as well as employees (including Directors) of its subsidiary, Sphere Medical Limited. In accordance with IFRS 2, for all grants of share options and awards the cost of the equity-settled share-based payments is measured at fair value at the date of grant.  Where employees are rewarded using share-based payments, the fair values of employees' services are determined indirectly by reference to the fair value of the instrument granted to the employee. The fair value is appraised at the grant date and excludes the impact of non-market vesting conditions. That fair value is expensed on a straight line basis over the vesting period for the related options based upon the Company's estimate of the shares that will eventually vest, with a corresponding credit to "other reserves". 

No expense is recognised for awards that do not ultimately vest as a result of the relevant employee ceasing to be employed by the Group.

Fair value is measured using the Black Scholes Option Pricing Model. The expected life used in the model is the expiry date of the options.

Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the value of the shares issued are allocated to share capital with any excess being recorded as share premium.

Government grants

Government grants of a revenue nature are credited to profit or lost when all of the conditions are fulfilled and they are receivable.

Foreign currency

Transactions denominated in foreign currencies are recorded in Sterling at the actual exchange rates as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported in sterling at the then prevailing rates of exchange.  Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in profit or loss.

Research and development expenditure

Expenditure on research (or the research phase of an internal project) is charged to profit or loss in the period in which it is incurred.   

Development expenditure is capitalised when the criteria for recognition as an asset are met, that is when the Group can demonstrate:

•    the technical feasibility of completing the project so that it will be able to use the asset for use or sale,

•    its intention to complete and its ability to use the asset,

•    how the asset will generate future economic benefits,

•    the availability of resources to complete, and

•    that costs associated with the asset and its development can be measured reliably. 

Regulatory and other uncertainties relating to the current stage of the Group's development projects mean that such criteria have not all been met to date. 

Development expenditure which is not capitalised because it fails to meet one or more of the above criteria for being capitalised is charged to profit or loss in the period in which it occurs.

Management monitors the progress of internal research and development projects by using a project management system.

Property, plant and equipment

Property, plant and equipment are carried at acquisition cost less accumulated depreciation and any provision for impairment. Depreciation is provided to write off the cost of all property, plant and equipment to its residual value on a straight-line basis over its expected useful economic lives as follows:

Plant and equipment                        3 - 4 years             

Residual values and useful lives are reviewed annually.

Intangible assets

Intangible assets are capitalised on the basis of the costs incurred to acquire. These costs are amortised over the estimated useful life of the asset:

Software                                                  2 years

Impairment of property, plant and equipment

At each balance sheet date the Group reviews the carrying amounts of its property, plant and equipment for any indication that those assets have suffered an impairment loss. For the purpose of this review assets are grouped into cash-generating units. As a result, some assets are tested individually for impairment and some are tested at cash-generating (or potentially cash-generating) unit level. If any indication of impairment exists, an impairment loss is recognised for the amount by which the assets or the cash-generating unit's carrying amount exceeds its recoverable amount. To determine the recoverable amount, management estimates expected future cash flows from each cash-generating unit and determines a suitable interest rate in order to calculate the present value of those cash flows. The data used for the Group's impairment testing are directly linked to the Group's latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancement. Discount factors are determined individually for each cash-generating unit and reflect their respective risk profiles as assessed by management. 

Impairment losses are charged pro rata to the assets in the cash-generating unit.  All assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment charge that has been recognised is reversed if the cash-generating unit's recoverable amount exceeds its carrying amount.

Financial assets

The Group's financial assets all fall into the category of loans and receivables.

The category of a financial asset is assigned on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument's category is relevant for the way it is measured and whether any resulting income and expenses are recognised in the profit or loss or in other comprehensive income.

An assessment of whether a financial asset is impaired is made at least at each reporting date. 

Interest receivable is accrued on a daily basis at the interest rate applicable to each deposit.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.  After initial recognition these are measured at amortised cost using the effective interest method, less provision for impairment. The Group's trade and other receivables fall into this category of financial instruments. Discounting, however, is omitted where the effect of discounting is immaterial.

Significant receivables are considered for impairment on a case-by-case basis when they are past due at the balance sheet date or when objective evidence is received that a specific counterparty will default. All other receivables are reviewed for impairment in groups, which are determined by reference to the industry and region of counterparty and other available features of shared credit risk characteristics, if any. The percentage of the write down is then based on recent historical counterparty default rates for each identified group.

Inventories

Inventories comprise directly attributable costs on incomplete projects or products and are held in the statement of financial position at the lower of cost and net realisable value. Cost includes all expenses directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Financing costs are not taken into consideration. Costs of ordinarily interchangeable items are assigned using the first in, first out cost formula. Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses.

Income taxes

Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods that are unpaid at the balance sheet date.

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. Deferred tax is, however, neither provided on the initial recognition of goodwill nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future.

In addition, tax losses available to be carried forward as well as other income tax credits are assessed for recognition as deferred tax assets. 

Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the reporting date. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that they will be available to offset against any future taxable income.

Management bases its assessment of the probability of future taxable income on the Group's latest approved budget forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. Specific tax rules in the other legislations in which the Group operates are also taken into account. If a positive forecast of taxable income indicates the probable use of a deferred tax asset, especially when it can be utilised without a time limit, that deferred tax asset is recognised in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties is assessed individually by management based on the specific facts and circumstances.

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in profit or loss, except tax relating to items recognised in other comprehensive income and tax relating to items recognised directly in equity.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value and accrued interest thereon.

Investments

Cash held on long-term deposit of more than three months and therefore not readily converted into cash are recognised as an investment.

Post employment benefits

The Group provides post employment benefits through different defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into an independent entity. The Group has no legal or constructive obligations to pay further contributions after its payment of the fixed contribution.   

The Group contributes to defined contribution plans, operated by independent life assurance companies, for the benefit of substantially all employees. Employer's contributions range from 6% to 12% of pensionable payroll dependent upon the age of the employee and are generally contingent upon employees' contributions. The amount charged to the profit or loss is the total of contributions payable in the year.

Financial liabilities

The Group's financial liabilities include borrowings, trade and other payables and derivative financial instruments and on initial recognition they are measured at fair value. Financial liabilities are measured at amortised cost using the effective interest rate method except for derivatives that are measured at fair value. 

Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument.  All interest-related charges and fair value movements are included in the statement of comprehensive income lines "finance costs" or "finance income". A finance liability is derecognised when it is extinguished, discharged, cancelled or expires.

Within financial liabilities are warrants issued, valued at their fair value.  Fair value is measured using the Black Scholes Model. The expected life is the expiry date of the warrant. 

Leased assets

In accordance with IAS 17 "Leases", the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is then recognised at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any. A corresponding amount is recognised as a finance leasing liability, irrespective of whether some of these lease payments are payable up-front at the date of inception of the lease.   

Subsequent accounting for assets held under finance lease agreements, i.e. depreciation methods and useful lives, correspond to those applied to comparable assets which are legally owned by the Group. The corresponding finance leasing liability is reduced by lease payments less finance charges, which are expensed to finance costs.

The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to profit or loss over the period of the lease.

All other leases are treated as operating leases.  

Operating lease agreements

Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged to the profit or loss net of any incentives received from the lessor on a straight line basis over the period of the lease. Associated costs, such as maintenance and insurance, are expensed as incurred. 

Share capital

Ordinary Shares and Preferred Ordinary Shares are classified as equity. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. On admission of the Company to AIM, the Preferred Ordinary Shares were automatically converted into new Ordinary Shares.

Share premium

Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of the expenses of the share issue.

Other reserve

The other reserve represents equity-settled share-based payments made to Directors and employees.

Warrants

Warrants issued are valued at their fair value and shown as a derivative liability.   The movement in the fair value is taken to the income statement.  Any balance of the warrants reserve in relation to any unexercised warrants at the expiry of the warrant exercise period will be transferred to the profit and loss account reserve.

Profit and loss account

This represents all current and prior period results as disclosed in profit or loss.

Significant accounting estimates and judgements

     Share Options and Warrants

Share options are granted over a discretionary period and vest in tranches over a three-year period. The fair value of options and warrants is determined using the Black-Scholes valuation model, which requires a number of estimates and assumptions. The significant inputs into the model are the share price at the date of grant, the exercise price, the expected option life, the expected volatility and the risk-free interest rate.

     Revenue

     The Board uses its judgement in the classification of types of revenue.

     Research and Development Expenditure

     The Board uses its judgement in the assessment of the extent, if any, to which expenditure is identified as development expenditure rather than research expenditure.

     Deferred Tax Asset

     The board uses it judgement as to the current level of trading losses and the uncertainty as to when sufficient taxable profits will be generated to relieve the losses when providing for the deferred tax asset.

     New standards and interpretations not applied

     The IASB and IFRIC have issued a number of standards and interpretations with an effective date after the date of these financial statements:  

     The Directors do not believe that the adoption of any of the above standards and interpretations will have a material impact on the Group's financial statements in the period of initial application.

4. Loss per share

Fully diluted loss per share is calculated after showing the effect of outstanding options in issue.  As the effect of the options would be to reduce the loss per share, the diluted loss per share is the same as the undiluted loss per share.

Calculation of loss per share is based on the following loss and numbers of shares:

5. Prior Period Adjustment

 The financial statements for 2010 have been restated.  The accounting treatment of the Warrants to subscribe for Ordinary shares has been changed to account for them as a financial liability as opposed to an equity instrument.  The impact has been to increase the finance costs and therefore the loss for 2010 by £410k.  Equity is decreased by £435k and derivative liabilities within current liabilities increase by £435k.  Earnings per share has decreased from 45.2p to 37.0p.  A restated Statement of Financial Position for 2009 has not been included as the figures are unchanged from the 2009 Statement, since the warrants were issued in 2010.

6. Share capital

     Share issue

The following issues of shares were made during the year:

·    193,893 Ordinary Shares of £0.01 were allotted fully paid for cash at £1.70 each

·    1,830,220 Preferred Shares of £0.01 were as a consequence of Admission automatically converted to Ordinary shares which did not result in any changes to the share capital or share premium account.

·    4,810,748 Ordinary Shares of £0.01 were allotted on Conversion of the principal amount of the Loan Notes 2012 plus accrued interest of 8%(net of tax) at £0.6475.  The loan notes had been issued during 2011. Under the terms of the Loan Notes 2012, the conversion triggered by IPO was effected at a price which was 30% below that at IPO.

·    15,135,135 Ordinary Shares of £0.01 were allotted fully paid for cash at £0.925.

Further Copies

Copies of this announcement and, on finalisation, the full annual report and accounts will be available, free of charge, for a period of one month from the Company's Nominated Adviser and Broker, Peel Hunt LLP, Moor House, 120 London Wall, London EC2Y 5ET, Tel: 020 7418 8900 or from Sphere Medical Holding plc, Harston Mill, Harston Cambridgeshire CB22 7GG, Tel: 01223 875222.  Copies of the full financial statements will be made available to shareholders in due course.