Intelligent Ultrasound Group PLC Final Results (6351H)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Intelligent Ultrasound Group Plc	LSE:MED	London	Ordinary Share	GB00BN791Q39	ORD 1P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	14.50	14.00	15.00				0.00	01:00:00

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
	0	0		N/A	0

Intelligent Ultrasound (LSE:MED)
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RNS Number : 6351H

Intelligent Ultrasound Group PLC

26 March 2020

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is considered to be in the public domain.

Intelligent Ultrasound Group plc

("Intelligent Ultrasound" or the "Group" or the "Company")

Unaudited Preliminary Results for the Year Ended 31 December 2019

Intelligent Ultrasound Group plc (AIM: MED), the ultrasound artificial intelligence (AI) software and simulation company, announces its unaudited preliminary results for the year ended 31 December 2019, showing another excellent year of progress for the Group during which its Clinical AI Division signed its first AI software agreement with a major ultrasound manufacturer and its Simulation Division continued to grow sales.

Financial highlights:

   --    Revenue from simulation sales grew 11% to GBP5.9m (2018: GBP5.3m) 
   --    Gross profit up 22% to GBP3.5m (2018: GBP2.8m) 
   --    R&D expenditure increased to GBP2.7m (2018: GBP1.9m)

-- Strengthened the balance sheet in August 2019 with a placing and open offer which raised GBP5.8m after expenses

-- Year-end cash plus investments (short term deposits), at GBP7.3m (2018: cash of GBP5.6m) and no debt(1)

   --    Current cash of GBP6.2m

(1) excluding IFRS 16 lease liabilities

Operational highlights:

-- Signed first long-term AI software licence and co-development agreement with one of the world's leading ultrasound equipment manufacturers

   --    Strong contribution from North America with revenue up 53% to GBP2.6m (2018: GBP1.7m)

-- Signed marketing partnership with Fujifilm SonoSite, Inc. in North America for ultrasound training and services

-- Commenced alliance with Mediscan Systems to use AI and simulation to improve patient care in India and enhance the Group's ultrasound scan image library to over 4 million images (2018: 1 million images)

-- Commenced regulatory approval process and commercial discussions for ScanNav AnatomyGuide's Peripheral Nerve Block AI software

Post year end:

   --    Received ISO13485:2016 medical device accreditation 
   --    Launched COVID-19 simulation training system

Commenting on the results, Riccardo Pigliucci, Chairman of Intelligent Ultrasound said:

"2019 has been another year of excellent progress by the Group and I would like to thank both our staff and our shareholders for enabling this to happen. The Clinical AI Division has performed particularly well, signing its first licensing agreement for ScanNav with a major OEM and progressing commercial discussions for its second AI software product. The reception for our products in development at trade shows is particularly encouraging. The Simulation Division has also worked hard to continue growing revenue.

However, it would be wrong to ignore the recent spread of the COVID-19 virus that is currently impacting all regions in which the Group operates, and we have therefore implemented a number of cost-saving measures that will enable the Group's EBITDA for FY2020 to remain in line with expectations. The outlook for the medium and long term remains unchanged, with the Group expected to have sufficient funds to continue its simulation and AI business activities for the next twelve months, when the revenues from its first AI software licence agreement are expected to be generated.

We remain an ambitious Group that is excited about bringing our first AI software products to market and continuing the growth of the business over the coming years."

Enquiries:

 
  Intelligent Ultrasound Group plc                                                       www.intelligentultrasound.com 
  Stuart Gall, CEO                                                                            Tel: +44 (0)29 2075 6534 
   Helen Jones, CFO 
 
  Cenkos Securities - Nominated Advisor                                                       Tel: +44 (0)20 7397 8900 
   and broker 
  Giles Balleny / Cameron MacRitchie (Corporate 
   Finance) 
  Michael Johnson / Julian Morse (Sales) 
 
  Walbrook PR                                         Tel: +44 (0)20 7933 8780 or intelligentultrasound@walbrookpr.com 
  Anna Dunphy / Paul McManus                                                       Mob: +44 (0)7876 741 001 / Mob: +44 
                                                                                                       (0)7980 541 893

About Intelligent Ultrasound Group ( www.intelligentultrasound.com )

Intelligent Ultrasound (AIM: MED) develops artificial intelligence-based clinical image analysis software tools for the diagnostic medical ultrasound market and hi-fidelity virtual reality simulators for the ultrasound training market. Based in Cardiff and Oxford in the UK, Atlanta in the US and with representation in Beijing in Asia, the Group operates two divisions:

Clinical AI Division

Focusses on developing deep learning-based algorithms to make ultrasound machines smarter and more accessible. Products in development include ScanNav which uses machine-learning based algorithms to automatically identify and grade ultrasound images to provide scan assessment and audit of protocol-based ultrasound scanning; and AnatomyGuide, which aims to simplify ultrasound-guided needling by providing the user with real-time AI-based needle guidance software for a range of medical procedures.

Simulation Division

Focusses on hi-fidelity ultrasound education and training through simulation. Its three main products are the ScanTrainer OBGYN training simulator, the HeartWorks echocardiography training simulator and the BodyWorks Eve Point of Care and Emergency Medicine training simulator. To date over 850 simulators have been sold to over 500 medical institutions around the world.

CHAIRMAN'S STATEMENT

Overview of the year

2019 was a pivotal year for the Group with the pre-revenue Clinical AI Division meeting all its commercial and development milestones for its first two AI-based software platforms. This included:

-- signing our first long-term licence and co-development agreement in July 2019 with one of the world's leading ultrasound equipment manufacturers for our AI-based real-time ultrasound imaging software, a significant advance in validating our commercial model; and

-- completing the pre-regulatory development of AnatomyGuide, the real-time anatomy highlighting software for nerve blocks and progressing both regulatory approval and commercial discussions

The Group's Simulation Division continued to show year-on-year growth and increased revenue by 11% to GBP5.9m, with particularly encouraging results in North America. The marketing partnership agreement signed with Fujifilm SonoSite, Inc. in the second half of the year, is a signal that our focus on high quality training remains important to the ultrasound market.

Strategy

Just over two years ago, the Group took the strategic decision to capitalise on our expertise in ultrasound image simulation and training by expanding the business into the development of real-time AI-based software for integration into ultrasound equipment used in the clinic. The expansion required both the successful acquisition and integration of The University of Oxford start-up company, Intelligent Ultrasound Limited, to augment our existing AI capability, as well as the support of shareholders to fund the subsequent research and development.

Two years on, I am impressed to see how much the executive team has achieved in such a short time, but I would also like to thank our existing and new shareholders for having the vision to back the Company through this strategic change.

A component of this strategy was to change the Company name from MedaPhor Group plc to Intelligent Ultrasound Group plc. The Board believes that the new name is reflective of our strategic change to being both a leading developer of artificial intelligence clinical software and a global leader in ultrasound training through simulation.

Board and governance

The Board continues to recognise the importance of maintaining the highest standards of corporate governance and, as such, the Company has adopted the Quoted Companies Alliance Corporate Governance Code. Towards the end of the year we appointed an external advisor to conduct a full review of our board and its performance. The review is currently on-going and it is expected that its recommendations will be implemented during 2020.

At the end of the year, Wilson Jennings, the Group's CFO stepped down from the Board and I would like to thank Wilson for his valuable contribution since joining the Group ahead of our IPO in 2014 and to wish him well for the future in his semi-retirement. Wilson has been an integral part of our team and he will be missed by the management and staff alike.

At the same time the Board is very much enjoying working with our new CFO, Helen Jones, who joined the Board on the 1 January 2020. She has a strong commercial and technical background that will benefit the Group going forward.

People

I would like to thank all the staff in the Group for working so hard in 2019 to grow the simulation business and to meet all the development and commercial milestones that we set for the new AI software products.

We operate in a highly competitive market and recruitment and retention of the best people remains a priority for the Group.

Outlook

The Clinical AI Division performed particularly well in 2019, meeting all its milestones including signing its first licensing agreement with a major Original Equipment Manufacturer ("OEM") and progressing development and commercial discussions for its second AI software product. The Simulation Division also worked hard to grow revenue, retain margins and keep its overheads in line with expectations.

However, it would be wrong to ignore the recent spread of the COVID-19 virus that is currently impacting all regions in which the Group operates and we have therefore implemented a number of cost-saving measures that will enable the Group's EBITDA for FY2020 to remain in line with expectations. The outlook for the medium and long term remains unchanged, with the Group expected to have sufficient funds to continue its simulation and AI business activities for the next twelve months , when the revenues from its first AI software licence agreement are also expected to be generated .

The Group is currently prioritising its resources on developing additional variants of its COVID-19 lung ultrasound training module, as the frontline fight against the virus continues (details of which are provided in the CEO's Report below); continuing to progress all internal milestones for its ScanNav range of AI products and accelerating proof of concept models for new AI product variants. This will give the Group the potential to bring additional AI products to market in 2021 and therefore be in a stronger position when the current restrictions end.

We remain an ambitious Group, that is successfully expanding into the new AI-based clinical software market and we are confident that, once we are through this period of uncertainty, we can continue to build upon this momentum.

Riccardo Pigliucci

Non-executive Chairman

CEO REVIEW

Artificial intelligence is expected to have a significant impact on medical imaging over the next decade and we aim to be at the forefront of that change as it happens, in ultrasound imaging.

To achieve this, we have organised the Group into two divisions - Clinical AI and Simulation, both of which are supported by a management and administrative resource. The report below details how each division operates, the progress made over the year and the key challenges that each division faced.

CLINICAL AI DIVISION

Our aim is to be a global leader in the provision of AI-based clinical ultrasound software that can boost scanning quality and streamline sonographer workflow in medical ultrasound specialties, such as anaesthesiology, obstetrics, gynaecology, radiology and primary care medicine, as well as making ultrasound accessible to more medical professionals.

The Division is built around the 2017 acquisition of The University of Oxford AI software company, Intelligent Ultrasound Limited that supplemented our in-house image analysis and ultrasound know-how and has enabled us to develop potentially ground-breaking AI image analysis tools for the professional ultrasound scanning market.

The algorithms are based on a growing database of over 4 million images that drive our machine learning; combined with sophisticated deep learning models originally developed by Professor Alison Noble FRS OBE (a founder of Intelligent Ultrasound Limited) and her team from The University of Oxford. This has enabled us to develop our ScanNav image analysis software and the first releases of the ScanNav family of products are in the process of being brought to market in 2020.

On 4 July 2019 the Group announced that it had signed its first long-term licence and co-development agreement for certain of its AI software products in development with one of the world's leading ultrasound equipment manufacturers. The long-term agreement will enable the integration of our real-time image analysis software onto a range of specialty specific ultrasound systems marketed in the global healthcare market. The first royalty per unit revenues are expected during 2021. Terms of the agreement remain confidential and undisclosed for commercial reasons.

Software products in development include:

ScanNav Audit

The ScanNav Audit software provides real-time support for ultrasound practitioners performing the 20-week fetal anomaly scan. ScanNav Audit aims to ensure that a complete set of scan images, that conform to the required global scanning protocols, are captured during the procedure. The ScanNav software acts as a live 'virtual' peer-review, ensuring that the scan is performed correctly by highlighting issues to the sonographer as he or she saves each image. The software will also provide a record of each sonographer's performance, allowing managers to monitor staff and form part of the record keeping and audit requirements of the clinic. ScanNav Audit requires regulatory approval prior to launch.

The Group expects to develop multiple obstetrics variants of ScanNav Audit to complement the 20-week protocol software described above.

ScanNav AutoCapture

The ScanNav AutoCapture software automatically captures and analyses all the ultrasound image planes in real-time, as the sonographer moves the ultrasound probe over the patient's abdomen during the 20-week fetal anomaly scan. The software then automatically selects and saves the key images required to meet the global protocols. The Directors believe that the ScanNav AutoCapture software has the potential to:

-- speed up workflow - as the software automatically captures the correct images, operators do not need to manually freeze and save each image required by the protocol - allowing them to focus on their dynamic assessment of the fetus ; and

-- improve accuracy and consistency - the use of AI software should reduce the operator variability from the procedure, which is expected to result in more accurate and consistent image capture.

ScanNav AutoCapture requires further development and regulatory approval prior to launch.

The Group also expects to develop multiple obstetrics variants of ScanNav AutoCapture to complement the 20-week protocol software described above.

ScanNav AnatomyGuide

ScanNav AnatomyGuide is an AI based ultrasound software product which can automatically and in real-time, identify anatomical structures on the live ultrasound scan image, highlighting structures such as arteries that must be avoided during a needling procedure. The software is currently being developed for use during Peripheral Nerve Block (PNB) procedures to support less experienced practitioners and its development has been partly funded by Innovate UK.

PNB is a form of anaesthesia using needling that can be used for certain surgical procedures as an alternative to general anaesthesia and as a form of pain relief (potentially reducing the need for opioid analgesia). The PNB procedure requires less time and resource and is safer than general anaesthetic. However, PNB requires significant skill to guide the needle safely through the patient's anatomical structures and AnatomyGuide aims to assist the anaesthetist during the procedure.

In May 2019, we made the first live demonstration of the ScanNav AnatomyGuide software to clinicians at the Annual Scientific Meeting of Regional Anaesthesia United Kingdom (RA-UK) .

The product development was substantially completed during 2019 for the first five nerve blocks and the regulatory and commercial partner process has started, with the aim of bringing the first variant of the product to market by the end of 2020.

Future ScanNav products

ScanNav Assist

The successful placing and open offer in August 2019 enabled the Group to start the process of building a third software development team that will look to begin the process of developing ScanNav Assist. ScanNav Assist aims to facilitate the automatic recognition of abnormalities within a general 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 the appropriate specialist. The Directors believe that ScanNav Assist will have the potential to allow more point-of-care medical practitioners to use ultrasound imaging for frontline diagnosis. The Directors believe that once developed such a device would be likely to support a broad range of medical professionals including GPs, midwives, paramedics and doctors working in Emergency Rooms.

ScanNav HealthCheck

In the longer term, we are investigating the potential development of AI software that could enable consumers to scan themselves at home. ScanNav HealthCheck aims to develop the current ScanNav technology to enable consumers to perform scans on themselves. When combined with the next generation of low-cost ultrasound devices, this software could have the potential to enable health conscious individuals to benefit from the ability to scan themselves at home.

AI image database

In March 2019, we announced an alliance with Mediscan Systems, a premier fetal medicine and ultrasound research and training centre based in India, under which the Group provides ScanTrainer ultrasound training simulators in return for access to their large ultrasound image libraries. This has enabled us to significantly expand our AI image database by over one million images and we are proud to support Mediscan in its goal of improving the quality of ultrasound practise in India and throughout the world.

The Division's AI image database currently has in excess of 4 million images acquired from several providers and we expect the growth in this database to continue in 2020 and beyond.

The curation and management of this data is of paramount importance to the Group and, as such, all externally sourced ultrasound imaging data is anonymised before it is sent to us. Patient consent and the right to use the data are obtained under a GDPR-compliant data sharing agreement for each image library. Ultrasound scans recorded by the Group from volunteers are also stored anonymously and always obtained with their consent and conform to the GDPR.

Notwithstanding the data anonymisation, all image data is stored securely, and its use is restricted to those who require access for development work. None of the source images are used in products sold to end-users as they are only used to train and create the deep-learning models of the product.

Challenges to the Clinical Division

AI image analysis in ultrasound is a new area of medical innovation and we are attempting to open up markets in which the market size and the revenue models are unproven. We are also attempting to do this with relatively limited funds, compared to some of the AI based medical image analysis companies already operating in the US, China and Israel.

The threat from COVID-19 has resulted in very necessary restrictions being imposed on access to medical facilities, travel, conferences and face-to-face meetings to try to control the spread of the pandemic. This may compromise some aspects of our research and development projects; however, our Clinical Division currently still expects to meet its key milestone of first revenues in H1, 2021.

Our approach to these challenges is as follows:

   --      continue to progress all internal milestones for the ScanNav range of AI products; 
   --      accelerate the development of any variants of these products;

-- focus on developing AI software that has both a clinical need and a clear economic rationale for its purchase;

-- partner the development of our first products with OEMs who can access the large ultrasound market more quickly with their existing product ranges and sales networks and facilitate faster regulatory approvals; and

-- continue to build our AI image database to ensure we have high quality, curated images that will enable us to build AI algorithms in the field of anaesthesiology, obstetrics, gynaecology, radiology and primary care medicine.

The signing of our first agreement with one of the world's leading ultrasound machine manufacturers, combined with the encouraging reception to our products under development, has given us confidence that we can turn them into commercial products that can generate long-term revenue for the Division.

SIMULATION DIVISION

Based in Cardiff (UK), Alpharetta (US) and with representation in Beijing (China), our Simulation Division designs, develops and sells some of the world's leading hi-fidelity ultrasound training systems for teaching ultrasound scanning to medical professionals in institutions and medical device companies.

This is the original business of the Group which was created out of Cardiff University Medical School and is the foundation of our expertise in ultrasound imaging and understanding of the clinical needs of the medical professionals who rely on ultrasound's growing diagnostic capabilities.

Our comprehensive range of ultrasound training simulators are, in the main, high value, cap-ex sales made to the global medical institution market and sold through our direct sales forces in the US and UK and a network of almost 30 resellers in the rest of the world. The Division has continued to grow sales year-on-year, and it is recognised as one of the gold standard providers of ultrasound training simulators in the obstetrics/gynaecology (OBGYN), echocardiography/anaesthesiology (ECHO) and emergency medicine/point-of-care (PoCUS) markets.

During the year, the division reduced its net cash consumption impact on the Group.

Research & Development

During 2019 the Simulation R&D team focussed much of its resource on the development of a new Compact version of the ScanTrainer for the OBGYN markets that aims to extend ScanTrainer's appeal to smaller hospitals and medical simulation centres in the US and around the world.

In addition, a new augmented reality (AR) app was developed, based on the HeartWorks software, aimed at broadening its appeal to the global cardiac and echocardiography teaching market and potentially to individual doctors who will benefit from access to the system's market leading 3D cardiac anatomy and ultrasound capabilities.

Post year end we launched a COVID-19 version of our BodyWorks Point-of-Care simulator, designed to train healthcare providers to use lung ultrasonography. Ultrasound has major utility for the management of respiratory related COVID-19 due to its safety, repeatability, absence of radiation, low cost, ease of disinfection and point of care use. This new training simulator, as well as the free COVID-19 upgrade training module for all our existing BodyWorks customers, includes a number of examples of lung ultrasound appearances typical of COVID-19 infection to enable frontline clinical staff to practise and train in the use of lung ultrasound. The module was made available to the market on 24 March 2020 and the first systems are already in use in the UK and US. We hope this initiative will help with the training of healthcare professionals working in the frontline of this global emergency.

Territory review

Our Simulation Division sales grew by 11% to GBP5.9m in 2019 (2018: GBP5.3m) and there are positive signs that the ultrasound simulator market for hi-fidelity training simulators will continue this growth once we are through the disruption currently being experienced as a result of the COVID-19 pandemic.

North America

Revenue in 2019 increased by over 50% to GBP2.6m (2018: GBP1.7m).

This was an excellent performance by the North America team and the region remains a key market for medical simulation. Based in Alpharetta, Georgia, the team are now able to provide full sales, marketing, shipping, technical support and small-scale local system build and we believe this capability was an important element in enabling us to enter into a marketing agreement with Fujifilm SonoSite, Inc. to deliver a training solution to the point-of-care ultrasound (PoCUS) market.

The agreement utilises Intelligent Ultrasound's BodyWorks Eve PoCUS training solution and the HeartWorks transthoracic echocardiography (TTE) and transoesophageal echocardiography (TEE) simulator training platforms to accelerate training for all Fujifilm SonoSite's PoCUS systems. Both companies will co-exhibit at numerous conferences, as well as providing hands-on workshops where clinician training is needed.

During the year sales of HeartWorks and BodyWorks on the new Eve manikin platform were particularly encouraging and we expect the Fujifilm SonoSite marketing agreement will generate increased awareness and therefore demand for these simulators.

Rest of the World

Revenue in 2019 was steady at GBP2.6m (2018: GBP2.6m).

Revenue in the Rest of the World is mainly generated by our reseller network of just under 30 resellers and included simulation system sales of GBP0.5m (2018: GBPNil) at fair value, which were exchanged for ultrasound images under the alliance with Mediscan referred to above . As well as a landmark sale of multiple systems to universities in Romania, we were encouraged by good growth in the Iberian market. France however, proved to be a more challenging market in 2019, but a refreshment of the reseller parties is expected to strengthen our position in the region.

United Kingdom

Revenue in 2019 declined by 28% to GBP0.7m (2018: GBP1.0m).

The UK had a difficult year, which is believed to be in part due to the inertia in NHS non-essential spending caused by the continued delay in completing Brexit. Despite significant interest being shown by hospital departments wishing to buy our systems, many found their purchase requests being delayed or blocked by the hospital procurement departments. After a very challenging 2019, the Chancellor's budget on 11 March 2020 offered some comfort through his commitment to provide more funding for the NHS.

Challenges to the Simulation Division

High values sales in the medical training sector remain affected by health budgets, which can be both hard to access and predict, especially during times of political upheaval or global pandemics, which can divert funds from training to frontline care. Like many markets, medical simulation is subject to competitive products and associated pricing and margin pressures.

The Division has historically responded well to these pressures by focussing on offering products that provide a gold standard in training ultrasound. This has traditionally been important to end-users whose careers depend on their ability to scan and diagnose using ultrasound and as a consequence, purchasing decisions tend to be based on quality of training and value for money rather than the lowest price solution.

Clearly the potential impact on sales from both the ongoing exit of the UK from the EU and COVID-19 are difficult to quantify at this time, but are being closely monitored by the Group to assess the impact on inventory, its supply chain and staff availability, as well as revenue. The development of a new simulation system aimed at training medical professionals working in response to the threat from COVID-19 is an example of the Division's agile response to unpredictable market conditions.

Quality Management System

In 2018 the UK operation implemented a Quality Management System and I'm pleased to say that post year-end on 4 March 2020, we received ISO 13485:2016 certification following an audit of our systems by the certification body, LRQA.

ISO 13485:2016 is the internationally recognised quality standard to ensure the consistent design, development, production, installation and sale of medical devices that are safe for their intended purposes. The Group's Clinical AI Division is in the process of bringing a range of AI-based image analysis software products to market and obtaining ISO 13485:2016 certification is an essential step in taking these products through regulatory approval.

Workplace environment

We recently merged our two UK sites into the Cardiff office but, in response to the threat from COVID-19, we have now implemented a working from home policy for the majority of our staff. In the longer term, we intend to move to larger, more modern and flexible office space in the centre of Cardiff, but until then, we will continue to host live demonstrations of all our latest technology at our current head office facility at the Cardiff Medicentre. We were recently proud to host a visit by the Chancellor of the Duchy of Lancaster, The Rt Hon Michael Gove MP and The Secretary of State for Wales, The Rt Hon Simon Hart MP, when they experienced first-hand the advances the Group has made over the last two years.

We would be delighted to welcome any shareholders or prospective investors should they also wish to visit us to see our technology for themselves.

Looking ahead

Despite the understandable concerns over COVID-19, we aim to continue to be both ambitious and successful in our quest to train medical professionals in the use of ultrasound, which, more than ever, is a key medical diagnostic tool; as well as develop cutting-edge AI software technology that will generate long-term licence revenue for the Group over the coming years.

Stuart Gall

Chief Executive Officer

FINANCIAL REVIEW

Summary financial performance

 
                                                       2019    2018 
 Revenue (GBPm)                                         5.9     5.3 
 Gross profit (GBPm)                                    3.5     2.8 
 Gross profit margin (%)                                 58      53 
 R&D costs expensed (GBPm)                              2.2     1.3 
 Administrative expenses (GBPm)                       (8.2)   (7.1) 
 Adjusted EBITDA* (GBPm)                              (3.1)   (2.7) 
 Loss after taxation (GBPm)                           (4.2)   (3.4) 
 Cash and investments (short term deposits) (GBPm)      7.3     5.6 
---------------------------------------------------  ------  ------

*Non-GAAP measure reconciled below

Revenue

Revenues from the Simulation Division increased 11% to GBP5.9m (2018: GBP5.3m). The growth achieved this year was due to strong simulator sales in North America, up by GBP0.9m (53%) compared to 2018. However, this was partially offset by a fall in UK sales of GBP0.3m (28%) considered to be attributable to continued training budget cuts in the NHS and uncertainty surrounding the timing and impact of Brexit. Sales in the Rest of the World were in line with 2018.

Gross profit

Gross margin increased from 53% in 2018 to 58% in 2019 and was helped by the higher proportion of direct sales representing 56% of total sales (2018: 50%), as well as a number of higher margin distribution sales.

Administrative expenses

Administrative expenses increased by GBP1.1m during the year to GBP8.2m (2018: GBP7.1m) as a result of our continued increased investment in R&D activity, particularly in the Clinical AI Division. We also increased the number of sales support staff employed in North America and the number of logistics staff in the UK.

Research and development costs and grants received

The Group expensed through the income statement GBP2.2m (2018: GBP1.3m) of R&D costs in 2019, largely in relation to earlier stage R&D activity in the Clinical AI Division, which had not yet met the criteria for capitalisation under IAS 38. A further GBP0.5m (2018: GBP0.5m) of costs relating to the continued ongoing development of products in the Simulation Division were capitalised within intangible assets.

The Group received an R&D grant from Innovate UK of GBP0.2m (2018: GBP0.3m) which has been included within Other Income.

Adjusted EBITDA

 
                                 2019    2018 
                                 GBPm    GBPm 
-----------------------------  ------  ------ 
 Operating loss                 (4.6)   (3.6) 
 Add back/(deduct): 
 Depreciation & amortisation      1.4     1.2 
 Share option charges             0.1     0.1 
 Exceptional items                  -   (0.4) 
-----------------------------  ------  ------ 
 Adjusted EBITDA                (3.1)   (2.7) 
-----------------------------  ------  ------

The adjusted EBITDA loss increased by GBP0.4m in 2019 which was mainly attributable to the higher level of investment in R&D activity during in the year.

Adjusted EBITDA is not a measurement of financial performance under IFRS however it is considered that the presentation of adjusted EBITDA enhances the understanding of the Group's financial performance, in regard to understanding its ability to generate stable and predictable cash flows from operations.

Exceptional items in 2018

The Exceptional item in the prior year related to a credit of GBP0.4m in respect of a fair value adjustment on the settlement of contingent consideration relating to the acquisition of Intelligent Ultrasound Limited ("IUL") in 2017.

Taxation

The Group claims each year for R&D tax credits and, since it is loss-making, elects to surrender these tax credits for a cash rebate. The amount included within the consolidated income statement in respect of amounts received and receivable for the surrender of R&D expenditure was GBP0.168m (2018: GBP0.214m). The 2019 tax credit also includes GBP0.08m credit in respect of a release of a provision made in 2018 for potential pre-acquisition over claims of R&D tax credits in IUL which HMRC confirmed in the period does not need to be repaid. The tax credit for the year also includes deferred tax of GBP0.09m (2018: GBP0.09m) on the fair value of intangible fixed assets acquired with Inventive Medical Limited ('IML') and IUL which is being recognised over the life of those assets.

As at 31 December 2019, the Group has cumulative gross UK tax losses of approximately GBP14.9m (2018: GBP11.4m) for which no deferred tax asset has been recognised.

Placing and open offer

On 28 August 2019 the Company issued 63,369,043 new ordinary shares of 1 pence each at a price of 10 pence per share which raised GBP6.3m before costs of the share issue and GBP5.8m after costs. The share issue costs of GBP0.5m have been netted off against the share premium arising on the new share issue.

Balance sheet

Consolidated net assets increased to GBP11.0m (2018: GBP9.3m). Intangible fixed assets at GBP2.3m were GBP0.6m lower than the carrying amount at 31 December 2018 of GBP2.9m. Additions to intangibles in the year were GBP0.5m (2018: GBP0.5m) relating to capitalised development costs; whereas, amortisation of all intangibles including IP and brands totalled GBP1.0m (2018: GBP1.0m).

The Group adopted the new leasing standard IFRS 16 in 2019 and recognised an additional GBP0.1m within property, plant and equipment and a corresponding lease liability in relation to leases of office space and company cars.

Trade and other receivables of GBP2.7m (2018: GBP1.9m) have increased largely due to the timing profile of the high level of sales in the last quarter of 2019. Trade and other payables of GBP1.8m (2018: GBP1.5m) include GBP0.2m of warrants issued as part of the consideration paid for IUL (2018: GBP0.2m).

Cash and investments

Cash and cash equivalents at 31 December 2019 stood at GBP1.8m (2018: GBP5.6m). The Group also had GBP5.5m of investments in the form of cash held in short term deposits that matured post year end on 6 January 2020.

Net cash used in operating activities was GBP3.3m (2018: GBP2.6m) and the net cash outflow arising from investment activities was GBP6.3m (2018: outflow of GBP0.9m) due to the cash held in short term deposits. Cash flow in the year was boosted by the placing of new ordinary shares in the Company which raised GBP5.8m net of costs (2018: placing raised GBP4.8m net of costs). The net proceeds have been, and will continue to be, used for the research and development to bring the ScanNav products to market and to continue the proof of concept research and development work on future ScanNav products and general working capital.

The Group continues to explore appropriate financing options that will fund its growth from 2021 onwards.

Events since the end of the financial year

The recent spread of the COVID-19 virus and the resultant downturn in global business are well documented and impacting all regions in which the Group operates. There is also considerable uncertainty over the likely duration of the disruption. Consequently, in anticipation of a short term slow-down in global simulator sales, we have implemented a number of cost saving measures that will enable the Group's EBITDA to remain in line with expectation. The outlook for the medium and long term remains unchanged, with the Group expected to have sufficient funds to continue its simulation and AI business activities well into 2021, when the revenues from its first AI software licence agreement are expected to be generated.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME