Half-year Report

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About Intelligent Ultrasound Group

Intelligent Ultrasound (AIM: IUG) is one of the world's leading 'classroom to clinic' ultrasound companies, specialising in real-time hi-fidelity virtual reality simulation for the ultrasound training market ('classroom') and artificial intelligence-based clinical image analysis software tools for the diagnostic medical ultrasound market ('clinic'). Based in Cardiff in the UK and Atlanta in the US, the Group has two revenue streams:

Simulation

Real-time hi-fidelity ultrasound education and training through simulation.  Our main products are the ScanTrainer obstetrics and gynaecology training simulator, the HeartWorks echocardiography training simulator, the BodyWorks Eve Point of Care and Emergency Medicine training simulator with Covid-19 module and the new BabyWorks Neonate and Paediatric training simulator and now includes NeedleTrainer that teaches real-time ultrasound-guided needling and incorporates the training version of ScanNav Anatomy PNB. To date over 1,700 simulators have been sold to over 800 medical institutions around the world.

Clinical AI software

Deep learning-based algorithms to make ultrasound machines smarter and more accessible using our proprietary ScanNav ultrasound image analysis technology. Current products on the market utilising this technology are GE HealthCare's SonoLyst software that is incorporated in their Voluson Expert, Signature and SWIFT ultrasound machines; ScanNav Anatomy PNB that simplifies ultrasound-guided needling by providing the user with real-time AI-based anatomy highlighting for a range of medical procedures. 

www.intelligentultrasound.com

NOTE: ScanNav Anatomy PNB is CE approved and cleared for sale in the US by the FDA but is not available for sale in any other territory requiring government approval for this type of product.

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2024

Sale of clinical AI business to GE HealthCare

Post period end on 18 July 2024, the Group announced that it had entered into a conditional sale and purchase agreement for the sale of the Clinical AI business (Intelligent Ultrasound Limited and certain other clinical AI related assets) to GE HealthCare for an enterprise value of £40.5 million on a cash free/debt free basis. The proposed sale, which excludes the NeedleTrainer and NeedleTrainer Plus products, was approved by shareholders on 6 August 2024 and is now only subject to regulatory approval expected by the end of September with completion of the sale expected in October.

Transaction highlights:

·      Sale of the Clinical AI Business to GE HealthCare agreed for an enterprise value of £40.5 million.

·      Disposal excludes the NeedleTrainer/Trainer Plus product which will be retained within the remaining Simulation Business.

·      The Simulation Business generated total revenues of £10.0 million in the financial year ended 31 December 2023 (including £0.8m relating to the NeedleTrainer product).

·      The consideration represents an implied value of 12.4p per Ordinary Share on current issued share capital and a premium of 70.9 per cent to the Ordinary Share price on 17 July 2024 and a premium of 30.9 per cent to the volume weighted share price for the last 12 months. The Proposed Transaction also values the Clinical AI Business at 33.8 times full year 2023 revenues of that business.

·      The transaction is subject to confirmation from the Competition and Markets Authority under the Enterprise Act, and the Investment Security Unit under the National Security and Investment Act, that they do not oppose the transaction.

·      It is the Board's intention to make a material return of capital following a review of the growth potential and capital requirements of the post-transaction business and taking legal and tax advice on the structure of a return.

·      An announcement detailing the proposed use of funds and future strategic direction for the post-transaction business is expected to be made by the time of completion of the Proposed Transaction, which, dependent on the timing of the Regulatory Consents, is expected to be in October this year.

Full details on the sale can be found in the 'Proposed disposal of the Clinical AI business' Circular.

Continuing operations (Simulation including NeedleTrainer)

Revenue

As we will be retaining the NeedleTrainer products in the simulation portfolio post the GE HealthCare transaction, we have reclassified the NeedleTrainer revenue into the simulation revenue for H1 2024 and its comparative period, H1 2023.

Simulation revenue (including NeedleTrainer) in the first half of the year declined by 22% to £4.5m (H1 2023: £5.8m).

This resulted from a decline in the UK and North American markets:

·    The decline in UK sales was expected, due to previously flagged NHS budget pressure, reducing sales by 58% to £0.8m (H1 2023: £1.9m)

·    However, the 23% decline in North America sales to £2.2m (H1 2023: £2.8m) was not anticipated, with nearly £0.7m of expected sales held in either delivery backlog or purchase order delays

Positives in the first half were:

·    Reseller sales (ROW) increasing by 37% to £1.6m (H1 2023: £1.1m), with growing sales into China, the Middle East and Germany

·    NeedleTrainer related sales doubling to £1.0m (2023: £0.5m)

Research and Development

In the period we focussed on developing the:

·    HeartWorks cardiac updates to our BabyWorks 2.0 simulator

·    New needling functionality for our BodyWorks POCUS simulator

·    New Endometriosis Plus Compact simulator

·    Updates to NeedleTrainer including new video and e-learning content and additional needle lengths

Discontinued operations (Clinical AI excluding NeedleTrainer)

Revenue

Clinical AI related revenue increased by 94% to £0.4m (H1 2023: £0.2m) and is based on sales of three AI products:

·    Our ScanNav Assist AI technology drives GE HealthCare's SonoLyst X/IR and SonoLystLive software, the world's first fully integrated ultrasound AI tool that automatically and in real-time recognises the 21 views recommended for fetal sonography imaging. SonoLystLive is now a standard feature on the Voluson Expert 22 and 20; and in April 2024 was launched as a standard on the new Voluson Signature 20 ultrasound machine. SonoLystLive is also an optional extra on the Voluson Expert 18 and Signature 18 ultrasound machines and SonoLyst X/IR is an optional extra on the SWIFT ultrasound machines.

·    ScanNav Anatomy Peripheral Nerve Block ("PNB") is our own CE and FDA cleared, direct-to-market device, that simplifies ultrasound-guided needling by providing the user with real-time AI-based anatomy highlighting for a range of medical procedures.

·    ScanNav FetalCheck is a pre-regulatory approval AI based software that enables an unskilled user to automatically measure gestational age. It continues to be used in the largest ever trial on the use of aspirin to prevent pre-eclampsia that is being conducted in Kenya, Ghana and South Africa in a trial funded by the Bill & Melinda Gates Foundation and led by the international NGO Concept Foundation.

Board Changes

On completion of the GE HealthCare transaction, Nicholas Sleep will be resigning as Director and joining the GE HealthCare team. I would like to take this opportunity to thank Nicholas for his drive and superb contribution to building such a successful Clinical AI operation and adding so much to the Group, both commercially and technically. He and his excellent team will all be missed.

Operations

We continue to operate out of our head office in the centre of Cardiff, the North America office in Alpharetta, Georgia and warehouse operation in Caerphilly. We successfully operate a flexible hybrid work environment, whereby the majority of employees combine office and at-home working that is appropriate to the Company and employee.

Environmental, Social, and Governance (ESG)

In May we published our third ESG report in the 2023 annual report and accounts. We continue to instigate new initiatives to promote better employee and local engagement and believe we are having a positive impact locally, nationally and globally.

The full report can be viewed here: 2023 Annual Report & Accounts

Financial Review

The sale of the Clinical AI business to GE HealthCare has been classified as an Asset Held for Sale in the balance sheet and presented as a discontinued operation in the income statement in line with the requirements of IFRS 5 'Disposal of subsidiaries, businesses and non-current assets'. The comparatives have been restated as if the operation had been discontinued from the start of the comparative period. The assets and liabilities of the Clinical AI business are presented separately on the balance sheet.

Revenue

Continuing operations (Simulation including NeedleTrainer)

Revenue declined by 22% (£1.3m) in H1 2024 to £4.5m (H1 2023: £5.8m). Continuing operations include revenue from NeedleTrainer which is remaining within the product portfolio but was previously reported within the Clinical AI business.

The majority of the decline in simulation revenues was attributable to the UK market, where sales were down £1.1m (58%) on last year to £0.8m (H1 2023: £1.9m) with NHS budget availability still constrained. Sales in North America also declined by 23% to £2.2m (H1 2023: £2.8m). Positively, sales from resellers in the ROW region improved by 37% to £1.6m (H1 2023: £1.1m).

With the decline in revenue, gross profit for the period decreased by £0.9m to £2.6m (H1 2023 (restated*): £3.5m) and in addition the average gross margin dropped to 57% (H1 2023 (restated): 61%) mainly due to the higher proportion of reseller sales and product mix variances.

Discontinued operations (Clinical AI excluding NeedleTrainer)

Revenues increased by 94% to £0.4m (H1 23: £0.2m) mainly arising from growth in royalty income from GEHC.

Administrative costs

*restated for discontinued operations and a reclassification of distribution and direct labour costs of £0.17m into cost of sales

Cash overheads relating to continuing operations were £3.11m, £0.27m lower than the prior period. This mainly arose from lower sales commissions and reduced marketing and external R&D spend.

Overheads from discontinued operations also decreased due to a decision to delay certain R&D projects and other planned product marketing expenditures as well as freeze recruitment and leavers replacements.

Loss after tax

The Group loss after taxation for the period was £2.0m (H1 2023: £1.0m), £1.3m relating to continuing operations and £0.7m to discontinued operations.

Balance Sheet

The Group's net assets at 30 June 2024 reduced by £1.7m to £8.0m (31 December 2023: £9.7m), mainly relating to the cash burn in the period of £2.08m combined with lower trade receivables of £0.5m associated with variations in timing of invoicing in Q2 2024. Liabilities (excluding the £9.5m intercompany loan included within the liabilities held for sale) reduced by £0.9m to £2.3m (31 December 2023: £3.3m) due to lower trade payables and accruals.

The assets and liabilities of the Clinical AI business have been shown separately on the balance sheet with the intercompany loan owed by the Clinical AI business of £9.5m shown within liabilities held for sale and the associated receivable in the remaining business shown within current assets.

The 2023 R&D tax credit of £0.5m is expected to be received in September.

Total lease liabilities decreased by £0.1m to £0.6m (31 December 2023: £0.7m) with ongoing lease payments reducing the amounts owed to the end of the lease period.

The Group had cash and cash equivalents of £1.0m at 30 June 2024 (31 December 2023: £3.0m), a decrease of £2.0m in the period (H1 2023: £3.9m) and an improvement of £1.8m compared to H1 2023 despite £0.3m higher operating cash outflows of £0.9m (H1 2023: £0.6m). The prior period was significantly impacted by higher working capital balances associated with timings of trade receivables in Q4 and purchases of inventory which resulted in net cash outflows from operating activities of £2.7m. Net cash outflows in H1 2024 have reduced to £1.5m with working capital movements. Cash outflows from investing activities totalled £0.7m (H1 2023: £0.9m), of which £0.5m related to capitalised R&D costs (H1 2023: £0.7m) and £0.2m of additions to property, plant and equipment (H1 2023: £0.2m). The net cash outflow from financing activities was £0.1m (H1 2023: £0.2m), principally relating to lease payments.

Outlook

Having spent the last seven years successfully creating first-to-market AI products and building a strong capability in real-time automated ultrasound image analysis, we are delighted that our achievements have been recognised by GE HealthCare.

The remaining simulation business, which had a difficult trading period in the first half of this year, will be boosted by the inclusion of the NeedleTrainer range previously reported in our Clinical AI business, and the Board will use the time between signing and completion of the sale to GE HealthCare to conduct a comprehensive review of the remaining simulation business.

It is the Board's intention to make a material return of capital following a review of the growth potential and capital requirements of the post-transaction business and taking legal and tax advice on structure of a return. An announcement detailing the proposed use of funds and strategic direction for the Company is expected to be made in October when the sale of the clinical AI business to GE HealthCare is expected to complete.

Stuart Gall

CEO

14 August 2024