Episurf Medical announces an up to approx. SEK 120 million rights issue subject to EGM approval and brings forward date of year-end report; Dennis Stripe to act as executive chairman

This press release may not be announced, published or distributed, in whole or in part, directly or indirectly, in the United States, Canada, Japan, Australia, Hong Kong, New Zealand, Singapore, South Africa or any other country where such publication or distribution would violate applicable laws or rules or would require additional documents to be prepared or registered or require any other actions to be taken, in addition to the requirements under Swedish law. This press release is not a prospectus but an announcement of the board of directors’ of Episurf conditional resolution to carry out a new issue of shares with preferential rights for existing shareholders in Episurf. For further information, please refer to “Important notice” in this press release. N.B. This press release has been published in Swedish and English. In the event of any discrepancy between these two versions, the Swedish version shall prevail.

The Board of Directors (the “Board”) of Episurf Medical AB (publ) (“Episurf” or the “Company”) has resolved on an up to approximately SEK 120 million new issue of A and B shares with preferential rights for existing holders of A and B shares (the “Rights Issue”), subject to subsequent approval of an extraordinary general meeting (the “EGM”).

• Each A share entitles its holder to subscribe for one new A share and each B share entitles its holder to subscribe for one new B share.
• The subscription price is SEK 7.50 per new share (both A shares and B shares), which corresponds to a discount of approximately 37.5 per cent compared to the theoretical share price following the detachment of subscription rights, based on the closing price of Episurf’s B share on Nasdaq Stockholm on 18 January 2017. The total issue proceeds will amount to up to approximately SEK 120 million before deduction of transaction related expenses.
• Serendipity Ixora AB (“Serendipity”) and LMK Forward AB (“LMK”), as well as Episurf’s Acting CEO Pål Ryfors and certain other key employees, have undertaken to subscribe and pay for their respective pro rata parts of the Rights Issue, corresponding to approximately 21.7 per cent of the Rights Issue. In addition, a guarantee consortium procured by Erik Penser Bank has, subject to certain conditions, undertaken to subscribe for new shares to such extent that the Rights Issue is subscribed for up to 100 million. This means that the Rights Issue is underwritten by subscription and guarantee commitments to approximately 83.6 percent.
• The Rights Issue is subject to approval by an EGM in Episurf to be held on 20 February 2017. The EGM has been summoned today by way of a separate notice.
• To facilitate the Rights Issue, the Board has resolved to bring forward the date of the publication of the year-end report. The year-end report will be published on 20 February 2017.
• Dennis Stripe, who was elected as chairman of the Board in August 2016, will work as executive chairman together with acting CEO Pål Ryfors during the search process for a permanent CEO.

Background and rationale

Episurf is a medical technology company offering unique patient specific implants and surgical instruments for the treatment of painful joint injuries. By combining expertise in implant development and personalized design, Episurf can deliver customized treatment alternatives based on the individual patient's unique anatomy and the site of injury in order to enable people with painful joint damages a more active and healthier life. Episurf predominantly targets patients in the treatment gap that exist between early biological interventions and partial or total knee replacements. It is Episurf’s view that this treatment gap is of significant size globally given the limited amount of treatment options available for these middle-aged patients.

To date, 164 surgeries have been performed in Europe with the Episurf implant Episealer® and the Company is reporting convincing clinical results. Following a controlled product launch through selected surgeons during 2012–2015, Episurf decided to accelerate the commercialization phase of the Company’s products during 2016. Up until the end of 2015, 73 surgeries with Episealer® were performed. In 2016, Episurf more than doubled that number to 159 as per the end of 2016. In addition to accelerated commercialization, a second priority in 2016 was production of clinical evidence, and in May 2016, the first congress presentation ever with Episealer® clinical follow-up data was held, showing excellent results. The third main priority during 2016 was the preparatory work for a launch of the Company’s products on the US market.

The Rights Issue is an investment in the next steps of Episurf’s development, with selected priority areas in the coming 18–24 months. The first priority is the continued commercialization in the European market together with production of clinical evidence during this commercialization. The second priority is the next step of the US strategy, namely submission of an application for FDA approval during 2017. A third priority is continued product development with a focus on Episurf’s unique digital 3D-based damage assessment tool (Epioscopy®). Additional strengthening within the fields of health economic studies, regulatory affairs and reimbursement are also prioritized areas.

Continued launch in key markets in Europe

The Company’s first product, the knee implant Episealer® Condyle Solo, was launched in 2012. The following years the Company launched Episealer® Trochlea Solo and Episealer® Femoral Twin. During 2016, Episurf noted an increased demand for the Episealer® Femoral Twin implant, implying that more patients with elongated cartilage lesions in the condyle and trochlea areas of distal femur were treated. Besides Episurf’s key product offerings, Episurf also offers an IT platform and a unique 3D-based damage assessment tool (Epioscopy®) that offers surgeons the possibility of digitally interacting with Episurf for joint visualization and damage assessment, to get suggestions on patient unique treatments, design of implants, surgical tools and surgery planning.

The majority of Episurf’s implant portfolio is currently split between Germany (26 percent), United Kingdom (12 percent), Benelux (26 percent) and Scandinavia (34 percent). During 2016, the highest growth was achieved in United Kingdom and Germany, which both more than tripled their implant portfolios. The development in Benelux and the Nordic countries were also positive. Episurf ended 2016 with 86 surgeries performed during 2016 and a positive trend of 34 surgeries performed during the fourth quarter. The company currently has ten sales representatives in Europe, of which five in Germany, two in the United Kingdom, two in Scandinavia and one in Benelux.

FDA clearance and launch in North America

Episurf has a strategic target to obtain FDA approval and launch its products on the US market which is the world’s largest orthopedic market. In order for Episurf to obtain FDA approval in the United States, Episurf has to produce adequate clinical proof for the purpose of demonstrating that Episealer® constitutes a safe and efficient treatment alternative for its designated use. In order to produce such proof, there are three possible regulatory pathways for Episealer®; The first is a 510(k) process in which Episealer® would be compared to other class II products (predicate devices). The second alternative is a De Novo 510(k) route in which approval can be granted for new products lacking predicate devices, which have therefore been automatically classified as Class III products but are considered to be of low to medium risk. The third alternative is a PMA process which is based on demonstrating the safety and efficiency of the product through adequate and well controlled clinical trials. The PMA process is the strictest regulatory pathway required for Class III products.

In July 2016, Episurf participated in a pre-submission meeting with the FDA in Washington. Following this meeting, Episurf submitted a 513(g) Request for information for obtaining FDA’s views about the classification and the regulatory requirements that may be applicable to the Episealer® device. Episurf is currently waiting for FDA’s response to the 513(g) request and the objective is to make the submission for FDA approval during 2017.

Clinical evidence

As of 18 January 2017, 164 Episealer® implants have been implanted into patients. One patient has at this stage had the implant more than four years and ten, 22 and 73 patients have had their implants for three, two and one years, respectively. The first congress presentation with compiled Episealer® clinical data was held in May 2016, when 12 months’ data for 14 patients was presented at the SFAIM-meeting in Sweden. This was followed by presentation of 24 months’ data for eight patients at the SOF-meeting in Sweden and 12 months’ data for ten patients at the ICRS World Congress in Italy. The patients are followed-up with the clinical scores KOOS (Knee injury and Osteoarthritis Outcome Score) and VAS (Visual Analogue Scale). The results show statistically significant clinical improvements from preoperatively to 12 and 24 months’ follow-up of the patients.

Ten patients included in a detailed clinical trial in Sweden have at this stage all passed 24 months, and their clinical data is currently being compiled for scientific publication. In the July 2016 issue of the peer-reviewed journal Aspetar Sports Medicine Journal[1], the article ”The mini-metal concept for treating focal chondral lesions and its possible application in athletes”, written by Prof. Leif Ryd, addresses how a joint resurfacing technology such as the Episealer® technology can be a viable treatment with fast recovery time for active athletes suffering from cartilage lesions.

The Rights Issue

The Board has resolved, subject to the approval by the EGM, to raise up to approximately SEK 120 million, by way of the Rights Issue. Those who on the record date on 23 February 2017 are registered as shareholders in Episurf in the share register kept by Euroclear Sweden AB will receive one (1) subscription right of series A for each A share held and one (1) subscription right of series B for each B share held. Each subscription right of series A entitles its holder to subscribe for one (1) new A share (with three votes) and each subscription right of series B entitles its holder to subscribe for one (1) new B share (with one vote). This will result in a new issue of up to 15,949,804 new shares, of which up to 3,400,871 new A shares and up to 12,548,933 new B shares, corresponding to an increase in the share capital of up to SEK 4,788,991.50. The subscription price is SEK 7.50 per share (both A shares and B shares), which brings total proceeds from the Rights Issue to up to approximately SEK 120 million before deduction of transaction related expenses.

The subscription corresponds to a discount of approximately 37.5 per cent compared to the theoretical share price following the detachment of subscription rights, based on Episurf’s closing B share price of SEK 16.5 at Nasdaq Stockholm on 18 January 2017.

Subscription for new shares will take place during the subscription period, which will run from and including 27 February 2017 until and including 13 March 2017. Trading in subscription rights will take place from and including 27 February 2017 until and including 9 March 2017. The Board is entitled to extend the subscription period as well as the period for trading in subscription rights. Subscription will also be possible without the exercise of subscription rights.

Holders of A and B shares who choose not to participate in the Rights Issue will have their ownership diluted by up to 50 percent in regards of A shares and up to 50 percent in regards of B shares, but are able to financially compensate for this dilution by selling their subscription rights.

If not all shares are subscribed for with support of subscription rights, the Board will resolve on the allocation of shares subscribed for without subscription rights as follows:

1. firstly, shares not subscribed to through a preferential right shall be offered to all shareholders for subscription (subsidiary preferential right). If shares thus offered for subscription are insufficient for the subscription that takes place through a subsidiary preferential right, the shares shall be allocated among subscribing parties in proportion to the previous shareholding. To the extent this cannot take place, the shares shall be allocated by the drawing of lots.
2. Secondly, allocation shall be completed to others who have applied for subscription without support from subscription rights and, in case of over-subscription, in proportion to the number of shares indicated in each subscription application and in case this cannot be completed, by the drawing of lots,
3. thirdly, any remaining shares will be allocated to those who have guaranteed the Rights Issue, in accordance with separate subscription commitments with the Company, and in proportion to the size of their respective commitments.

In order to facilitate the Rights Issue, the Board has also decided to put forward proposals at the EGM to amend the limits for the share capital and the number of shares in the articles of association.

Commitments and underwriting

Serendipity, holding 2,822,563 A shares (corresponding to approximately 17.7 percent of the shares and approximately 37.2 percent of the votes), and LMK, holding 600,000 B shares (corresponding to approximately 3.8 percent of the shares and 2.6 percent of the votes), have undertaken to subscribe and pay for their respective pro rata parts of the Rights Issue. Episurf’s Acting CEO Pål Ryfors and certain other key employees have also undertaken to subscribe and pay for their respective pro rata parts of the Rights Issue. All of the commitments also include undertakings to vote in favor of the Rights Issue and the Board’s other proposals at the EGM. In total approximately SEK 25.9 million or 21.7 percent of the Rights Issue proceeds are covered by these subscription commitments. No fees are payable for the subscription commitments.

In addition to the subscription commitments, a consortium of guarantors procured by Erik Penser Bank has, subject to certain limited conditions, undertaken to subscribe for new shares not subscribed for in the Rights Issue to such extent that the Rights Issue is subscribed for up to SEK 100 million, provided however that the guarantors commitment shall not exceed approximately SEK 74.1 million. This means that the Rights Issue is underwritten by subscription and guarantee commitments to approximately 83.6 percent. The guarantors will receive fees on market terms for the guarantee commitments.

Exemption from the Swedish Securities Council

Serendipity currently holds, pursuant to an exemption granted by the Swedish Securities Council (Sw. Aktiemarknadsnämnden), approximately 37.2 percent of the votes in Episurf. As described above, Serendipity has undertaken to subscribe and pay for its pro rata part of the Rights Issue. The Swedish Securities Council has granted Serendipity an exemption from the mandatory bid rules if Serendipity’s share of the votes in the Company increases due to Serendipity’s subscription of its pro rata part of the Rights Issue. If Serendipity subscribes for its pro rata part of the Rights Issue and no other shares are subscribed for (i.e. not even by the persons having signed subscription or guarantee commitments), Serendipity’s ownership will increase to approximately 30.1 percent of the share capital and 54.2 percent of the votes in the Company.

Indicative timetable for the Rights Issue

New date for publication of year-end report

To facilitate the Rights Issue, the Board has resolved to bring forward the date of the publication of the year-end report. The year-end report will be published on 20 February 2017.

Dennis Stripe to act as executive chairman of the Board

Dennis Stripe, who was elected as chairman of the Board at an extraordinary general meeting held in August 2016, will work as executive chairman together with acting CEO Pål Ryfors during the search process for a permanent CEO.

Advisors

Asperia AB and Erik Penser Bank are financial advisors and Gernandt & Danielsson is legal advisor to Episurf.

For more information, please contact:

Pål Ryfors, acting CEO and CFO, Episurf
Tel: +46 70 962 36 69
Email: pal.ryfors@episurf.com

This information is information that Episurf is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact person set out above, at 07.30 CET on 19 January 2017.

About Episurf Medical

Episurf Medical is endeavoring to bring people with painful joint injuries a more active, healthier life through the availability of minimally invasive and personalized treatment alternatives. Episurf Medical’s Episealer® personalized implants and Epiguide® surgical drill guides are developed for treating localized cartilage injury in joints. Episurf Medical’s μiFidelity® system enables implants to be cost-efficiently tailored to each individual’s unique injury for the optimal fit and minimal intervention. Episurf Medical’s head office is in Stockholm, Sweden. Its share (EPIS B) is listed on Nasdaq Stockholm. For more information, go to the company’s website: www.episurf.com.

Important information

This press release does not contain or constitute an invitation or an offer to acquire, sell, subscribe for or otherwise trade in shares, subscription rights or other securities in Episurf. Invitation to the persons concerned to subscribe for shares in Episurf will only be made through the prospectus that Episurf intends to publish at the Company’s website, following the approval and registration thereof by the Swedish Financial Supervisory Authority (Sw. Finansinspektionen). The prospectus will contain, among other things, risk factors, financial statements as well as information regarding the company’s board of directors. This press release has not been approved by any regulatory authority and is not a prospectus and accordingly, investors should not subscribe for or purchase any securities referred to in this press release except on the basis of information provided in the prospectus to be published by Episurf.

In certain jurisdictions, the publication or distribution of this press release may be subject to restrictions according to law and persons in those jurisdictions where this press release has been published or distributed should inform themselves about and abide by such restrictions.

This press release is not directed to persons located in the United States (including its territories and possessions, any state of the United States and the District of Columbia), Canada, Japan, Australia, Hong Kong, New Zealand, Singapore, South Africa or in any other country where the offer or sale of the subscription rights, paid subscribed shares (Sw. betalda tecknade aktier) or new shares is not permitted. This press release may not be announced, published or distributed, directly or indirectly, in or into the United States, Canada, Japan, Australia, Hong Kong, New Zealand, Singapore, South Africa or any other country where such action is wholly or partially subject to legal restrictions or where such action would require additional prospectuses, other offer documentation, registrations or other actions in addition to what follows from Swedish law. The information in this press release may not be forwarded, reproduced or disclosed in such a manner that would contravene such restrictions or would require such additional prospectuses, other offer documentation, registrations or other actions. Failure to comply with this instruction may result in a violation of the United States Securities Act of 1933, as amended (the “Securities Act”) or laws applicable in other jurisdictions.

No subscription rights, paid subscribed shares or new shares have been or will be registered under the Securities Act, or with any other securities regulatory authority of any state or other jurisdiction of the United States and no subscription rights, paid subscribed shares or new shares may be offered, sold, resold, transferred, delivered or distributed, directly or indirectly, into or within the United States or on account of such persons other than pursuant to an exemption from, or in a transaction not subject to the registration requirements of the Securities Act, and in compliance with any applicable securities laws of any state or jurisdiction of the United States. No public offering of subscription rights, paid subscribed shares or new shares is made in the United States. There is no intention to register any securities referred to herein in the United States or to make a public offering in the United States.

This press release contains forward-looking statements which reflect Episurf’s current view on future events and financial and operational development. Words such as “intend”, “will”, “expect”, “anticipate”, “may”, “plan”, “estimate” and other expressions than historical facts which imply indications or predictions of future development or trends, constitute forward-looking statements. Forward-looking statements inherently involve both known and unknown risks and uncertainties as they depend on future events and circumstances. Forward-looking statements do not guarantee future results or development and the actual outcome could differ materially from the forward-looking statements.

The information, opinions and forward-looking statements concluded in this announcement speak only as of its date and are subject to change without notice.

[1] July 2016; Cartilage: Surgical Options.