Mainstay Medical Provides Company Update and Reports 2019 Full Year Financial Results

ReActiv8 Pre-Market Approval (PMA) application accepted for review by the U.S. Food and Drug Administration (FDA) in October 2019
Day 100 meeting with the U.S. FDA regarding ReActiv8 PMA completed in December 2019
Regulatory approval from the Australian Therapeutic Goods Administration (TGA) for ReActiv8 received in December 2019; application for inclusion on Australian Prostheses List for private reimbursement submitted
European commercial validation efforts continue to progress

February 25, 2020 02:00 AM Eastern Standard Time

DUBLIN--(BUSINESS WIRE)--Regulatory News:

Mainstay Medical International plc (“Mainstay” or the “Company”, Euronext Paris: MSTY.PA and Euronext Growth of Euronext Dublin: MSTY.IE), a medical device company focused on bringing to market ReActiv8^®, an implantable restorative system to treat disabling Chronic Low Back Pain, today provides a company update and reports its financial results for the full year ended 31 December 2019.

Jason Hannon, CEO of Mainstay, said: “We continue to make significant progress toward our key objectives. We have continued our interactions with the FDA regarding our PMA filing for ReActiv8, and we expect a decision regarding approval around the end of 2020. The PMA included one-year data from 160 patients from the ReActiv8-B clinical study. All of the remaining patients have completed their one-year assessments, and we are pleased to see that the data from the entire population are consistent with our previously-reported one-year results, adding to the strength of the long-term evidence supporting ReActiv8.”

“We received regulatory approval for ReActiv8 in Australia, and we are seeking inclusion on the Prostheses List to secure reimbursement from all private health insurance funds in Australia,” continued Mr. Hannon. “We also continue to make progress working with key physicians in Germany who are incorporating ReActiv8 into their practices in order to validate commercial adoption, refine patient selection strategies and follow ongoing patient progress.”

Business Update

In December 2019, Mainstay completed a Day 100 meeting with the U.S. FDA regarding its PMA application submission for ReActiv8. The PMA was accepted by the FDA for filing in October 2019, and a decision regarding approval is expected around the end of 2020. The PMA application is based upon the totality of the clinical data for ReActiv8, including the data from its ReActiv8-B pivotal trial.
In December 2019, the Company received regulatory approval from the Australian TGA for ReActiv8. This approval confirms inclusion of ReActiv8 in the Australian Register of Therapeutic Goods (ARTG), enabling commercialization throughout Australia. The Company has submitted an application for ReActiv8 to be included in the Prostheses List of reimbursed products, with a reimbursement decision expected in the third quarter of 2020. The Prostheses List identifies implantable devices eligible for reimbursement from private health insurance funds in Australia. Mainstay plans to launch ReActiv8 commercially in Australia after securing a place on the Prostheses List.

In Germany, Mainstay’s initial European market, the Company continues its commercial validation efforts. Mainstay is solely dedicated to building a small number of reference sites where high volumes of patients are treated with ReActiv8, allowing the Company to gather associated clinical data, refine patient selection processes for commercial markets, and gain the learnings needed to accelerate commercial launch in future markets. Mainstay achieved its goal of having 20 discrete implanting physicians in Germany by the end of 2019.

Financial Update

During 2019, Mainstay conducted financing activities that resulted in approximately $28 million of cash runway extension, consisting of:

In July 2019, Mainstay completed financing transactions consisting of the issuance of 4,649,775 new ordinary shares at a purchase price of €3.00 per share and the drawdown of €3.0 million in additional debt from the Company’s existing lender, IPF Partners, resulting in aggregate gross proceeds of €16.9 million (US$18.9 million).
In April 2019, Mainstay and its subsidiary, Mainstay Medical Limited, entered into an amendment to their agreement with IPF Partners relating to the existing debt facility. Pursuant to the amendment, all principal and interest payments are deferred until 2021, the loan term was extended to 2023 and the interest rate on all tranches was changed to 8%. The loan is also convertible in certain circumstances, including FDA approval of ReActiv8, to ordinary shares at a price of €8 per share. The Company also granted 1.5 million warrants over ordinary shares to IPF Partners with an exercise price of €6.

Revenue during the year ended 31 December 2019 was $1.1 million (2018: $0.6 million). The 2019 figure does not include deferred revenue at 31 December 2019 of $0.049 million.
Operating expenses for the year ended 31 December 2019 were $19.2 million (2018: $29.6 million). The decrease was driven primarily by reduced costs relating to activities and personnel following the completion of all implants in the ReActiv-8 B clinical trial.
Cash on hand as at 31 December 2019 was $17.4 million (31 December 2018: $15.5 million).

– End –

About Mainstay

Mainstay is a medical device company focused on commercializing an innovative implantable restorative neurostimulation system, ReActiv8^®, for people with disabling Chronic Low Back Pain (CLBP). The Company is headquartered in Dublin, Ireland. It has subsidiaries operating in Ireland, the United States, Australia, Germany and the Netherlands, and is listed on regulated market of the Euronext Paris (MSTY.PA) and the Euronext Growth market of Euronext Dublin (MSTY.IE).

About Chronic Low Back Pain

One of the root causes of CLBP is impaired control by the nervous system of the muscles that dynamically stabilize the spine. ReActiv8 is designed to electrically stimulate the nerves responsible for contracting these muscles to improve dynamic spine stability, allowing the body to recover from CLBP.

People with CLBP usually have a greatly reduced quality of life and score significantly higher on scales for pain, disability, depression, anxiety and sleep disorders. Their pain and disability can persist despite the best available medical treatments, and only a small percentage of cases result from an identified pathological condition or anatomical defect that may be correctable with spine surgery. Their ability to work or be productive is seriously affected by the condition and the resulting days lost from work, disability benefits and health resource utilization put a significant burden on individuals, families, communities, industry and governments.

Further information can be found at www.mainstay-medical.com

CAUTION – in the United States, ReActiv8 is limited by federal law to investigational use only.

PR and IR Enquiries:

LifeSci Advisors, LLC
Brian Ritchie
Tel: + 1 (212) 915-2578
Email: britchie@lifesciadvisors.com

FTI Consulting (for Ireland)
Jonathan Neilan or Patrick Berkery
Tel. : +353 1 765 0886
Email: mainstay@fticonsulting.com

Euronext Growth Advisers:
Davy
Fergal Meegan or Barry Murphy
Tel: +353 1 679 6363
Email: fergal.meegan@davy.ie or barry.murphy2@davy.ie

Forward looking statements

This announcement includes statements that are, or may be deemed to be, forward looking statements. These forward looking statements can be identified by the use of forward looking terminology, including the terms “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “should”, “will”, or “explore” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward looking statements include all matters that are not historical facts. They appear throughout this announcement and include, but are not limited to, statements regarding the Company’s intentions, beliefs or current expectations concerning, among other things, the FDA’s review of the Company’s PMA application for ReActiv8, the clinical data relating to ReActiv8, the potential for the FDA to approve ReActiv8 for marketing in the United States, the Company’s expected cash runway and the Company’s results of operations, financial position, prospects, financing strategies, expectations for product design and development, regulatory applications and approvals, reimbursement arrangements, costs of sales and market penetration and other commercial performance.

By their nature, forward looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward looking statements are not guarantees of future performance, and the actual results of the Company’s operations, the development of its product, and the markets and the industry in which the Company operates may differ materially from those described in, or suggested by, the forward looking statements contained in this announcement. In addition, even if the Company’s results of operations, financial position and growth, and the development of its product and the markets and the industry in which the Company operates are consistent with the forward looking statements contained in this announcement, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments of the Company to differ materially from those expressed or implied by the forward looking statements, including, without limitation, the outcome of the Company’s interactions with the FDA on the PMA application for ReActiv8, the final outcome of the Company’s ReActiv8-B clinical trial, the successful launch and commercialization of ReActiv8, general economic and business conditions, global medical device market conditions, industry trends, competition, changes in law or regulation, changes in taxation regimes, the availability and cost of capital, the time required to commence and complete clinical trials, the time and process required to obtain regulatory approvals, currency fluctuations, changes in its business strategy, and political and economic uncertainty. The forward-looking statements herein speak only at the date of this announcement.

Mainstay Medical International plc and its subsidiaries
Annual Report
for the year ended 31 December 2019

Mainstay Medical International plc
Table of contents

Corporate and shareholder information	1
Chairman’s statement	4
Biographies of Directors	5
Directors’ report	7
Corporate governance report	21
Risk factors	25
Directors’ responsibilities statement	53
Independent auditor’s report to the members of Mainstay Medical International plc	55
Consolidated statement of profit or loss and other comprehensive income	60
Consolidated statement of financial position	61
Consolidated statement of changes in shareholders’ equity	62
Consolidated statement of cash flows	63
Notes to the consolidated Financial Statements	64
Parent Company Financial Statements	90

Forward looking statements
This annual report includes statements that are, or may be deemed to be, forward looking statements. These forward looking statements can be identified by the use of forward looking terminology, including the terms “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “should”, “will”, or “explore” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward looking statements include all matters that are not historical facts. They appear throughout this report and include, but are not limited to, statements regarding the Company’s intentions, beliefs or current expectations concerning, among other things, the FDA’s review of the Company’s PMA application for ReActiv8, the clinical data relating to ReActiv8, the potential for the FDA to approve ReActiv8 for marketing in the United States, the Company’s expected cash runway and the Company’s results of operations, financial position, prospects, financing strategies, expectations for product design and development, regulatory applications and approvals, reimbursement arrangements, costs of sales and market penetration and other commercial performance.

By their nature, forward looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward looking statements are not guarantees of future performance, and the actual results of the Company’s operations, the development of its main product, and the markets and the industry in which the Company operates may differ materially from those described in, or suggested by, the forward looking statements contained in this report. In addition, even if the Company’s results of operations, financial position and growth, and the development of its main product and the markets and the industry in which the Company operates, are consistent with the forward looking statements contained in this annual report, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments of the Company to differ materially from those expressed or implied by the forward looking statements, including, without limitation, the final outcome of the Company’s ReActiv8-B clinical study, the outcome of the Company’s interactions with the FDA on the PMA application for ReActiv8, the Company’s cash position, the successful launch and commercialization of ReActiv8, general economic and business conditions, global medical device market conditions, industry trends, competition, changes in law or regulation, changes in taxation regimes, the availability and cost of capital, the time required to commence and complete clinical trials, the time and process required to obtain regulatory approvals, currency fluctuations, changes in its business strategy, and political and economic uncertainty. The forward-looking statements herein speak only at the date of this annual report.

Mainstay Medical International plc
Corporate and shareholder information

Directors	Oern Stuge MD, Independent Non-Executive Chairman
	Jason Hannon, Chief Executive Officer and Executive Director
	David Brabazon, Independent Non-Executive Director
	Greg Garfield, Non-Executive Director
	Antoine Papiernik, Non-Executive Director
	James Reinstein, Independent Non-Executive Director
	Dan Sachs MD, Non-Executive Director

Secretary	Matthew Onaitis

Registered office	77 Sir John Rogerson’s Quay
	Block C, Grand Canal Docklands
	Dublin 2, Ireland

Registered number	539688

Website	www.mainstay-medical.com

ISIN / Symbol	IE00BJYS1G50 / MSTY.PA (Paris) and MSTY.IE

Solicitors/ Lawyers	McCann FitzGerald
	Riverside One
	Sir John Rogerson’s Quay
	Dublin 2, Ireland

	Latham & Watkins
	885 3rd Avenue,
	NY 10022, USA

Independent Auditor	KPMG
	Chartered Accountants
	1 Stokes Place
	St Stephen’s Green
	Dublin 2, Ireland

Principal Bankers	HSBC
	Bank of Ireland

Euronext Growth Adviser and Broker	J&E Davy Davy House 49 Dawson Street Dublin 2, Ireland
Registrar	Computershare Investor Services (Ireland) Limited
	Heron House
	Corrig Road
	Sandyford Industrial Estate
	Dublin 18, Ireland

Paying Agent (in France)	Caceis Corporate Trust
	1/3, Place Valhubert
	75013 Paris, France

Mainstay Medical International plc
Chairman’s statement

Dear Shareholder
I am pleased to present the 2019 Annual Report for Mainstay Medical and its subsidiaries. Based on the progress made by the Company during 2019, we believe the Company is well positioned for success in 2020 and beyond.

Business review
We announced headline results from the ReActiv8-B Clinical Trial in November 2018. Whilst the difference between the treatment and control groups on the primary endpoint of responder rate at 120 days was not statistically significant due to a higher than expected response rate in the control group, we believe the overall results from the trial represent solid evidence of the efficacy and safety of ReActiv8. These overall results include additional, pre-specified analyses of the primary efficacy endpoint, as well as high responder rates in the patients that have reached one year since implantation, and a significant reduction in the use of pain medications by patients at one year.

We believe these results will continue to support commercial validation efforts in Germany and other markets under our existing CE Mark. These results also formed the basis for our submission of a Pre-Market Approval (“PMA”) Application for ReActiv8 with the U.S. Food and Drug Administration (FDA) in August 2019.

A detailed review of the Company’s corporate activity in 2019 can be found in the Directors’ Report on page 7 of this Annual Report.

Finance review
Cash on hand as at 31 December 2019 was $17.4 million (2018: $15.5 million). Operating expenses were $19.2 million during the year ended 31 December 2019 (2018: $29.6 million).

Outlook
Our corporate objectives for 2020 are to advance the PMA review process with the FDA with a decision regarding approval expected around the end of 2020; and to continue our commercial validation efforts in Germany and other select markets by focussing on building a limited number of high-volume ReActiv8 practices that will allow us to gather associated clinical data, refine the patient selection process and gain the learnings needed to accelerate commercial launch in future markets.

Directors and Staff
I would like to thank our staff, consultants, clinical trial investigators and all my fellow Directors for their support and dedication, which has enabled the continued success of the Company. Of course, we also owe a debt of gratitude to all those people who agreed to be subjects in our Clinical Trials and helped to advance ReActiv8 as an option for the millions of people suffering from Chronic Low Back Pain. I look forward to the future with optimism.

Yours faithfully,

Oern Stuge MD
Chairman
24 February 2020

Mainstay Medical International plc
Board of Directors
Biographies of Directors

Oern Stuge MD
Dr. Oern R. Stuge is the independent non-executive Chairman of the Board. He is an international executive with 30 years of experience in the life science sector. Dr Stuge is the owner of ORSCO Life Sciences AG through which he holds several executive & non-executive board memberships & advisory roles.

During the last 8 years, Dr. Stuge has participated in Enterprise Development of different companies and successfully sold/listed 7 companies.

Prior to founding ORSCO, Dr. Stuge worked for 12 years for Medtronic, Inc. in different roles including Senior Vice President (“SVP”) & President Europe & Central Asia, and SVP & President Cardiac Surgery. He was a member of the Medtronic Executive Committee & Operating Committee. Dr. Stuge led a successful transformation of Medtronic’s Cardiac Surgery business. Under his leadership, Medtronic founded the Structural Heart Division and launched the first commercially available percutaneous heart valve in the world. Prior to this, he led business acceleration of Medtronic’s neurological and cardiovascular business in Europe, Middle East & Africa.

Dr. Stuge earned an MD from University of Oslo, an MBA from IMD, Switzerland and an INSEAD Certificate of Corporate Governance.

Jason Hannon
Mr. Jason Hannon joined Mainstay Medical as Chief Executive Officer and as a Director in October 2017. Mr. Hannon has extensive experience in the medical devices industry, particularly in the areas most critical to the future success of Mainstay: commercialization of new products, penetration of new markets, product innovation, strategic and financial planning, raising capital, regulatory and clinical management, and the building of a high-performance culture. Mr. Hannon previously served as President and Chief Operating Officer of NuVasive (NASDAQ:NUVA), a leading medical device company focused on transforming spine surgery with minimally disruptive, procedurally-integrated solutions. During his 12 years at the company, he helped grow NuVasive from a small U.S.-centric business with a handful of products into the third largest spine company in the world.

Mr. Hannon has a JD degree from Stanford University and a BA degree from the University of California, Berkeley.

David Brabazon
Mr. David Brabazon is a non-executive director of Mainstay. Mr Brabazon is a pharmaceutical industry executive who is a co-founder and board member of AixThera since November 2019. He was a co-founder, Chief Financial Officer and board member of Adapt Pharma Limited from 2013 through May 2019. Both companies of which are US focused specialty pharmaceutical businesses. Adapt Pharma Limited was acquired by Emergent BioSolutions Inc. in October 2018. Mr. Brabazon previously was a co-founder and Chief Financial Officer of Azur Pharma plc, which merged with Jazz Pharmaceuticals plc in early 2012. Mr. Brabazon continued to serve in the merged business as Senior Vice President of Finance and Company Secretary until late 2012. Prior to Azur Pharma, Mr. Brabazon served as Vice President of Finance and Group Financial Controller of Elan Corporation plc.

Mr. Brabazon is a chartered accountant and holds a Masters of Accounting degree from University College Dublin, Ireland and a Master of Business Administration degree from INSEAD, France. Mr. Brabazon serves as a director of Headway (Ireland) Limited which provides support and services to people affected by brain injury.

Greg Garfield
Mr. Greg Garfield is a Non-Executive Director of the Company and is the Senior Managing Director for KCK Medtech. Mr. Garfield serves as a director on the boards of numerous private and public companies in the healthcare industry. From 2006 to 2011, he had various roles at Acclarent, Inc., a medical technology company, including Chief Operating Officer and General Counsel. Acclarent, Inc. was acquired by Johnson and Johnson at a valuation of approximately $800 million cash in January 2010. From 1995 to 2006, Mr. Garfield had various roles at Guidant Corporation, a medical technology company, including Vice President of Business Development and General Counsel. Guidant was acquired by Boston Scientific Corporation in 2006 at a valuation of approximately $27 billion in cash and stock. Mr. Garfield has a Bachelor of Science degree from California Polytechnic State University and a JD degree from McGeorge School of Law, University of the Pacific.

Antoine Papiernik
Antoine Papiernik is a Non-Executive Director of Mainstay and a Managing Partner at Sofinnova Partners, which he joined in 1997.

Mr. Papiernik has been an initial investor and active board member in public companies like Actelion, ProQR, Shockwave Medical, NovusPharma (then sold to CTI), Movetis (then sold to Shire), Mainstay, Pixium Vision and Stentys, which went public respectively on the Zürich stock exchange, the NASDAQ, the Milan Nuovo Mercato, the Belgium Stock Exchange, and Euronext Paris, in Cotherix (initially NASDAQ listed, then sold to Actelion), CoreValve (sold to Medtronic), Fovea (sold to Sanofi Aventis), Ethical Oncology Science (EOS, sold to Clovis Oncology), and Recor Medical (sold to Otsuka). He has also invested in and is a board member of private companies Reflexion Medical, Medday, Tissium, SafeHeal, Mnemo Therapeutics, Ablacare, Corewave,Highlife and Rgenix. Mr. Papiernik has an MBA from the Wharton School of Business, University of Pennsylvania. In 2012 and 2011 he was selected by Forbes for its “Midas List” of the world’s top venture capital investors. Mr. Papiernik is one of the only Europeans on the list, and one of the few life science investors as well.

James Reinstein
James A. Reinstein is a Non-Executive Director of the Company with more than 25 years of medical device experience. Mr. Reinstein is a General Partner at Palo Alto Medtech Advisors (PAMTA), an advisory firm assisting investment firms assess opportunities within the medical device industry. PAMTA also advises medical device companies with strategic planning, funding and all other aspects to build and grow a business. He was the President, CEO and board member of Cutera, Inc. a NASDAQ listed global device company at the forefront of medical aesthetics industry until January 2019. Just prior to Cutera, he was the President and CEO of Drawbridge Health, a joint venture of GE Healthcare and GE Venture. Previous to Drawbridge, Mr. Reinstein was the President and CEO of Aptus Endosystems Inc., where he led the sale of the company to Medtronic for over $100 million. Prior to joining Aptus, Mr. Reinstein served as Executive Vice-President and Chief Commercial Officer at Cyberonics, a neuromodulation company focused on helping patients with epilepsy, depression and chronic heart failure. Mr. Reinstein spent 17 years at Boston Scientific in various roles and functions including business development, marketing and general management. Most of his career at Boston Scientific was spent working and living in Europe, Asia and Latin America.

Mr. Reinstein was employed by Procter and Gamble after graduating with a BA in Marketing from the Terry College of Business at the University of Georgia in Athens. He also completed post graduate studies in management at INSEAD Business School in Fontainebleau, France. Mr. Reinstein sits on the board of directors of Pixium Vision, a publicly traded company based in Paris, France, and Monteris Medical, a privately held company located in the United States.

Dan Sachs MD
Dr. Dan Sachs is a Non-Executive Director and a founder of Mainstay. Dr. Sachs is also the founder of KSpine Inc., Respicardia, Inc., and Amphora Medical, Inc., all venture-backed medical device companies. Dr. Sachs serves as Co-Director of the Innovation Fellows Program within the Institute for Engineering in Medicine at the University of Minnesota, and on the Oversight Committee of the Coulter Translational Research Program at the University of Michigan. Dr. Sachs was previously a venture capital investor with Investor Growth Capital and Spray Venture Partners, for which he served on the board of directors of Neuronetics (STIM), CoTherix (acquired), and CHF Solutions (acquired).

Dr. Sachs previously served as Instructor in Medicine on the faculty of Harvard Medical School in the Division of Emergency Medicine. Dr. Sachs earned an MD from the University of Michigan, and an MBA from Harvard Business School.

Mainstay Medical International plc
Directors’ report

The Board of Directors are pleased to report on the progress of Mainstay Medical International plc (“Mainstay” or the “Company”) and present the Annual Report of the Company and its subsidiaries (the “Group” or “we”) for the year ended 31 December 2019.

Principal activities
Mainstay is a medical device company focused on commercializing ReActiv8®, an implantable restorative neurostimulation system designed to treat an underlying cause of disabling Chronic Low Back Pain (CLBP).

The Company is headquartered in Dublin, Ireland. It has subsidiaries operating in Ireland, the United States, Australia, the Netherlands and Germany, and its ordinary shares are admitted to trading on Euronext Paris (MSTY.PA) and Euronext Growth operated by Euronext Dublin (MSTY.IE).

As at 31 December 2019, the Company together with its operating subsidiaries Mainstay Medical Limited, MML US, Inc., Mainstay Medical (Australia) Pty Limited, Mainstay Medical Distribution Limited, Mainstay Medical B.V. and Mainstay Medical GmbH, form the Mainstay Medical Group.

Key performance indicators
Current key performance indicators, used by management to measure performance and exercise control over operations are summarized below:

Securing funds - The Group has financed its operations to date principally through the issuance of equity securities and debt funding. The management team continues to develop and strengthen relationships to explore further financing options. These may include debt funding, private placement or public offering of equity or debt securities, and/or strategic partnering.

Effective monitoring of use of funds - Management prepares budgets and rolling forecasts to track and monitor use of funds. Actual expenditure is measured against budget and is reported to and evaluated by the Directors on a monthly basis.

Achieving milestones - The Group has defined the strategic activities and milestones leading to commercialization of ReActiv8. These include:

Product design and development of ReActiv8
Conducting the ReActiv8-A Clinical Trial
Quality System certification
Obtaining CE Marking
European commercialization of ReActiv8
Obtaining approval for an Investigational Device Exemption (an “IDE”) from the US Food and Drug Administration (the “FDA”) to conduct the ReActiv8-B Trial, a clinical trial of ReActiv8 to support marketing approval in the US
Conducting the ReActiv8-B Trial to generate data to file a Pre-Market Approval Application (a “PMAA”) with the FDA
Following Pre-Market Approval (“PMA”), starting the US commercialization of ReActiv8.

Progress towards and achievement of these milestones is reported by the management team to the Board on a regular basis. Outlined in the following business and financial review sections of this report, we describe our performance during the year ended 31 December 2019 on the relevant areas above, including updates on progress towards milestones, and analysis of expenditure and use of funds during the year.

Business review
Clinical and Regulatory Activities

US Pivotal ReActiv8-B Clinical Trial – The ReActiv8-B Trial is an international, multi-centre, prospective randomized sham controlled triple blinded clinical trial with one-way crossover, conducted under an IDE from the FDA. The ReActiv8-B Trial is intended to gather data in support of the Company’s PMA application. Information about the Clinical Trial can be found at https://clinicaltrials.gov/ct2/show/study/NCT02577354.

A total of 204 subjects were implanted with ReActiv8 at leading clinical sites in the U.S., Europe and Australia and randomized 1:1 to therapy or control 14 days after implant. In the treatment group, the ReActiv8 pulse generator was programmed to deliver electrical stimulation expected to elicit contractions of the multifidus muscle. In the control group, the ReActiv8 device was programmed to provide a low level of electrical stimulation. Following assessment of the primary endpoint at 120 days, subjects in the control group crossed-over to receive levels of electrical stimulation similar to those in the treatment group.

The subjects in the study had an average age of 47, and an average duration of chronic low back pain of 14 years. This patient population had tried many other treatment alternatives, including physical therapy and drugs, with limited success, and 79% of the subjects were on pain medication at baseline.

The primary efficacy endpoint of the study was a comparison of responder rates between the treatment and control groups as measured on the visual analog scale (VAS) of pain, consisting a 0-10 scale with 0 being no pain and 10 being the worse imaginable pain. Responders were defined as having a 30% or greater improvement on this measure between baseline and 120 days after baseline, without any increase in pain medication and/or muscle relaxants taken in the two weeks prior to the primary endpoint assessment visit. The following table shows the result on the primary efficacy endpoint:

Primary Efficacy Endpoint	Treatment N=102	Control N=102	Difference p-value
Responder (≥30% Reduction in Low Back Pain VAS and no Increase in Pain Medications)	57.1%	46.7%	10.4% p=0.1377

The Investigational Plan for the study included a pre-specified sensitivity analysis, assessing the impact of medication changes to treat acute, unrelated pain conditions on the primary endpoint.

The Company, in consultation with statistical advisors, determined that a valid way to handle the subjects with pain medication increases for reasons unrelated to low back pain would be to analyze the endpoint with these subjects removed, as pain medication use for reasons unrelated to low back pain was an exclusion criterion in the study. By doing so, inference is limited to the population of subjects taking pain medication only for reasons related to low back pain, as intended by the patient selection criteria in the trial protocol.

Six subjects had increases in pain medications for reasons other than low back pain. The following table presents the results of the primary efficacy endpoint in the subjects not requiring an increase in pain medications for reasons other than for low back pain, showing a clinically-meaningful and statistically-significant difference:

Primary Efficacy Endpoint	Treatment N=96	Control N=102	Difference p-value
Responder (≥30% Reduction in Low Back Pain VAS and no Increase in Pain Medications)	60.6%	46.7%	14.0% p=0.048

The Investigational Plan for the study also included a pre-specified analysis of the primary endpoint data examining the cumulative proportion of responders, which is a comparison of ranks and inherently preserves information over a dichotomized endpoint, thereby improving statistical power. In that analysis, a statistically significant difference between the treatment and control groups was demonstrated, with the treatment group showing a higher proportion of responders across all threshold levels.

Numerous secondary endpoints and supporting analyses were collected to assess improvements in the treatment group as compared to the control group at 120 days, including reduction from baseline in pain as measured by both mean reduction in VAS and percent pain relief (PPR), change from baseline in disability measured by the Oswestry Disability Index (ODI), change from baseline in quality of life measured by the European Quality of Life Score on Five Dimensions (EQ-5D), subject global impression of change (SGIC), clinician global impression of change (CGI), patient treatment satisfaction as measured by the treatment satisfaction questionnaire (TSQ) and pain resolution (defined as VAS ≤2.5 cm). As shown in the following table, when evaluating the therapy across multiple dimensions of subject outcomes, the treatment effect is significant in seven of the eight secondary endpoints/supporting analyses: mean reduction in VAS, PPR, ODI, EQ-5D, SGIC, treatment satisfaction and CGI:

	Treatment N=102		Control N=102		Difference p-value
Endpoint	N	Mean ± SD (Min, Max) or N (%)	N	Mean ± SD (Min, Max) or N (%)	Difference p-value
Change in Low back pain VAS	100	-3.3 ± 2.7 (-8.5, 3.0)	101	-2.4 ± 2.9 (-8.8, 3.5)	0.9 p = 0.032
Percent Pain Relief	100	52 ± 32 (0, 100)	101	35 ± 36 (0, 100)	17 p ≤ 0.001
Change in ODI	100	-17.5 ± 15.1 (-58.0, 20.0)	101	-12.2 ± 14.6 (-48.0, 32.0)	5.4 p = 0.011
Change in EQ-5D	100	0.186 ± 0.199 (-0.365, 0.782)	100	0.115 ± 0.178 (-0.640, 0.665)	0.071 p = 0.009
Subject Global Impression of Change					NA p = 0.003
Much better	100	32 (32%)	101	18 (18%)
Better	100	22 (22%)	101	16 (16%)
A little better	100	25 (25%)	101	29 (29%)
No change	100	10 (10%)	101	24 (24%)
A little worse	100	6 (6%)	101	5 (5%)
Worse	100	4 (4%)	101	6 (6%)
Much worse	100	1 (1%)	101	3 (3%)
Satisfied with Treatment					NA p ≤ 0.001
Definitely Yes	100	61 (61%)	101	40 (40%)
Maybe	100	29 (29%)	101	37 (37%)
Definitely Not	100	10 (10%)	101	24 (24%)
Clinician Global Impression					NA p ≤ 0.001
Much Better	100	57 (57%)	100	22 (22%)
Slightly Better	100	26 (26%)	100	29 (29%)
About the Same	100	16 (16%)	100	42 (42%)
Slightly Worse	100	1 (1%)	100	5 (5%)
Much Worse	100	0 (0%)	100	2 (2%)
Remitters (VAS ≤ 2.5)	100	34 (34%)	101	28 (28%)	6.3% p = 0.335

At the 120-day visit, subjects in the control group were allowed to cross-over to receive stimulation at a therapeutic level. All control subjects elected to cross-over at this timepoint. At the time of filing of the PMA, 160 subjects had completed the 1-year assessment visit, consisting of 80 in each group. In this population, all efficacy outcomes for the treatment group and for the control group post crossover progressively improved through the 1-year assessment visit, consistent with the rehabilitative nature of the therapy (8 months of therapy for the crossover group).

Outcomes at 1 year (8 months of therapy for the crossover group):

VAS Responders:
- 69% in the treatment group
- 63% in the crossover group
Change in VAS:
- -4.4 in the treatment group
- -4.4 in the crossover group
Average Percent Pain Relief:
- 67% in the treatment group
- 66% in the crossover group
Average ODI Change:
- 21-point reduction in the treatment group
- 20-point reduction in the crossover group
Average EQ-5D Change:
- 0.218-point increase in the treatment group
- 0.183-point increase in the crossover group
Average SGIC:
- 76% Better or Much Better in the treatment group
- 72% Better or Much Better in the crossover group
Average Treatment Satisfaction:
- 82% Definitely Satisfied in the treatment group
- 76% Definitely Satisfied in the crossover group
Average CGI:
- 78% Much Better in the treatment group
- 71% Much Better in the crossover group

Although the study was not designed to reduce medications after the 120-day visit, subjects were allowed to change medications after that time point. As the following table shows, of the 61 patients (treatment and crossover groups combined) who were on at least one opioid-containing medication at baseline and had a 1-year visit, 28% had discontinued use of opioids, and an additional 21% had decreased opioid use, for an overall rate of 49% of patients who decreased or discontinued opioids by the 1-year visit.

Medication Change Status	Opioid % (n/N)
Discontinued or Decreased	49% (30/61)
No Change	44% (27/61)
Increased or Added	7% (4/61)

Notably, patients who decreased or discontinued opioids had similar efficacy results as the overall population. In addition, 97% of those who were not on an opioid at baseline and had a 1-year visit remained off opioids.

All of the subjects remaining in the study have now completed the 1-year assessment visit, consisting of 176 subjects, 87 in the treatment group and 89 in the control group. For this population, all of the efficacy and safety outcomes at one year were consistent with the results presented above.

The incidence and type of adverse events (AEs), including serious AEs, compares favourably to that of spinal cord stimulator devices, with no unanticipated AEs related to the device, procedure or stimulation.

ReActiv8-A Clinical Trial/PMCF Study – The ReActiv8-A Clinical Trial was an international, multi-center, prospective, single arm clinical trial of ReActiv8 that formed the basis of our CE mark for ReActiv8.

Following CE marking approval, a range of activities is required for post market clinical follow up to gather additional data on the long-term performance and safety of ReActiv8. The ReActiv8–A PMCF Study is a continuation of the ReActiv8-A Clinical Trial (but using CE Marked ReActiv8). Subjects enrolled in the ReActiv8–A Clinical Trial in the UK were converted to the ReActiv8-A PMCF Study. Physicians commenced with these implants in late 2017, and 43 implants were completed by the end of 2018 and we continue to gather clinical data from these patients.

ReActiv8-C Registry – In addition to the ReActiv8-A PMCF Study, the Company is maintaining the ReActiv8-C Registry, an international, multi-centre data collection registry. All centres that use the product commercially are invited to participate in the Registry program. All patients who are implanted with ReActiv8 at the centres participating in the Registry will be invited to enroll in the Registry until the target enrolment numbers have been reached. The purpose of the Registry is to gather additional summary data on long term performance of ReActiv8 in at least 50 patients.

PMA Submission – In August 2019 the Company submitted a pre-market approval (PMA) application to the FDA for ReActiv8. The FDA notified the Company in October 2019 that it had made a threshold determination that the application was sufficiently complete to begin an in-depth review.

In December 2019 the Company completed a Day 100 meeting with the FDA regarding the PMA application. Prior to the meeting, the FDA provided us with its initial feedback on the PMA, consisting of questions regarding the data included in the PMA and the interpretation of such data. The Company currently has no plans to conduct another premarket pivotal IDE trial for ReActiv8.

TGA Approval – In December 2019, the Company received regulatory approval from the Australian Therapeutic Goods Administration (TGA) for ReActiv8. This approval confirms inclusion of ReActiv8 in the Australian Register of Therapeutic Goods (ARTG), enabling commercialization throughout Australia. The Company has submitted an application for ReActiv8 to be included in the Prostheses List of reimbursed products, with a reimbursement decision expected in the third quarter of 2020. The Prostheses List identifies implantable devices eligible for reimbursement from all private health insurance funds in Australia.

Commercial Activities
Commercial Validation – In Germany, Mainstay’s initial European market, the Company continued to make progress working with key physician partners who are incorporating ReActiv8 into their practises in order to validate commercial adoption. The Company is focussed on building a limited number of reference sites where high volumes of patients are treated with ReActiv8, allowing the Company to gather associated clinical data, refine patient selection processes for commercial markets, and gain the learnings needed to accelerate commercial launch in future markets. Towards the end of 2019, we implanted our first patient in Switzerland and we plan to launch commercial efforts in the United Kingdom in the first half of 2020. We plan to launch ReActiv8 commercially in Australia after securing a place on the Prostheses List.

Following receiving approval regulatory approval from the Australian TGA for ReActiv8. we have applied for inclusion of Reactiv8 on the Prostheses List of reimbursed products. We plan to launch ReActiv8 commercially after securing a place on the Prostheses List.

US Patents – The total current number of issued US issued Patents in the Mainstay portfolio is 17. Mainstay continues to add to its portfolio of issued patents and pending patent applications.

Financing Activities
Equity Offering – On 29 July 2019, the Company completed financing transactions to raise €16.9 million financing (approximately $18.9 million). The financing transactions consisted of the issuance of 4,649,775 new ordinary shares at a purchase price of €3.00 per share and the drawdown of €3.0 million (approximately $3.34 million) in additional debt from the Company’s existing lender. The funds are being used to support our regulatory approval process in the U.S. and to advance our commercial validation efforts for ReActiv8 in Germany and other markets.

On 25 October 2019, the Company announced the publication of a prospectus (the Prospectus) in connection with the Placement and admission to trading on ESM (now Euronext Growth) and Euronext Paris.

The Prospectus comprises a Summary Document, a Securities Note and a Registration Document. These documents are available on our website www.mainstay-medical.com).

Debt Facility
On 18 April 2019, Mainstay Medical Limited entered into an amendment to its agreement with IPF Partners relating to the existing debt facility. Pursuant to the amendment:

The repayment schedule for the three existing tranches drawn under the debt facility was amended such that no principal or interest will be repaid until 2021, with the principal and accrued interest to be amortized over the period from 1 January 2021 through 30 September 2023.
A new tranche of €3.0 million was made available to Mainstay, which was drawn down on 29 July 2019. The repayment schedule for the new tranche is the same as the amended repayment schedule for the three existing tranches.
The interest rate for all tranches will be 8% per annum, with interest accruing but capitalized prior to 1 January 2021.
The 5% repayment fee applicable to each existing tranche was eliminated.
All principal and accrued interest from all tranches will automatically convert into ordinary shares of Mainstay Medical International plc at a price per share of €8 upon the earlier of (a) FDA approval of Mainstay’s PMA application for ReActiv8, (b) the date by which at least 900,000 ordinary shares of Mainstay Medical International plc are publicly sold on-market by non-affiliates of Mainstay after 18 April 2019 at a price per share of at least €8, or (c) IPF Partners’ election to undertake such conversion, in each case unless Mainstay elects to satisfy such obligation in whole or in part in cash.
The minimum cash covenant was amended so that Mainstay is required to hold cash at least equal to its projected cash expenditures for operations and debt repayment for the next three months, and the covenant relating to the achievement of commercial milestones was eliminated.
Mainstay Medical International plc also issued to IPF Partners a warrant to purchase 1.5 million of its ordinary shares at a price per share of €6 at any time prior to the 6^th anniversary of the amendment date.
Medical International plc has issued further conditional warrants to IPF Partners that will become exercisable only to the extent Mainstay elects to repay the debt in cash rather than issue ordinary shares when a conversion of the debt is triggered. As such, the conditional warrants are intended to ensure that, notwithstanding any such election to repay in cash, IPF Partners retains the right to subscribe for ordinary shares of the Company on the terms and conditions that would otherwise have applied.

All tranches under the facility will continue to be secured by way of fixed and floating charges over the assets and undertakings of Mainstay Medical Limited, and the fixed first charge created by Mainstay Medical International plc in favor of IPF over its present and future shares held in Mainstay Medical Limited continues in effect.

Financial review
Income statement –Revenue during the twelve-month period ending 31 December 2019 was $1.1 million (2018: $0.7 million). Revenue was generated from sales of ReActiv8 systems to customers in Germany, the UK, Ireland and Switzerland.

Operating expenses related to on-going activities were $19.2 million during the year ended 31 December 2019 (2018: $29.6 million). On-going activities during the financial year included research and development, clinical and regulatory activities, selling, general and administrative activities.

Research and development expenditure during the 2019 period included the salaries of engineers, technicians, and quality and regulatory specialists; the cost of outsourced development and manufacturing activities; biocompatibility and pre-clinical studies; and quality costs including the maintenance of our quality system. Research and development expenses were $2.9 million during the year ended 31 December 2019 (2018: $3.5 million). A decrease of $0.6 million is primarily driven by reduced payroll related costs following a reduction in headcount in 2019.

Clinical and regulatory expenses were $3.9 million during the year ended 31 December 2019 and decreased by $7.1 million from $11 million during the same period in 2018. This is primarily driven by decreased direct trial costs relating to activities for the ReActiv8-B Clinical Trial, following the announcement in July 2018 of the completion of all implants and reduced payroll related costs following a reduction in headcount in 2019.

Our selling, general and administrative expenses were $12.4 million during year ended 31 December 2019, and $15.1 million during the same period in 2018. The decrease of $2.7 million is primarily driven by payroll related costs in addition to reduced legal and professional fees incurred in 2019 versus 2018.

The loss for the year was $22.4 million (2018: $31 million).

Statement of financial position – Total assets of the Group at year end were $20.6 million (2018: $19.4 million). Cash on hand at 31 December 2019 was $17.4 million (2018: $15.5 million). Cash used in operating activities was $15.6 million during the year ended 31 December 2019 (2018: $27.4 million). This operating cash outflow reflects the cost of the research and development of ReActiv8, undertaking our clinical trials, commercialization expenditure, the ongoing costs of being a public company, and running the Group.

Principal risks and uncertainties
A summary of the principal risks relating to the Group and Company and/or its industry include the following:

We have incurred significant operating losses and may not be able to achieve or subsequently maintain profitability.
We expect to require additional funds in the future in order to meet our capital and expenditure needs and further financing may not be available when required or, if available, could be dilutive to current investors, or require us to agree to terms which are specifically favourable to new investors, or to restrictions significantly limiting our access to additional capital.
Our future financial performance is entirely dependent on the commercial success of ReActiv8, our only product as of the date of this Report, obtaining adequate reimbursement for ReActiv8, and rates of product adoption and market penetration.
Failure to comply with debt covenants or failure to make repayments on our debt facility could have a material adverse effect.
We operate in a highly regulated environment and regulatory approval is required before we can market or sell ReActiv8 in any market.
Seeking and obtaining regulatory approval for medical devices can be a long and uncertain process. Strict or changing regulatory regimes, government policies and legislation in any of our target markets may delay, prohibit or reduce potential sales.
We are required to conduct clinical trials for regulatory approvals and other purposes. Clinical trials carry substantial risks and are costly and time consuming, with uncertain results.
Any inability to fully protect and exploit our intellectual property may adversely impact our financial condition, business, prospects and results of operations.

A more extensive description of the existing and future potential risks to Mainstay’s business and to the Company’s ordinary shares are outlined in the Risk Factors section of this report, on pages 25 to 52, and should be considered carefully by Shareholders and prospective investors.

Financial risk management
The Group is exposed to a variety of financial risks including credit risks, liquidity risks, interest rate risks and foreign currency risks. Further information can be reviewed in Note 21.

Risk management framework - Mainstay’s Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to the limits. Risk management systems and policies will be reviewed regularly as conditions affecting the Group change.

The Group has no significant concentrations of financial risk other than concentration of cash with individual banks. Other than liquidity risk based on the Company’s use of cash during the year, there has been no significant change during the year or since the year end to the types or quantum of financial risks faced by the Group or the Group’s approach to the management of those risks.

Liquidity risk - Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Since inception the Group has funded its operations primarily through (i) the issuance of equity securities and (ii) debt funding. The Group continues to explore funding strategies (e.g.: equity, debt, partnering) to support its activities into the future. Adequate additional financing may not be available on acceptable terms, or at all. The Group’s inability to raise capital as and when needed would have a negative impact on the Group’s financial position and its ability to pursue its business strategy.

Credit risk - Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet contractual obligations and arises principally from the Group’s cash and cash equivalents and trade and other receivables. Credit risk is managed on a Group basis. The maximum exposure to credit risk is represented by the carrying amount of each asset.

Foreign currency risk - The Group’s presentational currency is the US Dollar. The Group’s exposure to foreign currency risk arises through expenditure incurred in Euro and Australian Dollars. The Group’s Australian subsidiary has an Australian Dollar functional currency, and three of the Group’s subsidiaries located in Ireland, Germany and the Netherlands have a Euro functional currency.

Interest rate risk - The Group’s cash balances are maintained in short term access accounts and carry a floating rate of interest.

The Company’s loan originally carried a variable rate of 3-month Euribor plus a margin ranging from 10.5% to 12.5%. The repayment schedule for the three existing tranches drawn under the debt facility, as well as the new tranche made available, was amended in April 2019 such that no principal or interest will be repaid until 2021, with the principal and accrued interest to be amortized over the period from 1 January 2021 through 30 September 2023. The interest rate for all tranches is fixed at 8% per annum, with interest accruing but capitalized prior to 1 January 2021.

Outlook and future developments
Our corporate objectives for 2020 are to advance the PMA review process with the FDA with a decision regarding approval expected around the end of 2020; and to continue our commercial validation efforts in Germany and other select markets by focussing on building a limited number of high-volume ReActiv8 practices that will allow us to gather associated clinical data, refine patient selection processes and gain the learnings needed to accelerate commercial launch in future markets.

Directors and Secretary and their interests
The names of the persons who were Directors during the year are set out as follows:
Oern Stuge MD, Independent Non-Executive Chairman
Jason Hannon, Chief Executive Officer and Executive Director
David Brabazon, Independent Non-Executive Director
Greg Garfield, Non-Executive Director
Antoine Papiernik, Non-Executive Director
James Reinstein, Independent Non-Executive Director
Dan Sachs MD, Non-Executive Director
Nael Karim Kassar, Non-Executive Director (resigned 20 September 2019)

It is the Board’s current intention that one third of all Directors will retire at each AGM, subject to any additional requirements under Articles 90 to 94 of the Company’s Articles of Association.

Mr. Antoine Papiernik, Dr. Oern Stuge and Nael Karim Kassar retired at the Company’s Annual General Meeting (“AGM”) held on 20 September 2019. Mr. Papiernik and Dr. Stuge submitted themselves for re-election by the shareholders and Nael Karim Kassar notified the Board that he would not offer himself for re-election. The Board decided not to replace Mr. Kassar and therefore the size of the Board was reduced from eight to seven Directors following the resolutions to re-elect each Director being passed at the AGM.

Tom Maher ceased serving as Company Secretary on 30 January 2019 and Matthew Onaitis was appointed as Company Secretary on 30 January 2019.

The beneficial interest of the Directors and Company Secretary, who held office at 31 December 2019, in the ordinary share capital of the Company at the dates below were as follows:

*Ordinary shares*
Name		At 31 December 2019	At 31 December 2018
David Brabazon	Ordinary shares of €0.001 each	212,828	57,828
Dan Sachs MD	Ordinary shares of €0.001 each	515,000	515,000
Jason Hannon	Ordinary shares of €0.001 each	30,000	30,000
Greg Garfield	Ordinary shares of €0.001 each	2,912	2,912

*Share options*	Deemed date of grant	Exercise price per ordinary share	Expiry date	No. of ordinary shares under option as at 31 December 2019	No. of ordinary shares under option as at 31 December 2018	No. of vested options as at 31 December 2019
Oern Stuge MD	23 Jan 2013	US$1.00	10 years from vesting	55,014	55,014	55,014
Oern Stuge MD	13 Dec 2016	€15.50	10 years from vesting	17,000	17,000	12,746
Jason Hannon	6 Sept 2017	€14.85	10 years from vesting	401,862	401,862	226,045
Jason Hannon	23 March 2018	€16.90	10 years from vesting	118,628	118,628	51,896
Jason Hannon	13 Aug 2019	€3.76	10 years from vesting	464,000	-	-
David Brabazon	5 Dec 2013	US$1.00	10 years from vesting	18,427	18,427	18,427
David Brabazon	13 Dec 2016	€15.50	10 years from vesting	5,700	5,700	4,257
James A. Reinstein	2 Sep 2015	€16.87	10 years from vesting	20,000	20,000	20,000
James A. Reinstein	13 Dec 2016	€15.50	10 years from vesting	6,200	6,200	4,646
Matt Onaitis	20 Aug 2018	€15.00	10 years from vesting	100,000	100,000	33,332
Matt Onaitis	13 Aug 2019	€3.76	10 years from vesting	90,000	-	-

*RSU*	Deemed date of grant	No. of RSUs	Vesting date

Jason Hannon	1 Feb 2019	120,000	1 January 2021
Matt Onaitis	1 Feb 2019	40,000	1 January 2021

The Employee Incentive Plan was amended in 2019 to allow for the issue of restricted stock units (“RSUs”), being rights to receive Ordinary Shares at no cost to the relevant employee, director or consultant.

Except as disclosed in this report, none of the Directors who held office at 31 December 2019, had a beneficial interest in the share capital of the Company or its subsidiaries and no such interest, the existence of which is known or could with reasonable diligence be ascertained by the relevant Director, is held by any connected person.

Mr. Papiernik held no interest in the issued share capital of the Company other than the interests that he is deemed to hold in the Company by virtue of the interests that he holds in Sofinnova Capital VI FCPR. At 31 December 2019, Sofinnova Capital VI FCPR owned 2,949,146 ordinary shares amounting to approximately 22% of the entire issued ordinary share capital of the Company. As at 31 December 2018, Sofinnova Capital VI FCPR owned 2,415,813 ordinary shares amounting to approximately 27.5% of the entire issued ordinary share capital of the Company.

Directors’ remuneration

The following table shows the amount of remuneration paid and benefits in kind granted to the Directors by the Group for services in all capacities relating to 2019:

2019:	Fees	Salary	Annual Incentive	Benefits in Kind	Total
Executive Directors
Jason Hannon	$40,000	$460,000	$217,500	$105,707	$823,207

Non-Executive Directors
Oern Stuge MD	$103,906	-	-	-	$103,906
David Brabazon	$58,171	-	-	-	$58,171
Greg Garfield	-	-	-	-	-
Nael Karim Kassar (resigned 20 September 2019)	-	-	-	-	-
Antoine Papiernik	-	-	-	-	-
James A. Reinstein	$58,171	-	-	-	$58,171
Dan Sachs MD	-	-	-	-	-

2018:	Fees	Salary	Annual Incentive	Benefits in Kind	Total
Executive Directors
Jason Hannon	$40,000	$473,474	-	$83,167	$596,641

Non-Executive Directors
Oern Stuge MD	$106,292	-	-	-	$106,292
David Brabazon	$61,417	-	-	-	$61,417
Greg Garfield	-	-	-	-	-
Nael Karim Kassar	-	-	-	-	-
Antoine Papiernik	-	-	-	-	-
James A. Reinstein	$61,417	-	-	-	$61,417
Manus Rogan PhD (resigned 24 September 2018)	-	-	-	-	-
Dan Sachs MD	-	-	-	-	-

None of the directors exercised any share options in either 2019 or 2018.

Issued share capital
At 31 December 2019, the authorized share capital of the Company was €75,000, comprised of 35,000,000 ordinary shares of €0.001 each and 40,000 deferred shares of €1.00 each. A full description of the rights attached to the ordinary and deferred shares of the Company is available in the Articles of Association on the Company’s website. Further information on share movements is provided in Note 19.

On 20 September 2019, at the Company’s 2019 AGM, the Shareholders passed resolutions:

authorizing the Directors, pursuant to section 1021 of the Companies Act 2014, in substitution for all existing such authorities, to exercise all powers of the Company to allot relevant securities (within the meaning of section 1021 of the Companies Act 2014) up to an aggregate nominal amount of €17,000 during the period commencing on the date of the passing of the resolution and expiring on 20 September 2024 (being five years after the date of passing of the resolution), provided that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offer or agreement as if the authority hereby conferred had not expired;
empowering the Directors, pursuant to section 1023 of the Companies Act 2014, in substitution for all existing such authorities, to allot equity securities (within the meaning of section 1022 of the Companies Act 2014) for cash pursuant to the authority conferred by the resolution above as if sub-section (1) of section 1022 of the Companies Act 2014 did not apply to any such allotment, provided that this power shall be limited:
- to the allotment of equity securities in connection with a rights issue, open offer or other invitation to or in favour of the holders of ordinary shares in the Company where the equity securities respectively attributable to the interests of such holders are proportional (as nearly as may be) to the numbers of ordinary shares in the Company held by them (but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with fractional entitlements that would otherwise arise or with legal or practical problems under the laws of, or the requirements of any recognized regulatory body or any stock exchange in, any territory, or otherwise howsoever); and
- to the allotment of equity securities up to an aggregate nominal amount of €17,000,

and shall expire on 20 September 2024 (being five years after the date of passing of the resolution), provided that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such offer or agreement as if the power hereby conferred had not expired.

increasing the Company’s authorized share capital from €60,000 divided into 20 million ordinary shares of €0.001 each and 40,000 deferred shares of €1.00 each to €75,000 divided into 35 million ordinary shares of €0.001 each and 40,000 deferred shares of €1.00 each, and amending the Company’s Memorandum and Articles of Association to reflect such increase.

The Company is not aware of any agreements between holders of securities that may result in restrictions in the transfer of ordinary shares or voting rights over ordinary shares. The Directors in their absolute discretion and without assigning any reason therefor may decline to register any transfer of a deferred share. The Company is authorized at any time to appoint any person to execute on behalf of the holder(s) of deferred shares a transfer thereof and/or an agreement to transfer the same, without making any payment to the holder(s) thereof and persons so entitled, to such person(s) as the Company may determine as holder(s) thereof and beneficially entitled thereto.

At no time during 2019 were any ordinary or deferred shares in the Company held or acquired by the Company or any subsidiary of the Company.

Share Option Plan
The Group operates a share option plan (the “Plan”). As at 31 December 2019, the Plan allows for the Company to grant share options or restricted stock units (“RSUs”) to employees of the Group companies, and other eligible persons. Shares are issued when share options are exercised or RSUs are vested in accordance with the Plan.

The Employee Incentive Plan was amended in 2019 to allow for the issue of RSUs and the number of shares in the option pool were increased by 1.5 million during 2019.

Memorandum and Articles of Association
The Company’s Articles of Association detail the rights attached to the shares; and the rules relating to the Directors, including their appointment, retirement, re-election and powers. Changes to the Articles of Association must be approved by the shareholders in accordance with the legislation in force from time to time.

At the Company’s 2019 AGM, a special resolution was passed to amend the Memorandum and Articles of Association of the Company to increase of the Company’s authorized share capital from €60,000 divided into 20 million ordinary shares of €0.001 each and 40,000 deferred shares of €1.00 each to €75,000 divided into 35 million ordinary shares of €0.001 each and 40,000 deferred shares of €1.00 each.

A copy of the Memorandum and Articles of Association can be obtained from the Group’s website.

Substantial shareholders
As at 31 December 2019 before publication of this Directors’ Report, in so far as was notified to the Company, the following were holders of 3% or more of the Company’s issued ordinary share capital:

Shareholder	No. of ordinary shares	Percentage
Sofinnova Capital VI FCPR	2,949,146	22%
Fountain Healthcare Partners (Note 1).	2,268,553	16.9%
KCK Limited	2,236,418	16.7%
RICA UNIVERSAL S.A	1,064,935	7.9%
Seamus Mulligan (Note 2)	772,039	5.8%
The Ireland Strategic Investment Fund (ISIF)	714,285	5.3%
Dan Sachs MD	515,000	3.8%

Notes:

Includes 935,220 Ordinary Shares held by Fountain Healthcare Partners Fund 1, L.P. and 1,333,333 Ordinary Shares held by Fountain Healthcare Partners Fund 3, L.P.
Includes Ordinary Shares held by Barrymore Investments Limited and Nerano Capital Limited

Going concern
The Directors have evaluated whether there are conditions and events, considered in aggregate, that raise doubt about the Group’s ability to continue as a going concern. The Directors note the following relevant matters:

The Group had cash of $17.4 million as at 31 December 2019 ($15.5 million as at 31 December 2018).
The Group had operating cash out-flows of $15.6 million for the year ended 31 December 2019 (year ended 31 December 2018: $27.3 million).
Due to the phase of development of the Group, the Group expects to continue to incur losses in the medium term due to the ongoing investment required in research and development, clinical and commercial activities and expects to continue to seek funding from investors or other finance providers as required.
The Group has renegotiated its debt and raised additional equity finance during the year to support the Group’s activities for the foreseeable future.

After making enquiries and having considered the conditions noted above and the options available to the Group, the Directors have a reasonable expectation that the Group can carefully monitor its cash flows and has the ability to consider various strategies for additional funding and budgets to manage cash to ensure that the Group will have sufficient funds to be able to meet its liabilities as they fall due for a period of at least 12 months from the date of the Financial Statements and are satisfied that the Financial Statements should be prepared on a going concern basis.

Dividends
The Directors do not recommend the payment of a dividend.

Research and development
Certain Group undertakings are engaged in ongoing research and development aimed at continuous improvement of the Group’s product and processes. Research and development expenditure is set forth in Note 6 to the consolidated Financial Statements.

Related party transactions
Details of related party transactions that have taken place during the reporting period are set forth in Note 26 to the consolidated Financial Statements.

Political and charitable donations
During the year, the Group and Company made no donations requiring disclosure.

Post balance sheet events
Details of important events affecting the Company which have taken place since the end of the year are given in Note 29 to the consolidated Financial Statements.

Subsidiary undertakings
At 31 December 2019, the Company (Mainstay Medical International plc) had the following subsidiaries:

Mainstay Medical Limited (“MML”) is registered in Ireland and its principal activities include research, development, clinical and regulatory activities and support services to other Group companies.
MML US, Inc. is registered in the United States of America and its principal activity is the provision of support services to other Group companies.
Mainstay Medical (Australia) Pty. Limited (“MMA”) is registered in Australia and its principal activity is the provision of support services to other Group companies.
Mainstay Medical Distribution Limited (“MMD”) was incorporated in Ireland and its principal activity is the provision of sales and distribution services.
Mainstay Medical GmbH (“MMG”) is registered in Germany and its principal activity is the provision of sales support services.
Mainstay Medical BV (“MMBV”) is registered in the Netherlands and its principal activity is the provision of management and sales support services.

The Company owns 100% of the called-up share capital of each of the above subsidiaries.

Accounting records
The Directors, through the use of appropriate procedures, personnel and systems, have ensured that measures are in place to secure compliance with the Company’s and the Group’s obligation to keep adequate accounting records under section 281-285 of the Companies Act 2014. The books of account of the Company and the Group are maintained at its registered office.

Relevant audit information
The Directors believe they have taken all steps necessary to make themselves aware of any relevant audit information and have established that the Group’s statutory auditors are aware of that information. In so far as they are aware, there is no relevant audit information of which the Group’s statutory auditors are unaware.

Audit Committee
The Company has established an Audit Committee. Please refer to page 22 for further information.

Directors Compliance Statement:
The Directors, in accordance with Section 225(2) of the Companies Act 2014, acknowledge that they are responsible for securing the Company’s compliance with the Relevant Obligations (as defined by the Companies Act 2014), and the Directors confirm that:

a compliance policy statement has been drawn up setting out the Company’s policies that are, in their opinion, appropriate with regard to such compliance;
appropriate arrangements or structures are in place that are, in their opinion, designed to provide reasonable assurance of compliance in all material respects with those Relevant Obligations; and
a review has been conducted, during the financial year, of those arrangements or structures.

European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006
The Company and a subsidiary of the company, MML, are party to a Facility Agreement dated 24 August 2015 with IPF Fund I SCA SICAV-FIS ("IPF") whereby IPF provided a debt facility to MML. On 18 April 2019, the Company, MML and IPF entered into an amendment and restatement agreement to the Original IPF Facility Agreement (the “IPF Amendment and Restatement Agreement”) In certain circumstances in the event of a change of control of the Company or of MML, the debt facility may become immediately repayable at IPF's option.

Auditor
The auditor, KPMG, Chartered Accountants, will continue in office accordance with Section 383 (2) of the Companies Act 2014.

A resolution authorizing the Directors to fix the auditors remuneration was passed at the Company’s AGM on 20 September 2019.

On behalf of the Board on 24 February 2020,

Oern Stuge MD
Chairman

Jason Hannon

CEO

Mainstay Medical International plc

Corporate governance report

The Board recognizes the importance of good governance in supporting growth in long term shareholder value and is accordingly committed to maintaining the highest standards of corporate governance commensurate with the size and stage of the development of the Group.

While there is no specific corporate governance regime mandated in Ireland for companies listed on Euronext Growth of Euronext Dublin nor is there any specific corporate governance regime mandated in France for companies who are listed on Euronext but not incorporated in France, the Company applies recognized corporate governance principles to the extent they are appropriate for a company of its size, stage of development and resources.

The Board will also take account of other institutional shareholder governance guidelines on disclosure and shareholder authorizations to the extent they are appropriate for a company of its size, stage of development and resources.

The Board
The Board is responsible for the supervision and control of the Company and is accountable to the Company. The Board has reserved decision-making on a variety of matters, including determining strategy for the Group, reviewing and monitoring executive management performance and monitoring risks and controls.

The Board comprises seven Directors, including one Executive Director, five Non-Executive Directors and the Non-Executive Chairman. The roles of Chairman and Chief Executive Officer are not exercised by the same individual.

The Board meets regularly (no less than four times per year) to consider strategy, performance and the framework of internal controls. The Directors have also established an Audit, Risk and Compliance Committee, a Remuneration Committee, and a Nominations Committee, each having formally delegated rules and responsibilities. Each of the Committees currently comprises Non-Executive Directors only.

The Board comprises a mix of the necessary skills, knowledge and experience required to provide leadership, control and oversight of the management of the Company and to contribute to the development and implementation of the Company’s strategy. In particular, the Board combines a group of Directors with diverse backgrounds within the medical device and related sectors, in both public and private companies.

All the Directors bring independent judgment to bear on issues affecting the Group and all have full and timely access to information necessary to enable them to discharge their duties. The Articles require each Director to retire at the annual general meeting held in the third calendar year following the year in which he was appointed or last re-appointed but unless he falls within the next succeeding paragraph he shall be eligible for re-appointment.

A Director shall also retire at any annual general meeting if he has agreed to do so (whether in accordance with the terms of his appointment or otherwise) and, unless the Directors have agreed otherwise, he shall not be eligible for re-appointment.

Internal control
The Board acknowledges that it is responsible for maintaining the Company’s system of internal control and risk management processes required to safeguard the Group’s assets and intellectual property. Such a system is designed to identify, manage and mitigate financial, operational and compliance risks inherent to the Company and the Group. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute assurance against material misstatement or loss.

The main features of internal control and risk management processes for preparing Financial Statements and financial reporting include:

Board approval of the annual budget and strategy;
Monitoring of performance against the annual budget through monthly Board reports detailing actual results versus budget, analysis of material variances, and re-forecasting where required;
Finance function resourced to facilitate segregation of duties;
Audit, Risk and Compliance Committee review of the integrity of the Annual Report and Half-Yearly Report;
Board review and approval of the Annual Report and Half-Yearly Report; and
Board approved authorization limits and investment policy.

Board Committees
The Board has established a number of committees to deal with specific matters. Brief particulars are set out below:

Audit, Risk and Compliance Committee – Mr. David Brabazon (Independent Chairman), Mr. James Reinstein (Independent) and Dr. Oern Stuge (Independent);
Nominations Committee - Dr. Oern Stuge (Independent Chairman), Mr. David Brabazon (Independent), Mr. Antoine Papiernik and Mr. James Reinstein (Independent);
Remuneration Committee - Mr. James Reinstein (Independent Chairman), Mr. David Brabazon (Independent), Mr. Antoine Papiernik and Dr. Oern Stuge (Independent).

Audit, Risk and Compliance Committee
The Audit, Risk and Compliance Committee is chaired by Mr. David Brabazon (the Audit, Risk and Compliance Committee Financial Expert). The Chief Financial Officer and Chief Executive Officer may also be invited to attend meetings of the Committee. It meets at least two times a year and is responsible for ensuring that the financial performance of the Group is properly monitored and reported on. The Committee also meets with and reviews findings of the audit with the external auditor. It meets with the auditors at least once a year without any members of management being present and is also responsible for considering and making recommendations regarding the appointment and remuneration of such auditors.

Nominations Committee
The Nominations Committee is chaired by Dr. Oern Stuge. It meets at least once a year and considers the selection and re-appointment of Directors. It identifies and nominates candidates for all Board vacancies and reviews regularly the structure, size and composition (including the skills, knowledge and experience) of the Board and makes recommendations to the Board with regard to any changes.

Remuneration Committee
The Remuneration Committee is chaired by Mr. James Reinstein. It meets at least two times a year and considers and recommends to the Board the framework for the remuneration of the Chief Executive Officer, Chairman, Company Secretary, Chief Financial Officer, executive Directors and such other officers as it is designated to consider and, within the terms of the agreed policy, considers and recommends to the Board the total individual remuneration package of each executive Director including bonuses, incentive payments and share awards. It reviews the design of all incentive plans for approval by the Board and (if required) shareholders and, for each such plan, recommends whether awards are made and, if so, the overall amount of such awards, the individual awards to executive Directors and the performance targets to be used. No Director is involved in decisions concerning his/her own remuneration.

General meeting
The Company shall hold in each year a general meeting as its annual general meeting in addition to any other meeting in that year and shall specify the meeting as such in the notice calling it. Not more than 15 months shall elapse between the date of one annual general meeting and that of the next. All general meetings other than annual general meetings shall be called extraordinary general meetings.

The Directors may convene general meetings. Extraordinary general meetings may also be convened on such requisition, or in default may be convened by such requisitions and in such manner as may be provided by the Companies Act 2014.

Subject to the provisions of the Companies Act 2014 allowing a general meeting to be called by shorter notice, an annual general meeting and an extraordinary general meeting shall be called by at least 21 clear days’ notice, except that an extraordinary general meeting that is not called for the passing of a special resolution may, subject to compliance with all applicable provisions of the Companies Act 2014, be called by at least 14 clear days’ notice.

The Directors shall specify in the notice of a general meeting the voting record date, being a date not more than 48 hours before the general meeting to which it relates. A person shall be entered on the register at the voting record date in order for that person to exercise the right of a member to participate and vote at the general meeting, and any change to an entry on the register after the voting record date shall be disregarded in determining the right of any person to attend and vote at the meeting.

No business other than the appointment of a chairman shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business. Two persons entitled to attend and to vote upon the business to be transacted, each being a member or a proxy for a member, shall be a quorum.

If such a quorum is not present within half an hour from the time appointed for the meeting, the meeting, if convened upon the requisition of members, shall be dissolved; in any other case the meeting shall stand adjourned to the same day in the next week at the same time and place, or to such other day and at such other time and place as the Directors may determine.

All business shall be deemed special that is transacted at an extraordinary general meeting. All business that is transacted at an annual general meeting shall also be deemed special, with the exception of declaring a dividend, the consideration of the Company’s statutory financial statements and reports of the Directors and auditors, the appointment of Directors in the place of those retiring, the appointment or re-appointment of the auditors (subject to sections 380 and 382 to 385 of the Companies Act 2014) and the fixing of the remuneration of the auditors.

Every member entitled to attend and vote at a general meeting may appoint a proxy to attend, speak and vote on his behalf provided, however, that:

a member may appoint more than one proxy provided that each proxy is appointed to exercise the rights attached to shares held in different securities accounts; and
a member acting as an intermediary on behalf of a client in relation to shares may appoint that client or any third party designated by that client as a proxy in relation to those shares,

subject to such requirements and restrictions as the Directors may from time to time specify.

The Company’s AGM gives shareholders the opportunity to question the Directors. The Directors must answer any question a member asks relating to the business being dealt with at the meeting unless answering the question would interfere unduly with the preparation for the general meeting or the confidentiality and business interests of the Company, or the answer has already been given on a website in the form of an answer to a question, or it appears to the Chairman of the meeting that it is undesirable in the interests of good order of the meeting that the question be answered.

The business of the Company is managed by the Directors who may exercise all the powers of the Company, subject to the Companies Act 2014, the Articles of Association and to any directions given by the members by special resolution.

Votes
The Companies Act 2014 requires that resolutions of the general meeting be passed by the majority of votes cast (ordinary resolution) unless the Companies Act 2014 or the Company’s Articles of Association provide for 75% majority of votes cast (special resolution). The Company’s Articles of Association provide that the Chairman has a casting vote in the event of a tie.

At meetings, unless a poll is demanded, all resolutions are determined on a show of hands, with every shareholder who is present in person or by proxy having one vote so that no individual shall have more than one vote, and on a poll every member shall have one vote for every share carrying rights of which he is the holder. On a poll a member entitled to more than one vote need not cast all his votes or cast all the votes he uses in the same way. At the meeting, after each resolution has been dealt with, details will be given of the level of proxy votes lodged for and against that resolution and also the level of votes withheld on that resolution.

Subject to the Companies Act 2014 and to such requirements and restrictions as the Directors may, in accordance with the Companies Act 2014 specify, the Company at its discretion may provide for participation and voting in a general meeting by electronic means.

Subject to the Companies Act 2014 and to such requirements and restrictions as the Directors may, in accordance with the Companies Act 2014 specify, the Company may at its discretion provide for voting on a poll by correspondence. Where the Company permits votes to be cast on a poll by correspondence, it shall be required to count only those votes cast in advance by correspondence that are received before the date and time specified by the Company for that purpose, provided that such date and time is not more than 24 hours before the time at which the vote is to be concluded.

Diversity Policy
The Board is keen to ensure the Group benefits from the existence of a high-quality Board comprising of individuals with an appropriate balance of skills and experience. In considering nominations to the Board, the Nomination Committee takes into account the benefit of Board diversity, including diversity of business background, geographical diversity and gender diversity.

The Board does not currently have a formal diversity policy in place due to the early stage of development of the Group. During 2020 the Board will continue to focus attention on considering nominations to the Board that re-affirms the Board’s commitment to diversity across the Group.

Mainstay Medical International plc

Risk factors
This section addresses the existing and future material risks to Mainstay’s business. However, the following does not set out an exhaustive list or explanation of all risks that shareholders or prospective investors may face when making an investment in the ordinary shares and should be used as guidance only, as further risks and uncertainties not currently known to the Board, or that the Board currently deems immaterial, may also have an adverse effect on the Company’s or the Group’s financial condition, business, prospects and/or results of operations. In such a case, the market price of ordinary shares could decline, and investors may lose all or part of their investment.

Risks Relating to Our Business and Our Financial Position

We have incurred significant operating losses and may not be able to achieve or subsequently maintain profitability
We have incurred significant net losses since we were founded. For the years ended 31 December 2019 and 31 December 2018, we had a comprehensive loss of $22.3 million and $31 million respectively. We have funded our operations through equity capital and debt, and have raised more than $139 million of equity capital and we have drawn $18.3 million under our debt facility (the outstanding principal on this debt is $12.8 million as at 31 December 2019). We have devoted substantially all of our resources to the research and development of ReActiv8, including completion of our feasibility study in October 2012, progress on our ReActiv8-A Clinical Trial (which commenced in 2014 and led to CE Marking in May 2016), progress of our U.S. Pivotal ReActiv8-B Clinical Trial (the purpose of which is to gather data in support of our application for Pre-Market Approval (“PMA”) from the U.S. Food and Drug Administration (“FDA”)), initial commercialisation, and expansion of our intellectual property portfolio.

To implement our business strategy and generate revenue and profit in the future, we need to, among other things, obtain regulatory approvals for ReActiv8 (which on the date of this report is our only product) in our target markets. We have obtained CE Marking of ReActiv8, which allows for commercialisation of ReActiv8 in the European Economic Area (the “EEA”, which includes the EU, Iceland, Liechtenstein and Norway) and Switzerland.

In January 2017, we applied to the Australian Therapeutic Goods Administration (“TGA”) for ReActiv8 to be admitted to the Australian Register of Therapeutic Goods (“ARTG”) which would allow for commercialisation in Australia. In April 2018, the TGA requested additional clinical data with respect to ReActiv8 which we submitted in June 2019. In December 2019, we received regulatory approval from the TGA for ReActiv8, confirming inclusion of ReActiv8 in the ARTG and enabling commercialization throughout Australia. We have submitted an application for ReActiv8 to be included in the Prostheses List of reimbursed products in Australia, with a reimbursement decision expected in the third quarter of 2020. The Prostheses List identifies implantable devices eligible for reimbursement from all private health insurance funds in Australia. We cannot be certain whether we will be successful in securing inclusion of ReActiv8 on the Prostheses List. We do not plan to commercialize ReActiv8 in Australia until inclusion on the Prostheses List is secured.

There is no assurance that commercialisation in the EEA, Switzerland or Australia (if inclusion of ReActiv8 on the Prostheses List is secured) will be successful or will generate sufficient revenue (and profits) to cover expenses or fund future growth.

We have filed a PMA for ReActiv8 in the U.S., but we have not yet obtained regulatory approval for ReActiv8 in the U.S. The U.S. Pivotal ReActiv8-B Clinical Trial did not achieve statistical significance on its primary endpoint, but it did achieve statistical significance on two pre-specified alternative analyses of that endpoint and on multiple secondary endpoints. We cannot be certain whether the totality of the data from the U.S. Pivotal ReActiv8-B Clinical Trial will be sufficient to demonstrate safety and efficacy to the satisfaction of the FDA to allow for the approval of our PMA application. If U.S. regulatory approval is not obtained, then it will not be possible to commercialise ReActiv8 in the U.S.

If we are unable to obtain additional regulatory approvals for ReActiv8 in the U.S. and elsewhere, or if product development, manufacture, marketing, sales or commercialisation of ReActiv8 is delayed or abandoned, we may never generate significant revenue or become profitable. Even if we do become profitable in the short term, we may be unable to sustain or increase our profitability on a quarterly or annual basis over the medium to long term. In any case we will need to obtain additional capital to fund commercialisation (including expanding reimbursement), to fund continuing research and development, and to run additional clinical trials. We expect to incur losses for the foreseeable future as we continue to pursue these objectives.

We expect to require additional funds in the future in order to meet our capital and expenditure needs and further financing may not be available when required or, if available, could require us to agree to terms which are specifically favourable to new investors, or to restrictions significantly limiting our access to additional capital
We expect to require additional funds in the future in order to meet our capital and expenditure needs, including funds to pay our financial obligations as they fall due, continue research and development, conduct clinical trials, continue our work to obtain regulatory approval and other activities necessary to bring ReActiv8 to target markets and to establish marketing and sales capabilities. However, we may not be able to obtain additional financing on terms favourable to us, if at all, when needed. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, we may cease to have operations and may need to liquidate some or all of our assets, being, at this point, the Group’s intellectual property.

In addition, if we raise additional funds through further issues of equity or debt or other forms of financing, existing shareholders could suffer significant adverse financial consequences, including dilution. Any new equity securities could have rights, preferences and privileges superior to those of current shareholders. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain any required additional capital.

Our future financial performance is entirely dependent on the commercial success of ReActiv8, our only product as of the date of this report, obtaining adequate reimbursement for ReActiv8, and rates of product adoption and market penetration
Our only product as of the date of this report, ReActiv8, is designed to treat people suffering from chronic low back pain (“CLBP”), a serious and often debilitating medical condition. The success of ReActiv8 may be negatively impacted by many factors, including regulatory delays, adverse regulatory or legal actions, problems arising from manufacturing, research and development, rates of product adoption, lack of reimbursement and market penetration and low sales in target markets. Because our business currently relies on the success of a single product, any factors that negatively impact the regulatory approval and commercialisation of ReActiv8 would adversely affect our financial condition, business, prospects and/or results of operations.

Failure to comply with debt covenants or failure to make repayments on our debt facility could have a material adverse effect
In August 2015, Mainstay Medical Limited entered into an agreement for a debt facility of up to $15 million. In April 2019, we agreed to an amended debt facility, and in July 2019 we announced the drawdown of €3 million in additional debt from a new tranche of the debt facility.

The repayment schedule for the three existing tranches drawn under the debt facility was amended in April 2019 such that no principal or interest will be repaid until 2021, with the principal and accrued interest to be amortized over the period from 1 January 2021 through 30 September 2023. The repayment schedule for the new tranche is the same as the amended repayment schedule for the three existing tranches.

The interest rate for all tranches will be 8% per annum, with interest accruing but capitalized prior to January 1, 2021. All principal and accrued interest from all tranches will automatically convert into ordinary shares of the Company at a price per share of €8.00 upon the earlier of (a) FDA approval of the Company’s PMA application for ReActiv8, (b) the date by which at least 900,000 ordinary shares are publicly sold on-market by non-affiliates of the Company since 18 April 2019 at a price per share of at least €8.00 or (c) IPF’s election to undertake such conversion, in each case unless the Company elects to satisfy such obligation in whole or in part in cash.

The terms of the agreement include covenants, including a requirement that Mainstay Medical Limited hold cash at least equal to its projected cash expenditures for operations and debt repayment for each three-month period after 18 April 2019. In addition, on 18 April 2019 the Company issued to IPF warrants to purchase 1.5 million of its Ordinary Shares at a price per Ordinary Share of €6.00 at any time prior to the 6th anniversary of the amendment date (being 18 April 2019). The Company has issued further conditional warrants to IPF that will become exercisable only to the extent the Company elects to repay the debt in cash rather than issue Ordinary Shares when a conversion of the debt is triggered.

The facility is secured by way of fixed and floating charges over the assets and undertakings of Mainstay Medical Limited, and the debenture includes customary terms and conditions. In addition, the Company created a first fixed charge in favour of IPF over its present and future shares held in Mainstay Medical Limited.

If we fail to comply with the provisions included in the debt facility, and/or the debt covenants, and/or fail to make repayments of principal or interest, IPF might enforce their security, which would have a material adverse effect on our financial condition, business, prospects and/or results of operations.

There is no guarantee that the performance of ReActiv8 in commercialisation will match the performance of ReActiv8 in clinical trials
While the Company will take steps including physician training and certification, and having company sales representatives or field clinical specialists attend some or all implant procedures, ReActiv8 clinical performance in commercialisation may be different from the clinical performance observed during the clinical trials for a number of reasons, including less control on the selection of people suitable for use of the product, use by physicians with different experience and/or training, and failure to adhere to a follow up regimen in the absence of clinical trial oversight.

Furthermore, issues with product performance may subsequently be identified once a product is in the market. Regulatory authorities require medical device manufacturers to monitor and report certain types of adverse events as part of the medical device reporting (“MDR”) regulations so that safety issues can be identified and addressed quickly. When such issues are identified, corrective actions may be required – such as modifying labelling or instructions for use, improving training, or removing the device from the market – to ensure proper use or patient safety. Any of these could result in significant time delays and/or expense and/or may harm our reputation. Such issues may result in the need for our product to be suspended from sale or withdrawn from the market. In these circumstances our product may require substantial redesign and/or re-engineering to address any identified issues. This may result in the need to undertake further clinical trials to re-establish the safety and efficacy of the revised product, which would be costly and time consuming and may exceed our resources.

Any of these circumstances may have a material adverse effect on the timing and extent of our future revenues and profitability.

We only recently began commercializing ReActiv8 in the EEA and have no history of commercializing ReActiv8 in the United States or elsewhere
ReActiv8 has been CE Marked since 2016, enabling us to commercialize it throughout the EEA. We have received TGA approval for ReActiv8 in Australia, but we do not intend to begin commercialisation activities there unless and until ReActiv8 is included in the Prostheses List. We have not yet obtained approval from the FDA to commercially market in the United States. As a result, we have a limited history of commercializing ReActiv8 generally and no history of selling ReActiv8 in the United States or elsewhere. As an organization, we have never commercially launched a product in the United States, nor commenced a sales representative training program or conducted a launch of a similar expected size. A commercial launch and training program of this size is a significant undertaking that requires substantial financial and managerial resources. We may be unable to gain broader market acceptance in the countries in which we have already begun to commercialize ReActiv8 or successfully commercialize it in the United States or elsewhere for a number of reasons, including:

established alternatives to ReActiv8 with strong relationships with customers, including physicians, hospitals and third-party suppliers;
limitations in our ability to demonstrate differentiation and advantages of ReActiv8 compared to alternative methods for treating CLBP and the relative safety, efficacy and ease of use of ReActiv8;
the limited size of our sales force and the learning curve required to gain experience selling ReActiv8;
the inability to obtain sufficient supply of the components for the ReActiv8 system or secure second-source suppliers if our main suppliers are unable to fulfil our orders;
insufficient financial or other resources to support our commercialization efforts necessary to reach profitability; and
the introduction and market acceptance of new, more effective or less expensive competing products and technologies.

If we do not achieve significantly greater market acceptance of our product, do not gain momentum in our sales activities, or fail to significantly grow our market share, we will not be able to grow our revenue and our business and financial condition will be adversely affected.

There is no certainty that the market for ReActiv8 will develop as currently anticipated by the Company, or at all
We believe that the potential number of people with CLBP who could benefit from ReActiv8 is large, based on our estimate of persons suffering with CLBP in our key target markets. However, development of the market depends on several factors, including regulatory approvals, availability and level of reimbursement, acceptance of the treatment by the medical profession, product performance after approval, emergence of other current and future treatments for CLBP, as well as the global trend to reduce healthcare costs. If, as a result of these factors, the market for our product does not develop as currently anticipated, our ability to generate revenue could be materially adversely affected.

If we fail to develop and retain an effective direct sales force in the United States, Australia or other major new markets, our business could suffer
In order to commercialize ReActiv8 in the United States, Australia or other major new markets where we receive regulatory approval and plan to commercialize, we will likely be required to build a direct sales force. In any such case, we will initiate our commercial launch and increase our marketing efforts, which would require us to make significant investments to retain, develop and grow the number of direct sales personnel that we employ. There is significant competition for sales personnel experienced in relevant medical device sales. Once hired, the training process is lengthy because it requires significant education for new sales representatives to achieve the level of clinical competency with ReActiv8 expected by physicians. Upon completion of the training, our sales representatives typically require lead time in the field to grow their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. Furthermore, the use of ReActiv8 often requires or benefits from direct support from us. If we are unable to attract, motivate, develop and retain a sufficient number of qualified sales personnel, and if our sales representatives do not achieve the productivity levels we expect them to reach, our revenue will not grow at the rate we expect, and our financial performance will suffer. Also, to the extent we hire personnel from other medical device companies, we may have to wait until applicable non-competition provisions have expired before deploying such personnel in restricted territories or incur costs to relocate personnel outside of such territories, and we may be subject to allegations that these new hires have been improperly solicited, or that they have divulged to us proprietary or other confidential information of their former employers. Any of these risks may adversely affect our business.

The success of ReActiv8 depends on its acceptance and adoption by medical professionals
Our success will require acceptance and adoption by medical professionals of ReActiv8 as a new treatment for people with CLBP. Such acceptance will depend on medical professionals being convinced of the clinical performance, benefits, safety and cost-effectiveness of ReActiv8 and being prepared to undertake special training in certain cases.

Acceptance of ReActiv8 depends on educating physicians as to the distinctive characteristics, perceived benefits, safety and ease of use of ReActiv8 as compared to alternative solutions and communicating to physicians the proper application of ReActiv8. The U.S. Pivotal ReActiv8-B Clinical Trial did not achieve statistical significance on its primary endpoint, but it did achieve statistical significance on two pre-specified alternative analyses of that endpoint and on multiple secondary endpoints. We cannot be certain whether the totality of the data from the U.S. Pivotal ReActiv8-B Clinical Trial will be sufficient to demonstrate safety and efficacy to the satisfaction of physicians. If we are not successful in convincing physicians of the merits of ReActiv8 or educating them on the use of ReActiv8, they may not use ReActiv8 and we may be unable to increase our sales, sustain our growth or achieve profitability.

Even if the safety and efficacy of ReActiv8 is established, medical professionals may be hesitant to change their medical treatment practices or accept and adopt ReActiv8, including for the following reasons:

general conservatism about adoption of new and innovative treatment practices;
lack of awareness or acceptance of the role of inhibition of the multifidus muscle in causing CLBP and the suitability of neurostimulation therapy to address this inhibition;
lack of experience with ReActiv8 and with neurostimulation as a treatment alternative;
perceived lack of long-term evidence, including that provided by the results of our U.S. Pivotal ReActiv8-B Clinical Trial, supporting additional patient benefits;
perceived clinical risk of a new treatment;
inability to convince key opinion leaders to provide recommendations regarding ReActiv8, or to convince patients, physicians, or payers that ReActiv8 is an attractive alternative to other products;
perceived liability risks associated with the use of a new product and procedures;
limited or lack of reimbursement and coverage within healthcare payment systems;
cost associated with the purchase of new product and equipment;
other procedures competing for physician time and attention; and
the time commitment that may be required for special training.

Economic, psychological, ethical or related concerns may limit general acceptance and adoption of ReActiv8. Lack of acceptance and adoption of ReActiv8 by a significant number of medical professionals may limit our future revenues and profitability.

Our success will be heavily contingent on third party payment from government providers, healthcare insurance providers or other public or private sources
The existence of coverage and adequate reimbursement by government and private payers will be critical to market adoption for existing and future products, if any. Medical professionals and hospitals will be unlikely to use ReActiv8, at all or to a great extent, if they do not receive adequate reimbursement for the procedures utilising our product, and potential patients may be unwilling to pay for the product themselves.

With the global pressure on healthcare costs, payers are attempting to contain costs by, for example, limiting coverage of, and the level of reimbursement for, new therapies. Any limitations on, decreases in or elimination of payments by third party payers may have an adverse effect on our financial condition, business, prospects and/or results of operations.

In many countries, a series of codes is used to classify diagnoses and clinical procedures performed, and there are separate coding systems for delivery of stationary (inpatient) and ambulatory (outpatient) care. Payment for ReActiv8 is dependent on classification of the procedure that utilises ReActiv8 within these coding systems.

If coding is not yet in place or coverage of available coding is insufficient in relevant markets, we will have to work with the relevant parties to establish appropriate coding and reimbursement levels. This can be a lengthy process (months to years) and there is no guarantee that coding can be obtained at satisfactory levels, or at all, or if obtained, that it will be adequate to enable us to build a profitable business selling ReActiv8.

There are existing reimbursement codes applicable to ReActiv8, which hospitals can use in Germany, Switzerland and Austria. In Australia, we have submitted an application for ReActiv8 to be included in the Prostheses List of reimbursed products, with a reimbursement decision expected in the third quarter of 2020. The Prostheses List identifies implantable devices eligible for reimbursement from all private health insurance funds in Australia. We cannot be certain whether we will be successful in securing inclusion of ReActiv8 on the Prostheses List.

Securing adequate or attractive reimbursement often depends on demonstrating the cost effectiveness of a product, for example with a medical economics study. There is also no assurance that we will be able to demonstrate cost effectiveness of ReActiv8 in a timely manner or at all.

Failure to obtain attractive reimbursement from payers may have a material adverse effect on our financial condition, business, prospects and results of operations.

Active implantable medical devices such as ReActiv8 carry risks associated with the surgical procedure for implant, removal or use of the device, or failure of the device, or associated with the therapy delivered by the device
All medical devices have associated risks. Regulatory authorities regard AIMDs as the highest risk category of medical devices, and accordingly AIMDs are subject to the highest level of scrutiny when seeking regulatory approval. The risks include, among others, (i) risks associated with any surgical procedure, such as infection, allergic reaction, and consequences of anaesthesia and (ii) risks associated with any implantable medical device, such as device movement, lead dislodgement, lead breaks or fracture, electromagnetic interference, device failure, tissue damage including nerve damage, pain and psychological effects. A comprehensive list of the risks associated with ReActiv8 is included in the documentation (labelling) provided with the device to both physicians and patients.

The design and development of an AIMD uses many disciplines, including electrical, mechanical, software, biomaterials, and other types of engineering. Engineers employed by us undertaking research and development or manufacturing activities may make an incorrect decision or make a decision during the engineering phase without the benefit of long term experience, and the impact of such wrong decisions may not be apparent until well into a product’s life cycle, which in either case may have a material adverse effect on our financial condition, business, prospects and/or results of operations.

Adverse events associated with these risks may lead some patients to blame us, the physician or other parties for such occurrences. This may result in product liability lawsuits, medical malpractice lawsuits, investigations by regulatory authorities, adverse publicity, criminal charges or other harmful circumstances for us. Any of those circumstances may have a material adverse effect on our ability to conduct our business, to sell ReActiv8, or to develop future products (if any).

Our business exposes us to an inherent risk of potential product liability claims relating to the manufacturing, clinical trials, marketing and sale, or recall of an active implantable medical device
Our product is an AIMD with complex electronic circuits and software. It is not possible to design and build AIMDs which are 100% reliable, as all such devices carry a risk of failure or malfunction.

Medical device manufacturers are exposed to the risk of potential product liability claims arising from device failures and malfunctions, product use and associated surgical procedures. A product liability claim may be raised as a result of factors outside our control, such as product failure, off-label use of our product, or failure of the medical practitioners or patients to follow the instructions for use. It is possible that a product liability lawsuit may be lost through no fault of ours, which could result in reputational risk, increased insurance premiums, and depression of future sales, all of which may have an adverse effect on our financial condition, business, prospects and/or results of operations.

Device failures discovered during clinical trials may lead to suspension or termination of the trial, which could have a material adverse effect on the Group.

Following regulatory approval and market release, device failures or malfunctions may result in a recall of the product, which may be restricted to a specific manufacturing lot or may impact all products in the field. Recalls may occur at any time during the life cycle of a device once regulatory approval has been obtained for the commercial distribution of the device. In most markets including the U.S. and the EU, authorities may request a manufacturer to carry out a recall, irrespective of whether the manufacturer itself deems this is required. Recalls can impact our business as they can be expensive, time consuming and can divert resources and management from normal operations. Replacement of products subject to recall can be free of charge under warranty and is therefore a potential expense for us. In some cases, the cost of a recall can include the cost of the surgical procedure to replace or remove a product. In addition, a recall may impact our future sales, or may lead to the loss of key suppliers or legal action against us by people affected by a recall and/or regulatory authorities whose role it is to supervise the distribution and sale of medical devices.

Consolidation of product liability claims into a class action lawsuit may require large dedication of resources for defence, which will be time consuming, costly, and a major distraction from the running of the business.

We have purchased product liability insurance at a level that we believe to be appropriate for a company of our size and nature, to help cover the costs of defence of product liability lawsuits and for damages. For products used as part of a clinical trial, clinical trial insurance helps cover defence of lawsuits relating to the product and for damages, if awarded. We regularly review the level and appropriateness of the product liability insurance in place, but we may not be able to maintain or increase product liability insurance on acceptable terms, and such insurance may not provide adequate coverage against potential liabilities. A successful claim brought against us in excess, or outside, of our insurance coverage could have a material adverse effect on our financial condition, business, prospects and/or results of operations.

ReActiv8 may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to regulatory authorities, and if we fail to do so, wee could be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with ReActiv8, or a recall of ReActiv8 either voluntarily or at the direction of a regulatory authority, could have a negative impact on us.
If we obtain FDA approval, we will be subject to FDA’s MDR regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device approval, seizure of our products or delay in clearance or approval of future products.

The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labelling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.

Depending on the corrective action we take to redress a product’s deficiencies or defects, a regulatory authority may require, or we may decide, that we will need to obtain new approvals for the device before we may market or distribute the corrected device. Seeking such approvals may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA or other regulatory authorities. We may initiate voluntary withdrawals or corrections for ReActiv8 in the future that we determine do not require notification of a regulatory authority. If a regulatory authority disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.

Competition in the medical device industry is intense and expected to increase
Competition from medical device companies is intense, and we expect it to further increase. We may not be able to compete successfully against our current and future competitors, including competitors with larger financial capabilities. Whilst we are not currently aware of a direct competitor product on the market, potential competitors may develop new products or adapt existing products or their uses for the same patient group targeted by our product, which could present competition for ReActiv8.

Treatment for CLBP is potentially a very large market, and is attracting potential competitors. Any potential competitors’ products currently in clinical trials, or in development, or developed in the future, could have superior clinical results, could be easier to implement clinically, could be more convenient for patients and/or less expensive than our product or could reach commercialisation before our product. Such occurrences could have a material adverse effect on our ability to generate sufficient revenues to sustain our business.

During a clinical trial for regulatory approval, products are generally provided at no charge. Entry by a competitive product into clinical trials, while our product is being commercialised, could have an adverse effect on our sales (for example, where our product is approved for use and released to the market and the competitor is still in clinical development), or may inhibit timely enrolment in our on-going clinical trials.

In addition, the commercial availability of any approved competing product could potentially inhibit recruitment and enrolment in our clinical trials. We may successfully conclude our clinical trials and obtain regulatory approval or favourable reimbursement treatment but may fail to compete against potential competitors or alternative treatments for CLBP that may be available or developed. Any inability by us to compete effectively against other medical device companies or to effectively manage the risks related to competition may have a material adverse effect on our financial condition, business, prospects and/or results of operations.

New or competing treatments for CLBP may emerge
ReActiv8 is an AIMD designed as treatment for people with CLBP. Alternative therapies for this patient group may include, among others, physical therapy (such as lumbar extensor strengthening exercises), watchful waiting (i.e. no therapy), traction therapy, the McKenzie Method of exercise therapy, lumbar stabilisation exercises, massages, drugs (including analgesics, opioids, sleep aids, muscle relaxants and anti-depressants), acupuncture, steroid injections, back schools, various types of energy application including ultrasound, transcutaneous electrical nerve stimulation (“TENS”), osteopathic therapy, and thermotherapy, spine surgery and spinal cord stimulation (“SCS”). New treatment options, or modifications of existing treatments or their uses, may emerge which yield clinical results equal to, or better than, those achieved with ReActiv8, possibly at a lower cost. Patients might also prefer such new therapies to ReActiv8 therapy if such therapies do not require the patient to undergo a surgical procedure. Emergence of such new therapies may inhibit our ability to develop and grow the market for ReActiv8, which would have a material adverse effect on our financial condition, business, prospects and results of operations.

Consolidation in the healthcare industry or group purchasing organizations could lead to demands for price concessions, which may affect our ability to sell ReActiv8 at prices necessary to support our current business strategies.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators, regulators and third-party payers. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests for pricing concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single accounts may continue to use their market power to consolidate purchasing decisions for hospitals. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices of ReActiv8.

Attracting physicians and patients to perform clinical trials and meet clinical trial objectives is costly and uncertain
Performing clinical trials requires the engagement of many hospitals, clinics, and clinicians. In particular, we must engage a physician at each clinical trial centre to maintain overall responsibility for the conduct of the clinical trial (the “Investigator”). Each Investigator may have additional physicians or other medical professionals working under his or her direction to conduct a trial (e.g. to recruit clinical trial patients or perform surgery or other procedures). We may not be able to attract a sufficient number of qualified Investigators to conduct clinical trials within an adequate time, and those Investigators may not be able to attract or enrol a sufficient number of patients to meet our clinical trial objectives.

Clinical trial patients may be sourced from the Investigator’s own practice clinic or hospital, or may be referred from another physician. Potential clinical trial patients must sign an informed consent before undergoing certain clinical tests to determine whether the patient meets the enrolment criteria for the clinical trial (inclusion and exclusion). Once a patient is enrolled in the clinical trial, the patient must comply with the trial requirements, including clinic visits, use of ReActiv8, and undergo certain tests. Some patients may not comply with the requirements of the trial, or could at any time withdraw from the trial, which could lead to poor or unusable data, which may compromise the results of the clinical trial.

Failure to attract a sufficient number of eligible clinical trial patients may lead to time and cost overruns, poor quality results, or inability to complete the clinical trial, all of which may materially adversely affect our ability to achieve regulatory approval, and thereby our ability to market our product and achieve revenues and profits.

We depend on third party suppliers for the manufacture of ReActiv8. Disruption of the supply chain or failure to achieve economies of scale could have a material adverse effect
We depend on a limited number of third party suppliers for the manufacture of ReActiv8 and the loss of one or more of these third party suppliers or their inability or unwillingness to supply us with adequate quantities of products could harm our business in the future. Certain of our suppliers, including Oscor Inc. and CCC del Uruguay S.A, are sole suppliers. These sole suppliers and any of our other suppliers may be subject to circumstances which impact our ability to supply, including enforcement action by regulatory authorities, natural disasters (e.g., hurricanes and earthquakes), industrial action (e.g., strikes), financial difficulties including insolvency, pressure or demands on manufacturing capacity (e.g., by products for other customers that compete for manufacturing capacity), among a variety of other internal or external factors.

If any of our existing suppliers are unable or unwilling to meet our demand for product or components, or fail to respect their contractual commitments to us, or if the components or finished products that they supply do not meet quality and other specifications, clinical trials or commercialisation of our product could be delayed. Alternatively, if we have to switch to a replacement manufacturer or replacement supplier for any of our product components, or commence our own manufacturing to satisfy market demand, we may face additional delays and other issues, and the manufacture and delivery of ReActiv8 could be interrupted for an extended period of time, which interruption could delay completion of our clinical trials or commercialisation. Alternative suppliers may be unavailable, may be unwilling to supply, may not have the necessary regulatory approvals, or may not have in place an adequate quality management system.

Establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, may affect the performance specifications of ReActiv8 or could require that we modify its design. Even if we are able to find replacement suppliers, we will be required to verify that the new supplier maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements. Any of these events could require that we obtain a new regulatory authority approval before we implement the change, which could result in further delay and which may not be obtained at all.

Our suppliers, in turn, depend on their own suppliers and supply chain. Any disruption of the supply chain could have a material adverse effect on our financial condition, business, prospects and/or results of operations.

Our suppliers may not be able to increase yields and/or decrease manufacturing costs over time, and the cost of goods sold may not decrease or may in fact increase, resulting in an adverse effect on our financial condition, business, prospects and/or results of operations.

In addition, our suppliers may discontinue supply of components or materials upon which we rely before the end of the product life of our product. The timing of the discontinuation may not allow us sufficient time to develop and obtain regulatory approval for replacement products or components before we exhaust our inventory. If suppliers discontinue supply of components or materials, we may have to pay premium prices to our suppliers to keep their production lines open. We may have to obtain alternative suppliers, or buy substantial inventory to last until the scheduled end of life of our product or through such time as we have an alternative product developed and approved by the regulatory authorities. We may have to temporarily cease supplying our product once our inventory of the discontinued materials or component is exhausted.

Any of these interruptions to the supply of materials or components could result in substantial reduction in our available inventory and an increase in our production costs, which may have a material adverse effect on our financial condition, business, prospects and/or results of operations.

We are dependent on access to raw materials and products and manufacturing of our product is not guaranteed by the third parties with whom we contract
Although we do not manufacture our product, our third party manufacturers are dependent on continuing supply of certain raw materials. In particular, some raw materials such as biocompatible polymers (plastics) may only be available from a sole supplier. If the supplier of the raw material encounters problems, goes out of business, refuses to supply certain materials, or dramatically increases the prices of certain materials, it may disrupt the ReActiv8 supply chain. Disruption in our supply chain via our third party manufacturers may result in interruption of supply of our product, which could have a material adverse impact on our ability to proceed with commercialisation, begin or continue clinical trials, and our financial condition, and could require product redesign and/or engagement with alternative manufacturers, which could be expensive and time consuming.

Manufacturing issues may arise that are detrimental to the Group
We use external vendors to manufacture and supply ReActiv8. Vendors are required by applicable laws and regulations to have in place and implement appropriate quality management measures and are generally subject to inspections by regulatory authorities. A vendor may be unable to supply the quantity of products according to our requirements, or may suffer internal delays or problems which could impact the quality, delivery or compliance with the specifications of ReActiv8. This may have a material adverse effect on our financial condition, business, prospects and results of operations.

Any identified manufacturing or quality issue may require extensive rework of products or a complete scrapping of the inventory of affected products, and could also require suspension of distribution of products, or products to be returned from the field for modification.

Compliance with regulations for quality systems for medical device companies is difficult, time consuming and costly. We may be found to be non-compliant, for example as a result of future changes in or interpretation of the regulations regarding quality systems in certain jurisdictions.
We have developed and maintained a Quality Management System (“QMS”) to ensure quality of our product and activities. The QMS is designed to be in compliance with regulations in many different jurisdictions, including the Quality Systems Regulations (“QSR”) mandated by the FDA, and the requirements of the AIMD Directive, including the international standard ISO 13485 required for obtaining CE Marking. In some circumstances, the requirements of regulations and standards may be different and may be mutually exclusive.

Compliance with regulations for quality systems for medical device companies is difficult, time consuming and costly, and it is possible that we may be found to be non-compliant at any time. In addition, we may be found to be non-compliant as a result of future changes in, or interpretation of, the regulations for quality systems. If we do not achieve compliance or subsequently become non-compliant, the regulatory authorities may (i) require that we take appropriate action to address non-conformance issues, (ii) withdraw marketing clearance, (iii) require product recall, or (iv) take other enforcement action.

Our external vendors must (in general) also comply with the QSR and ISO 13485. Any of our external vendors may become non-compliant with QSR or ISO 13485, which could result in enforcement action by regulatory authorities, including, by way of example, a warning letter from the FDA or a requirement to withdraw from the market or suspend distribution, export or use of products manufactured by one or more of our vendors. This may have a material adverse effect on our financial condition, business, prospects and results of operations.

Any change or modification to a device may require further approvals (depending on the jurisdiction) and must be made in compliance with appropriate regulations (QSR for the U.S. and the AIMD Directive for Europe), which compliance may cause interruption to or delays in the marketing and sale of our product. U.S. federal, state and other laws regarding the manufacture and sale of AIMDs are subject to future changes, as are administrative interpretation and policies of regulatory agencies. If we fail to comply with applicable laws where we would intend to market and sell our product, we could be subject to enforcement action including recall of our devices, withdrawal of approval or clearance and civil and criminal penalties. If any of these events occurs, there may be a material adverse effect on our financial condition, business, prospects and/or results of operations.

In some markets we may depend on distributors for the market and sale of ReActiv8 over which we have little or no control
For some markets our intended distribution strategy may be to rely on third party distributors for ReActiv8.

In markets where we may depend on distributors, we would not directly control the performance of a distributor. Thus the level of sales we generate, and the profitability we achieve, in those markets may depend on the efforts of others. A distributor’s failure to perform according to expectations and/or contractual obligations may have an adverse effect on our reputation, financial condition, business, prospects, and/or results of operations.

We may be unable to attract and retain management and other personnel we need to succeed
We rely on the expertise and experience of our board of directors, senior management and other key employees and contractors in management, research and development, clinical and regulatory matters, sales and marketing and other functions. The retention and performance of our directors, senior management and other key employees are therefore significant factors in our ability to achieve our objectives. The departure of any of these individuals without timely and adequate replacement, or the loss of any of our senior management may have a material adverse effect on our financial condition, business, prospects and results of operations, and there can be no guarantee that we would be able to find and attract other individuals with similar levels of expertise and experience or similar relationships with commercial partners and other market participants. In addition, our competitive position could be materially adversely affected if a member of senior management transferred to another company seeking to develop a rival product. Further, we conducted a reduction in workforce in early 2019, and as a result of this or other losses, working with fewer employees and the loss of the expertise of our departed employees may adversely affect our efficiency and ability to achieve key objectives.

Our future growth will require hiring a number of qualified clinical, scientific, commercial and administrative personnel. If we are unable to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development, commercialisation or growth.

Pursuant to rights afforded to our directors and officers under the Articles of Association, and as is customary for Irish incorporated listed public companies, we have entered into indemnification agreements with our directors and senior management, including certain contractors. As a consequence of such indemnification agreements, we may have to use our resources to indemnify such persons, which could have an adverse effect on our future financial performance.

We rely on third parties for management services, manufacturing, marketing, regulatory advice and other services that are crucial to our business
In order to carry out our business, we depend heavily on third party consultants, contractors, distributors, manufacturers, agents and numerous other partners for core and non-core services and functions, including management functions (e.g., certain payroll services), clinical studies, applications for regulatory approval, commercial operations and other services and functions that may involve interactions with government and quasi-government authorities. As a result, if any of these parties fails to perform as promised or intended or contracted, our business plans for obtaining regulatory approval for ReActiv8 in targeted geographies and commercialising ReActiv8 may suffer, and our business may be materially adversely affected.

We may be at risk for non-compliance with applicable laws and regulations
Doing business on a worldwide basis requires us to comply with the laws and regulations of various jurisdictions. In particular, our operations are subject to anticorruption laws and regulations, which may include the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), the UK Bribery Act of 2010, the Criminal Justice (Corruption Offences) Act 2018 and other Irish anti-bribery laws and regulations, and anti-bribery laws and regulations in other countries, including those having implemented the OECD Anti-Bribery Convention. Anticorruption laws prohibit corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to another person, including but not limited to a government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise improperly influence a person. The laws are broad and many apply to private as well as public bribery and also penalize the receipt as well as the giving of bribes. In the course of establishing and expanding our commercial operations and seeking regulatory approvals in the EU, the U.S., and internationally, we will need to establish and expand business relationships with various third parties and will interact more frequently with various officials, including regulatory authorities and physicians employed by state-run healthcare institutions who may be deemed to be “foreign officials” under the FCPA or similar laws, or who may otherwise be candidates for illicit payments in exchange for improper benefits. We have implemented policies and procedures designed to ensure compliance with the FCPA, UK Bribery Act of 2010, the Criminal Justice (Corruption Offences) Act 2018 and other Irish anti-bribery laws and other similar laws, but acts or omissions of any of the parties we rely on, including directors, executive officers, employees, third party consultants, contractors, distributors, manufacturers, agents and numerous other partners, could potentially cause us to incur liability under applicable laws and regulations.

Our operations may also be subject to applicable laws and regulations on economic sanctions and export controls, including those administered by the U.S. and the EU, which are complex and may be violated inadvertently.

In case of a violation of any of the anti-bribery, economic sanctions or export control laws, we could be subject to fines, confiscation of profits or legal sanctions, such as termination of authorizations, licenses, concessions and financing agreements, suspension of our operations, or prohibitions on contracting with public authorities. Any such violation, even if prohibited by our policies, could have a material adverse effect on our financial condition, business, prospects and results of operations.

Information Technology (“IT”) forms a key support requirement within our business. Any failure of our IT systems could present a substantial risk to our business continuity.
The efficient operation of our business depends on IT systems. We rely on our IT systems to help manage our administration, marketing, accounting and financial functions, clinical and regulatory functions, manufacturing processes, and our research and development functions.

The regulatory and legal environment of our industry requires us to maintain records for long periods of time, sometimes indefinitely. In most cases, those records are kept in electronic form and without paper copies.

We use third party suppliers to provide computing, communication, data storage and backup services, and failure of any of those third party suppliers may have an adverse effect on our ability to operate, which could have an adverse effect on our financial condition, business, prospects and results of operations. Although industry standard practices are in place for regular information backup, failure of our IT systems infrastructure may result in the inability to continue business until the records are recreated, and this may have an adverse effect on our financial performance or our financial condition, business, prospects and results of operations.

Our employees and contractors often work from home offices, in particular employees or contractors who need to be close to the customer base to enable rapid support (for example, sales representatives and field clinical specialists). This requires strong IT infrastructure support (telephone, email, internet access), which must be continuously maintained. Failure of our IT infrastructure, a security breach by a malicious third party, or loss of critical information may have an adverse effect on our financial condition, business, prospects and results of operations.

Our employees frequently utilise portable laptop or notebook computers. Loss, theft or damage to a portable computer could result in loss of key information (in some cases to a competitor), which could have a material adverse effect on our financial performance or our financial position.

U.S. “anti-inversion” tax laws could negatively affect our results
Under rules contained in U.S. tax law (Section 7874 of the Internal Revenue Code), a non-U.S. company, such as Mainstay Medical, can be subject to tax as a U.S. corporation in the event it acquires substantially all of the assets of a U.S. corporation and the equity owners of that U.S. corporation own at least 80 percent of the non-U.S. company’s stock by reason of their holding stock in the U.S. corporation.

In 2014 the Group undertook the a corporate reorganisation during which the Company acquired the assets (being shares in MML) of Mainstay Medical Inc. (“MMI”) (a U.S. corporation), and former shareholders of MMI became shareholders of the Company. The ownership of equity that former shareholders of MMI received in the 2014 reorganisation is substantially below the 80 percent standard for application of the above U.S. rules. Accordingly, we do not believe these rules should apply. There can, however, be no assurance that the IRS will not challenge the determination that these rules are inapplicable. In addition to the 2014 reorganisation, there was an earlier Group reorganisation transaction in 2012. We do not believe integrated treatment of this transaction with the 2014 reorganisation to be appropriate because there are independent business reasons for undertaking these transactions. In the event that the U.S. anti-inversion rules are held to apply to us, we would be subject to U.S. federal income tax on our worldwide income, which would negatively impact the cash available for distribution and the value of the ordinary shares.

The anti-tax avoidance directive could negatively affect our results
The first Anti-Tax Avoidance Directive (“ATAD 1”) was adopted as Council Directive (EU) 2016/1164 on July 12, 2016 and was required, for the most part, to be implemented by all EU member states by January 1, 2019. The ATAD 1 was required to be transposed into Irish law by January 1, 2019, with certain exceptions. The second Anti-Tax Avoidance Directive, which together with ATAD 1 is referred to as the ATADs, was adopted as Council Directive (EU) 2017/952 on May 29, 2017. Pursuant to the ATADs, the Irish Finance Act 2019 has implemented measures to counteract cross-border tax mismatches. None of the changes should affect the tax treatment of our profits and therefore it is not currently envisaged that they would impact upon the value of our ordinary shares.

We are exposed to foreign exchange risk
We are, and will in the future be increasingly, exposed to exchange rate fluctuations including, among others, the Euro, U.S. Dollar, Australian Dollar, Swiss Franc and Pound Sterling. Fluctuations of exchange rates outside a budgeted range may affect revenues, expenses, or our ability to raise future capital if it is needed, and may have an adverse impact on our financial condition, business, prospects and/or results of operations.

Risks Relating to Regulation of Our Industry

We operate in a highly regulated environment and regulatory approval is required before we can market or sell ReActiv8 in any market
ReActiv8 is an active implantable medical device (“AIMD”), which requires regulatory approval before it can be marketed or sold by us. At the date of this document, the only regulatory approvals we have received are the CE conformity assessment, or CE Marking, for ReActiv8, which allows commercialisation of ReActiv8 in the EEA and in Switzerland, and the TGA approval for ReActiv8 to be admitted to the ARTG, which allows for commercialisation throughout Australia. We have submitted an application for ReActiv8 to be included in the Prostheses List of reimbursed products in Australia, with a reimbursement decision expected in the third quarter of 2020. The Prostheses List identifies implantable devices eligible for reimbursement from all private health insurance funds in Australia. We cannot be certain whether we will be successful in securing inclusion of ReActiv8 on the Prostheses List. We do not plan to commercialize ReActiv8 in Australia until inclusion on the Prostheses List is secured.

Regulatory approval in the U.S. is via a PMA issued by the FDA. The U.S. Pivotal ReActiv8-B Clinical Trial did not achieve statistical significance on its primary endpoint, but it did achieve statistical significance on two pre-specified alternative analyses of that endpoint and on multiple secondary endpoints. We cannot be certain whether the totality of the data from the U.S. Pivotal ReActiv8-B Clinical Trial will be sufficient to demonstrate safety and efficacy to the satisfaction of the FDA to allow for the granting of a PMA. The process typically takes significantly longer than CE Marking. Once granted, the PMA does not have an expiry date, however, regulatory approvals may be withdrawn if, for example, a new and unexpected risk emerges that would make continued marketing of our product no longer acceptable to the FDA. There is no guarantee that further regulatory approval will be obtained for ReActiv8 or any other product we develop, either now or in the future. Any such regulatory approval may also experience delays.

The regulatory approval process may delay or prevent the launch of our product in our target markets, which would negatively impact or prevent our ability to achieve our objectives. If we fail to obtain further approval of ReActiv8 in a timely manner, or at all, sales of ReActiv8 may be delayed or may not be achieved, thereby adversely affecting our ability to generate revenues or fund our on-going activities.

Seeking and obtaining regulatory approval for medical devices can be a long and uncertain process. Strict or changing regulatory regimes, government policies and legislation in any of our target markets may delay, prohibit or reduce potential sales
We are primarily targeting commercialisation in markets in the EEA, Switzerland, Australia and the U.S., and we must comply with complex regulatory requirements in these markets before we can market or sell our product in each market. Once initial regulatory approval is gained for our product for a particular market, any subsequent products or product modifications may also require further regulatory approval before we can market the subsequent or modified products.

In the EU, regulatory approval is obtained via CE Marking according to the European Active Implantable Medical Devices Directive 90/385/EEC and subsequent amendments (the “AIMD Directive”), which provides approval for the EEA and is accepted by certain other non-EEA countries, including Switzerland. We received CE Marking in May 2016.

In May 2017, a package of European Union legislation entered into force, replacing the existing regulatory framework for medical devices in the EEA, including for AIMD (the “New EU Medical Device Regulations”). The New EU Medical Device Regulations will apply as of 2020.

The New EU Medical Device Regulations mean a more centralised control of the European medical device market, and may increase the amount of work, time, or cost of obtaining regulatory approval for the marketing of medical devices in Europe. Under the new regulatory framework, it is likely that (i) the regulatory requirements for the design and manufacturing of AIMDs will be applied more stringently than in the past, (ii) there will be stricter requirements for clinical investigations and clinical evidence, (iii) the obligations for manufacturers to monitor the safety of their products, once placed on the market, will increase, and (iv) manufacturers will be subject to increased scrutiny. The New EU Medical Device Regulations will make the EU approval process for AIMDs more similar to the U.S. PMA process. The new legislation may also prevent or delay the EEA approval or clearance of any future products we may develop or impact our ability to modify currently EEA approved or cleared products on a timely basis. The large increase in devices being assessed by Notified Bodies for regulatory compliance, and delays as Notified Bodies interpret the requirements of the new regulation for particular devices, may impact timelines for regulatory approval. The specific impact of the New EU Medical Device Regulations on existing products is uncertain and could impact the approval of future products and/or could require additional resources to maintain compliance with the new regulations.

In the U.S., regulatory approval is obtained via a PMA issued by the FDA. Regulatory approval can be a lengthy, expensive and uncertain process. The process typically takes significantly longer than obtaining CE Marking. Applications for regulatory approval require extensive pre-clinical, clinical and technical testing, all of which must be undertaken in accordance with the requirements of regulations and guidance for the FDA. The U.S. Pivotal ReActiv8-B Clinical Trial did not achieve statistical significance on its primary endpoint, but it did achieve statistical significance on two pre-specified alternative analyses of that endpoint and on multiple secondary endpoints. We cannot be certain whether the totality of the data from the U.S. Pivotal ReActiv8-B Clinical Trial will be sufficient to demonstrate safety and efficacy to the satisfaction of the FDA to allow for the granting of a PMA.

The regulations to which we are subject are complex and have tended to become more stringent over time. In addition, ReActiv8 is subject to extensive testing to international standards such as for electrical safety and electromagnetic compatibility. Changes in standards may require re-testing of our product, and there is no assurance that compliance with an earlier standard will also mean compliance with a more recent version of a standard. Further, the exit from the Eurpoean Union of the United Kingdom, commonly known as Brexit, could have an adverse impact on our ability to efficiently maintain our CE Mark or manage our supply chain. If we cannot comply with changed standards, we may have to redesign or recall our products, either of which could have a material adverse effect on our financial condition, business, prospects and/or results of operations.

We are required to conduct clinical trials for regulatory approvals and other purposes. Clinical trials carry substantial risks and are costly and time consuming, with uncertain results
The outcomes of clinical trials are by their nature uncertain and dependent on a number of variables inherent to clinical research, such as the ability of the design of the clinical trial to produce the anticipated result, the suitability of the clinical trial patients for the therapy, the experience and the expertise of the referring and implanting medical professionals, the ability and willingness of the clinical trial patients to perform the activities required from their participation in the trial, and the quality of the clinical follow up.

Adverse events, both anticipated and unanticipated, and related or unrelated to the device, occur in clinical trials. Significant unanticipated adverse events associated with ReActiv8, and/or errors in associating adverse events, could result in damage to our reputation, lawsuits, suspension or delay of clinical trials, and/or enrolment difficulties. Any delay or suspension of clinical trials may delay the filings of regulatory submissions and ultimately the ability to commercialise ReActiv8 and to generate revenues.

The U.S. Pivotal ReActiv8-B Clinical Trial did not achieve statistical significance on its primary endpoint, but it did achieve statistical significance on two pre-specified alternative analyses of that endpoint and on multiple secondary endpoints. We cannot be certain whether the totality of the data from the U.S. Pivotal ReActiv8-B Clinical Trial will be sufficient to demonstrate safety and efficacy to the satisfaction of the FDA to allow for the granting of a PMA or to the satisfaction of other regulatory bodies. Failure to achieve FDA or other regulatory body approval may require product redesign, new or additional clinical trials, additional testing, and other measures which typically require significant additional cost and time.

We are required to fund clinical trials. This typically includes the payment of professional fees for physicians; hospital costs; fees for one or more contract research organisations (“CROs”); data collection; retention and management; fees for consultants to run committees; and clinical trial insurance premiums. Medical device companies are usually required to provide products and services at no charge during clinical trials leading to regulatory submissions, and therefore we will not generate revenue from product sales from the use of ReActiv8 in such clinical trials. We may be required to fund the cost of surgical procedures to replace or remove the device in clinical patients. The costs of the clinical trials may exceed the resources available to us, in the medium to long term, possibly resulting in delayed completion, cost overruns, or failure to complete.

Results of clinical trials are intended to be published after the trial concludes. Some physicians or other parties may prematurely publish clinical results prior to conclusion of the trial, which may adversely affect future trial enrolment, have adverse regulatory impact, prevent us from securing patent protection, result in diminished competitive position or damage our reputation.

We are required to conduct one or more post-approval studies which could be expensive and fail to produce the desired results
Following CE Marking, a range of activities is required for Post Market Clinical Follow-Up (“PMCF”) to gather additional data on long term performance and safety of Re-Activ8, including continuation of the ReActiv8-A Clinical Trial and implementation of a Registry which may result in product recall, suspension of sales, and/or restrictions on commercialisation. Such consequences could have a material adverse effect on our business and financial condition, business, prospects and/or results of operations.

As part of, or following, the FDA grant of a PMA for ReActiv8 in the U.S. (if granted), the FDA may require us to conduct one or more post-approval studies (“PAS”), which could be extensive, expensive and time consuming.

The PAS may uncover problems with ReActiv8 and may result in a need to redesign certain aspects of ReActiv8 and/or conduct additional studies and may include possible suspension from sale. Such consequences could have a material adverse effect on our financial condition, business, prospects and/or results of operations.

The misuse or off-label use of ReActiv8 may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
ReActiv8 received a CE Mark for a specific indication for use, and if ReActiv8 receives FDA approval, that approval will be limited to specific indications for use. We train our current sales and marketing personnel, and if ReActiv8 receives FDA approval we will train any future U.S. marketing and sales personnel, to not promote ReActiv8 for uses outside of the approved indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using ReActiv8 off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of ReActiv8 for indications other than those approved by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.

In addition, physicians may misuse ReActiv8 or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If ReActiv8 is misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. As described below, product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.

Our use and disclosure of individually identifiable information, including health information, is subject to privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
We are subject to regulation regarding the processing (including disclosure and use) of personal data. We therefore must comply with strict data protection and privacy laws and regulations, including without limitation Regulation 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (the “GDPR”) which took effect from 25 May 2018 and is the primary legislation governing the use of personal data in the E.U., and the U.S. Health Insurance Portability and Accountability Act of 1996 (“HIPAA”).

GDPR introduced substantial changes to data protection law, including an increased emphasis on businesses being able to demonstrate compliance with their data protection obligations, which required investment by us in our compliance strategies. In addition, relevant supervisory authorities are given the power to issue fines of up to 4 percent of an undertaking’s annual global group turnover or €20 million (whichever is the greater) for failure to comply with certain provisions of the GDPR.

HIPAA establishes a set of national privacy and security standards for the protection of individually identifiable health information, including what is known as protected health information, by health plans, healthcare clearinghouses and healthcare providers that submit certain covered transactions electronically, or covered entities, and their “business associates,” which are persons or entities that perform certain services for, or on behalf of, a covered entity that involve the use or disclosure of protected health information. Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties and, in certain circumstances, criminal penalties including fines and/or imprisonment. In addition, HIPAA authorizes state attorneys general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care claim in state civil suits such as those for negligence or recklessness in the misuse or breach of protected health information.

Numerous other laws and regulations govern collection, dissemination, use and confidentiality of personally identifiable health information, including (i) U.S. state privacy and confidentiality laws (including state laws requiring disclosure of breaches); and (ii) European and other foreign data protection laws, including the GDPR (as defined below). We therefore must comply with strict data protection and privacy laws and regulations, including the Data Protection Acts 1988 and 2003 and the European Communities (Electronic Communications Networks and Services) (Privacy and Electronic Communications) Regulations 2011.

We are also subject to evolving EU laws on data export, as we may transfer personal data from the EU to other jurisdictions. These obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other requirements or our practices. In addition, these rules are constantly under scrutiny. We rely on a mixture of mechanisms to transfer personal data from our EU business to the United States and could be impacted by changes in law as a result of a future review of transfer mechanisms by European regulators under the GDPR, as well as current challenges to these mechanisms in the European courts.

Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally identifiable information may result in governmental enforcement actions and investigations, fines and penalties, litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Such failures could have a material adverse effect on our financial condition and operations. If the third parties we work with violate applicable laws, contractual obligations or suffer a security breach, such violations may also put us in breach of our obligations under privacy laws and regulations and/or could in turn have a material adverse effect on our business.

We are or will become subject to certain fraud and abuse laws and transparency laws, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
We are or will become subject to healthcare fraud and abuse regulation and enforcement, which could significantly impact our business, particularly if we receive FDA approval of our PMA for ReActiv8 and expand our U.S. operations. Fraud and abuse laws can vary significantly by jurisdiction, complicating our compliance effort. In the United States, the laws that may affect our ability to operate include, but are not limited to:

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of this statute or specific intent to violate the Anti-Kickback statute itself to have committed a violation. The U.S. government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers and distributors like us. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $74,792 for each violation, plus up to three times the remuneration involved. Violations of the federal Anti-Kickback Statute can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to 10 years. In addition, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid;

federal civil and criminal false claims laws and civil monetary penalty laws, that prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to pay or transmit money or property to the federal government or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property to the federal government. These laws may apply to manufacturers and distributors who provide information on coverage, coding, and reimbursement of their products to persons who do bill third-party payers. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties ranging from $11,181 to $22,363 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs.
the federal HIPAA law, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. A person or entity does not need to have actual knowledge of these statutes or specific intent to violate them to have committed a violation;
the federal Physician Sunshine Act requirements under the 2010 Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or, collectively, the ACA, which impose reporting and disclosure requirements on device and drug manufacturers for any “transfer of value” made or distributed by certain manufacturers of drugs, devices, biologics, and medical supplies to physicians (including doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm customers; and
state and foreign law equivalents of each of the above federal laws, such as state anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payer, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, pricing transparency laws, and permitting laws.

Similar laws apply to us and our operations in Europe and will apply in other jurisdictions. These laws and regulations constrain our promotional and other business activities by limiting the kinds of financial interactions, including discount and other commercial transactions, we may have with individuals or entities that use, order, purchase or recommend ReActiv8 such as patients and healthcare providers. The scope and enforcement of these laws are uncertain and subject to change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations and vary by jurisdiction. Due to the breadth of these laws, the narrowness of exceptions and/or safe harbors available, and the range of interpretations to which the laws are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.

Enforcement bodies have increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.

Healthcare reform may have a material adverse effect on our industry and our results of operations.
In March 2010, the ACA was signed into law in the United States. The ACA made changes that significantly affected the healthcare industry, including medical device manufacturers. The ACA included new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, entities that manufacture, produce or import medical devices were required to pay an excise tax in an amount equal to 2.3% of the price for which such devices are sold in the United States. Through a series of legislative amendments, the tax was suspended for 2016 through 2019, but is scheduled to return beginning in 2020, absent further Congressional action. The ACA also included, among other things, demonstrations to develop organizations that are paid under a new payment methodology for voluntary coordination of care by groups of providers, such as physicians and hospitals, and the establishment of a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research. The increased funding and focus on comparative clinical effectiveness research, which compares and evaluates the risks and benefits, clinical outcomes, effectiveness and appropriateness of products, may result in lower reimbursements by payers for ReActiv8 in the U.S., if ReActiv8 is approved by the FDA, and decreased profits to us.

Other federal legislative changes have been proposed and adopted since the ACA was enacted. These changes included an aggregate reduction in Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

The full impact on our business of the ACA and other new laws, including any outside of the U.S., is uncertain. Healthcare reform measures that may be adopted in the future, singularly or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Our Intellectual Property

Any inability to fully protect and exploit our intellectual property may adversely impact our financial condition, business, prospects and results of operations
Our success depends significantly on our ability to protect our proprietary rights, including the intellectual property related to and incorporated into ReActiv8. We rely on a combination of patent protection, trademarks and trade secrets, and we use confidentiality and other contractual agreements to protect our intellectual property. We generally seek patent protection where possible for those aspects of our technology and product that we believe provide significant competitive advantages. Our patent portfolio includes 17 granted U.S. patents, 57 patents outside the U.S. and 31 U.S. and foreign patent applications in the patent families. However, we may be unable to adequately protect our intellectual property rights or may become subject to a claim of infringement or misappropriation, which we may be unable to settle on commercially acceptable terms. We cannot be certain that our pending or future patent applications will result in issued patents. In addition, we do not know whether any issued patents will be upheld as valid or will be proven to be enforceable against alleged infringers or that they will prevent the development of competitive products or provide meaningful restriction against potential competitors or against potential competitive technologies.

The process of obtaining patent protection involves filing applications in multiple jurisdictions and patent offices, and may take many years. Success in one jurisdiction does not guarantee success in another jurisdiction, particularly as different jurisdictions may apply different legal principles. For example, it is possible to obtain a patent for a medical method in the U.S., but such patents cannot be applied for in Europe. Therefore, there may be circumstances where an invention is patented in one jurisdiction but a patent cannot be obtained in one or more other jurisdictions.

In responding to our patent application, a patent office may reject one or more (or sometimes all) claims. This may lead to an extensive dialogue between our patent attorneys and the patent office in an effort to reach agreement and grant of a patent. There is no assurance that such efforts will be successful, and thus no assurance that all patent applications will result in an issued patent.

In addition to the requirements of each patent office setting forth the necessary characteristics of an invention in order to enable the issuance of a patent, patents are issuable only to the inventors of the invention covered or to their assignees. In some, but not all, jurisdictions the law provides that inventions made by employees during normal working hours and using employer resources belong to the employer. We require our employees to enter into proprietary information and inventions assignment agreements assigning to us ownership of their inventions made in the course of their employment. We also require consultants and vendors providing services to us that could result in the creation of inventions to enter into agreements with us to assign to us their inventions made as a result of their relationships with us. If we fail to obtain such an agreement from an employee in a jurisdiction where ownership of employee inventions does not automatically vest in the employer, or if we fail to obtain such an agreement from a consultant or vendor, inventions made by these employees, consultants or vendors might be owned by them and not by us. As a result, we might not be entitled to a patent on any such invention and we might not own such an invention. If such invention relates to any of our products in development or on sale, we might be required to cease such development or sale, and pay damages to the owners.

There is no assurance that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable. Parties seeking to compete with us (directly or indirectly) or other third parties may successfully challenge and invalidate or render unenforceable our issued patents, including any patents that may be issued in the future, or could develop competitor products to ReActiv8. This could prevent or limit our ability to stop potential competitors from marketing products that are identical or substantially equivalent to ours. In addition, such parties may be able to design around our patents, obtain competitive patents or other intellectual property rights regardless of prior art in our patents or patent applications, or develop products that provide outcomes that are comparable to our product but that are not covered by our patents.

Much of our value is in our intellectual property, and any challenge to our intellectual property portfolio (whether successful or not) may impact the value of ReActiv8 and the Company.

We could become subject to intellectual property litigation or other disputes that could be costly, result in the diversion of management’s time and efforts, require us to pay damages, prevent us from marketing ReActiv8 or other products and/or reduce the margins for ReActiv8
Third party patents or other intellectual property may emerge which may have a materially adverse effect on our ability to commercialise ReActiv8, and there is no assurance that such third party patents or intellectual property will not emerge.

The medical device industry is characterized by rapidly changing products and technologies, and there is intense competition to establish intellectual property and proprietary rights to use these new products and the related technologies. This vigorous protection and the pursuit of intellectual property rights and positions has resulted and will continue to result in extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, and the determination is often uncertain in advance. There may be existing or future patents that ReActiv8 may inadvertently infringe. Potential competitors may have or develop patents and other intellectual property that they assert our product infringes.

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file one or more lawsuits and assert infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable or may refuse to enjoin the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. The standards that courts use to interpret patents are not always applied predictably or uniformly and can change, particularly in differing jurisdictions or as new technologies develop. As a result, we cannot predict with certainty how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court. Further, even if we prevail against an infringer in district court, there is always the risk that the infringer will file an appeal and the district court judgment will be overturned at the appeals court and/or that an adverse decision will be issued by the appeals court relating to the validity or enforceability of our patents. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted in a manner insufficient to achieve our business objectives.

Any infringement claim against us, even if without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources and/or divert the time and efforts of management from our core business. In addition, any potential intellectual property litigation could force us to do one or more of the following: stop selling/using our product or using technology that contains the allegedly infringing intellectual property; forfeit the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others; pay substantial damages to the party whose intellectual property rights we may be found to be infringing; redesign those products that contain or utilise the allegedly infringing intellectual property; or attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all. Any of these circumstances may have a material adverse effect on our financial condition, business, prospects and results of operations.

Requirements to obtain licenses to third party intellectual property rights may arise in the future. If we need to license any third party intellectual property, we could be required to pay lump sums or royalties on sales of our future products. In addition, there can be no assurances that, if we are required to obtain licenses to third party intellectual property, we will be able to obtain such licenses on commercially reasonable terms or at all. Our inability to obtain required third party intellectual property licenses on commercially reasonable terms or at all could have a material adverse impact on our business, results of operations, financial condition or prospects.

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defence of our issued patents. On 16 September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switched the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The U.S. Patent and Trademark Office (the “USPTO”) developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, in particular, the first-to-file provisions, only became effective on 16 March 2013. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defence of our issued patents, all of which could have a material adverse effect on financial condition, business, prospects and results of operations.

In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defence of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the U.S. are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by the U.S. or other countries. Those changes may affect our patents or patent applications and our ability to obtain additional patent protection in the future.

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements
The USPTO and various other non-U.S. government patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and other non-U.S. patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our product or procedures, we may not be able to stop a potential competitor from marketing products that are the same as, or similar, to our own, which could have a material adverse effect on our financial condition, business, prospects and results of operations.

We may not be able to adequately protect our intellectual property rights throughout the world
Filing, prosecuting and defending patents on ReActiv8 in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some countries may not protect our intellectual property rights to the same extent as laws in the U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in some or all countries outside the U.S. Potential competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories in which we have patent protection that may not be sufficient to terminate infringing activities.

We do not have patent rights in certain countries in which a market for ReActiv8 may exist. Moreover, in some jurisdictions where we do have patent rights, proceedings to enforce such rights could result in substantial costs and divert our efforts and attention from other aspects of our business, and could put our patents at risk of being invalidated or interpreted narrowly, or put our patent applications at risk of not issuing. Additionally, such proceedings could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful, collectible or enforceable. Thus, we may not be able to stop a competitor from marketing and selling in certain countries products that are the same as or similar to our products, and our competitive position in those countries could be materially harmed.

We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent which might adversely affect our ability to develop and market ReActiv8.
We cannot guarantee that any of our patent searches or analyses, including the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are accurate, complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending application in the United States and abroad that is relevant to or necessary for the commercialization of ReActiv8 in any jurisdiction. For example, U.S. patent applications filed before November 29, 2000 and certain U.S. patent applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Patent applications in the United States and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications covering our products could have been filed by others without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover ReActiv8 or the use of ReActiv8. The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market ReActiv8. We may incorrectly determine that ReActiv8 is not covered by a third-party patent or may incorrectly predict whether a third party’s pending patent application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our products and services. Our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our products and services.

If we fail to identify and correctly interpret relevant patents, we may be subject to infringement claims. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing any of our products that are held to be infringing. We might, if possible, also be forced to redesign products or services so that we no longer infringe the third-party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.

The patent protection for ReActiv8 may expire before we are able to maximize its commercial value, which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.
Patents have a limited lifespan. In the United States, if all maintenance fees are paid timely, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. The patents for ReActiv8 have varying expiration dates and, if these patents expire, we may be subject to increased competition and we may not be able to recover our development costs. For example, U.S. Patent No. 8,606,358 is set to expire March 10, 2028, if all maintenance fees are paid timely. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our patent rights may not provide us with sufficient rights to exclude others from commercializing product candidates similar or identical to ours.

We depend on confidentiality agreements with third parties to maintain confidential information
We rely upon unpatented confidential and proprietary information, including technical information, and other trade secrets to develop and maintain our product and competitive position. While we generally enter into confidentiality and invention assignment agreements with our employees and other third parties to protect our intellectual property, there can be no assurance that they will provide meaningful protection for our trade secrets and proprietary information, that those employees or third parties will not breach such agreements or that adequate remedies will be available in the event of an unauthorised use or disclosure of such information. Unauthorised use or disclosure of our confidential and proprietary information may have a material adverse effect on our financial condition, business, prospects and results of operations.

Intellectual property rights do not necessarily address all potential threats to our business
Once granted, patents may remain open to invalidity challenges, including opposition, interference, re-examination, post-grant review, inter parties review, nullification or derivation action in court or before patent offices or similar proceedings for a given period after allowance or grant, during which time third parties can raise objections against such grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit the scope of the challenged allowed or granted claims or may lose the allowed or granted claims altogether.

In addition, the degree of future protection afforded by our intellectual property rights is uncertain because even granted intellectual property rights have limitations and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative:

others may be able to develop and/or practice technology that is the same or similar to our technology or aspects of our technology, but that are not covered by the claims of the patents that we own or control, assuming such patents have issued or do issue, or otherwise infringe our other intellectual property rights;
we or any future strategic partners might not have been the first to conceive or reduce to practice the inventions covered by the issued patents or pending patent applications that we own or have licensed;
we or any future strategic partners might not have been the first to file patent applications covering certain of our inventions;
it is possible that our pending patent applications will not lead to issued patents;
issued patents that we own or have licensed may not provide us with any competitive advantage, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
third parties performing manufacturing or testing for us using our products or technologies could use the intellectual property of others without obtaining a proper license;
parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising exclusive rights over that intellectual property;
we may not develop or in-license additional proprietary technologies that are patentable;
we may not be able to obtain and maintain necessary licenses on commercially reasonable terms, or at all; and
the patents of others may have an adverse effect on our business.

Should any of these events occur, they could significantly harm our business and results of operations.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of their former employers or other third parties.
We do and may employ individuals who were previously employed at universities or other medical device companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for us, and we are not currently subject to any claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties, we may in the future be subject to such claims.

Litigation may be necessary to defend against these claims. If we fail in defending against any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products. Such a license may not be available on commercially reasonable terms or at all. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees and could result in customers seeking other sources for the technology, or in ceasing from doing business with us.

We may not be successful in obtaining necessary intellectual property rights to future products through acquisitions and in-licenses.
Although we intend to develop products and technology through our own internal research, we may also seek to acquire or in-license technologies to grow our product offerings and technology portfolio. We may be unable to acquire or in-license intellectual property rights relating to, or necessary for, any such products or technology from third parties on commercially reasonable terms or at all. In that event, we may be unable to develop or commercialize such products or technology. We may also be unable to identify products or technology that we believe are an appropriate strategic fit for our company and protect intellectual property relating to, or necessary for, such products and technology.

The in-licensing and acquisition of third-party intellectual property rights for product candidates is a competitive area, and a number of more established companies are also pursuing strategies to in-license or acquire third-party intellectual property rights for products that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. If we are unable to successfully obtain rights to additional technologies or products, our business, financial condition, results of operations and prospects for growth could suffer.

In addition, we expect that competition for the in-licensing or acquisition of third-party intellectual property rights for products and technologies that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs. We may be unable to in-license or acquire the third-party intellectual property rights for products or technology on terms that would allow us to make an appropriate return on our investment.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks.

We may not be able to protect our rights in our trademarks and trade names, which we need in order to build name recognition with potential partners or customers in our target markets. In addition, third parties may have used trademarks similar and identical to our trademarks in foreign jurisdictions and may have filed or may in the future file for registration of such trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to market ReActiv8 in those countries. In any case, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively, and our business may be adversely affected.

Risks Relating to Our Ordinary Shares

Future issuances or exercise of ordinary shares, share options or share warrants may affect the market price of the ordinary shares and could dilute the interests of existing shareholders
We have incurred significant net losses since we were founded. If we are unable to obtain regulatory approvals for ReActiv8 in the U.S. or elsewhere, or if product development, manufacture, marketing, sales or commercialisation of ReActiv8 is delayed or abandoned, we may never generate significant revenue or become profitable. Further, we expect to require additional funds in the future in order to meet our capital and expenditure needs. To date we have funded, and for the immediate future, we expect to continue to fund, our operations through equity capital (by way of issuance of new ordinary shares and/ or rights to subscribe for new ordinary shares) and debt.

The shareholders have authorised the board of directors to allot securities of the Company, without having regard to statutory pre-emption rights, during the period ending on 20 September 2024 up to an aggregate nominal value amount of €17,000, without seeking shareholder approval. The issue price per new ordinary share will be as determined by the directors, provided that no share be issued as a discount to its nominal value. If the Company issues additional ordinary shares, it could cause dilution for the holders of ordinary shares and could have a negative impact on the price of ordinary shares.

Under the First Warrant Instrument with IPF, the Company has granted rights to subscribe for 1,500,000 ordinary shares at an exercise price of €6.00 per share. In addition, under the terms of the IPF Amendment and Restatement Agreement and the Second Warrant Instrument, the Company may be required to issue ordinary shares at a price of €8.00 per share. As at 31 December 2019, assuming the triggers for conversion under the IPF Amendment and Restatement Agreement were met in the second half of 2020, this could result in the issuance of approximately 1.7 million new ordinary shares. If the existing subscription rights were to be exercised or triggered, or if further rights to subscribe for ordinary Shares were to be granted or exercised, this could cause dilution for the holders of ordinary shares and could have a negative impact on the price of ordinary shares.

From time to time, the Company has issued share options to its employees, directors or consultants. Since the IPO, those share options have been granted with an exercise price equal to the market value of an ordinary share at the date of grant. The vast majority of those share options have an exercise price that is significantly in excess of the quoted price per ordinary share on Euronext Growth of Euronext Dublin and Euronext Paris. The Employee Incentive Plan was amended in January 2019 to allow for the issue of RSUs, being rights to receive ordinary shares at no cost to the relevant employee, director or consultant. Vesting of existing share options or RSUs or the grant or vesting of share options or RSUs in the future could cause dilution for the holders of ordinary shares and could have a negative impact on the price of ordinary shares.

The market price and/or liquidity of our securities may fluctuate widely in response to various factors which may limit or prevent investors from selling their ordinary shares
The market price and/or liquidity of ordinary shares could be subject to wide fluctuations in response to many risk factors listed in this section, beyond our control including (without limitation):

actual or anticipated fluctuations in our financial condition and operating results;
our failure to obtain regulatory approval for ReActiv8 beyond CE Marking and TGA approval;
our failure to successfully commercialise ReActiv8;
adverse results or delays in our clinical trials;
actual or anticipated changes in our growth rate;
competition from existing products or new products that may emerge;
announcements by us, our collaborators or our potential competitors of significant acquisitions, strategic partnerships, joint ventures, strategic alliances, or capital commitments;
adverse regulatory decisions;
the inability to establish potential strategic alliances;
unanticipated serious safety concerns related to the use of our product;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
issuance of new or updated research or reports by securities analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
price and volume fluctuations in trading of our ordinary shares on Euronext Growth of Euronext Dublin or Euronext Paris;
additions or departures of key management or scientific personnel;
disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;
our inability to obtain reimbursement by commercial third-party payers and government payers and any announcements relating to coverage policies or reimbursement levels;
announcement or expectation of additional debt or equity financing efforts;
issuances by the Company of ordinary shares or transfers or sales of ordinary shares by shareholders;
issue or exercise of share warrants or share options; and
general economic and market conditions.

The above and related market and industry factors may cause the market price, demand and/or liquidity of our ordinary shares to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their ordinary shares. In addition, the stock market in general, and development stage companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.

Our ordinary share ownership is concentrated in the hands of our principal shareholders, who may be able to exercise a direct or indirect controlling influence on us
Our seven largest shareholders together own approximately 78% of our ordinary shares in issue at the date of this report. As a result, these shareholders (or a combination of some of these shareholders), if they were to act together, would have significant influence over all matters that require approval by our ordinary shareholders, including the election of directors and approval of significant corporate transactions. Subject to customary shareholder protections on takeovers and related party transactions, corporate action might be taken even if other ordinary shareholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our Company that other ordinary shareholders may view as beneficial.

If our ordinary shares cease to be listed on the Euronext Growth operated by Euronext Dublin, certain transfers of our ordinary shares will be subject to Irish stamp duty.
Our ordinary shares are currently listed on the Euronext Growth operated by Euronext Dublin. Under Irish law, stamp duty is generally payable on transfers of shares of an Irish company (other than transfers between spouses) whenever a document of transfer is executed. Stamp duty is generally charged at a rate of 1%, rounded to the nearest euro, and is payable by the transferee (or, in some cases, all parties to the transfer). Under Irish law, transfers of shares of Irish companies listed on the Euronext Growth operated by Euronext Dublin are exempt from stamp duty. As a result, stamp duty is not currently chargeable on transfers of our ordinary shares. If our ordinary shares cease to be listed on the Euronext Growth operated by Euronext Dublin, however, stamp duty would be payable on such transfers to the extent they involve an instrument of transfer, subject to certain exceptions.

If securities or industry analysts do not publish research or publish unfavourable research about our business, the price of our ordinary shares and trading volume could decline
The trading market for our ordinary shares depends in part on the research and reports that securities or industry analysts publish about us or our business. If few or no securities or industry analysts cover us, the trading price for our ordinary shares could be negatively impacted. If one or more of the analysts who covers us downgrades this recommendation on our ordinary shares, publishes unfavourable research about our business, ceases coverage of our Company or fails to publish reports on us regularly, demand for our ordinary shares could decrease, which could cause the price of our ordinary shares or trading volume to decline.

We do not currently intend to pay dividends, and, consequently, the ability to achieve a return on investment will depend on appreciation in the price of the ordinary shares
We have never declared or paid any cash dividends on our ordinary shares and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your ordinary shares for the foreseeable future and the success of an investment in ordinary shares will depend upon any future appreciation in the value of the Company. Consequently, investors may need to sell all or part of their holdings of ordinary shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our ordinary shares.

We may be a passive foreign investment company (“PFIC”) for 2019 or subsequent years, which could result in adverse U.S. federal income tax consequences to U.S. investors
For U.S. federal income tax purposes, a non-U.S. corporation will be considered a passive foreign investment company (“PFIC”) for any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during such year) is attributable to assets that produce or are held for the production of passive income. If we are a PFIC for any taxable year during which a U.S. holder holds shares, the U.S. holder may be subject to adverse tax consequences, including (1) the treatment of any gain on disposition as ordinary income, rather than capital gain qualifying for preferential rates, (2) the application of an interest charge with respect to such gain and certain dividends and (3) compliance with certain reporting requirements. We do not believe that the Company was a PFIC for its 2019 taxable year, although the U.S. Internal Revenue Service (“IRS”) may disagree with this conclusion in the event it audits any U.S. shareholder’s tax reporting. Based on the value and composition of our assets, we may, however, be a PFIC for 2020 and potentially for future taxable years. The determination of PFIC status is fact-specific, and a separate determination must be made for each taxable year (after the close of each such taxable year). Each U.S. shareholder is strongly urged to consult its tax advisors regarding these issues.

Irish law may afford fewer remedies in the event shareholders suffer losses compared to the U.S. or other jurisdictions
As an Irish company, we are governed by the Irish Companies Act 2014 and Irish company law generally, which differ in some material respects from laws generally applicable to typical U.S. corporations and other non-Irish corporations and their shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or other officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. You should also be aware that Irish law does not allow for any terms of legal proceedings directly equivalent to the class action available in U.S. courts. Accordingly, holders of our shares may have more difficulty protecting their interests than would holders of shares of a company organised in a jurisdiction of the U.S.

A takeover bid for the Company’s securities would be subject to supervision by French and Irish regulatory authorities, which may add complexity to, and delay completion of, any takeover bid for the Company
As a company with its registered office in Ireland and whose securities are admitted to trading on a regulated market (within the meaning of point (21) of Article 4(1) of Directive 2014/65/EU) in France only, the Company is, for the purposes of Directive 2004/25/EC of the European Parliament and the Council dated 21 April 2004 (the “Takeover Directive”), a shared jurisdiction company. This means that a takeover bid for its securities would be subject to the Irish Takeover Rules of the Irish Takeover Panel in some respects, but also subject to the general regulation (règlement général) (the “French Takeover Rules”) of the Autorité des marchés financiers (the “AMF”) in most other respects.

In the case of a takeover bid for a shared jurisdiction company, the Takeover Directive provides that matters relating to the consideration offered in the case of a bid, in particular the price, and matters relating to the bid procedure, in particular the information on the offeror’s decision to make a bid, the contents of the offer document and the disclosure of the bid, shall be dealt with in accordance with the rules of the EU member state in which the securities of the company are admitted to trading on a regulated market, in this case France. Matters relating to the information to be provided to the employees of the offeree company and matters relating to company law, in particular the percentage of voting rights conferring “control” and any derogation from the obligation to launch a bid, as well as the conditions under which the board of the offeree company may undertake any action which might result in frustration of the bid, shall be determined by the rules of the EU member state in which the Company has its registered office, in this case, Ireland.

We believe we are currently the only shared jurisdiction company (current or previous) for the purposes of the Takeover Directive where, in the case of a takeover bid, the relevant competent authorities would be those of France and Ireland. Accordingly, a takeover bid for the Company would be supervised by two competent authorities, who would need to agree amongst themselves the correct delineation, with respect to such takeover bid, between the application of their respective takeover rules, as well as between their respective responsibilities and powers. We believe that this could lead to additional complexity in planning, making and/or completing any such takeover bid, which in turn could result in an extension of the transaction timetable and increased transaction costs.

Future sales of ordinary shares by existing shareholders could depress the market price of the ordinary shares
If our existing shareholders sell, or indicate an intent to sell, substantial amounts of ordinary shares in the public market, the trading price of the ordinary shares could decline significantly.

Mainstay Medical International plc
Directors’ responsibilities statement

Statement of the Directors in respect of the Annual Report and Financial Statements
The directors are responsible for preparing the annual report and the Group and Parent Company financial statements, in accordance with applicable law and regulations.

Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law, the directors are required to prepare the Group financial statements in accordance with IFRS as adopted by the European Union and applicable law including Article 4 of the IAS Regulation. The directors have elected to prepare the Parent Company financial statements in accordance with IFRS as adopted by the European Union as applied in accordance with the provisions of Companies Act 2014.

Under company law the directors must not approve the Group and Parent Company financial statements unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position of the Group and Parent Company and of the Group’s profit or loss for that year. In preparing each of the Group and Parent Company financial statements, the directors are required to:

select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;
assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
use the going concern basis of accounting unless they either intend to liquidate the Group or Parent Company or to cease operations, or have no realistic alternative but to do so.

The directors are also required by the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Central Bank of Ireland to include a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group.

The directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy at any time the assets, liabilities, financial position and profit or loss of the Parent Company and which enable them to ensure that the financial statements comply with the provision of the Companies Act 2014. The directors are also responsible for taking all reasonable steps to ensure such records are kept by its subsidiaries which enable them to ensure that the financial statements of the Group comply with the provisions of the Companies Act 2014 including Article 4 of the IAS Regulation. They are responsible for such internal controls as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsible for safeguarding the assets of the Group, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for preparing a directors’ report that complies with the requirements of the Companies Act 2014.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s and Parent Company’s website http://www.mainstay-medical.com. Legislation in the Republic of Ireland concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed on page 14 of this annual report, confirm that, to the best of each person’s knowledge and belief:

The Group financial statements, prepared in accordance with IFRS as adopted by the European Union and the Parent Company financial statements prepared in accordance with IFRS as adopted by the European Union as applied in accordance with the provisions of Companies Act 2014, give a true and fair view of the assets, liabilities, and financial position of the Group and Parent Company at 31 December 2019 and of the loss of the Group for the year then ended;
The Directors’ report contained in the annual report includes a fair review of the development and performance of the business and the position of the Group and Parent Company, together with a description of the principal risks and uncertainties that they face; and
The annual report and financial statements, taken as a whole, provides the information necessary to assess the Group’s performance, business model and strategy and is fair, balanced and understandable and provides the information necessary for shareholders to assess the Parent Company's position and performance, business model and strategy.

On behalf of the board on 24 February 2020,

Oern Stuge MD

Chairman

Jason Hannon
CEO

Independent auditor’s report to the members of Mainstay Medical International plc

Report on the audit of the financial statements

Opinion
We have audited the financial statements of Mainstay Medical International plc (‘the Company’) for the year ended 31 December 2019 set out on pages 60 to 94, which comprise the Consolidated statement of profit or loss and other comprehensive income, the Consolidated and Parent Company statements of financial position, the Consolidated and Parent Company statements of changes in shareholders’ equity, the Consolidated and Parent Company statements of cash flows, and related notes, including the summary of significant accounting policies set out in note 3. The financial reporting framework that has been applied in their preparation is Irish Law and International Financial Reporting Standards (IFRS) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2014.

In our opinion:

the financial statements give a true and fair view of the assets, liabilities and financial position of the Group and Parent Company as at 31 December 2019 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRS as adopted by the European Union;
the Parent Company financial statements have been properly prepared in accordance with IFRS as adopted by the European Union, as applied in accordance with the provisions of the Companies Act 2014; and
the Group and Parent Company financial statements have been properly prepared in accordance with the requirements of the Companies Act 2014 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (Ireland) (ISAs (Ireland)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section of our report. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.

We were appointed as auditor by the directors on 2 May 2014. The period of total uninterrupted engagement is the 6 years ended 31 December 2019, of which the Company has been a public company for 5 years. We have fulfilled our ethical responsibilities under, and we remained independent of the Group in accordance with, ethical requirements applicable in Ireland, including the Ethical Standard issued by the Irish Auditing and Accounting Supervisory Authority (IAASA) as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.

Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows (Substantial modification of loans and borrowings has been identified as a key audit matter for the first time in 2019):

Revenue recognition $1.105 million (2018 - $0.663 million)
Refer to page 67 (accounting policy) and page 71 (financial disclosures)

The key audit matter

How the matter was addressed in our audit

Revenue recognition contains an inherent fraud risk relating to the judgement in respect of the timing of revenue recognition related to the transfer of control to the customer.

We obtained and documented our understanding of the Group’s revenue process, and tested the design and implementation of the relevant controls therein, including anti-fraud controls.

Our substantive audit procedures included, among others, performing the following audit procedures for a sample of transactions selected based on magnitude of the individual transaction and/or the amount of revenue recognised in the year:

- We tested the existence and accuracy of a sample of revenue transactions in the period, by agreeing revenues to customer orders, invoices and cash receipts where appropriate and assessed the appropriateness of the timing of transactions close to the period end by agreeing individual transactions to documents confirming that the performance obligations had been satisfied and that control had been transferred to the customer; and

- We performed procedures to assess the appropriate authorisation of manual journals entries posted to the revenue account.

Based on the procedures performed we identified no material misstatements relating to revenue.

Substantial modification of loans and borrowings $17.4 million (2018 - $11.9 million)
Refer to page 69 (accounting policy) and pages 76, 77 and 80-86 (financial disclosures)

The key audit matter

How the matter was addressed in our audit

During 2019, the Company modified the terms of its debt facilities. The modification included the addition of a conversion option, the issue of warrants and changes to the interest rate and repayment terms of the facility. While we did not identify a significant audit risk related to the modification, the complexity of the related accounting requirements and the judgements and estimates in the valuation of the financial instruments resulted in a significant allocation of resources in the course of our audit.

Our audit procedures included, among others, the following:

- We assessed the design and implementation of controls over the significant unusual transaction;

- We assessed the accounting treatment of the transaction, including the classification of the modification as substantial and the financial instrument classification requirements of the components of the new debt;

- We performed procedures to assess the significant inputs into the valuation of the components of the new debt, which included involving our own valuation specialist to assess the significant judgements and estimates relating to the valuation of the conversion option and warrants; and

- We assessed the adequacy of the financial statement disclosures relating to the matter.

Based on the procedures performed we identified no material misstatements and considered the judgements and estimates used in the valuation of the related financial instruments to be reasonable.

The above matter, specifically the valuation of the conversion option and warrants, was the only key audit matter related to our audit of the Parent Company financial statements.

Our application of materiality and an overview of the scope of our audit
The materiality for the Group Financial Statements as a whole was set at $0.10 million (2018: $0.15 million). This was calculated with reference to a benchmark of operating expenses. Materiality represents 0.5% of this benchmark. We consider operating expenses to be the benchmark that most influences the economic decisions of users of the financial statements.

We report to the Audit Committee all corrected and uncorrected misstatements we identified through our audit with a value in excess of $0.02 million (2018: $0.02 million), in addition to other audit misstatements below that threshold that we believe warrant reporting on qualitative grounds.

Materiality for the Parent Company Financial Statements as a whole was set at $0.10 million (2018: $0.15 million). This was initially determined with reference to a benchmark of total assets, of which it represents 0.5%, but restricted to the absolute amount of Group materiality.

The Group audit team performed the audit of the Group as if it was a single aggregated set of financial information. The audit was performed using the materiality levels set out above.

We have nothing to report on going concern
We are required to report to you if:

we have anything material to add or draw attention to in relation to the directors’ statement in note 2 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Parent Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements.

We have nothing to report in these respects.

Other information
The directors are responsible for the preparation of the other information presented in the Annual Report together with the financial statements. The other information comprises the information included in the Directors’ report, Corporate and shareholder information, Chairman’s statement, Biographies of Directors, Corporate governance report, and Risk factors.

The financial statements and our auditor’s report thereon do not comprise part of the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Based solely on our work on the other information we report that, in those parts of the directors’ report specified for our consideration:

we have not identified material misstatements in the directors’ report;
in our opinion, the information given in the directors’ report is consistent with the financial statements; and
in our opinion, the directors’ report has been prepared in accordance with the Companies Act 2014.

Other corporate governance disclosures
We are required to address the following items and report to you in the following circumstances:

Fair, balanced and understandable: if we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy;

Report of the Audit Committee: if the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We have nothing to report in these respects.

In addition as required by the Companies Act 2014, we report, in relation to information given in the Corporate Governance Statement on pages 21 to 24, that:

based on the work undertaken for our audit, in our opinion, the description of the main features of internal control and risk management systems in relation to the financial reporting process, and information relating to voting rights and other matters required by the European Communities (Takeover Bids (Directive 2004/EC) Regulations 2006 and specified for our consideration, is consistent with the financial statements and has been prepared in accordance with the Act;
based on our knowledge and understanding of the Parent Company and its environment obtained in the course of our audit, we have not identified any material misstatements in that information; and
the Corporate Governance Statement contains the information required by the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017.

We also report that, based on work undertaken for our audit, the information required by the Act is contained in the Corporate Governance Statement.

Our opinions on other matters prescribed by the Companies Act 2014 are unmodified
We have obtained all the information and explanations which we consider necessary for the purpose of our audit.

In our opinion, the accounting records of the Parent Company were sufficient to permit the financial statements to be readily and properly audited and the financial statements are in agreement with the accounting records.

We have nothing to report on other matters on which we are required to report by exception
The Companies Act 2014 requires us to report to you if, in our opinion, the disclosures of directors’ remuneration and transactions required by Sections 305 to 312 of the Act are not made.

The Companies Act 2014 also requires us to report to you if, in our opinion, the Company has not provided the information required by section 5(2) to (7) of the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017 for the year ended 31 December 2019 as required by the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) (amendment) Regulations 2018.

Respective responsibilities and restrictions on use

Directors’ responsibilities
As explained more fully in their statement set out on page 53, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (Ireland) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The risk of not detecting a material misstatement resulting from fraud or other irregularities is higher than for one resulting from error, as they may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control and may involve any area of law and regulation and not just those directly affecting the financial statements.

A fuller description of our responsibilities is provided on IAASA’s website at https://www.iaasa.ie/getmedia/b2389013-1cf6-458b-9b8f-a98202dc9c3a/Description_of_auditors_responsiblities_for_audit.pdf.

The purpose of our audit work and to whom we owe our responsibilities
Our report is made solely to the Company’s members, as a body, in accordance with Section 391 of the Companies Act 2014. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for our report, or for the opinions we have formed.

Sean O’Keefe

24 February 2020

for and on behalf of
KPMG
Chartered Accountants, Statutory Audit Firm
1 Stokes Place
St. Stephen’s Green
Dublin 2

Mainstay Medical International plc
Consolidated statement of profit or loss and other comprehensive income
for the year ended 31 December 2019

($'000)	Notes	Year ended 31 December 2019	Year ended 31 December 2018

Revenue	5	1,105	663
Cost of sales		(669)	(359)
Gross profit		436	304

Operating expenses	6	(19,226)	(29,589)
Operating loss		(18,790)	(29,285)

Finance expense	9	(3,475)	(1,890)
Net finance expense		(3,475)	(1,890)
Loss before income taxes		(22,265)	(31,175)
Income taxes	11	(120)	98
Loss for the year		(22,385)	(31,077)
Net loss attributable to equity holders		(22,385)	(31,077)
Basic and diluted loss per share (in $)	10	($2.08)	($3.65)
Other Comprehensive Income
Items that may be reclassified subsequently to the statement of profit or loss:
Foreign currency translation differences of foreign operations		92	33
Total comprehensive loss for the year		(22,293)	(31,044)

Total comprehensive loss attributable to equity holders		(22,293)	(31,044)

The accompanying notes form an integral part of these consolidated Financial Statements.

Mainstay Medical International plc
Consolidated statement of financial position
at 31 December 2019

($'000)	Notes	31 December 2019	31 December 2018
Non-current assets
Property, plant and equipment	12	126	235
Right of use asset	18	290	-
Total non-current assets		416	235
Current assets
Trade and other receivables	13	866	813
Income tax receivable		118	213
Inventory	14	1,863	2,575
Cash and cash equivalents	15	17,398	15,545
Total current assets		20,245	19,146

Total assets		20,661	19,381

Equity
Share capital	19	72	67
Share premium	19	159,429	143,897
Share based payment reserve	22	15,677	11,716
Other reserves	20	4,718	4,626
Retained loss		(179,863)	(157,022)
Total equity		33	3,284

Non-current liabilities
Loans and borrowings	16	14,519	8,791
Lease liability	18	107	-
Total non-current liabilities		14,626	8,791

Current liabilities
Loans and borrowings	16	2,886	3,158
Lease liability	18	227	-
Income tax payable		141	18
Deferred revenue		49	-
Trade and other payables	17	2,699	4,130
Total current liabilities		6,002	7,306

Total liabilities		20,628	16,097

Total equity and liabilities		20,661	19,381

The accompanying notes form an integral part of these financial statements.

On behalf of the Board on 24 February 2020,

Oern Stuge MD
Chairman

Jason Hannon

CEO

Mainstay Medical International plc
Consolidated statement of changes in shareholders’ equity
for the year ended 31 December 2019

($'000)	Share capital	Share premium	Unde- nominated capital reserve	Reorgani -zation reserve	Foreign currency translation reserve	Share based payment reserve	Retained loss	Total equity
Balance as at 1 January 2018	64	106,414	49,273	(44,573)	(107)	7,613	(124,505)	(5,821)
Loss for the year	-	-	-	-	-	-	(31,077)	(31,077)
Other comprehensive income	-	-	-	-	33	-	-	33
Total comprehensive loss for the year	-	-	-	-	33	-	(31,077)	(31,044)
Transactions with owners of the Company:
Issue of Shares	3	37,483	-	-	-	-	(1,440)	36,046
Share based payments	-	-	-	-	-	4,103	-	4,103
Balance at 31 December 2018	67	143,897	49,273	(44,573)	(74)	11,716	(157,022)	3,284

Opening adjustment on initial application of IFRS 16	-	-	-	-	-	-	(51)	(51)
Adjusted balance as at 1 January 2019	67	143,897	49,273	(44,573)	(74)	11,716	(157,073)	3,233
Loss for the year	-	-	-	-	-	-	(22,385)	(22,385)
Other comprehensive income	-	-	-	-	92	-	-	92
Total comprehensive loss for the year	-	-	-	-	92	-	*(22,385)*	*(22,293)*
Transactions with owners of the Company:
Issue of Shares	5	15,532	-	-	-	-	(405)	15,132
Share based payments	-	-	-	-	-	3,961	-	3,961
Balance at 31 December 2019	72	159,429	49,273	(44,573)	18	15,677	(179,863)	33

The undenominated capital reserve, reorganization reserve and foreign currency translation reserve are shown as “other reserves” in the consolidated statement of financial position and within Note 20.

The accompanying notes form an integral part of these consolidated financial statements.

Mainstay Medical International plc
Consolidated statement of cash flows
for the year ended 31 December 2019

($'000)	Notes	Year ended 31 December 2019	Year ended 31 December 2018
Cash flow from operating activities
Loss for the year		(22,385)	(31,077)
Add/(less) non-cash items
Depreciation	12,18	362	89
Finance expense	9	3,475	1,890
Share-based compensation	7,22	3,961	4,103
Income taxes		120	(98)
Add/(less) changes in working capital
Trade and other receivables		(96)	(242)
Inventory		642	(180)
Trade and other payables		(1,295)	(517)

Taxes paid		(114)	(188)
Interest paid		(245)	(1,133)
Net cash used in operations		(15,573)	(27,353)

Cash flow from investing activities
Acquisition of property, plant and equipment	12	(5)	(123)
Net cash used in investing activities		(5)	(123)

Cash flow used in financing activities
Gross proceeds from issue of shares	19	15,537	37,486
Transaction costs on issue of shares	19	(405)	(1,440)
Proceeds from loans and borrowings	16	3,341	-
Repayment of loans and borrowings	16	(750)	(3,000)
Payment of lease liabilities	18	(290)	-
Net cash from financing activities	28	17,433	33,046

Net increase in cash and cash equivalents		1,853	5,570
Cash and cash equivalents at beginning of year		15,545	9,975
Cash and cash equivalents at end of year	16	17,398	15,545

Mainstay Medical International plc
Notes to the consolidated Financial Statements

1. General information and reporting entity

Mainstay Medical International plc (the “Company”) is a public limited company incorporated and registered in Ireland. Details of the registered office, the officers and advisers to the Company are presented on the Corporate and Shareholder Information page.

The Consolidated Financial Statements (“the Financial Statements”) for the years ended 31 December 2019 and 31 December 2018 comprise the results of the Company and of its subsidiaries (together the “Group”).

At 31 December 2019, the Group comprises the Company and its operating subsidiaries Mainstay Medical Limited, MML US, Inc., Mainstay Medical (Australia) Pty. Limited, Mainstay Medical Distribution Limited, Mainstay Medical BV and Mainstay Medical GmbH.

The Company’s shares are quoted on Euronext Paris and Euronext Growth operated by Euronext Dublin.

Mainstay is a medical device company focused on commercializing ReActiv8, an implantable restorative neurostimulation system designed to treat an underlying cause of disabling Chronic Low Back Pain.

2. Basis of preparation

Statement of compliance
The Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), as adopted by the European Union (“EU”) and in accordance with the Euronext Growth rules of Euronext Dublin. The Company Financial Statements have also been prepared in accordance with IFRS as adopted by the EU, as applied in accordance with the Companies Act 2014 (the “2014 Act”), which permits a company that publishes its company and group financial statements together to take advantage of the exemption in Section 304 of the 2014 Act from presenting to its members both its company statement of profit or loss and other comprehensive income and related notes which form part of the approved company financial statements.

The Financial Statements are available on the Group’s website.

The IFRSs adopted by the EU applied by the Group in the preparation of these Financial Statements are those that were effective for accounting periods beginning on or after 1 January 2019 with no early adoption of forthcoming requirements.

The Financial Statements were authorized for issue by the Board of Directors on 21 February 2020.

Going concern
The Directors have evaluated whether there are conditions and events, considered in aggregate, that raise doubt about the Group’s ability to continue as a going concern. The Directors note the following relevant matters:

The Group had cash of $17.4 million as at 31 December 2019 ($15.5 million as at 31 December 2018).
The Group had operating cash out-flows of $15.6 million for the year ended 31 December 2019 (year ended 31 December 2018: $27.4 million).
Due to the phase of development of the Group, the Group expects to continue to incur losses in the medium term due to the ongoing investment required in research and development, clinical and commercial activities and expects to continue to seek funding from investors or other finance providers as required.
The Group has negotiated its debt and raised additional equity finance during the year to support the Group’s activities for the foreseeable future.

Basis of measurement
The Financial Statements are prepared on the historic cost method, except for share based payments, which are initially measured at grant date fair value, and the conversion option and the warrants associated with the loan, which are carried at fair value.

Currency
The Financial Statements are presented in US Dollars (“$”), which is the functional and presentational currency of the Company. Balances in the Financial Statements are rounded to the nearest thousand (“$’000”) except where otherwise indicated.

Use of estimates and judgements
The preparation of the Financial Statements in conformity with IFRS requires management to make judgements, estimates and assumptions. Estimates are reviewed on an ongoing basis. The areas where estimates have the most significant effect on amounts recognized in the Financial Statements are initial fair value measurement of equity-settled share-based payments (Note 22) and the fair value of identifiable instruments relating to the Company’s convertible loan (Note 16).

Basis of consolidation
The Financial Statements comprise the consolidated results of Mainstay Medical International plc and its subsidiaries.

3. Significant accounting policies

The Financial Statements have been prepared applying the accounting policies as set out below. These have been applied consistently for all years presented.

Adoption of newly effective accounting standards and amendments

The Group applied the following standards for the first time in the current year:

IFRS 16 - Leases (effective date 1 January 2019) (see further information below)
IFRIC 23 - Uncertainty over Income Tax Treatments (effective date 1 January 2019)
Prepayment Features with Negative Compensation (Amendments to IFRS 9) (effective date 1 January 2019)
Long-term interest in associates and joint ventures (Amendments to IAS 28) (effective date 1 January 2019)
Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) (effective date 1 January 2019)
Annual Improvements to IFRS Standards 2015- 2017 Cycle: Various standards (effective date 1 January 2019)

The adoption of these new or amended standards did not have a material impact on the Group’s financial statements. The immaterial impacts of the change in accounting policies arising from the implementation of IFRS 16 are as follows:

IFRS 16 - Leases
The Group has initially adopted IFRS 16 from 1 January 2019. IFRS 16 introduced a single, on-balance sheet accounting model for lessees. As a result, the Group, as a lessee, has recognized right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments.

The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognized in retained earnings at 1 January 2019 ($51,000). Accordingly, the comparative information presented for 2018 has not been restated. The details of the changes in accounting policies are as follows:

Definition of a Lease
As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards of ownership. Under IFRS 16, the Group recognizes right-of-use assets and lease liabilities for leases.

The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.

Impact of IFRS 16 on transition:
The impact of the IFRS 16 transition on 1 January 2019 increased non-current assets by $537,000, increased liabilities by $588,000 and reduced equity (retained loss) by $51,000.

When measuring lease liabilities for leases that were previously classified as operating leases, the Group has discounted lease payments using its incremental borrowing rate at 1 January 2019. The discount rate applied for all leases was 12%.

Reconciliation of operating lease commitments under IAS 17 to opening lease liability under IFRS 16	2019 $’000
Operating lease commitments as at 31 December 2018 disclosed in the Group’s consolidated financial statements	503
Discounted using the incremental borrowing rate at 1 January 2019	480
Extension options reasonably certain to be exercised	108
Lease liabilities recognized as at 1 January 2019	588

Of which are:
Current lease liability	254
Non-current lease liability	334
	588

Impact of IFRS 16 in the year:
As at 31 December 2019 non-current assets increased by $290,000, current liabilities increased by $227,000 and non-current liabilities increased by $107,000. The Group has recognized depreciation and interest expenses instead of operating lease expenses in relation to those leases under IFRS 16. During the year ended 31 December 2019, the Group recognized $247,000 of depreciation expense and $38,000 of lease interest expense from these leases in the consolidated statement of profit or loss.

Further information in relation to the Group’s leases is detailed in Note 18.

New standards and amendments not yet effective
A number of new standards and amendments to standards have an effective date of 1 January 2020. These standards and amendments to standards are not yet effective and have not been early adopted.

Amendments to References to Conceptual Framework in IFRS Standards
Definition of a Business - Amendments to IFRS 3 (not yet endorsed by the EU)
Definition of Material - Amendments to IAS 1 and IAS 8
Interest rate benchmark reform amendments to IFRS 9, IAS 39 and IFRS 7
Amendment to IAS 1 Presentation of Financial Statements Classification of Liabilities as Current or Non-Current (effective 1 January 2021)

None of the above are expected to have a material impact on the Group’s implementation of its accounting policies or on its reported results.

a) Revenue recognition

The Group recognizes revenue when it transfers control over a product or service to a customer. This may arise on shipment, on delivery or in accordance with specific terms and conditions agreed with customers and provided there are no material remaining performance obligations required of the Group.

Revenue is measured at the fair consideration received/receivable for the sale of goods to external customers net of value added tax and discounts. Expected discounts are estimated and provided for as a reduction in revenue based on agreements with customers, agreed promotional arrangements and accumulated experience. Accumulated experience is used to estimate and provide for the discounts, using the expected value method, and revenue is only recognized to the extent that it can be reliably measured and when it is probable that future economic benefits of the transaction will flow to the Group. Service revenues (relating to training and implant support) are recognized when the related services are rendered. When a customer is invoiced, or cash is received but conditions specified within the contract for recognition of the related revenues have not been met, revenue is deferred until all conditions are met. The Group occasionally sells goods and services as a bundled arrangement. Such sales are unbundled based on the relative fair value of the individual goods and services components and each component is recognized separately in accordance with the Group’s recognition policy.

b) Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity. The financial statements of subsidiaries are included in the Financial Statements from the date that control commences until the date that control ceases. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated on consolidation.

c) Pension costs

The Group provides pensions to its employees in Ireland and Australia under defined contribution schemes. Obligations for contributions to the defined contribution schemes are expensed as the related service is provided.

d) Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated to write off the cost of each asset over its estimated future life, as follows:
Computer and office equipment: 3 – 5 years

e) Leases

Accounting policy in 2019, following adoption of IFRS 16

Accounting policy in 2018, prior to adoption of IFRS 16

Operating leases related to the Group’s offices are charged to profit or loss on a straight-line basis over the lease term. An operating lease is one where the majority of risks and rewards of the asset are not transferred to the Group over the lease term. The Group has no finance leases.

f) Taxation

Tax expense comprises current and deferred tax. Current and deferred taxes are recognized in the consolidated statement of profit or loss and other comprehensive income except to the extent that they relate to a business combination, or items recognized directly in equity.
Current tax is the expected tax payable or receivable on the taxable result for the year and any adjustments in relation to tax payable or receivable in respect of the previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:

temporary differences on the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; or
temporary differences related to subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future.

Deferred tax is measured at the tax rates at which the temporary differences are expected to reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset where the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities related to the same taxation authority. Deferred tax assets are recognized to the extent that it is probable that there will be taxable profits in the foreseeable future against which they can be utilized. The Group has no recognized deferred tax asset as at 31 December 2019.

The Group recognizes tax credits as a component of income tax in jurisdictions where the tax credit regime is not in substance a government grant.

g) Foreign currency

Transactions in foreign currencies are recorded at the rate prevailing at the date of the transactions. Any resulting monetary assets and liabilities are translated at the exchange rate at the reporting date and all exchange differences thereon are dealt with in consolidated profit or loss.

The income statement and balance sheet of subsidiaries that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
assets and liabilities at each reporting date are translated at the closing rate at the reporting date; and
income and expenses in the income statement and statement of comprehensive income are translated at average exchange rates for the year. Average exchange rates are only permissible if they approximate actual rates.
All resulting exchange differences are recognized in other comprehensive income and are taken to a separate currency reserve within equity, the foreign currency translation reserve.

h) Financial instruments

Classification and measurement of financial assets and liabilities

On initial recognition a financial asset is classified as measured at Amortized Cost, or Fair Value Through Other Comprehensive Income (FVOCI), or Fair Value Recognized Through Profit and Loss (FVTPL). Financial assets are not reclassified after initial recognition unless the related business model changes. A financial asset is measured at amortized cost if it is held in a business model whose objective is to hold assets to collect contractual cashflows and its contractual terms give rise on specific dates to cash flows that are solely payments of principal or interest.

Trade and other receivables
Trade and other receivables are classified by the Group as amortized cost assets under IFRS 9. These assets are recognized initially at fair value. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method, less any impairment losses.

Cash and cash equivalents
Cash and cash equivalents are classified by the Group as amortized cost assets under IFRS 9. Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less, which are carried at amortized cost, less any impairment losses.

Trade and other payables
Trade and other payables are classified by the Group as other financial liabilities under IFRS 9. These liabilities are recognized initially at fair value. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method.

Interest-bearing borrowings
Interest-bearing borrowings are classified by the Group as other financial liabilities under IFRS 9 and are recognized initially at fair value including any attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost using the effective interest method over the contractual term.

Substantial modification of financial liabilities
When the terms of financial liabilities are substantially modified, the Company de-recognizes the existing liability and records any new liabilities at fair value on the date of modification. Any difference between the previous carrying value and the fair value of the new instruments is recorded in the Statement of Profit or Loss and Other Comprehensive Income. Expenses associated with the modification of debt are expensed as incurred.

Derivative financial liabilities
Instruments to be settled in the Company’s own shares are recorded as derivative financial liabilities unless they qualify for equity classification due to settlement arising by the exchange of a fixed amount of cash for a fixed number of the Company’s own equity.

These instruments are initially recognized at fair value and any subsequent changes in fair value are recorded in the Statement of Profit or Loss and Other Comprehensive Income. The conversion features and warrants issued as part of the Company’s debt have variability in the number of shares that may be required to be issued and accordingly are recorded as derivative financial liabilities carried at fair value.

Financial instruments separation
Financial instruments which the Company separates comprise convertible notes issued by the Group that can be converted into ordinary shares by the holder and which are automatically converted in certain circumstances (see Note 16). These instruments were separated into their components based on the fair value of each component at the date of issue. The Company’s debt contains the following components:

Liability component, measured at amortized cost; and
Derivative component, measured at fair value

On conversion, any financial liabilities are reclassed to equity.

i) Equity

Ordinary share capital is recognized directly in equity at fair value on issue and is not subsequently re-measured.

j) Impairment

Non-financial assets
All non-financial assets other than deferred taxes are reviewed at the reporting date to determine whether there is evidence of impairment. If such indicators exist, then the asset’s recoverable value is determined. An impairment loss is recognized if the carrying value exceeds the recoverable amount. Recoverable amount is the greater of an asset’s value in use and its fair value. In assessing value in use, the estimated future cash flows associated with the asset are discounted to their present value using a pre-tax discount rate that reflects current market conditions.

Financial assets
At each reporting date, in accordance with IFRS 9, the Group assesses whether its financial assets, comprising accounts receivable and cash, are impaired. The Group evaluates customer accounts with past-due outstanding balances, and analyses customer credit worthiness, payment patterns and trends. Based upon a review of these accounts and management’s analysis and judgement, we estimate the future cash flows expected to be recovered from these receivables. As at 31 December 2019, our trade receivables balances amounted to $0.24 million, and impairment losses are immaterial at this time. Further information on the Group’s credit risk is detailed in Note 21. The Company measures loss allowances at an amount equal to lifetime expected credit losses, except for cash which is measured at 12-month expected credit losses. The maximum period considered when estimating expected credit losses is the maximum contractual period of exposure to credit risk.

k) Provisions

A provision is recognized if, as a result of a past event, the Group has a present obligation that it is probable, will result in an outflow of resources and can be estimated reliably.

l) Finance income and expense

Finance income comprises foreign exchange gains on financial items and deposit interest. Interest income is recognized as it accrues. Finance costs comprise interest on borrowings, movement in the fair value of financial instruments and foreign exchange losses.

m) Share based payments

The grant date fair value of equity-settled share-based awards made to employees and non-employees is recognized as an expense, with a corresponding adjustment to equity, over the vesting period of the award. The amount recognized as an expense is adjusted to reflect the number of awards for which the achievement of service and non-market conditions is expected to be met, such that the amount ultimately recognized represents only vested awards.

The grant-date fair value of share options granted to employees is determined using a Black-Scholes model, details of which are provided in Note 22. The grant-date fair value of share options granted to non-employees is determined based on the fair value of services received in return for the option, or where such a value is not available, based on the same model as used for employee options. Options can only be settled by way of share issues. The grant date fair value of Restricted Stock Units (RSUs) granted to employees is estimated based on the closing price of the Company's common stock on the date of grant.

n) Warrants

Warrants issued alongside debt instruments other than those issued as part of the current year’s debt modification, which are dealt with above, are initially recognized at fair value with a corresponding reduction in the debt instrument liability whereon this adjustment to the liability is amortized to the income statement on an effective interest rate basis.

o) Earnings per ordinary share

Basic earnings per share are calculated by dividing net profit/(loss) attributable to equity holders for the year by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share are calculated by dividing net profit attributable to equity holders for the year by the weighted average number of ordinary shares in issue during the year after adjusting for the effects of all potential dilutive ordinary shares that were outstanding during the financial period.

p) Research and development expenditure

Expenditure on research is charged to the income statement in the year in which it is incurred.

Expenditure on development is charged to the income statement in the year in which it is incurred, with the exception that development expenditure is capitalized where expenditure is incurred in the development of an asset for sale; is intended to be developed for sale; and for which the likelihood of development and sale is probable. No costs have been capitalized to date.

q) Inventories

Inventories are stated at the lower of cost and net realizable value. The cost of inventories is based on the first in – first out principle and includes expenditure in acquiring the inventories and bringing them to their existing location and condition. Net realizable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. Provision is made, where necessary, for aged, slow moving, obsolete and defective inventories.

4. Segment reporting

Due to the current nature of the Group’s current activities, the Group considers there to be one operating segment, Active Implantable Medical Devices (“AIMD”s). The results of the Group are reported to the Chief Operating Decision Maker of the Group, the Chief Executive Officer. There are no reconciling items between the Group’s reported consolidated statement of profit or loss and other comprehensive income and statement of financial position and the results of the AIMDs segment.

Geographic disclosures

The Group has operations in Europe, the US and Australia. The non-current assets held in these jurisdictions are detailed below:

($'000)	31 December 2019	31 December 2018
Ireland	132	101
Germany	-	2
United States	284	132
Australia	-	-
Total non-current assets	416	235

The Group’s total revenue by country is detailed below (excluding deferred revenue of $0.049 million for 2019):

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Ireland	58	109
UK	152	-
Germany	875	536
Other Europe	20	18
Total revenue by country	1,105	663

5. Revenue

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Revenue arising from the sale of goods	1,105	663
Total revenue	1,105	663

This excludes deferred revenue at 31 December 2019 of $0.049 million. Revenues from two customers represented approximately $422,000 of the Group’s total revenues.

6. Operating expenses

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Research and development expenses	2,896	3,447
Clinical and regulatory expenses	3,893	11,047
Selling, general and administration expenses	12,437	15,095
Total operating expenses	19,226	29,589

7. Employee numbers and benefits

As of 31 December 2019, the Group’s employees were based in Ireland, Germany, the United States, the Netherlands and Australia.

The table below sets out the number of employees of the Group for each financial year shown, analyzed by category:

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Research and development and quality	5	12
Clinical and regulatory	1	9
Selling, general and administration	12	16
Total employee numbers	18	37

Parent company employees
Management and administration	3	4

The aggregate payroll costs of these employees, including Directors, were as follows for each financial year shown:

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Wages and salaries	4,284	6,002
Other remuneration	732	474
Social security costs/ payroll taxes	304	441
Share based payments	3,961	4,103
Pension	25	84
	9,306	11,104

8. Statutory information and Auditor’s remuneration

The loss before income tax has been arrived at after charging the following items for each financial year shown:

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Audit services	67	200
Other assurance services	78	125
Taxation advisory services	19	60
Total auditor’s remuneration	164	385
Foreign exchange loss	(187)	(198)
Depreciation of plant and equipment	114	89
Research and development expenditure	2,896	3,447

9. Finance expense

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Finance expense
Foreign exchange loss	(187)	(198)
Lease interest	(38)	-
Finance expense associated with borrowings:
Interest expense	(1,115)	(1,692)
Impact of substantial modification of borrowings (Note 16)	(1,123)	-
Fair value movement on conversion option	(105)	-
Fair value movement on warrants	(907)	-
Total finance expense	(3,475)	(1,890)

10. Earnings per share

As the Group is incurring operating losses, there is no difference between basic and diluted earnings per share.

	Year ended 31 December 2019	Year ended 31 December 2018
Net Loss for the year ($’000) attributable to equity holders	22,385	31,077
Weighted average number of ordinary shares in issue	10,758,902	8,504,996

Loss per share	$2.08	$3.65

In accordance with IFRS, share options, warrants, conversion rights and RSUs are not included in the weighted average number of ordinary shares for the purposes of calculating diluted earnings per share as they are anti-dilutive. Refer to note 22 for information on share options and RSUs outstanding as at 31 December 2019 and 31 December 2018.

11. Taxes

Current income tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the relevant taxation authorities. The tax rates and tax laws used to compute the amount are those used in Ireland, the United States, Australia, the Netherlands and Germany.

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Irish income tax	-	-
Income tax in other jurisdictions:
Foreign current tax	156	94
Adjustments in respect of prior years	(36)	(192)
Total income tax charge/(credit)	120	(98)

Certain companies within the Group provide services to other group companies, and consequently generate revenues and profits that are subject to corporation tax in Australia, United States, the Netherlands and Germany.

Reconciliation of effective tax rate

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Loss before tax	(22,265)	(31,175)
	-
Taxed at tax rate in Ireland of 12.5%	(2,783)	(3,897)
Non-deductible expenses	517	690
Tax credits	(115)	(178)
Foreign rate differential	159	148
Adjustments in respect of prior periods	(36)	(192)
Unrecognized tax losses	2,378	3,331
Total income tax (credit)/charge	120	(98)

Unrecognized deferred tax assets
The Group has unrecognized potential deferred tax assets. These potential assets are not recognized because future taxable profits against which they can be utilized are not sufficiently certain. The availability of these assets does not expire.

Capital allowances on intellectual property which is recognized as an asset for tax purposes but is not capitalized under IFRS, will be available should the Group generate relevant income in future periods against which the capital allowances are deductible.

The unrecognized deferred tax asset relating to share based payments arises principally in our US subsidiary.

Gross timing differences:	At 1 January 2018	Arising in year	Adjustment in respect of prior years	At 31 December 2018	Arising in year	Adjustment in respect of prior years	At 31 December 2019
Unrecognized tax losses	80,627	26,648	387	107,662	19,031	(140)	126,553
Intangible assets	15,000	-	-	15,000	-	-	15,000
Share based payments	1,317	(401)	-	916	(424)	-	492
Derivative financial instrument – conversion option	-	-	-	-	1,203	-	1,203
Derivative financial instrument – warrant	-	-	-	-	2,886	-	2,886
Total gross temporary differences	96,944	26,247	387	123,578	22,696	(140)	146,134

Unrecognized deferred tax asset
Unrecognized tax losses	10,078	3,331	48	13,457	2,378	(17)	15,818
Intangible assets	1,875	-	-	1,875	-	-	1,875
Share based payments	290	(89)	-	201	(93)	-	108
Derivative financial instrument – conversion option	-	-	-	-	150	-	150
Derivative financial instrument – warrant	-	-	-	-	360	-	360
Total unrecognized deferred tax asset	12,243	3,242	48	15,533	2,795	(17)	18,311

12. Property, plant & equipment

	Computer and office equipment	Computer and office equipment
($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Cost
At beginning of year	625	502
Additions	5	123
At end of year	630	625

Depreciation
At beginning of year	390	301
Charge for the year	114	89
At end of year	504	390

Carrying value at end of year	126	235

13. Trade and other receivables

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Trade receivables	245	143
VAT and sales tax receivable	170	169
Prepaid expenses and other current assets	451	501
Total trade and other receivables	866	813

Information about the Group’s exposure to credit risks and impairment losses for trade receivables is included in Note 21.

14. Inventory

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Raw Materials	79	52
Work in Progress	306	136
Finished Goods	1,478	2,387
Total inventory	1,863	2,575

There were no provisions netted against inventory as at 31 December 2019. The cost of inventory used in cost of sales during 2019 was $637,000 (2018: $344,000). During 2019, inventories were reduced by $182,000 as a result of a write down to net realizable value.

15. Cash and cash equivalents

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Cash in bank accounts – USD	16,965	15,170
Cash in bank accounts – EUR	272	187
Cash in bank accounts – AUD	161	188
Total cash and cash equivalents	17,398	15,545

16. Interest bearing loans and borrowings

IPF Debt Financing
On 24 August 2015, MML entered into the IPF debt facility for up to $15.0 million. The facility was drawn down in three tranches. In April 2019 a new tranche of €3.0 million (approximately $3.34 million) was made available to Mainstay. On 29 July 2019 Mainstay announced the drawdown of €3.0 million in additional debt from the new tranche of the existing debt facility.

At the same time, the Company amended the terms of its existing agreements such that all the principal and interest payments are deferred until 2021, the loan term was extended to 2023 and the interest rate on all tranches was changed to 8%. The loan is also convertible in certain circumstances to ordinary shares at a price of €8 per share.

The minimum cash covenant was amended so that Mainstay is required to hold cash at least equal to its projected cash expenditures for operations and debt repayment for the next three months, and the covenant relating to the achievement of commercial milestones was eliminated.

The Company considers the amendment represented a significant modification of the terms of the original debt. Accordingly, the previous loans and associated accruals were de-recognized and the new loan and related warrants were recognized at fair value.

The agreement contains additional features and these features, being the conversion options and warrants, require separation as their economic characteristics and associated risks are not deemed to be closely related to the host instrument (see note 21).

Loans and Borrowings - current

($'000)

Year ended
31 December
2019

Year ended
31 December
2018

Term Loan

Deferred finance costs

Accrued interest

Derivative financial instrument – warrant

2,886

3,000

(90)

248

Total

2,886

3,158

Loans and Borrowings – non current

($'000)

Year ended
31 December
2019

Year ended
31 December
2018

Term Loan

Deferred finance costs

Accrued interest

Conversion option

12,620

696

1,203

7,200

(103)

1,694

Total

14,519

8,791

Total loans and borrowings

17,405

11,949

17. Trade and other payables

($'000)	Year ended 31 December 2019	Year ended 31 December 2018
Trade and other payables	1,534	1,789
Payroll tax liability	46	74
Accrued expenses	1,119	2,267
Total trade and other payables	2,699	4,130

18. Leases

The Group leases office facilities at two locations. These leases are due to expire in August 2020 and August 2021. Previously these leases were classified as operating leases under IAS 17.

Information about leases for which the Group is a lessee is presented below.

Right-of-use assets

($'000)	Year ended 31 December 2019
Balance at 1 January	537
Depreciation charge for the year	(247)
Additions to right-of-use assets	-
Right-of-use assets	290

Amounts recognized in profit or loss

($'000)	Year ended 31 December 2019
Interest on lease liabilities	38
Total	38

Lease liability

($'000)	Year ended 31 December 2019
Balance at 1 January	588
Payments made on leased liabilities for the year	(254)
Additions to right-of-use assets	-
Lease liability	334
($'000)	Year ended 31 December 2019
Non-current lease liabilities	107
Current lease liabilities	227
Total	334

19. Called up share capital

The Company’s ordinary shares are issued and quoted in Euro and have been translated in US Dollars at the rates prevailing at the date of issue.

Authorized and Issued Share Capital

*Authorized*	31 December 2019 €	31 December 2018 €
35,000,000 (2018: 20,000,000) ordinary shares of €0.001 each	35,000	20,000
40,000 deferred shares of €1.00 each	40,000	40,000
	75,000	60,000

*Issued, called up and fully paid*	2019 $	2018 $
13,421,504 (2018: 8,770,229) ordinary shares of €0.001 each	16,421	11,240
40,000 deferred shares of €1.00 each	55,268	55,268
	71,689	66,508
In $’000	72	67

Details of movement in issued shares:
On 29 July 2019, Mainstay raised gross proceeds of €13.9 million (approximately $15.5 million) through a placement of 4,649,775 new ordinary shares. This issuance of new ordinary shares was recorded in the Statement of Financial Position in USD at the rate on the date of the transaction. Transaction costs directly attributable to the issue of the new ordinary shares of approximately $0.4 million have been offset against retained earnings (in accordance with the Companies Act 2014).

	*Movement of shares*
Number of shares	Ordinary shares		Deferred shares

At 1 January 2018	6,618,897		40,000
Issue of shares	2,151,332		-
Issue of ordinary shares on exercise of share warrants	-		-
At 31 December 2018	8,770,229		40,000

At 1 January 2019	8,770,229		40,000
Issue of shares	4,649,775		-
Issue of ordinary shares on exercise of share options	1,500		-
At 31 December 2019	13,421,504		40,000
	*Movement of shares*
$’000	Share capital	Share premium

At 1 January 2018	64	106,414
Issue of shares	3	37,483
Issue of ordinary shares on exercise of share options	-	-
At 31 December 2018	67	143,897

At 1 January 2019	67	143,897
Issue of shares	5	15,531
Issue of ordinary shares on exercise of share warrants	-	1
At 31 December 2019	72	159,429

20. Other reserves

($'000)	31 December 2019	31 December 2018
Reorganization reserve	(44,573)	(44,573)
Undenominated capital reserve	49,273	49,273
Foreign currency translation reserve	18	(74)
Total other reserves	4,718	4,626

Reorganization reserve
The reorganization reserve represents a reserve related to requirements of Irish Companies Acts. It comprises (i) fair value differences on ordinary shares arising as a result of group restructurings in 2012 and 2014; and (ii) the pre-acquisition retained losses of subsidiaries at the date of the 2012 and 2014 restructurings. Further information on these transactions are available in our 2015 Annual Report and our 2014 IPO Prospectus, available on the Group’s website.

Undenominated capital reserve
The undenominated capital reserve represents the fair value movement on embedded derivatives associated with preference shares between the issue of the shares and their conversion (during 2014) which does not meet the definition of Share Premium under the Irish Companies Act. The Company therefore recorded this fair value movement in a “Undenominated Capital Reserve” on conversion. This reserve is not distributable. Further information on these transactions are available in our 2015 Annual Report.

Foreign currency translation reserve
The currency reserve reflects the foreign exchange gains and losses that arise on foreign operations that have a functional currency that differs from the presentation currency of the Company. The assets and liabilities of these subsidiaries are translated at the closing rate at the reporting date, income and expenses in the income statement are translated at the average rate for the year and resulting exchange differences are taken to the currency reserve within equity.

The Group has three subsidiary companies with a Euro functional currency and one subsidiary company with an AUD functional currency.

21. Financial instruments

A. Accounting classifications and fair value

The following table shows the carrying amounts and fair values of financial assets and financial liabilities as at 31 December 2019 and 31 December 2019:

2019 ($’000)		Financial assets and liabilities at amortized cost		Other financial liabilities		Financial instruments held at fair value		Fair value
Financial assets
Cash and cash equivalents		17,398		-		-		N/A
Trade and other receivables		245		-		-		N/A
Financial liabilities
Trade and other payables		-		(2,610)		-		N/A
Interest bearing loans and borrowings		-		(12,620)		-		(12,343)
Derivative financial instruments – conversion option		-		-		(1,203)		(1,203)
Derivative financial instruments - warrant		-		-		(2,886)		(2,886)
At December 2019		17,643		(15,230)		(4,089)		N/A

2018 ($’000)	Financial assets at amortized cost		Other financial liabilities		Total carrying value		Fair value
Financial assets
Cash and cash equivalents	15,545		-		15,545		N/A
Trade and other receivables	143		-		143		N/A
Financial liabilities
Trade and other payables	-		(4,130)		(4,130)		N/A
Interest bearing loans and borrowings	-		(11,949)		(11,949)		(11,988)
At December 2018	15,688		(16,079)		(391)		N/A

All financial instruments are Level 3.

B. Measurement of fair values

Valuation techniques and significant unobservable inputs

Items held at amortized cost where fair value is disclosed
We disclose the fair value of our financial instruments that are measured at amortized cost using the following fair values hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1: Inputs are based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs are based upon other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Cash and trade payables are settleable within 30 days and accordingly fair value is deemed to be equal to carrying value.

The fair value of interest-bearing loans and borrowings is calculated based on the present value of future contractual principal plus interest cash flows discounted at appropriate market rates of interest. These are classified as level 3 fair value instruments.

There were no transfers into or out of any classification of financial instruments in any period.

Details of key unobservable inputs and the methodologies used by the Group in determining the fair value disclosures for financial instruments as at 31 December 2019 are detailed in the table below.

Type

Valuation approach

Key unobservable inputs

Interaction between key unobservable inputs and fair value

Loans and borrowings

Income approach

Marked interest rate (11% to 13%)

A 50 bps increase in the interest rate used would decrease the fair value by $141,000
A 50 bps decrease in the interest rate would increase the fair value by $139,000

Items held at fair value

The following table shows the valuation techniques used in measuring the Company’s financial instruments which are recorded at fair value on the Company’s statement of financial position as well as the significant unobservable inputs:

Type	Valuation Technique	Significant Unobservable Inputs	Relationship Between Inputs and Fair Value
Conversion option	Black Scholes Valuation Model	Term (9 months; to expected FDA decision)	An extension of the term would increase the value of the instrument
		Volatility (128.81%)	A higher volatility would increase the value of the instrument


Warrants	Black Scholes Valuation Model	Term (5.3 years)	An extension of the term would increase the value of the instrument
		Volatility (76.55%)	A higher volatility would increase the value of the instrument

On issuance of the above instruments on 18 April 2019 the following were the significant unobservable inputs:

	Conversion Option	Warrants
Term	4 years	4 years
Volatility	58.95%	58.95%

The following table shows a reconciliation between the initial and closing fair values of the above financial instruments:

($’000)	Conversion Option	Warrants
Balance at 1 January 2019	-	-
Amount recognized on issue	1,098	1,979
Change in fair value recognized in statement of profit and loss	105	907
Balance at 31 December 2019	1,203	2,866

Sensitivity Analysis

The following shows the impact of reasonable possible changes in significant inputs on the value of the above instruments at 31 December 2019:

($’000)	Conversion Option	Warrants
Increase of term by 6 months	687	606
Increase in volatility of 10%	197	402

C. Financial risk management

In terms of financial risks, the Group has exposure to credit risk, liquidity risk and market risk (comprising foreign currency risk and interest rate risk). This note presents information about the Group’s exposure to each of the above risks together with the Group’s objectives, policies and processes for measuring and managing those risks.

I. Risk management framework

Mainstay’s Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to the limits. Risk management systems and policies will be reviewed regularly as the Group expands its activities and resource base to take account of changing conditions.

The Group has no significant concentrations of financial risk other than concentration of cash with individual banks. The Group is also exposed to credit risk arising on trade receivables, with further information provided under Credit risk below. Other than liquidity risk based on the Company’s use of cash during the year, there has been no significant change during the year or since the year end to the types or quantum of financial risks faced by the Group or the Group’s approach to the management of those risks.

II. Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet contractual obligations and arises principally from the Group’s cash and cash equivalents and trade and other receivables. Credit risk is managed on a Group basis. The maximum exposure to credit risk is represented by the carrying amount of each asset. The carrying value of receivables is a reasonable approximation of fair value.

Trade and other receivables
Trade receivables comprise amounts due from customers, all of which were past due as at 31 December 2019 and 31 December 2018. The Group’s credit risk management policy and process in relation to trade receivables involves carrying out credit checks where appropriate, and by active credit management. The utilization of credit limits is regularly monitored. In addition, it involves periodically assessing the financial reliability of customers, considering their financial position, experience and other factors.

The Company does not have exposure to significantly different categories of customers, and accordingly details of credit risk by customer type or jurisdictions is not provided.

There were no material impairment losses recorded in the period and the provision for expected credit losses recorded at 31 December 2019 is also immaterial. The carrying value of trade receivables of $0.24 million at 31 December 2019 (2018: $0.1 million) represents the maximum exposure to credit risk.

The below table provides an analysis of aging of receivables as at 31 December 2019.

2019 ($’000)	Current	1 - 30 Days	31 - 60 Days	61 – 90 Days
Trade and other receivables	17	94	51	83
2018 ($’000)	Current	1 - 30 Days	31 - 60 Days	61 – 90 Days
Trade and other receivables	93	50	-	-

Cash and cash equivalents
The Group maintained its cash balances with its principal financial institutions throughout the year, and the Group limits its exposure to any one financial institution by holding cash balances across several financial institutions. The cash and cash equivalents are held with bank and financial institution counterparties, which are rated BBB- to AA-, based on Moody and Standard and Poor’s ratings. The credit rating status of the Group’s principal financial institutions is reviewed by the Audit Committee or the Board annually.

The cash balance is reported to the Board of Directors on a monthly basis, and a monthly review of all cash balances held at each institution is carried out by the CFO. The Group maintains most of its cash in USD denominated accounts. The Group held cash and cash equivalents of $17.4 million as at 31 December 2019.

Impairment on cash and cash equivalents has been measured on a 12-month expected loss basis and reflects the short maturities of the exposures. The Group considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties.

Guarantees
The Company has guaranteed the payment of the liabilities and commitments of its subsidiaries in Ireland (as defined in section 357 of the Companies 2014 Act) for the years ended 31 December 2019 and 31 December 2018.

III. Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities as they fall due.

Since inception the Group has funded its operations primarily through (i) the issuance of equity securities and (ii) debt funding. The Group continues to explore funding strategies (e.g.: equity, debt, partnering) to support its activities into the future. Adequate additional financing may not be available on acceptable terms, or at all. The Group’s inability to raise capital as and when needed would have a negative impact on the Group’s financial position and its ability to pursue its business strategy.

The following is an analysis of the maturity of the contractual (undiscounted) outflows associated with the Group’s financial liabilities at 31 December 2019 and as at 31 December 2018.

($’000)	Carrying value	Cash flow (total)	Less than 1 year	Between 1- 2 years	Between 2- 5 years
31 December 2019:
Financial Liabilities Trade and other payables	2,699	2,699	2,699	-	-
Interest bearing loans and borrowings	13,316	16,544	-	4,296	12,248
Derivative financial instruments – conversion option	1,203	-	-	-	-
Derivative financial instruments - warrant	2,886	-	-	-	-
Lease liability	334	390	265	125	-
At 31 December 2019	20,438	19,633	2,964	4,421	12,248

($’000)	Carrying value	Cash flow (total)	Less than 1 year	Between 1- 2 years	Between 2- 5 years
31 December 2018:
Non-derivative financial Liabilities Trade and other payables	4,130	4,130	4,130	-	-
Interest bearing loans and borrowings	11,949	14,635	3,893	10,742	-
At 31 December 2018	16,079	18,765	8,023	10,742	-

The cashflows presented for interest bearing loans and borrowings at 31 December 2019 are the cashflows only in the case of non-conversion.

IV. Foreign currency risk

The Group is exposed to transactional foreign currency risk to the extent that there is a mismatch between the currencies in which sales, purchases, receivables and borrowings are denominated and the respective functional currencies of Group companies. The Group’s reporting currency is the US Dollar. The Group’s Australian subsidiary has an Australian Dollar functional currency, and three of the Group’s subsidiaries located in Ireland, Germany and the Netherlands have a Euro functional currency.

The following table sets forth, for the years indicated, certain information concerning the exchange rate between: (i) the Euro and the US Dollar; and (ii) the Australian Dollar and the US Dollar:

Euro per USD1.00	End of year	Average
Year ended 31 December 2018	1.145	1.18
Year ended 31 December 2019	1.123	1.12

Australian Dollar per USD1.00	End of year	Average
Year ended 31 December 2018	0.706	0.745
Year ended 31 December 2019	0.702	0.696

The Group did not have material asset or liability amounts in foreign currencies at year end, other than trade payables and accruals (net of cash) of €160,000 (2018: €747,000) and the debt, conversion options and warrants noted above.

Sensitivity analysis
A strengthening (or weakening) of the US Dollar against the Euro of 5% would have (decreased)/ increased the loss for the year by $10,000 (2018: $35,000). Any reasonable or likely movement between the US Dollar and the Australian Dollar is considered not likely to have a material impact on the Group’s statement of profit or loss and other comprehensive income.

V. Interest rate risk

As the Company’s debt is now at fixed rates, changes in interest rates would have no impact on finance expense other than immaterial impacts on the fair value of derivative financial instruments.

The Group’s cash balances are maintained in short term access accounts and carry a floating rate of interest. A 50 basis points change in the rate of interest applied to the cash balance held by the Group would not have had a material impact on the Group’s statement of profit or loss in the year.

22. Share based payments

Stock Incentive Plan

The Group operates a share option plan (the “Plan”). As at 31 December 2019, the Plan allows for the Company to grant options over ordinary shares of Mainstay Medical International plc to employees of the Group companies, directors, consultants and other contractors. As at 31 December 2019, 2,678,000 (2018: 1,784,000) share options over ordinary shares of the Company that had been granted under the Plan were outstanding.

Since the IPO, those share options have been granted with an exercise price equal to the market value of an ordinary share at the date of grant. As at the date of this report, the vast majority of those share options have an exercise price that is significantly in excess of the quoted price per ordinary share on Euronext Growth and Euronext Paris. The Plan was amended in January 2019 to allow for the issue of RSUs, being rights to receive ordinary shares at no cost to the relevant employee, director or consultant. The Company has granted 390,000 RSUs during 2019 and 351,000 are outstanding as at 31 December 2019.

The Plan allows for flexibility in the grant conditions of each individual option or RSU including variations on the amounts of options or RSUs granted, the vesting requirements for each option or RSU and the expiration terms of the options or RSUs.

Share Options
Details of RSU’s and share options granted that are outstanding as at 31 December 2019:

	Number of instruments (in thousands)	Contractual life of options
Options granted in 2010	34	10 years from grant
Options granted in 2011	17	10 years from grant
Options granted in 2012	3	10 years from grant
Options granted in 2013	232	10 years from vesting
Options granted in 2014	85	10 years from vesting
Options granted in 2015	289	10 years from vesting
Options granted in 2016	228	10 years from vesting
Options granted in 2017	418	10 years from vesting
Options granted in 2018	428	10 years from vesting
Options granted in 2019	944	10 years from vesting
Total share options in issue	2,678
RSU’s granted in 2019	351

The above options all include service vesting conditions related to employee and non-employee service and vest over periods ranging from one to four years.

The following table provides a reconciliation of the total share options in issue at the end of each year shown:

(Number of instruments in thousands)	Year ended 31 December 2019	Weighted average exercise price 2019	Year ended 31 December 2018	Weighted average exercise price 2018
At beginning of year	1,784	€13.23	1,423	€12.53
Options granted during the year	959	€3.76	448	€16.17
Options expired unexercised	-	-	-	-
Options forfeited	(63)	€14.18	(87)	€16.47
Options exercised	(2)	€4.48	-	-
Outstanding at end of year	2,678	€9.88	1,784	€13.23
Exercisable at end of year	1,237	€12.29	922	€10.95

Total non-cash expense charged to profit and loss in relation to share options for the year ended 31 December 2019 was $4m (2018: $4.1m).

The value of services received in return for the share options granted to employees and non-employees was based on the fair value of the options granted, measured using a Black-Scholes model with the following inputs:

	Year of Grant
	2019	2018
Weighted average share price (€)	3.76	16.17
Weighted average exercise price (€)	3.76	16.17
Weighted average expected share volatility	63.25%	53.21%
Expected term (years)	7	7
Expected dividends	-	-
Risk free rate (average)	0.03%	0.03%
Fair value of option ($)	12.29	10.95

23. Contingencies

The Directors and management are not aware of any contingencies that may have a significant impact on the financial position of the Group.

Subsidiary guarantee
The Company has guaranteed the payment of the liabilities and commitments of its subsidiaries in Ireland for the purposes of section 357 of the Companies Act 2014 for the years ended 31 December 2019 and 31 December 2018.

24. Pension schemes

Defined contribution schemes
The Group operates defined contribution pension schemes for certain employees in Ireland and Australia. The assets of the schemes are held separately from those of the Group in independently administered funds. The advice of a professionally qualified pension consultant was taken in the setting up and maintenance of the schemes.

Total pension costs of the defined contribution schemes for the year ended 31 December 2019 amounted to $24,859 (2018: $83,570). There were no accruals or prepayments in respect of the pension costs at 31 December 2019 (2018: None).

25. Subsidiary undertakings

At 31 December 2019, the Company had the following subsidiaries and owns 100% of the called up ordinary share capital of each such subsidiary:

Mainstay Medical Limited is registered in Ireland.
MML US, Inc. is registered in the United States of America.
Mainstay Medical (Australia) Pty. Limited is registered in Australia.
Mainstay Medical Distribution Limited is registered in Ireland.
Mainstay Medical GmbH is registered in Germany.
Mainstay Medical BV is registered in the Netherlands.

26. Related party transactions

There were no balances due to or from related parties as at 31 December 2019 (2018: None).

Key management compensation and Directors’ remuneration
The Group defines key management as its non-executive directors, executive directors and senior management. Details of remuneration for key management personnel are provided below:

($'000)	31 December 2019	31 December 2018
Salaries	1,197	1,958
Directors’ fees	260	269
Other remuneration	599	915
Payroll taxes	51	130
Share based payments	2,654	3,591
Pension	-	26
Total remuneration	4,761	6,889

Aggregate amount of emoluments paid to or receivable by the Directors' during the year:

($'000)	31 December 2019	31 December 2018
Salaries	460	473
Directors’ fees	260	269
Other remuneration	323	83
Payroll taxes	12	12
Share based payments	1,781	2,540
Total remuneration	2,836	3,377

Details of the shareholding interests and remuneration of the Directors of the Company are included in the Directors’ report on pages 14 to 16.

27. Capital management

Please refer to our disclosure relating to risk management within Note 21.

28. Net cash from financing activities reconciliation

Reconciliation of term loan, leases and equity to cashflow:

($'000)	As at 1 January 2019 Carrying Value	Cashflow Issue of ord shares / issue costs	Cashflow Repayment of borrowings / proceeds from borrowing/ lease payments	Non Cash Adjustments	Loss for the year	As at 31 December 2019 Carrying Value
Liabilities
Term Loan	10,200	-	2,591	4,614	-	17,405
Leases	588		(290)	36		334
Total	10,788	-	2,301	4,650	-	17,739
Equity
Share Premium	143,897	15,532	-	-	-	159,429
Share Capital	67	5	-	-	-	72
Retained loss	(156,989)	(405)	-	-	(22,293)	(179,687)
Total	(13,025)	15,132	-	-	(22,293)	(20,186)

29. Events subsequent to 31 December 2019

There were no events subsequent to the year ended 31 December 2019 that would have a material impact on the Financial Statements.

Parent Company Financial Statements
Mainstay Medical International plc

Company statement of financial position
At 31 December 2019

($'000)	Notes	31 December 2019	31 December 2018

Non-current assets
Investment in subsidiary	(d)	60,422	56,965

Current assets
Prepayments and other receivables	(a)	213	131
Amounts due from subsidiary undertakings	(c)	-	81,380
Cash and cash equivalents	(b)	13,283	6,189
Total current assets		13,496	87,700

Total assets		73,918	144,665

Equity
Share capital	19	72	67
Share premium	19	159,429	143,897
Share based payment reserve	22	15,677	11,716
Undenominated capital reserve		49,273	49,273
Retained loss		(154,843)	(61,780)
Surplus/(deficit) on shareholders' equity		69,608	143,173

Non-current liabilities
Loans and Borrowings		1,203	-
Total non-current liabilities		1,203	-

Current liabilities
Loans and Borrowings		2,886	-
Trade and other payables	(e)	221	1,492
Total current liabilities		3,107	1,492

Total liabilities		4,310	1,492

Total equity and liabilities		73,918	144,665

On behalf of the Board on 24 February 2020,

Oern Stuge MD	Jason Hannon
Chairman	CEO

Company statement of changes in shareholder’s equity
For the year ended 31 December 2019

($'000)	Share capital	Share premium	Un- denominated capital reserve	Share based payment reserve	Retained loss	Total equity
Balance at 1 January 2018	64	106,414	49,273	7,613	(58,749)	104,615
Comprehensive loss for the year	-	-	-	-	(1,591)	(1,591)
Transactions with owners of the Company:
Issue of Shares	3	37,483	-	-	(1,440)	36,046
Share based payments	-	-	-	4,103	-	4,103
Issue of ordinary shares on exercise of share options and warrants	-	-	-	-	-	-
Balance at 31 December 2018	67	143,897	49,273	11,716	(61,780)	143,173

Balance at 1 January 2019	67	143,897	49,273	11,716	(61,780)	143,173
Comprehensive loss for the year	-	-	-	-	(92,658)	(92,658)
Transactions with owners of the Company:
Issue of Shares	5	15,532	-	-	(405)	15,132
Share based payments	-	-	-	3,961	-	3,961
Balance at 31 December 2019	72	159,429	49,273	15,677	(154,843)	69,608

Company statement of cash flows
At 31 December 2019

($'000)	Notes	Year ended 31 December 2019	Year ended 31 December 2018
Cash flow from operating activities
Net loss attributable to equity holders		(92,658)	(1,591)
Add/(less) non-cash items
Share-based compensation		502	(9)
Reversal of impairment of receivables		81,380	-
Finance expense		4,319	-
Add/(less) changes in working capital
Prepayments and other receivables		(82)	(31,481)
Trade and other payables		(1,499)	837

Net cash used in operations		(8,038)	(32,244)

Cash flow from financing activities
Gross proceeds from issue of shares		15,537	37,486
Transaction costs on issue of shares		(405)	(1,440)
Net cash from financing activities		15,132	36,046

Net increase in cash and cash equivalents		7,094	3,802

Cash and cash equivalents at beginning of year	(b)	6,189	2,387
Cash and cash equivalents at end of year		13,283	6,189

Notes to the Company Financial Statements
Notes 1, 2, 3, 22 and 29 to the Consolidated Financial Statements (as provided earlier herein) also directly apply to the Company Financial Statements. The accounting policies of the Company are the same as the accounting policies of the Group as set out in Note 3 to the consolidated Financial Statements, with the exception of:

Business Combinations

The Company was incorporated to be the parent company of the Group for the purposes of the initial public offering. This was accounted for in accordance with IAS 27, whereby the Company measured in its separate Financial Statements its interest in subsidiaries at the fair value of the ordinary and preference shares in issue by MML at 3 April 2014, the date of the 2014 Reorganization.

In addition, the following notes are specific to the Company statement of financial position:

(a) Prepayments and other receivables

($'000)	31 December 2019	31 December 2018
Prepayments	135	118
VAT recoverable	78	13
	213	131

(b) Cash and cash equivalents

($'000)	31 December 2019	31 December 2018
Cash in bank accounts – USD	13,139	6,132
Cash in bank accounts – Euro	144	57
	13,283	6,189

(c) Amounts due from subsidiary undertakings (all due on demand)

($'000)	31 December 2019	31 December 2018
Mainstay Medical Limited	-	75,636
Mainstay Medical Distribution Limited	-	4,546
Mainstay Medical BV	-	1,198
Mainstay Medical GmBH	-	-
	-	81,380

(d) Investment in subsidiary

($'000)	31 December 2019	31 December 2018
Opening balance	56,965	52,849
Investment in subsidiary	-	-
Effect of group share based payments	3,457	4,116
Closing balance	60,422	56,965

(e) Trade and other payables

($'000)	31 December 2019	31 December 2018
Trade and other payables	58	150
Payroll tax liability	9	23
Accrued expenses	154	1,319
	221	1,492

(f) Financial instruments

The Company’s policies for managing financial instruments risks are the same as those for the Group. The Company’s primary financial instruments and their associated risks are as follows:

Financial assets
The Company’s only financial assets are cash and cash equivalents (which are held in the currencies detailed in note (b)). A 5% change in the exchange rate between the US dollar and the Euro would have altered the Company’s loss for the year by $7,000 (31 December 2018: $290,000). The carrying value of the Company’s cash is the same as its fair value.

Financial liabilities
The Company’s only financial liabilities are warrants, conversion options, trade and other payables, payroll tax liabilities and accruals as set out in Note (e). The carrying value represents the fair value of these liabilities.

Contacts

PR and IR Enquiries:
LifeSci Advisors, LLC
Brian Ritchie
Tel: + 1 (212) 915-2578
Email: britchie@lifesciadvisors.com

FTI Consulting (for Ireland)
Jonathan Neilan or Patrick Berkery
Tel. : +353 1 765 0886
Email: mainstay@fticonsulting.com

Euronext Growth Advisers:
Davy
Fergal Meegan or Barry Murphy
Tel: +353 1 679 6363
Email: fergal.meegan@davy.ie or barry.murphy2@davy.ie

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