CEO REVIEW

AI remains a key element of our 'Classroom to Clinic' approach to ultrasound as we expand both our simulation and clinical AI revenue streams. The report below details the progress made in 2021 and the key challenges faced during the year.

SIMULATION

Training medical professionals in the specialist skills required to competently scan a patient using the diagnostic capabilities of ultrasound is a key foundation stone of our business. We understand the clinical needs of medical professionals who rely on real-time ultrasound imaging and consider ourselves one of the world's leading companies in this growing market.

We design, develop and sell some of the world's leading real-time, hi-fidelity ultrasound training simulators for teaching ultrasound scanning to medical professionals and medical device companies. Our simulators are, in the main, high value capital equipment sales sold through our direct sales forces in the US and UK, as well as through a network of resellers covering the rest of the world.

During the year ultrasound simulation revenue grew by 43% to £7.4m (2020: £5.2m) and contributed £4.5m (2020: £3.2m) of gross profit towards the Group overheads. Over 650 medical institutions around the world now use our ultrasound simulators.

We also expanded our product range and now operate in the following markets:

·      Obstetrics and gynaecology (OBGYN)

·      Echocardiography and anaesthesiology (ECHO)

·      Emergency medicine and point-of-care (PoCUS)

·      Critical care and intensive care

·    Neonate and paediatrics

Research & Development

During the year, we invested £1.2m in simulation R&D (2020: £0.9m). The team focussed on developing the new BabyWorks ultrasound simulator platform for neonate and paediatric scanning, the new HeartWorks 3D Echo module, and a number of product upgrades that aim to provide remote eLearning capability for our HeartWorks and BodyWorks simulators, especially important in the current environment.

BabyWorks is an ultra-realistic baby manikin offering medical professionals a safe and effective training tool for point-of-care ultrasound (PoCUS) and echocardiography in paediatric and neonatal care. The combination of an anatomically accurate, tactile manikin combined with real patient ultrasound scans provides a high fidelity, precise scanning experience that replicates scanning a real baby. Initial feedback from the launch in the second half of 2021 has been very positive and we look forward to building sales during 2022.

Geographical Review

United Kingdom

Revenue increased by 76% to £2.5m (2020: £1.4m)

The UK had a record year, with spending on our simulators continuing to grow across all product lines. The launch of BabyWorks in the second half of 2021 was well received and combined with the HeartWorks 3D Echo simulator that was launched in January 2022, there continues to be strong purchasing interest in the UK market.

We look forward to continuing the growth of the UK revenues in 2022.

North America

Revenue increased by 18% to £2.7m (2020: £2.3m)

Despite the pandemic impacting access to hospitals in several important US states, sales in North America also grew to a record high. With an established operational base in Alpharetta, Georgia, we are expanding the sales team in 2022 to take advantage of the revenue potential in the North American market.

As with 2020, there were almost no major face-to-face trade exhibitions in the US during the year, but we continued to adapt well to the pressures of operating in a restricted market. During 2020 and 2021, the pandemic restrictions enabled products to be demonstrated live over the internet, and although it is expected that the medical profession will wish to revert to face-to-face product demonstrations in 2022, we will look to try and increase the use of this cost-effective demonstration tool. As such, during 2022 we will be upgrading the web demonstration facilities in Alpharetta to match the facilities in our head office in Cardiff.

As with the UK, the launch of BabyWorks and HeartWorks 3D Echo was well received by the market, and we look forward to growing our North American revenues in 2022.

Rest of the World

Revenue increased by 53% to £2.2m (2020: £1.4m)

This was a year of recovery for our reseller sales, although revenue is still 18% below our pre-pandemic sales of 2019. Reduced sales in a number of countries, including China and Germany, that continued to be affected by the pandemic, were offset by encouraging sales in Eastern Europe and Japan. In the second half of the year, we initiated a joint sales venture with Skills Meducation, one of our Western Europe resellers, whereby we are jointly investing in a dedicated Intelligent Ultrasound salesperson. The long-term aim is to increase French sales to the equivalent UK level and, if successful, roll out to other reseller markets.

We have continued to provide training and product sales support from our head office web demonstration facilities and have been able to minimise sales and training related travel throughout the year. The BabyWorks new product launch was conducted entirely online and was well received. We do, however, expect sales support and training related costs to increase in 2022.

With the pandemic restrictions easing in the many of our markets, we look forward to growing reseller revenues in 2022 and beyond.

Challenges to our simulation revenue streams

Ultrasound continues to be a growing medical diagnostic tool, with increasing demand for training that can enhance a medical practitioner's scanning skills.  However, there have historically always been capital expenditure limitations on medical training budgets for high value simulators within the global healthcare market. As such funds for purchasing departments can be hard to access and revenues difficult to predict, especially during times of government cutbacks, political upheaval or global pandemics, when funds can be diverted from training to frontline care.

During 2022 we expect the restrictions caused by the pandemic to recede in the majority of our markets, but there may be some exceptions that impact sales in countries such as China, where zero tolerance Covid-19 policies are operated and regions can be locked down at short notice, but we would not expect these to materially impact the Group. The absence of exhibitions and conferences has restricted the growth of the Group's lead pipeline during the pandemic and there is a risk that the leads from our increased number of email campaigns may have a lower sales conversion rate.

The impact of rising inflation causing medical device costs to rise faster than hospital budgets in 2022/23 could potentially reduce future health spending.

The risk of inflation related interest rate rises pushing countries into recession could also impact on medical training budgets in the longer term.

Although we do not sell to or purchase from the Ukraine, sales to our Russian reseller are currently on hold and we have adjusted our 2022/23 forecasts accordingly. Russia accounted for 2% of our sales in 2021.

The purchasing decisions in the high-fidelity sector of the ultrasound simulation market continue to be based on quality of training and value for money, rather than simply the lowest priced solution. During the year, we continued to respond well to new competitive products and pricing and margin pressures, by expanding our range of simulators that provide the highest standard of ultrasound training, offering a variety of purchase price points and increasing our eLearning options that can work in tandem with our hands-on training simulators.

2021 saw an increase in key component supply chain pressure and this remains a concern for companies of our size. Costs are increasing across the board and lead times are lengthening. Although we work closely with our suppliers, we have had to increase our key component stock holdings to provide some insurance against potential supply disruption and this is continuing in 2022. Despite the challenges, our current stock combined with our stock order commitments indicate we should be able to deliver all expected orders over the coming 12 months.

CLINICAL AI

A key part of the company's 'Classroom to Clinic' vision is to follow medical professionals, as they graduate out of the classroom-based simulation training environment and provide them with access to real-time AI-based clinical software that makes ultrasound easier to use.

This vision became a reality in 2021, with our ScanNav image analysis AI technology, which provides real-time support to clinicians whilst they are scanning, being incorporated into three products in the market:

·      GE Healthcare's SonoLyst software which is incorporated in their Voluson SWIFT ultrasound machine, utilises our ScanNav Assist technology

·      ScanNav Anatomy PNB (Peripheral Nerve Block) that simplifies ultrasound-guided needling by providing the user with real-time AI-based anatomy highlighting for a range of medical procedures

·      NeedleTrainer that teaches real-time ultrasound guided needling and incorporates ScanNav Anatomy PNB 

We continue to follow a two-pronged go-to market strategy of:

·      Signing royalty-based, 'on-machine' licences for the provision of real-time AI software with the major manufacturers, whose established sales networks can provide faster access to our technology in the new ultrasound machine markets

·      Selling proprietary 'plug-in' real-time AI enabled devices direct to the global pool of existing ultrasound machines, through our own sales network

Clinical AI related revenue for the year was £0.2m (2020: £0.0m) and reflects the impact of the pandemic in 2021 that limited global new product roll-out, reduced key opinion leader contact and resulted in almost no exhibitions or congress events. As we said at the beginning of 2021, as the pandemic restrictions relax and face-to-face meetings and exhibitions restart, we anticipate 2022 to be the year where we generate more significant sales growth from our AI based products.

During the year, we invested £2.1m in clinical AI related R&D (2020: £1.7m).

ScanNav Assist

Our ScanNav Assist AI technology acts like a personal scanning assistant, by comparing the image or view acquired to specific criteria on standard views within a fetal scan, to ensure they contain the required anatomy for the imaging plane. The software aims to provide real-time workflow enhancements, that support faster, more standardised scanning, but importantly also support decision making, so that the stress of scanning is reduced and the 'burn-out' of operators being asked to increase productivity is minimised.

In 2019, we entered a long-term partnership agreement for our ScanNav Assist AI software with GE Healthcare, one of the world's leading ultrasound manufacturers, that provides for the integration of our real-time AI image analysis software into GE Healthcare's full range of Voluson women's health ultrasound machines.

At the end of September 2020 GE Healthcare launched the Voluson SWIFT, which is the first GE ultrasound system to feature SonoLyst, the new software that utilises our ScanNav Assist real-time image analysis software and is the world's first fully integrated AI tool that recognises the 20 views recommended by the ISUOG mid-trimester practice guidelines for fetal sonography imaging. SonoLyst is an optional add-on and feedback during the year has been encouraging, despite the pandemic related impact on global roll-out that restricted sales training and key opinion leader contact. As pandemic restrictions relax, we expect to see increased revenue in 2022.

Post year-end we announced we had signed an extension to the GE Healthcare agreement to enable GE Healthcare to utilise the ScanNav Assist AI software in a new women's health segment of automated ultrasound image analysis, that is outside the Group's original agreement. The terms, product sales and the timings of the related product launches are undisclosed.

Future variants of ScanNav Assist that will support additional scanning protocols are in development.

ScanNav Anatomy PNB (Peripheral Nerve Block)

ScanNav Anatomy PNB uses the latest AI technology to automatically highlight the key nerve block anatomical structures on a live ultrasound image and support the performance of healthcare professionals who are suitably qualified, but who perform ultrasound-guided local anaesthesia procedures on a less frequent basis.

This first version of ScanNav Anatomy PNB received CE approval in April 2021 and supports nine common peripheral nerve blocks. It is sold as a stand-alone screen mounted on a portable stand that is plugged into existing ultrasound machines to provide clinicians with continuous feedback from real-time highlighting of their live ultrasound.  Users can also re-familiarise themselves with blocks that are carried out less frequently using the system's integrated 3D animations.

ScanNav Anatomy PNB is also available as a training simulator for medical learning on volunteers, prior to patient contact (see NeedleTrainer below).

Increasingly, ultrasound-guided peripheral nerve blocks are being used as a prudent alternative to general anaesthesia, but not all anaesthetists have the specialist knowledge of ultrasound anatomy to perform them. Through the adoption of ScanNav PNB, it is hoped that hospitals will be able to increase the number of ultrasound-guided nerve blocks that they can perform. The cart-based system is sold in the UK through the Group's direct sales team. 

We continue to progress the product's FDA regulatory filing to enable a version of the product to be sold in the US, as well as seeking to license an integrated version of the product to the major ultrasound manufacturers. The need for an additional US-based Human Factors study delayed the regulatory approval and anticipated launch of the PNB clinical system in the US, but the Group still envisages the PNB system will contribute to revenues in 2022.

Our aim is to develop further variants of ScanNav Anatomy that can be added to the existing ScanNav standalone hardware platform and support ultrasound scanning in both interventional radiology and general radiology, as appropriate.

NeedleTrainer

Launched at the end of 2021, NeedleTrainer was developed by the clinical AI software team as a real-time training version of ScanNav Anatomy PNB. Currently the device is a portable, plug-in system that uses a retractable needle and real-time, virtual image overlays to simulate needling non-invasively on a live volunteer, using the live ultrasound scan. This enables medical professionals to develop hand-eye coordination, optimum positioning and accuracy in ultrasound-guided interventional procedures in a safe, realistic, clinical environment. The system is sold with the trainer version of ScanNav Anatomy PNB integrated into the software.

Future ScanNav AI products

Although during 2021 we focused on developing the partnership with GE Healthcare, commercialising ScanNav Assist, ScanNav Anatomy PNB and NeedleTrainer, the following additional AI related products are in various early stages of development.

ScanNav Detect 

ScanNav Detect aims to facilitate the automatic recognition of abnormalities within a general medical ultrasound scan, confirming that a clinician has correctly scanned the anatomical area of interest, and then flagging any areas of potential abnormality, so the patient can be triaged to a specialist. This could potentially allow more medical practitioners, such as GPs, midwives, paramedics and doctors to use ultrasound imaging for frontline medical diagnostic sonography. 

ScanNav HealthCheck

ScanNav HealthCheck remains a proof-of-concept development area that aims to enable ultrasound scans to be performed at home.

Challenges to the Clinical AI revenue streams

AI-based medical imaging software remains an immensely exciting, and potentially hugely significant global market. However, there is considerable competition from both existing ultrasound manufacturers and well-funded independent AI software vendors. The commercial modelling, although embryonic, is as yet unproven.

To respond to these challenges, we remain focussed on developing AI software that has both a clinical need and a clear economic rationale for its purchase. The ScanNav Assist software is a good example of how our software aims to speed up scanning yet also support the sonographer so that a faster scan is also less stressful, benefiting the operator, the imaging centre and the patient.

As with the simulation market, funds for purchasing departments can be hard to access and revenues difficult to predict, especially during times of government cutbacks, political upheaval or global pandemics.

During 2022 we expect the restrictions on face-to-face contact caused by the pandemic to recede in the majority of our markets, but there may be some exceptions that impact sales in countries such as China, where zero tolerance Covid-19 policies are operated and cities/regions can be locked down at short notice. The easing of these restrictions will also help with any overseas product trials and studies for regulatory clearance, which proved harder to monitor remotely in 2021 and caused delay to our FDA regulatory process.

Royalty payments from sales related to ultrasound machine vendors can be impacted by product launch delays that are outside our control.

The impact of rising inflation may cause medical device costs to rise faster than hospitals budgets and could potentially reduce future health spending.

Recruitment of high calibre AI software engineers remains a challenge, however during the year we continued to recruit high quality staff by offering attractive, flexible salary packages and expect this to continue in 2022.

The new UK Conformity Assessed (UKCA) medical device approval is due to come into effect from 30 June 2023. Failure to migrate our CE approvals to UKCA (caused by, for example, bottlenecks from limited UK regulatory body capacity) could impact the Group's ability to sell its medical device products in the UK from that point.

Quality Management System

The Group continues to meet the standards of ISO 13485:2016 to ensure the consistent design, development, production, installation and sale of medical devices that are safe for their intended purpose.

Workplace environment

Our larger, more modern and flexible head office space in the centre of Cardiff significantly improved our ability to operate effectively during the variety of pandemic restrictions that were in place during the year.

With restrictions changing monthly, we supported office, at home and hybrid working throughout the year, by continuing to provide employees with the hardware and software to work from home, where appropriate. All Covid-19 related changes were regularly communicated to staff and we continue to hold our weekly all-staff meeting over the internet, with an attendance of over 90%. Health and safety risk assessments were conducted regularly and our anonymous annual staff survey helped us assess the impact of the pandemic on employee welfare and support staff where appropriate. During the pandemic we were pleased that no staff were furloughed.

When restrictions allowed, we held large hands-on trial study days and shareholder technology open days in Cardiff.

The Group's warehouse and technical support operation in Caerphilly, that opened in 2020, has also enabled us to build and ship more systems than ever before, as well as hold the increased stock levels caused by the current market conditions.

As ever, all our staff have been tremendous in another difficult working year and I would also like to convey my thanks to all our stakeholders for being so supportive.

Looking ahead

After a positive 2021 in which we grew revenues to £7.6m and reduced operating losses to £4.3m, we are encouraged by the start to 2022.

We are expanding our US sales team and now have four core simulation products that are expected to continue the growth of our simulation revenues in 2022 and beyond.

We have three clinical AI-related software products in the market and hope to obtain FDA clearance for ScanNav Anatomy PNB during the year. We are building an excellent partnership with the world's leading ultrasound company - GE Healthcare, that was recently expanded with a new product extension to the agreement and as with our simulation revenues, expect to see growth in our clinical AI-related revenues in 2022 and beyond.

With the pandemic restrictions around the world easing and enabling a return to face-to face meetings, a growing range of 'classroom to clinic ultrasound' products in the market, new products in the pipeline, an established operational base, and an encouraging start to the year, we expect the strong revenue performance of 2021 to continue in 2022.

There are a number of potential growth opportunities for the Group relating to new AI product development programmes, as well as increases in the machine learning, direct sales and marketing teams and we therefore continue to monitor closely our cash, investment in R&D and overheads against the anticipated sales growth curve.

We remain excited about the potential of our 'Classroom to Clinic' business.

Stuart Gall 

Chief Executive Officer